Research Watch

Oil spikes and cash protection. Shiller's call on stocks. Rural returns heat up. Bloomberg's real-time billionaires list. On video, meridian market theory...to music.

PORTFOLIO POINT: This is a sampling of the week's best research notes. In a world of too much information, we hope our selection helps you spot the market's key signals.

Crude prices are receiving plenty of attention as geopolitical developments send prices sharply higher, forcing investors to question whether oil is the new Greece. This week, Research Watch presents a handy guide to protecting your cash in the event of a continued spike – possibly even a war in Iran – plus a novel price forecast, based on an analysis of past forecaster follies. Despite all that, Robert Shiller, the man who predicted the tech crash and the US housing bust, says stocks are now his favourite bet '” although there are some ominous market signals behind a new spate of stock downgrades. Nomura details exactly what the latest round of rate hikes mean for banks' bottom lines, while another observer says a new era of rural returns is just beginning. Meanwhile, Bloomberg introduces the world's first real-time rich list; The Economist says the economy can't keep tech down; and Morgan Stanley is red-faced after the bust-up of a Wall Street prostitution ring. On video, a financial blogger introduces an entertaining new style of market analysis.

This is when oil will hit markets '¦

“First, the good news. Oil prices and the stock market remain positively correlated. As you can see, the red line – which represents the 30-day correlation between the stock market and oil prices – remains above 0.0%. For now, when people are buying oil they're also buying equities, which is a signal that oil prices represent strong end demand, and not the kind of supply shock that would really derail the global economy '¦ [But] the grey line shows oil consumption as a percentage of GDP, and as you can see, it's easily in the territory where oil prices could dropkick the market.” (Ian Scott and Robertas Stancikas of Nomura via Business Insider, March 6)

'¦ But you can protect your money (even if war breaks out in Iran).

"Here's an idea from Barclays' Sreekala Kochugovindan. It shows the VIX (AKA: The fear index) vs. the price of Brent Crude during the period around the Iraq war. They're nicely correlated, as you can see, and so it's reasonable to surmise that a conflict with Iran and an equivalent move in oil would prompt an equivalent move in the two measures." (Money Game, March 8)

You should also count on slippery oil forecasts '¦

“Deutsche Bank research going back to 1999 found that analysts 'consistently underestimate' the Brent oil price by an average of 27%. The chart below shows the forecasted price made by analysts compared to the actual Brent oil price outturn. Every year, analysts have underestimated how strong Brent will be, ranging from as little as 2% to as high as 54%. Using the average forecasting error, Brent could be as high as $135 a barrel.” (US Global Investors, March 2)

Robert Shiller backs stocks '¦ “It doesn't seem to me that [stocks are] in a bubble situation as [they] were, say, in the 1990s. In the 1990s, there was just a general mood that we're entering a new millennium, with Internet technology and advanced technology and America soaring. It was a bubble all over the world, really. I don't know that we're in that state of confidence now '¦ China had what looks like a bubble, but the government has taken steps against it. This is another reason not to expect bubbles so much. The stock market bubble of the 1990s and the housing bubble of the 2000s were still at a time when central bankers and government authorities believed much more in free-market efficiency than they do now. The authorities are now thinking that it's their responsibility to choke off bubbles. Stocks [are a better 10-year bet than inflation-protected securities from the US Treasury]. [Stocks are] highly priced, and they're risky, but they've had a good historic record. And last time I looked, inflation index bonds have a negative real yield.” (Robert Shiller via USA Today, March 4)

But pay attention to brokers '¦ “Analysts have been getting increasingly cautious as stocks have been surging. According to data compiled by FactSet, Buy ratings declined to 51% of all ratings from 54% two months ago. Meanwhile, Sell ratings now account for 5%, up from 4% '¦ The percentage of Buy ratings at month end hasn’t been this low and the percentage of Hold ratings at month end hasn’t been this high since the end of March 2011, which was one month prior to the start of a 17% decline in the price of the S&P 500 from April 30 through September 30.” (Business Insider, March 2)

Rationalising rate rises '¦ 20% '” The estimated return banks are currently making on their mortgage lending businesses '¦
1% The estimated earnings boost the major banks receive for every five-basis-point increase in their standard variable rate. On the same five-basis-point increase regional banks receive a 3% earnings uplift and a 0.25% gross profit margin benefit '¦
$122 million '” How much extra revenue Westpac earns by pushing up rates by five basis points '¦
$126 million '” How much extra revenue Commonwealth Bank earns by pushing up rates by five basis points '¦
$68 million '” How much extra revenue ANZ earns by pushing up rates by five basis points '¦
$83 million '” How much extra revenue NAB earns by pushing up rates by five basis points
70bps '” The average discount the major banks are currently offering borrowers on mortgages over $500,000” (Nomura Equity Research via Property Observer, March 7)

Move over Forbes '¦ The Bloomberg Billionaire Index is a new, real-time measure of the world’s wealthy based on changes in markets, the economy and Bloomberg reporting, updated daily. The full list is available here.

(Bloomberg, March 6)

Rural returns are looking up '¦

“Which distinctly British asset class has offered the most attractive returns over the past decade? Central London property? Not even close, even if it has done rather well. UK farmland is the answer, having more than tripled in value over a decade which will otherwise not be remembered for its outsized returns. The rise in farmland values is not only a British phenomenon. All over Northern Europe, North America [and Australia] farmland values have responded well to higher commodity prices '¦ Now, if 'rental income’ on farmland is going up as measured by higher crop prices, it is only logical that the value of the land appreciates, similar to the dynamics in the commercial property sector. However, I have long been puzzled by the fact that you find virtually no exposure to farmland in institutional portfolios despite the supremely attractive yields on offer when compared to commercial property. Pension funds happily buy office buildings, earning a return of 4-5%, maybe 6%, yet few have ventured into farmland where yields can be as high as 10% if the farm is big enough and run professionally enough '¦ In addition to the numbers [the capital appreciation, the potential rental yield, and the fact that it's generally under-owned] '¦ farmland is the prime bet for people looking to bet on the rise in the developing world getting richer, and the coming 'protein bomb', the phenomenon of people eating more meat as they move up through the socio-economic ranks.” (Niels Jensen via Absolute Returns, March 2012)

Why the future will be better than you think ... "Peter Diamandis and Steven Kotler make a breezy case for optimism in 'Abundance: The Future is Better Than You Think' ... a godsend for those who suffer from Armageddon fatigue. They also remind us that technology keeps improving despite economic gloom. Messrs Diamandis and Kotler argue that the world is on the cusp of a succession of abundance-producing breakthroughs. The technological revolution has gone furthest in the world of smart machines. The smartphone contains a collection of tools--from voice recorders to video cameras to GPS devices--that would have cost tens of thousands of dollars a decade ago. But it is rolling on in lots of other areas too. Carmakers are working on driverless vehicles ... Robotics firms are working on friendly bots. Manufacturers are experimenting with 3D printers that can produce everything from musical instruments to blood vessels. Firms of every type are building an 'internet of things' that will tell us when our machines are in danger of breaking down or our pipes are leaking water. They argue that four big forces are speeding these innovations from the drawing board to the supermarket. The first is the rise of a generation of philanthropists who believe that technology can rid the world of ancient evils ... The second is the discovery of the 'fortune at the bottom of the pyramid" [as firms] realise that poor people collectively constitute a huge market ... The third is the proliferation of do-it-yourself innovators [in the technology space] ... The fourth is the clever use of prizes [that encourage] the brainy to compete, and can focus a vast amount of brain power on a specific problem." (The Economist, March 3)

Red faces at Morgan Stanley ... In an odd twist to the curious case of Anna Gristina – who burst into tabloid fame [this week] after being accused of orchestrating a multimillion-dollar brothel that catered to New York's wealthy elite – prosecutors say she was arrested last month with an unnamed employee of Morgan Stanley. Ms Gristina was [allegedly] meeting with the employee to secure financing for a new business ... specifically a dating web site that matched consenting adults just looking for 'love.' ... Ms Gristina, an immigrant from Scotland who now lives upstate, had some bona fide investors, according to a private investigator she hired. It remains unclear whether the Morgan Stanley employee was counted among the investors." (Dealbook, March 6)

Video of the Week: A new genre of market analysis '¦ Erik Swarts believes stock markers have traversed one central trend line over the past 40 years, and charts 'median market theory' on video, to music.

(Market Anthropology, February 24)