Does Liquidity Reduce Risk Premia?

I was recently looking at liquidity versus solvency, and Jim Reid at Deutsche Bank was still wondering about the credit matters in the European periphery on Wednesday. The credit strategists at BNP Paribas had an interesting take on divergences in credit and equity markets today, my emphasis:

The inconsistency between credit and equity markets can only be explained by the discrepancy in confidence levels being expressed by the markets with regards to the various liquidity measures announced by the ECB, EU Commission and IMF in assisting the PIIGS. We believe the ECB will be forced to expand their quantitative easing measures or the sovereigns may have to go directly to either the EFSF facility or the IMF to overcome medium term refinancing risk, a factor that is spooking credit markets but being ignored by equities. For once, we believe, equities may be telegraphing the right message, as in more liquidity from the authorities to reduce risk premia and hence painting a glass half full picture.

Click on charts to enlarge, courtesy of BNP Paribas.

Inspired by Battle Royale Between Fundamentals & Technicals at Trader's Narrative, I would rather say that the "Battle" is won, as stupid as it may be, by ECB' s "Unlimited Liquidity", that is Resolving The Emergency Of Investors, err, Banks ...

If need for additional liquidity and low interest rates are signs of tight money, does liquidity then reduce the risk premia?

More Details About "Cream Lickers"

US equity strategy team at Goldman Sachs provides us with more details about "cream lickers" at efficient frontiers. Click on chart to enlarge, courtesy of Goldman Sachs (I have a small problem with the date on the chart).

But note, US equity mutual funds have still difficult times ...

Who Loves The Government Debt?

Nice chart from global fixed income strategists at Nomura. Click on chart to enlarge, courtesy of Nomura.

However, in many cases, and ever more often, the private sector brings the governments down, via banking system... and sometimes governments bring down the banks? Or everyone has inflated expectations about the future?

Japanese Savers Remain Cool

From the latest Fixed Income Outlook by Societe Generale:

USD JGB CDS indeed widened, but largely as a result of re-pricing of sovereign CDS globally in reaction to the crisis in Europe. Other measures of creditworthiness such as USD JGB ASW have been largely stable and only increased slightly since May 2010 as USD/JPY CCS basis widened amid concerns of USD shortages globally.

Click on chart to enlarge, courtesy of Societe Generale.

And continued:

Risks to consolidation are very substantial, nonetheless. In case fiscal tightening efforts by the current administration are non-credible to Japanese savers, a crisis of confidence is possible.

... we are only likely to see a Japan sovereign crisis if Japanese savers lose confidence in the safety of their ¥ assets. This would manifest itself in capital flight from Japanese banks, higher JGB yields and a wider USD/JPY CCS basis. As such, in a real sovereign credit crisis we would expect convergence between JGB USD CDS and JGB USD ASW.

Watch China?

Test Your Habits Of Highly Ineffective People

Interesting reading by Dan Ariely, The 7 Habits of Highly Ineffective People ...

Citi From Russia With Love

Equity strategists at Citi Global Markets came with a new hit "From Russia with Love" yesterday:

The PE ratio probably exaggerates Russia’s valuation discount. One reason Russia’s multiple is so low is the market’s heavy weight in energy stocks, which look cheap everywhere. Understated depreciation, low payout ratios and high capex needs also play a role in this discount.

Nevertheless, Russian stocks do look cheap to us. A review of PE, PB, EV/EBITDA, free cash flow yield and EYR metrics all suggest that Russia is at the bottom of the emerging market valuation spectrum, even if we adjust to account for Russia’s sector weights. One exception: dividend yield.

Click on chart to enlarge, courtesy of Citigroup Global Markets.

As to earnings yield ratio vs. bond yields:

The earnings yield ratio is another metric worth watching... This ratio, by which the earnings yield or inverse of the PE is compared with the bond yield, is particularly flattering to Russia given the current level of external debt yields and the relatively narrow Russian Eurobond spread. Russia’s earnings yield of 17% is triple the eurobond yield of 6%, a ratio that is very unusual in a global context (Figure 15).

You never know for sure why the discounts ...

Spain Entering Next Danger Zone And Equities Still Very Much At Risk?

Still a lot of caution on the lips of technical chartists in the house of Swedish SEB today. Click on charts to enlarge, courtesy of SEB.

Average Chinese Investment Math?

Click on chart to enlarge, courtesy of JPMorgan.

It is not clear to me, why the real 3-year deposit rates are used, but, probably, due to best visual fit. However, the economists at JPMorgan note:

At the root of the Chinese property market’s boom-bust tendency is the lack of investment alternatives for the average Chinese citizen. As Figure 15 shows, investors are more inclined to channel their funds into real estate when deposit rates are at low or negative levels. While the government’s administrative measures may help stabilize the sector in the short-term, capital market reforms and the broadening of both onshore and offshore investment options are necessary preconditions for stability in the long-term.

Eehhh, imagine what happens, if capital account goes free?

Ready For World Cup Volatility?

The ueber-bull Binky Chadha & Co. from Deutsche Bank looked at volatility so far this year on Wednesday. Here are some charts, click on charts to enlarge, courtesy of Deutsche Bank.

Guys at Bespoke Investment Group also have a kind of compilation on recent volatility:

Up and Down and Round and Round
S&P 500 50-Day Average Daily Change Back Above 1%
The All or Nothing Market

Strategists at Nomura have a reminder today:

- Those hoping that this afternoon’s first World Cup game will herald a quiet month for markets may be disappointed.
- The past four World Cup tournaments have produced lower trading volumes, with the exception of Korea/Japan in 2002 when the majority of games took place outside the trading hours of most of the world’s football fanatics who are largely based in Europe and the US.
- With this year’s World Cup taking place in South Africa which is in the GMT+2 hour time zone, we think a similar decline in volumes could be expected over the coming month.
- However, this decline in volumes has not always translated into a decline in realised volatility. During the last World Cup, Germany 2006, realised volatility rose markedly vs the month before and after and the average of the year despite volumes falling.
- All those planning to put their feet up for the next month can expect a lot of company, but keep half an eye on the trading screens as portfolio P/L may not be as lethargic.

Click on charts to enlarge, courtesy of Nomura.

Deluded By Liquidity Glut?

I read latest by Rick Bookstaber today - Common Sense Crisis Risk Management, but this sentence does not leave my sick mind:

With so much money flooding into the market (and so much money means so much leverage), people start to scan the landscape for the less known – and less liquid – markets to find value.

This should be amazing, and I have noted that long time ago, there seems to be some mis-understanding? Even Milton Friedman, the high priest of mechanical monetarism, according to TheMoneyIllusion, I thought so too Dr. Friedman, has noted:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.
. . .
After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

So, liquidity is needed to keep the system alive, but "cream lickers" at efficient frontiers...

... start to scan the landscape for the less known – and less liquid – markets to find value.

Deluded by liquidity glut and...

... fallacy of identifying tight money with high interest rates and easy money with low interest rates ...

Apparently, old fallacies never die.