Global Investing

Politicians are busy blaming betting in financial markets for the recent market turmoil, with Jean-Claude Juncker, chairman of euro zone finance ministers, urging investors to stop playing a “casino game” with their shares this week.

But dare-devil operators in financial markets have shown no sign of halting their innovation in financial instruments, which are enabling investors to bet on everything from Academy Award winners to space travelling.

One of the most traded contracts on trading platform Intrade is the outcome of the U.S. Presidential election, due in just over a month.

The Barack Obama contract, based on the U.S. dollar, rose 1.5 points to 62.5, with 5,857 contracts traded on Tuesday. The level is just below a record high set in mid-July.

The John McCain contract fell half a point to 37.6, having hit an all-time high only a few weeks ago.

The present may be pretty bleak for investors, but that has not stopped one firm from looking decidedly at the future – privatised space travel. Fortis Investments reckons space tourism will one day become all the rage with travellers willing to fork out thousands upon thousands of dollars for the adventure.

In the latest issue of Fund Expert magazine, Fortis looks at the nascent industry and reckons that the price of a space trip – roughly $200,000 to begin with – should come down substantially as a result of competition. There is already some – including Virgin Galactic, which is aiming for launch by next year, and Rocketplane, which should go up the year after.  They will start modestly, just sticking their noses out of the atmosphere.

The new industry, however, eventually should mean a boom in new employment, requiring commercial astronauts, flight attendants, tour operators and so on. But the flight operators may also be licking their lips at the prospect of getting government military and scientific research contracts. Fortis – whose Brussels headquarters coincidently is located on Avenue de l’Astronomie — reckons that a NASA flight currently costs the U.S. government $1.3 billion a pop. So outsourcing would be attractive.

In these troubled times, go back to basics.

Theo Zemek, AXA Investment Managers‘ global head of fixed income, says investors should adopt “Quaker investment policies” – sober and safe investment strategies that can be explained to their grandmothers.

“Anyone who utters the word ‘hedge’, after all these CDS (failures), ought to be taken out and be shot,” the 25-year markets veteran told a media briefing.

“This is the scariest market I’ve ever seen in 25 years. The world of complex instruments, credit guarantees… That world is very much an ancient history… It’s a darn tough market. Who is left standing among our counterparties?”

During a briefing in the London office of Societe Generale this week, Alain Bokobza, head of European Equity and Cross Asset strategy, handed out a booklet containing series of charts and graphs to explain the bank’s latest multi asset portfolio for the fourth quarter.

As he explained the outlook for the UK economy, a chart on UK growth was discreetly missing from the booklet.

“There’s no chart. It’s too gloomy to print it,” Bokobza told the participants.

Societe Generale sees inflation shooting below the Bank of England’s target of 2 percent over the next two years and has a bullish call on UK stocks as it predicts benchmark interest rates to fall to 3.5 percent in a year’s time from the current 5.0 percent.

“Dear readers, let us begin this week’s missive by acknowledging its partial incompleteness. For understandable considerations, there are some capital market situations that we cannot discuss. We thank all our readers for their support and look forward to continuing to provide you with timely analysis.”

This is how Lehman Brothers’ strategists began their last ever weekly research note, published on Saturday – only two days before the U.S. investment bank collapsed.

In the 146-page research, Lehman strategists argued that bonds are performing well in September thanks to rising risk aversion and financial institution uncertainties.

With emerging market stocks taking a beating, now would not seem to be an obvious time to launch new equity funds for the asset class. Benchmarker MSCI’s main emerging market stock index, after all, has lost more than a quarter of its value so far this year and concerns about the U.S. economic slowdown spreading are rife.

Despite this, U.S. investment manager Putnam says it is set to launch two new emerging market equity funds in October – one for U.S. investors, the other for Europeans. Is this perverse or prescient?

Putnam, of course, reckons it is the latter. During a chat with Reuters in London, Boston-based officials said the move reflected the long-term outlook for emerging markets which has not changed during the current market ructions. Growth projections for emerging economies remain far more attractive for equities than do those for developed markets, said Matthew Scales, a senior investment product manager.

Merrill Lynch is giving a refresher course on Ten Markets Rules to Remember, created by Bob Farrell, the bank’s former dean of research during his tenure from 1957-2001.

Below are  the original rules:

#1: Markets tend to return to the mean over time
#2: Excess in one direction will lead to an opposite excess in the other direction
#3: There are no new eras, excesses are never permanent
#4: Exponentially rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
#5: The public buys the most at the top, the least at the bottom
#6: Fear and greed are stronger than long-term resolve
#7: Markets are strongest when they are broad, and weakest when they narrow to a handful of blue-chip names
#8: Bear markets have three stages: sharp down, reflexive rebound and a drawn-out fundamental downtrend
#9: When all experts and forecasts agree, something else is going to happen
#10: Bull markets are more fun than bear markets

So what does this mean today? 

David Rosenberg, Merrill’s North American economist  says: ”Rule #4 could be about the sliding U.S. dollar, as it now revives in mean-reverting fashion (back to Rule #1) .”  

Interesting juxtapositions at a Barclays Capital chat. On the day when oil prices were plunging below $106 a barrel — more than $40 below their July record peak — the investment bank held a lunch seminar to discuss trading strategies on inflation. ”It seems odd to have an inflation seminar when oil prices more or less collapsed,” said Tim Bond, head of global asset allocation. He added, however, that there is still structural upward pressure on inflation and this theme is further to run.

Rodrigo Valdes, Barclays’ chief Latin American economist and former head of research at Chile’s central bank, talked about the varying impact on inflation from food prices, as those gathered tucked into roasted sea trout with razor clams, carrot puree and sorrel velonte.

He said the surge in food and other resource prices hits emerging markets more than others, predicting Latin American inflation to peak in Q4 or Q1 with quite a lot of interest rate hikes to come. “If you buy a cup of coffee here, there’s not much coffee in it … In Brazil, it’s not the case,” he said.

The price of oil was falling sharply on Tuesday after traders stopped worrying about former Hurricane Gustav’s winds, but by at least one calculation it remains very pricey – that is, its link to the price of gold.Some market watchers argue that there is a long-term relationship between the prices of the two commodities. Roughly speaking, this theory would have 10 barrels of crude oil costing the same as one ounce of gold.  Back in March, for example, gold hit a record of $1,030 an ounce and a barrel of oil brought around $105.

By July, however, gold had fallen and oil had risen to the extent that the ratio was not 10 to 1, but 5.9 to1. Some argued at the time that hedge funds noticed this and began to short crude. With the latest tumble, oil is about 27 percent below its high. But against gold, the ratio is still at 7.4 to 1.

The problem is that gold won’t stop falling either, which rather undermines the ratio theory. Perhaps it is all just hooey. If it is not, however, oil would have to dive another 25 percent to reach equilibrium of $79 a barrel against today’s gold price.

As Democrats and Republicans kick off the final countdown to the Nov. 4 election, strategists at U.S. investment bank Lehman Brothers have done some interesting data mining.

Figures looking back economic conditions in 1948-2007 show the economy under Democrats enjoyed a higher GDP growth rate (4.2 percent vs 2.8 percent for Republican adminsitrations) and a lower average unemployment rate (5.1 percent vs 5.9 percent).

Looking at a longer timeframe since 1828, however, Lehman strategists found that government and corporate bonds fared better when a Republican occupied the White  House (it excluded Whigs).