Stocktake: Greed still good on Wall Street

“On Wall Street, a culture of greed just won’t let go”, the New York Times headlined last week, following the publication of a survey of attitudes to wrongdoing among financial companies.

The survey described as “shocking” the finding that 24 per cent would “engage in insider trading to make $10 million if they could get away with it.” Of those with less than 10 years’ experience in the industry, 38 per cent would commit insider trading in this instance; that figure fell to 9 per cent among those with at least 20 years’ experience.

Our reaction was closer to that of the DealBreaker blog. “The question is: if you could commit a victimless crime and not get caught, and make $10 million, would you? And 24 per cent said yes? What is wrong with the other 76 per cent?”

Now, insider trading is not really “victimless”. Still, a poll last year found 23 per cent believed people would kill their favourite pet for a million dollars. And we’re meant to believe a similar percentage would engage in perfectly safe insider trading for a prize that’s 10 times as great?

Shocking indeed.

Chinese hard landing poses greatest threat
A Chinese hard landing poses by far the greatest threat to world markets, according to Bank of America Merrill Lynch's (BofAML) latest monthly survey of global fund managers.

More than half – 56 per cent – say the biggest risk is a Chinese hard landing and a commodity collapse. A net 65 per cent now expect weaker growth from China, compared to 31 per cent last month and just 8 per cent in May.

The survey offers a number of contrarian alerts. A net 83 per cent favour the dollar over other currencies, the highest reading ever recorded by the survey.

Cash holdings, meanwhile, have risen to 4.6 per cent – the highest level in a year and a contrarian buy signal for equities, said Merrill.

Negativity still abounds
Perhaps the key contrarian takeaway from the survey, however, is that a net 18 per cent are now underweight in emerging markets – the most negative reading in 12 years.

The MSCI Emerging Markets index is already down by 12 per cent this year, compared to a 15 per cent gain for the S&P 500.

BofAML's Michael Hartnett notes the market value of Wells Fargo and JP Morgan now tops that of every energy and materials company in Brazil, Russia, India and China. Less than three years ago, the two banks were valued at less than half of the Bric commodity sectors.

Overall, emerging indices now trade at just 9.5 times earnings, prompting Citigroup to recently say things would have to get "really dire" to justify such multiples.

Cheap markets can get cheaper, of course, but the long-term prospects look good. GMO, headed by contrarian legend Jeremy Grantham, last week updated its seven-year asset forecasts.

It sees real annual returns of 7 per cent for emerging mar- kets, compared to negative annual returns for US stocks.

Envy at US and German all-time highs
With the Iseq still some 60 per cent below 2007's high, Irish investors could be forgiven for looking on enviously at all-time highs being set in the US, where the Dow last week hit a record high for the 27th time this year. In Germany, the Dax is nearing May's record high while in the UK, the FTSE 100 is closing in on its 1999 peak.

However, the high-fliers, not the Iseq, are the outliers. Markets in Spain, Portugal, Italy and Greece are between 50 and 85 per cent below their all-time highs. More surprisingly, France's Cac 40 is roughly 45 per cent below levels recorded 13 years ago.

Of the much-trumpeted Brics – Brazil, Russia, India and China – only India’s Sensex is anywhere near all-time highs. Both Russia and Brazil have lost one- third of their value since 2007, while China’s stock market would need to treble to regain 2007 levels.

Quotes of the week

"I'm not sure. It may stand for collateralised debt obligation, but I'm not sure" – Paolo Pellegrini, on being asked in court what CDO stands for. In 2007, Pellegrini helped create Abacus 2007- AC1, the controversial mortgage CDO that netted hedge fund manager John Paulson more than $1 billion

“Jury Endures CDO Testimony From A to Zzzzz” – Bloom- berg’s headline on the trial

"Nobody really understands gold prices and I don't pretend to understand them either"
– Ben Bernanke

"Anyone who has made me a quarter of a billion dollars, I am not going to say bad things about" – Herbalife shareholder Carl Icahn on billionaire rival Bill Ackman, who is facing steep losses after betting against the stock. Icahn had previously described Ackman as "like a crybaby in the schoolyard".