Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Posts Tagged ‘Equities’

Rational Irrational Exuberance?

Posted by hkarner - 1. März 2018

Andrés Velasco, a former presidential candidate and finance minister of Chile, is the author of numerous books and papers on international economics and development. He has served on the faculty at Harvard, Columbia, and New York Universities.

We tend to be uncomfortable with the notion that an economy’s fundamentals do not determine its asset prices, so we look for causal links between the two. But needing or wanting those links does not make them valid or true.

SANTIAGO – The timing was exquisitely ironic: equity markets peaked – and a week later began crashing – just as pundits left this year’s World Economic Forum meeting in Davos, where they concluded that the global economy was on a steady upswing. In the weeks since, experts have divided into two camps.

Some, including new US Federal Reserve Board chairman Jerome Powell, believe that economic fundamentals are strong, and that what stock markets experienced in early February was only a temporary hiccup. In this view, there is nothing keeping major central banks from carrying out “beautiful” (that is, gradual and painless) monetary-policy “normalization.” Den Rest des Beitrags lesen »


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The Market Dogs That Didn’t Bark

Posted by hkarner - 28. Februar 2018

Anatole Kaletsky is Chief Economist and Co-Chairman of Gavekal Dragonomics. A former columnist at the Times of London, the International New York Times and the Financial Times, he is the author of Capitalism 4.0, The Birth of a New Economy, which anticipated many of the post-crisis transformations of the global economy. His 1985 book, Costs of Default, became an influential primer for Latin American and Asian governments negotiating debt defaults and restructurings with banks and the IMF.

Did February’s equity-price reversal mark the end of the bull market, or was it just a temporary correction? In addressing this question, one must look not just at the stock market, but also at oil prices, long-term US interest rates, and currencies.

LONDON – Three months ago, I argued that rising stock markets around the world were a consequence of improving economic conditions, not a sign of “irrational exuberance.” Since that commentary was published, share prices accelerated upward, and some “irrational exuberance” did start to appear, leading to a sharp fall in early February. Although most stock markets are still well above their levels of last November, the question lingers: Did February’s reversal mark the end of the bull market, or was it just a temporary correction?

The strongest evidence, as Sherlock Holmes might have remarked, comes from the dog that didn’t bark. More precisely, it comes from three vehement guard dogs – oil prices, long-term US interest rates, and currencies – that slept peacefully through the commotion on Wall Street. Den Rest des Beitrags lesen »

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The long-term returns from collectibles

Posted by hkarner - 25. Februar 2018

Date: 22-02-2018
Source: The Economist: Buttonwood

Investing in the finer things of life

BONDS, shares and Treasury bills are all very well, but in the end they are just pieces of paper. They are not assets you can hang on the wall or display to admiring neighbours. Many rich people like to invest their wealth in more tangible form; property, of course, but also collectibles such as art, fine wine and classic cars.

Is that wise? Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School (LBS) have run the numbers for their annual analysis of the financial markets in the Credit Suisse global investment-returns yearbook. Some of these assets have done rather better than others (see chart). Fine wine delivered the best returns; surprising to cynics who might assume that, in the long run, the value of wine vanishes as it turns into vinegar. Really old wine often has historical resonance. A bottle of Chateau Lafite Rothschild from 1787 was sold for $156,450 in 1985 because it was thought to belong to Thomas Jefferson.

Estimating the returns from these assets, after costs, is tricky. Indices covering art or musical instruments are much less comprehensive than those covering shares. There may be an upward bias inherent in collectible returns, as successful works are more likely to survive.

Transaction costs, if valuables are sold at auction, may be 30-40%. But these are the kind of assets that tend to be held for many decades (and passed between generations) so the annual cost burden may compare reasonably with equities, which are traded much more frequently.

Then there are the costs of insurance. If people want to keep a Stradivarius at home, theft is a big risk; robbery with violins is a serious crime, after all. Den Rest des Beitrags lesen »

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Many happy returns: new data reveal long-term investment trends

Posted by hkarner - 6. Januar 2018

Date: 04-01-2018
Source: The Economist: Free exchange

Property yields more than shares and bonds; investment returns outstrip economic growth

DATA-GATHERING is the least sexy part of economics, which is saying something.

Yet it is also among the most important. The discipline is rife with elaborate theories built on assumptions that turned out to be false once someone took the time to pull together the relevant data. Accordingly, one of the most valuable papers produced in 2017 is an epic example of data-retrieval: a piece of research that spells out the rates of return on important asset classes, for 16 advanced economies, from 1870 to 2015. It is fascinating work, a rich seam for other economists to mine, and a source of insight into some of today’s great economic debates.

Rates of return both influence and are influenced by the way firms and households expect the future to unfold. They therefore find their way into all sorts of economic models. Yet data on asset returns are incomplete. The new research, published as an NBER working paper in December 2017, fills in quite a few gaps. It is the work of five economists: Òscar Jordà of the San Francisco Fed, Katharina Knoll of the Bundesbank, Alan Taylor of the University of California, Davis, and Dmitry Kuvshinov and Moritz Schularick, both of the University of Bonn. (Messrs Jordà, Schularick and Taylor have spent years building a massive collection of historical macroeconomic and financial data.) For each of the 16 economies, they craft long-term series showing annual real rates of return—taking into account both investment income, such as dividends, and capital gains, all net of inflation—for government bonds and short-term bills, equities and housing. Theirs is the first such data set to gather all of that information for so many countries over so long a period. Den Rest des Beitrags lesen »

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I Hate This Market, I Love This Market

Posted by hkarner - 26. April 2016

Date: 26-04-2016
Source: The Wall Street Journal

The plunge and then surge of commodity prices this year shows investors have spent more time watching each other than watching the fundamentals

In markets, as in life, a sudden fright can quickly be replaced by embarrassed laughter. The fear evident earlier this year has already been superceded by nervous giggling in Western equity markets, while in some areas of commodities, where the shock was deepest, it seems to have turned into full-on hysterics.

Anyone who bought back into commodities at their bottom in late January has been laughing all the way to the bank. By the end of last week, global mining shares had rebounded 75%, the strongest over a similar period since at least 1994, when data for the FTSE World Mining index starts. If that sounds like a lot, consider the frenzied trading in the previously obscure futures contract for steel reinforcing bars, or rebar, in Shanghai last week, where turnover was higher than on the entire stock market. Den Rest des Beitrags lesen »

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Are Equities Overvalued?

Posted by hkarner - 28. März 2015

Date: 27-03-2015
Source: Project Syndicate


Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, Academic Board Chairman of the Fung Global Institute in Hong Kong, and Chair of the World Economic Forum Global Agenda Council on New Growth Models. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of  The Next Convergence – The Future of Economic Growth in a Multispeed World.

MILAN – Since the global economic crisis, sharp divergences in economic performance have contributed to considerable stock-market volatility. Now, equity prices are reaching relatively high levels by conventional measures – and investors are starting to get nervous.

The question is whether stock valuations are excessive relative to future earnings potential. The answer depends on two key variables: the discount rate and future earnings growth. A lower discount rate and/or a higher rate of expected earnings growth would justify higher equity valuations. Den Rest des Beitrags lesen »

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American equities: the party may be over

Posted by hkarner - 21. März 2015

Date: 20-03-2015
Source: The Economist

American shares have enjoyed one of the greatest bull runs in history, with the S&P 500 index rising by more than 200% since the depths of the financial crisis in 2009. But as the economy picks up and the Federal Reserve begins to normalise interest rates, the going is getting tougher. Rising labour costs seem likely to squeeze margins. And the strong dollar is hurting American multinationals, which make much of their profits abroad. S&P 500 earnings are expected to decline by 5% in the first quarter of this year, compared with a year earlier. On this measure American firms will underperform European companies (the share prices of which are tracked by the benchmark STOXX 600 index). The weak euro is helping European firms, which are even more enthusiastic globetrotters than their American peers: their earnings are expected to grow by 5-10% in 2015. A shift in the corporate balance of power is coming.
share prices US

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The best and worst performing assets of 2013

Posted by hkarner - 2. Januar 2014

Date: 02-01-2014
Source: The Economist

INVESTORS who poured into equities last year may be sleeping in today after celebrating 2013’s bubbly returns. Returns on share prices (along with reinvested dividends) surged by 23% globally, the best performance in three years.

More cautious types who stuck to bonds and precious metals may have got up early to reassess their allocation strategies for 2014. Returns on government bonds shrank by 4% in 2013—the first decline in eight years—and the fall in the gold price was the biggest since 1981.

Worries that some euro-area members such as Greece might leave the club continued to prove unfounded last year, and those who invested in these countries were well rewarded whether they bought stocks or bonds. Punters in emerging markets would have had to be more selective, however. In Latin America, Argentine equities far outshone those of neighbouring Brazil and Chile, whereas in Asia and the Middle East, shares in Pakistan and Saudi Arabia surged while Indonesia’s and Turkey’s sagged.

Asset Performance 2013

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Signs of the Top

Posted by hkarner - 20. August 2013

John Mauldin, 18/8
What Are They Smoking?

The investment media seems obsessed with the question of whether the Fed will taper. The real question should be not about „tapering“ but about credibility. What happens when fundamentals become the narrative as opposed to what the central bank is doing? What happens if the Federal Reserve throws a liquidity party and nobody comes? Today we look at some of the fundamentals. The market is in fact overvalued, but that doesn’t mean it can’t become more overvalued. Is this August 1987 or August 1999?

Before we delve into that question, let me fix a problem. Last week I mentioned a great strategy paper authored by my good friend Jon Sundt, President and CEO of Altegris. I failed to include the link. Here is the link. I encourage anyone who is looking to diversify into alternative investments to read it.

Signs of the Top

We are told they don’t ring a bell when bull or bear markets start. That may be true, but it does seem that there are similar signs as we approach turning points. This week in my reading I have been struck by a number of signs that suggest that, if we haven’t reached a top in the latest bull market cycle, at least a pause may be in order. Let’s review a few of them. The first comes from Charles Gave, who notes that margin debt is now back to extremes.

I started in the fascinating business of trying to understand why markets go up and down in February 1971. The old money manager in the French bank which had hired me straightaway said: „Charles, you will never get rich in this business using other people’s money. Do NOT leverage your positions. Leverage might be all right for fellows who deal in real estate, but for those in stock markets, it only brings misery.“

Being young and smart (or so I thought), I assumed this advice could not conceivably apply to me. A few margin calls later, accompanied by quite a string of sleepless nights, and I came to realize that the old gentleman had a point.

Now that I am quite old myself and certainly not as smart as I thought I was in 1971, I find myself tracking the moves of the poor souls who believe they can leverage profitably. Then I do the opposite. This is why Charles the 70-year-old is watching what Charles the 30-year-old is doing—to do the reverse. Have a look at the graph.

The red line at the top is New York Stock Exchange margin debt as a multiple of US GDP per capita, the black line on the bottom pane is a ratio between US stocks and (government) bonds. It seems that the fellows using other people’s money to get rich have an uncanny ability to leverage up when shares become overvalued vs. bonds. They also seem to get most enthusiastic just before a recession, usually after a prolonged outperformance of equities against bonds. Den Rest des Beitrags lesen »

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Commodities: The end of the Holy Grail

Posted by hkarner - 5. August 2013

Anne-Laure Delatte, Claude Lopez, 4 August 2013, voxeu

Commodities are usually advertised as having the same returns and less volatility than equities. This column presents the results of a recent CEPR working paper showing that previous studies based on rather restrictive assumptions produced biased results that favoured commodities over equities. Using an alternative methodology, co-movement between traditional asset and commodity markets seems to be symmetric and occurs most of the time. What changes is the strength of the relationship. The returns of equities and commodities have become more integrated in the aftermath of the subprime crisis, a result that questions the diversification benefits of commodities.

Commodities are usually advertised as the ‘orthogonal asset class’ by the financial industry,1 based on the findings of several academic studies. Among the first, Gorton and Rouwenhorst (2005) show that commodity future contracts have the same average returns as equities along with a negative correlation, but present less volatile returns. In other words, commodities provide excellent diversification benefits because commodity returns grow when returns of bonds and equity decrease. Commodity futures are even to earn above average returns when equity earn below average returns. Several papers argue that the correlations between equity and commodity tend to fall in turbulent periods, an asymmetric pattern attributed to investors‘ flight-to-quality strategy (Chong and Miffre 2005).

These patterns have attracted a large number of financial investors seeking to diversify their portfolio (see Bichetti and Maystre 2012). The number of futures and option contracts outstanding on commodity exchanges has increased fivefold between 2003 and 2012 and investors with a motive of physical hedging represent now less than 30% of positions, according to the Commodity Futures Trading Commission. Den Rest des Beitrags lesen »

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