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Saturday, May 5

5th May - Weekender: Trading & Markets

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:


GENERAL (but timely)
Some genuine uncertaintiesButtonwood’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.

China Leads The WayThe Short Side of The Long
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.

Nine Takeaways From Earnings SeasonZH
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%.

U.S. Is More Important to Euro Shares Than EuropeThe Source / WSJ
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 premiumAbnormal 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 stocksphysorg
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 measuresGreenbackd
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.

Mean Reversion in Stock Prices: Implications for Long-Term InvestorsDNB (pdf)
Netherlands Bank DNB Working Papers by Jacob Bikker and Laura Spierdijk

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 ETFalphaville / 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

Is EURUSD Volatility About To Explode?ZH
…the gap between EURUSD implied volatility and European equity implied volatility is becoming excessive.

China's Population Poised to Crash in Perfect Demographic StormMish’s
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 TradeTF Market Advisors

Japanese exchange-rate policy: Weaken, dammit!The Economist
Japan’s policymakers try subtle approaches to cheapen the yen

CDX tranches, now trading without delta near you!alphaville / FT
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.

Some Interesting Developments by SNB and Norway's SWFMarc to Market
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 flowsSober 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 middleIrish 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 Studentsmarket folly

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 CrisisThe 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.

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 StrategiesCME 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?