Monthly Archives: October 2012

James Mackintosh

If you only know one thing about European summits, it should be this: agreements aren’t worth the paper they’re written on. The fact something has been publicly announced, even written down in 4am post-summit communiques, means nothing.

Yet another European summit has been discussing yet another urgent issue, and yet again it is one that was supposed to have been agreed at a previous summit: banking union. The wrangling this time extends as far as the question of whether what was previously agreed is even legal.

Once again the deal was struck in the early hours of the morning, and once again Europe’s leaders hailed it a success

James Mackintosh

Lee Buchheit is a man worth listening to. The Cleary Gottlieb lawyer wiped €100bn off Greece’s debts when he restructured the country’s bonds at the expense of the private sector, in just the latest in a long line of sovereign defaults he has overseen.

Now he’s airing his thoughts on the options for Spain and Italy, jointly with Mitu Gulati of Duke Law School – and rather bravely, he’s due to speak about it in Portugal next week.

His key message is that Spain is running on borrowed time, and should get on with a Uruguay-style debt reprofiling as soon as possible, extending maturity dates on bonds far into the future but continuing to pay interest. 

James Mackintosh

Even after the extraordinary summer rally in European equities, strategists continue to punt European shares as cheap, and so worth buying. Unfortunately, it’s more complicated than that.

The sell-side analysts pushing the idea are too numerous to list, but one of the better argued cases is that presented by the cyclically-adjusted price-earnings ratio (CAPE), which averages profits over 10 years in an attempt to eliminate the effects of the economic cycle.

Paul Jackson at Societe Generale has some nice charts showing Europe looks cheap, and demonstrating the use of one derivative of CAPE, the cyclically-adjusted dividend yield.

CAPE vs its average