Gold Market Highlights (3/15/2010)

Monday, March 15th, 2010

Gold Market

For the week, spot gold closed at $1,101.90 per ounce down $32.75 or 2.89 percent. Gold equities, as measured by the XAU Gold & Silver Index (XAU) fell 2.79 percent for the week. The U.S. Trade-Weighted Dollar Index (DXY) also slipped, losing 0.77 percent.

Strengths

• Hedge fund managers John Paulson and George Soros both made significant investments, at discounts to market, in a potential gold-mining company with significant mineral assets. These transactions point to an expectation of future economics in the gold mining sector which are deemed to be more attractive.
• John Embry, chief investment strategist at Sprott Asset Management, was recently interviewed on Mineweb.net and noted the public is becoming increasingly aware of the looming sovereign debt crises. He noted that historically they would counsel investors to have 5 to 10 percent of their assets in the precious metals sector, but now that suggestion is above 20 percent.
• A recent IMF Staff Position Note “Rethinking Macroeconomic Policy,” released this quarter, is making the argument that traditional inflation targeting of 2 percent may not be optimal and opens the discussion of inflation targets at 4 percent.

Weaknesses

• Some of the recent weakness in gold was attributed to liquidations of long position related to an upcoming hearing by the Commodity Futures Trading Commission to investigate speculative interest in the precious metal market.
• South African has fallen to the world’s fourth largest gold producer behind China, Australia and the United States. Falling production is partly being driven by declining ore grades, down 8 percent over the past year. Reportedly, China is very active within South Africa trying to secure supplies of industrial metals, but likely would not rule out opportunities to obtain production interest in the precious metals sector.
• The prime minister of Greece has been busy trying to find governmental allies to create regulations that would limit the use of credit-default-swaps in financial markets, which he blames for driving up the borrowing costs of issuing debt.

Opportunities

• Last year was the first time union membership in the public sector rose above private sector membership. The average hourly wage of public employees last year was $39.66, about 45 percent higher rate than the average hourly wage of $27.42 paid in the private sector. According to U.S. Bureau of Labor Statistics, businesses have cut 8.5 million jobs while government job losses are almost nil. Public spending to support these jobs could contribute to massive deficits that could weaken the dollar and benefit gold.

Threats

• RBC recently highlighted that the South African rand could rise 10 percent in the next three months as the country prepares to host soccer’s World Cup. Unless the gold price rises an equal amount, some of the miners could see a margin squeeze.
• Several reports have highlighted whether the days of big gold companies is over. While this can be an opportunity, uncertainty is more prevalent in the near term.
• The world’s biggest gold miner is planning to list its African assets as a separate company in London. In another case, the world’s third largest gold miner hinted the company could rationalize assets.

Tags: Chief Investment Strategist, China Australia, Commodity Futures Trading Commission, Futures Trading Commission, George Soros, Gold, Gold Equities, Gold Market, Gold Mining Company, Gold Producer, Imf Staff, Industrial Metals, Inflation Targets, John Embry, John Paulson, Ore Grades, Precious Metal Market, Precious Metals Sector, Prime Minister Of Greece, Silver Index Xau, Speculative Interest, Spot Gold
Posted in Markets | No Comments »

David Darst - Robert Kessler - Interview Transcript (Feb. 19)

Sunday, February 28th, 2010

Connie Mack recently interviewed David Darst, chief investment strategist for Morgan Stanley Smith Barney, and Robert Kessler, head of Kessler Investment Advisors, which runs portfolios for institutional investors and governments around the world. This is a MUST view/read interview. The complete transcript follows.

CM: David Darst is known as a master of the art of asset allocation. He is the chief investment strategist for Morgan Stanley Smith Barney. David is also a teacher and prolific author, and his latest book is The Little Book that Saves Your Assets . And it’s great to have you both here. Thanks so much for joining us on WealthTrack.
Robert Kessler, U.S. Treasuries, you make your living in investing and managing portfolios of U.S. Treasuries, and as long as I’ve known you, they have been denigrated by most of the competition except in this most recent period when everyone rushed to Treasuries, but now the naysayers are back again. So why are they wrong again about Treasuries?

ROBERT KESSLER: It’s not a question of being wrong or right. A Treasury is really a benchmark to almost every other asset class. So as a benchmark, you can’t be wrong or right about a benchmark. It’s just simply matter of spread between what other asset classes are selling at. So in the Treasury market, we’re lucky enough to be able to have a choice of overnight Treasuries, which is cash, or longer-term Treasuries. And longer term Treasuries are really based on whether you believe inflation is going to be an issue or whether disinflation will be an issue.
So right now we’re in what we call a credit crisis. We’re in a credit recession. And during credit periods of time, you don’t want to own risk assets, and if you don’t want to own risk assets, you want to go to something that has very little risk, which is a Treasury. Now the question becomes: do you own Treasuries as bills overnight or do you really believe that rates are going to come down because there’s very little inflation in the world? So since we believe rates will come down because there is very little inflation, then Treasuries become very attractive.

CONSUELO MACK: All right. So let me stop you there and we’re going to follow up on that in a couple of minutes. David Darst, as a global strategist first and as an asset allocator second, how do you view this?

DAVID DARST: It’s a great point because really, inflation is a monetary phenomenon. We have a big war going on between this monetary phenomenon called inflation potential down the road.

CONSUELO MACK: Right.

DAVID DARST: And deflation is a credit phenomenon. And right now credit is contracting. The latest month figure for December showed it contracted, consumer credit, Consuelo, by $2.5 billion. That’s 11 months in a row the government has been keeping these numbers since 1943. It’s never contracted for 11 months in a row. So right now we have this epic, titanic struggle between the deflation phenomenon, credit contracting and the inflation phenomenon, which is the government attempting to pump up the money supply, add liquidity to the system, which people, makes them worry about inflation down the road. So we feel that maybe Treasury bonds, Treasury securities, you can have them in the portfolio right now, you need to have a little offense as well as a little defense. Treasury securities are a defensive investment in our opinion. Last two years ago they were up 20%. They were up 20% in 2008 when the stock market went down 37%. Last year, ten-year Treasuries lost 9.9% on a total return basis.
I’m very receptive. For a person basically to say stay away from Treasuries means they think interest rates are going to rise. That means the consumer is going to come back. That means that credit is going to stop contracting and we’re going to worry about inflation. But over the next 12 months, I’m not so sure those things are going to be an issue, Consuelo.

CONSUELO MACK: So short term at any rate, next 12 months, Treasuries are probably a good place to be defensive.

DAVID DARST: I think you can have some in the portfolio. We are underweight. We are underweight. Normal is 16%. We’re 7%. That’s our largest single underweight. We are very underweight because we’re worried about the health of sovereign credit finance about the condition of the U.S., the U.K., the European community and so forth, the condition of these finances. So much money has been issued.

CONSUELO MACK: Okay. How do you answer that argument because, in fact, as you know, that most people who are looking at U.S. Treasuries are saying, we’ve got a record deficit; we have to finance that record deficit. If we are basically having to sell a lot of Treasury bonds, that is going to mean that the value of the dollar of our securities is going to go down. And then, in fact, that means that it’s going to be inflationary for the U.S. So how do you respond to that argument? Why aren’t you worried about the size of the deficit and what we have to finance being inflationary?

ROBERT KESSLER: Let me answer two questions. The first question is this concept of the deficit. There is this constant talk of deficits lead to inflation. We don’t really have any indication that that’s true. In the Depression in the United States, we had huge deficits, of course, and we had no inflation. We had deflation. Japan has gone through 20 years now of deficits that are far, far higher than ours, and they have deflation. So we don’t know anything about the inflation side of it. What’s really important is that if people can’t raise prices and there’s an awful lot of excess capacity in the world and wages are going down and unemployment keeps staying kind of sticky at these very, very high levels, it’s very difficult to have inflation.
And so there is no inflation. That’s not our issue. The real issue is– television was interesting today because not only are we dealing with Greece, Greece is very interesting because we’re bailing out Greece and bailing out perhaps Portugal next, but we’re probably going to bail out New Jersey after that. Because New Jersey just announced today that they’re running into a huge deficit, too.

CONSUELO MACK: As are a lot of states.

ROBERT KESSLER: As are a lot of states. So we have states having problems, lowering wages, firing people; very, very difficult to raise prices and consequently, very difficult to have inflation.

CONSUELO MACK: All right. So you think we’re deflationary. You think the credit contraction you think which is extraordinary is actually, we’re in the beginning stages of it. You’re not thinking a year down the road, you’re thinking for inflation, you’re thinking, what three, four, five…

ROBERT KESSLER: It sounds like I’m being very pessimistic.

CONSUELO MACK: You’re a bond person.

ROBERT KESSLER: No, no but I don’t want to be pessimistic. We just got back from the Middle East. I have to tell you, not only is everything for rent in the Middle East, not only are buildings completely unoccupied, but banks, since we deal with banks, banks right now are doing one trade. They’re doing what we call a carry trade, meaning they’re buying their sovereign debt, either U.S. sovereign debt or their sovereign debt short term and they’re carrying it at very low cost.

CONSUELO MACK: Because they can borrow it at very low cost.

ROBERT KESSLER: Because they can borrow at very low cost, as is JP Morgan in the United States and as is Morgan Stanley and everyone else. So the fact of the matter is when people say we’re in a bear market in Treasuries, it’s ridiculous. Last year, even though David is correct, the ten-year Treasury was down 9%. The fact of the matter is we made more money last year in two-year Treasuries than any year I can think of because everyone was carrying a two-year Treasury at zero and getting a point. Now, in bank talk…

CONSUELO MACK: So they were borrowing at lower than 2% and then they were buying the two years… So they made?

ROBERT KESSLER: They do it at a very high leverage level because they don’t need to do very much with a capital question. So the fact of the matter is you have this bull market going on and yet everyone is saying, anything but Treasuries. Tell that to JP Morgan.

CONSUELO MACK: Right. So David, not to completely focus on Treasuries, but as far as asset allocation, you said that your biggest underweight is U.S. Treasuries right now.

DAVID DARST: It’s sovereign credit, Consuelo.

CONSUELO MACK: Across the board.

DAVID DARST: It would include U.K., it would include Canada, it would include Europe.

CONSUELO MACK: And the reason for that is what?

DAVID DARST: Well, the sovereign… we believe there’s so much issuance of sovereign debt; we do believe that the balance sheet of the Fed has ballooned from $900 billion to $2.2 trillion. We do see the deficits as being quite large on out into the future. And we do believe that these trillion dollar and trillion and a half dollar deficits are going to have to be bought and to entice people, which will cause higher interest rates. So that’s why Morgan Stanley’s economists have a big out-of-consensus call, which Robert is very familiar with. And by the way, the word Robert means bright fame. His name means bright fame. Now Robert is familiar with this- Morgan Stanley is expecting 5.5%. And every conversation I get into, I have to argue we think that inflation fears will be higher towards the end of 2011. We see all this slack. But there’s concern. Supply, which you mentioned, that is the excess issuance by the Treasury, and also the Fed, and I know there’s a lot of disagreement over this, we expect them to begin their exit strategy later this year, second half of this year.

CONSUELO MACK: And exit strategy could mean raising the federal funds rate?

DAVID DARST: Higher short-term interest rates, and that means we think higher long-term interest rates. We take a little bit of respectful issue with Robert Kessler’s brilliance over here. But we believe the essence of our underweight versus sovereign debt is because of enormous supply and people’s concern. Inflation is the biggest… The biggest inflations of all times have all come from fighting deflation. In the 1946 to 1949 period in Germany, in communist China, in the 1920s and 1923 period of Weimar Germany, the biggest inflations have all come from fighting deflation.

CONSUELO MACK: So what’s interesting is the common ground is here. Right now we are fighting deflation, which is actually positive at least for the next 12 months, possibly for…

DAVID DARST: Steroids, financial steroids. Mark McGuire has admitted to it and the Fed is taking financial steroids.

ROBERT KESSLER: Let me be a little contrary for a second.

CONSUELO MACK: For a second?

ROBERT KESSLER: All right, for 30 seconds. The fact of the matter is we talk about this exit strategy all the time about the Fed. I’m into the entrance strategy. I am trying to figure out how we’re going to help out 8.5 million people who don’t have jobs. It’s probably closer to 17 million because that’s really a more correct figure.

CONSUELO MACK: The ones who have been discouraged and not looking for jobs anymore.

ROBERT KESSLER: Why we’re talking about exit strategies is very, very disconcerting to me.

CONSUELO MACK: Because the Fed is actually. Bernanke is talking about it, right.

ROBERT KESSLER: What we’re talking about again is Wall Street and the banking industry. When you get to, excuse me, the middle of the United States, at least where I live.

DAVID DARST: Right, you live in Denver.

ROBERT KESSLER: In Denver. People don’t have a clue to what JP Morgan is doing or Morgan Stanley is doing. What they’re looking for is their job, and when someone says, excuse me, I think it will be a good idea to raise interest rates, they can’t even borrow money; not only can’t they borrow money, no one will lend them any money. So they’re really…

CONSUELO MACK: Like the credit contraction you were talking about.

ROBERT KESSLER: So the issue is why are we talking about exiting the strategy?

DAVID DARST: The reason we’re talking about exit strategy is psychological. It’s the use of Shakespearean language and words to try to divert people from worrying about the debasement of the currency, internally and externally. And that’s why he’s saying it. And I agree with you. I don’t see rates jacking way up very quickly. This is going to be gradual, but we went from $900 billion Fed balance sheet to $2.2 trillion. And it is very, very important.
Sarkozy, during the last four weeks– opening speech at the World Economic Forum said that in 2011 France is going to be head of the G7 and the G20 and he says his number-one agenda item is to create a new world monetary system, a new system without the United States dollar as the primary reserve currency. The reason they talk about exit strategy, Robert, is to keep people from going to this new currency.

CONSUELO MACK: So how concerned are you about the fact that the dollar could be replaced as the reserve currency?

ROBERT KESSLER: First of all, for a second I’m going to represent Main Street as opposed to Wall Street, and Main Street doesn’t have a clue to what we’re talking about.

CONSUELO MACK: Right.

ROBERT KESSLER: Believe me. This all gets very, very complicated to talk about.

CONSUELO MACK: And our viewers are investors.

ROBERT KESSLER: They’re investors, so my answer to all of this is the United States will continue to be the reserve currency. There’s nothing wrong with the dollar. Everyone will put money into the dollar, as we’re doing today. Today is a very, very good example. We had a 30-year auction today. What was exciting about it, even though it didn’t go over very big as an auction, didn’t go well, but what was exciting about it is 23% of the auction was bought by Americans. What we call direct investors.

CONSUELO MACK: We’ve seen a trend here where the direct investors, Americans are buying more and more of their Treasury securities.

ROBERT KESSLER: And so when you look at the American dollar, as you can look at the Japanese yen- the reason the yen has stayed strong for so long is because the Japanese support their own country.

DAVID DARST: Internal savings, financing.

ROBERT KESSLER: And in the United States, we are beginning to do the same thing. And so even though we have a deficit, if we’re willing to pay for it, then frankly there’s nothing so terrible about the deficit.

DAVID DARST: Your legion of viewers in the aggregate have 25% stocks, 25% their home and 7% bonds. That’s why, as you’ve pointed out on the show, Consuelo, over the nine months from March through December, they, we all put $315 billion net into bond funds and ETFs, $35 billion into non-U.S. stocks and minus $24 billion into U.S. stocks. So there has been this trend. 1982, the average baby boomer, the median age was 25 years old. Today it’s the reverse of the digits- 52 years old. People have been killed by the dot com meltdown, the housing price meltdown and the financial stock meltdown and that want to set aside some money. So your point is an excellent point, Robert. They want to put this money and maybe some of the buyers will be U.S. households.

ROBERT KESSLER: Let me add one more statistic.

CONSUELO MACK: Very quickly because we have to get to the One Investment.

ROBERT KESSLER: The statistic being, that if Americans begin to invest in Treasuries the way they have in the past, then there would be no deficit. There would be simply no deficit.

DAVID DARST: We’re sitting on $8 trillion of cash right now. And they need only $1.5 trillion, but we need higher rates, Robert, to entice us to take it out of the cookie jar and the mattress and put it in Treasuries.

CONSUELO MACK: So one quick question for you, David Darst, and this is put your asset allocation hat on again. What are you overweighting, in a minute or less?

DAVID DARST: We’re overweighting corporate credit to summarize quickly. That would be high yield bonds, and high grade bonds.

CONSUELO MACK: Because of the yield.

DAVID DARST: The yield is more attractive. We are overweight in real estate investment trust, which have a nice yield to them.

CONSUELO MACK: Right.

DAVID DARST: We’re overweight in emerging market stocks and Canadian stocks, Australian stocks, and in small cap stocks. They have basically taken a little gas in the first part of this year. We think that’s a pause, a healthy, needed correction that we will believe as the economies grow around the world- we just jacked up our China forecast to above 10% for this year- and we think probably world growth will surprise to the up side. Maybe that’s why yields will surprise to the up side, too. Interest rates.

CONSUELO MACK: Very interesting. And so let’s go to the One Investment for our investor viewers out there, and Robert Kessler, guess what you’re recommending.

ROBERT KESSLER: A quick comment.

CONSUELO MACK: Yes.

ROBERT KESSLER: A quick comment. I am so weary of people who wear white suits and recommend emerging markets. Now, David’s not.

DAVID DARST: White suits?

ROBERT KESSLER: White suits.

DAVID DARST: Tom Wolf.

ROBERT KESSLER: Right.

CONSUELO MACK: I don’t understand that.

ROBERT KESSLER: Consequently, what I’m saying is I think you want to be in everything that is risk-averse. And therefore I would suggest that a Treasury, whether it’s overnight money or it’s ten or a 30-year Treasury, I think the ten year will probably outperform everything this year, and that’s a way-out kind of a call, but I do think that rates are going to substantially come down, and they do usually the second or third year after a recession, and since we’re only a year into this, we have a long ways to go, and I think you’ll see the ten-year Treasury probably back at 2% range or lower. And that’s a big move.

CONSUELO MACK: Wow. And David Darst, you’re thinking defensive action, too.

DAVID DARST: I am, Consuelo. Procter & Gamble (PG), which I’ve recommended on the show before- they have 23 products with over $1 billion in annual sales, and they have 20 products in addition with over $500 million in annual sales. They just changed leaders. Robert McDonald takes over from A.G. Lafley. McDonald has been with them for 29 years. He sold Folgers Coffee. He’s selling off the pharma area to focus on personal care, on household products and human well-being, okay. We see three billion people every day out of six billion in the world that are touched by a Procter & Gamble product.

CONSUELO MACK: Wow.

DAVID DARST: He wants it to go up to four billion. Only 30% of their revenues are outside the U.S. and Europe. Stock sales are 14 times last year’s earnings. It yields 2.9%. They’ve not been buying stocks in a year and a half. They’ve just begun to buy stocks, and the last thing is it was only up 1% last year with its lag to market. It went down less than the market. It went down 14 in ‘08 when it went 37 down, up 1% last year. We think this is a company that’s been a defensive stock about to go on the offense.

CONSUELO MACK: So we have a diversified portfolio right here between the two of you. Robert Kessler from Kessler Investment Advisors, thank you so much for coming in from Denver and from New York, it’s great to have you regardless, David Darst from Morgan Stanley Smith Barney, thanks so much for joining us.
At the conclusion of every WealthTrack, we tried to leave you with one action to take to build and protect your wealth over the long-term, as well. This week we’re revisiting a retirement income theme that we and many of our guests have emphasized over the years. This week’s Action Point is: lock in some retirement income for life.
How do you do that? The Obama administration recently came out in support of annuities as a tool to deliver a form of “guaranteed lifetime income.” Specifically, President Obama has called for a change in federal rules to allow adding annuities to 401(k) retirement plans.
Until that becomes a reality, one way to assure a stable flow of income that you can count on for life is to buy the simplest, plain vanilla version, an immediate fixed annuity, also known as a single premium immediate annuity. You turn over a one-time payment to an insurance company, and it in turn will provide you with a predictable and guaranteed monthly income as long as you live. To make sure it’s there, that it is as long as you live, only work with life insurance companies that have the highest credit ratings, and don’t put all your eggs in one basket.
The financial advisors we have talked to recommend investing only a portion, no more than one-third of your retirement assets, in annuity products, and also recommend consider staggering the amount you put in over a number of years, so you can adjust your income stream as you need it. To get an idea of what kind of monthly income a given amount will return, go to immediateannuities.com for a quote.
Now what troubles many people about these immediate fixed annuities is that you might die before you have recovered your investment, your heirs don’t get any benefit, and inflation can eat away at the value of the income stream. So the insurance industry, in its infinite wisdom, has responded with variations on immediate annuities that address these concerns. The tradeoff is the adjustments reduce the monthly income. Annuities are not right for everyone, but as a vehicle to create your own guaranteed pension plan for life, an immediate fixed annuity is definitely worth considering.
That concludes this edition of WealthTrack. Join us for one of our Great Investors series next week. I’ll sit down with Steven Romick, portfolio manager of the FPA Crescent Fund, a finalist for Morningstar’s Domestic Equity Fund Manager of the Decade award. In the meantime, to watch this program again, please go to our website, wealthtrack.com. Starting Monday, you can see it as streaming video or a podcast. Thank you for visiting with us. And make the week ahead a profitable and a productive one.

Source: Consuelo Mack, WealthTrack, February 19, 2010
http://www.wealthtrack.com/transcript_02-19-2010.php

Tags: Asset Allocation, asset class, Asset Classes, Bonds, Chief Investment Strategist, Connie Mack, Credit Crisis, David Darst, Disinflation, Institutional Investors, Interview Transcript, Kessler Investment Advisors, Morgan Stanley, Naysayers, Prolific Author, Recession, Robert Kessler, Smith Barney, Stanley Smith, Treasuries, Treasury Market
Posted in Markets | No Comments »

Wealthtrack: The Outlook for U.S. Treasuries

Monday, February 22nd, 2010

Investment guru Marc Faber calls Treasuries junk bonds. Best-selling Black Swan author Nassim Taleb says, “It’s a no brainer, every single human should short US Treasury bonds.”  And there is a new expression among traders on Wall Street these days, “anything but Treasury bonds” or ABT for short. Is the conventional wisdom right?

This week on Wealthtrack, Consuelo Mack poses the question: What place do US Treasuries, bonds in general, stocks and alternative investments have in an investment portfolio in today’s markets? The guests are Robert Kessler, head of Kessler Investment Advisers and one of Fortune Magazine’s “Top American Investors” and David Darst, Morgan Stanley’s chief investment strategist and author of The little book that saves your assets.

Note: The transcript of this interview is not available yet, but will be posted here as soon as it arrives.

Source: Wealthtrack, February 18, 2010.

Tags: Abt, Alternative Investments, American Investors, Black Swan, Chief Investment Strategist, Consuelo Mack, Conventional Wisdom, David Darst, Fortune Magazine, Investment Advisers, Investment Guru, Investment Portfolio, Junk Bonds, Marc Faber, Morgan Stanley, No Brainer, Robert Kessler, Treasuries, Treasury Bonds, Wealthtrack
Posted in Markets | No Comments »

Embry: Why Gold Will Keep Going Up

Wednesday, February 3rd, 2010

Below is the link to a recent speech by John Embry, Chief Investment Strategist of Sprott Asset Management, on the outlook for gold bullion (courtesy of GATA).

Embry concludes his address as follows:

“I now firmly believe the chances of gold ever trading below $1,000 per ounce are remote. The only caveat I would offer is that if the world suffered a catastrophic deflationary collapse, gold could briefly be swept under but would then re-emerge with even greater relative strength as the only true safe haven. However, in a world of pure fiat currency, I think a near-term deflationary outcome is highly unlikely. In fact, I strongly suspect gold is going to stage a parabolic rise from current levels in the not-too-distant future, a development that will come as a shock to the many detractors of the world’s only real money.

“Gold is the only real money because it isn’t someone else’s liability.

“This remains one of the best supply-demand imbalance stories I have encountered in my long career and it will only be enhanced by the existence of massive short positions that will be impossible to cover amid myriad paper claims on gold that dwarf the physical supply, which, by the way, is a subject for another day.”

Click here to read Embry’s interesting and educational speech.

Source: GATA, February 29, 2010.

Tags: Asset Management, Caveat, Chief Investment Strategist, Deflationary Collapse, Detractors, Distant Future, Existence, fiat, Fiat Currency, Gold, Gold Bullion, Gold Trading, John Embry, Money Gold, Ounce, Real Gold, Real Money, Relative Strength, Safe Haven, Shock, Speech Source
Posted in Markets | No Comments »

Bernstein’s top 10 predictions for 2010

Friday, December 18th, 2009

Richard Bernstein, CEO of Richard Bernstein Capital Management and previously Chief Investment Strategist and Head of the Investment Strategy Group at Merrill Lynch, has just formulated his top 10 predictions for next year. Bernstein’s ideas come courtesy of The Business Insider - The Money Game.

1. Stock and bond market returns in the US will again be positive.

2. The US dollar is likely to meaningfully appreciate once market-driven short-term rates begin to rise.

3. US dollar “carry trades” could get killed as 2010 progresses and the US dollar appreciates. Once accounting for leverage, hedge fund performance will likely trail long-only equity performance.

4. The Fed will spend the second half of the year trying to catch up to, and flatten, the yield curve. Short-term rates could increase more than investors currently think. Long-term rates could rise quite a bit in the first part of the year as inflation finally begins to appear, but are likely to fall during the second half of the year when the markets realize the Fed is serious about fighting inflation. The curve is likely to be much flatter one year from today than it is currently.

5. Corporate profits are likely to explode to the upside during 2010. Trailing four-quarter S&P 500 reported earnings growth could exceed 100%. Investors still seem to be under-estimating the operating and financial leverage that is built into corporate profits.

6. Employment in the US will probably continue to improve. Consumer Discretionary stocks will likely be among the best performing sectors.

7. Treasuries will probably underperform stocks. That underperformance is unfortunately likely to reinforce both individual and institutional investors’ views that it is wise to be under-diversified.

8. Small cap value, I think, will be the US’s best performing size/style segment. Small banks’ outperformance might be the biggest surprise for 2010.

9. Financial regulation will progress, but the bull market will probably aid politicians’ “forgetfulness”. As a result, new regulation could be relatively meaningless. In my opinion, serious regulation won’t occur until after the next downturn, which could be worse if no meaningful new regulation is implemented in 2010.

10. I think the Democrats will do better in the 2010 mid-term elections than people currently think they will. It seems very likely to me that in December 2010, investors will look back on the year and realize that monetary and fiscal policy stimulus still works.

Source: The Business Insider - The Money Game, December 16, 2009.

Tags: Bond Market, Business Insider, Cap Value, Capital Management, Chief Investment Strategist, Consumer Discretionary Stocks, Corporate Profits, Earnings Growth, ETF, Game 1, Hedge Fund Performance, Institutional Investors, Investment Strategy, Merrill Lynch, Money Game, Operating And Financial Leverage, Richard Bernstein, Small Cap, Strategy Group, Treasuries, Yield Curve
Posted in Markets | No Comments »

Jeremy Grantham: “Fair value on the S&P is 860″

Tuesday, October 27th, 2009

Jeremy Grantham has become a familiar and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, the co-founder and chief investment strategist of Boston-based GMO has just published the October edition of his quarterly newsletter entitled “Just desserts and markets being silly again”.

Before quoting from the report, Grantham recently put matters into perspective in a Kiplinger article, saying: “The recent rally has been very speculative, favoring risky assets over the past few months. I’m sorry if you missed investing at the market’s March lows, but don’t compound the damage to your portfolio by chasing gains in risky assets. We’re at the beginning of a seven-year period of lean returns. You should only be buying the highest-quality blue-chip com­panies, where valuations are most attractive.”

Here are a few excerpts from the Grantham’s newsletter.

“Corporate ex-financials profit margins remain above average and, if I am right about the coming seven lean years, we will soon enough look back nostalgically at such high profits. Price/earnings ratios, adjusted for even normal margins, are also significantly above fair value after the rally. Fair value on the S&P is now about 860 (fair value has declined steadily as the accounting smoke clears from the wreckage and there are still, perhaps, some smoldering embers). This places today’s market (October 19) at almost 25% overpriced, and on a seven-year horizon would move our normal forecast of 5.7% real down by more than 3% a year. Doesn’t it seem odd that we would be measurably overpriced once again, given that we face a seven-year future that almost everyone agrees will be tougher than normal?

“Price … does matter eventually, and what will stop this market (my blind guess is in the first few months of next year) is a combination of two factors. First, the disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on profit margins as the quick fix of short-term labor cuts fades away. Second, the slow gravitational pull of value as US stocks reach +30-35% overpricing in the face of an extended difficult environment.

“It is hard for me to see what will stop the charge to risk-taking this year. With the near universality of the feeling of being left behind in reinvesting, it is nerve-wracking for us prudent investors to contemplate the odds of the market rushing past my earlier prediction of 1,100. It can certainly happen. Conversely, I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again. I would still guess (a well-informed guess, I hope) that before next year is out, the market will drop painfully from current levels. ‘Painfully’ is arbitrarily deemed by me to start at -15%. My guess, though, is that the US market will drop below fair value, which is a 22% decline (from the S&P 500 level of 1,098 on October 19).

“Unlike the really tough bears, though, I see no need for a new low. I think the history books will be happy enough with the 666 of last February.”

Click here for the full report on Grantham’s reasoning for his cautious stance.

Source: Jeremy Grantham, GMO, October 2009.

Tags: Chief Investment Strategist, Co Founder, Desserts, Excerpts, Gmo, Guess, Horizon, Jeremy Grantham, Lean Years, Lows, October 19, Panies, Price Earnings Ratios, Profit Margins, Quarterly Newsletter, Rally, Risky Assets, S Market, Valuations, Wreckage
Posted in Markets | No Comments »

Mauboussin: 8 Common Investor Mistakes

Sunday, October 11th, 2009

Michael Mouboussin, Legg Mason’s Chief Investment Strategist, talks with Henry Blodget and Aaron Task on Yahoo TechTicker about his latest book, Think Twice: Harnessing the Power of Counterintuition, which discusses the most common mistakes investors make.

Click play to watch:

Here is the list:

1. Succumbing to tunnel vision.
2. Being overly reliant on experts.
3. Not realizing how much we’re influenced by peer pressure.
4. Viewing each problem as unique.
5. Illusion of understanding.
6. Assuming there’s a definitive answer.
7. Assuming all risks are factored in.
8. Confusing luck versus skill.

Tags: Answer 7, Chief Investment Strategist, Definitive Answer, Henry Aaron, Henry Blodget, Illusion, Investor Mistakes, Investors, Legg Mason, Peer Pressure, Tunnel Vision, Vision 2, Yahoo
Posted in Markets | No Comments »

Jeffrey Saut: Long Emerging Markets and Raw Materials

Tuesday, May 12th, 2009

Raymond James’ chief investment strategist, Jeffrey Saut, has published his newsletter of May 11, 2009, in which he posits a discussion on investing in emerging and frontier markets and raw materials, and corroborates his thoughts with those of Thomas Melendez from MFS, and Jeremy Grantham, GMO.

You may read, as well as print, this weeks entire letter in the slidedeck below by clicking on the ‘full screen’ radio button at the top right hand of the frame.

You can download the entire document here.

Jeffrey Saut’s Bio:
Jeffrey Saut is Chief Investment Strategist and Managing Director of Equity Research at Raymond James & Associates.

Mr. Saut began his career on a trading desk in New York City. In 1973, he joined E.F . Hutton, where he began following equities and writing research. He subsequently worked as a securities analyst for Wheat First Securities, and then Branch Cabell, where he ran the equity research group as director of research and acted as portfolio manager for the firm’s affiliate, Exeter Capital Management. As director of research, he built the research and institutional sales departments for the regional brokerage firm Ferris, Baker and Watts, Inc. and subsequently Sterne, Agee & Leach, Inc.

Mr. Saut is well known for his insightful and colorful commentary regarding the stock market, and he makes regular media appearances.

Hat tip: Marketfolly.com

Tags: Add new tag, Array, Branch Cabell, Brokerage Firm, Chief Investment Strategist, Colorful Commentary, Director Of Research, E F Hutton, Emerging Markets, Equity Research, ETF, Ferris Baker, Frontier Markets, Hat Tip, Institutional Sales, James Jeffrey, jeffrey saut, Jeremy Grantham, Media Appearances, Radio Button, Raymond James, Raymond James Associates, Regional Brokerage, Securities Analyst, Sterne Agee, Sterne Agee Leach, Writing Research
Posted in Commodities, Economy, Emerging Markets, Markets, Outlook | No Comments »

Webcast: Perspectives on the markets – the new retirement paradigm

Wednesday, May 6th, 2009

The current economic environment may have affected even the most well-considered retirement plans. Wherever you are on the path to retirement, recent declines in equity and housing prices are likely to have raised concerns about whether or not you are still on track.

This webcast comprises a panel discussion featuring the views of Morgan Stanley and external strategists as they present their perspectives on the current economic outlook and discuss key retirement planning issues. The discussion is chaired by Charlie Rose and panelists include the following:

• Paul McCulley, Managing Director and Generalist Portfolio Manager at PIMCO, and member of PIMCO’s investment committee.

• Moshe Milevsky, Finance Professor at the Schulich School of Business at York University in Toronto (Canada).

• David Darst, Chairman of Morgan Stanley’s Asset Allocation Committee and Chief Investment Strategist of Morgan Stanley Global Wealth Management.

• Barbara Reinhard, Deputy Chief Investment Strategist of Morgan Stanley Global Wealth Management.

• Jim McCarthy, Head of Retirement, Equity and Planning Solutions of Morgan Stanley Global Wealth Management.

Click on the image to view the full one-hour webcast, or view the featured topics lower down.

Where are we in the economic crisis, and when will it be over?
Hear insights on where we are in the crisis and when they anticipate the environment may improve.

Is the government on the right track? Does the country have confidence in the government?
Does the US have confidence that the decisions being made now - about housing and the stimulus plan, for example - are the right ones?

Are the economy and Wall Street never going to be the same?
Hear how the panelists believe the current crisis will impact investors in the long term.

What makes you optimistic and cautious over the next 5 years?
Is there reason to be optimistic? What are the opportunities that come with market recovery?

What realities about retirement do baby boomers have to face?
The baby-boomer generation, which is so close to retirement, will be the most impacted by this crisis. What choices will they have to make?

How should you think differently about retirement savings and diversification?
How can the 78 million baby boomers think differently about their ability to meet their personal and financial goals?

Source: Morgan Stanley, May 2009.

Tags: Allocation Committee, Canada, Canada David, Charlie Rose, Chief Investment Strategist, David Darst, Economic Crisis, Economic Environment, Finance Professor, Global Wealth, Investment Committee, Jim Mccarthy, Morgan Stanley, Moshe Milevsky, Paul McCulley, PIMCO, Planning Solutions, Retirement Equity, Retirement Planning, Retirement Plans, Schulich School Of Business, Wealth Management
Posted in Markets | No Comments »

Donald Coxe: A Difference of Opinion on the Stimulus Program? (February 13, 2009)

Monday, February 16th, 2009

Donald Coxe, Chief Investment Strategist, Coxe Advisors LLC’s, weekly conference call is an excellent source of outlook and insight from one of the market’s foremost thinkers.

GreenLightAdvisor.com has transcribed the February 13, 2009 call in its entirety for your review:

Donald Coxe, February 13, 2009
Thank you all for tuning in to the call that comes to you from Chicago.

The chart that we faxed out; we actually faxed out two of them this time; both of them were from election day, November 4, 2008. The Dow Jones Industrials and Gold. And our question that we asked rhetorically was:

“A difference of opinion on the Obama Program?”

When we’re in a situation where the only thing that seems to be working out big time for investors is Gold, then this is hardly a time when the illuminati in Washington are going to be very happy about what’s going on. So I want to begin by saying that the question about gold’s move is in itself something that we’ve got to analyze because its so powerful. And, Part of me says that now that there’s all of this enthusiasm and all the advertisements that I’m seeing on television from people that I wouldn’t want to spend an evening with are saying that you gotta buy gold. This is very reminiscent of the 1979-1980, which was the time that gold peaked in its triple waterfall situation. I don’t think that we’re anywhere near a top on gold but it still is something in effect where at least if you see it being discussed publicly, its by people who are mildly unsavory.

Well you can’t get this kind of move only from the mildly unsavory. And the question is, is the sustained selloff in the stock market at a time we’ve had a sustained rally in gold are they coming up with different interpretations on the Obama program. I think it is entirely credible to make out a case for buying gold on the basis that the program will work. Because if the program works, then what we’re going to have is an economic recovery, but given the sheer scale of what they’re pumping into the economy, and the debt that’s building up, then it’s going to be a 70s style economy in the sense that inflation rates are going to rise from a deflationary type situation, into a postive level and its everybody’s best guess as to whether that level is going to be painful or not, but its the kind of thing that would support the financial asset that benefits most from inflationary expectations.

On the other hand, you talk to people about it and what they’re saying is ‘no’, that these two charts are showing you the same thing, which is fear. That they don’t believe that the program is going to work; that its just going to make things worse, and therefore they’re fleeing out of assets denominated in paper money of all kinds and going into gold. And apparently the justification for that is particularly that the big Swiss banks are seeing is that their high net worth clients are taking out safety deposit boxes and putting gold bullion into them and not the kind of small wafers that are being peddled on television by these somewhat conspiratorial types.

Far be it for me to make the case for gold on the basis that the system is going to collapse. But on the other hand, if you get that value out of gold while still saying that there’s a better part of it I think then that’s a better story to have and one that I as a strategist who doesn’t like to predict armageddon can believe in. Besides which, there’s lots of evidence out there that armageddon is not the new consensus.

What we know from the 70s is that if you have a recession at a time of fast money supply growth that what happens is that the stock groups that tend to do best during the recession and to lead you out of the recession tend to be commodities. So the commodities stocks of course, were just hammered after the ‘midnight massacre’ of July 13, 2008 which is what really launched deflation in the world. But what’s interesting is what’s happened to them since then in relative strength. We come back to my old faithful of the IBD’s 197 industry subgroup rankings and what changes there are in that from week to week. This week, if we take the top 21 stock groups, we see that 7 of them, that is one-third of them are commodity groups led, of course, once again, by metals, ores, gold and silver; they’ve been at the top for some time. But we’ve got food flour and grain; we’ve got oil and gas transport pipeline, we’ve got oil and gas refining and marketing, I feel very good about the fact that pure refiners have done so well, I can tell you. Food, miscellaneous preparation, retail, wholesale food; and Oil and Gas, International Exploration and Production interestingly enough.

So, what that tells me is that this is the kind of swing at a time when everything looked bad, back in 1974, and by the way, things looked much worse then than they do now, in 1974. We were down to a 6 mulitple on the Dow. And the belief in equities as an asset class was being abandoned on all sides and unemployment was double digit levels and governments were falling; things were much much worse then. But, what you could see was the relative strength of the commodity groups, including, by the way, the supermarkets back then, which is interesting, because the supermarkets are doing well now. So, I would therefore like to take the view that what signals we’re getting for the market are that the market like all the pundits, isn’t sure that this $2-trillion that’s being thrown at the system is going to work. But the belief is if it does work, we’re going to have a greater demand for scarce assets, and that everybody recognizes that the huge selloff that we’ve had in commodities and commodities stocks means that scarcities could come back pretty quickly. And that’s exactly what happened in the 70s.

Now, I’m quite sure there’s a lot of you out there saying ‘you keep talking about the 70s, and its a different world.’ It is in many respects, but only in one, I think, that’s really crucial, and that is on the real estate side. Because back then what we had was the baby boomers were university graduates having to live with their parents or grandparents because there were no houses available for them. There was a housing shortage because of course, there was no way they could expand the housing market fast enough to take cognizance of the huge number of baby boomers coming out of high schools, community colleges, and universities; well we havn;t anything like that this time, because of the birth dearth that began back then. What we have is a situation where the housing supply was built on the assumption that things would be the same as they had been every other cycle and of course they aren’t the same, and they will never be the same the next 50 years. So that’s the big difference. We have demographic deflation across the industrial world and in that sense, what it means is that there is one asset class which cannot behave as it did back then. And back then, house prices, although it took them a while to start moving up, even though we had inflation, they did. In any case, you didn’t lose money on housing back then.

But as for the stock groups, what’s interesting is that despite what we have as this ‘pitiest’ price for West Texas Intermediate (WTI) of $35 bucks a barrel, what we see is that it seems to be the most artificial of prices because nothing else that you see on the screen relates to it. Oil for delivery in December is $53. Now I have never seen anything like that. I mean, imagine, a 50% premium for ten months. So this relates to the whole question that a battle is going on between Brent and WTI, and Dennis Gartman, and as usual, Dennis is the best at analyzing these things; he’s saying that the WTI contract is now just plain silly. Because it relates to such a tiny amount of oil, and the only place in the world where oil is in oversupply is in Cushing, Oklahoma. Well, if we look at other oil prices then, what we’re seeing is that despite the huge economic slowdown in the world, that we’ve got oil for delivery in December 2010, that we can believe these parts of the WTI contract because they are not related to storage problems around Cushing. These are way out on the (futures) curve and we’re looking at $60 oil out then.

I think that the fact that the oil stocks, despite the fact that spot WTI has gone to a new low, the oil stocks are actually starting to perform better, is people’s recognition that with the cutbacks that OPEC has already delivered and then the evidence that US consumption hasn’t fallen by 5%, 6%, or  7% as people thought; those statistics were clouded by what the retail gasoline sales were; and of course, what they did, because retail gasoline was down by 50%, was in trying to adjust for this after you took out state taxes and all these things, people got wrong what the actual volumes there were. So what we see is that the actual demand for oil in the world has not fallen off a cliff. Yes, the demand for industrial goods and consumer goods and ? and things like that has fallen of a cliff. But certainly not for most commodities, and particularly, not for oil. And with the move that we’re getting in the fertilizers, and I’d just like to mention once again, the value of the IBD survey, because way down, you get way down the list, number 56 on the list, and you see chemicals and fertilzers [12:23] but that this week and three weeks ago they were down in the depths at 154 and the charts show you that there has been a huge change in attitude towards the fertilizers and indeed towards the agricultural stocks generally.

Now, that’s not because I think the world has embraced our view of the strong possibility that the two centuries of global warming have come to an end, and that we might be entering a period of global cooling which would dramatically affect the outlook for crops in the northern hemisphere. No, I think its simply once again the recognition that although demand is reduced somewhat for key grains and feedgrains as a result of the economic slowdown, that it has not collapsed and the carry overs even though they’re bigger than they were a year ago, are not so great as to suggest that the prices farmers are going to get for their grain are going to be profitable. Yes, spot corn is $3.66, but the new corn that hasn’t been planted yet, which will be delivered in December is $4.07, and corn for the next year after that is $4.25. These are prices, that if you’re a farmer who does a good job producing it, could make a lot of money on it, despite the collapse in demand for ethanol. So, what I’m basically saying is that we already have two commodity groups which in the last few weeks have been moving up strongly, and they’re basically saying that you don’t have to take a bet on how the Obama program works out, as to whether or not this recession is going to drag out a couple more years. You can make money here.

In other words, the savagery with which all commodities and commodity stocks sold off during the collapse, particularly after the Lehman bankruptcy; that is behind us, and now investors are starting to look at what the world will be like if the program succeeds or if it fails, and at the moment, they’re not prepared to take bets, big bets on the program succeeding. Now, one of the reasons they’re not prepared to take big bets is because of the poor performance of the bank stocks. And, I’ve told you over and over again, and I’ll tell you again, that a bear market which begins with a breakdown in the financials doesn’t end until the financials outperform. And, we had that brief period of outperformance, but it was only, as we saw, by the kind of stuff that Alex Rodriguez was consuming. In this case it was financial steroids.

After the Midnight Massacre, when they made it illegal to sell short the bank stocks and also forced the hedgies to unwind their shorts on what they had, it was a situation where the bank stocks rallied to huge premium relative to the performance of the S&P 500, and after that was taken away, which, it was taken away after the end of September, they collapsed on relative strength, and they have not been able to rally from this huge discount on relative strength since then. So, as much as I would like to be able to say that we know that the worst is behind us for the broad stock market and the economy, I can’t say it until the bank stocks find a way of rallying.

I watched President Obama’s first press conference, and once again was very impressed with this man. He is articulate, he’s cool, he’s smoothe, he’s the real deal. However, we already knew that the stimulus proposal that he was endorsing had been drafted by Nancy Pelosi and friends; Barney Frank and people like that in the House. And therefore [16:30] what it was, was long on a far-left liberal wishlist items that they could never have gotten through Congress on their own, and short on genuine stimulus, such as tax cuts, or on the infrastructure type deals that everybody thought they were going to be emphasize, including $4-billion for ACORN; I mean, that is just staggering to me, that they would do that. ACORN is being charged and being investigated for vote fraud in quite a few states, and they also were also leading the pressure on the mortgage lenders to make 100% loans to Latinos and African-Americans on the interest of social justice. So, I mean, the idea that these people who are going to be able to use the money to get lawyers to defend them against vote fraud charges. That takes chutzpah, to include that in the National Stimulus Bill.

But that’s only $4-billion out of $800-billion, but the problem that happened and why the market has sold off since then is the recognition that what we were told was going to be targeted and temporary is anything but. Its all sorts of global-warming type programs, and things that again, maybe depending on your viewpoint, just fine ways to spend the taxpayer’s money, but we don’t need to work hard to figure out ways to spend the taxpayers’ money on a massive deficit. What we need is to do things that get people working.

Now its true, that Keynes famously said its better to pay somebody to dig holes and to fill them in, than not to have any activity at all. And so, what one can probably say about the rest of this bill is that even if you don;t think that a lot of the things they want to do are worth doing, as long as they do them soon, then probably there’s an advantage in doing them. The problem is that these will be built in as permanent new government programs which means that trying to deal with the deficit thereafter, will be a challenge beyond the best designs of Larry Summers.

But that’s way out in the future. Let’s talk about whether right now this is going to work. And once again, we have some evidence to the effect that things are getting better. Money supply growth right through the curve is now moving rapidly, and yes, its true that velocity has collapsed, but the experience of past recessions is, that you first of all grow the money supply, and then eventually, sometimes grudgingly, the velocity comes back, and when that does, then what you can get is a much faster recovery than any of the economists have forecast. I mean, it does turn around pretty rapidly.

So, in this case, we’ve not only got the remarkable stimulus from the central banks, which should start showing up, across the whole OECD in terms of money supply growth, but in addition, what we have is the bailouts in the banking system, and, again, you can argue wtih why this or that institution is getting help, and this or that institution is not; that’s not really important. What is important is that they are helping financial institutions and as long as they help the ones that can actually do something useful, then I’m not going to be too upset if they help those that don’t deserve to be helped, namely the big Wall Street banks. Those banks got into trouble because they gave up the business of banking for the business of gambling and speculation in order to create huge bonuses for the insider. There is no case other than counterparty risk case for throwing money at them.

What you need to do is give money to the banks that actually talk to customers face-to-face and do business with them face-to-face about their real needs, their loans, their letters of credit for trade, all of these things. And we had a period when the letters of credit had dried up all over the place across the world, because banks weren’t doing this. You couldn’t find anybody, because this is a low margin deal and there was a state of panic. What’s interesting is that trade does seem to be coming back. We’ve had a more than a doubling of the Baltic Dry Index; now I know that this is from an absolutely miniscule level - it was down 98%. But we’ve also got numbers coming out of China indicating that this is one place where they’ve managed to get both the money supply growing, and the velocity growing. So once again, these guys who say they follow the dictates of Mao, but not of capitalism, are doing a better job on applying Friedman and Keynes, than any of the governments in the so-called capitalist world.

But if you’re a commodity stock investor you actually care more about what’s happening in China, than what’s happening in Chicago. So, i think that you can make the case that the stock market is giving you signals that the economic recovery globally is going to come later in the year, but it will be led by the usual suspects in this decade, namely China and India, because India, although its not growing as fast as it was, is still growing, and they are also very aggressive about monetary expansion and assistance to financial institutions. So, I think, for those of you who have cash, and courage, that, and maybe that have read some of those individuals who are saying that we’re already in a depression and the only thing to be in is either cash or selling short, if you don’t share that stijian gloom, then you just look at the signals coming out of the IBD itself, as to which stock groups have moved from being blasted, to being in favour, and you can see a lot of stock charts indicating that the market is telling you who is going to lead us out of this. And that’s a road map that’s very useful.

Now all of this is going to be discussed in much greater detail in Basic Points which I’m pleased to say comes out at the end of next week, but we’re working on it now so we’re back in harness as it were. I’ll end by pointing out that, again, looking at this list what we see is that oddity that if you don’t look at the big moneycentre banks, which are still in ghaslty shape as their relative strength goes, there down at the bottom of the IBD list, but what you see is that regional banks, NorthEast, Midwest, Southeast, these banks that are banks and don’t create collateralized debt obligations, these stock groups are outperforming. There is one other group that’s come up strongly in the list, and I’m not sure that I can tell you what it means, but funeral services is another booming business and maybe this is a good time to stop and take your questions, because maybe I’m putting too much emphasis on which stock groups are attracting attention .

Let me sum it up by saying, I believe that going to the great economists of the past, that even if so much of what’s being done here is being done with bad motives, and its being given to bad people, its better probably than doing nothing, and by the way, I sort of admired Obama’s chutzpah is saying that the opposition were the Republicans who weren’t voting for this confection of Nancy Pelosi and left-wing of the party were in favour of doing nothing. It wasn’t the case at all. It was that they wanted to have tax cuts and targeted programs which was what had been promised three weeks before. I think, take the political debate out of it. This is the administration that won the election. These are the ones that are in power, there’s no point going off and insulting and what is likely here, is that we’re going to get a turn. Ans so, with that I believe that you follow the signals themselves and the groups that outperforming right now are likely to be the groups that will be outperforming 6 months from now. That’s the way it was in the 70s and as I say the only difference between now and the 70s is about an asset class that you’re not going to get much enthusiasm right now anyway, which is real estate. That’s it. Any questions?

(27:07 End of prepared portion)

Tags: Advertisements, Big Time, Buy Gold, Buying Gold, Chief Investment Strategist, Conference Call, Difference Of Opinion, Donald Coxe, Dow Jones, Dow Jones Industrials, Economic Recovery, Election Day, Emerging Markets, Foremost Thinkers, Illuminati, India, Insight, Investors, Rally, Selloff, Shee, Source Insight, Stimulus, Stock Market, Waterfall
Posted in Commodities, Credit Markets, Economy, Emerging Markets, Gold, India, Markets, Oil and Gas, Outlook, US Stocks | No Comments »

Jeff Saut: Making a Case for the Bulls

Thursday, February 5th, 2009

This post is a guest contribution by Jeffrey Saut, Chief Investment Strategist and Managing Director of Equity Research at Raymond James & Associates.

I believe “income” will be a profitable investment theme for the foreseeable future. Indeed, the baby boomers are retiring; and, the yields afforded them via Treasury securities, money-market funds, and certificates of deposit (CDs) won’t supplement their retirement account incomes enough to support them in the style to which they have become accustomed. Enter stocks, which since 1926 have averaged a total annualized return of 10.4%.

Interestingly, roughly 5% of that return has come from earnings growth, 0.9% has come from price-to-earnings (P/E) multiple expansions - but 4.5% of said return was derived from dividends. More than 40% of long-term investment returns have been driven by dividends. Furthermore, if investors buy non-dividend-paying stocks, and the overall stock market declines, they tend to be at the “directionality” of the stock market.

However, the shares that investors purchase of dividend-paying stocks, whose share price subsequently declines, actually own an asset that is becoming more valuable as its dividend yield rises, provided the dividend is maintained.

While some contend that aggregate corporate dividends have been reduced, and/or eliminated, due to the maelstrom in the financial complex, I have recommended avoiding financials for the last 5 years, and therefore have been relatively unaffected by those dividend reductions.

Excluding the battered financials, however, most corporate balance sheets appear in relatively good shape. Yet companies remain hesitant to commit more money to capital expenditures in this weakened economic environment. Therefore, I think it reasonable to expect corporations will use dividends as an increasingly valuable strategy for distributing excess cash.

To be sure, non-financial balance sheets are in better shape than the financial complexes’, suggesting that dividends, and dividend increases, should be a favored corporate strategy going forward — rather than share repurchases — since for the last 18 months most share prices have traveled lower, making share repurchases a value-destroying strategy.

To this point, most companies have two avenues for cash: They can either plow back/re-invest in capital expenditures, M&A activities, and/or working capital initiatives, or they can pay/increase dividends, repurchase shares, and/or reduce debt. My analysis suggests that managers will probably pursue shareholder-friendly initiatives after meeting internal/external objectives. This implies they will likely pay, and/or increase, dividend streams.

This is a not unimportant observation, since the retiring “boomers” seem to be moving toward the mantra scribed in the first paragraph, of the first chapter, of Ben Graham’s book The Intelligent Investor: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

Note that Dr. Graham uses the word adequate, not spectacular, when speaking of investment returns. Plainly, secure dividends tend to cushion a portfolio and enhance total returns. Dividends also provide, at least to some degree, the “margin of safety” Ben Graham speaks of in the last chapter of his book: To wit, if you own a stock with a 7% yield, those shares can decline by 7% over the next 12 months, and you won’t have lost any money. Consistent with these thoughts, I have employed Graham’s investing matrices to our investing strategy for more than 40 years. That’s why I constantly reiterate the theme of “dividend yields.” I continue to invest this way, and would note that, in Bespoke’s dividend-yielding stock list, there are 5 companies from the Raymond James research universe of stocks. Those issues are: 8.8%-yielding Realty Income (O); 7.3%-yielding Polaris Industries (PII); 5.5%-yielding NYSE Euronext (NYX); 4.8%-yielding Hudson City Bank (HCBK); and 4.8%-yielding Aflac (AFL).

And while they are not on Bespoke’s list, additional yielding names from Raymond James’ “Analyst Current Favorites” report include: Republic Services (RSG); Johnson & Johnson (JNJ); Allstate (ALL); Inergy (NRGY); Home Depot (HD); Essex Property Trust (ESS); and New York Bancorp (NYB).

Speaking to the equity markets, I was pretty bullish between the psychological/capitulation stock market “low” of 10/10/08 (where 93% of the stock traded on the NYSE made new yearly lows), as well as the subsequent “price low” of November 20, 2008, often commenting that the stock market was in a bottoming process on a short/intermediate-term basis. Furthermore, I was adamant that participants should favor the upside into mid-January 2009 where a correction would be due. I also opined that the stock market’s internal metrics (advance/decline, upside versus downside volume, new highs versus new lows, etc.) in that decline would tell us a lot about the future direction for stocks.

Accordingly, I became increasingly defensive as the “ides of January” approached. Since then, I’ve been monitoring the market’s internals, but so far they are telling us nothing. The picture should become clearer if the DJIA (8000.86) can either confirm the breakdown by the D-J Transports (TRAN) of their November 20, 2008 “low” with a like breakdown below the Dow’s November 20, 2008 closing-low of 7552.29 (so far, what we have is a downside non-confirmation, which is bullish); or, if the DJIA and the TRAN can better their January 6, 2009 reaction highs of 9015.10 and 3717.26, respectively, which would be a Dow Theory “buy signal.”

Until then, I continue to take the market’s temperature. Indeed, sometimes me sits and thinks; sometimes me just sits. That said, I continue to think it’s a mistake to get too bearish, because of the bullish case that can be made.

1. If forward earnings estimates are anywhere close to the mark, stocks in the aggregate are cheap;

2. Nominal interest rates are zero and real interest rates a negative;

3. Money is the “oil” that makes the economic engine run, and money is being printed like wallpaper;

4. Oil prices have collapsed, which is tantamount to a huge tax cut;

5. The authorities are pulling-out ALL the stops;

6. The official recession is now 13 months old, with the typical one lasting 18 months;

7. If past is prologue, the fourth quarter of 2009 will end the recession;

8. The stock market tends to stop going down 6 months prior to recessions’ end;

9. So far the TRAN has broken below its November 2008 low without the DJIA doing the same (read: downside non-confirmation; and

10. If the DJIA and the TRAN rally above their respective January 6, 2009 closing highs, it would be a Dow Theory buy signal.

As well, I have seen this play before. As Dennis Gartman wrote last week:

“There is no question that this is the worst economic time since the Great Depression”… Sluggish economic growth this year will cap the worst 3-year period centered on a recession since the Great Depression… Forecasts for a weak recovery in 1992 suggest the period since 1990 will be the worst for the economy since the Great Depression… The banking industry has plunged to its lowest point since the Great Depression… “This is the worst retail sale period on record since the Great Depression… This recession is hitting white-collar workers more heavily than any since the great Depression of the 1930s.”

Those media quips were taken from various newspapers during the recession of 1990-1991.

The call for this week: At down 8.5%, the S&P 500 just had its worst January in history. That swoon flashed cautionary signals from not only the January Barometer (so goes January, so goes the year), but the December Low Indicator as well. Moreover, in the past 3 weeks, there have been 3 90% Downside Days (points lost versus points gained AND downside volume versus upside volume were skewed more than 90% to the downside), suggesting that the sellers have not yet been exhausted. The result left most of the market averages I follow below their respective 10-, 30-, and 50-day moving averages, indicating a full downside retest of the November lows is likely in the works.

Whether that retest will be successful remains to be seen, but I’m hopeful, because my proprietary oversold indicator is just about as oversold as it can get. In the interim we are cautiously sitting and waiting until the stock market speaks.

Source: Jeff Saut, Minyanville, February 2, 2009.

Tags: Annualized Return, Baby Boomers, Capital Expenditures, Certificates Of Deposit, Chief Investment Strategist, Corporate Balance Sheets, Dividend Paying Stocks, Dividend Yield, Earnings Growth, Excess Cash, Financial Balance, Investment Returns, Jeff Saut, jeffrey saut, Long Term Investment, Money Market Funds, Profitable Investment, Retirement Account, Stock Market Declines, Treasury Securities
Posted in Economy, Markets, Oil and Gas, US Stocks | No Comments »

Byron Wien: Ten Surprises for 2009

Tuesday, January 6th, 2009

Byron R. Wien, Chief Investment Strategist of Pequot Capital Management, Inc., today issued his list of Ten Surprises for 2009. Mr. Wien has issued his economic, financial market and political surprises annually since 1986. The 2009 list follows:

1. The Standard and Poor’s 500 rises to 1200. In anticipation of a second-half recovery in the U.S. economy, the market improves from a base of investor despondency and hedge fund and mutual fund withdrawals. The mantra changes from “fortunes have been lost” to “fortunes can still be made.” Higher quality corporate bonds, leveraged loans and mortgages lead the way.

2. Gold rises to $1,200 per ounce. Heavy buying by Middle Eastern investors and a worldwide disenchantment with paper currencies drive the price of precious metals higher. In a time of uncertainty, investors want something they can count on as real.

3. The price of oil returns to $80 per barrel. Production disappointments and rising Asian demand create an unfavorable supply/demand balance. Other commodities also rise, some doubling from their 2008 lows. Natural gas goes to $9 per mcf.

4. Low Treasury interest rates coupled with huge borrowing by the Treasury send the dollar into a serious downward slide. Overseas investors become concerned that the currency printing presses will never stop. The yen goes to 75 and the euro to 1.65.

5. The ten-year U.S. Treasury yield climbs to 4%. Later in the year, as the economy shows signs of recovery, economists and investors shift their mood from concern about deflation to worries about inflation. A weak dollar, rapid growth in money supply and record-setting deficits (over $1 trillion) are behind the change.

6. China’s growth exceeds 7% and its stock market revives. World leaders credit China’s authoritarian government for its thoughtful stimulus policies and effective execution during a challenging period. The Chinese consumer begins to spend more and save less and this shift is behind the unexpected strength in the economy.

7. Falling tax revenues from the financial sector cause New York State to threaten bankruptcy and other states and municipalities follow. The Federal government is forced to step in and provide substantial assistance. The New York Post screams “When will the bailouts stop?”

8. Housing starts reach bottom ahead of schedule in the fall, and house prices stabilize after dropping 15% from year-end 2008 levels. The Obama stimulus program proves effective and a slow growth recovery begins before year-end. Third and fourth quarter real gross domestic product numbers are positive.

9. The savings rate in the United States fails to improve beyond 3%, as most economists expect. The concept of thrift seems to have vanished from American culture. Peak job insecurity and negative growth drive increased savings early in the year, but spending resumes as the economic growth turns positive in the second half, making Christmas 2009 the best ever.

10. Citing concerns about Iraq’s fragile democratically elected government and the danger of a Taliban-controlled Afghanistan, Barack Obama slows his plan for troop withdrawal in the former and meaningfully increases U.S. military presence in the latter. In a hawkish speech he states that the threat of terrorism forces the United States to maintain a strong military force in this strategic area.

Mr. Wien believes these surprises, which the consensus would assign only a one-in-three chance of happening, have at least a 50% probability of occurring at some point during the year. In previous years, more than half of the elements of the list have proven correct.

Pequot Capital Management is a private investment firm.

Source: Business Wire
http://www.businesswire.com/portal/site/home/permalink/?ndmViewId=news_view&newsId=20090105005763&newsLang=en

Tags: Authoritarian Government, Capital Management Inc, Chief Investment Strategist, Chinese Consumer, Corporate Bonds, Demand Balance, Despondency, Disenchantment, Downward Slide, Leveraged Loans, Overseas Investors, Paper Currencies, Pequot Capital Management, Pequot Capital Management Inc, precious metals, Price Of Oil, Printing Presses, U S Treasury, Unexpected Strength, Weak Dollar
Posted in Bonds, Commodities, Credit Markets, Economy, Gold, Markets, Oil and Gas | No Comments »