10 years S&P 500 index chart and its PER below.

The U.S. stock market closed on Thursday near the abyss. In only 10 months, all stock earnings from 2002 has disappeared.

See the chart above, you can see the evolution of the index of the largest 500 companies listed on the United States. Is at its lowest level in 10 years.

US stock index and mutual fund cash level (1950-2008)

A manager can maintain a higher weight of his portfolio without investing, for two reasons. Firstly, for fear that the stock market will go down more. In this case the manager prefer to maintain high levels of liquidity for avoid losses to its investors. Secondly, if we are in a “bear” market, the manager knows that some of his clients will sell their funds investment for fear of further losses. In this scenario, the manager will prefer to have lower levels of investments to provide liquidity for these sales. So it seems obvious that the times of nerves on the stock exchange is equivalent to high levels of liquidity and, on the other hand, years of euphoria on the stock Exchange, the managers maintains as much invested to take advantage of the bull market.

As we can see in the chart, in the complicated 70s and 80s, the average liquidity of the Mutual Funds industry are 10% of its assets. It is from the mid-90s when it began its long bull cycle, so the weight of the liquidity is decreasing year after year until the minimum reached in the summer of 2007 (which coincides with the historical top in US stocks indexs).

The current levels of less than 5%, is an indicator that we are perhaps at the end of a bullish stock market cycle.

list of the worst countries of the planet (source: bespoke)

Puerto Rico and Ukraine, or Saudi Arabia and China or Vietnam? What these countries have in common? It’s easy, all these stocks index have fallen more than 60% of its value from its peak. Puerto Rico had lost -79%. It means that most shares have fallen more than 80% in this stock Exchange. It’s a market crash.

We attach a very interesting chart in which you can appreciate even as subprime mortgages were the first in present crisis, now “prime” mortgages are  are behaving worse lately, showing therefore, that the mortgage problem is not concentrated in certain risky loans but is a problem throughout the mortgage market.

delinquencies growth in subprime and prime loans 2007-2008 (source FT)

Falls of 25% on average in all major global stock indexs this year. Plummeting 40% on average in emerging stock markets such as china or india stock index.

What’s happen?

Look at this indicator Morgan Stanley. Since 1998 this indicator was not enough nivels so low. It is a first signal of at least a short bullish rebound in stocks.

Morgan Stanley capitulation indicator chart (1990-2008)

Morgan Stanley capitulation indicator post index return. 17,6% gains in 3 months, and 19,8% in 6 months.

David Einhorn, Hedge Fund manager

David Einhorn, apart from being one of Hedge Funds managers with better performance these years, has gained considerable notoriety on Wall Street for his public speeches. His hedge Fund, Greenlight Capital, maintains a short position in Lehman Brothers.

Just today in the Financial Times Web you may find 3 videos of an interview with David Einhorn.

Video 1: David about the american SEC and “short sellers”.

Video 2: David on rating agencies.

Video 3: David on investing in bonds and stocks.

US road traffic are declining for the first time in 25 years.

In economics as in life, it is very important to use logic and common sense. Often, some of the economic indicators published are complicated to understand for everyone, such as money supply data, the GDP deflator, aggregate demand, or current account deficits. There exist “alternative indicators” in real life that help everybody to understand the economic situation (see my post on the relationship between the construction of skyscrapers in New York and subsequent economic crises). Another indicator that reflects the health of economic activity is the growth in traffic on the roads. In fact, for the first time in 25 years, the traffic in the United Status are declining. The figure is even more serious, looking at other recessions, like in 1990 or in 2001 or 2002 ones.  Never in the past the road traffic decreases.

So this time, this recession in the United States may be much worse than previous ones.

Chinese stock exchange in 2.003 and now. Source (FT)

This is the trading average values of chinese stock exchange in 2.003 and now. ¿It’s a bubble?.

Perhaps will be interesting to review the chinese stock indicator.

If everyone wears as the Burmese monks, there is neither Inditex or Mango or H&M.

Thanks to the blog hawaiibombay.com, I found a very interesting interview of Custo Dalmau, founder of Custo Barcelona, held last October of 2007. As you know Custo just complain Desigual for copying their designs.

In this interview with the newspaper El Pais, Custo states that are in talks with an American group, not to sell Custo but, “only look to divest a minority group with industrial profile.” Explains how they do combat piracy in China, were they manufacture its cloths (in Portugal and Thailand although the prototypes are designed in Barcelona).

Talking about the fashion world, Custo explains that “80% is logistics, distribution and production “. “Even if you have the best product in the world, you must be able to offer it, logistics is the key.

In relation to the fashion industry in Spain Custo declares, “in Spain, with the exception of Amancio Ortega (Inditex), few people are ready. Here I think there are good designers, but if you are unable to bring the product to the consumer’s wardrobe is useless. That portion of the logistics is the great unknown. ”

See also this excellent document, the company’s strategy Barcelona clothes Mango, an international example, it Esade business school has developed a case study of the company Mango, a world famous brand and together with the Galician company Inditex, are An example of successful global companies in the difficult world of fashion.

Finally, last friday, I see the shares of the American manufacturer of shoes CROCS, tumble today on the stock market by 44%. The Crocs are the famous colored plastic shoes that are sold everywhere. After such collapse can be virtually certify the death of Crocs, RIP.

frustration index: days when the stock market goes up one day and the next day falls more (1940-2008)

Bespoke investments provide us with highly relevant information about current market situation. The first figure is very curious. This is the statistical analysis of historical periods in the American stock market that, after a day hike or climb stock, the next day not only falls on stock index, but the fall is greater than the percentage rise in the previous day. This phenomenon has occurred 15 times in the past 50 days ¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡

This is a very rare phenomenon. Is unnatural or contrary to human psychology find some cheap shares today and expensive the next day. The market tends to follow trends at least several days or weeks.

List of largest short interests in June 2008 (source Bespoke Investments)

Again the department stores company Sears Holding (SHLD) has largest short positions with 53% of free float. It also appears in the top rankings real estate sector shares (KBH, LEN or CTX) as in May.

There are only one surprise, pharmaceutical Mylan Laboratories (MYL), a specialist in generic drugs, suffers nearly 24% of its free float in short positions.

To the right Alexei Miller, CEO of Gazprom, and to the left  Gerhard Schroeder former German chancellor who now works for Gazprom.

This is one of the few interviews offered by Alexei Miller, the president of the opaque company Gazprom, the king of planet gas reserves. This interview for Financial times, was neither personal nor telephone, was via email.

Aleixei Miller responds about the controversy of the Russian branch of British Petroleum, TNK-BP, “Gazprom has nothing to do with them”.

About his recent forecast that petroleum will reach the $250, it declares, “the oil price that I predicted is not surprising. The global energy consumption has been growing at a breakneck pace and looks almost price-insensitive. The last 10 years (1997-2007) saw the Chinese energy consumption almost double and the Indian one grow over 1.5-fold. It can be contributed not only to their industrial growth, but to a principal shift in the lifestyles of their populations. Asia has replaced bikes with scooters. What about the next step to cars? The emerging economies are striving for energy resources to secure their growth and the developed ones are at least interested in the preservation of the status quo. All this happens against the background of the changes in the global economic setup and serious geopolitical changes. Oil price hikes are linked to a major revision of long-term forecasts. They demonstrate global energy supply-demand imbalance in the coming decades. Due to growing financial transactions on the markets of raw materials we are already facing today the prices of tomorrow. The two factors jointly trigger a “great price leap” on the crude oil market.”

Alexei Miller said: OPEC has no control over oil price.

“In general it seems that even OPEC doesn’t have any real influence on the global oil market nowadays. Not a single decision has been passed of late that would really influence the global oil market. Many major oil-producing countries have approached their peak extraction capacities and are limited in their ability to vary the production volumes.”

World natural gas proven reserves in 2.007
And the most important answer, read this one:

“As far as Russian investment attractiveness is concerned, not only we, but also most observers view our country as a most attractive market. However, one rule has to be taken into account to ensure successful investments in the energy sphere – it is better to invest jointly with the state. For example, into Gazprom stock.”

Miller said recently  that in the coming years Gazprom would become “the most influential in the energy business”.

Above, the evolution of Brazil stock index vs. other emerging stock markets. Below two indebtness ratios.

Is is worth investing in Brazil?. Standard & Poors upgraded Brazilian government debt to BBB-, the lowest of the investment grade ratings, giving a huge boost to the Brazilian stock market, one of the best in the World in 2,008, and to its long-term bonds market.

In 2,003 Brazil public debt accounted for almost 60% of their gross domestic product, and currently represents only a little more than 40%. The cost of interest debt accounts now for only 6% of Brazil gross domestic product. This improvement has benefited Brazil with an strong inflow of foreign direct investment, which can be seen with the rise of 40% of Brazilian Real against the US Dollar in just 3 years (see Brazilian Real chart against the dollar and the Euro).Brazil is the seventh country in the world in tearms of foreign reserves currencies (a clear indicator of financial health health).

In Fact, Brazil is one of the few countries in the world where they are finding large oil fields, in deep waters in the Atlantic Ocean.