Guest Post by D Short.
The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. It’s a fairly simple concept, but laborious to calculate. The Q Ratio is the total price of the market divided by the replacement cost of all its companies. Fortunately, the government does the work of accumulating the data for the calculation. The numbers are supplied in the Federal Reserve Z.1 Flow of Funds Accounts of the United States, which is released quarterly.
The first chart shows Q Ratio from 1900 to the present. I’ve calculated the ratio since the latest Fed data (through 2011 Q3) based on a subjective process of extrapolating the Z.1 data itself and factoring in the monthly averages of daily closes for the Vanguard Total Market ETF (VTI).
We start the new year like we ended the old year: with a mixed sentiment picture. The Rydex market timer is extremely bullish, and this is a bear signal. The “dumb money” indicator is neutral and company insiders are as well. Overall, my interpretation is bearish. Sustainable price moves usually start when there are too many bears, and it is short covering that is the fuel that sparks a price rise. After the short covering subsides, sustainable price moves are typically heralded by having too many bulls willing to chase prices higher. Neither of these extreme conditions are currently present, and it is difficult to see the market embark on a sustainable price move in their absence. Lower prices would bring out more bears and this would be a precursor to a tradeble, sustainable rally. Higher prices should be supported by increasing number of bulls, and this would be a signal that a sustainable rally, that everyone so desperately wants, is unfolding. As stated above, I am betting that we will see lower prices before higher as there are few bears (i.e., no short covering) and as the time for the bulls to have taken the reigns of this market have long since past.
So the property sector in many of the PIIGS countries is under severe stress, but how are property proces actually behaving? Ireland, one of the ex Tiger economies is experiencing the sharpest drops ever. With properties in free fall mood, asking prices fell by 7.7% in the fourth quarter alone. Many are now entering negative equity, and we all know what that means. The hang over period has just started. From Finfacts Ireland:
Asking prices for Irish residential property across Ireland fell by an average of 7.7% in the fourth quarter – - between September and December – - according to the 2011 In Review report published by property website Daft.ie. This is the sharpest three-month fall in house prices to date and means that the percentage fall in prices over the course of 2011 was 18%, as large the fall seen in 2009. The average asking price is now just over €175,000, 52% below the 2007 peak of €366,000.
The year has started on a positive note. Bloomberg is picking up on the theme we outlined yesterday. There are some quite big numbers to refinance this year. Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year. The amount needing to be refinanced increases to more than $8 trillion when interest payments are included. Video below;
We have to agree with some of the emails we have received from our readers lately. Yes, the Eurozone is in a great mess, but countries like Portugal, Greece, Ireland are not of great importance to the World Economy. Investors have been focusing on the Euromezz, and seldom do we hear about the US debt nowadays. Let’s not forget, the US has now joined the 100% club, and counting. With interest rates at record lows, it is easy to forget about what would happens if interest rates start going up to a “normal” average. We doubt this time is different, and rates will stay low for ever….
Below are some charts from last year, still worth recalling.
It seemed like hardly a week went by in the latter half of 2011 without a counterintuitive story about how well the German economy was doing despite the euro crisis raging around it. Growth continued, private consumption was up and exports were strong.
2012 has started with another eyebrow raiser. On average in 2011, 41.04 million people in Germany were employed, the most ever since the country’s reunification in 1990. It was an increase of 1.3 percent over 2010.
That, though, might be the end of the good news for a while. It would appear that most in the country, led by Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble, believe that 2012 will be the year when Germany finally begins to feel the effects of the euro-zone crisis which chewed its way through much of the 17-member currency union in 2011.
Many pundits talk about volatility, Vix, fear etc without even having the slightest idea of what volatility is. Others explain complex matters in a complex way, so “ordinary” people don’t understand what these quants actually talk about. One of the brightest minds when it comes to volatility and good reports on volatility, is Marko Kolanovic of JPM. Below some thoughts on volatility for 2012, courtesy Mr Kalonovic.
In 2011 we witnessed two distinct market regimes: very low volatility in H1, and extreme correlation, poor liquidity and high volatility in H2. Escalation of European sovereign credit crisis in August caught investors by surprise, triggering a series of large risk on/off flows. The record drop in equity liquidity and the rise of cross-asset correlations effectively shut off equity markets for fundamental stock investors. In addition, derivative hedging flows at times overwhelmed liquidity, further adding to market volatility and correlation.
According to Dent the Demographics effect is about to kick in. Dent predicts S&P to fall 30-50% in 2012.
Jim O’Neill of GS is slightly more positive, and expects the market to go up 20%. Two rather different views below;
So, 2012 has just started. We are back to reality, and soon many Europeans will realize how bad things actually are. We have focused on Italy lately, but let’s not forget about the other countries of PIIGS.
Meanwhile, Portugal is feeling the pain. With the Portugese economy in free fall, tensions are building within the unemployed. Latest on the brain drain out of Portugal, the prime minister is urging people to emigrate in order to find a job. From Al Jazera;
The decision to leave one’s country “is not easy, it’s painful and difficult, and people don’t emigrate just because some political leader says they should,” said Peixoto, who described Passos Coelho’s remarks as “odd for a prime minister to make”.
Ana Maria Gomes, a member of the European Parliament, said that when she heard what he said, “I felt furious, because that is the last thing a prime minister should say.”
“Worse than feeling impotent is giving up, because no matter how complicated things are, we can and must pull out of this, because we have qualified young people, the result of the investment in education made over the last few decades,” said Gomes, one of the most prominent leaders of the so-called left wing of the Socialist Party.