Global Investing

Avoid financial meltdown – use a thesaurus

So it’s not just investors who are guilty of moving in a herd-like fashion.

Financial journalists use the same verbs and nouns with greater frequency as stock markets overheat but display more variety in their phraseology after the bubble bursts, a study by Irish computer scientists has shown.

Trawling through nearly 18,000 on-line news articles that mention the Dow Jones, FTSE and Nikkei stock indices between 2006 and 2010, Aaron Gerow of Trinity College Dublin and Mark Keane of University College Dublin found that the language used by the writers had become more similar in the run-up to the global financial crisis.

“Meaningful regularities” in language employed before the crash showed “progressively greater agreement” in “positive perceptions of the market”.

Financial commentaries from The Financial Times, the New York Times and the BBC as well as news wire services such as Reuters, for instance, deployed increasingly similar noun-phrases as the market overheated, possibly reflecting a “narrowing of reporting to a relatively smaller number of key events/companies.”

from Jeremy Gaunt:

Don’t invest in gold?

Bit of fun, this -- and might raise some issues about returning to the Gold Standard. The S&P 500 stock index priced in gold (thanks to Reuters graphics whiz Scott Barber):

Equities - SP 500 priced in dollars and gold

from Jeremy Gaunt:

Micro versus macro

There is little doubt that the latest U.S. earnings season has been a good one for long-equity  investors. Thomson Reuters Proprietary Research calculates that with 67 percent of S&P 500 companies having reported, EPS growth -- both actual and that still forecast for those who have not filed yet -- has come in at 36 percent.

Furthermore, a large majority of the reports have surprised on the upside, as they like to say on Wall Street.  Some 75 percent of  reports have been better than expected.  Not surprisingly, the S&P index gained around 6.9 percent in July and is up another 1.7 percent in the first two trading days of August.

But given what looks like at least a faltering U.S. economy with little consumer confidence, some analysts  have begun asking what there is to get excited about. Philipp Baertschi, chief strategist at wealth manager Bank Sarasin, for example, calls it a case of micro bulls versus macro bears and warns that it won't last.

Too much correlation

Globalisation is evident in this graphic put together by James Bristow, a global equities portfolio manager at BlackRock. It shows the correlation between the U.S. S&P stock index and counterparts in Europe, Australasia and the Far East.

Basically, what happens these days on Wall Street is matched everywhere else, or vice versa.

It is a bit of a problem for long-term investors. One of the best ways to diversify used to be to buy outside your domestic market. Not so now. This is likely to push more institutional investors to non-correlated assets and hedge funds.

Back to the dance floor

It was Chuck Prince, former CEO of Citigroup, who famously said on July 9, 2007: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still standing.”

PARAGUAY/

Little did he know the music did nearly stop for Citi with its shares tumbling to less than $2 in 2009 from $55 in 2007.

A year later, worldwide reflation from huge liquidity injection and stimulus packages helped the global economy from collapsing.  The music may have started. The question is, should investors return to the dance floor?

Sell in May and go away?

“Sell in May and go away” — a strategy that implies that taking a good summer holiday is the best way to deliver returns — may seem like an out-dated axiom by which to manage a share portfolio, but research from S&P indicates that using a strategy this decade would have paid dividends.

Analysing the monthly performance of 16 European markets over the 10 year period from January 2000 to December 2009, S&P shows that the summer months are inauspicious for investing.RTXFFP2_Comp

Germany saw an average total return 0f 3.3 percent over the January to May period compared with an average loss of 1.4 percent over the June to August summer months, and a total return of 8.9 percent for the year as a whole, S&P says.

Another fine excuse for selling stocks

There is no question that the losses on stock markets at the moment are primarily the result of the Greek crisis. A downgrade of a euro zone country’s sovereign debt to junk is enough to make all but insane mainstream investors take a large step away from risk.

But could it also be that the Greek crisis has come at a time when big investors were looking for an excuse to cool down the equity rally? MSCI’s all-country world stock index hit a peak on April 15 that was not only higher than anything seen this year, but also last year as well.  Up about 85 percent from its March 2009 lows, in fact.

Partly as a result, there were some signs emerging that suggested a correction would soon be in the works.

from MacroScope:

Greek Contagion: One Hell of a Tail Risk

The crisis of confidence in Greece's fiscal health has dented U.S. equities, though not enough to compromise a budding American economic recovery. Even a significant slowdown in European growth prospects might have limited immediate impact on the United States. However, that benign backdrop could vanish, economists at Morgan Stanley say, if the Greek situation were to turn in to an outright credit crisis.  They call it the "contagion tail risk":

While the retreat in risky assets in the past few weeks is not yet a headwind for growth, it is hardly a plus.  If the crisis spills over into broader risk aversion and a drying up of liquidity — the functional equivalent of the US subprime crisis — the consequences could be more dire.

JP Morgan, for its part, notes that it's not just Greece investors need to worry about.

It’s the exit, stupid

Ghoul

Anyone wondering what ghoul is most haunting investors at the moment could see it clearly on Tuesday — it is the exit strategy from the past few years’ central bank liquidity-fest.

Germany came out with a quite positive business sentiment indicator, relief was still there that Greece had managed to sell some debt a day before, and Britain formally left recession – albeit in a limp kind of way.

But what was the main global market mover? It was China implementing a previously announced clampdown on lending.

RIP 2008-2009

It was down, down, down in 2008 and up, up , up in 2009. So what will 2010 bring?

Year