Gas Price Reversals

On an earlier post I was commenting on a disconnect between oil and gasoline prices. Oil was falling but gasoline was staying up...

Well guess what...? The very opposite is happening now... Take a look

In the last 3 months, gasoline prices have dropped from $3.55 to $3.20  while oil has fluctuated between a low of $75 per barrel to a current $100.

How long does it take to clear oil inventories? Or is it simply noise from day traders?

The cheaper it gets, the less I want it

Great intuitive commentary in the Financial Times yesterday about the effects of really low rates on the banking industry and the economy.

Pimco's Bill Gross argues that low rates could entice less borrowing instead of more.

Good read for students and practitioners

Is Pure Expectations Hypothesis useful?

Does Pure Expectations Hypothesis provide good estimates of future rates?

Does PEH matter?

Most finance students at one point or another have the Pure Expectations Hypothesis. The professor will show term structure data, and then say something like…

“If PEH holds (big if) we can use today’s data to calculate what the market expectations are for next year’s rates. “

How good are these predictions?

Based on 2010’s daily term structure data, I calculated the PEH expectations for 2011. Take a look for yourself. The chart below shows the prediction and the real outcome.

Will they come closer?

Soccer and Efficient Market Hypothesis

I always enjoy showing my students live examples of how EMH works in reality. I usually use an online earnings call while looking at the stock prices, tick by tick. This week for instance, I shared the afterhours drop in the price of Apple after their earnings miss. Students are generally impressed by this market wisdom and by how quickly prices incorporate information.

But every now and there are some situations that leave me speechless.

Coincidentally this week I witness one such moment. Please bear with me.

My favorite Chilean soccer club: Universidad de Chile (not related to any university), like many others in Chile is a publicly traded company trading under the mnemonic AZUL AZUL. Yes, imagine the Patriots, Cowboys, Sox and Yankees trading in the NYSE.

My team’s share price went up this Friday. A lot! It went up so much that the bourse had to stop trading when it had literally doubled in value.  After trading was re-started it settled for a67% gain. This on top of a 28% gain on Thursday.

The reason? On Wednesday the team had a superlative performance (4-0) against Flamengo a Brazilian team in a South-American tournament.

You can watch the beautiful 4^th goal here.

I am buying some AZUL AZUL!!!

Is the Nikkei that bad?

Japanese stocks have performed badly since, ... well since what seems forever. Looking from a long term buy-and-hope strategy, had you invested in the NIKKEI in 1984 your returns would be around nada. No matter how much we complain about our financial markets and their crises, had you invested in the S&P500 you would be sitting in a 600-700% return.

 From a shorter term perspective, say after the dotcom bubble, results are similar. Japanese stocks underperform US equities. Does this mean that investors should avoid Japanese stocks? Not really. Look in the same chart how the JPY/USD is doing.

Oversimplifying calculations, and assuming that an American investor put 10,000 USD (around 1,333,333 JPY) in the Nikkei in 2002, he/she would be sitting on a20%equity loss. Today he/she would only have 1,066,666 JPY, which at the current exchange rate (75 JPY/USD) would be 14,222USD…

I don’t know about you… but I would take it.

Is the Nikkei that bad? Not if you are an American.

Slovakia and the Kentucky Derby

Slovakia and the Kentucky Derby.

An old mentor of mine once told me... "Son... you don't put a mule in the Kentucky Derby"

At first, I thought the old man was funny but crazy. In time, I have learnt to appreciate those words of wisdom.

In fact it is exactly what Slovakia is arguing in their resistance to approve a bailout package for Greece.

Why help a country that is broke? Why throw good money after bad?
I totally agree with them

That is not the whole story, there are two moral issues that needs to be explored.

1) Should one of the poorest countries in the EU have to pay for the rescue of a richer one? Should Slovakia, a model of good governance and responsibility have to pay for the irresponsibility and corruption of Greece?

2)  According to the EU budget, between 2007 and 2013, Slovakia will receive 11 billion Euros in net transfers, or 2,039 Euros per capita. Greece... they will receive 25 billion (2,238 per capita). Should Slovakia have the right to renege on this?

What is ahead?

According to intrade here is what to expect for 2012

Romney to be the Republican Candidate (62% chance), and the DOW below 12,000 (60% chance).
Republicans will control the senate (67% chance) with a 50% chance of going into recession


Ouch