Tuesday links: permabear bull market


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Business is good for permabear analysts these days.  (NYTimes, Big Picture)

Breaking the buck was a real possibility for many money market mutual funds in the midst of the crisis.  (WSJ)

What are the transports telling us about the market as a whole?  (The Reformed Broker)

The MLP meme goes big time.  (WSJ earlier Abnormal Returns)

Warren Buffett is positioning his bond portfolio for inflation.  (Bloomberg, Money Game)

Quite a week for stock buyback (announcements).  (24/7 Wall St.)

Evidence for a retail-led bond bubble.  (Fundmastery Blog, Zero Hedge also WSJ)

Want to play the slope of the yield curve?  There is an ETN for that.  (ETFdb)

Is an M&A boom a brewin’?  (CNBC)

Are structured notes the next bubble?  (Bloomberg)

Some details behind the booming emerging market bond markets.  (beyondbrics also ETFdb)

A commodity index ETF that focuses on commodities in backwardation.  (IndexUniverse)

Weekly options have taken off.  (VIX and More)

Picking strike prices for your stock replacement strategy.  (Tyler’s Trading)

Markets change.  Does your trading methodology take this into account?  (Abnormal Returns also Investing With Options)

The real Mark Hurd scandal:  just how bad the HP board really is.  (The Corporate Library also SAI, DailyFinance)

Is Hewlett-Packard (HPQ) now a bargain?  (Crossing Wall Street also Afraid to Trade)

The GM purchase of Americredit is all about the forthcoming IPO.  (NYTimes)

KKR (KKR) pulls the plug on a proposed stock offering.  (WSJ, peHUB)

What role does funding risk play in the cross-section of stock prices?  (SSRN)

What return factors show up in German stock returns?  (CXO Advisory Group)

Remember that spike in oil prices last year?  (Pragmatic Capitalism)

More responses on how to invest in a deflationary environment.  (Street Capitalist, Random Roger)

What do CPI and the CRB tells us (if anything) about deflation?  (Big Picture)

The OECD Composite Leading Indicator is rolling over.  (Data Diary)

Evidence builds for a new recession, a year out.  (Economist’s View, Free exchange, Real Time Economics, Street Sweep)

Two more surveys indicate poor business sentiment.  (Real Time Economics, Calculated Risk)

Rail traffic continues to recover, albeit slowly.  (Calculated Risk, Pragmatic Capitalism)

Discounting the effects of quantitative easing.  (Aleph Blog)

Mohamed El-Erian thinks the Fed can’t do much at this point.  (CNBC, Bloomberg, DJ Market Talk)

Inflation is, at best, a distant worry.   (Econbrowser)

Productivity fell in Q2.  (WSJ, Bloomberg, Atlantic Business)

The unemployment issue needs to be addressed before the stock market can truly move.  (TheStreet, Lex also DJ Market Talk)

Are jobs going wanting because employers have unrealistic pay demands?  (Slate also EconomPic Data)

On the difference between “can’t” and “won’t.” (Kid Dynamite)

What investors really want.  (Meir Statman)

How index fund advocate Richard Ferri allocates his portfolio.  (Bucks Blog)

On the differences between managing your own money vs. other people’s money.  (Charts Gone Wild)

A tech IPO boom is imminent, if you have a brand name.  (GigaOM, FT Alphaville)

A lesson in how not to value Apple (AAPL).  (Fortune)

The stock market is hoping that Netflix (NFLX) can do what few companies have done before.  (AR Screencast)

fflick is StockTwits for movies.  (Speakeasy)

Is the “user generated revolution” stalling?  (Newsweek)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Tuesday screencast: Netflix fans


This post is by abnormalreturns from Abnormal Returns


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In today’s screencast we revisit the situation at Netflix (NFLX).  It may seem odd that we are returning to the case of Netflix so soon after doing a screencast just a month ago.  However it has been an interesting month for the company and the stock.  After selling off after its earnings release Netflix stock has bounced back.*

Maybe more importantly the company has continued to sign deals to provide additional content for its streaming service.  In doing so the company is trying to do what few others have done before:  transition from an analog (DVD by mail) to a digital (video streaming) business model.  It is our thesis that the market is rife with “Netflix fans” who are hoping the company can successfully (and profitably) pull it off.  In the meantime it will have to deal with competition from the low-end from the likes of Redbox, i.e. CoinStar (CSTR).

*No position in Netflix stock.

Posts mentioned in the above screencast:

Netflix vs. Google:  on the importance of focus (AR Screencast)

Netflix’s big “earnings headfake.”  (Bespoke)

Another sign that Netflix is aggressively beefing up its streaming library.  (Media Decoder)

The Netflix deal immediately makes Epix profitable.  (Company Town

This new deal means Netflix is now gunning for the likes of HBO.  (NewTeeVee)

Skepticism about Netflix’s ability to keep adding subscribers.  (24/7 Wall St.)

Coinstar stock chart.  (Finviz)


Adaptative trading


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We have recently been reading Mike Bellafiore’s book “One Good Trade.”*  Although the book focuses on the practice of proprietary, i.e. intraday, trading it holds some lessons for traders and investors of all stripes.  In particular we found Chapter 7 entitled “Stocks in Play” of interest.

“Stocks in Play” at SMB Trading consist of stocks that meet a list of criteria that make for more consistent intraday setups.  What Bellafiore and his colleagues don’t do is overlay any additional criteria that limit this list based on industry, sector, etc.  This allows them to adapt to what the market is giving them.  As Bellafiore notes:

After 12 years of trading, there are some mornings when I am trading a stock for the first time ever.**

He goes on to recount many calls and e-mails from traders struggling to find profitable trading opportunities in part because they are “unwilling to move away from their normal basket of stocks.”

Why is that important?  If a trader or investor has a profitable, replicable strategy then it makes sense to apply it to as many securities as possible.  In short, one’s profit opportunity is a function of how many independent bets one can make in a universe of securities.***

In a certain sense it may be more difficult for successful traders to recognize this necessity.  It is easy to get comfortable with a specific approach to the markets, especially after a period of success.  That is until the markets change, and they always do.  At least a struggling trader knows that changes need to be made.

Nor is this concept specific to short-term traders.  Investors also face an ever changing set of market opportunities.  If your investment methodology is not designed with adaptation built in, then it may be time to think about a new approach to the markets.   Eventually every investment approach will need to adapt to keep up with the times.

In short, things change.  Markets change.  Your basket of stocks should change with the times as well.

*Wiley Trading was kind enough to send a review copy of the book.

**p. 167, One Good Trade, Bellafiore, Mike, John Wiley & Sons, 2010.

**Some readers will recognize this as an application of the Fundamental Law of Active Management.  For a nice explanation see this piece by Cam Hui at Humble Student of the Markets.


Monday links: fundamental mispricings


This post is by abnormalreturns from Abnormal Returns


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High stock correlations eventually yield fundamental mispricings.  (Zero Hedge)

Looking back at the “death cross” hype.  (The Reformed Broker also Dynamic Hedge)

The Chinese equity market has calmed down of late.  (Bloomberg)

Who benefits from the global heat wave?  (Lex)

Turkey and Indonesia have been the place to be this year. (Bloomberg)

Adam Warner, “Friends, Greeks, Romans, the Rise of Weekly’s is no longer a hypothetical.”  (Daily Options Report)

Farmers need to decide how much wheat to plant, as Australia benefits from higher wheat prices.  (WSJ, ibid)

On the irreducible math of mutual fund fees.  (AR Screencast)

How best to measure risk-adjusted returns.  (FT, SSRN)

Losing money trading only teaches you how to lose money.  (SMB Training)

How to position your portfolio for deflation.  (market folly)

How well did Hewlett-Packard (HPQ) really perform under Mark Hurd?  (CNBC, DailyFinance)

Every CEO is replaceable.  (Deal Journal)

Big shock.  Freddie Mac needs more cash.  (Street Sweep)

Last week’s economic numbers were at best a “mixed bag.” (Econbrowser)

Economic news flow has taken a turn for the worse.  (FT ALphaville, Money Game)

Expect the Fed to “downgrade” its outlook for the US economy.  (FT, Calculated Risk)

On the prospects for more quantitative easing from the Fed.  (Economist’s View, Pragmatic Capitalism)

What is causing the distortion between job openings and high unemployment?  (Money Game)

James Surowiecki, “A better tax system would have more brackets, so that the super-rich pay higher rates.”  (New Yorker)

Is the economics profession ideological by nature?  (Curious Capitalist)

Marketing The Economist magazine as a hipster newsweekly.  (NYTimes)

Skype files for an IPO.  (GigaOM, ibid, SAI)

A bear market in Nascar.  (Planet Money)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Monday screencast: fund fee facts


This post is by abnormalreturns from Abnormal Returns


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Starting today we are going to post our daily screencast to the Abnormal Returns Classic blog.    First that gives our readers easy access to this new(ish) feature.  Second it allows us to provide the links to the items we discuss in the screencast.  For those interested we are using he Screenr functionality at Chart.ly which recommend highly.

In today’s screencast we discuss the irreducible math of mutual fund fees.  A recent Morningstar study shows that mutual fund fees are a nearly infallible predictor of future fund performance.  To quote Russel Kinnel at Morningstar:

Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.

In short, high fees lead to lower returns.  We discuss why this might be the case.

How expenses and stars predict success.  (Morningstar)

How expenses and stars predict success – data table.  (Morningstar)

Low fees outshine the star system.  (WSJ)

Luck versus skill in the cross-section of mutual fund returns.  (SSRN)


Sunday links: old world dividends


This post is by abnormalreturns from Abnormal Returns


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Friday after-the-close shocker:  Hewlett Packard CEO Mark Hurd is out.  (WSJ, Bloomberg, SAI, , TRB, MarketBeat)

What now for the future new CEO of Hewlett-Packard (HPQ)?  (Bloomberg, Deal Journal)

A couple of prominent analysts are not shocked that things ended this way for the former Hewlett CEO.  (Jeff Matthews, TheStreet)

Why does a CEO accused of wrongdoing get severance?  (SAI, Tech Trader Daily, Street Sweep)

The Mark Hurd resignation prompts an age old question.  (The Epicurean Dealmaker)

Why are these big cap tech stocks so cheap?  (Barron’s)

The risk-on/risk-off market illustrated.  (StockCharts Blog)

Want dividends?  Go to Europe.  (WSJ)

In praise of a “stock replacement” strategy.  (Barron’s)

Trust real-time results over a backtest anytime.  (MarketSci Blog)

Wheat futures prices have risen a great deal more than spot.  (NYTimes, WSJ)

AIG (AIG) is not out of the woods yet.  (Lex, Marketwatch)

On proprietary trading, how banks can have their cake and eat it too.  (Stone Street Advisors)

What does a $1 a year CEO buy you?  (SSRN)

How inelastic is demand for stocks?  (The Psy-Fi Blog)

Commercial real estate prices fell sharply in June.  (Calculated Risk)

Should we be worried about the drop in temp employment?  (Real Time Economics, Calculated Risk, Big Picture)

Weak employment numbers are going to prompt the Fed to do more.  (Real Time Economics)

Mohamed El-Erian on the employment report and the need for a new policy mix.  (FT Alphaville)

Consumer credit continues to shrink. (Bloomberg, EconomPic Data, Money Game)

What kind of jobs would exports create?  (FT Alphaville)

“There’s a class war coming to the world of government pensions.”  (NYTimes)

On the ins and outs of investing in frontier markets.  (WSJ)

Has something fundamentally changed in the economies of sub-Saharan Africa?  (Rajiv Sethi)

Would you trust your financial plan to a computer?  (Intelligent Investor)

The business environment is always uncertain:  get over it.  (Justin Fox)

If intrigued by the summary, read the article.  (A Dash of Insight)

Q&A with James Altucher.  (Kirk Report)

Why StockTwits changes everything for the individual investor.  (UpsideTrader)

How one trader uses StockCharts and FinViz.  (Charts Gone Wild, ibid)

Demand Media files to go public.  (DealBook, All Things Digital, GigaOM, DailyFinance)

Fake Steve Jobs flips for FlipBoard.  (Newsweek)

Should we be wary of billionaire’s bearing gifts?  (Telegraph, naked capitalism)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Friday links: behaving badly


This post is by abnormalreturns from Abnormal Returns


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Wheat prices are surging.  The fallout.  (FT, FT Alphaville, Zero Hedge, Money Game, Market Blog)

Wheat is a notable standout in a faltering commodity sector.  (Lex)

Another reason to like large caps:  earnings beats.  (Bespoke)

July hedge fund returns.  (Reuters, EconomPic Data)

What typically happens to the stock market in the third year of an election cycle?  (Marketwatch)

Ten high earnings yield companies that rank amongst hedge fund top holdings.  (YCharts Blog)

What the heck is going on in the TIPS market?  (FT Alphaville)

Charles Schwab (SCHW) is getting into the bond ETF business.  (ETFdb, ibid)

Sometimes ETF innovation goes too far.  (IndexUniverse also AR Screencast)

More on Americans “reaching for yield.”  (Curious Capitalist, Morningstar also Fundmastery Blog)

Do corporate bonds exhibit momentum?  (CXO Advisory Group)

Microsoft (MSFT) is “clearly cheap”, but…  (Bronte Capital)

Should Apple (AAPL) shareholders be worried by its new found market cap?  (Barron’s)

Jeff Matthews on the succession issue at Berkshire Hathaway (BRKA).  (Tech Ticker)

What role might finreg play on those long-dated equity put options Warren Buffett wrote?  (Financial Crookery)

Invest in what you know…at your own risk.  (Don Fishback)

Incorporating feedback is what makes a model adaptive.”  (Systematic Relative Strength)

How Wall Street is looking to deal with the Volcker Rule.  (NYTimes also WSJ)

Some thoughts on the Flash Crash post-mortem.  (Points and Figures, naked capitalism)

Kent Thune, “Are capital markets leading economic indicators or are they leading economic funding for growth?”  (Big Picture)

Why corporate America’s profits continue to surprise on the upside.  (Economist)

How have economic indicators been coming in relative to trend of late?  (VIX and More)

The public sector remains a drag on employment.  (Real Time Economics, Ezra Klein)

Non-farm payroll figures were so bad it almost makes you want to work on the farm.  (The Reformed Broker also EconomPic Data, Free exchange, Economix, Pragmatic Capitalism, Points and Figures, CWS, Econbrowser, Atlantic Business, DJ Market Talk)

Unlike in recoveries past, a rise in temporary workers is not translating into permanent hiring.  (Bloomberg)

Job postings keep moving up year-over-year.  (EconomPic Data)

Some manufacturing is moving back to the USA.  (USA Today)

Rail traffic keeps moving higher.  (Pragmatic Capitalism)

Bloggers have a dim view of the current economy.  (Growthology)

Is the unemployment situation more cyclical or structural?  (CBS Moneywatch)

Washington keeps abetting reckless behavior in the housing market.  (FT Alphaville, Atlantic Business, Free exchange)

Is deflation scarier than inflation?  (Slate)

Signs of a slowdown in Brazil.  (Fortune)

Contrary to popular opinion food isn’t “cheap” in America.  (Gregor Macdonald)

The tendency of investors to “behave badly” has not changed over time.  (Bucks Blog)

An interview with John Burbank of Passport Capital.  (Benzinga)

A book review of Zack Miller’s “Tradestream Your Way to Profits.”  (market folly)

Another example of the power of social media, in commodities.  (Forbes)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


ARTV with Adam Warner


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Last night we interviewed Adam Warner of the Daily Options Report on StockTwits TV.  We covered a number of topics including the complexity surrounding the VIX complex, the prospects for new kind of ETF and whether a standalone publicly traded options exchange, the CBOE, can thrive in the future.

Below you can find the broadcast embedded and the links mentioned in our discussion.

On the challenges of making trading recommendations in options.  (Daily Options Report)

On the prospects for an ETF based on the S&P 500 Dynamic VEQTOR Index.  (Daily Options Report, ibid)

CBOE Shares Decline After Profit Misses Estimates on Costs, Access Revenue  (Bloomberg)

Expiring Monthly:  The Option Trader’s Journal.  (Expiring Monthly)


Thursday links: yield pigs


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Wheat continues screaming higher.  (Bloomberg also Economist)

Don’t fight commodity momentum.  It can go on longer than you think.  (Leigh Drogen)

Earnings and revenue beat rates.  (Bespoke)

Do Chinese equity indices now lead world markets?  (beyondbrics)

Why don’t analysts change their opinions based on new information/data?  (CSS Analytics)

Equity volumes tumble.  Have investors simply given up?  (FT, Money Game)

John Paulson is reducing equity exposure.  (FT, WSJ, FT Alphaville)

Gold vs. Stocks:  point, counterpoint.  (IndexUniverse, ibid)

How demographics could be a bigger drag on asset prices.  (FT Alphaville)

Who’s right?  Stocks or bonds? (MarketBeat)

The 10-30 year Treasury spread and the dangers of data mining.  (Crossing Wall Street)

Why the corporate bond market has done as well as it has.  (Economist)

Junk bond prices are getting “bubbleicious.”  (Bloomberg)

Yield wins in the long run.  (EconomPic Data)

Pushing one a string.  The harsh realities of today’s bond market.  (Abnormal Returns also AR Screencast)

Doug Kass thinks it is time to short bonds.  (TheStreet)

IBM (IBM) knows how to issue bonds at the right time.  (MarketBeat)

The MLP meme goes big time.  (Bloomberg earlier Abnormal Returns)

The TED spread continues to come in.  (Bespoke)

Chile is priced for perfection.  (Marketwatch)

Why do individuals do badly trading stocks in their own industry?  (Journal of Finance)

On the benefits of combining investment strategies.  (the research puzzle)

Peeking at the motivations behind the ETF business.  (FT Alphaville)

Hedge funds need to be careful about how much of an ETF they own.  (Institutional Investor)

Why Anthony Ward is making such a big bet on cocoa.  (Economist)

The role of pension funds in the gold boom.  (Institutional Investor)

Quant funds need to step up their game. (Greenbackd)

An exercise in how Ben Graham might have compared two companies.  (Value Investing with Walter Schloss)

Buffett Partnership letters all in one place.  (Above Average Odds via market folly)

On the effect media coverage can have on markets.  (Journal of Finance)

Founder-led buyouts have a rocky history.  (Dealbook)

Special situation investors are flocking to Motorola (MOT).  (24/7 Wall St., Street Sweep)

Time Warner (TWX) and AOL (AOL):  a study in contrasts.  (Lex)

Morgan Stanley (MS) is trying to figure out how to deal with the Volcker Rule.  (WSJ, Clusterstock also FT)

Reactions to the notion that Goldman Sachs (GS) will spin off its proprietary trading operations.  (Bloomberg, Zero Hedge, Hedge->According.ly

Good reasons to discount the drop in the ECRI WLI.  (Money Game)

Jobless claims continue to disappoint.  (DJ Market Talk, The Reformed Broker)

Mohamed El-Erian joins the deflation camp.  (Bloomberg, Money Game)

A jump in personal bankruptcies.  (WSJ)

How aging Baby Boomers affects consumer spending.  (Big Picture also Real Time Economics)

Should the Treasury continue to extend debt maturities?  (WSJ)

Why regulation is vital to the banking sector.  (Jesse’s Cafe Americain)

It looks like “aid to the states” is going to happen.  (WashingtonPost, Kid Dynamite, Atlantic Business)

Why is the Japanese Yen at record highs?  (Free exchange, FT Alphaville)

The BRIC countries are investing in Africa.  (beyondbrics)

Putting corporate boards on the political spectrum.  (FT Alphaville)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Pushing on a string


This post is by abnormalreturns from Abnormal Returns


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In an equity-centric world it sometimes easy to forget the unforgiving mathematics of bond pricing.  Unlike equities, fixed income securities have limits on their potential for capital appreciation.  Bond prices can only escape the inevitability of par for so long, absent a trip to bankruptcy court.  As the yield curve continues its path downwards the attempt to squeeze excess returns from the bond market becomes more like pushing on a string.

One can see from the chart below the downward moves in both the Treasury and BBB-corporate bond curves.  The moves are especially pronounced at the short end of the curve.

Source:  research puzzle pix

In today’s financial markets it seems that we are beginning to see some of these limits come into play.  For example IBM was recently able to issue 3 year bonds at 1%.  Even an instantaneous drop in the yield by 50 bp yields only a 1.5% rise in the price of the bond.  In short, absent earning the coupon there is little in the way of capital appreciation opportunity here.

The aforementioned is an extreme example due to both its coupon and maturity, but it is indicative of the situation facing the overall bond market. Given the puny yields on so-called safe investments like bank deposits and Treasury securities it should not be surprising that individuals are in a desperate search for yield.  Cash has been flowing out of money market mutual funds in search of higher yields.

Given the recent performance of high yield bonds this is not surprisingly a likely destination for some of this cash.  Investors have been pouring money into high yield bond funds as defaults ebb.  From a Bloomberg article one fund manager called the market behavior “a little big bubblelicious.”  The risk is that individuals don’t know exactly what they are getting themselves into.  As Carl Richards wrote a few months ago:

One of the things that I’m most worried about right now is people taking money that they want to keep safe and trying to find investments that earn a yield that’s a little higher. This is called “stretching for yield,” and it can be be a dangerous game, especially if you don’t understand the rules.

The logical conclusion is to short the bond market, right?  Some analysts like Doug Kass are currently recommending that approach.  Kass argues for getting long the ProShares UltraShort 20+ Year Treasury ETF (TBT).  While this approach is technically easy, one should recognize that this approach comes with some costs.  Those include the feeds of the underlying ETF and the costs of carrying the short bond positions themselves.

The other bigger picture issue to deal with is the case of Japan.  Japan has been mired for nearly the past two decades in a low-growth environment.  This has lead to 10-year JGBs now trading with a yield below 1.0%.  If one is an ardent believer in the deflation case, then current government bond yields may not seem all that high in the future.

In any event we should all get used to the notion that we are investing in a low nominal return environment.   Some interesting charts at EconomPic Data highlight the limits we are now facing in the bond market.  We should view future returns through the lens of current yields:

This equity-like performance of high quality bonds can not continue. At some point the level of yield… wins. With the current yield to worst of the “Barclays Agg” index at less than 2.6%, investors expecting anything more than 2.6% over the next 4-5 years (i.e. the duration of the index) will be disappointed.

There a number of implications from this discussion.  Included in this would be pension funds having to revisit their rate-of-return assumptions.  Playing a reversal in this interest rate trend remains an option, but it is not a risk-free one.  The bottom line is that fixed income investors need to face up to the realities of current bond prices and brace for an extended period of diminished returns.

Update:  This post from Distressed Debt Investing on “yield pigs” is also worth a look.


Wednesday links: slow down


This post is by abnormalreturns from Abnormal Returns


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What should we make of the record spread between the 10 and 30-year Treasury bond?  (Crossing Wall Street, dshort)

If companies are loaded with cash, why are they still borrowing?  Because they can (and cheaply).  (AR Screencast also research puzzle pix, EconomPic Data)

AMZN’s reaction to earnings pretty much sums up the entire market’s performance this earnings season.”  (Bespoke)

Traders have been betting against the Yen (and JGBs) for a long time.  (Money Game, FT Alphaville, Street Sweep)

Is the rally in wheat a preview of further commodity price increases?  (MarketBeat, FT Alphaville, The Reformed Broker, VIX and More)

We are living in a “risk on/risk off” world these days.  (TheStreet)

Congress is going on vacation.  Good news for the stock market.  (Marketwatch)

High correlations are pushing individual investors to the sidelines.  (FT Alphaville)

The number of bears is ebbing.  (Bespoke)

How much longer can Bruce Berkowitz keep it up?  (ROI)

ETF Deathwatch for August.  (Invest With An Edge)

The money illusion and market valuations.  (The Psy-Fi Blog)

Why certain indicators provide similar signals.  (MarketSci Blog)

Eddy Elfenbein, “Much like the housing bubble, the Higher Ed bubble is being driven by cheap, government supported credit.”  (Crossing Wall Street)

Trading algorithms leave (weird, often beautiful) tracks.  (The Atlantic)

“As trading continues to speed up to unfathomable heights measured in micro-nanoseconds, I keep my focus on trying to find ways to  s l o w  d o w n my trading.”  (Chicago Sean)

What role does financial distress play in the cross-section of equity returns?  (Journal of Finance)

Investor sentiment, not the business cycle, drives financial anomalies.  (SSRN)

What CEO characteristics matter for performance?  (Journal of Finance)

More on the corporate cash situation.  (Pragmatic Capitalism)

Top line growth is tepid at best at the biggest consumer companies.  (Credit Writedowns also Bespoke)

Who would want to buy Barnes & Noble (BKS)?  (Atlantic Business, MarketBeat)

The John Mack era is officially over at Morgan Stanley (MS).  (CNBC)

Is Goldman Sachs (GS) going to spin-off its private equity (and prop trading) business?  (Reuters, Clusterstock)

What role did lower real interest rates play in the housing bubble?  (Economix, WSJ, Big Picture)

The ADP employment report indicates continued slow jobs growth.  (EconomPic Data, Calculated Risk)

The ECRI WLI is widely misunderstood.  (Big Picture)

Why does any one support private macroeconomic forecasts?  (Marginal Revolution, Capital Gains and Games)

The ISM Non-manufacturing survey comes in ahead of expectations.  (Calculated Risk, EconomPic Data, Atlantic Business)

We all know the economy is slowing.  Why we should worry about the unknowns.  (Money Game)

Small business sentiment is awful.  (naked capitalism)

Inflationary expectations are not stable.  (Macro Musings)

Analysis on why a compromise on the extension of the Bush tax cuts is likely.  (Macroadvisors, Real Time Economics, A Dash of Insight)

BP (BP) gets closer to permanently plugging the Macondo well.  (WSJ also NYTimes)

A review of Mike Bellafiore’s “One Good Trade.”  (The Crosshairs Trader)

The new Blackberry Torch won’t save Research in Motion (RIMM).  (SAI, ibid, Tech Trader Daily, 24/7 Wall St., DailyFinance, Technologizer)

A closer look at the cash situation at Apple (AAPL).  (asymco, ibid via Daring Fireball)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Tuesday links: illiquidity premia


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Emerging markets are once again outperforming.  (Bespoke, beyondbrics)

Sentiment is rapidly shifting towards the bullish camp.  (Marketwatch)

A reversal in fortune.  Oversold stocks are scarce.  (Bespoke)

Waiting on a reversal in the death cross.  (MarketBeat)

Wheat prices are soaring.  (Lex, WSJ, FT Alphaville, Bloomberg)

Why the grain complex and PowerShares Agricultural ETF (DBA) are set for a fall.  (Minyanville)

1,032 ETFs and counting.  (Invest With An Edge, DailyFinance)

The Barclays ETN+ Inverse S&P 500 VIX Short-Term Futures ETN (XXV) is now a liquid trading vehicle.  (VIX and More)

How quant funds performed through the crisis.  (Morningstar)

Garnering an “illiquidity premium” without venturing into alternative assets.  (All About Alpha)

More historical equity risk premium estimates.  (CXO Advisory Group)

Buffett’s successor(s) are not set yet.  (Jeff Matthews)

Is Berkshire Hathaway (BRKB) overvalued?  (Fortune)

Why aren’t there more IPO auctions?  (FT Alphaville)

Corporate cash hoarding isn’t sustainable.  (Fortune contra Marketwatch)

Roger Lowenstein asks what purpose does publicly traded private equity serve?  (Bloomberg)

Signs that the correction in gold is over.  (Trader’s Narrative)

What are copper, palladium and gold telling us about the state of the economy?  (Trader’s Narrative, Bespoke)

Price ratio charts often make great “chart porn” but make sure there is some intuition behind them.  (AR Screencast)

Financial executives are “severely miscalibrated.”  (SSRN)

What purpose do SEC fines serve?  (Big Picture, NYTimes)

Banks are spinning off assets to comply with the Volcker Rule.  (CNBC, peHUB)

Why the financial markets seem so willing to overlook the weak US economy.  (Econoclast)

Showing just how interconnected the financial system has become over the past decade.  (Free exchange)

Just how likely is a “mass mortgage refi“?  (FT Alphaville)

The Fed is dipping its toe back into the quantitative easing waters.  (WSJ, Money Game, Telegraph)

The savings rate continues to rise.  (Calculated Risk, WSJ, Big Picture, EconomPic Data)

Can Texas keep it up?  (Free exchange)

Some US states rank right up there in terms of default risk.  (Bespoke)

The decade of the temporary worker.  (TheStreet also Money Game)

Indonesia is running hot.  (ETFdb, Credit Writedowns)

Main Street is getting company news releases after Wall Street.  (IR Web Report)

Buying and selling (on mobile devices) is going to be huge.  (VC Dispatch, CNNMoney, WSJ)

How is Google (GOOG) going to make a profit off of Android?  (SAI)

Research in Motion (RIMM) is up against the wall.  (GigaOM, CNNMoney, Apple 2.0)

Hamilton Nolan, “As a means of leisure, gambling is fine. As a means of public policy, it is a sham.”  (Gawker)

Jonah Lehrer, “The best brands are blankies.”  (The Frontal Cortex)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Monday links: hard markets


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Just about everything went right (market-wise) in July.  (The Capital Spectator)

Taking the measure of the stock market in August.  (Marketwatch, Big Picture)

“Listen: the markets are always hard. Its supposed to be like that.”  (Ultimi Barbarorum)

Big names are betting on deflation.  (WSJ, The Money Game, DJ Market Talk)

Where did a $1 trillion in money market funds go?  (The Reformed Broker, USA Today)

Money market funds are finally start charging fees again.  (Bond Buyer via Infectious Greed)

Where did all that money market cash go?  A worrisome development, or simple yield seeking?  (AR Screencast)

The Dilbert approach to money management.  (WSJ)

Investing in Africa is easier said than done.  (Random Roger)

The bullish case for Chile.  (The Money Game)

Emerging market equities are no longer much of a diversifier.  (Reuters via FT Alphaville)

Ugh.  Stock buybacks are back in vogue.  (DJ Market Talk)

The IPO market is returning to life, albeit tentatively.  (Fortune)

If you want exposure to volatility, buy options not the VIX.  (Marketwatch)

The bull market in (pork) bellies.  (WSJ)

The Volcker Rule and the attraction of an ETF business.  (FT Alphaville)

On the value of using more complex valuation metrics.  (CXO Advisory Group)

Chance plays a bigger role in your investment returns than you would like to think.  (WSJ)

Consumer confidence down.  Buy stocks.  (Bloomberg)

What is the ISM manufacturing survey saying about the state of the economy?  (Bloomberg also Real Time Economics)

What are the Fed’s options for monetary stimulus at this point?  (Econbrowser)

Want a job?  Get a college degree.  (The Money Game, Time)

Europe’s banks are not out of the woods, just yet.  (The Money Game)

The Chinese manufacturing economy is slowing.  (Bloomberg, EconomPic Data)

An interview with Felix Zulauf.  (Big Picture)

Miguel Barbosa interview Dan Ariely on “The Upside of Irrationality.”  (Simoleon Sense)

In the age of the search engine how much does a domain name really matter?  (Lex)

On the rise of the “gesture economy.”  (Howard Lindzon)

Is the smartphone going to replace your credit card?  (Bloomberg)

Why Apple (AAPL) should buy Infineon (IFX).  (TechCrunch)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Sunday links: financial earthquakes


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“Investors have clearly been ho-hum about better than expected earnings, and they have beaten down stocks that missed estimates.  Better than expected is simply what’s expected these days.”  (Bespoke also MarketBeat)

Are bonds expensive?  Stocks cheap? Or both?  (WSJ)

A look at July asset class performance, including corporate bonds.  (Bespoke, ibid)

Equity sentiment at week-end.  (Trader’s Narrative)

Why is the ELEMENTS S&P Commodity Trends Indicator ETN (LSC) struggling?  (VIX and More)

How a dispersion trade is a bet on a lower correlation in stock returns.  (WSJ)

The myth of the stock-economy connection.  (Atlantic Business via Anal_yst)

Are stock correlations finally breaking down?  (MarketBeat)

Where the heck is the Norway ETF?  (ETFdb)

Active ETFs are now getting into the options game.  (IndexUniverse)

The options markets are pretty quiet at the moment.  (Barron’s)

The ag rally is overbought.  (Bespoke)

Is it finally time for Africa to shine as an investment opportunity?  (Barron’s)

A closer look at Bruce Berkowitz’s financial-heavy portfolio.  (Morningstar)

Is Pimco’s Total Return Fund too big to manage?  (WSJ)

You never forget your first trading loss.  (Minyanville)

Has Cerberus Capital Management turned the corner?  (Economist)

Why can’t the SEC eliminate kill 12b-1 fees altogether?  (WSJ, IndexUniverse, NYTimes, InvestmentNews)

Citigroup’s $75 million fine is a sign that little has changed on Wall Street.  (CNBC also Kid Dynamite)

The credit card business is still a good one.  (NYTimes)

Is blue chip America finally ready to put its cash to work?  (Bloomberg)

David Merkel, “Panics are events, often multiple events, and booms are processes.”  (Aleph Blog)

The financial crisis as earthquake metaphor explored.  (NYTimes)

25% of Americans now have bum credit scores.  (Big Picture)

Why Texas is winning the recession.  (Atlantic Business earlier AR Screencast)

Consumers are not eating out all that much.  (Calculated Risk)

Is the Fed too complacent about disinflationary expectations?  (Economist’s View)

This is an “ugly” economic recovery.  (Econbrowser)

Is the drop in the ECRI WLI over?  (BondSquawk)

On the state of the Canadian economy (and currency).  (Bloomberg)

Vitaliy N. Katsenelson, “Japan is proof that a country cannot borrow itself to prosperity.”  (Contrarian Edge)

A (positive) review of Raghuram Rajan’s “Fault Lines.”  (Aleph Blog also NYTimes)

On the need for some default investment options for individuals.  (The Psy-Fi Blog)

Should the big banks fear BankSimple?  (Mashable)

Michael Mandel, “In terms of jobs, journalistic occupations are outperforming the overall economy.  However, many of the journalistic jobs  are not being created in conventional journalism industries.”  (Mandel on Innovation and Growth)

RIP, The Big Money.  (AllThingsD, Poynter)

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Friday links: emerging dividends


This post is by abnormalreturns from Abnormal Returns


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Emerging market bonds had a good July.  (BusinessWeek)

Emerging markets are catching up on yet another measure:  dividends.  (WSJ)

Not every Western consumer products company can win in the emerging markets. (Lex)

Investors continue to show confidence in the emerging markets as they mature and develop.  (AR Screencast)

High yield bond funds continues to see inflows.  (Distressed Debt Investing)

Corporate borrowers are finding a willing bond market.  (WSJ, DealBook)

Taking a closer look at the yield curve(FT Alphaville)

A look at the P/E ratio on the S&P 500.  (Bespoke)

A profile of Li Lu who is “in line” to be a successor to Warren Buffett.  (WSJ, Clusterstock)

Keeping your cool in the market and waiting for fat pitches.  (The Reformed Broker, Derek Hernquist)

Hedge fund investors are entrusting their money to the biggest funds.  (DealBook also Institutional Investor)

Some hedge funds that played the credit crisis correctly are nervous.  (Bloomberg)

What is the S&P 500 VEQTOR Index?  (SurlyTrader)

Using average stock variance to time the market.  (CXO Advisory Group)

Demand for MLP funds remains high.   (Morningstar earlier Abnormal Returns)

Coffee prices are on the rise.  (Globe and Mail)

JP Morgan makes the case for timberland as an investment.  (Greenwood Project)

The BIS gold swap mystery, solved.  (FT)

Banks need more capital.  (Economix)

What modern art and theoretical economic theory have in common.  (Worthwhile Canadian Initiative)

Chief economists are for PR.  (Falkenblog)

Welcome to the “schizophrenic economy.”  (BusinessWeek also Business Insider)

A punk GDP number.  (Points and Figures, Free exchange, Atlantic Business, Economix, Floyd Norris, Deal Journal)

Post-revision the great recession was worse than originally thought.  (EconomPic Data, Calculated Risk, Free exchange)

The Fed IS worried about deflation.  (Economix, The Money Game, Real Time Economics, Free exchange, Barron’s)

Taking a closer look at rail (and truck) traffic.  (Value Plays, Pragmatic Capitalism also Calculated Risk)

Next week’s ISM numbers could be “ugly.”  (The Money Game contra Calculated Risk)

Hank Paulson on the blame housing subsidies have on the bubble and financial crisis.  (WashingtonPost, Fundmastery Blog contra Big Picture)

Americans aren’t moving the way they did in past recessions.  Blame underwater mortgages.  (WashingtonPost)

Growing debt burdens at the state level.  (CNNMoney)

China is now the world’s second largest economy.  (Reuters)

GM’s future is in China.  (Minyanville)

Goodbye BP, hello again Amoco.  (Huffington Post)

The (search) party is over for Google (GOOG).  (Fortune)

No Facebook IPO until 2012 (at the earliest).  (Bloomberg, SAI, GigaOM)

Things just got interesting. Digital Sky Technologies files to go public.  (DealBook, GigaOM, peHUB)

Could social gaming and gambling merge if online gaming is legalized?  (peHUB)

The worst movie year ever?  (WSJ)

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ARTV on the state of the financial world


This post is by abnormalreturns from Abnormal Returns


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Last night we did a solo show focusing on our ideas about what has been happening in the economy and market post-crisis.  We focused specifically on the growing schism between corporate America and Main Street and why markets seem to all be trading in unison.

Below you can find the broadcast embedded and the links mentioned in our discussion.

Below are the links mentioned in this broadcast:

  • What $FDX earnings tell us about the distinction between the stock market and the domestic economy.  (AR Screencast)
  • Squaring the circle:  corporate America and the correlation conundrum.  (Abnormal Returns)
  • How the latest earnings will only create more rage at Corporate America.  (The Money Game)
  • Anomalous capacity shrinkage.  (Economist’s View)
  • No matter how you look at it earnings surprises (and guidance) look strong.  (Bespoke)
  • Heavy industry is booming.  (FT)
  • Cash as the real option.  (Worthwhile Canadian Initiative)
  • Corporate profits and cash piles.  (Free exchange)
  • $837 billion in cash.  (Crossing Wall Street)
  • Increasingly globalized companies now “inhabit their own thriving economy, unencumbered by many of the ills of nation-states.”  (Time)
  • Recovery apartheid.  (The Reformed Broker)
  • Lost in correlation fatigue.  (FT Alphaville)
  • The forthcoming golden age of stockpicking.  (Abnormal Returns)
  • Investors face a world of correlation.  (FT)
  • On correlations and ETFs.  (FT Alphaville)
  • GMO’s Chancellor:  stable US firms bright spots.  (IndexUniverse)


Thursday links: crosscurrents aplenty


This post is by abnormalreturns from Abnormal Returns


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A look at the range-bound S&P 500.  (VIX and More also Bloomberg)

Doug Kass, the market is facing “crosscurrents aplenty.”  (TheStreet)

Bruce Berkowitz likes Morgan Stanley (MS).  (WSJ also InvestmentNews)

Dr. Copper is back.  (MarketBeat)

Now that the Baltic Dry Index is rising, no one is talking about it.  (The Money Game)

What Ned Davis Research likes right now.  (Trader’s Narrative)

ETF rebalancing is roiling late-day trading.  (Reuters)

PIMCO has emerged from the financial crisis stronger. It has continued hiring as others pause or pull back. “  (Economist)

There is a sellers strike in the market for long-dated volatility.  (Bloomberg)

The CBOE (CBOE) thinks it can go it alone.  (Bloomberg also HFR)

Are VIX moving averages a self-fulfilling prophecy?  (Daily Options Report)

When consumer confidence is at its worst, future stock market returns are at their best.  (Systematic Relative Strength)

Worried about correlations? Think long-term instead.  (Random Roger)

Tom Brakke, “If your way of thinking about your investment exposures is out of sync with the reality of today, it’s time to rip it up and start over.”  (the research puzzle)

It is time to reassess the way investors pay money managers.  (Economist)

Tough times on Wall Street.  Not really.  (The Reformed Broker)

Algorithmic trading programmers are striking to trade their models.  What could go wrong?  (Forbes via Clusterstock)

What caused the 2006-08 commodity price boom?  (Economist’s View)

Cross-currents in the commercial real estate market.  (Pension Pulse)

Renting is the new buying.  (Fortune)

By this measure emerging markets still have a ways to go.  (Fortune)

Euribor continues to move higher.  (MarketBeat)

What happened to the European double dip?  (Bespoke)

Global industrial production is at “record high levels.”  (FT)

On the correlation between M2 and CPI.  (macroblog)

Inflation vs. deflation:  deflation is winning.  (Big Picture)

Maybe economists should be more focused on disequilibrium?  (Rajiv Sethi)

On the correlation between jobs and durable goods.  (Big Picture)

Is the recession shifting even greater power towards employers?  (Rortybomb also Macro Musings)

Raghuram Rajan thinks ultra-low interest rates are preventing the US from making necessary adjustments.  (FT)

On the relationship between debt/GDP and economic growth.  (Free exchange also Money & Co.)

Is debt/GDP the right measure of indebtedness?  (AR Screencast)

The US is the new California.  (Gregor Macdonald)

The rise of the African consumer.  (beyondbrics)

Why the price of electric cars are likely to come down, fast.  (Slate)

The Kindle is going mass market with new, lower priced devices.  (WSJ)

How gaming became the future of social media.  (Fortune)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Wednesday links: trading wipeouts


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Companies are raising dividends, but continue to hold big slugs of cash.  (Crossing Wall Street, ibid)

No matter how you look at it earnings surprises (and guidance) look strong.  (Bespoke, ibid also Markets Blog)

Still no reversal in the number of bears.  (Bespoke)

Are ETFs the cause of rising stock correlations?  (FT Alphaville)

ETFs and high-frequency traders simply don’t care about valuations.”  (FT Alphaville)

Josh Brown, “Don’t allow the sudden popularity of “your” stock make you hate it.  Be emotionally possessive about something else, not your investments.”  (The Reformed Broker)

“Sometimes your trades just don’t work out.”  (SMB Training)

The historical performance of August.  (MarketSci Blog)

If gold reverses course it is going to hurt a lot of bandwagon jumpers.  (MarketBeat)

A look at the hedge fund ETFs.   (ETFdb)

Arguments for a second half slowdown.  (Calculated Risk)

Citigroup (C) did all right in selling Phibro.  (DealBook)

Goldman’s fund of fund business is doing just fine, thank you.  (Absolute Return+Alpha)

Don’t confuse strategy with outcome.  (CBS Moneywatch)

How to avoid a (trading) wipeout.  (The Crosshairs Trader)

What if there is no risk-free rate?  (SSRN via CXOAG)

Who is likely to buy what at the BP (BP) “garage sale.” (DealBook)

Um, where did the oil slick go?  (NYTimes)

Goldman Sachs (GS) (and Citigroup (C)) have already found a loophole around limits on proprietary trading.  (FBN, Bloomberg, Points and Figures)

If the US is the new Japan, keep an eye on leading economic indicators.  (The Money Game also Financial Armageddon)

Bill Gross notes the challenges of deleveraging in a world fraught with declining world population growth rates.  (The Money Game, Street Sweep also Daily Intel)

The asset-backed securities market has re-opened, albeit tentatively.  (DailyFinance, FT Alphaville

Debating the value of mortgage securitization.  (Economix)

How much farther do home prices have to fall?  (Big Picture)

How far will the home ownership rate fall?  (Calculated Risk, Bloomberg)

The steel market is soft.  (NYTimes)

Dueling opinions of the durable goods number.  (Kid Dynamite also Calculated Risk, EconomPic Data)

Arguments for a second half slowdown.  (Calculated Risk)

Continued pressure on state and local governments.  (WashingtonPost, Bloomberg)

What is going to be the next big driver of American economic growth?  (DJ Market Talk)

A bull market for financial regulators turned lobbyist.  (Big Picture)

China is not seriously considering raising interest rates.  (China Financial Markets)

George Soros is buying a stake in the Bombay Stock Exchange.  (FT, FT Alphaville)

Four reasons to believe in Brazil.  (Economist)

Middle class Brazilians are beginning to invest in stocks.  (beyondbrics)

The ETF industry has discovered Brazil and provides a number of ways to invest in this BRIC country.  (AR Screencast)

Google (GOOG) wants to take Facebook on.  (WSJ also Bloomberg)

Disney (DIS) is entering the social gaming business in a big way.  (Media Decoder, GigaOM)

Even the most defensible business moats eventually get spanned. (The Psy-Fi Blog)

Why StockTwits is important.  (SMB Training)

Why don’t networks broadcast all the pilots they paid for?  (Freakonomics)

Comedy MVPs since 1975.  (kottke)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Tuesday links: breadth rebound


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How closely is the market paying attention to rising earnings estimates?  (Crossing Wall Street, Horan Capital)

The breadth rebound is pushing towards overbought levels.  (Bespoke)

Time to rebalance your portfolio.  (market folly)

A graph that shows just how little yield there is out there.  (EconomPic Data)

Testing the idea that moving average systems have stopped working of late.  (World Beta)

Ugh.  10-year swap spreads are negative again.  (FT Alphaville)

Travel-related stocks are demonstrating some relative strength.  (Barron’s)

There is growing interest in VXX calls.  (VIX and More)

A new twist on the commodity ETF – call writing.  (IndexUniverse)

Who is going to win the ETF ticker lawsuit?  (IndexUniverse)

The current economy is a boon to temporary staffing firms.  (DJ Market Talk)

Exploiting the accrual volatility anomaly.  (CXO Advisory Group)

Investors in Build America Bonds are becoming more cognizant of credit of late.  (Bloomberg)

A reasonable explanation why companies are holding so much cash of late.  (Worthwhile Canadian Initiative, Free exchange)

Squaring the circle:  corporate America and the correlation conundrum.  (Abnormal Returns)

The recovery is increasingly splitting between the haves and have nots.  (The Reformed Broker, The Money Game)

Go North young man.  N. Dakota and Alaska lead the country in job growth.  (Portfolio via Reuters)

Texas largely avoided the housing bubble and recession.  Storm clouds on the horizon?  (Fundmastery Blog, Street Sweep)

The Texas economy was a standout this past decade, but how did Texas stocks perform?  (AR Screencast)

The debate over the fiscal multiplier are back.  (FT, WSJ also Atlantic Business)

James Montier of GMO has a new piece up on the austerity debate.  (Pragmatic Capitalism, Credit Writedowns)

Although backward looking, home prices up according to Case Shiller.  (Calculated Risk, EconomPic Data, Big Picture, Planet Money also Lex)

What effect does uncertainty have on economic activity?  (Real Time Economics)

The gap grows.  India raises its interest rates.  (Lex)

Is the Euro crisis over?  (Curious Capitalist)

BP (BP) plans to sell $30 billion in (questionable) assets.  (FT, The Money Game)

Russia is the new Saudi Arabia.  (Gregor Macdonald)

How the does the Big Mac Index relate to measures of economic development.  (The Atlantic)

A brief (and skeptical) history of behavioral finance.  (Monevator)

Are you in “justification mode“?  (Kirk Report)

How to plan for the fact that our long-term forecasts are likely wrong.  (Farnam Street)

Oliver Stone pulls his punches in Wall Street:  Money Never Sleeps.  (Mean Street)

Based on a recent transaction the Boston Red Sox are now worth $1.2 billion.  (Marketwatch)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Corporate America and the correlation conundrum


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Did the financial crisis, and the subsequent economic recession, make us forget the underlying changes in the nature of corporate America’s earnings?

We started answering this question in our screencast earlier today as we discussed the growing gap between how professional investors and individual investors view the market.  This Bloomberg article notes that while institutional investors continue to embrace equities, individuals are increasingly wary of the stock market.  This is due to the fact that they have two very different perspectives on things.

Institutional investors are likely reacting to the results of earnings like those from FedEx that are reflecting the results from a growing, albeit slower than normal, global economy.  Whereas individual investors are focusing on the steady stream of downbeat news coming from the domestic economy.  It is indeed confusing to see this growing disparity between the real economy and the corporate economy.

Zachary Karabell at Time this week notes how the changing nature of corporate America and the global economy have made the link between the stock market and the national economy more tenuous.  He writes:

Stocks are no longer mirrors of national economies; they are not — as is so commonly said — magical forecasting mechanisms. They are small slices of ownership in specific companies, and today, those companies have less connection to any one national economy than ever before.

This trend is likely to continue as the growing middle class in these emerging economies starts outpacing that of the developed world.  In short this beyondbrics post notes:

Spending power is moving south and east, and it’s doing so at blistering pace.

This shift in spending power provides opportunities for growth that American companies simply do not see here domestically or in the rest of the developed world, like Europe.  The above post mentions some companies poised to profit from these opportunities.  It makes perfect sense to pursue them.

The long-term question for American companies is whether position in these large, rapidly going countries is both sustainable and profitable.  If the answer to both of those questions is yes, then investors should feel comfortable putting a reasonable multiple on those earnings.

For investors the question of how to invest based on this knowledge is more problematic.  The past few years have seen unprecedented levels of correlation between national stock markets, sectors and individual stocks.  It seems that macro picture has outweighed whatever benefits one might have seen at the corporate level.  John Authers at FT notes how:

The world trades in unison. Many bright people spend many long hours pondering which stocks, sectors or countries to buy but, of late, it scarcely seems to matter.

Some might take this observation to its logical conclusion that an all-domestic based portfolio is the optimal solution.  We have written a great deal about this topic including this:

Therefore those who argue that an all-domestic portfolio avoids the messy problem of international diversification miss the big picture.  Over some shorter time horizon this decision might very well turn out be a correct one.  Nor is international diversification some sort of panacea.  Investment risks abound both internationally (as well as domestically).  However over the long term ignoring the increasingly dynamic nature of the global economy and the benefits from diversifying across it seems short-sighted at best.

The fact of the matter is we really don’t know what the true correlation is, or should be, between domestic equities and international equities.  All we have is historical results which in the past decade have been punctuated by frequent crises.  Eventually markets will return to something approaching a new normal.  (How long they remain there is another question entirely.)  At that point a new set of skills will be required of today’s macro-themed investors.  Authers again:

Macro factors should dominate at present but not to this extent. The more investors behave on the assumption that the macro is all that matters, the more it tends to be true – and the greater the risks that stock prices get out of kilter. If the market ever calms down, the indiscriminate way investors now allocate their money should create a killing for those who pick their stocks carefully.

Whether we get back to some sort of golden age of stockpicking is less important than acknowledging that the world has changed around us.  While those changes may be a mixed social and economic bag it behooves investors to take the lessons of the new global economy to heart.  Anything less would mean living in denial.