Here are
the less-timely trading-, markets- and research-related article links from the
past week or so. You can get update notifications by following MoreLiver on Twitter or Facebook. Contact me with any questions or
suggestions!
Previously
on MoreLiver:
TRADING, RESEARCH, MARKETS
GENERAL (but timely)
Some genuine uncertainties – Buttonwood’s
/ The Economist
I am sure that many people will assign some
ideological bias to these questions but they seem to me to be reasonable issues
with which policymakers, investors and voters must grapple, let alone the
humble trade of columnists. The absolute
certainty with which some people proclaim on either side of these issues fills
me with unease.
Equity market breadth at present remains
healthy enough to warrant the continuation of an uptrend, but what we can
notice in recent weeks is that defensive sectors are now starting to outperform
cyclicals.
STOCK MARKETS
Nine Takeaways From Earnings Season – ZH
Goldman Sachs: Despite the positive surprises, full-year 2012 EPS estimates are unchanged relative to the start of earnings season, and currently stand at $105 vs. our top-down forecast of $100. Over half of consensus 2012 earnings growth is attributed to 4Q. Margins at 8.8% have hovered near peak levels for a year, but consensus expects a sudden jump in 4Q to a new peak of 9.1%. We forecast a further decline to 8.7%.
Goldman Sachs: Despite the positive surprises, full-year 2012 EPS estimates are unchanged relative to the start of earnings season, and currently stand at $105 vs. our top-down forecast of $100. Over half of consensus 2012 earnings growth is attributed to 4Q. Margins at 8.8% have hovered near peak levels for a year, but consensus expects a sudden jump in 4Q to a new peak of 9.1%. We forecast a further decline to 8.7%.
Correlations are
stronger between European equity markets and the S&P 500 than they are to
the state of their own domestic economies. The correlation between the FTSE 100
and the S&P 500 has, during the past five years, been an astonishing 97%.
“Sell in May” Debunked? – MarketSci
Blog
I’ve assumed that each year the investor only
looked at the data available from 1930 up to that point in time, and invested
in whatever 6 months of the year had been the best for stocks. This is called
“walking the test forward”, and (to some degree) removes the benefit of
hindsight.
The Evolution of “Sell in May” – MarketSci
Blog
I show how the stock market’s best 6 months of
the year has evolved over the last 80+ years…
The myth of the frictionless equity risk
premium – Abnormal
Returns
Equity risk premiums are a central component of
every risk and return model in finance and are a key input into estimating
costs of equity and capital in both corporate finance and valuation. Given
their importance, it is surprising how haphazard the estimation of equity risk
premiums remains in practice.
Statistical analysis could predict bankrupt
stocks – physorg
During the 20-year period from 1989 to 2008,
21% of of all stocks listed in US stock markets became bankrupt. Since
bankruptcies affect many investors and have played a large role in the recent
global financial crisis, predicting bankruptcy before it happens could help
some investors avoid large losses. In a new study, a team of physicists has
used concepts from statistical physics to identify some characteristic
behaviors of pre-bankrupt stocks that differ significantly from stocks that
don't become bankrupt. The approach may eventually help investors forecast
stock bankruptcies weeks or months in advance.
Which price ratio outperforms the enterprise
multiple? – Greenbackd
(authors) examine a range of price ratios over
the period 1971 to 2010… The returns to an annually
rebalanced equal-weight portfolio of high EBITDA/TEV stocks, earn 17.66% a
year, with a 2.91% annual 3-factor alpha (stocks below the 10% NYSE market
equity breakpoint are eliminated)
Do long-term, normalized price ratios
outperform single-year price ratios? – Greenbackd
There is no evidence in Gray and Vogel’s
results that any long-term average is better than any other, or better than a
single-year price ratio. One heartening observation is that, however we slice
it, value outperforms glamour. Whichever price ratio we choose to examine, over
any long-term average, value is the better bet.
Should the business cycle affect the choice of
price ratio? Asset-based measures versus earnings and cash flow-based measures – Greenbackd
There is little evidence that a particular
value strategy outperforms all other metrics during economic contractions and
expansions. However, there is clear evidence that value strategies as a whole
do outperform passive benchmarks in good times and in bad. The one exception to
this rule is during the April 1975 to June 1981 business cycle, a time when a
passive small-cap equity portfolio performed exceptionally well.
Value Investing: Investing for Grown Ups? – SSRN
Value investors generally characterize themselves as the grown ups in the investment world, unswayed by perceptions or momentum, and driven by fundamentals. While this may be true, at least in the abstract, there are at least three distinct strands of value investing.
Value investors generally characterize themselves as the grown ups in the investment world, unswayed by perceptions or momentum, and driven by fundamentals. While this may be true, at least in the abstract, there are at least three distinct strands of value investing.
Mean Reversion in Stock Prices: Implications
for Long-Term Investors – DNB
(pdf)
Netherlands Bank DNB Working Papers by Jacob Bikker and
Laura Spierdijk
EXCHANGE-TRADED FUNDS
ETFs – The Next Accident Waiting to Happen? – Golem
XIV
I think that in a couple of years, unless
something alters the current trends in money flows, we will come to know ETFs
the way we already know the securitization and packaging of sub-prime mortgages into CDOs
ETFs – Part 2 – Golem
XIV
Now lets look at how, as the ETF market has
grown, the clever boys and girls of finance have found ‘innovative’ ways of
pumping those ETFs up a bit, just like they did to Securities.
A mystery in the iShares Dax ETF – alphaville
/ FT
In April, the iShares Dax ETF experienced outflows of some $5bn. For a fund which held about $13bn under management at its peak, that’s a sizeable chunk of capital that just flew out
In April, the iShares Dax ETF experienced outflows of some $5bn. For a fund which held about $13bn under management at its peak, that’s a sizeable chunk of capital that just flew out
OTHER ASSETS
Is EURUSD Volatility About To Explode? – ZH
…the gap between EURUSD implied volatility and
European equity implied volatility is becoming excessive.
Five Reasons China's Growth Rate
Projections Will Not Happen: 1. Peak Oil 2. Unsustainable, very troubled
State-Owned-Enterprise (SOE) investment model 3. Regime change will shift from investment export
driven model to consumption driven model and the transition will be extremely
painful 4. Crash of China's property bubble 5. Demographics
Why shorting Spanish and Italian Bonds is the
Right Trade – TF
Market Advisors
Japanese exchange-rate policy: Weaken, dammit! – The Economist
Japan’s policymakers try subtle approaches to cheapen the yen
DERIVATIVES
Back up a moment to remember what first brought
JP Morgan’s Chief Investment Office to our attention. It was a bunch of hedge
funds complaining to journalists that big trades done by the CIO were causing
the Markit CDX.NA.IG.9 credit index to become a lot cheaper than its component parts.
A Review of Volatility and Option Pricing
(2009) – arxiv
The literature on volatility modelling and
option pricing is a large and diverse area due to its importance and
applications. This paper provides a review of the most significant volatility
models and option pricing methods, beginning with constant volatility models up
to stochastic volatility. We also survey less commonly known models e.g. hybrid
models. We explain various volatility types (e.g. realised and implied
volatility) and discuss the empirical properties.
PLAYERS
The Swiss National Bank reported its reserve
figures yesterday and the increase in its sterling holdings are notable and may
help explain the its relative strength… Separately, Norway's sovereign wealth
fund, the Government Pension Fund Global, indicated it has sold off its Irish
and Portuguese bond holdings, pared its Spanish and Italian holdings and
increased its exposure to Mexico, Brazil and Indian bonds.
Hedge fund flows – Sober Look
Here are the latest available flows by fund
strategy. Looks like futures funds and some large diversified funds are the
only ones to get material inflows.
Media-savvy economists playing both sides against
the middle – Irish
Times
One of the more interesting phenomena of the
crash years has been the emergence of the celebrity economist. The collapse of
public trust in politicians and the many institutions of government created a
space in the public debate which was filled by a handful of media savvy and
articulate economists.
Notes From Warren Buffett's Meeting With MBA
Students – market
folly
REGULATION
Fundamental review of trading book capital
requirements – BIS
Press
release about the Basel Committee consulting on the fundamental review of
trading book capital requirements: This
consultative document presents the initial policy proposals emerging from the Basel Committee’s
fundamental review of trading book capital requirements. These proposals will
strengthen capital standards for market risk, and thereby contribute to a more
resilient banking sector. Full document: BIS (pdf)
Regulatory Reform since the Financial Crisis – The
Big Picture
Governor
Daniel K. Tarullo / Council on Foreign Relations: However, this necessary attention to details also places us at risk of
losing sight of the broader reform picture. So this morning I would like to do
some stocktaking: to review briefly the vulnerabilities in the financial system
that contributed to the crisis and compel regulatory response, to outline some
key reforms adopted to date, and to identify important tasks that remain.
Sympathy for the Flash Crash – Aaron
Brown / Minyanville
The entire modern world has become too complex
for anyone to understand, and therefore, too complex for anyone to fix with
top-down rulemaking.
OTHER
Correlating Risky Assets – The Aleph Blog
So as new asset or sub-asset classes are
introduced, in the short-run they are uncorrelated, and likely rally, because
few own them. But after the rally, many
now own it, and the future correlations are high because so many own it. The correlations ultimately depend on two
things: the underlying economics, and investor behavior. Investor behavior is the dominant aspect of
pricing.
Crisis Alpha and Risk in Alternative Investment
Strategies – CME
Group
The key lies in understanding the differences
found in three kinds of risk: price, credit and liquidity risk. The authors
examine the performance of various alternative investment strategies, as
executed by different hedge funds and CTAs, in view of the types of risks they
take
Happy 2nd Anniversary, Flash Crash of 2010! – The
Big Picture
This Sunday will mark the 2nd anniversary of
the May 6th Flash Crash of 2010. As we all trade in this extremely low-volume
environment, it is fitting that we recap where we stand today.
“A gradual deterioration in the collateral
backing multi-cedulas” – alphaville
/ FT
Interestingly Dierks adds there are already
huge disparities within individual multi-cedulas with respect to the highest
and lowest over-collateralisation ratios: “Depending on the banks involved, the
latter ranges from 60% to as much as 300%”. What was it that Santander’s CEO said again
about mortgages always getting paid?