Archive for April, 2010
Friday, April 30th, 2010
Here are this weekend’s reading diversions. Oh, the things we take for granted… What are these chemicals exactly that we’re putting into our bodies day after day, without ever asking or wondering, “What is that?”
Have a great weekend!
During the interview process, you want to highlight as many of your strengths as possible. An easy way to do this is by slipping a few simple phrases into your next job interview. Here are seven things you should say in an interview.
If you were having lunch at a restaurant, black bean soup could be the healthiest thing on the menu.
While many of these products are diluted in toothpaste form, and mixed with water, they are still irritants through prolonged usage. For example, exercise caution if your toothpaste contains Sodium Lauryl Sulfate (SLS).
Several studies have shown that men with ED have a significantly higher risk of cardiovascular disease – heart attacks and strokes
Displaying a bottle of acid-lowering medicine surrounded by bottles of hot sauce and chicken wings only encourages you to indulge in tempting food, then take a pill to solve the problem.
The trick is to understand your true feelings and what those feelings actually mean to you.
“You’re not a bad daughter,” I told my patient, a grown woman with children of her own.
You need to start with a base of core nutrition, but by adding a few eye healthy foods to that base, you may be able to see improvements in your eye health. Here’s a list of ten different foods that can help to preserve or even improve your vision.
The test involves having a pen-sized tube inserted into the colon so doctors can identify and remove small polyps.
Tags: Black Bean Soup, Cancer Test, Chicken Wings, Colon Cancer, Could Save Thousands, Different Foods, Diversions, Exercise Caution, Eye Health, Grown Woman, Healthy Foods, Heart Attacks, Hot Sauce, Job Interview, Pesticide, Risk Of Cardiovascular Disease, Sodium Lauryl, Tempting Food, Toothpaste, True Feelings
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Friday, April 30th, 2010
This article is a guest contribution by Barry Ritholtz, The Big Picture.
I have been watching with a mixture of awe and dismay some of the really bad analysis, sloppy reporting, and just unsupported commentary about the GS case.
I put together this list based on what I know as a lawyer, a market observer, a quant and someone with contacts within the SEC. (Note: This represents my opinions, and no one elses).
Ten Things You Don’t Know (or were misinformed by the Media) About the GS Case
1. This is a Weak Case: Actually, no — its a very strong case. Based upon what is in the SEC complaint, parts of the case are a slam dunk. The claim Paulson & Co. were long $200 million dollars when they were actually short is a material misrepresentation — that’s Rule 10b-5, and its a no brainer. The rest is gravy.
2. Robert Khuzami is a bad ass, no-nonsense, thorough, award winning Prosecutor: This guy is the real deal — he busted terrorist rings, broke up the mob, took down security frauds. He is now the director of SEC enforcement. He is fearless, and was awarded the Attorney General’s Exceptional Service Award (1996), for “extraordinary courage and voluntary risk of life in performing an act resulting in direct benefits to the Department of Justice or the nation.”
When you prosecute mass murderers who use guns and bombs and threaten your life, and you kick their asses anyway, you ain’t afraid of a group of billionaire bankers and their spreadsheets. He is the shit. My advice to anyone on Wall Street in his crosshairs: If you are indicted in a case by Khuzami, do yourself a big favor: Settle.
3. Goldman lost $90 million dollars, hence, they are innocent: This is a civil, not a criminal case. Hence, any mens rea — guilty mind — does not matter. Did they or did they not violate the letter of the law? That is all that matters, regardless of what they were thinking — or their P&L.
4. ACA is a victim in this case: Not exactly, they were an active participant in ratings gaming. Look at the back and forth between Paulson’s selection and ACAs management. 55 items in the synthetic CDO were added and removed. Why?
What ACA was doing was gaming the ratings agencies for their investment grade, Triple AAA ratings approval. Their expertise (if you can call it that) was knowing exactly how much junk they could include in the CDO to raise yield, yet still get investment grade from Moody’s or S&P. They are hardly an innocent party in this.
5. This was only one incident: The Market sure as hell doesn’t think so — it whacked 15% off of Goldman’s Market cap. The aggressive SEC posture, the huge reaction from Goldie, and the short term market verdict all suggest there is more coming.
If it were only this one case, and there was nothing else worrisome behind it, GS would have written a check and quietly settled this. Their reaction (some say over-reaction) belies that theory. I suspect this is a tip of the iceberg, with lots more problematic synthetics behind it.
And not just at GS. I suspect the kids over at Deutsche bank, Merrill and Morgan are working furiously to review their various CDOs deals.
6. The Timing of this case is suspect. More coincidental, really. The Wells notice (notification from the SEC they intend to recommend enforcement) was over 8 months ago. The White House is not involved in the timing of the suit itself, it is a lower level staff decision.
7. This is a Complex Case: Again, no. Parts of it are a little more sophisticated than others, but this is a simple case of fraud/misrepresentation. The most difficult part of this case is likely to turn on what is a “material omission.” Paulson’s role in selecting mortgages may or may not be material — that is an issue of fact for a jury to determine. But complex? Not even close.
8. The case looks thin: What we see in the complaint is the bare minimum the prosecutor has to reveal to make their case. What you don’t see are all the emails, depositions, interrogations, phone taps, etc. that the prosecutors know about and GS does not. During the litigation discovery process, this material slowly gets turned over (some is held back if there are other pending investigations into GS).
Going back to who the prosecutor in this case is: His legal reputation is he is very thorough, very precise, meticulous litigator. If he decided to recommend bringing a case against the biggest baddest investment house on Wall Street bank, I assure you he has a major arsenal of additional evidence you don’t know about. Yet.
Typically, at a certain point the lawyers will tell their client that the evidence is overwhelming and advise settling. That is around 6-12 months after the suit has begun.
9. This case is Political: I keep hearing that phrase, due to the SEC party vote. It is incorrect. What that means is the case is not political, it means it has been politicized as a defense tactic. There is a huge difference between the two.
10. I’m not a lawyer, but . . . Then you should not be ignorantly commenting on securities litigation. Why don’t you pour yourself a tall glass of STF up and go sit quietly in the corner.
I have $1,000 against any and all comers that GS does not win — they settle or lose in court. Any takers? My money is already in escrow — waiting for yours to join it. Winnings go to the charity of the winners choice.
Source: 10 Things You Don’t Know (or were misinformed) About the GS Case, Barry Ritholtz, The Big Picture, April 23, 2010.
Questions Surrounding the SEC’s Litigation vs Goldman (April 17th, 2010)
Tags: Bad Ass, Barry Ritholtz The Big Picture, Billionaire, Criminal Case, Crosshairs, Dismay, Elses, Exceptional Service, Gold, Guilty Mind, Letter Of The Law, Mass Murderers, Material Misrepresentation, Mens Rea, No Brainer, Real Deal, Risk Of Life, Robert Khuzami, Rule 10b, Sec Enforcement, Voluntary Risk
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Thursday, April 29th, 2010
This article is guest contribution by Frank Holmes, U.S. Global Investors.
While the rest of the world suffered through its worst financial crisis in a half century, China went shopping. Since 2005, China has made 185 deals worth $100 million or more, totaling more than $222 billion.
The largest of these deals was the $12.8 billion joint venture between Chalco and Alcoa made to purchase 12 percent of Rio Tinto back in 2008. This deal was struck in Australia which has been China’s most popular destination both in terms of quantity and dollar amount.
Indicative of the large future the Chinese government has in store for its country, the most popular sectors for these deals have been metals and energy, respectively.
Forbes just published an interesting interactive map based on data from the Heritage Foundation detailing these transactions.
click for larger image
As you view the presentation, pay special attention to how the pace picks up. By the second half of 2009, China is averaging more than seven $100 million deals a month.
You can check out the full interactive version at Forbes.com
Tags: Alcoa, Chalco, China, Chinese Government, Financial Crisis, Forbes, Frank Holmes, Heritage Foundation, Interactive Map, Interactive Version, Joint Venture, Metals, Pace, Rest Of The World, Rio Tinto, Second Half, Sectors, Shopping, Tracking Email, U S Global Investors
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Thursday, April 29th, 2010
This article is a guest contribution by Richard Thies, Northern Trust.
April 20, 2010
There comes a time in every man’s life when he must say goodbye to old friends. This process can be difficult, but sometimes your old friends are nothing but a bad influence. The exceptionally accommodative monetary policy shared by the US and Canada has become a bad influence on the Canadians. When the Fed said it was going to ‘keep rates low for an extended period,’ the Bank of Canada (BOC) enacted a ‘conditional commitment’ to do the same through Q2 2010. But as often happens, the two friends drifted apart and with each passing data release it became clear that the Canadians really were no longer in the same boat as the US. This morning, the BOC paved the exit-road by ending their conditional commitment to keep rates at 0.25%, setting the stage for a June hike of the overnight rate.
Barring a major surprise, Canada will thereby become the first G7 country to begin its tightening cycle. The main factors influencing their decision appear to have been the heady rebound of the housing market and recent headline inflation numbers (Charts 2 and 3) as well as exceptional fiscal stimulus unexpectedly spilling over into the early part of this year, further fueling economic activity. Despite these reasons, it is not without some reservation that the BOC waves goodbye to the Fed, on what is likely to be a steadily widening rate spread between the two nations – the spread will likely be around 125 bps by the end of the year. The persistent strength of the C$ is a problem for Canada’s large export sector and the tightening will exacerbate this issue, further impairing US consumption of Canadian goods (though it is good news for upstate New York shop owners). Also, the Canadian economy, while benefiting from commodity demand in emerging markets is still reliant on a rebound in the rest of the industrialized world. In spite of the continued drags, the BOC expects the economy to return to full capacity by Q2 2010 and to experience growth of 3.7% this year, compared to our estimate of a 2.8% expansion in the US. So, goodbye old friend, we’ll see you on the exit road sometime next year.
Tags: American Perspective, Bad Influence, Bank Of Canada, Bps, Canadian Economy, Canadian Market, Conditional Commitment, Economic Activity, Emerging Markets, Exit Road, Export Sector, Fiscal Stimulus, G7 Country, Goodbye Old Friend, Headline Inflation, Housing Market, Inflation Numbers, Northern Trust, Old Friends, Overnight Rate, Thies, Two Friends
Posted in Canadian Market, Markets | Comments Off
Thursday, April 29th, 2010
This article is a guest contribution by Paul Kasriel, Chief Economist, Northern Trust.
April 29, 2010
We mentioned in our April 2010 U.S. Economic and Interest Rate Outlook [It's Been A While] that the ongoing contraction in commercial bank lending was an important factor curbing our enthusiasm about near-term growth in U.S. aggregate demand. But we did acknowledge that our lack of optimism might be misplaced if the cause of the continued contraction in bank lending was due more to write-downs of loans gone sour rather than of pay-downs of loans. We argued that if bank loans were falling because the dollar amount of write-downs exceeded the dollar amount of new loans being granted, the write-downs were immaterial with respect to new spending. The spending with respect to the bank loans now being written down occurred in the past, when the loans were originally granted. If, however, bank loans were now falling because the dollar amount of pay-downs exceeded the dollar amount of new loans being granted, then this would have negative implications for near-term aggregate demand. The entities paying down their debt would be cutting back on their current spending.
When we wrote that April outlook, we did not know how to determine whether write-downs or pay-downs were dominating the behavior of bank loans. One of our readers, Jim Fickett, who publishes an investment commentary called “ClearOnMoney“, showed us how to make the distinction. Fickett pointed out to us that, by definition:
$ change in bank loans = $ amount of new loans – $ amount of pay-downs – $ amount of write-downs.
Although there are no data on pay-downs, there are Federal Reserve data on loan charge-offs (i.e., write-downs.).
If the terms of the identity are re-arranged, we find that:
(2) $ change in bank loans + $ amount of write-downs =
$ amount of new loans – $ amount of pay-downs.
So, if the sum of the dollar change in bank loans/leases plus the dollar amount of charge-offs, i.e., the left-hand side of identity (2), is negative, then, by definition, the difference between the dollar amount of new loans granted minus the dollar amount of pay-downs, i.e., the right- hand side of identity (2), must also be negative. And if this is the case, then the dollar amount of pay-downs must exceed the dollar amount of new loans granted.
Let’s go to the data. Chart 1 shows the quarterly dollar amount of net charge-offs on commercial bank loans/leases and the quarterly dollar change in commercial bank loans/leases. In Q4:2009, net charge-offs totaled $49,363 million and bank loans/leases contracted by $62,321 million. In Chart 2, the dollar amount of net charge-offs is added to the dollar change in bank loans/leases, which is the left-hand side of identity (2). In Q4:2009, this sum was minus $12,958 million. From identity (2), this also means that the dollar amount of loan pay-downs exceeded the dollar amount of new loans granted by $12, 958 million.
Chart 3 shows the sum of the dollar change in bank loans/leases plus the dollar amount of net charge-offs on a four quarter moving total basis. In the four quarters ended Q4:2009, the sum of the change in bank loans/leases plus net charge-offs was minus $205,135 million. Thus, according to identity (2), the amount of pay-downs exceeded the amount of new loans granted by $205,135 million.
The upshot of all this is that the record decline in commercial bank loans/leases that the U.S. experienced in 2009 was dominated by pay-downs of loans rather than write-offs. Pay-downs have negative implications for new aggregate demand whereas write-downs are irrelevant (at least directly) with regard to new aggregate demand. Write-downs do have indirect negative implications for new aggregate demand to the degree that write-downs result in the reduction of bank capital. The decline in capital limits the ability of banks to create new credit. This might explain why banks allowed their outstanding loan balances to contract net of writedowns. The continued contraction in commercial bank loan/lease balances is cause for caution with regard to the near-term growth in economic activity.
Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
(c) Northern Trust, 2010
Tags: Aggregate Demand, April 29, Bank Loans, Charge Offs, Chief Economist, Contraction, Distinction, Dollar Bank, Dollar Change, Entities, Federal Reserve, Federal Reserve Data, Interest Rate Outlook, Investment Commentary, Leases, Negative Implications, Northern Trust, Optimism, Paul Kasriel, Respect
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Thursday, April 29th, 2010
This article is a guest contribution by John Hussman, Hussman Funds.
As of last week, our most comprehensive measure of market valuation reached a price-to-normalized earnings multiple of 19.1, exceeding the peaks of August 1987 (18.6) and December 1973 (18.3). Outside of the valuations achieved during the late 1990′s bubble and the approach to the 2007 market peak, the only other historical observation exceeding the current level of valuation was the extreme of 20.1 reached just prior to the 1929 crash. The corollary to this level of rich valuation is that our projection for 10-year total returns for the S&P 500 is now just 5.3% annually.
While a number of simple measures of valuation have also been useful over the years, even metrics such as price-to-peak earnings have been skewed by the unusual profit margins we observed at the 2007 peak, which were about 50% above the historical norm – reflecting the combination of booming and highly leveraged financial sector profits as well as wide margins in cyclical and commodity-oriented industries. Accordingly, using price-to-peak requires the additional assumption that the profit margins observed in 2007 will be sustained indefinitely. Our more comprehensive measures do not require such assumptions, and reflect both direct estimates of normalized earnings, and compound estimates derived from revenues, profit margins, book values, and return-on-equity.
That said, valuations have never been useful as an indicator of near-term market fluctuations – a shortcoming that has been amplified since the late 1990′s. The lesson that valuations are important to long-term investment outcomes is underscored by the fact that the S&P 500 has lagged Treasury bills over the past 13 years, including dividends. Yet the fact that these 13 years have included three successive approaches (2000, 2007, and today) to valuation peaks – at the very extremes of historical experience – is evidence that investors don’t appreciate the link between valuation and subsequent returns. So they will predictably experience steep losses and mediocre returns yet again. Ironically, before they do, it also means that investors who take valuations seriously (including us) can expect temporary periods of frustration.
I’ve long noted that the analysis of market action can help to overcome some of this frustration, as stocks have often provided good returns despite rich valuations so long as market internals were strong, and the environment was not yet characterized by a syndrome of overvalued, overbought, overbullish, and rising yield conditions. In hindsight, the stock market has followed this typical post-war pattern, and we clearly could have captured some portion of the market’s gains over the past year had I ignored the risk of a second wave of credit strains (which I remain concerned about, primarily over the coming months).
It is important to recognize, however, that even if we had approached the recent economic environment as a typical, run-of-the-mill postwar downturn, we would now be defensive again, as a result of the current overvalued, overbought, overbullish, rising yields syndrome. I do recognize that my credibility in sounding a cautious note would presently be stronger if I had ignored further credit risks and captured some of the past year’s gains. But the awful outcome of this same set of conditions, which we also observed in 2007, should provide enough credibility.
Looking Back, Looking Forward
Last year, in the August 31 market comment A Tale of Two Data Sets, I observed “If we had a reasonable basis to believe that the recent economic downturn was an ordinary run-of-the-mill post-war recession having no lasting structural impact, and believed that the record profit margins observed in 2007 (about 50% above the historical norm) could be recovered and sustained, we would infer an average return/risk profile for the market that is still much less favorable than we have normally observed following bear market lows, but strong enough to warrant the removal of a good portion of our hedges outright, with a willingness to remove another portion of our hedges on market weakness.
“On the other hand, using the same essential measures of valuation and market action, but including periods of major economic dislocation into the dataset, produces average return/risk inferences that are substantially less favorable. Indeed, the reason we were somewhat “burned” during the fourth quarter of 2008 is that we expected – too early, in hindsight – a powerful rebound from the extremely oversold conditions we observed, based on normal market behavior. The larger dataset also includes periods of similarly powerful rebounds – but the attempt to participate in them is less appealing due to their lack of predictability as well as their sometimes abrupt and costly endings.”
Given that valuations and market action have generally been a useful guide to setting investment exposure in normal post-war market cycles, it may be helpful to detail how these factors behaved during the period between 1929 to 1935, which represents the greatest period of credit strains observed in U.S. data. Though not all of the data we use in our market and economic analysis is available for this period, some of it can be estimated and proxied enough to allow us to characterize the key results. The results below are specific to methods we actually use, but I expect that they could be broadly replicated using any basic combination of valuations (say, Shiller PEs), and market action (say, moving averages or breadth measures).
At the outset, I should note that overall, our general criteria of valuation and market action would have been quite helpful during the Depression. When we apply the methods that we developed for post-war data to Depression-era data, we find that there was clearly sufficient evidence from valuations and market action to warrant a strong avoidance of risk during much of that period, and eventually to establish a significant exposure to market fluctuations.
But here is the difficulty. The primary benefit of the market action criteria was in avoiding risk, while nearly all of the gains from applying our approach would have been attributable to the valuation considerations we use. While applying post-war criteria would have resulted in an overall gain between 1929 and 1935, the bulk of that gain was driven by market exposure accepted during periods of exceptionally low valuations. Negative market action was a powerful signal to avoid market risk, but except when valuations were extremely favorable, positive market action contributed nothing on its own.
What is most striking about Depression-era data between 1929-1935 (and post-credit crisis data more generally) is that when we examine periods when one would generally grade market action as favorable on the basis of major trends and market internals, we find that taking positive exposures would actually have resulted in a net loss. This is due to the abruptness of trend reversals, so even periodic gains of 30-50% would have been largely erased through a combination of abrupt initial losses and subsequent whipsaws. While the compound net loss from periods of “trend following” over the full period was tolerable (about a -25% drawdown), that figure represents a combination of large individual gains and losses – substantial volatility, with a negative overall contribution to returns.
Partitioning the data provides a clearer picture. When valuations exceeded even 12 times normalized earnings (on our most comprehensive measure discussed above), seemingly “favorable” market action was followed by profound losses averaging -69.8% on an annualized basis (generally reflecting a few weeks of vertical losses until enough damage was done to kick the market action measures negative). Once the initial damage was done coming off of the uptrend, valuations over about 12 were still hostile, but were associated with slightly less profound losses averaging -37.7% annualized.
In contrast, only when valuations became quite depressed did the combination of favorable valuations and market action produce positive subsequent returns. Multiples below 12, coupled with favorable market action, were associated with annualized returns of 12.5%, while multiples below 12 coupled with unfavorable market action were associated with further mild losses averaging -4.5% annualized.
In 2009, we observed only a few weeks in March when the S&P 500 was priced at less than 12 times normalized earnings (again, on our best measure). At that time, indicators of market action were still negative. Faced with two possible data sets, one assuming further credit strains and one assuming that the problems had been solved, I noted “even giving the two possibilities equal weight is harsh, because as I’ve repeatedly noted, post-crash markets have included advances as large, and larger, than we’ve observed since March, but with devastating follow-through.” Needless to say, sharply negative return figures don’t “average in” very well.
How to respond?
Which brings us to the present. As of last week, even from a strictly post-war standpoint, a defensive investment stance is warranted, based on a syndrome of overvalued, overbought, overbullish and rising-yield conditions. Equally important is how to respond appropriately as these conditions change.
First, my primary concern with regard to fresh credit strains would be the period of recognition. We may very well have a multi-year period over which the full effects of deleveraging is actually felt, but the most damaging declines often occur where reality departs materially from expectations. The past year has been seen an easing of credit strains even as the volume of delinquent loans has hit new records, partially because of the abandonment of mark-to-market accounting, and partly because mortgages are long-term assets and it’s possible to kick the can down the road with mortgages that aren’t being serviced. It’s unlikely in any event that these problems have actually been solved, because we can’t reconcile the quantity of delinquent loans with the tamer figures for foreclosures and writedowns. Still, we need several more months of data before we can start relying on “extend and pretend” to dispense with the problem through an extended period of chargeoffs and Fannie/Freddie bailouts. Meanwhile, I remain concerned.
The economy and the markets have enjoyed a great deal of positive effect from the enormous deficit spending of the past 18 months (if it doesn’t seem that the economy has benefited, consider the dismal the profile of GDP and personal income when stimulus spending and transfer payments are excluded). It’s not at all clear that these effects are durable, and it’s also not clear to what extent bank assets have been marked up, passed off to Fannie and Freddie, or otherwise obscured.
Here is precisely how we plan to approach the current uncertainties.
First, over the next few months, we are continuing to allow for uncertainty as to whether we should assume a “typical post-war” cycle or a “post-crash, credit strained” environment. As noted above, the primary distinction between these data sets is how the market responds to valuations and market action. Accordingly, the main strategic difference between “post-war” and “credit-strained” criteria is that valuations take a larger role relative to market action in a deleveraging cycle.
Over the course of 2010, absent very clear (i.e. crisis-level) additional credit strains, our weighting toward “post-war” criteria will increase in an approximately linear way. If we don’t observe a significant second-wave of credit strains this year, I am comfortable with our standard post-war criteria to address any residual risks. If we do observe such strains, my primary concern would be the initial period of recognition. We would still gradually move our weights toward “post-war” criteria, but at a slower rate.
Based on the convexity analysis that I discussed late last year, my impression is that it is more appropriate to weight investment positions rather than expected returns from the two possible data sets. For example, if we weight expected returns, it is nearly impossible to give any weight at all to a credit strained environment and still justify a positive investment position, because of the size of the losses that can emerge in credit-strained conditions. In contrast, if the investment position would be zero based on “credit strained” criteria and 60% based on typical post-war criteria, a 60/40 weighting, respectively, would result in a weighted exposure of 24%.
Presently, if the Market Climate was to improve based on our standard post-war criteria, we would move 40-50% in the direction of that exposure. For example, if the market declines enough to clear the overbought, and overbullish components of present conditions, or if yields decline sufficiently to remove the present upward pressures we observe, and provided that market internals do not deteriorate notably, we would be left with a strenuously overvalued market, but with favorable market action and no negative syndromes. That wouldn’t warrant a fully invested position in any event, but we would become decidedly more constructive.
What if the market simply moves higher? It is safe to say that at current valuations, a continued extension of overvalued, overbought, overbullish conditions, with no reprieve from interest rate pressures, would keep us in a hedged stance. The Strategic Growth Fund is not appropriate for investors who wish to speculate under that specific set of conditions, because we have no historical evidence that it is sensible to take market risk, on average, once that syndrome emerges.
Ideally, any removal of the current overvalued, overbought, overbullish, rising-yields syndrome would involve a substantial improvement in valuations, an initial deterioration in market action, and then an eventual firming of internals. That outcome would allow us much greater latitude in accepting market exposure.
In short, accepting a greater level of market exposure will require, at minimum, that we clear the present syndrome of overvalued, overbought, overbullish, rising-yield conditions. The quickest way to a more constructive investment stance would be a meaningful improvement in valuations (which would most likely be associated initially with a deterioration in market action), and no further credit strains. That would allow us to establish a strong market exposure on early evidence of improved market action. If we do observe significant fresh credit strains, our valuation criteria will be more demanding, particularly in the initial recognition phase. In any event, however, we will gradually transition toward standard “post-war” criteria as we move through 2010 – slower if we observe credit strains, but otherwise in a roughly linear way as we move through the year.
Presently, the market is strenuously overvalued, faces a syndrome of overextended conditions that has historically proved hostile, and relies on the absence of further credit strains to an extent that strikes me as incredible. Our investment objective continues to focus on outperforming our benchmarks over the complete market cycle, with smaller periodic losses than a passive investment strategy. We’ve achieved that objective since the inception of the Funds, and I’m comfortable that we have the tools to achieve that objective as we go forward. I frankly don’t know which direction the market is headed here, but I hope I’ve made it clear how I expect to approach the evidence, and why.
As of last week, the Market Climate in stocks remained characterized by an overvalued, overbought, overbullish, rising-yields syndrome that has historically produced periods of marginal new highs, slight declines, and yet further marginal highs, followed somewhat unpredictably by nearly vertical drops. I’ve often accompanied the description of this syndrome with the word “excruciating,” because the apparent resiliency of the market and the celebration of each fresh high, can make it difficult to maintain a defensive stance. Interestingly, the analysts at Nautilus Capital recently noted that the most closely correlated periods in market history to this one were the advances of 1929 and 2007. While exact replication of those advances would allow for a couple more weeks of further strength, we’ve generally found it dangerous to expect history to do more than rhyme. These hostile syndromes have a tendency to erase weeks of upside progress in a few days.
In bonds, the Market Climate last week remained characterized by relatively neutral yield levels and unfavorable yield pressures. While we would be inclined to increase the duration of the Strategic Total Return Fund modestly if the 10-year Treasury yield was to push beyond 4% or so, we are comfortable with our current duration of just under 4 years. For now, I continue to be concerned about potential credit strains, which may provide the opportunity to accumulate precious metals, TIPS, and possibly foreign currency exposure on associated price weakness.
Tags: Assumption, Assumptions, Book Values, Corollary, Dividends, ETF, Extremes, Financial Sector, Hussman Funds, John Hussman, Long Term Investment, Market Fluctuations, Market Peak, Market Valuation, Metrics, Profit Margins, Return On Equity, Shortcoming, Treasury Bills, Valuations
Posted in Markets, US Stocks | Comments Off
Thursday, April 29th, 2010
This post is a guest contribution by Asha Bangalore, economist of The Northern Trust Company.
The FOMC left the federal funds rate band 0%-0.25% intact, no surprises here. Several modifications to the March statement were necessary in light of recent economic reports pointing to improving economic conditions. Here are the changes from the March 16, 2010 meeting:
Fed funds rate: In today’s statement, the much cited phrase “warrant exceptionally low levels of the federal funds rate for an extended period” was left untouched.
Dissent – President Hoenig of the Federal Reserve Bank of Kansas has now dissented at three consecutive meetings. In Hoenig’s opinion, the exceptionally low level of the federal funds rate is no longer necessary and it has the potential to build up “financial imbalances and increase risks to longer-run macroeconomic and financial stability.”
Economy: In its March statement, economic activity was seen to be strengthening. Today, the Fed retained this view. The labor market is now seen as “improving” compared with the March portrayal that it is “stabilizing”. Restraints from high unemployment, modest income growth, lower housing wealth, and tight credit continue to be pertinent factors holding back the pace of consumer spending. In today’s missive, consumer spending is deemed to have “picked up” vs. “expanding at a moderate rate” in the March statement. Although housing starts are at a depressed level, they have “edged up,” which is more bullish than the March statement when housing starts were seen as flat.
Inflation: The language regarding inflation was left intact vs. the March statement. Inflation is predicted to be subdued for some time.
Fed’s balance sheet: The Fed’s portfolio includes $1.25 trillion agency mortgage-backed securities, an asset acquired to stabilize the housing market and hold down mortgage rates. The widespread speculation that today’s announcement would include indications of the Fed’s plan to liquidate these holdings proved incorrect. Undoubtedly, the meeting would have included discussions about the balance sheet of the Fed. In our opinion, the outright sale of mortgage-backed securities is many months ahead and will be tied to developments in the housing market. In the early stages of tightening monetary policy, reverse repos, term deposits and higher interest rates on excess reserves will be favored over sale of mortgage-backed securities.
Further insight on the Fed’s decision is also provided in the video clip below, featuring Ken Volpert, a Vanguard principal, and Bill Gross, co-CIO & founder of Pimco.
Tags: Bill Gross, Consecutive Meetings, Consumer Spending, Depressed Level, Economic Activity, Economic Conditions, Economic Reports, Fed Funds Rate, Federal Funds Rate, Federal Reserve Bank, Financial Stability, Hoenig, Housing Market, Housing Starts, Missive, Moderate Rate, Mortgage Backed Securities, Mortgage Rates, Northern Trust Company, Pertinent Factors, Tight Credit
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Thursday, April 29th, 2010
A few weeks ago, I asked Fred Hickey what he would do as chairman of the Federal Reserve. In the remainder of our interview, I asked Fred (Fred Hickey is author of The High Tech Strategist Newsletter, and a participant in the annual Barron’s Roundtable). whether we can avoid recessions in a business cycle, what will happen to the US Dollar, how our creditors are behaving, and what advice he can offer given the new economic environment.
Damien Hoffman: Fred, can we create a perpetual business cycle where we don’t get recessions?
Fred: No. I have a quotation on my board here that says, “The final outcome of the curve expansion is general impoverishment.” That means if we continue down this path the outlook, unfortunately, is general impoverishment for the country.
I hope that’s not how it’s going to play out. But I’m not particularly optimistic with the current leadership that we have in government today.
At some point the dollar is going to break down — really break down. Right now there’s still a rush to safety from the worry about Europe. But I don’t know why they’re so worried about Europe when we’re the ones with the trillions of dollars of deficits.
Damien: It’s an ironic flight to safety. It’s almost a cosmic comedy.
Fred: It’s just a Pavlovian reaction. However, at some point that won’t be the reaction and the dollar will get crushed. Eventually there will be some recognition that this country is broke. No one seems to be talking about this, but in a recent US Treasury foreign holdings report I saw a flat line where the mainland Chinese were not buying our treasuries anymore. Their position was holding; meaning, they were buying just enough to offset the maturing bonds. Now we’re seeing outright declines. This has gone on for several months and now it’s an outright decline.
Damien: What about the Russians?
Fred: The Russians are also reducing their positions. They reduced $10 billion in December and it’s dropped from a $140 billion almost to $118 billion over the last few months.
The Russians have been out there saying they’re buying gold, Canadian bonds, and diversifying their positions. Well, here they are doing it. At some point, enough people around the world will say they don’t want to be in dollars anymore and they will get out. It looks to me that the Chinese and the Russians are getting out.
The smart guys are leaving the ship and it looks to me like we’re replacing them with are our own printed money as well as hedge funds who are borrowing money and buying treasuries. This is a very bad group to have. Those are not long term holders. That could reverse very quickly. If that happens you can have a dollar collapse.
Damien: So is gold the hard currency which will continue to win?
Fred: I never lose sleep with my big gold position, but I do lose sleep when I have a big dollar position. I always see pullbacks in gold as buying opportunities because what I’ve discussed are the big forces really moving things. There are very few people on this planet that understand the big macro picture behind the movement to gold. We’re now in a 10 year bull market in gold. We ran a twenty year bear market, so it might be a twenty year bull market. We may be only halfway through.
I’m not sweating $1100 gold as the top like so many others in this country. They see bubbles everywhere in gold. They never saw the bubble in real estate, never saw the bubble in stocks, never saw anything. However, all these people in the U.S. see a bubble in gold. I don’t see it. I sleep like a baby with my gold position.
Damien: Fred, given the situation our country faces, what type of advice do you give your children?
Fred: That’s a hard question. First, you must be willing to work hard at anything you do. Try to find something you enjoy and you can feel good about. It helps you work hard.
Save your money and don’t build up debts. I never get myself in any kind of trouble because I never had any debt. So, if I’m wrong I’m never going to get really destroyed because I don’t have leverage. Debt is a four letter word. I’m an old fashioned guy.
Don’t ignore history. There are a lot of lessons to be learned that many people seem to never learn. I have my kids reading what I consider to be many of the investment classics.
Damien: That’s great advice especially keeping out of debt. If most Americans just followed that one simple principle, we’d be in a whole different position right now.
Fred: If most individuals and our government.
Damien: Right. Well, thank you very much for the rare interview, Fred. Our readers really appreciate you taking the time.
Fred: My pleasure. All the best.
Tags: Barron, Business Cycle, Chairman Of The Federal Reserve, Cosmic Comedy, Creditors, Declines, Economic Environment, Federal Reserve, Fred Hickey, High Tech Strategist, High Tech Strategist Newsletter, Hoffman, Impoverishment, Mainland, Pavlovian Reaction, Recessions, Russians, Treasuries, Trillions, Us Treasury
Posted in Canadian Market, Emerging Markets, Gold, Outlook | Comments Off
Thursday, April 29th, 2010
By Dian L. Chu, Economic Forecasts & Opinions
Europe’s hopes of containing the crisis dimmed as Spain became the third euro-zone nation to be hit with an S&P downgrade in just two days, following steeper cuts on Portugal and Greece.
Fears of a Greek contagion to other euro zone nations ratcheted higher on that news sparking a market selloff across the globe, sending the euro to fresh lows against the dollar, and intensified the pressure to finalize a rescue plan for Greece.
Blaming the Euro Currency Union
The ongoing Greek debt crisis has revived the old arguments that all national governments need monetary sovereignty. Financial Times columnist Samuel Brittan also recently suggested that if Greece has its own currency,
“…it can issue its own money; so it can pursue a fiscal policy attuned to domestic needs, without being dependent on the international bond market.”
All Better With The Drachma?
So, what if Greece had stayed with the Drachma, and never switched to the euro? Would this debt crisis be averted?
Unfortunately, as illustrated by the chart from the Council on Foreign Relations (CFR), in the six years before joining the euro, only 27% of Greek debt was issued in drachma. At the end of 2000, just before Greece joined the euro zone, 79% of its outstanding debt was already denominated in euros, and a mere 8% in drachmas.
Blame It On Profligate Spending
This could only lead to an inescapable conclusion as noted by the CFR,
“Even if Greece had remained outside the euro zone, its dependence on euro borrowing would only have increased. A falling drachma would merely have brought the current crisis to a head earlier by accelerating the rise in Greece’s debt-to-GDP ratio (think Iceland)….problem is excessive foreign borrowing, a problem with which Greece has struggled since the early 19th century.”
Meanwhile, a Greek official said the IMF is considering increasing the Greek loans to €100 billion to €120 billion ($132.5 billion to $159 billion) over three years, from the current €45 billion, but expressed doubts about whether the boost would happen.
The actions of the EU and IMF are sending a message to investors that it is not important that PIIGS nations have excessive and unsustainable public spending and fiscal deficits, because ultimately the countries of the euro zone who will resolve the problem.
There doesn’t have to be a rescue plan for Greece, as long as the markets believe in “the moneylender of the last resort” (the countries of the euro zone.)
In that sense, the debt-rescue-or-not saga of Greece could drag on for a while before some uncommon event forces a concrete resolution out of the EU and IMF.
Tags: Bond Market, Contagion, Council On Foreign Relations, Currency Union, Debt Crisis, Drachmas, Economic Forecasts, Euro Zone, Financial Times, Financial Times Columnist, Fiscal Policy, Gdp Ratio, Greece Fears, Inescapable Conclusion, International Bond, Joining The Euro, Monetary Sovereignty, Moral Hazard, National Governments, Selloff
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Thursday, April 29th, 2010
In addition to fundamental and technical analysis, it is particularly important to measure the crowd’s sentiment regarding extreme bearishness or bullishness. A convenient tool for this is provided by the Investors Intelligence survey of investment advisors.
According to the latest reading (April 27), 54.0% of advisors are bulls (up from 34.1% in February) and 18.0% are in the bear camp (down from 27.8% in February). As shown below, the last time bullish sentiment was at this level was in December 2007 when the S&P 500 Index was trading 26% higher at 1,500.
Source: Bespoke, April 28, 2010.
“Bulls around 55% and fewer than 20% bears are the first indications of a market top. As mentioned last week, we now classify the advisory sentiment as negative, similar to the outlook that started this year [and preceded a 9% correction]. Markets can still move higher and the bulls could approach 60% before a final top is in place. In the near-term, though we would expect a modest pull back to consolidate the near three-month rally. At present we do not project a correction approaching 10%,” said the report.
I am holding a cautious stance here.
Tags: Bear Camp, Bears, Bullish Sentiment, Bulls, Crowd, Extreme Bearishness, Intelligence Survey, Investment Advisors, Investors Intelligence, Last Time, Market Sentiment, Mentioned Last Week, Rally, Stock Market
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