Things That Are More Important Than Facebook

Wednesday, May 30th, 2012

by Finance Addict

Facebook is hitting new intra-day lows as I write this. And again I ask, “who cares?” I don’t mean to be unsympathetic, but I’m going to assume that anyone who bought into in Zuckerberg’s heads-I-win-tails-you-lose coming out party has only done so with money they can afford to lose. If not then I would suggest that they read this and this.

I’ve already written about two massive economic developments that are far more important: the euro’s near-death experience and the U.S. fiscal cliff. Here’s one more: the BRICs are over.

Brazil, Russia, India and China. Four high-growth and highly exciting countries whose progress the world has been tracking since 2001. The stagnant and troubled economies of Europe and the U.S. are very much hoping that the BRICs will help lead us through the valley of the shadow of death, as they did the last time. But are we out of luck?

Brazil

• Brazilian automakers have had 6 months of falling car sales. It’s the world’s third-largest car market and “responsible for 20 percent of the country’s industrial economy”.
• Its currency has dropped almost 15% in the past three months. This may help Brazilian exporters, but may also help stoke inflation.
• Speaking of exports, Brazil’s economy is very dependent on sales of commodities to other countries. (Vale, the world’s largest producer of iron ore is a Brazilian company.) A slowdown in its customers’ economies will lead its own economy to weaken even more.

Russia

• Its GDP growth remains positive but has slowed down recently (from 3.9% in March to 3.7% in April.)
• Its economy is also heavily dependent on commodities sales that will suffer as one of its largest customers, the eurozone, continues its descent.
• Russian politics remain volatile. Large parts of Russian society remain displeased with Vladimir Putin’s self-determined staying power and have expressed this. How will this end?
• The government doesn’t have much of an issue with budget deficits, but this could change if (1) Putin pulls a Saudi Arabia and tries to buy off his citizens and / or (2) oil prices really fall off. (My emphasis below.)

Russia’s oil sector [...] pay[s] a progressively higher share of their revenues when oil prices are higher

[...]

[T]his policy has an interesting side effect. When oil prices fall, oil companies see only a very small decline in their revenues, since when oil prices are high, the lion’s share of their revenues are taxed away anyway. The flip side is that the government takes a serious hit when prices drop. (Source: Russia Behind the Headlines)

India
Serious doubts are emerging about the near-term economic future of India. Here’ what the IMF has to say:

The extent of the recent slowdown in India’s growth rate has surprised most Indiawatchers even in the face of ongoing international financial market volatility, high and volatile oil prices, and the uneven global recovery.

Europe’s a disaster, the U.S. is a question mark and the BRICs might be stumbling. Facewho?

(c) Finance Addict

Tags: Brazil, Brazilian Company, Brazilian Exporters, BRICs, Car Market, Economic Developments, Eurozone, Facebook, GDP Growth, Government Doesn, India, Industrial Economy, Near Death Experience, Russian Politics, Russian Society, S Industrial, Shadow Of Death, Staying Power, Troubled Economies, Valley Of The Shadow, Valley Of The Shadow Of Death, Vladimir Putin
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The Narrowing Gap between US and Emerging Markets in 2011

Tuesday, February 1st, 2011

The Narrowing Gap between US and Emerging Markets in 2011

Prepared by John Zechner, JZechner Associates, sub-advisor to NexGen Financial.

January 2011

Going forward, we remain positive on the outlook for stocks over the next 2-3 year period and have positioned your portfolio accordingly, even though we are more wary about a short-term correction in the stock market given the sharp advances since last August. In terms of the portfolio themes, the stocks still reflect an outlook for expanding global economic growth. The only difference is that we think that growth will slow down to more normal rates in the Emerging Economies (particularly China) and will pick up somewhat in North America. This should lead to better performance from domestic stock sectors such as retailing, autos, housing, rail, technology and even financials. On the other side, we don’t expect commodity stocks to continue to dominate the gains the way they have in the past two years even though they may continue to rise. The gains should come more from volume growth as opposed to price growth. We will continue to monitor all economic developments though and shift the portfolios accordingly and in line with the opportunities presented by the market.

At month end the Fund had an asset mix of 53.8% of its assets in stocks, 22.9% in fixed income and 23.3% in cash. Within the stock component, 74% of those assets were in Canadian stocks and the remaining 26% was in US stocks, primarily in the Technology and Financial sectors.

Canadian Balanced Growth Fund – Review and Strategy

We had another month of exceptionally strong relative performance in the NexGen Canadian Balanced Growth Fund in December as Asset Mix, Sector Rotation and Stock Selection all contributed to the gains. We generated returns for the month, the 4th quarter and the full year which were all well ahead of the Benchmark Performance Measure for this fund. The Asset Mix favoured stocks, which again did better than bonds last month. Sector overweight positions in the resource stocks and underweight positions in financial stocks both added value during the month. In terms of specific stocks, Manulife Finanical (up 19.5% on the month), Suncor Energy (up 10.8%), Quadra FNX Mining (up 18.2%), Thompson Creek Metals (up 16.8%) and Gold Wheaton (up 14.7% on buyout offer from Franco-Nevada Mining) were the biggest contributors to the December advance in your portfolio. Uranium Participation (down 4.5%) and Research in Motion (down 8.2%) were the biggest drags on the portfolio last month.

North American Growth Fund – Review and Strategy

The return for the NexGen North American Growth Fund was strong again in December and well ahead of the benchmark for the Fund (50% S&P/TSX Composite Index/50% S&P500 Index in Canadian dollars). The Fund was also well ahead of this benchmark measure for the 4th quarter and full-year periods. The strategy has remained consistent throughout this year with an emphasis on the Canadian resource sector and an underweight in US consumer stocks. Cash has been at minimal levels for most of the year.

As of December 31st, cash in the Fund was 6.7% with Canadian stocks at 57.8%, well above the 50% benchmark for the Fund. Key sector positions included Energy, Basic Materials and Technology. Key portfolio names in the Energy sector include Athabaska Oil, Talisman Energy, Petrobank Energy, Suncor and Uranium Participation. In the Basic Materials sector, the largest holdings include Barrick Gold, Kinross Gold, Thompson Creek Metals and Yamana. Other significant holdings include Canadian Tire and Research in Motion as well as Sun Life and TD Bank in the Financials.

US stocks remain below their benchmark weight of 50% with a month end level of 35.4 % of the portfolio. The focus within the US stocks remains on multinational companies with strong export businesses and a focus on the business market, rather than the consumer. Key stocks include the newly-issued General Motors, General Electric, Exxon Mobil, Freeport-McMoran and Cliffs Natural Resources. The Fund also has large positions in Bank of America and JP Morgan in the Financials and Hewlett-Packard, Microsoft, Intel, Cisco, Apple and IBM in the Technology sector.

Financial Markets: Monthly Review and Outlook

Stocks carried the momentum from the rally that started in August right into the end of 2010 as improving economic data, strong earnings growth, increased corporate activity and falling bond prices all motivated investors who were either out of the stock market or holding too many bonds to shift funds into the equities on a more upbeat outlook for 2011. In Canada, the S&P/TSX Composite Index followed up the 3rd quarter gain of 10.2% with a 4th quarter increase of 9.5% to push the index to an annual return of 17.6%. This followed the 35.0% return generated by the index in 2009. The strength in the 4th quarter of 2010 followed the pattern of the entire 2-year rally with the resource sectors leading the advance. The Basic Materials lead the 4th quarter advancers with a gain of 14.1%, despite a lack of help from the gold stocks which only advanced 5.0% for the quarter. Energy stocks were a close 2nd for the quarter with a gain of 13.5% while Financials lagged with a gain of only 4.0% and the Telecom sector fell by 1.1%. It was the same story for the annual returns where the largest positive impact on the index was the 35.8% gain for the Basic Materials sector. The Consumer Discretionary and Health Care sectors were the only other ones to beat the index last year, and that was driven primarily by the performance of 2 stocks, Magna in the Consumer group and Biovail (now Valeant Pharmaceutical) in Health Care. Laggard groups in 2010 included Financials, Energy and Technology with gains, respectively, of 4.4%, 8.7% and 4.7%. Interesting as well was the difference in returns for the smaller stocks versus the large cap group. The TSX60, which is made up of the largest 60 stocks in the index including all the major banks, the larger energy companies and RIM, gained just 10.9% in 2010 while the TSX Completion Index (total index less the TSX60) gained 26.5% for the year! Clearly good stock selection was able to deliver superior investment results for the year. When we looked at our strongest gainers for the past year they were almost all smaller names, including Grand Cache Coal (up 106%), Uranium One (up 75%), Farallon Mining (up 45%), Magna International (up 44%) and Gold Wheaton (up 43%). Laggards in 2010 included the larger financial names (Royal Bank down 7.5% and Manulife down 11.3%) and RIM (down 18%).

Outside of Canada the rally continued as well, leading to strong annual gains for most global stock markets. In the US, the S&P500 saw almost all of its gains come in the 4th quarter with an advance of 10.2%, which lead to an annual gain of 12.8%. Strength in US technology stocks (particularly Apple and Google) helped push the Nasdaq Index to a 16.9% annual gain. The MSCI World Index gained 9.6% in 2010, driven in large part by the 4th quarter gain of 8.6%. Germany lead the European markets with a gain of 16.1% in 2010 as that economy benefited from weakness in the Euro currency and strength in the manufacturing sector. Emerging Markets as a group were also strong last year with the MSCI index up 16.4%. A notable exception to the global stock market gains was in China, where the Shanghai index fell by 14.5% in 2010, despite the fact that China was probably the biggest source of economic strength in the global economy and clearly the leader in driving the strength in the Basic Materials (commodity) sector.

While stocks were rallying into year-end, bonds were headed in the other direction despite the best efforts of the US Federal Reserve to add support to long-term Treasury prices by the announcement in early November that they would be buying over US$600 billion worth of Treasury securities over a six-month time frame (the much bally-hoed “QE2” program). Bond prices were also hurt by more indicators of economic strength coming in North America and Europe, which had been laggards thus far in the recovery. This is one of the key themes we have focused on for our outlook in 2011. Although we remain positive on the outlook for global economic growth as well as global stock markets in general, we believe that the nature of this advance will be changing somewhat. The Emerging Markets of the world had been the stalwarts of growth following the collapse in 2008 as their lighter government and consumer debt burdens and inherent secular shift into industrial versus agricultural economies. China had been the leader over the past two years with the real annual growth rate surpassing12% early last year. But as we enter 2011, the spread between economic growth rates in the US and Emerging markets will narrow, with US growth picking up and China in particular slowing down a bit. This will still push global growth higher but it won’t be as strongly focused on the commodity sectors that generally gain when Emerging economies dominate global growth. We expect that consumer goods and services, technology, autos and even housing will start to grow again this year but that it will be tougher on the commodity trade, which suddenly won’t be the ‘only game in town.’

One of the big reasons why we see a stronger recovery taking hold in the US is that there are two big sectors that have effectively been ‘running at zero’ but which are now starting to show some signs of recovery. For both of these sectors, just a return to ‘trend’ growth will lead to some huge gains. The first is autos. The US industry is clawing its way back from selling 8-9 million units of production to 11-12 million annually. But 10 million to 12 million units, against a fleet of 220 million units, just barely replaces the autos that are literally dying each year. So there has really been no discretionary spending there. Housing, which has yet to show any recovery, is in a similar condition. Housing starts are running at 500,000 to 600,000 units a year. The ongoing trend demand in housing is roughly 1.4 million units a year; that’s a combination of household formation growth of 1.1 million, and 300,000 houses fall down each year. So, again, the US has been under-producing and living off excess inventory, but that can only go on so long.

Tags: 4th Quarter, Asset Mix, Benchmark Performance, Canadian Market, Canadian Stocks, China, Commodities, Commodity Stocks, Currency, Domestic Stock, Economic Developments, Emerging Economies, Emerging Markets, energy, Financial Sectors, Fixed Income, Global Economic Growth, Gold, Performance Measure, Rail Technology, Relative Performance, Sector Rotation, Stock Sectors, Stock Selection, Volume Growth, Zechner
Posted in Canadian Market, Commodities, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook | Comments Off

Is 70 the New 65?

Thursday, November 18th, 2010

Is 70 the New 65?

The Canadian Business Journal reports, Raise retirement to 67, think tank says:

A policy think tank believes increasing retirement eligibility by two years may fix an impending demographic crunch.The Mowat Centre for Policy Innovation, a think tank affiliated with the University of Toronto, published a report today calling for a raise in eligibility ages for the Canadian Pension Plan and Quebec Pension Plan from 65 to 67, and the earliest ages from 60 to 62.

“By 2050, an age increase would reduce CPP expenditures by about $15 billion per year and increase contribution revenues by about $5 billion per year,” the report said. “Increasing the eligibility ages is a fair solution for financing the costs of population aging, because doing so divides these costs across younger and older generations.”

The report, Is 70 the New 65? Raising the Eligibility Age in the Canada Pension Plan, was written by Martin Hering and Thomas R. Klassen, compared Canada’s situation to similar legislation enacted in Australia, the United States and throughout Europe.

You can download the full report by clicking here. Table 1 above shows that even though the retirement age increase would be implemented gradually over a relatively long period of time, its impact on the CPP’s finances would be significant after 2025:

Specifically, policy makers could reduce the CPP’s minimum contribution rate (the rate required to sustain the CPP), from the current 9.82 to 9.06 per cent, without affecting benefit levels and while maintaining the required size of assets.8 Alternatively, benefits could be increased over time while maintaining current premium levels.

A reduction of the minimum contribution rate from 9.82 to 9.06 per cent would create a significant buffer between the minimum and the legislated contribution rate. This would make it more likely that plausible demographic and economic developments— such as a higher than expected increase in life expectancy, a slower than expected growth of wages, or lower than expected investment returns—would have a much smaller impact on the sustainability of pension finances and would reduce the need for significant policy shifts, including increased premiums or reduced benefits.

The table also shows that a gradual increase in retirement ages increases contributions and decreases expenditures each year, so that by 2050 the CPP has $982 billion more in assets than otherwise would be the case. An important measure of the CPP’s financial health is the assets in years of expenditure: by 2050, the CPP would have assets of 11 years of expenditure, and thus twice the legal minimum of 5.5 years. Put differently, the plan’s funding would grow from about 25 per cent to about 50 per cent of liabilities.

The consequence is that an increase in eligibility age creates a cushion for the CPP, allowing the existing contribution rate of 9.9 per cent to remain unchanged if demographic and economic conditions were more unfavourable than expected. In our projections, we assumed that employees would delay their retirement by 2 years and used the same assumptions regarding retirement rates that the Chief Actuary used in the 2006 actuarial report on the CPP (see Appendix B). Specifically, we expected that about 40 per cent of workers retire at the earliest retirement age, about 30 per cent at the normal retirement age, about 20 per cent between the earliest and normal retirement ages, and less than 5 per cent after the normal retirement age.

The assumption that a very high proportion of workers— about 40 per cent—chooses to receive an actuarially reduced CPP benefit at the earliest possible age primarily reflects the role of private retirementincome sources, especially occupational pensions, in the retirement decisions of individuals (Wannell 2007b, 2007a). The assumption that Canadians would change their behaviour significantly and delay their retirement by 2 years allows us to estimate the potential size of the effect of a retirement age increase. If individuals did not delay their retirement by as much as we assumed, the impact of an age increase on the minimum contribution rate and on the level of funding would be smaller than that shown in our estimates.

Even though an increase of eligibility ages would certainly lead to savings because individuals would have to postpone their receipt of CPP benefits at least until age 62 and would receive reduced benefits if they retired before age 67, it would not force them to wait until age 67. For example, workers who plan to retire at age 65 could still do so if they accept a permanent actuarial reduction of their pension by 14.4 per cent. In this case, the retirement age increase from 65 to 67 would reduce expenditures but would not increase contribution revenues.

The study is interesting but increasing the retirement age to 67 will not be easy. Also, I worry that if we do increase it to 67, then in a few years, who is to say policymakers won’t try to increase it again to 70? Nevertheless, with people living longer and healthier lives, increasing the retirement age may be an option worth exploring.

Tags: Assets, Benefit Levels, Business Journal, Canada Pension Plan, Canadian Business, Canadian Market, Canadian Pension Plan, Crunch, Economic Developments, Eligibility Age, Expenditures, Fair Solution, Generations, Hering, Life Expectancy, Period Of Time, Policy Innovation, Quebec Pension Plan, Retirement Age, Retirement Eligibility, University Of Toronto
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Chairman Bernanke’s Testimony Sticks to Main Message of Minutes, But Q&A is More Insightful

Thursday, July 22nd, 2010

by Asha Bangalore, Northern Trust

Chairman Bernanke’s prepared testimony largely echoed the message of the minutes of June 22-23 FOMC meeting.  He reiterated that the FOMC expects “continued moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years.”  He also noted that the “majority saw risks to growth as weighted to the downside.”  He concluded with the caveat that “the economic outlook remains unusually uncertain.”  In addition, the customary note of reassurance was the last sentence of the testimony:  “We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.”

Although the above citations suggest that the outlook is uncertain with the probability of weakening economic conditions much higher than the last time Mr. Bernanke testified about the economy, the following remarks from the Q&A session imply that the Fed is more willing to wait-and-see and weigh options before undertaking unconventional measures:  (the emphasis is our own)

“Monetary policy is currently very stimulative. If the recovery seems to be faltering, then we at least need to review our options. We have not fully done that review and we need to think about possibilities. But broadly speaking, there are a number of things we can consider and look at. One would be further changes or modifications to our language or framework, describing how we intend to change interest rates over time, giving more information about that. We could lower the interest rate we pay on reserves, which is currently one fourth of one percent. The third will have to do with changes in our balance sheet and that would involve not either letting securities run off as they are currently or even making additional purchases. We have not come to the point where we can tell you precisely what the leading options are. Clearly each of these options has got drawbacks, potential costs. So we are going to continue to monitor the economy closely and continue to evaluate the alternatives that we have, recognizing that the policy is already stimulative. We still have options, but they are not going to be conventional options, so we need to look at them carefully and make sure we are comfortable with any step that we take.”

The guarded approach is justified on the grounds that the U.S. economy is indeed on the recovery path compared with the situation a year ago when the economic outlook was significantly grimmer.  Nonetheless, he noted early in the testimony that the pace of private sector job creation (+100,000) in the last six months is “insufficient to reduce the unemployment rate materially”

Deflation and credit crunch did not feature in the testimony.  Bernanke’s views about other hot issues circulating in financial market media:

Double Dip:  Low Probability Event

Small Business: Sales not credit is the main problem.

Fiscal Stimulus:  “Bernanke said some people want more government support for the economy, while others are concerned about the federal deficit and the possible negative impact of increasing it.”
“There’s some truth to both of those arguments.”
“The best approach, in my view, is to maintain some fiscal support in the economy, but to combine that” with steps to address the fiscal issue.

Tags: Balance Sheet, Bangalore, Bernanke, Caveat, Citations, Downside, Economic Conditions, Economic Developments, Economic Outlook, Fomc, inflation, Interest Rate, Moderate Growth, Monetary Policy, Northern Trust, Policy Actions, Price Stability, Probability, Reassurance, Unemployment Rate
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