Caisse Getting Ready for the Next Big Move? (Natural Resources)

Thursday, September 30th, 2010

Fred­eric Tomesco of Bloomberg reports, Caisse Pen­sion Fund May Bor­row More After C$8 Bil­lion Pro­gram, Sabia Says:

The Caisse de Depot et Place­ment du Que­bec, Canada’s biggest pen­sion fund man­ager, isn’t rul­ing out sell­ing more bonds after com­plet­ing an C$8 bil­lion ($7.8 bil­lion) bor­row­ing pro­gram three months ago, Chief Exec­u­tive Offi­cer Michael Sabia said.

The Caisse in June sold 750 mil­lion euros ($1 bil­lion) in 3.5 per­cent bonds matur­ing in 2020 through its CDP Finan­cial unit, the last step in a seven-month plan to replace short-term bor­row­ings with longer-term debt. As of June 30, the Mon­tréal– based Caisse, which man­ages Quebec’s pub­lic pen­sion plan, had net assets of C$135.8 billion.

“We did the C$8 bil­lion that we set out to do,” Sabia said Sept. 28 in an inter­view at Caisse head­quar­ters in Mon­tréal. “We dealt with the most press­ing prob­lem. Whether or not down the road at some point we decide to do some­thing else, that’s pos­si­ble. I won’t nec­es­sar­ily rule that out.”

The lat­est trans­ac­tions mean that about 74 per­cent of the Caisse’s sources of financ­ing have matu­ri­ties of more than two years, while 78 per­cent of its assets are invest­ments such as real estate that the firm will hold for more than two years, Sabia said. Before the refi­nanc­ing, only 20 per­cent of the bor­row­ings were due in two years or more, while 80 per­cent of the assets were long-term, he said.

“We had this really big mis­match between sources and uses of funds,” Sabia said. “That exposed us to a huge amount of refi­nanc­ing risk. One of the things that this orga­ni­za­tion learned in 2008 was that we can’t always count on refinancing.”

Record Loss

Dur­ing the global finan­cial cri­sis that fol­lowed Lehman Broth­ers Hold­ings Inc.’s bank­ruptcy, the Caisse sold equi­ties, closed out futures con­tracts and reduced its foreign-exchange hedg­ing amid a fall in the Cana­dian dol­lar. It even­tu­ally reported a record loss of C$39.8 bil­lion, or 25 per­cent, for 2008, includ­ing C$6.1 bil­lion in hedging-related losses.

After post­ing a 10 per­cent gain last year, the Caisse reported a 2.3 per­cent return in the first six months of 2010, led by its infra­struc­ture and private-equity units.

Sabia, 57, said he expects the refi­nanc­ing to allow the Caisse to seize invest­ment oppor­tu­ni­ties more quickly than in the past.

“We live in a period of exag­ger­ated response and dis­con­nec­tion between fun­da­men­tals and short-term mar­ket reac­tions,” he said. “It takes very lit­tle to move mar­kets. In this envi­ron­ment, what really mat­ters is insti­tu­tional agility.

You need to be able to react to events and to do it quickly.”

Sabia, the for­mer CEO of Cana­dian telecom­mu­ni­ca­tions com­pany BCE Inc., joined the Caisse in March 2009.

Mr. Sabia is right, the Caisse being a mature fund needs to reduce refi­nanc­ing risk and be as oppor­tunis­tic as pos­si­ble while min­i­miz­ing risk, which is very dif­fi­cult when you're man­ag­ing billions.

Tags: Bloomberg Reports, Brazil, Caisse De Depot, Caisse De Depot Et Placement Du Quebec, Canadian Dollar, Canadian Market, Chief Executive Officer, China, Commodities, energy, Futures Contracts, Global Financial Crisis, Lehman Brothers, Lehman Brothers Holdings, Lehman Brothers Holdings Inc, Maturities, Michael Sabia, Mismatch, Montreal Quebec, Move Commodities, Natural Gas, Natural Resources, Net Assets, oil, Pension Fund Manager, Pension Plan, Public Pension, Quebec Canada, Term Borrowings, Term Debt
Posted in Brazil, Canadian Market, China, Energy & Natural Resources, Infrastructure, Markets, Oil and Gas | Comments Off

The U.S. Oil Glut

Thursday, September 30th, 2010

This note is a guest con­tri­bu­tion by Bespoke Invest­ment Group.

Although US oil inven­to­ries declined by 475K bar­rels in the lat­est week, the decline was less than the fore­casted decline of 700K bar­rels.  As shown in the charts below, oil inven­to­ries in the US are cur­rently right near their high­est lev­els of the year rel­a­tive to the his­tor­i­cal aver­age (bot­tom chart).  Since oil stock­piles peaked ear­lier in the year, inven­to­ries have declined by 2% (blue line top chart).  In the aver­age year, how­ever, oil stock­piles are down 6% from their sea­sonal high for the year (red line top chart).

Copy­right © Bespoke Invest­ment Group

Tags: Bespoke Investment Group, Bottom Chart, Decline, oil, Oil Glut, Oil Inventories, Oil Stockpiles, Red Line
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off

China: A World-Class Act (Mobius)

Thursday, September 30th, 2010

This arti­cle is a guest con­tri­bu­tion by Mark Mobius, Vice-chairman, Franklin Tem­ple­ton Invest­ments.

I attended a Franklin Tem­ple­ton client con­fer­ence in Viet­nam in August and had the oppor­tu­nity to meet a spe­cial guest speaker for the event, Li Cunxin, the author of the book Mao’s Last Dancer. Li grew up in China dur­ing the Cul­tural Rev­o­lu­tion where he and his fam­ily had to endure poverty and hard­ships, get­ting by with hav­ing dried yams for each meal. He was lucky to be selected from thou­sands of chil­dren to join Mao’s wife’s bal­let group.  Again he had to undergo tough train­ing but emerged as a lead dancer, and then with phe­nom­e­nal suc­cess as a prin­ci­pal dancer on the world stage. Now he lives in Aus­tralia with his Aus­tralian wife and chil­dren.  Since retir­ing from danc­ing, he has become a stock bro­ker and an inter­na­tional moti­va­tional speaker.

Li’s suc­cess is reflec­tive of China’s rise as an eco­nomic heavy­weight. The coun­try recently became the world’s sec­ond largest econ­omy and is pro­jected to over­take the U.S. as the largest econ­omy in the world as early as 2030, if cur­rent growth trends con­tinue.[1]

I have been liv­ing in Hong Kong since the 1960s and, like Li, have wit­nessed the tremen­dous changes in the daily lives of peo­ple in China. Today, mil­lions of Chi­nese have refrig­er­a­tors, wash­ing machines, mobile phones and other elec­tronic appli­ances in their house­holds – unheard of dur­ing the years of the Cul­tural Rev­o­lu­tion. And the nation of bicycle-riders has turned into one of fer­vent car own­ers, with more than 1.2 mil­lion cars sold in China every month, sur­pass­ing U.S. domes­tic car sales.[2]

I con­tinue to believe the invest­ment prospects and long-term out­look for China are excel­lent for a num­ber of rea­sons. In my opin­ion, the rea­son for China’s eco­nomic suc­cess is really because of the Chi­nese peo­ple: (1) Chi­nese lead­er­ship is intel­li­gent, resource­ful and enlight­ened, with an inter­est in main­tain­ing growth with a bet­ter stan­dard of liv­ing for all Chi­nese; (2) that lead­er­ship has the orga­ni­za­tional skills and poli­cies capa­ble of ensur­ing that China con­tin­ues to achieve the high­est GDP growth of any major coun­try in the world; (3) China has the finan­cial resources to under­take this gar­gan­tuan task with the world’s largest store of for­eign reserves; (4) China has one of the health­i­est bank­ing sys­tems in the world, where most indi­vid­u­als have lit­tle bor­row­ings; and (5) invest­ments in infra­struc­ture con­tinue to boom, con­tribut­ing to future competitiveness.

As China cel­e­brates the found­ing of the People’s Repub­lic of China (PRC) on Octo­ber 1, investors con­tinue to be con­cerned about over­heat­ing in select sec­tors, greater infla­tion­ary pres­sures and a widen­ing wealth gap in the coun­try. I do not believe the Chi­nese real estate mar­ket is in dan­ger­ous bub­ble ter­ri­tory, for a num­ber of rea­sons I dis­cussed in an ear­lier blog. In sum­mary, the Chi­nese prop­erty mar­ket is deep and var­ied, aver­age house­hold lever­age is sub­stan­tially lower than that in the U.S., and the gov­ern­ment has been quick to act to pre­vent bub­bles. In terms of infla­tion, while con­sumer price infla­tion con­tin­ues to rise, pro­ducer price infla­tion has begun to sub­side, declin­ing from a year-to-date high of 7.1% year-over-year in May to 4.3% year-over-year in August.[3] The recent move to increase the flex­i­bil­ity of the ren­minbi, allow­ing for a slight appre­ci­a­tion, is another tool that the cen­tral bank can use to con­trol inflation.

The widen­ing wealth gap is a com­mon social prob­lem in var­i­ous coun­tries and is not unique to China. For exam­ple, based on the GINI Coef­fi­cient which mea­sures income equal­ity, China is on par with the U.S.[4] The Chi­nese gov­ern­ment has been try­ing to spread the eco­nomic ben­e­fits to the non-coastal regions by devel­op­ing inland cities and invest­ing in infrastructure.

There will always be chal­lenges on the path to pros­per­ity, but noth­ing seems insur­mount­able to the Chi­nese peo­ple, who are deter­mined that their coun­try regain its past glory and its place on the world stage.

[2] Source: China Asso­ci­a­tion of Auto­mo­bile Man­u­fac­tur­ers, as of Jun 30, 2010.

[3] Source: China Eco­nomic Infor­ma­tion Net, as of Aug 31, 2010.

[4] Source: GINI Coef­fi­cient World CIA Report, CIA World Fact­book, July 2009.

Copy­right © Franklin Tem­ple­ton Investments

Tags: Bicycle Riders, Car Owners, China, China Today, Chinese Leadership, Class Act, Commodities, Cultural Revolution, Domestic Car, Economic Success, Electronic Appliances, Franklin Templeton Investments, Growth Trends, International Motivational Speaker, Investment Prospects, Mark Mobius, Million Cars, Phenomenal Success, Principal Dancer, Stock Broker, Term Outlook, Yams
Posted in China, Infrastructure, Markets, Outlook | Comments Off

Kim Shannon — Outlook for Canadian Banks

Thursday, September 30th, 2010

Kim Shan­non — The Out­look for Cana­dian Banks

Kim Shan­non, port­fo­lio man­ager and founder of Sionna Invest­ment Man­agers, which man­ages mutual funds for Bran­des Invest­ment Part­ners, dis­cusses her out­look and views on the Cana­dian bank sec­tor with Dan Richards, of ClientInsights.ca

Dan Richards: Kim, can we start today by talk­ing about Cana­dian Banks. Can we begin by talk­ing about how Cana­dian banks have per­formed over the last lit­tle while.

Kim Shan­non: They've had quite a volatile ride. We've had them be quite chal­lenged in '08, and then have a pretty phoenom­e­nal recov­ery, and a cou­ple of the banks are back at the highs that they were in 2007, and back in 2007 we had blue skies as far as the eyes could see for banking.

We don't have that future fore­cast today.

DR: The end of June, look­ing at the pub­lic data on the funds you man­age, you had about a 10%-age weight­ing in Cana­dian banks, and that's just over half of the weight of banks in the index. Can you talk about the ratio­nale for that.

KS: We think that the Cana­dian banks are expen­sive today. They have shown up incred­i­bly well in our model for most of the last 25 years, but recently, they are not show­ing up well in the mod­els, so intrin­si­cally they are not inex­pen­sively any longer, like they have been in the past.

And that's largely the rea­son we are under­weight. Our con­cern is that they'll be dead money for investors, basi­cally earn­ing you a div­i­dend yield at best, and our job is to cre­ate wealth for investors.

DR: And could you elab­o­rate when you "they show up in your model, as attrac­tive in the past, not as attrac­tive today?"

KS: Our model iden­ti­fies which stocks are truly cheap in the uni­verse, and tra­di­tion­ally banks have been inex­pen­sive rel­a­tive to the other oppor­tu­ni­ties, that of stocks in the uni­verse. Today, they are not show­ing up in the uni­verse of 140 cheap­est stocks, which means that they're expen­sive rel­a­tive to their tra­di­tional earn­ings power. On top of that we're con­cerned that the earn­ings power is likely to be sub­par what we've seen in the last decade.

DR: Now, the one bank that you do own that's roughly at the index weight would be Bank of Nova Sco­tia. So it sounds like in an envi­ron­ment where you're not crazy about banks, that's one bank that you don't mind. Can you talk a lit­tle about that?

KS: Well, that one shows up as rel­a­tively less expen­sive than the rest over­all. But, its also an incred­i­bly well man­aged bank, and its always had a bet­ter than aver­age effi­ciency ratios, its had an incred­i­bly strong cul­ture that sur­vived new CEOs com­ing and going into the role. For a future focus, we really like the fact that they're inter­na­tional in nature, and they actu­ally have true poten­tial for real growth because they are embed­ded in emerg­ing mar­kets that are under-banked. The rest of the banks in Canada are pri­mar­ily located in Canada, with some enti­ties mostly in the United States, and those are very mature bank­ing envi­ron­ments, and so any growth they can enjoy means they're hav­ing to steal it from a competitor.

DR: Kim, final ques­tion. Over the last lit­tle while, we've seen some earn­ings dis­ap­point­ments by some Cana­dian banks. Do you want to com­ment on that?

KS: We've been talk­ing to investors for quite some time about what we believe to be ongo­ing pres­sures on Return on Equity and earn­ings and so we're not sur­prised that there's been a stum­ble here because that fits in with our analy­sis that it will be very hard to enjoy the strong earn­ings that we saw for the mid­dle part of this past decade in banking.

DR: Kim, thank you very much.

[CSSBUTTON target="http://www.clientinsights.ca" color="23238E" textcolor="ffffff"]Access many more Dan Richards' inter­views at ClientInsights.ca[/CSSBUTTON]

Tags: Autoload, Blue Skies, Brandes Investment Partners, Canadian Banks, Canadian Market, Create Wealth, Dead Money, Dividend Yield, Flv Player, Investment Managers, Investors, Job, Models, Mutual Funds, Outlook, Portfolio Manager, Rationale, Shannon, Stocks, True Loop, Universe, Universe Today
Posted in Canadian Market, Markets, Outlook | Comments Off

The Myopic Bond Market

Thursday, September 30th, 2010

It is axiomatic that investors in gov­ern­ment bonds expect to earn a return in excess of infla­tion. Why invest in a bond if it does not increase the pur­chas­ing power of one's cap­i­tal? Hence, the cur­rent yield to matu­rity of a bond includes an expected real return ele­ment and a com­po­nent for expected infla­tion. Since 1926, long-term U.S. gov­ern­ment bonds have had an annu­al­ized return of 5.6% com­prised of a real return of 2.6% and an infla­tion com­po­nent of 3.0%.

As yields plunge ever lower, the bond mar­ket appears to be antic­i­pat­ing a pro­tracted period of low infla­tion. Fears of out­right defla­tion have esca­lated as the eco­nomic recov­ery slows swelling the bur­geon­ing legion of bond pur­chasers and fur­ther depress­ing yields. In turn, lower yields rein­force the notion that future infla­tion rates will them­selves be lower. This self-reinforcing cycle, how­ever, begs the ques­tion – how suc­cess­ful has the bond mar­ket been in fore­cast­ing future infla­tion rates?

The answer is "not very". As illus­trated in the fol­low­ing graph, long-term gov­ern­ment yields (in red) have almost con­sis­tently mis­es­ti­mated the sub­se­quent long-term infla­tion rate (in green). Dur­ing the late 1920's and the mid-1970's to 1990, the bond mar­ket chron­i­cally over­es­ti­mated future infla­tion. This is evi­denced by the fact that long-term bond yields were sub­stan­tially in excess of the fol­low­ing 20-year inflation.

Con­versely, from the early 1930's until the early 1970's, the bond mar­ket nearly always under-estimated sub­se­quent infla­tion. In gen­eral, long-term bond yields were below the sub­se­quent long-term infla­tion rate. Over­all, the cor­re­la­tion between long-term bond yields and the sub­se­quent long-term infla­tion was a neg­li­gi­ble 0.20.

Mid-term bond yields also did a poor job of antic­i­pat­ing future infla­tion. The fol­low­ing graph illus­trates how intermediate-term gov­ern­ment yields (in red) failed to antic­i­pate the sub­se­quent five-year infla­tion rate (in green). As can be seen, intermediate-term bond yields tended to be either too high rel­a­tive to the sub­se­quent real­ized infla­tion rates (as occurred in the late 1920's and the late 1970's through to mid-2000's) or too low (as occurred in the late 1930's and 1940's and the 1970's).

The cor­re­la­tion between intermediate-term bond yields and the sub­se­quent five-year infla­tion rate was a weak 0.27.

The bond mar­ket does a poor job of esti­mat­ing future infla­tion rates over the mid to long-term. Hence, investors should have lit­tle com­fort that today's low yields prop­erly antic­i­pate future infla­tion over longer time frames or prop­erly com­pen­sate them for the risk of poten­tially higher infla­tion fur­ther down the road.

In fact, his­tor­i­cally, low bond yields have not pro­vided investors with suf­fi­cient reward for the risk of unex­pected higher infla­tion. This is illus­trated in the fol­low­ing graph which com­pares the monthly long-term bond yields from Jan­u­ary 1926 to Sep­tem­ber 1990 to the annu­al­ized real (i.e. infla­tion adjusted) return actu­ally earned in long-term bonds over the sub­se­quent twenty years.

Low long-term gov­ern­ment bond yields such as the 3.4% yield today have typ­i­cally resulted in either low or neg­a­tive real returns for long-term bond­hold­ers. The only excep­tion was the mid-1920's when bond investors ben­e­fited from falling prices in the late 1920's and early 1930's as well as wartime price con­trols. Very low intermediate-term bond yields such as the 1.3% yield today have also resulted in either low or neg­a­tive real returns over the sub­se­quent five years (see Appen­dix I).

At today's low yields, gov­ern­ment bond investors are bank­ing on a future of pro­tracted low infla­tion or even out­right defla­tion. They need to under­stand that, like Mr. Magoo, the bond mar­ket really doesn't see clearly at a dis­tance. Hence, although low infla­tion is the likely sce­nario over the sev­eral years, beyond that, the bond mar­ket has lim­ited insight into mid to long-term inflation.

And the mar­ket is akin to Mr. Magoo in another respect. With yields so low today, it will also be prone to some nasty acci­dents in the future.

Sep­tem­ber 30, 2010

www.tacitacapital.com

Appen­dix I

Source: Data from Morn­ingstar Ibbot­son cov­er­ing the period Jan­u­ary 1926 to Sep­tem­ber 2005; cal­cu­la­tions by Tacita Cap­i­tal. 60-month real return is the actual annu­al­ized inflation-adjusted return on intermediate-term bonds com­pared to the bond yield in month one.

Tacita Cap­i­tal Inc. ("Tacita") is a pri­vate, inde­pen­dent fam­ily office and invest­ment coun­selling firm that spe­cial­izes in pro­vid­ing inte­grated wealth advi­sory and port­fo­lio man­age­ment ser­vices to fam­i­lies of afflu­ence. We under­stand the chal­lenges of afflu­ence and apply the lead­ing research and best prac­tices of top finan­cial aca­d­e­mics and indus­try prac­ti­tion­ers in assist­ing our clients to reach their goals.

Tacita research has been pre­pared with­out regard to the indi­vid­ual finan­cial cir­cum­stances and objec­tives of per­sons who receive it and is not intended to replace indi­vid­u­ally tai­lored invest­ment advice. The asset classes/securities/instruments/strategies dis­cussed may not be suit­able for all investors and cer­tain investors may not be eli­gi­ble to pur­chase or par­tic­i­pate in some or all of them. The appro­pri­ate­ness of a par­tic­u­lar invest­ment or strat­egy will depend on an investor's indi­vid­ual cir­cum­stances and objec­tives. Tacita rec­om­mends that investors inde­pen­dently eval­u­ate par­tic­u­lar invest­ments and strate­gies, and encour­ages investors to seek the advice of a finan­cial advisor.

Tacita research is pre­pared for infor­ma­tional pur­poses. Nei­ther the infor­ma­tion nor any opin­ion expressed con­sti­tutes a solic­i­ta­tion by Tacita for the pur­chase or sale of any secu­ri­ties or finan­cial prod­ucts. This research is not intended to pro­vide tax, legal, or account­ing advice and read­ers are advised to seek out qual­i­fied pro­fes­sion­als that pro­vide advice on these issues for their indi­vid­ual circumstances.

Tacita research is based on pub­lic infor­ma­tion. Tacita makes every effort to use reli­able, com­pre­hen­sive infor­ma­tion, but we make no rep­re­sen­ta­tion that it is accu­rate or com­plete.  We have no oblig­a­tion to inform any par­ties when opin­ions, esti­mates or infor­ma­tion in Tacita research changes.

All invest­ments involve risk includ­ing loss of prin­ci­pal. The value of and income from invest­ments may vary because of changes in inter­est rates or for­eign exchange rates, secu­ri­ties prices or mar­ket indexes, oper­a­tional or finan­cial con­di­tions of com­pa­nies or other factors. There may be time lim­i­ta­tions on the exer­cise of options or other rights in secu­ri­ties trans­ac­tions.  Past per­for­mance is not nec­es­sar­ily a guide to future per­for­mance.  Esti­mates of future per­for­mance are based on assump­tions that may not be real­ized. Man­age­ment fees and expenses are asso­ci­ated with investing.

Tags: Annualized Return, Bond Market, Bond Yields, Correlation, Current Yield, Deflation, Early 1970, Economic Recovery, Graph, Inflation Component, Inflation Fears, Inflation Rate, Inflation Rates, Notion, Poor Job, Purchasing Power, Term Bond, Term Inflation, U S Government Bonds, Yield To Maturity
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Tracking Performance of Base Metals

Thursday, September 30th, 2010

Base metal prices took a big hit from the finan­cial cri­sis but many of the met­als are now see­ing their shine return. Since late 2008, cop­per has expe­ri­enced the strongest rebound (up 137 per­cent through mid-September) fol­lowed by nickel and lead.

The out­per­for­mance is sim­ply a fac­tor of sup­ply and demand. Stim­u­lus from China, the U.S. and other coun­tries helped demand out­strip sup­ply as mines have strug­gled to raise output.

China has been the key dri­ver of higher cop­per prices dur­ing the upswing, but could pro­vide a head­wind for the next sev­eral months. The coun­try con­sumes nearly half of global sup­ply but is cur­rently destock­ing its cop­per sup­ply which weak­ens over­all demand for cop­per in the mar­ket­place. This is one rea­son we’ve seen cop­per prices rise only 7.5 per­cent, lag­ging behind tin and nickel prices.

How­ever, it’s likely to be only a tem­po­rary lag. Copper’s indus­trial flex­i­bil­ity makes cop­per one of the most impor­tant met­als as the global econ­omy continues.

The mar­ket hasn’t been as kind to alu­minum in the past but the metal was up 42 per­cent from very depressed lev­els through mid-September. Mac­quarie says the alu­minum mar­ket has been in a sur­plus and the indus­try is car­ry­ing his­tor­i­cally high lev­els of inventory.

Those high inven­tory lev­els looked to be gob­bled up by a com­bi­na­tion of phys­i­cal and invest­ment demand. Accord­ing to Deutsche Bank, roughly 75 per­cent of the alu­minum inven­tory that sits on the Lon­don Metal Exchange is spo­ken for through financial/investment demand. With short-term inter­est rates around the globe pre­dicted to remain near zero for an extended period of time, inter­est in the metal as an invest­ment should remain robust.

Phys­i­cal demand for alu­minum is expected to grow by 40 per­cent this year, with 40 per­cent of that com­ing from China. If the Chi­nese gov­ern­ment is suc­cess­ful in trans­form­ing the coun­try into a consumer-led econ­omy, alu­minum could be a big ben­e­fi­ciary because of its use in auto­mo­biles, elec­tric­ity and other con­sumer goods.

Tags: Base Metals, China, Chinese Government, Copper Prices, Depressed Levels, Deutsche Bank, Financial Investment, Global Economy, Global Supply, Headwind, Inventory Levels, Investment Demand, London Metal Exchange, London Metals Exchange, Macquarie, Nickel Prices, Outperformance, S Industrial, Stimulus, Term Interest, Time Interest, Upswing
Posted in China, Energy & Natural Resources | Comments Off

Doug Kass: "There is an Inevitability of a Bull Market"

Wednesday, September 29th, 2010

Tran­script

KERNEN: Doug, I wanted to talk to you ear­lier about this and your call that could be the trade of the decade.

And that's the short bonds in which, I think what gets inter­est­ing in times like this is that for how many years have we decided that rates have nowhere to go but up?

And I remem­ber at the begin­ning of this year, every­one said over four per­cent, every­one, every economist.

KASS: I did not.

KERNEN: Maybe you didn't.

KASS: In my sur­prise list, I said the ten-year yield will go under three percent.

KERNEN: Well, you also said that Democ­rats would pick up seats in the House and the Senate.

KASS: Right.

KERNEN: So you said some other inter­est­ing things, too, that — and you've come to that. You said you were dead wrong about that.

KASS: Yes, yes.

KERNEN: OK. But on the bond call, if you had started the year say­ing we're going up above — peo­ple have tried to stay short bonds longer than their finances have allowed them to stay short. And now we're star­ing at the ad we have, ka ching, ka ching, ka ching with the.

QUICK: Cen­tral banks.

KERNEN: Yes, the cen­tral banks all across the world turn­ing them in and gold at $1,300 and a slow econ­omy, yet indus­trial com­modi­ties all went up. It's star­ing you in the face to the point of where it almost sounds too obvi­ous to work.

But it's like rates have nowhere to go but up, right? Right?

KASS: But (ph) to argue (ph).

(CROSSTALK)

KERNEN: How come it's such a hard trade (ph) to make?

KASS: The rea­son it's hard is because short rates are anchored as zero for the time being, but the.

KERNEN: Arti­fi­cially?

KASS: Arti­fi­cially. There's a pos­si­bil­ity — a zero inter­est rate pol­icy. But there is a pos­si­bil­ity that QE II fails just like QE I failed and the admin­is­tra­tion will be forced into some sort of trans­for­ma­tive jobs program.

More fis­cal stim­u­la­tion at the expense of mon­e­tary and that will pro­vide growth.

KERNEN: And that would be the end of the bond market.

KASS: That would be the end of the bond mar­ket. I guar­an­tee you.

KERNEN: So — OK. So we print more money. That wouldn't work. And that would make us print even more money is what you're say­ing kind of?

KASS: We'd have a focused trans­for­ma­tive jobs pro­gram much like Mr. Augus­tine talked about.

KERNEN: Which would also be expensive.

KASS: Yes.

KERNEN: And it's expen­sive around the globe right now for everybody.

KASS: Right, right.

KERNEN: .just like the ad has.

All right, Doug, thank you.

QUICK: Thanks for com­ing in, Doug.

KASS: Thank you.

KERNEN: You haven't had any sea breezes yet today, right? That's just the name of your.

KASS (ph): .you know it is a drink.

KERNEN: Right.

KASS: I do know. I also live on Seabreeze Avenue in Palm Beach, Florida.

KERNEN: OK, that makes sense and all right, it doesn't mean it's — OK, thank you.

KASS: Thanks for hav­ing me.

END

Tags: Bond Market, Bonds, Central Banks, Commodities, Crosstalk, Decade, Democrats, Doug Kass, Economist, Gold, Industrial Commodities, Inevitability, Interest Rate Policy, Interesting Things, Ka Ching, Qe Ii, Senate, Slow Economy, Staring You In The Face, Surprise, Zero Interest
Posted in Bonds, Gold, Markets | Comments Off

Hedge Fund Titan David Tepper Weighs in on Economy, Markets, and his Strategy

Wednesday, September 29th, 2010

Tran­script

(BEGIN VIDEOTAPE)

KERNEN: My entire body has chills right now because of this guy that I'm going to intro­duce right now.
And I'm going to explain how hard it is to get this — remem­ber when Howard Hughes, no one had ever seen him, and that guy met him in the desert and they didn't even know who he was?

QUINTANILLA: Melvin.

KERNEN: Melvin, Melvin.

QUINTANILLA: Melvin and Howard.

KERNEN: This guy, no one has ever seen — let me intro­duce our spe­cial guest for the next half hour, raked in a record of $7.5 bil­lion for his fund last year by invest­ing in finan­cials return­ing an eye-popping 132 per­cent for him­self and investors.

Join­ing us in a rare exclu­sive inter­view, hedge fund heavy weight, David Tep­per, Pres­i­dent and founder of $12.4 bil­lion Appaloosa Man­age­ment who I've talked — David, thank you for com­ing in.

TEPPER: You're wel­come, Joe.

KERNEN: Talked about you a lot because the Short Hills Mall is the only thing peo­ple know about Short Hills. And you, instead of being in the, you know, the canyons of New York City, you've man­aged this money out at — over­look­ing a park­ing lot near the Short Hills Mall.
And talked about you a lot. I've run into you but didn't know who you were. You're kind of like Car­los, the Jackal — no one has ever seen.

TEPPER: Actu­ally seen him.

KERNEN: this man before. So it's like.

QUINTANILLA: What was said to you to get you to come here?

KERNEN: Yes.

TEPPER: What was said to me?

QUINTANILLA: Yes.

KERNEN: Yes.

TEPPER: You know, actu­ally, I lis­tened to Joe who said I was mys­te­ri­ous, elu­sive — at least this type of stuff. So I said, you know, why not come on?

KERNEN: So far, it worked good. All right.

TEPPER: Although I'm a lit­tle con­cerned when you say you have chills when you see me. I'm not going to the mess (ph).
(CROSSTALK)

KERNEN: Oh, no, no, no. It's only in the nicest way.

TEPPER: All right. We can talk. I mean, that's okay. I mean, if.

Tags: Appaloosa, Canyons, Carlos The Jackal, Chills, China, Crosstalk, David Tepper, Desert, Economy, ETF, ETFs, Half Hour, Heavy Weight, Howard Hughes, Investing, Investors, Joe Kernen, Melvin And Howard, New York City, Parking Lot, Short Hills Mall, Titan, Videotape
Posted in China, ETFs, Gold, Markets | Comments Off

Is China's Yuan Intervention Coming To An End?

Wednesday, September 29th, 2010

This arti­cle is a guest con­tri­bu­tion by James Pressler, North­ern Trust.

Cur­rency inter­ven­tion is a funny thing, par­tic­u­larly in Asia. Plenty of emerg­ing economies main­tain some quiet gov­ern­ment pres­ence in the mar­kets with rarely a men­tion, while Japan's sud­den defense of the yen was accepted after the ini­tial sur­prise wore off. Then there is China — an overt cur­rency mar­ket pres­ence that gets plenty of press, mounds of crit­i­cism, yet rarely changes. With the next round of chal­lenges to the yuan fast-approaching, might Beijing's yuan pol­icy be due for a change?

The most recent shift in China's forex pol­icy came in mid-June, not sur­pris­ingly just days before pol­i­cy­mak­ers headed to an inter­na­tional sum­mit where the yuan exchange rate threat­ened to dom­i­nate con­ver­sa­tion and shame Beijing's lead­er­ship. Those 11th-hour reforms resulted in a six-cent appre­ci­a­tion of the yuan and damp­ened enthu­si­asm for anti-China rhetoric, but just as soon as cur­rency talk shifted away from the yuan, the appre­ci­a­tion came to a halt. In August, the cur­rency even weak­ened, los­ing four of those six hard-earned cents, and inspir­ing Wash­ing­ton to come back from its sum­mer recess with more talk of leg­isla­tive retal­i­a­tion. Indeed, the yuan appre­ci­ated by twelve cents over the next month. In all like­li­hood this was not a coincidence.

The cur­rent pol­icy envi­ron­ment in Wash­ing­ton, how­ever, sug­gests that another 'spon­ta­neous' appre­ci­a­tion of the yuan may not mol­lify leg­is­la­tors. After all, mid-term elec­tions are approach­ing and US leg­is­la­tors (read: Democ­rats) are look­ing to score as many points as pos­si­ble before the Novem­ber vote. The House is cur­rently debat­ing leg­is­la­tion that would brand China as a "cur­rency manip­u­la­tor," and its pas­sage (it cur­rently car­ries strong bipar­ti­san sup­port) would be the first step toward retal­ia­tory sanc­tions through the World Trade Orga­ni­za­tion (WTO). Even though the pro­posed bill would likely not pass through the Sen­ate until at least Novem­ber and not be rec­on­ciled and signed into law until the next Con­gress is sworn in, it would begin a pos­si­bly irre­versible process that could force China into address­ing some sig­nif­i­cant imbal­ances. And if there is one thing Bei­jing does not respond well to, it is being pushed around by for­eign interests.

Within China, pol­i­cy­mak­ers are already fret­ting about a real estate bub­ble that is grow­ing more men­ac­ing by the day, con­fi­dence fig­ures that are less than assur­ing, and an export indus­try ill-prepared to face the chal­lenge of a stronger cur­rency. The last thing it wants to endure is puni­tive tar­iffs by the US (with the bless­ing of the WTO) issued against any indus­try seen as adversely affected by the arti­fi­cially low exchange rate. Beijing's argu­ments against the "cur­rency manip­u­la­tor" label are fairly sim­ple. First, it insists that the US is using such leg­is­la­tion to rem­edy a trade imbal­ance of its own mak­ing, and China should not be pun­ished for the excesses of the US. Sec­ond, Bei­jing notes that a 20% appre­ci­a­tion of the yuan (the con­sen­sus esti­mate of the yuan's under­val­u­a­tion) would trig­ger a wave of bank­rupt­cies and mas­sive job losses. And then it points to the last few rounds of reforms, insist­ing it has already addressed the issue.

Through this approach, Bei­jing is show­ing its friend­lier side, allow­ing the yuan to appre­ci­ate and mak­ing plenty of state­ments through the state media about how fur­ther unde­fined reforms are being imple­mented. It is likely to keep this up even if the US House passes the bill on to the Sen­ate, wait­ing for mid-term elec­tions to play out and see what kind of Wash­ing­ton it will face. A vic­tory by those more will­ing to pur­sue the "cur­rency manip­u­la­tor" brand could likely result in a change of tone in Bei­jing, with pub­lic state­ments shift­ing toward the down­sides of a trade war, pos­si­ble retal­i­a­tion and a less-receptive envi­ron­ment for US com­pa­nies look­ing to invest in China. It is unlikely that the Chi­nese gov­ern­ment will launch a pre-emptive strike to a pos­si­ble trade war, but it will make very clear that any actions taken — regard­less of the WTO's bless­ing — will come at a hefty price.

Tags: 11th Hour, Bipartisan Support, China, Currency Intervention, Currency Manipulator, Currency Market, Emerging Economies, Funny Thing, Government Presence, Initial Surprise, International Summit, James Pressler, Market Presence, Mid Term Elections, Northern Trust, Policy Environment, Retaliatory Sanctions, Summer Recess, World Trade Organization, World Trade Organization Wto, Yuan Exchange Rate
Posted in China, Markets | Comments Off

Bob Doll: Second Round of Quantitative Easing is Likely

Wednesday, September 29th, 2010

This arti­cle is a guest con­tri­bu­tion by Bob Doll, Chief Equity Strate­gist for Fun­da­men­tal Equi­ties, Black­Rock Invest­ments, LLC

Sep­tem­ber 27, 2010

Last week marked the fourth con­sec­u­tive week in which stock mar­kets posted gains, with the Dow Jones Indus­trial Aver­age climb­ing 2.4% to 10,860, the S&P 500 Index advanc­ing 2.1% to 1,149 and the Nas­daq Com­pos­ite ris­ing 2.8% to 2,381. With these gains, the S&P is now up around 3% for the year, while the Dow is up 4% and the Nas­daq 5%.Investors are ques­tion­ing whether the improved tone of equity mar­kets in recent weeks is merely a reflec­tion of stocks mov­ing to the upper end of their trad­ing range or if this trend is a reflec­tion of real under­ly­ing changes. Cer­tainly, the macro back­drop does seem improved when com­pared to one month ago. Eco­nomic data has moved from "bad" to "less bad" (if not to "good"), and the rhetoric from Wash­ing­ton, DC has recently focused on some pro-business and tax poli­cies. Opti­mism is grow­ing that with the upcom­ing midterm elec­tions, investors may be see­ing some more equity-friendly poli­cies in the works. From our per­spec­tive, we are lean­ing more toward the pos­i­tive side of the mar­ket debate and remain opti­mistic that the econ­omy will avoid a double-dip reces­sion, mean­ing that stocks should be able to con­tinue to grind higher.

In per­haps the most notable head­line last week, the National Bureau of Eco­nomic Research told us (rather belat­edly) that the reces­sion ended in June of 2009. The "Great Reces­sion" marked the longest reported reces­sion since the Great Depres­sion, and over the 18 months of its exis­tence, it resulted in an annu­al­ized decline in gross domes­tic prod­uct of 2.8% and a loss of 7 mil­lion jobs.

In other eco­nomic news, the Fed­eral Reserve com­mented last week that it remains com­mit­ted to doing what it can in terms of using its bal­ance sheet to reflate the econ­omy. Mir­ror­ing recent state­ments from the Bank of Eng­land and the Bank of Japan, the Fed made it clear that low growth lev­els are not accept­able, nor are defla­tion risks, and that the cen­tral bank stands ready to begin the next phase of quan­ti­ta­tive eas­ing. In its state­ment, the Fed admit­ted that it believes infla­tion lev­els are too low, lim­it­ing its abil­ity to pro­mote sta­ble prices. This was a sig­nif­i­cant state­ment, as until now the Fed was more focused on the slow pace of growth and high unem­ploy­ment. These con­cerns obvi­ously still remain, but by explic­itly adding defla­tion risks to the list of prob­lems, the Fed has made it clear that addi­tional pol­icy action is needed.

Although the down­side risks to the econ­omy seem to have eased over the past month, there is lit­tle rea­son to expect high growth rates to resume soon, sug­gest­ing that the Fed's work is not fin­ished. The world's devel­oped economies seem to have set­tled into a period of pos­i­tive but weak growth marked by high unem­ploy­ment and high deficits. In this envi­ron­ment, the Fed­eral Reserve is under pres­sure to help the econ­omy break out of this phase. The prospects for addi­tional quan­ti­ta­tive eas­ing mea­sures have already prompted a decline in the value of the dol­lar and the low­er­ing of private-sector bor­row­ing costs.

Tags: Backdrop, Bank Of England, Bank Of Japan, Bob Doll, Double Dip Recession, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Data, Economic News, Federal Reserve, Great Depression, Gross Domestic Product, Midterm Elections, Nasdaq Composite, National Bureau Of Economic Research, Pro Business, Stock Markets, Strategist, Tax Policies
Posted in Markets | Comments Off

Gymkhana Three — Part 2 — The Ultimate Playground — L'autodrome

Wednesday, September 29th, 2010

What a rush... Enjoy!

Tags: Autodrome, Playground, Rush
Posted in Markets | Comments Off

The Shocking Cost of Regulation

Wednesday, September 29th, 2010

I saw some shock­ing num­bers this week on the costs of reg­u­la­tion by the U.S. government.

An arti­cle in the online Wall Street Jour­nal pegs the cost of fed­eral reg­u­la­tions in the U.S. at close to $2 tril­lion in 2008 – the equiv­a­lent of 14 per­cent of GDP. It works out to roughly $8,000 per pri­vate sec­tor employee, and for small employ­ers, the fig­ure is more than $10,500 per employee.

And with new reg­u­la­tory mea­sures passed dur­ing the cur­rent admin­is­tra­tion, that already huge num­ber will be going con­sid­er­ably higher.

The arti­cle points out that such high reg­u­la­tory over­head makes it hard for Amer­i­can busi­nesses to com­pete with over­seas rivals, and thus it affects hir­ing as well, par­tic­u­larly for small companies.

“As much as it is fash­ion­able to blame China for the demise of small man­u­fac­tur­ing in Amer­ica, the evi­dence sug­gests that look­ing for some rea­sons closer to home is war­ranted,” the arti­cle says.

The cost of reg­u­la­tory mea­sures is high but the biggest drag on eco­nomic recov­ery may be the num­ber ques­tion marks sur­round­ing the busi­ness com­mu­nity. Small busi­nesses have become par­a­lyzed await­ing the result of new health­care, tax and other reform.

It’s good to hear that a busi­ness per­son may be appointed to one of the administration’s top eco­nomic posts – some­one who could bring a dif­fer­ent per­spec­tive to the White House’s inter­nal debate now dom­i­nated by aca­d­e­mics. A Bloomberg sur­vey reported in an arti­cle of The Econ­o­mist reported that 75 per­cent of Amer­i­can investors believe the cur­rent admin­is­tra­tion is anti-business.

I might also sug­gest look­ing for inspi­ra­tion at the places where jobs are being cre­ated – the large emerg­ing nations whose poli­cies are more focused on social invest­ing than on social welfare.

I did an inter­view yes­ter­day dis­cussing the hid­den cost of over­reg­u­la­tion with Yahoo! Finance’s Tech Ticker. I also dis­cuss the role lever­age played in the demise of Lehman Broth­ers and Fan­nie Mae. You can find it on Yahoo! Finance’s homepage.  

Tags: American Businesses, American Investors, Article Points, Business Community, Business Person, China, Current Administration, Demise, Different Perspective, Drag On, Economic Recovery, Fannie Mae, Internal Debate, Lehman Brothers, Private Sector Employee, Question Marks, Regulatory Measures, Social Welfare, Trillion, Wall Street Journal, Where Jobs, Yahoo Finance
Posted in China | Comments Off

Charles Brandes – Why Value Investing Outperforms (Part 2)

Tuesday, September 28th, 2010

Charles Bran­des — Why Value Invest­ing Out­per­forms (Part 2)

Charles Bran­des, founder of Bran­des Invest­ment Part­ners (1974), which today man­ages over $50-billion in assets, glob­ally, dis­cusses why value stocks out­per­form growth stocks and bonds over the long term, with Dan Richards, Clientinsights.ca.

If you have not seen or read Part 1, you may access it here.

Dan Richards: If value stocks aren't volatile, and they aren't riskier, why in your view do they deliver supe­rior long term performance?

Charles Bran­des: That's pri­mar­ily behav­ioural. That's pri­mar­ily the fear and greed in the stock mar­ket and that has not changed for many many years. We can see that obvi­ously, with the way stock prices fluc­tu­ate so much more than the actual value of the company.

DR: So you've got that behav­ioural phe­nom­e­non at work, that fear and greed, and you know that par­tic­u­larly, when those glam­our stocks hit the head­lines and investors get all excited and enthused — they want Apple or Google.

CB: Every­body wants those...It doesn't mat­ter what the price is.

DR: And, the other thing that we look at when we look at stock val­u­a­tions is stocks are really a price to the func­tion of future earn­ings. Its the future cash flow that's dis­counted today, and that's often dri­ven by expec­ta­tions. But really, when you're buy­ing a share of stock, you're really buy­ing the expec­ta­tions that the mar­ket has over what those future earn­ings are going to be. Would that be a fair characterization?

CB: Yes, Very much, very correct.

DR: So the inter­est­ing ques­tion is what hap­pens when a com­pany announces earn­ings and the actual earn­ings are dif­fer­ent than what the mar­ket expected higher or lower? So lets start with those glam­our stocks like Apple or Google. What would hap­pen if the earn­ings came in and they were less than the mar­ket expected.

CB: We've done a study of this in the Bran­des Insti­tute, and we found on the glam­our stocks that if a sur­prise earn­ing comes in, if its a sur­prise neg­a­tive more than the expec­ta­tions, the stock goes down, very very con­sid­er­ably. If its a sur­prise pos­i­tive, because the mar­ket in the glam­our stocks is always look­ing for much much pos­i­tive, it also can go down.

DR: Even if it outperforms...

CD: Even if it out­per­forms what every­body expects it to do. 'Cause everybody's so enthu­si­as­tic about these companies.

DR: How about value stocks? What hap­pens, you know, to those stocks that are rel­a­tively cheap, by your stan­dards? What hap­pens... Let's talk first about what hap­pens when there are pos­i­tive earn­ings sur­prises com­pared to expectations?

CB: Pos­i­tive earn­ings sur­prises in the value stocks; because nobody expects it at all, there's no expec­ta­tion there of them doing any­thing good, the stock prices will rise con­sid­er­ably, in those instances. We found in the study in the Bran­des Insti­tute, that it is so con­sid­er­able, that is one of the rea­sons that value stocks outperform.

DR: So that is what hap­pens if you get a pos­i­tive earn­ings sur­prise. How about a neg­a­tive earn­ings sur­prise? You know, results come in below what the mar­ket expects.

CB: This is the part that's really sur­pris­ing. Even on a value non-glamour stock, if the earn­ings sur­prise is even neg­a­tive, the expec­ta­tions for these com­pa­nies is so neg­a­tive that it makes the stock price go up, because even if they report any­thing, its amaz­ing, we found this in our study over many years about these earn­ings surprises.

DR: So when you look at the research that you've done, what would be your one over­all con­clu­sion, com­ing out of that analy­sis that you've done over the long term impact of results report­ing com­pared to expectations?

CB: It's expec­ta­tions that are so neg­a­tive for the value stocks that if you buy them that these prices and any­thing that is con­sid­ered pos­i­tive changes, which it does, quite often, that's why value out­per­forms the glam­our stocks.

DR: Charles, thank you.

END OF PART 2

PART 1

[CSSBUTTON target="http://www.clientinsights.ca" color="23238E" textcolor="ffffff"]Access many more Dan Richards' inter­views at ClientInsights.ca[/CSSBUTTON]

Tags: Assets, Brandes Investment Partners, Cash Flow, Cb, Characterization, Charles Brandes, Earnings, Fear, Glamour Stocks, Google, Greed, Growth Stocks, Hana, Phenomenon, Stock Market, Stock Prices, Stock Valuations, Stocks And Bonds, Term Performance, True Loop, Value Investing, Value Stocks
Posted in Markets | Comments Off

“Rules are Rules?!” (An email from Grandma)

Tuesday, September 28th, 2010

“Rules are Rules?!” (An email from Grandma)

by Jef­frey Saut, Chief Invest­ment Strate­gist, Ray­mond James

Sep­tem­ber 27, 2010

The Good news:
It was a nor­mal day in Sharon Springs Kansas, when a Union Pacific crew boarded a loaded coal train for the long trek to Salina.

The Bad news:
Just a few miles into the trip a wheel bear­ing became over­heated and melted, let­ting a metal sup­port drop down and grind on the rail, cre­at­ing white hot molten metal drop­pings spew­ing down to the rail.

The Good news:
A very alert crew noticed smoke about halfway back in the train and imme­di­ately stopped the train in com­pli­ance with the rules.

The Bad news:
The train stopped with the hot wheel over a wooden bridge with cre­osote ties and trusses.
The crews tried to explain to higher-ups, but were instructed not to move the train!
They were instructed Rules pro­hibit mov­ing the train when a part is defective!

REMEMBER, RULES are RULES!
(Don't ever let com­mon sense get in the way of a good disaster!)

Hard and fast “rules,” I have argued against them since enter­ing this busi­ness some 40 years ago because in the stock mar­ket you have to be flex­i­ble.  The rea­son for flex­i­bil­ity is that mar­kets tend to be dri­ven by, “fear, hope and greed only loosely con­nected to the busi­ness cycle.”  I used to get into argu­ments with finance pro­fes­sors about this point.  While it’s true over the long run invest­ing is all about earn­ings, many investors lose money in the short/intermediate term (even if earn­ings are improv­ing) adher­ing to that “it’s all about earn­ings” rule because some­times Mr. Mar­ket decides “he” is unwill­ing to put a high price earn­ings mul­ti­ple (PE) on those earn­ings.  For exam­ple, if you bought McDon­alds stock (MCD/$75.10) in 1972, earn­ings increased for the next 10 years.  In fact, McDon­alds never had a down sequen­tial quar­ter over that time­frame, still share­hold­ers lost money for nearly a decade because Mr. Mar­ket was unwill­ing to cap­i­tal­ize that improv­ing earn­ings stream any­where near the PE mul­ti­ple he was will­ing to pay in the early 1970s.  To be sure, in the short/intermediate term, the stock mar­ket is, “fear, hope and greed only loosely con­nected to the busi­ness cycle!”

Tags: Business Cycle, Chief Investment Strategist, China, Coal Train, Commodities, Finance Professors, Hot Wheel, Intermediate Term, jeffrey saut, Long Trek, Mcdonalds, Molten Metal, Price Earnings, Raymond James, Salina, Sequential Quarter, Sharon Springs Kansas, Trusses, Union Pacific, Ups, Wheel Bearing, Wooden Bridge
Posted in China, Markets | Comments Off

Bill Gross: Investment Outlook (October 2010)

Tuesday, September 28th, 2010

Invest­ment Outlook

William H. Gross | Octo­ber 2010

"Stan Druck­en­miller is Leaving"

• The New Nor­mal has a new set of rules. What once pumped asset prices and favored the pro­duc­tion of paper, as opposed to things, is now in retrograde.
• The hard cold real­ity from Stan Druckenmiller’s “old nor­mal” is that pros­per­ity and over­con­sump­tion was dri­ven by asset infla­tion that in turn was lever­age and inter­est rate correlated.
• Investors are faced with 2.5% yield­ing bonds and stocks star­ing straight into new nor­mal real growth rates of 2% or less. There is no 8% there for pen­sion funds. There are no stocks for the long run at 12% returns.

So the hed­gies are in retreat and, in some cases, on the run. Ken Grif­fin at Citadel is con­sid­er­ing cut­ting fees, and Stan Druck­en­miller at Duquesne/ex-Soros is pack­ing his bags for the golf course. Frus­trated at his inabil­ity to repli­cate the accus­tomed 30% annu­al­ized returns that his busi­ness model and exper­tise pro­duced over the past sev­eral decades, Stan is throw­ing in the towel. Who’s to blame him? I don’t. I respect him, not only for his finan­cial wiz­ardry, but his phil­an­thropy which includes not only writ­ing big checks, but spend­ing lots of time with per­sonal causes such as the Harlem Children’s Zone. And at 57, he’s cer­tainly learned how to smell more roses, pick more daisies, and replace more div­ots than yours truly has at the advanc­ing age of 66. So way to go Stan. Enjoy.

But his depar­ture and Mr. Griffin’s price-cutting are more than per­sonal anec­dotes. They are reflec­tive of a broader trend in the cap­i­tal mar­kets, one which saw the avail­abil­ity of cheap financ­ing drive asset prices to unsus­tain­able heights dur­ing the dot­com and hous­ing bub­ble of the past decade, and then suf­fered the slings and arrows of a liq­uid­ity cri­sis in 2008 to date. Sim­i­larly, liq­uid­ity at a dis­count drove lots of other suc­cess­ful busi­ness mod­els over the past 25 years: hous­ing, com­mer­cial real estate, invest­ment bank­ing, good­ness – dare I say, invest­ment man­age­ment – but for them, its des­ti­na­tion is more likely to be a semi-permanent rest stop than a free­way. The New Nor­mal has a new set of rules. What once pumped asset prices and favored the pro­duc­tion of paper, as opposed to things, is now in ret­ro­grade. Lever­age and dereg­u­la­tion are fad­ing from the hori­zon and their polar oppo­sites are in the ascen­dant. Some char­ac­ter­ize it in bib­li­cal terms – seven fat years to be fol­lowed by seven years of lean. Oth­ers like Michael Moore and Oliver Stone describe it in terms of social jus­tice – greed no longer is good. And the hed­gies – well, they just take their ball and go home. What, after all, is the use of com­pet­ing if you can’t play by the old rules?

Whoever’s slant or side you choose to take in this tran­si­tion from the old to the “new” nor­mal, the unmis­tak­able fact is that future invest­ment returns will be far lower than his­tor­i­cal aver­ages. If a lev­ered Druck­en­miller, Soros, or Grif­fin could deliver double-digit returns in the past, then a less lev­ered hedge fund com­mu­nity with a lower yield­ing menu will likely resign them­selves to a high sin­gle–digit future. If a “stocks for the long run” Jeremy Siegel grew used to his­tor­i­cally “val­i­dated” 9 to 10% returns from stocks prior to writ­ing his best­seller in the late 1990s, then the expe­ri­ence of the last decade should at least tem­per his con­fi­dence that the “mar­ket” will deliver any sort of mag­i­cal high single-digit return over the long-term future. And, if bond investors believe that the resplen­dent and abun­dant cap­i­tal gains of the past 25 years will be dupli­cated from yield lev­els of 2 to 3% – well, they just haven’t been to Japan, have they?

Tags: Asset Prices, Bill Gross, Business Models, Cold Reality, Commercial Real Estate Investment, Gross Investment, Hedgies, Housing Bubble, Investment Outlook, Ken Griffin, Liquidity Crisis, Mr Griffin, Personal Anecdotes, Personal Causes, Real Estate Investment, Real Estate Investment Banking, Slings And Arrows, Stan Druckenmiller, Throwing In The Towel, William H Gross
Posted in Markets, Outlook | Comments Off

Three Small Cap Ideas from Sprott's Peter Imhof

Monday, September 27th, 2010

BNN's port­fo­lio man­ager inter­views are a great repos­i­tory of invest­ment ideas from across the asset man­age­ment spec­trum. Today we fea­ture Sprott's Peter Imhof. Dur­ing the Sep­tem­ber 23, 2010 appear­ance, Imhof, port­fo­lio man­ager of the Sprott Small Cap Equity Fund, dis­cussed three his/her 3/4 top picks for the com­ing period.

Imhof likes Orko Sil­ver (OK-X 1.970) He's very bull­ish on sil­ver. Imhoff said "Its a mis­un­der­stood story." Orko is devel­op­ing one of the biggest pure sil­ver deposits in Mex­ico. Its cur­rently fetch­ing a $200-million mar­ket cap and its in a joint ven­ture with a $3-billion mar­ket cap com­pany, Pan-American (PAA-T) who will fully fund the project into pro­duc­tion with Orko retain­ing 45% of the economics.

His sec­ond top pick is Wi-Lan Inc. (WIN-T 3.99) This com­pany is a licens­ing com­pany for wire­less such as RIM (RIM-T), Nokia (NOK-N), etc. Imhof pointed out that, "Recently at Wi-Lan's Mark­man [patent hear­ing — more back­ground here] hear­ing with Apple (AAPL-Q), Dell (DELL-Q), HP (HPQ-N) and a few oth­ers, it was man­dated that a medi­a­tion was to take place and is to be fin­ished by Oct 20, 2010."

Finally, Imhof dis­cussed a small Tim­mins area gold explo­ration com­pany North­ern Gold Min­ing (NGM-X 0.410). The com­pany is believed to have "resources indi­cated of about 1 mil­lion ounces, and that doesn't include a lot of drilling they have been doing for the last sev­eral months," Imhof added.

Report Card (How Did Last Year's Top Picks Do?)

Mosaid (MSD-T 23.900) A Top Pick Feb 11/10. Up 8.01%.

Ben­net Envi­ron­men­tal (BEV-T 1.830) A Top Pick Feb 11/10. Down 11.21%. Sold his hold­ings at about $2.80 but look­ing at it again because it is close to cash value now.

Glen­tel Inc. (GLN-T 19.450) A Top Pick Feb 11/10. Up 27.22%.

Data: Stockchase.com

Tags: Aapl, Area Resources, Bnn, Cap Company, Cap Equity, Equity Fund, Gln, Gold Exploration Company, Gold Mining, Hp Hpq, Imhoff, Investment Ideas, Market Cap, Markman, Markman Hearing, Pan American, Peter Imhof, Portfolio Manager Interviews, Silver, Silver Deposits, Small Cap, Timmins Area, Wi Lan
Posted in Gold, Markets, Silver | Comments Off

Warren Buffet: Recession Not Over

Monday, September 27th, 2010

This arti­cle is a guest con­tri­bu­tion by Trader Mark, of the Fund­My­Mu­tu­al­Fund Blog.

Until we take a break between QE2 and QE3 all dis­cus­sions of eco­nom­ics and reports will sim­ply be for the­o­ret­i­cal and intel­lec­tual rea­sons.  In the end, any mar­ket is made up of sup­ply and demand.  If you have a rel­a­tively fixed sup­ply of stock cer­tifi­cates (or sugar, cof­fee, what­ever com­mod­ity) being chased by an ever increas­ing amount of fiat money, any­one who took Eco­nom­ics 101 and lasted through day 2 of class knows what hap­pens to price.  The U.S. mar­ket was able to rally some 70%+ dur­ing QE1 even as Amer­i­cans actu­ally with­drew (on a net basis) money from the mar­ket — so you can see the power of "the not so invis­i­ble hand".  [Jan 6, 2010: Charles Bider­man of TrimTabs Claims US Gov­ern­ment Sup­port­ing Stock Mar­ket]

This is the tem­plate every­one is work­ing on — again to repeat what I say each time, QE has very lit­tle to do with the real econ­omy (don't believe the lies com­ing out of that mouth) and every­thing to do with goos­ing assets of all types.  Some por­tion of those gains in paper assets can then be rolled into the real econ­omy I sup­pose over time via the 'wealth effect'... so the Fed sim­ply is try­ing to repeat 1999 NASDAQ as the attempt to repeat 2005–2007 hous­ing looks to be impos­si­ble.  (although we are try­ing might­ily with record low mort­gage rates, the return of 0% down mort­gages — now gov­ern­ment spon­sored, pay­ing peo­ple to buy homes via cred­its, and the like)

What­ever the case, this mantra has changed psy­chol­ogy and half the bat­tle in the mar­ket is ani­mal spir­its.  If every­one believes act A will lead to out­come B, then it self rein­forces to a great degree.  QE2 has not even begun but every­one is in a rush to front run the per­ceived asset infla­tion of all type, hence it has been self ful­fill­ing.  Some­where Ben is laugh­ing watch­ing the rat's lemming's in his lab exper­i­ment scurry.  So as I said, any­thing I post about eco­nom­ics go for­ward is to be read, processed and then dis­carded imme­di­ately since none of it mat­ters until we take a break from QE2. (which again — has not even STARTED)  At which point Ben can start hint­ing about QE3 which should get spec­u­la­tors in a lather, front run­ning assets once more... and we can keep this game going for­ever and ever (and ever!) Who needs a real econ­omy any­more?  Manip­u­la­tion of assets is so much easier.

To that end today around 10 AM came a very poor exist­ing home sales num­ber.  The mar­ket paused for a sec­ond... should it react to real­ity?  Nah, a per­ma­nent open mar­ket oper­a­tion of dol­lars was going to be flood­ing in the mar­ket in 15 min­utes, so let's start a new leg up ... and so we did.

(My only ques­tion to this "we can't lose" idea is why did the Japan­ese stock mar­ket not surge to all time highs with the amount of QE they did for a decade+?)

——————————————

This story on Buf­fet refut­ing the econ­omy is out of reces­sion is inter­est­ing not so much for his words but some of the sta­tis­tics he gave on his busi­nesses.  The rail­road com­pa­nies are act­ing as if we are back to 2007 global trade highs (in terms of stock action) but appar­ently eco­nomic activ­ity is still far below peak lev­els.  That said, does it mat­ter?  There is only so much sup­ply of rail­road stock cer­tifi­cates with ever increas­ing fiat money chas­ing it... you get the pic­ture right?

• Bil­lion­aire War­ren Buf­fett says the econ­omy remains in a reces­sion, by his def­i­n­i­tion, because most peo­ple and busi­nesses still aren't doing as well as they were before the finan­cial cri­sis.  Buffett's assess­ment of the econ­omy con­tra­dicts the view of experts who announced this week that the reces­sion offi­cially ended in June 2009. But Buf­fett says he uses a com­mon­sense stan­dard to eval­u­ate the economy.
• "On any com­mon­sense def­i­n­i­tion, the aver­age Amer­i­can is below where he was before, or his fam­ily, in terms of real income, GDP," (gross domes­tic prod­uct) Buf­fett said on CNBC. "We're still in a reces­sion. And we're not gonna be out of it for awhile, but we will get out of it."
• He said the gov­ern­ment is run­ning a fed­eral deficit equal to 9 per­cent of the nation's gross domes­tic prod­uct, which is pro­vid­ing quite a lot of stim­u­lus.  "It doesn't depend on call­ing it the stim­u­lus bill to be stim­u­lat­ing. I mean, if the gov­ern­ment is spend­ing $3 for every $2 it takes in, that is, that is fis­cal stim­u­lus," Buf­fett said.

Here are some of the very inter­est­ing metrics:

• Buf­fett gets insight into the health of the econ­omy through the per­for­mance of Berkshire's sub­sidiaries.   Buf­fett said Berkshire's busi­nesses are improv­ing but at a slow rate.
• He said Berkshire's Burling­ton North­ern Santa Fe rail­road, for instance, is prob­a­bly doing bet­ter than many U.S. busi­nesses, and it's only about 61 per­cent of the way back to its peak ship­ping vol­umes from the bot­tom of the recession.
• And Berkshire's Shaw Car­pet used to sell about 13 mil­lion yards of car­pet a week. Buf­fett said that fell to about 7 mil­lion yards dur­ing the reces­sion, so Shaw elim­i­nated 6,500 jobs. Buf­fett said Shaw won't start hir­ing back until the busi­ness gets back to sell­ing at least 10 mil­lion yards a week, and so far it's only sell­ing about 9 mil­lion yards a week.

Copy­right © Fund­My­Mu­tu­al­Fund

Tags: Animal Spirits, Fiat Money, Half The Battle, Invisible Hand, Lab Experiment, Lemming, Low Mortgage, Mantra, Mortgage Rates, Nasdaq, Paper Assets, Qe, Qe1, Qe2, S Market, Stock Certificates, Trimtabs, Warren Buffet, Wealth Effect
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Let the Carnival Begin for this Impressive ETF

Monday, September 27th, 2010

Note from Adam Hewi­son, CEO of MarketClub/INO.com.

Here is a mar­ket that we like a lot more than the US mar­ket. We really like the way its act­ing and it looks set to take out the highs that were seen in Decem­ber of 2009. If that is the case, then we could see this mar­ket make all-time highs pretty quickly. You def­i­nitely want to have this one on your radar screen.

In this new short video, I show you what I'm look­ing at and how we show­cased this mar­ket last week when we did our last webinar.

This mar­ket is still look­ing good and look­ing strong. Pay very close to it this Fri­day because if it closes well, it should bode well for the
fol­low­ing week.

Tags: Acting, All Time Highs, Carnival, Carnival Time, Ceo, ETF, Lot, New Video, Radar Screen, Webinar
Posted in ETFs, Markets | Comments Off

Not yet out of the woods (Hussman)

Monday, September 27th, 2010

This arti­cle is a guest con­tri­bu­tion by John P. Huss­man, Ph.D., Huss­man Funds

"CAMBRIDGE Sep­tem­ber 20, 2010 — The Busi­ness Cycle Dat­ing Com­mit­tee of the National Bureau of Eco­nomic Research met yes­ter­day by con­fer­ence call. At its meet­ing, the com­mit­tee deter­mined that a trough in busi­ness activ­ity occurred in the U.S. econ­omy in June 2009. The trough marks the end of the reces­sion that began in Decem­ber 2007 and the begin­ning of an expansion."

NBER Busi­ness Cycle Dat­ing Com­mit­tee announcement

Very often, announce­ments by the Busi­ness Cycle Dat­ing Com­mit­tee are met with a good deal of media crit­i­cism. In most cases, this is because the announce­ments tend to come long after a turn in the econ­omy is con­sid­ered to be com­mon knowl­edge. On this point, it's impor­tant to rec­og­nize that the job of the Com­mit­tee is not to pre­dict or fore­cast the econ­omy, but rather to set offi­cial dates for the begin­ning and end of U.S. reces­sions and expan­sion. In that sense, the Com­mit­tee is an offi­cial arbiter of U.S. eco­nomic history.

In the present instance, the announce­ment that the reces­sion ended in June 2009 has been crit­i­cized for an unusual rea­son — not because the announce­ment is so late that an expan­sion is already con­sid­ered to be com­mon knowl­edge, but rather because, to most Amer­i­cans, it is not at all clear that the econ­omy is in an expan­sion at all. On that front, it is impor­tant to rec­og­nize that the Com­mit­tee took pains to make it clear that it was not fore­cast­ing the future or sug­gest­ing that eco­nomic progress has even been very good:

"In deter­min­ing that a trough occurred in June 2009, the com­mit­tee did not con­clude that eco­nomic con­di­tions since that month have been favor­able or that the econ­omy has returned to oper­at­ing at nor­mal capac­ity. Rather, the com­mit­tee deter­mined only that the reces­sion ended and a recov­ery began in that month. The com­mit­tee decided that any future down­turn of the econ­omy would be a new reces­sion and not a con­tin­u­a­tion of the reces­sion that began in Decem­ber 2007."

Monthly mea­sures of GDP show dete­ri­o­rat­ing eco­nomic momentum

In its release, the Com­mit­tee noted that it "places par­tic­u­lar empha­sis on mea­sures that refer to the total econ­omy rather than to par­tic­u­lar sec­tors." These include "a mea­sure of monthly GDP that has been devel­oped by the pri­vate fore­cast­ing firm Macro­eco­nomic Advis­ers," and "mea­sures of monthly GDP and GDI that have been devel­oped by two mem­bers of the com­mit­tee in inde­pen­dent research (James Stock and Mark Watson)."

The Com­mit­tee gen­er­ously pro­vides down­load­able data on these mea­sures, which make for fas­ci­nat­ing research. In par­tic­u­lar, a review of that data sug­gests that the NBER may have to deal with the prospect of a "future down­turn of the econ­omy" much sooner than any of us would like.

Below, I've plot­ted the smoothed quar­terly and 6-month growth rates of the Stock and Wat­son monthly GDP mea­sure cited by the Com­mit­tee, fol­low­ing the method of Zarnowitz and Moore (see last week's update). The data is through June 2010. Note that the plunge in the smoothed growth rates occurred because even though GDP growth was pos­i­tive for the sec­ond quar­ter, there was a sharp down­turn in the monthly fig­ures, which a vari­ety of indi­ca­tors also picked up (such as the ECRI Weekly Lead­ing Index), and has unfor­tu­nately con­tin­ued into the present quarter.

Though the Stock and Wat­son data has a longer his­tory, the same down­turn can be observed in the Macro­eco­nomic Advi­sors data

Below, I've com­bined the long-term Stock and Wat­son data with the ECRI Weekly Lead­ing Index growth rate to give a pic­ture of how fluc­tu­a­tions in these mea­sures have cor­re­lated with past reces­sions (shaded orange) iden­ti­fied by the NBER. Given the upward spike in growth that we observed in mid-2009, the choice of a June 2009 turn­ing point is con­sis­tent with his­tor­i­cal prece­dent. The Com­mit­tee typ­i­cally dates the begin­ning of a recov­ery at the point where the growth rates of under­ly­ing mea­sures of eco­nomic growth clearly spike from neg­a­tive to pos­i­tive. What is of imme­di­ate con­cern though, is the tra­jec­tory that growth rates have taken since then.

Again, the graph pre­sented here is as of June 30, 2010. While we know the ECRI data has dete­ri­o­rated fur­ther since June, we won't have GDP fig­ures for a while yet. Given the data in hand, it's clear that past growth down­turns of the same extent have often gone on to become reces­sions. How­ever, there are a few excep­tions where these growth rates dipped below zero and then recov­ered. If we had good rea­son to expect pos­i­tive eco­nomic tail­winds, we would be less con­cerned about the present dete­ri­o­ra­tion. Unfor­tu­nately, my impres­sion is that the bulk of the growth that we did observe com­ing off of the June 2009 eco­nomic low was dri­ven by a burst of stim­u­lus spend­ing cou­pled with a vari­ety of pro­grams to pull eco­nomic activ­ity for­ward. My con­cern is that these syn­thetic fac­tors are now trail­ing off, with lit­tle intrin­sic eco­nomic activ­ity to carry a recov­ery forward.

Suf­fice it to say that we're not yet out of the woods.

Employ­ment growth ver­sus GDP growth

One clue about pos­si­ble GDP growth can be obtained by look­ing at employ­ment growth, since the two are clearly related.

On a quar­terly (non-annualized) basis, the aver­age quar­terly change in non-farm pay­rolls since 1960 has been about 0.4% (stan­dard devi­a­tion +/- 0.6), while the aver­age quar­terly change in real GDP has been about 0.8% (stan­dard devi­a­tion +/- 0.9). As of the August employ­ment report, non-farm pay­roll growth over the past 3 months has been about –0.2%, or about 1 stan­dard devi­a­tion below the norm. This would cor­re­late to a quar­terly GDP loss of about –0.4%, or roughly –1.6% on an annu­al­ized basis. Of course, part of that employ­ment loss was dur­ing June, so if we get 100,000 new jobs in the Sep­tem­ber employ­ment report, the quar­terly change will also be roughly flat, mak­ing it a coin flip as to whether third-quarter GDP was pos­i­tive or negative.

Unfor­tu­nately, the high rate of new claims for unem­ploy­ment sug­gests con­tin­ued pres­sure on the job mar­ket. The 4-week aver­age of new claims is presently at 459,500 weekly, which already would be asso­ci­ated with pay­roll job losses. But it is impor­tant to rec­og­nize that these job losses are on an already depressed labor force. To put the fig­ures on an equal foot­ing with his­tor­i­cal data, one can place the data in the con­text of a fully employed labor force, by divid­ing by (1-.01 x unem­ploy­ment rate). Admit­tedly, the cur­rent data would be even worse if we fully adjusted by using the U6 unem­ploy­ment rate, which includes dis­cour­aged work­ers, but using the over­all employ­ment rate is suf­fi­cient to improve the sta­tis­ti­cal use­ful­ness of the new claims data.

The chart below presents the his­tor­i­cal rela­tion­ship between the adjusted weekly new claims data and adjusted monthly non-farm pay­roll job growth. Note that the present rate of new claims would typ­i­cally be con­sis­tent with roughly 250,000 monthly job losses on an adjusted basis, which works out to about 226,000 job losses given the present rate of unemployment.

For­tu­nately, there have been other instances where job losses were thank­fully much less than what would have been implied by the new claims data, but it is clear that the per­sis­tently high level of weekly new unem­ploy­ment claims is incon­sis­tent with the expec­ta­tion of robust pay­roll gains.

Frankly, I am hop­ing that we are wrong on this. Our invest­ment strat­egy is a long term one. We don't rely on being "right" about indi­vid­ual instances. Rather, we focus on aver­age out­comes, tak­ing greater expo­sure to risk in con­di­tions that have his­tor­i­cally been asso­ci­ated with favor­able returns and tak­ing less risk in con­di­tions that have his­tor­i­cally been asso­ci­ated with weak returns — on aver­age. The present over­all return-to-risk pro­file is not favor­able, on aver­age. But again, despite our present defen­sive posi­tion, we would pre­fer — hands down — to be wrong about oncom­ing eco­nomic weak­ness. In our view the mar­ket is already fully priced for an eco­nomic recov­ery any­way, so the chal­lenges are steep for investors even with­out a fur­ther downturn.

As I've noted before, risk man­age­ment is for­giv­ing. Dur­ing the past decade of rich val­u­a­tions, and based on our analy­sis, through­out his­tory, the tem­po­rary returns that investors have missed dur­ing peri­ods of hos­tile val­u­a­tions and over­bought con­di­tions have been more than com­pen­sated by the avoid­ance of sub­se­quent — often pro­found — losses that cor­rect those val­u­a­tions. But this is a long term, aver­age ten­dency. We aren't mar­ket timers — we are risk man­agers. For now, con­di­tions con­tinue to stack on the defen­sive side.

Mar­ket Climate

Presently, our val­u­a­tions mea­sures sug­gest clear over­val­u­a­tion (our esti­mated 10-year total return for the S&P 500, based on a vari­ety of mod­els includ­ing the oper­at­ing earn­ings model pre­sented a few weeks ago, is only about 5%-5.4% annu­ally), mar­ket action is stren­u­ously over­bought, mar­ket inter­nals are rel­a­tively pos­i­tive, but eco­nomic pres­sures are still neg­a­tive, and sen­ti­ment is once again bull­ish enough to define an "over­val­ued, over­bought, over­bull­ish" condition.

The Strate­gic Growth Fund is fully hedged at present, and cur­rently has a "stag­gered strike" posi­tion, where our put option strikes are raised closer to the level of the mar­ket (at a cost of just over 1% of assets) to pro­vide tighter down­side defense. On Friday's advance, our stocks did not par­tic­i­pate as much as we would have liked (com­ing off of a very good rel­a­tive per­for­mance on Thurs­day), so the Fund pulled back a frac­tion of a per­cent. As usual, the day-to-day fluc­tu­a­tions in the Fund when we are hedged are pri­mar­ily dri­ven by the dif­fer­ence in per­for­mance between the stocks we hold long and the indices we use to hedge. The Strate­gic Inter­na­tional Fund is also over 90% hedged, with the pre­cise fig­ure vary­ing mod­estly from day-to-day as we exe­cute new stock pur­chases and asso­ci­ated hedges. Suf­fice it to say that both Funds are defen­sive here.

As a side­note in reponse to a few ques­tions last week, since our pre­cise hedge level may vary from day-to-day and week-to-week, I may describe our hedge posi­tion with words such as "fully," "largely," "tightly," "nearly fully" and so forth, which really con­vey lit­tle dis­tinc­tion. At the point where it becomes appro­pri­ate to remove large por­tions of our hedges, I will be very clear about our change in posi­tion and the ratio­nale for that change. I don't antic­i­pate such major hedg­ing changes until we observe a clear shift in some com­bi­na­tion of val­u­a­tion, over­bought con­di­tions, or eco­nomic pressures.

In bonds, the Mar­ket Cli­mate con­tin­ues to be char­ac­ter­ized by mod­er­ately unfa­vor­able yield lev­els and favor­able (i.e. down­ward) yield pres­sures. The Fed­eral Reserve con­tin­ues to tele­graph a will­ing­ness to engage in fur­ther quan­ti­ta­tive eas­ing, which sug­gests the prospect of fur­ther Trea­sury pur­chases in the event of eco­nomic weak­ness. We're observ­ing clear pres­sure on the U.S. dol­lar in response to sug­ges­tions about QE, which is as expected. The Strate­gic Total Return Fund cur­rently has a dura­tion of just over 4 years, pri­mar­ily in straight Trea­sury notes, about 10% of assets in pre­cious met­als shares, about 5% of assets in for­eign cur­ren­cies (pri­mar­ily Japan­ese yen, Swiss franc, and British pound), and about 2% of assets in util­ity shares.

Copy­right © Huss­man Funds

Tags: Arbiter, Business Activity, Business Cycle, Cambridge, Common Knowledge, Conference Call, Continuation, Dating, Downturn, Economic Conditions, Economic History, Economic Progress, Economy, Hussman Funds, Job, Media Criticism, National Bureau Of Economic Research, Recession, Recessions, Trough
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Charles Brandes — Why Value Investing Outperforms (Part 1)

Monday, September 27th, 2010

Charles Bran­des — Why Value Invest­ing Out­per­forms (Part 1)

Charles Bran­des, founder of Bran­des Invest­ment Part­ners (1974), which today man­ages over $50-billion in assets, glob­ally, dis­cusses why value stocks out­per­form growth stocks and bonds over the long term, with Dan Richards, Clientinsights.ca.

Dan Richards: We're going to talk about some research that Bran­des Insti­tute team has con­ducted recently, on the role of expec­ta­tions when it comes to stock mar­ket returns. Let's start by talk­ing a lit­tle bit about what the long term returns for stocks look like going back to 1920 or so.

Charles Bran­des: Yes, well the long term return for stocks going all the way back after infla­tion has aver­aged about 6.5% to 7%.

DR: How would that com­pare to bonds?

CB: The return on stocks would be about 2 or 3 times the return on bonds, after inflation.

DR: Aca­d­e­mics look at these results and they say, well, the rea­son, that stocks out­per­form bonds is because of some­thing called a risk pre­mium, that because are more volatile, riskier, they demand a higher return. What's your view on the role of risk pre­mium in explain­ing why stocks outperform.

CB: Well, risk, as the aca­d­e­mics define it is wrong. For a long term investor, risk is hav­ing to do with how well com­pa­nies do; the aca­d­e­mics define it as just the price changes or volatil­ity.  That's true for spec­u­la­tors, prices changes and volatil­ity in the short term, that's risk for spec­u­la­tors, but not for investors.

The aca­d­e­mics' expla­na­tion for why stocks out­per­form bonds is not the right expla­na­tion. The real sim­ple expla­na­tion is that stocks which rep­re­sent busi­nesses that cre­ate goods, they cre­ate the wealth that can pay the bond inter­est. So they have to cre­ate more wealth than bonds create.

DR: Talk about the facts that stocks as a whole have out­per­formed bonds. Now, within stocks there are a cou­ple of dif­fer­ent cat­e­gories; there are value stocks com­pared to what are called growth stocks. I think you call them 'glam­our' stocks. Could you talk about the dif­fer­ence between value stocks and what you call glam­our stocks?

CB: Yes, its just a def­i­n­i­tion of the price that they're trad­ing for, in rela­tion­ship to the earn­ings of the  com­pany; so again, the glam­our stock is the one whose price is high com­pared to the earn­ings of the com­pany, because the mar­ket is antic­i­pat­ing the earn­ings are going to grow. They're growth stocks; glam­our stocks growth stocks.

Value stocks are where there is very lit­tle antic­i­pa­tion of growth, usu­ally, and their earn­ings are high, com­pared to the actual price of their stock.

DR: So we've talked about the dif­fer­ence between those two cat­e­gories of stocks, value stocks vs. glam­our stocks. Talk about what the long term per­for­mance looks like for those two dif­fer­ent kinds of stocks.

CB: If you take those cat­e­gories and you look at the top glam­our stocks vs. the top value stocks, the value stocks over a long period of time will out­per­form by as much as 5% or 6% per year. In some cases, some peri­ods, you can see them out­per­form­ing by as much as 10% per year.

DR: So an aca­d­e­mic might look at that and say, well, if you've got a cat­e­gory of stocks like value stocks that out­per­form to that extent, well the rea­son must be that they're more volatile and riskier than those other cat­e­gories of stocks. what's your obser­va­tion on that?

CB: Well, there's a cou­ple of prob­lems with their con­clu­sions. First of all, they're not more volatile, as they define risk as volatil­ity. So, that is not right. From the other risk stand­point, of how com­pa­nies do over a long period of time, they're also not more risky. They're actu­ally safer, you're pay­ing for it is a lot less price wise than like­wise for future development.

END OF PART ONE

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