Zweig: Investors Faith in Returns a “Fairy Tale”

Tuesday, January 19th, 2010

Jonathan Zweig, of WSJ’s Intelligent Investor column writes that investors are out of touch with reality as far as their expectations for investment returns are concerned.

The faith in fancifully high returns isn’t just a harmless fairy tale. It leads many people to save too little, in hopes that the markets will bail them out. It leaves others to chase hot performance that cannot last. The end result of fairy-tale expectations, whether you invest for yourself or with the help of a financial adviser, will be a huge shortfall in wealth late in life, and more years working rather than putting your feet up in retirement.

Read the whole article.

Source: Why Many Investors Keep Fooling Themselves, Jonathan Zweig, January 16, 2009
http://online.wsj.com/article/SB10001424052748704381604575005291706758502.html?mod=WSJ_PersonalFinance_PF2

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Roundup: Economy and Bond Market (12/24/2009)

Sunday, December 27th, 2009

The Economy and Bond Market

The yield on the 10-year Treasury note increased by 26 basis points during the holiday-shortened week, leaving the yield at 3.80 percent. The spread between the two-year note and the 10-year note reached a record 285 basis points during the week, likely reflecting investor concern about future inflation levels.

Current inflation, as measured by the Personal Consumption Expenditure Core Price Index (PCE Deflator) shown below on a year-over-year basis, remains relatively contained. The November data released this week showed a 1.4 percent year-over-year increase and was flat on a month-to-month basis.

Strength

• Sales of existing U.S. homes in November rose 7.4 percent to an annual rate of 6.54 million homes, greater than the forecasted rate of 6.25 million.
• Price inflation data this week slightly beat expectations. The Personal Consumption Expenditure (PCE) Price Index for November was up 1.5 percent year-over-year versus a 1.6 percent consensus.
• Personal income in November increased 0.4 percent from October, the fifth consecutive month-over-month increase and the biggest monthly increase since May, while personal spending increased 0.5 percent. The increases left the savings rate unchanged at 4.7 percent for November.
• Initial jobless claims last week declined to 452,000, down from 480,000 the previous week. This was the lowest level since September, 2008. The four-week average for claims, which smooths out fluctuations, fell to 465,250, its sixteenth-straight weekly decline.
• Orders for durable goods increased 0.2 percent in November. However, durable goods orders excluding transportation increased by 2.0 percent, almost twice the 1.1 percent forecast.

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Weakness

• Sales of new U.S. homes in November fell 11.3 percent to a seasonally adjusted annual rate of 355,000, below the expected rate of 438,000.
• Real U.S. gross domestic product (GDP) for the third quarter was revised downward to 2.2 percent from the previously reported 2.8 percent.
• The Richmond Federal Reserve Bank’s Manufacturing Sector Activity Index fell to minus four in December from a positive one in November and a positive seven in October. The consensus expected it to rebound to five.

Opportunity

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4-5 percent. The global economic recovery appears to be taking hold.

Threat

• The Fed reiterated their monetary policy stance in the prior week and on the surface nothing really changed but they are incrementally moving to reduce the policy accommodation and often these things move quicker than many expect.

Tags: Admin Post, Amp, Avw, Basis Points, Bond Market, Cb, Ck, Consensus, D1, Decline, Deflator, Durable Goods Orders, Economy, Fluctuations, GDP, Gross Dom, Gross Domestic Product, Img Src, Inflation Data, Initial Jobless Claims, Investor Concern, Market Economy, Openx, Personal Consumption Expenditure, Personal Income, Price Index, Price Inflation, Random Number, Roundup, S Gross, Year Treasury Note
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Economic Threats and Investment Opportunities

Monday, December 14th, 2009

In an article, published today at GlobeAdvisor.com, Pierre Daillie, Managing Editor, AdvisorAnalyst.com discusses how economic threats translate into different investment opportunities.

Confused about what’s in store for the economy? The long-in-the-teeth rally in equities, falling U.S. treasury bond yields, and record gold prices reflect both the uncertainty, and the conflicting wagers on inflation and deflation. It appears we’re at an inflection point, the outcome of which will depend on how economic policy makers act. The debate as to what happens next rages on.

To read the story, please visit http://www.globeadvisor.com/advisoranalyst/aa200912132.html

Tags: Act, Advertisement, Amp, Avw, Cb, Ck, Economic Policy Makers, Economic Threats, Economy, Gold, Gold Prices, Img Src, inflation, Inflection Point, Investment Opportunities, Lt, Managing Editor, Openx, Policy Debate, Rages, Rally, Random Number, Teeth, Translate, Treasury Bond Yields, Treasury Yields, U S Treasury, Uncertainty, Wagers
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Post-Bubble: “Good” News is “Bad” News?

Thursday, November 5th, 2009

In a recent Barron’s article, Randall Forsyth shares Michael Kahn’s (Barron’s technical analyst) view that the market, on the basis of numerous indicators is showing signs of strain, of topping.

Michael Kahn, Barrons.com’s own technical guru, thinks the seven-month-long advance now is showing signs of topping out. In his latest column, (”Setting Free the Bears,” Nov. 2,) points to various technical signs that the market is topping out. Unlike in the summer, when the major indexes paused at several junctures, market internals such as breadth now suggest something more serious.

Albert Edwards argues that if bonds and equities are indeed decoupling, then the market is going to be very sensitive to changes in the economic cycle. Edwards notes that during the 1965 to 2000 period, “bad” news was “good” news. Now, post-bubble in the US, with Japan as its progenitor, or model,  Edwards is suggesting that “good news” that hurts the bond market, is “bad” news for stocks.

In post-bubble Japan, bonds and equities decoupled. In the U.S. from 1965 to 2000, lower bond yields would mean higher stock prices, so “bad news” would be treated as “good news” if it benefited the bond market and, in turn, price-earnings multiples. But in Japan, equities follow the economic and profits cycle.

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Edwards emphasizes that, even in Japan’s secular bear market since 1989 (during which the Nikkei is off by three-quarters), there have been numerous 50%-plus rallies coming off of cyclical low points. Bit investors should have always sold these rallies when cyclical leading indicators topped out.

Post-bubble Japan is the progenitor for the U.S. after the bursting of its credit bubble, Edwards long has hypothesized. If so, the equity market is tied more tightly to the economic cycle, in which case investors need to be keenly aware of cyclical turning points.

Read the whole article here.

Tags: Avw, Bad News, Barron, Barron's, Bond Market, Bond Yields, Credit Bubble, Economic Cycle, Img Src, Junctures, Leading Indicators, Michael Kahn, Openx, Price Earnings, Progenitor, Random Number, Secular Bear Market, Setting Free The Bears, Stock Prices, Stocks Bonds, Technical Analyst, Technical Guru, Technical Signs, Three Quarters
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The Dying Dollar: Rumours and Misinformation

Thursday, October 15th, 2009

Martin Wolf writes an interesting column in the FT.com October 13, 2009:

It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements.

We should start with what is not happening. In the recent panic, the children ran to their mother even though her mistakes did so much to cause the crisis. The dollar’s value rose. As confidence has returned, this has reversed. The dollar jumped 20 per cent between July 2008 and March of this year. Since then it has lost much of its gains. Thus, the dollar’s fall is a symptom of success, not of failure.

This is an idea that we have covered at some length during the course of the year, so it is a dear subject for us to feature, as it goes hand in hand with the raging debate between equity bull and bear, and deflationist vs. reflationist.

During the first quarter of this year, when equity markets were tanking the dollar was strengthening, and that was a direct result of the market taking a large long position in the dollar, via cash instruments and other short term government securities. By February 2009, the Fed’s cash position had reached such an untenable shortage because investors and banks were hoarding it, that the Fed and Treasury Department were forced to resort to Quantitative Easing (QE) measures that added $2-trillion of printed liquidity into the credit market. Most in the market missed the fact that there was, at the time, a panic among monetary authorities that the physical supply of cash would run out.

With the Dow benchmark crossing over 10,000 yesterday, and other markets attaining commensurate or higher levels, is it any surprise, given that US$450-billion has moved from money market funds alone to be re-invested, that the dollar is faltering? In the simplest of terms, the global equity markets’ slingshot recovery has led to a slingshot devaluation of the dollar.

Superficially, the shortage of cash in February was deflationary. In the present, the flood of liquidity from QE, plus the US/UK Zero-Interest-Rate-Policy, are fueling re-investment in risk assets, and driving the dollar to an out-of-balance devalued state. To put it mildly, if this is the current basis for long term inflation, it too, is rather shallow.

The most likely scenario at this stage would be monetary intervention - and that means that while gold may continue to rise a little bit further from its current highs, it is due for an IMF selloff in concert with the G20, all of whom have a vested interest in seeing the greenback at higher levels against the Euro, Yen, and RMB.

The less likely scenario rests with whether or not the Fed can convince its public that the economy is expansionary, thus enabling them to reinstate an interest rate, which too, would raise the dollar’s value and repatriate cash from assets to the money market.

Our suspicion is that the Canadian dollar’s recent run and that of other non-dollar centric currencies would end upon either scenario.

Therefore, there may be a strategic currency-based opportunity in buying US dollar denominated assets, and preferably in short term government securities. If you have the stomach for it, the real opportunity may be in longer dated US government bonds, as either intervention or re-instatement of interest rates would result in lower long term yields.

Tags: Alternative Arrangements, Avw, Bull And Bear, Canada, Cash Instruments, Cash Position, Collapse, D1, Death Bed, First World War, Global Monetary System, Gold, Gold Bugs, government securities, Hawks, Img Src, liquidity, Martin Wolf, Misinformation, Monetary Authorities, Mongers, Openx, Qe, Random Number, Rumours, Treasury Department, Trillion
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In Praise of Emerging Markets

Thursday, October 8th, 2009

This post is a guest contribution by John Derrick, Director of Research at US Global Investors.

We believe global growth is the most powerful investment theme now and for the foreseeable future. You can see this playing out as countries like China, India and Brazil grow in economic stature. As we saw in Pittsburgh last week, the G-7 is being supplanted by the more inclusive G-20 when it comes to global economic decision-making.

Emerging market stocks were hit especially hard during the financial crisis but have been among the best performers during the rebound. We are currently in the midst of a synchronized global recovery, and with aggressive government stimulus, strong balance sheets and an ever-growing share of global GDP, emerging markets are likely to outperform the developed markets due to strong domestic consumption and forward-looking infrastructure investments.

The chart below from Goldman Sachs on consumer spending illustrates that point.

Goldman estimates that consumer spending in China will increase by about 10 percent in 2010, while India and Brazil will be in the 4 percent to 6 percent range. At the same time, negative growth is expected in Spain, Britain and Italy, and the forecast for the United States is flat. Industrial production in emerging markets has recovered to roughly where it was when the recession began; in developed markets, IP is still down nearly 20 percent.

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This second chart, also from Goldman Sachs, compares the operating margins in developed and emerging markets for the companies in Europe’s Dow Jones Stoxx 600 Index. The analysis going back to the early 1990s found that the emerging-market operations of these companies have consistently yielded higher margins, and oftentimes the spreads have been significant.

US Global Investors recently hosted a global outlook webcast that featured Dr. Marc Faber, the well-known investor based in Hong Kong. In the course of that webcast, Dr. Faber addressed the developed-versus-emerging issue:

If you look at the next 10 to 20 years in the West, I don’t see how the lifestyle of the average person will improve meaningfully. On the other hand, if you look at a country like Vietnam, they have a GDP per capita annually of $800 which may go to $3,000 over the next 15-20 years.

The same is true for China and India. You suddenly have a middle class of 230 million people in India who will be buying cars like the $2,500 Nano and other goods.

Once a family moves from the bicycle to the motorcycle, it’s an improvement in their standard of living. But when you move to the car and drive your children to school in your car, it’s a huge increase in your standard of living and your social class.

Global growth has been a tremendous benefit for commodities, with the key driver being strong demand from China. And as we pointed out in a recent webcast focused on China, that use of commodities is less to fuel export growth and more to satisfy domestic demand as income levels rise. Increasing demand for commodities and the corresponding rise in prices has positive knock-on effects for much of the developing world.

The increasing importance of emerging countries in the world order also argues for their currencies to strengthen relative to the dollar. International stock markets outperformed the US market during the 1970s and much of the 1980s, with much of that outperformance relating to relative currency strength.

A continuation of the dollar’s decline in the face of slow growth and yawning budget deficits - nearly $11 trillion between 2009 and 2019, according to White House estimates - would provide a significant tailwind for globally-minded investors.

Source: John Derrick, US Global Investors - Investor Alert, October 2, 2009.

Tags: Avw, China, Commodities, Companies In Europe, Consumer Spending, Director Of Research, Domestic Consumption, Dow Jones, Dr Marc Faber, Economic Decision, Economic Stature, Emerging Market Stocks, Emerging Markets, Foreseeable Future, Global Gdp, Global Growth, Global Investors, Global Outlook, Global Recovery, Gold, Goldman Sachs, Img Src, India, Infrastructure Investments, John Derrick, Market Operations, Openx, Operating Margins, Random Number
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What Follows Record-Setting Dow Quarters?

Thursday, October 8th, 2009

This is a guest post by Barry Ritholtz, editor of The Big Picture Blog and author of the newly released book, Bailout Nation

With futures deep in the red, let’s take a look at how markets do after big quarters. The quarter ending September 30 saw the Dow putting in its best quarter since 1998, up a solid ~15%.

With everyone waiting for a pullback, and yesterday (Thursday] and today [Friday] viewed as the probable start, perhaps its time to review some history. What has happened historically after markets have put in record setting quarters - 15%+?

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For the most part, momentum has trumped mean reversion historically. Jim Bianco crunched the numbers, and he found that “stocks returned an average of 1.33% over the month following one of these record quarters, 3.46% over the following quarter, and 9.95% over the following year”.

It is worth noting that these average returns following quarters of 15%+ performance are nothing out of the ordinary. The average monthly return over all periods in the DJIA since 1900 is 0.58%, the average quarterly return is 1.66%, and the average yearly return is 6.90%. If anything, the average returns following huge quarterly gains actually outpace the average returns during all periods.

Perhaps another way to look at it is that these record setting rallies, especially following big selloffs, are themselves a form of mean reversion.

Here’s the table of the past 15% quarters:

Source: Barry Ritholtz, The Big Picture, October 2, 2009.

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Ridiculous Hype Over Secret Oil Meetings

Tuesday, October 6th, 2009

This post is a guest contribution by Michael “Mish” Shedlock, of Mish’s Global Economic Trend Analysis.

Once again everyone is hyperventilating over “secret” moves to trade oil in currencies other than the US dollar. Please consider The demise of the dollar by Robert Fisk.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.”

Supposedly Robert Fisk knows the plans but “Americans have not discovered the details”.

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Such “secret” talks surface about once a year and nothing ever happens. Yet, even if these talks led to actual actions, they are irrelevant for the simple reason it does not matter one iota what oil is priced in.

I discussed this concept in Oil Pricing Unit Red Herring on November 18, 2007. At the time everyone was going gaga because Venezuela and Iran would supposedly not take dollars for oil.

Ten Simple Facts

1) Oil is priced in dollars.
2) Oil trades in Dollars and Euros right now in spite of the pricing unit being dollars. OPEC has recently admitted this fact.
3) Clearly oil does not have to be priced in Euros to trade in Euros, or for that matter priced in Yen to trade in Yen. The same applies to any major currency.
4) Neither Venezuela or Iran hold any dollar reserves. To the extent that either is taking trades in dollars, there is clearly nothing forcing them to hold dollars. By extension there is nothing forcing any OPEC country to hold dollars if it doesn’t want to.
5) It takes less than a second for Forex trades to take place. 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency.
6) The above logic applies to any currency and any commodity.
7) Nothing is stopping anyone at any time anywhere from selling dollars for whatever currency they want to hold. Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.
8) Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.
9) Dollars are held (or not held) for reasons totally unrelated to pricing unit. Some of those reasons are political, some are based on sentiment, some on trade patterns and trade relationships, and some to suppress the value of local currencies to improve exports.
10) Currencies float and so do the price of oil and commodities. Pricing oil (or any other commodity) in Euros will not cause a price change in dollars. Look at gold which is simultaneously priced in everything as proof.

War Over Pricing Unit?

Fisk concludes with “Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.”

Iran has virtually no trade with the US, nor is there US foreign direct investment in Iran. Pray tell what does Iran need to hold dollar reserves for? Iran’s statements amount to political hot air and nothing more. It announced something the world already knew, they already held no dollar reserves. Who should care?

Note that it takes less than a second for Forex trades to take place, and 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency. Logically, it makes no difference if US dollars are converted into Euros one second before a purchase or one second after the a purchase.

Given that it is irrelevant what oil is priced in outside of something illiquid like Yap Island stones, the logical conclusion is the US did not go to war over oil being priced in Euros.

Currencies Are Fungible

Let’s put the horse in front of the cart where it belongs.

You can get a price of oil in any major currency you want today because all major currencies are fungible. However, pricing oil in a basket of currencies would do nothing but cause confusion. The idea is ridiculous.

Saudi Arabia, China, Japan, and any other country can hold whatever reserves they want in whatever currencies they want regardless of the pricing unit of oil. Reserves are based on trade relationships not pricing units!

Pricing oil in Euros (or even sillier - a basket of currencies) will not cause anything to happen. If pricing unit changes do happen, they will be a result of sentiment changes in regards to existing dollar hegemony and not the other way around.

Dollar Armageddon is not coming over a pricing unit, nor did the US invade Iraq for that reason. The story is nothing meaningless hype.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
http://globaleconomicanalysis.blogspot.com/2009/10/ridiculous-hype-over-secret-oil.html

Tags: Avw, Bigan, Central Bank Governors, China, China Japan, China Russia, Chinese Yuan, Commodities, Demise Of The Dollar, Economic Trend, Energy Interests, Euro Gold, Gold, Gulf Arabs, Japanese Yen, Loyal Allies, Michael Mish, Middle East History, Mish Shedlock, oil, Openx, Red Herring, Robert Fisk, Secret Moves, Secret Talks, Unified Currency
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