Posts Tagged ‘Staying Power’
Wednesday, May 30th, 2012
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.
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?
- 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.
- 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)
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.
- Foreign investment, (think of Intel, HP, GE, Honeywell, and all the other multi-nationals operating there) has slowed down dramatically.
- The coalition government seems at a loss for how to deal with its problems. India, as it likes to say, is the world’s largest democracy and its great diversity is reflected in its political scene. Imagine the political gridlock in the U.S. multiplied threefold and you’ll get a rough idea of the difficulties India has in confronting tough choices.
- This is especially true when it comes to corruption. India’s middle-class is sick and tired of the rampant corruption among the political and business class. The credibility of its leaders is vanishing at warp-speed. At this rate, it’s not clear whether India will be able to capitalize on its tremendous demographic dividend.
- As I mentioned last week, the Chinese have become extremely pessimistic about their own prospects.
- History Squared also pointed out a recent Economist article which shows that China’s top politicians, i.e. the Chinese most in the know, are making contingency plans.
Officials who can afford to send their families abroad are usually the most powerful, and the most aware of China’s problems. Says Mr Li of Peking University, “They know better than anyone that the China model is not sustainable and that it’s a risk to everybody.”
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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Tuesday, August 17th, 2010
This article is a guest contribution by Dr. Charles Lieberman, Chief Investment Officer, Advisors Capital Management.
Individual investors are gone from the equity market more so than any time in decades, pushed out by poor returns, unfathomable volatility, and concern and disillusion with the political and economic environment. Instead, investors have turned to bonds, as they seek safety and the return of their capital ahead of investment returns. This search for safety will prove counterproductive and investors will get hurt down the road once the economy recovers. Their flight from stocks has made the equity market the place to be for the foreseeable future, although only those with some staying power will reap these benefits.
The flight to safety is demonstrated most clearly by the flow of investor funds into bond funds and bonds. IBM recently issued a $1.5 billion 3-year note to yield 1.0%, one-half the yield on its common stock. This contrast indicates in the starkest terms that many investors prefer that they get their capital back in three years, even if they earn almost nothing on that investment, rather than risk capital loss by buying the common stock. U.S. Treasury TIPs, which protect investors from inflation, yield zero in the 5-year maturity range. So, some investors are forgoing all return, if they can keep their capital inoculated against inflation over this term. Just as impressive is last week’s Johnson & Johnson issue of 10-year notes at 3.15% in contrast with the 3.7% yield on its common. It is very likely that the stock investor will earn a return that is a multiple of the return earned on these bonds over a ten year horizon.
This preference for bonds over stocks is not restricted to just high quality borrowers. High yield bond issuance so far this year has already exceeded $155 billion, versus a record $163.6 raised in calendar year 2009. So, last year’s record level of issuance will be exceeded by a considerable margin. August issuance is normally quite light, but $21.1 billion has already been brought to market. In fact, when we speak to bond dealers in our effort to buy bonds for our clients, finding attractive paper is hard and we have been forced to become very selective in our picks. In contrast, we can easily sell anything we own. We have also heard that bond funds have had to sacrifice their ability to be selective, because so much cash is pouring in, they must buy almost anything available to avoid sitting on mounds of uninvested cash. How did we arrive at this point?
Investors are clearly seeking safety. Their concerns may be motivated by fear that economic growth might lapse, that the Washington political process is so polarized that good policy is hard to win approval, while foreign policy is also fraught with unusual dangers. In truth, I can think of any period in my entire investment career when the outlook has ever been clear and there werent major concerns. Uncertainty has always been high.
The economic outlook is “unusually uncertain”, as suggested by Fed Chairman Bernanke, a rhetorical flourish that supports current apprehension. Looking back, I recall forecasts of a double dip recession in every single recovery I have lived through, even though not one ever flamed out. People are always nervous that bad times will come back. That history notwithstanding, a double dip recession forecast has become fashionable, once again. However, the data suggest that growth has slowed in 2010, not that a second recession has started or is even likely. Companies have refinanced themselves with enormous volumes of debt and equity issuance. Public companies are sitting on about $1.7 trillion in cash, S&P 500 companies are sitting on about $1trillion, profit margins have widened very sharply and profits and cash flow are quite robust. Analysts have been caught up in this atmosphere of caution and companies keep exceeding and raising their profit forecasts above that of analysts. The typical company has too much cash and needs to figure out how to use this asset more productively than earning a few basis points. Companies have been investing in new equipment and technology in their effort to improve competitiveness, but despite this sizeable rise in capital investment, retained profits exceed investment, so the cash hoard keeps getting larger. So, acquisition activity has picked up and most firms have used cash to finance these deals. It is hard to see the basis for a significant retrenchment in the corporate sector under these conditions.
The health of the banking system is also greatly improved. Late in 2008 and early in 2009, there were reasons to fear that the entire financial system might unravel, severely damaging the overall economy. After the failure or near failure of Lehman, Bear Stearns, AIG, Fannie Mae and Freddie Mac, a financial collapse was not a farfetched possibility. Instead, the banking system was recapitalized, bad loans were written off, and government loans have been largely repaid. Yes, borrowers are not borrowing, but this has as much to do with the flush condition of the corporate sector as it does with the caution of bankers to lend. Good projects can get financing, as is easily demonstrated by the extraordinary low rates available in the bond market.
Tags: Bond Funds, Bond Issuance, Capital Management, Chief Investment Officer, Common Stock, Disillusion, Dr Charles, Economic Environment, Foreseeable Future, High Yield Bond, Individual Investor, Individual Investors, Investment Returns, Investor Funds, Lieberman, Maturity Range, Risk Capital, Staying Power, Stock Investor, U S Treasury
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Monday, April 13th, 2009
The comments below were provided by Kevin Lane of Fusion IQ.
Another stellar day for the markets on Thursday as up to down volume ratios on the NASDAQ and NYSE were 12.36 to 1 and 14.78 to 1 respectively, while their advance to decline ratios were also correspondingly bullish at 5.10 to 1 and 7.28 to 1 respectively. We always say these metrics are the best gauges of confidence and conviction behind the markets move and help to better handicap a rally’s likely staying power as it reflects more participation and commitment by the market largest aggregate buyers – institutions.
When a market is up but these metrics aren’t as positively skewed it is typically more a sign of short covering, which is not a long lasting liquidity event (buying) to drive stocks markedly higher. However, days with internal readings like Thursday’s or the ones we highlighted back in early March (when the index was about 17% lower), are signs of significant buying and commitment which suggest a good (i.e. durable) rally is at hand.
For the last few days we have been saying the obvious and easy call was to say the market would stall as the S&P 500 approached resistance. From a common sense as well as a technical perspective even we had to respect that this resistance may be a factor after a 26% gain from the lows.
Playing devil’s advocate in our head and knowing nothing is certain or has to act a certain way we did hold out an alternative and equally likely thesis – a continuation of the rally. We also suggested several blueprints on how to navigate this call of stall or rally. We suggested that being prepared and then executing a game plan makes one less emotional and makes for better results. Along the vein of being open to the idea that the game changes constantly and like a good coach, a trader/investor needs to adapt (or change) their game plan as new wrinkles occur. In this case the wrinkle was that the market could possibly move higher and evidence was growing to suggest that.
That evidence we suggested that was altering the original game plan of a likely stall near 850 (after we suggested investor buy just above S&P 500 at 700) was growing anecdotal observations of everyone echoing disbelief in this rally’s staying power. We suggested it was pervasive and growing louder and as more and more naysayers and doubters said things such as: “I am in cash and can sleep.” or my favourite: “I am not worried that I am missing this up move it’s not a real move.” Pardon my naiveté (lol!), but the last time I checked a 26% rally in several weeks is pretty damn real.
Hearing those “safe in cash” comments now, not after the first 20% or 30% correction but after a 50% correction from the peak and then adding to the equation negative sentiment towards equities, individual investors and fund managers with lots of cash on the sidelines, a ton of bad news discounted into prices and a global push to aggressively stimulate, made for a pretty compelling backdrop to buy stocks (if not for the long haul at least for a good cyclical rally).
As further supportive evidence to a rally extension theme being likely, on Thursday we highlighted that sentiment had not become excessively bullish yet (typically a rally killer), even after the aggressive move off the lows. Therefore we suggested stocks weren’t in danger because liquidity (buying power) was not tapped out yet. Techs, high beta and growth style investing outpaced the market for the duration of the rally and continue to be the place and style bias producing the best returns.
Source: Kevin Lane, Fusion IQ, April 13, 2009.
Tags: Blueprints, Common Sense, Continuation, Conviction, Devil S Advocate, Down Volume, Game Changes, Game Plan, Handicap, Liquidity Event, Lows, Metrics, Nasdaq, Nyse, Short Covering, Staying Power, Technical Perspective, Trader Investor, Volume Ratios, Wrinkles
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