Archive for the ‘Markets’ Category
Why is a trading tax, a bad thing?
Congress wants to bring a new tax on trading. For every $5000 you trade, government wants to take $12.50. Well that doesn’t sound bad for long term investors, right? No. Taxing trade can significantly impact the market efficiency. Take a look at chart 1 that has transaction costs (in basis points) for a few economies.
Chart 1
S&P Index for 137 years
Here is the regression trend on S&P index. However, take this data with a pinch of salt, as S&P 500 didnt exist back in 1870 (it is just an extrapolation of a trend) and most of the American bluechips came after the Long Depression of 1870s.
Companies came during or end of Long Depression:
Standard Oil (1870) – mother of most oil companies today, including XOM, Goldman Sachs (1882), AT&T (1880-85), J&J (1887), GE (1890), JP Morgan (1895), Ford (1903)
Still, this chart has some insight.
Source: Dshort.com
Emerging market indices that have grown in the past 3 months
MarketWatch has a good report on the progress in emerging market indices the past 3 months. While some of the indices have gone up, I would really be careful of some of those countries. While countries like China and to some extent India and Brazil seems a relatively safe long term bet, given their size and demographics, it is not clear how other countries will fare in the crisis of a lifetime. Chile and Israel are stable democracies and good rule of law, but given their smaller size it is not clear if they can face a sizable change in global trade patterns. Argentina and South Korea might get into deeper trouble, based on their fragile financial systems as seen in the recent history.
Here is the the report.
Of the 23 country benchmarks that comprise the widely watched MSCI Emerging Market Index, 14 have outperformed the S&P 500.
Driving this outperformance, investors have bet that economies which rely heavily on exports and commodities are poised to benefit first when the global economy starts to recover.
MSCI EM index, which as of last week had rallied 8% since the S&P 500’s Nov. 21 low, now shows only a 1.5% advance.
The gains since November didn’t come easy, arriving on the heels of steep yearly losses for the markets as the credit crisis tightened its grip and consumer and investor sentiment slid. The Bovespa ended 2008 down 53%, ending five years of consecutive gains. The Shanghai Composite fell 65%, Taiwan’s Taiex dropped 46% and the Merval tumbled 54%.
Detailed Gold stats and analysis for Q4, 2009 – Update 1
Now this report is also a part of Manual of Ideas and Seeking Alpha
Here is the detailed stats and analysis using the data from World Gold council, US geological survey and other
sources.
Can Dow reach 1600 by the end of this crisis?
The title seems scary. Can we really get that bad and fall 3/4 from this point? Hopefully, we won’t. But, economic theories don’t preclude that possibility. This is because of the fundamental relationship between stock market and the economy.
Businesses produce profits and the profits impact both the GDP and stock values. You can have the profits go closer to zero and GDP still non-zero, due to the other components in GDP, but you cannot have GDP going to a toilet and profits keep going up indefinitely. Thus, GDP forms an upperbound for corporate profits. Generally Market capitalization of the entire economy is a product of GDP, corporate profits as a % of GDP and what investors think the future will be (Price to Earnings ratio).
World’s best companies – Fortune list
S&P gets its earnings wrong
Today’s Op-ed makes an interesting case for changing how S&P computes “E” in P/E for the S&P 500 index.
http://online.wsj.com/article/SB123552586347065675.html
Standard & Poor’s recently shocked investors with an announcement that reported earnings for its S&P 500 Index for the fourth quarter of 2008 are forecast to be negative for the first time since such data were calculated in 1936.
… Suppose on a given day the only price changes in the S&P 500 are that the largest stock, Exxon-Mobil, rose 10% in price and the smallest stock, Jones Apparel Group, fell 10%. Would S&P report that the S&P 500 was unchanged that day? Of course not. Exxon-Mobil has a market weight of over 5% in the S&P 500, while the weight of Jones Apparel is less than .04%, so that the return on Exxon-Mobil is weighted 1,381 times the return on Jones Apparel. In fact, a 10% rise in Exxon-Mobil’s price would boost the S&P 500 by 4.64 index points, while the same fall in Jones Apparel would have no impact since the change is far less than the one-hundredth of one point to which the index is routinely rounded.
Yet when S&P calculates earnings, these market weights are ignored. If, for example, Exxon-Mobil earned $10 billion while Jones Apparel lost $10 billion, S&P would simply add these earnings together to compute the aggregate earnings of its index, ignoring the vast discrepancy in the relative weights on these firms. Although the average investor holds 1,381 times as much stock in Exxon-Mobil as in Jones Apparel, S&P would say that that portfolio has no earnings and hence an “infinite” P/E ratio. These incorrect calculations are producing an extraordinarily low reported level of earnings, high P/E ratios, and the reported fourth-quarter “loss.”
Take a look at the Oil refining companies
The oil prices are going down and it should be bad for all petroleum related companies, right? Well, have you guys looked at the pump prices for gasoline the last 2 months? I took a month vacation in December and when I returned I was shocked to see the price in my gas station rocketed from 1.58 to 2.18 (a shocking 60% up), while the world oil prices are still going down. And in fact, the trend is seen nationally. The gasoline prices have gone up more than 25% since Christmas. So, who is benefitting from this? The answer is – refiners. Their gross margins have gone up from about 10% in December to as high as 50% in January.
Great stocks for this Recession/Depression
A recession or a depression is not uniformly bad to everyone. There a lot of companies that can benefit from the current market condition, if their business model is good and they have enough cash to not rely on the debt markets. There are certain industries that will be created or be greatly benefitted as consumers shift their choices and lifestyles. In great depression, for example, the nascent movie industry greatly benefitted as more unemployed folks paid a nickel to watch a movie and spend 3 hours of their time. Then there are strong companies in weak markets where the recession helps in killing the weaker competitors and giving the strong ones a greater share of the market pie. They can also afford to give their employees lesser salary and bargain hard with their suppliers. Then there are companies that offer an inferior good (in an economic sense) that can be substituted for a superior good. Those who would normally buy at Nordstrom or Macy’s might move to Wal-Mart or Amazon.com, for example.
A Series on Depression – Tulip Mania of 16th Century Holland
<< Previous in the Series Next in the Series >>
Though it is not exactly a Depression, it is one of the major economic bubbles in the modern history. It had all the elements of a bubble – frenzied people buying an asset in the hope that some other person will pay them higher than what they paid. At one point around 1637 it went so crazy that one Tulip bulb cost more than 12 acres of land and 20 years of a worker’s salary.
This crisis is interesting in that it hyper-inflated a very silly object (a flower) and well analyzed over the centuries and it has a special place in economic history given some of the innovations it brought like the futures contracts. As we will see later in the article, a lot of information about this crisis in the traditional media is more hype than truth and many modern researchers debunk the folklore comparing this crisis to major depressions. This crisis was confined mostly to a small duration around January-February 1637, and didn’t have a lot of serious effects on Dutch economy, contrary to what a lot of traders believe.
Taking a look at investing in the airlines
If you have taken a flight these days, you will not be surprised with the amount of fees they add to your ticket. Most airlines even charge for the first bag you check-in. Here is the list of all charges in various airlines. Now, the positive is that many airlines are returning to profitability. Today’s WSJ writes:
But those who check multiple bags, ski equipment or oversized or overweight luggage are paying much, much more — allowing airlines to make a tidy profit. In those instances, baggage fees may yield more profit for the airline than what the carrier is making on the basic passenger ticket.
… Customers were paying the fee at other airlines without a backlash. Delta said it wasn’t getting any benefit from not charging the fee. So why not charge it?
Historic gold, silver, oil prices and their relationships
Here is the result of some data collection on gold, silver and oil. Enjoy the charts 
.
Did you know that the gold price in 1793 is about 20 dollars/ounce (ounce = ~31 grams) and now it is about $800 (about 40X gain in 300 years). http://goldinfo.net/yearly.html
Here is the 600 year history of silver and gold-silver ratio. http://goldinfo.net/silver600.html
Are we done with the down fall yet?
We have been seeing housing and stock markets falling the last few months. So, are we there yet? Is the crisis over?
I don’t think so.
Housing
Here is Shiller’s home price snapshot between 1890-2006. We have fallen a bit since 2006, but we have not fallen anywhere closer to historical levels. Look at how home price zoomed in the last 20 years, and we have a long way to fall to that point.
Stocks
Here is the historic stock price to earnings ratio measure as an average of 10 year corporate profits. This is the classic measurement that says how much value for money you get from your stock investment. This snapshot was taken last year, and current P/E as measured by this chart is around 18, whereas during historical bear markets, P/E fell below 10. So, we are not even down the half way point.
Image from Newyork Times
Energy usage patterns of tomorrow
Couple of interesting graphs from today’s International Energy Agencies’ report:
Peak oil? Nah… But, you cannot keep continuing to rely on crude. Crude production is hitting a peak at the currently producing fields, but other forms of oil production will continue to be going up.
Why stocks keep moving up and down?
Pitfalls of Inverse ETFs
Suppose you believe that the market is going to go down, what would you do? Normal answer is sell what you have and get out. However, what if you have nothing to sell? Till a couple of years ago, the answer would have been "Stay on the sidelines" for simple investors. The sophisticated investors always had plenty of avenues – Shorting the stock, buying puts, selling naked calls, etc. However, the gap was narrowed with the arrival of Inverse ETFs that allows even novice investors to short the market in a less risky way (you cannot lose more than what you put in the ETF, while in shorts your loss is theoretically unlimited and this can be psychologically unsettling for some). However, the power and pitfalls of these instruments are poorly understood by many, particularly by the long term investors. The power is obvious – you can go 1/X or 2/X of the market pretty easily leaving all the pesky details of achieving them to the ETF managers. Here are the pitfalls.
What’s happening with Gold?
Gold had the biggest monthly drop since 1983, last month. It dropped 18% in that month to about $700/ounce (1 troy ounce approximately equals 31 grams). It seems counterintuitive given the fact that crisis generally increases the price of gold, and October is the month of peak credit crisis.
What is happening with oil and how do we hedge against its price rise?
This article appeared in Seeking Alpha
Oil prices have been steadily going down the last couple of months and a few are wondering how long this will last. The price of oil is around $67/barrel (1 barrel of oil approximately equals 42 US gallons or 159 liters) for December 2008 delivery and this is less than half the price we were seeing in the summer. However, the prices of future deliveries have not fallen that low. The prices for December 2013 contracts (to take oil delivery 5 years from now) are about $90 and this indicates that atleast a few traders believe that the price of the oil will go back up at some point. Let’s analyze what is happening, and see how we can take constructive action to protect us from future oil rise. We suggest two ETFs that might help you make constructive investment decisions based on this.
Changing energy usage patterns
Opec’s gimmicks
![clip_image001[5]](http://lh4.ggpht.com/vvbalajiviswanathan/SCykLMIvm6I/AAAAAAAAAQM/o0cpcIiw51o/clip_image001%5B5%5D%5B3%5D.jpg?imgmax=800)
Why are CA and FL hit mainly by mortgage crisis? Striking difference between Jumbo and non-jumbo mortgages
I was going through ofheo’s data (Office of Federal Housing Enterprise) and one thing that mainly struck me was the dramatic difference between the Jumbo and Non-jumbo mortgages. In the first chart,
State of US housing – April 2008
Home construction turned up unexpectedly in April. It seems multi family dwelling is growing up. Here is the data from census.gov:
