Further Reading: Michelangelo’s David vs the Drunken Moose Edition

September 13, 2011
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On this day in history: Michelangelo began work on his sculpture of David, 1501

Via Abnormal Returns Market breadth is still pointing toward the bears, the UK owes those nasty Conservative euro skeptics a big thanks you and in the surprise of the day, French banks are under pressure.

Joshua Brown points out that what was inconceivable is now starting to seem likely. I like his list since they are all things I have been arguing were likely for some time. Yes, I am aware that this is a textbook example of confirmation bias.

Surly Trader wonders of the safe trade isn’t that European large caps outperform the S&P 500:

The Eurozone is facing massive political headwinds, but at a dividend yield of 5.98% and P/E of 8.35, it looks relatively attractive versus the S&P 500?s 2.23% dividend yield and 12.71 P/E.  Will the Eurozone unravel in a spectacular way?  I doubt it, but to hedge your bets you could buy European stocks and sell US stocks in the prospect that the two will close their valuation gap.

I don’t know if that trade works short term, but longer term it looks very appealing.

Drunk Swedish moose found in apple tree. Seems it was eating fermented apples. I enjoy Calvados or the occasional foray into a bottle of Applejack, but I try not to risk running into trees when I do so.

Theory says risky stocks should return more. The data says it isn’t so simple. The response of finance academics? “I can’t hear you!”

I remember presenting this chart to an NBER conference around 2000, and the esteemed audience told me I was wrong; my data had to be incorrect. I was working at Moody’s, so my ratings data was as good as it got. Anyway, I wrote it up and sent it to Journal of Portfolio Management, and the editor, Peter Bernstein, wrote back they weren’t accepting submissions at that time. I thought that was an odd response. This avenue wasn’t part of my day job, so I let it go, but I keep updating my data for fun.

I like Eric’s response:

Reality is that which, when you don’t believe it, doesn’t go away, so I don’t really mind when people tell me I’m wrong on facts like this.

I find I often get the same response when I challenge long term earnings assumptions. I keep telling people that earnings only grown 1-2% above inflation and they act like it is an opinion, not a fact. That earnings will not grow appreciably faster in the future is an opinion (if well founded) what has already happened is a fact.

Joshua brown also noticed this and delivered an old cliche’ “You can like the debt and hate the equity, but you can’t like the equity and hate the debt.” One of my favorites. Want a great application? If you feel owning junk bonds are too risky at the moment, then holding the Russell 2000 or something highly correlated to it makes no sense. Small cap stocks are a pretty good equity proxy for the junk bond market.

Sports stories written by algorithm. Hmmm…Maybe my friend Matt left sports journalism at just the right time.

This probably not the best time for Belgium to still not have a government  (500+ days and counting.) Granted that is not a sentiment I am likely to have often.

Want a robust economy? Until deleveraging proceeds further and housing recovers it probably will not happen.

Five Funky Ways With a Peanut Butter Sandwich. I am partial to the first option, but my favorite place to eat a PB&J is at the le Pavillion hotel in New Orleans at 10 PM.

Calculated Risk has created a handy table with clickable links to each country in Europe’s bond yield. Greece’s 2 year yield is now near 70%!

Greece 2 Year 5 Year 10 Year
Portugal 2 Year 5 Year 10 Year
Ireland 2 Year 5 Year 10 Year
Spain 2 Year 5 Year 10 Year
Italy 2 Year 5 Year 10 Year
Belgium 2 Year 5 Year 10 Year
France 2 Year 5 Year 10 Year
Germany 2 Year 5 Year 10 Year

Much was made in some quarters that consumer credit was increasing again. Of course I am of two minds on this. Deleveraging needs to occur for the economy to recover, but it is a drag on economic growth in the short term. However, it isn’t really true. Student loans are increasing dramatically, everything else is still in decline. Bad for now, good for down the road. Quote and Chart via Jake at Econompicdata

Bloomberg details:

Consumer borrowing in the U.S. rose by the most in more than three years in July, led by a gain in non-revolving credit that includes student loans.

Credit increased $12 billion after a revised $11.3 billion rise in June, the Federal Reserve said today in Washington. Economists projected a $6 billion gain, according to the median forecast in a Bloomberg News survey. The rise in non-revolving loans was the most since November 2001.

Revolving credit showed the biggest decrease in six months, indicating Americans may be cutting back on non-essential items as limited job and wage growth depresses consumer confidence. Employment and income gains may be required to help spark the household spending and the recovery.

Note that the chart above assumes all non-revolving consumer loans held by the federal government are student loans (and they mainly are).

Source: Federal Reserve

Of course student loans are not that safe either with for profit schools sporting default rates above 15%! Call that a delayed version of deleveraging.

In the developing world we see the rise of private cities.

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