How Government Policies Affect Markets

Saturday, October 9th, 2010

One key element of our investment process at U.S. Global Investors is tracking and monitoring government policies. We believe policies are precursors to changes in the marketplace and taking a look at year-to-date performance of the S&P 500 Index is a good way to illustrate how.

This chart shows the year-to-date performance for each sector of the S&P 500 through the end of the quarter. Consumer discretionary (up 12.11 percent) and industrials (up 11.45 percent) have been far and away the top performers, nearly doubling third place telecom, while energy (down 2.34 percent) and healthcare (down 2.48) are the worst performers.

The performance of both the best and worst sectors can be traced back, at least in part, to government policies.

Consumer discretionary has drawn much of its performance from the auto retail sector which is up almost 45 percent. One driver has been better-than-expected auto sales but another was Toyota’s recalls and the resulting Congressional investigation. Toyota’s fall has been Ford’s and other domestic manufacturers’ gain as they have wrestled back market share from foreign companies.

Rising overseas sales for construction and farming equipment manufacturers such as Caterpillar and Deere have buoyed industrials. Investors have flocked to telecom, which is represented by AT&T and Verizon, as an income play since the current dividends for those companies are yielding 5-6 percent.

Energy and healthcare have felt the sting of government policies. Uncertainty about healthcare reform has kept providers and pharmaceutical companies at depressed levels. For energy, the BP disaster and ensuing drilling moratorium took down the drillers, suppliers and producers. Like the Gulf Coast, the sector has yet to recover and government officials have given no indication as to when the drilling ban will be lifted.

Possible quantitative easing (QE) measures have led to the run-up in materials. The market’s anticipation of these measures has been commodity positive and dollar negative. We think this could be one of the best sectors during the fourth quarter but there is a risk of a pullback if QE measures don’t meet market expectations.

The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of June 30, 2010: Caterpillar, Verizon Communications, AT&T. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500. The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period. The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500. The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500. The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500. The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500. The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500. The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500. The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.

Tags: Auto Sales, Caterpillar, Congressional Investigation, Depressed Levels, Dividends, Domestic Manufacturers, Drillers, Farming Equipment, Government Officials, Government Policies, Gulf Coast, Healthcare Reform, Industrials, Market Share, Moratorium, Pharmaceutical Companies, Qe, Retail Sector, Rsquo, Top Performers, U S Global Investors
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BlackRock’s Crystal Ball into 2010 and the Next Decade

Friday, January 8th, 2010

BlackRock, Inc. (BLK) Vice Chairman Bob Doll has been putting out annual predictions for 15 years.  Doll, who helps oversee about $3.2 trillion at BlackRock, the world’s biggest asset manager, just released his ten predictions for 2010 and for the next ten year.  Eleven of the twelve predictions he made for 2009 were right.  Below are Highlights of his latest market forecasts.

In general, Doll believes U.S. stocks will outperform cash, Treasuries and other developed economies with S&P 500 rallying another 12% this year reaching 1250 from their Jan. 4 open of 1116.56.

The U.S. is on its way to recovery, but the economy will grow slower than that of a typical recovery mainly due to heavy debt load.  Inflation will be a “non-issue” in the U.S., Europe and Japan this year even with rising prices of gold and oil.  Dollar will likely remain weak in broad trading range with Euro and Yen.

Doll also noted structural issues in the economy would continue to present problems. Chief among them are

“ongoing consumer deleveraging; a banking system facing deteriorating loan quality and an increasing yet uncertain regulatory environment; securitizations markets still largely shuttered, and a real estate market that may still be healing for several years.”

Emerging-market stocks and economies will outperform the developed world this year.  His ”favorite secular story in the emerging markets remains Brazil.”  (Note: Barclays Capital recently warned of a possible Bovespa (BVSP) correction in Q1 or Q2 this year based on technical chart analysis).

Furthermore, he advised investors should prepare for rising taxes following healthcare reform and protectionist government policies if the unemployment rate remains high.

Doll favors healthcare (especially managed care and healthcare services), information technology and telecommunications sectors. However, he advised underweight on financials as they are likely to continue to underperform.

Note:  Doll’s predictions differ from that of Blackstone Group LP’s Byron Wien’s. Wien’s ten predictions for the new year call for the S&P 500 to finish year 2010 flat, U.S. GDP to expand about 5% and financials to outperform the market.

Doll’s Predictions for 2010

1. U.S. economy grows above 3% outpacing the developed world
2. Unemployment to remain high, but with positive job growth
3. Earnings rise significantly – 20-30% on cost & productivity advantage particularly from a weak dollar.
4. Inflation a non-issue for the developed countries, but oil and gold will still go up
5. Interest rate rises on treasury curve – 10-year treasury targets 4.5%
6. Stock outperform cash and treasury - S&P 500 should rally another 12%
7. Emerging markets outperform
8. Health care, IT & Telecom outperform
9. More M&As
10. Dems stay in control of the Congress

Doll’s predictions for the next 10 years:

1. US equities experience high single digit percentage total returns, in the range of 6% to 8% annually, after the worst decade since the 1930s.
2. Recessions occur more frequently during this decade, rather than only once a decade as occurred in the last 20 years.
3. Healthcare, information technology, and energy alternatives are leading growth areas for the United States.
4. The US dollar continues to become less dominant as the decade progresses.
5. Interest rates move irregularly higher in the developed world.
6. Country self-interest leads to more trade and political conflicts.
7. An aging and declining population gives Europe some of Japan’s problems.
8. World growth is led by emerging market consumers.
9. Emerging markets weighting in global indices rises by 10 percentage points.
10. China’s economic and political ascent continues.

Doll’s Advise to Investors

• Look for quality in all styles and caps.
• Focus on better-positioned sectors – IT, healthcare and telecommunications are his favorite sectors.
• Think about geography – Emerging markets, Brazil, in particular.
• Gains will be harder to come by – Ongoing volatility and selectivity will be critical.

Here is the video where Doll appeared at CNBC on Jan. 6 discussing his latest predictions.  His full commentary is available at BlackRock web site here.

Video Source:  CNBC
Economic Forecasts & Opinions

Tags: Asset Manager, Banking System, Barclays, Barclays Capital, Blackrock Inc, Bob Doll, Bovespa, Brazil, Chairman Bob, China, Crystal Ball, Debt Load, Emerging Market Stocks, Emerging Markets, Gold, Government Policies, Healthcare Reform, Healthcare Services, Market Forecasts, oil, Regulatory Environment, Services Information Technology, Treasuries, Typical Recovery, Unemployment Rate
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