Disappointing, but Not Terrible

Tuesday, July 10th, 2012

 
Disappointing, but Not Terrible

07/09/12

by Charles Lieberman, Advisors Asset Management

Job growth has slowed to a disappointing pace over the past three months, insufficient to bring down unemployment, but not so weak that recession is much of a threat. This mediocre performance also leaves the Fed in a quandary, neither making an obvious case to leave policy unchanged or a clear case to implement yet another form of policy accommodation.The economy added 80,000 net workers, the third consecutive month in which hiring remained so sluggish, following a first quarter in which hiring averaged 226,000 monthly. But other details in the report were more encouraging. The workweek rose by 0.1 hours, a seemingly small number, but equivalent to roughly 385,000 full time jobs. Hiring of temporary workers also advanced by 25,000, an important precursor to permanent hiring. A solid 0.3% increase was also reported for wage rates, which is important to finance household spending. With the housing sector beginning to gain some momentum, providing a new source of demand to support growth, a relapse into recession appears highly unlikely. So, the employment report was far from a disaster, but that’s hardly a ringing endorsement.

Fed officials are surely going to have quite a debate over the future direction for policy. Public statements suggests that they are quite divided over whether to implement more innovative initiatives to promote growth, although a number of them worry that reversing all of their efforts at the appropriate time may become more difficult. Certainly one possible new initiative may be to buy mortgage backed securities instead of U.S. Treasuries bonds. This would make reversing the Fed’s accommodative policies easier, since mortgage pay down principal every month. There is also concern that the Fed is running out of policy options. It is commonly accepted that the efficacy of policy is diminishing, although there is quite a bit of disagreement whether further initiatives would be worthwhile.

It is highly unlikely that any new fiscal policy initiatives can make it through Congress prior to the election, which is now less than four months away. So, the onus for any additional initiatives falls exclusively on the Fed. Even if there is no new policy implemented at the Fed’s upcoming meeting, it is likely they would feel obligated to do something if hiring remains disappointing. They may choose to act now to avoid complaints that they are acting out of political considerations as we get closer to the election.

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Tags: Clear Case, Disagreement, Efficacy, Employment Report, Fed Officials, Household Spending, Lieberman, Management Job, Mediocre Performance, Mortgage Backed Securities, Policy Options, Precursor, Public Statements, Quandary, Recession, Relapse, Time Jobs, Treasuries, Wage Rates, Workweek
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China Eases the Way

Sunday, June 10th, 2012

China Eases the Way

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Following negative data last week, investors were clearly concerned about global growth and anxiously anticipated government actions. While Europe and the U.S. disappointed investors, China surprised on the upside by cutting interest rates. The market reacted positively, as the S&P 500 Index increased 3.7 percent.

It’s clear the government’s tone in China shifted this week with the rate cuts. The government appeared to be comfortable with slower growth, but that position seemed to change as the country took steps to avert a hard landing and cut interest rates to stabilize the economy.

Over the past decade, there were only two periods when the government reduced rates: once in 2002, and several times at the end of 2008. This time, rates were cut by 25 basis points each on lending and deposits. The one-year benchmark deposit rate is now 3.25 percent and the 1-year lending floor rate is now at 6.31 percent. Historically, easing rates have been positive for the MSCI China Index.

As we often say at U.S. Global Investors, government policy is a precursor to change. While there has been quite a bit of negative news lately, government policy is making a significant step toward growth. We believe now’s not the time to be bearish.

Analysts are only beginning to see signs of increased infrastructure spending, which should help spur growth for the remainder of the year. If you’ll remember in 2011, China deliberately tightened its credit policy to stem inflation and slowed financing to local governments, says J.P. Morgan. As a result, fixed asset investment growth in infrastructure decelerated considerably, and railway investment was completely halted, decreasing nearly 20 percent on a year-over-year basis during the second half of 2011, says J.P. Morgan.

The decline in infrastructure and real estate investment on a year-over-year percentage change is clearly seen in CLSA’s chart, and it’s what Andy Rothman has attributed to slower growth in the world’s second-largest economy:

Highway infrastructure spending “increased sharply” from January through April, particularly in Western China, says J.P. Morgan. The research firm says that the economic growth rates in the Central and Western areas of the country “already outpace those of more developed coastal provinces.” Fixed asset investment for infrastructure, energy development and water projects in the Central and Western regions has grown at a faster clip than in the Eastern region on a year-over-year basis.

Rail infrastructure has also picked up. As of the end of 2011, the Ministry of Railways received a credit line of more than $300 billion from banks, and plans on issuing additional railway bonds, seeking investments by pension funds and encouraging the private sector to invest, says J.P. Morgan.

With fixed asset investment in the rail sector growing 34 percent on a month-over-month basis, this government support is “starting to be translated into action,” says Macquarie Commodities Research. If we see spending in railways continue to increase, China will be able to meet their full-year target, according to Macquarie.

China’s GDP during the second quarter is likely to be about 7.5 percent, and the expectation for 2012 remains at 8 percent. While the country’s GDP is lower than its 2010 high of 12 percent, it is helpful to put this in context with global growth. “Comparatively, it looks like strength—not weakness,” reiterates ISI.

What’s important for investors to realize is that the combination of a ramp up in targeted fiscal spending combined with broad-based monetary easing is a positive dynamic not only for China—but for the global economy as a whole.

John Derrick contributed to this commentary.

Tags: Asset Investment, Basis Points, Benchmark, Chief Investment Officer, China, Clsa, Frank Holmes, Global Growth, Government Actions, Government Policy, inflation, Investment Growth, J P Morgan, Local Governments, Msci China Index, Negative News, Percentage Change, Precursor, Real Estate Investment, Time Rates, U S Global Investors
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The Case for Chinese Stocks (Koesterich)

Friday, March 23rd, 2012

by Russ Koesterich, Chief Investment Strategist, iShares

China recently modestly lowered its annual growth target to 7.5% from 8%. This change has made many investors nervous that China may be in for a period of sluggish growth.

While investors are reasonably concerned about a hard landing, I believe such a scenario can be avoided in 2012. As a result, I continue to advocate overweighting Chinese equities for three reasons.

1.) Relatively Strong Growth Expectations: The lowered growth target isn’t necessarily a precursor to a hard landing. Why? The government’s 2012 growth target is a reasonable estimate for Chinese potential going forward.

The new target reflects the government’s endorsement of a beneficial, long-term rebalancing of the Chinese economy. China can’t, and probably shouldn’t, try to maintain the pace of growth achieved during the past decade as much of that growth came from fixed investments. In order to create a more sustainable long-term model, China needs to raise consumption and moderate investment, a rebalancing that will likely help support Chinese equities. Currently, China is unusual, even for an emerging market, in that only about 1/3 of its economic activity comes from personal consumption.

In addition, even if China grows at 7.5%, it still would be one of the world’s fastest growing economies and the government’s growth goal is typically a floor. In fact, actual Chinese growth is expected to be in the 8% to 8.5% range this year.

2.) Attractive Valuations: Assuming China can grow as expected in 2012 and engineer a soft landing, Chinese equities look attractive from a valuation perspective. While Chinese stocks are up significantly this year, the Chinese market is still down nearly 8% over the past 12 months. It’s now trading for less than 1.7x book value, a significant discount to where it has traded over the past five years and well below the emerging market average.

3.) The Inflation Outlook: Rising prices were a major problem in China last year, with consumer prices up 5.5% in 2011. But inflation in China is now decelerating. Currently, prices in China are up only 3.2% from a year earlier, and inflation is expected to stay low for the remainder of the year. Lower inflation will provide more latitude for the Chinese central bank to loosen monetary policy, which should further support the local economy and local stock prices.

To be sure, the Chinese market is not without risks, particularly surrounding local property prices. Still, as I expect China will most likely engineer a soft landing, the market’s decelerating inflation, cheap valuations and strong relative, and rebalancing, growth make it one investors may want to consider. For those looking to gain exposure to Chinese equities, my preferred methods of access are the iShares MSCI China Index Fund (NYSEARCA: MCHI), the iShares FTSE China 25 Index Fund (NYSEARCA: FXI) and the iShares MSCI China Small Cap Index Fund (NYSEARCA: ECNS).

Source: Bloomberg

The author is long FXI

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.  Securities focusing on a single country and investments in smaller companies may be subject to higher volatility.

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Tags: 7x, Attractive Valuations, Chief Investment Strategist, Chinese Economy, Chinese Growth, Chinese Market, Chinese Stocks, Economic Activity, Economy China, Emerging Market, Growth Expectations, Growth Goal, Growth Target, Inflation Outlook, Personal Consumption, Precursor, Rebalancing, S Endorsement, Sluggish Growth, Term Model
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Investor Sentiment: Are These the Makings of a Sustainable Rally?

Tuesday, January 3rd, 2012

We start the new year like we ended the old year: with a mixed sentiment picture. The Rydex market timer is extremely bullish, and this is a bear signal. The “dumb money” indicator is neutral and company insiders are as well. Overall, my interpretation is bearish. Sustainable price moves usually start when there are too many bears, and it is short covering that is the fuel that sparks a price rise. After the short covering subsides, sustainable price moves are typically heralded by having too many bulls willing to chase prices higher. Neither of these extreme conditions are currently present, and it is difficult to see the market embark on a sustainable price move in their absence. Lower prices would bring out more bears and this would be a precursor to a tradeble, sustainable rally. Higher prices should be supported by increasing number of bulls, and this would be a signal that a sustainable rally, that everyone so desperately wants, is unfolding. As stated above, I am betting that we will see lower prices before higher as there are few bears (i.e., no short covering) and as the time for the bulls to have taken the reigns of this market have long since past.

The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator shows neutral sentiment.

Figure 1. “Dumb Money”/ weekly

Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “Sentiment remained in Neutral territory this past week. Sellers did show a bit more conviction than buyers, but with the year closing there was, no doubt, some tax-related selling. Volume fell from a week earlier, the result of the holiday and end-of-quarter lock-ups coming into play.”

Figure 2. InsiderScore “Entire Market” value/ weekly

Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 59.84%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops.

Figure 3. Rydex Total Bull v. Total Bear/ weekly

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Tags: American Association Of Individual Investors, Bulls, Company Insiders, Dumb Money, Extreme Conditions, Extremes, Figure 1, Investor Sentiment, Market 1, Market Timer, Marketvane, Neutral Territory, No Doubt, Precursor, Price Move, Put Call Ratio, S&P500, Short Covering, Sustainable Rally, Ups
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The Economy and Bond Market Radar (December 12, 2011)

Sunday, December 11th, 2011

The Economy and Bond Market Radar (December 12, 2011)

Long-term treasury yields ended the week modestly higher as European leaders came together on Friday to form a fiscal pact that placated the market for the time being and led to a sell off in the long end of the Treasury curve.

While there was considerable anticipation and discussion regarding the outcome of the European Central Bank (ECB) meeting on Thursday and Friday’s European Union (EU) summit, the most important piece of data may have come from the other side of the world. The chart below depicts year-over-year inflation in China, which fell to the lowest levels in 14 months. The reason this may be so significant is that this could be a precursor to full-fledged easing in China, which has been the incremental global growth driver in recent years. If China were to cut interest rates, that would be a strong signal that global reflationary policies are back in force and boosts prospects for both global economic growth as well as appreciation in risky assets.

Strengths

• The EU leaders came to an agreement, in principle, on a fiscal pact that will hopefully lead to real reform and stabilize markets in the near future.
• China’s November CPI fell to 4.2 percent and opens the door to more aggressive easing policies in China.
• The University of Michigan Confidence Index rose more than expected in the preliminary December release.

Weaknesses

• Weakness is several Chinese indicators also increases the probability of an interest rate cut as China’s export growth and service sector PMI slowed.
• S&P put negative outlooks on 15 of 17 eurozone countries and the EU may lose its AAA rating as well.
• Factory orders in the U.S. fell 0.4 percent in October and September’s data was also revised lower.

Opportunities

• The Federal Open Market Committee meets next Tuesday and, while expectations are low for a significant change in policy, the Fed could surprise the market.

Threats

• The situation in Europe remains extremely fluid and negative news is almost expected at this point; unfortunately, it is politically driven and difficult to predict outcomes and ramifications.

Tags: Bond Market, Confidence Index, CPI, European Leaders, Eurozone Countries, Federal Open Market Committee, Global Economic Growth, Global Growth, Inflation In China, Market Radar, Open Market Committee, Outlooks, Pact, Precursor, Risky Assets, Service Sector, Strong Signal, Treasury Curve, Treasury Yields, University Of Michigan Confidence
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Dispatch from Milan: The Most Likely Scenario for Italy (Koesterich)

Friday, November 11th, 2011

by Russ Koesterich, iShares

I’d long planned to travel to Milan this week to meet with Italian investors, but the fact that my trip coincided with political turmoil in Italy tuned out to be a lucky coincidence. My trip has allowed me to develop a much clearer picture of what Italy’s political turmoil means for the markets and why the next 72 hours are critical.

There is a consensus among investors I spoke with and — judging by news reports — among investors in general that last night’s appointment of Mario Monti to the position of senator for life is an important precursor to a deal for a new Italian government.

Based on my conversations, investors believe that the most likely deal scenario is that Berlusconi will finally bow to political pressure this weekend and resign, and Monti will be appointed prime minister to head a coalition government. Under this scenario, an imminent election would be avoided.

Why Monti for prime minister? He’s a respected technocrat, and Italian investors believe he can lead a caretaker coalition government that will implement the necessary reforms. One senior investor explained to me that by making him a senator for life, he is now prohibited from forming his own political party, a scenario that derailed another technocrat government in the mid 1990s.

Here’s the Best-Case Scenario: Assuming the most likely scenario happens – Berlusconi resigns and Monti becomes prime minister — I would expect global equities and other risky assets to stage a strong rally. This scenario would be a major, positive step toward implementing necessary reforms in Italy. Plus, once Italy starts to move down a path of reform, investors expect that the European Central Bank will be more willing to resume its bond purchase program.

Here’s the Worst-Case Scenario: The market implications if Berlusconi stays on and there is an election in early 2012 are far from cheery. This scenario would likely lead to a collapse in the Italian bond market, a strong likelihood of a severe European recession and a rising likelihood that the euro currency could break up. In addition, the risks of a banking crisis would also rise. Under this scenario, investors would want to consider lowering their allocation to risky assets.

The next 72 hours will be critical. Most Italians I spoke with thought an announcement about a government deal is likely over the coming weekend.

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Tags: Best Case Scenario, Caretaker, Coalition Government, Collapse, Consensus, Global Equities, Ishares, Italian Government, Lucky Coincidence, Mario Monti, Market Implications, Mid 1990s, Milan Italy, Necessary Reforms, News Reports, Political Turmoil, Precursor, Prime Minister, Risky Assets, Russ, Technocrat Government, Worst Case Scenario
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U.S. Equity Market Cheat Sheet (October 24, 2011)

Saturday, October 22nd, 2011

Wall St. looking east from Nassau St., c. 1911 – click image to enlarge

U.S. Equity Market Cheat Sheet (October 24, 2011)

The domestic stock market as measured by the S&P 500 Index was higher this week by 1.12 percent. Eight sectors increased and two decreased. The best-performing sector for the week was financials which increased 3.92 percent. Other top-three sectors were energy and utilities. Technology was the worst performer, down 2.15 percent. Other bottom-three performers were materials and telecommunication services.

Within the financials sector the best-performing stock was State Street Corp., up 14.40 percent. Other top-five performers were Travelers Co., Morgan Stanley, ACE Ltd. and AON Corp.

The financial sector has been the best performer over the past month as investors appear to be looking past a potential financial crisis in Europe. The U.S. Global domestic equity funds have been significantly underweight financials and this has hampered performance in recent weeks. We believe government policy is a precursor to change and until there is true clarity on what steps governments will take to resolve the current situation in Europe, we will follow our models and largely stay on the sidelines.

At U.S. Global Investors we employ a “GARP” (growth at a reasonable price) approach to investing. At a very basic level, we look for companies growing revenues by at least 10 percent and generating high returns on capital. We use this model to initially select investments and to monitor existing positions to determine whether or not they still conform to the model. So far this earnings season, with one exception, holdings have continued to meet the model based on the new third quarter earnings reports with many posting revenue gains well in excess of 10 percent. The one exception was a health care stock which was subsequently sold.

Strengths

• The consumer electronics group was the best-performing group for the week, gaining 15 percent on strength in its single member, Harman International Industries Inc. The firm reported quarterly earnings which handily exceeded the analysts’ consensus estimate.
• The oil & gas storage & transportation group outperformed, up 14 percent on strength in member El Paso Corp. The pipeline company rose approximately 25 percent after Kinder Morgan agreed to buy El Paso in a cash and stock deal valued at $21.1 billion.
• The homebuilding group gained 9 percent. On Wednesday the Commerce Department announced that U.S. housing starts in September increased 15 percent from August levels to 658,000 starts at an annual rate, above the consensus expectation of 590,000 starts. This was the highest annual rate since April 2010.

Weaknesses

• The casinos & gaming group was the worst-performer, down 7 percent on weakness in member Wynn Resorts Ltd. The firm reported quarterly revenue and earnings below the consensus estimate. Strength in the firm’s Asian operations was offset by weakness in its Las Vegas operations where net casino revenue was down 8.3 percent year-over-year.
• The computer hardware group underperformed, falling 6 percent, led down by the group’s largest member, Apple. The firm reported quarterly revenue and earnings below the consensus estimates. The shortfall was due largely to consumers postponing purchases of the iPhone in September in anticipation of a new model expected to be introduced in October. ExxonMobile has now regained its position as the largest company by market capitalization with Apple’s fall this week.
• The gold group gave up 6 percent, led down by its single member, Newmont Mining Corp. The price of gold declined for the week.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.
• We are right in the midst of earnings season and many bellwether companies are reporting next week including Caterpillar, Dupont and ExxonMobil.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Ace Ltd, Aon Corp, Cheat Sheet, Consumer Electronics Group, Domestic Equity Funds, Domestic Stock Market, Earnings Reports, Earnings Season, Financial Sector, Gold, Government Policy, Harman, Harman International, Harman International Industries, Harman International Industries Inc, Morgan Stanley, Nassau St, October 24, Performing Group, Precursor, Quarter Earnings, Sidelines, State Street Corp, Telecommunication Services, U S Global Investors
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Chinese stocks tank – precursor of global markets?

Monday, April 19th, 2010

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Goldman jitters and the pledge of China’s central bank to immediately implement new lending rules to curtail property speculation have resulted in the Chinese Shanghai Composite Index plunging by a massive 4.8% this morning.

After today’s sharp sell-off, the Index (2,980 at the time of writing) is the only major bourse trading below both its 50-day (3,055) and 200-day moving average (3,096). It is now of critical importance that the February low of 2,935 – a mere 45 points away – must hold in order for the cyclical bull market to remain intact.

Source: StockCharts.com

The Chinese stock market was the first to turn the corner after the credit crisis sell-off – a full five months before the majority of indices bottomed in March 2009 – and is being watched closely to ascertain whether this market would be the first to spell danger for global stocks, i.e. the proverbial canary in the coalmine. Given the overbought, overbullish and overvalued condition of most stock markets, be extremely cautious out there.

Tags: 200 Day Moving Average, Bourse Trading, China, Chinese Stock Market, Chinese Stocks, Coalmine, Credit Crisis, Critical Importance, Email, Five Months, Global Markets, Global Stocks, Gold, Goldman, Jitters, Pledge, Precursor, Property Speculation, S Central, Shanghai Composite Index, Stock Markets, Tank
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