Stocktake

Market calm is particularly perplexing to those who note the geopolitical risks in Gaza, Ukraine, Syria, Iraq, Afghanistan, Nigeria, Mali and various other political hot spots.

However, the fact equity markets are ignoring these tensions is “nothing new”, according to a JP Morgan note last week. Excluding the 1973 Israeli-Arab war, which catalysed soaring oil prices, military conflicts seldom cause medium-term market damage.

Today, although war-zone countries account for 11.7 per cent of the world’s population, said JP Morgan, they represent just 3 per cent of global GDP, 0.7 per cent of global market capitalisation and 0.4 per cent of portfolio investment inflows.

Unless the major powers get sucked into today’s conflicts, it seems, investor nonchalance will likely persist.

Lazarus-like Twitter trades at big multiple

Twitter, it appears, is not dead after all.

The stock rose 35 per cent following last week’s blow-out earnings report. It’s in stark contrast to April, when the social-media company lost a quarter of its value after reporting disappointing user numbers.

Commentators were quick to say the end was nigh. An Atlantic article, for example, A Eulogy for Twitter, carried an illustration of a dead whale being taken to its grave by a group of birds.

Now, Twitter is once again hot. Apparently, it’s going to kill its competitors, take over the world and make all its shareholders incredibly rich.

The problem with both cases is that investors are getting caught up in storytelling. Twitter was not the worst company in the world in April, nor is it the best today. It’s a young, volatile growth stock, one that collapsed in the spring after failing to live up to heady expectations, and one that soared last week after topping muted estimates.

Whether Twitter is a great company or a lousy one is largely irrelevant: what’s important is its price. Trading at 18 times 2015 sales estimates, Twitter is incredibly expensive. That means little in the short term, but everything in the long term.

Low volatility persists in fear index slumber

Today’s low volatility continues to worry many, who see it as evidence of investor complacency, and point to other calm- before-the-storm episodes.

The Vix, or fear index, is about 13 today, and has spent the last two years below its long-term average of 20. It’s unsustainable, bears say, adding that July’s multi-year low of 10 mirrors past volatility bottoms.

However, averages can mislead. The Vix has historically spent just 20 per cent of the time between the 18-22 level, notes technical analyst Ryan Detrick. Although readings of 10 have marked major lows, volatility does not spike overnight, he adds. The Vix spent seven years below the 20 level in the 1990s, and another four years below 20 in the mid-noughties.

If history is any guide, today’s low-volatility cycle may last much longer than some expect.

Nasdaq is weaker than it looks

The Nasdaq is hovering around 14-year highs but strong showings from tech giants such as Apple and Facebook mask underlying weakness.

When an index is hitting 52-week highs, you want to see a large percentage of component stocks doing the same. However, US fund manager Dana Lyons notes just 1.45 per cent of Nasdaq stocks hit new highs on July 18th – the lowest percentage since at least 1990. On July 25th just 1.96 per cent of Nasdaq stocks did so, the third-lowest reading of the past 15 years.

There have been only three other occasions where such a low range was recorded, one of them being at the peak of the dotcom bubble in 2000 and another in September 2007, just before another major market top.

The latest reading may be a false alarm – that happens. But a rally is not sustainable if a few stocks are doing all the heavy lifting, so bulls must hope market breadth improves.

Appetite for apocalypse

Scarcely a week passes without Marc Faber predicting a 20 to 30 per cent equity-market fall. A scratched record? Maybe, but Dr Doom defended his record last week, saying he "must've made some right calls" over his career. "Otherwise, I wouldn't be in business."

Faber, despite his penchant for extreme predictions, can be insightful. Still, the notion only accurate forecasters can remain in business is fanciful. The CXO Advisory blog, which tracks various forecasters and gurus, gives a 45 per cent accuracy rating to Faber, slightly below average.

CXO found the best-known forecasters scored average to well below average in terms of accuracy. Media exposure, not accuracy, explains their fame.

You won’t sell many newsletters or appear regularly on TV if you say things such as: “Long-term investors should do fine, who knows about the interim?” In contrast, there’s always an appetite for apocalyptic assessments.