Recap 2-24-14


Several bits of food for thought today. First, the technicians will have a field day tomorrow talking about how there was a failed break higher in SPX, as it rallied to new highs but closed below the high close from 1/15:

The last time this happened was in August 2012. It certainly wasn’t a smooth ride back then, but it’s probably not wise to extrapolate this type of price action too far out:

Second, Greenbackd (among others) notes that P/E dispersion is at the lowest level in 25 years. Readers should go to that site to read the post in its entirety, but I’ll repost a few charts:

Obviously, this suggests that the opportunity set in Long/Short equity is unusually low. And it could persist – as the market continues getting more efficient.

Third, this chart from RBC via FTA shows how consensus expectations for further BoJ QE has been gradually pushed farther out: (I drew in the green line at ~50% to better show how median expectations is has clearly been delayed from 2Q to 3Q. Not sure how the recent BoJ meeting affected these expectations though)

Finally, Robert Gordon published a paper on NBER on long term US growth. The generalized conclusion looks fairly reasonable to me. Highlights from the abstract:

The United States achieved a 2.0 percent average annual growth rate of real GDP per capita between 1891 and 2007. This paper predicts that growth in the 25 to 40 years after 2007 will be much slower… Future growth will be 1.3 percent per annum for labor productivity in the total economy, 0.9 percent for output per capita… There is no need to forecast any slowdown in the pace of future innovation for this gloomy forecast to come true, because that slowdown already occurred four decades ago. In the eight decades before 1972 labor productivity grew at an average rate 0.8 percent per year faster than in the four decades since 1972.

I have written in late November about this in detail so I won’t repeat myself. But I will say that this change of glacial proportions was and continues to have major effect on macro asset pricing that very few people understand.


  • German IFO improved to 111.3 vs 110.5 exp and 110.6 prev
  • Moody’s upgraded Spain’s credit rating to Baa2 from Baa3 after the close on Friday.
  • Pentagon Plans to Shrink Army to Pre-World War II Level – NYT
  • Microsoft is cutting the price of Windows 8.1 by 70% for low cost PC’s – BBG

Upcoming Data:

  • Tue: Italy Consumer Confidence, US Consumer Confidence, Case-Shiller House Prices
  • Wed: UKGDP, US New Home Sales
  • Thu: EU Money Supply, Canada Current Account, US Durable Goods Orders, Jobless Claims
  • Fri: Month End, Japan Housing Starts, EU Unemployment, CPI, Canada GDP, Chicago PMI, Pending Home Sales, China Mfg PMI
  • Sun: AustraliaMfg PMI, Japan Capital Spending, Australia New Home Sales, China Non-Mfg PMI, Markit Mfg PMI
  • Mon: EU PMI, US Personal Spending, ISM

5 thoughts on “Recap 2-24-14

  1. It’s not a priori obvious to me that valuation clustering reduces the opportunity set. After all, if you can buy the diamonds on the same valuations as the dogs, it seems a propitious backdrop, at least for Growth At A Reasonable Price investors. For deep value players, obviously not so much.

    For sure, the opportunity set is not what it was in 2000/2001, but I don’t expect to see such conditions again in my investing career, so perhaps it isn’t so illuminating as a benchmark (in similar vein to how the now-common refrain ‘not nearly as rich as 2000’ doesn’t move me).

    1. That’s a reasonable point. I should’ve clarified that I was referring to shorter term opportunity sets – i.e. valuation reversion between the stocks of two companies that compete directly with each other. So I thought that would have an impact on Long/Short strategies. The larger misvaluations – the valuation of dogs like diamonds in your example – tend to only correct during recessions / financial shocks. Certainly a source of alpha also – but may be outside the mandate/domain of the Long/Short guys.

      1. Fair enough; that seems like a corollary of falling vols and falling institutional volumes. I don’t know what the situation is like now, but a few years ago, at least in Europe, there was a crazy proliferation of long/short funds, so a bit of winnowing is probably in order.

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