Global Investing

It’s 2 o’clock. Let’s buy shares

It’s 2 o’clock. You’ve had your lunch. Now what should you do?

Buy shares, if you follow what U.S. bank Goldman Sachs has found from trading patterns among major U.S. equity indices and ETFs.

According to Goldman’s analysis, the S&P 500 index has tended to do substantially better during the last two hours of trading.

Since the start of 2008, the index increased by an average of 11 bps per day between 2pm and 4pm. In contrast, between 9:30am and 2pm, it declined by an average of 24 bps per day. This translates into a cumulative return of 35% for holding the S&P index between 2pm and 4pm versus -54% for holding it between 9:30am and 2pm.

Interestingly, returns after 2pm depend critically on how the S&P traded up until then. When the S&P is down between 9:30am and 2pm, the subsequent 2pm to 4pm return has averaged -6 bps since the start of 2008. In contrast, when the S&P is up by 2pm, the subsequent return has averaged 33 bps – a difference of about 39 bps.

This pattern has become even more pronounced since the bear market intensified. Since October 2008, the S&P rallied, on average, a further 101 bps towards the end of trading if the market was already up by 1% at 2pm. If the market was down 1%, the S&P lost, on average, 10 bps in the last two hours of trading.

Whoops!

Just how much have world stocks suffered in the past year or so? Try this. According to the World Federation of Exchanges, the market capitalisation of global stock markets has halved. It was $63 trillion in October 2007. At the end of January this year it was only $31 trillion.

 

It has all been more furious than most people can recall as well. When the internet-stock bubble burst at the beginning of this decade, MSCI’s all-country world stock index lost around 51 percent of its value from peak to trough. In the latest drop, the index fell 58 percent from an all-time high in November 2007 to a new cycle low yesterday.

 

And it has been fast. The internet-stock bubble decline took slightly more than 30 months. The current fall has taken only 16 months.

Everybody down

Thomson Reuters proprietary research shows the estimated earnings growth rate for S&P 500 index companies in the first quarter of this year to be minus 31.4 percent. As the chart below shows, all 10 sectors that comprise the index are expecting an earnings decline relative to a year earlier.

Zeitgeist check

Some more bits and bobs to capture the current mood among investors.

–  So far, 2009 is worse than 2008 for stock investors. MSCI‘s main world index is down around 17 percent in January and February.  A year ago, it had lost around 8 percent.

– Eastern and central Europe are the new worries because of bank exposure to troubled economies.  ”The travails in the east, like the vampires of folklore, are sucking the lifeblood from European markets and investor sentiment,” State Street suggests.

– Cross-border flows into the euro zone hit record lows in February,  the same firm says.

from Raw Japan:

Government stock rescue?

Japanese stocks are sinking towards levels unseen since 1982, sending alarmed government officials scurrying to come up with some way of propping them up.

MARKETS-JAPAN-STOCKS Officials are looking at steps to support stocks after the plunge, which has taken the benchmark Nikkei to within sight of a 26-year low hit last October.

That slices into the value of huge share portfolios held by Japanese banks and erodes their capital just when the economy needs them to boost lending.

from Funds Hub:

Great expectations

It was the outcome most commentators were expecting.

rtx9j4vEven Roger Lawson of the UK Shareholders' Association, which represented 150,000 small investors, admitted it was "not totally unexpected".

But the defeat for hedge funds RAB Capital and SRM Global and other former shareholders claiming damages for the loss of their holdings in Northern Rock when it was nationalised last year is nevertheless a hard blow to bear.

The former shareholders may appeal, but a valuation of the equity at zero or close to zero is now looking entirely possible.

from MacroScope:

Is the ECB driven by pride?

All the G7 countries outside the euro zone now have interest rates of 1 percent or less, prompting some grumbling in various financial quarters that the European Central Bank is being particularly stubborn in keeping its rates at 2 percent.

Now comes an interesting take on this from JPMorgan Asset Management which suggests the gap may have more to do with egg on the face than monetary policy. 

"There is a school of thought," it writes in a new note "that the ECB has been in a state of denial ever since it decided to raise rates last July.  An organisational behaviourist would observe a desire to preserve 'face' in the deliberate way by which the central bank has reversed its previous tightening stance."

Nowhere to hide

Shampoo, margarine and medicine – surely some things will be okay in a recession?

Unfortunately, the concept of defensive stocks is taking a big knock along with so much else this time round. Companies making the stuff are themselves no longer certain what the future holds.

Unilever’s decision to scrap its financial targets sent its shares skidding this week and raised the spectre that more companies may follow suit.

For better or worse?

Wealth managers at Citi Private Bank are telling their clients to stay neutral in their exposure to hedge funds at the moment, whether the strategy be event driven, equity long/short or macro. The main reason is that capital markets are still stressed and many hedge funds still need to deleverage.

The firm points out, however, that hedge funds had a good news-bad news kind of year in 2008. Based on the HFRX Global Hedge Fund Index, it was the worst performance on record. The index lost 23.3 percent. Its next worst performance was 2002 — and that was only a 1.5 percent decline.

Losses were widespread across all kinds of strategies. Only merger arbitrage and systematic macro gained anything. 

Dead cat bounce?

New year can get in the way of understanding what is happening on financial markets. Just because humans measure the year in 12 month tranches, it does not necessarily follow that markets do. Consider world stocks, for example. MSCI’s all-country world stock index is often cited as having fallen 43.5 percent in 2008. In fact, long-term investors’ losses were a lot worse. From an all-time high on November 1, 2007, to a low on November 28, 2008, the index fell 56.2 percent.

Something similar is happening at the moment. Investors might be focusing on year-to-date losses of around 5.7 percent for the index, but they are doing better than that. The index has gained 14.5 percent from that November 28 low last year.

What is your interpretation? 1) The credit crunch crash lasted for 12 months, hit bottom on November 28 and stocks are now recovering or 2) We have just had a dead cat bounce.