We performed an analysis of the correlation of the stock prices of the companies that we have covered over the last two years to the broader stock market. Based on the price movements in the selected stocks and S&P 500 over the last decade, we mapped the pattern seen in the degree of correlation that is exhibited when there are changes in the overall market direction owing to change in the “perceived” macro-situation.
For the purpose of our analysis, we divided the total period under consideration (December 31, 2000 till August 31, 2010) in to four sub-periods reflecting four different market sentiments:
- Pre-crisis- Dec 31, 2000 -Dec 31, 2007 – Long-term
- Financial crisis- Jan 01, 2008 to March 09, 2009
- Rally - March 10, 2009 to April 30, 2010
- Correction - May 01, 2010 to Present
Based on the daily prices of the stocks and S&P 500 in the aforesaid periods, we calculated the following metrics to analyze the degree of correlation as well the relative price movements:
- Correlation coefficient
- Annualized volatility
- Ratio between stock volatility and S&P 500 volatility
- Annualized return
- Z-score – calculated by dividing annualized return by annualized volatility
- Ratio between stock z-score and S&P 500 z-score
Based on the matrix obtained, we have the following key observations:
As stimulus induced economic indicators drove financial markets higher through the end of 2009 and into the middle of 2010, many financial advisors and researchers believed the Great Recession was taking its final breath and believed they bore witness to a forceful yet successful example of a proper response to a endemic crisis by policymakers around the globe. Fast forward to the present and you find that the Eurozone solvency crisis, the US economic slowdown and the Chinese real estate/lending bubble forces general economic consensus to move from that of recovery and prosperity to a gloomier picture of a return to output contraction or more realistically, realization that we never really left the period of economic contraction sans hefty government stimulus. Although it was a while ride, much of what BoomBustBlog has alleged has come to pass in terms of the condition of global banks, global economic output, and the prospects of the companies and countries that we cover. Most sell-side economists have lowered their GDP growth outlooks to near 1% for the next quarter, and more attention is being focused on central bank officials and the idea of new stimulus measures – all pretty much in line with our prognostications throughout 2008 and 2009. The problems has been that regardless of monetary policy, new stimulus and the growing need for them markets have moved with incredible correlation and very low dispersion among stocks over the past few quarters making it very difficult to monetize the fact that we have been right all along. These recent events beg the question, “Is this the end of the Stock Picker?” and if so, then “What does this portend for the future of the investment markets when casino style gambling has returned better results than adhering to fundamentals, math and basic common sense?” “Has the Fed destroyed the fundamental investor?” Let’s peruse the topic as illustrated in the mainstream financial media:
Stocks Move with the Market: CNBC
- 78% of the S&P 500 simply moves with the market and ignores underlying fundamentals
- CNBC attributes this to the rise of algorithmic trading and death of traditional stock picking, however, correlations have been higher in eras that lacked heavy algorithmic trading
Correlation Soars on S&P 500: WSJ
- Individual stock correlations to the S&P have reached their highest point since the crash of 1987
- Movements have forced fund managers from examining long term fundamentals and into quick moves into cash, treasuries, and investment grade corporate debt
Back in September of 2007 when I was preparing to launch a hedge fund, I came up with this interesting name for a blog. It was BoomBustBlog. What made it interesting is that I can literally blog ad infinitum on the synthetically crafted booms and busts of the global economy, for the method of shepherding the economy in this day and age is actually predicated on the existence and/or creation of Booms and Busts. Of course, from my common sense perspective, one would think that the job of a central banker would be to ameliorate the effects of, and in time eliminate booms and busts... Apparently, that doesn't appear to be the flavor du jour. As a matter of fact, it appears as if central bankers are doing the exact opposite. Of course, attempting to cure a bust with a boom, or worse yet attempting to prevent a boom from busting with another boom is a recipe for disaster, and worse yet the probability of success is close to nil, yet central bankers try anyway. This leads to overt and explicit policy errors, which leads to outsized profit opportunities to those who pay attention. Enter "The Great Global Macro Experiment, Revisited", from which I will excerpt below. Please keep in mind that this article was written in October of 2008, and turned out to be quite prescient, I will annotate in bold parentheticals the portions of particularly prescient relevance. The original macro experiment piece was posted on my blog in September of 2007... For those that are interested, I plan on discussing this topic live on Bloomberg TV today: “Street Smart” with Matt Miller & Carol Massar at 3:30 pm.
I've been harping on banks a lot lately, so why give up a good thing. Next up, we have a "how to" manual for JP Morgan private bank salespersons to assist wealthy executives in insider trading and the liquidation and/or monetization of restricted stock. You see, this gets sticky because it very well may be against the law to put a hedging position on your restricted stock portfolio based upon non-public information. As a matter of fact, I'm pretty sure it is against the law. This is how JP Morgan presents it...
Much of the mainstream media has carried articles that were at least somewhat skeptical of the European bank stress tests. I think being "somewhat skeptical" is about 5 leagues below where they should be, but its a start. After all, the EU actually passed a bank that is literally insolvent. I don't want to pound on the actual insolvency of this German bank, since I already went into detail on this topic earlier, but it is imperative that my readers understand the depth and extent of the travesty (or lies) that are being promulgated in the name of "transparency". I ridiculed the basis of these stress tests last week (European Bank Investors, Don’t Look Now – You’ve Been Hoodwinked, BamBoozled…), but now it is time to show you that these tests which assume the biggest threat to the European banking system (sovereign default or restructuring) will not occur and capriciously passes banks that not only will be hampered in the future, but are actually quite insolvent (by nearly any realistic means measurable) now, have actually proven that the risks of restructuring and/or haircuts are virtually guaranteed. This leaves the results of the stress tests a farce, at best and an insult to capitalism and common sense.
The tests assumed that there would not be a sovereign default. The tests also refused to mark "hold to maturity" inventory to market, despite the fact that said inventory may be permanently impaired. The logic? Europe will not allow a default. But how about a restructuring? And how will Europe handle more than one sovereign coming to the restructuring trough? I've already demonstrated the damage that can be done in A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina.
Price of the bond that went under restructuring and was exchanged for the Par bond in 2005
Price of the bond that went under restructuring and was exchanged for the Discount bond
Personally, I consider the European bank stress tests to be a farce; an attempt to Bamboozle, Hoodwink and Dis-inform any who would be naive enough to drink the Kool-Aid - not to dissimilar from the US bank stress tests (see You’ve Been Bamboozled, Hoodwinked and Lied To! Here’s the Proof). CNBC reports that "NO" default scenarios will be played out, which I find to be rather unrealistic since the reasons why the banks are enjoying restricted access to the capital markets is the fear of default! Think long and hard about this...
You are showing signs of HIV, and nobody wants to come near you, make love to you or lend long term to you due to the symptoms of this most unpleasant and deadly disease despite the many proclamations you have made to the contrary. You decide to set the record straight by visiting a prominent doctor to diagnose your issues and placate your associates. The doctor comes up with a prognosis, but simultaneously declares that:
- AIDS (the syndrome), and death have not and will not be considered because the doctor will not let any of his patients catch AIDS or die! Whaaatt!!!??? Does the doctor really have that much control over who catches diseases and who dies? [Analogous to refusing to even consider the potential for default on sovereign debt, as if no European country has ever defaulted before - many have, and many probably will in the future as well). This analogy actually serves us quite well for the ECB has very limited control over who gets sick and how the contagions (both financial and economic) are transmitted (see below).
- The patient will be assumed to operate between 96% and 57.8% efficiency. This is, of course, a problem if the patient truly is terminally ill, for his health should receive significantly more of a.... Well, a haircut.
- Only the patient's mucous membranes and other very short-lived tissue will be considered for examination, for the patience plans on keeping other body parts for the long term, hence they should not be affected by fluctuations by any potential illness. Yes, I know this statement doesn't make any damn sense, but then again neither does the ECB excluding hold to maturity and portfolio inventory from the stress tests either. It really doesn't matter how long you plan on holding said items, if they are permanently impaired in value, then they are permanently impaired, Right???!!! I know, we won't even consider a default scenario, but since countries do default.. If a default occurs, or more realistically a restructuring, then wouldn't longer term inventory be impaired - Permanently???!!! In the post A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina I demonstrated how much damage was done to the Argentinian bond holders after their restructuring. Too bad the Argentinian investors didn't have the all-powerful ECB there to declare that restructuring and default are not part of the rules, hence not allowed. The following is the price of the bond that went under restructuring and was exchanged for the Par
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I have been sounding the alarm on the Spanish banking system since January of 2009, and the Italian banks since the first quarter of this year. Now, the MSM is starting to catch up. For those who have not been reading my recent European work, I offer you The Pan-European Sovereign Debt Crisis series, for all others - read on...
Eleven banks including Germany's Commerzbank and Italy's Banco Popolare will fail the European Union's stress tests, Alessandro Roccati, director at Macquarie Securities, told CNBC Wednesday.
"We identify a handful of banks which would need more capital in a base case stress scenario; these are: all Greek banks, Bankinter, Postbank, Banco Popolare, BCP, Commerzbank and Sabadell," a report from Macquarie Securities said.
If BoomBustBlog subscribers recall, we had a very similar (if not significantly more extensive) list in our 1st quarter warning of banks exposed to the sovereign debt crisis (click here to subscribe).
The EU and the IMF have promised a combined $1 trillion dollar bailout to assist Greece and potentially other debt laden companies in financing their opertations. The goal was to produce American-style shock and awe. The problem is they failed to attach American-style propaganda to it, hence reality is showing through the crachs. CNBC reports Moody's Cuts Portugal Rating, and as a result ECB's Trichet Wants End of Rating Agencies Oligopoly.
Moody's slashed Portugal's credit rating by two notches to A1, citing a deterioration of the country's debt ratios and weak growth prospects.
Portugal's debt-to-GDP and debt-to-revenue ratios have risen rapidly in the past two years, Anthony Thomas, vice president and senior analyst in Moody's Sovereign Risk Group, said in a statement.
The euro [EUR=X 1.2573 -0.0012 (-0.1%)] fell after the announcement and the spread between Portuguese and German 10-year government bonds widened by 4 basis points to 290 points. "The bond markets response hasn't been dramatic," Martin van Vliet, euro-zone economist at ING Bank, told CNBC.com. The downgrade came a little before a Greek auction to sell 6-month T-bills, the first since a bailout package agreed by the European Union and the International Monetary Fund in May.
Most likely because everyone knows Portugal is messed up...
Greece sold 1.625 billion euros ($2.03 billion) of 6-month instruments at a yield of 4.65 percent, up from 4.55 percent in a similar auction on April 13, according to Reuters.
So, after a $1 trillion dollar bailout announcement to drive down the costs of Greece's funding, they have to pay 10 basis points MORE than they did before the bailout! With friends like that, who needs enemies???
On Wednesday, May 26th, 2010 I released "A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina" in which I explicitly outlined the restructuring of Greek debt using the Argentina experience as a template (I suggested that mixture of zero coupon bonds and explicit haircuts would be utilized to re-wrap debt). During that time, many analysts and government officials at the time (and even now) said that I was totally unrealistic in expecting a Greek default or explicit restructuring (reference Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!). Well, fast forward about 60 days, and voila, guess what the hell is going on??? Zero coupon bonds! Haircuts! Where have we heard this before??? Thanks and hat tip to BoomBustBlogger Shaunsnoll, "It’s no secret: Greece is restructuring debt" (via FT.com)
...consider the cost of sending lawyers and consultants – you could call them spies – to hang around Brussels and Frankfurt to assess the risk of a Greek default.
Yet simply by looking “on internet”, you could find out that Greece has already started to restructure its state debts. Look at the site for the Hellenic Association of Pharmaceutical Companies (www.sfee.gr), and you will find a link to a joint press release by the Greek Ministry of Health and Social Welfare and the Ministry of Finance. On June 9, unnoticed by most in the financial world, they stated: “The [Greek state hospital system] debts of 2007, 2008, 2009 amounting to €5.36bn [£4.4bn, $6.7bn] will be settled with zero coupon bonds.” The hospital debts lingering from 2007 will be paid with two-year zeros, 2008 with three-year zeros, and 2009 with four-year zeros.
There is some, actually a lot, of detail missing from the one page release, which presumably will be filled in by the legislation that will be introduced, and probably passed, to implement the restructuring. The release does say: “It is certain that the banks co-operating with the suppliers will show interest in prepaying these bonds, transforming the corporate risk undertaken on behalf of their customers – hospital suppliers – in credit risk against the Greek state, in the form of a bond which can be financed through ECB.” And, according to the release: “In case suppliers settle these bonds by January 2, 2011 . . . the above ‘discounts’ corresponds to a total percentage of about 19 per cent.”
CNBC runs as a headline the usual contradictory nonsense that we come to expect from certain heads of state. It would be funny if it didn't portend such dire consequences. The Spanish banks, just last week, were declared to be some of the healthiest in Europe (spoken with my fingers crossed behind my back, wry smile and spittle dripping from the side of my mouth). Of course, Banco Santadar and BBVA shares rocketed on the news that they are no longer insolvent and that the Spanish housing market pauses no threat.
Europe mostly flat (Greece up 2.3 percent), euro behaving, U.S. futures were calm ahead of the quadruple witching expiration. Spanish bank Banco Santander is up 1 percent on several pieces of news:
1) a spokesman for Spain's Prime Minister remarked that the Spanish bank performed strongly during the recent stress tests, saying the bank had "one of the best" results. The Committee of European Banking Supervisors is expected to provide details of the results in the coming weeks.they have the best ranking so far in a European bank stress tests, according to a Spanish government source; not clear when the full results of those tests will be published.
2) the bank also confirmed they have made an offer for 318 British branches of Royal Bank of Scotland.
They already have a strong presence in the UK. Santander's vice-chairman caused a small stir yesterday when he said they were talking with M&T Bank, based in Buffalo, NY, about possibly merging its U.S. operations with them.
But all of a sudden the banks in Spain get pissed off when the ECB declares it no longer wants to play the Pan-European subprime lender role: Spanish Banks Rage at End of ECB Offer
Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a 442 billion euros ($542 billion) funding program this week, accusing the central bank of “absurd” behavior in not renewing the scheme. On Thursday, the clock runs out on the ECB financing program – the largest amount ever lent in a single liquidity operation by the central bank – under the terms of the one-year special liquidity facility launched last summer. One senior bank executive said: “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.”
Another top director said: “The ECB’s policy is that they don’t want to provide maturity of more than three months. But they have to adapt.” Banks across the euro zone, but in Spain in particular, have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank funding virtually non-existent. The 442 billion euro ECB facility, which charges interest at a rate of 1 percent, is not set to be renewed, something that banks in Spain and elsewhere in Europe say ignores current commercial realities. A special offer of six-day liquidity will tide banks over until the following week’s regular offer of seven-day funds. On Wednesday, the ECB will also be offering unlimited three month liquidity, and further offers of three-month liquidity will keep banks going until at least the end of the year. “The system is just not working,” agrees Simon Samuels, banks analyst at Barclays Capital in London. “We’re approaching the third year of liquidity support and still the market cannot survive unaided.”
BarCap estimates that at least 150 billion euros of the ECB funding that is maturing will not be rolled over into shorter-term three-month schemes, forcing banks to shrink their own lending. Spain’s banks have been among the hardest hit by the faltering confidence in the euro zone economies in recent months following problems with the country’s smaller savings banks, or cajas. The bigger commercial banks, led by Santander and BBVA, feel unfairly tarred.
Yeah, right. "Unfairly Tarred"!!! I've been warning about the Spanish Banks since January or 2009. Now that the chickens have come home to roost, they are screaming "unfairly tarred"??? How about (chicken roosting) feathered and tarred!
As We Have Warned, the Fissures Are Widening in the Spanish Banking System Monday, May 24th, 2010
I have made our position on Spain clear through a complete forensic review of the state’s finances for subscribers: Spain public finances projections_033010. An excerpt from this subscription document (subscribers, reference page 2) shows the euphoric, yet highly unrealistic optimism upon which Spain has built its fiscal austerity projections.