James Mackintosh

As the market rally falters (perhaps), John Authers and I have a new home on FT Alphaville.

This blog will no longer be updated, but our occasional thoughts and more frequent output will appear at ftalphaville.ft.com. Bookmark it and check back! Read more

James Mackintosh

Appliances Online is now AO, and it’s a hit with the market. Shares leapt 40 per cent as it floated in London today. The facts:

AO had revenue in the year to March 2013 of £275.5m, on which it made net income of £6.8m: a 2.5 per cent net profit margin.

With a shiny new market cap of £1.68bn it is worth almost as much as Carphone Warehouse or Dixons, two major high street retailers. It is big enough to make the FTSE 250 (subject to other criteria).

Basic valuations look fanciful: It is priced at 247 times trailing earnings, or six times sales.

But no one cares about traditional valuation tools any more. AO is an online retailer, and they’re where it’s at. Its shares are not about earnings or dividends this year, next year or the year after; they are about first-mover advantage, an option on AO becoming the Amazon of the fridges-to-cookers world. Read more

James Mackintosh

Some interesting charts from Credit Suisse this morning are testing the idea that eurozone unemployment looks particularly awful.

Adjust for the rising number of people participating in the workforce in the eurozone, and the falling number willing to work in the US, and unemployment is just about the same in both. Read more

James Mackintosh

Are emerging markets a bargain or yet another proverbial falling knife?

More bargain-hunters are starting to appear. Today Barclays equity strategists Dennis Jose, Ian Scott and Joao Toniato went so far as to recommend buying Russia’s Gazprom and Sberbank (along with China Shipping Development Co) to gain EM exposure.

Could emerging markets be the most-disliked region currently? They have been punished by investors, underperforming developed market equities by nearly 35% since Nov 2010, considerably worse than what would be suggested by their earnings (Figure 2). Amongst sellside analysts, a Bloomberg poll seems to indicate that few research houses recommend an
overweight on EM equities. From our meetings as well, we find most investors have little sympathy for our recent call to overweight EM equities

A few rather nice Barclays valuation charts after the break, plus some caution.

 Read more

John Authers

Quite a few people seem to dislike a column I wrote earlier this week on exchange-traded funds and their role in the emerging market sell-off. So let me offer a little extra data that was not in the earlier piece.

The following chart, compiled from Strategic Insight Simfund data, shows total inflows and outflows from US investors to emerging market equity funds of three types: active funds, indexed open-ended funds, and indexed ETFs. Figures are in billions of dollars. Starting in 2009, when emerging markets began their rebound, and going through to the final quarter of last year, I believe the story it tells could not be much clearer: ETF money is flighty.

Money in ETFs is far more volatile and far more prone to exit in a hurry than money invested in emerging markets through other vehicles. As EM investing is supposed to be a game for the long term, this is a problem. Read more

James Mackintosh

There’s a basic formula for trading Abenomics:

NKY ≈ SPX x JPY Read more

James Mackintosh

Falling prices are great if you’re a consumer. They’re no good if you’re an indebted government.

One measure of this is the interest rate the government pays, adjusted for inflation. If tax revenues rise roughly in line with inflation – and they should move br0adly with the GDP deflator as a measure of total economy prices – then higher prices equal higher tax revenues and so more ability to service debt.

Higher inflation means higher nominal GDP growth, no matter what is happening to real GDP. The result is smaller debt relative to the size of the economy – even if price rises have not left voters any better off (as measured by real GDP growth). Because bond coupons are fixed, inflation is good for borrowers and bad for lenders.

Here’s the good news on Spain: nominal 10-year bond yields and the extra interest it has to pay relative to Germany are both sharply down.

Spanish nominal bond yield

Here’s something less positive: Spanish bond yields adjusted for the GDP deflator – in other words, how much help the Spanish debt is getting from nominal GDP growth.

Spain real yield Read more

John Authers

How exactly should we benchmark hedge funds? It is obviously unfair to compare them directly to equity indices, as the whole point of hedge funds is to aim for an “absolute” return, not a return relative to gains in the equity market. They will naturally under-perform an S&P 500 tracker in years like 2013 when the stock market shoots straight up.

I drew attention last week to the way hedge fund returns have been left badly behind by long-only equity returns over the five years of the post-crisis relief rally, and this understandably provoked comments that this was an unfair comparison. There are also obviously many methodological problems with creating hedge fund indices. Hedge funds have many different strategies, and they may be particularly prone to “survivorship bias” – those that do not have a good story to tell tend to shut down quietly, and do not tell index compilers about their record.

However, hedge funds do have to accept that their offerings will be used by asset allocators trying to use them to balance against the main asset classes of equities and bonds. On that basis, the following chart, produced by Barclays’ capital solutions group using HFRI indices, is very interesting.

It confirms a basic intuition: hedge funds did very well during the bursting of the dotcom bubble, more than held their own during the subsequent 2002-2007 rally, and have had a far harder time of it in the last five years. Why might this be? Read more

John Authers

The Bank of England has hit the target at last. UK inflation is at 2 per cent, bang in line with the Bank’s target, for the first time since the end of 2009. This is good news for the UK, which had been buffeted by an incipient inflation problem. But it is part of a global trend that could be far more problematic: deflationary pressure.

As the chart shows, the BoE now completes a set of all the four major developed market banks – along with the Federal Reserve, the Bank of Japan and the European Central Bank – to have inflation at or below the target of 2 per cent. Read more

James Mackintosh

Old stock market wisdom has it that as goes January, so goes the year. As with “sell in May”, “run your winners” and so many others, there is some truth in the saying: in 62 of the last 85 years the US market has moved the same direction in January as in the full year ahead.

On the other hand, the first day of trade is irrelevant, as Howard Silverblatt at S&P Dow Jones Indices points out. Read more

James Mackintosh

When the European Central Bank governing council meets on Thursday in Frankfurt, sushi is unlikely to be on the menu. But officials should have a concern: is the eurozone turning Japanese?

This chart shows headline inflation (in Japan the measure excludes fresh food) for Japan since its bubble turned to bust in 1990, heralding a slide into deflation. Radical action by its central bank is just beginning to return price rises, as the far right hand side shows. Read more

James Mackintosh

As the festive season approaches investors will be preparing for the boring but essential job of selling some of their wonderfully-performing US shares to rebalance their portfolios back into underperforming bonds, protecting some of those gains.

The question investors face is whether such diversification will help protect their portfolios in the future. Read more

James Mackintosh

How much is a £20 coin worth? The Royal Mint seems to have created a risk-free arbitrage, thanks to its decision to sell the first silver £20 coin for £20, with free postage (hat tip to Elroy Dimson). It is legal tender, so there’s no risk of it being worth less than £20 (and it could always be paid into a bank account or swapped at the Bank of England if you feared it might be).

Yet, on ebay demand is such that the coins are selling for £30 or more – and some chancers are listing the coins for as much as £65, plus postage. Presumably these prices are being paid by collectors attracted by scarcity value. It certainly has nothing to do with the intrinsic value, as the silver content of the coins is worth only about £6.33. Read more

James Mackintosh


Bear

Source: www.geekphilosopher.com

Where are all the bears? Even some of the usual suspects have stopped growling, with David Rosenberg of Gluskin Sheff going so far as to dispute the idea that he’s a permabear. There are a few still carrying the flame – Russell Napier, the stock market historian, thinks the S&P 500 will fall to 500 – but with the S&P now at 1,772 there are few willing to listen to the growls. Read more

James Mackintosh

Money has been piling into European shares as fears of the euro imploding recede, the economy shows signs of life and investors look for the next trade after Japan.

But the “eurozone shares are cheap” theme might have run its course. This chart shows the discount of eurozone forward price-to-earnings compared to the US, as a percentage (using MSCI indices). Read more

James Mackintosh

FT Alphaville today has a nice chart suggesting London house prices are down by more than a quarter in real terms.

Here’s an alternative thought: the quality of measurement of London house prices has collapsed. This chart shows London house prices after inflation as measured by LSL/Acadametrics, the Office for National Statistics, Nationwide, and the Halifax index Alphaville used. I used CPI, rather than the discredited RPI, for most of them, but showed the effects of both RPI and CPI for the Acadametrics series.

London housing indices

Halifax down at the bottom there is clearly out of line with the rest, although Nationwide’s index still shows a hefty real terms loss, of 9 per cent. Read more

John Authers

At first, the idea that the Nobel economics prize should be shared between Eugene Fama and Robert Shiller sounds absurd – akin to making Keynes and Friedman share the award.

Gene Fama, of the University of Chicago, is famous as the father of the Efficient Markets Hypothesis, after all, while Yale’s Bob Shiller is famous primarily for being the principal critic of that hypothesis. Read more

James Mackintosh

Investors have used all sorts of valuation models in the past 20 years. Which to use for Twitter, now that it is preparing to float?

Here’s another handy measure: price per worker. Twitter is more than its staff, of course. But it’s a useful sanity check on any valuation. The higher the value, the more investors have to assume there’s something really special about their assets – factories (a carmaker), intellectual property (think cure for cancer), innovative culture (Apple?), near-monopoly position (once Microsoft, now Google). Read more