Prieur’s readings (November 30, 2009)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

•  Paul Lim (The New York Times): A rally that needs more “E”, November 28, 2009.
IN the first leg of a bull market, when optimism and euphoria are ascendant, investors are willing to bet that the economy will improve and that corporate profit growth is just around the corner. This faith manifests itself not just in rising share prices, but also in rising price-to-earnings ratios. But hope can take the market only so far. Earnings – the “E” in the P/E ratio – must soon recover and become the catalyst for rising prices if this rally is to last. All reports so far, however, show that earnings are still falling.

• Roula Khalaf (Financial Times): Reality catches up with the Gulf’s model global city, November 27, 2009.
To be fair, Dubai’s plans to restructure its companies and put resources in the most viable assets might be sound. But given that details of any strategy are treated like a national secret, and that decision-making is wrapped up in palace intrigue, the city and now the rest of the world are left to operate on rumours and speculation rather than facts.

• Stacy-Marie Ishmael (FT Alphaville): “Perhaps Dubai’s problems are much bigger than assumed …”, November 27, 2009.
The potential for contagion is very real, and at this point, unquantifiable. What’s happening in Dubai is a not-so-small reminder that swans of all colours abound.

• Jennifer Ablan (Reuters): Pimco: Dubai triggers “overdue correction” in stocks, November 27, 2009.
Rising fears of a possible debt default at a Dubai state-owned conglomerate is the catalyst for an “overdue correction” in equities and risk assets, the chief executive of top bond fund manager Pimco said in an interview on Friday. “Dubai is serving as a catalyst for an overdue correction in risk assets that have been supported by liquidity rather than fundamentals,” CEO Mohamed El-Erian told Reuters. “While many have acknowledged in the last few weeks the growing wedge between market valuations and economic and corporate realities, few have been willing to take their equity exposure down. Dubai is changing all of this.”

• Simon Johnson (The Baseline Scenario): Does Dubai matter? Ask Ireland, November 28, 2009.
The credit default swap spreads for Irish banks have widened significantly – even relative to HSBC, with its direct Dubai involvement.  In part, this is hedge funds betting that others will want to insure against the rising risk of an Irish default, but what’s the connection?
The thinking is that a partial bailout – with creditor losses – for Dubai from Abu Dhabi implies something about how Ireland will be treated within the European Union (and the same reasoning is also more vaguely in the air for Greece).

• Wolfgang Münchau (Financial Times): Greece can expect no gifts from Europe, November 29, 2009
The EU’s authorities, rightly or wrongly, are more afraid of the moral hazard of a bail-out than the possible spillover effect of a hypothetical Greek default.

• Anthony Bolton (Financial Times): Chinese stocks are set to lead the world, November 26, 2009.
“I will bring my successful [Fidelity] Special Situations investment approach to Chinese stocks as well as running a fund that will benefit from China’s very attractive secular growth. For an investor like me the opportunity is simply too great to pass up. My retirement can wait a while yet'” said Anthony Bolton.

• National Retail Federation: Black Friday verdict: As expected, number of shoppers up, average spending down, November 29, 2009.
As the closely-watched Black Friday weekend winds down, a National Retail Federation survey conducted over the weekend confirms the expected: more people spent less.

• Ben Bernanke (The Washington Post): The right reform for the Fed; November 29, 2009.
We have come a long way in our battle against the financial and economic crisis, but there is a long way to go. Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.

• Mark Felsenthal (Reuters): Audit would hurt economic prospects: Bernanke, November 27, 2009.
Federal Reserve Chairman Ben Bernanke said on Friday congressional proposals to audit the Fed and strip it of regulatory powers as part of post-crisis reforms could damage prospects for economic and financial health in the future. “These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States,” Bernanke wrote in a column posted on the Washington Post’s website.

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