Secular markets (WSJ)

Asset returns for the week ending 12/19/2008

Redemption doesn't mean you are off the hook ...

So it turns out that if you got your money out of an investment (say a fund) with or without profits, and it turns out to be a fraud, you will have to give some or all of it back (principal in addition to profits) to cover losses of fellow investors. So, it means that you are really never off the hook. Next time you are up for a victory dance, make sure your adviser/manager was legit.

For more details check WSJ.

Asset returns for the week ending 12/12/2008

Linkfest 11/25/2008

• Google to lay off 10,000 (temps mostly) (HipMojo)

Asset returns for the week ending 11/21/2008

Linkfest 11/17/2008

• Mines are shutting down all over the world (WSJ)
• New trends in supercomputing (WSJ)

Asset returns for the week ending 11/14/2008

Linkfest 11/12/2008

• Dubai property boom seems to be over for now (WSJ)
  

Linkfest 11/10/2008

• Baltic Dry Index down 93% from peak (FT Alphaville)
• S&P500 estimates getting further correction (Bloomberg)
• Student debt on the rise as savings diminish (Bloomberg)
• ETFs that might be worth buying now (A Dash of Insight)

UNG above 30 SMA.

I think the decline in UNG has stopped:

Asset returns for the week ending 11/07/2008

Linkfest 11/09/2008

• According to Donald Coxe of BMO Financial Group, agricultural commodities, gold companies, and energy are the investment themes to consider (Barron's)

Pakistan's external debt ...

Linkfest 11/04/2008

• A number of indicators have turned bullish (FT Alphaville)
  Caveat: The comparison against history can sometimes lead to tremendously false conclusions

Linkfest 11/02/2008

• A glimpse of the real estate fraud from the last housing boom (Bloomberg)
• According to Barron's Big Money polls 70% money managers say that stocks will be the best-performing asset class in 2009 (Barron's)
• Netbooks becoming more popular than regular laptops (Barron's)
• Some alternative energy storage companies (Seeking Alpha, Seeking Alpha)
  

Asset returns for the week ending 10/31/2008

World stocks cheap according to Citigroup

Here is an interesting graph from Citigroup published in WSJ today. It shows the trailing P/E of world markets since 1970 and also average over a decade.



According to this graph the global stocks are trading at 10.3x trailing earnings, which is cheapest since 1970s.

Linkfest 11/01/2008

• Ethanol company VeraSun Energy filed chapter 11 (WSJ)
• Finally Japanese workers realizing that there is more to life than work (WSJ)
• World markets cheap on trailing P/E basis (WSJ)

Linkfest 10/31/2008

• All risky assets were boosted by low interest rates and healthy global growth (Economist)
• Exiting emerging market investment positions and unwinding of carry trade are causing dollar and yen to rise (Economist)

Linkfest 10/30/2008

• Days of huge and easy oil reserves are over (WSJ)
• Things expected to get worse next quarter (Bloomberg)
• UK companies likely to gain more from dollar rise and sterling's decline than neighbors (Reuters)
• AAPL is the most undervalued company among large techs (Bullish Cross)

Sizes of Gulf state soverign wealth funds

Source: WSJ

Linkfest 10/29/2008

• The death of Vista and cannibalization of Office (NYT)
• Earth not running out of oil soon, but output of old fields declining (@ 9.1% annual) faster than expected, need to invest $360bn over next 22 years (FT)
• Gulf states using the typical "long-term investor" face saving trick (WSJ)
• Wheat's biggest single day jump in 20 years (Bloomberg) [DBA]
• Emerging markets cheap on trailing P/E basis but currency risk significant (US Global Investors) [EWZ, RSX, IFN, FXI]

Linkfest 10/28/2008

• Japan's economy getting by external factors (WSJ)
• Microsoft's push into Africa (WSJ)
• Pakistan and IMF (WSJ)
• 700 new-car dealerships might close this year (WSJ)
• Dubai real estate boom is ending (WSJ)
• Pakistan getting closer to financial disaster with every passing day (FT)
• So much for the decoupling of markets (IndexUniverse)

Linkfest 10/26/2008

• Labor market worse since last 2 recessions (WSJ)
• Refiners reducing production (WSJ)
• Europe on the brink of currency crisis (Telegraph)
• Thousands of hedge funds close to failure (Telegraph)

Asset returns for the week ending 10/24/2008

Linkfest 10/24/2008

• John Paulson's funds up 15-25% YTD (WSJ)
• Roubini on hedge fund panic and failures (Bloomberg)
• Current state of housing crisis in California (WSJ)
• W bottom formation in Ultra S&P500 (TBP)
• Threatening letters received by financial institutions (Reuters)
• Cheap South American plays (SeekingAlpha)
  

Linkfest 10/23/2008

• Performance reviews do more harm than good (WSJ)
• Oil countries face reckoning (IHT)
• Walmart hints about the economic situation (SeekingAlpha)
• Drop in prescription drug sales (NYT)
• Possible reasons for dollar's strength (Plus EV)
• Reasons for optimism (IndexUniverse)
• The problem with homeowner bailout plans (InvestorCentric)
• The worst year ever for S&P500 (BIG)
• Changing financial habits of baby boomers (Analytical Wealth)
  

Pakistan's financial crisis - status 10/20/2008

According to WSJ, Pakistan is looking to IMF for loan in order to finance the debt payments. This is after China pretty much refused to provide any assistance.

Since Pakistan's credit rating has been cut lately, the interest rate on which IMF will provide funds is most likely going to be much higher than the rates of its current loans. This means that the debt load will rise further and so will the probability of default. The preconditions of this loan will include spending cuts and tax increases. I don't see any reduction in government spending any time soon. Why is that? The newly elected govt has to recoup the funds that it spent on election campaigns and also provide assistance in the form of contracts and jobs to their near and dear.

That brings us to tax increases, now who pays taxes honestly in Pakistan. Well for starters, the average person who works in a government or semi-government organization. Due to tax withholding, he has not option left to him but to pay them. Do you think that above average or above median revenue earners (industries, land owner, businessmen) honestly pay taxes due on their incomes? We are talking about Pakistan here so you need to think again. Now who gets the burden of tax increases? Yep, you got that right, the average guy who has already been crushed under the burden of paying for not only his earnings but also the tax evaders. Now he has to bear even bigger load.

Asset returns for the week ending 10/17/2008

Linkfest 10/19/2008

• Inflation was so 2007, 2009 will be about deflation (WSJ)

Linkfest 10/18/2008

• Debt-laden nations including Pakistan close to meltdown (FT)


• US consumer confidence monthly decline biggest on record (FT)

Linkfest 10/17/2008

• Warren Buffet is buying mode now (NYT)
  
• Sharp drop in US oil demand (WSJ)
• Recessions means a spike in illegal immigrant deportations (WSJ)
• Middle East and China funds resume their investment spree (WSJ)
• GOOG Q3 results (WSJ)
• Decline in commodities doesn't mean cheaper food (WSJ)
• Andrew Lahde's (HFM) goodbye letter (worth a read) (The Big Picture)
• More about Andrew Lahde (FT, FT)
  

Linkfest 10/16/2008

• Turkmenistan gas field 5th largest in the world (WSJ)
• Behaving responsibly will get you in trouble (Infectious Greed)
• Home prices seem far from bottom (NYT)
• Sharp declines in equities partly due to hedge fund unwind (Infectious Greed)
• Dumping stocks now might not be such a good idea (Don Fishback)
• We have a global recession for sure (The Big Picture)
• Want to invest in wool? (HardAssetInvestor)
• Even Citadel is down 26% YTD, time to reconsider that arrogance (Fund my Mutual Fund, WSJ)
• Another cyclical bottom call (Trader's Narrative)
• Yet another reason to be bullish: Merrill's fund manager survey (WSJ)
• The Subprime Panic (SSRN)
• Peer-to-peer lending in a bit of trouble (NYT)
• Barclays Global Investors has $2.08 trillion under management (II)
• $43 billion pulled out US hedge funds in Sept (FT)
• Crusader Fund closing doors (Bloomberg)
• No matter what your strategy is you are f@#$&^ (NakedShorts)
• Yet another buy call (Econbrowser)
  

Largest drop in S&P500 till now for the current bear market

Bespoke did a comparison of biggest drops in history and today's drop stand at number 8. Notice that 9 out of 15 happened in October.

Linkfest 10/15/2008

• New sector leaders (Ticker Sense)
• Slow down in Chinese demand (FT)
• Please die peacefully at 59 (the ONION)
• Correlation between Democratic president and stock market is meaningless (Greg Mankiw)
• Go wash your hands! (SciAm)
• Top 10 excuses (CXO Advisory Group)
  

Linkfest 10/14/2008

• More measures needed to stabilize housing prices (WSJ)
• More than 15,000 acres already burnt in SoCal fires (WSJ)
• "A strong China means a strong Pakistan" (WSJ)

Linkfest 10/13/2008

• Global effect of the financial crisis (WSJ)
  
• Every stock is undervalued (Ockham Research)
• BRIC trade is over (Portfolio.com)

Linkfest 10/12/2008

• Closer to the Bottom (Barron's)

The week that was...

Linkfest 10/10/2008

• Prepare to go long (The Big Picture)
  
• IEA cuts global oil demand increase forcecast to 0.5% for 2008 (NYT)
• Gulf states' markets have lost $350 bil since Jan (WSJ)
  
• Jim Rogers doesn't agree with bailing out a bunch of Maserati driving Wall Streeters (CNBC)
• Tiger Cubs or Wet Cats (NY Post)
• Hedgies that couldn't hedge (Economist)
• Lots of people to blame for the current crisis (Aleph Blog)
• The secular bear market may end in 2017 (Juggling Dynamite)
• Paper: A Quantitative Approach to Tactical Asset Allocation (SSRN)
• Paper: Does Trend Following Work on Stocks? (pdf)
  

Linkfest 10/09/2008

• Dubai's gov debt 41.8% of GDP (WSJ)
• Techs in trouble (WSJ)
• Different way of estimating equity risk premium (SSRN)

464 Point rally in Dow, bear market is over, right?

Not quite. Yesterday's close was quite unusual. A large number of stocks just went parabolic in the last 1 hour, and for no apparent reason, and by that I mean why did techs rally with financials. There was talk of Treasury helping/bailing out the banks but why should that affect Ctrip or Baidu or Apple or RIM. BTW Baidu has been blocked by a number of social networks in China from indexing their subscribers' pages. And this news has been and is supposed to affect Baidu negatively. So what the hell happened?

I have a theory, that a significant number of large hedge funds (including quants) were heavily short on equities which included in addition to the above mentioned two, large fractions of tech, energy and financial sectors. The short-selling ban put their covering into overdrive.

The moves in these stocks are significant enough to warrant some explanation. I saw this happening yesterday before close and it continued in the pre-market today.

Now my 2 cents on this short-selling ban. There was a time when these ginormous banks made huge and I mean freaking huge amount of $$$ naked shorting companies all over the world. Now the tables have turned and its payback time. But not yet, SEC and Treasury won't allow such illegal behavior. How dare these local funds and foreign funds and all these evil doers short our stock and that too without borrowing. It look like in an unfair blackjack where you are not allowed to count cards. Rules are changed as soon as the other side starts winning. Its not that the other side just played unfair with the financials, rather it was the greed and absolute stupidity that brought this on. I am not saying naked shorting is right in any way, what I am saying is that SEC's wake up call is timed perfectly with financials getting beaten up.

My first technical trade ...

I have been trading equities and equity options for a while. I never had any clear strategy about when to enter and when to exit a trade. It was mostly driven be emotions. And I have lost quite a bit of my hard earned money doing that. A large number of my trades have been on the long side, and since I never had a good exit strategy I have hardly ever grabbed serious profit from any single trade, although there was a lot on the table at one time or another.

Recently I have been trying to find a reasonably reliable trading system. It is not supposed to be perfect, but good enough to protect my profits and exit the trade if it goes sour. After skimming a few books, which were recommended by Barry Ritholtz in his 'Apprenticed Investor' series, and scouring the web, I settled on MACD, with EMA(12) crossing over EMA(26). And I picked Ultrashort S&P500 as the ETF to apply it on, since I believe S&P500 will see at least 1000 mark, if not lower, before we hit the bottom in US equities. Why I believe so is quite simple - the S&P500 earning estimates have been coming down and the current estimates are around $60., which makes the current forward P/E multiple 20.7. For a bear market this is a very high multiple and from what I have read till now, bear markets end when multiples reach around 13-15. With multiple of 15 and earnings estimates of $60, the index comes out to be 900, which is 27% below where the index is today. I expect quite a wild ride ahead.

Anyhow, I entered the trade at $66.35 and set a stop at $64. The price jumped around for a couple of days and then penetrated $64 stopping me out. I put a re-entry order at $64 after waiting for 3 days, which never executed and today it zoomed up and is currently at $69.50. Now the question is what do I do now, should I wait for a pullback or enter here? I don't know. If you are reading this post by any chance, and have a reasonable answer, please drop me a msg.

Post-Trade Analysis: It is too early to tell if I am right in believing where S&P500 is headed, but in a very short term I think I was dead on. My mistake was not properly measuring the stop. Picking just a number was quite a dumb thing to do. I have just discovered a stop calculating method called ATR (Average True Range), which takes the max of 3 ranges - day's low to high range, previous low to day's close range and previous high to day's close range, and then takes average of 10 or 14 days. One recommended strategy is to use 4*ATR(10), which seems reasonable.

Brazil's economy

Here is a primer on Brazil's economy.

The shocking food crisis

According to Economist:

On a conservative estimate, food-price rises may reduce the spending power of the urban poor and country people who buy their own food by 20% (in some regions, prices are rising by far more). Just over 1 billion people live on $1 a day, the benchmark of absolute poverty; 1.5 billion live on $1 to $2 a day. Bob Zoellick, the president of the World Bank, reckons that food inflation could push at least 100m people into poverty, wiping out all the gains the poorest billion have made during almost a decade of economic growth.

The silent tsunami

The new face of hunger

Reviving the ration card

Have US equities fallen enough?

Stock gains from the last decade have already been lost. That sounds scary and pessimistic. Here are some stats from the WSJ:

The Standard & Poor's 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen an average of just 1.3% a year over the past 10 years, well below the historical norm, according to Morningstar Inc. For the past nine years, it has fallen 0.37% a year, and for the past eight, it is off 1.4% a year. In light of the current wobbly market, some economists and market analysts worry that the era of disappointing returns may not be over.

This is an awful return compared to the US long term trend of 3% real GDP growth.

Here is a comparison with conservative US Treasurys:

Big U.S. stocks were outrun even by Treasury bonds, which historically perform much less well than stocks. Adjusted for inflation, Treasurys are up 4.7% a year over the past nine years, and up 5.8% a year since the March 2000 stock peak. An index of commodities has shown about twice the annual gains of bonds, as have real-estate investment trusts.

In my opinion, the bull run in stocks from 2003 to 2007 was primarily fueled by two factors - consumer spending due to increases in home equity from rising house prices leading to a refinancing boom and significant corporate investment, both of which were the result of low interest rates. Here I would like to argue that had the unusual rise in home equity been absent, US GDP growth would have been much lower. It seems to me that the recent bull market was shaky primarily because the GDP growth wasn't exactly on sound basis. Unsustainable rise in home prices caused an illusion of growth.

Some investors and economists believe that soon the whole credit crisis will be behind us and the US economy will be back on track of 4% real GDP growth. I disagree with this opinion and the reason is that during this bull market wages have not risen enough to sustain consumer spending. Now that housing prices are retreating, how does anyone expect to sustain the same level of consumer spending. This will probably result in a prolonged recession, which might not be as deep as in the past but certainly not as short as the recent bear markets have been.

According to Robert Shiller from the same WSJ story:

... the S&P 500 traded in the late 1990s at more than 40 times its component companies' profits -- far above the historical norm of 16. (To avoid distortions, he uses average profits over a 10-year period.) Today, the S&P 500 still trades at more than 20 times profits -- still far above average.

Additionally I believe that analyst estimates of S&P500 earnings are still on the higher side and there are going to be a downward revisions. This will make P/E even higher if the stocks remain at the current level. To get to P/E of 14 or 15, stocks have to come down further and my crude estimate suggests that S&P500 index might come below 1100 before we will see a bottom of this bear market. As painful as it seems, it might turn out to be a reality.

A number of investors argue that since global economy is in good shape with emerging markets booming forward with their high growth rates, US stocks are becoming undervalued. I disagree with this argument too because a significant portion of the growth in emerging markets comes from exports of which US and Europe are main consumers. If US and European consumption slows, isn't that going to affect these economies? How much would that effect be? At this point, I don't think I have the answer and the stats or the skills to determine that. May be my friends in the blogosphere can shed some light on it.

But all is not doom and gloom in the US equities. There are some factors that have potential of putting a bottom under this bear market. First, the world is flushed with petrodollars, and they are looking for a home. We have seen sovereign wealth funds from the East investing in Citibank and Merrill Lynch. I think many more deals will happen. Second, a lot of investor money that came out of real estate and other investments can flow into US equities. Although right now it seems that its favorite destination is in the commodities. Third, the recession can convince people to save more and some of that savings can flow into funds which in turn direct them to equities.

Bottomline is that I don't see a bottom in US equities right now but by the end of this year or the first half of next year, we might get there. But this downward journey will certainly be painful.

Economist on 'Agflation'

This story appeared in The Economist in Dec 07. Here are the main points:

• Food prices (real) fell by 3/4 during 1974-2005
• Since 2005 prices have jumped 75%
• Underlying reason for agflation is diet changes caused by growing wealth of emerging economies
• Meat consumption of Chinese consumer 20Kg in 1985 and 50Kg in 2007
• 8Kg grain used to produce 1Kg beef
• Additional 200m-250m tons of grain is fed to cattle now compared to 1980
  
• Another reason, US ethanol subsidies - 30m tons of extra maize in 2007
• In 2000 15m tons of maize was used to make ethanol, now it is 85m tons
• In 2007 US maize harvest has been 335m tons a lot of it at the expense of other crops
  
• Result - it will hurt urban consumers but will benefit farmers and ag communities
• High grain prices persuading people to clean more forests
• Share of public spending on agriculture in developing countries has fallen by half since 1980

A Big Oil Discovery

Here is a link to Economist report on oil discovery in Brazil:

... If the government’s early estimates are confirmed—that the broader area where the recent discoveries were made might hold as much as 70bn-100bn barrels—Brazil will be able to boast of holding among the world's ten-largest oil reserves in the medium to the long term ...