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World Week Ahead: Behind the curve

World Week Ahead: Behind the curve

By Timothy Moore

Aug. 22 (BusinessDesk) - The reality is that the vast majority of investors are in the same boat - the one that has been hit by rogue wave after rogue wave and even by waves that you can see coming but can do nothing to avoid.

The clearest measures of how unprepared investors - and their myriad of advisers - have been are the wild swings in prices and momentum and the recent surge in volatility.

A snapshot of the Standard & Poor’s 500 Index’s performance in the form of a chart the past month would translate into one of the most challenging elevation charts for a Tour de France stage.

And a simple read of the Chicago Board Options Exchange Volatility Index, or VIX, is a reflection of how wary investors have become. The VIX ended on Friday at 43. During the past 52 weeks, it has ranged from as low as 14 to as high as 48.

“What I'm seeing right now is a basically a crisis of confidence, more so than an economic crisis or financial crisis necessarily at this stage,” Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, told Reuters.

And it’s not just a lack of confidence in policymakers in Washington or Europe - though lawmakers and leaders in both the US and across the eurozone have dithered away trillions of dollars of value.

Companies too are giving investors cause for concern. Last week it was Hewlett-Packard. It threw in the towel on its tablet and smartphone product line, said it was considering spinning off or selling its personal computer business too. And it was looking to spend $US10 billion to become a major software player.

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Analysts at Baird &Co see great risks in the HP transformation, succinctly saying that shares in the company had lost their “safe haven” status.

Safe havens? They seem to be fewer and even then central bankers in Switzerland and Japan, for example, are trying their best to discourage buying of their currencies. And while the slide in yields on U.S. Treasuries to record lows could be seen in other times as a sign of strength, it’s more a place of refuge.

“Realising that global economic growth will continue to be marked down compared to what people were expecting, that we are seeing no inflation and that central banks are keeping rates low, investors have every incentive to grab yield wherever they can, and this means buying further out the Treasury curve,” Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas SA, a primary dealer, told Bloomberg.

This week the focus is on what happens in Jackson Hole, Wyoming. It’s the annual gathering of global central bankers, hosted by Federal Reserve Chairman Ben Bernanke.

Before then, the U.S. will release data on new home sales, durable goods orders, consumer sentiment and gross domestic product.

It’s the economic numbers that may prove the catalyst for a rebound in equities. A key reason is sentiment and the fact that valuations have been hammered.

Last week Birinyi Associates told clients that stocks were in a buy zone, with the S&P 500 10% below its 50-day moving average: it “is the most oversold the market has been” since March 2009.

Birinyi pointed out that the 2.25% dividend yield on the S&P 500 was higher than the 10-year U.S. Treasury note's yield, making this “only the second period since the 1950s where stocks have yielded more than bonds”.


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