The 'January Effect' is a relatively well known stock market anomaly, whereby equities have historically performed better in January than in any other month of the year. Most explanations for the January effect focus on how tax-conscious investors sell stocks in December that are down for the calendar year, in order to write off losses against their capital gains. This behaviour pushes the prices of these poorly performing stocks lower, but bargain hunters then buy these artificially cheap stocks at the beginning of January, thus pushing their prices up. I suspect that this theory only goes some way to explaining the January effect, as it would suggest that stocks should do badly in December but this doesn't seem to be the case.

Anyway, I thought I'd have a look at the US high yield bond market, and interestingly it tells a similar story. This chart (click to enlarge) shows that high yield bonds in the US have on average returned 1.7% in Januaries since 1987, half a percent ahead of the next best month. The same pattern can be seen in Europe, where Januaries have outperformed the next best month by 0.7% on average (although it's harder to draw conclusions because European data only goes back to 1997). The tax explanation for the January effect makes less sense for high yield bonds, because individual investors don't typically buy individual high yield bonds. What we're probably seeing here is the fairly close correlation between high yield bonds and equities.

As readers of this blog will be aware, our view is that the high yield market is not pricing in the risk of recession right now (for example, see here). High yield has performed poorly over the past six months, and we've heard decidedly little from the rally monkey recently (this is something that a trader from an investment bank used to send to the market on a good day in order to get those animal spirits going). Will we be hearing a bit more from the monkey next month?

Have a go at the Fed's online monetary policy game (click here), where you take the role of Chairman Bernanke in setting rates in the face of a number of economic scenarios. I've just been reappointed as Fed Chairman thanks to my "solid" policies. The game seems to reward mimmicking the Fed's past actions - success will come by marching interest rates to the top of the hill, then marching them all the way back down again.

On an unrelated note, a book recommendation. Tim Harford's "The Undercover Economist" is a brilliant look at real world economics. Did you know, for example, that low end computer printers are often identical to the more expensive models, but have had a chip added to slow them down? He also explains why the secondhand car market is utterly disfunctional - imagine half the secondhand cars on the market are great runners (peaches) and half are bangers (lemons), but all look pretty much the same to an untrained eye. If a peach is worth £4000, and a lemon worth £1000, and the buyer can't tell the difference, the "fair" average price is £2500. However, the seller can tell the difference, having already owned the car. If the seller has a peach, he won't sell for £2500 as he knows that it's worth £4000, not £2500. Thus the only cars that come onto the market are lemons - and if you buy a secondhand car, you are buying a lemon. This "inside" information distorts the efficient market for both buyer and seller. Plenty more interesting anecdotes covering everything from the economics of coffee shops, to the benefits of road pricing ("we recognise that food, clothes and housing cannot be free or we would quickly run out of them. It is because roads are free that we have run out of spare road space").

Thank you for all your entries. The winner is Nick Tudball of BNP Paribas, with 19 out of 20. There was a tie for second and third, with James Mitchell of UBS and Sara Swinden (who I suspect sits near to Nick Tudball) of BNP Paribas, both on 17 out of 20. We had a draw for second place, and James won. The average score was 13.6. The highest M&G entry came from Sophie Gray in our marketing team. Prizes will be sent out shortly!

The answers are as follows:

1. What was hidden in the coffee beans in Beverley Hills Cop?
A surprising number of people - mainly our investment bank counterparties - said cocaine. It was in fact bearer bond certificates.

2. What is the largest single living organism in the UK, and is also the nickname of a Nottingham Forest player?
It's the Major Oak, a giant tree in Sherwood Forest. It's also the nickname of Wes Morgan, a stocky Forest defender.

3. Where would you find a creature whose hobby is collecting and polishing rocks, an airship, a tiny family with eight children and a red blanket?
"In the Night Garden", the brilliantly calming pre-bedtime BBC children's programme.

4. Who covered "Stop me if you've heard this one before" by The Smiths and had a top ten hit earlier this year? And it's NOWHERE NEAR AS GOOD as the original.
Mark Ronson (and the more geekish added "featuring Daniel Merriweather").

5. Name the TV show which has a beer in it with the same name as our telecoms analyst.
The Simpsons, and Duff Beer - our telecoms analyst is Simon Duff.

6. CORNISH TERROR SNICK (anag.)
Northern Rock Crisis.

7. If this was a joke, how would you get two whales in a mini?
Down the M4 and across the Severn Bridge, or variations thereof.

8. In which book/film does Sherman McCoy trade Giscard bonds?
Tom Wolfe's "Bonfire of the Vanities" - published in 1987. The Giscard Bond, issued by the French government, had coupons and maturity value linked to the French Franc value of a fixed weight of gold.

9. How does the gilt trader played by Paul McGann in the 80s thriller "Dealers" get to work every day?
In a seaplane which he landed on the Thames at Tower Bridge (it was the 1980s, crazy times).

 10. What's this film?
 Anchorman: The Legend of Ron Burgundy.

 

 

11. Whose bond desk does Michael Lewis work on in "Liars Poker"?
Salomon Bros (now Citibank). Three trainspotters named the actual heads of desk that Michael Lewis worked for.

 12. Who is this? Neil Armstrong - first man on the  moon. Not Richard Woolnough, as one person submitted.





13. He had a Scottish father, and his mum was Swiss. Both died in a climbing accident. He studied oriental languages at Cambridge, and fought with the Navy in WWII. From then on we know much more about him. Who is he?
James Bond.

14. Which member of the M&G bond team has seen Big Daddy fight Giant Haystacks, live, not once but twice?
Richard Woolnough, manager of the M&G Optimal Income Fund, M&G Corporate Bond Fund and M&G Strategic Corporate Bond Fund, astronaut.

15. Which chef has got the most Michelin stars in total for his restaurants around the world?
Joel Robuchon with a total of 17 stars - he overtook Alain Ducasse and Gordon Ramsay with the recent publication of Michelin's Japan guide.

16. Which of these gilts has the longer modified duration? Treasury 4 3/4% March 2020 or Treasury 8% June 2021?
The 2020 bond - although it's shorter in maturity, its lower coupon extends its duration beyond that of the 2021 bond.

17. Which film's climax revolves around the price of frozen orange juice futures?
Trading Places.

18. What did The Fall do 24 of, more than any other band?
The Fall recorded 24 "John Peel Sessions". David Gedge also has 24 sessions, but with different bands (Wedding Present, Cinerama).

19. M&G's banking credit analyst represents Scotland at which sport?
Tamara Burnell represents Scotland at Korfball.

20. Who is the greatest football manager of all time, Brian Clough or Bill Shankly?
Brian Clough.

 

The closing date for entries is tomorrow - Friday 21st December - at 5 pm. Winners will be announced next week sometime, depending on how quickly we can get the entries marked - think of us as you tuck in to your Christmas lunch, we shall be in the office wading through sacks of quiz entries by candlelight. Bah.

You can find the quiz here. It is deliberately tricky, so the winning score won't be 20. Email or fax us your entry. Good luck, and have a great Christmas.

 

‘Tis the season to be jolly, and is the time of year when I have the delights of seeing my children in the traditional nativity play. The story is familiar to all of us. At this time of year our thoughts also focus on the potential for giving, or in my children’s case, receiving gifts.

Quite appropriately in the financial world, the central banks want stable conditions (unlike Mary and Joseph, who would have rather been in the inn). The UK’s very own leading wise man, the appropriately named Mr King, provided Northern Rock with a further gift yesterday by roughly doubling the Bank of England’s commitment to £56 billion. The Northern Light continues to glow, albeit dimly.

One of the kings in the nativity brought the gift of gold. Our King’s recent promise to Northern Rock equates to roughly 39 tonnes of gold, but sadly the Bank of England has only around 31 tonnes of gold in its vaults.

The second king brought Frankincense, which is usually mixed with oils to anoint new born infants. Will our king manage to oversee the rebirth of Northern Rock? Can the company’s reputation be salvaged? Will Mr Branson's virgin birth be delivered?

The third king brought myrrh, an embalming material traditionally used at funerals. Our King told the Treasury Select Committee yesterday that “a painful adjustment faces the global banking sector over the next few months as losses are revealed and new capital is raised to repair bank balance sheets”. I think that the effects of the credit crunch have much further to run – given that UBS (arguably the most cautious and reputation-obsessed investment bank) announced that it has lost $10bn on AAA-rated CDO exposure, you can be sure that the tidings to come from the banking sector will not be of comfort and joy.

Mr King is not the only wise man bearing gifts - the ECB have injected €350 billion worth of Euros into the system. The desire for a return to stability, peace and quiet is evident. But will the recent central bank activity and the season's extra liquidity be remembered as a Christmas nativity, or will it be Christmas naivety?

 

The people I speak to about the growing probability of a US consumer recession seem to have a widely held hope that the Asian and emerging market economies have matured enough to take up the slack. This is the so-called "de-coupling" scenario. I think it's nonsense, and some research sent out today from Morgan Stanley's Stephen Roach shows why. American consumers spent $9.5 trillion over the last year. Chinese consumers spent just $1 trillion and Indians $650 billion. On the back of an envelope I reckon this means that for every 1% fall in US consumption, the Chinese and Indian consumers have to increase their spending by nearly 6%, just for global consumption to stand still. This seems unlikely to happen, especially when you think what this emerging market consumption is driven by. It's driven by wages generated by workers employed in factories making stuff for US consumers. When the US consumers stop buying, the factories stop making stuff, and workers don't get paid, and so they can't buy stuff for themselves. And they especially can't buy 6 times as much stuff as they were buying before. Even worse, I worry about what happens to these tens of millions of workers who have been attracted from the countryside and into the crowded, expensive cities to work in the factories. Do they go home quietly and return to the farms? Or do they question the authority of the Chinese government - after all it's easier to accept the lack of democracy when times are prosperous than when you're hungry and poor. A US consumer slowdown could have some significant geo-political implications for the world's most populous nation.

On a lighter note - enter the quiz (see below). You are likely to be in with a shout of winning if you get 10 or more, and you don't have to have the Alan Greenspan book (second and third prizes) if you really don't want it. We will substitute for Harry Potter and the Dysfunctional Goblet of Credit on request.

 

To take your mind off the misery in the following markets - banking, commercial property, risky credit, emerging markets, housing - we invite you to take part in our Christmas Quiz. There are 20 questions in total, and the closing date for entries is Friday 21 December by 5pm. No purchase of M&G bond funds necessary (although if you haven't done your ISA this year yet...). Entry is open to anybody - clients, counterparties, competitors (and other enemies) and M&G staff. No prizes for M&G staff though, although the highest scoring staff entry can have a pint of bitter on us in The Bell. May the best user of Google win, and thanks for reading us over the past year.

See below for entry and prize details

1. What was hidden in the coffee beans in Beverley Hills Cop?
2. What is the largest single living organism in the UK, and is also the nickname of a Nottingham Forest player?
3. Where would you find a creature whose hobby is collecting and polishing rocks, an airship, a tiny family with eight children and a red blanket?
4. Who covered "Stop me if you've heard this one before" by The Smiths and had a top ten hit earlier this year? And it's NOWHERE NEAR AS GOOD as the original.
5. Name the TV show which has a beer in it with the same name as our telecoms analyst.
6. CORNISH TERROR SNICK (anag.)
7. If this was a joke, how would you get two whales in a mini?
8. In which book/film does Sherman McCoy trade Giscard bonds?
9. How does the gilt trader played by Paul McGann in the 80s thriller "Dealers" get to work every day?

 10. What's this film?

 

 

11. Whose bond desk does Michael Lewis work on in "Liars Poker"?

 12. Who is this?

 

 

13. He had a Scottish father, and his Mum was Swiss. Both died in a climbing accident. He studied oriental languages at Cambridge, and fought with the Navy in WWII. From then on we know much more about him. Who is he?
14. Which member of the M&G bond team has seen Big Daddy fight Giant Haystacks, live, not once but twice?
15. Which chef has got the most Michelin stars in total for his restaurants around the world?
16. Which of these gilts has the longer modified duration? Treasury 4 3/4% March 2020 or Treasury 8% June 2021?
17. Which film's climax revolves around the price of frozen orange juice futures?
18. What did The Fall do 24 of, more than any other band?
19. M&G's banking credit analyst represents Scotland at which sport?
20.Who is the greatest football manager of all time, Brian Clough or Bill Shankly?

First Prize
The Sopranos: Complete Series Box Set. All six series, 28 DVDs. The best thing that's been on TV for years. Worth well over one hundred English pounds.

Second Prize
A signed* copy of Alan Greenpsan's autobiography “The Age of Turbulence: Adventures in a New World”.

Third Prize
Two signed* copies of Alan Greenspan's autobiography “The Age of Turbulence: Adventures in a New World”.

* signed by the M&G bond team

To enter
Simply email your answers along with your full contact details to quiz@bondvigilantes.co.uk or download and faxback this form to 020 7548 3637.

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