• Heading Towards Deflations
    Posted by on November 19th, 2008 at 2:38 pm

    The TIPs say deflation is coming and may stay around for a bit:

    Yet, if you believe the yields on US Treasury inflation protected bonds, or Tips, we shall have a 2.2 per cent fall in prices in 2009, a 2.5 per cent decline in 2010 and only flat prices in 2011. If that turns out to be true, the real interest rate burden on even the highest-rated borrowers will be extremely hard to bear.
    As a practical matter, long before we had significant “negative prints” of consumer prices, the Federal Reserve would just flat out buy Treasury bonds and monetise away with “quantitative easing”. Gold dealers would replace hedge fund managers at the art auctions, model agency parties and Congressional hearings.

    But there’s more to the story. John Dizard says that the market is simply becoming less efficient:

    What’s really going on is another effect of the disappearance of dealer and arbitrageur capital. The dealers can’t afford to make efficient markets, given their decapitalisation, downsizing, and outright disappearance. That means anomalies sit there for weeks and months, where they would have disappeared in minutes or seconds.

    Here’s another look at yield you can get for the TIP maturing in two months.
    research.stlouisfed.org1119.png
    It’s currently yielding 13.73%.

  • Inflation and Stocks
    Posted by on November 19th, 2008 at 1:48 pm

    With today’s report showing how steeply prices fell last month, I wanted to revisit the issue of inflation’s impact on stock prices. Let me add the important caveat that correlation doesn’t necessarily mean causation. The short answer is that inflation is bad for stocks. In fact, the only thing worse is deflation. What the market likes is inflation that’s nice, steady, predictable and low.
    Going back to 1926, there have been 72 months of deflation coming in below -5%. The inflation-adjusted total return for that period is an annualized loss of -9.6%.
    Here’s how it breaks out.
    Inflation Rate…………Real Stock Returns (annualized)
    Below -5%…………………………-9.6%
    Between 0% and -5%………….20.9%
    No Inflation………………………..17.1%
    Between 0% and 2%…………..10.0%
    Between 2% and 5%…………..14.1%
    Between 5% and 7.5%………..-0.2%
    Between 7.5% and 10%………-2.8%
    Over 10%………………………….-11.1
    Basically, when inflation is over 5% or under -5%, the market averages a real 5.5% loss. When inflation is between -5% and 5%, it average a 15% gain.

  • Gene Simmons Rings the Opening Bell
    Posted by on November 19th, 2008 at 12:48 pm

    What else needs to be said?

  • CPI Posts Biggest Drop in 61 Years
    Posted by on November 19th, 2008 at 11:42 am

    The headline rate dropped by 1% last month which was the most since monthly record began, although the numbers in the database go back to 1913. Consumer prices dropped for an extended period beginning in the 1920s and going into the 1930s. Wall Street was expecting a fall of 0.8%.
    We knew a big drop was coming thanks to the fall in oil prices, however, the biggest surprise was the core prices also fell for the first time since 1982. Wall Street was expecting a 1% rise and it got a 0.1% loss.

  • More on Corporate Bond Spreads and Their Impact on Equities
    Posted by on November 18th, 2008 at 3:23 pm

    Michael Stokes stokes picks up on my post from last week, and finds that “high spreads have been bullish for the stock market, except when spreads reach extreme heights (like they have at this very moment).”
    2008111702.gif

  • If There Was Something We Could Have Done….
    Posted by on November 18th, 2008 at 2:09 pm

    Citigroup hits 13-year low:
    image739.png

  • Ken French on Why Commodities are a Bad Investment Idea
    Posted by on November 18th, 2008 at 1:50 pm

  • Looking at Harvard’s Endowment
    Posted by on November 18th, 2008 at 1:39 pm

    Daniel Gross looks at the (mis)management of Harvard’s endowment portfolio. Or as he says, “looks like it was chosen by someone who watched a few episodes of CNBC’s Squawk Box and heard that the hot new investments were emerging markets, commodities, and private equity.”
    Gross writes:

    The biggest position disclosed—all amounts and dollar values are as of Sept. 30—was $463 million in the iShares MSCI Emerging Market fund. As the six-month chart shows, that fund’s off nearly 60 percent from this summer and down by about one-third from the end of September. Third-largest was a $233 million position in Weyerhauser, the wood-products giant that has fallen about 40 percent since the end of September. The top 10 included $232 million in the iShares MSCI Brazil Index Fund, off about 40 percent since the end of September; about $51 million in the iPATH MSCI India Index, off about one-third since the end of September; and $158 million in the iShares FTSE/Xinhua China Index, off about 30 percent since the end of September. For good measure, top 10 holdings also included index funds that were plays on South Africa’s commodity-based economy and on the perennially emerging market of Mexico. Would it surprise you to learn that both of those investments, after fairing poorly in the third quarter, have fallen further in the fourth quarter?

    I think Gross is being a bit unfair here. Harvard only has to disclose its position in publicly traded companies, and that’s “only” $2.9 billion, or less than 8% of its portfolio. For any long-term investor, which Harvard certainly is, you can safely reserve 8% of your portfolio for play money.

  • Obama to Detroit: Drop Dead
    Posted by on November 18th, 2008 at 1:32 pm

    Or at least, that’s what he should say. The UK Times sums it up well:
    Rescuing ailing industries represents a retreat to comforting orthodoxies by the Democrats. The new administration might note that the British Government has learnt from experience. Labour in the 1970s supported British car manufacturing, when British Leyland faced a liquidity crisis. The company was a constant drain on public resources. Only later did Labour grasp that investment in manufacturing is wasteful if there is no demand for the product. Gordon Brown has rightly urged Mr Obama not to introduce protectionist trade policies, which would merely compound the crisis. They are not the only example of economic interventionism that should be avoided scrupulously.

  • The Problem with Point Spreads
    Posted by on November 18th, 2008 at 1:21 pm

    I’ve written before that football point spreads aren’t too different from stock prices. The point spreads are merely set by the bookies so they can have even money on both sides of the bet. They’re not trying to predict the games. They’re trying to estimate how others will predict the game. That’s very close to how stock prices work.

    One of the problems in the betting market is that a team doesn’t care how much it wins by, as long as they win. Outside of pride, the teams are indifferent (we hope) to point spreads.

    Sunday’s game between the Steelers and Chargers was a big headache for folks in Las Vegas. On the surface, the Steelers won a tough game by the score of 11-10. By the way, that was the first game in NFL history to have that final score (one touchdown and extra point, one safety and four field goals).

    The Steelers were favored to win by four points. On the final play of the game, with the Steelers up 11-10, Troy Polamalu grabbed a loose ball and ran to the end zone to give the Steelers an apparent 17-10 lead—and covering the spread.

    The officials, however, overturned the touchdown saying the Chargers made an illegal forward pass. The Steelers, naturally, didn’t care since the game was over and they won. The league later admitted the mistake. There could have been as much as $10 million riding on that decision.

    Here’s the final play of the game: