A little R&R (thats Reinhart and Rogoff to you)

April 15-19, 2013

AMERIAS 

Market comments: Last Monday, Gold fell almost 9%, while the S&P experienced its worst trading day in five months. Even the DJIA was hit hard last week, following a missed earnings report by IBM.  These falls came amid volatility across markets.  The VIX index increased by almost 50%, to over 17 (15 is considered quite volatile). Last week marked both the worst trading week of 2013, and worst one day losses of 2013 for the S&P 500 and DJIA.  Is this just the beginning of an even larger market correction?

Mr. Meisels, the president of Phases & Cycles Inc. says "Enthusiasm for this vibrant but aging bull market must be tempered by the technical indicators that suggest that the markets are weakening and are preparing for either a pause or a correction".

Company news:  For the first time since 2005, IBM missed earning expectations. Sales fell 2.3% last year, resulting in the share price falling 7% on Friday.  Apple also experienced problems, with shares falling below $400.  It is 43 per cent from its record high in September. There are lingering concerns about the compan’ys product pipeline and use (or lack of use) of cash. The Globe and mail suggests that Apple “trades at just nine times earnings, which is a bargain next to the 15 times earnings valuation for the broad S&P 500. [It is] Apple’s lowest valuation over the past 12 years and makes it cheaper on a price-to-earnings basis than Microsoft Corp., a technology company that’s looking more and more like a staid utility.”

International News:  Central bankers are flying blind.  Lorenzo Bini Smaghi, former member of the European Central Bank’s executive board, said at last week’s IMF meeting “We don’t fully understand what is happening in advanced economies.”

Otherwise: Social media is gaining increasing attention as a market influencer. An article by Gillian Tett of the Financial Times suggests social information improves trading. Indeed, “the best returns occur when investors are plugged into diverse social groups that enable them to collide with information from multiple networks. In the social media world, as in real life, it pays to hover on the edge of cliques – but not get slavishly sucked into just one.” Do you know what is trending?

A debate developed last week on the data used by Reinhart and Rogoff; two economics professors at Harvard and authors of the much loved “This Time is Different: Eight Centuries of Financial Folly”.  Reinhart and Rogoff are proponents for austerity, and suggest economic growth slows when a country’s ratio of debt to gross domestic product exceeds 90 per cent. This new evidence greatly weakens their case for austerity, but still emphasizes the important of appropriate budgeting. Yet, people are coming out of the woodwork to slam austerity.

UK/EMEA

Carbon credits -  Last week the EU voted against carbon permit price prop up/stopping new permit auction. Permits are so cheap there is little incentive for companies to change their manufacturing methodology. Additionally, carbon goals are short term in nature, creating another reason for little incentive for reduction. 

Also, the IMF lowered 2013 growth estimates by 0.2%. Evidence revealed "unexpected slowdown in Chinese GDP growth in the first quarter of the year to 7.7 per cent – prompting talk of a “new normal” for the pace of expansion of the country’s economy."

It seems that  dividend payments by UK-quoted companies dropped 25 per cent in the first three months of this year, reinforcing the prospect that such payouts might fall in 2013 after two years of marked growth.