Thursday, July 12, 2012

"Correlation will lead to opportunities"

The Financial Times' John Authers hints at a couple different arbitrages.
From the FT:
Stocks have never been so correlated. The specifics of each company’s profit and loss account have become secondary to the broader factors of the market.

The figures demonstrate this beyond argument. In October last year, for example, the one-month correlation between individual S&P 500 stocks reached 90 per cent. The average since 1990 has been 30 per cent. Similarly, the correlation of different geographical indices has increased steadily. Twenty years ago, emerging markets offered great diversification from the developed world, with a correlation of almost zero. Now, that correlation is close to 80 per cent, according to MSCI indices.

Correlations that are this close imply that markets are ignoring corporate fundamentals, and that therefore companies’ cost of equity is being set inefficiently....MUCH MORE
We'll be coming back to this.