FT Long Short

Mario Draghi has at the very least pulled off a great coup of expectations management. On Thursday he said exactly what everyone expected him to say. Markets had already rallied in hope for more than a month ahead of his announcement. This might usually be the cue for a sell-off, but instead the euro held steady, while peripheral bond and stock markets went to the races.

Spain’s 10-year yield is now below 6 per cent, while the buying opportunity when this risk-on wave started now looks to have been immense. Spanish shares (as measured by the Ibex) are up by a third in the two months, while Eurozone bank stocks (as measured by the FTSE Eurofirst index) have gained more than 50 per cent. I discussed all of this with Jamie Chisholm in the first of the new series of Authers’ Notes:

The larger questions are whether this can continue, and if there is any way to time the risk-on and risk-off waves. Read more

There are interesting arguments over whether the US residential housing bubble has really finished correcting, as I argued in a column earlier this week. But if it hasn’t, then the outlook for property in theUK, and most especially London, is alarming.

Of all the local property bubbles, Miami’s was the most extreme. Let’s look at it in comparison with London. For the US, we use the S&P Case-Shiller data, which are now widely followed. For the UK we use data from the LSL Property Services/Acadametrics indices, which is deliberately setting out to map the UK property market in the same way that Case-Shiller maps the US. Handily, both are set so that the beginning of 2000 equals 100.

So Miami plainly had all the symptoms of a bubble, with prices leaving for orbit in a way that they never did in London. But London’s inexorable rise looks extraordinary by comparison. Read more

The Shanghai Composite now rests at its lowest level since March 2009 – which is just when stock markets the rest of the world over began to recover. Admittedly, Shanghai bounced several months earlier, once China started administering its stimulus. But still, this is quite a turn of events given that the Chinese economy continues to grow far faster than the rest of the world.

What gives? Specifically with relation to Shanghai, it entered the period in the aftermath of a historic bubble that looked almost exactly like the Nasdaq bubble that had burst seven years earlier. There follows a chart from the Short View back in late 2007, when the Shanghai had indeed, we now know, peaked.

 Read more

There is an interesting debate over my column on Monday, which looked at evidence for distorted profits in the US. In brief, there is a long-term discrepancy between the earnings yield on the S&P 500 (the inverse of the price/earnings ratio), and the long-term actual real return to investors (what they receive in dividends and in capital appreciation on an annualised basis). The two ought to be very similar. But in fact, earnings yield runs at about 1.5 percentage points per year higher.

The column highlighted research by the great Andrew Smithers who can be seen here discussing his idea with Martin Sandbu, who is doing a great job on the Authers’ Note video:

Mr Smithers’ explanation for the discrepancy, which does not make him popular, is that earnings are systematically overstated – and that the manipulation has intensified now that the modern bonus culture gives executives a much greater incentive to overstate profits in the short term. However, there is another possible explanation. Read more