There current credit crisis has been compared to many things in the financial press - 1987 crisis, LTCM etc - and the Economist seems to think that it is a more protracted like 2001, where initial Fed was received with euphoria but the subsequent ones were taken with trepedition given their implications about the economic growth trends. The Economist think that the final shoe to fall will be the dollar.
Buttonwood: Action replay
The Economist
Sep 27th 2007
Was the script for the recent turmoil written in 1998, 1990, or is it new?
LIKE generals condemned to fight the last war, investors seem fated to hark back to the last financial crisis. When markets plunged on “Black Monday” in October 1987, people feared a repeat of the Wall Street crash of 1929. Central banks cut interest rates in part because they wanted to avoid a re-run of the 1930s' depression.
But the world has suffered a lot of financial crises and it is not always clear which one to use as a benchmark. Take the central banks' responses to the recent problems in the credit markets. Do they suggest that we are looking at a repeat of 1998, when Long-Term Capital Management, a hedge fund, wobbled, or at 1990, when there was a financial crisis at savings-and-loans banks, then the main providers of American mortgages?
As David Bowers of Absolute Strategy Research points out, it makes an enormous difference which crisis (if either) is being replayed. In 1998 rate cuts quickly restored the animal spirits of investors and the dotcom bubble followed. If that pattern is to be repeated, investors should be piling into growth-sensitive sectors like emerging markets and commodities.
But in 1990 several rate cuts failed to stop the American economy from sliding into recession. That may be what happens once again now, especially as most observers believe it takes 12-18 months for changes in interest rates to have much economic effect. Figures released on September 25th showed that the inventory of unsold American homes is at its highest level since 1989. If we are following the 1990 script, then investors should be opting for the safety of Treasury bonds.
The strength of the world's stockmarkets since the Federal Reserve cut rates on September 18th indicates that most investors are, to misquote Prince, “partying like it's 1998”. The MSCI emerging-markets index reached a record high on September 24th, and the best-performing industries in share-price terms over the past month have been economically sensitive ones, such as mining and chemicals.
Ajay Kapur of the hedge fund First Horse Capital says that America's stockmarket normally returns 7.2% over the six months after the first rate cut in the cycle, even in periods when the economy is slipping into recession. When a downturn is avoided, the average six-monthly gain is 20.1%. Mr Kapur says the world is dominated by “fiat currency democracies” in which governments and central banks tend to give in to popular pressure and “print money” to avoid hard times. He believes the recent actions of the Fed, the European Central Bank and the Bank of England endorse his view.
Those bears who believe the drama is more likely to resemble 1990 than 1998 base their case on what they think are excessive levels of consumer debt. Clearly, many of them were far too early in predicting a debt-driven crisis; Peter Warburton's jeremiad “Debt and Delusion”, for example, was published back in 1999.
But they have a point now. As economies become more sophisticated, it may make sense for consumers to take on more debt as a means of smoothing their consumption over their lifetimes. Indeed, this should add to economic stability. Ironically, however, greater stability only encourages consumers to take on more debt since they are less fearful of losing their jobs in recessions.
Consumer debt cannot keep growing faster than income forever. That evil day has been delayed, over the past 20 years, by the downward trend in interest rates. But the bears think the crunch has now arrived, as it did in Japan in the 1990s.
The world may not have to wait too long to see whether they are right. As David Rosenberg, an economist at Merrill Lynch, recalls, the stockmarket rallied in response to a half-percentage-point rate cut in early January 2001. But by the time the Fed lowered rates again at the end of that month, its move was seen by investors as a sign of desperation.
Three months ago Buttonwood pointed to three portents that would suggest investors should prepare for the worst. One of those, higher credit spreads, has indeed appeared. Another was a resurgence of inflation. Although that looks unlikely in the short term, especially if economies weaken, the long-term chances of higher inflation must surely have gone up. Gold is at its highest level since it last peaked in 1980.
The final sign was a burst of yen strength (which would indicate an unwinding of speculative bets). The yen has risen against the dollar since June but there has been no sharp lurch higher; perhaps because the Japanese economy is itself weak. But if the gloomsters are to be proven right, we must surely see some turmoil in the currency markets first.
Tuesday, October 02, 2007
Monday, October 01, 2007
Todays Reads
Bill Gross Still Mr. Bond Bull
Bill Gross is still bullish on bonds owing to the housing downturn that shows not end in sight and the potentially larger impact of housing than of stock prices. His firm (PIMCO) has rule out of thumb that says a "Fed easing cycle historically has required a destination of 1% real short rates or lower. Under a conservative assumption of 2.5% inflation, that implies Fed Funds at 3.75% or so over the next 6-12 months." And he suggest that such forecast is not totally out of the realm of possibility give than the Bernanke Fed might have asymmetric reaction to asset price movements al la Governor Kohn emulating an escalator on the way up (25bp increases) and an elevator on the way down (50bp reduction).
Investment Outlook - What Do They Know?
October 2007
Bill Gross
If you’re struggling to find something that symbolizes the transition from the old-fashioned markets of yesteryear to the seemingly inexplicable wildness of today’s derivative-driven, conduit-imploding financial complex, you need look no further than the contrast between old television’s Louis Rukeyser and thoroughly modern Jim Cramer. Calm, stately, with deep-throated baritone certainty, Rukeyser was the spokesman for aging boomers who wanted assurance that a nostril-snorting bull market would reign supreme. No less a cheerleader, but with soprano-inflected importuning decibels louder than any rival on the flat screen, Cramer, in recent weeks at least, has been willing to recognize that the momentum could turn in favor of the visiting bears. At a moment of courageous yet seemingly reckless abandon during a week when Treasury, Fed, and White House officials were trying to calm investors with an “all clear” story line, Cramer screamed at the CNBC camera, “They know nothing, they know nothing!” Just who “they” were was left to the imagination, but it was clear that in Cramer’s world Rukeyserian bullishness was not the order of the day. (more... )
Chinese Economy Will Continue to Roar Ahead
The Chinese economy continues to surprise the doubters. But given several macroeconomic headwinds - US economic slowdown, Chinese food price inflation, rising non-performing loans, stock market bubble - the article argues that they are actually a blessing in disguise. It looks like the Chinese economy is here to stay.
China's economy - How fit is the panda?
The Economist
Sep 27th 2007
NO COUNTRY in history has sustained such a blistering rate of growth over three decades as China. Its economy grew by a staggering 11.9% in the year to the second quarter. Since 1978 it has grown by an average of almost 10% a year—more than Japan or the Asian tigers achieved over similar periods when their economies took off. But eventually every sprinter trips. Japan's growth averaged 9.5% in the two decades to 1970, but slowed to 4.7% in the 1970s and to only 1% by the 1990s. (more...)
Bill Gross is still bullish on bonds owing to the housing downturn that shows not end in sight and the potentially larger impact of housing than of stock prices. His firm (PIMCO) has rule out of thumb that says a "Fed easing cycle historically has required a destination of 1% real short rates or lower. Under a conservative assumption of 2.5% inflation, that implies Fed Funds at 3.75% or so over the next 6-12 months." And he suggest that such forecast is not totally out of the realm of possibility give than the Bernanke Fed might have asymmetric reaction to asset price movements al la Governor Kohn emulating an escalator on the way up (25bp increases) and an elevator on the way down (50bp reduction).
Investment Outlook - What Do They Know?
October 2007
Bill Gross
If you’re struggling to find something that symbolizes the transition from the old-fashioned markets of yesteryear to the seemingly inexplicable wildness of today’s derivative-driven, conduit-imploding financial complex, you need look no further than the contrast between old television’s Louis Rukeyser and thoroughly modern Jim Cramer. Calm, stately, with deep-throated baritone certainty, Rukeyser was the spokesman for aging boomers who wanted assurance that a nostril-snorting bull market would reign supreme. No less a cheerleader, but with soprano-inflected importuning decibels louder than any rival on the flat screen, Cramer, in recent weeks at least, has been willing to recognize that the momentum could turn in favor of the visiting bears. At a moment of courageous yet seemingly reckless abandon during a week when Treasury, Fed, and White House officials were trying to calm investors with an “all clear” story line, Cramer screamed at the CNBC camera, “They know nothing, they know nothing!” Just who “they” were was left to the imagination, but it was clear that in Cramer’s world Rukeyserian bullishness was not the order of the day. (more... )
Chinese Economy Will Continue to Roar Ahead
The Chinese economy continues to surprise the doubters. But given several macroeconomic headwinds - US economic slowdown, Chinese food price inflation, rising non-performing loans, stock market bubble - the article argues that they are actually a blessing in disguise. It looks like the Chinese economy is here to stay.
China's economy - How fit is the panda?
The Economist
Sep 27th 2007
NO COUNTRY in history has sustained such a blistering rate of growth over three decades as China. Its economy grew by a staggering 11.9% in the year to the second quarter. Since 1978 it has grown by an average of almost 10% a year—more than Japan or the Asian tigers achieved over similar periods when their economies took off. But eventually every sprinter trips. Japan's growth averaged 9.5% in the two decades to 1970, but slowed to 4.7% in the 1970s and to only 1% by the 1990s. (more...)
Thursday, April 26, 2007
Of Markets & the Economy
The US market has roared mightily since the dip in mid-summer last year but the GDP growth profile has only become less optimistic during the same period (see chart). This divergence is very puzzling. Is the market move driven by fundamental factors (i.e. expecting growth to rebound in H2 07) or is it more a technical phenomenon - AMZN jumped 25% yesterday because of short covering post good earnings numbers (15% of the stock outstanding has short position)? It is hard to know for sure but Wall Street Journal tries to address the debate over the fundamental underpinning of the stock movements.
The stock market has been a lousy barometer of the economy.
From the beginning of 2004 through the first quarter of 2006, economic growth averaged an impressive 3.4%. The Dow Jones Industrial Average rose just 6%. Since then, economic growth has slowed to a little more than 2%, yet the blue-chip index has leapt 18%, ending yesterday's session at a record 13089.89, the first time it has closed above 13000.
So, is the stock market providing reassurance? Or is it out of touch? (more >>>)
The stock market has been a lousy barometer of the economy.
From the beginning of 2004 through the first quarter of 2006, economic growth averaged an impressive 3.4%. The Dow Jones Industrial Average rose just 6%. Since then, economic growth has slowed to a little more than 2%, yet the blue-chip index has leapt 18%, ending yesterday's session at a record 13089.89, the first time it has closed above 13000.
So, is the stock market providing reassurance? Or is it out of touch? (more >>>)
Friday, April 20, 2007
Bernanke Music Video - "Every Breath You Take" -
Every Breath You Take
Columbia Business School Follies
Spring 2006
Lyrics
[George W. Bush:] "Ben Bernanke is the right man to build on the record that Alan Greenspan has established. I will urge the Senate the act promptly to confirm Ben Bernanke as the fourteenth Chairman of the Federal Reserve."
Every breath you take
Every change of rate
Jobs you don't create
While we still stagflate
I'll be watching you
Every single day
Bernanke takes my pay
When growth goes away
Inflation will stay
I'll be watching you
Oh can't you see?
The Fed's where I should be
How my poor heart aches
With each of your mistakes
First you move your lips
Hike a few more BPS
When demand then dips
And the yield curve flips
I'll be watching you
Since you came supply's lost without a trace
I dream at night that I punch you in the face
Your interest policies I cannot embrace
I feel so wronged and I long for Greenspan's place
I keep cryin': Benny! Benny! Please...
Oh can't you see?
The Fed Chair should be me
How my poor heart aches
When prices escalate
Every move you make
Every oath you take
Hope your models break
Bet that beard is fake
I'll be watching you
CBS is great
Wouldn't change my fate
But we'll be watching you
We'll be watching you
Columbia Business School Follies
Spring 2006
Lyrics
[George W. Bush:] "Ben Bernanke is the right man to build on the record that Alan Greenspan has established. I will urge the Senate the act promptly to confirm Ben Bernanke as the fourteenth Chairman of the Federal Reserve."
Every breath you take
Every change of rate
Jobs you don't create
While we still stagflate
I'll be watching you
Every single day
Bernanke takes my pay
When growth goes away
Inflation will stay
I'll be watching you
Oh can't you see?
The Fed's where I should be
How my poor heart aches
With each of your mistakes
First you move your lips
Hike a few more BPS
When demand then dips
And the yield curve flips
I'll be watching you
Since you came supply's lost without a trace
I dream at night that I punch you in the face
Your interest policies I cannot embrace
I feel so wronged and I long for Greenspan's place
I keep cryin': Benny! Benny! Please...
Oh can't you see?
The Fed Chair should be me
How my poor heart aches
When prices escalate
Every move you make
Every oath you take
Hope your models break
Bet that beard is fake
I'll be watching you
CBS is great
Wouldn't change my fate
But we'll be watching you
We'll be watching you
Thursday, April 19, 2007
Daily Musing: Sino-Phobia
One of today's business headlines was a surprisingly strong Chinese GDP growth for Q1 2007 (11.1% vs 10.4% expected). The Bloomberg story, Asian Stocks Post Biggest Drop in a Month on China Rate Concern promptly declared that unexpectedly strong growth will prompt Chinese authorities to hike rates - which will slow Chinese growth and also weaken the US$. That could impact the rest of Asia, thus the fallout on Asia equities today.
Let's analyze the facts. Chinese interest rates matter to the world only to the extent that they impact Chinese growth. Chinese growth is very important for global growth and inflation. But a worry about China's growth at this time is unwarranted. China needs to grow, and grow at a high single-digit rate to absorb the vast number of rural migrants pouring into the cities everyday. It is the key to the legitimacy of the Communist Party. Other issues like huge foreign reserve, current account surplus, pollution, human rights et. al. are secondary. So I won't lose my sleep over the China's economy.
Interest rates in China are very low. The benchmark rate, the so-called 12-month lending rate is at only 6.39% compared to 10%+ growth in real GDP (see Figure). A rule of thumb says that equilibrium real rate should be equal to real GDP growth. So if anything, China's rate should be higher (in fact at least double the current rate if we take into account 3.3% CPI) notwithstanding today's strong GDP number. Btw, the Economist magazine argued for higher rate in its Mar 22 issue. The article also discussed why Chinese monetary policymarkers have penchant to change rates in 27bp increments versus 25bp increments by their western counterparts (read the article).
Let's analyze the facts. Chinese interest rates matter to the world only to the extent that they impact Chinese growth. Chinese growth is very important for global growth and inflation. But a worry about China's growth at this time is unwarranted. China needs to grow, and grow at a high single-digit rate to absorb the vast number of rural migrants pouring into the cities everyday. It is the key to the legitimacy of the Communist Party. Other issues like huge foreign reserve, current account surplus, pollution, human rights et. al. are secondary. So I won't lose my sleep over the China's economy.
Interest rates in China are very low. The benchmark rate, the so-called 12-month lending rate is at only 6.39% compared to 10%+ growth in real GDP (see Figure). A rule of thumb says that equilibrium real rate should be equal to real GDP growth. So if anything, China's rate should be higher (in fact at least double the current rate if we take into account 3.3% CPI) notwithstanding today's strong GDP number. Btw, the Economist magazine argued for higher rate in its Mar 22 issue. The article also discussed why Chinese monetary policymarkers have penchant to change rates in 27bp increments versus 25bp increments by their western counterparts (read the article).
NY Fed Conference on, "The euro and The dollar: Pillars in Global Finance"
"The euro and The dollar: Pillars in Global Finance"
Participants
H.E. Ambassador John Bruton, Delegation of the European Commission to the United States
Timothy F. Geithner, President and Chief Executive officer, Federal Reserve Bank of New York
Joaquín Almunia, Commissioner for Economic and monetary Affairs, European Commission
Richard Clarida, Professor of Economics and International Affairs, Columbia University
Mickey Levy, Chief Economist, Bank of America
Nouriel Roubini, Professor of Economics and International Business, New York University
Charles Wyplosz, Professor of Economics, Graduate Institute of International Studies, Geneva
Andrew Crockett, President, JPmorgan Chase International
William Dudley, Executive Vice President, Federal Reserve Bank of New York
Alberto Giovannini, Chief Executive Officer, Unifortune Asset management SGR
Jacques de Larosière, BNP Paribas
Paul Volcker, Chairman of the Board of Trustees, International Accounting Standards Committee
Pervenche Berès, Chair, Committee on Economic and monetary Affairs, European parliament
Kathleen l. Casey, Commissioner, US Securities and Exchange Commission
William Rutledge, Executive Vice President, Federal Reserve Bank of New York
David Wright, Director, DG Internal Market and Services, European Commission
Jan Hatzius, Chief US Economist, Goldman Sachs
Caio Koch-Weser, Vice Chairman, Deutsche Bank Group
Edwin M. Truman, Senior Fellow, Peterson Institute
Sir Nigel Wicks, Chairman, Euroclear
Jean-claude Trichet, President, European Central Bank
Participants
H.E. Ambassador John Bruton, Delegation of the European Commission to the United States
Timothy F. Geithner, President and Chief Executive officer, Federal Reserve Bank of New York
Joaquín Almunia, Commissioner for Economic and monetary Affairs, European Commission
Richard Clarida, Professor of Economics and International Affairs, Columbia University
Mickey Levy, Chief Economist, Bank of America
Nouriel Roubini, Professor of Economics and International Business, New York University
Charles Wyplosz, Professor of Economics, Graduate Institute of International Studies, Geneva
Andrew Crockett, President, JPmorgan Chase International
William Dudley, Executive Vice President, Federal Reserve Bank of New York
Alberto Giovannini, Chief Executive Officer, Unifortune Asset management SGR
Jacques de Larosière, BNP Paribas
Paul Volcker, Chairman of the Board of Trustees, International Accounting Standards Committee
Pervenche Berès, Chair, Committee on Economic and monetary Affairs, European parliament
Kathleen l. Casey, Commissioner, US Securities and Exchange Commission
William Rutledge, Executive Vice President, Federal Reserve Bank of New York
David Wright, Director, DG Internal Market and Services, European Commission
Jan Hatzius, Chief US Economist, Goldman Sachs
Caio Koch-Weser, Vice Chairman, Deutsche Bank Group
Edwin M. Truman, Senior Fellow, Peterson Institute
Sir Nigel Wicks, Chairman, Euroclear
Jean-claude Trichet, President, European Central Bank
Wednesday, April 18, 2007
What Spending Slowdown?
The BusinessWeek article adds to the current debate on capex. The debate centers around government data (non-defense capital goods ex-air in M3 release) showing slowdown in corporate capex and the impact it could have on future economic growth and productivity trends. Basically the article argues that one can't take the government's data on face value because the issue has become complex owing to globalization. There is a huge discrepancy between what the government is saying about capex and what the businesses are saying and that ought to give pause to anyone who is worried about the state of capex.
When is a slowdown not a slowdown? On the face of it, the government's statistics tell a very convincing story about cautious companies and weak business investment. For example, so far in 2007 new orders for nondefense capital goods, such as computers, trucks, and machinery, are barely higher than they were a year ago, an omen, perhaps, of tough times ahead for corporate profits.
There's only one problem. Corporate America is still spending big time, just increasingly outside the U.S. A BusinessWeek analysis of financial reports from more than 1,000 large and midsize U.S.-based companies shows that global capital expenditures in the fourth quarter of 2006 were actually up 18.1% over the previous year, a number that includes nonresidential construction as well as info-tech equipment and machinery. The comparable growth for domestic business investment, which is all the government reports each quarter: only 8.9%, without adjusting for inflation. (more >>>)
Debunking Messrs Roubini & Hatzius
Read a blog, "Explaining the Mystery of Why Housing Jobs Have Not Fallen Much...and the Worsening Housing Recession... " by Prof Roubini where he discusses the apparent discrepancy between "dismal" housing sector and "apparently" strong construction employment numbers. He cites two possible reasons (1) according to Goldman Sach economist, Jan Hatzius, homebuilders have not started laying off workers (2) undocumented workers hide the actual job losses in the construction industry. May be I am not looking at the same (correct?) data as Mr. Hatzius and Prof Roubini but I come with different conclusions.
Data I look at do not support Mr. Hatzius' argument. Homebuilders have been laying off workers. If you look at employment in S&1500 Homebuilders (BZH, CHB, CTX, DHI, HOV, KBH, LEN, MDCj, MHO, MTH, NVR, PHM, RYL, SKY, SPF, TOL), they have declined in 2006, to 78,000 from 104,000, a whopping 25% decline (first chart). If you look at the data for the broad construction industry, all the available sources - BLS (second chart), Manpower Survey (third chart), Challenger Survey (fourth chart) - show dismal trends in construction employment. What is interesting however is that the woes in construction sector have not permeated into the broader economy. Private payroll growth in the non-construction sector is ok; hiring is fine; and layoffs are actually trending lower.
Prof Roubini's argument about undocumented workers can cut both ways, so net-net it should have no impact. If undocumented workers were not recorded in the current construction employment slowdown, I bet they were not recorded during the boom time either. The anecdotes from the New York Times article are just anecdotes.
So what's my point? My point is that unlike Messrs Roubini & Hatzius, I believe that the problems in the residential housing sector are well-established by the data. That should not be the debate. The debate should be whether that problem is going to spread to the rest of the economy and when. Of course there are people on both sides of the fence. Homebuilders' stock prices seem to suggest that the worst is over for housing but there are others who think that "we ain't seen nothing yet" by pointing out to the housing inventory data. My gut feeling based on variety of housing data is that housing has bottomed and will start to become less of an issue past the summer. Of course, I could be dead wrong. The current slump could persist for another 6-9 months prompting consumers to curtail their holiday spending, and that’ll be the end of the current cycle.
Data I look at do not support Mr. Hatzius' argument. Homebuilders have been laying off workers. If you look at employment in S&1500 Homebuilders (BZH, CHB, CTX, DHI, HOV, KBH, LEN, MDCj, MHO, MTH, NVR, PHM, RYL, SKY, SPF, TOL), they have declined in 2006, to 78,000 from 104,000, a whopping 25% decline (first chart). If you look at the data for the broad construction industry, all the available sources - BLS (second chart), Manpower Survey (third chart), Challenger Survey (fourth chart) - show dismal trends in construction employment. What is interesting however is that the woes in construction sector have not permeated into the broader economy. Private payroll growth in the non-construction sector is ok; hiring is fine; and layoffs are actually trending lower.
Prof Roubini's argument about undocumented workers can cut both ways, so net-net it should have no impact. If undocumented workers were not recorded in the current construction employment slowdown, I bet they were not recorded during the boom time either. The anecdotes from the New York Times article are just anecdotes.
So what's my point? My point is that unlike Messrs Roubini & Hatzius, I believe that the problems in the residential housing sector are well-established by the data. That should not be the debate. The debate should be whether that problem is going to spread to the rest of the economy and when. Of course there are people on both sides of the fence. Homebuilders' stock prices seem to suggest that the worst is over for housing but there are others who think that "we ain't seen nothing yet" by pointing out to the housing inventory data. My gut feeling based on variety of housing data is that housing has bottomed and will start to become less of an issue past the summer. Of course, I could be dead wrong. The current slump could persist for another 6-9 months prompting consumers to curtail their holiday spending, and that’ll be the end of the current cycle.
Saturday, March 31, 2007
The Economist - Browsing the bourses
Browsing the bourses
The Economist, 29-Mar-2007
Companies scour global exchanges to find a better price for their shares
BASED in Toronto, Golden China Resources is a mining company with the kind of scary but alluring profile you might expect for a firm that goes prospecting for gold. Established only three years ago, it is still losing money. But it boasts an intriguing technology using bacteria in the refining process, promising rights in China and what appears to be a growing inventory of established reserves.
With bullion prices rising and economic doubts gathering, times should be good for gold producers. But on the Toronto Stock Exchange, Golden China has lost its lustre. Its share price has fallen by half since early 2006. In response, the company has embarked on a different kind of prospecting. It is studying how different bourses around the world value companies like itself. Its findings are a challenge to anyone who believes financial markets are consistent or rational.
Take, for example, the market's view of “in situ” ounces, meaning gold that is in the ground. According to an outside analysis, Canadian exploration companies are valued at $75 an ounce on average. As refined gold now sells for more than $650 an ounce, this leaves some margin for processing and mining risk.
If the deposits controlled by these Canadian companies are in China, the valuation slips to $43 an ounce. This may reflect worries that China's methods of verifying potential assets are less stringent. It may also be a consequence of more general fears about property rights in China.
That would be the end of the story were it not for an odd detail. Golden China then went on to look at the valuation of gold producers listed in Hong Kong or on the Chinese mainland. The results were striking: they were valued at $180-240 an ounce. Sino Gold, an Australian company which on March 16th made a secondary listing on the Hong Kong exchange, is priced at about $190 an ounce.
There may be some simple explanations for these big disparities. For example, the Chinese companies in the study all turn a profit. But investors in gold exploration probably care more about the treasure to be unearthed than the trickle of income from ongoing sales.
In fact, Golden China has hit on a broader seam of market discrepancies: the value of a share often depends on where the stock is floated. The most glaring examples are provided by Hong Kong-listed firms that also list in Shanghai, where they almost always get a better price for their shares. No wonder Hong Kong feels threatened by the migration of listings to its mainland rival.
More subtly, global exchanges disagree about the value they put on everything from food companies to banks, even after taking account of differences in a firm's local prospects. Perhaps investors feel better protected and better informed by some bourses rather than others. Exchanges often claim that stiff auditing and disclosure standards add a premium to the shares listed on them. But strangely, valuations right now seem highest in murky stockmarkets like China's.
Bourses may also attract their own distinctive base of investors, interested in some sectors more than others. America's markets attract the technophiles, China's lure the gold bugs. Like retail arcades, exchanges each seem to draw their own tribe of customers who know what they want, pay a premium for it and ignore bargains that would fetch much higher prices elsewhere. Golden China is like an electronics store trying to sell its wares (cheaply) on London's Savile Row rather than Tokyo's Akihabara market.
To profit from such disparities, enterprising investors have long combed the world's bourses looking for cheap stocks. It makes perfect sense for companies to do the reverse: scour the world for markets that will pay high prices for their shares, thus reducing the cost of their capital.
Unfortunately, bagging a higher valuation is not always as easy as listing on a different exchange. For example, lots of international companies coughed up for a Tokyo listing in the late 1980s, hoping to share in the euphoric multiples then applied to Japanese firms. But they were disappointed; their share prices remained tied to those back home.
Golden China is considering a more dramatic migration. Already most of its 700 employees work in China. The company's executives are thinking about joining them, and shifting their primary listing from Toronto to Hong Kong in the process. At the moment, they reckon the company's $50m market value plus its debt is worth only as much as its plant and outside investments, giving it no credit for its 1.5m ounces of gold. If more appreciative customers for their shares exist elsewhere, why not bring the company to them? It would appear the only rational response to an irrational market.
The Economist, 29-Mar-2007
Companies scour global exchanges to find a better price for their shares
BASED in Toronto, Golden China Resources is a mining company with the kind of scary but alluring profile you might expect for a firm that goes prospecting for gold. Established only three years ago, it is still losing money. But it boasts an intriguing technology using bacteria in the refining process, promising rights in China and what appears to be a growing inventory of established reserves.
With bullion prices rising and economic doubts gathering, times should be good for gold producers. But on the Toronto Stock Exchange, Golden China has lost its lustre. Its share price has fallen by half since early 2006. In response, the company has embarked on a different kind of prospecting. It is studying how different bourses around the world value companies like itself. Its findings are a challenge to anyone who believes financial markets are consistent or rational.
Take, for example, the market's view of “in situ” ounces, meaning gold that is in the ground. According to an outside analysis, Canadian exploration companies are valued at $75 an ounce on average. As refined gold now sells for more than $650 an ounce, this leaves some margin for processing and mining risk.
If the deposits controlled by these Canadian companies are in China, the valuation slips to $43 an ounce. This may reflect worries that China's methods of verifying potential assets are less stringent. It may also be a consequence of more general fears about property rights in China.
That would be the end of the story were it not for an odd detail. Golden China then went on to look at the valuation of gold producers listed in Hong Kong or on the Chinese mainland. The results were striking: they were valued at $180-240 an ounce. Sino Gold, an Australian company which on March 16th made a secondary listing on the Hong Kong exchange, is priced at about $190 an ounce.
There may be some simple explanations for these big disparities. For example, the Chinese companies in the study all turn a profit. But investors in gold exploration probably care more about the treasure to be unearthed than the trickle of income from ongoing sales.
In fact, Golden China has hit on a broader seam of market discrepancies: the value of a share often depends on where the stock is floated. The most glaring examples are provided by Hong Kong-listed firms that also list in Shanghai, where they almost always get a better price for their shares. No wonder Hong Kong feels threatened by the migration of listings to its mainland rival.
More subtly, global exchanges disagree about the value they put on everything from food companies to banks, even after taking account of differences in a firm's local prospects. Perhaps investors feel better protected and better informed by some bourses rather than others. Exchanges often claim that stiff auditing and disclosure standards add a premium to the shares listed on them. But strangely, valuations right now seem highest in murky stockmarkets like China's.
Bourses may also attract their own distinctive base of investors, interested in some sectors more than others. America's markets attract the technophiles, China's lure the gold bugs. Like retail arcades, exchanges each seem to draw their own tribe of customers who know what they want, pay a premium for it and ignore bargains that would fetch much higher prices elsewhere. Golden China is like an electronics store trying to sell its wares (cheaply) on London's Savile Row rather than Tokyo's Akihabara market.
To profit from such disparities, enterprising investors have long combed the world's bourses looking for cheap stocks. It makes perfect sense for companies to do the reverse: scour the world for markets that will pay high prices for their shares, thus reducing the cost of their capital.
Unfortunately, bagging a higher valuation is not always as easy as listing on a different exchange. For example, lots of international companies coughed up for a Tokyo listing in the late 1980s, hoping to share in the euphoric multiples then applied to Japanese firms. But they were disappointed; their share prices remained tied to those back home.
Golden China is considering a more dramatic migration. Already most of its 700 employees work in China. The company's executives are thinking about joining them, and shifting their primary listing from Toronto to Hong Kong in the process. At the moment, they reckon the company's $50m market value plus its debt is worth only as much as its plant and outside investments, giving it no credit for its 1.5m ounces of gold. If more appreciative customers for their shares exist elsewhere, why not bring the company to them? It would appear the only rational response to an irrational market.
Wednesday, March 28, 2007
The Great Inflation - Anatomy of a hump
Anatomy of a hump
The Economist, Mar 8th 2007
What caused the Great Inflation? And what might bring it back?
IF YOU were to draw the path of inflation in the typical big, rich economy over the past half century, your picture would look much like a dromedary's back: a low flat line in the 1960s; a knobbly hump of high and volatile price rises in the 1970s; dramatic disinflation in the 1980s; and low, stable inflation rates since. Japan and Germany, which were quicker to quell inflation, are well-known exceptions. But for the rest, the shape and timing of the Great Inflation bulge look remarkably similar.
This is a bulge that today's central bankers are anxious not to repeat. So it is no surprise that several governors from America's Federal Reserve are attending a conference on March 9th to discuss a new report* on the Great Inflation, written by a weighty group of macroeconomists from academia and Wall Street.
Most scholars agree on a basic explanation of the hump, placing both blame and credit squarely on central bankers. Consumer prices accelerated in the late 1960s because monetary policy was too loose. German and Japanese central bankers realised this earlier than others and tightened policy accordingly. Eventually others followed suit, and general disinflation began in the early 1980s. Since then inflation has stayed under control because central bankers are credibly committed to price stability and far better at their job.
Beyond that broad tale lie several debates about important details. Economists differ on how much non-monetary phenomena, such as closer trade integration, affect the inflation process. They also offer competing explanations for why central bankers botched things so badly a generation ago. One possibility is that they simply got the numbers wrong, consistently overestimating their economies' speed limits. Others blame theoretical misjudgments, particularly the belief that higher inflation could buy a lasting drop in unemployment. A third approach emphasises political pressure. Inflation got out of hand because central banks were under the thumb of politicians who preferred rising prices to higher joblessness.
In this latest report the authors subject such controversies to painstaking cross-country forensics. They show that price stability across the G7 countries has been far more closely correlated than economic stability. Almost everywhere, inflation took off between 1969 and 1970. And every country, except Germany and Japan, failed to tame it until the mid-1980s. Output, however, was less tightly synchronised. Although recessions in many countries have become less wrenching in recent decades, output volatility began to ease in the mid-1980s in America, but not until the early 1990s in Britain, Canada and France.
What to make of these differences? The Great Inflation, because it was felt simultaneously across countries, must have had a common cause. This cannot have been the 1970s oil shocks, because consumer prices started accelerating long before the price of crude did. Easy money is the only remaining suspect. And although the Great Disinflation was also simultaneous across many countries, GDP growth settled down at very different times. This implies that better monetary policy cannot take full credit for today's less painful recessions.
The statistical magnifying glass also casts doubt on some favourite alibis for monetary misrule. Bad data, for example, do not get central bankers off the hook: revisions to statistics on trend growth and unemployment were not big enough to excuse the scale of inflation. Instead, monetary policy was simply too loose. The authors show that the central bankers of the 1970s failed to adhere to the modern “Taylor rule”, a formula that links the appropriate level of short-term interest rates to the deviation of output from its trend and inflation from its target. Of course John Taylor, a Stanford economist, did not formalise his rule until 1993. But even without this guide, central banks should not have flunked the basic tenets of sound money.
Hawks v camels
Neither the Taylor rule, inflation targets nor any other bits of the modern central bankers' toolkit were necessary to end high inflation. But the scholars think these tools have helped to keep inflation down, which, in turn, has spawned a virtuous circle. When inflation is low and stable, a temporary uptick in consumer prices has far less impact on long-term price trends. The economists' model implies that less than 1% of a temporary price surge is translated into a permanent rise in inflation today, compared with 60% three decades ago.
That may give today's policymakers more leeway than their predecessors enjoyed. But since this wiggle-room is the legacy of low inflation volatility, it cannot be taken for granted. Were central bankers to lose their guard, inflation could soon resurge.
More worrying, the economists pour cold water on many a policymaker's favourite gauge of his own performance, namely the public's expectations of future inflation. Central bankers often cite low inflation expectations as evidence that monetary policy is appropriate. That may be a mistake. This paper argues that expectations were a good guide to future price pressure only when inflation was high. But now, if anything, inflation expectations are a backward-looking indicator, lagging measures of actual inflation.
All told, this statistical sleuthing suggests today's central bankers have little room for complacency. Inflation remains low and stable because policymakers are vigilant, not because any deep, structural changes insulate the modern economy from price pressure. If central bankers relax, higher, more volatile inflation could easily return. Rudyard Kipling's camel, remember, got its hump for being “most 'scrutiatingly idle”.
"Understanding the Evolving Inflation Process" by Stephen Cecchetti, Peter Hooper, Bruce Kasman, Kermit Schoenholtz and Mark Watson
Fed Governor Mishkin, "Inflation Dynamics"
The Economist, Mar 8th 2007
What caused the Great Inflation? And what might bring it back?
IF YOU were to draw the path of inflation in the typical big, rich economy over the past half century, your picture would look much like a dromedary's back: a low flat line in the 1960s; a knobbly hump of high and volatile price rises in the 1970s; dramatic disinflation in the 1980s; and low, stable inflation rates since. Japan and Germany, which were quicker to quell inflation, are well-known exceptions. But for the rest, the shape and timing of the Great Inflation bulge look remarkably similar.
This is a bulge that today's central bankers are anxious not to repeat. So it is no surprise that several governors from America's Federal Reserve are attending a conference on March 9th to discuss a new report* on the Great Inflation, written by a weighty group of macroeconomists from academia and Wall Street.
Most scholars agree on a basic explanation of the hump, placing both blame and credit squarely on central bankers. Consumer prices accelerated in the late 1960s because monetary policy was too loose. German and Japanese central bankers realised this earlier than others and tightened policy accordingly. Eventually others followed suit, and general disinflation began in the early 1980s. Since then inflation has stayed under control because central bankers are credibly committed to price stability and far better at their job.
Beyond that broad tale lie several debates about important details. Economists differ on how much non-monetary phenomena, such as closer trade integration, affect the inflation process. They also offer competing explanations for why central bankers botched things so badly a generation ago. One possibility is that they simply got the numbers wrong, consistently overestimating their economies' speed limits. Others blame theoretical misjudgments, particularly the belief that higher inflation could buy a lasting drop in unemployment. A third approach emphasises political pressure. Inflation got out of hand because central banks were under the thumb of politicians who preferred rising prices to higher joblessness.
In this latest report the authors subject such controversies to painstaking cross-country forensics. They show that price stability across the G7 countries has been far more closely correlated than economic stability. Almost everywhere, inflation took off between 1969 and 1970. And every country, except Germany and Japan, failed to tame it until the mid-1980s. Output, however, was less tightly synchronised. Although recessions in many countries have become less wrenching in recent decades, output volatility began to ease in the mid-1980s in America, but not until the early 1990s in Britain, Canada and France.
What to make of these differences? The Great Inflation, because it was felt simultaneously across countries, must have had a common cause. This cannot have been the 1970s oil shocks, because consumer prices started accelerating long before the price of crude did. Easy money is the only remaining suspect. And although the Great Disinflation was also simultaneous across many countries, GDP growth settled down at very different times. This implies that better monetary policy cannot take full credit for today's less painful recessions.
The statistical magnifying glass also casts doubt on some favourite alibis for monetary misrule. Bad data, for example, do not get central bankers off the hook: revisions to statistics on trend growth and unemployment were not big enough to excuse the scale of inflation. Instead, monetary policy was simply too loose. The authors show that the central bankers of the 1970s failed to adhere to the modern “Taylor rule”, a formula that links the appropriate level of short-term interest rates to the deviation of output from its trend and inflation from its target. Of course John Taylor, a Stanford economist, did not formalise his rule until 1993. But even without this guide, central banks should not have flunked the basic tenets of sound money.
Hawks v camels
Neither the Taylor rule, inflation targets nor any other bits of the modern central bankers' toolkit were necessary to end high inflation. But the scholars think these tools have helped to keep inflation down, which, in turn, has spawned a virtuous circle. When inflation is low and stable, a temporary uptick in consumer prices has far less impact on long-term price trends. The economists' model implies that less than 1% of a temporary price surge is translated into a permanent rise in inflation today, compared with 60% three decades ago.
That may give today's policymakers more leeway than their predecessors enjoyed. But since this wiggle-room is the legacy of low inflation volatility, it cannot be taken for granted. Were central bankers to lose their guard, inflation could soon resurge.
More worrying, the economists pour cold water on many a policymaker's favourite gauge of his own performance, namely the public's expectations of future inflation. Central bankers often cite low inflation expectations as evidence that monetary policy is appropriate. That may be a mistake. This paper argues that expectations were a good guide to future price pressure only when inflation was high. But now, if anything, inflation expectations are a backward-looking indicator, lagging measures of actual inflation.
All told, this statistical sleuthing suggests today's central bankers have little room for complacency. Inflation remains low and stable because policymakers are vigilant, not because any deep, structural changes insulate the modern economy from price pressure. If central bankers relax, higher, more volatile inflation could easily return. Rudyard Kipling's camel, remember, got its hump for being “most 'scrutiatingly idle”.
"Understanding the Evolving Inflation Process" by Stephen Cecchetti, Peter Hooper, Bruce Kasman, Kermit Schoenholtz and Mark Watson
Fed Governor Mishkin, "Inflation Dynamics"
Tuesday, March 27, 2007
The Economist - What's it all about, alpha?
What's it all about, alpha?
Mar 22nd 2007
Demystifying fund managers' returns
TOO many notes. That's what Emperor Joseph II famously said to Mozart on seeing his opera “The Marriage of Figaro”. But surely to think of a musical work as just a series of notes is to miss the magic.
Could the same be said about fund management? It is the fashion these days to separate beta (the systematic return delivered by the market) from alpha (the manager's skill). Investors are happy to pay high fees for the skill, but regard the market return as a commodity. Distinguishing the two is, however, difficult.
A fund manager might beat the market because of luck or recklessness, rather than skill, for example. Suppose he packed his portfolio with oil stocks. When the crude price rises that would pay off, but it would be a pretty risky portfolio. More generally, alpha sceptics often attribute eye-catching returns to “style bias”, such as favouring stocks with a high dividend yield.
But should they be biased against style bias? After all, the only portfolio utterly free of bias would be one that included the entire market. Were a Britain portfolio to exclude just one stock, such as BP, it would have a small-cap bias, a sector bias and a currency bias (most of BP's revenue is in dollars). Hence any excess return must stem from some element of style.
Academics have entered this debate, trying to pin down the factors that drive a fund's performance. These might include the difference in returns between small-cap and large-cap stocks (fund managers tend to favour the former) or the level of credit spreads and so on. Bill Fung and Narayan Naik of London Business School have come up with a seven-factor model which, they say, can explain the bulk of hedge-fund performance. After allowing for these factors, the average fund of hedge funds has not produced any alpha in the past decade, except during the dotcom bubble.
This approach suggests the whole idea of alpha might be an illusion. Academics can explain most of it, and the only reason they cannot explain all of it is because they are not clever enough to think of the missing factors.
However, it is also possible to take the opposite tack. This type of analysis gives managers no credit for choosing the systematic factors—the betas—that drive their portfolios. Yes, these betas could often have been bought for very low fees. But would an investor have been able to put them together in the right combination?
It is as if a diner in Gordon Ramsay's restaurants were brave enough to tell the irascible chef: “This meal was delicious. But chemical analysis shows it is 65% chicken, 20% carrot, 10% flour and 5% milk. I could have bought those ingredients for £1.50. Why should I pay £20?” The chef's reply, shorn of its expletives, might be: “The secret is in the mixing.”
This debate matters because people are now trying to replicate the performance of hedge funds with cloned portfolios. Indeed Messrs Fung and Naik have shown that their model would have produced an annual return over the past four years of 11.6%, well ahead of the average fund of hedge funds. Their performance was purely theoretical. But Goldman Sachs and Merrill Lynch have launched cloned hedge funds on the market.
There are two potential criticisms of the cloned approach. One is that it will simply reproduce all the systematic returns that hedge funds generate and none of their idiosyncratic magic. However, this “magic” is hard to pin down. Even if it does exist, Messrs Fung and Naik suggest it may be worth no more than the fees hedge funds charge, so the managers are the only ones to benefit from their skills.
The second criticism is that the clones will always be a step behind the smart money. You cannot clone a hedge fund until you know where it has been. But by then it may have moved on. As a result, the clones may pile into assets that the hedge funds are selling, making the classic mistake of buying at the top. This may not be a fatal flaw, however. It is possible to imagine some clones taking contrary bets, buying the betas that seem temporarily out of favour, in the hope that they will be purchasing what the hedge funds are about to buy.
There are some nice ironies at work here. Hedge-fund managers often rely on secretive “black box” models: the investor puts his money in at one end and sees the returns spat out at the other, but no more than that. Now, armed with just that information, academics are coming up with their own models, which almost match the hedge funds' performance.
Mozart might have sympathised. His operas were more than the sum of his notes. But even if the great composer had no peers, he has had plenty of imitators.
Mar 22nd 2007
Demystifying fund managers' returns
TOO many notes. That's what Emperor Joseph II famously said to Mozart on seeing his opera “The Marriage of Figaro”. But surely to think of a musical work as just a series of notes is to miss the magic.
Could the same be said about fund management? It is the fashion these days to separate beta (the systematic return delivered by the market) from alpha (the manager's skill). Investors are happy to pay high fees for the skill, but regard the market return as a commodity. Distinguishing the two is, however, difficult.
A fund manager might beat the market because of luck or recklessness, rather than skill, for example. Suppose he packed his portfolio with oil stocks. When the crude price rises that would pay off, but it would be a pretty risky portfolio. More generally, alpha sceptics often attribute eye-catching returns to “style bias”, such as favouring stocks with a high dividend yield.
But should they be biased against style bias? After all, the only portfolio utterly free of bias would be one that included the entire market. Were a Britain portfolio to exclude just one stock, such as BP, it would have a small-cap bias, a sector bias and a currency bias (most of BP's revenue is in dollars). Hence any excess return must stem from some element of style.
Academics have entered this debate, trying to pin down the factors that drive a fund's performance. These might include the difference in returns between small-cap and large-cap stocks (fund managers tend to favour the former) or the level of credit spreads and so on. Bill Fung and Narayan Naik of London Business School have come up with a seven-factor model which, they say, can explain the bulk of hedge-fund performance. After allowing for these factors, the average fund of hedge funds has not produced any alpha in the past decade, except during the dotcom bubble.
This approach suggests the whole idea of alpha might be an illusion. Academics can explain most of it, and the only reason they cannot explain all of it is because they are not clever enough to think of the missing factors.
However, it is also possible to take the opposite tack. This type of analysis gives managers no credit for choosing the systematic factors—the betas—that drive their portfolios. Yes, these betas could often have been bought for very low fees. But would an investor have been able to put them together in the right combination?
It is as if a diner in Gordon Ramsay's restaurants were brave enough to tell the irascible chef: “This meal was delicious. But chemical analysis shows it is 65% chicken, 20% carrot, 10% flour and 5% milk. I could have bought those ingredients for £1.50. Why should I pay £20?” The chef's reply, shorn of its expletives, might be: “The secret is in the mixing.”
This debate matters because people are now trying to replicate the performance of hedge funds with cloned portfolios. Indeed Messrs Fung and Naik have shown that their model would have produced an annual return over the past four years of 11.6%, well ahead of the average fund of hedge funds. Their performance was purely theoretical. But Goldman Sachs and Merrill Lynch have launched cloned hedge funds on the market.
There are two potential criticisms of the cloned approach. One is that it will simply reproduce all the systematic returns that hedge funds generate and none of their idiosyncratic magic. However, this “magic” is hard to pin down. Even if it does exist, Messrs Fung and Naik suggest it may be worth no more than the fees hedge funds charge, so the managers are the only ones to benefit from their skills.
The second criticism is that the clones will always be a step behind the smart money. You cannot clone a hedge fund until you know where it has been. But by then it may have moved on. As a result, the clones may pile into assets that the hedge funds are selling, making the classic mistake of buying at the top. This may not be a fatal flaw, however. It is possible to imagine some clones taking contrary bets, buying the betas that seem temporarily out of favour, in the hope that they will be purchasing what the hedge funds are about to buy.
There are some nice ironies at work here. Hedge-fund managers often rely on secretive “black box” models: the investor puts his money in at one end and sees the returns spat out at the other, but no more than that. Now, armed with just that information, academics are coming up with their own models, which almost match the hedge funds' performance.
Mozart might have sympathised. His operas were more than the sum of his notes. But even if the great composer had no peers, he has had plenty of imitators.
Wednesday, February 14, 2007
Why hard assets are not easy to find
Why hard assets are not easy to find
By Raghuram Rajan
Financial Times, Feb 12 2007
Signs of extremely benign financing conditions are plentiful, ranging from low long-term interest rates to historically narrow credit spreads on risky assets. Many observers call this a liquidity glut, thereby implicating central banks and their accommodative policies. But in my view, these conditions may primarily be driven by a global shortage of hard assets.
My argument relies on two global ingredients. The first is that, in spite of substantial worldwide income growth, if anything there has been an increase in the desire to save out of it. In emerging markets where income growth is rapid, savings increase. Household consumption in developing countries takes time to catch up with higher incomes – either because households take time to be confident that the increase is permanent or because credit constraints prevent them from borrowing to consume against future incomes.
Also, emerging market governments, including oil producers, not only have higher revenues but have become more careful about expenditure, given past experiences with deficits.
But perhaps most intriguing is the increase in corporate savings, especially in industrial countries. Profitable corporations, made more profitable by lower taxes and interest rates, retain earnings rather than hand them back as dividends to shareholders.
This is where we come to the second ingredient. Nominal corporate investment in hard assets – such as inventories, property, plant and equipment – has been restrained, especially relative to the quantities that might be warranted by the tremendous productivity growth of the past few years. Instead, more corporate savings have been invested in financial assets.
A number of possible explanations exist. Some sectors may have invested too much during the technology boom and be still working it off. A competitive need to improve inventory management and, more generally, utilisation of capital may also be at work. The cost of capital goods has fallen, which implies that less nominal investment is needed to achieve the same level of real investment. Furthermore, the nature of required investment may be changing, especially in industrial countries – from physical capital to human capital.
Perhaps the key factor, though, in holding back investment in hard assets may be economic uncertainty – ranging from corporate takeover threats to the increasing cost-competitiveness of emerging markets. Indeed, it makes less and less sense for corporations in industrial countries to make large domestic investments in the manufacturing sector. But as they look to invest in non-industrial countries, they become subject to the uncertainties of policy there. Not only do they have to worry about whether China is a better place to invest than Vietnam but also whether it will continue to be better 10 years from now. No wonder many corporations are focused on trying to improve the efficiency of their existing capital and stock of knowledge.
The mismatch between unabated global desired savings and lower realised investment has led to a financing glut, particularly pronounced in debt markets. With subdued investment in hard assets, there are fewer assets that can be used as collateral on which to base corporate debt. Given that a substantial portion of the world’s desired savings are put to work by central banks and financial institutions, many of which have statutory requirements (or matching considerations) to buy debt, we have many buyers for debt but too few debt instruments being issued.
Consider some implications. First, given that markets are integrated, the glut has spilt over into areas such as property and pushed prices higher. Especially affected have been the most illiquid markets and assets that have a debt-like character, such as utilities, which pay a steady dividend. Some of these markets are frothy, given the long-term prognosis for the savings-investment balance.
Second, while corporations may have learnt to be cautious through recent experience, builders and households have not faced adversity for some time and may have a greater propensity to over-invest. Third, sophisticated financial systems such as that of the US, have been particularly adept at creating instruments the market wants. This has helped the smooth financing of the US current account deficit and may be partly a cause of the deficit.
Finally, easy financing conditions the world over are not primarily because of the accommodative policy followed by the Group of Three central banks in recent years, though clearly monetary policy can add or subtract at the margin by affecting liquidity conditions and carry trades.
What is hard to forecast is how financing conditions will change. As capacity constraints tighten and as the policy environment in emerging markets becomes more clear, more investment will naturally be undertaken, reducing the financing imbalance and pushing up long-term interest rates. If this happens smoothly, the froth in exchange and asset markets will dissipate without much disruption. If long-term rates move more rapidly, for instance because of an inflation scare, the ride could be far more volatile.
The writer is a professor of finance at the Graduate School of Business at the University of Chicago
By Raghuram Rajan
Financial Times, Feb 12 2007
Signs of extremely benign financing conditions are plentiful, ranging from low long-term interest rates to historically narrow credit spreads on risky assets. Many observers call this a liquidity glut, thereby implicating central banks and their accommodative policies. But in my view, these conditions may primarily be driven by a global shortage of hard assets.
My argument relies on two global ingredients. The first is that, in spite of substantial worldwide income growth, if anything there has been an increase in the desire to save out of it. In emerging markets where income growth is rapid, savings increase. Household consumption in developing countries takes time to catch up with higher incomes – either because households take time to be confident that the increase is permanent or because credit constraints prevent them from borrowing to consume against future incomes.
Also, emerging market governments, including oil producers, not only have higher revenues but have become more careful about expenditure, given past experiences with deficits.
But perhaps most intriguing is the increase in corporate savings, especially in industrial countries. Profitable corporations, made more profitable by lower taxes and interest rates, retain earnings rather than hand them back as dividends to shareholders.
This is where we come to the second ingredient. Nominal corporate investment in hard assets – such as inventories, property, plant and equipment – has been restrained, especially relative to the quantities that might be warranted by the tremendous productivity growth of the past few years. Instead, more corporate savings have been invested in financial assets.
A number of possible explanations exist. Some sectors may have invested too much during the technology boom and be still working it off. A competitive need to improve inventory management and, more generally, utilisation of capital may also be at work. The cost of capital goods has fallen, which implies that less nominal investment is needed to achieve the same level of real investment. Furthermore, the nature of required investment may be changing, especially in industrial countries – from physical capital to human capital.
Perhaps the key factor, though, in holding back investment in hard assets may be economic uncertainty – ranging from corporate takeover threats to the increasing cost-competitiveness of emerging markets. Indeed, it makes less and less sense for corporations in industrial countries to make large domestic investments in the manufacturing sector. But as they look to invest in non-industrial countries, they become subject to the uncertainties of policy there. Not only do they have to worry about whether China is a better place to invest than Vietnam but also whether it will continue to be better 10 years from now. No wonder many corporations are focused on trying to improve the efficiency of their existing capital and stock of knowledge.
The mismatch between unabated global desired savings and lower realised investment has led to a financing glut, particularly pronounced in debt markets. With subdued investment in hard assets, there are fewer assets that can be used as collateral on which to base corporate debt. Given that a substantial portion of the world’s desired savings are put to work by central banks and financial institutions, many of which have statutory requirements (or matching considerations) to buy debt, we have many buyers for debt but too few debt instruments being issued.
Consider some implications. First, given that markets are integrated, the glut has spilt over into areas such as property and pushed prices higher. Especially affected have been the most illiquid markets and assets that have a debt-like character, such as utilities, which pay a steady dividend. Some of these markets are frothy, given the long-term prognosis for the savings-investment balance.
Second, while corporations may have learnt to be cautious through recent experience, builders and households have not faced adversity for some time and may have a greater propensity to over-invest. Third, sophisticated financial systems such as that of the US, have been particularly adept at creating instruments the market wants. This has helped the smooth financing of the US current account deficit and may be partly a cause of the deficit.
Finally, easy financing conditions the world over are not primarily because of the accommodative policy followed by the Group of Three central banks in recent years, though clearly monetary policy can add or subtract at the margin by affecting liquidity conditions and carry trades.
What is hard to forecast is how financing conditions will change. As capacity constraints tighten and as the policy environment in emerging markets becomes more clear, more investment will naturally be undertaken, reducing the financing imbalance and pushing up long-term interest rates. If this happens smoothly, the froth in exchange and asset markets will dissipate without much disruption. If long-term rates move more rapidly, for instance because of an inflation scare, the ride could be far more volatile.
The writer is a professor of finance at the Graduate School of Business at the University of Chicago
Wednesday, January 31, 2007
Tuesday, January 30, 2007
Bernanke's Conundrum: Job Market Refuses to Slow With Economy
Bernanke's Conundrum: Job Market Refuses to Slow With Economy
Bloomberg, 2007-01-30
By Scott Lanman
Call it the Federal Reserve's new conundrum: If the U.S. economy has slowed as much as some data suggest, why is the labor market still so strong?
Chairman Ben S. Bernanke and his colleagues are debating the significance of an unemployment rate that's near a five-year low and 2006 job growth that's almost as strong as the prior year's. Either the labor market is lagging behind the slowdown by a few months, or the economy is stronger than official numbers suggest.
Better-than-forecast growth would increase the danger that the Fed, whose policy makers meet today and tomorrow to set interest rates, will lose ground in its fight against inflation. San Francisco Fed President Janet Yellen, calling the situation a ``puzzle,'' says there's a ``serious risk'' of faster price increases.
``The labor market has proved surprisingly tight in the face of what has been a decent slowing in growth,'' said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, who predicts the Fed will raise interest rates by year-end. It's the ``key issue in the inflation outlook.''
Minutes from the Fed's last Open Market Committee meeting cited the labor market as members' chief inflation concern, and economists expect a similar signal in the Fed's statement tomorrow. The strength in employment is dashing some investors' hopes of a rate cut anytime soon.
Last month, policy makers left their benchmark lending rate at 5.25 percent for the fourth straight meeting after ending two years of increases in August, betting that economic growth was slowing enough to bring inflation down. All 107 economists surveyed by Bloomberg News forecast the Fed will again leave the rate unchanged.
`Gangbusters'
There is little dispute among Fed officials and economists about the demand for labor. Yellen, 60, told an audience in Scottsdale, Arizona, on Jan. 17 that the labor market is ``going gangbusters,'' language she repeated in Reno, Nevada, five days later.
Employers last month added 167,000 workers, capping a year in which growth averaged 153,000 a month compared with 165,000 a month in 2005. The December unemployment rate of 4.5 percent was the lowest year-end level since 2000 and was down from 4.9 percent a year earlier.
The chief U.S. economic-growth indicator has been giving the opposite signal. Expansion in gross domestic product slowed to a 2 percent annual pace in the third quarter from 2.6 percent in the three months through June and 5.6 percent in the first quarter.
Expanding Economy
The signal may change this week. The government's initial estimate of fourth-quarter GDP, to be published tomorrow, will show growth accelerated to a 3 percent rate at the end of 2006, according to the median estimate in a Bloomberg survey of economists.
Economists raised their predictions this month after higher- than-forecast retail sales and a narrower trade deficit bolstered the notion that the economy may be in better shape than earlier figures indicated.
``This disconnect story looked much more compelling several weeks ago, when the fourth quarter looked weaker,'' said former Fed Governor Laurence Meyer, now vice chairman of forecasting firm Macroeconomic Advisers LLC in Washington.
Labor Costs
A report tomorrow from the Labor Department may show its employment cost index, a measure of compensation costs, rose 1 percent from October to December for the second straight quarter, the fastest pace in more than two years. That comes as average hourly earnings last month jumped 4.2 percent from a year earlier, a gain last exceeded in 2000.
Yellen says she doesn't consider such readings troubling. Over the past year, increases in the employment cost index have been ``remarkably restrained,'' she said in her January. 22 speech. Overall, the labor market shows ``at best a mixed picture'' and the situation is more likely to be ``benign,'' she said.
One economist who agrees is Jim O'Sullivan of UBS Securities LLC in Stamford, Connecticut.
``We do think ultimately that growth is going to weaken enough to push unemployment up,'' he said. ``I don't think there's any doubt that if real GDP stayed as weak as 2 percent, that the unemployment rate will start going up.''
UBS expects the jobless rate to rise to 5.1 percent in the fourth quarter and real GDP to increase at a 2.2 percent rate for the full year.
This would ease the Fed's main inflation concern. Other economists reckon unemployment is likely to fall.
`Tight Resources'
``If the unemployment rate falls further, as I'm thinking, later on this year, that will create additional tight resources; workers will demand greater wages; and that can push up inflation in the future,'' said Christopher Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``That's why the Fed would want to restart its rate hikes.''
Some economists say the job market's strength may not be a puzzle at all; instead, it could be evidence that borrowing costs are still low enough to stimulate investment. In fact, this conclusion is shared by analysts with opposing views on whether there's a tradeoff between inflation and unemployment.
``When the Fed gets easy, typically, but not always, you'll see a tightening labor market and a more rapidly growing economy,'' said Brian Wesbury, chief economist at First Trust Advisors LP in Lisle, Illinois, and a former economist for Republicans in Congress.
Assistance From Fed
Jared Bernstein, an economist at the union-backed Economic Policy Institute in Washington, said the Fed's rate stance is ``absolutely'' helping the labor market by not being too restrictive.
The extent to which the job market's tightness generates inflation may depend on something outside the Fed's control: productivity. Richmond Fed President Jeffrey Lacker, the only official to publicly favor higher interest rates in the second half, said on Jan. 19 that productivity growth will keep any wage-inflation in check.
Bernanke, 53, doesn't see a productivity slowdown yet. He said in an August speech that ``strong'' growth in productivity will probably go on for ``some time'' as companies make better use of computers to raise workers' per-hour output.
``The key unknown is projections of what productivity is going to be,'' said New York University economics professor Mark Gertler, who taught Lacker in the early 1980s at the University of Wisconsin and has collaborated on research with Bernanke. ``The economy can weather high wage adjustments if they're accompanied by high productivity growth.''
Bloomberg, 2007-01-30
By Scott Lanman
Call it the Federal Reserve's new conundrum: If the U.S. economy has slowed as much as some data suggest, why is the labor market still so strong?
Chairman Ben S. Bernanke and his colleagues are debating the significance of an unemployment rate that's near a five-year low and 2006 job growth that's almost as strong as the prior year's. Either the labor market is lagging behind the slowdown by a few months, or the economy is stronger than official numbers suggest.
Better-than-forecast growth would increase the danger that the Fed, whose policy makers meet today and tomorrow to set interest rates, will lose ground in its fight against inflation. San Francisco Fed President Janet Yellen, calling the situation a ``puzzle,'' says there's a ``serious risk'' of faster price increases.
``The labor market has proved surprisingly tight in the face of what has been a decent slowing in growth,'' said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, who predicts the Fed will raise interest rates by year-end. It's the ``key issue in the inflation outlook.''
Minutes from the Fed's last Open Market Committee meeting cited the labor market as members' chief inflation concern, and economists expect a similar signal in the Fed's statement tomorrow. The strength in employment is dashing some investors' hopes of a rate cut anytime soon.
Last month, policy makers left their benchmark lending rate at 5.25 percent for the fourth straight meeting after ending two years of increases in August, betting that economic growth was slowing enough to bring inflation down. All 107 economists surveyed by Bloomberg News forecast the Fed will again leave the rate unchanged.
`Gangbusters'
There is little dispute among Fed officials and economists about the demand for labor. Yellen, 60, told an audience in Scottsdale, Arizona, on Jan. 17 that the labor market is ``going gangbusters,'' language she repeated in Reno, Nevada, five days later.
Employers last month added 167,000 workers, capping a year in which growth averaged 153,000 a month compared with 165,000 a month in 2005. The December unemployment rate of 4.5 percent was the lowest year-end level since 2000 and was down from 4.9 percent a year earlier.
The chief U.S. economic-growth indicator has been giving the opposite signal. Expansion in gross domestic product slowed to a 2 percent annual pace in the third quarter from 2.6 percent in the three months through June and 5.6 percent in the first quarter.
Expanding Economy
The signal may change this week. The government's initial estimate of fourth-quarter GDP, to be published tomorrow, will show growth accelerated to a 3 percent rate at the end of 2006, according to the median estimate in a Bloomberg survey of economists.
Economists raised their predictions this month after higher- than-forecast retail sales and a narrower trade deficit bolstered the notion that the economy may be in better shape than earlier figures indicated.
``This disconnect story looked much more compelling several weeks ago, when the fourth quarter looked weaker,'' said former Fed Governor Laurence Meyer, now vice chairman of forecasting firm Macroeconomic Advisers LLC in Washington.
Labor Costs
A report tomorrow from the Labor Department may show its employment cost index, a measure of compensation costs, rose 1 percent from October to December for the second straight quarter, the fastest pace in more than two years. That comes as average hourly earnings last month jumped 4.2 percent from a year earlier, a gain last exceeded in 2000.
Yellen says she doesn't consider such readings troubling. Over the past year, increases in the employment cost index have been ``remarkably restrained,'' she said in her January. 22 speech. Overall, the labor market shows ``at best a mixed picture'' and the situation is more likely to be ``benign,'' she said.
One economist who agrees is Jim O'Sullivan of UBS Securities LLC in Stamford, Connecticut.
``We do think ultimately that growth is going to weaken enough to push unemployment up,'' he said. ``I don't think there's any doubt that if real GDP stayed as weak as 2 percent, that the unemployment rate will start going up.''
UBS expects the jobless rate to rise to 5.1 percent in the fourth quarter and real GDP to increase at a 2.2 percent rate for the full year.
This would ease the Fed's main inflation concern. Other economists reckon unemployment is likely to fall.
`Tight Resources'
``If the unemployment rate falls further, as I'm thinking, later on this year, that will create additional tight resources; workers will demand greater wages; and that can push up inflation in the future,'' said Christopher Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``That's why the Fed would want to restart its rate hikes.''
Some economists say the job market's strength may not be a puzzle at all; instead, it could be evidence that borrowing costs are still low enough to stimulate investment. In fact, this conclusion is shared by analysts with opposing views on whether there's a tradeoff between inflation and unemployment.
``When the Fed gets easy, typically, but not always, you'll see a tightening labor market and a more rapidly growing economy,'' said Brian Wesbury, chief economist at First Trust Advisors LP in Lisle, Illinois, and a former economist for Republicans in Congress.
Assistance From Fed
Jared Bernstein, an economist at the union-backed Economic Policy Institute in Washington, said the Fed's rate stance is ``absolutely'' helping the labor market by not being too restrictive.
The extent to which the job market's tightness generates inflation may depend on something outside the Fed's control: productivity. Richmond Fed President Jeffrey Lacker, the only official to publicly favor higher interest rates in the second half, said on Jan. 19 that productivity growth will keep any wage-inflation in check.
Bernanke, 53, doesn't see a productivity slowdown yet. He said in an August speech that ``strong'' growth in productivity will probably go on for ``some time'' as companies make better use of computers to raise workers' per-hour output.
``The key unknown is projections of what productivity is going to be,'' said New York University economics professor Mark Gertler, who taught Lacker in the early 1980s at the University of Wisconsin and has collaborated on research with Bernanke. ``The economy can weather high wage adjustments if they're accompanied by high productivity growth.''
Junk Bonds are Overvalued, Defaults to Rise, NYU's Altman Says
Junk Bonds are Overvalued, Defaults to Rise, NYU's Altman Says
Bloomberg, 2007-01-25
By Caroline Salas
High-yield, high-risk bonds are overvalued and may tumble as default rates in the U.S. more than triple this year, said Edward Altman, a New York University professor who in the 1960s created a widely used mathematical formula that measures the risk of bankruptcy.
Altman predicts 2.50 percent of the $1.1 trillion junk bond market will default this year, up from 0.76 percent at the end of 2006. The rate will climb to 2.72 percent in 2008, he said last night at a Fixed-Income Analysts Society Inc. event in New York.
With companies having little trouble meeting interest payments, investors have pushed yield premiums on speculative- grade bonds to the lowest in a decade. Junk bonds yield 2.63 percentage points more than Treasuries on average, down from 3.54 percentage points a year ago, according to data compiled by Merrill Lynch & Co..
Even with a ``modest spike'' in defaults, ``it's hard to see how this market is going to do well,'' Altman, 65, said. Some investors predict default rates will remain below 1 percent this year and ``they have to say that'' to justify why they are buying bonds at such narrow yield spreads, he said.
Junk bonds are rated below Baa3 at Moody's Investors Service and below BBB- at Standard & Poor's. The securities returned 11.8 percent last year, including reinvested interest, their second- best performance since 1997, Merrill Lynch index data show. Bonds rated CCC and lower did the best, gaining 18.6 percent.
Z-Score
Altman in 1968 created the Z-score, a mathematical formula that measures a company's bankruptcy risk. Ratios such as working capital, or the amount of money available to run a business, to total assets are used in determining the Z-score. The lower the score, the higher the risk of bankruptcy.
Money from hedge funds and private equity firms are giving the riskiest borrowers access to capital and keeping default rates low, said Altman, who predicted in January 2005 the rate would rise to 4.27 percent last year from 3.37 percent.
``Just about everybody who forecast defaults was wrong,'' said Altman. ``I don't know if I am eating humble pie.''
Cheap debt has helped fuel a record amount of leveraged buyouts, where takeover firms use a combination of their own funds and debt issued in the target's name to fund the acquisition. Private equity firms and management announced more than $700 billion of takeovers last year, a record.
``We're able to borrow at unusually low spreads,'' Steven Rattner, co-founder of buyout firm Quadrangle Group LLC, said in an interview at the World Economic Forum in Davos, Switzerland. ``I'm not sure I'd want to be the buyers of that high-yield paper. The world isn't pricing risk appropriately.''
Record Sales
Companies sold a record $184 billion of junk bonds last year, and loans with below-investment-grade ratings reached an all-time high of $682 billion, according to data compiled by Bloomberg.
``There's an incredible amount of liquidity, primarily coming from non-bank institutions,'' Altman said. He estimated hedge funds account for as much as 40 percent of all trading in high-yield bonds.
Sales of the riskiest junk bonds, those rated CCC, may spur defaults, Altman said. Junk bonds that were rated B- or lower when they were issued accounted for 42 percent of high-yield sales last year, according to S&P.
Open Solutions Inc., a provider of software for financial- services companies, last week sold $325 million of 9.75 percent eight-year notes to finance its $1.4 billion takeover by the Carlyle Group and Providence Equity Partners Inc. The debt is rated Caa1 by Moody's and CCC+ by S&P.
`Very Disturbing'
``These chickadees are going to come home to roost,'' Altman said. ``But they're very happy eating in their barnyard, and they haven't. Which is very disturbing.''
The percentage of bonds considered in distress fell to a record low of 1.3 percent this month from 1.6 percent in December, S&P said this week in a report. Seventy companies had bonds trading at distressed levels, down from 97 in December, according to S&P, which defines distressed bonds as those with yields more than 10 percentage points above Treasuries.
Merrill Lynch's index of distressed bonds has shrunk to a face value of $6.5 billion from $27.4 billion at the end of 2005 and $161 billion in 2002.
``Every time there is a big bankruptcy we do open a bottle of fine wine in my household,'' said Altman. ``It's been a real dry spell. I am hoping for a more liquid situation going forward.''
Bloomberg, 2007-01-25
By Caroline Salas
High-yield, high-risk bonds are overvalued and may tumble as default rates in the U.S. more than triple this year, said Edward Altman, a New York University professor who in the 1960s created a widely used mathematical formula that measures the risk of bankruptcy.
Altman predicts 2.50 percent of the $1.1 trillion junk bond market will default this year, up from 0.76 percent at the end of 2006. The rate will climb to 2.72 percent in 2008, he said last night at a Fixed-Income Analysts Society Inc. event in New York.
With companies having little trouble meeting interest payments, investors have pushed yield premiums on speculative- grade bonds to the lowest in a decade. Junk bonds yield 2.63 percentage points more than Treasuries on average, down from 3.54 percentage points a year ago, according to data compiled by Merrill Lynch & Co..
Even with a ``modest spike'' in defaults, ``it's hard to see how this market is going to do well,'' Altman, 65, said. Some investors predict default rates will remain below 1 percent this year and ``they have to say that'' to justify why they are buying bonds at such narrow yield spreads, he said.
Junk bonds are rated below Baa3 at Moody's Investors Service and below BBB- at Standard & Poor's. The securities returned 11.8 percent last year, including reinvested interest, their second- best performance since 1997, Merrill Lynch index data show. Bonds rated CCC and lower did the best, gaining 18.6 percent.
Z-Score
Altman in 1968 created the Z-score, a mathematical formula that measures a company's bankruptcy risk. Ratios such as working capital, or the amount of money available to run a business, to total assets are used in determining the Z-score. The lower the score, the higher the risk of bankruptcy.
Money from hedge funds and private equity firms are giving the riskiest borrowers access to capital and keeping default rates low, said Altman, who predicted in January 2005 the rate would rise to 4.27 percent last year from 3.37 percent.
``Just about everybody who forecast defaults was wrong,'' said Altman. ``I don't know if I am eating humble pie.''
Cheap debt has helped fuel a record amount of leveraged buyouts, where takeover firms use a combination of their own funds and debt issued in the target's name to fund the acquisition. Private equity firms and management announced more than $700 billion of takeovers last year, a record.
``We're able to borrow at unusually low spreads,'' Steven Rattner, co-founder of buyout firm Quadrangle Group LLC, said in an interview at the World Economic Forum in Davos, Switzerland. ``I'm not sure I'd want to be the buyers of that high-yield paper. The world isn't pricing risk appropriately.''
Record Sales
Companies sold a record $184 billion of junk bonds last year, and loans with below-investment-grade ratings reached an all-time high of $682 billion, according to data compiled by Bloomberg.
``There's an incredible amount of liquidity, primarily coming from non-bank institutions,'' Altman said. He estimated hedge funds account for as much as 40 percent of all trading in high-yield bonds.
Sales of the riskiest junk bonds, those rated CCC, may spur defaults, Altman said. Junk bonds that were rated B- or lower when they were issued accounted for 42 percent of high-yield sales last year, according to S&P.
Open Solutions Inc., a provider of software for financial- services companies, last week sold $325 million of 9.75 percent eight-year notes to finance its $1.4 billion takeover by the Carlyle Group and Providence Equity Partners Inc. The debt is rated Caa1 by Moody's and CCC+ by S&P.
`Very Disturbing'
``These chickadees are going to come home to roost,'' Altman said. ``But they're very happy eating in their barnyard, and they haven't. Which is very disturbing.''
The percentage of bonds considered in distress fell to a record low of 1.3 percent this month from 1.6 percent in December, S&P said this week in a report. Seventy companies had bonds trading at distressed levels, down from 97 in December, according to S&P, which defines distressed bonds as those with yields more than 10 percentage points above Treasuries.
Merrill Lynch's index of distressed bonds has shrunk to a face value of $6.5 billion from $27.4 billion at the end of 2005 and $161 billion in 2002.
``Every time there is a big bankruptcy we do open a bottle of fine wine in my household,'' said Altman. ``It's been a real dry spell. I am hoping for a more liquid situation going forward.''
Saturday, January 13, 2007
Cohen, Granville, Acampora Don't Move Markets Anymore, Do They?
Cohen, Granville, Acampora Don't Move Markets Anymore, Do They?
Bloomberg, 2006-11-29
By Daniel Hauck
Joseph Granville and Ralph Acampora aren't moving the U.S. stock market as they used to, and no one has come along lately to take their place.
When Granville told newsletter readers to ``Sell Everything'' on Jan. 6, 1981, the Dow Jones Industrial Average fell 2.4 percent the next day. The average rose after a similar forecast on Oct. 26 this year. Acampora helped boost the Dow to a 1.1 percent gain on Jan. 8, 1999, by saying a rally was beginning. This year, the average fell when he wrote in an Oct. 30 report that the worst was over for stocks in 2006.
Forecasts from fellow 1980s and 1990s pundits Elaine Garzarelli and Abby Joseph Cohen don't have the impact they once did either. And bearish projections from top-ranked strategists Francois Trahan of Bear Stearns & Co. and Merrill Lynch & Co.'s Richard Bernstein this year failed to dent stocks' rally.
``It's gotten a lot more difficult to make that call,'' said Warren Simpson, who helps manage more than $3 billion at Stephens Capital Management in Little Rock, Arkansas. ``It's kind of passe, isn't it? There's too much risk.''
Making accurate forecasts is harder than it was 20 years ago because the rise of hedge funds has created a bigger pool of money, muting the impact of any one strategist, said Cummins Catherwood, who helps manage $700 million at Walnut Asset Management in Philadelphia.
Pundits also are dealing with a more fickle audience that is ``privy to much more information than they used to be,'' said Simpson. ``In the old days, you were dependent on your broker to tell you what the market was doing. Now people have it on their desks all over the country.''
`Sell Everything'
Investors now have more and faster information about markets from the Internet. Microsoft MSN Money, Yahoo Finance and AOL Money each attracted more than 10 million people in the U.S. in October, according to ComScore Networks Inc., a market researcher in Reston, Virginia.
Granville, 83, and Acampora, 65, helped pioneer technical analysis, or the study of price charts to make buying and selling decisions. Their influence diminished after they maintained for too long the positions that made them famous.
Granville, who got his start at what was then the brokerage E.F. Hutton in 1957, correctly forecast the bear market of 1977- 78 before his ``Sell Everything'' call.
``Joe was extremely powerful,'' said Robert Stovall, global strategist at Wood Asset Management Inc. in Sarasota, Florida, who worked with him at E.F. Hutton. ``If he gave the thumbs down to a market, it was like the emperor in the coliseum. The market would go down.''
Granville's Call
Granville later failed to foresee the rally that started in 1982 and lasted for five years. He also called for losses in 1995 before the so-called Internet bubble began.
Not all his most accurate calls were long ago. On March 11, 2000, a day after the Nasdaq Composite Index peaked at 5048.62, he wrote that investors in technology stocks ``will soon be burned.'' The index, which now gets 42 percent of its value from computer-related shares, sank 78 percent through Oct. 9, 2002.
Now he predicts the Dow average will fall as low as 7100 within six to 18 months. He draws on the observation that only five of the Dow's 30 members reached new 52-week highs when the Dow closed above 12,000 on Oct. 19 and none set records.
``When I make a prediction or a statement, it's coming from somebody who's gone through 50 years of markets,'' he said in an interview from Kansas City, Missouri, where he's based.
Dow 10,000
Acampora, a 40-year Wall Street veteran, became known for his forecasts during the 1990s at what's now Prudential Equity Group LLC. When the Dow stood at 7600 in June 1997, he correctly predicted it would reach 10,000, a level breached in March 1999.
After that happened, he said the average would climb to 18,500 by 2006. The Dow industrials closed above 12,000 for the first time on Oct. 19.
He hasn't yet released his official forecast for 2007, though he said the current four-year advance in the Dow average may be extended at least through 2008. He wrote in a note last month that 21 stocks in the Dow are ``attractive technically'' and ``buys for the long-term.''
Knight Capital Group Inc., the second-biggest matchmaker for trades on the Nasdaq Stock Market, hired Acampora in October 2005 after Prudential closed the technical research department he headed. This year, he ranked third among technical analysts in Institutional Investor magazine's annual fund-manager survey.
Acampora's Following
``Acampora currently has more of a following, more credibility, than Granville,'' said Stovall, who also worked with Acampora at Prudential. ``But they're both very serious students and the early Granville books written in the early 1960s added a lot to technical analysis.''
Garzarelli, who is 55 according to Marquis Who's Who, correctly predicted the 1987 crash as a Lehman Brothers Inc. strategist. In a June 2005 Bloomberg article, she estimated the S&P 500 would surge 25 percent in the next year. The index rose 2 percent in the 12 months, and her call didn't move the market.
``I don't have a platform,'' Garzarelli said in an interview from Springfield, Pennsylvania. She said her work, Granville's and Acampora's gets less attention from the media because they no longer are at ``major'' firms.
Since 1995, Garzarelli has headed her own firm. She uses a 14-indicator model to predict the market's moves, and expects the S&P 500 to reach a record in 2007.
Market Forecasting
Cohen, Goldman Sachs Group Inc.'s chief U.S. investment strategist in New York, made her name with bullish forecasts amid the Internet bubble. She was the top-ranked strategist in Institutional Investor's survey in 1998 and 1999.
She lost influence after underestimating the plunge that began in March 2000. In this year's survey, she wasn't listed among the top seven strategists.
Cohen, 54, was traveling and unavailable for comment, according to a Goldman spokesman, Ed Canaday. Her role has changed since the 1990s, Canaday said, as she focuses more on a ``longer-term, macro view'' than predicting daily market moves.
This year, Cohen has been a more accurate forecaster than Bear Stearns's Trahan and Merrill's Bernstein, the strategists now at the top of Institutional Investor's poll.
She said on June 13 that stocks had fallen too far and the S&P 500 would rebound to 1400 by year end. The index set its low for the year that day and has since risen 13 percent to 1386.72. Trahan has a year-end forecast of 1200, while Bernstein said at the start of 2006 that the index would slip 1.9 percent to 1224.
Pundits ``make calls and they're right sometimes,'' Stephens Capital's Simpson said. ``When they're wrong people don't listen to them as much anymore.''
Bloomberg, 2006-11-29
By Daniel Hauck
Joseph Granville and Ralph Acampora aren't moving the U.S. stock market as they used to, and no one has come along lately to take their place.
When Granville told newsletter readers to ``Sell Everything'' on Jan. 6, 1981, the Dow Jones Industrial Average fell 2.4 percent the next day. The average rose after a similar forecast on Oct. 26 this year. Acampora helped boost the Dow to a 1.1 percent gain on Jan. 8, 1999, by saying a rally was beginning. This year, the average fell when he wrote in an Oct. 30 report that the worst was over for stocks in 2006.
Forecasts from fellow 1980s and 1990s pundits Elaine Garzarelli and Abby Joseph Cohen don't have the impact they once did either. And bearish projections from top-ranked strategists Francois Trahan of Bear Stearns & Co. and Merrill Lynch & Co.'s Richard Bernstein this year failed to dent stocks' rally.
``It's gotten a lot more difficult to make that call,'' said Warren Simpson, who helps manage more than $3 billion at Stephens Capital Management in Little Rock, Arkansas. ``It's kind of passe, isn't it? There's too much risk.''
Making accurate forecasts is harder than it was 20 years ago because the rise of hedge funds has created a bigger pool of money, muting the impact of any one strategist, said Cummins Catherwood, who helps manage $700 million at Walnut Asset Management in Philadelphia.
Pundits also are dealing with a more fickle audience that is ``privy to much more information than they used to be,'' said Simpson. ``In the old days, you were dependent on your broker to tell you what the market was doing. Now people have it on their desks all over the country.''
`Sell Everything'
Investors now have more and faster information about markets from the Internet. Microsoft MSN Money, Yahoo Finance and AOL Money each attracted more than 10 million people in the U.S. in October, according to ComScore Networks Inc., a market researcher in Reston, Virginia.
Granville, 83, and Acampora, 65, helped pioneer technical analysis, or the study of price charts to make buying and selling decisions. Their influence diminished after they maintained for too long the positions that made them famous.
Granville, who got his start at what was then the brokerage E.F. Hutton in 1957, correctly forecast the bear market of 1977- 78 before his ``Sell Everything'' call.
``Joe was extremely powerful,'' said Robert Stovall, global strategist at Wood Asset Management Inc. in Sarasota, Florida, who worked with him at E.F. Hutton. ``If he gave the thumbs down to a market, it was like the emperor in the coliseum. The market would go down.''
Granville's Call
Granville later failed to foresee the rally that started in 1982 and lasted for five years. He also called for losses in 1995 before the so-called Internet bubble began.
Not all his most accurate calls were long ago. On March 11, 2000, a day after the Nasdaq Composite Index peaked at 5048.62, he wrote that investors in technology stocks ``will soon be burned.'' The index, which now gets 42 percent of its value from computer-related shares, sank 78 percent through Oct. 9, 2002.
Now he predicts the Dow average will fall as low as 7100 within six to 18 months. He draws on the observation that only five of the Dow's 30 members reached new 52-week highs when the Dow closed above 12,000 on Oct. 19 and none set records.
``When I make a prediction or a statement, it's coming from somebody who's gone through 50 years of markets,'' he said in an interview from Kansas City, Missouri, where he's based.
Dow 10,000
Acampora, a 40-year Wall Street veteran, became known for his forecasts during the 1990s at what's now Prudential Equity Group LLC. When the Dow stood at 7600 in June 1997, he correctly predicted it would reach 10,000, a level breached in March 1999.
After that happened, he said the average would climb to 18,500 by 2006. The Dow industrials closed above 12,000 for the first time on Oct. 19.
He hasn't yet released his official forecast for 2007, though he said the current four-year advance in the Dow average may be extended at least through 2008. He wrote in a note last month that 21 stocks in the Dow are ``attractive technically'' and ``buys for the long-term.''
Knight Capital Group Inc., the second-biggest matchmaker for trades on the Nasdaq Stock Market, hired Acampora in October 2005 after Prudential closed the technical research department he headed. This year, he ranked third among technical analysts in Institutional Investor magazine's annual fund-manager survey.
Acampora's Following
``Acampora currently has more of a following, more credibility, than Granville,'' said Stovall, who also worked with Acampora at Prudential. ``But they're both very serious students and the early Granville books written in the early 1960s added a lot to technical analysis.''
Garzarelli, who is 55 according to Marquis Who's Who, correctly predicted the 1987 crash as a Lehman Brothers Inc. strategist. In a June 2005 Bloomberg article, she estimated the S&P 500 would surge 25 percent in the next year. The index rose 2 percent in the 12 months, and her call didn't move the market.
``I don't have a platform,'' Garzarelli said in an interview from Springfield, Pennsylvania. She said her work, Granville's and Acampora's gets less attention from the media because they no longer are at ``major'' firms.
Since 1995, Garzarelli has headed her own firm. She uses a 14-indicator model to predict the market's moves, and expects the S&P 500 to reach a record in 2007.
Market Forecasting
Cohen, Goldman Sachs Group Inc.'s chief U.S. investment strategist in New York, made her name with bullish forecasts amid the Internet bubble. She was the top-ranked strategist in Institutional Investor's survey in 1998 and 1999.
She lost influence after underestimating the plunge that began in March 2000. In this year's survey, she wasn't listed among the top seven strategists.
Cohen, 54, was traveling and unavailable for comment, according to a Goldman spokesman, Ed Canaday. Her role has changed since the 1990s, Canaday said, as she focuses more on a ``longer-term, macro view'' than predicting daily market moves.
This year, Cohen has been a more accurate forecaster than Bear Stearns's Trahan and Merrill's Bernstein, the strategists now at the top of Institutional Investor's poll.
She said on June 13 that stocks had fallen too far and the S&P 500 would rebound to 1400 by year end. The index set its low for the year that day and has since risen 13 percent to 1386.72. Trahan has a year-end forecast of 1200, while Bernstein said at the start of 2006 that the index would slip 1.9 percent to 1224.
Pundits ``make calls and they're right sometimes,'' Stephens Capital's Simpson said. ``When they're wrong people don't listen to them as much anymore.''
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