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
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
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
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
Russell Napier’s Anatomy of the Bear seems to be quite a cult classic among investors. I regularly see it on portfolio managers’ desks. Meanwhile, his video interviews with the FT in the years since the crisis also seem to have created quite a cult following. This week he completed his fourth interview with us since 1999, and he is sticking to his claim, based on historical experience, that the S&P 500 will need to slide down below 500 once more before this bear market is over (he did say 400 in the book).
How much has his story changed, and how seriously should we take him? This obviously divides opinion. So here are his previous interviews with us, in chronological order. Read more
Just what depths of political stupidity are markets discounting? The partial shutdown of the US government passed with little or no impact on the markets that stood to be most affected, even though there was uncertainty about it to the end.
Almost all European stock markets opened higher, despite the news from the US. The dollar index dropped 0.35 per cent in the minutes following the realisation that the shutdown would happen, and then recovered somewhat. The yield on the benchmark 10-year Treasury bond gained 5 basis points to 2.66 per cent – still far below the 3 per cent it briefly touched a few weeks ago. So what has happened so far – the failure to agree on a budget and an initial shutdown of the US government – has evidently been priced in. Read more
Here’s the market reaction to the shutdown of (some of) the US government:
- Benchmark US 10-year Treasury yields rose 0.05 percentage points immediately
- The dollar index fell 0.4 per cent immediately
- US equities dropped 0.6 per cent in the build-up yesterday, but the fall was still less than the 0.73 per cent fall in developed world equities.
- The e-mini S&P 500 futures contract is up 0.4 per cent since the shutdown took effect at midnight in Washington
All of which suggests that investors really aren’t that bothered. Here is conventional wisdom on why: Read more
A rally of 150 per cent – the rise in the S&P 500 since its intraday low of 666 in March 2009 – looks like the very essence of a bull market.
Adjust for inflation and it is possible to see as merely a bear market rally – perhaps the biggest dead cat bounce of all time. The real capital value of an investment in the S&P 500 is still below where it was in 2007 or 2000. After both of those peaks and subsequent crashes, shares were pumped up by central banks keeping interest rates much too low. Read more
Much to the frustration of journalists, all we know officially about the Twitter IPO is this:
https://twitter.com/twitter/status/378261932148416512 Read more
Maybe we should reinstate Glass-Steagall. Or maybe we should revisit the system of publicly quoted banks. That at least seems to be the implication of comments made to me by John Reed, who spent almost two decades as the CEO of the old Citicorp and then joint CEO of the newly formed Citigroup. You can find text from my interview with him here and here.
However, I think it is worth highlighting still another passage, as it cuts to the heart of how banks should be valued, and arguably even how they should be owned. He now believes that commercial banking and trading cultures should not be combined. When I pointed out that trading can boost returns, he made the following response:
I could understand that an institution might want to bridge both businesses. If someone like Deutsche Bank were to be only a commercial bank it would be a quite different entity. They’ve used that investment bank to change their earnings profile and their ROE [return on equity] targets. They have a 20 per cent target for ROE.* You could not achieve that in Europe with a commercial bank. You have to get heavily into the markets to imagine getting those kinds of returns.
I think the industry would be healthier if instead of looking at returns they look at p/e [price to earnings] ratios. The more you become a trading organistion, the less your p/e. You should aspire to be like Coca-Cola and have a 20 times p/e.
Obviously the numbers are approximate, and the figures for Deutsche need to be updated. To be more precise, Deutsche under its former CEO Josef Ackermann had a 25 per cent “pre-tax ROE”, which our banking editor Patrick Jenkins suggests would be more like 16 or 17 per cent under German taxes. At present, Deutsche’s ROE, which varies considerably from quarter to quarter, is more like 12 per cent. But the validity of Mr Reed’s point is unaffected, as is clear from this chart. Coke is the blue line here (note Citi’s price/earnings ratio went almost to infinity as it was seen returning from loss to low earnings in 2010). Aside from the rude interruption of the great financial crisis, the point stands that the market will pay a much higher multiple for the earnings of a consumer branded company that it will pay for the earnings of a universal bank.
Note: Citi high PE reflected negative and then v low earnings
There then comes the issue of whether Glass-Steagall or something like it should be reinstated, forcing commercial banks to divest their trading arms. Banks have lobbied fiercely against this. Mr Reed suggests that this is against the public interest: Read more