• Barry Ritholtz and Robert Reich believe investors should not be pleased with recent positive corporate earnings surprises.
• Hal Varian reports that Google Trends predicts further reductions ahead in new claims for unemployment insurance.
• Felix Salmon [1], [2] describes how Larry Summers lost a billion dollars for Harvard.
• ExxonMobil is investing big bucks in some radical new tools for controlling carbon emissions.
• Lucian Bebchuk worries that the proposed Goldman Sachs compensations represent a return to a dangerously flawed incentive structure.
• Dave Altig has a very interesting graph showing just how pessimistic consensus estimates are about this economic recovery.
• And here's one of the reasons I always try to find something that doesn't come from AP as a source any time I want to link to something in the news.

Editor's Note: The following is a roundup of articles about ETFs, index funds and indexes by sources other than IndexUniverse.com. Comments and suggestions are welcome through email at: <!-- var prefix = 'ma' + 'il' + 'to'; var path = 'hr' + 'ef' + '='; var addy31849 = 'mcoleman' + '@'; addy31849 = addy31849 + 'indexuniverse' + '.' + 'com'; var addy_text31849 = 'mcoleman' + '@' + 'indexuniverse' + '.' + 'com'; document.write( '' ); document.write( addy_text31849 ); document.write( '' ); //-->mcoleman@indexuniverse.com <!-- document.write( '' ); //-->or <!-- var prefix = 'ma' + 'il' + 'to'; var path = 'hr' + 'ef' + '='; var addy27500 = 'mhougan' + '@'; addy27500 = addy27500 + 'indexuniverse' + '.' + 'com'; var addy_text27500 = 'mhougan' + '@' + 'indexuniverse' + '.' + 'com'; document.write( '' ); document.write( addy_text27500 ); document.write( '' ); //-->mhougan@indexuniverse.com.

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Bad Bets: Illiquid ETFs

Ian Salisbury of Dow Jones Newswires is one of the best fund reporters in the business. In his latest piece appearing in the Wall Street Journal, he takes a survey of 300 recent trades in 10 lightly traded ETFs.

Salisbury writes that it wasn't unusual to find prices off by 5%. In some cases, those spreads were more than 10%. Here's the story's lead: "Exchange-traded funds promise to let investors trade baskets of stocks at predictable prices throughout the day. But some thinly traded ETFs have been falling short of that goal."

At least online, no accompanying chart or graphics detail which 10 ETFs he's comparing. And later, Salisbury writes: "The 10 ETFs selected weren't randomly chosen but represent a sampling of funds that embody this trend. Investors that stick to more established, heavily traded ETFs can expect better results."

You can read the full report here.

Exchanges Slow As Hedge Funds Decline

Whether you're an options fan or not, you might enjoy this original piece of reporting by Bloomberg's Jeff Kearns.

He takes the initiative to crunch some numbers on his own, resulting in a unique perspective of how options exchanges are showing big slowdowns as lots of money sits in cash and other safe havens.

Kearns also ties slowdowns in activity to stats from Hedge Fund Research. That data shows trading at the exchanges dropped as hedge funds were suffering their worst back- to-back monthly declines in September and October. You can catch the story here.

Preferred Stock ETFs

While markets continue to fall, one area that advisors have been talking about lately is preferred stocks. Advisor and newsletter writer Don Dion takes a look at a pair of ETFs focusing on this part of the market—the iShares S&P U.S. Preferred Stock Index Fund (NYSE: PFF) and the PowerShares Financial Preferred (AMEX: PGF).

Not only are both beating the broader market by double-digits this year, each sport yields of better-than 10%, observes Dion. One question looms here, though. Why no mention of PowerShares Preferred (AMEX: PGX)?

You can read his comparison of the two ETFs here.

Plotting ETF Volume Vs. Index Volume

On Barry Ritholtz's The Big Picture blog, there's an interesting short piece with a chart comparing trading activity of ETFs compared to the underlying index.

The author, Michael Panzner, writes: "As the market has sold off since January, exchange-traded fund volumes have outpaced those of the underlying indexes, suggesting that ETFs are increasingly becoming the hedging and speculative mechanisms of choice in the U.S. equity market."

You can read it here.

Emerging Markets Indexes Tumble

Russia's Micex Index fell almost 9% and the MSCI Emerging Markets Index dropped 4.6% on Thursday on fears that slumping oil prices will cripple developing economies around the world, according to Bloomberg News.

As oil slid to $52 a barrel, Russia moved to cut corporate taxes. (Russian indexes have lost the most of any major markets this year). You can read more about yesterday's turmoil in emerging markets here.

Drink Your Coffee First

If you haven't had your morning cup of coffee, this next one probably isn't a good idea to take a gander at just yet.

It's a piece on Seeking Alpha full of doom and gloom preparing investors for Friday's market action. But more than David Fry's analysis, the bottom of the article includes some interesting market data of various indexes.

Drink up! Here you go.

REITs Take Fall

Shocks in commercial REIT markets are rippling through exchange-traded funds, notes David Gaffen in the Wall Street Journal's Marketbeat blog.

Gaffen points to widening spreads in credit default swaps on commercial real estate investment trusts. Such swaps serve as private insurance contracts to protect against corporate bankruptcies or other severe financial problems.

Impacted have been funds such as the SPDR Dow Jones Wilshire REIT ETF (NYSE: RWR). You can read the story here.

Colbert on Software Trading Algorithms

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So many a long EUR/USD punter was handed a rather sharp thump in the lumber region today while their counterparts perched on the other side of the fence got some much awaited relief. At this point it is by no means a sure thing that 1.60 may not return to the table, but if the ECB lays down the whip for now I think such a move is unlikely (which, judging by my earlier attempts to call the EUR/USD this year, probably means that it is very likely).

Trichet in the Sweetspot?

Wait a minute then. Doesn't this mean that Trichet got exactly what he wanted this time around as the EUR/USD dipped alongside a rate hike? This may be the case and while I am a firm believer in not attaching excessive importance on the strength of correlations the chart below does quite neatly sum-up the ECB's present dilemma (as well as does the growing divergence between core and headline inflation as I explain here).

Perhaps I am being a little sloppy in chart construction here - since the dates don't match exactly - but then again, the point I am making is hardly rocket science. It is important to remember here that the increase in headline oil prices is absolute even if of course the appreciation of the Euro itself lowers the relative price. As Macro Man so succinctly pointed out at one point, it is exactly this issue (or the neglience thereof) which makes nominal inflation targeting such a dangerous business. Put another way, we could follow Barry Ritholtz's lead and dub the surge in crude oil prices the "Trichet Rally."

Readers could be perhaps rightly be accusing me of criticizing the ECB unjustly here. A flip side to this coin would then be to interpret the ECB's move solely in the light of anchoring inflation expectations. In such a minimalist framework - neatly skinned of such "flabby" concepts such as neutral interest rates, output gaps etc - the main thrust would seem to be that inflation is largely a reflection, not of movements in monetary aggregates, but of what people believe it is going to be in the future (but over which horizon?) and of their ability to enforce those expectations on their employers or customers.

Whatever the ultimate validity of this point of view, one thing is for sure, and that is that the recent surge in headline inflation has produced a sharp spike in inflation expectations even if investors seem, at the same time, willing to accept the credibility of the Fed's inflation fighting intentions, at least as judged by the yields they are willing to accept on US treasuries.* In this light the ECB is neatly fielding the ball across and into the court of BOE and the Fed by signalling the need for a collective response in providing a credible commitment to flush out global inflation. To add further to their shoulder padding, the ECB recently got some strong indirect support from the BIS's 77th annual report (see also Brad Setser), which elaborated in great detail on their view that it is excess liquidity that is the main source of the global economy's ills.

Of course, there can be little doubt that since a significant part of the current inflation spike is global in origin, then a credible response to inflation will entail some kind of global monetary policy response. The ECB cannot fight this one alone and as I have argued over and over again inflation targeting in a world where investors follow yield carries great risks of being counterproductive.

But how likely is it that we will see such a response, and assuming we do, what would it look like? If a significant part of the pressure on global energy and food supply-side resource constraints comes from pressures which ultimately originate in rapid growth in BRIC-like emerging economies how can monetary policy within the OECD help. Doesn't slowing growth further in the developed economies only run the risk of sending even more funds off to the emerging markets in search of yield? And, just how realistic (or fair) is it to ask citizens in what are, after all, largely poor countries, to use monetary policy to restrain their growth simply because our shoes are now starting to pinch.

Clearly, the BOE and the Fed seem, at the present time, to be pretty reluctant to follow the ECB's best foot forward, and while many emerging markets are beginning to tighten the reigns the USD pegs remain and so does Japan's near ZIRP interest rate policy. And of course even further monetary tightening in those emerging economies which are feeling the full force of the inflation pressure can have rather perverse effects, as, for example, in China, where reserves seem to have jumped by around $75bn in April and $40bn in May (to a total which is now reckoned to run at something over $1,800bn) on the back of expectations for further rate rises and currency appreciation.

Another point worth making here would be that, while I fundamentally agree with the BIS that something needs to be done to rein in global inflation, the risk of provoking outright deflation in some key low growth OECD economies is non-negligible should the slowdown be too sharp . The key here is the link between the idiosyncrasies of national demographics, internal consumer demand and thus the differential abilities to pull the local economy out of any trough it may fall into. We should remember that the world is ageing and in some corners with an unprecedented speed. In fact, my own and others' research suggests that the turn of the 20th century has seen the importance of persistent low fertility in OECD and key emerging countries spike dramatically. Quite simply, it increasingly seems to be the case that fertility does matter and especially, with a lag of 30+ years of below replacement fertility.

A detailed argument will have to wait for another day but what I am suggesting, is that if we are not all careful the world could end up with a number of "Japans" on its hands after all of this is over, and that would especially be the case if monetary policy makers became set on administering a strong dose of anti-inflammatory medicine. This is not an argument for not taking inflation seriously and acting upon such concerns, but it is one for thinking seriously about the possible consequences of your actions, since a bad outcome could mean, for example, confronting the Eurozone with an Italian economy which will never be able to repay its government debt. In a global context what we may well find is that a growing number of ageing economies emerge from the present downswing as being totalyy dependent on export growth to achieve headline GDP growth, and I am sure that it is not too difficult to see how this would present a problem in and of itself in terms of finding the countries ready willing and able to accept the deficits which will be necessary to balance the global books.

More to Come?

But possibly I am getting ahead of myself. What about yesterday's move by Trichet; will it be the first of many or simply that famous token move it has already been dubbed? Given my continuing scepticism towards the ECB's one page playbook and my previous comments it should not surprise readers to learn that I believe this will be the last such move for the foreseeable future (see also Aurelio Maccario). As always with ECB speak, one could easily interpret Trichet's statement as containing an inbuilt option to raise rates as and when it is deemed necessary. What I really think though is that the ECB's stance will be really contidioned by the slowdown in the German economy which will probably make itself felt later this year. Given the probability of such a scenario, and with the entire zone slowing, I have a difficult time seeing from where exactly the ECB is going to be able to must the strength to lift rates again significantly.

So what about that reduction in interest rates which investors had such high expectations for as we entered 2007? The ECB will fight long and hard to avoid such a move in 2008 I think, and in fact, given the likely downward rigidness of headline inflation (this is structural remember), the Eurozone may be entering whatever comes next with a central bank unwilling to ease monetary policy in any significant way. This may well be the assymetry we have, at least until their is a significant shift in attitudes in Frankfurt.

Over at Bloomberg Simon Kennedy cooks up a neat story in which the ECB's strategy is narrated as pre-emptive damage control. I am willing to go with that narrative. However, today's move may still turn out to be a swan song for the ECB's credibility (as Sebastian pointed out here) even if this was exactly the underlying reason for the decision. The risk we face then is not so much one which comes from the adverse growth effect of the 25 basis points increase itself but rather that the ECB finds forced into reverse gear far sooner than it would like to. This could make today's events look rather a sign of weakness than one of strength even if they do, at this point, paint a picture of an ECB firmly situated at the helm of global monetary policy. As ever, history may well show a tendency to be rather less than flattering in its ultimate judgement of those who would steal the show in the here and now. Unlike good wine, age, I fear, will ultimately weary them.

* Personally, I think that the whole discussion of the yield curve is in badly need of a dose of the good old segmentation theory which I believe would go along way to explain why in fact emerging economies are willing to continue financing the US. I mean, it is pretty damn obvious that they are not buying T-bills for their real return, isn't it?