In this week's edition, plenty on the stock market as the earnings season comes to a close. Also, the financial crisis is now five years old. Why do repos exist? Why should we care about higher corn prices? Can ratios like P/B or P/E be used to invest successfully? Find all the answers here.
Previously
on MoreLiver’s:
USA: FED
If the markets are pricing in more from Jackson Hole - which the recent equity rally
suggests may be the case - we are setting up for a sharp selloff in risk
assets.
Morgan Stanley: Macro Matters: The Campaign
Season, Fed Style –
ZH
Fed officials must be disappointed by an
economic outlook that falls short of both of their objectives. They
individually think that policy can do better, but they cannot collectively
agree on how.
USA: ELECTIONS
Economists to Romney campaign: That’s not what
our research says –
Wonkblog
/ WP
I contacted some of the named economists to ask
what they thought of the Romney campaign’s interpretation of their research. In
every case, they responded with a polite version of Marshall McLuhan’s famous
riposte. The Romney campaign, they said, knows little of their work. Or of
their policy proposals.
Ryan's Budget: The Most Fraudulent Proposal in
American History – Economist’s
View
If you think the middle class has it too good,
too much security, taxes aren't high enough, not enough fear of unemployment,
too much help for education, and so on, while the wealthy haven't been coddled
enough in recent years, not enough tax cuts, too little upward redistribution
of income, not enough bank bailouts, etc., etc., then the Republican proposals
should make you happy.
Culture Of Fraud – Krugman /
NYT
This would be a terrible thing even if it were
in a defensible cause. It’s even worse when the goal is to elect a man who
seems to have no core, no purpose save personal ambition.
STOCK MARKETS
The Equity Hitchhiker’s Guide to the Global
Galaxy – Bank
of America Merrill Lynch (pdf)
25 pages
from 6-Aug (requires FT alphaville Long Room registration)
Previewing The Q4 "Hail Mary"
Earnings Season – ZH
Goldman
Sachs: The divergence between trends in
earnings and valuation is likely to become more pronounced as profit forecasts
continue to be reduced in the coming months. In the US, our 2Q earnings season
takeaways are: (1) disappointing sales; (2) in-line earnings; (3) margins are
still declining; (4) 3Q estimates imply no growth while 4Q estimates imply significant growth; (5)
earnings estimates are falling, driven by Energy and Materials.
Who’s “buying” this rally? – alphaville
/ FT
RBC and Goldman second-guessing the investors.
Earnings vs. Stock Returns – The Big Picture
the stock market tends to underperform whenever
earnings growth is particularly strong… percentage of companies beating
earnings estimates has little-to-no effect on subsequent stock returns.
With Earnings Season Nearly Over 60% Of
Companies Have Missed On The Top Line, Revenues Down 1% From Last Year – ZH
BofAML’s
report: a stunning 60% of all S&P
member missing on the top line. More importantly, for the first time since the
Lehman collapse, year-over-year revenue "growth" will be negative,
declining at 1% from Q2 2011.
Charts of the Day: Trading Volume Slump
Continues – MarketBeat
/ WSJ
Credit Suisse dissects the current data a step
further and finds some noteworthy trends taking place this summer.
How to Identify the Cheapest Stocks (Part 2 of
4) – Turnkey
Analyst
Part 1
(avoiding losses) here
A Primer To Intraday Market Moves – ZH
S&P
index analysis
Presenting The Ultimate 'Muppet' Indicator – ZH
Bloomberg's IPO index has dramatically diverged
in performance from the ever-exuberant S&P 500… the IPO index clearly
signals management's knowledge that 'it ain't getting any better than this' by
the dismal reality of its performance.
REGULATION
Repeal of Glass-Steagall: Not a cause, but a
multiplier – The
Big Picture
What we should be discussing is the corrupting
influence of crony capitalism and radical deregulation. Instead, we find
ourselves forced to defend capitalism and free markets. We should be finding
ways to definancialize the U.S. economy and reduce
bankers’ influence.
Market Declines: What Is Accomplished by
Banning Short-Selling? – FED
The 2008 ban on short sales failed to slow the
decline in the price of financial stocks; in fact, prices fell markedly over
the two weeks in which the ban was in effect and stabilized once it was lifted.
Similarly, following the downgrade of the U.S. sovereign credit
rating in 2011—another notable period of market stress—stocks subject to
short-selling restrictions performed worse than stocks free of such restraints.
Libor, meet transaction data. Transaction data,
meet Libor – alphaville
/ FT
Including
data on real transactions to LIBOR is not easy – as there are only few done
deals.
ECONOMY
Deflation Probabilities on Our Radar Screen – Atlanta
FED
Readings from the financial market indicate the
likelihood of a sustained deflation is currently about 15 percent, or a bit
less. That's up from earlier in the year, but not nearly as high as in 2010.
It's A Centrally-Planned World After All, With
Ever Diminishing Returns – ZH
Bridgewater: The
three contractions in global growth that have occurred since the financial
crisis were offset by heavy blasts of fiscal and monetary stimulation by global
governments and central banks. But each wave of support has also had less
impact on global conditions than the previous wave.
NIME Outlook for the World Economy 2012-2020 – Federal
Planning Bureau
The Federal Planning Bureau’s new outlook for
the world economy presents projection results for the main economic areas of
the world over the period 2012-2020.
Megatrend: Diminishing Marginal Innovation — Six
Consequences
My hypothesis, however, is that we’re at the
start of a new Megatrend: Diminishing Marginal Innovation. The low-hanging
fruits of revolutionary technologies have already been discovered.
Consequently, we’ll need increasing effort to achieve changes that are only
incremental and at most, transform a sector.
The perils of Phlogistonomics –
Noahopinion
We label
the unknown productivity with things like culture or technology, but the word
choicehas an effect on policy views.
3D Printing: Rise of the machines – alphaville
/ FT
How would things have gone if the US, rather than taking
advantage of cheap labour in China, had kept things at
home and heavily invested in automation? It’s a hypothetical that we will
examine below. Not least because it’s a thought experiment that can get us
thinking about the implications for China of the rise of 3D
printers.
Bubble thy neighbor: portfolio effects and
externalities from capital controls – ECB (pdf)
The opportunity cost of hoarding cash is lower
than you think – alphaville
/ FT
Corporates have been hoarding increasing levels
of cash since the start of the finanical crisis. Investors tend to frown on it,
(see Apple’s cash pile) but are the alternatives really that much better?
Survey-based nowcasting of US growth: a real-time
forecast comparison over more than 40 years – ECB (pdf)
TRADING
Unrealistic Optimism and the Impoverished
Investor – The
Psy-Fi Blog
This bias is so pervasive that it’s highly
unlikely to be a social adaptation to culture and is probably an evolutionary
trait, hard-wired into our brains. No
matter how it arises, it’s going to induce investors to take a positive view of
the world: a view which cuts right across behavioral investing rule number one.
Volatility ETFs’ crazy churn – Lighthouse
IM
Tiny moves in the equity market can be
amplified by using volatility ETFs (not that I would endorse this). It’s
leverage without leverage for the day trader.
Research Review: Portfolio Strategy – The
Capital Spectator
Do Decomposed Financial Ratios Predict Stock
Returns and Fundamentals Better? – Turnkey
Analyst
We investigate the prediction of excess returns
and fundamentals by financial ratios, which include dividend-price ratios,
earnings-price ratios, and book-to-market ratios, by decomposing financial
ratios into a cyclical component and a stochastic trend component. We find both
components predict excess returns and fundamentals. Cyclical components predict
increases in future stock returns, while stochastic trend components predict
declines in future stock returns in long horizons. This helps explain previous
findings that financial ratios in the absence of decomposition find weak
predictive power in short horizons and some predictive power in long horizons.
We also find both components predict fundamentals.
Do Individual Investors Learn from Their
Mistakes? – SSRN
we use an administrative dataset which covers the trading history of 19,487 individual investors. Our results show that underdiversification and the disposition effect do not decline as investors gain experience. However, we find that experience correlates with less portfolio turnover, suggesting that investors learn from overconfidence.
we use an administrative dataset which covers the trading history of 19,487 individual investors. Our results show that underdiversification and the disposition effect do not decline as investors gain experience. However, we find that experience correlates with less portfolio turnover, suggesting that investors learn from overconfidence.
Intra-Horizon VaR and Expected Shortfall
Spreadsheet With VBA
– scribd
Spreadsheet demonstration of Intra-Horizon VaR,
Intra-Horizon Expected Shortfall and Intra-Horizon Probability of loss calcs in
Excel and VBA for the Normal and GBM cases
Beware Of Drama In Your Daily Dose Of
Investment Advice –
Capital
Spectator
It all adds up to a strong case for thinking
that diversifying across a wide array of asset classes and rebalancing the mix
periodically is the foundation of a successful investment strategy. It’s also a
foundation that should be customized to a degree to fit your specific financial
situation and investment goals.
BoaML: following a long period of ultra-low
interest rates, and little hope for much higher growth any time soon, many
investors have capitulated and bought corporate bonds despite the low yields as
alternatives – such as stocks – look comparatively less attractive.
Bonds to Perform Better Than Usual in QE3 – Bondsquawk
Credit
Suisse: Our analysis suggests that each
new round of QE brings diminishing benefits for equity returns, and that
allocating a significant part of a portfolio to bonds tends to improve the
portfolio’s risk-return profile.
HEDGE FUNDS
Why investors should avoid hedge funds – Felix
Salmon / Reuters
Indeed, if AIMA has been reduced to this rather
pathetic game of “gotcha”, that says to me that there really is no robust
refutation of Lack’s book. There are huge risks involved in investing in any
hedge fund: they’re illiquid investments, and can blow up through bad luck or
bad faith or old-fashioned bad investing at any time. In order to compensate
for those risks, investors should be getting substantial excess returns.
They’re not. So they should stay away.
Hedge funds and Econ 101 – Noahpinion
The main point is that, if we believe in supply
and demand, then we should not expect hedge fund managers to give you their
winnings when they could keep the winnings for themselves via fees. Which they
usually can do, since the elasticity of demand for "money tomorrow"
is high. Simon Lack's results should not especially surprise anyone who
believes in Econ 101.
OTHER
The EM Revolving Door of Capital – The
Reformed Broker
When people think of Emerging Markets, they
think of countries where capital is flowing into for investment and
development. But something interesting
has been happening since the events of 2008-2009 - emerging countries have
gotten a lot more proactive about making their own investments away from home.
Why does repo exist? – Worthwhile
Why don't I just sell my watch instead, then
wait till next month before deciding whether to buy it back? Why do I and the
Pawnbroker choose to agree in advance on what we will do next month? Why don't
we just wait and see what we will want to do next month?
Swindles, bears and brains – summer reading for
investors – The
Telegraph
With just a week to go before my summer
holiday, I'm fine-tuning my reading list. This year I'm packing three
quite different books.
Book Bits – The
Capital Spectator
Wall Street Eats Its Young – The
Reformed Broker
And those financial advisors who are surviving
this Ice Age tend to be older and grayer - more so every year. The average FA in America is now 49 years old. And that
number will likely trend higher in the near future, not lower. Why is this
happening? It's quite simple, actually:
Wall Street Eats Its Young.
Crisis 5th Birthday
Goodbye
Financial Engineers, Hello Political Wonks – EconoMonitor
Congrats!
We’re Halfway to a Lost Decade! – MarketBeat
/ WSJ
Reflections
on the crisis soundtrack of our lives – alphaville
/ FT
A reading list to reflect loss of faith in
capitalism – FT
Appropriately for a US election year, the longlist
for the 2012 Financial Times and Goldman Sachs Business Book of the Year Award
includes an array of titles charting the strengths and weaknesses of the
American corporate, economic and financial system.
Chart: When Corn-ageddon meets China-pocalypse – ASA
Société Générale noted that meat prices
inflation in China appears to be quite correlated with the
changes in global corn price.