Tuesday, July 21, 2009

Reading links.

As I’ve updated before, I maintain a news sidebar where I link to relevant newsworthy articles. The website is http://news.fundamentalinsights.slinkset.com/ which is updated almost on a daily basis as and when I come across interesting articles, so do check back regularly.

To whet your appetite, here’s a sampler for this week.

  • Lex on Markets : The second quarter may well have marked the bottom. But it could also descend into infamy as the most deceptive three months in economic memory. Certainly all the talk of a second Great Depression has vanished. Equity markets are up by between a 10th and a third and data are better across a range of economic indicators.

    Plummeting demand has only moderated due to stimulus policies and zero interest rates. Neither is sustainable. There may be a minibubble in commodities, additionally inflated by Chinese hoarding. All over the world, household, corporate (and now government) balance sheets are overleveraged.

    It is not scaremongering to worry that the second quarter was just a blip. Indeed, Tuesday’s worse-than-expected consumer confidence data in the US suggest optimism may now be ebbing away.

  • Tim Bond : History is bunk : Existing data confirms that a sharp improvement in the US labour market is due over the next three months. The June payrolls report, contrary to market perception, was entirely consistent with the recovery story. The return to positive growth, whether in output, profits or employment, is in the process of occurring right now, with the “turning point” covering the June-September period. Historic data is therefore much less meaningful than usual. The current consolidation in the markets is a good opportunity for investors to raise exposure to cyclical assets.

    And since we are in the midst of the cyclical turning point, historic data is of very little relevance to the actual state of the economy. We reiterate our advice to use the current pause in the cyclical asset rally to add to long exposures.

  • S&P 500 Rally Poised to End : The 34 percent rebound in the Standard & Poor’s 500 Index since March shows few hallmarks of a bull market, and stocks will probably stagnate for years. The main benchmark for American equities probably will continue to make “no net price progress” for at least two more years.

  • New Bull Market?

  • Banks bogus bonus : More likely, banks are taking advantage of new accounting rules that allow them to place a higher paper value on the mortgages than the price they actually paid for them. These "mark-to-market" changes took effect just in time for the second quarter. Bank profits have improved for months because of the new accounting rules that allowed banks to mark up the value of the troubled assets already on their books. What is new is that banks are buying more MBS to add to that tally. Banks could buy the MBS at low prices in the market, which would boost the banks' own trading fees, since banks get paid whenever they trade for their own accounts. Banks could also record as "profit" the difference between the price they paid and the price that the securities are thought to be really worth. They make money because they're buying more MBS, recording more profit on both the old and new ones, and paying themselves fees.

    And, at the same time, there are many who would argue that taking advantage of accounting-rule changes is not making money and that the "profits" are fake. If that's true, take some comfort. Even this year's alleged record bonuses will probably be paid in illiquid, long-term stock that banks can pull back any time they like. Fake bonuses, then, for fake profits.

  • Breakdown becomes a Bear Trap. : Using flag pole as a measuring stick, I estimate a possible upside price target of 1200. Assuming that price is in the ball park, our long-term model, which is still bearish, will be switching to bullish very soon. Until then, I will still assume that the long-term is bearish, but I thought it worthwhile to point out that we are nearing a tipping point.

  • Still bullish? Doomsville!

  • Inflationary pressures are a legitimate concern : But let's get back to Hester. He states that "it's important to note that during the current secular bear market, the volatility of inflation has mostly been well contained." The value is less than those seen at past bear market bottoms, but the trend is rising.

    "Valuations going forward may show their typical sensitivity to economic uncertainty, and for this reason, the change in the slope of the volatility of inflation over the last two years is troublesome. The level of inflation volatility is still low, relative to the peaks reached during prior secular bear markets. If the level of inflation volatility continues to increase, it will become more difficult to argue that the secular bear market has come to an end."

    Inflationary pressures are a legitimate concern. Hester's notion that the characteristics of a true bull market bottom have not been met are intuitive and insightful. From my perspective, the Faber strategy performs more efficiently when we avoid being in the market when inflation pressures -real or perceived- are high, as determined by our inflation indicator, which assesses trends in commodities, gold, and yields on the 10 year Treasury.

    This is the most compelling evidence that suggests the impending signal from the Faber strategy will be a false signal. Avoidance of equities in times of uncertainty -as measured by strong trends in gold, commodities, and yields on the 10 year Treasury bonds - is unlikely to lead to under performance.

  • Is the equity risk premium actually zero? And this : The Equity Premium is No Longer a Puzzle

  • Debt is capitalism’s dirty little secret : Just why is there so much debt in the Anglo-Saxon world? Bankers and regulators know well that it is in nobody’s long-term interests to have allowed borrowing to escalate to a position where the US now owes far more, as a multiple of the economy, than at the start of the Great Depression.

    The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite.

    The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all. According to Société Générale economists, the inflation-adjusted income of the highest-paid fifth of US earners has risen by 60 per cent since 1970, while it has fallen by more than 10 per cent for the rest.

    we should all come to terms with the fact that these are structural issues needing structural solutions; they need to be enforced over a longer time period than any one government’s term. So we need a new political consensus, one aimed at reducing overall debt levels while reducing inequality by encouraging education, entrepreneurship and investment in innovation.

For much much more, please click on the link below!

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