About liquidity, loans and savings

In these days characterized by a cautious return of investor interest towards equity markets, sparked largely by the renewed and decisive intervention of the Obama, I've again the desire to talk about liquidity, loans, savings.

I believe that these issues are fundamental, even for being able to help determine the potential of the current stock rebound, which, however, must still take into consideration the negative newsflows from macroeconomy and / or from company, that I still wait for in the coming months.

As I already told in the system there is an enormous amount of liquidity parked, waiting for better times.

In support of this conclusion I propose this other new chart, always focused on the United States (but it would not be very different for the other main areas of reference).

Surely the excess liquidity imply risk of inflation, but on the other hand, it also has a potential power to sustain a recovery, or at least, a consolidation of the financial markets, in particular equities.

Moreover, the circuit of credit, which could attract, at least in part, the liquidity is still substantially blocked: neither business nor the families are feeding it with requests for loans, as evidenced by the chart below.

The following graph contribution, however, shows another parallel phenomenon, which, from my point of view, is extremely positive in order to restore a proper balance in the macroeconomic fundamentals of the U.S. system.

Not only there isn't request for capital, but it is feeding the virtuous circuit of savings, the impact of which is not as high as in a decade.

In short, there is no need to become suddenly and completely optimists about the prospects of the economy and markets, but I think at least it is absolutely legitime the expectation of not repeating in the coming months, the past experience of hannus horribilis 2008.

Stay tuned.

Original post: In tema di liquidità, prestiti e risparmio

Liquidity parked

The main word in world stock markets today is a simple "sell".

Pessimism on the economy, business problems (more or less serious, but often considered as irreversible), uncertainty and fear about the future are the keywords that seem in themselves to justify what is happening and, especially, seem to hide any fundamental consideration.

Let assume that, but for how long it can continue?

This is the question asked to me more and more frequently in those hours and that is certainly difficult to try to answer, leaving aside the emotion at least for a moment.

But I try to make some comments, starting from a point that I feel bring together Finance and Physics: that is the "law" that nothing is created and nothing is destroyed, but everything is transformed (note: I'm not a physicist, I hope not to have set out in a wrong way!).

I mean that, regardless of the price at which any financial transaction is close, together with a seller there is - necessarily - someone who buys and thus, at the system level, there is always those who lose in the face of those who gains, and vice versa, in a so-called "zero sum" game.

Not only that, but you may also consider that the liquidity arising from sales in some way remains within the financial system (invested in equities, bonds, cash or anything else, or consumed, but, also for that way, it remains or can quickly returns to circulation).

That said, it is clear that sales of these days and months are generating an enormous amount of liquidity that does not return immediately in stock market, or in risky assets, but finds different uses.

Excluding that the preferred harbour in these days can be represented by corporate bonds or hedge funds or commodities, and also considering the limited appeal of medium-to-long term government bonds, I think that a large part of this liquidity is still parked in cash or, however, in money market instruments, waiting for better times.

My opinion is confirmed by graphs like the following:

Money market funds currently hold U.S. assets for a total value equal to 75% of the entire capitalization of the stock market!

This is a long term peak, certainly in part due to the substantial decline of the stock market capitalization, but also due to the increase in short-term investments, considered as a "safe" parking of the available cash. In any case it seems to me a very interesting information for its future implications.

I want to say that sooner or later investors that are today fearful and risk-adverse, will be unpleased to "benefit" of the security offered by the money markets, gaining only 1% or so, to search for alternatives maybe more risky (but always less, continuing the long trend of depreciation), but also described by a potential performance perspective increasingly attractive, such as the stock market or the credit market (of high quality).

The incentives to do so seem to be already enormous, probably it's becoming only a matter of timing.

Original post: Liquidità parcheggiata

Capitulation of equity markets... and then?

Not all market cycles are the same, but it is possible to note that certain trends in prices and certain behaviors of investors tend to recur.

During a bear market, in particular, an early stage of rejection is followed by a growing fear and by a more and more intense and extended selling, before a final mass capitulation.

Both the current trend than that of 2000-2003 followed the same pattern, as shown in this diagram.

But what happens after the mass capitulation? In general, the minimum of market cycles are characterized by equity valuations often seen as convenient, but - at the same time - by a complete discouragement of potential investors.

In these cases, the daily flow of news becomes the true determinant of market, capable - as we saw again in recent sessions - to dictate pace and direction of prices.

It would be necessary to produce a sustained flow of positive news for a stock rally could take root and gain strength.

Unfortunately, this can not happen - I think - as long as banks and other major international financial institutions (most recently, the case of U.S. insurance giant AIG) will continue to announce serious financial difficulties and balances at risk.

Right now, if anything, it is likely that equity markets will try again to test new minimum (who asks me, I say - jokingly, but not too - that the minimum possible in an index or an action is without doubt the zero!).

The debate on whether today's stock market valuations are attractive or less attractive and is still in progress. Many market participants and economic commentators focus their attention on the very low level of Price/Earnings, as indisputable evidence of value.

However, one should ask: how reliable are the current estimate of profits at the base of the P/E ratio ?

If you look at the forward earning (profits expected in the next 12 months) the reliability seems to be very limited, especially in recent quarters. In addition, the estimates of analysts do not seem to be sufficiently reliable for making predictions, even considering that, at present, there is an almost total lack of consensus on the dynamics of expected earnings, an event which, however, is absolutely unusual (see chart).

You can find other measures of value that, even in previous recessions, have proven to be quite reliable, not in order to identify the exact points of minimum (and who could seriously say that!), but at least for indicate areas of relatively cheap acquisition, targeting, of course, an appropriate investment horizon.

One of these measures seems to be the P/E developed by Robert Shiller that, in the numerator, use the level of real price (i.e. adjusted for inflation) of the market index S&P500, and, in the denominator, the average of real profits of the previous 10 years.

The graph below brings together the indicator (inverted, i.e. in terms of E/P, real earnings yield) with the performance that the stock market has done in the following decade.

From 1880 onwards, it seems clear that the indicator has a job if not perfect, at least good!

The Shiller's P/E was 16.3 in long-term average, and 19.3 in the last 50 years. In December 1999 was 44.2, at a record level that heralded a negative trend in the following decade, between 2000 and 2009 (!).

Today it is 13.4 which is the lowest level of the last 21 years, and for the first time since 1988 below 14. I leave to you any conclusion on the matter.

Regards.

Original post: Capitolazione delle Borse… e poi?