A Bourse Diary

Thoughts on stocks, speculation and ... life

Friday, June 23, 2006

New Economist: Inflation: a rational phobia?

New Economist is posting some interesting research on the inflation estimations and on the current fears:

New Economist: Inflation: a rational phobia?

Everyone is looking at the matter in his own way. Some argue, that inflation figures are underestimated due to hedonic measurement, others say statistical effects such as "owners equivalent rent" makes inflation rate looks higher than in real life...

It's not an easy issue. What I tend to is: inflationary pressures should come down to confortable levels after those long run in rising interest rates. From the corportae site there are still no worrysome signs. If inflation is in tendency lower than statistically shown, the real interst rate is higher and should lead to a harder landing.

Friday, June 16, 2006

Grahams Margin of Safety for the US Stocks

A nice view on the valuation of the US stock market through the eyes of the investment classics - the US Market Blog (link below) reminds us of Graham's Margin of Safety model.

It it surely not the first time to compare earning of stocks, hence stocks earnings rate, with the interest rate on long term bonds. Though, I think the investors tend to oversee or forget this important ratio especially in times of uncertainty and volatile movements.

The article provides a nice graph of the Margin of Safety Model (explained there - a relative figure of stocks and bond earnings) calculated for the time since 1988, and ... well both bulls and bears will find their arguments on it:

The US stocks have traded since 1988 almost all the time with "negative" margin of safety. If you have followed Graham's model, you may have missed some of the greatest bull markets. But there is also that point: the best time to buy was in retrospect when stocks had positive margin of safety (even if slightly, or if you don't want to be that exact - when margin of safety was around zero) - e.g. 1994-1995 and 2003, and on the other side: it was mostly very bad time to buy stocks, when margin of safety was strongly in negative terrain. (Chart is provided as well).

Now we are strongly positive, considerably positive...

The author ends up suggesting, like I do, that this circumstances do provide us substantial "safety" in the current situation. When the earnings of the US companies do not collapse, even with decreasing earnings and slowly raising interest rates and (suppose: slowly) falling stock prices, the market remains very well grounded with enough inner safety.

And, for I do not believe we have had or have an extreme phase at the stock markets (so that additional factors have to be considered), I suppose, the logic of finance, of relative attractivity of investments, of capital as a whole have to take overhand.

US Market » The Current Graham Margin of Safety for the US Market

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Wednesday, June 14, 2006

The Big Picture on Inflation

The Big Picture Blog has some interesting thoughts on the inflation: current figures and concerns, implications on the fed policy and on the overall pattern of development.

The Big Picture: Articles on Inflation

Inflation figures indicate some more trouble

The inflation figures came in today a bit higher than anticipated. I have mentioned already my general view, that liquidity situation is now worsening, and - more important - can actually not be "discounted", i.e. you should not think of it as of corporate news which are now priced in.

Though the fundamental valuation and prospective for the world stock exchanges and economy remains sound. We do not have the 2000 environment.

Of course, one could be concerned about earnings development - with business cycle moves, sales move and earning fluctuate. It's very natural. But I've always stated, that not the underlying economic conditions is what should make you scary at the bourse - it's the people, the mass, with their emotional and from time to time irrational behavior.

I can't recognize any exuberance in the recent past, any striking cause of disappointment. And - if you don't trust (like me) the earnings estimations, think for a moment this way: the companies have made large restructuring, have focused on core business, there were - my opinion - no business or financial "adventures" in recent years. So we will stay firm. Even if there is a cooling off economically, the earnings should not behave as after the stocks mania of late 90s. And any further decline in stock prices brings the valuation to even more favorable levels. Do not forget the fundamentals...

Anyway, the liquidity problem should make some troubles in the coming weeks. So I would expect trouble and prepare for buying. Slowly... don't rush... (if you have good portfolio positions; if not I suppose you should run to make some...but first look at the disclaimer...)

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Saturday, June 03, 2006

The Payroll Figures from Now and the Past - how do you think about it?

There is a nice chart I've seen on The Big Picture Blog - it shows the development of the payroll recovery after some equivalent recessions in the past:

Source attributed: Contrary Investor

The author is - to say it politely - concerned about the outlook for the bourse and the economy by this comparatively weak recovery of employment. And he has not overlooked the fact, that we start this jobs recovery from quite low unemployment levels and that the recent recession in the USA was a rather small one. Though there is concern, and "the bill" for the very supportive monetary policy (as main reason to do relatively smooth in the real economy despite the second biggest stock market collapse in history) is still to be paid...

So, it's surely not easy to get the right view on those complex developments. I can't do it as well. Anyway, what I thought about is, that the pressure on prices (i.e. inflation) coming from the employment increase should remain weaker than currently feared. Ok, before the last report...

A smoother recovery (and the smoother recession before) provide - in my view - one more indication about the effects of globalization, more stable and ripe financial markets and capability of the world economy (and of course of the US-economy). It just does not shake that much as it used to. And the business cycles turn smoother and longer.

And I do expect this stock cycle will turn out to be longer than anticipated.

The free market economy is more capable than ever to absorb shocks, deterioration than ever before. As mentioned - we absorbed very well the severe bear market after 2000. The few of a budget deficit and slowing real estate markets will (hey - probably, I'm not an oracle) not get us so easy out of track.

So, if the economy is to stay relatively robust, how about the shares? They can nonetheless go down? Yes, if there were "hot air" and "hot speculation" and the prices are not in trace with the fundamentals. But I can't see none of that at the recent levels.

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Disclaimer: All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and are in no way intended to serve as personal investing advice and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Readers should not make any investment decision without first conducting their own thorough due diligence. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed.