The Capital Specator is taking short holiday break to ring in 2009. We’ll be returning on Friday, January 2 to review 2008 and consider risk and opportunity for the newly minted year ahead. It’s a dirty job, given the current economic climate, but we’ll forge ahead regardless. Perspective is always valuable, even more so in times of crisis.
Meanwhile, to all all readers, thanks for your support. Here’s wishing everyone a healthy and prosperous 2009. Cheers!
–James Picerno, editor

Bonds are usually the only asset class that Stan Richelson owns in the client portfolios that he manages at his wealth management firm, Scarsdale Investment Group in Blue Bell, Pa. But not all fixed-income securities are created equal, of course, as he explains in his recent book Bonds: The Unbeaten Path to Secure Investment Growth.
Selectivity is all the more important in today’s turbulent times—even with bonds, Richelson advises in today’s edition of The Inside View podcast. Despite enormous yield premiums over Treasuries in some corners of the bond world—including “investment-grade” corporates—Richelson is more conservative than ever when it comes to investing in what’s generally the most conservative asset class. He expects tough times ahead for the corporate world and that makes him anxious about the sector’s prospects. The high yields, in other words, don’t look enticing after he considers the risk in 2009 and beyond.
The lofty yields in munis, on the other hand, represent “enormous opportunity,” he says. He’s also intrigued with inflation-indexed Treasuries, even though deflation is the big worry at the moment.
For the full conversation on what Richelson’s thinking for bond investing these days, take a listen…

Deflation is here. The question before the house: How long it will last?
Ideally, it’s just passing through, albeit throwing everyone into a temporary tizzy with worries that the U.S. is set to repeat the Japanese experience. Certainly the Federal Reserve is working over time in trying to make sure the disease is short-lived. But for the moment, at least, prices are generally falling, as we’ve discussed, including here.
The great experiment in trying to keep a sustained case of deflation at bay is upon us. The immediate danger is that consumers and businesses expect deflation to persist. As many studies have shown over the years, along with more than a fair bit of empirical evidence, expectations are critical factors in determining the level of inflation and its cousin, deflation. Once the Fed loses the battle on managing expectations, monetary policy becomes much weaker.

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Spending is out, saving is in. The trend not only has legs, it has depth and magnitude, as the personal income and spending report for November reminds. But at a time when prices are falling generally, the gap between spending in nominal terms (i.e., before adjusting for inflation) and real terms (after inflation) is growing. Ditto for personal income. Therein lie some of the critical opportunities and risks for 2009 and perhaps beyond.
Let’s start with the basics. U.S. disposable personal income dropped 0.2% last month in current dollar terms, the Bureau of Economic Analysis reported on Wednesday. That’s down from a slight 0.1% rise in October and the first monthly fall since July. A sign of the times, given the recession now in progress.

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The Capital Spectator is taking a few days off to celebrate Christmas. We also plan to sleep late, refrain from editing past midnight and kick back with an eggnog or two. Heck, we might even sing a few carols. But not for long: We’ll soon return to our usual publishing schedule. Meantime, to all our readers, here’s wishing everyone a happy holiday and a prosperous new year. Cheers!

The year is almost over, but some forecasts warn that the economic challenges have only just begun. For some perspective on what to expect, we spoke earlier today with Bob Dieli in today’s episode of The Inside View, the third installment in our new podcast talk show.
Dieli’s a familiar presence on these digital pages. We last checked in with Bob on December 2, when CS summarized his take on the challenges of trying to measure and survey the current state of the business cycle. When he’s not talking with your editor, Dieli heads up RDLB Inc., his Lombard, Ill. economic consultancy that publishes its research at NoSpinForecast.com.
Bob’s career in the dismal science began in the late-1970s, when he specialized in the challenge du jour: inflation. These days, deflation seems to be the bigger risk, as we discussed last week. Yet Dieli’s not convinced that deflation is now fate for the U.S. economy, even if the latest batch of consumer prices suggest otherwise, as we discussed last week. For his reasoning, along with some thoughts on the economy generally, come pay a visit to The Inside View…

Please visit CapitalSpectator.podbean.com for more options with this and other Inside View podcasts.

The Madoff investment scandal may be the biggest Ponzi scheme in history, in which case the swindle offers oversized as well as familiar lessons in what not to do with the care and tending of money.
Reading the ongoing news reports of how this crime was executed summons a range of emotions: frustration, sadness, shock and anger, to name a few. All the more so because so much of the investment pain was easily avoided. At least in theory.

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U.S. corporate earnings have been under pressure for some time, based on reported operating earnings for the S&P 500. Indeed, the bloom fell off the rose a year ago, when S&P earnings took a dive in 2007’s fourth quarter from the formerly plush levels.

A lower level of earnings has prevailed ever since, as our chart above shows. But bottom-up estimates (as per Standard & Poor’s as of December 16) are looking up for 2009. If the forecast proves accurate, by this time next year S&P 500 operating earnings will return to the heights of 2007. If such an earnings rebound is coming, the S&P 500 looks inexpensive based on the forward earnings multiple of 10.6, as per the full-year 2009 earnings estimate of $83.44.

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Even by the standards of the great bear market of 2008, REITs have had an especially dreadful year. The Dow Jones Wilshire REIT Index has crumbled by nearly 44% in 2008 through December 18, 2008. The loss exceeds even the dismal performance of the U.S. stock market, which is down about 39% year to date, as of last night’s close for the Wilshire 5000.
But as REIT prices have tanked, yields have soared. Equity REITs are yielding over 9% these days on a 12-month trailing basis. That’s up from about 3.5% back in November 2006.
Does the hefty trailing yield signal that it’s time to start buying? Or do the expected risks still outweigh the potential rewards? For some thoughts on the hazards and opportunities that await real estate investment trusts, we talked earlier today with veteran REIT analyst Barry Vinocur, editor of REIT Zone Publications in Novato, Calif. In our latest episode of Inside View–our new podcasting series–Vinocur takes us on a tour of the battered landscape of publicly traded real estate.

Please visit CapitalSpectator.podbean.com for more options with this and other Inside View podcasts.

Mr. Market is hurting these days, but what exactly does that mean?
The world’s capital and commodity markets are comprised of multiple asset classes, of course, and they don’t often move in lockstep. The last few months are the exception, but this too shall pass, just as the tendency for bull markets to bloom everywhere during 2002-2007 gave way to something else.
It may not be obvious from casual observation of late, but if we consider longer periods the numbers suggest that owning multiple asset classes is still a worthy pursuit for strategic-minded investors. That may sound counterintuitive given all the red ink this year, but the global market portfolio has held up fairly well over time.
Consider our CS Global Market Index (CS GMI). Although it’s suffered recently, for the past 10 years through November 2008 it’s earned a modest but positive 2.95% annualized total return. (CS GMI is our proprietary benchmark of the world’s major asset classes: global stocks, global bonds and global REITs plus commodities–based on U.S. futures—with everything weighted as per the various market values at the close of 1997.)
Three percent may look unimpressive, but keep in mind that gains over that time frame aren’t universal. US stocks, for instance, are off by an annualized 0.37% during that stretch, as per Russell 3000. Bonds, on the other hand, are in the black for the 10 years through November 2008. The Lehman US Aggregate, for example, is higher by an annualized 5.28% for the decade through last month.

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