Research Watch

How the new News could have reported, Europe's tail risk, September crises, six reasons to be bullish, gold's shine, and Dr Doom returns.

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

After a monumental fortnight for Australian media, News Corp has taken the shake-up global with its long-awaited announcement that it will split itself into separate entertainment and publishing companies. In a helpful new report, Nomura peers beyond the headlines and into the account books, reverse-engineering four years of separated earnings reports that tell a story of two very different companies with widely divergent futures. There are fresh warnings about Europe from Ray Dalio, who builds on one of Alan Kohler’s big themes at the moment '” that investors need to be mindful of that 'fat tail’ risk that Germany abandons its struggling neighbours '” alongside a study showing that we’re approaching the cruellest month for banking disasters. On a more positive note, analysts at Credit Suisse offer six reasons to stay bullish, as others expect a wave of stimulus in the emerging world following a rate reduction by Israel’s central bank '” a proven, if unlikely, global bellwether. Meanwhile, find out how to get rich in five lucky trading days, how to stay wealthy with gold, and how you can lose everything with bad investment advice from the moon. On video, doomsayer Nouriel Roubini gets raunchy in his assessment that Germany will leave this week’s leaders summit unsatisfied with the continent’s “born-again virgins”.

The good News and the bad News... “[Nomura] reverse-engineered the numbers back to 2008 (and forward, into the estimates for 2012-14) to show how News Corp may have reported as separate entertainment and publishing arms (click here for full-size images). Here’s 'Good NWS’, which might trade at 13x price to earnings, alongside 'Bad NWS’, which Nomura pencils in 8x.”

(Nomura via FT Alphaville, June 26)

When tail risk becomes reality... “[European] alliances are shifting in a logical manner. The German-French alliance is breaking down in favour of contributor (higher rated credit) countries aligning against recipient (lower rated credit) countries. Similarly, the terminology to describe who is reasonable and who is unreasonable reflects these parties’ respective interests. Those who don’t have to contribute use terms like 'inflexible’ and 'irresponsible’ to describe the contributors’ reluctance to 'do enough’ to prevent collapse by lending more to recipients who can’t service their existing debts, while those who have to contribute use terms like 'inflexible’ and 'irresponsible’ to describe the recipients’ reluctance to 'do enough’ to cut their spending and borrowing to service their debts. Students of human nature and deleveragings know that this is to be expected. Similarly, talk of a fiscal union to resolve these problems has to be looked at in light of the question of whether it is in the interest of fiscally strong contributors to have a fiscal union with fiscally weak recipients in which the majority rules how the money is divided. For this reason, we think the popular assumption that the Germans and the ECB (which requires agreement of the key factions within it) will come through with the money to make all these debts good should not be taken for granted. Said differently, we think there are good reasons to doubt that European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way, without a Plan B in place. This 'fat tail’ event must be considered a significant possibility.” (Ray Dalio of Bridgewater Associates via Zero Hedge, June 26).

A European cheat sheet...

(Societe Generale, June 20)

The cruelest month of the cruelest year...

“The frequency with which the world goes to hell in September seems hardly random. '¦ Historically the fall was a popular time for crises because farmers needed to borrow to bring in the harvest, which strained fractional-reserve banking systems. '¦ [Another] theory blames the October 30th fiscal year-end of American mutual funds; managers trying to avoid losses or hold onto gains for the year were more likely to succumb to herd behaviour as that date approached. '¦ [There is also] a tendency for crises to happen in election years; think Mexico, 1982 and 1994, Korea, 1998, America, 2008, Greece, 2009. The intuition behind this was that crises are the result of imbalances that accumulate over a long time. Politicians have a strong incentive to delay dealing with them until after an election, and often, as was the case with Greece, to actually hide the truth until the polls close. This means imbalances often reach their breaking point right around the election. This has been a busy year for elections: we've already had Russia, France, and Greece, twice. Mexico’s is just a few weeks away, and of course, America’s fiscal problems come to a (contrived) head mere weeks after November’s election. That’s also roughly around when China has its version of elections, i.e. the long-orchestrated change in the Communist Party’s leadership.” (The Economist, June 25).

Six reasons to be bullish... “1) Economic lead indicators, although beginning to soften, are consistent with reasonable GDP growth forecasts; 2) Dovish central banks and synchronised QE are the end game; 3) Rising global excess liquidity is consistent with a c10% re-rating; 4) Valuations relative to bonds are still attractive; 5) Equities remain the hedge if, as we expect, long-term inflation expectations rise; 6) Positioning is still cautious.” (Andrew Garthwaite of Credit Suisse, June 27).

The big easing... “Israel’s central bank [has cut interest rates] by 25bps to 2.25 per cent. Why’s this one so important, we hear you ask. '¦ In the past, the Bank of Israel initiated an aggressive easing cycle in October 2008, and was a precursor in terms of the easing policy response. Likewise, the BoI started another easing cycle in September 2011, and was only preceded by Brazil (with an August move). We believe that the Bank of Israel may play its role of a pace-setter again for global EM central banks'¦” (Societe Generale via FT Alphaville, June 25).

The difference five days can make...

“$1 invested in the S&P500 in January 1962 would have turned into $18.66 by now if all you had done was buy and hold. If you'd missed the five worst days each year you'd have pocketed a cool $15,468.” (Ticker Sense, June 26).

Gold: 'indestructible wealth’... “Stocks can declare dividends, but they can omit their dividends during hard times. Furthermore, stocks can go broke. But gold represents indestructible wealth. Gold rises in terms of fiat money, and gold declines in terms of fiat money. Gold possesses some properties that are beyond the scope of other investments. Gold can’t go broke, because gold does not derive its purchasing power from the edict or control of any sovereign power or central bank. Gold has no counter-parties. Gold is tangible and is accepted everywhere '” in good times or bad. Gold exists outside the world’s banking system. Unlike fiat money, gold is wealth on its own. It’s tangible and not the fantasy-creation of central bankers. Gold does not need a sponsor or the acceptance of an expert (such as pricing a Picasso painting), because all gold is intrinsically the same. Gold does not tarnish nor does it degenerate '” the gold in your watch may be the same gold that Cleopatra wore around her neck. The supply of gold, unlike paper money, is limited. Alchemists have tried for centuries to turn other metals into gold '” but have never succeeded. Gold is a beautiful metal on its own and the lust for gold seems to be built into the DNA of mankind. If you own ten thousand ounces of gold, you can say that you will ALWAYS be wealthy.” (Richard Russell via King World News, June 25).

Lunar investing... “The SEC has charged Florida investor Gurudeo 'Buddy' Persaud with concealing from his clients the fact that his investment strategy was based on the moon. Seriously: 'The SEC alleges that in making trading decisions, Persaud chiefly relied on an Internet service that provided directional market forecasts based on lunar cycles and gravitational pull. Persaud’s strategy was premised on the idea that gravitational forces affect mass human behaviour, and in turn, the stock market. For example, Persaud believed that when the moon exerts greater gravitational pull on the Earth, people feel dejected and are more inclined to sell securities. '¦ Persaud touted his experience in the financial services industry as a certified financial planner and gave investors his personal guarantee their principal contributions were secure. He made numerous misrepresentations and omissions to investors, foremost among them failing to disclose his trading strategies were based on lunar cycles and the gravitational pull between Earth and the moon.'” (Clusterstock, June 21)

Video of the Week: Dr Doom is back... Nouriel Roubini says the Germans will never marry the “born-again virgins” in southern Europe on vows of fiscal abstinence.


(Bloomberg, June 27)

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