Stocktake

 

Compiled by PRONSIAS O'MAHONY

Data, not Moody’s, triggers market hits

US MARKETS suffered their second-worst decline of 2012 last Thursday, with many blaming the falls on rumours of bank rating downgrades (Moody’s did downgrade 15 major banks after the trading session ended). In reality, awful economic data was a more likely trigger.

Firstly, Moody’s indicated bank downgrades were likely last February. Secondly, markets tend not to fret over rating agencies anyway. Last week, Bloomberg examined market reaction to 314 rating actions since 1974. Almost half the time, government bond yields fell when a rating action suggested they should climb. An IMF study in January arrived at similar conclusions.

Markets price in the negatives long before agencies issue downgrades – think of Enron, Lehman and AIG.

Businesses braced for a fall in Q2

EUROPEAN CONCERNS led to Pepsi, shipping giant FedEx and tobacco firm Philip Morris all lowering guidance last week. Reuters data shows 3.6 companies have issued earnings warnings for every one company that has raised its outlook, the worst ratio for pre-announcements since 2001.

Estimates for Q2 and 2012 as a whole continue to fall, despite Q1 results that beat expectations.

Tech earnings are now forecast to grow by just 1.8 per cent compared to 13.6 per cent in the first quarter. Excluding Apple, tech earnings may fall 4.2 per cent.

Goldman Sachs strategist David Kostin last week said the equities outlook was modest, and that “we are at a peak level of margins”.

Between 1950 and the mid-1990s, profit margins almost always ranged between 4 and 6 per cent. They nearly touched 8 per cent during the dotcom bubble before briefly surmounting that level prior to the property bust.

These days, margins are in double-digit territory, which is unprecedented and surely unsustainable.

Outperformance rarely continues

WHEN MANAGED funds end their advertisements with that old chestnut about past performance being no guarantee of future results, investors should listen; outperformance rarely continues.

A new Standard Poor’s report found top-performing US funds over a three-year interval are most likely to be in the bottom quartile during the following three-year period. Only 5.23 per cent of large-cap funds held on to a top-half ranking over five consecutive 12-month periods.

Indeed, just 5.97 per cent of large-cap funds with a top-quartile ranking over the five years ending March 2007 kept up a top-quartile ranking over the next five years.

In other words, not only are the best performers not likely to repeat their outsized returns, they’re likely to lag.

Robertson bullish on Europe stocks

HEDGE FUND octogenarian Julian Robertson, whose legendary Tiger Management firm secured annual returns of 32 per cent between 1980 and 1998, is bearish on the euro but sees value in European stocks.

Robertson said last week that there were value opportunities in Europe, where stocks had been “badly beaten down”. Despite his contrarian reputation, however, he remains short the euro, even though it is a “crowded trade”.

Written in the stars

PONZI SCHEMES are not new, although one based on astrology may well be a first.

The US Securities and Exchange Commission alleges Florida investor Buddy Persaud raised $1 million by promising returns of 6 to 18 per cent through stock and property. Instead, said the SEC, he based his trading decisions on lunar cycles and the gravitational pull of the moon.

Apparently, people feel dejected and more inclined to sell stocks when the moon exerts greater gravitational pull on the Earth. Unfortunately, it didn’t work, and the fund’s bank accounts were empty by 2011.

“He should have known that an SEC enforcement action was in the stars,” said a SEC director.