DETECTIVE WORK: Stock market correlation typically rises in times of market distress, with individual stocks moving in tandem with indices. US market correlation recently hit its highest level since Black Monday in 1987.
Economic concerns are not the only factor. Stock market correlation is on a long-term uptrend, partly driven by the explosion in exchange-traded funds (ETFs) that track market indices. In 2000, ETFs accounted for just 2 per cent of trading volumes; today, it’s more than 30 per cent. Besides index-tracking funds, you’ll find ETFs that track specific sectors, leveraged ETFs that offer double or treble the daily returns of the indices and ETFs that facilitate bets on market declines.
The prospect of continued market correlation means that asset allocation, not stock selection, is more important than ever. Playing stock detective can be fun, but with stocks moving in unison, practitioners might need to become increasingly patient.
BEING BUFFETT: Stock-picking isn't dead, Warren Buffett fans might assert. Can't investors adopt his methodology or track his purchases, like last week's Bank of America investment?
Not necessarily. Bank of America jumped by a quarter following the announcement, denying copycats the chance to buy at Buffett’s price.
Investors who copied Buffett and bought into General Electric in late 2008 have seen their shares decline by over a third, while shares in Goldman Sachs, another 2008 investment, are flat.
Not that Buffett’s too bothered. He extracted his pound of flesh from the desperate companies and was granted special dividends of 10 per cent annually in GE and Goldman (ordinary GE investors saw their dividend cut by two-thirds shortly afterwards). Bank of America agreed to cough up an annual dividend of 6 per cent – more than 10 times what ordinary shareholders get.
Copying Buffett, unfortunately, is easier said than done.
LOGIC À LAGARDE: IMF chief Christine Lagarde's call for urgent recapitalisation of European banks was pithily dismissed this week by Bank of France governor Christian Noyer. "Frankly, I don't understand what she said," he sniffed.
Others do. The International Accounting Standards Board warns that some banks are not accurately writing down Greek debt impairments, and it seems French banks are particularly guilty. BNP Paribas and insurer CNP Assurances have written down their Greek debt holdings by 20 per cent. Most European banks, however, have written down their Greek debt by 50 per cent.
Noyer’s comments that Lagarde was “misinformed” or “did not have French banks in mind” look distinctly Nearyesque.
