Sell ​​in May and go away

 

I am a big fan of stock sayings, and Sell in May and go away talk to me particularly. I started working on the Exchange since May 1990, and I would have been better advised to sell or to abstain rather than buying at all is to celebrate my arrival. The period May to October was not the most flamboyant for shareholders.
According to this dictum, the semester from May to October is unfavorable, in contrast to the period from November to April. For a follower of the theory of efficient markets, the effect of seasons on the Bourse smile. Who thinks about behavioral finance, the question deserves to be dug.
A study by the U.S. broker SSB gives inconclusive results, economic growth over the period is a more important factor.
By cons, research conducted by Dutch researchers published in 2001 by the Social Science Research Network states that 36 of the 37 cases studied, the period from May to October has been worse than the other, and without an explanatory factor is set identified.
What prognosis for 2011? We just finished a semester beaming back interest rates, oil remains very expensive, geopolitics is hardly serene, and the effect may not have been very sensitive in the last 2 years. If we find good reasons to sell, no need to rack their brains for a long time. We will certainly have a chance to talk

China Shakes The World

I recently read a book recently published by James Kyng, former Financial Times correspondent in China, under the title "China Shakes the World, The Rise of a hungry nation."
Some ideas to be learned from this fascinating book:
- The Chinese labor force increases by 25 million people each year who must find work. This is without counting the internal population movements, with the influx from the countryside to the cities. The strong long-term growth of the economy is a vital necessity. To simplify, China said the jobs to us, the West said to us profits.
- The vastness of the Chinese domestic market is a dream, not only the West; the Chinese as well. In fact, the Chinese domestic competition in all segments of consumer products is intense, especially since the producers are on equal terms. The consequence is that the margins are very low, and profits are sought for export.
- At the cultural level, the numbers of very great importance. The official slogans are an illustration. This is a consequence of the permanent situation of overpopulation, and the difficulty to feed every mouth. China is a country that really hungry, in every sense of the word. We can better understand the speed with which China has integrated science and technology.

For the future, let us ask some questions about the future role of China in the world of finance. With 1.2 trillion dollars in foreign reserves, increasing rapidly, and a large domestic savings, the raw material does not fail! For now, the asset allocation is not optimal. But it is likely that major Chinese banks will quickly integrate the tools of modern finance. With the size of their balance sheets, they will become formidable competitors. Moreover, the government plans to create an investment agency, with $ 200 billion to begin with, history of investing a portion of foreign exchange reserves of more optimally, a little on the model of Singapore's Temasek. This will be an institutional investor interest. The time is not far distant when China initiated the takeover bid will win over European and U.S. exchanges.

Are The Banks Illiquid?

To understand the current financial crisis, it is good to keep in mind the following concepts:
- The real business of a bank is to make the transformation: to transform short-term resources into long-term jobs. By definition, a bank is illiquid. The maturity of its assets is always longer than its liabilities, that resources are deposits of customers or funds borrowed from the market. Transform the asset into a negotiable instrument in any market changes nothing; it merely shifts the problem.
A bank and the banking system generally work only on trust: if the bank cannot find resources on the market, or if depositors fearing for their money, liquidity risk materialize. You can create all the regulations, regulations, national supervisory bodies and international as you want, it makes no difference.
And on this point, the structure of bank capital is of little influence.
On 29 September, Dexia and Natixis lost over 25% in stock. DEXIA is owned by Belgian public authorities and the CDC, NATIXIS is not owned banks, mutual insurance group, and Caisses d'Epargne, in the bosom of the CDC still. These are no short-term shareholders or speculators eager to immediate profits.

Investment Safety Net

Where is the safety net in the financial system? In fact, every bank has, more or less formal, more or less explicit. A bank is not actually a business like any commercial company: its transformation function of financial flows on the one hand, the leverage of its balance sheet on the other hand, make a bank failure involves systemic risk significant. The existence of the safety net is in itself an element of risk, since it can reduce the sense of risk among investors as among bank customers. And when risk aversion raises abruptly loud reaffirmation of the existence of safety net policies and the monetary authorities do not help to restore confidence. This question is not new: Alan Greenspan had raised the subject in May 2001.
Currently, the market requires less risk, which is materialized by the requirement for reduction of bank leverage: decrease in assets, so credit crunch, increasing equity, so severe dilution of existing shareholders, and the final stage being nationalized with an elimination of shareholders earlier.
Strengthen regulation is a double edged up capital ratios exacerbates the credit crunch. We can see the confusion that exists between minimum standards and the assessment in the market. The crisis is not over, and the political and monetary authorities are preparing a few more to rescue financial institutions, illiquid and / or insolvent.

Stocks and Bonds Together

There is no surprising that the rising stock market has since been held in conjunction with the rise of the bonds, the yield of government bonds to 10 years back from 4% to 3.50%.
In my opinion, the phenomenon is rather healthy. It is true that in times of intense crisis, we see the fall of actions coincide with the rise of the bonds, in a movement of flight to quality. This divergence implies then a very strong rise in the risk premium on equities.
In an assessment of market shares made by discounting future cash flows, the relevant discount rate is the rate "risk free" government bonds plus the risk premium on the market. This means that the increase of joint stocks and bonds is reflected, side actions, lower the discount rate as a result of lower risk-free rate. Looking back a little, we know that rising stock between 1995 and 1999 could be largely explained by lower bond yields during this period.
In recent months, there was again a decline in risk premium, which can be read for example in the course of corporate CDS and in reducing the implied volatilities of options and that improved earnings expectations.
Decrease the risk free rate, reducing the risk premium, higher earnings forecasts: These three elements combine to explain the current rally in equities.
Whether it goes well in the optimism is that another story.