Stock take


Gold bubble?Gold prices briefly topped $1900 this week, fuelling chatter that it is in bubble territory. Wells Fargo analysts disagree, noting that gold’s rise over the last five years (200 per cent) is dwarfed by the dotcom bubble in 2000 (500 per cent rise over five years) and the oil bubble that burst in 2008 (340 per cent over five years). Furthermore, the gold:oil ratio stands at 22.4, “well above the historical average of 15.5 but certainly not unprecedented”.

Nouriel “Dr Doom” Roubini disagrees, tweeting that “when gold goes hyperbolic as now, it’s a bubble. Issue is at which level it crashes? 3K, 4K.”

Roubini’s track record is less than stellar here, however. In December 2009, gold bull Jim Rogers dismissed Roubini’s talk of a commodity bubble, saying that the yellow metal would hit $2,000 in the next decade. No way, said Roubini. “Maybe it will reach $1,100 or so but $1,500 or $2,000 is nonsense.” Ahem.

Bank trouble: Investors believe Bank of America is in big trouble. The cost of insuring the bank against default, as measured by credit default swaps, this week exceeded the previous highs hit in 2009. Its price to book ratio has fallen to just 0.32 – that’s near its 2009 lows, and indicates that investors simply do not believe Bank of America’s assets to be nearly as valuable as the bank is pretending.

This week the bank hit back at pesky bloggers and short sellers who have it in for the stock. Onetime analyst Henry Blodget, who is now an online publisher and who had analysed the stock’s collapse, was “making ‘exaggerated and unwarranted claims’, which is what the SEC stated publicly when he was permanently banned from the securities industry in 2003”, the bank said. Not only that, Blodget was using analysis provided by “a hedge fund that has acknowledged it will benefit if our stock price declines”.

That doesn’t mean that the hedge fund analysis is wrong, however. In 2008, renowned short seller David Einhorn was vilified by Lehman Brothers after he questioned the bank’s accounting practices and bet against the stock. Everyone knows how that turned out.

Earnings hit:If Europe falls into recession what kind of an earnings hit can companies expect? According to Morgan Stanley, Europe has seen five periods of sub 2 per cent GDP growth since the 1970s, with earnings falling by “at least 30 per cent” on each occasion.

Markets tend to price in such eventualities long before analysts. While analysts have slashed earnings growth expectations for 2011 over the last few months, the expected 2012 growth rate has actually risen over the past month, Morgan Stanley notes. In other words, if GDP does drop significantly, current earnings estimates will look decidedly optimistic.