Emerging-Market Stocks Soar on Obama Plan, Wiping Out 2009 Loss

Emerging-market stocks climbed the most in nearly two weeks, erasing losses for 2009, on speculation the Obama administration’s plan to rid banks of toxic assets will help spur global economic growth.

ICICI Bank Ltd., India’s second-largest lender, jumped 6.1 percent as the U.S. prepared to announce details of a plan today to buy as much as $1 trillion of troubled assets. OAO Lukoil, Russia’s second-biggest oil producer, rose to the highest since October as crude gained and Citigroup Inc. advised clients to buy the nation’s stocks. China shares posted a sixth day of gains, the longest winning stretch in more than 17 months as SAIC Motor Co. rose 5.4 percent.

The MSCI Emerging Markets Index added 3.3 percent to 571.27 at 8:51 a.m. in London, putting the index on course for the first 2009 gain since Jan. 9. The benchmark for equities in 23 developing nations tumbled 54 percent last year and lost as much as 16 percent this year on concern the first global recession since World War II would erode earnings.

“Stocks are building a base for the next bull market,” Mark Mobius, who oversees about $20 billion of emerging-market assets at San Mateo, California-based Templeton Asset Management Ltd., said in an interview on Bloomberg Television today. “We’re finding bargains in every country. You have to be careful not to miss the opportunity.”

The MSCI benchmark has rallied 14 percent in March, headed for the biggest monthly gain since December 1993, on speculation China’s 4 trillion-yuan ($586 billion) stimulus plan will boost demand for commodities and as the biggest U.S. banks said they were profitable in January and February following $1.2 trillion in writedowns worldwide.

U.S. Treasury Secretary Timothy Geithner is expected to unveil the Public Private Investment Program today, expanding the $700 billion rescue of the financial system by relying on private investors to buy the troubled assets clogging banks’ balance sheets.

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net;

Stocks in Europe, Asia, U.S. Futures Gain; Banks, Daimler Rise

Stocks in Europe and Asia climbed and U.S. index futures advanced on speculation the Obama administration’s plan to rid banks of toxic assets will revive lending and economic growth.

Deutsche Bank AG and Citigroup Inc. rose more than 5 percent before U.S. Treasury Secretary Timothy Geithner unveils an expansion of the $700 billion rescue of the financial system. Daimler AG surged 6.1 percent after the automaker said it will sell a 9.1 percent stake to Abu Dhabi’s Aabar Investments PJSC. Petro-Canada jumped 18 percent in Germany after agreeing to be bought by Suncor Energy Inc. to create the biggest Canadian energy company.

“We think the outcome of Timothy Geithner’s plans will encourage the markets further on and we will have a lot of good performances in the next few weeks,” said Herbert Perus, head of global equities at Raiffeisen Capital Management in Vienna, which has the equivalent of $62 billion. “There are a lot of opportunities in the market right now.”

The MSCI World Index climbed for the ninth time in 10 days, increasing 1.2 percent at 9:33 a.m. in London. The gauge of 23 developed nations has added 16 percent since March 9 as Citigroup, Bank of America Corp. and JPMorgan Chase & Co. said they made money in the first two months of 2009 and the Federal Reserve said it would buy $300 billion of government bonds to combat the worst financial crisis since the Great Depression.

Geithner’s Plan

Futures on the Standard & Poor’s 500 Index gained 2.8 percent. Geithner is expected to introduce the Public Private Investment Program today, expanding the bailout of the financial system by relying on enticing private investors to buy the troubled assets clogging banks’ balance sheets.

The dollar weakened and the yen fell to a five-month low against the euro on speculation additional U.S. steps to help banks dispose of toxic assets will spur demand for higher- yielding currencies. The gains in stocks damped demand for government securities, pushing U.S. Treasuries down for a third day. U.S. bonds earlier had erased losses after a Chinese official said the nation will keep buying the securities as they are an “important element” of the country’s reserves.

Europe’s Dow Jones Stoxx 600 Index gained 1.4 percent. Barclays Plc climbed on speculation Hellman & Friedman LLC will bid for its iShares unit along with a group of private equity firms. The regional gauge has rebounded 11 percent from a 12- year low March 9, trimming its 2009 retreat to 12 percent.

The MSCI Asia Pacific Index posted its biggest rally this year, adding 3.9 percent today.

Bull Market

Mark Mobius said the next “bull-market” rally has begun and there are bargains in every emerging market following the record slump in stocks. The executive chairman of Templeton Asset Management Ltd. said investors “have to be careful not to miss the opportunity.”

Deutsche Bank, Germany’s largest bank, rose 5.7 percent to 29.92 euros. Mitsubishi UFJ Financial Group Inc., Japan’s biggest publicly traded bank, advanced 4.7 percent to 512 yen.

Geithner has crafted an approach using up to $100 billion of bailout money to spur investment funds to purchase -- and banks to unload -- the illiquid securities and loans that have caused credit to dry up. The Treasury, Fed and the Federal Deposit Insurance Corp. will all play a role alongside private investors in aiming to buy between $500 billion and $1 trillion of troubled assets.

The announcement is a major test for Geithner, whose first speech on the financial rescue Feb. 10 offered so few details that it triggered a 4.9 percent drop in the S&P 500. Adding to the pressure on the administration is a wave of populist anger over the rescue thus far, following the revelation employees of American International Group Inc. got at least $165 million in bonuses after the insurer received a $173 billion bailout.

‘The Rhetoric’

“The expectations level on Geithner to deliver is heightened,” said Manus Cranny, a London-based market analyst at MF Global. “We need to see the rhetoric carried through,” he said in a Bloomberg Television interview.

Citigroup surged 19 percent to $3.12 in pre-market New York trading, while Bank of America jumped 16 percent to $7.16. The S&P 500 Financials Index of banks, brokerages and insurers has rallied as much as 54 percent from a 17-year low on March 6.

While bank stocks have climbed, bonds of the companies yield 8.55 percentage points more than Treasuries, about the widest in 13 years, according to Merrill Lynch & Co. indexes. The gap between yields of financial institutions’ bonds and Treasuries widened even as their shares jumped, suggesting this month’s record rally is in jeopardy.

Barclays Advances

Barclays added 9.9 percent to 115.4 pence. The U.K.’s third-largest bank may sell its iShares unit in a transaction valued at as much as $5 billion, a person with knowledge of the situation said. Barclays has set a deadline for offers for the end of this week, said the person.

A New York-based Hellman & Friedman spokesman declined to comment on the possible bid. Nicola Hankey, a Barclays’ spokeswoman, declined to comment when contacted by Bloomberg News.

Daimler, the second-largest maker of luxury cars, climbed 6.1 percent to 22.65 euros. Aabar will buy 96.4 million new Daimler shares at 20.27 euros apiece. The 1.95 billion-euro ($2.67 billion) investment buttresses Daimler’s resources as the worst auto-industry crisis in decades forces the maker of Mercedes-Benz cars and trucks to cut hours for 54,000 German assembly-line workers and close two plants in North America.

European automobile shares also rose after Goldman Sachs Group Inc. boosted its recommendation on the industry to “attractive,” saying now is the “best buying opportunity in 10 years.” Renault SA gained 3.3 percent to 15.50 euros.

Petro-Canada rallied 18 percent to C$34.94 in German trading after Suncor Energy agreed to buy it for about C$17 billion ($14 billion) in an all-share transaction to diversify and gain assets in the North Sea, North Africa and Latin America. Suncor shares slid 4.7 percent to C$29.44.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

Do Changes in Stock Prices Cause Recessions?

The economy and the stock market are closely related. Many people examine the stock market to find out how the economy is doing. It's long been known that if the stock market is in a period of decline, the economy is sure to follow. However there is little evidence that the stock market causes the economy to rise or fall. The stock market does not directly affect the economy. It is simply a mirror of people's generally correct beliefs about what is about to happen in the economy. The best way to understand this is to realize that a stock market index the Dow Jones Industrial Average (DJI) is simply a price. Because the value of index is a price, it only has two determinants: supply and demand.

Supply


Any first year college textbook in Economics states that for most goods if the supply increases in the short run then the price of the good should decline. For example, if the car companies suddenly doubled their supply of cars then we would expect the price of cars to fall.

If we thought that changes in the supply of stocks are the main cause of stock market rises and declines then, according to this rule, when a company issues new stock we would expect the price of stock to decline. If stock prices are largely determined by the supply of stocks and the market declines prior to an economic decline, we should see a flood of new stock issues before a recession. This does not happen in practice, as new stock issues tend to occur as the economy enters a growth period. This is because the money made from a stock issue is used to increase the output of the company, which causes economic growth to rise.

Demand


It appears that if we want to understand why the economy tends to move in the same direction as the stock market, we'll have to consider the demand for stocks. To do this, we'll need to understand what motivates an investors decision to buy or sell shares. Many investors such as Warren Buffett evaluate their stock portfolios on their inherent value. The inherent value is the total expected earnings of the company over a time period, discounted by the fact that a dollar today is not worth as much as a dollar tomorrow. If investors believe that a recession is coming, then they will believe that company earnings will be less in the future (since that typically takes place in a recession) which will decrease the inherent value of the stock. When the inherent value of the stock is far below its current price, investors will sell the stock, driving the price of the stock down. If investors believe a boom is coming, they will increase their estimates of the inherent value because future earnings should be higher than they previously expected. Often this will lead to the inherent value being far higher than the current price of the stock, so investors buy the stock. This leads the price of the stock to rise.

The belief that the stock market drives the economy is due to an error in logic. Generally we think that if A came before B that A caused B. Philosophers refer to this as the post hoc, propter hoc fallacy. In this case, the expectation of a decline in the economy causes the stock market to decline today. Or in logical terms, A came before B, because the expectation of B caused A. It's also important to realize that it's not the expectation of future economic changes that is causing changes in stock prices. It's the fact that people are acting on these expectations. If investors bought and sold stocks based on astrological factors or Barry Bonds' current homerun total then these would be causing the price of stocks to change. In a situation like that, it would seem that the stars are causing the price of stocks to change; the economy would have nothing to do with it.

It is because a large number of investors act on this inherent value principle that the economy tends to follow the stock market. Investors are constantly watching macroeconomic variables to try and determine when the next downturn in the economy will happen. Investors are often right when they predict the future growth rate of the economy. As a result, they often sell off their shares before the economy goes into a decline making it look like the stock market is causing a recession. In reality the causality runs the other way because the two things that causes price to change are changes in supply or changes in demand.

Does Wired's Page Count Predict NASDAQ Movements?

The thing I love the most about the internet (other than the fact it provides me with a steady income!) is that I get exposed to a bunch of interesting ideas and theories that I would otherwise not hear about. One such idea making it's way through the blogosphere is the relationship between the number of advertisements in Wired, a technology and society magazine, and the NASDAQ, an American market for high tech stocks. I first learned about this relationship from the blog Marginal Revolution, though the original idea seems to come from The Podcast Network. After correcting for a mistake in his statistics, the author found the following:

I received this months Wired yesterday. I sat down for a few moments to have a flick through, and noticed two things. Firstly, it has a nice swish glossy cover, and secondly, it's fat-just like the dot.com days.

That got me thinking. I wondered how Wired's page count might reflect the technology industry. So I plotted page count against the Nasdaq, and received this surprising result.

Other than a few missing magazines, I've got most of the collection since 1996. You'll note that the Nasdaq (red) tracks Wired's page count (blue). I'm not suggesting you go an buy technology shares, but gee, I'm thinking the reports of money pumping back into technology companies might just be true given the big up-tick in this months page count (294).

It's an interesting concept and would make for a terrific econometrics project for a student looking for ideas.

Any good economic study should begin with a theory and a question with a testable hypothesis. A common theory is that the demand for labor is downward sloping - thus a rise in wages should, all else being equal, cause a reduction in the quantity demanded for labor. The question we can then test based on that theory is, "Have past rises in the minimum wage caused the unemployment rate to rise?" We can collect the data then run a number of statistical tests to see what our data tells us about the answer.

In this case our theory would be that just before or during a boom in a particular sector we should a rise in advertisements for that sector's products. Our particular question is "Does a high tech boom cause more companies to advertise in Wired Magazine?"

We've got data (though it's on the number of pages in Wired, not on the number of ads), but of course, there could be many other possible explanations why the number of ads might rise. We should try to control for these as much as possible. The obvious one, as brought up on Marginal Revolution, is that companies are probably more likely to advertise in the months before Christmas. This is something any good study should control for, by seasonally adjusting the data.

Is there anything else we might want to adjust for? If we're just concerned with fluctuations of the number of pages (or ads) and the level of the NASDAQ, we may want to de-trend the data, as there might be a natural growth trend to both. Is there other trends we might want to account for, such as the rise in personal disposable income?

There are many different directions you can take such a study in. Many economics students often think their project has to be about "classic" economic issues such as interest rates and GDP growth (I know I did when I was a student!), but if you look around the web, you can find all sorts of interesting questions (with data) to investigate. This one in particular interests me, but if it's not your cup of tea, I'm sure you can find something more to your tastes.

What does the value of the Dow Jones represent?

If you read the newspaper, listen to the radio, or watch the nightly news on television, you'll probably hear about what happened to "the market" today. It's all fine and good that the Dow Jones finished up 35 points to close at 8738, but what does that mean?

The Dow Jones Industrial Average (DJI), commonly just referred to as "The Dow", is an average of the price of 30 stocks. The stocks represent 30 of the largest and most widely traded stocks in the United States. The Dow Jones Corporation, the administrators of the index, changes the stocks in the index from time to time. On November 22, 2002, the following 30 stocks were components of the index:

3M, Alcoa, American Express, AT&T, Boeing, Caterpillar, Citigroup, Coca-Cola, E.I. DuPont de Nemours, Eastman Kodak, Exxon Mobil, General Electric, General Motors, Hewlett-Packard, Home Depot, Honeywell, Intel, IBM, International Paper, J.P. Morgan Chase, Johnson & Johnson, McDonald's, Merck & Co., Microsoft, Philip Morris, Procter & Gamble, SBC Communications, United Technologies, Wal-Mart, and Walt Disney.

The Dow Jones Industrial Average is computed by taking the average price of the 30 stocks and dividing that figure by a number called the divisor. The divisor is there to take into account stock splits and mergers. Otherwise the index would decrease whenever a stock split took place. Suppose a stock on the index worth $100 splits is split or divided into two stocks each worth $50. If we did not take into account that there are twice as many shares in that company as before the DJI would be $50 lower than before the stock split because one share is now worth $50 instead of $100.

The divisor is determined by weights placed on all the stocks (due to these mergers and acquisitions) and changes quite often; at November 22, 2002 the divisor was equal to 0.14585278. So if you took the average cost of each of these stocks on November 22 and divided this number by 0.14585278, you'd get the closing value of the DJI on that date which was 8804.84. You can also use this divisor to see how an individual stock influences the average. If the price of International Paper increases by two points, the DJI would increase by 13.7 points assuming none of the other stock values changed (13.7 = 2 / 0.14585278). Because of the formula used by the Dow a one point increase or decrease by any stock will have the same affect, which is not the case for all indices.

So the Dow Jones number you hear in the news each night is simply this weighted average of stock prices. Because of this, the Dow Jones Industrial Average should just be considered a price in itself. So when you hear that the Dow Jones went up 35 points, it just means that to buy these stocks (taking into account the divisor) at 4:00pm today (the closing time of the market) it would have cost 35 more dollars than it would have cost to buy the stocks the day before at the same time. That's all there is to it.