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We thought we had it all figured out before this week started.We were wrong.
The top minds in the investment business offered some novel analysis, broke conventional wisdom, and even opened our eyes to some misperceptions.
What follows are excerpts from 11 of the best stories this week. All of the important stuff you might have missed this week, right here.
'Wait, what's that: Japan has grown the most since 1960. OK, part of that is due to the uber-strong yen and the translation back into dollars. But then, next is... France. And then Germany! OK, but what if we set them all equal to each other right at 1980, when the Reagan revolution began. It turns out that Great Britain, Japan, and Australia have all grown faster than the US on a per capita basis. And Germany is very close. Bottom line: Anyway you slice it doesn't it look like anything special happened starting in 1980.'
'Now the first thing to note is that contrary to some popular delusions, which posit that the government is only pumping more and more into the economy, in the last quarter, government spending was a net drag on growth, as stimulus fades, and austerity starts to kick in.
But the spending cut was more than expected, and Phillips posits that it's the result of gridlock in DC. More specifically, he argues that it's the ongoing result of funding mechanisms called 'continuing resolutions' which are the temporary stopgap measures that Congress uses to keep the government operating in the absence of a full-year budget deal.'
'This study examines whether religiosity at the county level is associated with future stock price crash risk. We find robust evidence that firms headquartered in counties with higher levels of religiosity exhibit lower levels of future stock price crash risk. This finding is consistent with the view that religion, as a set of social norms, helps to curb bad news hoarding activities by managers.'
ALBERT EDWARDS: Dear Investors: Prepare For The Market To Rip Out Your Hope, And Consume It In Front Of Your Eyes
'SocGen's Albert Edwards blasts the recent stock-market rally, and says there's still way too much 'hope.' Only when the hope is totally gone will we know the great ice age is over. 'One key lesson from Japan is that an essential ingredient to the end of a long valuation bear market is revulsion,' he writes. 'It is when buyers-on-dips become sellers-on-rallies. It is when volume dries up to almost nothing. It is the loss of hope. In Japan we saw huge rallies in the Nikkei on the back of short-lived cyclical recoveries. Each cyclical failure and further new lows in the equity market saw hope being progressively crushed. Previous US valuation bear markets typically take 4 or 5 recessions to fully play out. We have only had two.' '
'More and more we're hearing about how 2012 is similar to 2007. For example, yesterday Albert Edwards put out this chart of stalled earnings momentum, comparing the current scene to 2007. And just now on CNBC, ECRI's Lakshman Achutchan hinted at the comparison in defending his recession call ... But basically, that's where the comparisons stop. In 2006-2007, initial jobless claims were steadily drifting higher. Now they're dropping like a rock. In 2006-2007, housing starts were dropping like a rock. Now they're rising. Along the same lines, total employment growth was decelerating on an annual basis in 2006-2007, whereas now it's accelerating.'
'On why Ford is shifting billions of dollars a year from their equity portfolio into bonds: 'They're doing that because of the certainty, locking in their liabilities relative to their assets. Even at a low, 2-3% rate. Boomers, from the standpoint of individual investors, are the same way. They're beginning to get older and require more certainty. Do they find appeal in a Johnson and Johnson at 3.5% dividend yield with growth potential? Sure they do, but they also believe they want that money back, and if there is a 2008-2009 scenario, perhaps they won't. So there are demographic tradeoffs here that have to be considered.' '
'Everyone keeps wondering when this Teflon market is finally going to crack. Here's one chart, via Doug Kass, that more and more people are paying attention to. It's the S&P 500 (red line) vs. the ratio of the Dow Transports vs. the S&P 500 (blue line). The idea among some 'Dow Theorists' is that when the Transports get very weak (relatively) it's a sign that the market as a whole is doomed to fall. It is pretty stark the gap that's opened up this year. At a minimum it at least shows that some parts of the market are getting roughed up by the rise in oil prices.'
'His general consensus: Sell U.S. government bonds, buy stocks. 'I don't think people understand how risky a U.S. bond is at 2 per cent return,' he said. 'A 2 per cent government bond, with marginal taxes rates all in... you're keeping 1.2 per cent when the range of inflation of is 2 to 3 per cent, so your capital is being confiscated. It makes no sense.' Cooperman added that he doesn't own a single U.S. treasury in his portfolio.'
'For starters, he writes that many Japanese investors he spoke with said they bought Japanese bonds because of their nation's external surpluses. But just last month, Japan reported its first trade deficit since 1980, and O'Neill thinks these deficits are like to continue. And with low yields and a relatively strong yen he doesn't expect international investors to continue buying Japanese bonds. To avoid a crisis he thinks Japan needs to do two key things. First, it needs to curb public spending, implement tax reform, and bring about strong productivity gains to drive GDP growth - all with the aim of bringing its long term debt under control.'
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