from Global Investing:
Solar activities and market cycles
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.
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).
But a low in solar activity seems to be followed by a high. Scientists are predicting a solar maximum of activity in sunspots in 2012 that could e the strongest in modern times, according to Shaffer.
"The concern is that something weird is going on and that the current extreme low in the sunspot cycle, similar to the stock market, can be followed by an unusually high sunspot cycle leading to a solar maximum, or in other words, a peak in sunspot activity," he writes in his latest book.
"Our analysis is currently indicating a stock market low in the United States in approximately year 2012, which coincides with either a sunspot low or high depending on the cycle. "
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”.
Krugman’s criticism is unfair. There are clear links between QE and investor appetite for commodity derivatives and physical stocks (via the Federal Reserve’s “portfolio balance” effect), and from investors’ holdings of derivatives and physical inventories to cash prices (given the relatively inelastic supply and demand for raw materials in the short term).
In other words, there are financial as well as real economy links between QE and commodity prices. Commodities have some of the characteristics of financial assets as well as physical consumption materials. Via portfolio effects, QE could boost the relative (real) price of commodities even if it did not boost employment and output in the United States by very much.
It is a more open question whether commodity-driven inflation would hinder or promote a recovery in output and employment in the advanced industrial economies. It would reduce the real burden of inherited debts from the boom years. But it would harm savers, and it might harm manufacturers and households, depending on whether increased commodity prices were matched by rising non-commodity consumer prices and wages.
Overall, an unbalanced, commodity-driven inflation would probably be more of a drag on recovery than a help. Reasonable observers have reached different conclusions. In any event, the analyst’s warning was certainly not a “classic freshman mistake” or evidence of a new “Dark Age of economics” that the erudite professor labelled it.
Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. QE always favor all the commodity investments with low risk matter. Higher QE, higher commodities inventories.
http://www.mikeastrachan.com/
We are all widows and orphans now
It may seem like a world turned upside down: stocks are desired for their dividends and bonds are all about capital appreciation, or at least preservation.
It was all so different over much of the past 20 years, when despite steady falls in inflation and rising prices for bonds, the real money was perceived to be in equity price gains.
Dividends were for widows and orphans; those without the knowledge or guts to take the big risks and make the momentum plays.
The truth is that we are all, if we are lucky enough, eventually widows or orphans.
Now, for reasons of fashion and reasons of structure both the importance of and the demand for dividends are likely to grow.
The past decade though, we’ve been living and investing like rock stars, largely ignoring dividend growth. The results are clear; lousy returns but higher and higher turnover within equity portfolios as investors chase momentum and the next big thing. This generates lots of fees and helped to drive a growing share of GDP for financial services but has not served the interests of investors well.
“To those with an attention span measured in longer than milliseconds — who are few and far between, to judge from today’s markets — dividends are a vital element of return,” James Montier, a member of the asset allocation committee at fund managers GMO wrote in a letter to shareholders.
Maybe they can get the law changed, and bring something back like the Americus Trusts. Split stocks into their dividends and their capital appreciation.
Last time (mid-80s), the capital appreciation won; it might be different this time.
Stocks from Venus, bonds from Mars
Forget about politics, the biggest divide in the U.S. is between stock and bond investors, who aren’t so much arguing as speaking entirely different languages.
Stocks, while about flat for the year, are priced moderately cheaply by historical standards, implying that investors think they have a reasonable, if not spectacular, outlook for the next couple of years.
Earnings are strong, and forward looking estimates of earnings, while coming somewhat off the boil, are still rosy and cash balances are high.
Bonds, in contrast, are telling you that the U.S. will be dicing with deflation and recession over the same period, painting a landscape in which the great thing is to hang on to your capital.
Check this out: The yield on a ten-year U.S. government bond is 2.58 percent while the S&P 500 has an earnings yield, measured on a standard accounting basis, of 6.23 percent.
Somebody, to put it mildly, is going to end up disappointed.
There is simply no way that earnings can stay that high relative to stock prices while bond yields stay that low. If the earnings can be sustained, stock prices will rise. If that scenario plays out, here’s betting the whole deflation and recession thing has given way to either moderate growth and even possibly inflation.
Christian67, check your facts: as reported by the Treasury, China has actually been selling bonds “like crazy.” But other nations, primarily Japan, have been snapping them up.
Not discussed by James in this piece is the role of the trade deficit, which has been exploding since bottoming out in May of ’09. All of those trade dollars have to come home to roost somehow. Currently, the purchase of U.S. treasuries is the only way for that to happen. That’s why bond yields are staying so low. Since most companies are investing the bulk of their capital overseas (primarily in China), investing in equities only adds fuel to the fire, increasing the dollars that need to be plowed back into U.S. treasuries.
For assets, demographics may be destiny
Right about now a massive demographic shift is getting under way which will put substantial downward pressure on house and stock prices, perhaps suppressing global asset prices by one percent a year.
This is going to complicate the response to a series of thorny outstanding problems. Less buoyant asset markets will make it that much harder to work out from under a massive overhang of debt in many advanced economies. It will also put retirement plans in a vise, as more would-be retirees find the assets they had hoped to live off of in old age are not worth enough.
That means longer working lives but also higher savings, which may, you guessed it, hit consumption, company profits and give stock and other asset prices another shove lower.
And, if you believe that the sharply rising house and stock prices of the last generation were in part a social phenomenon, then look out for the opposite, as stocks and houses get a bad name as they suffer from a series of unfortunate effects.
A new Bank for International Settlements working paper by economist Elod Takats looks at the interaction of demographics and asset prices and finds not a meltdown but a long hard slog for house prices and, by extension, for other assets like stocks.
“If you look at the U.S., or most English-speaking countries, the next 40 years is substantially different from the last 40,” Takats said.
“We had demographic tailwinds over the past forty years and will have headwinds over the next forty.”
Stocks, bonds and the earnings season dance
A look at company earnings implies it is a great time to be a corporation in America, but for investors a rising savings rate and the threat of deflation mean that, ugly and risky as they are, government bonds looks good in comparison to stocks.
So far it has been a pretty remarkable earning season in the U.S. Almost 80 percent of companies reporting have beaten analysts’ estimates and profits among the largest companies are up more than 40 percent on the same period last year. Perhaps even more remarkably, companies are managing to trouser a record 10.2 cents in every dollar of revenue after operating costs, according to Standard & Poor’s.
That’s the rub – profitability growth is outpacing revenue growth, which has been 9.0 percent, implying that the gangbusters pace of profits is more due to cost cutting and efficiencies than a sustainable expansion in anyone’s business model.
So far, stock market investors seem to like it. The S&P 500 is up nearly 10.0 percent since its early July lows and has gained about 4.0 percent since the reporting season kicked off in earnest. Then again, earnings seasons are usually kind to stock, suspiciously kind.
It is almost as if someone pulled the plug on the feed of economic news to stock investors while allowing the earnings beat stories to keep on coming.
The real challenge for U.S. companies and for stock market valuations is how profit growth can be sustained in the face of anemic overall economic growth, if not a double dip recession.
How do you increase profits if consumers are not spending more and if they are not earning more, but are finally starting to save more. The figures really don’t add up very well.
Bonds have to be the favorite with rates expected to stay low for a Real long time
Economy volatility a hurdle for stocks
Rather than inflation, it may turn out that economic volatility is the true test facing equities in the years to come.
Coming in the wake of an almost unprecedented set of circumstances and policies, the outlook for growth and inflation is extremely murky. For equity investors that means there is far less certainty over both the outlook for profits and how to value them than they had grown used to in the 25 years to the onset of the current crisis.
It is not simply that very low interest rates and bloated central bank balance sheets may cause inflation. That is true, but it is also possible that Japanese-style deflation takes hold. There is a higher chance now of wild swings in inflation, growth and monetary policy than any time in the post-World-War-Two period.
This again is about the death of the so-called Great Moderation, a construct that held that economic growth and inflation had somehow become more biddable. That was largely an illusion, but as long as it lasted investors became more willing to pay more for company profits.
The steadier economic growth is, the more predictable corporate profits become. Steady inflation too is a huge boon to investors; it allows for easier discounting of future cashflows and also leads to fewer gut-wrenching mistakes by policy-makers. It is, after all, a lot easier to travel 60 miles on hour on a straight, level road than on one with sharp curves, steep climbs and sudden downhill legs.
Long periods of moderation tend to amplify this effect. Investors become more and more willing to up the multiples they will pay for given streams of future earnings.
What is interesting about the current period is not that investors thought better of their former easy confidence but how quickly something like that confidence has come back. Price/earnings ratios in the United States — currently in the 14-15 neighborhood — have begun climbing once again and are at levels below recent peaks but still far above where they were for much of the 1970s and 1980s. PE ratios fell during most of the last decade, driven downward by the popping of the dotcom bubble more than the evaporation of the Moderation mirage.
Good article, and I enjoyed reading the comments posted by CrisisMaven, Kina and Story_Burn.
from Rolfe Winkler:
The inflationary threat to stocks
Would inflation be good for stocks?
With the monetary and fiscal spigots open wide, some investors say equities are a good place to be. But David Einhorn of Greenlight Capital has warned that inflation could compress price-to-earnings multiples. A look back to history suggests his fears are warranted.
(Click chart to enlarge in new window)
The Federal Reserve has lowered rates to virtually zero and expanded its balance sheet significantly, stuffing banks with excess reserves that are available to lend. If the market picks up, banks will find themselves surrounded by creditworthy borrowers again and excess reserves could quickly flow into the real economy, increasing inflation.
In the meantime, many analysts argue that the government is likely to keep printing money to finance runaway fiscal deficits and large unfunded obligations for Medicare and Social Security, increasing inflation.
The Fed will tell you that deflation is the primary risk facing the economy as the private sector continues to de-lever. And inflation is hardly guaranteed. There's still time for the Obama administration to get America's fiscal house in order and the Fed can choose to tighten monetary policy. Highly unlikely both, but nevertheless possible.
A fine theory Richard, but the increase in the discount rate of future earnings more than offsets any increase in earnings during inflationary periods.
What’s interesting to note is that during the ’70s, the earnings of the S&P 500 actually outpaced inflation, increasing from $1.80 at the beginning of 1972 to $4.06 at the beginning of 1982, when inflation finally moderated.
But what happened to stock prices during that time? They were flat. The S&P was at 102 on 12/31/71. It was at $122 on 12/31/81. So despite earnings that more than doubled, stocks were actually up only 20%.
Why?
Because the average P/E multiple for the index declined from 18 to 8.
Oh, and when Volcker moved to kill inflation, it hammered earnings by 25%. But the market saw inflation was declining and the P/E multiple again increased, so despite the fall in earnings, stocks were UP in 1982.
from Commentaries:
Long on volatility, short on meaning
It's hard not to be cynical about what the markets are supposedly telling us this week.
Don't get me wrong, I think markets can be a good barometer for sentiment and a leading indicator for trends before they bubble to the surface.
But their behavior this week suggests that the few traders and investors working during these dog days of summer are more interested in pushing prices around for short-term gain than making a bet on where the economy and financial markets are heading.
It's nothing new that trading desks are thinly staffed in the last weeks of summer, but after last year's rude interruption of summer holidays, more are taking advantage of the relative calm this year to soak their feet in the ocean rather than man the phones.
That's caused some interesting cross-currents that are making the message a bit of a muddle. Today, for example, oil prices rose early on hopes of an economic recovery while gold, a haven for those seeking a safe harbor, marched toward $1,000 per ounce as investors grew more cautious.
And Treasuries, after two days of solid gains despite better than expected economic data, fell today as investors continued to look to the stock market rather than data for clues.
Treasury yields, in fact, had been threatening to break back to lows seen in May even though the government has flooded the market with new notes -- $70 billion more to come next week -- and the economy has improved markedly since then.
http://www.businessday.co.za/articles/Co ntent.aspx?id=81722
from Commentaries:
Don’t be fooled by global stock stumble
Don't blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.
Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.
In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.
So it's only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.
Problems surfaced in the United States last week, when a double-whammy of soft retail sales followed by a drop in consumer sentiment reignited worries that for all the good cheer about an emerging recovery, the exhausted American shopper is still unfit to carry the economy.
These concerns carried over into Monday trading in Asia, where they mingled with homegrown worries. In China, a drop-off in direct foreign investment helped fuel a nearly 6 percent decline in the Shanghai stock index and concerns about the Japanese economy helped trim more than 3 percent from the Nikkei.
U.S. stock indices have followed suit, with the S&P 500 off 2.43 percent and the Dow Jones Industrial Average off 2 percent.
It is unfortunate that the web gives us this “license” to be rude and insulting while we supposedly express our views or a contrary view to that of another person while we hide behind pseudonyms that give us some false sense of coward’s courage.
Thank you Agnes for writing this piece, even though some do not (apparently) entirely agree.
I suppose that time will prove us all wrong, in some regard.
