No precedent for printing money
STOCKTAKE:EUROPEAN stocks ripped higher last Thursday after ECB chief Mario Draghi announced a potentially unlimited European bond-buying programme.
Deutsche Bank’s Jim Reid says investors are “more reliant on our politicians and central bankers to manipulate and shape markets and returns than perhaps ever before”. Although Reid is bullish on Europe, he cautions against investor certainty.
In the US, where data goes back to 1790, treasuries hit all-time lows in July. Dutch yields, for which there are 495 years of data, recently hit an all-time low. UK rates are at their lowest since the Bank of England’s inception in 1694, while the size of its balance sheet relative to GDP is at record levels. Similar trends are being seen elsewhere, Reid adds.
“Anyone predicting the endgame is speculating outside of the historical dataset as there are few precedents for such broad- based money printing. Can we really say with any confidence how this experiment will end?”
Much of Europe looks dirt cheap
STOCK market history suggests significant European upside, according to a new study by Mebane Faber. Faber analysed 32 indices according to its cyclically adjusted price-earnings ratio (Cape). The MSCI Ireland index is the second-cheapest (behind Greece) in the study, with a Cape of just 4.97 – less than half its historical median. Italy (6.54) is dirt cheap, as are Portugal (7.2), Austria (7.66) and Spain (8.49), while France, Germany and the UK all look reasonable.
The cheapest countries outperformed by 4-7 per cent annually, while there was an equal underperformance for the overvalued countries.
The study is at iti.ms/TqlAfg
US is only market near all-time high
US MARKETS hit a four-year high last week and are just 9 per cent below all-time highs. No other major equity gauge is as close, notes Bloomberg. UK and Canadian markets are 17 and 24 per cent away from their peaks. Euro Stoxx 600 is over 30 per cent shy of its peak.
Iseq investors will look on enviously. The index has lost two- thirds of its value since 2007, even though it is over 60 per cent above its 2009 low. But spare a thought for Chinese investors – the Shanghai Composite Index last week hit its lowest point since February 2009, and has lost two-thirds of its value since 2007.
Facebook pigs get slaughtered
THE hand-wringing over Facebook’s stock price continues. Forbes asked readers to consider the poor Goldman Sachs private clients “round-tripped back to their cost of entry 20 months later”, while the New York Times slammed Facebook’s CFO. “It is David Ebersman’s fault. There is just no way around it.”
Actually, there is, says billionaire Mark Cuban. The CFO’s job is not to manage shareholder portfolios; Facebook “maximised the cash available to it . . . good for them”. Cynical? Perhaps, but it’s preferable to the blame game. Investors were warned of Facebook’s bubbly valuation but thought they could flip the stock for a fast buck. They were, in Wall Street parlance, pigs. While bulls and bears make money, pigs get slaughtered.
Clued-in investors mind volatility gap
OVERNIGHT trading in the US markets is now equal to volatility during the daytime session, says quantitative strategist Michael Stokes ( marketsci.com). Daytime trading has been at least 50 per cent more volatile for most of the past 30 years, notes Stokes, but the gap has narrowed since 2008.
Why? The increased influence of European and Asian markets upon US indices is an obvious cause, but Stokes notes that previously robust overnight strategies have lost their edge.
Clued-in investors are likely closing these inefficiencies, leading to an increase in overnight volatility.