The Great Debate UK

from Felix Salmon:

What does the stock sell-off mean?

At 8:30 tomorrow morning, the July jobs report will come out, and it's almost certainly going to be pretty miserable, with headline employment growth of maybe 100,000 new jobs, significantly less than needed just to keep up with population growth. The jobs report is rightly renowned as the most market-moving of all economic indicators, and so market action in the immediate wake of its release is closely watched.

What's going on here? If anybody tries to tell you we're seeing "fears of a double-dip recession," or somesuch, ignore them. Fears of a double-dip recession do not appear overnight, and do not send markets down 3.5% in the course of a morning. When vague "fears" are cited as the prime reason for a sell-off, you can be sure that in fact there's no reason at all. Markets are volatile things, and sometimes this kind of thing happens. If you can't stand it, you shouldn't be invested in stocks in the first place.

One thing you can be sure of: all tomorrow's reports about how markets have reacted to the employment report should be taken with an enormous pinch of salt. At this point, it's impossible to know what's priced in and what isn't, and in any case this kind of volatility would normally last a second day in any case. Whatever markets do tomorrow, they might well have done anyway even if the employment report hadn't come out.

If markets hadn't moved much today and instead this sell-off had happened tomorrow, it's certain that everybody would blame the employment report, no matter how good it was. It's one of the basic tenets of market reporting: if markets move on the day that non-farm payrolls are released, then there's always a direct causal relationship between the move and the report.

from Felix Salmon:

Why tech stocks deserve to be cheaper than industrials

Many thanks to commenter buysidemetrics for finding this very smart quote from Bill Gates, which actually comes from a discussion he had with Warren Buffett in 1998:

BUFFETT: The technological revolution will change the world in dramatic ways, and quickly. Ironically, however, our approach to dealing with that is just the opposite of Bill's. I look for businesses in which I think I can predict what they're going to look like in ten or 15 or 20 years. That means businesses that will look more or less as they do today, except that they'll be larger and doing more business internationally.

from Felix Salmon:

The LinkedIn IPO debate

In the blue corner, we have Joe Nocera and Henry Blodget (twice). In the red corner, there's The Epicurean Dealmaker (twice), with The Analyst as cornerman. The debate centers on the fact that the shares LinkedIn sold Thursday are worth hundreds of millions of dollars more than LinkedIn received from its bankers. To Nocera and Blodget, the conclusion is clear: LinkedIn's bankers screwed the company out of that money, giving it instead to their favored buy-side clients.

There's no doubt that investment bankers deliberately underprice IPOs. Blodget explains why:

from Breakingviews:

Four reasons to hedge against Japanese equities

What was a contrarian view right after Japan's earthquake has become consensus: confidence in a V-shaped recovery has powered a 10 percent rally in Japanese stocks since March 15. That outlook still appears likely, but questions surround the speed and strength of the recovery. Investors should hedge against the risk that politics, power shortages, and nuclear troubles prompt investors to turn tail.

Amid a drumbeat of cautiously optimistic forecasts, foreign investors pumped almost $12 billion into Japanese stocks, a surge that helped stoke an unwanted spike in the yen. Even Warren Buffett joined the chorus of support for Japanese equities. The rally also turned up some reconstruction darlings such as generator-maker Denyo <6517.T>, which has climbed 44 percent since March 15; water purification company Nihon Trim <6788.T>, up 48 percent; and lighting company Iwasaki <6924.T>, up 58 percent. 

from Felix Salmon:

Goldman’s Facebook plan falls apart

When the news came out that Goldman Sachs was orchestrating a private offering of Facebook shares at a $50 billion valuation, those shares overnight became an even hotter commodity than they had been up to that point. Check out the results of the periodic SecondMarket auctions: the three auctions in December, before the Goldman news was public, cleared at between $21.01 and $22.75 per share. The first auction after the Goldman news, by contrast, cleared at an all-time record of $28.26 per share -- that's a valuation of over $70 billion.

Clearly the Goldman news moved markets -- a lot. And equally clearly, that's very problematic in terms of securities law. Andrew Ross Sorkin explains why Goldman now feels forced to restrict its offering to non-US investors:

from Felix Salmon:

The silly, underperforming Dow

Eddy Elfenbein notes that the Dow has significantly underperformed the market of late. Here's how it compares to the S&P 500 over the past 180 days: up 16.6%, which is great, but not nearly as great as the S&P's 19.9% gain.

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Is this a bearish sign of speculative activity? Perhaps; Eddy's theory is that "the Dow hasn’t captured the strength in cyclical stocks." But the big picture, of course, is that the Dow is a ridiculous way of measuring the stock market, and that it's certain to diverge from the S&P 500 on an irregular basis. The real surprise, frankly, is not that it diverges as much as this now and then, but rather that it hews so closely to the broader stock market most of the time.

from Felix Salmon:

Why Facebook won’t go public

Miguel Helft explains why Facebook is going to have to go public sooner or later:

Mr. Zuckerberg’s quest to keep Facebook private will not last forever. Federal regulations require companies with 500 or more investors to disclose their financial results, eliminating one of the principal advantages of staying private.

from Global Investing:

Solar activities and market cycles

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Can nature's cycles enrich our finance and market theories?

Market predictions based on the alignment of the sun, moon and the earth and other cycles could help investors stay disciplined and profit in economic storms, says Daniel Shaffer, CEO of Shaffer Asset Management.

SPACE/SUN

Shaffer writes that sunspot activities show that the sun has an approximate 11-year cycle and as of March 31, 2009, sunspot activity has reached a 100-year low (this, interestingly, coincides with a cycle low in equity markets, reached sometime mid-March in 2009).

from Reuters Investigates:

Escape from Wall Street

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Leah Schnurr and Edward Krudy report today on retail investors fleeing the stock market. Will the Lost Decade create a Lost Generation of investors who avoid the market in a way not seen since the Great Depression?

Here's what one of the authors had to say about the story:

By Edward Krudy

The perception that the stock market is a place where the average person can share in the wealth of the nation has been a cornerstone of American society throughout the twentieth century. That's why we felt it was a big deal when small investors started to abandon the market.

from The Great Debate:

Quantitative easing and the commodity markets

-The views expressed are the author's own-

A warning by an International Energy Agency (IEA) analyst this week that quantitative easing (QE) risked inflating nominal commodity prices and derailing the recovery drew a withering response from Nobel Economics Laureate Paul Krugman, who labelled the unfortunate analyst the "worst economist in the world".

According to New York Times columnist Krugman "Higher commodity prices will hurt the recovery only if they rise in real terms. And they'll only rise in terms if QE succeeds in raising real demand. And this will happen only if, yes, QE2 is successful in helping economic recovery".

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