Posts Tagged ‘Outlook’
Rosenberg, Lee Debate Outlook for U.S. Stocks
Monday, March 26th, 2012
Thomas Lee, chief U.S. equity strategist of JPMorgan Chase, and David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, talk about the outlook for U.S. stocks and their investment strategies.
Source: Bloomberg, March 23, 2012
Tags: Chief Economist, David Rosenberg, Debate, Gluskin Sheff, Investment Strategies, Jpmorgan Chase, Outlook, Stocks, Strategist, Thomas Lee
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Outlook for Gold, Equities and Earnings, and USD — Borthwick, Merk, Gartman, Ortel
Wednesday, February 1st, 2012
Duration: 8:40 mins
A must see compilation of interviews with Faros Trading's Douglas Borthwick, Axel Merk, Dennis Gartman, and Newport Partners' Charles Ortel, who share their not-so-basic, unconventional thoughts on gold, equities and earnings quality, and the U.S. dollar.
Sources:
Charles Ortel on BNN, January 26, 2012
Douglas Borthwick on Bloomberg — January 26, 2012
Axel Merk on Bloomberg — January 26, 2012
Dennis Gartman on CNBC — January 31, 2012
Tags: Axel, Bloomberg, Bnn, Cnbc, Compilation, Dennis Gartman, Dollar, Duration, Earnings Quality, Gold Equities, Merk, Newport Partners, Ortel, Outlook
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Marc Faber: Far Better Off in Precious Metals and Global Stocks Rather Than Bonds
Friday, January 20th, 2012
Jan. 20 (Bloomberg) — Marc Faber, publisher of the Gloom, Boom & Doom report, talks about the outlook for stocks versus bonds and his investment strategy. He speaks with Sara Eisen and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Faber said in the interview, that given the choice between U.S. Treasurys and European bonds, he would choose the U.S. Treasurys; given the choice between equities, real estate, bonds and precious metals, he would choose precious metals and equities.
Eric Schatzker calls Faber out on his bearish 2009 call on U.S. Treasurys, and laughably, Faber admits that David Rosenberg was right, and he owes him a bottle of whiskey.
Length: 5:34 mins
Source: Bloomberg
Tags: Amp, Bloomberg Television, Bonds Investment, Boom, David Rosenberg, Doom, Eisen, Eric, Global Stocks, Gloom, Gloom Boom Doom, Insidetrack, Investment Strategy, Marc Faber, Outlook, precious metals, Publisher, Real Estate, Sara, Stocks Bonds, Treasurys, Whiskey
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Outlook for U.S. Small Businesses Improves
Wednesday, January 11th, 2012
This post is a guest contribution by Asha Bangalore, vice president and economist of The Northern Trust Company.
The Small Business Optimism Index moved up to 93.8 during December from 92 in the prior month. The improvement is noteworthy and it is the highest since February 2011. However, the level of the index is within the range seen during the recession (see Chart 1).
Of the sub-indexes, the percentage of respondents indicating that poor sales have been problematic declined to 23% in December vs. 25% in the previous month. Further reductions of this component of the survey would point to a turnaround in business conditions.
Among other highlights of the survey, only 8.0% reported credit is harder to get, one of the lowest readings for the year (see Chart 3). Somewhat contradicting the December employment report is the fact that only 1.0% of respondents indicated that they increased employment in the last three months. Overall, the December report on small businesses records more positives than negatives.
Source: Asha Bangalore, Northern Trust – Daily Economic Commentary, January 10, 2011.
Tags: Business Conditions, Business Optimism, Economic Commentary, Economist, Employment Report, Further Reductions, Indexes, Northern Trust Company, Outlook, Recession, Respondents, Small Business, Small Businesses, Three Months, Turnaround, Vice President
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David Rosenberg: U.S. Economy is Still Fragile
Tuesday, January 10th, 2012
David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, talks about the outlook for the U.S. and European economies.
Source: Bloomberg, January 9, 2012.
Tags: Amp, Chief Economist, David Rosenberg, Economy, European Economies, Gluskin Sheff, Outlook, Stocks, Strategist
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Jim Rogers: Why He's Shorting Stocks and Favouring Commodities
Friday, December 30th, 2011
Jim Rogers discusses his outlook for the economy, stocks, and commodities.
Call Notes:
Jim Rogers: I'm not optimistic about 2012, and maybe even not 2013."
Favouring agricultural commodities — huge shortages developing of just about everything, and even, particularly, a shortage of farmers. Agriculture's going to be a great place the next 10–20 years.
Shorting emerging markets stocks, American technology, European stocks;
JR: "I don't see much reason to own stocks, when one can own commodities. If the world gets better, i'm going to make a lot of money in commodities because of the shortages, and if the world doesn't get better, governments will print money. Whenever governments have printed money, the only way to protect one's self is to own real assets."
China: Hard or Soft Landing?
JR: "Some parts of the Chinese economy will have a very hard landing; the Chinese government has been trying to kill the real estate boom for 2 1/2 years. They've raised interest rates 6 times, raised reserve requirements a dozen times; they're gonna pop the real estate bubble, but that's not the whole China story. There's gonna be parts of the Chinese economy that are gonna boom no matter what happens to real estate in Shanghai and Beijing."
How about beaten down stocks like Potash and Mosaic?
JR: "I'm not familiar enough to give you a good comment; I just remember in the 70s, stocks went down and did nothing, and economies did nothing, and yet commodities themselves went through the roof. Some commodities stocks did well in the 70s; A recent Yale study showed that you would have made 300% more investing in commodities themselves rather than commodities stocks, unless you were a very good stock picker. So I'm sticking with the real commodities."
Comment: Jim Rogers travels everywhere in the world with his family, and he eats his own cooking.
What about the other BRIC nations? What about Brazil and its dependency on China? Would you short Brazil?
JR: "I'm short India, I'm short Russia. Brazil is a huge natural resource based economy, and in commodity bull markets they do well. Fortunately, I'm not long, I don't have any positions — Unfortunately, the new Brazilian government is starting to do some pretty foolish things which I think will not make them participate as much as they could."
Jim Rogers is long gold, long silver, expects correction to continue down to the $1300/oz. level.
JR: "I'm a terrible market timer, I'm a terrible trader. It would not surprise me if gold went down to $1,300-$1,200. If it goes that low, I'm going to buy a lot more. I'm not selling any ofo my gold or silver, but I'm not a good market timer. I'm just saying that gold has been up 11 years in a row, it deserves a substantial correction. Substantial corrections are not unusual in bull markets. If it goes that low, I'll buy a lot more."
Source: CNBC, December 28, 2011.
Tags: agricultural, Agricultural commodities, Agriculture, American Technology, Chinese Economy, Chinese Government, Cnbc, December 28, Economy Stocks, European Stocks, Gonna Pop, Good Stock, Investing In Commodities, Jim Rogers, Outlook, Potash, Real Assets, Real Estate Boom, Real Estate Bubble, Real Estate In Shanghai, Shorting Stocks, Stock Picker, Stocks And Commodities, World Doesn, Yale Study
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Canadian Corporate Bond Market Outlook (Marc-André Gaudreau)
Sunday, December 11th, 2011
Natcan's Marc-André Gaudreau, PM for Horizons Alphapro Corporate Bond ETF (HAB:TSX), discusses his outlook for Canadian corporate bonds in the following Q&A:
1. Will Interest rates rise despite government action to keep them low? Is the bond market activity suggesting a move in rates over the next 12 months?
2. Will the European crisis have any further impact on North American credit markets?
3. What's your outlook for Canadian Corporate Bonds vs. Government issued bonds over the next 6 months?
4. What's your target duration for Canadian Corporate Bonds held in HAB?
5. Are there any big differences in the bonds you hold in HAB vs. Index tracking corporate bond ETFs?
Source: Horizons ETFs
Tags: 12 Months, Alphapro, Bond Market, Bond Rates, Canadian Bonds, Canadian Government, Cdn, Corp Bonds, Corporate Bond, Corporate Bond Market, Corporate Bonds, Credit Markets, Duration, Euro, Flv Player, Gaudreau, Government Action, Horizons, interest rates, Market Outlook, Natcan, Outlook, Target, True Source, Tsx
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David Rosenberg says Europe May Pull U.S. Into Recession
Monday, November 28th, 2011
David Rosenberg, chief economist and strategist at Gluskin Sheff and Associates, talks about Europe’s sovereign-debt crisis and the possible impact on the U.S. economy. He also discusses the outlook for U.S. stocks and his investment strategy.
Source: Bloomberg, November 24, 2011.
Tags: Chief Economist, David Rosenberg, Debt Crisis, Economy, Europe, Gluskin Sheff, Investment Strategy, Outlook, Recession, Sovereign Debt, Stocks, Strategist
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China's Manufacturing PMI: Outlook Worsening
Thursday, November 24th, 2011
The HSBC Flash China Manufacturing PMI for November dropped to a 32-month low of 48.0 from 51.0 in October. According to Markit, new orders are contracting while stocks of finished goods are contracting at a faster rate. It is evident that local demand is slowing as new export orders are expanding more quickly. Although the stocks of finished goods are contracting at a faster rate, stocks of purchases are expanding again despite a contraction in the quantity of purchases, indicating that Chinese manufacturers remain overstocked relative to demand.
Although the HSBC PMI sometimes differs significantly from the official CFLP PMI, both gauges indicate a significant slowdown in China’s manufacturing sector. The CFLP manufacturing PMI has continued to follow the below-par trend since February this year. Although the PMI is likely to tick up in November thanks to seasonal strength, I expect only a slight rise to approximately 51.3 from October’s 50.4.
Sources: CFLP; Li & Fung; Plexus Asset Management.
On a seasonally adjusted basis I expect the CFLP manufacturing PMI to remain unchanged at 50.6.
Sources: CFLP; Li & Fung; Plexus Asset Management.
The slowdown in domestic demand as indicated by the HSBC report does not auger well for China’s non-manufacturing sector. November is normally one of the weakest months of the year from a seasonal point of view. I would therefore not be surprised if the CFLP non-manufacturing PMI fell to 49.5 or below in November.
Sources: CFLP; Li & Fung; Plexus Asset Management.
A fall to 49.5 will result in the PMI reaching the lowest level of 51.2 since February 2009 on a seasonally adjusted basis according to my calculations.
Sources: CFLP; Li & Fung; Plexus Asset Management.
The expected manufacturing and non-manufacturing PMIs will confirm that China’s GDP growth is likely to slow to below 9% in the last quarter of this year.
Tags: Adjusted Basis, Amp, Asset Management, China Gdp, China Manufacturing, Chinese Manufacturers, Contraction, Export Orders, Finished Goods, Flash, GDP, GDP Growth, Last Quarter, Manufacturing Sector, Months Of The Year, Outlook, Pmi, Point Of View, Slowdown, Stocks
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Gold and Oil Outlook (Bart Melek)
Sunday, November 20th, 2011
This online video features Bart Melek, Head of Commodity Strategy, TD Securities, in conversation with MaryAnn Matthews.
While the economy and financial markets have been clouded with uncertainty, crude oil continues to chart its own path. Bart discusses what is behind this strength and also provides his outlook on gold, silver and natural gas.
In this interview, Melek addresses the following questions:
- What is behind crude's strength and what's your outlook?
- Do you expect to see seasonal strength in natural gas?
- Your thoughts on gold as a traditional safe haven?
- Your outlook for silver and other precious metals?
- What role can precious metals play in an investor's portfolio?
To view, click here or on image below:
Copyright © TD Waterhouse
Tags: Addresses, Bart, Commodity Strategy, Crude Oil, Economy, Financial Markets, Gold Silver, Investor, Maryann, Melek, Natural Gas, Oil Online, Online Video, Outlook, Path, precious metals, Safe Haven, Td Waterhouse, Uncertainty
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TSX Stocks: The Quest for Value
Friday, November 11th, 2011
This online video features Anish Chopra, Managing Director, TD Asset Management and Portfolio Manager of the TD Canadian Value Fund, in conversation with MaryAnn Matthews.
The Canadian earnings season is well underway and early trends have been encouraging. Against the backdrop of an uncertain global economy, Anish discusses his outlook for earnings going forward. He also shares names of some stocks that he likes.
In the interview, Anish Chopra addresses the following questions:
- What are some trends you are noticing in reported earnings?
- Which sectors are expected to show strong earnings?
- How are valuations on the TSX?
- How are you factoring the European debt crisis in your investment decision making?
- Can you share names of some stocks that you like?
Click here or on the image below to view:
Copyright © TD Waterhouse
Tags: Addresses, Asset Management, Backdrop, Canadian, Canadian Earnings, Canadian Market, Debt Crisis, Earnings Season, Factoring, Global Economy, Investment Decision, Managing Director, Maryann, Names, Outlook, Portfolio Manager, Sectors, Stocks Online, Stocks Quest, Tsx, Valuations, Video Features, Waterhouse
Posted in Canadian Market, Markets, Outlook | Comments Off
France, the New Elephant in the Room
Friday, November 11th, 2011
On January 7, long before Italy was in the spotlight of mainstream media attention, I wrote Italy The Invisible Elephant.
It was five or six months before Italy became an uncloaked popular economic topic.
However, "elephant hunting" is now a popular sport and mainstream media has done a better job at spotting the next one (with help of S&P threats to France's AAA rating of course).
Elephant Spotting Articles
San Francisco Chronicle: France Plans EU7 Billion in Taxes, Cuts to Save AAA Rating
France unveiled tax increases and spending cuts amounting to 7 billion euros ($9.6 billion) for next year to defend its triple-A rating as growth slows and Europe's debt crisis deepens.
The country will increase some levies on large companies, push up the lower end of its range of value-added taxes and curb welfare spending, Prime Minister Francois Fillon said today.
"French people must roll up their sleeves," Fillon said at a press conference in Paris. "We have one goal: to protect the French people from the severe difficulties faced by some European countries."
Los Angeles Times: Eurozone debt jitters creeping into French bonds
The European debt crisis has gone from bad to worse as Italian government bond yields have soared, threatening the solvency of the Eurozone’s third-largest economy.
But things could go from worse to worst if bond yields keep rising in France, the continent’s No. 2 economy after Germany.
The French government knows it can’t afford for the bond market to turn on it. Paris announced a new round of spending cuts last week aimed at ensuring that the country holds on to its coveted AAA credit rating.
Moody’s Investors Service warned last month that it might put a negative outlook on France’s top-rung rating if Paris made too many commitments to back up its banks or other Eurozone states with tax dollars.
But France’s need to protect itself also raises doubts about its ability to extend help to Italy as Rome’s debt nightmare worsens.
Ah yes, how can you save Greece and Italy if your concern is to save yourself?
The answer is you cannot and a quick look at sovereign debt spreads will show the bond market is starting to figure that out.
Sovereign Debt Table France vs. Germany
| Duration | Germany | France | Spread |
|---|---|---|---|
| 2-Year | 0.38 | 1.61 | 1.23 |
| 3-Year | 0.51 | 1.81 | 1.30 |
| 5-Year | 0.94 | 2.46 | 1.52 |
| 10-Year | 1.78 | 3.47 | 1.69 |
To help put that spread table into perspective let's look at today's action in 10-Year and 2-Year government bonds.
France 2-Year Government Bonds
France 10-Year Government Bonds
Germany 2-Year Government Bonds
Germany 10-Year Government Bonds
The two-day move in French bond yields vs. German is likely a 6-sigma event. Today alone, the 2-year yield rose 27 basis points vs. 2 for Germany.
Unfortunately the chart does not reflect this because Bloomberg charts are hopelessly a day out of sync with the numbers posted left of the chart.
While the equity markets are cheering the Rise of the Borg (and also the ECB stepping into the fray as the buyer of last resort of Italian bonds), a new elephant, completely visible, stepped into the room.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Tags: Aaa Credit, Bond Market, Bond Yields, Bonds, Debt Crisis, Economic Topic, Eurozone, Francois Fillon, French People, Government Bond, Investors Service, Italian Government, Jitters, Los Angeles Times, Mainstream Media Attention, Negative Outlook, New Elephant, Outlook, Popular Sport, Prime Minister Francois Fillon, San Francisco Chronicle, Solvency
Posted in Bonds, Brazil, Markets, Outlook | Comments Off
James Paulsen: Investment Outlook (November 2011)
Friday, November 11th, 2011
The Next Investment Catalyst?
Accelerating Economic Growth??
by James Paulsen, Chief Investment Strategist, Wells Capital Management (Wells Fargo)
November 2011
At least for the time being, the stock market seems to have survived yet another round of “Euro-Crisis Mania.” Recent policy actions announced yesterday by European officials have at least temporarily calmed fears of an imminent calamity. Most believe the rally in the S&P 500 Index to almost 1300 in the last month is due almost entirely to improvements in the European crisis outlook. While recent European developments certainly helped improve the mood of investors, we believe the recent stock market rally mostly reflects a huge reassessment of the potential recession risk in the U.S. economy.
The stock market collapsed in early August after a significant downward revision to real GDP growth in late July suggesting the pace of economic growth nearly flat lined in the first half of this year. Thereafter, the probabilities economists placed on an imminent U.S. recession rose significantly, and many prominent forecasters suggested a recession was indeed forthcoming. In recent weeks, however, a steady stream of “better-than-feared” timely economic reports from Main Street USA has calmed fears of an imminent recession. In combination with another robust corporate earnings season (which looks anything but recessionary) and capped by yesterday’s report that U.S. third quarter real GDP growth was a much stronger-than-anticipated 2.5 percent (with a robust and totally surprising real final demand growth of 3.6 percent!) has ultimately elevated investor greed beyond diminishing recession fears.
So now what? Investors have backed away from the recession cliff and the S&P 500 has returned to its approximate 1250 to 1350 trading range evident prior to the recession scare between February and July. Does the stock market remain trendless next year? Will it again come under intense selling pressure? Or is there a catalyst (beyond the notable currently attractive stock market valuation—that is, the stock market has trended sideways this year while earnings have continued to rise and competitive bond yields have declined) which would allow the stock market break out to new recovery highs?
Is Economic Growth Accelerating?
Although most have backed away from an imminent recession expectation, the consensus forecast still calls for only “muddling along” economic growth during the coming year. According to Bloomberg, the consensus economic forecast for real GDP growth is an anemic 2 percent for both the fourth quarter of this year and for all of 2012. Most believe the U.S. economy is destined for “sluggishness” since policy officials can no longer assist. Monetary officials are widely perceived as out of bullets and fiscal authorities seem helplessly gridlocked. Without another dose of stimulus, why should the economy improve?
Although policy official assistance for the economy may be limited, the private sector has adopted a policy of “self-medication” which could produce a surprising acceleration in real GDP growth next year. Exhibit 1 illustrates six sources of “stimulus” implemented in recent months which should improve economic prospects in the coming year.
Exhibit 1: Economic Self-Medication
First, the national average mortgage interest rate has declined by more than 1 percent since early this year. Long-term interest rates have declined by similar amounts on Treasury securities and on corporate and municipal bond yields. Although no policy official is responsible, long-term credit costs for many economic sectors have been significantly reduced in the last several months.
Tags: Chief Investment Strategist, Corporate Earnings, Downward Revision, Early August, Earnings Season, Economic Reports, European Developments, European Officials, Forecasters, GDP Growth, Investment Outlook, Market Rally, Outlook, Policy Actions, Real Gdp, Reassessment, Recession Fears, Steady Stream, Street Usa, Wells Capital Management, Wells Fargo
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Don’t Play Monopoly with your Portfolio
Thursday, November 10th, 2011
This Week's Feature: BMO Equal Weight Utilities ETF ( Ticker: ZUT )
Globally equity markets staged an incredible recovery from their October lows. However, Europe’s ongoing troubles ensure that heightened anxiety will remain. Even more reason to keep a careful eye on risk inside your portfolio.
Major equity indices for the United States, Europe and Emerging Markets rallied by 14% to 20% over the last five weeks. The S&P TSX 60 rose 12.5%. Commodities rallied too, with crude oil and copper up about 19%.
Euro-zone relief drove the rally, just as Euro-zone despair drove the drop. Until the Euro-zone begins to resolve its debt issues, every move it makes will agitate markets. When the Greeks decided to put their debt plan before a referendum last Tuesday, European equity markets fell 5%.
In this volatile environment, investors must be more vigilant in managing portfolio risk. One risk often overlooked is counterparty risk. As the exchange-traded market has developed, more, er…esoteric, ETFs have arisen, some of them with counterparty risk.
First, I should stress that most ETFs invest directly in stocks or bonds. These plain vanilla ETFs pose no counterparty risk. Other ETFs use futures contracts: no counterparty risk here either, but they do have other issues such as leverage that I have discussed before.
Then, there are ETFs that use “over-the-counter” (OTC) derivatives contracts. These are the ones that come with counterparty risk. These ETFs do not invest directly. Instead, they pay a fee to a counterparty, say a bank, and in exchange, the bank pays the ETF the return on some index like the S&P 500. All goes well until the day the bank is unable to pay the return.
How can you tell whether your ETFs have counterparty risk? You must read the prospectus. In a past role as a manager of OTC derivatives for a Bay Street fund manager, I was responsible for controlling counterparty risk. Are most investors ready or willing to do that? Unlikely.
In Europe, institutional investors are selling their OTC ETFs in droves and shifting to plain vanilla ones. France’s second largest bank, Société Générale, has seen outflows of Euro 4.4 billion this year from the OTC ETFs managed by its Lyxor division. There is nothing inherently wrong with the ETFs but investors are worried about SocGen’s exposure to Greek debt. SocGen’s stock price has fallen nearly 60% this year.
In recent notes, I discussed sector diversification and lower-risk, higher-dividend sectors like REITs. Another is the utilities sector.
When we play Monopoly, my sons tend to pass on Water Works and Electric Company in favor of Pacific Ave or Boardwalk. Like them, most Canadians pass on utilities for their portfolios.
That’s largely because the S&P TSX Composite passes on utilities. Three sectors dominate the Composite – financials, energy and materials – with nearly 80% of the weight. Utilities account for just 2%, even though their benefits would seem to mesh well with what most investors want.
Utilities are less volatile than energy, materials and even the Index as a whole. They pay better dividends than the Index and every other sector barring telecoms. Best of all, they are not so closely tied to the events in Europe.
There are a couple of Canadian utilities ETFs available: the iShares S&P TSX Capped Utilities (XUT/TSX) and the BMO Equal Weight Utilities (ZUT/TSX). Of the two, BMO ZUT is larger with about $95 million in assets.
iShares XUT is market cap weighted and holds 11 companies, with Fortis, TransAlta, Emera, Canadian Utilities and Atco making up about 70%. XUT pays a dividend of about 2.9%.
BMO ZUT is rebalanced twice a year to equal weights across 15 companies. It pays a dividend of about 5.3%. ZUT also holds one oil pipeline company, Pembina: not strictly a utility but the same idea.
The high yield will attract longer-term investors. In the near term, keep in mind that valuations are rich. The average price-to-earnings ratio for the companies inside ZUT is 23.4 times, with a price-to-book of about 1.93 times. For the Composite, the values are 15.2 times and 1.84 times.
Some of the premium is justified by the benefits. But a price fall in the near term is possible and that would be a good time to enter.
ZUT is less volatile than XIU, the TSX 60 ETF.
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Tags: Bonds, Canadian, Careful Eye, Commodities, Crude Oil, Debt Issues, Debt Plan, Emerging Markets, Equal Weight, Euro Zone, European Equity, Futures Contracts, Greeks, Last Tuesday, Lows, Otc Derivatives, Outlook, Plain Vanilla, Play Monopoly, Portfolio Risk, Prospectus, TSX 60, Volatile Environment, Zut
Posted in Bonds, Brazil, Canadian Market, Commodities, ETFs, Markets, Oil and Gas, Outlook | Comments Off
Roman Empire Under Pressure: Margin Call of 4–5 Billion Euros as Clearing House Raises Deposit Requirements on Italian Bonds
Wednesday, November 9th, 2011
Roman Empire Under Pressure
Margin Call of 4–5 Billion Euros as Clearing House Raises Deposit Requirements on Italian Bonds
Yields on Italian bonds rose once again on Tuesday as margin requirements on those bonds rose sharply. Bloomberg reports LCH Clearnet Boosts Deposit Required for Trading Italian Government Bonds
The so-called deposit factor charged for Italian bonds due in seven-to-10 years will be raised to 11.65 percent, LCH Clearnet SA said in a document on its website dated yesterday. That compares with a charge of 6.65 percent announced in an Oct. 7 document. The additional charges will be applied from close– of-day positions today, LCH said.
Roman Empire Under Pressure
Steen Jakobsen, chief economist at Saxo Bank, pinged me with these comments.
Major investment banks calculate the “margin call” to be around 4–5 billion EUR as of tomorrow.
The Italian situation is very complicated – on one hand Berlusconi has promised to step down, on the other there are no alternatives to him in the opposition, there is no real hope for majority for “someone else”.
Berlusconi has a long history of comebacks, and being 75 years old he has little to lose. The main issue remains whether Italy truly moves forward with austerity and reforms. One without the other has no value for market and for building a fire-wall around Italy.
The facts are simple: No one but Italy itself can save Italy under present conditions.
ECB intervening is merely delaying the inevitable. Italy needs to move forward.
Only two countries has had lower growth than Italy since 2000 – Haiti and Zimbabwe!
This is the present outlook for 2011 and 2012:
Conclusions
A bureaucrat government in Greece and potentially Italy will not solve anything. What’s needed in both countries are:
- A government elected to deal with crisis
- A plan for creating growth and reforms
- An austerity plan underwritten by politicians, labor unions and employers.
That does not seem likely for now, in either country.
At a bare minimum we will have another month of uncertainty. A concerning trivia remains in place: When a country passes 6.5% in 10 year yield – the call for help from the IMF has only been 14 days behind. Italy is different, but the timeline is running out.
Safe travels,
Steen
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Tags: Austerity, Berlusconi, Bloomberg Reports, Bonds, Boosts, Building A Fire, Bureaucrat, Chief Economist, Clearing House, Clearnet, Close Of Day, Fire Wall, Government Bonds, Investment Banks, Italian Government, Italian Situation, Margin Call, Margin Requirements, Oct 7, Outlook, Present Conditions, Roman Empire
Posted in Bonds, Brazil, Markets, Outlook | Comments Off
Art Cashin: "The Spinout May Begin", And Why Equities Just Got Punk'd By Bonds Once Again
Wednesday, November 9th, 2011
UBS' Art Cashin, the "Friends of Fermentation" commitee Chairman speaks.
The Spinout May Begin — Overnight Events
Asian stocks followed the New York lead and traded higher. European stocks looked to do the same with Paris and Frankfurt trading up over 1% at 3:30 EST. Italian bonds, however, were having none of it.
The yield on the Italian 10 year pushed well above 7%. More importantly the spread between it and a basket of other
bonds widened enough to prompt some regulators to raise the level of collateral needed for the Italian bonds.Worse yet, the whole Italian bond yield inverted. The yield on the 2 year and 5 year actually traded higher than the yield on the 10 year.
That spooked markets and Milan was down over 600 points by 6:00 EST.
Things have calmed somewhat since but we need to get some adult supervision soon.
The problem is now clear. Italy is both too big to fail and too big to save. Tomorrow we’ll go through some of the numbers.
And here Art explains why with everyone chasing beta to make up for the October underperformance in which hedge funds only achieved about10-20% of the broader market's gains, how everyone just got burned. Badly:
Most money market managers have been underperforming the market. There are several ways you can try to make up the difference.
In the old days, you might find the hot new stock in the hot new industry. But given the very heavy correlation among asset classes (everything moves together), that’s not productive.
So now, some managers are trading the swings. You wait for the selling to dry up and as the market begins to turn up; you rush in to buy the high beta stocks (they give you the most bang for the buck). So, by buying the dips in this manner, you add another point or two to your performance.
That strategy may be the cause of another phenomenon noted by Jason Goepfert. It is the apparent crowding into these positive stocks causing some distortion in the arms index.
Here’s a bit of what Jason said:
"This is more directly related to breadth than sentiment, but the Arms Index (better known as the TRIN) is showing that over the past week, traders have poured into positive stocks. There has been roughly 25% more volume flowing into advancing stocks than declining stocks."
Jason further notes that the prior two times this happened this year, it was at or near a short-term market top. In any case, this morning’s outlook suggests that the bond market is the better interpreter of events Italian.
As always.
Tags: Adult Supervision, Art Cashin, Asian Stocks, Asset Classes, Bonds, Collateral, Commitee Chairman, Correlation, Dips, European Stocks, Hedge Funds, Market Managers, Money Market, Outlook, Overnight Events, Phenomenon, Regulators, Several Ways, Spinout, Swings, Ubs
Posted in Bonds, Brazil, Markets, Outlook | Comments Off
Outlook for Major Economies: Mixed Bag!
Wednesday, November 9th, 2011
With the October PMIs under the belt I had another look at what to expect on the economic front with regard to economic growth in the major economic regions.
The outlook for the Eurozone is grim. The recovery since the great financial crisis of 2008/2009 has been sub-par compared to what my GDP-weighted PMI for the Eurozone suggested. In the graph below the PMI indicates that the growth in GDP in the third quarter is likely to be in the vicinity of 0.8% compared to a year ago. That means that in the third quarter the economy shrank by 0.5% or at an annualized rate of 2%. The situation in the fourth quarter is significantly worse as year-on-year GDP growth is likely to be a negative 0.5%. This implies that the economy has contracted at a rate of 1.7% from the third quarter – a massive 4.7% annualized!
Sources: Dismal Scientist; Markit; Plexus Asset Management.
The Eurozone is therefore firmly in the grip of a recession. The German IFO Business Expectations Index indicates that the Eurozone economy will face further headwinds going into the first quarter next year.
Sources: Dismal Scientist; Markit; Plexus Asset Management.
In the U.S. the current level of the ISM GDP-weighted PMI (manufacturing and non-manufacturing) is consistent with year-on-year GDP growth of 1.5 – 2.0%. I expect year-on-year growth of about 1.75% in the fourth quarter – up slightly from 1.6% in the third quarter. On a quarter-on-quarter annualized basis I therefore expect a slight acceleration to 2.86% from 2.46% in the third quarter.
Sources: Dismal Scientist; Markit; Plexus Asset Management.
Japan’s GDP probably stopped contracting in the third quarter and may have expanded for the first time since the third quarter of last year. The manufacturing PMI also indicates a further but tepid expansion in the Japanese economy.
Sources: Dismal Scientist; Markit; Plexus Asset Management
The GDP-weighted CFLP PMI (manufacturing and non-manufacturing) for China indicates further weakening of GDP growth on a year-ago basis to below 9%.
Sources: Dismal Scientist; CGLP; Li & Fung; Plexus Asset Management.
The fortunes of China’s economy and especially the manufacturing sector remain closely tied to those of Japan.
Sources: CFLP; Li & Fung; Markit; Plexus Asset Management
The U.K. economy is heading for a recession. The GDP-weighted PMI that I calculate indicates that year-on-year GDP growth in the fourth quarter has stagnated, if not contracted. I estimate that the economy has probably contracted by approximately 1% or an annualized rate of more than 4% from the third quarter.
Sources: Dismal Scientist; Markit; Plexus Asset Management.
To summarize:
Japan: expanding at last
China: growth slowing
U.S.: slight acceleration in growth
Eurozone: in deepening recession
U.K.: entering recession
Tags: Acceleration, Asset Management, Business Expectations, Dismal Scientist, Economic Front, Economic Growth, Economic Regions, Eurozone, Expectations Index, Financial Crisis, Fourth Quarter, GDP, GDP Growth, Graph, Ism, Japanese Economy, Outlook, Pmi, Pmis, Recession, Vicinity
Posted in Markets, Outlook | Comments Off
James Paulsen likes Emerging-Market Stocks on Interest Rates
Wednesday, November 9th, 2011
James Paulsen, chief investment strategist at Wells Capital Management, talks about the outlook for emerging-market economies and stocks. He also discusses his strategy for U.S. equities.
Source: Bloomberg, November 7, 2011.
Tags: Chief Investment Strategist, Emerging Market Economies, Emerging Market Stocks, interest rates, Outlook, Wells Capital Management
Posted in Markets, Outlook | Comments Off
Bill Gross and Mohamed El-Erian in Depth (Part Two)
Monday, November 7th, 2011
Part two of Consuelo’s exclusive double interview with two of the investment world’s biggest stars! Bill Gross and Mohamed El-Erian, Co-Chief Investment Officers of money management powerhouse PIMCO, sit down together to discuss outlook and strategy.
Here is the full transcript for Part Two of this in depth interview with Bill Gross and Mohamed El-Erian.
October 28, 2011
CONSUELO MACK: This week on WealthTrack, part two of WealthTrack’s exclusive interview with two of the world’s most influential investors. PIMCO’s Great Investor Bill Gross and Financial Thought Leader Mohamed El-Erian sit down together to discuss their investment strategies in the “new normal” world– next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. This week we are continuing our exclusive conversation with PIMCO’s two influential Financial Thought Leaders, Bill Gross and Mohamed El-Erian together. It is a rare occasion to be able to interview them side by side, and as you will see they are a fascinating study on how a successful partnership works. Since 2008, they have been co-chief investment officers of one of the world’s leading money management firms, Pacific Investment Management Company– PIMCO– which Gross co-founded in 1971. El-Erian is also CEO and is expanding the firm from its very large bond roots into stocks, commodities, ETFs, and passive as well as its core active strategies. Gross’ legendary PIMCO Total Return Fund, which he has led to the top of the bond world in performance and size since 1987, will soon have an ETF clone, actively managed by him.
El-Erian a former head of Harvard’s endowment and fifteen year veteran of the IMF, was also a top ranked emerging markets bond fund manager during his early years at PIMCO. He now co-manages the PIMCO Global Multi-Asset Fund which, as its name implies, can invest anywhere in the world, in multiple assets through passive indexes and actively managed PIMCO funds. According to Morningstar, it is the first PIMCO fund to be formally run in a team format and it also has an innovative tail risk hedging strategy to cushion it in down markets– it could be a model for the firm itself!
El-Erian and Gross are hedging their bets in all sorts of ways. They are working overtime to understand what El-Erian calls the string of once unthinkable macro events of recent years, which he and Gross believe are having a huge negative impact on the markets and investment results. They are also preparing for an even weaker “new normal” slow growth and low return environment than they envisioned for the developed world back in 2009. We pick up the conversation discussing this year’s uncharacteristic underperformance of Gross’ PIMCO Total Return Fund. I asked Gross if this time feels different than the few other years when the fund fell behind.
BILL GROSS: Well, the underperformance has been more substantial. Let’s be honest about it. And so it feels different. The problem this year is the Total Return Fund for the first six to seven months was set up for a new normal type of economy and now we’re in the new normal minus and so the shift, which propelled treasury prices and treasury yields lower, was actually very quick and very sudden. It was related, to some extent, to the debt ceiling crisis which occurred a few months ago and the lack of confidence in the United States. Surprisingly, when it was downgraded to double A plus, treasury did the best and that was because, I think, the recognition on the part of investors that the ability to address the deficit, that the ability to basically produce growth going forward was limited, as opposed to new normal-ish. And that was the big problem, I think, that the Total Return Fund had in terms of adjusting so quickly.
CONSUELO MACK: So you’ve rebalanced, as Mohamed said in a recent interview, The Total Return Fund. So the last I looked you had 16% in treasuries. Given what you’ve just told me about the new normal minus, are you increasing your treasury exposure? I mean, what are you overweighting now in the Total Return Fund?
BILL GROSS: Well, we’re overweighting mortgages. The mortgages are “agency guaranteed.” Not an explicit guarantee, but an implicit guarantee that becomes more and more explicit as the years and verbal guarantees go by.
CONSUELO MACK: So like Fannie and Freddie?
BILL GROSS: Fannie and Freddie. Those are mortgages which yield three to 3.5 percent. Sounds very low, but you know, compared to a five year treasury at 1.25 percent, that’s a nice attractive spread. And so mortgages have been over weighted. They’re not treasuries, but they’re treasury related. They’re, in our opinion, very safe double A plus, AAA type of assets and that’s one area where we’re hoping to pick up yield without sacrificing quality.
CONSUELO MACK: So the other stuff like financial services bonds, like Citigroup bonds or some of the emerging market bonds, are those things that you are now underweighting? So have you done a risk off trade pretty much in the Total Return Fund?
BILL GROSS: No. The risk off has basically been evidenced by increasing the treasury overweighting as a counterbalance to the risk. We haven’t really sold our JP Morgan or our Wells Fargo assets in terms of the financially related credits, nor have we sold the emerging market countries. We’re a believer in the emerging market growth. We’ve certainly tried to counterbalance that with a higher concentration of treasuries and I think that’s working out fine.
CONSUELO MACK: You know, Mohamed, I have to ask you, “When Markets Collide” which was your bestselling and really wonderful book that came out several years ago which was, again, very prescient, and one of the things that you talked about on WealthTrack a couple of years ago after that book that came out was that one of the lessons that you’ve learned from the financial crisis is the unthinkable can happen. So when I just hear Bill describing the fact that treasuries rally after the debt is downgraded in the U.S. – so what are the other big, unthinkable things that are happening, that are affecting PIMCO’s investment outlook and strategy?
MOHAMED EL-ERIAN: You know, I used to keep a list of unthinkables, but it got so long that now I keep it to the last three months. Because just think what has happened over the last few months. We’ve had, as Bill said, the US government flirt with default. The biggest bond market in the world. Unthinkable. We’ve lost our AAA from one rating agency. Unthinkable. We have now three European countries in the élite club, the Eurozone, rated as junk. One is rated worse than Pakistan. Unthinkable. We have Switzerland that has made its name as the safe haven to take steps to stop being a safe haven. They say we don’t want to be a safe haven anymore. All these are unthinkables. If we were having this interview a year ago and I said, “in a year’s time this is what would have happened” I would have doubted myself on every single one of them. I would have doubted myself even more on all of them and yet they’ve happened. Why? The system is trying to tell us something. What the system is trying to tell us that there are major global realignments. I tell my wife, “It’s like the tectonic plates shifting.” Okay? You get lots of earthquakes and things and things realign. And we’re going through a major realignment. And it’s happening slowly.
CONSUELO MACK: It is? It feels awfully fast to me.
MOHAMED EL-ERIAN: Well, let me give the example. So let’s take the example of treasuries. This a situation where PIMCO was right on three of the four issues that are critical to the valuation of treasuries, but the fourth one became so large. So treasuries are determined by the outlook for growth. If you remember, consensus was up here, we were down here. Consensus came towards here. Treasuries are dictated by the outlook for policies and we’ve been saying for a long time, don’t expect the Fed to raise rates. It is floor to zero for a long time. That has happened.
Treasuries are also determined by the credit outlook and we’ve been expressing concern about the credit outlook, and sure enough, the U.S. lost its AAA. But there was that fourth element which was the flight to quality. So PIMCO’s view was, why not gain what treasuries give you in AAA countries instead? Why not go to Norway? Why not go to Germany? Why not go to Australia? Why not go to Canada where you can get the same interest rate exposure without credit? And what happened because of all of these unthinkables is that suddenly the flight to quality became dominant. People didn’t care anymore. Bill has this notion of your cleanest dirty shirt– that people are willing to wear their dirty shirt if they view it as the cleanest dirty shirt.
CONSUELO MACK: So the U.S. treasuries are the cleanest dirty shirt?
MOHAMED EL-ERIAN: Are the cleanest dirty shirt. Right. And that is a little bit of a driver of the unthinkable. For us it’s been an important reminder to push ourselves even harder in terms of thinking of what else can happen out there. And I think that that is the challenge for everybody. We’re navigating these major changes. The markets are going to romance very short term things. How else do you explain to someone that in the last 15 minutes of trading the Dow can move by 400 points on a policy headline?
CONSUELO MACK: Try high frequency trading, up to 70% of U.S. market volume now. That’s not policy, that’s technological reality in the markets.
MOHAMED EL-ERIAN: Correct, but lack of conviction, right? So when you don’t have the conviction, when you don’t have the anchors, all it takes is you tip it a little bit and then everybody takes you one way, and then suddenly you tip it the other way and everybody tips it the other way because we’ve lost our anchors. We’ve lost the conviction because the U.S. is going through the unthinkables and Europe is going through the unthinkable. And that is the world that all investors have to navigate through and it’s an uncomfortable world, it takes you out of your comfort zone, but you have no choice. That’s the reality of today’s world.
CONSUELO MACK: So do fundamentals still count, Bill?
BILL GROSS: Well, they do, but fundamentals are being distorted in the financial markets and have been actually for ten or twenty years, but even more so now. You know, fundamentally, you could say that with inflation at 2.5 to 3 percent, that 10 year treasury deserves to be at 3.5 to 4 percent. That would be the historical relation. Fundamentally, you could say that the policy rate that Ben Bernanke’s Fed fund level should be at 2 to 2.5 percent. That would be the historical relation to inflation, but fundamentals have been thrown out the door, certainly because the economy hasn’t recovered. Unemployment is at nine percent, etcetera. The Fed must do something, but also the series of quantitative easings, the One, the Two, the Twist, you know, have produced distortions in the market that are not really relative to historical example or historical fundamentals, so it becomes a question not just of diagnosing value.
You know, we’d be the first to say that treasuries are overvalued relative to what they’re offering the investor class, but in addition, you have to observe where they’re going to be from the standpoint of policy technicals. Will the Fed stay at 25 basis points for the next five years? And if so, then it’s certainly to an investor’s advantage instead of accepting 25 basis points for successive periods of time for the next five years to buy a five year treasury at 1.25 percent. And so it becomes a question not just of fundamentals, but of determining policy maker choices and policy maker decisions going forward and that’s a delicate balance.
CONSUELO MACK: What do you say to individual investors now who have basically grown up thinking that they should be in the stock and the bond markets for their retirement savings and that that’s what we should depend on? Can they depend on it?
MOHAMED EL-ERIAN: So we tell them it’s right to feel unsettled. Right? Because again, you know, we are going through major structural change.
CONSUELO MACK: Right.
MOHAMED EL-ERIAN: Right? And there are these shifts and you’re going to feel uncomfortable. It’s like someone in the middle of an earthquake. They’re going to feel uncomfortable, but the answer is not necessarily abandon the city, but rather understand what’s going on and understand what is fragile and what is valued– because if you understand and have the right mindset, you can navigate. We did something, luckily, on the business side that has helped us a lot. Back in ’08, ’09, we invited a professor from the London Business School to come and speak to us. He made his reputation, his name is Don Sull, by looking at why successful companies split into either remaining successful or not. And it’s really interesting. It’s not because they don’t recognize the paradigm shift. Companies are very good at recognizing when the world is changing. It’s what do they do next. And the biggest trap that a company can fall in, the biggest trap that an investor can fall in is that they recognize the shift, but then they become hostage to what is called “active inertia.” Active inertia is active in the sense that you do something, but inertia you’re doing more of the same, but your world is changing and, therefore, you have to evolve with it. And therefore, you know, the message that we tell investors is you’re right to feel unsettled. Okay? That’s because the world is changing, but understand that that requires you to also evolve with it. I’ll give you an example.
CONSUELO MACK: So tell us how do we adapt as investors? And I know one of your specialties is emerging markets. You ran one of the top emerging market bond funds here for seven years. How do we adapt? What should we be doing with our portfolio today?
MOHAMED EL-ERIAN: I’ll tell you what we did at PIMCO. First, we made sure we have the best sector and country specialists. So you want to have the best people there that are looking at the world from a bottom up perspective. But that’s not enough. You need to compliment it with a top down. You need to ask them every single day, are your choices and what you like and not like consistent with the growth dynamics that we’re seeing? Are they consistent with balance sheet? Balance sheet is absolutely critical to navigate an earthquake. Are they consistent with the policy choices that the policy makers are making right now? So what we try to do is bring the best bottom up expertise complimented with a lot of thinking. Bill and I sit through four days a week, three hours of an investment committee where we discuss these things over and over again to try and get it right. And it’s hard work, but there is no alternative. Right?
CONSUELO MACK: Well, PIMCO is also diversifying into other asset classes, and into equities, and you’re doing ETFs, the Total Return Fund is going to have a new ETF, which is a whole other topic. But back to the original question is how do we as investors– I know how PIMCO is adapting, but how do we as investors adapt our portfolio? What should we be doing differently?
MOHAMED EL-ERIAN: So first, be very clear about what your objectives are. Second, be very clear what your risk tolerance is. Third, recognize that the answer today to your objectives are solutions, not products. Investors make the mistake of thinking only in products space, but you need a more holistic solution. Fourth, be very clear as to how much volatility you’re willing to stomach because volatility has this nasty tendency of encouraging you to do something stupid at the wrong time. Right? Then you can put together a portfolio. It would mean being more global than you are today. Much more global. It would mean understanding that the asset classes are transforming. For example, the S&P today relies to a great extent on what’s happening overseas. It’s no longer domestic.
CONSUELO MACK: Right. Forty percent of revenues are overseas. Right.
MOHAMED EL-ERIAN: And don’t be hostage to the familiar. So we have a tendency of saying, I’m only going to invest in this name because I’ve seen it. Well, you know what? There are certain names, as Bill mentioned, that are coming up in the rest of the world that are as attractive and they are the big names of tomorrow; and therefore, it’s important to target tomorrow as opposed to yesterday.
CONSUELO MACK: So Bill, same question to you. So how do we adapt to the new reality as investors? How should we be positioning our portfolios?
BILL GROSS: As Mohamed is suggesting, you need to go global. You need to think in, to some extent, in non-dollars based. The world revolves around the dollar. The dollar is the reserve currency, but to the extent that it depreciates relative to other currencies and relative to stronger growth economies over time, then other economies and other assets that are in non-dollars base might be a significant advantage. It doesn’t mean, you know, take your entire portfolio and put it into Brazil and into the Brazilian real, but it means an investor probably, if they want a higher return, they’re going to have to go to those parts of the world and those currencies which offer a higher rate of return. So I think that would be critical. And last, as Mohamed has suggested, you simply have to know what your risk parameter is. We’re fond of quoting a phrase from Will Rogers that says, “At certain periods of time, you should be more concerned about the return of your money, as opposed to the return on your money.” We try and do both here, but importantly, during a period of uncertainty, during a period of slow growth in the developed world or no growth in the developed world, certainly the return of your money is critical going forward. You don’t want to lose 10 or 20% of it because you’re behind the eight ball going forward.
CONSUELO MACK: So Mohamed, specifically you co-manage PIMCO’s Global Multi-Asset Fund, a fund of funds. So how are you positioning it? What are you overweighting in PIMCO’s Global Multi-Asset Fund?
MOHAMED EL-ERIAN: So importantly, this is a go anywhere fund.
CONSUELO MACK: Yes.
MOHAMED EL-ERIAN: It can do equities, it can commodities, it can do fixed income all in the liquid space. Even more critically, it’s a fund that has tail hedging in it. Now, tail hedging is something that’s very familiar to people as individuals, but not as investors.
CONSUELO MACK: So explain what it is.
MOHAMED EL-ERIAN: So when we buy car insurance, we tail hedge. We ask the question, “What deductible do you want?” Five-hundred, a thousand, two-thousand? We don’t buy car insurance because we think we’re going to crash the car, because if we’re going to crash the car we shouldn’t be driving. We buy car insurance because there’s a small probability of a really bad event and we want to know whether we can limit our losses in that world.
So the global multi-asset strategies, what they do is they incorporate within the construction of the portfolios this tail hedging. And you see how it worked during the third quarter, which was a terrible quarter and it really does kick in to limit the downside in that. How are we positioned relative to where most people are? We’re much more global. Secondly, we look for equity risk, but very high up the capital structure.
CONSUELO MACK: So senior credit, for instance? I mean, preferreds?
MOHAMED EL-ERIAN: So senior credit. So what a lot of investors sort of don’t think about, they think of equity risk only coming in equity. If you buy commodities, you’d be amazed how much equity risk there is in commodities because commodities are also correlated to growth, just like equities are. So in certain states, commodities can offer you a better claim on the upside than equities do. We are overweight in emerging market bonds. We overweight local bonds in emerging markets where we think that you are earning both a high interest rate and you have a potential for capital appreciation. We are diversified in currency as you can suspect from what Bill just said. And we look at this actively.
So there are three of us who run this fund, Vineer Bhansali, Curtis Mewbourne, and myself, and we’re each responsible for a different part of it, but we consult every single day and position it accordingly. What we’ve been doing recently is we’ve been increasing our gold exposure. We had taken it down significantly as gold peaked. We thought it had gone too far. Now we see potential. We think that we are still in a very volatile period. We are going to have many bouts of risk off. And people are going to look for hedges and increasingly gold is starting to enter as part of an asset allocation, so we have been increasing gold. And we have been shifting out of the U.S., which has outperformed in the equity space, to certain emerging economies that were initially hit hard not by their fundamentals, but by the amount of capital that came out. So this is a continuous repositioning to reflect valuations and also our secular views.
CONSUELO MACK: One Investment for long term diversified portfolio, I ask all our guests this at the end of WealthTrack interviews. So Bill Gross, what should we all own some of in a long term diversified portfolio?
BILL GROSS: Certainly bonds.
CONSUELO MACK: Certainly bonds?
BILL GROSS: Yes.
CONSUELO MACK: Broad category.
BILL GROSS: Because bonds, high grade bonds not necessarily treasuries, but single A and double A corporate bonds, provide an acceptable return relative to inflation. Not an historic return, but an acceptable return relative to inflation. In an uncertain world of slow to no growth in the developed world, it seems to me that investment grade bonds of multinational corporations, single A or double A corporations which yield three to four to five percent, are certainly low, but acceptably high relative to inflation and relative to the alternative. So for a longer term investment, for a five, ten, fifteen year type of investment, a single A or double A corporate bond. And for those that are earning a Wall Street as opposed to Main Street income, municipal bonds in the single and double A category are very attractive as well. They yield more than U.S. treasuries, which is an historical twist, so to speak. So I’d recommend both of those.
CONSUELO MACK: Mohamed, what is your One Investment for a long term diversified portfolio?
MOHAMED EL-ERIAN: So how to supplement Bill without repeating Bill, that’s really hard. Anything that has the three characteristics of very strong balance sheet, exposure to emerging market growth, and income. So either dividends, etcetera. So lots of companies meet that criteria.
CONSUELO MACK: So stocks or bonds?
MOHAMED EL-ERIAN: Right. So think of a Microsoft with a three percent plus dividend, exposed to emerging markets, sitting with a ton of cash would be an example of a company like that. There are many examples of companies like that. There are countries, sovereigns that have these characteristics. Right?
CONSUELO MACK: Such as?
MOHAMED EL-ERIAN: Brazil. Sitting with $300-billion of reserves, having good growth prospects on there, and paying an interesting carry or interest income, if you like– what Bill referred to in terms of high quality companies, high quality municipals. So these characteristics one finds in quite a few different places and you can build a portfolio on that that allows you to sleep at night, gives you income, and also because it has so many buffers in terms of the balance sheet, can navigate this enormous volatility
CONSUELO MACK: So Bill Gross, thank you so much for joining us. Mohamed El-Erian, what a treat to have the Dynamic Duo from PIMCO here on WealthTrack.
BILL GROSS: Thank you for coming.
CONSUELO MACK: Thank you.
MOHAMED EL-ERIAN: Thank you very much.
CONSUELO MACK: At the conclusion of every WealthTrack, we give you one suggestion to help you build and protect your wealth over the long term as well. This week’s Action Point: Consider the investment themes emphasized by Bill Gross and Mohamed El-Erian. First, think international, that’s where the growth is. Second, think quality, of business, balance sheet, and credit, whether it’s a company or a country. Third, consider emerging markets in particular for all asset classes including stocks, bonds and currencies. Both Bill and Mohamed recommend holding local currency bond funds, not dollar denominated ones, to protect against future dollar declines.
Next week we are going to delve deeper into emerging markets with two experts: Matthews Asia Funds’ chief investment officer, Robert Horrocks, and Payden Rygel’s emerging markets bond fund strategist Kristin Ceva. Both are also successful fund managers. Thank you for watching and make the week ahead a profitable and a productive one.
Tags: Asset Fund, Bill Gross, Bond Fund, Bonds, Brazil, Canadian Market, Chief Investment Officers, Commodities, Consuelo Mack, Depth Interview, Double Interview, Gold, Gross Co, Investment Management Company, Investment Strategies, Investment World, Investor Bill, Mohamed El Erian, Money Management Firms, Outlook, Pacific Investment Management Company, Partnership Works, Pimco Total Return, Pimco Total Return Fund, Rare Occasion, Wealthtrack
Posted in Bonds, Brazil, Canadian Market, Commodities, ETFs, Gold, Markets, Outlook | Comments Off
3 Drivers, 2 Months, 1 Gold Rally?
Sunday, November 6th, 2011
3 Drivers, 2 Months, 1 Gold Rally?
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
Federal Reserve Chairman Ben Bernanke announced this week that the Federal funds rate will stay near zero for now. He reasoned that the “low rates of resource utilization and a subdued outlook for inflation over the medium run” would likely “warrant exceptionally low levels for the federal funds rate at least through mid-2013.”
This will likely translate to the real interest rate (which is the rate of interest an investor can receive on a U.S. Treasury bill after allowing for inflation) remaining negative for at least another year and a half.
For gold investors, a low-to-negative interest rate has been associated with a powerful historical trend. Going back four decades, gold has experienced positive higher year-over-year returns whenever the real interest rate tipped below 2 percent. And the lower the rates drop, the stronger gold tends to perform.
Marc Faber, editor of the Gloom Boom & Doom Report, believes the Fed will keep rates near zero even longer than 2013. In his November commentary, he points to the opinion of Chicago Federal Reserve Bank President Charles Evans, who wants the Fed to “commit itself to keep short-term rates at zero until the unemployment rate falls below 7 percent or the outlook for inflation over the medium term goes above 3 percent.” If Evans has his way, Dr. Faber extrapolates that rates could “stay at zero for five or even 10 years (and negative in real terms).” Based on Dr. Doom’s prediction, one could infer that gold could continue its bull run for several years to come.
This rate-cutting trend is not only an American phenomenon, as other countries have been slashing their interest rates. In surprise moves, the central banks of Europe, Brazil, Indonesia and Turkey have all recently cut rates. This week, the European Central Bank surprised markets when it cut its key interest rate by 0.25 percent. Brazil has cut rates twice over the past two months, and Turkey cut its benchmark interest rate a few months back as part of an unorthodox move to keep its economy from overheating.
Many investors follow the Fed’s decisions, but to see countries’ rate changes in action over the years, The Wall Street Journal put together an interesting interactive showing how countries around the world have increased or decreased their interest rates over the past several years. Check it out now.
The other strong action central banks have been taking is loading up on gold. In “Perfect Storm Creates Tidal Wave of Gold Demand,” we discussed how the trend of gold buying by central banks in the East has been increasing while the Western central banks have ceased selling their gold. Now Turkey’s central bank is trying to manage liquidity in the banking system by allowing banks to keep up to 10 percent of their required reserves against lira liabilities in gold.
Bloomberg News reported that if Turkish banks fully allocate that 10 percent, it will free up $3.1 billion in liquidity.
This has followed a similar move by Turkey’s central bank to allow private banks to hold an increased percentage of their reserves against foreign-currency liabilities. Since that change, 21.6 tons of gold were added. According to Bloomberg News, another 55 tons of gold could be added after the new adjustment goes into effect on November 11. This would bring the total gold reserves in the Turkish central bank to a value of $10 billion.
‘Tis the Season for Gold
Combine the central bank purchases of gold with the fact that we are now entering the strongest months of the year for gold. The chart from Bank of America Merrill Lynch (BofA) below shows how gold and gold equities have performed on an average monthly basis over the past 10 years. While the spot gold price has differed from the S&P/TSX Composite Index of gold equities during the first 10 months of the year, their historical pattern is very similar during the last two months. November has historically been the strongest month of the year for gold equities, with mining stocks increasing 8.1 percent.
Combined with equity valuations at historically low levels, BofA believes, “gold equities could follow the historical pattern in late 2011.”
The argument for a rally in gold and gold equities this time of year is strengthened when we compare the seasonal patterns over different time frames. I often show gold’s historical patterns when I present my Goldwatcher Presentation to emphasize how strong these last months of the year have been over every time period.
The 5-year pattern has strayed from the longer-term historical patterns, particularly before the October timeframe. For the past five years, the gold price has started the year weak, and then moved considerably higher than its 15– and 30-year historical average from February through September.
However, over the 5-, 15– and 30-year patterns, the trends in November and December have mimicked each other.
BofA says a key driver of this late-year gold trend has been increased jewelry demand for the Christmas buying season. We agree wholeheartedly, as the gift giving season around Christmas drives many consumers to purchase gold jewelry for their loved ones. And despite consumer sentiment remaining near a record low, the National Retail Federation anticipates holiday sales rising a modest 2.8 percent this November and December.
In India and China, people are especially amorous of the metal and buy gold out of love. It is customary in most developing countries to give gold as a gift to friends and relatives for birthdays, weddings and to celebrate religious holidays. And this time of year, gift giving in the form of gold is especially strong in India. Indians recently celebrated Diwali, which spurs gold buying during a five-day celebration of good over evil, light over darkness, and knowledge over ignorance (Read the Frank Talk post on Diwali).Diwali is followed by the main Indian wedding season where many Indians will be buying golden gifts for the bride and the groom. In China, 2012 is the “Year of the Dragon” and retailers expect to sell gifts in the form of gold dragon jewelry, pendants, statues and coins.
Gold investors should remember that volatility swings both ways. If you look at 10 years of data, gold bullion has had 10 percent price swings about 7 percent of the time. These ten percent swings are more common for gold equities, as the NYSE Arca Gold BUGS Index has had 10 percent swings over 20 trading days about a third of the time.
With three drivers—1) negative real interest rates propelling investors to seek gold for it’s perceived “safe haven” qualities, 2) the Love Trade in full bloom, and 3) central banks increasing their holdings in the yellow metal—happening over the next two months, gold is one commodity that could benefit.
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