Thursday, February 10, 2011

How to Catch Knives and Weekend at Abdullah's

Well TMM are not sure whether the king of Saudi is dead or not but one thing is for sure: he's really old and apparently not that well. Which leads TMM to think - if he were to die would they even tell us? TMM would like to see a remake of one of their favorite films - weekend at Bernie's.


TMM were hardly surprised that EM equities had a rough start to the year but having provided our readers our thoughts on the matter along these lines:
We have to ask ourselves just when we decide to fade these moves. As can be seen in the snap below, some very big moves have been seen out there in SE Asia.

As most macro-folk know, value is a relative thing and when looking at equities it often helps to compare earnings yields (the inverse of a PE ratio) and what the yield is on the local currency 10 year bond. It’s a simplistic measure on some level but it does get to the core of a lot of actors’ decisions: whether to hold bonds or equities, whether as a corporate to issue debt or equity. It doesn’t do much for relative FX valuations and what the yield spread should be between different markets but it does provide some anchor for equity valuations. So, what does it tell us?


With respect to India below it does seem to pick a few big turns and by that metric equities should be getting cheap sometime around 16000 on the Sensex. But cheap to what?
Well, cheap to local rates but how good value are they in historical context? To that end TMM have plotted the spread between Indian local FX 10 years and the US 10 year treasury and the inflation differential between India and the US. As can be seen below Indian bonds tend to be great value when the inflation differential isn’t so bad and they arguably are at this point in time as the CPI differential is falling. However – there are two ways these series can converge on inflation – either US picks up or India gets under control. Given what we are seeing in agricultural markets we can rule out the latter in the short term but a peak in CPI later in the year could not be far off and is plenty in local FX bonds at this point in time. TMM are holding off on equities but as we said before, dabbling in local FX bonds does not look completely insane except in a full-blown risk off panic which we aren’t ruling out. 


To that end, TMM are thinking that one of two things are possible - we see a bounce within the next few weeks in EM, likely after some more bloodshed OR we move into a generalized risk off. DM vs EM may have seen its best days this year (after 8% or so of alpha in 6 weeks, depending upon your reference indices) but things that have taken an absolute pasting this year - US rates, bearish bets in DM, etc etc may not be dead just yet. TMM are looking at a few other favorites like IBEX/DAX and thinking that though this is probably not the end as we know it, its likely time for a turn. 

8 comments:

Leftback said...

Reliance looks like it was a good knife to grab. We did grab EGPT a while back but it was a 24 hour marriage. What happens in Cairo stays in Cairo.

Anonymous said...

It would seem Tricky Trichet is in the process of pulling a G.W. Bush, hand off power just as the crisis begins to materialize in order that it may appear that it was the fault of his successor.

Perhaps Weber recognized this gambit--thus explaining his abrupt exit. Now that Gordon Brown is out of a job, methinks he would be a fine choice. After all, he *did* save the world as we know it. Gordo for ECB chairman!

Leftback said...

Anyone following the Fannie/Freddie announcement coming on Friday? What if they decided to announce put-backs to the banks, as part of a plan to wind down Fan/Fred and in order to bring the "free market" back into housing? Of course you wouldn't want to be holding BAC and WFC common when they do it.

That would probably help to provide this administration with much-needed PR.

Just a thought, they will probably just carry on fellating the TBTF banks as usual.

Anonymous said...

fellating ... priceless

Charles Butler said...

Ibex/DAX was beautiful, and beautifully timed - but there might not be much left there. By next fall, with IPO's to sate any amount of hunger for Spanish financials, the index will probably be 50% banks plus 20% TEF.

Add no domestic economic growth to the mix and the whole thing looks like a volatile dividend fund.

Leftback said...

LB is eating a slice of Humble Pie and wearing a tall cylindrical cap marked "D", for not seeing the short-term possibilities of IBEX/DAX and of Charles' excellent call on STD, a ticker that can easily be misinterpreted. Well done, chaps!

Anonymous said...

There was a recent comment on Indonesia being great value on this blog, well that first chart just showed great values can become even greater value, just don't follow your own advice too soon and catch the falling knife. Comments like "there could be a rebound soon, or the market could fall further" are just astrology, better refrain or throw away hard earned credibility.

Tradebot said...

uh, I'm venturing out my asset class (IR / FX) to the weird and fantastic turf of equities, but I wouldn't touch banks with a ten-foot barge pole. There might be some bargains there but unless you have inside info , it is practically impossible to get a basic valuation out from the convoluted financial statements.

However, one should take advantage of real money's reluctance on holding peripheral equity index exposure - TEF comes into mind, especially with Latam biz they have and the data biz driving growth in Europe. And it pays a nice dividend as well.