Friday, 29 June 2012

Euro area summit statement - recapitalisation of Spain's banking sector

As reported in a summit statement this morning and as reported by, the European Commission is now proposing to allow the European Stability Mechanism (ESM) to recapitalise banks directly. The first paragraph of the statement reads as follows:

"We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institutionspecific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally".

The further reports that "Madrid can sweep the burden of the bailouts off its sovereign books" as a result of this proposal" and that "bailout loans to Spain would no longer be granted seniority status".

So, what's the bottom line? Losses at banks are being socialised across the whole eurozone leading to even more moral hazard and the central planners of the eurozone will be assuming even more power through the "single supervisory mechanism". The tax payers will eventually pick up the tab. This is just more of what got us into this mess to begin with - low interest rates, easy credit and little accountability. We are now one step closer, again, for the individual EU countries to lose their sovereignty. It's all part of the plan.

Wednesday, 27 June 2012

Weekly Seafood Update: Norwegian Farmed Salmon Exports, week 25 2012

Statistics Norway reported an export of 17,805 metric tonnes of fresh/chilled and frozen farmed salmon from Norwegian salmon farmers in week 25, 2012. On a rolling average four week basis volume in tonnes exported were up 33.1% (4,359 tonnes) on the same period last year.

The weighted average price per kilo for the week was NOK 27.70 and was down 20.5% YoY on a rolling average four week basis.

The value of exports for the week was NOK 493.114 million, an increase of 6.0% (NOK 26.768 million) on last year on a rolling average four week basis.

The trend reported last week continues with a substantial increase in volume on last year and a decline in price leading to an accelerating percentage increase in the value (in NOK) of exports (up from 4.1% last week to 6.0% this week) as the increase in volume more than offset the drop in price.

Moral Hazard 101

If there is one thing I remember from the Economics 101 class back in in the early 1990s, it is the concept of "moral hazard". Well, the politicians are continuing to forget/ignore moral hazard (not sure what percentage of them has ever taken an Economics 101 class though..) as they continue to bail out banks and countries. Cyprus is up next.

So, here is an easy-to-understand reminder to politicians of what moral hazard is.

Tuesday, 26 June 2012

The eurozone crisis: End this madness now!!!

Spain again seeks help for their banks. There is only one reasonable solution to the eurozone crises: let the banks that are insolvent fail and let the countries that are insolvent default. There is far too much debt out their already to pay for it through future growth and the pain will continue for decades if the EU and central planners continue to put this missery on us all. Not to mention all the resources, costs and opportunity costs of the EU and the governments spending their time searching for a solution and managing the crisis - money well spent tax payers?

Friday, 22 June 2012

Weekly Seafood Update: Norwegian Farmed Salmon Exports, week 24 2012

Statistics Norway reported an export of 18,837 metric tonnes of fresh/chilled and frozen farmed salmon from Norwegian salmon farmers in week 24, 2012. On a rolling average four week basis volume in tonnes exported were up 33.4% (4,353 tonnes) on the same period last year.

The weighted average price per kilo for the week was NOK 26.21 and was down 21.9% YoY on a rolling average four week basis.

The value of exports for the week was NOK 493.753 million, an increase of 4.1% (NOK 18.908 million) on last year on a rolling average four week basis.

In general, the past trend continues with an increase in volume on last year and a decline in price. New for this week however is that the value of total exports are now increasing YoY. Also, prices are declining less on last year as prices today are competing with deteriorating prices at this stage last year - this has been the case for a few weeks now.

Source: Statistics Norway, EcPoFi

Source: Statistics Norway, EcPoFi

Source: Statistics Norway, EcPoFi

Thursday, 21 June 2012

The S&P 500 / Gold Ratio (as of 31.05.2012)

In this day and age where fiat money is showing its true colour (i.e. no intrinsic value) as central banks are printing money like never before, gold as an investment and inflation hedge has in recent years received increased attention from investors, policy makers and economists alike. The banking industry is pushing to include gold as a Tier 1 capital asset and the potential reintroduction of the gold standard is also being discussed frequently these days it appears. We thought it was about time therefore to start publishing the relationship between the S&P 500 composite index and the price of Gold, the S&P 500 / Gold ratio, on a regular basis.
The ratio is calculated simply by dividing the S&P 500 composite index by the price of gold in USD/oz. It is not clear what the relationship between the two series ought to be, but it is perhaps reasonable to expect the two series to track each other over the long term. Certainly, as was the case in especially 1999-2000, the ratio can signal extreme over- or under-valuations (when the S&P 500 composite was overvalued based on fundamentals - refer to the earnings yield post in this blog published 14.06.2012). As of 31.05.2012, the ratio is 0.86. This compares to an average of 1.63 and a median of 1.14 since 1978. The charts below are updated as of 31.05.2012.

Source: Shiller Home page, World Gold Council, EcPoFi

Source: Shiller Home page, World Gold Council, EcPoFi

Wednesday, 20 June 2012

A Financial Analysis of Norway, Part I: Introduction

Norway is amongst the wealthiest nations on earth with a GDP per capita of NOK 549,243  (ca USD 91,540) in 2011, the second highest in Europe (behind Luxembourg) according to Statistics Norway and the third highest in the world in 2010 according to the World Bank. The country's wealth has primarily been generated by exploration of its vast crude oil and natural gas reserves which was first discovered in the late 1960s. Most of the profits made from oil and gas are transferred to the Government Pension Fund Global and at the end of Q1-2012 the value of the fund was NOK 3,496 billion, or about USD 592 billion, making it perhaps the largest sovereign wealth fund in the world according to some reports. Despite this enviable financial position, especially during these financially worrying times, the country has achieved little of significance outside of its offshore industry (if you're not from Norway, can you think of a Norwegian company other than Statoil?). The electorate and politicians alike in Norway need to reassess really what a government is supposed to get involved with and how much money should be spent by it. When analysing Norway, it makes sense to break it down in two departments: onshore (mainland Norway) and offshore (the oil and gas industry), like one would do when analysing a company with many revenue streams and departments.

Many observers, including the government itself (you would expect them to!), seem to be full of praise on how well Norway is doing. Well, on the net Norway is doing extremely well financially as it has been blessed with massive oil and gas reserves for more than four decades. But the really interesting question is: how well could it have done and how well could it do with all this wealth? How well are things going compared to its potential? In a series of posts titled "A Financial Analysis of Norway" I try to shed some light on what is not going well in Norway in economic/financial terms. I will include the source material references in english when they are available, but if not the source will be in Norwegian I am afraid.

The motivation behind this series of articles is that the Norwegian government and the state has been on an unsustainable spending spree in recent years (and long before that many libertarians would argue) which is making Norway and its people worse off than they could be (or not as well-off as they could be). For example, ranks Norway only 40 in the world in its "economic freedom" rankings for 2012 and at number 20 out of 43 in Europe, "mainly reflecting a considerable deterioration in the control of government spending" (it evaluates countries in four broad areas of economic freedom: rule of law; regulatory efficiency; limited government; and open markets). The spending spree includes further expanding an already overweight public sector, through generous unemployment benefits, a multitude of government grants by government ministers as reported by (the largest tabloid newspaper in Norway), to mention a few. Much of this has been financed by high personal tax rates and other direct and indirect taxes, a basic VAT rate of 25%, toll roads everywhere, the introduction of tax on dividends  in 2006 (leading to double-taxation for shareholders with some exceptions), the list goes on.

Dispite a high overall tax burden by any standard (and remember when looking at this chart that Norway has one of the highest GDP per capita in the world), the central government still managed to run a deficit for mainland Norway of an average of about NOK 60.424 billion a year, every year, during the last 10 years (based on National Accounts as published by - the Ministry of Finance has confirmed the fiscal accounts are not published in english). During the last three years, the annual deficit for the central governemt for mainland Norway averaged NOK 94.064 billion a year. These are by no means small sums for a country of just five million people.

The first chart (of many charts to come) is the government spending to private consumption ratio depicted below. It has increased from about 44.7% in 2000 to about 51.9% in 2011. Government spending in Norway reached more than 50% of private consumption for the first time in 2009 and has for the last three years remained above this level.

To be continued.

Source:, EcPoFi

Thursday, 14 June 2012

10-year Average Earnings- and Dividend Yields, S&P 500 (as of 13.06.2012)


EcPoFi presents monthly this report about the earnings yield and dividend yield of the S&P 500 share index. The analysis is based on datasets published on Professor Robert Shiller's home page. The dataset is on a monthly basis both for price, earnings and dividends and quarterly figures are linearly extrapolated to monthly figures.

The 10-year average rolling earnings yield is calculated by dividing the average annual earnings during the most recent 120 months by the current price of the index where historical earnings are adjusted for inflation to reflect its nominal value today. The same principles apply to the dividend yield. A 10 year period is applied as this smooths out shorter term fluctuations in aggregate company earnings (and dividends) which better represents the long term earnings capacity for companies included in the index (read for example any edition of Graham and Dodd's book Security Analysis).

The 10 year average earnings- and dividend yields are not useful for predicting shorter term fluctuations in the stock market, but are useful ratios for identifying especially extreme over- or under valuations. In general and all else remaining the same, the higher the earnings and dividend yields the cheaper the S&P 500 index is and the lower the yield the more expensive it is. Please note that due to companies only reporting earnings quarterly, there is a lag before reported earnings are included in the E/P ratio reported here. This normally does not have a major impact on the average earnings figure due to the relatively long history of earnings applied in the ratio (but it could affect it during periods of unusually strong or poor earnings).

Earnings- and dividend yields as of 13.06.2012

Based on the closing price of the S&P 500 index of 1,344.88 on 13 June 2012, the current yields are as follows:

The current earnings yield of 4.82% is higher than the historical average since 1991 of 4.08% suggesting that the S&P 500 index is currently cheaper than average.

Source: Shiller, EcPoFi

The current dividend yield of 1.93% is slightly higher than the 1.84% average since 1991, suggesting that the current market valuation of the S&P 500 index based on dividends is largely in line with the historical average.
Source: Shiller, EcPoFi

The above yields however should be seen in relation to the general level of interest rates as one would normally expect the earnings yield to be somewhat correlated to the general level of interest rates. The chart below shows the 10 year US Treasury Constant Maturity Rate GS10 on a monthly basis starting in 1991. Although there have been some shorter term fluctuations, the general trend has been downward during the past 21 years.

Source: Shiller, EcPoFi
Subtracting the 10 year US Treasury interest rate from the earnings yield indicates the relative valuation of the S&P 500 vs Treasury yields (a variation of the "the Fed Model"). Although not theoretically flawless (see bottom of this page), the spread nonetheless provides useful insights into the current stock market valuation relative to long term treasury yields. Note the term "relative" here, as the spread does not tell you which one is over-valued or under-valued. As of time of writing, the earnings yield exceeds the treasury yield by 300 basis points. This is amongst the highest reported since 1991 and indicates that currently the stock market values earnings lower compared to the 10 year treasury than what it has done on average since 1991. But be careful with any exact interpretation: the current high spread could be due to a significant over-valuation of long term US treasuries!

Source: Shiller, EcPoFi

In concluding the above analysis, the S&P 500 is currently valued lower than what has typically been the case since 1991 when based on earnings, dividends and the spread. These factors by themselves indicate this might be a good entry point for the long-term buy and hold iequity nvestor. I say good (and not great) as the earnings yield by itself is not significantly higher than average and there could be much better buying opportunities ahead in this boom-and-bust environment which is unlikely to stop any time soon as US and EU debt problems continue unreseolved and low interest rates fuels further misallocation of capital (read: speculation). For example, the earnings yield peaked at 7.42% in March 2009, and we all know now that was a bargain (and it probably will be next time as well if it hits such a number).
Two obvious risks, from a long list, are 1) interest rates could increase (unlikely over the short-term though) and 2) earnings (and hence dividends) could drop below average in the coming years as a result of the still ongoing bank and sovereign debt crisis which could negatively affect growth. Certainly though, given an alternative of investing money in highly profitable, dividend paying companies with strong balance sheets and US Treasuries for the long term (i.e. 5 years +), I would put my own money in the former (and so I have).

Please note the following caveats/criticisms of models comparing earnings yield with treasury yields (as noted by Stimes and Wilcox in "Equity Market Valuation when discussing the "Fed Model"):
1. It ignores the equity risk premium
2. It ignores earnings growth opportunities
3. It compares an arguably real variable (the earnings yield) with a nominal value (the T-bond yield).