Guest post by Doug Short.
Here is a summary of the four market valuation indicators I updated at the beginning of the month.
|● The Crestmont Research P/E Ratio (more)
● The cyclical P/E ratio using the trailing
● The Q Ratio, which is the total price of the
● The relationship of the S&P Composite to
To facilitate comparisons, I’ve adjusted the two P/E ratios and Q Ratio to their arithmetic means and the inflation-adjusted S&P Composite to its exponential regression. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I’m using as a surrogate for fair value. Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 34% to 50%, depending on the indicator. This is an increase from the previous month’s 33% to 46% range.
Biderman on the US corporate taxes.
The Unites States now has the highest corporate income tax globally. Congratulations. Corporate income tax is the worst, most capital and value destroying tax of all types of taxation. And we are the leaders.
To understand why corporate income tax destroys capital over the long term; you need to first to understand that all there is in a corporation are people; nothing other then people managing and working at growing a business. A corporation is just the name of a group of people working together to provide goods and services for sale. This might be a shock to some, but all corporate employees pay income taxes on whatever they make. Similarly shareholders pay taxes on the income they get from a business via distributions. Video below.
Not even two years have passed, but majority have forgotten about the Flash Crash. With the markets having enjoyed a no volume melt up over the past months, it sure could get flashy if this market starts heading lower. The liquidity has just been drying up during this rally. With the low liquidity and depressed volatility levels, investors should recall what actually happened less than two years ago.
Jurre Herman, 11 year old boy, from Holland delivers the solution to the Eurozone problems, in the lucrative Wolfson economic prize. Easily explained graphics, shows how Greece should leave the Euro. Maybe he should be adding Spain to the chart? From the Guardian.
Herman explains: “All these euros together form a pancake or a pizza (see on top in the picture). Now the Greek government can start to pay back all their debts, everyone who has a debt gets a slice of the pizza.”
Showing an impressive understanding of economics, he goes on to say: “The Greek people do not want to exchange their euros for drachmas because they know that this drachma will lose its value dramatically.” To tackle this thorny issue, he plans to fine those Greeks hiding their euros or transferring them to other European countries, by doubling the amount of euros they tried to hide.
Some good points on the Spanish situation. From Macrobusiness.
The pain in Spain continues with the government releasing the country’s latest budget which has been described by some Spanish economists as ‘the most severe since Franco’:
Spain’s government has announced $36 billion in new budget cuts, as it attempts to reassure the European Union that it will not need a financial bailout.
The budget savings will take the form of a freezing of civil servant wages, ministerial spending cuts and new corporate taxes, announced Soraya Saenz de Santamaria, the country’s deputy prime minister, on Friday.
“The ministries will see an average reduction of 16.9 per cent … there will be adjustments of over 27 billion euros [$36 billion] through revenues and through spending,” she said, after she and her cabinet colleagues passed the draft budget at a meeting in Madrid.
“This government will not raise value added tax but is calling for an extra effort within corporate taxes,” she said. Overall, government spending cuts will amount to $22.7 billion.
The government has also decided to freeze civil servants’ salaries, but to maintain unemployment benefits and planned pension increases.
From the author of ”Currency wars; The making of the Next Global Crisis”, James Rickards. We advise everybody in reading the book, but here is a sample of the topics covered in the must read book. From a speech presented by Mr Rickards.
The blame game has only begun. The best defense is offense, as Rajoy blames Zapatero for the mess. Irrespective of who created the mess, Spain needs to start dealing with the deep problems the country faces. From El Pais;
Prime Minister Mariano Rajoy on Monday blamed the swingeing cuts in spending included in this year’s state budget on the errors of the previous administration, and argued that without the austerity drive Spain would face the same fate as Ireland, Portugal and Greece in needing a bailout.
The public deficit last year came in at 8.5 percent of GDP instead of the six percent pledged by the outgoing Socialist government. The Rajoy administration last Friday unveiled an austerity budget including savings of 27 billion euros, in order to meet the deficit target for this year of 5.3 percent of GDP.
“If the previous government had met its deficit target of six percent, the cuts would have been 18 billion euros less,” Rajoy told a meeting of his Popular Party’s executive committee.
|Another great insight easily explained by Nanex.
On Friday, Aug 5, 2011, we processed 1 trillion bytes of data for all U.S. equities, options, futures, and indexes. This is insane. A year ago, when we processed half of that, we thought it was madness. A year before that, when it was 250 billion bytes, we thought the same. There is no new beneficial information in this monstrous pile of data compared to 3 years ago. It is noise, subterfuge, manipulation. The root of all that is wrong with today’s markets.
HFT is sucking the life blood out of the markets: liquidity. It is almost comical, because this is what they claim to supply. No one with any sense wants to post a bid or ask, because they know it will only get hit when it’s at their disadvantage. Some give in, and join the arms race. Others leave.
Take the electronic S&P 500 futures contract, known as the emini, for example. This is, or used to be, a very liquid market. The cumulative size in the 10 levels in the depth of book was often 20,000 contracts on each side. That means a trader could buy or sell 20,000 contracts “instantly” and only move the market 10 ticks or price levels. Even during the flash crash, before the CME halt, when hot potatoes were flying everywhere, the depth would still accommodate an instant sale of 2,000 contracts.
Guest post by Vix and more.
If you thought the TVIX (VelocityShares Daily 2x VIX Short-Term ETN) story was behind us, you might want to think again.
No, I am not talking about the recent news that FINRA is “looking at the events and trading” associated with TVIX and more generally that the regulator has “a review under way looking at a host of issues relating to ETNs and other complex products.”
Instead, my interest is in the return of some meaningful premium in TVIX relative to its Intraday Indicative Value (a real-time estimate of an ETP’s fair value, based on the most recent prices of its underlying securities) during the last three days.
For some historical perspective, consider that in the months prior to Credit Suisse (CS) suspending creation units on February 21, TVIX typically traded at a premium of about 0.5% above its indicative value. After the creation units were suspended, the premium vacillated wildly (as seen in the graphic below), though for several weeks the premium was locked in a relatively narrow range of 10-20%. That premium over indicative value spiked to 89% on the day before the announcement that Credit Suisse was resuming creation units. Once that resumption of creation units was announced, the premium in TVIX fell all the way back to 2% in just three days, no doubt signaling to many that it would soon be business as usual in TVIX trading.
During the last three days, however, the TVIX premium is has remained largely in the 10-15% range, ending today at 11.4%.
Based on the Q4 Flow of Funds data, the Q Ratio at the end of 2011 was 0.87, which is 24% above the arithmetic mean. Now, as we start Q2 of 2012, the broad market is up about 12.9%, which means our estimate of the Q ratio moves higher. My estimate would put the ratio about 34% above its arithmetic mean and 45% above its geometric mean. Of course periods of over- and under-valuation can last for many years at a time, so the Q Ratio is not a useful indicator for short-term investment timelines. This metric is more appropriate for formulating expectations for long-term market performance. As we can see in the next chart, the current level of Q has been associated with several market tops in history — the Tech Bubble being the notable exception.