Remember the old man, Joe Granville? In March he predicted the Dow would fall 4000 points in 2012. People laughed at him back then…
Volume precedes price. It sure is happening in Spain, Italy, Eurostoxx and other indices. Has the time come to the US markets?
Repeat after me; volume precedes price.
Essential charts update below.
We will be back with a large chart update over the weekend.
Guest post by Azizonomics.
Central planning — like war — never changes. It has always been a powerful and effective way of achieving an explicit objective (e.g. building a bridge, or a road), but one that has has always come with detrimental side-effects. And the more central planners try to minimise the side-effects, the more side-effects appear. And so the whack-a-mole goes on.
This was true in the days of Rome, too.
THE high is over. The European Central Bank’s two long-term refinancing operations (LTROs) in December and February saw commercial banks borrow over €1 trillion ($1.3 trillion) of three-year money at the ECB’s main interest rate, which it had cut to 1%. Ostensibly a scheme to keep euro-area banks afloat, the LTROs also boosted flagging public-debt markets in the zone’s southern periphery, as banks used some of the cash to buy high-yielding bonds. That effect has faded.
Spain’s ten-year government-bond yield has been rising since the second tranche of three-year ECB cash was doled out. This week it reached almost 6%, the highest level since November (see chart 1). The U-turn owes a lot to the shifting dynamics of the euro-zone bond markets, which have also affected Italy. Missteps by Spain’s new government have not helped. Beneath all this lie deeper fears about Spain’s injured banks, the stringency of the government’s fiscal plans, and the impact of both on an already weak economy.
While there is a global China put, the white knight seems to be getting more tired by the day. With rising inflation and a slowing growth, things are about to get interesting in China. Growth slowed more than forecast last quarter in China as exports and domestic demand cooled, boosting pressure on Premier Wen Jiabao to loosen policy further and shore up expansion in the world’s second-biggest economy. Gross domestic product expanded 8.1 percent from a year earlier, the least in almost three years. Bloomberg video below.
The Trader has written extensively on the Spanish collapsing economy over the past year. With investors having shifted focus from the relatively small Greek problems, Spain is the new burning point, but we still feel few understand what is really about to happen in Spain and the domino that is about to hit the rest of Europe. Spain is the 12th largest Economy of the World. Unemployment is huge, growth is negative, the property market is rotten and the banking system is to put it mildly, “unhealthy”. The banking sector is holding black holes in the balance sheets, but few seem to be willing to understand this fact. Let’s see how long before something “big” happens in Spain.
Meanwhile here are some must see charts to enjoy by Scott Barber of Reuters;
By Neel Kashkari of PIMCO.
These Newtonian beliefs also affect how many people think about investing. “Mean reversion” is the investment world’s version of “what goes up must come down.” It’s usually a pretty good rule. Mean reversion suggested that the extraordinary price to earnings multiples of technology stocks in the late 1990s couldn’t last; they would eventually revert to historical average valuations. Similarly, mean reversion suggested that house price increases in the U.S. in the mid-2000s weren’t sustainable. They didn’t last either.
But is mean reversion always right? In 2000 mean reversion would have suggested the bull market for bonds would be over. Interest rates couldn’t stay low, let alone fall further, could they? But here we are in 2012 and we’re not predicting a bear market any time soon.
In tension with mean reversion is Newton’s First Law: A body at rest tends to stay at rest. In investment parlance there needs to be a catalyst to force the system to revert to the mean. Left alone, it may continue in its elevated state for a long time.
The timing of that reversion matters: Just because someone can identify a bubble doesn’t mean they can make money from their insight. People who shorted tech stocks too early may have lost a lot of money while the bubble kept expanding.