‘Micro’ Equity Focus Is Shifting To ‘Macro’ Bond Reality

Fixed income markets have always focused closely on news about the US macro-economy; while traditionally, equity market participants have focused more on the “micro” data – in particular, news about current and prospective corporate earnings – to form their views about the relative attractiveness of different stocks or the market as a whole. Goldman finds that the financial crisis changed all that. The responsiveness of the US equity market to economic news increased dramatically, now showing about twice as much sensitivity to macro data as it did in the years before the financial crisis. While micro data remains important – especially in quantifying just how much QE-hope the market is ‘abiding’ by, macro news is likely to be the critical driver of equity markets until the global economic outlook is considerably brighter than it looks today (or macro decouples from Fed/ECB jawboning). On average the market’s responsiveness to all these economic indicators suggests that we are still very much living in a macro world. In the meantime, there are some exceptions to the fairly consistent reactions to economic news that we see between equity and bond markets.


Goldman Sachs: Economic News and the Equity Market

Traditionally, equity market participants have focused more on the “micro” data – in particular, news about current and prospective corporate earnings – to form their views about the relative attractiveness of different stocks and about the market as a whole.

While equity market investors were certainly well aware of the major economic releases, they were often seen as just one part of the “mosaic” of information gathered by investors rather than a central driver of markets.

The financial crisis changed all that. The responsiveness of the US equity market to economic news increased dramatically during the crisis and has remained high since (Exhibit 1).


Assessing the Market Impact of Economic Data

The equity and bond markets show fairly consistent reactions to economic news, with a couple of notable exceptions. Stronger-than-expected news about growth pushes up both equity prices and bond yields, but stronger-than-expected news about inflation has the opposite impact on the equity market.


Bond markets appear to be more attuned to business survey data and relatively less responsive to news about consumer confidence or GDP. This is portrayed in Exhibit 4, in which the vertical axis measures only the average absolute response of the equity market to each indicator (i.e. we reverse the sign on the inflation data) and omits NFP.


Market Focus Varies over the Cycle

In general, the equity market appears to have shifted its focus in intuitive ways:

  • News about housing activity was extremely important as this sector of the economy collapsed in 2007-2008, but moved markets much less before and since.
  • Similarly, equity investors worried about upside surprises to inflation while the economy looked strong, but have paid relatively little attention to these data lately.
  • Reports on consumer spending and confidence were extremely important in the early recovery, but seem to have received a bit less attention over the last year or two (Exhibit 8).
  • Concerns about the global growth outlook and the still-weak labor market have kept markets very focused on news about the manufacturing sector and employment (Exhibit 9).



While the response of equities to economic data is generally straightforward—more growth and economic activity is good, more inflation is bad — there are some limited circumstances under which “good news is bad news” from a market perspective.

Towards the end of the business cycle, when inflation pressures and Fed tightening are a concern, markets may see especially strong activity data as a mixed blessing. This is evident in Exhibit 9, which shows that as of early 2007, the two-year trailing average response to employment data was negative (i.e. in 2005-2006, when the economy looked good, the equity market didn’t react well to stronger-than expected employment reports). But at most times, good news on employment or economic activity is also good news for the equity market.

Taking an average of the market’s responsiveness to all these economic indicators suggests that we are still very much living in a macro world. The equity market shows about twice as much sensitivity to macro data as it did in the years before the financial crisis (refer back to Exhibit 1). We suspect this will remain the case until the US and global economic outlook becomes considerably clearer.

The ‘Recession-Proof’ Olympic Dream

With the 2012 London Olympics now underway, ConvergEx’s Nic Colas takes a look at the business of the Games.  As it turns out, the five-circle logo of the International Olympic Committee is essentially one of the strongest brands on the planet.  Broadcasters and advertisers spent $4.9 billion to associate themselves with the upcoming Olympics as well as the 2010 Vancouver Winter Games.  Future commitments to the IOC for upcoming games are already well beyond these results.  The reason for this success seems to boil down to two fundamental drivers. In the developed economies of the world, the games represent an opportunity to reach a large audience that has grown fragmented and hard to reach due to everything from the social media to DVR devices.  In emerging markets, ever-larger middle classes represent excellent growth opportunities for global brands.  The bottom line is that the Olympics may prove to be the last piece of media content that remains relevant and interesting to the majority of the world’s consumers.

ConvergEx: Olympic Economics

Over the next 17 days over 4 billion people will tune in to watch some portion of the 2012 Olympic Games.  They will cheer on the athletes from their native lands.  They will enjoy the spectacle of the opening and closing ceremonies.  And they will see sports as diverse as equestrian dressage, judo, and water polo. But what this majority of the earth’s population will not see are all the contests which have been relegated to the history books of Olympic Games.  Early on in the development of the modern games, the host country had the option of adding sports in which they had an outsized chance of claiming a medal.  This lead to some truly unusual sporting choices, including:

  • Club swinging (1904 and 1932).  A precursor to rhythm gymnastics, the contestants swing clubs in elaborate routines.  Dominated by American contestants during the St. Louis (1904) and Los Angeles (1932) games.
  • One handed weight lifting (1896, 1904, and 1906).  Pretty much what it sounds like, with the average of left and right hand weights calculated to determine a winner.  Won by a Greek during the first Olympics of the modern age.
  • Dueling Pistols (1906).  Contestants shoot at a mannequin with a target placed at throat level at distances of 20 and 30 meters.  The longer distance went to a Greek at the 1906 games, held in Greece, with the shorter one taken by a Frenchman.
  • Live pigeon shooting (1900).  Release 300 birds, bang away and count the carnage.  Won by a Belgian on at the Paris games, with a Frenchman winning silver.
  • For a complete list: http://www.topendsports.com/events/discontinued/list.htm.


From humble, if occasionally oddball, beginnings, the Olympics have become a very large business indeed.  Much of the most dramatic growth has come in the last 20 years.  We’ve included a broad range of data about the games in the tables after this note, but here is a highlight reel:

  • Revenue reporting from the International Olympic Committee (IOC) goes in four year cycles, and also all its revenue comes from “Marketing” – essentially the sale of broadcast rights and marketing partnerships.  For the 2009-2012 period, “Broadcast” revenues are $3.9 billion and “TOP Programme” (sponsorship deals) are $957 million.  That’s a total of $4.9 billion over 4 years, or a 7% compounded annual growth rate from the 1993-1996 revenue cycle, which netted only $1.5 billion in Broadcast and TOP Programme inflows.
  • Large corporate sponsors – think Coca-Cola, McDonalds, Visa and Samsung – are shelling out $957 million for the London Games cycle, up from just $96 million for the 1985-1988 Olympic cycle of Calgary (winter) and Seoul (summer) games.
  • Broadcast revenues to the IOC from the last games in Beijing were $1.8 billion, the amount that global broadcasters paid for the rights to air the games in their individual countries.  The 2012 London numbers are not yet available, but they will certainly top $2.0 billion, and the growth rates for this line item are simply staggering.  Consider that the global broadcast revenues for the 1960 Rome games (pre Telstar, the first satellite to allow for live transmissions between the US and Europe) was just $1.2 million.  The 1988 Los Angeles Olympics cost the worlds’ broadcasters a total of $287 million.  The games in Sydney (2000) broke the $1 billion mark, and London will likely do the same for the $2 billion barrier.
  • The U.S. media market is the largest single driver of these increases.  Since the 1998-2000 period, spending on broadcast rights for the North American market have increased from $1.1 billion to $2.2 billion, an increase of $1.1 billion.  For the rest of the world – essentially the other 219 countries that show the games – the increase has been just shy of $1.0 billion.
  • Where does all this money go?  The answer is not clear.  The IOC’s website shows that 90% of their revenues go to National Olympic Committees (NOCs), International Olympic Sports Federations (Ifs), and “Other Organizations” dedicated to the Paralympics and anti-doping agencies.  Budget data from the London Olympic organizers shows that they will receive 700 British pounds ($1.1 billion) from the IOC as their share of the television and sponsor proceeds.  As I noted above, revenues from the current Olympic cycle are close to $5 billion, even before you include ancillary items such as ticket sales.  There’s the IOC contribution to the 2010 Vancouver games to consider in the math, but the winter games are much smaller in cost and scope than the summer offering.

The bottom line is that the IOC has a fantastic business, and this week the organization announced that its ‘Reserves’ now total $558 million.  That is up over $400 million from the reserves reported in 2001, at just $105 million, although down slightly from last year’s $592 million.  Advanced bookings for upcoming games – Winter 2014 in Japan and Summer 2016 in Brazil – already stand at $3.6 billion and the target is to raise over $4 billion.  Corporate sponsor revenue for these two events is already at $1 billion, up from the $957 million for London/Vancouver.  (See here for more reporting).

The Olympics is therefore an unequivocal business success story, unharmed by global recession, sovereign debt woes, and the other economic problems of the moment.  But why?  A few thoughts to close out this note:

  • Broadcasters and advertisers in developed economies have to constantly address the increased fragmentation of their target audience, namely consumers of content and product.  The Olympics are a one-stop-shop where all the challenges of online media/live TV/DVR fade into the background.  Viewers watch events largely in real-time or a few hour delay, and there’s only one source for the content.  In the U.S., this is NBC.
  • In emerging markets such as China, India, and parts of Africa, the Olympics give international brands a chance to reach consumers very efficiently.  How else can you show 4 billion people your logo without having to address the vagaries of each local market?
  • In the ongoing debate about the value of “Content” versus “distribution,” the Olympics settle the argument in favor of the former.  Yes, the Internet and mobile advertising and social media and scores of other offerings make the job of marketers and advertisers that much more difficult.  But when you have globally relevant content, all those challenges fall by the wayside.

Source below for more charts (pdf):

Olympic Marketing Fact File 2012

Guest Post: The State As A Fantasy

Submitted by James E. Miller of the Ludwig von Mises Institute of Canada

The State As A Fantasy

If there were a prize for the best “do as I say, not as I do” politician, the latest winner would be California Senator Dianne Feinstein.  Senator Feinstein, who is currently leading a crusade to plug the White House’s recent spring of classified military leaks, is the Chairwoman of the powerful Select Committee on Intelligence.  Because of her position of power, she has become “deeply disturbed by the continuing leaks of classified information to the media.”   In other words, Ms. Feinstein finds it appalling that the American public is finding out about the not-so-glamorous doings of its own government.  Her scorn for disinfecting sunlight has inspired her to call for the prosecution of Wikileaks founder Julian Assange for espionage.

This talk of super secretive government would be all fine and good for a minion of the security state except for one thing: Senator Feinstein is one of the biggest leakers in Congress herself.  And it just so happens that her husband has benefited financially from contracting with the U.S. military.  For all her talk of protecting the American people, Feinstein is just another well-connected thief in the societal racket known as the state.  As Salon’s Glenn Greenwald trenchantly observes:

That the powerful Senator who has devoted herself to criminally punishing low-level leakers and increasing the wall of secrecy is herself “one of the biggest leakers in Congress” is about as perfect an expression as it gets of how the rule of law and secrecy powers are sleazily exploited in Washington

In the scum filled world of politics, unscrupulous behavior is a permanent fixture.   It’s why the rule makers go out of their way to convince the voting public that its best interests are being taken to heart.  The vision of a righteous government is sold to the people not just on Election Day but everyday thereafter.  As long as voters stay complacent in the fantasy that their elected representatives are fighting the good fight, outspoken critics of the state will remain a minority.  No amount of shoddy logic, guilt tripping, or blatant lies will awake the masses before it’s too late and all previous memories of freedom have been violently stripped away.

The truth is suppressed by the fantasy being continually force fed to the public, not just by politicians and their teleprompters, but by the a vast portion of the media which acts more like a squawk box for the state itself rather than an independent observer.  The New York Times, the supposed great standard-bearer of journalistic quality, recently admitted that its stenographers and reporters allow their writings to be contorted by the same public officials who they claim to cover objectively.  These reporters, so desperate to get a few words with any government official, are willing to give full discretion on what is reported right back to the people whose interest lies in manipulating the information the public receives.  As the Times article reveals:

From Capitol Hill to the Treasury Department, interviews granted only with quote approval have become the default position.

The unconscionable behavior of the political class should be thought of as a contagious disease that infiltrates any industry that comes within influence of the state.  Government contractors, lobbying associations, favored corporations, and even the press all seek to use the monopolized power of government to further their own interests.  Instead of attempting to roll back stifling regulations, many of these firms simply wish to get in on the spoils of the great extortionary scheme.  The results are always the same.  Politicians pretend to be saving the people from cold-natured capitalism while politically-connected businessmen and bankers act as if their commercial success is completely of their own doing.  The hidden truth is both act in tandem to fleece the average taxpayer.

The fantasy then continues unabated.  As F.A. Hayek recognized in The Road to Serfdom, central planners and their intellectual patrons achieve their power by gathering the

“support of all the docile and gullible, who have no strong convictions of their own but are prepared to accept a ready-made system of values if it is only drummed into their ears sufficiently loudly and frequently.”

No matter how many times government policy fails to deliver on its promises, the reasoning stays the same:  Politicians just need more tax dollars to spend goods into existence, central bankers need to print more money, human rights must be stripped away to ensure safety, consumers need to spend more and save less, and government will always know best.

Today as most major economies are taking a turn for the worse, news outlets are filled with the pleas of esteemed intellectuals for further monetary stimulus and spending.  Even those economists generally considered in favor of markets are looking to central banks, which are given a totally non-free market government grant of privilege, to induce a boom in lending and demand through printing money.  As Pater Tenebrarum pointed out, it appears that Federal Reserve is close to announcing another round of monetary expansion.  The Telegraph’s veteran economics commentator Ambrose Evans-Pritchard even went as far as to pen an editorial titled “Weimar solution beckons as manufacturing crashes in US Fifth District?”  No one seemed to ask the more important question of “since when does destroying a nation’s currency and setting the foundation for the rise of a murderous regime actually help out manufacturing when all is said and done? “

Even the man on the street, unlike Evans-Pritchard and his money-crankish peers in academia and print media, realizes that adding to the stock of currency does not add to society’s overall stock of wealth.  More paper dollars, euros, yen, etc. isn’t the same as more foodstuffs, personal computers, and cellular phones.  When Zimbabwe’s stock market was skyrocketing to heavenly heights in 2007, the inflation lovin’ crowd must have looked on with delight at the uninhibited fruition of their favored policy.  Grandmothers carrying wheelbarrows full of cash to the supermarket to purchase a few loafs of bread meant nothing in the face of accelerating GDP figures.

But again, the fantasy at play here is the idea that the state can create something out of nothing with the magic of the printing press.  But as history proves time and time again, unbacked credit expansion always sews the seeds of its own destruction as the boom must inevitably turn to bust.  The real beneficiaries of newly created fiat money isn’t society in general but, as Murray Rothbard notes, “the State, State-manipulated banks and their favorites” who are first in line to receive the currency first.   Proponents of central banking must spend a good deal of time concocting nonsensical explanations to ensure the overall public realize how ripped off it really is.

At no place in time were governments ever formed with good intentions in mind.  This is the unvarnished truth as opposed to the fantasy world that is indoctrinated first within public school classrooms and is repeated in various outlets until old age.  The state being a burden on society is a universal principle that transcends through all governmental levels and sizes.  It was recently reported that a thirteen year old had his hot dog cart shut down by city officials in the city of Holland, Michigan.  Because of zoning restrictions aimed at protecting already established restaurants, the boy, Nathan Duszynski, saw his small enterprise succumb to the crookedness of local government officials.

Now just think about this for a minute.  A thirteen year old was savvy enough and had the foresight to purchase a significant amount of capital to start a modest business.  When most kids his age are sitting in front of the television, Duszynski was gaining real world business experience.  His customers didn’t say no to his effort; the government did.  The public is typically told that zoning laws are for their own safety when quite the opposite is true.  Zoning laws, like practically any decree that stems from closed-door dealings of politicians, are to the benefit of some individuals at the expense of others.

Mr. Duszynski, by virtue of his entrepreneurship, has already accomplished more productive-wise than any lifelong bureaucrat or politician.  It is this writer’s hope that the shutting down of his small business will serve as a lesson for him in that he won’t buy into the fantasy that the state exists to provide peace and liberty.

War Of The Central Banks?

Wolf Richter   www.testosteronepit.com

The coordinated confidence-inspiring words from the Eurozone’s fearless leaders yesterday and today about doing whatever it would take to save the euro wasn’t about Greece anymore. Its life support may get unplugged in September. Politicians have apparently given up. The tab isn’t that dramatic: default and return to the drachma would cost Germany €82 billion and France €62 billion (Ifo Institute PDF). Survivable.

The fearless leaders were afraid of Spain, whose vital signs were deteriorating. Unemployment hit 24.6%, worse than Greece’s 22.5%. In the southern region of Andalusia, it rose to a mind-boggling 33%. Youth unemployment (16-24) set a sobering record of 53.3%. Even more worryingly, in a country where family solidarity and multi-generational households are the norm, the number of households where no one worked climbed to 1,737,000. So, in the first half of 2012, over 40,000 Spaniards emigrated—up 44% from last year. Instead of consuming and producing in Spain, they took their education that society had invested in and sought their fortunes elsewhere.

Despite repeated assurances that Spain would not need a bailout other than the €100-billion bank bailout, Spanish Economic Minister Luis de Guindos flew to Berlin to meet with German Finance Minister Wolfgang Schäuble … to discuss a bailout. For €300 billion. And hours beforehand, “sources” told the Spanish media that if Spain didn’t get its wish list, whose top item was a massive bond-buying program by the ECB to force Spain’s borrowing costs down, Spain would consider “more forceful measures.” Because Spain had no money to meet its obligations in October, it would have to default! The D-word made into print. A scary message for the fearless leaders of the Eurozone [for that whole debacle, read… The Extortion Racket Shifts to Spain].

It worked! Thursday, European Central Bank President Mario Draghi caved: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Emphasis on believe me—as in “I beg you, please believe me”—because the other part of his pronouncement, within our mandate, is controversial. It’s where the ECB had clashed with the German Bundesbank and others who stubbornly clung to the notion that the treaties governing the ECB gave it only one mandate: price stability. Not propping up stock and bond markets.

Draghi outlined a way around that single-mandate limit: if high borrowing costs for certain countries “hamper the functioning of the monetary policy transmission channels, they come within our mandate,” he said. In other words, every time yields go up somewhere in the Eurozone, the ECB is free to “do whatever it takes” to force them down.

On Friday, with the D-word still hanging heavily in the air, German Chancellor Angela Merkel and French President François Hollande talked on the phone—for the first time? A call that was ballyhooed to the media. They were “fundamentally attached to the integrity of the Eurozone” and were “determined to do everything to protect it.”

Then it bubbled up that the ECB might take concerted action with the States to lower the cost of borrowing for Spain and Italy, though it might take a few days or weeks to finalize the mechanisms. According to “sources,” the ECB could re-launch its program of buying Spanish and Italian bonds in the secondary market. The EFSF bailout fund and its successor, the ESM, could be used to buy Spanish or Italian debt in the primary markets. And the ECB could take Fed-like action if the ESM were given a banking license. It would allow the ESM to borrow from the ECB and then buy debt in the secondary and primary markets. There would be “no taboos,” Draghi said. Debt crisis solved.

He’d thrown down the gauntlet. The ECB’s moderate bond-buying program last year caused a stir in Germany. ECB President Axel Weber, who’d been overruled, resigned over it. ECB chief economist Jürgen Stark retired in protest. Politicians launched attacks against the ECB, among them Frank Schäffler (FDP) who’d said, “If the ECB continues like this, it will soon even buy old bicycles.” In March, the ECB stopped the bond buying program.

A restart would be “problematic,” a Bundesbank spokesperson said dryly. On the other hand, the Bundesbank considered it “not problematic” if the EFSF bought Spanish debt. Hurdles remain. Such action would have to be approved by the Bundestag’s “Group of Nine” whose representatives are on vacation. And Spain would have to formally request a bailout before the EFSF could buy its bonds—but Spain is still denying that it’s even discussing a bailout. It would be the sixth of seventeen Eurozone countries to be put on life support.

In June, Cyprus had held its nose and requested aid. Now, European technocrats are swarming once again over Cyprus to find out how much it would need. And each time they do, billions are added. How can such a small country blow through so much money? Well, read…. The Ballooning Cyprus Fiasco.

And then, there’s the ultimate questions….. But Who The Heck Is Going To Do All The Bailing Out?

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