Stocktake

Compiled by PROINSIAS O'MAHONY

Bad week but bulls still unperturbed

MARKETS tumbled over the last week as European woes came back into focus. The SP 500 suffered a five-day losing streak while Spain’s Ibex fell by 3.9 per cent on Wednesday alone. All 30 major indices tracked by Bespoke Investment Group registered declines over a five-day period.

But investors don’t appear spooked. Even after the sell-off, 27 of the aforementioned indices remain above their 50-day moving averages, indicating near-term strength, and 26 are up in 2012. Bespoke notes that 28 of the 30 indices were technically overbought the previous week, so profit-taking likely contributed to market falls. With volatility gauges in Europe and the US below historical averages, bulls see this as a pullback rather than the return of serious jitters.

Google searches out all-time highs

GOOGLE has barely paused for breath since mid-July, rising over one-third to surpass its all-time high. Now the fifth-most valuable US company, Google is within striking distance of third place – its $247bn market cap almost identical to Wal-Mart and Microsoft, with Apple ($639bn) and Exxon Mobil ($424bn) in the top spots. Google’s uptrend is in contrast to Facebook, which last Monday needed the protection of Nasdaq circuit breakers to prevent short sellers from taking positions, following a one-day 10 per cent decline.

When it floated last May, it was valued at $104bn, more than half Google’s then valuation. Today, Google trades at more than five times Facebook’s $44bn market cap. Even now, Facebook trades at 51 times estimated earnings, compared to 18 for Google, indicating the gap may widen.

Indian festival moves gold market

SIX consecutive weekly gains have seen gold rise by 12 per cent this quarter, its best performance since Q2, 2010. But market commentator Mark Hulbert notes that October has historically been gold’s weakest month. Why?

He cites Ned Davis Research (NDR), which found gold demand rises around the five-day Indian festival of Diwali. Analysing the last 10 Diwali festivals, NDR found that gold typically forms a tradable low at the start of the festival, which begins this year on November 13th. Central banking policies have driven gold’s recent upsurge but NDR found “roughly 50 per cent” of gold demand still comes from jewellery. Hence, the Diwali connection.

Bubbles a struggle for policymakers

“WE STILL do not have a good definition of an asset bubble,” notes a new Chicago Federal Reserve paper, “and we still do not know how to identify them, what causes them to grow or burst, or what their welfare implications are.”

One is tempted to respond, “I know it when I see it”, as did the US judge who famously struggled to define pornography.

However, Jeremy Grantham’s casual definition – a price rise at least two standard deviations above the long-term trend – does the job nicely. The famous value manager has identified 34 major investment bubbles, and all but two – the British and Australian housing bubbles – eventually reverted to trend.

Bubbles are nigh on certain in cases of a “nearly perfect economy and generous money”, he said last year, and there are usually warnings before a bubble breaks. “Any value manager worth his salt can measure when there is a large bubble,” he added.

Fowl extravagance mere chicken feed

THE British media was agog last week with news that hedge fund manager Crispin Odey is building a £130,000 temple for his chickens. A planning application for the 775sq ft temple noted that while the design and materials appear “rather grandiose for the purpose of a chicken house”, the building is “still modest in size”.

Journalists scoffed at the “fowl extravagance” but £130,000 is chicken feed to Odey, so he won’t give a cluck about all the fuss.