5 Year Total Return Performance by Asset Class

Courtesy of Deutsche Bank, we see the 5 Year Total Return Performance of stocks, bonds, precious metals, etc. As noted here, Gold, Silver, and Bonds have significantly outperformed equities. On a side note, somewhat surprising to me was how well High Yield bonds have performed, and how poorly the Shanghai Index as performed over the last 5 years. China's GDP continues to grow, and the China bulls continue to point out that China will be the leading economic powerhouse in the 21st Century, but whether this is true or not, we won't know yet, but what we can note is that the market is weary of China and its rate of "real" growth (not nominal).

My concluding point is that everyone says that gold/silver will continue to go up, stocks will trade range bound and bonds have to be approaching their own bear market.......but, if this run-up in Gold/Silver doesn't scream there's some type of bubble, then I don't know what does. Gold and Silver are typically a good hedge against a currency being debased (which, we all can agree is occurring in Europe and the US), but at these types of levels, do you really think the reward outweighs the risk?

Economic Musings - 2.23.12

The market appears to be trading range bound, as jobless claims hold steady in the US, however the investment community is hearing more talk of a moderate recession in Europe. According to the EU's latest projections, they expect the 17-nation Euro economy to experience a moderate recession and contract 0.3% in 2012, with Greece expected to contract 4.4% due to austerity measures and Portugal expected to decline 3.3% as they try not to fall into the "Greece" category (ie the worst of the PIIGS). This is something to watch because China's economy is still dependent on exports, and a significant amount of their exports go to Europe. To put this perspective, the US GDP is comprised of 67% consumer goods consumption, whereas China's GDP is only comprised of 30% goods consumption. Therefore, if Europe's banks continue to shrink and GDP does contract, Europeans will not have as much access to liquidity, and could reduce their spending, further impacting their economic output.

In addition, in the U.S., there appears to be some technical resistance at play, as US equities, as measured by the S&P 500, have been up 8.3% to begin the year, with last year's "losers" (ie Financial Services) performing the best and last year's "winners" (ie utilities), performing the worst.

Why the Market is More Weary of the ISDA than the Actual Greek Bailout

For today's comment, in honor of Greece's 54% "voluntary" hair cut from its creditors, I rehash my comment from early December (http://webbpicks.blogspot.com/2011/12/tues-12611.html) on the importance of whether the International Swaps and Derivatives Association or "ISDA" deems Greece's "voluntary" hair cut as a "credit event", thus triggering credit default swaps or "CDS". If the ISDA doesn't recognize these CDS as being triggered for Greece's bailout, then investors are going to call into question the value of all credit default swaps on every country/companies and whether these investors have actually "hedged" their exposure. If these CDS don't pay out when bonds have technically defaulted (through a 'voluntary' hair cut), then what's the point of even hedging these in the first place. Investors are now going to reprice "risk", thus leading to a higher risk premium, thereby requiring a higher return for their investments, and could cause volatility in the markets to rise.

On a side note, as to how different the markets have been behaving since September through November last year, when 1-3% dives/rises in the market were becoming common place. Courtesy of Jeff Staut, Raymond James, the S&P 500 has now gone 35 trading sessions in 2012 without suffering a 1% down day. There have been 12 other years since 1928 whether the S&P 500 has traded higher for 30 sessions or more without a 1% down day. In all but one of those occurrences, the S&P 500 was higher at year's end, with a median gain of more than 15%.

Why Should We Care About Greece?

For today's comment I am going to discuss why investors care about Greece, and then end with why investors shouldn't care about Greece.

The market today is going to be very volatile as Europe is weighing on investors minds, but fortunately the news out of the US is good, and bullish. To begin, the markets in Europe were spooked after concern has begun to weigh that Greece will miss a debt payment next month as the latest Greek bailout aid was postponed to February 20th. In addition, Moody's warned it could downgrade the long-term credit ratings of the 17 of the largest banks, and in particular, the banks with the most Euro exposure. But, over the pond, weekly jobless claims fell to a near 4-year low to 348,000, and housing data was strong with housing starts rising 1.5%.

Now to begin why we should care about Greece....although Greece seems to be a small cog in the Euro, it's seen by investors as a proxy for the bond markets, given the fiscal debt deficits and debt of many countries and is also a proxy as to how the European leaders will deal with its other weaker countries. Greece is by far the weakest of the countries, but the other PIIGS countries, and in particular Portugal, are very weak and without aid very well could end up like Greece. Will the stronger Euro countries request so much austerity for their aid that it's impossible for those countries to pay back the stronger, creditor countries? Or will the stronger creditor countries devalue the Euro, and essentially help pay for the weaker countries debt problems? This is not an easy resolution, and I wouldn't expect to see a definitive resolution in the near term.

Now, courtesy of Jim O'Neill from Goldman Sachs Asset Management as to why the "world" shouldn't care as much about Greece.

"This past week, the 6th in the year 2012, has displayed a slightly different character to the previous 5 weeks with the equity markets losing their strong upward momentum. There have been some understandable reasons for this, not the least of which is the never-ending saga of Greece, which I shall discuss a bit more below, and the related challenges about resurrecting a credible and permanent European Monetary Union (EMU) from this mess. Despite this, my main message is – once again – to please keep this in perspective. Greece’s economy is somewhere between $300 to $350 billion. Last year alone, China’s GDP increased by $1.4 trillion, to $7.3 trillion. I reckon that means China has created the economic equivalent of another ½ of Greece in the 6 weeks of 2012 to-date. It is also the case that the evidence about a self-sustaining recovery in the US continues to build after yet another decline in weekly job claims, a rather reliable indicator."

As you can see, China is much more important to the world GDP, and in the end, will have a much bigger impact on the markets then Greece. And, as long as economic indicators continue to be solid in US, we will focus on our own growth, and push aside all this "PIIGS" talk.

Obama's Proposed Tax Policy

Today's softness in the equities market is just a pull back due to today's economic #s, and I also believe due to political bipartisanship due to Obama's new proposed tax policy, which I have included some bullet points below. Now, most of this will not get passed as is, but some of this will be very popular with the masses, including the carried interest being taxed as ordinary income. I will go out on a limb and note that there's no way that Congress could pass dividends being taxed as ordinary income. As many know, once a company has paid out a dividend, it's already been taxed at the corporation's tax rate, so by taxing it again to an individual in the highest tax bracket, you will in effect have taxed that company's profit at close to 50%, which makes dividends not and economical use of capital deployment for corporations. This unintended consequence could ultimately result in a decline in dividends from corporations.
• Top individual income tax rate of 39.6%, starting in 2013 (up from 35%)
• Long- term capital gains top rate of 20%, up from 15%.

• 3.8% tax on unearned income of couples earning $250,000 or more; individuals making$200,000 — is to take effect in 2013 to pay for the 2010 health- care reform law.

• Dividends are treated like ordinary income. Top Federal bracket for some taxpayers = 43.4% (including dividends). Top dividend tax rate is now 15%

• The AMT is replaced with a 30% minimum tax for individuals with annual incomes of at least $1 million.

• The Carried Interest option benefiting hedge fund managers and private equity managers moves to ordinary income rates instead of a preferential 15%

Equities vs. Government bonds

Today's comment I look at the long-term and recent performance of equities vs. government bonds (ie US Treasuries). Courtesy of BASML, these charts below, which are based on a rolling 10-year annualized return, illustrate that in the last decade, government bonds have outperformed equities. With that being said, with the Federal Reserve supporting the market by keeping rates low for an extended period, I would currently allocate more to equities. Although government bonds did outperform equities last year, I believe equities will outperform US Treasuries this year. As I have previously noted, equity valuations are attractive, macroeconomic factors are trending positively, government policy is supportive and S&P dividend is yielding more than 10-year US Treasuries. I would still favor allocating some of your portfolio with corporate bonds, but would not be a buyer of US Treasuries.

The reason to be bullish for US Treasuries is if you believe there will be a major banking and debt crisis that spills over into US and China. And, as we have seen so far this year, that has not been the case. Earlier today, Greece's government approved austerity measures necessary to receive its next round of bailout package. The market has digested this positive news, and the S&P 500 is trading in the black to begin the day (up about 0.5% right now)

Fri 2.10.12

Today, the market is looking to pull back. The market has been on a nice run lately, and I would look for some profit taking today. If you remember last year, I harped on the fact that the market was becoming used to huge, wild swings of 2-3% or more a day. Well, lately volatility has declined and we have enjoyed a nice, steady rise. In fact, so far in 2012, there's only been one day of a decline of 0.5% or more and we haven't had a decline of 1% or more since late December. However, the news out of Europe and Greece is gloom and doom, as the European finance minister is basically saying there should be no Greek bailout, and it appears that other Euro countries are looking to push Greece out of the Euro.

The other point I would like to make about this rally we have enjoyed, is that too many investors have become bullish. Stocks, like McDonald's, are hitting their multi-year highs, even though we are in a sub 3% GDP environment. Furthermore, this is all happening while volume has been significantly lower than historical norms.
But, to leave on a positive note, courtesy of Sam Stovall, from S&P, when stocks are in the "black" in January (note the S&P was up 4.4%), then 86% of the time since 1945, the market has been in the black for that year.

Tues 2.7.12

To keep expounding on the notion that 4th quarter's earnings season has been less stellar than previous quarters, I note that WSJ has picked up on this and has a graph which states that this earnings season is shaping up to the be the worst since the financial crisis for profit margins and firms beating expectations. Of the 204 companies in the S&P 500 that reported results in January, 60% have beaten estimates, which is well below the 70% that beat expectations in the first 3 quarters of 2011. However, I again must throw some "warm water" on this "cold water" statistic, as companies are continuing to provide solid earnings guidance for 2012, and 4th quarter has historically been a "clean-up" quarter, so as an investor I would look at the whole picture, which says that the economy is starting to rise (albeit slower than we would like) and employment data is moving in the right direction. Lastly, companies balance sheets are as solid as they have ever been, with a substantial amount of cash on their books, so although it will be bumpy, look for the trends to continue to be favorable.

Fri 2.3.12

Not much more that I can say, that hasn't already been said about today's HUGE jobs number. The Consensus was around 100k, and the highest estimate was 225k, so today's 243k number really was a welcome surprise to the markets and to the rally we are enjoying. Furthermore, the market has priced in more of a recession for Europe (and in particular, Western Europe) then what is currently playing out. And, all the big global companies, such as UPS/Fed Ex and Caterpillar, are all coming in with higher, revised guidance on 2012, and ramping up their investments. So, I would look for continued strength in the equity market, and not pay too much attention to the "As the World Turns" (also known as the PIIGS countries), and enjoy this rally.


To me, this is a similar feeling to how I felt after watching Alabama beat Clemson in the Georgia dome in Saban's 2nd year. For years, beginning with Dubose and ending with Shula, it became second nature to be pessimistic, and to believe that our glory days would never resurface. But, after watching Alabama come out and just completely pummel a soft ACC Clemson team, I started to realize that give it some time, and Alabama would be back on top.....having that same feeling from now with the US economy

Mon 1.30.12

First on the macro front, Portuguese credit-default swaps rose to a record 39.5%, signaling a 71% chance of default over the next five years, as investors continue to remain concerned about debt talks and the upcoming E.U. summit. Investors are focusing on Greek bond talks, which could offer the best idea of what haircut debt holders are willing to take. Also with respect to Greece, Germany has proposed that Greece hand control over its finances to a Eurozone budget commissioner before the newest terms of its bailout are agreed upon. As one can imagine, Greece is not happy about this new wrinkle, at all.


Lastly, to update my note from last week on S&P earnings and the number that are missing Consensus. See below from a table that Credit Suisse prepared. As I noted in a previous note, 70% of companies had beaten expectations in 1Q11, 2Q11, and 3Q11 results, and 62% of the long-term historical average. So, although earnings are trending toward the historical average, this is still way down from the last 3 quarters of results.  The S&P 500 was up 1.9% last week, with Information Technology sector leading the way, up 8.5% (almost entirely due to Apple's earnings), while Telecom Services were the lowest performing sector (primarily due to AT&T's loss as a result of its break-up fee it paid for the T-Mobile deal that was denied by the DOJ).

Mon 1.23.12

My note today focuses on how S&P earnings so far have disappointed investors. Of the 77 S&P components that have reported 4Q11 results, 43 have beaten estimates, 26 have missed and 9 have met Consensus. To put this into some kind of historical perspective, this means that although 56% of the companies have beaten expectations, this is way below the 70% rate that we experienced in the first 3 quarters of 2011 and is below the 62% historical average.


Well, one might counter this and say investors are not as focused on near term earnings, but more so of future earnings (i.e. guidance). Of the 108 companies that provided earnings guidance last quarter, 68 have missed and 13 have matched their estimates. What this tells me is that investors are going to scrutinize their earnings estimates for 2012, as investors weigh in earnings vs. macroeconomic factors that are trending favorably. Ultimately, I look for this to result in more volatility in the coming months once earnings season ends.

Thurs 1.5.12

For my comment today, following up on the bullishness of Wall Street strategists for the big brokerage houses. In early December, I illustrated a couple of their 2012 estimates, but today, courtesy of the WSJ, I have a graphic which shows how well they performed last year and what their forecast is for this year. Enjoy

Wed 12.28.11

It's been a while, but here's my last comment of the year. As I predicted December has seen a nice Santa Claus rally to end the year. Yesterday's volume was the lightest traded day of the year, so you can expect more of the same heading into the last couple of trading days. One tidbit I thought was interesting, courtesy of the WSJ, is that during the Dow's 115 year history, the Dow has risen 80% of the time over the final five trading days, registering an average gain of 1.2% over those final five days. Looking at the S&P 500, the index has risen during the last week of the year 77% of the time, averaging a 0.9% gains, which compares to average gain of 0.15% for all weeks since 1928.  Of course, with today's down day, led by banking and energy stocks, we are in danger of ending the last week in the red.


Lastly, on a positive note to begin 2012, courtesy of Kathy Lien at GFT Advisors, stocks usually perform well in election years --–and, over the past five decades, stocks fell only four out of the 17 presidential-election years. (With 2008 being the outlier due to the banking and credit crisis)

Thurs 12.22.11

Surprising that treasuries would be trading higher today, as the equity markets are showing strength this morning, up 0.5% while the 10-year bond is now at 1.94%....so who's right? Typically the best bet is to listen to the bond market, but in this case I think the equity market is correct. I think today's the last day we will see much volume, and with today's rise, I would expect to see more of the same as the Santa Claus rally continues into the year, albeit at a lower pace than we would have liked to see.


Here are 4 points on why we should listen to the equity market today:


- Encouraging Drop In Weekly Jobless Claims - New U.S. claims for unemployment benefits dropped last week to its lowest in more than 3-1/2 years, suggesting the labor market recovery was gaining speed. Initial claims for state unemployment benefits dropped 4,000 to a seasonally adjusted 364,000, the Labor Department said. That was the lowest level since April 2008.


- Downward Revision To 3Q GDP But Data Points To Positive Growth Trends - U.S. economic growth was slower than previously estimated in the third quarter on a sharp drop in healthcare spending, but stronger business investment and a fall in inventories pointed to a pickup in output in the current period.  Gross domestic product grew at a 1.8 percent annual rate in the third quarter, the Commerce Department said in its final estimate, down from the previously estimated 2 percent. Economists had expected growth to be unrevised at 2 percent. Though spending on healthcare dropped by $2.2 billion, spending on durable goods was stronger than previously estimated, indicating household appetite to consume remains healthy.
 
- Surprise Jump In Consumer Confidence - U.S. consumer sentiment improved in December to its highest level in six months as Americans felt better about the economy's prospects for the year ahead, a survey released on Thursday showed.  The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment rose to 69.9 from 64.1 in November.  It topped the median forecast of 68.0 among economists polled by Reuters and beat December's preliminary figure of 67.7.
 
- Strong Leading Indicators Data - U.S. NOV LEADING ECONOMIC INDICATORS +0.5 PCT (CONSENSUS +0.3 PCT) VS OCT +0.9 PCT