Monday, April 09, 2007

Easing in

Markets ar easing in to the post-Easter/post-payroll week, with most of Europe out for Easter Monday today. Thus, it will be tomorrow before one can say that whatever impact last Friday's employment figures might have is truly in the price. If Asian markets are anything to go by, then equities will put in a good performance today and tomorrow. Of course, earnings season lurks like the proverbial 800 pound gorilla, and a series of disappointing out-turns could easily reverse favourable developments on the macro front.

Macro Man took the weekend off, and so didn't post the answers to the previous weekend's quiz on P/E ratios. Congratulations to Sandy, the winner.

The answers were as follows:

Shanghai 40.5
Nikkei 37.4
Sensex 23.1
SPX 17.1
FTSE 16.8
TSE 16.4
Hang Seng 15.6
DAX 14.6
ISE 100 13.1
Bovespa 12.4


"Cassandra" said...


Since expectations rule, the retrospective PEs are often superflous in equityland. Moreover, since my full namesake is Nihoncassandra I do wonder from where the Nikkei PE=37 was actually derived. Perhaps it includes negative values? (not helpful in such index calculations). Perhaps it is "parent" and not "consolidated" accounts (thereby vastly understating earnings).

Japan for the most part is PE= approx low 20s (retrospective) and even lower 20s on a prosepctive basis).


Mo' better capital efficiency in USA, better "value" in Japan. I suppose the question might be: "is Icarus a deserving economic role model?"

Macro Man said...

Cassandra, you are indeed correct that those are trailing P/E's, scribbled down a week and a bit ago from my trusty Bloomberg.

While it's true that estimated earnings would be a truer gauge of value in a perfect world, this would sadly require the estimates to possess the forecasting acumen of, say, the proverbial chimpanzees flinging darts at newspapers.

I did a study a few years ago that measured the average forecast error of index earnings growth estimates across a wave of markets. To call the overoptimistic bias "Panglossian" is an understatement.

Anyhow, not sure what caused the boost to Japanese P/E's using the trailing data...I suspect you'd know better than me!

"Cassandra" said...

The sum of the parts (individual bottom-up analysts) tends towards the Panglossian with the sum of the consensus (consensii?!?!) dribbling downwards to meet the actual index reported.

The top-down expectational set on the other hand tends towards the Eeyore-ian, typically being overly pessimistic, ex-ante. What is it about macroeconomics that drives such Strategists to such despair?? Does Pessimism reall "sell" so well, or is it the seduction of the seemingly deterministic Chomsky-like outcome??!?

Macro Man said...

As I recall, it was top down numbers that I was using in the study...but now that I think about it, I did the work 5 years ago, so the pie-in-the sky wishcasts of the late 90's had a higher weight than they would now. I can well imagine that the early noughties may well have been the elixir of death that turned Pangloss into Chomsky. Or, my memory could be faulty and it was actually bottom up data I was using.

As to why pessimism sells...I have a theory that people feel smarter when they're pessimistic- it's like they show off their list of worries like a guy on a street corner shows off watches in his coat lining. Pollyanna and Chicken Little are equally poor investment gurus, but poor Polly seems to come in for a lot more stick than CL...

Cassandra said...

points taken, though I think the loss-aversion behavioural archetype is deeply seated in the psyche of prehistoric man. The fat-tail-like outcome of being wrong about the swiftness of one's flight ability while exercising one's hunting prowess would in all likelihood be fatal, whereas the more cautious , though potentially suffering slow starvation, or diminished heroism with which to impress a potential mate, would at least be around to try to impress a mate on another occasion.

That said, the optimists have certainly triumphed in the post-Volcker days of easy money, though it must be said shooting fish in barrels or buffaloes on plains mid 1800s was hardly a challenge....

Charles Butler said...

re: pessimism

One of the fundamental functions of homo sapiens in the grand scheme of things is to spew forth gossip - which is mostly conjecture concerning the possibility that our neighbour's linen is, in fact, dirtier than he would have us think. Despite pretensions to the contrary, economists, pundits and prognosticators (and their readers) cannot overcome our hard wiring in this regard.

Macro Man said...

Indeed. One of the most important (and indeed, difficult) challenges in investing/trading is knowing what to focus on (in my world, a few key themes) and what to ignore (most of the rest.)

With technology has come a sharp rise in the noise-to-signal ratio.

Charles Butler said...

The modern concept of information as what you get, for example, on your computer screen is, in fact, a convenient and self-agrandizing co-option of a word that was never intended to be confused with 'information's' utility at the receiving and interpreting end - being you and me. In information science it referred mainly to the mathematical and technical problem of ensuring that a zero-bit (or whatever) sent was received as one at the other end. The fact that the signal itself is information in the IT sense has no bearing on the information content that it may or may not boast.

Unfortunately, success with the technological problem of signal-to-noise has created its own anti-matter evil double at the level of content. On the other hand, it's a pretty satisfying experience to be able to construct some workable solution out of all that crud.