Global Investing

Bad economic data, please

Interesting twist at the moment – how are financial markets going to view not-so-bad or good data out of the United States in the run-up to the next Federal Reserve meeting.

Investors have been pricing in a chunky operation by the Fed to feed the markets with cheap cash – look at the gold, silver, the Australian dollar and the Canadian dollar. Bad data from the United States will keep investors confident of such Fed action and support the flows into high yielding assets.

But any data showing the pace of recovery in the world’s largest economy is not in such a bad shape. Investors will adjust their expectations and positions, causing a sell-off in equities, speculative-grade credit and high-yielding currencies.

Maybe bad data is what investors want over the next few weeks.

from Jeremy Gaunt:

And the investor survey says…

Reuters asset allocation polls for August are out. They show very little change from July, which suggests investors are still cautious and uncertain about what is happening.

One big difference, month-on-month, was a large jump into investment grade corporate debt.  Andrew Milligan of Standard Life Investments reckons this  may in part  have been because  sovereign debt rallied so much over summer that returns from government bonds are now too meagre.

Here is the big picture:

Poll

from Jeremy Gaunt:

Wishful thinking on earnings?

The U.S. earnings season is over bar a handful of firms. It has been robust to say the least: Thomson Reuters Proprietary Research calculates that S&P 500 companies overall had second-quarter earnings growth of 38.4 percent. That was 11 percentage points higher than people had been expecting heading into the season.

There may be more surprises ahead -- although which sort, remains in question. The research suggests that analysts still expect solid growth in the coming quarters and that the decline in U.S. economic strength over the summer has not changed their minds much.

Third-quarter earnings growth is estimated at 24.9 percent, down slightly from July estimates but higher than earlier in the year. Fourth-quarter estimates are at 31.8 percent.

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.

Emerging markets pull through

Emerging market stocks have been a big favourite among investment managers this year, based on the view that long-term growth patterns remain in place despite the wobbles in developed economies. But it has not been an easy ride. MSCI’s emerging market stocks index has been in an out of positive territory for much of the year.  It has just moved back into the black after a rally of  more than 16  percent since late May.

EM

from David Gaffen:

5 Questionable Arguments Against the Double-Dip

Don’t tell George Costanza, but double dipping is all the rage these days. The possibility of the U.S. slipping back into recession after a brief period of growth is a hot topic of late – and while such an occurrence is unlikely, pundits are feverishly declaring that it can’t and won’t happen. 

Here are some of their reasons, some of which appear to strain credulity:  Double-dips are “rare.” Simon Hobbs of CNBC is a vigorous promoter of this idea, but let’s face it, the last 15 years of financial-market history is a veritable compendium things that no one expected to happen – LTCM, the financial panic, Lehman Brothers. Rare means nothing. The stock market hasn’t dropped enough. Ah yes, the stock market, that stellar indicator of the economy’s future, such as in October 2007, when it hit an all-time high, two months before the onset of the worst recession since the Great Depression. Next. The yield curve hasn’t flattened enough. This indicator comes with a bit more in the way of history, as a flattened/inverted yield curve has been a reliable indicator of economic weakness ahead. But the Federal Reserve is anchoring the short end of the curve to the ground with its zero interest rate policy. It complicates the curve’s predictive value – something Goldman Sachs noted in a morning commentary. “External shocks” are responsible for the declines in economic activity, such as that in Europe. Similar shocks were enough to spark recessions in the 1930s, 1970s, and in 2008. Everything’s connected now, remember? Corporate profits are strong. As they were all the way through the beginning of 2007, once again, before the most recent eruption.  

A recent Reuters poll put the odds of a double-dip recession at about 15 percent. Gluskin Sheff’s bearish strategist David Rosenberg puts it around 50-50, and Jim Bianco of Bianco Research also put that kind of odds on it. It may not happen – but when a lot of people are trying to convince you that something’s not going to happen, it can make you believe that it’s more likely than not.

What fund managers think

Bank of America-Merrill Lynch’s monthly poll of around 200 fund managers had a few nuggets in the June version, aside from the usual mood-taking.

Gold is too expensive.  A net 27 percent of respondent thought it overvalued, up from 13 percent in May. Then again, the respondents to this poll have reckoned gold is too pricey since September 2009.

The fall in the euro should be tailing off. A net 14 percent reckon the single currency is still overvalued, but that is way down from the net 45 percent who thought so in the May poll.

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.

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.

How do rich people get rich?

An upcoming book by Kaye Thomas explains in plain English the secret of succesful investing:  Turning money into more money.

 cashWhile everyone goes through good times and bad times, the 1980 Harvard Law School graduate suggests sticking to four main rules for success:

1) Create and maintain a regular programme of saving, in an amount that makes sense relative to your income level and financial goals.