The Reserve Bank of India left its key interest rate unchanged at 8% on Monday, the first pause by Governor Raghurum Rajan after hiking rates 75bps since September. Rajan certainly appears to be living up to the considerable hype since taking the job last year. In addition to introducing much needed reforms, Rajan has corralled CPI inflation to a two-year low of 8.1% Y/Y and stabilized India’s currency. The Rupee was one of the worst performing EM currencies through the first three quarters of 2013 but has since rallied and even outperformed the JPMorgan EM Currency Index since January 1. Higher real interest rates obviously make the Rupee more attractive but Rajan’s steady-hand is giving confidence to foreigners investing in India.
Indian Rupee / US Dollar (white)
–
JPMorgan EM Currency Index (orange)
(Source: Bloomberg, GBI)
43
The number of years since Southwest Airlines took wing. Once the industry’s brassy upstart, the airline has begun to resemble the mainstream rivals it rebelled against in its youth: carriers that were slow-growing, complex and costly to run.
(Source: Wall Street Journal)
The strong performance of stocks in 2013 has many commentators describing the current market as being in a bubble. And often they cite the Shiller P/E [price-to-earnings] ratio, a measure developed by Yale economist and Nobel Prize winner Robert Shiller.
As of March 19, 2014, the Shiller P/E stood at 25.4, much higher than the historical average of 16.5. If a value of 16.5 indicates that the market is fairly valued, as some commentators believe, then the current market is more than 50% overvalued. (See Chart below)
The Shiller P/E is a twist on the traditional P/E. It takes the previous 10 years’ earnings on the S&P 500® Index, adjusts them to current dollars, averages them, and then divides this result into the S&P 500’s current market capitalization. By relying on 10 years of earnings, the Shiller P/E mitigates the earnings volatility that can distort the traditional market P/E.
One problem with this measure, however, is that it may be used in a way that is too restrictive. If a reading of over 16.5 means that the market is “overvalued,” then stocks have been “overvalued” for most of the past two decades. Since January 1991, the Shiller P/E has been above average for 268 of the past 278 months.
Yet, during that time, the S&P 500 has more than quintupled, rising from 326.4 (on January 2, 1991) to more than 1,860 (as of March 19, 2014). Including dividends, this amounts to a compound annual return of 10.1%. Clearly, investors using the Shiller P/E in order to avoid an “overvalued” market would have missed out on significant gains.
The Shiller P/E is not, however, without its critics. Wharton professor Jeremy Siegel, for example, has pointed out that the metric may be biased upward because of accounting rule changes made in the late 1990s. These changes require that assets be written down when they lose value and then charged against income. Increases in asset prices, however, are not recorded unless the assets are sold.
These changes create a downward bias in reported GAAP earnings, says Siegel, resulting in an upward bias in the Shiller P/E. Siegel also believes these accounting changes make comparisons of today’s earnings with those reported before the changes invalid. He recommends that for an apples-to-apples comparison with today’s market, only the last 15 years of Shiller P/Es be used. The average over this period (December 1998 to December 2013) is 26.5, further suggesting that current valuations may not be as unreasonable as many suggest.
Those arguing for a market bubble also cite corporate profit margins, which are near record highs and which some believe are likely to return to more normal levels soon. But many factors are behind the higher profitability, including low interest rates and favorable tax rates in international markets, neither of which is likely to change soon.
Operating leverage is also responsible for the improved profits, according to Milton Ezrati, Lord Abbett Partner, Senior Economist and Market Strategist. “The capital intensity of U.S. business enhances productivity, but it also raises fixed costs relative to total costs, and these fixed costs don’t go away during an economic downturn the way employee costs do,” said Ezrati. “Fixed costs must be covered even when revenues decline, so when sales fall, earnings may drop precipitously,” he added. “But when revenues rise, much of the increase goes right to the bottom line, as the fixed costs are covered.”
This positive effect may persist for a while, according to Ezrati. The economy is still using only 78.5% of its existing capacity, according to the Federal Reserve, suggesting that firms still have more equipment to bring online, which would allow even more revenues to flow to the bottom line.
(Source: Lord Abbett)
The Citi Economic Surprise Index tracks actual economic data relative to consensus expectations. When the index is above zero, economic data releases are coming in better than expected, and conversely, readings below zero signal economic data releases are below expectations. Since mid-January, the index has been falling and is now in negative territory, indicating a slowdown in economic activity relative to expectations. Some, but not all, of this weakness can be attributed to the harsh winter weather. However, we could be near a low in this measure as economists begin to incorporate new information into their forecasts.
(Source: Citigroup)
165
The number of job openings posted by mobile-game developer King Digital Entertainment, following a lackluster listing on the New York Stock Exchange last week.
(Source: Wall Street Journal)
2.7%
The yield paid by the government’s 10-year Treasury note, the most prominent market rate, was down on Friday from 3% at the end of December, after the U.S. Federal Reserve began easing back on policies that keep interest rates low.
(Source: Wall Street Journal)
This graph shows why Deflation is a bigger worry in Europe right now.
While it’s difficult to distinguish cause from effect between these two monetary indicators they both point towards deflation in Europe. The latest reading from February showed that the 3-month average of M3 money supply growth in the Eurozone remained 1.2% Y/Y. Ostensibly the Germans oppose balance sheet expansion because it is inflationary in nature. Conversely, balance sheet contraction is deflationary in nature; it’s just a matter of picking your poison.
(Source: Bloomberg & GBI)
8,405,837
New York City’s population hits a new record, according to an estimate released Thursday by the U.S. Census Bureau.
(Source: Wall Street Journal)
Some number highlights copied from the Forbes article below:
The past year Sequoia’s scrappy methods have produced the firm’s biggest gains ever. A record nine Sequoia partners appear on the FORBES Midas List of the most successful venture capitalists, thanks to the firm’s lucrative investment in companies such as Airbnb, Dropbox, FireEye, Palo Alto Networks, Stripe, Square and WhatsApp. At the No. 1 spot is Sequoia partner Jim Goetz, who backed WhatsApp in 2011, well before Facebook agreed to buy the mobile-messaging company for $19 billion. Leone ranks No. 6, followed by colleagues Michael Moritz, Alfred Lin, Roelof Botha, Neil Shen, Michael Goguen, Bryan Schreier and Kui Zhou.
Consider Sequoia Venture XI Fund, which in 2003 raised $387 million from about 40 limited partners, chiefly universities and foundations. Eleven years later Venture XI has booked $3.6 billion in gains, or 41% a year, net of fees. Sequoia’s partners stand to collect 30%, or $1.1 billion, while limited partners get 70%, or another $2.5 billion. Look for even more outsize returns from Venture XIII (2010), which is up 88% a year so far, and Venture XIV (2012). The latter two will split the $3 billion or so Sequoia takes home from the WhatsApp deal. Add it up and Sequoia is turning its own partners into billionaires while keeping outside investors purring.
(Source: Forbes)