Posts filed under “Think Tank”

Words from the (Investment) Wise August 9, 2009

Words from the (investment) wise for the week that was (August 3 – 9, 2009)

Risky assets last week again marched higher to the tune of economic data supporting the argument of a global economic recovery. A realization among investors that the economic transition from recession to recovery was gaining momentum resulted in many global stock markets and commodities scaling fresh peaks for the year.

09-08-09-01

Source: Steve Breen

The S&P 500 Index closed the week above the psychological 1,000 level, marking its highest level since November and capping four consecutive weeks of gains. And more upside lies ahead, said Abby Joseph Cohen, Goldman Sachs’ market strategist, who expects the Index to reach the 1,100 point by year end. (Is this a contrary indicator coming from a permabull?)

Many commodities such as crude oil, copper, aluminum, nickel, lead and zinc hit their highest levels of the year, not to mention sugar recording a 28-year peak. “The financial crisis has been addressed, the commodity crisis has not,” warned Goldman Sachs (via the Financial Times), predicting that this year’s rise in prices was “just the beginning” of another rally that was “ultimately likely to be even more extreme” than those seen in the past. However, the Baltic Dry Index – a measure of freight rates for iron ore and bulk commodities that correlates very well with base metal indices – has broken technical support on the downside and short-term weakness in metals prices looks likely, possibly as a result of the Chinese buying frenzy having come to an end.

While high-yielding commodity-linked and emerging-market currencies were in favor, the US greenback dropped to its weakest level since October before staging a rally on Friday after the announcement of the US employment data had pleased some traders (see comments in the “Economy” section below). Government bonds (with the exception of emerging markets) again sold off as the bond vigilantes cottoned on to the improved economic outlook.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates continued investor appetite for risky assets (albeit with investment-grade and high-yield corporate bonds taking a breather).

09-08-09-02

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

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Category: Think Tank

Six Impossible Things Before Breakfast

The Efficient Market Hypothesis, according to Shiller, is one of the most remarkable errors in the history of economic thought. EMH should be consigned to the dustbin of history. We need to stop teaching it, and brainwashing the innocent. Rob Arnott tells a lovely story of a speech he was giving to some 200 finance professors. He asked how many of them taught EMH – pretty much everyone’s hand was up. Then he asked how many of them believed it. Only two hands stayed up!

And we wonder why funds and banks, full of the best and brightest, have made such a mess of things. Part of the reason is that we have taught economic nonsense to two generations of students. They have come to rely upon models based on assumptions that are absurd on their face. And then they are shocked when the markets deliver them a “hundred-year flood” every 4 years. The models say this should not happen. But do they abandon their models? No, they use them to convince regulators that things should not be changed all that much. And who can argue with a model that was the basis for a Nobel Prize?

I am again out of town this week, but I have been saving a speech done by my friend James Montier of Societe Generale in London on the problems with the Efficient Market Hypothesis (EFM). While parts of it are wonkish, there are also parts that are quite funny (at least to an economist).

Ideas have consequences, and bad ideas usually have bad consequences. The current maelstrom from which we are emerging (finally, if in fits and starts) has many culprits. A lot of bad ideas and poor management that came together to create the perfect storm. Today, we look at some of the ideas that are part of the problem but are too often glossed over because they are “academic” and not of the real world. However, gentle reader, academic ideas that are taught and accepted as gospel by 99% of the professors have real-world consequences. Where does your money manager stand on these topics? It does make a difference. And now, let’s jump into James’s speech.

Six impossible things before breakfast, or how EMH has damaged our industry

What follows is the text of a speech to be delivered at the CFA UK conference on “What ever happened to EMH”. Dedicated to Peter Bernstein – Peter will be fondly remembered and sadly missed by all who work in investment. Although he and I often ended up on opposite sides of the debates, he was true gentleman and always a pleasure to discuss ideas with. I am sure Peter would have disagreed with some, much and perhaps all of my speech today, but I’m equally sure he would have enjoyed the discussion.

The Dead Parrot of Finance

Given that this is the UK division of the CFA I am sure that The Monty Python Dead Parrot Sketch will be familiar to all of you. The EMH is the financial equivalent of the Dead Parrot. I feel like the John Cleese character (an exceedingly annoyed customer who recently purchased a parrot) returning to the petshop to berate the owner:

“He’s passed away, This parrot is no more, He has ceased to be! He’s expired and gone to meet his maker. He’s a stiff! Bereft of Life, he rests in peace! If you hadn’t nailed him to the perch he’d be pushing up daisies! His metabolic processes are now history! He’s off the twig! He kicked the bucket. He’s shuffled off his mortal coil, run down the curtain and joined the bleedin’ choir invisible! This is an ex-parrot!!!”

The shopkeeper (picture Gene Fama if you will) keeps insisting the parrot is simply resting. Incidentally, the Dead Parrot Sketch takes on even more meaning when you recall Stephen Ross’s words that “All it takes to turn a parrot into a learned financial economist is just one word – arbitrage”.

The EMH supporters have strong similarities with the Jesuit astronomers of the 17th Century who desperately wanted to maintain the assumption that the Sun revolved around the Earth. The reason for this desire to protect the maintained hypothesis was simple. If the Sun didn’t revolve around the Earth, then the Bible’s tale of Joshua asking God to make the Sun stand still in the sky was a lie. A bible that lies even once can’t be the inerrant foundation for faith!

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Category: Think Tank

Where are those evil speculators?

In the context of the CFTC hearings this week discussing speculators, particularly in the crude contract, the CFTC today said the net speculative long position in crude totaled 34k, a 6 week high but is just 7k contracts above its average since March 2003 when the economy began its prior recovery. It got as high…Read More

Category: MacroNotes

Consumer Credit/GDP

In addition to the health of the US consumer’s balance sheet, a key factor in transitioning the US economy from the mean reversion improvement we are now seeing from the awful Q4 and Q1 performance to a healthy, sustainable long term growth rate will be its ability to deal with the consequence of higher interest…Read More

Category: MacroNotes

A tug of war sometime in the future

In addition to the health of the US consumer’s balance sheet, a key factor in transitioning the US economy from the mean reversion improvement we are now seeing from the awful Q4 and Q1 performance to a healthy, sustainable long term growth rate will be its ability to deal with the consequence of higher interest…Read More

Category: MacroNotes

Payrolls

July Payrolls fell by 247k, much better than expectations of a decline of 325k and a clear differential from ADP. Net revisions in the prior two months were higher by 43k. A major factor was a decline of 52k in manufacturing, 48k better than expected. The seasonal distortions from the auto companies may have had…Read More

Category: MacroNotes

Random Thoughts Ahead of Payrolls

Good Evening: Reversing its recent trend, U.S. stocks went up this morning before selling off and finishing lower. The S&P 500 broke its 21 session streak — barely — when it fell just more than 0.5% for the first time since July 7. Since the news flow was decidedly mixed, the catalyst was likely nothing…Read More

Category: Markets, Think Tank

NYSE Volume

For a 2nd day, volume in the financials are an extraordinary percentage of overall NYSE trading. Today, Citi and Bank America alone are 25% of total consolidated NYSE volume. Yesterday, Citi was part of a rebalancing and was the excuse for the large volume but amazingly, volume today is almost tracking yesterday’s pace.

Category: MacroNotes

Jobless Claims

Initial Jobless Claims totaled 550k, a large 30k less than expected and down from 588k last week. After the lumpiness in the July data due to the seasonal distortions of auto plant shutdowns that didn’t occur, today’s data is clean according to the Labor Dept. Continuing Claims though did rise by 69k and was 60k…Read More

Category: MacroNotes

BoE ramps up its printing press

While keeping rates unchanged as expected, the BOE surprised many by ramping up their QE policy when they announced they will grow the size of its Gilt purchases by 50b pounds to 175b. They said while both capital markets and economic conditions have shown signs of stabilization, conditions are still fragile. In an immediate response,…Read More

Category: MacroNotes