Notable #1
Posted on September 4, 2007 by Richard Beddard
Filed Under Investing, Markets |
State of the market
The Zopa blog does a good job explaining how cash from UK banks is funding defaulting US ’supbrime’ mortgages.
If Central banks bail out the debt market, they’ll keep on trading lemons, says Martin Wolf.
David Templeton says that while finance was the worst performing sector in August, insiders bought more stock in financial companies than any other.
MFI Diary says margin debt was at an all-time high in July, forcing traders to sell stocks to meet margin calls.
The August sell-off doesn’t qualify as a correction, let alone a crash, says the New York Times.
Andrew Smithers says balance sheets aren’t in good shape because companies increasingly rely on debt and off-balance sheet financing. Meanwhile ‘mark to market accounting’ inflates the value of assets on balance sheets when prices are high, but will expose weak balance sheets when prices fall.
Value shares led the recent sell-off, says the Economist. Computer-driven quantitative funds that had loaded up on value shares tried to dump them at the same time, turning them into (negative) momentum stocks.
The Economist Intelligence Unit’s free 42 page report (PDF) on the long-term impact of the debt crisis on the global economy concludes: “The main risk to the world economy is a deflationary spiral in asset prices”, but says there is a 60% probability it will be contained by “timely monetary policy action.”
The anonymous chief executive of an unnamed high street retailer warned his board of a “prolonged period of very sluggish growth” caused by decelerating growth in credit and employment, potential falls in property prices, and potential rises in inflation and interest rates.
The Times comments on grain stocks, at their lowest level for 25 years: “The basic ingredients of prosperity in developed countries — cheap food and cheap fuel — are no longer guaranteed.”
The way of the market
James Montier, author of two books on behavioural finance, says index investing isn’t passive, and that the movement of stocks into and out of indexes destroys value.
Robert Schiller, a professor at Yale University, says the market is inefficient but the WSJ blog doesn’t think he can prove it.
Mohnish Pabrai says price volatility isn’t a proper measure of risk, which is the permanent loss of capital or business impairment.
Jean-Marie Evaillard says value investing is so difficult (PDF), because you have to be willing to suffer pain.
Net-nets, the ultimate bargain stocks, explained on the Motley Fool.
Tweedy Brown documents “What has worked in investing” (1992, 53 pages, PDF), concluding that value investing works. That’s buying shares in companies with low prices relative to the past, their book value, and earnings. It’s especially true of smaller companies, and where insiders are buying.
Some fun
John Kay says the latest crop of ‘How to’ business books by TV entrepreneurs is inspirational, not educational.
Stumbling and Mumbling says foreign players in the Premiership aren’t stifling native talent, the reason there are so many foreigners is there isn’t much English talent.
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3 Responses to “Notable #1”
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Thanks for the selection of links Richard.
Today on the BBC morning program they actually put the problem of debt in Britain as their top story over the Madeleine McCann story, which I thought was surprising. I know that extremely positive financial news in the mainstream press herald’s imminent disaster in the financial markets. However I cannot remember what extremely negative news heralds. Does ANY significant financial news reaching the mainstream herald a general problem?
Hi Robin,
Hopefully it heralds the end of the sell-off. I think it’s interesting how the story has developed…
At first the big question was “what’s going on?”
Then it was “is it [subprime] significant?”
Since we’ve known about ‘conduits’ and ’sivs’ that own the subprime debt, and the banks’ obligation to fund them and unwillingness to fund each other, which all seems like bad news, the stock market has generally gone up.
How come the stockmarket’s going up now the really bad news is coming out? I’d suggest two reasons. First the City assimilated the information (i.e. worked out what is going on) quicker than the media. It seems to have decided the falls in August had more than discounted the crisis. Second, now the media understands the story its sensationalising it! Just a theory
It sounds like you’re thinking on similar lines…
Hi Richard,
I really do not know what to think to be honest. The market could go either way right now, what with all the bad data coming out of the US. However, my program says that there is some upward momentum again, so I have moved some of my cash back into the market.