Portfolio Performance : +54.76%

Actions : Closed my long USD/CHF on profit taking, which helped the performance of the portfolio. Systemic risk has spread and the contagion has appeared to affect Europe. Pressure is on the equity market. Commodities have slid, as expected.

I have sidetracked a bit to focus a paper on equity price movements instead of foreign exchange.

In "Fundamental information and share prices in Japan: evidence from earnings surprises and management predictions" by Robert M.Conroy, Robert S.Harris and Young S.Park 1998

The paper investigates whether corporate fundamentals, as captured by corporate earnings and especially management forecasts of such earnings, provide significant insights into Japanese stock prices.

All in all, the results from their paper show an important and changing role for earnings information in Japanes market pricing. Three clear empirical patterns stand out. Japanese stock prices react significantly to innnovations in information about company-specific earnings fundamentals. Price reactions are much more pronounced to management forecasts of future earnings than to announcements of current earnings. Finally, the pattern of price reactions to earnings news changes over time. The patterns of change are broadly consistent with the view that the alleged bubble period of the 1980's did see a smaller role for fundamental information about corporate performance. Moreover, reactions to bad news became particularly more pronounced after the bubble period ended.

They found that current stock price depends on expectations of both near term and long term earnings. As a result, share price rise if current earnings give investors new information about future performance. One would expect management forecasts of next year's earnings to elicit even stronger price responses. Also, in a bubble, when attenuated price responses to earnings fundamentals in this period are due to a speculative bubble or to investor's rational choices not to revise expectations of future earnings may ultimately be a matter of semantics. What is clear is that pricing effects appear to change with general market conditions. Apparently when market conditions have turned sour, specific company announcements result in more severe price changes. In more buoyant markets, such news may be given less weight as all boats are viewed a s rising.