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Sunday, August 12

12th Aug - Weekender: Trading & Markets

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.
EDIT: I also updated the Calendar page.

Previously on MoreLiver’s:

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The Jackson Hole "fix" is not coming Sober Look
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 StyleZH
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.

Economists to Romney campaign: That’s not what our research saysWonkblog / 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 HistoryEconomist’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.

The Equity Hitchhiker’s Guide to the Global GalaxyBank of America Merrill Lynch (pdf)
25 pages from 6-Aug (requires FT alphaville Long Room registration)

Previewing The Q4 "Hail Mary" Earnings SeasonZH
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 ReturnsThe 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 YearZH
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 ContinuesMarketBeat / 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 MovesZH
S&P index analysis

Presenting The Ultimate 'Muppet' IndicatorZH
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.

Repeal of Glass-Steagall: Not a cause, but a multiplierThe 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 Liboralphaville / FT
Including data on real transactions to LIBOR is not easy – as there are only few done deals.

Deflation Probabilities on Our Radar ScreenAtlanta 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 ReturnsZH
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 2012-2020Federal 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 InnovationSix 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 machinesalphaville / 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 controlsECB (pdf)

The opportunity cost of hoarding cash is lower than you thinkalphaville / 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 yearsECB (pdf)

Unrealistic Optimism and the Impoverished InvestorThe 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 churnLighthouse 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 StrategyThe 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.

Intra-Horizon VaR and Expected Shortfall Spreadsheet With VBAscribd
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 AdviceCapital 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.

Investors capitulate, investing in bonds while Europe takes a napalphaville / FT
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 QE3Bondsquawk
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.

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 101Noahpinion
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.

The EM Revolving Door of CapitalThe 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 investorsThe 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 BitsThe Capital Spectator

Wall Street Eats Its YoungThe 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 capitalismFT
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-pocalypseASA
Société Générale noted that meat prices inflation in China appears to be quite correlated with the 
changes in global corn price.

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