Europe Proposes Mass Confiscation of Private Assets

This is a shocking and disturbing piece of news. Reuters got a hold of a ‘secret document’ that shows the European Commission proposing wholesale confiscation of private European assets, for the greater good of the EU.

A document discovered by Reuters (available here) revealed two shocking developments in Europe.

1) Reuters reports that: “The EU is looking for ways to wean the 28-country bloc from its heavy reliance on bank financing and find other means of funding small companies, infrastructure projects and other investments.”

Obviously, the EU economy is growing too slow and the few visible green shoots aren’t of the organic sort. To boost growth, EU executives are proposing this scary and revolutionary solution:

“The savings of the European Union’s 500 million citizens could be used to fund long-term investments to boost the economy and help plug the gap left by banks since the financial crisis, an EU document says.”

According to the document, the EU Commission will ask the bloc’s insurance watchdog later on in 2014 for ways to “mobilize more personal pension savings for long-term financing.”

Keep in mind that politicians are crafty when it comes to using appealing and concealing verbiage, so let’s try to translate a couple of specific terms.

What does “Savings of EU citizens could be used to fund …” and “mobilize more personal savings” really mean?

Obviously, EU citizens don’t feel comfortable willingly investing in the kind of shenanigans the EU Commission (and probably EZB) is about to propose.

“Mobilize more personal pension savings” is more attractive than confiscate, but essentially means the same thing.

How much money are we talking about? A quick thumbnail calculation based on the data of Germany’s insurance giant Allianz (which pegs the per capita wealth of Western Europe at 44,780 euro) suggests total private assets amount to roughly 17 trillion euros (or $23.3 trillion).

2) Additionally, the EU Commission apparently would like to do away with fair value pricing in connection with long-term securitization of mortgages and trading of corporate bonds.

Let’s review and allow a moment for this to sink in: The EU economy is weak. The money of its citizen is to be used (seemingly against their will) to create the kind of financial products that caused the post-2007 financial crisis.  Accounting standards are to be changed to inflate prices and hide potential losses.

The asset confiscation part is unusual even by U.S. standards, but the proposed accounting trick was born in the U.S. before it appeared in this European proposal.

A similar accounting change, forced by Congress upon the Financial Accounting Standards Board (FASB) via the Emergency Economy Stabilization Act of 2008, miraculously made financial sector (NYSEArca: XLF) losses disappear into a black balance sheet hole called ‘comprehensive income.’

Near bankrupt banks all of a sudden turned profitable (on paper) and the S&P 500 and Dow Jones soared. In fact, this simple accounting trick may have contributed more to the post-2009 S&P 500 (NYSEArca: SPY) and Dow Jones (NYSEArca: DIA) rally than QE.

A concise but striking nutshell explanation of this accounting trick (born in the U.S. before exported to Europe) is available here:

The Simple Trick that Skewed P/E Ratios For Everyone

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

$7 Trillion Corporate Cash Pile – Can it Set Stock Market on Fire?

Based on recent Thomson Reuters data, corporations around the globe hold a record $7 trillion worth of cash on their balance sheets. This has to be bullish for stocks, right? Not necessarily. Here’s everything you’ll ever need to know about the effect of corporate cash piles on stocks.

Reuters just reported that companies around the world hold almost $7 trillion of cash and cash equivalents on their balance sheets.

The Federal Reserve pumped about $3 trillion into the U.S. economy. This has propelled the S&P 500 ETF (NYSEArca: SPY) by over 175%. Should we imagine what $7 trillion could do?

Let’s take a look at some basic numbers and concepts before we start drooling over the potential stock market profits.

Corporate Cash 101

It is somewhat difficult to find coherent corporate cash figures that allow consistent charting and tracking. Most estimates exclude financial corporations (NYSEArca: XLF), other don’t. Some estimates are limited to domestic cash piles, other are global.

The analysis provided here is based on data from the Federal Reserve for non-farm and non-financial companies.

Based on the latest available data, non-financial U.S. corporations had caches worth $1.76 trillion. As figure 1 illustrates, this is the highest corporate cash pile in history.

Two Sides of the Balance Sheet

However, there are two sides to the balance sheet: Assets and liabilities. Wherever there are assets, there are also liabilities.

Figure 2 shows that corporate liabilities have grown along with the assets. The data suggests that a fair portion of the corporate cash pile is mortgages by liabilities.

Figure 3 pegs the difference between U.S. non-financial corporate assets and liabilities – U.S. corporate net worth – at $1.1 trillion.

The ‘Corporate 1%’

According to the Financial Times (which analyzed the S&P Global 1200 Index), 32% of corporations hold 82% of the aggregate global cash hoard.

Figure 4 shows the top 5 cash richest corporations of 2013. Apple, Microsoft, Google, Verizon, Samsung.

Effect of Corporate Cash on Stocks

Basic logic suggests that corporate cash – if invested – is bullish for the economy and, by extension, major stock indexes like the S&P 500 and Dow Jones (NYSEArca: DIA).

Figure 5 plots the S&P 500 (SNP: ^GSPC) against U.S. corporate ‘net worth.’

The correlation between corporate ‘net worth’ and S&P 500 peaks contradict the assumption that corporate wealth is good for stocks.

The red lines show that major S&P 500 peaks coincided with prior, albeit smaller, corporate cash stockpiles.

Corporations have more money because they are paying less taxes despite record profits.

‘Legal’ tax evasion has become one of the biggest contributors to the growing cash pile.

Here’s how companies do it and how many billions they save (or cost Uncle Sam):

Corporate Profits – Born in the US, Taxed Elsewhere or Nowhere

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Diversification: The Correlation Risk Trap is Real

A rising tide lifts all boats and liquidity buoys all asset classes. That’s great, but it’s not diversification. In fact, it presents a whole new type of hidden risk. Many ‘diversified’ portfolios today would fail miserably at any sort of Black Swan event.

The purpose of diversification is to reduce risk. The rationale behind diversification used to be that booming cycles of some asset classes offset the bust cycle of other assets.

Diversification made sense in an environment where some asset classes boomed while others got busted, but that isn’t the case anymore.

Today most asset classes ebb and flow at the same time, but at different degrees. This makes diversification less effective and possibly dangerous.

The first chart shows the percentage change of the following asset classes/ETFs since January 2007: S&P 500 SPDR (SPY), iShares Core Total US Bond ETF (AGG), iShares Dow Jones US Real Estate ETF (IYR), and iShares S&P GSCI Commodity ETF (GSG).

In early 2007 stocks and commodities cushioned the decline in real estate prices. In 2008 commodities lessened the sting of falling stock and real estate prices.

Then came quantitative easing and it’s become clear ever since that all asset classes swim in the same liquidity pool. Some swim faster, some slower, but all float with the tide.

Different Approach to Diversification

A less popular, more contrarian and quite possibly more effective approach to diversification involves simple under appreciated cash.

Based on Rydex funds flow data, investors are despising cash like never before. Low interest rates are partially to blame for the great cash exodus, but excessive enthusiasm for stocks is probably the main motivation.

The second chart illustrates basic support (green) and resistance (red) ranges for the S&P 500. The S&P tends to get overbought in the red and oversold in the green zone.

Over the past years, investors did well to diversify out of stocks (and other assets) into cash when prices reached the red resistance range and rotate out of cash into stocks (and other assets) in the green range.

The S&P is about to reach overbought territory and risk is rising. Raising cash may offer more risk protection than diversification.

The Profit Radar Report will provide specific trigger levels indicative of a trend change from up to down.