FT Long Short

Dax redefines “record high”

James Mackintosh — Thu, 09 May 2013 22:05:44 +0000

There’s been quite a bit of excitement about the Dax hitting a record high this week, with the Wall Street Journal even splashing its European edition on it. The chart looks impressive:

Charting not-so-high-yield bonds

James Mackintosh — Thu, 09 May 2013 08:50:30 +0000

There’s a lot of excitement now junk bond yields (at least on one index) have dropped below 5 per cent for the first time. What to call them, for one thing. “High yield” no longer seems appropriate, although frankly “junk” was always better, and remains just as good. The fact that they barely ever default any longer, suggesting on its face that they are no longer junk, is yet another problem – as John discusses with Deutsche Bank’s Jim Reid in today’s Note video.

But hold on a minute. It is true yields have plunged. But the following charts show that junk bonds are much shorter dated now than they were, so the drop in yield is not as dramatic as it looks (if you lend someone money for less time, you should expect a lower yield as the loan is less risky). The average duration on the index is at a record-low three and a half years (modified duration is a tad longer, but still a record low).

On the other hand, investment-grade bonds (and top-grade junk too) have longer maturities – in the case of investment grade, the longest since 1980 at more than seven years. So the ultra-low yields (just over 2.5 per cent) of these better-quality bonds are even lower when adjusted for the risk of lending money for longer. Chart-fest after the jump.

Now then, investor, do you love your country?

James Mackintosh — Fri, 03 May 2013 13:04:31 +0000

Markets aren’t known for their patriotic fervour. Populated by cynics and motivated by money, there is little reason to expect local markets to support their national governments – particularly in the eurozone, where the response by the wealthy in crisis-hit countries has been to ship their cash to Germany or the UK.

But hang on! Perhaps brokers are more patriotic than popularly thought: it turns out that analysts tend to recommend shares in companies from their countries.

A nice piece of work by Charles de Boissezon at Société Générale‘s global equity engineering and advisory unit looked at broker recommendations on German and Spanish blue-chips, the two markets tending to be reasonably domestically-exposed.

Not surprisingly there are more buy recommendations on German than Spanish shares, and more sells on Spanish.

But the breakdown is revealing: analysts at German brokers are much more positive about German companies than analysts working for Spanish brokers, and vice-versa:

Excel, New Zealand and Reinhart & Rogoff

James Mackintosh — Wed, 17 Apr 2013 11:29:44 +0000

Economic bloggers love Excel, so they have leaped on the discovery that Ken Rogoff and Carmen Reinhart, two of the most famous economists out there, aren’t very good at spreadsheets.

The story is told elsewhere in detail, and the academic paper debunking R&R’s maths is full of delicious examples of mistakes (look at footnote 6 for a lovely example).

The gist of it is that enormous weight is given to one year in New Zealand, 1951, when R&R recorded GDP falling by 7.6 per cent.

This year is given a lot of weight for three reasons: First, four previous post-war years were excluded. Second, the average was worked out by producing an average for each country, then averaging those. The combined effect was to give one year in NZ the same weight as 19 years of Greece. Third, a whole bunch of other countries were excluded by mistake.

R&R admit the Excel error in excluding other countries, but are sticking to their other exclusions (because their data on debt-to-GDP had gaps at that point), and to their method of averaging. They also point out that the broad conclusion, that growth slows as debt rises, is still supported by the data, just not so dramatically.

The New Zealand figure is intriguing, though. The 7.6% drop in GDP appears to come from a series compiled by the late Angus Maddison, the great economic historian.

But 1951 was a very strange year for the Kiwis, and the falling GDP then is not an example of weak growth with high debt. The price of wool tripled in 1949-50, and since it made up about half of the country’s exports this boosted GDP enormously. When prices fell back, GDP fell again. Government debt really wasn’t an issue.

Good as gold

James Mackintosh — Mon, 15 Apr 2013 11:20:47 +0000

Spandau Ballet’s 1983 anthem Gold could be the national anthem for the world’s inflationistas.

Price action today suggests they should be looking back a few years, perhaps to the Boomtown Rats in 1979, with I Don’t Like Mondays.

The woes of gold

Financial Times — Fri, 05 Apr 2013 10:35:29 +0000

Stephen Foley, the FT’s markets correspondent, says a number of forces have combined to sour the outlook for the precious metal, and none of them seem likely to abate any time soon.

Getting high on stock market charts

James Mackintosh — Thu, 28 Mar 2013 17:09:57 +0000

Cue great excitement. All those pre-written articles and commentaries on the S&P 500 passing its previous closing highs can be rolled out, and there is something for the 24-hour TV to talk about other than the rather small queues at banks in Cyprus.

Just a couple of small flaws:

Hard hat time for eurozone banks

Janina Conboye — Thu, 28 Mar 2013 13:01:40 +0000

A suggestion by Dutch finance minister Jeroen Dijsselbloem that the Cyprus deal could mean depositors at troubled banks elsewhere in the eurozone also suffering has pushed banks back into bear territory. James Mackintosh, investment editor, warns of the risk of a vicious downward spiral unless Europe and the European Central Bank can reflate peripheral economies.

Bond proxy investment block

Financial Times — Wed, 27 Mar 2013 18:39:34 +0000

The S&P 500 is gnawing at an all-time high. Bond proxy stocks are driving the rally and James Mackintosh, investment editor, warns that as companies opt for share buy-backs rather than reinvesting, future profits and investors will be the poorer.

Cyprus upends bank capital structure

James Mackintosh — Mon, 25 Mar 2013 12:36:18 +0000

Cyprus has finally struck a €10bn deal to become the fifth country “rescued” by the rest of the eurozone, after Greece, Ireland, Portugal and a special loan for Spain. Almost a third of the 17 countries in the single currency have now had to be rescued.

Unlike all the other deals, Cyprus gets immediate deflation, through heavy losses for depositors above €100,000 at its two biggest banks, Bank of Cyprus and Laiki.