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Saturday, July 14

14th Jul - Weekender: World, Markets, Trading

A combined post on multiple topics. Also check last night’s US Close: Bragging Rights for my narcissistic, childish joy of calling the markets correctly. I will post my updated views later this weekend.

Previously on MoreLiver's:
Weekender: Weekly Support - weekly review and previews
Best of The Week - for the good articles you might have missed

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EUROPE
The Italian Conundrum Re-Define
After Spain, it’s Italy’s turn in the Eurocrisis spotlight. …The single biggest factor weighing on the Italian economy at present is the uncertainty about whether or not the Eurocrisis will be resolved.

The Eurozone crisis and exchange controlsClifford Chance
Contingency planning around the Eurozone crisis inevitably turns to the possibility of  exchange controls, whether in the context of a default by a Eurozone member state or a departure from the Eurozone. (hat tip Alea)

Portugal – Please Switch The Lights Off When You Leave!A Fistful of Euros
All in all Portugal may be in the invidious position of finding that while it complies with most of its immediate programme objectives the road to sustainable debt and growth levels to be fraught – as the IMF itself notes in its April programme review – with almost insurmountable difficulty. (presentation here)

The Beginning of the EndgameJohn Mauldin / The Big Picture
While the problems in the US, Japan, the United Kingdom, and Europe all stem from too much sovereign (government) debt, there are very real differences in how the Endgame plays out…If, somehow, some magic is found to deal with the sovereign-debt and banking crisis, the trade imbalances will still be there. And the only realistic way to deal with them is for wages to come down in peripheral Europe. And that will not happen overnight.

Weaponization of Economic TheoryMichael Hudson
Europe’s three needs: a debt write-down, a real central bank, and a more efficient tax system...The U.S. Government as well as European governments have taken bad bank debts onto the public balance sheet. This is not a problem for the United States, whose Federal Reserve can simply create the credit to roll over its debt. But for Europe, public debts simply cannot be paid under current central bank constraints. Instead of changing the central bank rules, the European Union is willing to plunge the continent into depression and economic shrinkage.

Catch-22: the craziness of saving the euroOpinion / FT
It is a European Catch-22. To believe the eurozone can be saved, you must be crazy. But if you don’t try to save it, you are no less crazy – which means you must keep believing something mad.

Europe and the world economy at the tipping pointMadariaga (pdf)
Armageddon is looming - The Eurozone crisis is entirely self-inflicted and policy-driven Presentation slides pdf
A massive drop in the ECB Deposit Facility balance is due to zero rateSober Look

Decline in Spanish banks' contribution to the ECB Deposit Facility Sober Look

Devaluation and internal adjustment of the real exchange rate bruegel

3 reasons Eurozone's investors love Danish bonds Sober Look
Lack of FX risk, fundamentals (low debt & deficit), outside Eurozone

What next for European MMFs? alphaville / FT
Fee waivers and duration extension, according to Fitch’s Fund & Asset Manager rating group.

Firm Credit in Europe: A Tale of Three Crises Central Bank of Ireland (pdf)

The effects of fiscal shocks on the exchange rate in the EMU and differences with the US Bank of Spain (pdf)

Assessing the anchoring of longer-term inflation expectations ECB (pdf)

Monetary and fiscal policy interactions in a monetary union ECB (pdf)

The effectiveness of monetary policy in steering money market rates during the financial crisisBundesbank (pdf)

Revisiting the effective exchange rates of the Euro ECB (pdf)

The PHF: a comprehensive panel survey on household finances and wealth in Germany Bundesbank (pdf)
  
USA
U.S. Monetary Policy: A View from Macro Theory St. Louis FED (pdf)

Bernanke should end this uncertainty about the FedGavyn Davies / FT
Either of these conditions was sufficient for additional easing, but both have now been met…It does not follow that the chosen path will necessarily involve an increase in the balance sheet, but it is likely to do so if the Fed follows the thinking of several of the doves and buys mortgage securities. Another round of forward guidance about rates is also very likely…The next FOMC meeting starts on 31 July.

Citi: Lessons from U.S. Fiscal Deleveraging After World War II ZH
The key is to find a path for expenditures and revenues that avoids the so-called “fiscal cliff” in the near term but that firmly reduces the trajectory of the debt over the medium to long run. Without such a solution, we leave ourselves vulnerable to the vagaries of sentiment in the bond market, thus opening the door to an unwelcome set of severe financial risks.

Cleveland Fed Estimates of Inflation ExpectationsFED Cleveland
Very nice charts, includes downloadable data

Is QE3 coming?Econbrowser
Conditions have changed since January, and we might expect some additional stimulus from the Fed at the next FOMC meeting.

Fed's Lockhart on Monetary PolicyCalculated Risk
On Friday afternoon, one of the undecided FOMC members, Atlanta Fed President Dennis Lockhart appeared to move closer to voting for QE3 now.

ASIA
FT podcast: Left behind in Japan and China – The World / FT
World Weekly with Gideon Rachman: The economic challenges and changes facing the young "ice age generation" in Japan, and the "post-1990" generation of Chinese youth. (16 min)

The ultimate guide to China’s monetary policyASA

No clear signs of bottoming yet for China’s economyASA
we see very few signs that points to recovery.  The consensus of a second half rebound is, in our view, based entirely on the faith on the government’s ability and willingness to stimulate the economy.


STOCK MARKET
Earnings Get a Little BetterBespoke
But over the past two days the reports have gotten better.  Of the last fourteen companies that have reported, ten have beaten estimates.  So while the total beat rate for the entire week remains low (11 out of 30), things look a lot better now than they did mid-week.  The market appears to have noticed this as well.

Impossible Earnings Season StepfunctionZH
Goldman Sachs: Our 2012 investment thesis for the US equity market has three pillars: a stagnating economy, static P/E multiple, and minimal earnings growth.

Beware of your residuals macrofugue
Increasing correlation amongst markets is likely a reality given a more synchronised business & policy cycle.  But that doesn't mean the outcomes in their stock markets will even be remotely similar.

OTHER ASSETS
A look at forecasts for peak oil – and the end of civilization Fabius Maximus
A common concern in the comments expresses fear of resource exhaustion, perhaps even leading to collapse of civilization. Here we examine the theory, evaluate the risks, and point to sources of more information.

Pricing nature's freebies Babbage / The Economist
All these are “ecosystem services”, provided by nature to mankind at no cost. Push nature too hard, though, and this generosity may end.

UBS' Hedge To The Next Leg Down In Commodities: GoldZH

Combating Widespread Currency Manipulation PIIE
China is not that different from many others. A quick & easy summary in WP’s article.

Currency Outlook and PositioningMarc to Market
Global growth and the European debt crisis continue to be the two main factors shaping the investment climate…More important than the economic data and bond auction are the political developments around the debt crisis. Two stand out. On Thursday, the German Bundestag debate aid for Spain. Chancellor Merkel will attend and Finance Minister Schaeuble will speak. The euro area finance ministers will meet on Friday and will likely approve the funds for Spain.

Housing Bubbles and Interest Rates Swiss National Bank (pdf)

PORTFOLIO
The Cross-Sectional Profitability of Technical Analysis Turnkey Analyst
Unlike existing studies that apply technical analysis to either market indices or individual stocks, this paper apply it to volatility decile portfolios, i.e., portfolios of stocks that are sorted by their standard deviation of daily returns.

Major Asset Classes: Ex Ante Risk Premia | June 2012 The Capital Spectator
With the history lesson out of the way, let’s take a stab at estimating ex ante risk premia for the major asset classes and GMI.

A Horse Race Between Tactical Asset Allocation ModelsEmpiritrage
We conduct a horse race with various tactical asset allocation (TAA) models. We present the performance of 8 different models applied to the “IVY5” asset classes (Domestic equity, foreign equity, long bonds, commodities, and REITs)… the top performing TAA model is the risk parity with momentum model. This model starts with the risk parity benchmark weights and then shifts weights across asset classes depending on relative momentum. (see also The King of Asset Allocation Models Turnkey Analyst)

Leon Cooperman on 14 Attributes That Make a Good Portfolio Manager market folly

REGULATION
The Market Has Spoken, and It Is Rigged Simon Johnson / Baseline Scenario
Power corrupts, and financial market power has completely corrupted financial markets. Barclays and the other global mega-banks involved in fixing Libor have brought their own industry very low – completely destroying the legitimacy on which sensible financial intermediation needs to be based.

Always Ask a Banker to Put the Lie in Writing View / BB
If we take Bob Diamond and Paul Tucker at their word, part of the Libor scandal at Barclays Plc  can be chalked up to a series of comic misunderstandings, like a children’s game of telephone. It’s a bit much to swallow, but the spectacle sure has been fun to watch.

Only Government Intervention Can Stop Corrupt Capitalism The Atlantic
After scandals at Barclays and GlaxoSmithKline, it's clear that a no-regulation approach to markets won't work.

Will regulators get it right on the Volcker Rule? Wonkblog / WP

Bank regulation and the future of banking – BIS (pdf)

Visa, MasterCard, banks in $7.25 billion retail settlementReuters
Visa Inc, MasterCard Inc and banks that issue their credit cards have agreed to a $7.25 billion settlement with U.S. retailers in a lawsuit over the fixing of credit and debit card fees in what could be the largest antitrust settlement in U.S. history. (nobody goes to jail)

The Spreading Scourge of Corporate CorruptionNYT

PSYCHOLOGY
Threaten a man's masculinity and he becomes a short-sighted risk takerThe British Psychological Society

A Tall Tale of Risk Aversion The Psy-Fi Blog
Bigger things are deemed more valuable than smaller ones by our monkey brains. This includes other people – and even our self-image.

HEDGE FUNDS
Market neutral vs. quant funds - recent trends Sober Look
It seems that institutional investors (and fund of funds managers) continue to support the so-called "market neutral" strategies… so-called "Quantitative" (Quant) directional strategies (with Renaissance Technologies being the most famous) have been on a decline.

Mastered by the universeButtonwood / The Economist
It is turning into another difficult year for the hedge fund industry. A survey by Globeop found that, in June, funds suffered the largest withdrawals in assets since October 2009.

Are Hedge Funds Burning Investors? Pension Pulse

Hedge Funds Underperform The Stock MarketZH
Citi's recent study on risk drivers shows the high-beta momentum trade has become by far the most crowded trade around

OTHER

Whodunit? Part I: Rocket Scientists on Wall StreetMinyanville

Aaron Brown: Much of the early success of quant traders was due to proper allocation of capital rather than finding exceptional edges…Quantitative analysis of optimal risk levels for traders did not kill the financial system. But it set events in motion that led to the murder.

Warren Buffett Discusses Just About Everything PragCap
this is partial transcription, or see the original videos Part 1, Part 2 and Part 3.

The Best Investment Advice George Soros Ever Gave Williams / Seeking Alpha
Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend and step off before it is discredited.

How This Journey Was LaunchedChicago Sean
The story of one trader’s beginnings.

Former investment banker: 'I saw many people cry' The Guardian
An ex-investment banker at a major bank tells Joris about redundancies, the recent crisis and Stockholm syndrome

The Machine and the Garden NYT
Call it the “Machinebrain” picture of the world: markets are perfectly efficient, humans perfectly rational, incentives perfectly clear and outcomes perfectly appropriate. From this a series of other truths necessarily follows: regulation and taxes are inherently regrettable because they impede the machine’s optimal workings. Government fiscal stimulus is wasteful. The rich by definition deserve to be so and the poor as well.

Capitalism’s Brave New WorldWeekly Standard
We have seen the future, and it microtasks

Book BitsThe Capital Spectator

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