May 9, 2008
MONEY DEBATES
Does money matter? The answer depends on who's talking. Suffice to say, however, Milton Friedman's dictum that inflation is always and everywhere a monetary phenomenon is now debatable in the academic community as well as in the board rooms of central banks around the world.
Consensus on the strategic answer for managing inflation appears to be fading. Michael Sesit at Bloomberg News has a nice essay today on some of the stress points that harass the subject of inflation theory these days.
Continue reading "MONEY DEBATES"
May 7, 2008
TALKING ABOUT OIL
Where's the price of oil headed? Higher, says Matt Simmons, CEO of Simmons & Co. International, a Houston energy-focused investment bank. Of course, Simmons has been saying that for years. In fact, his bullish view on crude predates the great energy bull market of the 21st century.
The surge in oil's price doesn't surprise Simmons because the fundamentals of supply and demand have been sending a clear signal about the future since the late-1990s, he says. For example, the discovery of large oil fields on a global basis has trailed off over the years, his research advises. Meanwhile, global demand keeps rising. And with China, India and other developing economies looking for more oil than ever before, the prospect of keeping supply and demand balanced looks more challenging by the day.
Continue reading "TALKING ABOUT OIL"
May 6, 2008
YIELD ANALYSIS
Dividend yields don't tell you everything, but they tell you a lot. Sometimes.
A fair number of studies over the years find that the correlation between yield and subsequent return over the next five years and beyond is strong enough to convince fair-minded investors to watch those yields for clues about what's coming. In other words, higher yields have a tendency to lead to higher returns, while lower yields imply lower returns.
No, it's not absolute. Nothing ever is in finance. That caveat aside, favoring markets, and points in time when yields are relatively higher has a tendency to improve the odds of capturing higher total returns in the years ahead. In fact, this is an old idea, captured in Ben Graham's famous counsel that the market is a voting machine in the short run and a weighing machine in the long run. By that he meant that speculators rule now, tomorrow, next week and even next year when it comes to setting prices. But over longer periods, certainly five years or more, valuation dictates price. And dividend yield has proven to be an especially robust signal of expected returns.
With that in mind, we present two charts, each telling different stories. The first chart below graphs the dividend yield history for the world's developed markets. Although the absolute levels vary, the trend of late has been consistent across regions: yields are up. That's a function of the fact that prices have fallen relative to levels of a year ago.
click to enlarge
Continue reading "YIELD ANALYSIS"
May 2, 2008
WILL MAY LOOK LIKE APRIL?
It's hardly great news, but the fact that job destruction was a bit less destructive last month will inspire the optimists that the recovery has begun.
Nonfarm payrolls shrunk by a relatively modest 20,000 last month, or roughly a quarter of the monthly losses that have been posted in each of the previous three months of this year. The April reprieve, if we can call it that, certainly made a graphical impression. As our chart below shows, last month's softening in job losses ended a five-month stretch of decelerating conditions for minting new employment opportunities. By that we mean that for the first time since last October, the trend last month didn't worsen compared to the previous month. And while we're pointing out reasons to be cheerful, let's note that the jobless rate ticked down to 5.0% in April, slightly better than the 5.1% for March.
But let's not get carried away, at least not yet. Let's not forget that goods-producing employment is still getting hammered even as the broader employment picture offers reason for hope. Meantime, Wall Street is eager to see light at the end of this tunnel, as yesterday's stock market surge suggests. Yet another rate cut by the Fed earlier in the week helped get the bulls' hearts racing, as did an improvement in the dollar in forex markets. And as we noted yesterday, April generally was a good month for most asset classes.
So, what's the problem? As always, there's no shortage of things to worry about. But no one should underestimate the stock market's capacity for climbing this year's wall of worry. Mr. Market is always looking forward while many of us are overly focused on the past. Such is the limitations of being stuck with wetware as the primary tool in the business of asset management.
Continue reading "WILL MAY LOOK LIKE APRIL?"
April 30, 2008
APRIL SHOWERS BROUGHT PERFORMANCE FLOWERS
The major asset classes had their best performance month in April since last October. Only TIPS and foreign developed market bonds suffered red ink last month, as our table below shows. On balance, April was the strongest monthly tally since the perfection of October 2007, when everything was in the black.
April fell short of the October standard, but not by much. Meanwhile, the leading performers were anything but subtle last month. Indeed, April's big winner was emerging market equities, which soared more than 9%. That's about as high a monthly rise as this corner of equities has ever posted.
In a strong second-place showing: REITs, up 6.4%, which is another performance that's rarely topped in any one month, based on the historical record.
Meanwhile, stocks across the board were up, and so were junk bonds and commodities. Let's just say that April was a success for investors with diversified portfolios. Unless you were loaded to the gills in inflation-indexed Treasuries and/or sovereign bonds issued by the major foreign governments, you almost certainly saw your portfolio's value rise last month.
Continue reading "APRIL SHOWERS BROUGHT PERFORMANCE FLOWERS"
JOE TURNS DEFENSIVE
The economy managed to grow slightly in this year's first quarter, the government reported today. GDP rose by an annualized 0.6% in this year's first three months, matching the growth rate in Q4 2007. Given all the recession anxiety of late, that's a victory of sorts. But this is no time for celebrating. As a closer reading of today's GDP report shows, consumers are turning defensive in their spending habits in a big way.
Personal consumption expenditures (PCE)--which represent about 72% of total GDP-- rose by a meager 1.0% (seasonally adjusted annual rate) in the first quarter--down from 2.3% in Q4 2007. That's the lowest pace since Q2 2001, which also witnessed a 1.0% expansion. The reason for the current slowdown: two of PCE's three major components posted declines in the first quarter. Spending on durable goods was particularly hard hit, dropping by a hefty 6.1%--the first case of red ink here since 2005. Nondurable goods also slipped in Q1, falling 1.3%. This marks only the fourth instance in the past 15 years that nondurable goods spending contracted in a quarterly reading.
The lone source of consumer spending salvation came via services expenditures; the only member of the three broad gauges that define consumer spending that posted a gain in Q1. Fortunately, services spending posted a healthy 3.4% jump. But that only reminds that consumer spending overall would be shrinking if it wasn't for the resilience in services.
Nonetheless, no one should misunderstand what's unfolding: Joe Sixpack's sentiment to buy, buy, buy has taken a hefty blow, at least for the moment. And no wonder: prices are soaring for basic staples, i.e., energy and food. Meanwhile, the family home is worth quite a bit less and Joe's investment portfolio probably suffers a similar discounting. Logic suggests that saving more and spending less is eminently reasonable at this juncture. The only question now: How long will the newly defensive sentiment last?
Clearly, it's premature to say that the worst of the economy's downshifting is past. Anecdotal evidence for the second quarter, which is barely a month old, suggests that the correcting process is still underway. Perhaps May and June will deliver better news, perhaps not. But based on the numbers presented in today's GDP update, combined with an objective survey of finance and economic conditions in the month of April, there's still a case for staying cautious and defensive in one's investment strategy. The proverbial "other shoe," it seems, is in the process of dropping as we write.
THE MEANING OF "REFOCUS"
Perhaps it signifies nothing, but the timing is suspicious.
Last December, the Treasury Department announced that it was sharply reducing the annual limit on investments in the inflation-indexed series of U.S. Savings Bonds, a.k.a., I-Bonds, to $5,000 a year as of January 1, 2008--down from $30,000 a year previously. (The $5,000/yr limit also applies to conventional Savings Bonds as of January 1.)
No big deal in the grand scheme of finance, although we can't help but notice that the new lower limit comes at a time when inflation-linked portion of payouts for I-Bonds look set to rise, as per the methodology that ties a portion of the bonds' interest rate to the consumer price index.
The official reason for the reduced investment maximum, as per the Treasury's press release, was rationalized this way: "The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest."
Continue reading "THE MEANING OF "REFOCUS""
April 28, 2008
THERE WILL BE INFLATION?
The Federal Reserve's two-day FOMC confab begins tomorrow and the
Leaning toward the view that this will be the end of the cutting is Peter Berezin, Goldman Sachs' global economist. "We expect this to be the last cut, but the Fed will be flexible in responding to economic conditions," Berezin tells AFP. "Obviously if the turmoil resurfaces, they will be apt to cut rates again. But barring that, they would like to stabilize rates."
Meanwhile, senior financial analyst at Bankrate.com Greg McBride tells AP: "We are entering the stage where it is time for the Fed to wind down and move to the sidelines. A quarter-point reduction is a nice segue to that transition. Short-term interest rates could stay low longer than many currently expect."
Judging by long-dated futures contracts, Mr. Market's calling for another 25-basis-point cut on Wednesday. The Dec '08 contract, for instance, currently prices Fed funds at roughly 2.0%. If the Fed cuts by a quarter point, 2.0% Fed funds at the end of the year would represent the longest stretch of interest rate stability for this series since Bernanke and company kept rates at 5.25% for the 15 months through September 2007.
But let's not get ahead of ourselves. First, let's see what the monetary czars will do (and say) this week. While we're waiting, let's observe once more that cutting interest rates at this juncture may be politically intelligent; it may even look shrewd as the ongoing economic slowdown/recession gathers momentum. But it's also risky with inflationary winds blowing. We'll know if cutting is savvy or something else in a year or so. Meanwhile, it's every investor for herself, forcing everyone into their own speculative craft to weather the macroeconomic seas as they come. With that in mind, let's take a dip and consider one blogger's view of the universe.
