The Great Debate

Plutocrat manipulates stock? Old news!

On Monday, the New York Times detailed William A. Ackman’s “extraordinary attempt to leverage the corridors of power” in order to to drive down Herbalife stock prices. Ackman, who runs the hedge fund Pershing Square Capital Management, has gone short on Herbalife.

He stands to make a great deal of money if the stock price declines — and he is not about to leave its decline to chance. So, the Times reports, Ackman has enlisted congressional representatives to solicit an investigation. He has organized news conferences and letter-writing campaigns. He is trying to make his attack on Herbalife’s stock seem a grassroots, civil rights issue.

The only thing extraordinary about all of this, however, is that the New York Times finds it extraordinary. These are some of the hoariest practices in American capitalism. Indeed, in 1886, Isaac Bromley, who was both a journalist and a lobbyist, accused the Times of being a tool of Wall Street bears in driving down Union Pacific stock. Bulls were using two other papers, the Indicator and the Graphic, to boost the stock.

Charles Francis Adams Jr., the president of Union Pacific, found himself in despair as Congress debated bills in 1886 to investigate his railroad. The railroad had a history of corruption — but that was not the point of the investigation.

Senators had unintentionally, Adams wrote, “been like jumping-jacks under the hidden manipulation of Wall Street influences. Men in Wall Street have pulled the strings and these senators have jumped up on their legs and waved their arms exactly like manikins.” 

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.

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).

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.

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.

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.

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.

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.

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.

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.