Equity markets the last few weeks have exhibited extreme volatility. Though your portfolio is structured to weather such storms, you will notice greater fluctuations in your portfolio's value. Approximately 11% of the decline has happened in the last week. Last summer, the markets experienced an eerily similar decline of 17%. This was followed by a quick market recovery.
Markets hate uncertainty and there has been a lot of it lately. First there was the political fight over raising the debt ceiling that was settled only after much internal strife and politicking. At the same time second quarter Gross Domestic Product (GDP - the sum total of all goods and services produced in this country) were weaker than expected. This was followed by a poor purchasing manager survey, disappointing consumer spending report and weak job creation.
The final knife fell with Standard & Poor's (S&P) downgrading the U.S. government's credit rating. The impact of the ratings change on the Treasury market should have been negligible. It was the timing of the S&Ps action that was significant. It came at a time when the markets were deaing with many issues and unknowns: the housing downturn, the deleveraging of households and businesses, the European sovereign debt crisis, and the end of the Feds QE2 (I talked about this in the last two newsletters). The downgrade was the tipping point for the equity markets. Ironically, the downgraded U.S. debt (Treasuries) has performed well increasing in value and pushing interest rates down further. The Federal Reserve did step in yesterday and take the unprecedented action of saying that interest rates will remain low through June 2013. This has helped take some uncertainty off the table but not enough.
Despite all these problems and the increased volatility in the equity markets, I do not think we are headed for another recession. Instead, we are seeing the markets grappling with the new reality of slower growth in the developed countries. Many of our multi-national corporations are poised to take advantage of this shift but it won't help with job creation in the U.S. So we will dodge the recession bullet but it will feel like a recession with high unemployment and low wage growth.
Despite the ishares S&P500 EFTs being down 5.3% year-to-date at Tuesday's close (August 9, 2011) many of the assests in your portfolios continue to perform well. Pimco Global Multi Asset, Pimco Foreign Bond Unhedged, Pimco Developing Local Markets, Pimco Total Return, Pimco Unconstrained Pimco Commodity Real Return, and Thornburg bond funds are all positive for the year and in several cases have racked up double digit returns. These funds have performed well and are keeping your portfolio stable in the face of recent equity declines.
I appreciate your continued confidence. I am gratified to see the checks and balances in everyone diversified portfolios working so I do not anticipate taking any drastic actions. I anticipate that sometime this year the equity markets will rebound off these oversold lows. In the meantime all the hedging strategies embedded in your investments will keep your portfolios from feeling the full brunt of this financial storm.
Wednesday, August 10, 2011
Tuesday, July 19, 2011
Drive or Fly - Which is Most Economical
If you were wondering this summer if it was cheaper to fly or drive on your vacation WELL I have the perfect website. It is a calculator on the BeFrugal.com website. http://www.befrugal.com/tools/fly-or-drive-calculator/
Besides the information you would expect, it incorporates the number of people traveling, the make and model of your car, price of your hotel rooms, tolls, taxis, rental cars, baggage fees plus more. It is really well done!
So take a minute and check to see if it pays to fly or drive!
Besides the information you would expect, it incorporates the number of people traveling, the make and model of your car, price of your hotel rooms, tolls, taxis, rental cars, baggage fees plus more. It is really well done!
So take a minute and check to see if it pays to fly or drive!
Wednesday, July 6, 2011
VC and PE Culture Clash
Venture Capital and Private Equity may seem to do the same thing but that is deceiving. Here is a great NY Times article that discusses how each has a different mindset and culture. It revolves around the recent Private Equity sale of Skype and how former employees stock options were handled. Basically, Private Equity operates in the New York Investment Banker mode of rape and pillage while the Venture Capital firms are west coast relationship oriented. It is the short term kill versus the long term relationship. I don't think that Silicon Valley will favor the PE mode of business over VC if given the choice.
http://dealbook.nytimes.com/2011/07/05/in-silicon-valley-a-culture-clash-sullies-a-romance/?scp=1&sq=Private%20equity%20and%20ventrue%20capital&st=cse
http://dealbook.nytimes.com/2011/07/05/in-silicon-valley-a-culture-clash-sullies-a-romance/?scp=1&sq=Private%20equity%20and%20ventrue%20capital&st=cse
Monday, June 27, 2011
International Dividends
It has been a tough market so far this year. Most of the early gains have been retraced. As of Friday the S&P 500 was up only 1.8%. The majority of that gain came from dividends. Investing in dividend paying stocks has always been a great defensive play. The U.S. and International markets face some daunting headwinds over the next few months with the Federal Reserve ending its second Quantitative Easing program (QE2) and in Europes continuing problems with its Sovereign Debt. In light of the problems facing the market, it is worth considering a global dividend strategy.
Tuesday, January 25, 2011
The Unemployment Picture
"Moving on is a simple thing; what it leaves behind is hard. "
Dave Mustaine
Paper thin, tepid, anemic; these are the words being used to describe the American economic recovery. Why are so many experts so cautious when the recession is officially over? Because this is unlike most post World War II recessions.
Most recessions are caused by tight monetary policy. The economy tends to turn around as soon as interest rates fall and more money is available to banks and borrowers. This recession was caused by loose monetary policy and bad lending practices. So just lowering interest rates (which are already historically low) will not help. The Federal Reserve has resorted to purchasing bonds (QE2 or “Quantitative Easing Round 2”) to try and pump more money into the system but, this will have only a limited effect.
A quick fix is not possible this time. The unemployment rate is emblematic of the problems facing the U.S. economy. The unemployment rate in December did drop to 9.4%. However, only 103,000 jobs were created. The U.S. economy needs to create 125,000 a month just to keep pace with population growth. A strong economic recovery really requires job growth of over 200,000 a month. So currently we are only creating jobs at half this rate.
Another reason that the unemployment rate dropped from 9.8% to 9.4% in December is many people just stopped looking for work. The real unemployment rate is estimated to be over 16%. To put this into perspective that would be as if the whole state of California were unemployed.
This is a new problem in the U.S. Unlike Europe, we are not used to dealing with long term chronic unemployment. The average unemployed worker in December had been out of work for 34 weeks, an increase of 19% from a year ago. The percentage of unemployed that have been out of work for over 28 weeks increased to almost 45%.
The government hopes that its stimulus programs will encourage companies and corporations to start hiring again. However, this may not fix the unemployment problem because many businesses are already looking for new employees and are having a difficult time finding qualified applicants. The Department of Labor reported in the fourth quarter that there are more than 3 million new job openings. If all those positions were filled the official unemployment rate would fall below 7%. So why aren’t these positions being filled?
Many economists believe that there is a mismatch between the job candidates’ skills and the qualifications employers require. This type of unemployment is notoriously difficult to fix. It is a shift in an economy from one set of jobs to another which require different skills.
A new report by Godofsky, Van Horn and Zukin from the Rutgers University’s John J. Heldrich Center for Workplace Development follows workers who have been displaced. It tries to capture the state of those unemployed during the Great Recession by interviewing workers unemployed in August 2009 and then re-interviewing them in March 2010 and November 2010. The results were startling. By November 2010, 54% of the participants were still unemployed. In addition, 13% had given up looking. In other words, 67% of those unemployed in August 2009 had not found a full time job.
For the one-third that had successfully found employment, it was not a bed of roses. Only 43% of the employed found jobs in a few months and over a third had been out of work for over a year. In addition, more than half the re-employed say that their new jobs will not allow them to get by financially and most were still looking for a better job. A third said that they took a reduction in fringe benefits. Over 40% had to accept work in a different field and almost 70% of these workers took a pay cut.
Only one-third of those unemployed in August 2009 believe that they will recover financially and return to where they were before the Great Recession. Over 80% say their finances are in fair to poor shape. It is not a pretty picture. Those displaced by the Great Recession are falling out of the middle class, and it is unlikely that they will ever regain their footing.
I would submit however, that the Great Recession only accelerated these dislocations in the labor market. It is ultimately the pace of innovation and technological change that is causing dislocations in the U.S. labor market. Jobs for unskilled labor are fast disappearing but so are many middle management jobs. Technology allows companies to do more with fewer workers and as a result flatten their organizations by eliminating the middle.
In addition, jobs can travel anywhere due to technology. So now many skilled workers are competing with workers located all around the world. New technologies create new jobs as they destroy others. It is this pace and these dislocations resulting from creative destruction-ism that is so unsettling. We see the results of this accelerating upheaval in our own lives and those around us. New statistics show that the chance that someone in your family will suffer a cut in pay or lose their job in any given year has increased to 26%.
The lesson from all this is to invest in human capital. Workers need to keep investing in their own training and update their skill set. Since it is now commonplace for workers to be constantly changing employers, it will become less common for companies to pay for or provide anything but direct skill training. So each person will need to actively manage their education and retraining through their entire career. Retraining and re-inventing ourselves will become imperative in order to stay employed and have a forward moving career.
The good news is that America continues to be the global leader in innovation and new ideas. The robustness of U.S. ingenuity and creativeness is the envied around the world. The way out of our current economic malaise is to innovate our way out of it. This will only further accelerate the pace of change, but hopefully more jobs will be created than destroyed.
But how will the least skilled be re-employed? Since the least skilled vie for jobs with unskilled labor around the world, their plight will not be easily resolved. To attract unskilled jobs to this country the cost of labor must drop to be competitive with the rest of the world. So in the long term unskilled labor will continue to experience a declining wages. Only when the cost of labor is competitive will manufacturing jobs return to this country. The good news is that manufacturing jobs have begun to return but the bad news is that the jobs are at reduced wages and benefits.
The global economy will continue to repair itself and the unemployment rate will fall modestly in 2011. There will still be bumps along the way. Rising interest rates may cause the bond market to perform badly. Rising food and energy markets will hit the pocket-books of the poor and middle classes hard while their salaries stagnate. However, falling wages will keep inflation moderate. The economy will continue to grow, just slowly. Don’t expect a miracle cure. The economy will keep progressing through rehab but it will take years not months.
Dave Mustaine
Paper thin, tepid, anemic; these are the words being used to describe the American economic recovery. Why are so many experts so cautious when the recession is officially over? Because this is unlike most post World War II recessions.
Most recessions are caused by tight monetary policy. The economy tends to turn around as soon as interest rates fall and more money is available to banks and borrowers. This recession was caused by loose monetary policy and bad lending practices. So just lowering interest rates (which are already historically low) will not help. The Federal Reserve has resorted to purchasing bonds (QE2 or “Quantitative Easing Round 2”) to try and pump more money into the system but, this will have only a limited effect.
A quick fix is not possible this time. The unemployment rate is emblematic of the problems facing the U.S. economy. The unemployment rate in December did drop to 9.4%. However, only 103,000 jobs were created. The U.S. economy needs to create 125,000 a month just to keep pace with population growth. A strong economic recovery really requires job growth of over 200,000 a month. So currently we are only creating jobs at half this rate.
Another reason that the unemployment rate dropped from 9.8% to 9.4% in December is many people just stopped looking for work. The real unemployment rate is estimated to be over 16%. To put this into perspective that would be as if the whole state of California were unemployed.
This is a new problem in the U.S. Unlike Europe, we are not used to dealing with long term chronic unemployment. The average unemployed worker in December had been out of work for 34 weeks, an increase of 19% from a year ago. The percentage of unemployed that have been out of work for over 28 weeks increased to almost 45%.
The government hopes that its stimulus programs will encourage companies and corporations to start hiring again. However, this may not fix the unemployment problem because many businesses are already looking for new employees and are having a difficult time finding qualified applicants. The Department of Labor reported in the fourth quarter that there are more than 3 million new job openings. If all those positions were filled the official unemployment rate would fall below 7%. So why aren’t these positions being filled?
Many economists believe that there is a mismatch between the job candidates’ skills and the qualifications employers require. This type of unemployment is notoriously difficult to fix. It is a shift in an economy from one set of jobs to another which require different skills.
A new report by Godofsky, Van Horn and Zukin from the Rutgers University’s John J. Heldrich Center for Workplace Development follows workers who have been displaced. It tries to capture the state of those unemployed during the Great Recession by interviewing workers unemployed in August 2009 and then re-interviewing them in March 2010 and November 2010. The results were startling. By November 2010, 54% of the participants were still unemployed. In addition, 13% had given up looking. In other words, 67% of those unemployed in August 2009 had not found a full time job.
For the one-third that had successfully found employment, it was not a bed of roses. Only 43% of the employed found jobs in a few months and over a third had been out of work for over a year. In addition, more than half the re-employed say that their new jobs will not allow them to get by financially and most were still looking for a better job. A third said that they took a reduction in fringe benefits. Over 40% had to accept work in a different field and almost 70% of these workers took a pay cut.
Only one-third of those unemployed in August 2009 believe that they will recover financially and return to where they were before the Great Recession. Over 80% say their finances are in fair to poor shape. It is not a pretty picture. Those displaced by the Great Recession are falling out of the middle class, and it is unlikely that they will ever regain their footing.
I would submit however, that the Great Recession only accelerated these dislocations in the labor market. It is ultimately the pace of innovation and technological change that is causing dislocations in the U.S. labor market. Jobs for unskilled labor are fast disappearing but so are many middle management jobs. Technology allows companies to do more with fewer workers and as a result flatten their organizations by eliminating the middle.
In addition, jobs can travel anywhere due to technology. So now many skilled workers are competing with workers located all around the world. New technologies create new jobs as they destroy others. It is this pace and these dislocations resulting from creative destruction-ism that is so unsettling. We see the results of this accelerating upheaval in our own lives and those around us. New statistics show that the chance that someone in your family will suffer a cut in pay or lose their job in any given year has increased to 26%.
The lesson from all this is to invest in human capital. Workers need to keep investing in their own training and update their skill set. Since it is now commonplace for workers to be constantly changing employers, it will become less common for companies to pay for or provide anything but direct skill training. So each person will need to actively manage their education and retraining through their entire career. Retraining and re-inventing ourselves will become imperative in order to stay employed and have a forward moving career.
The good news is that America continues to be the global leader in innovation and new ideas. The robustness of U.S. ingenuity and creativeness is the envied around the world. The way out of our current economic malaise is to innovate our way out of it. This will only further accelerate the pace of change, but hopefully more jobs will be created than destroyed.
But how will the least skilled be re-employed? Since the least skilled vie for jobs with unskilled labor around the world, their plight will not be easily resolved. To attract unskilled jobs to this country the cost of labor must drop to be competitive with the rest of the world. So in the long term unskilled labor will continue to experience a declining wages. Only when the cost of labor is competitive will manufacturing jobs return to this country. The good news is that manufacturing jobs have begun to return but the bad news is that the jobs are at reduced wages and benefits.
The global economy will continue to repair itself and the unemployment rate will fall modestly in 2011. There will still be bumps along the way. Rising interest rates may cause the bond market to perform badly. Rising food and energy markets will hit the pocket-books of the poor and middle classes hard while their salaries stagnate. However, falling wages will keep inflation moderate. The economy will continue to grow, just slowly. Don’t expect a miracle cure. The economy will keep progressing through rehab but it will take years not months.
Friday, January 21, 2011
Year End 2010 In Review
When money is once parted with, it can never return. 
Jane Austen
The results have been tabulated and the winner is: The U.S. Stock Market. Yes, the U.S. stocks outperformed its international counterparts in 2010. While international stocks came in a distant second, bond funds began to languish. The U.S. S&P 500 Large Cap Index actually generated double digit gains of 15.1% return for the year.
These results seem implausible given the haphazard manner in which the returns were generated. In fact, more than half the gains for the year were generated in December. The S&P 500 rose 17 out of 22 trading days for the month. It was the best December in almost 20 years. If this were a ride at Disney most entrants would have thrown up by now, and the ride doesn’t seem to be getting any smoother or predictable.
In addition, the riskier the asset in 2010 the better it performed. U.S. Small (S&P 600) and MidCap (S&P 400) stocks each rose 27% while U.S. Large Caps (S&P 500) rose 15%. In all U.S. equity arenas (Large, Mid and Small Cap), the riskier Growth strategy outperformed Value. The Mid Cap (S&P 400) Growth ishares were up 30% while the Value strategy rose 22%. The same was true in the Small Caps (S&P 600) where Growth strategy delivered 28% compared the Value strategies 23%.
International stocks lagged the U.S. but still delivered solid performance. The Developed Countries’ index (MSCI EAFE Intl) grew 8% while the Emerging Markets fared better producing a 16.5% return. Similar to the U.S., the riskier international stocks performed the best with International Small/Mid Cap Growth funds, growing 22.3%.
As the year ended it became clear that there was a divergence in performance for bonds and stocks. Bonds became a trouble spot in December as interest rates began to rise. Much of this decline was in response to the positive economic news and despite the Federal Reserve announcing that it would be purchasing bonds. This market intervention (quantitative easing round 2) is referred to QE2 by the press. The Fed is buying bonds in order to pump more money into the financial system and drive long term interest rates down. Despite the Fed’s efforts long term interest rates have been creeping up. Remember, as interest rates rise the value of bonds fall. This trend will most probably continue next year making it even more difficult to generate consistent income in most retirement portfolios.
Commodities had a fabulous fourth quarter rising 16% after being essentially flat for the year. This surge was caused by strong demand for raw materials from emerging markets especially China. Investors continued to be drawn to physical assets (e.g. gold, silver) due to concerns about the continued instability of the international markets. This pushed prices in many commodities to multi-year highs that are probably not sustainable in the short term. Some of these gains have been erased in the first weeks of 2011 but the long term outlook for commodities remains strong.
Tuesday, January 4, 2011
Libby Interviewed
I was interviewed by George Avalos of the San Jose Mercury and the Contra Costa Times. Here is the article that was published today.
http://www.contracostatimes.com/real-estate-news/ci_17001081?nclick_check=1
http://www.contracostatimes.com/real-estate-news/ci_17001081?nclick_check=1
Friday, April 24, 2009
How Are The Banks Doing? It Depends Who You Ask
What is going on with the banks? What are they doing with all that government TARP money? Are they crumbling, are they lending, are they solvent, are the toxic assets causing them to fail or are they just fine? As usual the answer isn’t simple and depending who you ask you will get a different answer. It all depends on your perspective.
As a bank executive your job is keep your bank alive. The primary reason companies fail is they spend more cash than they collect, In other words, they are cash flow negative. Based on recent financial reporting announcements, banks are cash flow positive due to increased fees from transactions they have facilitated and increased deposits. Many still have negative earnings due to write downs (on bad loans) but they can pay their bills and keep the lights on. So bank executives are relieved that the panic seems to be over and their banks can remain viable ongoing concerns.
However bank executives aren’t happy that their pay has been limited by government regulation related to the TARP funds. They also don’t like being lumped in with big bad wolf - AIG. So they want to give the government back its TARP funds as quickly as possible. Bank execs could care less about lending more money and stimulating the economy because there few incentives to make a lot of new risky loans. From a bankers perspective it would be better to hold on to the cash and use it to pay back the government’s TARP funds.
To make matters worse for the bank execs, the government wants the banks to sell their troubled (toxic) assets in order to free up capital to make new loans. These toxic loans have not been written down to their current market price because execs view these prices as just a market glitch. The current market for these assets is essentially frozen. The few transactions that take place are at a greatly discounted price. Many of these securitized investments are receiving a large portion of the interest and principal payments on time. So bank executives see no reason to sell these assets for a loss when they are generating an adequate cash flow. Now that the panic in the credit markets has subsided, the bank executives see no reason to cooperate with the government if it is not in their best interests.
The government’s objective is to get the economy up and running. To do this they need the banks to be lending. It is the lack of liquidity in the markets that caused most of the panic. The banks were leant the TARP funds to show the financial markets that the Treasury and the Federal Reserve had no intention of letting any more of the larger banks fail. In return, the banks were supposed to increase lending to consumers and companies thereby stimulating the economy. However, the banks are not cooperating and lending has fallen. An analysis by the Wall Street Journal of Treasury Department data showed that the largest banks refinanced 23% less in new loans in February than in October 2008 when TARP was launched.
Supposedly the government is stress testing the banks to see if they can survive tough market conditions. However, it is not in the governments best interests to have any of the banks fail this test. If most of the banks failed the government would not be able to prop them up again. The stress test may only be a political tool the administration is using to make the banks keep the TARP funds.
The Treasury Department wants to avoid any political backlash stemming from the banks reduced lending. The Obama administration wants the banks more accountable. It wants them lending. Currently, the government has little say regarding how the banks operate due to how the TARP legislation was structured by former Treasury Secretary Paulson. Since bailout funds are dwindling the Treasury has few options and little clout with the banks. One option that the Treasury has begun to consider is turning the TARP loans into equity (stock in the banks). This costs the taxpayers nothing. The losers in all this will be the investors that own bank stocks. Investors will find their ownership positions diluted and the value of the stocks would fall substantially.
So how are the banks doing? It depends who you ask and what metric you use.
As a bank executive your job is keep your bank alive. The primary reason companies fail is they spend more cash than they collect, In other words, they are cash flow negative. Based on recent financial reporting announcements, banks are cash flow positive due to increased fees from transactions they have facilitated and increased deposits. Many still have negative earnings due to write downs (on bad loans) but they can pay their bills and keep the lights on. So bank executives are relieved that the panic seems to be over and their banks can remain viable ongoing concerns.
However bank executives aren’t happy that their pay has been limited by government regulation related to the TARP funds. They also don’t like being lumped in with big bad wolf - AIG. So they want to give the government back its TARP funds as quickly as possible. Bank execs could care less about lending more money and stimulating the economy because there few incentives to make a lot of new risky loans. From a bankers perspective it would be better to hold on to the cash and use it to pay back the government’s TARP funds.
To make matters worse for the bank execs, the government wants the banks to sell their troubled (toxic) assets in order to free up capital to make new loans. These toxic loans have not been written down to their current market price because execs view these prices as just a market glitch. The current market for these assets is essentially frozen. The few transactions that take place are at a greatly discounted price. Many of these securitized investments are receiving a large portion of the interest and principal payments on time. So bank executives see no reason to sell these assets for a loss when they are generating an adequate cash flow. Now that the panic in the credit markets has subsided, the bank executives see no reason to cooperate with the government if it is not in their best interests.
The government’s objective is to get the economy up and running. To do this they need the banks to be lending. It is the lack of liquidity in the markets that caused most of the panic. The banks were leant the TARP funds to show the financial markets that the Treasury and the Federal Reserve had no intention of letting any more of the larger banks fail. In return, the banks were supposed to increase lending to consumers and companies thereby stimulating the economy. However, the banks are not cooperating and lending has fallen. An analysis by the Wall Street Journal of Treasury Department data showed that the largest banks refinanced 23% less in new loans in February than in October 2008 when TARP was launched.
Supposedly the government is stress testing the banks to see if they can survive tough market conditions. However, it is not in the governments best interests to have any of the banks fail this test. If most of the banks failed the government would not be able to prop them up again. The stress test may only be a political tool the administration is using to make the banks keep the TARP funds.
The Treasury Department wants to avoid any political backlash stemming from the banks reduced lending. The Obama administration wants the banks more accountable. It wants them lending. Currently, the government has little say regarding how the banks operate due to how the TARP legislation was structured by former Treasury Secretary Paulson. Since bailout funds are dwindling the Treasury has few options and little clout with the banks. One option that the Treasury has begun to consider is turning the TARP loans into equity (stock in the banks). This costs the taxpayers nothing. The losers in all this will be the investors that own bank stocks. Investors will find their ownership positions diluted and the value of the stocks would fall substantially.
So how are the banks doing? It depends who you ask and what metric you use.
Monday, April 20, 2009
Don't Count on the Consumer
The U.S. economy remains mired in a deep recession. How deep, well fourth quarter’ GDP declined 6.3% which was the biggest drop in output in 26 years. GDP figures for the first quarter are not available yet but are expected to be down an equivalent amount. Earnings and profits will also be down substantially in the first quarter after falling 20% in the fourth. These are horrendous results.
There have been encouraging signs in recent weeks and the panic has subsided but the recession is not over. The economy is still contracting and though the rate of decline seems to have moderated there are still problems to overcome. Hope is growing that things will improve even though the banking system is not yet operating normally. In Federal Reserve Chairman Ben Bernanke's words, there are signs of "green shoots," through snow in early spring. The economy is no longer in free fall but it is still in intensive care and the markets may be getting ahead of themselves.
The outlook for jobs however remains bleak. The unemployment rate is officially 8.5% in the U.S. and 11.2% in California. However, the real national unemployment rate is over 10% when you add in those that have been looking for a full time job for more than a year and those under employed (working part time but seeking full time). One out of every ten adults is unemployed and it will only get worse before it turns around.
Unemployment will continue to move higher as businesses downsize in response to falling sales and constrained credit. We have at least eight more months of rising unemployment before it starts to turn around. The unemployment rate is a lagging indicator because businesses will not begin hiring until the economy is expanding and well into recovery.
The lag is usually significant as the charts of previous recessions show below. These graphs were compiled by JP Morgan Asset Management which allows their charts to be reproduced. The gray bars are recessions and the black lines show the market low. The green line is the total return of the S&P500 which increases from the market lows. It is interesting to look at the orange line representing the unemployment rate because it typically builds higher even after a recession is over and the markets have moved significantly off their lows. In many cases, unemployment remains high for months after a recession is over.
The recovery from this recession will be held back by weak consumer demand. The American consumer will not be rejuvenating the economy by borrowing and spending. In fact the consumer isn’t consuming. He has started saving again and paying off debt. Americans have recognized that they need to have a contingency plan in case they lose their jobs or ever want to retire. The current argument that the average taxpayer will spend their tax refunds is faulty. Most taxpayers will save their refunds in case their salaries or jobs are cut. After watching their portfolios self destruct and the equity in their homes disappear, the average American is not spending recklessly. For the first time in twenty years the personal savings rate is on the rise. Debt payments as a percentage of disposable income have begun to fall. The American consumer is scared of losing what they have worked so hard to achieve and is finally planning for that rainy day.
There have been encouraging signs in recent weeks and the panic has subsided but the recession is not over. The economy is still contracting and though the rate of decline seems to have moderated there are still problems to overcome. Hope is growing that things will improve even though the banking system is not yet operating normally. In Federal Reserve Chairman Ben Bernanke's words, there are signs of "green shoots," through snow in early spring. The economy is no longer in free fall but it is still in intensive care and the markets may be getting ahead of themselves.
The outlook for jobs however remains bleak. The unemployment rate is officially 8.5% in the U.S. and 11.2% in California. However, the real national unemployment rate is over 10% when you add in those that have been looking for a full time job for more than a year and those under employed (working part time but seeking full time). One out of every ten adults is unemployed and it will only get worse before it turns around.
Unemployment will continue to move higher as businesses downsize in response to falling sales and constrained credit. We have at least eight more months of rising unemployment before it starts to turn around. The unemployment rate is a lagging indicator because businesses will not begin hiring until the economy is expanding and well into recovery.
The lag is usually significant as the charts of previous recessions show below. These graphs were compiled by JP Morgan Asset Management which allows their charts to be reproduced. The gray bars are recessions and the black lines show the market low. The green line is the total return of the S&P500 which increases from the market lows. It is interesting to look at the orange line representing the unemployment rate because it typically builds higher even after a recession is over and the markets have moved significantly off their lows. In many cases, unemployment remains high for months after a recession is over.
The recovery from this recession will be held back by weak consumer demand. The American consumer will not be rejuvenating the economy by borrowing and spending. In fact the consumer isn’t consuming. He has started saving again and paying off debt. Americans have recognized that they need to have a contingency plan in case they lose their jobs or ever want to retire. The current argument that the average taxpayer will spend their tax refunds is faulty. Most taxpayers will save their refunds in case their salaries or jobs are cut. After watching their portfolios self destruct and the equity in their homes disappear, the average American is not spending recklessly. For the first time in twenty years the personal savings rate is on the rise. Debt payments as a percentage of disposable income have begun to fall. The American consumer is scared of losing what they have worked so hard to achieve and is finally planning for that rainy day.
Monday, April 13, 2009
Emerging Market Recovery
Stocks have now advanced around 35% from their lows in early March. The Dow and S&P indices are down only in the mid single-digits for the year while the Nasdaq is actually up 5%. I fully expect that we will give some of this back. It is normal for the markets to bounce around like this when the market is making a bottom. Volatility will remain high and the market bounces will be erratic and chaotic until the economy is clearly in recovery.
The emerging markets are beginning to come back to life especially China. The government’s massive stimulus program has helped China avoid sliding into a very severe recession. The Chinese economy is not hampered by many of the same problems plaguing the U.S. The state-dominated economy was able to successfully implement a massive stimulus program in November and without any delays started massive infrastructure projects. This has partially offset slumping export of Chinese goods. One note of caution, in order for China to have a sustained rally, demand for Chinese products from the rest of the world must begin to recover.
In addition, Chinese consumers are very thrifty and are not burdened with heavy debt unlike their western contemporaries. So Chinese consumers are unencumbered by large credit card bills, loans and/or mortgages and are starting to spend again.
The emerging market stock exchanges have moved up sharply maybe a little too sharply in recent weeks. The MSCI Emerging Market International ishares (EEM) are up almost 13% year-to-date. This recovery has been very rapid but the fundamentals do not support such a large swing. I would not be surprised if we gave some of this back.
The Chinese have historically been ravenous consumers of commodities. A rapid recovery could spark an increase in commodity prices and inflation. Currently, we are in a slightly deflationary environment but this could change if demand for commodities increased rapidly. It is difficult to tell if the rally in China and other emerging countries is sustainable. At least the panic is over and the global economy can begin to heal. As the recovery takes hold it will be important to closely monitor commodity prices for signs of inflation.
The emerging markets are beginning to come back to life especially China. The government’s massive stimulus program has helped China avoid sliding into a very severe recession. The Chinese economy is not hampered by many of the same problems plaguing the U.S. The state-dominated economy was able to successfully implement a massive stimulus program in November and without any delays started massive infrastructure projects. This has partially offset slumping export of Chinese goods. One note of caution, in order for China to have a sustained rally, demand for Chinese products from the rest of the world must begin to recover.
In addition, Chinese consumers are very thrifty and are not burdened with heavy debt unlike their western contemporaries. So Chinese consumers are unencumbered by large credit card bills, loans and/or mortgages and are starting to spend again.
The emerging market stock exchanges have moved up sharply maybe a little too sharply in recent weeks. The MSCI Emerging Market International ishares (EEM) are up almost 13% year-to-date. This recovery has been very rapid but the fundamentals do not support such a large swing. I would not be surprised if we gave some of this back.
The Chinese have historically been ravenous consumers of commodities. A rapid recovery could spark an increase in commodity prices and inflation. Currently, we are in a slightly deflationary environment but this could change if demand for commodities increased rapidly. It is difficult to tell if the rally in China and other emerging countries is sustainable. At least the panic is over and the global economy can begin to heal. As the recovery takes hold it will be important to closely monitor commodity prices for signs of inflation.
Thursday, April 9, 2009
One Out of Every Ten Americans is on Food Stamps
Our recent economic woes have hit everyone but it has impacted those with the least the most. Nothing brings home the plight of many Americans as recent the recently released government statistics on SNAP/Food Stamp participation. As of January one out of every ten Americans (32 million) is receiving food stamp assistance, the highest participation rate ever. How does this compare to the good times when the economy was humming along in 2000? Well, the number of people participating in Food Stamps in July was 16.8 million individuals, 15 million less than today.
As the economy has continued to weaken and unemployment has surged many households are in trouble. It has hit every region of the country with every state reporting a year-over-year increase in families requesting and receiving aid. The pain was not felt by just the families living in the Sunbelt states and the industrial heartland. In fact, you may be surprised by some of the states that have been hit the hardest.
Eleven states reported greater than 20% increases in their caseloads from the previous year. Idaho experienced the highest year-over-year increase surging 32% followed by Utah (29%), Florida (29%), Nevada (29%), Arizona (25%), Wisconsin (25%), Georgia (23%), Vermont (23%), Maryland (22%), Texas (22%) and Massachusetts (21%). Below is a chart prepared by Food Research and Action Center which shows by state the annual increase in Snap/Food Stamp participation.
The non-profit and private sectors food banks have been overwhelmed by the surge of people needing help. Many local food banks are struggling to stay open because contributions have dried up.
Granted that Food Stamp statistics are lagging indicators like the unemployment rate but it does show the pain that many Americans are experiencing. It will likely get worse so it is important for all of us to look around our own communities and help. Our lives are so busy that it is easy to miss that others need your help. So on this Christian holiday weekend make a donation (of time or money) to your local food bank or food pantry and help combat hunger.
As the economy has continued to weaken and unemployment has surged many households are in trouble. It has hit every region of the country with every state reporting a year-over-year increase in families requesting and receiving aid. The pain was not felt by just the families living in the Sunbelt states and the industrial heartland. In fact, you may be surprised by some of the states that have been hit the hardest.
Eleven states reported greater than 20% increases in their caseloads from the previous year. Idaho experienced the highest year-over-year increase surging 32% followed by Utah (29%), Florida (29%), Nevada (29%), Arizona (25%), Wisconsin (25%), Georgia (23%), Vermont (23%), Maryland (22%), Texas (22%) and Massachusetts (21%). Below is a chart prepared by Food Research and Action Center which shows by state the annual increase in Snap/Food Stamp participation.
The non-profit and private sectors food banks have been overwhelmed by the surge of people needing help. Many local food banks are struggling to stay open because contributions have dried up.
Granted that Food Stamp statistics are lagging indicators like the unemployment rate but it does show the pain that many Americans are experiencing. It will likely get worse so it is important for all of us to look around our own communities and help. Our lives are so busy that it is easy to miss that others need your help. So on this Christian holiday weekend make a donation (of time or money) to your local food bank or food pantry and help combat hunger.
Monday, April 6, 2009
Weekly Market Recap
The U.S. markets rallied for their fourth week. We are now well up from the lows experienced in early March. Last week the S&P 500 rose 3.3% to 843 and the Nasdaq Composite advanced 5.0% to 1,622. Value stocks finally showed strength because the Financial Accounting Standards Board revised the mark-to-market rule giving bank stocks a boast. Value stocks however still lag growth stocks year-to-date. In fact, large to mid-cap growth stocks are now positive for the year.
Though the current rally has provided much needed relief, it does not mean the markets are only headed up. We have seen rallies galore since we started this ascent into hell last year. This is the fifth 10%-plus move we have seen in the past year and the previous rallies did not hold. For this rally to be sustainable the banks and the credit markets have to be functioning and stable.
The economy is still deteriorating. Last week, the official national unemployment rate reached 8.5% (an additional 660,000 jobs were lost in March). The real rate of unemployment is over 10% when you add in those that have been looking for a full time job for more than a year or those under employed (working part time but seeking full time). One out of every ten adults is unemployed and it will most probably only go get worse before it turns around.
This and other data suggest that the economy contracted in the first quarter by approximately 5%. Luckily some of the recent economic data related to housing sales, retail sales and consumer confidence is pointing to a moderation in the rate of decline. The Federal Reserve is also doing its best to pump money into the system and bolster up the banks. The economy is beginning to bottom out but the data is not pointing to a robust or steep US recovery. The economy will begin to stabilize the second half of the year but the going will be rough.
Though the current rally has provided much needed relief, it does not mean the markets are only headed up. We have seen rallies galore since we started this ascent into hell last year. This is the fifth 10%-plus move we have seen in the past year and the previous rallies did not hold. For this rally to be sustainable the banks and the credit markets have to be functioning and stable.
The economy is still deteriorating. Last week, the official national unemployment rate reached 8.5% (an additional 660,000 jobs were lost in March). The real rate of unemployment is over 10% when you add in those that have been looking for a full time job for more than a year or those under employed (working part time but seeking full time). One out of every ten adults is unemployed and it will most probably only go get worse before it turns around.
This and other data suggest that the economy contracted in the first quarter by approximately 5%. Luckily some of the recent economic data related to housing sales, retail sales and consumer confidence is pointing to a moderation in the rate of decline. The Federal Reserve is also doing its best to pump money into the system and bolster up the banks. The economy is beginning to bottom out but the data is not pointing to a robust or steep US recovery. The economy will begin to stabilize the second half of the year but the going will be rough.
Thursday, April 2, 2009
First Quarter 2009 Market Performance
I was quoted in yesturdays Contra Costa Times article on the First Quarter Performance.
Hope you enjoy!
Area stocks outperform market indexes
The stocks of Bay Area and East Bay public companies out-performed their counterparts on the national stock markets during the first quarter — but only by falling less than the Dow Jones 30, S&P 500, and Nasdaq Composite.
By the time the January-March period ended on Tuesday, the East Bay 50 index had fallen 2.7 percent and the Bay Area 100 index was down 0.2 percent. The Dow Jones Industrial Average plunged 13.3 percent, the S&P 500 slid 11.7 percent, and the Nasdaq fell 3.1 percent.
Those three-month losses came despite a general upswing in the stock markets towards the end of the first quarter.
"We seem to have gained some traction in the stock markets in March," said Libby Mihalka, president of Altamont Capital, a Livermore-based financial planning firm. "But we're not out of the woods yet."
The big problem now is financial gremlins continue to haunt broad stretches of the nation's economic landscape. And that has spooked investors.
"Short-term, there are so many things that are unknown," said Royce Charney, president of Oakland-based Trust Administrators, a financial company. "You still have all the bank and financial institution issues, and now we're dealing with the auto industry. But for long-term investors, the market still looks attractive."
Charney defined the long-term
"The collapsing financial system and the problems with the auto companies are hurting consumer psychology the most," said Richard Welty, president of Lafayette-based Welty Capital Management.
Among industry sectors during the quarter, the best-performing national index was the Morgan Stanley Retail Index, which rose 6.3 percent. The weakest sector was the Bloomberg Real Estate Index, which lost 33.7 percent of its value.
The best-performing East Bay companies during the quarter were primarily in the high-tech and biotech industries:
Novabay Pharmaceuticals jumped 188 percent. Emeryville-based Novabay said a deal it struck to develop and commercialize one of its dermatological compounds could produce $50 million in milestone payments for Novabay.
Zhone Technologies soared 130 percent higher. Oakland-based Zhone lost money in its fourth quarter, but the loss was in line with expectations. The wireless communications also landed some key deals and moved forward with plans to serve the rural United States.
Neurobiological Technologies was up 116 percent. The Emeryville-based biotech company said it would seek the sale of the company or its assets.
Socket Mobile was up 79 percent. The Newark-based maker of mobile-computing devices reported record annual sales in 2008, although the company lost money during the year and the fourth quarter.
SYNNEX Corp. jumped 74 percent. Fremont-based SYNNEX, a technology services company, announced fourth-quarter profits that beat analysts expectations by a wide margin.
Walnut Creek-based PMI Group was the worst-performing East Bay stock, falling 68 percent. The mortgage insurer reported a smaller fourth-quarter loss. PMI also was jolted by a downgrade by Fitch, which warned that PMI faces more losses and reduced liquidity.
Concord-based Pacer International fell 66 percent. The freight logistics company's fourth-quarter results fell short of estimates for earnings and revenues.
The best-performing Bay Area company was XTENT Inc., a Menlo Park medical devices company whose stock rocketed 367 percent higher. But the improvement may have been due to XTENT's disclosure during the quarter that it had hired an advisor to help it sell some core assets, sell the entire company, or seek a merger partner. XTENT also decided to eliminate 115 jobs, or 94 percent of its workforce.
Investors should be prepared to confront more volatility during the second quarter of this year, financial planners said.
And even after the volatility fades, and the economy starts to look better, it's still quite possible that a rebound won't produce much to cheer about.
"We're going into a slow-growth economy," Mihalka said. "Things will stay slow. And then we may have inflation.
Hope you enjoy!
Area stocks outperform market indexes
The stocks of Bay Area and East Bay public companies out-performed their counterparts on the national stock markets during the first quarter — but only by falling less than the Dow Jones 30, S&P 500, and Nasdaq Composite.
By the time the January-March period ended on Tuesday, the East Bay 50 index had fallen 2.7 percent and the Bay Area 100 index was down 0.2 percent. The Dow Jones Industrial Average plunged 13.3 percent, the S&P 500 slid 11.7 percent, and the Nasdaq fell 3.1 percent.
Those three-month losses came despite a general upswing in the stock markets towards the end of the first quarter.
"We seem to have gained some traction in the stock markets in March," said Libby Mihalka, president of Altamont Capital, a Livermore-based financial planning firm. "But we're not out of the woods yet."
The big problem now is financial gremlins continue to haunt broad stretches of the nation's economic landscape. And that has spooked investors.
"Short-term, there are so many things that are unknown," said Royce Charney, president of Oakland-based Trust Administrators, a financial company. "You still have all the bank and financial institution issues, and now we're dealing with the auto industry. But for long-term investors, the market still looks attractive."
Charney defined the long-term
"The collapsing financial system and the problems with the auto companies are hurting consumer psychology the most," said Richard Welty, president of Lafayette-based Welty Capital Management.
Among industry sectors during the quarter, the best-performing national index was the Morgan Stanley Retail Index, which rose 6.3 percent. The weakest sector was the Bloomberg Real Estate Index, which lost 33.7 percent of its value.
The best-performing East Bay companies during the quarter were primarily in the high-tech and biotech industries:
Novabay Pharmaceuticals jumped 188 percent. Emeryville-based Novabay said a deal it struck to develop and commercialize one of its dermatological compounds could produce $50 million in milestone payments for Novabay.
Zhone Technologies soared 130 percent higher. Oakland-based Zhone lost money in its fourth quarter, but the loss was in line with expectations. The wireless communications also landed some key deals and moved forward with plans to serve the rural United States.
Neurobiological Technologies was up 116 percent. The Emeryville-based biotech company said it would seek the sale of the company or its assets.
Socket Mobile was up 79 percent. The Newark-based maker of mobile-computing devices reported record annual sales in 2008, although the company lost money during the year and the fourth quarter.
SYNNEX Corp. jumped 74 percent. Fremont-based SYNNEX, a technology services company, announced fourth-quarter profits that beat analysts expectations by a wide margin.
Walnut Creek-based PMI Group was the worst-performing East Bay stock, falling 68 percent. The mortgage insurer reported a smaller fourth-quarter loss. PMI also was jolted by a downgrade by Fitch, which warned that PMI faces more losses and reduced liquidity.
Concord-based Pacer International fell 66 percent. The freight logistics company's fourth-quarter results fell short of estimates for earnings and revenues.
The best-performing Bay Area company was XTENT Inc., a Menlo Park medical devices company whose stock rocketed 367 percent higher. But the improvement may have been due to XTENT's disclosure during the quarter that it had hired an advisor to help it sell some core assets, sell the entire company, or seek a merger partner. XTENT also decided to eliminate 115 jobs, or 94 percent of its workforce.
Investors should be prepared to confront more volatility during the second quarter of this year, financial planners said.
And even after the volatility fades, and the economy starts to look better, it's still quite possible that a rebound won't produce much to cheer about.
"We're going into a slow-growth economy," Mihalka said. "Things will stay slow. And then we may have inflation.
Monday, March 30, 2009
Rally Not Sustainable Without Bank Recovery
The U.S. stock markets rallied for a third week. The S&P 500 index was up 6.2% last week. Stocks have now rallied approximately 25% up from their lows of less than three weeks ago. The rally has pushed the S&P 500 index into single digit losses for the year (down 9%) and for a few days moved the Nasdaq briefly into positive territory until it fell on Friday.
The market loved all the positive economic news it received last week starting with the 5.1% increase in existing home sales followed by a 4.7% increase in new home sales. Durable goods orders rebounded 3.4% and consumer spending rose 0.2%. All these indicators came in at better-than-expected levels. These could be signs that the economic recession may be moving past its peak but it is still too early to tell.
The market also rose last week because investors enthusiastically embraced the Obama’s Administration bank recapitalization plan. The Treasury Department outlined the Public-Private Investment Plan (PPIP) which gives banks the means to remove toxic assets from their books freeing up capital to make new loans. This plan should help the banks and the credit markets to recover and begin lending. Nonetheless, these market rallies cannot be sustained over the long run until the banks are on sound footing. This is not to say that the success of the PPIP is guaranteed. There are numerous details and glitches that need to still be worked out if the PPIP is to be successful. There are, however, numerous reasons to be optimistic about the prospects of this program. The PPIP combined with all the government fiscal programs should eventually bring about a resolution to the credit crisis.
The recent rallies have been encouraging from a technical perspective. Trading volume has been increasing on upward moves and declining on pullbacks. This is crucial to building a bottom, but it creates painful volatility as the markets over shoot on the latest news. There is still much negative news out there, including high levels of unemployment, a very troubled auto industry and an extremely fragile financial system that could still be subject to negative shocks. A market like this will create exciting rallies and sickening declines. These market gyrations are an important part of the bottom building process as the market challenges asset pricing over and over again. So it is important for investors to keep a long term perspective despite the excessive level of volatility.
The market loved all the positive economic news it received last week starting with the 5.1% increase in existing home sales followed by a 4.7% increase in new home sales. Durable goods orders rebounded 3.4% and consumer spending rose 0.2%. All these indicators came in at better-than-expected levels. These could be signs that the economic recession may be moving past its peak but it is still too early to tell.
The market also rose last week because investors enthusiastically embraced the Obama’s Administration bank recapitalization plan. The Treasury Department outlined the Public-Private Investment Plan (PPIP) which gives banks the means to remove toxic assets from their books freeing up capital to make new loans. This plan should help the banks and the credit markets to recover and begin lending. Nonetheless, these market rallies cannot be sustained over the long run until the banks are on sound footing. This is not to say that the success of the PPIP is guaranteed. There are numerous details and glitches that need to still be worked out if the PPIP is to be successful. There are, however, numerous reasons to be optimistic about the prospects of this program. The PPIP combined with all the government fiscal programs should eventually bring about a resolution to the credit crisis.
The recent rallies have been encouraging from a technical perspective. Trading volume has been increasing on upward moves and declining on pullbacks. This is crucial to building a bottom, but it creates painful volatility as the markets over shoot on the latest news. There is still much negative news out there, including high levels of unemployment, a very troubled auto industry and an extremely fragile financial system that could still be subject to negative shocks. A market like this will create exciting rallies and sickening declines. These market gyrations are an important part of the bottom building process as the market challenges asset pricing over and over again. So it is important for investors to keep a long term perspective despite the excessive level of volatility.
Monday, March 23, 2009
Forget the Sideshow: Just Resuscitate the Credit Markets
For the second week in a row, equities managed to post a positive gain despite heavy profit-taking at the end of the week. The S&P 500 gained 1.6% to close at 769. From the early March lows the market is up 20%.
The big news is the Federal Reserve’s announcement to institute a program to buy $1 trillion worth of mortgage-backed and Treasury securities in an effort to boost economic growth. The market for mortgage-backed securities has been frozen for months. The Feds attempt to thaw this market has been well received. The move is designed to lower mortgage rates so many homeowners (that are not under water and have jobs) can refinance. This should increase homeowners' cash flow and reduce foreclosures. In addition, this may induce prospective buyers to begin purchasing homes, thus bolstering the battered housing market.
Unfortunately while the Fed is doing its best to prop up the markets, save the banks and jump start the economy, Washington is too busy with its own sideshows. This one comes complete with a freak show of politicians berating AIG bonus recipients. While the outrage engendered by these bonuses is understandable, the grandstanding and legislative response is not productive.
If this proposed tax on bonuses received by TARP recipients is enacted, it will surely hurt the Fed's efforts to prop up the banking system. The bonuses are egregious but it is more important to get the economy jump started than to pursue a witch hunt. Stabilizing the banks should be our first and last priority. If we cannot stabilize the banks the economy will get much worse and the credit markets will freeze up further. Stabilizing the banks and greasing the gears of the credit markets should remain the government’s focus, not sideshows and witch hunts. Punishing these bonus recipients isn’t necessary because in the end the markets will extract its own retribution in the form of reduced pay or no job at all. Sooner or later these kings of finance will find that their industry has changed and the pickings are slim to none.
I anticipate the markets will be a little choppy but the rally will continue at a slow pace. If you are not in the stock market, I highly recommend that you start dollar cost averaging back in.
The big news is the Federal Reserve’s announcement to institute a program to buy $1 trillion worth of mortgage-backed and Treasury securities in an effort to boost economic growth. The market for mortgage-backed securities has been frozen for months. The Feds attempt to thaw this market has been well received. The move is designed to lower mortgage rates so many homeowners (that are not under water and have jobs) can refinance. This should increase homeowners' cash flow and reduce foreclosures. In addition, this may induce prospective buyers to begin purchasing homes, thus bolstering the battered housing market.
Unfortunately while the Fed is doing its best to prop up the markets, save the banks and jump start the economy, Washington is too busy with its own sideshows. This one comes complete with a freak show of politicians berating AIG bonus recipients. While the outrage engendered by these bonuses is understandable, the grandstanding and legislative response is not productive.
If this proposed tax on bonuses received by TARP recipients is enacted, it will surely hurt the Fed's efforts to prop up the banking system. The bonuses are egregious but it is more important to get the economy jump started than to pursue a witch hunt. Stabilizing the banks should be our first and last priority. If we cannot stabilize the banks the economy will get much worse and the credit markets will freeze up further. Stabilizing the banks and greasing the gears of the credit markets should remain the government’s focus, not sideshows and witch hunts. Punishing these bonus recipients isn’t necessary because in the end the markets will extract its own retribution in the form of reduced pay or no job at all. Sooner or later these kings of finance will find that their industry has changed and the pickings are slim to none.
I anticipate the markets will be a little choppy but the rally will continue at a slow pace. If you are not in the stock market, I highly recommend that you start dollar cost averaging back in.
Tuesday, March 17, 2009
Turnaround or Bounce? Look To The Banks
Last week’s positive move in the stock market was overdue, but it is unclear whether this is the beginning of a turnaround or merely a bounce from oversold conditions. There is some evidence that market conditions are improving. Last week’s rally was broad-based and volume was heavy, which are strong technical factors. Additionally, lower-quality stocks have been outperforming, which typically happens as markets turn around. However, it is very possible that we are still bottoming-out.
There was good economic news last week. Retail sales figures were surprisingly positive. January’s data was revised to show that sales actually rose, and February’s numbers were down only slightly. All told, it appears possible that overall first-quarter retail sales growth will net out to around zero, a much better scenario than was widely anticipated only a few weeks ago.
Today more good news. An unexpected rise in housing starts and a more moderate increase in wholesale prices point toward a brighter economic outlook. Another plus, the market appears to have leveled off before the recently passed stimulus package has started to have any effect.
That said, the overall economic environment remains troubled, and as Federal Reserve Chairman Ben Bernanke said last week, “Until we stabilize the financial system, a sustainable economic recovery will remain out of reach. In particular, the continued viability of systemically important financial institutions is vital to this effort.” The banking system needs to stabilize before we see a full recovery.
There was good economic news last week. Retail sales figures were surprisingly positive. January’s data was revised to show that sales actually rose, and February’s numbers were down only slightly. All told, it appears possible that overall first-quarter retail sales growth will net out to around zero, a much better scenario than was widely anticipated only a few weeks ago.
Today more good news. An unexpected rise in housing starts and a more moderate increase in wholesale prices point toward a brighter economic outlook. Another plus, the market appears to have leveled off before the recently passed stimulus package has started to have any effect.
That said, the overall economic environment remains troubled, and as Federal Reserve Chairman Ben Bernanke said last week, “Until we stabilize the financial system, a sustainable economic recovery will remain out of reach. In particular, the continued viability of systemically important financial institutions is vital to this effort.” The banking system needs to stabilize before we see a full recovery.
Tuesday, February 24, 2009
Housing Prices Plunge in December
The Case-Shiller index showed accelerating price declines in December. Every city experienced declines. Denver and Dallas held up the best declining approximately 4% in value from sales of existing homes in December of 2007. Sun Belt cities continued to post the worst declines with Las Vegas and Phoenix sliding 33% and 34%, respectively. San Francisco posted the worst monthly drop ever, a 31% decline. The rest of California fared no better with San Diego and Los Angeles both falling 25% and 25%, respectively.
The S&P/Case-Shiller home-price index is a closely watched gauge of U.S. home prices in 20 major metropolitan areas. The housing market will continue to deteriorate at least through the summer and probably through the rest of the year.
Deteriorating housing prices cause buyers to sit on the sidelines thus causing housing prices to fall further. This is a deflationary spiral that is hurting the economy. Consumer confidence dropped to an all time low of 25 in February. This is the lowest reading since the index's inception in 1967. This new reading shows consumers do not expect economic conditions (i.e. employment and business conditions) to improve in the next six months. In fact, 40% of respondents said they expect economic conditions to instead worsen. Under these conditions, few consumers are willing to buy a new home especially if they expect the housing market and economy to worsen. So the spiral continues …..
The only glimmer on the horizon is the new Obama housing stimulus plan. It is an elegant plan but it may not be enough. The plan is expected to help 9 million families refinance their mortgages to avoid foreclosure by using incentives and subsidies. Unfortunately, the plan is structured to offer the least help to homeowners in markets that have receded the most (the Sun Belt States, California, Florida and Michigan). It is a start and will help shore the housing market up in some parts of the country but it will not completely bolster the collapsing housing market.
Interactive Housing Market Graph Link
It is not likely that the economy will turn around in 2009.
The S&P/Case-Shiller home-price index is a closely watched gauge of U.S. home prices in 20 major metropolitan areas. The housing market will continue to deteriorate at least through the summer and probably through the rest of the year.
Deteriorating housing prices cause buyers to sit on the sidelines thus causing housing prices to fall further. This is a deflationary spiral that is hurting the economy. Consumer confidence dropped to an all time low of 25 in February. This is the lowest reading since the index's inception in 1967. This new reading shows consumers do not expect economic conditions (i.e. employment and business conditions) to improve in the next six months. In fact, 40% of respondents said they expect economic conditions to instead worsen. Under these conditions, few consumers are willing to buy a new home especially if they expect the housing market and economy to worsen. So the spiral continues …..
The only glimmer on the horizon is the new Obama housing stimulus plan. It is an elegant plan but it may not be enough. The plan is expected to help 9 million families refinance their mortgages to avoid foreclosure by using incentives and subsidies. Unfortunately, the plan is structured to offer the least help to homeowners in markets that have receded the most (the Sun Belt States, California, Florida and Michigan). It is a start and will help shore the housing market up in some parts of the country but it will not completely bolster the collapsing housing market.
Interactive Housing Market Graph Link
It is not likely that the economy will turn around in 2009.
Thursday, February 19, 2009
Inflation, Deflation, Reflation or Stagflation???
In the short term, the world’s economies will not have to worry about inflation. The drop in demand for goods and services is causing prices to actually drop. This disinflation will not last long since the supply is still constrained. As demand picks up again, especially in the emerging economies, inflationary forces will emerge. The U.S. government’s stimulus programs will actually add to the inflationary forces in the future. In the short term these forces will lead to reflation, which is the reappearance of a rising inflation rate. Reflation is not undesirable since a low level of inflation has always led to a stable economy. However, if reflation leads to high inflation (above 2%) then it is considered destructive to the general economy, and our Federal Reserve usually steps in to extinguish inflationary pressures. Except this time the Fed may not be able to combat inflation. (If it fights inflation then it causes growth to further stagnate; if the government encourages economic growth it sparks rising inflation).
Inflation is usually driven by strong economic growth. As we discussed before, it is unlikely that we will experience a high growth rate for quite a few years. But inflation can occur during periods of stagnant growth if there are constraints on supplies. We are facing numerous future constraints. Our growing trade deficit, aging population, rising cost of labor around the world, and supply-constrained commodities are all contributors to inflation. Inflation with stagnant growth is called stagflation and it looks like this is where we are heading in the long run (probably a year from now). Stagflation requires a completely different investment mindset. For instance, in a world prone to inflation and slow growth, fixed rate securities like Treasuries are really not “risk free” or safe since a rising inflation rate can eat up the wipe out any real return.
Since the early 1980’s inflation, also known as the Consumer Price Index or CPI, has been steadily falling in virtually every economy from double digits down to 2% (see chart below). So inflation has not been a factor on which investors have had to focus. As inflationary pressures reappear, it will become important to reach back to the investment strategies that worked thirty years ago and update them to meet the changing securities markets. For instance, strategies that emphasize inflation-linked bonds and commodities will probably do well in this environment while stocks may under perform.
In the near term, we will be experiencing reflationary pressures coupled with a stagnant or low growth economy. In this environment, high quality corporate bonds and municipal bonds will perform the best when mixed with stocks and the slow introduction of inflation-linked securities. Commodities in the near term will not perform well but will shine when inflation takes off. Your portfolio rebalancing recommendations will reflect the realities of this new investment landscape. Please review your rebalancing recommendations and return them to us as soon as possible.
The new administration certainly has an amazing number of wild fires to deal with. It will be impossible for them to put them all out and put things to right quickly. It will take massive government intervention in the form of both tax cuts and spending on infrastructure to stop the consequences of the sudden de-leveraging of financial markets, consumers and businesses. This will be a protracted recovery. Over the last few weeks the credit markets have begun to thaw. High quality corporate and municipal bonds will recover first as yield spreads to Treasuries narrow. The stock market will hold steady and may begin to slowly recover in late 2009 but will face massive head winds in the near term.
It is important to adjust to the economic headwinds we face and shift your portfolio to reap any strategic advantage the markets offer. The markets always recover in the long term but each time it is different. The key is not to panic. Instead, focus on identifying these differences and shift your portfolio to take advantage of them. Hiding in Treasuries will not repair your portfolio but may in fact garner you further losses. Short term volatility always yields opportunities if you know where to look.
Inflation is usually driven by strong economic growth. As we discussed before, it is unlikely that we will experience a high growth rate for quite a few years. But inflation can occur during periods of stagnant growth if there are constraints on supplies. We are facing numerous future constraints. Our growing trade deficit, aging population, rising cost of labor around the world, and supply-constrained commodities are all contributors to inflation. Inflation with stagnant growth is called stagflation and it looks like this is where we are heading in the long run (probably a year from now). Stagflation requires a completely different investment mindset. For instance, in a world prone to inflation and slow growth, fixed rate securities like Treasuries are really not “risk free” or safe since a rising inflation rate can eat up the wipe out any real return.
Since the early 1980’s inflation, also known as the Consumer Price Index or CPI, has been steadily falling in virtually every economy from double digits down to 2% (see chart below). So inflation has not been a factor on which investors have had to focus. As inflationary pressures reappear, it will become important to reach back to the investment strategies that worked thirty years ago and update them to meet the changing securities markets. For instance, strategies that emphasize inflation-linked bonds and commodities will probably do well in this environment while stocks may under perform.
In the near term, we will be experiencing reflationary pressures coupled with a stagnant or low growth economy. In this environment, high quality corporate bonds and municipal bonds will perform the best when mixed with stocks and the slow introduction of inflation-linked securities. Commodities in the near term will not perform well but will shine when inflation takes off. Your portfolio rebalancing recommendations will reflect the realities of this new investment landscape. Please review your rebalancing recommendations and return them to us as soon as possible.
The new administration certainly has an amazing number of wild fires to deal with. It will be impossible for them to put them all out and put things to right quickly. It will take massive government intervention in the form of both tax cuts and spending on infrastructure to stop the consequences of the sudden de-leveraging of financial markets, consumers and businesses. This will be a protracted recovery. Over the last few weeks the credit markets have begun to thaw. High quality corporate and municipal bonds will recover first as yield spreads to Treasuries narrow. The stock market will hold steady and may begin to slowly recover in late 2009 but will face massive head winds in the near term.
It is important to adjust to the economic headwinds we face and shift your portfolio to reap any strategic advantage the markets offer. The markets always recover in the long term but each time it is different. The key is not to panic. Instead, focus on identifying these differences and shift your portfolio to take advantage of them. Hiding in Treasuries will not repair your portfolio but may in fact garner you further losses. Short term volatility always yields opportunities if you know where to look.
Tuesday, February 17, 2009
Is Your Financial Advisor A Smooth Talking Con Artist?
Both the Stanford and Madoff scams have something in common. These advisors used simple techniques to separate investors from their money by promising high returns and no risk (greed). If something is too good to be true - Well It Is!!!!!!!
So here are the warning signs:
If you receive statements from only your Advisor's firm you could be in trouble. An Advisor should custodian your funds at a separate and independent company. I custodian my client's portfolios at Charles Schwab & Co. The client receives a separate statement directly from Schwab verifying their holdings. Madoff would never have been able to steal his client's money if custody of the funds had been held at another firm. Many advisers avoided the Madoff ponzi scheme because when they asked simple questions. When they found out that Madoff managed funds were not held by an independent third party brokerage firm they didn't invest. Never hand over custodian ship of your portfolio to your advisor.
If your advisor has you write a check or transfer your assets to them, you are probably never going to see your money again. I know I said it before but Never hand over custodianship to your advisor. The check should be made out to your custodian (i.e. Schwab, Vanguard, Fidelity).
Be wary of the promise of unreasonably high return with virtually no risk. There is no such thing as a free ride. This tripped up both the Madoff and Stanford investors. Stanford promised huge returns on risk less CDs. In addition, most investors assume that all CDs are FDIC insured up to $250,000. They are not. An advisor may say or promise that their CDs are insured or guaranteed but by whom? If ii is not FDIC insured don't invest. Be sure to ask alot of questions.
Do Not Invest in Anything You Do Not Understand. If your advisor can't explain it to you simply then they do not understand it or they are trying to take your money. Bottom line, it is your money so there is no such thing as a simple or stupid question. If your advisor becomes annoyed then find a new one. Do not invest in a fancy catch phrases (Stanford Investment Model or SIM) or a black box (Madoff's supposedly winner options trading strategy).
Finally, Listen to your gut. If you are uncomfortable and feel under pressure to sign with an advisor, then leave. It is alright to look foolish. In fact, it might be the smartest thing you have ever done. If after additional research and thought you change your mind, I guarantee that the advisor will still be happy to help you with your portfolio.
A smooth talking con artist is always happy to separate you from your money so stay alert!
So here are the warning signs:
If you receive statements from only your Advisor's firm you could be in trouble. An Advisor should custodian your funds at a separate and independent company. I custodian my client's portfolios at Charles Schwab & Co. The client receives a separate statement directly from Schwab verifying their holdings. Madoff would never have been able to steal his client's money if custody of the funds had been held at another firm. Many advisers avoided the Madoff ponzi scheme because when they asked simple questions. When they found out that Madoff managed funds were not held by an independent third party brokerage firm they didn't invest. Never hand over custodian ship of your portfolio to your advisor.
If your advisor has you write a check or transfer your assets to them, you are probably never going to see your money again. I know I said it before but Never hand over custodianship to your advisor. The check should be made out to your custodian (i.e. Schwab, Vanguard, Fidelity).
Be wary of the promise of unreasonably high return with virtually no risk. There is no such thing as a free ride. This tripped up both the Madoff and Stanford investors. Stanford promised huge returns on risk less CDs. In addition, most investors assume that all CDs are FDIC insured up to $250,000. They are not. An advisor may say or promise that their CDs are insured or guaranteed but by whom? If ii is not FDIC insured don't invest. Be sure to ask alot of questions.
Do Not Invest in Anything You Do Not Understand. If your advisor can't explain it to you simply then they do not understand it or they are trying to take your money. Bottom line, it is your money so there is no such thing as a simple or stupid question. If your advisor becomes annoyed then find a new one. Do not invest in a fancy catch phrases (Stanford Investment Model or SIM) or a black box (Madoff's supposedly winner options trading strategy).
Finally, Listen to your gut. If you are uncomfortable and feel under pressure to sign with an advisor, then leave. It is alright to look foolish. In fact, it might be the smartest thing you have ever done. If after additional research and thought you change your mind, I guarantee that the advisor will still be happy to help you with your portfolio.
A smooth talking con artist is always happy to separate you from your money so stay alert!
Thursday, February 12, 2009
The Economy Ain’t Hummin’ Along
Banks, consumers and businesses are rapidly deleveraging. The process was so abrupt that it was though someone slammed the brakes on the global economy. (Please note if you cannot read a graph or insert double click on it and it will appear larger and less fuzzy on your computer). First, the housing market began to deleverage in 2006 
sparking the financial sector to begin to deleverage in 2007 causing the consumer to deleverage in 2008 and in September the rest of the world followed. When so much liquidity is pulled from the markets and economy so rapidly the dislocations and shock waves are massive. Now only one entity is large enough to get the economy moving again, the U.S. government. The government is now moving forward rapidly to stimulate the economy as unemployment soars and economic growth stalls.
The unemployment rate is approaching the levels reached in the early 1980s. Given the recent severe declines in retail sales, business spending and employment, it is highly unlikely that the economy will improve anytime soon. It is clear that the job market will continue to deteriorate for most of 2009. It is entirely possible that we will reach the levels of unemployment experienced in 1982. Even if the much-needed stimulus bill passes soon, the economy is likely to end 2009 in roughly as bad a shape as 1982.
sparking the financial sector to begin to deleverage in 2007 causing the consumer to deleverage in 2008 and in September the rest of the world followed. When so much liquidity is pulled from the markets and economy so rapidly the dislocations and shock waves are massive. Now only one entity is large enough to get the economy moving again, the U.S. government. The government is now moving forward rapidly to stimulate the economy as unemployment soars and economic growth stalls.The unemployment rate is approaching the levels reached in the early 1980s. Given the recent severe declines in retail sales, business spending and employment, it is highly unlikely that the economy will improve anytime soon. It is clear that the job market will continue to deteriorate for most of 2009. It is entirely possible that we will reach the levels of unemployment experienced in 1982. Even if the much-needed stimulus bill passes soon, the economy is likely to end 2009 in roughly as bad a shape as 1982.
Currently, the unemployment rate was 7.6% in December 2008 if you include discouraged workers. In addition, another 5.2% of the labor force was involuntarily working part time. Combined the rate approaches 13%. 
However, this still understates the unemployment rate, because the Labor Department’s definition of discouraged workers is too narrow. If everyone looking for a full time job were counted, the rate could reach over 14%. It is estimated that unemployment reached over 30% during the Great Depression and it is doubtful we would approach this level given the size of the government’s proposed stimulus package. It is possible that we could come close to the 1982 peak rate of unemployment of 16%. .png)
Almost half of the current work force is too young to have any real memory of how tough it was to navigate through the early 1980s recession. They only remember the mild recessions of 1990-91 and 2001. Many are unprepared for layoffs and tough times. It is a generation that spends and does not save, a generation that has systematically borrowed from future income to finance today’s wants. Now the bill has just come due and the delinquency rates on Consumer Loans and Residential mortgages are climbing rapidly. Consumers are leveraged to the hilt, and as they lose their jobs they begin to default on their car, home and credit card debt. There is no buffer, no savings since they have not prepared for the end of the leveraging party.
However, this still understates the unemployment rate, because the Labor Department’s definition of discouraged workers is too narrow. If everyone looking for a full time job were counted, the rate could reach over 14%. It is estimated that unemployment reached over 30% during the Great Depression and it is doubtful we would approach this level given the size of the government’s proposed stimulus package. It is possible that we could come close to the 1982 peak rate of unemployment of 16%. .png){kind=link}
Almost half of the current work force is too young to have any real memory of how tough it was to navigate through the early 1980s recession. They only remember the mild recessions of 1990-91 and 2001. Many are unprepared for layoffs and tough times. It is a generation that spends and does not save, a generation that has systematically borrowed from future income to finance today’s wants. Now the bill has just come due and the delinquency rates on Consumer Loans and Residential mortgages are climbing rapidly. Consumers are leveraged to the hilt, and as they lose their jobs they begin to default on their car, home and credit card debt. There is no buffer, no savings since they have not prepared for the end of the leveraging party.
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