Posts Tagged ‘Fair Share’
Tuesday, December 20th, 2011
by William H. Gross, co-Chief, PIMCO
- Investors should recognize that Euroland’s problems are global and secular in nature; it will be years before Euroland and developed nations in total can constructively escape from their straitjacket of debt.
- Global growth will likely remain stunted, interest rates artificially low and investors continually disenchanted with returns that fail to match expectations.
- Investors should consider risk assets in emerging economies, such as Brazil and Asia, and bonds in the strongest developed economies, where the steep yield curve may offer opportunities for capital gains and potentially higher total returns.
A 12-year-old coffee mug has a permanent place on the right corner of my office desk. Given to me by an Allianz executive to commemorate PIMCO’s marriage in 1999, it reads: “You can always tell a German but you can’t tell him much.”
It was hilarious then, but less so today given the events of the past several months, which have exposed a rather dysfunctional Euroland family. Still, my mug might now legitimately be joined by others that jointly bear the burden of dysfunctionality.
“Beware of Greeks bearing gifts” could be one; “Luck of the Irish” another; and how about a giant Italian five-letter “Scusi” to sum up the current predicament?
The fact is that Euroland’s fingers are pointing in all directions, each member believing they have done more than their fair share to resolve a crisis that appears intractable and never-ending. The world is telling them to come together; they’re telling each other the same; but as of now, it appears that you can’t tell any of them very much.
The investment message to be taken from this policy foodfight is that sovereign credit is a legitimate risk spread from now until the “twelfth of never.”
Standard & Poor’s shocked the world in August with its downgrade of the U.S. – one of the world’s cleanest dirty shirts – to double A plus. But what was once an emerging market phenomenon has long since infected developed economies as post-Lehman deleveraging and disappointing growth exposed balance sheet excesses of prior decades.
Portugal, Ireland, Iceland and Greece hit the headlines first, but “new normal” growth that was structurally as opposed to cyclically dominated exposed gaping holes in previously sacrosanct sovereign credits.
What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets and society no longer have an appetite for it. In addition to initial conditions of debt to gross domestic product and related metrics, the ability of a sovereign to snatch more than its fair share of growth from an anorexic global economy has become the defining condition of creditworthiness – and very few nations are equal to the challenge.
It was in this “growth snatching” that the dysfunctional Euroland family was especially vulnerable. Work ethic and hourly working weeks aside, the Euroland clan has long been confined to the same monetary house. One rate, one policy fits all, whereas serial debt offenders such as the U.S., U.K. and numerous G-20 others have had the ability to print and “grow” their way out of it.
Beggar thy neighbor if necessary was the weapon of choice in the Depression, and it has conveniently kept highly indebted non-Euroland sovereigns with independent central banks afloat during the past few years as well. Depressed growth with more inflation, perhaps, but better than the alternative straitjacket in Euroland. As currently structured, Euroland’s worst offenders now find themselves at the feet of a Germanic European Central Bank that cannot be told to go all-in and to print as much and as quickly as America and its lookalikes.
Proposals from the German/French axis in the last few days have heartened risk markets under the assumption that fiscal union anchored by a smaller number of less debt-laden core countries will finally allow the ECB to cap yields in Italy and Spain and encourage private investors to once again reengage Euroland bond markets. To do so, the ECB would have to affirm its intent via language or stepped up daily purchases of peripheral debt on the order of five billion Euros or more. The next few days or weeks will shed more light on the possibility, but bondholders have imposed a “no trust zone” on policymaker flyovers recently. Any plan that involves an “all-in” commitment from the ECB will require a strong hand indeed.
On the fiscal side the EU’s solution has been to “clean up your act,” throw out the scoundrels and scofflaws (eight governments have fallen) and balance your budgets. Such a process, however, almost necessarily involves several years of recessionary growth and deflationary wage pressures on labor markets in the offending countries. While the freshly proposed 20-30% insurance scheme of the European Financial Stability Facility (EFSF) offers hope for the refunding of maturing debt, it is the deflationary, growth-stifling, labor/wage destroying aspect of the EU’s original currency construction that threatens a positive outcome over the long term. Without an ability to devalue their currency vs. global competitors or even – “Gott im Himmel” – Germany itself, peripheral countries may have survival to look forward to, but little else. Perhaps the Italians and Spaniards will put up with it, but maybe they won’t. The ultimate vote of the working men and women in these countries will always hang over the markets like a Damocles sword or perhaps a French/German guillotine. If the axe falls, then bond defaults may follow no matter what current policies may promise in the short term.
Investors and investment markets will likely be supported or even heartened by recent days’ policy proposals. The problem of Euroland is twofold however. First of all, they will remain a dysfunctional family no matter what the outcome. You can’t tell a German much, and while they can issue what appear to be constructive orders and solutions to the southern peripherals, there is little doubt that none of them will “like it very much.” Slow/negative growth and historically wide bond yield spreads will therefore likely continue. Globalized markets themselves will remain relatively dysfunctional, pointing towards high cash balances in presumably safe haven countries such as the United Kingdom, Canada and the United States. The U.S. dollar should stay relatively strong, ultimately affecting its own anemic growth rate in a downward direction.
Secondly, and perhaps more importantly however, investors should recognize that Euroland’s problems are global and secular in nature, reflecting worldwide delevering and growth dynamics that began in 2008. It will be years before Euroland, the United States, Japan and developed nations in total can constructively escape from their straitjacket of high debt and low growth. If so, then global growth will remain stunted, interest rates artificially low and the investor class continually disenchanted with returns that fail to match expectations. If you can get long-term returns of 5% from either stocks or bonds, you should consider yourself or your portfolio in the upper echelon of competitors.
To approach those numbers, risk assets in developing as opposed to developed economies should be emphasized. Consider Brazil with its agricultural breadbasket and its oil. Consider Asia with its underdeveloped consumer sector but be mindful of credit bubbles. In bond market space, the favorite strategy will be to locate the cleanest dirty shirts – the United States, Canada, United Kingdom and Australia at the moment – and focus on a consistent, “extended period of time” policy rate that allows two- to ten-year maturities to roll down a near perpetually steep yield curve to produce capital gains and total returns which exceed stingy, financially repressive coupons. A 1% five-year Treasury yield, for instance, produces a 2% return when held for 12 months under such conditions. Bond investors should also consider high as opposed to lower quality corporates as economic growth slows in 2012.
Because of Euroland’s family feud, because of too much global debt, because of deflationary policy solutions that are in some cases too little, in some cases ill conceived, and in many cases too late, financial markets will remain low returning and frequently frightening for months/years to come. I can imagine the coffee mugs for 2020 now: “Gesundheit!” from the Germans, “C’est la vie,” from the French and “Stiff Upper Lip,” from the British. In the United States I suppose it’ll still say, “Let’s go shopping,” although our wallets will be skinnier. You can always tell an American, you know, but you can’t tell ‘em to stop shopping. Likewise, investors should always be able to tell a delevering, growth constrictive global economy – but perhaps not. Dysfunction is not exclusive to politicians. Families, it seems, feud everywhere.
Note: Initial paragraphs were originally published in Financial Times Markets Insight on November 15, 2011
All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. The views and strategies described herein may not be suitable for all investors. Investors should consult their financial advisor prior to making investment decisions.
This material contains the current opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Info
Copyright © PIMCO
Tags: agricultural, Allianz, Bill Gross, Capital Gains, Coffee Mug, Developed Nations, Emerging Economies, Fair Share, Family Feud, Foodfight, Global Growth, Greeks Bearing Gifts, Gross Co, Gross Investment, Investment Outlook, Legitimate Risk, Office Desk, Predicament, Straitjacket, William H Gross, Yield Curve
Posted in Markets | Comments Off
Monday, July 11th, 2011
Full Interview Transcript:
Consuelo Mack WealthTrack – July 1, 2011
CONSUELO MACK: This week on WealthTrack, Great Investor Steven Romick shows why surfing where others fear to swim has placed him in the top one percent of money managers. FPA Crescent Fund’s contrarian value manager tells us which investment waves he is riding now, next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. This week we are catching up with Great Investor, Steven Romick, portfolio manager of the five star rated FPA Crescent Fund, a go anywhere, invest in anything fund he launched in 1993. A noted value-oriented contrarian, Romick was a finalist for Morningstar’s first ever Manager of the Decade Award for being one of the fund managers that “served investors the best during the most trying decade since the Great Depression.” His 11% plus annualized returns over the last ten years placed him in the top one percent of money managers.
What sets Great Investors apart? Having interviewed my fair share of them on WealthTrack over the last six years, I have come up with some essential traits: intensity about their work, attention to detail, disciplined investment process, independence of thought and deed, and the ability to withstand the passions of the moment and hold their ground even if it’s not good for business. FPA Crescent saw 90% of its assets leave the fund during 1998 and 1999 when Romick refused to buy into the escalating tech boom and vastly underperformed the then very tech-heavy market. Needless to say, had investors stayed with Romick, they would have been far ahead of the pack over the next three years. He aced the market and competition over that five year period.
In order to educate potential and current investors and avoid a similar exodus in the future, Romick and the team at FPA recently published “the FPA Contrarian Policy Statement,” outlining their goal: “…to provide, over the long-term, an equity-like return with less risk than the stock market,” which so far they have done. The Contrarian Statement also outlines their philosophy, including being “absolute value investors,” their “long-term focus,” saying they have to “accept short-term underperformance in exchange for long-term success” and their “downside protection and risk minimization.” It also lays out the process they follow, as they put it, to “seek the out-of-favor, unloved, or misunderstood…we are, in a word, ‘contrarian.’” We’ll have a link on our website, wealthtrack.com. I began the interview by asking Romick about another FPA philosophy, that macro matters, and to give us his view of the big picture.
You were quoted recently saying that we’re kind of at the respite between two crises right now. We know what the crisis was that we just came through, but what kind of a respite is this, and why do you think there is another crisis possibly that’s going to come down the road?
STEVEN ROMICK: Well, because sometimes the solution you use ends up just being a band-aid, and sometimes the medicine you’re taking can actually cause another illness. I mean, you try and kill cancer cells with chemotherapy, and chemotherapy taken to its extreme can certainly kill you. So when you look at the financial crisis, we have just doped up the system to such a great degree, how it’s going to come back and bite us in the butt is our big concern.
Debt continues to increase at the government level in the United States, and there has to be a day of reckoning there. And so we fear that day of reckoning, because as we continue to finance this growth and get lower and lower return for it, we fear the need to repay it in the future. And not only repay it, it’s going to come quicker than we think, because our debt rolls, almost half of it every two years. So we’re borrowing very short. About 44% of our national debt matures inside of two years.
CONSUELO MACK: So this is the huge cloud that you think is on the horizon. So in the meantime, let me you ask you how you’re investing, because when you were on WealthTrack in the spring of 2009, you came on and I basically asked you, what are you buying? And you went debt, debt, debt. And it was absolutely the right thing to do. You did extremely well with the debt that you had. What, 38% of your portfolio at one point?
STEVEN ROMICK: At one point, it was 34%.
CONSUELO MACK: Thirty-four percent of the portfolio was in corporate debt. So it’s now down to 7% of the FPA Crescent Fund? So why, number one, have you fled bonds? And what are you replacing them with? But first of all, why are you out of bonds?
STEVEN ROMICK: Well, it’s not that we fled so much as the fact that over the last few years, things have worked out and some of the bonds matured. But in March of ’09, our yield on our portfolio was about 23%. The yield on the portfolio is mid single digits now. And most of those bonds mature in a year, year and a half or so. So there’s just not a great yield spread. So the starting yield is low, and interest rates are low overall. So the spread doesn’t look so terrible. The high yield spreads are about 500 basis points more than treasuries, but we don’t want to get seduced just by the spread, because again, the starting yield’s so low. We just feel that we’re not getting paid to play.
CONSUELO MACK: Is that telling me that you view the bond market as very risky? That’s why you’re basically, you’re almost at cash equivalents.
STEVEN ROMICK: I feel we’re not getting paid to play. We’re in the business of trying to equity rates of return with less risk in the stock market. And if we’re going to go out and put up money at 6%, I think that we’re not necessarily going to get equity rates of return there, particularly for the risk that we’re assuming.
CONSUELO MACK: So what other areas are you avoiding at this point? And one of the goals is to avoid the permanent loss of capital. And I will quote the contrarian policy statement, “returns will be driven by not just what we own, but what we don’t own.” So what are you deliberately not owning in the FPA Crescent Fund?
STEVEN ROMICK: Well, you just stated one of them. We’re staying away from high yield bonds and distressed debt. We’re also staying away from smaller cap companies, because smaller caps- and this is a gross generalization, it doesn’t mean that all small cap stocks are expensive- but small cap stocks are about as expensive as they’ve been as a group, as compared to large cap stocks given the last 20 or 30 years, over the last 30 years, since the early 1980s.
CONSUELO MACK: So avoiding small caps. I mean, I know you’re also a bottoms up manager. Do you own any small caps at all?
STEVEN ROMICK: We have some, but our portfolio is tilted dramatically towards large cap stocks today.
CONSUELO MACK: All right. So why are large-cap stocks a place that you’re interested in?
STEVEN ROMICK: Large cap stocks offer a few things to us. One, I mean, there’s a misconception. One of the myths about small cap stocks is that they grow faster than large cap. And they certainly can, because these companies are more nimble, but that isn’t necessarily the case. In fact, if you look at the earnings on a trailing five year basis for the Russell 1000, a large cap index, versus the Russell 2000, a small cap index, in fact the Russell 1000 has outperformed, the large cap index has outperformed for the last 15 years consecutively.
CONSUELO MACK: So this is on earnings growth rates?
Tags: Boom, Brazil, Cap Stocks, Consuelo Mack, Decade Award, Exodus, Fair Share, Five Star, Fpa Crescent, Fund Managers, Great Depression, Intensity, Interview Transcript, July 1, Last Ten Years, Money Managers, Morningstar, Passions, Portfolio Manager, Waves, Wealthtrack
Posted in Brazil, Markets | Comments Off
Friday, May 6th, 2011
ExxonMobil reported its first quarter 2011 earnings on April 28, which came in at $10.65 billion, an increase of 69% from the same quarter last year when it earned $6.3 billion. While the huge earnings amount captured all of the media attention, several other items received much less attention (see chart):
ExxonMobil paid $8 billion in income taxes to various governments in the first quarter, which is about $22 million in income taxes each day, or almost $1 million each hour.
Compared to the first quarter last year, ExxonMobil increased its output of oil and natural gas by 10%, and a large part of that increased output came from a 192% increase in natural gas production in the United States, thanks to new advanced drilling technologies like hydraulic fracturing.
While higher oil prices certainly played a major role in increasing Exxon’s profits, the role of increased output shouldn’t be ignored. And we shouldn’t forget that retail natural gas prices in the United States, adjusted for inflation, are the lowest now since December 2002, in large part due to increased domestic production from companies like Exxon.
Dwarfing Exxon’s first quarter profits of $10.65 billion, are the total taxes paid or collected around the world by Exxon from January to March, which totaled to$26.2 billion and include $8 billion in income taxes, $10.3 billion in sales-based taxes, and $10.3 billion for all other taxes including property taxes, etc.
Exxon Mobil paid $8 billion in income taxes in the first quarter on $18.9 billion of income, which translates into a 42.3% effective income tax rate on its income. And yet according to Obama and others, oil companies “aren’t paying their fair share of taxes,” and should be taxed more?
The 6.1% average profit margin for Exxon’s industry “Major Integrated Oil and Gas” ranks #112 among all industries for the most recent quarter (data here), so if Obama wants to target ‘excessive’ corporate profits, there are many other industries much more profitable than the oil and gas industry.
For example, the surge in commodity prices has resulted in “windfall profit” margins of 31% for the silver industry, 23% for the copper industry and 19.8% for the gold industry. Internet providers are capturing 23% in profit margins, cigarette companies more than 21% and periodical publishers are earning a whopping 51.6% profit margin, so perhaps those would be ripe targets for Obama’s new lust to confiscate “windfall profits.”
The views and opinions expressed herein are the author’s own, and do not necessarily reflect those of EconMatters.
Tags: Dr Mark, Drilling Technologies, Exxon, Exxon Mobil, Exxonmobil, Fair Share, First Quarter, Gas Prices In The United States, Gdp Of The Philippines, Gold, Hydraulic Fracturing, Income Taxes, Media Attention, Natural Gas Prices, Next Five Years, Oil Company, Oil Prices, Property Taxes, Quarte, Quarter Profits, Tax Earnings
Posted in Markets | Comments Off
Tuesday, January 25th, 2011
The Absolute Return Letter December 2010
“The Dirty Dozen”
“Risk concerns the deviation of one or more results of one or more future events from their expected value. Technically, the value of those results may be positive or negative.”
The definition of risk
No, I am not going bonkers. Some egghead came up with this formula as a way to define risk, but we can do better than that. In the world of finance, risk is essentially the probability of an investment’s actual return being different from the expected return. As most of us are not overly concerned about actual returns being higher than expected, it is fair to say that in practical terms, risk is a measure of the probability of losing some or all of your investment.
Now, risk cannot always be quantified, and there is indeed a term for immeasurable risk. It is called uncertainty1. Good investment management is founded on robust risk management or, as we ought to label it, the ability to manage uncertainty well. Many moons ago, a good friend with more grey hair than myself gave me the advice to focus on the management of uncertainty. His philosophy was that if you manage that well, over time, performance will take care of itself.
Now, I must confess that over time I have made my fair share of mistakes. Managing risk/uncertainty is a heck of a lot more difficult in practice than the mathematicians want us to believe. I am only human. I get carried away from time to time like most other investors. Unless you were born with the DNA of Warren Buffett, keeping emotions at bay when making investment decisions is far from easy.
Herding like sheep
However, getting carried away seems to be the norm rather than the
exception these days. Maybe it is just me getting older and more cynical, but all around me I see investors chasing the same ideas with little (apparent) consideration given to the elements of risk involved. Find me an investor who is not in love with emerging markets or, for that matter, commodities. I see this sheep-like mentality wherever I turn.
That observation gave me the inspiration to this letter. Please note that I do not provide an enormous amount of detail in this letter (who wants to read a 50 page newsletter?). Rest assured, though, that most if not all of the risk factors mentioned below will be discussed in the months to come.
Before going any further, though, I need to get one more thing off my chest. I get a lot of positive feedback on these letters but also a fair amount of criticism for being too negative. I will admit that the Absolute Return Letter has a ‘negative’ edge to it, but I do not view myself as a perma bear. In fact, right now, we are looking for opportunities to increase the equity exposure in our private client portfolios. So why the somewhat downbeat tone to the letter? Because, as I have already stated, investment management is about managing risk well; hence most of my time is spent on identifying what can go wrong.
Now, let’s get started. In the following I list a number of risk factors which I believe investors should give serious consideration, but I do not for one second pretend for that list to be exhaustive. Neither should you read anything into the order of which those risk factors are listed. If you want my assessment of how to rank the various factors, you need to take a look at the risk scatter chart at the end of the letter.
We begin our journey in the high yield space, which is another asset class currently prone to herding; however, I need not look any further than my own parents to understand the urge to invest in high yield bonds. Now in their mid 70s, they are desperate for a bit of income, and corporate high yield provides that better than most other asset classes. Multiply their situation with over 100 million retired – or nearly retired – people in Europe and North America, and you will understand why high yield spreads keep going down.
# 1:High yield spreads
We have done some research on high yield spreads in recent weeks, as we
were becoming increasingly uncomfortable with the tightening spreads. We began to wonder (risk factor # 1) if high yield spreads are priced for perfection? Are spreads getting so tight that one could even talk of a bubble, and could that bubble burst, should the US (and/or European) economy fall back into recession? There is no question that corporate high yield bonds are now priced for fair weather but, we believe, not yet for perfection (see chart 1). Keep a finger near the trigger but not yet on it.
Source: Kingdom Capital Management
# 2: Double dipping
Obviously, the fate of corporate bonds is closely linked to the well-being of the corporate sector. As we see things, the risk of double dipping (# 2) is currently more prevalent in the US than it is in Europe, so let’s focus on the US for now. The other day I came across some interesting stats on the US economy (all representing year-on-year changes), which may surprise one or two people:
GDP growth rate +56%
- Personal Income +4.35%
- Savings Rate +23.91%
- Fixed Investment +5.37%
- Steel Output +10.32%
- Business Sales +8.86%
- Durable Goods Sales +12.2%
- Factory Shipments +7.21%
- Retail Store Sales +7.31%
- Factory Orders +17.18%
- Exports +12.58%
Source: Contrarian Musings
I find these numbers revealing, considering how much bad press the US economy actually gets at the moment. Yes, I know that recent comparisons have been easy vis-à-vis a very weak 2009 and, yes, I am aware that this is to a large degree rear mirror analysis. But the reality is that the US economy continues to confound. The weak spot continues to be the housing sector and, unfortunately for the economy as a whole, that is a very important sector.
Tags: Absolute Return, Commodities, Currency, Dirty Dozen, Egghead, Emerging Markets, Fair Share, Future Events, Good Friend, Grey Hair, India, Investment Decisions, Investment Management, Investment Outlook, Jensen, Managing Risk, Many Moons, Mathematicians, Neils, Niels Jensen, Probability, Risk Management, Time Performance, Uncertainty, Warren Buffett, Wikipedia
Posted in Commodities, Credit Markets, India, Markets, Outlook | Comments Off
Friday, May 1st, 2009
Each month ETF Trends publishes a useful performance round-up of ETFs (non-leveraged) trading on American stock exchanges.
“The markets and exchange traded funds (ETFs) in April had their fair share of ups and downs, but in the end, it was a positive month for several sectors and the major indexes.
The Dow Jones Industrial Average rose 7.3% for the month. The Nasdaq gained 12.7%, and the S&P 500 increased 9.4%. While there are some areas that are still struggling, a few sectors are also showing signs of improvement and crossing above their long-term trend lines (200-day moving average). This includes retail (up 20.9% in April), Taiwan (up 26.6%) and networking (up 29.7%).
The strongest sector this month was REITs, which rose about 32%.
For a complete look at the month of April, click through to see our April ETF Performance Report.”
Source: Tom Lydon, ETF Trends
Tags: American Stock Exchanges, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, ETF, Etf Performance, Exchange Traded Funds, Fair Share, Indexes, Month Of April, Moving Average, Nasdaq, Performance Report, Reits, Report Source, Sectors, Term Trend, Trend Lines, Ups, Ups And Downs
Posted in ETFs, Markets | Comments Off