'Real' yield is the core of market mover.

Economists regards real yields as a market mover in this summer. Real yields are linked with the yields on Treasury inflation protected securities, or TIPS. They can be measured as alternatives by looking at the yields on TIPS. 

"TIPS is a type of Treasury security issued by the U.S. government that is indexed to inflation in order to protect investors from a decline in the purchasing power of their money. The principal value of TIPS rises as inflation rises while the interest payment varies with the adjusted principal value of the bond. The principal amount is protected since investors will never receive less than the originally invested principal." - Investopedia

*Nominal yield = Real yield + (break-even) inflation rate 

*Real yield = Nominal yield - (break-even) inflation rate

*Break-even inflation rate = Nominal yield - Real yield

For example, if an investor buys an ordinary 10-year treasury notes, he can have possibility to lose about -0.9% in annualized basis since nominal yields on 10-year treasury notes is 0.67% and break-even inflation rate is 1.65% according to Federal Reserve Bank of St.Louis. 

However, it is very difficult for the nominal interest rate to fall below 0.10%, since interest rates on excessive reserves(IOER) on Fed is set at the target. If yields on Treasury notes falls below 0.10%, banks may be reluctant to buy any bond; they will rather lend it to the Fed. (The bond interest rate, the market rate, the yield on treasury notes, etc. are all applied in the same concept)

Of course, not everyone can deposit at a 0.10% interest rate in the Fed, so it would not be impossible for nominal interest rates to fall below 0.10%. Financial institutions, which are not eligible to save their capital to the central bank, must somehow keep large amounts of cash in a safe place and keep them in line with their debt structure for quite a long time; there is no alternatives than government bonds. But anyway, assuming that 0.10% is the primary lower limit of nominal interest rates, real interest rates are principally determined by (break-even) inflation rate.

For example, if the nominal 10-year treasury note yield falls to 0.10%, break-even inflation rate in the bond market will rise to 2.10% then the real return on the same maturity falls to -2.0%.

In August, real yields were likely to reach the downward limit. When the minutes of the FOMC discussions were released in July, the US mid- to long-term treasury bond yields jumped. The yield on TIPS has risen even more. Naturally, the government bond market's expected inflation declined. In other words, a dis-inflationary movements were unfolded as the financial market environment tightened after the announcement of the FOMC minutes. The dollar jumped and the gold price plummeted.

The financial market had been expecting the FOMC to clarify its forward guidance on zero interest rates and more of supportive asset purchase policies on upcoming September. Keeping zero interest rates until inflation exceeds the 2% target was almost certain. 

Yet, Fed only suggested the time to clarify the guidance on the path of interest rate policy as "at some point." It became unclear that Fed will ease the monetary policy this September. There could be no lower interest rate, and even if the Fed alone does something more, it won't help the unemployed who worked in restaurants, bars, hotels and theaters. The absence of Fed's leadership of economic stimulus eventually produced graphs of lowering break-even inflation rate whereas real yields rise slightly.

Nonetheless, Fed announced about monetary policy plans, remaining federal funds rate near zero until average inflation reaches and remains over 2 percent "over time".  Please see my blog down below.

https://techongstudy.blogspot.com/2020/08/review-of-monetary-policy-strategy-fed.html

This overall means owning Treasurys are not considered attractive since the stocks, gold, or corporate bonds can be an alternative that is likely to have more potential positive return. After Fed's super dovish monetary policy which is also supported by U.S. Treasury's fiscal policy, real yields have turn negative due to the short term interest rate near zero. This factor has encouraged investors to take risk-on mode and expose themselves to stock market, commodities or riskier trading field.

There are several reasons that real yields matter to the consequences below:

After Fed cuts FFR to zero due to pandemic hit, negative real yields were purposely driven, since the central bank has been buying Treasury bills and has given the signal targeting above 2% average inflation target(AIT) over time. The stance of Fed has given the effect of capping Treasury yields since long-term yields tend to follow short-term interest rates. This has given investors more confidence that Fed will allow inflation for long period of time, so the real yields have dropped.

Stocks & High yields

For the Fed, low real yields aren’t the only weapon for hiking asset price. For the anticipation of Fed's intervention on economy cushion, yield spread between Treasury  and investment-grade corporate bond is below its 10-year average, despite the pandemic. It helped companies to issue more amount of bonds in that short period of time, which enabled companies to keep on paying the workers and investments. Stocks also skyrocketed by negative real yields.

Dollar & Gold

Lower yields drop lays consequences on weakening dollar. The interest rate is the price of money. The quantity of money increases and decreases in the movement of the interest rate. When the money is overly supplied, then the value diminishes putting the price downwards. When the real yield of U.S. is higher than other countries, then the dollar gains its strength.

Thus, the decline of in U.S. real yields compared with German real yields has helped strengthen the euro against the dollar. Similar to bonds, gold is an asset that investors seek for safety. It also tends to soar during acceleration of inflation. because it then takes more dollars to purchase the same amount of the precious metal. Please see my blog below.

https://techongstudy.blogspot.com/2020/08/can-gold-and-silver-be-considered-as.html

Source: Global Monitor, WSJ 

https://www.facebook.com/globalmonitor.kr.1?epa=SEARCH_BOX

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield

https://www.wsj.com/articles/real-bond-yields-help-explain-surprising-market-moves-11600090704?mod=markets_lead_pos3

"Oracle is begging for TikTok's U.S business. Are you sure?"

Oracle Corp, one of the most lucrative but unflashy company in Silicon Valley, acquired TikTok US business in the battlefield against Microsoft and Walmart. At first, Microsoft's acquisition seemed promising, but it was overturned during the last minute negotiations. The relation between Oracle, which provides business software and consulting service for enterprises, and TikTok, a 15-second video sharing platform which is popular among teenagers, seems very awkward for investors or businesspeople. However, the most important factor ‘data’ lies behind this awkward encounter between both firms.

Timeline

According to WSJ, Oracle has been selected as a technology partner for TikTok's US business. The deal is quite far from the previously known acquisition of the entire business ever since Oracle has been founded in 1977. NYT cited that Oracle is most likely to gain a stake in TikTok, yet the size of investment is unclear. However, it is clear that this negotiation will bring Oracle deeply involved in TikTok's US business.

The rise of acquisition issue of TikTok's US business was due to a conflict between the US and China. Earlier, US President Donald Trump announced on July 31 that he would ban the use of TikTok in the United States. The reason was that ByteDance, a TikTok operator based in China, leaked personal information of Americans to the Communist Party in China, which could harm national security. On August 6, he signed an executive order to block all the transactions with ByteDance to US companies within 45 days. In addition, it issued a follow-up order to sell ByteDance's TikTok US business within 90 days. Since then, Microsoft has emerged as a prominent takeover negotiator, Walmart later joined the combat. I personally regarded Walmart was suitable for acquiring TikTok platform for the synergy of its e-commerce sales by live streaming).

However, Microsoft issued an official statement indicating that ByteDance will not sell TikTok to Microsoft, in that protecting TikTok user data and US security is need to be more prioritized. An hour later, news about Oracle's acquisition of TikTok came out. 

Oracle's bet on TikTok

Oracle is a traditional business-to-business (B2B) operating corporate. It has grown into a global software company based on the enterprise database market. There seems to be a distant business relationship with TikTok, a B2C business targeting consumers, especially youngsters. This is one of the backgrounds in which Microsoft, which has relatively rich B2C business experience, was superior in the acquisition competition. However, given that Oracle is trying to grow its cloud computing and consumer data business, acquiring TikTok US business can create business synergies.

First of all, TikTok can become an excellent anchor tenant of Oracle’s cloud infrastructure. This is because new space is needed to store the enormous amount of data that users create when separating the TikTok US business from ByteDance. TikTok has more than 100 million users in the United States. Oracle has struggled to compete its cloud business with Azure and AWS. According to market research firm Gartner, last year, Oracle was not in the top five cloud-computing companies by revenue. Microsoft is in second place.

<Bloomberg> pointed out that TikTok will be one of the greatest company to support Oracle in building its cloud infrastructure and enhance the user base ecosystem. In addition, Oracle proposed to make 20,000 new jobs in TikTok global business, Mnuchin said.

It is unclear whether Oracle will fully acquire TikTok's US business. It may remain one of the major partners. However, as it has been selected as a technology partner, Oracle is expected to use the TikTok platform to enhance its cloud business capabilities.

Source: WSJ, NYT, Bloomberg

https://www.wsj.com/articles/microsoft-drops-out-of-bidding-for-tiktoks-u-s-operations-11600039821

https://www.wsj.com/articles/walmart-joins-microsofts-pursuit-of-tiktok-11598544354

https://www.nytimes.com/2020/08/28/technology/tiktok-walmart-ecommerce.html

https://www.nytimes.com/2020/09/14/technology/deal-tiktok-us-china-trump.html

https://www.bloomberg.com/news/articles/2020-09-13/oracle-is-said-to-gain-advantage-in-deal-for-tiktok-in-u-s

https://www.wsj.com/articles/oracle-tiktok-deal-trump-politics-microsoft-11600129980?mod=hp_lead_pos2

Nvidia, ARM and Softbank. What should we know about the mega-deal.

Softbank Group, which has the leading investment vehicle Vision Fund, is about to sell ARM holdings to Nvidia Corp. Selling British chip designing company in $40 billion to a GPU company is almost near a deal. Most people may or may not know what those companies are doing (except investors or tech-savvy geeks) even though they are using them unconsciously. Wall Street Journal reporter Asa Fitch and Stu Woo kindly explains about them.

ARM Holdings

ARM plays the valuable key role in semiconductor sectors, which WSJ calls "world's most important behind-the-scenes chip companies".  It provides basic blueprints of the semiconductor by designing and licensing, and dominates more than 95% of world's smartphone.

Cambridge-based firm, Arm was founded in 1990 in collaboration with Apple Inc. and the Acorn Computer Group. It took a different strategy from its rival Intel. Arm focused on designing rather than energy consumption. Arm was in a position to take advantage of the 2000s smartphone revolution, as Apple, Samsung and other device manufacturers were looking for chips that would take a sip instead of wasting battery life. Softbank Group acquired 25% stake (32 U.S billion) of ARM, indicating the technology can lift the future of IoT. 

Nvidia Corp

Nvidia is famous for its graphic chips especially in video-games. During the pandemic, as console games such as Nintendo Switch was hot in demand, the GPU was widely used in it. Nvidia does not only concentrate on graphic chips for games but also for the data centers as the chip plays critical role in AI calculation as the automation industry sparks up. Nvidia has the highest market capital (300 billion) among U.S. semiconductor firms, outstanding Intel. 

Nvidia was founded in 1993, just 3 years after ARM's appearance and is located in Santa Clara, California. Its vision for the future demand of graphic games and multimedia content from consumers was firm and stubborn as personal computers have been supplied more widely. Jensen Huang is the CEO and co-founder of the company, who previously worked in AMD, which is now rival.

Acquisition

The pressure from shareholders presumably Elliot Management has made up Softbank's mind to sell its asset that is flagging its stock price. To shore up its stocks, Masayoshi Son announced to sell $40 billion of ARM, which made the share more than 20% this year. 

For Nvidia, the deal could grant a dominant role of its lucrative business on providing chips to the smartphone companies such as Apple. It could make Nvidia more powerful company against its rival competitor such as Intel or AMD as they try to adapt Arm desings in servers and personal computers. Apple has transferred its CPU from Intel to Arm based technology to make Mac more efficient. 

"Nvidia will pay $21.5 billion in stock and $12 billion in cash. SoftBank may also receive up to $5 billion in cash or stock subject to Arm hitting financial-performance targets. Nvidia will also issue $1.5 billion in stock to Arm employees", reports WSJ.

Threats

Since the acquisition of Arm Holdings is the biggest ever, there are 3 risks that Nvidia need to bear in mind. 

1. Battlefield between U.S. and China over the dominance of techno-hegemony can lead into the trouble of the whole semiconductor industry. With these in regards, regulators in both parties of the country need to agree on the sign off completely. In the past, Broadcom's acquisition over Qualcomm has been nullified as Trump administration fears geopolitical considerations. 

2. Job losses can be another reasons that some politicians in the U.K worry about. When SoftBank bought Arm, it guaranteed to grow jobs in Britain. Labour Party warned recently that Nvidia's acquisition of Arm could lead for unemployment as the pledge will also be invalidated.

3. Arm has been in partnership with many customers in neutral position. However, Nvidia's acquisition can raise the concern from Arm's customers that it can exploit using monopoly rights to the existing clients.

Source WSJ NYT FT

https://www.nytimes.com/2020/09/13/technology/nvidia-arm-softbank.html

https://www.wsj.com/articles/who-are-nvidia-and-arm-and-why-are-they-talking-about-getting-together-11599938641

https://www.ft.com/content/6bfe40a5-2426-4743-98cd-6fed9dd01b98

ECB's dilemma on the rise of Euro

The euro has been surging 10% against U.S. dollar in six months in part because investors think Europe is strongly performing economic rebound after the great lockdown due to  pandemic. The bet on European stocks rise has been increased and and investors have kept buying euros in the aspect of optimistic sign of euro-zone recovery. U.S dollar has been weakening in the announcement that Fed will remain its super dovish stance of maintaining federal fund rate near zero until average inflation target(AIT) overshoots over 2% moderately for some time. Please see my blog about it.

https://techongstudy.blogspot.com/2020/08/review-of-monetary-policy-strategy-fed.html

U.S. is still struggling with pandemic now; indicating countermeasures weren't very appropriate enough to flatten the curve. Moreover, uncertainty about new cold war between U.S-China, and anxiety about the presidential election in November makes investors unease. These factors make the dollar weaker than the counter-parties such as Japanese yen and euro. 

Eurozone's rapid recovery could be a good sign, however absolute growth alone could stimulate the euro's jump; that means it can hurt inflation target near 2% and European manufacturers from exporting. A strong euro contributes to the risk of deflation or dis-inflation because imported goods become cheaper for European buyers. Moreover, when it comes to export, goods will automatically become relatively more expensive for international customers who pay in other currencies. The price disadvantage will put them in worse condition to compete against foreign rivals. 

Even before the pandemic, exports from European started stagnating due to the global slowdown whether it is directly and indirectly affected by the trade tension between U.S. and China. The Trump administration has imposed tariffs to European commodities such as steel and aluminum. Also, spread of Chinese economic deterioration created less demand on European goods.  European based companies like Ferrari, Fiat-Chrysler, or Michellin will get profit hit with appreciation of their currency. 

“There is a cost to the euro rising, and it’s on earnings,” said Mathieu Savary, a strategist at BCA Research. “If you’re a European industrial company and you compete with Caterpillar, you’re likely to see your profits being hurt when the euro is going up.”  Other trading partners including U.S. and China can benefit from strong euro by taking advantage of their relatively weaker currency.

European Central Bank did not change their interest rate at -0.5% and would support €1.35 trillion, equivalent to $1.59 trillion, of eurozone debt under an emergency bond-buying program unveiled in March. The ECB now aims to keep inflation in average of 2%.

Stronger euro is problem to eurozone. It would not meet the target inflation rate and hurt their export industry. However, ECB does not have enough ammunition to lower the key interest rate nor provides fresh new stimulus program, which is already massive. The central bank does not directly target the exchange rate, but should concern about it in regarding to their economy.  

Source WSJ, NYT

https://www.wsj.com/articles/ecb-leaves-policy-mix-unchanged-as-it-monitors-covid-19s-impact-on-economy-11599738872

https://www.wsj.com/articles/companies-brace-for-profit-hit-from-euro-rally-11599473390?mod=searchresults&page=1&pos=7

https://www.nytimes.com/2020/09/10/business/ecb-euro.html

Do we need short-sellers in the market?

Short-selling

It's one of the way of investing in stocks. When considering about long position investing, investors expects the stock will rise in the future and secure the stocks until the price rise in the future. Mostly, they buy value-growth stocks for betting future rises. Short selling is an opposite concept with the usual method. Investors predict the price of a stock will fall and bet against it, earning gains with inverse direction to the long. 

Process

Investors borrow shares in current price, sell them in the market, and return them back in the future. That is why they hope the market to be transacted in lower price so they can pocket the difference. For example,

1) If a person A is deciding whether to buy the shares of a specific company. By analyzing the firm's fundamental, A expects the sales of the company will fall down which will lead to the fall.

2) The person A borrows the company stock from lenders or brokerage firms, and sells in the price of $100 (which is market current price).

3) As expected, the share drops about half which makes $100 into $50. Then investors buy the share again in $50.

4) The investors returns the stock back to the broker. Then the investors gain the gains of $50.

Success stories in short-selling

During the financial recession in 2008, Michael Bury (movie Big Short) was betting against housing market rise, predicting the bubble would collapse resulting to sharp drop of securities. He made great wealth by a huge amount of short selling (buying CDS) which later made into massive returns. It is about 489% return ($2.69 billion in total). Other than that, George Soros made substantial profit betting against the rise of British Pounds and Italian Lira. 

Do we need short-sellers in the market?

Yes, absolutely. Those forces take essential part in the stock market. They can stabilize the capital market being overpriced or over-heated (bubble). They also can provide liquidity to function the market smoothly. Moreover, short-selling companies scrutinize meticulously whether the company honestly reports their earnings or not, which leads on positive effect on corporate's transparency on their financial statement. For example in the beginning of this year, Muddy Waters started shorting Luckin Coffee, one of the biggest coffee chain firm in China. They found out the possibility of accounting fraud in the company, which later let the world know about the scandal.

Lets be careful

Short-selling can be effective to earn gains only if the investors have strong conviction to the market's direction. Timing is also most important basis that short-sellers need. I read the article related to it in Wall Street Journal. I want to share part of the story: 

Mr. Kullamägi, who has been speculatively investing about a decade has been enjoying himself on volatile stocks for betting against the rise. One day, he captured the prey for his bets on Eastman Kodak's fall in July. When the government announced to grant $765 million loan for Kodak for supporting to make vaccine against Covid-19. The stock had threefold rise, and Mr. Kullamägi thought that the Robinhoods (mom-and-pop investors) will push the shares of Kodak higher, but would not last long. He tried to short 45,000 stocks partially until July 29th, but accidentally clicked the wrong button to double the short amount all of 90,000 shares at once which lead more cost. The shares rose seven times more and he was "stuck for the ride". He has made $1.5 million in his expenses for the trade cost.

Investors like to gain their profits by any method. It is not only individuals but also applies to the big firms like Softbank and Berkshire Hathaway. The method can be differed since there are various types of betting, however lets be careful before we put into the movements.

Source: Short Selling Stocks Proves Costly for Some Investors

https://www.wsj.com/articles/short-selling-stocks-proves-costly-for-some-investors-11599645600?mod=mhp