Overvalued market going even higher: a technician thinks so

A friend sent me a comment by Richard Russell of the Dow Theory Letters, which Russell has been writing since 1954.  (He’s getting old.)  Russell refers to Robert Shiller’s price-earnings ratio, in which “p” is the current price and “e” is the average inflation-adjusted earnings of the past ten years.  Russell states the following:

“We are now 53.3% above the average P/E of the preceding decade. There have been only three times when valuations calculated by this method were higher -- the late 1920s, the late 1950s and 2007 just before the bull market ended. Judging from current valuations, we are either near the beginning of a bear market -- or facing a decade of sub-par performance from stocks."

 

Paradox: As a technician, Russell nonetheless sees the potential of a big upside breakout in the Dow.

The Southern Stream gas pipeling will avoid transit through Ukraine

Russia is pushing for construction to begin on the “Southern Stream” gas pipeline, which will avoid Ukraine entirely by going under the Black Sea to Bulgaria.  The already completed Northern Stream has reduced Russia’s reliance on Ukraine by 50% in supplying Europe, and the Southern Stream will allow Russia to completely cut off Ukraine and still provide gas to Europe.  The European Commission is opposing the pipeline on “monopoly” grounds. 

The pipeline will almost certainly go ahead. Russia is prepared to finance it 100% on spec if EU opposition prevents bank financing.  Bulgaria, Serbia and other states are in favor.  Italy will build the undersea section and the Germans are manufacturing the pipes. 

Polio declared a "world health emergency" by the WHO

Polio, which a few years ago was on the verge of being eliminated globally, is coming back, according to the WHO.  Polio is a virus that mainly affects children under 5 by multiplying in their intestines and then attacking the nervous system.  It spreads through infected water. There are vaccines but no cure.  The WHO has issued a “World Health Emergency.” There were 68 deaths by the end of April this year compared to 24 in the same period last year.

Polio is endemic in three countries:  Pakistan, Afghanistan and Nigeria.  It is spreading in and from Pakistan because Islamic militants have blocked vaccination programs there.  Syria, which was polio-free for 14 years, has now been inflected from Pakistan. 

Americans are becoming pariahs to international financial institutions

Deutsche Bank in Belgium has asked its clients who are US taxpayers to close their accounts by June.  In a letter, the bank said, “it is no longer allowed to use Internet, email, phone or fax to serve [US] retail clients.”  This is because of FATCA (The Foreign Account Tax Compliance Act) which is being phased in.  It required foreign banks to provide the IRS all financial information on all US taxpayers.  The penalties are draconian: a bank can be fined 30% of its annual US income for missing a single individual.

Americans have become pariahs to foreign financial institutions.  When I was living in Singapore several years ago, UBS announced that it would no longer accept any US citizens or green card holders as clients whether or not they lived abroad.  Will more individual Americans follow Pfizer and renounce their citizenship?

Gary Becker of the University of Chicago has died: Created "Rotten Kid Theorem."

RIP: Prof. Gary S. Becker of the University of Chicago died.  NYT: “Households, for example, were long seen as entities intent only on maximizing consumption, but Mr. Becker saw them as small factories that also produce valuable, though nonmarketable, basics of life, like leisure and sleeping.” He also came up with the “Rotten Kid Theorem:”  He wrote, “Children have an incentive to act altruistically toward each other as their parents want them to, even if children are really egotistical.” He believed that “behavior is driven by a much richer set of values and preferences that can also include altruism, loyalty and spite.”

The thing that I most remember is that he long ago said that children had changed from economic assets (i.e. a retirement program) of parents into consumption items.  Large families would come to be seen as signs of affluence.

Indian economy turning up, according the Finance Minister Chidambaram

In an interview, India’s finance minister Chidambaram gave an upbeat outlook for the economy:  4.9% growth in the FY ending March 31 past and 6% in the current year, with inflation, now 8.3%, moderating.  He has reduced his budget deficit forecast from 4.8% to 4.6%.  A bit ruefully, Chidambaram added, “I have done more heavy lifting in the last 12 months than the RBI.”  (RBI = Reserve Bank of India)

There is some Fed-envy among the politicians in India who have to do their jobs rather than rely on an accommodative central bank.

Bank of America's $4 billion mistake is neither complicated nor trivial

Bank of America’s $4 billion mistake:  The error is not trivial compared to BAC’s $145.2 billion in regulatory capital or $11.8 billion increase yoy.  Accounting rules cause banks to mark to market assets and liabilities.  So when a liability falls in value, the bank books a gain, but when they rise, it books a loss.  These gains and losses, if unrealized, can only be applied to earnings but not to regulatory capital. An unrealized gain was properly applied to earnings but improperly also applied to capital.

Bank of America paid PWC $94 million to do last year’s auditing.  BAC’s board’s audit committee is chaired by Sharon Allen, former chairman of DeLoitte.  The risk committee is headed by Frank Bramble, former vice chairman of MBNA, and includes former Fed governor Susan Bies, and Clayton Rose, a Harvard Business School professor.

My wife teaches algebra to 14-year-olds.  She says they often make mistakes like this.