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Friday, October 26

26th Oct - Weekender: Best of The Week

The best articles from my posts of the ending week.

Previously on MoreLiver’s:

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Whither the Euro? Seeking Resolutions for the EurozoneCFA Institute
Not surprisingly, a major theme of this year’s CFA Institute European Investment Conference in Prague was the prospect for the euro. Most speakers opined on the subject, sharing and supporting their various arguments.

EU Summit: Another Plan to Planeconomistmeg
All in all, this summit has teed up a number of issues surrounding the creation of the SSM and a banking union that policy makers will have to thrash out in the lead-up to and during the EU summit in Brussels in December. EU leaders hardly addressed the issue of a common EZ budget, but Van Rompuy highlighted that this too will be discussed in December.

Europe’s Indian summer to yield to a harsh winter of volatilitySaxo Bank
Steen Jakobsen: The EU Summit in June was hailed as a game changer and the big winner was the Spanish president Rajoy. Last week's EU Summit was a different story, as the announced banking union remains merely a plan to have a plan because Germany and Club North have decided that 'conditionality' is an integral part of a future compromise.

Taking A Man At His WordFistful of Euros
Especially now the ECB has become the in-tray into which all the politically unpalatable and thus unresolvable issues ultimately get dumped. The most recent example of this is the suggestion that Spain applying for a precautionary credit line would be the ideal solution to the country’s current dilemma since no money would actually need to change hands, making the move easier to sell to the German parliament.

“Europhorics”, our most dangerous friendsDie Zeit / presseurop
There are the “Eurosceptics”, and there are “Eurohaters”. And then there are the “Europhorics”, who are to be found among both intellectuals and politicians and who at least as dangerous as the former. To them the EU is not a union, but a worldview – and they are abusing it.

Europe’s Path to DisunityHans-Werner Sinn / Project Syndicate
The assertion that the eurozone could be transformed into a United States of Europe is no longer convincing. The path toward it is far more likely to lead to a deep rift within Europe, because turning the eurozone into a transfer and debt union would require more central power than currently exists in the US.

Chart of the week - Economic convergence in the euro areabruegel
Current accounts are moving towards balance…Fiscal balances are mostly moving towards a more sustainable zone, albeit with difficulty in the case of Greece…Nominal unit labour costs are mostly going down (with the exception of Italy) in the periphery and up in Germany, even if the gap between the level of Germany and that of the other countries is still large.

(Seemingly) Perpetually Miserable Indicesalphaville / FT

“Cancelling” QE debt alphaville / FT
 Bank of
England’s governor on canceling government bonds acquired by the central banks

Chart of the week: The real test of the eurobruegel
The single most pressing threat to the integrity, and perhaps also to the existence, of the euro is the depth of the recession in southern European member states

The battle for the Sparkassen beginsBrussels blog / FT
This issue has always been a potential dealbreaker: how will
Germany’s politically powerful network of small public banks — or Sparkassen — sit under the bailiwick of a single bank supervisor? Until now we’ve mainly seen diplomatic shadow-boxing on the matter. But that fight is beginning in earnest.

TARGET losses in case of a euro
Hans-Werner Sinn: As with the Eurozone crisis, the TARGET debate shows little sign of disappearing quietly. This column argues that the ECB has tolerated, if not created, huge TARGET imbalances that impose a particular risk on the northern countries should the euro break up. It calls for a fairer and more sustainable system – and suggests the US model may offer some guidance.

What inflation?alphaville / FT
Euroland M3 coming in below expectations and dropping again to 2.7.

Weakness the Eurozone credit growth persists; stark contrast with the USSober Look
The stagnation in lending is in part due to banks deleveraging in order to improve capital ratios for Basel III. But a big part of the issue is simply lack of demand from borrowers.

Greekileaks: German-backed plan for Greek bailoutThe World / FT
Greekileaks 2: The new draft MoUs for AthensBrussels blog / FT
With Athens and the so-called “troika” of international lenders close to a deal on an overhauled bailout that would extend the programme by two years, the focus today shifts to Brussels, where talks begin on round two of the revised Greek rescue: how to pay for it

What Do Spain And Greece Have To Look Forward To? SocGen Answers: "Not A Lot"ZH
SocGen: The moribund growth backdrop also begs the question what palpable difference any relief over Spain or Greece (if it comes) will do to the long end. The answer is probably not a whole lot.

Presidential Election Preview 1: Timeline And Fiscal Cliff FlowchartZH
GS: The key dates and likely paths to resolution of the "fiscal cliff"

Presidential Election Preview 2: Where They Stand And Why It MattersZH
GS: Legislative inaction now a greater risk than legislative action * The fiscal stakes are higher than they have been in decades * Monetary policy in (political) focus

Presidential Election Preview 3: Swing States And The HorseraceZH
Goldman finds that a divided government has on average produced considerably tighter fiscal policy - not a good sign.

Which Assets Will Benefit From QE?The Short Side of The Long
Equity market internals continue to deteriorate, especially in the Technology sector, which transitionally has had leading characteristics.

Q3 Earnings Season To Date Summary: Ugly... And Getting WorseZH
Goldman’s charts

FX Comment: the macro weekNordea

Bearish tripwiresHumble Student
Until I see a broader retreat in the major averages, reduction in risk appetite, the public getting bullish, and relative underperformance of cyclical stocks, I am still inclined to give the bulls the benefit of the doubt.

Credit Guest: Chadburn, on full ahead?Macronomics / MoreLiver’s Daily

S&P500 Q3 earnings: A struggle to meet revenue expectationsSaxo Bank
Revenue is investors' focal point * Development does not look good so far * Positive EPS surprises based on cost cutting do not impress investors * Revenue surprise but EPS miss gets a stock hammered.

As Market Plunges, Bob Janjuah Opines: "Tactical Short Risk Time"ZH
Full note from Nomura

Nordea Risk Perception PublicationNordea
Modest deterioration in sentiment – baseline still gradual improvement (or straight to full pdf)

Gawd but the currency wars are boringalphaville / FT
Sure we’ve got plenty of rhetoric, a Swiss franc floor and QE — but FX volatility is touching recent lows.

G10 Weekly: Macro vs. market divergence to end?Nordea (pdf)
Macro vs. market divergence to end? * US – Earnings and economic momentum * USDJPY – Leaving the comfort zone *  RIX  – Our call for further easing is intact

Market Timing and Roulette Wheels RevisitedInvestment Risk and Performance
In a 2001 Financial Analysts Journal article, we analyzed the difficulty of beating a buy-and-hold strategy using active asset switching. In this article, we present updated results. On average, during the 2000–11 time period, beating the market through market timing was difficult but not as difficult, on average, as during the 1926–99 period. The ease or difficulty of beating the market, however, varies tremendously over time. This reality has major implications for performance measurement.

Does Academic Research Destroy Stock Return Predictability?SSRN
We study the out-of-sample and post-publication return-predictability of 82 characteristics that are identified in the academic literature. The average out-of-sample decay due to statistical bias is about 10%, but not statistically different from zero. The average post-publication decay, which we attribute to both statistical bias and price pressure from aware investors, is about 35%, and statistically different from both 0% and 100%. Consistent with informed trading, after publication, stocks in anomaly portfolios experience higher volume, variance, and short interest, and higher correlations with portfolios that are based on published anomalies. Consistent with costly (limited) arbitrage, the post-publication return decline is greater for anomaly portfolios that consist of stocks that are large, liquid, have high dividend yields, and have low idiosyncratic risk. (full pdf from EFA2012)

Modern Portfolio Theory: Bruised, Broken, Misunderstood, Misapplied?CFA Institute
If the global financial crisis has left us with any enduring lessons, it’s that asset return distributions can be significantly skewed and asymmetrical, and that fat tails are the norm rather than the exception. So how can investment practitioners manage this reality?

Vol of VolFalkenblog
The idea was simple. Instead of sorting by vol, they sorted by vol of vol, and generate a rather large annualized return  difference (10%) between the high vs. low vol-of-vol buckets. It's a bit like the guys at Gillette coming out with 5 blades, applied to volatility.

Why diversification doesn't workThe Physics of Finance
The new paper by physicist Tobias Preis and colleagues makes this point with probably the largest data set used so far, looking at the stocks in the DJIA over about 70 years…a trending market, in either direction, induces significant correlations among the DJIA stocks.

Mutual fund casinos still skimming billionsMarketWatch
Who loses? You and the other 95 million American investors are losers in this casino. Years ago Bogle figured out how to cut your losses. Here’s his secret: In the real world of games, indexing beats actively managed funds

Wrestling With ForecastingThe Capital Spectator
All forecasts are wrong. That’s the nature of trying to look through the fog of uncertainty for guidance on the future. Some forecasts are less wrong than others, of course, but it’s always sensible to assume that the prediction du jour contains noise. That doesn’t mean that forecasting is worthless, but it does make predictions dangerous if you don't look at the estimates in probabilistic terms. But that's hardly standard procedure in the wider world. Thinking through the finer points for forecasting is too often neglected, and sometimes ignored entirely.

Forcing frequent failuresInterfluidity
I’m sympathetic to the view that financial regulation ought to strive not to prevent failures but to ensure that failures are frequent and tolerable.

Financial ecosystems can be vulnerable tooOpinion / FT
In general, greater complexity – more species and more interactions among them – tends to make the system more vulnerable to environmental shocks…Instead of addressing these fundamental issues, recent regulatory changes seem to be adding further complexity.

Heterogeneity at the IMFmainly macro
Their self criticism about the impact of austerity is both unusual and commendable in equal measure. They also appear to recognise that pushing Greece further than it can or should go is stupidity of the highest order. They are producing some of the best policy orientated empirical macro research at the moment. Yet this is the same IMF that in May co-hosted a conference on Latvia that looked very much like a PR job for the benefits of short sharp shock austerity. The IMF’s attitude to austerity remains nuanced and country specific.

Special: 25th Anniversary of The Crash of '87MoreLiver’s Daily

The Red Queen Effect Farnam Street
Running faster just to stay in same place (finance, arms races, evolution)

Pankkiunioni ja valehtelijoiden klubiOlli Pusa / Pankkiunioni

Seminaari euroalueen finanssipolitiikasta (16.9.) ETLA
(osa presentaatioista ladattavissa)

Suomi on PihallaJuhani Huopainen / US Puheenvuoro

Euroliittovaltio ja suomalainen veronmaksaja – varautukaa rajuihin veronkorotuksiin ja hillittömiin julkisten palveluiden leikkauksiintyhmyri

Kolumni: Taistelu, jonka poliitikot voittavat ainaFinanssialan Keskusliitto

Päättäjät elävät kuin tuhlaajapoikaPauli Vahtera / IL blogit

Euroliittovaltiossa Suomi maksaisi jopa 8 miljardia vuodessa ja leikkaisi omia menojaan saman verran – laskelma yleisön pyynnöstä tyhmyri

Suomen Emu historiaa eli kuinka meistä tehtiin hulttiopolitiikan maksajiaHeikki Porkka / US Puheenvuoro

Pääkirjoitus: Suomi vetäytyy, kun muu euroryhmä tiivistyyHS

Eurokriisi vaikeuttaa Maastrichtin kriteerien tulkintaaNordea

Eurokriisissä peli koveneeBrysselin Kone / YLE
Brysselin koneessa haastateltavana on perussuomalainen EU:n federalisaatiota vastustavan EFD-ryhmän jäsen, europarlamentaarikko Sampo Terho. Hän on ainoana suomalaismeppinä Europarlamentin talous- ja raha-asioiden valiokunnan täysjäsen, ja siis hyvällä näköalapaikalla eurokriisin suhteen. Miten tilanne hänestä tulisi ratkaista?

Pääkirjoitus: Suomi vetäytyy, kun muu euroryhmä tiivistyyHS

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