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What We Read Today 24 March 2015

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).

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Best and worst of the tourney so far (Scout.com, MSN Sports)  This is a good quick read summary of ther madness so far.


March Madness Makers and Takers (Bloomberg Business)  Detailed review of the financial side of March Madness.


Articles about events, conflicts and disease around the world

U.S.

Greece

France

Israel

Syria

Russia

India

China

Japan


Watch Out For "Dividend Traps" (Dave Gonigham, 5 Min. Forecast)  Yield chasers are warned to beware of high-priced dividends.  Some dividend stocks are now selling at historic price earnings multiples.  While the PE for the S&P 500 is an above-average 20 (see next article), some rather conservative stocks with reliable dividends are trading much higher.  That represents a valuation escalated because of very low interest rates.  When the 10-year Treasury is yielding less than 2% the current yield of Duke Energy above 2.6% can look very attractive - and the dividend yield of Proctor & Gamble above 3.3% even more so.  Why is this a possible trap?  See second article discussion below.

overvalued.dividends


Is the Stock Market Cheap? (Doug Short, Advisor Perspectives dshort.com)  Doug Short contributes to GEI. A historic view of the PE (price-to-earnings) ratio for the S&P 500 showing the author's contention that PE is not a good indicator of market performance in the near future.  This article was written in early March when the PE ratio was higher.  It was 19.7 as this was written.  So as an indicator, the PE ratio has its limitations as a valuation indicator for the entire stock market.  But it does have value for comparative valuations of stocks within the market.

Click for larger image at Advisor Perspectives dshort.com.
pe.ratio.history


Don't Fight the Fed: Interest Rates and their Impact on the Stock Market (Sam Stovall, AAII Journal)  This is a 2009 classical analysis of how stock markets react to interest rate increases.  The initial response is not what one might expect on the basis that the value of earnings and dividends are diminished when bonds pay higher coupons.  Stocks can (and do) rise in price when interest rates start rising.  But long-term, Stovall says"  "Don't fight the Fed."  (Actually this expression is generally attributed to have been originated by Martin Zweig - see here.)  Over the longer term, rising interest rates do suppress stock prices and falling interest rates promote them.

Econintersect:  As a simple model of how interest rates can affect stock prices. let's consider again Duke Energy and Proctor & Gamble.  At current interest rates these two stocks are trading at PE ratios of 26 to 28.  If we accept that these are appropriate ratios when the 10-year Treasury yield is 1.9% then a first approximation would be that the ratios would be cut in half if the 10-year bond rate doubled (to 3.8%, not an outlandish possibility - after all the yield has been above 3% as recently as 15 months ago).  If earnings were unchanged that would infer a market price for each stock at 1/2 current value and a doubling of the dividend yield.  This possibility is the "dividend trap" of the article above by Dave Gonigham.


European Negative Yields and U.S. High Yield Boom (Walter Kutz, The Daily Shot)  Kurtz draws a connection between the increasingly negative yields in the Eurozone and inflows to the U.S. junk bond market.  There is no denting a correlation as soon as the German 12-month note dropped to negative yield there was a surge of U.S. high yield buying.

euro.down.us.hi.yld.up


U.S. Household Debt at Best Levels in Decades (Walter Kurtz, The Daily Shot)  With a sharp reduction in mortgage interest as a share of disposable income, the U.S. household balance sheet associated cash flows has not looked this solid since the early 1980s.

us.household.debt.1980.2015


Other Economics and Business Items of Note and Miscellanea

A World without the Welfare State (Epic Times)  Hat tip to John O'Donnell.  How did the world ever operate without government provided welfare?  Richard Ebeling reviews the history and the philosophy.

Pension Funds Shun Bonds Just as Southeast Asia Needs Them Most (Bloomberg Business)  Pension funds in Indonesia, Malaysia, Thailand and Philippines are shifting away from bonds and into equities to try to compensate for declining currency exchange rates.  Here is another consequence of the strengthening dollar.

Liquidity crisis could spark the next financial crash (The Telegraph)  Corporate bonds could spark the next financial crisis if too many try to unload the glut of low yielding paper accumulated in recent years.

The Guardian’s fossil fuel divestment campaign could do more harm than good (The Conversation)  Selling shares in polluting energy companies just leaves these firms in the hands of less concerned owners.

Global warming is now slowing down the circulation of the oceans — with potentially dire consequences (The Washington Post)  Europe could freeze with global warming.

Regime Change: America's Failing Weapon Of International Deception (Zero Hedge)


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