Gold measured in wheat or oil is expensive

The Economist published on the 26.04.2011 an interesting chart measuring gold in oil and wheat:

 

Although wheat and oil has surged substantially for the last year (i.e. the latest drop of the graphs), gold is still above the red line, which symbolizes the purchasing power of wheat and gold at prices of 1986 to buy gold.

Gold has experienced a fabulous bull market for the last decade surging from $ 250.- to over 1500.- (+600%) per ounce.

High Profit Margins Could Depress Stock when Reverting to the Mean

Vitaliy Katsenelson argues that stock valuation measured by PE or dividend yields in comparison to bond yields is not that cheap if you consider that corporate profit margins are close to the pre-crisis all-time-highs. The chart plots pre-tax corporate profits from 1945 until mid-2010 is clearly displaying the high margins in relation to the last 60 years. 

Although after WWII profit margins were shrinking when equities were soaring, we had a massive growth of GDP, which we cannot expect when consumers and governments need to deleverage and housing will be soft for years to come.
BCA Research's chart below paints a similar picture.

The weakened US Dollar could give US business a boost due to lower production costs in the short term as the low Euro gave a boost to German manufacturing in 2010.
To sum up, short term environment might be positive for equities although the end of QE2 is a drag. Long term, profits might shrink due to decreasing margins.

Brazilian Real: new highs despite high inflation

Although the inflation is running higher the Brazilian Real is increasing against the US Dollar to new highs:

Source: Reuters

Yesterday's realesed inflation figuers which reached 6.3% yoy do not seem to deter investor from accumulating the Brazilian currency.

Morgan Stanley: Should we fear the end of QE2?

Morgan Stanley (MS) analyst Ronan Carr thinks markets might start to focus on tightening monetary tightening in the coming months as the end of QE2 in the US approaches, the ECB and potentially other central banks of develloped countries start to raise rates.

Morgan Stanley added the graph below shows how markets reacted when QE1 approached its end.

In 2009 the start of the bull market coincided with the announcement of QE1, and the bull market reached its peak with the end of QE1 in 2010. As you might remember, the current bull market started early autumn 2010 when QE2 was announced.
Combined with the other headwinds he sees – peaking leading indicators, margin pressures and inflation’s impact on growth Ronan Carr suggests a sector rotation from cyclical into defensive sectors, namely utilities, consumer staples,  as well as telecom.

Tata Motors: Cheap Growth Stock

Tata Motors Ltd.(TTM traded at the NYSE), India’s largest automobile manufacturer, is currently trading at  a PE multiple for 2011 of 9.2, which is low for a company with outstanding growth opportuninities. The Indian market has been depressed for the last 5 months due a spike in inflation and subsequently a spike in interest rates. Following the production stops at the competing Japanese automobile plants because of the horrible natural disasters, Tata Motors has already recovered somewhat during the last 2 weeks.

Geopolitics: Worst Case Scenario for Libya Is Plausible

Although Libya is not that important for financial markets as for example Saudi Arabia, Libya could complicate foreign policy substantially for years if the situation is deteriorating.
Some foreign policy experts make a plausible worst case scenario for Libya.:

1. We arm the "rebels"

2. Find this is both not enough and Qaddafi's forces overrun, confiscate,
and use arms against rebels and coalition air forces

3. We try air assault against Qaddafi's ground forces

4. Find this is insufficient and leads to excessive collateral damage

5. We try to convince coalition to place boots on the ground

6. Notably France and other members reject land invasion

7. NATO can't gain consensus to modify Resolution 1973

8. United States bites the bullet, air assaults known Qaddafi military bases, and
lands troops in Libya

9. Muslim nations raise unified cry that U.S. interest is Libyan oil and
Qaddafi becomes a hero with broad-based Islamic support, notably Iran

10. We pull troops from Afghanistan (not a bad thing, just not soon enough) for Libyan engagements (rings just like from Afghanistan in 2002 to prep for Iraq)

11. Pakistani ISI and TTP move with impunity across the FATA and begin
retaking Afghanistan (sounds like May 2002 ­- summer 2003)

12. Meanwhile Qaddafi's forces melt into southern Libyan desert leaving us
with a broken country #1 (courts won't allow confiscated billions to be
used by "coalition" for Libyan rebuilding), a latent desert threat, and
Afghan as broken country #2

13. Iran sees this as opportunity to "Balkanize" Iraq and presses
negotiations with Syria, Turkey, the Kingdom, and Jordan to carve out pieces of Iraq for all