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What happened in 2017?


According to Böhme, Rainer, Nicolas Christin, Benjamin Edelman, and Tyler Moore (2015), “Bitcoin is an online communication protocol that facilitates the use of a virtual currency, including electronic payments”. Some suppose that the year 2017 can be called the year of Bitcoin. And rightly so. Laymen all over the world were amazed while witnessing an almost unprecedented surge of more than 900% in Bitcoin’s price in 2017. The simple announcement of creating own cryptocurrency by Kodak made the company’s share price rise by 60%. It seems that cryptocurrencies begin to be the embodiment of profitability. However, the question that is also of interest to the publicity that still bears in mind the pain of 2008 financial crisis is whether all the fuss around Bitcoin is just in vain and it is just another bubble just like real estate in 2000s and tulipomania in the 17th century.

Especially now when it is treated like a store value allowing speculators to make bets concerning how far it can rise. Doesn’t it sound familiar? The reason why it is considered to be a bubble by certain groups of people is due to the absence of intrinsic value to its holder except for the one assigned by the community. Nevertheless, it is still believed that in case it is a bubble there’s still room for growth while comparing with dot com bubble of the beginning of the 21st century. However, the further surge of bitcoin poses another danger. As more and more people engage with this virtual currency that has the potential to disrupt existing payment systems and perhaps even monetary systems, the higher risk of regulators’ intervention emerges. Whatever happens to Bitcoin in 2018, we have every reason to be sure that it is worth following. But be cautious, as John Maynard Keynes once said: “The market can stay irrational longer than you can stay solvent”.


Another story worth telling is the story about Tesla that has seen the increase of 45.7% in its share price since the closing price on the last trading day in 2016. Such a surge can be attributed to the launch of Model 3 – lower cost EV. The announcement of the model 3 in 2016 resulted in roughly 325000 reservations, which implied the revenue of $14 bln. The expectation of future profits caused positive changes on the stock market. Those expectations were also accompanied by investors’ belief that the introduction of Model 3 will turn Tesla from a niche maker of expensive electric luxury cars to something more like a mainstream high-volume automaker. However, the stock of Tesla is highly susceptible to any news concerning the model making the stock highly volatile.

During the year 2017, Tesla faced challenges in terms of setting up the necessary production capacity. “Production bottlenecks” and the revelation that the desired production capacity will be postponed until the first quarter of 2018 (previously it was promised that desired level of production will be achieved by the end of 2017) brought about the fall of approximately 20% in Tesla’s share price since September of 2017. Investors also feel uncertain regarding Tesla’s plans to have a 25% profit margin on Model 3 while other automobile companies were not able to achieve such a margin on their EV. Thus, it is seen that the main challenges are only ahead of Tesla. And delivering on the capacity promises is just one of them.

EU growth

Economic development in the EU has been described by the so-called eurozone euphoria. The reason for that is the fact that, firstly, despite “Trump bump” the EU outperformed the US in terms of economic growth in the third quarter of 2017 and, secondly, 2017 proved to be the best year for the eurozone since the financial crisis.

The growth was largely driven by Germany and its exports and increased capital expenditure. Other big economies of the eurozone such as France and Italy also performed better than expected.  Since such a growth rate can be considered as abnormal for the area, it also entails decreasing unemployment from 12.1 per cent in 2013 to 9.3 per cent in April of 2017. As the Phillips curve predicts, lower unemployment is associated with higher inflation.

Thus, it is no surprise that the European Central bank made a decision to decrease the amount of bonds purchased as a result of Quantitative Easing to 30 billion euros to control inflation at the acceptable level of around 2%.









What’s next for Apple?

This week Apple released its quarterly results surprising investors and analysts with very strong earnings. After the announcement, the stock was up 6%. Although the stock is obviously undervalued and is trailing behind industry peers, the pressure to show growth in new markets and lack of new products still presents a big caveat in investing in the American tech giant.

On Tuesday, the company reported $78.4bn in revenues – the largest quarterly sales ever recorded in the Apple’s history. The record figures were helped by the great sales of iPhone 7 – the flagship product’s unit sales reached 78.29 million in the upbeat Christmas quarter. The jump in revenues from the mobile phone was largely due to the hike in average price – the more expensive phones were selling better driving the price to 695$ from 619$ per unit.

Although, the other divisions did not contribute that much to the 4th quarter success. The iPad sales were up from Q3, but continue to fall on the year-on-year basis. This quarter recorded the 13th consecutive decline. The new iPad Pro failed to boost the revenues of the stagnating division, while the new models of standard 9.7-inch tablet can’t match the demand of 2010-2013 when the innovative product was rapidly gaining ground all world. The good news for the company is that computers are still here and it seems that nothing could really substitute good old laptop. The new Mac, although largely criticized posted the best sales ever as well.

Apple sales breakdown. Source: Business Insider, Statista

The complimentary to the Apple product services are largely neglected as the secondary business of the company, but they prove to be even more and more profitable. App Store, Apple Music, iCloud, etc. almost reached the revenues of the computing department with 7.17bn in sales. The same goes for the Apple Watch – during the conference call Tim Cook, CEO, bragged that the quarter is the best for the smart watches as well. The analysts were not that optimistic. “Strategy Analytics”, a consultancy, estimated that sales were up from 5.1m to 5.2 m units and the market for smart watches grew by tiny 1% in 2016. The new wireless headphones are counted in the “Other” category and do not represent a big share of Apple’s sales, but if bundled with iPhone could do a good job in pushing the average price even higher.

The problem with Apple is that it now looks more as a value stock with a stable cash flow and no growth. The company heavily relies on the iPhone sales and had no star products since iPad. The new product that the company is supposedly working on are self-driving cars, although not known if Apple develops hardware or software. This is comforting, taking into account enormous research efforts of competitors in virtual reality and artificial intelligence.

The support for the claim came today when “Brand Finance”, a consultancy, updated its annual brand value ranking. Apple slipped to the second spot with a brand valued at $107.1bn, while Google overtook the first place with a value of $109.5bn. Commenting on the Apple’s brand value, which is down by 27%, the report says “Put simply, Apple has over-exploited the goodwill of its customers, it has failed to generate significant revenues from newer products such as the Apple Watch and cannot demonstrate that genuinely innovative technologies are in the pipeline”.

Most of the stock market analysts are long on the company anyway. With a P/E ratio of 15.42, a large pile of cash and the promises of strong US economy and lower corporate taxes, the company seems much undervalued and presents a good investing opportunity. The market is overwhelmingly bullish on Apple stock.

Big Banks, Small Banks: Monte dei Paschi and Feasible Ways to Deal with Non-Performing Loans

Big Banks, Small Banks: Monte dei Paschi and Feasible Ways to Deal with Non-Performing Loans

By Anton Nartov

The year 2016 has been full of unpleasant news for the European banking sector. It started with profitability and capital concerns about Deutsche Bank which resulted in its shares hitting an all-time low in September – worse than during the Great Recession. Another issue it related to Italian banks and specifically Monte dei Paschi, whose share prices have not seen steep upward movements since 2014, and whose bailout is to be discussed this weekend. The world’s oldest lender, however, is not the only problem for the Italian banking sector – most of the biggest banks in the country are currently being merged or recapitalized to finance a €360 billion pile of bad loans, which could potentially trigger worldwide economic disturbances via threatening Italy’s Eurozone membership. Analysts are certain that at least some of these banks will need government backing.

In July, the European Central Bank required that Monte dei Paschi reduced the share of non-performing loans (NPL) by around €32.3 billion by 2018, which triggered worries about solvency of the latter and Italy’s banking system overall. The situation is worsened by Matteo Renzi’s defeat at the recent Italian constitutional referendum that resulted in a turmoil of European markets and growing yields of Italian bonds. For Monte dei Paschi, which is Italy’s third largest bank by assets, this means increasing chances of collapse, since an attempt to raise the required €5 billion of additional capital by private sector investments is now likely to fail. Renzi tried to avoid a public bailout by any means, and Monte dei Paschi could have been rescued by such investment banks as JPMorgan and Mediobanca that were prepared to execute the plan. Another option was Qatar’s sovereign wealth fund; however, both plans have been declined due to the current political situation – investors are concerned about the high level of political uncertainty in Italy and anti-euro parties that potentially might come to power. Besides, it is obvious that these resources will be used to cover future losses, which does not make Monte dei Paschi an attractive investment, and this explains the awful share price performance throughout the year.

Thus, the only feasible option to avoid a wider banking crisis after Renzi’s defeat is pumping government money under so-called precautionary recapitalization, which involves a state injection of cash, bail-in of bondholders by converting their bonds into equity, and a set of compensations for small investors. It is worth mentioning, however, that the bailout is a complicated option for Italy, since under the new set European Union rules, bondholders are those to take a hit in case of a public bank bailout, which is introduced as a means to protect taxpayers. The problem is that the majority of bondholders in the case of Monte dei Paschi are individual investors, and a bailout will lead to either breaking the European Union rules and growing levels of budget deficit in Italy, or dramatic losses among investors holding subordinated bonds of the bank, who believed their savings were well protected.

The latest news reports state that Italy is demanding more time to make a €5 billion injection (specifically, until mid-January) in order to protect some bondholders, and if the ECB does not provide time, the bank is likely to be bailed-in in the upcoming days, leading to severe losses among these bondholders (according to EU regulations). Besides, speaking of macroeconomic indicators, Italy is currently facing the second highest debt level in the European Union (followed by Greece), so a government cash injection does not only damage individual investors, but also macroeconomic stability of the country, thus raising concerns about health of the European economy and stimulating safety-seeking behavior among investors. And although other options are being discussed by the press (such as exploring loans with the European Stability Mechanism), precautionary recapitalization is most likely to be undertaken by the government of Italy, although it has been attempted to avoid by any means.

To sum up, in spite of the medium term uncertainties faced by Monte dei Paschi, the main issue is the long run development of Italian banks. If non-performing loans are covered and the bailout is successful for Monte dei Paschi, the current and future issues are not solved completely unless there is a marketplace that can provide liquidity for NPLs, which also implies collateral as a means to compensate investors if the loan is unpaid. The solution of these issues is a topic for a different discussion, and in the nearest future we are likely to see what will be done to resolve some of the largest problems of the European financial sector.



Donald Trump and Financial Markets

NEW YORK, NY - NOVEMBER 09: Republican president-elect Donald Trump delivers his acceptance speech. (Photo by Mark Wilson/Getty Images)

NEW YORK, NY – NOVEMBER 09: Republican president-elect Donald Trump delivers his acceptance speech. (Photo by Mark Wilson/Getty Images)

How markets reacted to the surprising victory and what to expect next.

The possibility of Donald Trump presidency was a worrying event for many, but the economists were among the loudest to warn about the unfortunate consequences of Trump’s presidency. More than 370 economists including eight Nobel laureates signed an open letter against the potential president. But while the macroeconomic consequences of the policies put up by president-elect are long-term, the developments of financial markets are much harder to predict. In the article, a day before the election, Eric Zitzewitz, a professor of economics, warned of a 10% fall in global markets in case the Republican nominee wins the White House. Did not happen.

The American stock markets unexpectedly grew after Tuesday’s surprise. Those were Mr. Trump policies, which ensured many investors that some sectors of the economy may actually perform better. Dow Jones Industrial Average hit all-time-high, fuelled by hopes of tax cuts and increase in infrastructure spending. Many analysts do not attribute the stock market gains to the Trump election but rather alluding to the health of the American economy, which has been growing for more than 7 years.


The wider S&P 500 index also gained 0.2% with various sectors reacting differently to the news. The banks surged 3.7% on expectations of lower regulation and repeal of Dodd-Frank Act. The post-crisis restrictions and low-interest rates environment have been responsible for the sell-off of financial stocks. With the December Fed meeting coming closer and high possibility of rates hike, the banks may expect 2017 to be much better.

The similar sentiment of lower regulation boosted Healthcare stocks not only in the US but also in Europe, where they were the biggest winners. Pfizer is up more than 8% since the election. European giants Novartis and Sanofi are both up by more than 4% comparing to the Euro Stoxx 50, which plummeted on the news of Trump victory but then rallied and closed at the same levels.

The big losers of the night were Technology and Utilities shares. Tech companies are among the most relying on foreign exports and imports. If Mr. Trump’s to kill the US trade deals, tech giants will suffer first. With more than 50% of sales abroad, many technology companies may lose a significant part of their revenue. In addition, Donald Trump has strained relations with some IT leaders. Apple was criticized during the campaign for production in China. Amazon’s CEO and the owner of Washington Post was also attacked by Trump, who threatened investigation of Amazon.

Utilities that are famous for low volatility and stable dividends flow suffered from rising bond yields. The stocks of water, gas and energy suppliers are considered substitutes for bonds, so the bond market fluctuations affect their stock price.

The bond market reacted differently to equities with 10-y US Treasury bills prices down and yields up. Trump policies are likely to boost inflation, so the compensation for holding long-term assets must now be higher. Moreover, all the spending must be funded by the issuance of more bonds, so the supply will certainly rise.eur-usd

The currency market experienced a fast dip, with dollar plunging against the euro to 1.1250 and immediately regaining ground after Mr. Trump’s surprisingly calm acceptance speech. Fiscal spending, tax cuts and bringing the offshore cash back to America will essentially increase the demand for dollar and it will rally in the long run – the most accurate Bloomberg analysts claimed. Higher interest rates will also make dollar an attractive investment bringing capital from developing countries, whose currencies are to suffer most in the next 4 years. The aggressive protectionism will create hardship for America’s largest trade partners as Mexico, Canada and China. The Mexican peso is already at record lows losing more than 12% after the upsetting victory. The Chinese Yuan also plummeted to 6-year low.

Some commodities were also the big winners of the November 8 night. The gold is a traditional safe haven in case of recession or geopolitical tensions failed to keep up with the bad expectations and collapsed; it rallied right after the announcement and may rise even more in case the economy will not be so great under Trump, but for now it is surprisingly weak. The development of the oil price is difficult to predict. On one hand, Mr. Trump supported increasing domestic production and more investment in oil and gas infrastructure. On the other hand, it is unclear if the petroleum exporting countries will cut the production and what the US relations with them will look like. Donald Trump who has been accusing Muslims of terror during the campaign may not be very nice to the Middle East countries.

Taking into account how unpredictable Donald Trump is, his stance on the important issues may change overnight. The American political system is, though, not particularly vulnerable to the mood of the president. The economy has been doing great for the last years – GDP growth is strong, the country is close to the full employment and corporate profits are solid. Mr. Trump has to do something  in order to overturn the positive trend. That is why, as long as Congress thinks clearly, the market will not collapse, but some changes are definitely here to happen.