Deflation seems to be the major threat right now. Reviewing history, suggests that the world suffrered deflation two times. The first time was during the 1930's and the second time was during the 1990's in Japan. We are likely to see the third time but the major difference this time is that all governments make tremendous efforts in order to reinflate the economy. This brings us against two scenarios.
Monday, December 29, 2008
Saturday, November 22, 2008
$700 Bn not enough? What about $5 trillion? What...still not enough?
This time I will be brief and its one of the few times that I will allow myself the empathy-induced weakness embedded when arguing morals.
Saturday, November 15, 2008
History in the making--A detailed and highly informative view.
I read the following from Global Research at
Tuesday, November 11, 2008
No light at the end of the tunel (?) by Ektoras
There’s no reason to pretend any more. The economic news that poured out during October suggests that the US economy is indeed in a recession and Europe is likely to follow. The upcoming news that refer to job losses clearly indicate what follows… A DEEP decline in corporate profits and possible losses; We should stop hiding and finally admit that losses will reach almost all types of companies and not only the automobile sector. It is funny that we need to start reading our university books again in order to find out which goods are determined as “Giffen Goods”... A good investment idea would be stocks of companies whose production is based on such goods. One should keep in mind that “Giffen Goods” have changed since the theory was established BUT the idea remains the same. On macro grounds now, the unemployment rate shot up to 6.5% and 8% in the US and EU respectively. Unfortunately this is a lagging indicator, so we should expect that it will increase in the near future. Emerged economies had not witnessed such unemployment figures since the early 1980s. The situation is worse for the emerging economies. As our demand dwindles for products, those jobs that were created in Asia and Eastern Europe over the last ten years, will be just that amount of foreign jobs that will be terminated. The US and the EU exported jobs and credit and now they will be exporting unemployment and financial instability.
Sunday, November 2, 2008
Monday, October 27, 2008
The black hole of (de) leveraging by Ektoras
As Krugman stated falling home prices lead to the feared phenomenon of “debt deflation.”
Friday, October 24, 2008
The next day (or there will not be one?) by Ektoras
The market is crashing.. What did you expect? At this moment there are many reasons for the markets to collapse. May be we don’t want to realize it but it is just right in front of us. The real economy will suffer. The next thing that one should expect now is that debt coming from shipping companies will not be repaid and that banks that are heavily exposed to the emerging markets, and do not have a well established network, will face major loses.
Thursday, October 23, 2008
Comment By Ektoras
A good friend whose opinion I respect wrote a comment that deserves space in the front page.
The CDO unwind waiting to happen (Bloomberg)
The CDO unwind waiting to happen
Are the days of CDO carnage behind us?
Apparently not. Bloomberg reported on Wednesday:
Oct. 22 (Bloomberg) — Investors are taking losses of up to 90 percent in the $1.2 trillion market for collateralized debt obligations tied to corporate credit as the failures of Lehman Brothers Holdings Inc. and Icelandic banks send shockwaves through the global financial system.
The article is referring to synthetic CDOs: that is, CDOs which are not backed by tangible collateral (RMBS, CMBS, for example) but CDS contracts which reference some form of collateral.
In this case, CDS on corporations.
All of which may sound dreadfully esoteric. Until you ratchet up the numbers. On Friday last week, Barclays analyst Puneet Sharma put out a report on a possible synthetic CDO unwind, and what can be expected to happen to the market as we move through a recession in the coming months.
In graph form, here’s what would happen to the ratings on prime and high-grade tranches of the trillion dollar synthetic CDO market:
It can get worse (FT Alphaville)
It can get worse
Granted, this was written by UBS’s Jeffrey Palma on Oct. 21, and things have deteriorated since then.
Year to date, global equities are down 36.2%, on a total return basis, the worst year ever since MSCI World began in 1970. Before that, 1974 was the worst returning year, when equities fell 24.5%.
At today’s prices the MSCI World is back to its September 2003 levels, erasing 61 months of gains so far. This is more than the gains erased at any other time since the 1970s. In 1990 the index erased 24 months of gains, and then a further 15 months of gains in 1992. Between 2000-2003 the index erased its prior 53 months of gains.
Peak to trough things have been worse in the past. From their October 2007 peak, global equities are now down 43% in price terms compared to 48% between 2000 and 2003.
On the plus side, that means equities are trading on an average price/earnings ratio of 11.1 — the cheapest PE since 1982, according to UBS. FT Alphaville notes, however, that might not be so good when you consider the stocks are at their lowest level since before 1970 (as above).
On the other hand, over 50 per cent of companies are now offering dividend yields above 3 per cent — greater than the long-term average of 2.8 per cent since 1974, UBS says.
Opportunity to buy then? Not quite.
There’s still the coming recession.
In previous earnings cycles, global earnings have fallen 30-40% from their peak. So far EPS is down around 15%, suggesting earnings weakness is likely to persist well in to next year.
What’s worse is that while analysts are just starting to revise their earnings estimates for 2008 (almost over anyway) downwards, 2009 and 2010 still have a long way to go.
… while 2008 numbers have come down significantly, 2009 and 2010 estimates still look too lofty. As a result, forecasts for growth in these years will need to fall sharply.
What’s an investor to do then? Palma has the answer:
Stay defensive. Against an uncertain landscape we retain our defensive sector allocation, as investors continue to manage cyclical risk. Our largest overweights are in Consumer Staples and Telecoms as we encourage investors to search for yield and companies with stable earnings and less relative downgrade risk. These sectors are trading at a premium to the market because of these characteristics, but we don’t expect a reversal while uncertainty prevails.
Not surprising then that UBS have Campbell’s Soup on their preferred stock list.
Wednesday, October 22, 2008
Argentina Default Looms as Pension Funds Seizure Roils Markets (Bloomberg)
Argentina Default Looms as Pension Funds Seizure Roils Markets
Tuesday, October 21, 2008
Overnight Dollar Libor Declines to 1.28 Percent (BLOOMBERG)
Overnight Dollar Libor Declines to 1.28 Percent, BBA Says
European weather map (FT)
European weather map
Published: October 20 2008 21:35 | Last updated: October 20 2008 21:35
Stormy conditions prevail across Europe’s economies after the arrival of a full-blown banking sector crisis this month sent confidence plummeting and threatened widespread-economic damage.
The FT’s latest European economic “weather map” shows the extent of the deterioration since July and April. In July the continent’s economies had largely avoided a credit crunch but were being hit by sudden and steep rises in energy prices, compounded by the effects of a strong euro. In October, inflation is ebbing and the euro has softened.
The weather symbols were compiled by Ralph Atkins, Frankfurt bureau chief, and draw from official data as well as his own analysis. Click on a period to see the forecast.
Valuations Need To Fall Further for a Sustainable Rally
Last week we discussed Robert Shiller’s S&P500 trailing 10-year price earnings ratio that has averaged 16.3 since 1881 and the fact that it had dropped to 15 as of October 10th. While we saw prices increase last week and a rise in P/Es, what does the longer-term future hold?
In our next chart, we show annual trailing 10-year P/Es from 1920 to August 2008 using Dr. Shiller’s data. As we see from this chart, every major recession has resulted in P/Es falling below 10 for an extended period of time - lasting decades, not years - typical of secular bear markets. Click to enlarge:
At 15 last week, the P/E was back to just below the long-term average, but this was a daily drop, not an annual P/E. It will take many more months (possibly a year or more) to get back below 15 on an annual basis, meaning we probably won’t see this occurring till 2009 or even 2010.
After that, it could take a few more years to get back to single digits like we had during the last major recession in 1981-1982. In other words, markets and economies will need a long rest with P/Es below 10 before they will be able to mount the next sustainable bull market. A similar situation occurred during the Great Depression into the early 1950s, as we see from the chart above.
Could we get another cyclical bull market rally lasting a few weeks, months or even years as we saw between 2003 and 2007? Very possibly, but as we learned, more often such rallies are short-term and often end abruptly and rather unexpectedly. There are also the raft of fundamental financial challenges facing a sustained U.S. economic recovery like the crushing levels of debt, rapidly deflating derivatives and housing bubbles, falling Treasury sales and mounting government deficit as a result of more than $2 trillion in bailouts so far.
But that doesn’t mean you can’t make money trading the powerful reactive rallies embedded in every secular bear market. This is a trader’s market where it's important to set tight stops and take profits off the table regularly, not a time to buy and hold for the long-term, as the so-called pundits would have us believe, if we are in a true secular bear market.
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