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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

Elektronsko sporocilo je pregledano z antivirusnim programom.

 

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Even as GDP "surprises" Goldman Sachs to the upside, courtesy of some inventory build that only the government is seeing, and which completely skipped all the regional Fed reports, the market continues being stuck in an "sideways is up" mode, where any major economic upside surprise is a solid case for the Fed finally raising rates (yeah right). Yet the markets continue being on a good news is good news and bad news is even better news, roll.

So as we digest the GDP report, here are the latest observations from Soc Gen's Albert Edwards, who is not sharing any of the optimism generated courtesy of Goldman's 24-hour GDP reveral call.

One of the key conclusions from our late-1996 Ice Age thesis was that once the bubble burst, the close 35-year positive correlation between equity and bond yields would break down. This relationship had persisted for so long that it had become ingrained in investor psychology.

The 35-year period could be divided into two phases. The 1982-2000 equity bull market had largely been driven by PE expansion (not profits), which in turn had been driven by lower bond yields and lower inflation. Conversely, in the dismal years, the Dow went sideways for 17 years between 1965-82 as profits growth was wholly offset by multiple compression - driven this time by higher bond yields and higher inflation. Indeed, throughout this 35-year period, ?bad? economic news was generally good for equities as it drove bond yields lower and PEs higher. Equities had only a very loose relationship with the profits cycle.

We knew though from Japan that in a post-bubble world, once bonds and equities had decoupled, that the equity market would mirror the economic and profits cycle. And so, despite Japan's structural equity bear market, one could enjoy numerous 50%+ rallies if one invested as the cyclical lead indicators bottomed out. Conversely one should have ALWAYS sold when these same lead indicators peaked out. After recent massive cyclical gains in equities, that extremely dangerous topping out phase looks as if it has begun (see below).

We have long advocated that in a post-bubble world, investors could participate in explosive upside equity rallies driven by decent economic data and an underlying improvement of profits. We saw many of these rallies in the Nikkei over Japan?s lost decade. And even if one believed, correctly as it turned out, that each 50% rally would wither away, it would be simply daft not to participate in these policy-induced cyclical rallies.

Hence the explosive rally in the equity markets this year should not have come as a surprise to our readers. The cyclical indicators after all turned up around December time (for the ECRI and the Conference Board) and a touch later for the OECD leading indicator (see chart  below). But, having flagged up so strongly that one should tactically become a buyer of equities onthe upturn of these indicators, I failed to follow my own advice! To be perfectly honest, as the market powered ahead, I, like so many others, waited for the pull-back that never arrived. Do I feel like a grade 1 moron? Yes, I most sincerely do. Should I be beaten mercilessly to within an inch of my miserable life? Definitely.But I remain convinced we are still in a structural bear market and that this economic recovery rests on such shallow foundations that it will be washed away by the first moderate wave.

Many clients and salespersons point out though that lead indicators, including the ECRI, suggest instead that a traditional V-shaped recovery might unfold with 10%-plus quarterly GDP advances just over the horizon (see chart below).

And some observations on cyclical feedback loops that impact the thinking of both consumers and analysts:

I could be mean of spirit and point out that many of these proprietary lead indicators do actually include the equity market itself and so buying equities because the lead indicator is rising may be an entirely circular argument; but I think that is wrong. Indeed the tendency of analysts to upgrade their eps forecasts has been a pretty good sign a real economic recovery is underway (see chart below). My colleague, Andrew Lapthorne, monitors these data closely on a weekly bottom-up basis (as opposed to the top-down data below) and publishes these regularly in the extremely useful Global Equity Market Arithmetic document which comes out first thing every Monday morning ? link. This is worth getting.

If in the Ice Age, post-bubble world, the equity market is far more connected to the cycle (see chart below), we should be very aware of possible cyclical turning points. They say the trend is your friend until it hits a bend. Beware, we may have just hit one.

http://www.zerohedge.com/article/albert-edwards-trend-your-friend-until-it-hits-bend

Pomislim, preden natisnem. Vem, zakaj!

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

Elektronsko sporocilo je pregledano z antivirusnim programom.

 

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It is not for a lack of cash that companies are failing to invest; it is because profitable conditions do not exist. The biggest corporations have found it easier to borrow money than during the earlier credit squeezes, but those that have raised funds are not investing them. According to Dealogic, only six of the 100 largest US bond issues in 2009 gave investment, capital expenditure or R&D as the reason for obtaining additional money. Instead, companies are mainly seeking to shore up their balance sheets and possibly hoard to weather another downturn. Or, they plan to use the money for acquisitions – which are more likely to reduce rather than add to overall investment (8).

It is the lack of investment in the real economy that is behind the rise in the Dow and other financial markets. Liquidity created by the Federal Reserve and other money pumped into the economy by the government does not have profitable investment outlets. The cheaper money is instead flowing into stocks, bonds and commodities, pushing speculative gains higher and re-starting an asset bubble.

http://www.spiked-online.com/index.php/site/earticle/7603/

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

Elektronsko sporocilo je pregledano z antivirusnim programom.

 

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Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.

It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.

After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.

http://www.nytimes.com/2009/03/27/opinion/27krugman.html

---

Pomislim, preden natisnem. Vem, zakaj!

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

Elektronsko sporocilo je pregledano z antivirusnim programom.

 

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Short View: Fund manager nirvana

By John Authers, Investment editor

Published: October 19 2009 18:34 | Last updated: October 19 2009 22:31

This is a rally for everyone to enjoy. The raw numbers are good enough, with a rebound of more than 50 per cent in virtually all the world’s large stock markets since March, but the average stock has comfortably beaten the market.

The equal-weighted version of the S&P 500, in which each company accounts for 0.2 per cent, regardless of its size, has far outshone the version weighted according to market value. It has gained 88 per cent since the March low; the main S&P is up “only” 60.3 per cent in the same time. So the average stock has beaten the market by a huge margin. 

 

Meanwhile, expensive stocks, as measured by price/earnings multiples, are beating cheap stocks – showing strong momentum behind the stocks that look like winners.

As measured by Aronson Johnson + Ortiz, a Baltimore fund manager, expensive stocks have beaten cheap stocks by more than 10 per cent since May, their most significant outperformance since markets rebounded after the tech bust in late 2002. In the past, such outperformance has been a good warning sign of a bear market or correction to come. 

 

For the time being, this market is nirvana for the long-suffering workers in the maligned industry of active fund management. When hot stocks with high multiples do best, and when most stocks beat the market, beating the benchmark gets easy. If the benchmark itself has a historic rally, so much the better.

The genuinely strong results emanating from corporate America are propelling the market further, and other positive forces will continue for a while yet.

The performance that active equity managers will be able to boast about early next year could easily bring a new wave of money into stocks.

But at some point in the near future, this market will need a drastic correction. The money that has entered the market in the past few months has been smart so far – will it be smart enough to get out in time?

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

Elektronsko sporocilo je pregledano z antivirusnim programom.

 

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in še en dober odziv

According to Calvin Trillin (or, more accurately, the probably-at-least-semi-fictional interlocutor he meets at a bar in Midtown), the financial crisis was caused by smart people going to work on Wall Street. In the old days, the story goes, it was the lower third of the class that went to Wall Street, and “by the standards that came later, they weren’t really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn’t feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht.”

Then, however, as college debts and Wall Street pay grew in tandem, the smart kids started going to Wall Street to make the money, leading to derivatives and securitization, until finally: “When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was.”

It’s a cute story. But there may be an element of truth to it. In their well-known paper, “Wages and Human Capital in the U.S. Financial Industry: 1909-2006,” Thomas Philippon and Ariell Reshef measured the relative wage and relative educational levels of workers in the financial sector over the last century. The picture looks like this:

The relative wage I knew about — that’s something we also charted in our Atlantic article. The relative education I did not know about (although there was lots of anecdotal evidence).

Now, Philippon and Reshef calculate relative education using the share of workers with more than a high school education; the left axis is the difference between this share in the financial sector and in nonfinancial industries. So all college students are treated equally — there’s no differentiation by where you went to college or how you did there. But there’s no reason not to think that, as finance became more complicated and required more math aptitude (see Figure 3 in the paper), the level of academic achievement went up as well.

I read somewhere that of the CEOs of the largest banks, only Vikram Pandit at Citi was a true “quant,” and he only came in when Citi bought his hedge fund in 2007, after the bulk of the damage was done. (I’m not endorsing Pandit’s job as CEO, only saying that the mess was there before he arrived.) So there probably was this situation where the executive ranks were filled with old-style relationship-builders and dealmakers, and the increasingly quantitative traders were doing things they didn’t understand. A similar story has been told about Salomon under John Gutfreund in the 1980s (and LTCM under John Meriweather in the 1990s).

Technology firms also face a similar problem. In technology, as in most businesses, the way to make it to the top is through sales, so you end up with a situation where the CEO is a sales guy who has no understanding of technology and, for example, thinks that you can cut the development time of a project in half by adding twice as many people. I have seen this have catastrophic results. Even when you don’t have the generational issue that Trillin talks about, the problem is that the sociology of corporations leads to a certain kind of CEO, and as corporations become increasingly dependent on complex technology or complex business processes (for example, the kind of data-driven marketing that consumer packaged companies do), you end up with CEOs who don’t understand the key aspects of the companies they are managing. And the underlying problem is that, for all the blather that CEOs and boards spit out about succession planning and the importance of people, the fact remains that the market for CEOs is deeply flawed, as shown for example by Rakesh Khurana.

By James Kwak

http://baselinescenario.com/2009/10/14/calvin-trillins-theory/#more-5229

From: Bodnaruk Darko
Sent: Friday, October 16, 2009 12:08 PM
To: Golob Nejc; Jagarinec Primož; Kovač Bojan (Posl. za upravljanje s portfelji); Lavrič Maja (Posl.za upravljanje s portfelji); Mataj Aleš; Pust Tine; Rigelnik Matej; Žužek Dušan
Cc: 'tomaz.beja@gmail.com'
Subject: [Zanimivost] Op-Ed Contributor - Wall Street Smarts - NYTimes.com

 ena odmevna zgodbica...

Op-Ed Contributor

Wall Street Smarts

By CALVIN TRILLIN

Published: October 13, 2009

 

“Absolutely not,” he said. “I can buy my own drinks. My 401(k) is intact. I got out of the market 8 or 10 years ago, when I saw what was happening.”

He did indeed look capable of buying his own drinks — one of which, a dry martini, straight up, was on the bar in front of him. He was a well-preserved, gray-haired man of about retirement age, dressed in the same sort of clothes he must have worn on some Ivy League campus in the late ’50s or early ’60s — a tweed jacket, gray pants, a blue button-down shirt and a club tie that, seen from a distance, seemed adorned with tiny brussels sprouts.

“O.K.,” I said. “Let’s hear it.”

“The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street.” He took a sip of his martini, and stared straight at the row of bottles behind the bar, as if the conversation was now over.

“But weren’t there smart guys on Wall Street in the first place?” I asked.

He looked at me the way a mathematics teacher might look at a child who, despite heroic efforts by the teacher, seemed incapable of learning the most rudimentary principles of long division. “You are either a lot younger than you look or you don’t have much of a memory,” he said. “One of the speakers at my 25th reunion said that, according to a survey he had done of those attending, income was now precisely in inverse proportion to academic standing in the class, and that was partly because everyone in the lower third of the class had become a Wall Street millionaire.”

I reflected on my own college class, of roughly the same era. The top student had been appointed a federal appeals court judge — earning, by Wall Street standards, tip money. A lot of the people with similarly impressive academic records became professors. I could picture the future titans of Wall Street dozing in the back rows of some gut course like Geology 101, popularly known as Rocks for Jocks.

“That actually sounds more or less accurate,” I said.

“Of course it’s accurate,” he said. “Don’t get me wrong: the guys from the lower third of the class who went to Wall Street had a lot of nice qualities. Most of them were pleasant enough. They made a good impression. And now we realize that by the standards that came later, they weren’t really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn’t feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht.”

“So what happened?”

“I told you what happened. Smart guys started going to Wall Street.”

“Why?”

“I thought you’d never ask,” he said, making a practiced gesture with his eyebrows that caused the bartender to get started mixing another martini.

“Two things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years they’d have so much money they could then become professors or legal-services lawyers or whatever they’d wanted to be in the first place. That’s when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. That’s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.”

“But you still haven’t told me how that brought on the financial crisis.”

“Did you ever hear the word ‘derivatives’?” he said. “Do you think our guys could have invented, say, credit default swaps? Give me a break! They couldn’t have done the math.”

“Why do I get the feeling that there’s one more step in this scenario?” I said.

“Because there is,” he said. “When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that. All of that easy money had eaten away at their sense of enoughness.”

“So having smart guys there almost caused Wall Street to collapse.”

“You got it,” he said. “It took you awhile, but you got it.”

The theory sounded too simple to be true, but right offhand I couldn’t find any flaws in it. I found myself contemplating the sort of havoc a horde of smart guys could wreak in other industries. I saw those industries falling one by one, done in by superior intelligence. “I think I need a drink,” I said.

He nodded at my glass and made another one of those eyebrow gestures to the bartender. “Please,” he said. “Allow me.”

Calvin Trillin is the author, most recently, of “Deciding the Next Decider: The 2008 Presidential Race in Rhyme.”

http://www.nytimes.com/2009/10/14/opinion/14trillin.html?_r=1&em

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

Elektronsko sporocilo je pregledano z antivirusnim programom.

 

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Economist o mojih priljubljenih medvedih (Edwards, Rosenberg, Roubini...).
Nič novega, ampak po Economistovo lepo predstavljeno bistvo njihove teze.

Unrepentant bears

The end is nigh (again)

Oct 1st 2009
From The Economist print edition

Pessimistic commentators remain anything but convinced by the stockmarket rally

Illustration by Belle Mellor

ALBERT EDWARDS first made a bearish call on the American stockmarket at the end of 1996. As an investment-bank strategist (then at Dresdner Kleinwort, now at Société Générale), he was subjected to a fair degree of ridicule over the next decade, particularly during the dotcom boom. But in the long run Mr Edwards turned out to be right, with last year’s financial calamities his apparent vindication. Had investors sold the S&P 500 index on his recommendation, bought Treasury bonds and held them for the past 13 years, they would have received a higher return.

But in recent months stockmarkets have staged a remarkable rally: the MSCI world index has climbed by 64% since March (see chart 1). Some forecasters say cheerily that the world economy is likely to make a sprightly recovery. Mr Edwards, though, remains bearish. He is one of a stubborn bunch of pessimists who believe that share prices are overvalued and the economic recovery is built on sand. These unrepentant bears are used to betting against the consensus and are not put off by the rally. “I am willing to be patient,” says another notable pessimist, David Rosenberg of Gluskin Sheff, a Canadian asset-management firm. Lately the bears have been encouraged by disappointing American data, for example on durable-goods orders and new-home sales.

The best-known sceptic is Nouriel Roubini, an economics professor at New York University’s Stern School of Business, unimaginatively dubbed Dr Doom (the moniker was first assigned in the financial world to Henry Kaufman, a bond strategist at Salomon Brothers in the 1970s and 1980s). Back in 2005 and 2006, Mr Roubini sounded warnings about the property bubble and the dangers of the American current-account deficit. When the credit crunch hit in 2007, he was treated as a prophet and quickly became a fixture on the conference circuit, delivering jeremiads in heavily accented English (he was born in Turkey and grew up in Iran and Italy).

Mr Roubini’s latest pronouncement, made in early September, was to warn of a slow, U-shaped economic recovery, with below-trend growth for two to three years. (Optimists predict a V-shape, with recovery as rapid as the slide into recession.) He fears that surplus economies like China and Japan will not boost consumption enough to make up for the downturn in American consumer spending. 

Shock therapy

In general, the bears take the line that the unprecedented actions of governments and central banks (enormous fiscal deficits, near-zero interest rates and “quantitative easing”) may have jolted the global economy temporarily into life, but they have not resolved the underlying causes of the mess. In particular, they worry that consumers and companies remain excessively indebted, and that deleveraging will quickly stamp out any recovery.

Their usual template is Japan. Its example inspired Mr Edwards to come up with the “Ice Age” thesis in the 1990s as he mused on how assets should be priced in a world of low nominal GDP growth. He thought that the dividend yield on American and European equities would eventually exceed the yield on government bonds. This had come to pass in Japan in the late 1990s and again in the early 2000s, but had not occurred in most Western countries since the late 1950s. It implied a huge derating of shares.

“The bulls’ view of the world was that low bond yields and low inflation should cause high price/earnings ratios,” explains Mr Edwards. But in his view the bulls were ignoring the corollary; that low inflation would lead to low earnings growth. When investors cottoned on to the subdued outlook for profits, as they did in Japan, the effect on share prices was dramatic.

Mr Edwards admits that he consistently underestimated the determination of the authorities to prevent a bear market. As they cut interest rates in response to each market wobble, the result was a series of bubbles, first in technology shares and then in housing.

The other bears agree, and see the recent market rally as simply the authorities’ latest attempt to prop up asset prices. George Magnus, an economic adviser at UBS, a big Swiss bank, says: “This recovery is entirely dependent on the unprecedented largesse of governments and central banks. Things may be better than last autumn when there was an imminent threat of a financial collapse but the recovery is built on very short-term foundations.” In particular, businesses emptied their inventories last year; manufacturing has enjoyed a rebound in recent months as companies have stopped slashing stocks, but Mr Magnus argues it is not self-sustaining.

Mr Rosenberg says government incentive schemes have been behind the housing-market rally and the jump in car sales. Activity was similarly boosted in the fourth quarter of 2001 after the Federal Reserve slashed interest rates in response to the terrorist attacks on New York and Washington. But he points to the sharp slowing of American car sales in September after the cash-for-clunkers programme ended and thinks the same may occur in housing when a subsidy to first-time buyers expires at the end of November.

Because the recovery is so dependent on government support, the bears think it will soon peter out. Mr Edwards worries that the economy will start to turn down in the first half of next year. Mr Magnus thinks the global economy might be able to eke out a meagre growth rate but “if you don’t have credit growth operating, it is hard to sustain spending while unemployment is still rising.”

The bears argue that although governments may have stabilised the banking system, they have not been able to restart private-sector lending. In America bank lending has been falling rapidly over the past three months while in the euro zone broad-money growth has slipped to just 2.5% year-on-year (see the left panel of chart 2). In recent months consumers in Britain and America, two of the most heavily leveraged economies, have been repaying debt (see the right panel).

The problem, according to Mr Magnus, is that household balance-sheet problems tend to last. “They are often linked to property and property busts which take years to play out,” he says. Mr Edwards thinks the outcome will be a reverse of the 1990s boom, when rising asset prices boosted consumer confidence, spending and the economy. Now that share and house prices have dropped, consumers will increase their savings and reduce consumption, weighing the economy down.

The debt problem will act as a permanent drag on the hopes for recovery. Japan had lots of economic rebounds and stockmarket rallies in the course of the 1990s. Over the entire decade, however, the economy was sluggish and investors lost a large proportion of their money. The Nikkei 225 average, Tokyo’s best-known stockmarket measure, is still only a quarter of its peak, reached at the end of 1989.

The bears think many Western economies will face a similar period in the doldrums. “My forecast is not a V-shaped recovery or a W [a second dip, then recovery] but a long series of Us with periods of expansion followed by contraction,” says Mr Magnus. “There is a lot of volatility but the economy doesn’t really go anywhere.”

Just as monetary easing has not resulted in any surge in lending, the bears also think the fiscal element will run out of steam. “The fiscal stimulus has to end, because we can’t keep expanding the deficit,” says Mr Edwards. Either voters will be unwilling to sanction higher deficits, or the markets will take fright and push up bond yields, killing the recovery by a different method. British political debate is already dominated by the need to cut spending and raise taxes.

A rally too far

Given this outlook, the bears believe stockmarkets have got far ahead of themselves: the S&P 500, having sunk below 680 in early March, stood at 1,057 at the end of September. “If the S&P 500 was at 840-860, I would say this is a natural market reaction to the end of a recession, but let’s get a grip,” says Mr Rosenberg. “The market is up 60% from the lows, not 20%. Normally, it takes three years of recovery before the market is up 60%. The rally has occurred while the American economy has shed 2.5m jobs. This market is pricing in 4% economic growth, but what if there’s only 1-2% growth next year?” he asks.

In addition, Mr Rosenberg says investors should be suspicious that the recovery is so dependent on low interest rates and government action. “What is the appropriate multiple that investors should place on earnings that are being propped up by the government? All asset prices are going up together, from gold to Treasury bonds. People say the rally is driven by liquidity. But when every analyst is talking about liquidity you know the top is near,” he argues.

Conventional analysts tend to argue that on the basis of profit forecasts for 2010, stockmarkets are reasonably valued. But bears doubt that profits will rebound so dramatically. They tend to prefer longer-term measures. Andrew Smithers of Smithers & Co, a consultancy, produced a timely book in 2000 arguing that Wall Street was in bubble territory. On his two favourite measures, the q ratio (which compares share prices with the replacement cost of net assets) and the cyclically adjusted price/earnings ratio (which averages profits over ten years), the American market is still overvalued, by 41% and 37% respectively. As chart 3 shows, Wall Street got back to an average valuation by the March lows, but never looked particularly cheap by historical standards.

The bears quoted above are all academics or strategists who can afford to take a detached view when the markets move against them. Mr Magnus is a veteran observer who has seen a few market cycles. Mr Rosenberg has escaped from the optimistic consensus at Wall Street (he worked until last year at Merrill Lynch, which used a bull as a corporate symbol). Mr Edwards has the security of regularly finishing top of polls of London’s favourite strategists, despite (or perhaps because of) his bearish views. Mr Smithers runs his own firm.

Things are rather different for Bill Fleckenstein, who runs a hedge fund at his firm, Fleckenstein Capital. A noted sceptic on the dotcom and housing booms, he closed his short-only fund (which bet on falling prices) in 2008. “I always knew the response to the recession would be printing money and didn’t want to be short any more,” he says. “If they print enough money, stocks can go anywhere they want to.” Crispin Odey, a London hedge-fund manager, has expressed similar views. But this is tactical, rather than strategic, bullishness. Mr Fleckenstein thinks the authorities’ tactics are eventually doomed to failure. “You cannot print your way to prosperity,” he says. In that sentence, he sums up the bearish case.

http://www.economist.com/displaystory.cfm?story_id=14541030

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The last two earnings seasons, after global stocks hit rock bottom in March, were excuses for big rallies. The S&P 500 rose 11 per cent while first-quarter earnings were announced, and 15 per cent in the second quarter season, according to Goldman Sachs. Without those earnings season gains, stocks would be down for the year.

This phenomenon has been around all decade. Research last year by Andrew Lapthorne of Société Générale in London showed that, since 2000, the average annualised performance during the first, second and third quarter reporting seasons (the fourth quarter's season tends to go on for longer and its effect is more diffuse) had been a 2.3 per cent gain. For all times outside these periods, the S&P had on average suffered a 1.2 per cent annualised loss.

This shows the extent of corporate "earnings management". Companies have been good at setting the market's expectations at a level that they can exceed. The market makes most of its progress when these manufactured "surprises" are revealed.

There is every reason to believe that this trend will repeat itself over the next few weeks. The bar for this quarter is low; brokers are braced for a decline of 25 per cent in earnings compared with a year ago, according to Thomson Reuters. And companies have made fewer negative announcements than usual ahead of this reporting season, implying that fewer have bad news to reveal.

So there is every chance this season will help to extend the rally in stocks.

But there are some important differences from the last two earnings seasons. They showed that companies had protected profits better than many had expected, by savage cost cuts. Those cost cuts, arguably an overreaction to last year's Lehman debacle, in turn helped ensure the sudden fall in global economic activity.

Bad economic times can increase companies' pricing power and their negotiating power with their employees.

The tricky part will be to increase their revenues. So investors are now looking to be positively surprised by corporate revenues. After falls of 14 and 17 per cent in the past two quarters, consensus forecasts suggest that sales have fallen 15 per cent in the third quarter.

And yet brokers also expect earnings to start rising at a clip of more than 30 per cent in the new year. This implies either that margins will improve or that revenues will have to boom.

As the chart shows, margins are already far above historical norms, so this looks like a stretch.

http://www.ft.com/cms/s/0/f2657d92-b534-11de-8b17-00144feab49a.html?nclick_check=1

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To elektronsko sporocilo in vse morebitne priloge so poslovna skrivnost in namenjene izkljucno naslovniku. Ce ste sporocilo prejeli pomotoma, Vas prosimo, da obvestite posiljatelja, sporocilo pa takoj unicite. Kakrsnokoli razkritje, distribucija ali kopiranje vsebine sporocila je izrecno prepovedano. Ni nujno, da to sporocilo odraza uradno stalisce druzbe.

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