While its true that there are significant worries around the globe, Greece and the Euro zone especially, the key driver for stock markets and interest rate policies is the fundamental health, or lack thereof, the global economy. Greece's debt woes wont affect China, India the US and Canada - but is the European headache a telling sign of the future of a global slowdown?
by Andrew Pyle, for Yahoo! Canada Finance
Depending on how heavily weighted you are in stocks, the experience of the past four weeks may have ranged from mild discomfort to panic. If you are in the latter camp, trust me when I tell you it might be time to have a heart-to-heart with yourself in the mirror and figure out if your risk tolerance really did return following the 2008-09 market crash. But, the blame for feeling a little out of control again doesn’t rest entirely with perhaps an overly high exposure to equities.
Anxiety over things like Greece’s mini debt crisis, Spain’s version of the S&L crisis and fear of an economic meltdown because countries are going to have to tighten their fiscal belts has resulted in not only the correction in stocks this past month, but an increase in market volatility. Indeed, my main observation of investor attitudes during 2008 was that it was not necessarily the extent of portfolio losses that caused unrest. It was that ugly feeling of not being in control and not knowing where things were heading and worse still, hearing that no one else seemed to have a working market Garmin either.
Real Risk Assessment
Some think that economists get paid to make correct forecasts. If so, they (including yours truly) would have been grossly underpaid since making accurate calls day in and day out could have been channeled instead into some wickedly profitable trading. No, economists pay for their groceries by assessing the current situation, examining all relevant risks, placing probabilities around those risks and being able to succinctly explain deviations between what actually happens and the outlook and risk assessment. By doing so, their clients are better prepared to establish more meaningful budgets and better calculate risk surrounding investment decisions.
The role of the financial adviser is similar, though I would be the first to argue that an adviser will best serve his or her client by not talking about the outlook. If economists, market strategists and equity analysts can’t make consistently accurate calls on the outlook, why should an adviser be expected to possess such wizardry. No, the adviser’s job is to listen to the information out there but make certain that the client is correctly allocated, in line with that client’s objectives, financial situation and risk tolerance. More importantly, the adviser needs to maintain that allocation strategy, unless the client’s situation changes and then establish a new strategy.
Let’s now put the two roles together. The economist will look at this current state of the union and, regardless of the base case assumptions, will have to acknowledge that there are some very real risks on the landscape. Europe may very well suffer a prolonged economic draught because of severe fiscal retrenchment, while there are some financial institutions that will suffer from continued stress in the eurozone bond market (government as well as corporate). There is also the risk that the recent market correction deepens (ie, the dreaded bear market) and causes collateral damage on economies outside of Europe. To dismiss these risks would be irresponsible; however, that doesn’t mean we necessarily have to assign huge probabilities to them.
What About the Positive Risks?
Yes, as surprising as it may seem, there are some silver linings to this May market cloud we’ve been in. Let’s start with the bond market. You may have noticed that your bond funds didn’t perform as well in the early part of this year as they did when the stock market was tumbling in 2008. There’s a good reason for that. When economies are imploding, central banks are cutting interest rates ferociously and people are pulling the rip cord on the way out of the equity plane in search of a softer landing, bonds excel. When economies start to grow again, stocks shoot higher and central banks begin to talk about tightening, bonds usually give back some of their previous winnings.
This was particularly true of Canada, where we saw significant increases in bond yields as Bank of Canada tightening was priced in. I still believe Mr. Carney will give us a hike next week, but there has been a substantial recovery in Canadian bonds as a result of this month’s equity slide. The 2-year federal government bond has dropped close to half a percent from the highs seen in April, while the 5-year yield has fallen 0.6%. For those of who you who thought they missed the boat in getting a good 5-year mortgage rate to lock in, fear not. Lower borrowing costs are also good for economic growth because they free up more money for consumers to spend. The same holds true for the US. In fact, most major economies have witnessed lower bond yields in the past several weeks. Even Greek bonds have knocked several percentages off from the worst of that country’s crisis.
Then there’s the cost of energy. I know that the oil bulls among us hated to see crude slide from over $85/barrel at the start of this month to lows touching $65 last week. However, if there was a concern that rising oil prices would threaten to choke off the global economic recovery, that concern has diminished. Gasoline futures have tumbled from about US$2.40/gallon to below US$2.00 in less than four weeks. Since we are now into the peak driving season for the US and Canada, the extra demand may limit the amount of pass-through of lower wholesale gasoline prices; but it is unlikely we’re going to see increases at the pump either. Less money at the pump means more money in the jeans and ultimately at the store next door.
Weighing the Risks Up
When I was asked late last year what chance there was for North America to experience a double-dip recession later in 2010 or in 2011, my answer was that it was still close to 50/50. That may have seemed high at the time but my central fear was that interest rates would rise excessively and cause the US housing sector to fall back on itself again. Considering that many US financial institutions (and states) were still in rough shape, this would be enough to cause the economy to contract, with negative repercussions for Canada. Yet, with interest rates under control and even declining, the day of reckoning for US housing has been pushed back. Ditto for Canada. Depending on how much refinancing activity we see with this temporary lull in rates (yes, I said temporary), the foundation of the housing sector could be strengthened enough to better endure the eventual climb in rates later on.
As for Canada, we have also seen some pressure on our currency as a result of the May madness. The drop from parity to almost 92 US cents shook a lot of people up, although this is basically where the equilibrium level for the Loonie’s exchange rate is. We should neither be spooked by this decline, nor be naïve enough to rule out a quick return to parity should global capital markets stabilize at the US dollar’s expense. Still, any weakening in the Loonie is a relief for manufacturers and exporters. In fact, I think this is a double positive for Canada. So far, there has been little slippage in the US economic recovery and we have actually seen consumer confidence in that country rise beyond expectations this month, despite the equity correction. Continued recovery in US economic demand plus a more relaxed Loonie tells me we’ll have decent export numbers.
So, the bottom line here is that things aren’t always as bad as they appear in the headlines. Sometimes we can discover offsets to the more talked about risks facing our own domestic economy and market. This is just one of those times. I’m not suggesting you drop everything and start loading up on stocks, but if your risk tolerance allows and you’re underweight equities versus your planned target, then perhaps this might a good time to rebuild positions. Again, it is important to first have this discussion with your financial adviser. Andrew Pyle
Saverio Manzo
www.saveriomanzo.com
Friday, May 28, 2010
Tuesday, May 25, 2010
Germany fixes, Greece + Europe
The following is based on a daily newsletter from Andy Busch of BMO Capital Markets who, in my opinion, has a handle on Europe's woes and what needs to be done.
"It seems I spend more and more of my time thinking about leadership and expectations. The combination can be an amazing positive force in not only personal, but public lives. When action/inaction stems from low expectations and translates into lack of action, the outcome can be just as powerful. Europe is a perfect study of both cases."
I think by now, most everyone is familiar with the dishonesty of the Greek government’s fiscal position as well as the Greek taxpayer’s propensity to avoid paying what is legally required. Both have been stunning in their brazenness and stunning in the negative impact towards European debt and equities. Clearly, both felt they could game the system and be rewarded with the fruits of belonging to a group that they cheated to gain entrance into and cheated to remain in the club.
For Greece , the process lasted 10 years, but it finally caught up to them. It’s like a student coming out of university having never worked, with loads of credit card debt, then being surprised when no one wants to hire them. Did they think that the world was going to give them a free pass and further enable their bad behavior? Employers and lenders have a funny way of looking at this: they offer neither employment nor more money.
In the northern part of Europe , the country that led the rest of the continent into the European Monetary Union is taking ownership of the group and leading by example. PM Merkel presented a 9 point list of changes that need to be made to the group to ensure its sustainability including a provision for enforcing the rules. Merkel is showing the rest of Europe that they are serious about their own deficits and are serious about the rest of Europe following their lead.
This is exactly what investors and debt holders need to see coming from Europe : strong leadership to raise expectations that will achieve high goals. Change won’t occur overnight, but this is the strongest step taken in the crisis and may be the critical step towards resolving the problem of the group.
It’s simple, but effective: leading by example.
Source: Busch, Andrew B., BMO Capital Markets
Saverio Manzo
www.saveriomanzo.com
"It seems I spend more and more of my time thinking about leadership and expectations. The combination can be an amazing positive force in not only personal, but public lives. When action/inaction stems from low expectations and translates into lack of action, the outcome can be just as powerful. Europe is a perfect study of both cases."
I think by now, most everyone is familiar with the dishonesty of the Greek government’s fiscal position as well as the Greek taxpayer’s propensity to avoid paying what is legally required. Both have been stunning in their brazenness and stunning in the negative impact towards European debt and equities. Clearly, both felt they could game the system and be rewarded with the fruits of belonging to a group that they cheated to gain entrance into and cheated to remain in the club.
For Greece , the process lasted 10 years, but it finally caught up to them. It’s like a student coming out of university having never worked, with loads of credit card debt, then being surprised when no one wants to hire them. Did they think that the world was going to give them a free pass and further enable their bad behavior? Employers and lenders have a funny way of looking at this: they offer neither employment nor more money.
In the northern part of Europe , the country that led the rest of the continent into the European Monetary Union is taking ownership of the group and leading by example. PM Merkel presented a 9 point list of changes that need to be made to the group to ensure its sustainability including a provision for enforcing the rules. Merkel is showing the rest of Europe that they are serious about their own deficits and are serious about the rest of Europe following their lead.
This is exactly what investors and debt holders need to see coming from Europe : strong leadership to raise expectations that will achieve high goals. Change won’t occur overnight, but this is the strongest step taken in the crisis and may be the critical step towards resolving the problem of the group.
It’s simple, but effective: leading by example.
Source: Busch, Andrew B., BMO Capital Markets
Saverio Manzo
www.saveriomanzo.com
Sunday, May 16, 2010
A New Way to Measure Progress?
We measure our country's growth, our economic and social prosperity, by the three little letters "GDP". So much of what we do, the decisions our governments, banks and corporations make hinges on GDP numbers. But for many reasons, this is a severely outdated and at times inaccurate measurement. To get a truer gauge of what's really happening all around us, a new tool that contains over 100 inputs is on its way.
“Whatever you may think progress looks like — a rebounding stock market, a new house, a good raise — the governments of the world have long held the view that only one statistic, the measure of gross domestic product, can really show whether things seem to be getting better or getting worse. G.D.P. is an index of a country’s entire economic output — a tally of, among many other things, manufacturers’ shipments, farmers’ harvests, retail sales and construction spending. It’s a figure that compresses the immensity of a national economy into a single data point of surpassing density. The conventional feeling about G.D.P. is that the more it grows, the better a country and its citizens are doing. In the U.S., economic activity plummeted at the start of 2009 and only started moving up during the second half of the year. Apparently things are moving in that direction still. In the first quarter of this year, the economy again expanded, this time by an annual rate of about 3.2 percent.
All the same, it has been a difficult few years for G.D.P. For decades, academics and gadflies have been critical of the measure, suggesting that it is an inaccurate and misleading gauge of prosperity . . . In the U.S., one challenge to the G.D.P. is coming not from a single new index, or even a dozen new measures, but from several hundred new measures — accessible free online for anyone to see, all updated regularly. Such a system of national measurements, known as State of the USA, will go live online this summer. Its arrival comes at an opportune moment, but it has been a long time in the works. In 2003, a government official named Chris Hoenig was working at the U.S. Government Accountability Office, the investigative arm of Congress, and running a group that was researching ways to evaluate national progress. Since 2007, when the project became independent and took the name State of the USA, Hoenig has been guided by the advice of the National Academy of Sciences, an all-star board from the academic and business worlds and a number of former leaders of federal statistical agencies. Some of the country’s elite philanthropies — including the Hewlett, MacArthur and Rockefeller foundations — have provided grants to help get the project started. “
Full article:
http://www.nytimes.com/2010/05/16/magazine/16GDP-t.html
Saverio Manzo
www.saveriomanzo.com
“Whatever you may think progress looks like — a rebounding stock market, a new house, a good raise — the governments of the world have long held the view that only one statistic, the measure of gross domestic product, can really show whether things seem to be getting better or getting worse. G.D.P. is an index of a country’s entire economic output — a tally of, among many other things, manufacturers’ shipments, farmers’ harvests, retail sales and construction spending. It’s a figure that compresses the immensity of a national economy into a single data point of surpassing density. The conventional feeling about G.D.P. is that the more it grows, the better a country and its citizens are doing. In the U.S., economic activity plummeted at the start of 2009 and only started moving up during the second half of the year. Apparently things are moving in that direction still. In the first quarter of this year, the economy again expanded, this time by an annual rate of about 3.2 percent.
All the same, it has been a difficult few years for G.D.P. For decades, academics and gadflies have been critical of the measure, suggesting that it is an inaccurate and misleading gauge of prosperity . . . In the U.S., one challenge to the G.D.P. is coming not from a single new index, or even a dozen new measures, but from several hundred new measures — accessible free online for anyone to see, all updated regularly. Such a system of national measurements, known as State of the USA, will go live online this summer. Its arrival comes at an opportune moment, but it has been a long time in the works. In 2003, a government official named Chris Hoenig was working at the U.S. Government Accountability Office, the investigative arm of Congress, and running a group that was researching ways to evaluate national progress. Since 2007, when the project became independent and took the name State of the USA, Hoenig has been guided by the advice of the National Academy of Sciences, an all-star board from the academic and business worlds and a number of former leaders of federal statistical agencies. Some of the country’s elite philanthropies — including the Hewlett, MacArthur and Rockefeller foundations — have provided grants to help get the project started. “
Full article:
http://www.nytimes.com/2010/05/16/magazine/16GDP-t.html
Saverio Manzo
www.saveriomanzo.com
Wednesday, May 12, 2010
Debts Keep Rising: Keep an eye on your debt level
A slowdown in spending in Canada? What slowdown? Canadian’s continue to spend and find themselves with the highest household debt in history.
"Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates rise – and they will - a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes."
How will an 1% or 2% increase in borrowing rates affect you? How about a 5% increase? Run the numbers and make sure you’re prepared.
OTTAWA - Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians' appetite for spending money they don't have.
Julian Beltrame, The Canadian Press
A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.
That's $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.
"This report is another indication of Canadians' readiness to consume today and pay later," says association president Anthony Ariganello.
"The concern is do they understand the full cost of paying later?"
The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.
Most Canadians don't yet share that concern. The accountants' survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.
But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.
The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.
The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.
The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.
The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.
Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.
BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada's decision to slash rates to historic lows during the recession.
"That's why we did not experience a great recession," he noted. "That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem."
But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.
Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike.
Saverio Manzo
http://saveriomanzo.com/
"Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates rise – and they will - a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes."
How will an 1% or 2% increase in borrowing rates affect you? How about a 5% increase? Run the numbers and make sure you’re prepared.
OTTAWA - Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians' appetite for spending money they don't have.
Julian Beltrame, The Canadian Press
A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.
That's $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.
"This report is another indication of Canadians' readiness to consume today and pay later," says association president Anthony Ariganello.
"The concern is do they understand the full cost of paying later?"
The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.
Most Canadians don't yet share that concern. The accountants' survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.
But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.
The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.
The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.
The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.
The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.
Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.
BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada's decision to slash rates to historic lows during the recession.
"That's why we did not experience a great recession," he noted. "That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem."
But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.
Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike.
Saverio Manzo
http://saveriomanzo.com/
Wednesday, May 5, 2010
Bonds and interest rates: false safety?
The question all investors have to ask themselves right now about their income-producing holdings: should I stay or should I go now?
Bonds and GICs maxed out with yields of about 4 per cent for five years just recently.
Many know the bond conundrum: Bond or Fixed Income funds fall in price – and will continue to fall in price - as bond yields rise. (Conversely, they go up as rates decline)
If you’re going to hold onto Bond or Fixed Income funds, get used to this sort of thing. Preferred shares behave more like bonds than stocks - they’re considered fixed income by some, but not all, advisers - and most types of bonds will fall in price as we continue moving through the rising rate cycle just begun.
Should you care as an investor about Bond or Fixed Income funds falling in price? If you’re tightly focused on generating income and can accept a price decline, then no. Bond or Fixed Income funds will continue to pay coupon interest commitments as rates rise, which means the income will flow.
The arguments for selling are that your prime goal is to preserve capital, or that it will drive you to distraction to see the value of CPD (and possibly other income holdings) in decline. After 2008, investors have every right to be sensitive about seeing their stocks fall in value. At the same time, however, one of the lessons of 2008 was that quality income investments continued to deliver cash to investors, even as they plunged in value.
Preferred shares were not immune to the carnage of 2008. You can see this in the fact that Bond or Fixed Income funds price is still down by almost 20 per cent on a cumulative three-year basis.
Expect another rally to begin when interest rates peak and everyone’s looking ahead to rate declines. Will you be around for the rebound of bonds and other income-producing securities? Depends on whether you’re all about income or capital preservation.
Material for this post was obtained from Rob Carrick's recent article
Saverio Manzo
www.saveriomanzo.com
Bonds and GICs maxed out with yields of about 4 per cent for five years just recently.
Many know the bond conundrum: Bond or Fixed Income funds fall in price – and will continue to fall in price - as bond yields rise. (Conversely, they go up as rates decline)
If you’re going to hold onto Bond or Fixed Income funds, get used to this sort of thing. Preferred shares behave more like bonds than stocks - they’re considered fixed income by some, but not all, advisers - and most types of bonds will fall in price as we continue moving through the rising rate cycle just begun.
Should you care as an investor about Bond or Fixed Income funds falling in price? If you’re tightly focused on generating income and can accept a price decline, then no. Bond or Fixed Income funds will continue to pay coupon interest commitments as rates rise, which means the income will flow.
The arguments for selling are that your prime goal is to preserve capital, or that it will drive you to distraction to see the value of CPD (and possibly other income holdings) in decline. After 2008, investors have every right to be sensitive about seeing their stocks fall in value. At the same time, however, one of the lessons of 2008 was that quality income investments continued to deliver cash to investors, even as they plunged in value.
Preferred shares were not immune to the carnage of 2008. You can see this in the fact that Bond or Fixed Income funds price is still down by almost 20 per cent on a cumulative three-year basis.
Expect another rally to begin when interest rates peak and everyone’s looking ahead to rate declines. Will you be around for the rebound of bonds and other income-producing securities? Depends on whether you’re all about income or capital preservation.
Material for this post was obtained from Rob Carrick's recent article
Saverio Manzo
www.saveriomanzo.com
Sunday, May 2, 2010
The Economy and Markets: time for prospective
Greece and Europe, interest rates on the rise, the stock markets up some 70% plus and the global economy moving along. What does this all add up to for our retirement and investment portfolios?
The following is an excellent, albeit somewhat technical, prospective on matters:
Macro Overview: Economy & Markets
It is time to take a big picture look at everything: This is a summation of everything we have discussed over the past month and quarter. Where are we in this particular cycle?
Macro-Economy: The economic backdrop seems to be confusing quite a few people. Perhaps its the psychology of the moment. I keep hearing weak, data free analysis. Here is our 7 point overview:
1. The Economy is recovering; The recession is over: Of that, we have no doubt, as the data is clear. The free fall of 2008-09 is over, and a gradual improvement is seen across the board. Industrial manufacturing, exports, autos, retail sales, durable goods, travel all confirm the economy is “healing.”
2. But, the recovery is “Lumpy”: — Part of the reason some people doubt the recovery story is how unevenly distributed the improvements are. Geographically, much of the country is still soft. In retail, it is pent up demand plus luxury goods. In technology, its mobile devices and consumer products. Financial firms are taking advantage of the steep yield curve and ZIRP to arbitrage profits, as opposed to actually lending. Profits are not evenly distributed either.
3. Government spending is only part of the story: In the midst of the crisis, Credit froze, the consumer panicked, and business spending looked to be going extinct. Uncle Sam temporarily bridged the gap.
But the argument that government spending is the only game in town is overstates the case. Private sector CapEx spending and hiring is improving (albeit slowly); Consumers have come out of their bunkers and are dining out, going to the movies, hitting the malls, traveling.
We have not returned to the Home ATM days of 2004-07 — and probably wont in our lifetimes — but the present environment is a massive improvement from the 2008-09 contraction.
4. Weak Improvement in Employment: The massive labour under-utilization is one of the two biggest drags on the economy (RE being the other). Near record low hours worked suggest that employers can simply increase hours rather than make new hires. Thus, I do not look for a V-shaped employment recovery — forget about 400-500k NFP data — anytime soon.
There are 15 million unemployed, and 8 million underemployed — it will take a long time for them to be re-absorbed into the economy. The 2001 recession took 47 months to return employment to pre-recession levels. This recession will likely take 65-75 months to achieve that goal — if not longer.
5. Real Estate (Commercial and Residential): We do not believe that residential real estate has found its natural price level yet. It remains over-valued. This is due to artificially low mortgage rates, foreclosure abatements and mortgage mod programs. We are probably 10-15% over valued, when measured by Median Sales price to median Income, Rent vs Ownership Costs, and Home Value as a Percentage of GDP.
Commercial real estate tends to lag residential by 18-24 months. It is still adapting to the downsizing of America, particularly retail. The over-investment in commercial real estate of the past decade will take at least another 5 years to resolve, if not longer.
6. Deflation? Inflation?: Well, as my pal Jeff Saut notes, we definitely have “flation.” Just not the type that everyone fears.
As of today, Deflation is a fact, inflation is an opinion. We are still living in a period of falling prices, heavy discounts, wage deflation, asset depreciation and lack of pricing power. The S&P500 is below levels seen in the 1990s; Wages are flat for a decade.
The risk going forward is that the Fed fails to remove the accommodations in time. But they have Japan as an example of Zirp with no inflation. So long as labor under-utilization is near record levels, they can take their time in tightening.
7. The rest of the world: Europe is a disaster, and is likely to remain that way for a while. Asian economies are doing very well, helping to pull the rest of the world along — but China’s market is at 6 months lows, something few people are discussing. The risk in China’s real estate and stock markets has been mostly ignored,. Commodity regions and emerging markets still have strength.
~~~
Market Overview: Unfortunately, most of the commentary we see about markets have been unusually ignorant, myth driven, and based on rationalizing bad decision making.
Our views:
1. Cyclical Bull, Secular Bear: The secular bear market collapse of 55% was right in line with other such debacles. The collapse was faster and more furious than typical, but the depth was normal. The snapback is also well within the range of bear market rallies — cyclical bull runs that last 6 to 24 months and range from 25% to 135%.
While it is possible that we are witnessing the start of a new 1982-like Secular bull market, the valuations argue against it. Stocks most likely simply did not get cheap enough — or despised enough — to initiate a multi-decade bull run. My best guess about that bottom is its likely 3-7 years away.
2. Snapback: The 75% bounce over a year seems like a lot — until you put it into the context of a six month 5,000 point collapse. we call that the Armageddon trade — Dow 5000! 3000! We’re going to zero! – was a spasm of panic. It has been mostly unwound the past year.
3. Correction coming (eventually): The cyclical bull tends to end with ~25% correction that lasts about a year. So we are always looking for signs that this run is over. Despite the recent turmoil, we have not found confirmation that the bull run is over — yet.
We look at many factors to help identify that inflection point:
4. Liquidity: Institutional fund managers seem to be all in (only 3% cash), while Investors are at only median levels of equity exposure. Liquidity is still abundant, free money abides. Money flow for the past few months have gone into US equities — that is a new element — at about $2B per week.
5. Internals: The market technical/internals remain constructive: Breadth and momentum are positive. New 52 week highs are also strong. Earnings are supporting some of the move, as year over year comparos are absurdly easy. The uptrend remains in place, and until it is broken we maintain an upside bias.
6. Sentiment: The biggest risk is the unusually high level of bulls. Note however that event hat has moderated over the past week. We are not at the sorts of extremes yet that make the contrarian in us scream SELL.
Source: Barry Ritholtz
saverio Manzo
www.saveriomanzo.com
The following is an excellent, albeit somewhat technical, prospective on matters:
Macro Overview: Economy & Markets
It is time to take a big picture look at everything: This is a summation of everything we have discussed over the past month and quarter. Where are we in this particular cycle?
Macro-Economy: The economic backdrop seems to be confusing quite a few people. Perhaps its the psychology of the moment. I keep hearing weak, data free analysis. Here is our 7 point overview:
1. The Economy is recovering; The recession is over: Of that, we have no doubt, as the data is clear. The free fall of 2008-09 is over, and a gradual improvement is seen across the board. Industrial manufacturing, exports, autos, retail sales, durable goods, travel all confirm the economy is “healing.”
2. But, the recovery is “Lumpy”: — Part of the reason some people doubt the recovery story is how unevenly distributed the improvements are. Geographically, much of the country is still soft. In retail, it is pent up demand plus luxury goods. In technology, its mobile devices and consumer products. Financial firms are taking advantage of the steep yield curve and ZIRP to arbitrage profits, as opposed to actually lending. Profits are not evenly distributed either.
3. Government spending is only part of the story: In the midst of the crisis, Credit froze, the consumer panicked, and business spending looked to be going extinct. Uncle Sam temporarily bridged the gap.
But the argument that government spending is the only game in town is overstates the case. Private sector CapEx spending and hiring is improving (albeit slowly); Consumers have come out of their bunkers and are dining out, going to the movies, hitting the malls, traveling.
We have not returned to the Home ATM days of 2004-07 — and probably wont in our lifetimes — but the present environment is a massive improvement from the 2008-09 contraction.
4. Weak Improvement in Employment: The massive labour under-utilization is one of the two biggest drags on the economy (RE being the other). Near record low hours worked suggest that employers can simply increase hours rather than make new hires. Thus, I do not look for a V-shaped employment recovery — forget about 400-500k NFP data — anytime soon.
There are 15 million unemployed, and 8 million underemployed — it will take a long time for them to be re-absorbed into the economy. The 2001 recession took 47 months to return employment to pre-recession levels. This recession will likely take 65-75 months to achieve that goal — if not longer.
5. Real Estate (Commercial and Residential): We do not believe that residential real estate has found its natural price level yet. It remains over-valued. This is due to artificially low mortgage rates, foreclosure abatements and mortgage mod programs. We are probably 10-15% over valued, when measured by Median Sales price to median Income, Rent vs Ownership Costs, and Home Value as a Percentage of GDP.
Commercial real estate tends to lag residential by 18-24 months. It is still adapting to the downsizing of America, particularly retail. The over-investment in commercial real estate of the past decade will take at least another 5 years to resolve, if not longer.
6. Deflation? Inflation?: Well, as my pal Jeff Saut notes, we definitely have “flation.” Just not the type that everyone fears.
As of today, Deflation is a fact, inflation is an opinion. We are still living in a period of falling prices, heavy discounts, wage deflation, asset depreciation and lack of pricing power. The S&P500 is below levels seen in the 1990s; Wages are flat for a decade.
The risk going forward is that the Fed fails to remove the accommodations in time. But they have Japan as an example of Zirp with no inflation. So long as labor under-utilization is near record levels, they can take their time in tightening.
7. The rest of the world: Europe is a disaster, and is likely to remain that way for a while. Asian economies are doing very well, helping to pull the rest of the world along — but China’s market is at 6 months lows, something few people are discussing. The risk in China’s real estate and stock markets has been mostly ignored,. Commodity regions and emerging markets still have strength.
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Market Overview: Unfortunately, most of the commentary we see about markets have been unusually ignorant, myth driven, and based on rationalizing bad decision making.
Our views:
1. Cyclical Bull, Secular Bear: The secular bear market collapse of 55% was right in line with other such debacles. The collapse was faster and more furious than typical, but the depth was normal. The snapback is also well within the range of bear market rallies — cyclical bull runs that last 6 to 24 months and range from 25% to 135%.
While it is possible that we are witnessing the start of a new 1982-like Secular bull market, the valuations argue against it. Stocks most likely simply did not get cheap enough — or despised enough — to initiate a multi-decade bull run. My best guess about that bottom is its likely 3-7 years away.
2. Snapback: The 75% bounce over a year seems like a lot — until you put it into the context of a six month 5,000 point collapse. we call that the Armageddon trade — Dow 5000! 3000! We’re going to zero! – was a spasm of panic. It has been mostly unwound the past year.
3. Correction coming (eventually): The cyclical bull tends to end with ~25% correction that lasts about a year. So we are always looking for signs that this run is over. Despite the recent turmoil, we have not found confirmation that the bull run is over — yet.
We look at many factors to help identify that inflection point:
4. Liquidity: Institutional fund managers seem to be all in (only 3% cash), while Investors are at only median levels of equity exposure. Liquidity is still abundant, free money abides. Money flow for the past few months have gone into US equities — that is a new element — at about $2B per week.
5. Internals: The market technical/internals remain constructive: Breadth and momentum are positive. New 52 week highs are also strong. Earnings are supporting some of the move, as year over year comparos are absurdly easy. The uptrend remains in place, and until it is broken we maintain an upside bias.
6. Sentiment: The biggest risk is the unusually high level of bulls. Note however that event hat has moderated over the past week. We are not at the sorts of extremes yet that make the contrarian in us scream SELL.
Source: Barry Ritholtz
saverio Manzo
www.saveriomanzo.com
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