The GBPEUR cross currency pair is getting stronger for already 6 weeks. Since November 12th, it broke a resistance line at 0.82. Before that, it was trading in a narrow range between 0.77 and 0.81.
Since November 12th, it has one direction: up. While the economic crisis weakened the US dollar against the all currencies, the pound didn’t make a correction. It stayed low, with the GBP/USD not able to settle above 1.50. It drifted there only for short periods.
1.0444 – 1
= 444 pips.
But we STILL shouldn’t join the Euro.
The Fed Model is a theory of equity valuation used by some security analysts that hypothesizes a relationship between long-term treasury notes and the expected return on equities.
According to this valuation model, in equilibrium the real yield on the 10-year U.S. Treasury Bonds should be similar to the S&P 500 earnings yield (that is, S&P forward earnings divided by the S&P level).[citation needed] Differences in these yields identify an over-priced or under-priced equity market.
More specifically, if the S&P earnings yield is higher than the treasury yield investors should sell treasuries and buy stocks (i.e. stocks are undervalued), while if the S&P earnings yield is lower investors should sell stocks and buy the more attractive treasuries (i.e. stocks are overvalued). The Fed Model was so named by Ed Yardeni of Prudential Securities based on the fact that some research at the Federal Reserve in the mid 1990’s used similar ideas.[1] But the model goes back much further than this and can be found in various forms in a number of security analysis books. In this sense, the term Fed Model is misleading, and the model is definitely not endorsed by the Fed.
- S&P 500: 6.40%
- 10YR T-Note: 2.21%
6.40 – 2.21 = 4.19%
So, if stocks are so attractive, why is no one buying?
The zero interest rate policy (ZIRP) is a Keynesian macroeconomics scheme for economies exhibiting slow growth with a very low interest rate, such as contemporary Japan and since December 16, 2008 the United States.
Under ZIRP, the central bank maintains a 0% nominal interest rate. The intended effect of a ZIRP is to encourage investment throughout the economy by making capital purchases more financially attractive. Whether ZIRP succeeds in achieving this goal is a matter of much debate.
- Bank of England: 2.0%
- Federal Reserve: 0.25%
- Bank of Japan: 0.103%
- European Central Bank: 2.5%
- Reserve Bank of Australia: 4.25%
- Swiss National Bank: 0.5%
- Bank of Canada: 1.5%
= 11.103%
God forbid the carry trade should come back any time soon.
Do you use this? It is a way to gauge the value of stocks to gilts – a UK government bond.
This ratio, based on income as opposed to capital gains, describes yield on gilts divided by the yield on equities. It helps to determine the more attractive investment option – bonds or stocks. It is said that when GEYR is high equities are expensive and, barring a fall in bond yields, should fall in price to resume equilibrium, and vice versa.
Thanks to Alun for the question, keep me on my toes.
A few choice cuts from a volatile year for the market:
1. Cramer calls out Ben Bernanke just after Bear Stearns hits the market – Aside from the theatrics of CNBC’s Jim Cramer, what I’ll remember most was the timing. Cramer was spot on in his analysis and for that it is Plain Vanilla’s best moment of 2007!
2. Ed Pastorini and the phantom bid – This was M&A gone mad just before the market got bad. This private equity baron, and this bid speculation turned out to be a hoax as some bright spark put Edward Pastorini through the anagram machine and got Top Insider Award.
3. Northern Rock bank run – I couldn’t help it, I had to get the beleaguered mortgage bank in. This firm was the poster child of the credit crunch in the UK and looks set to carry on flying the flag in 2008.