Sunday, December 19, 2010

'Tis the season for top ten lists and financial prognostication

Year’s end is a time for publishing top ten lists covering topics such as the best movies, books, music, sports teams, weight-lose techniques, and New Year’s resolutions. In the world of investing, it is also the season for financial prognostication. Among the most frequently discussed predictions are those addressing how the S&P 500 index will perform in the coming year. For 2011, all major Wall Street strategists have a positive outlook for the S&P 500’s performance, with targets ranging from a low-end 1.2% increase to a high-end performance of 10%, based on this past Friday’s market close.

MY TAKE: Financial and economic forecasting remains a dismal science with little data supporting their accuracy. However, Wall Street strategists are not uniquely challenged in this regard. Projections from organizations such as the World Bank, the International Monetary Fund and the U.S. Department of Commerce’s Bureau of Economic Analysis suffer similar challenges. Bottom line - Most investors remain hopeful for the future, but are cognizant of the economic challenges facing many major economies. Similar to top ten lists, financial and economic predictions are always great topics for debate. The year ahead will provide us with much to consider.

Monday, December 13, 2010

Getting aboard, with High-Speed Rail

Earlier this month, the California High Speed Rail Authority Board voted to begin construction of the main phase of the system, a 520-mile span connecting Los Angeles and San Francisco, with construction costs estimated at $43 billion. At the same time, the Chinese government plans to spend $600 billion to expand its network of high-speed rail coverage. Additionally, its railway companies including CSR Corporation Limited and China Railway Group Ltd. are forming partnerships with industrial manufacturers Alstom, Bombardier Inc. and General Electric Corp. to develop new rail systems around the world.

MY TAKE:  While China expands its global high-speed rail presence, which includes high-speed links with Thailand and Laos and a passenger train that travels at a world record speed of 302 miles per hour, U.S. based projects remain controversial. Opponents suggest the projects are too expensive or wasteful, while supporters state that potential benefits include reductions in fossil fuel dependency, job creation and reduced transportation congestion. This past week, after governors in Ohio and Wisconsin decided not to move forward with somewhat questionable high-speed rail projects, the U.S. Department of Transportation announced it would redirect $1.2 billion of federal funding to projects in California, Oregon and Washington. Successful completion of these projects will likely require private sector investment and a less polarized political environment.

The following is a CNN Video on High Speed Rail in China (February 2010)

Sunday, December 12, 2010

Globally, a week with mixed market action

This past week, investors in U.S. equities benefited from news of an extension of the Bush tax cuts, increased U.S. consumer confidence, a narrowing of the U.S. – China trade gap, a continuation of jobless claim benefits, along with markets that were less concerned about European sovereign debt issues. On Saturday, the Chinese government said its consumer price index rose 5.1 percent in November. This is the largest increase in 28 months driven by sharp price increases in food, retail sales and property construction.

MY TAKE: As some markets have moved higher, there seems to be a sense of “Risk On” with analysts increasing their 2011 estimates. I would suggest a more cautious approach as we move toward the end of the year. While “decoupling” among major global markets may take place, this is generally not the case. If inflation in China persists, there are significant implications for investors globally.

Sunday, December 5, 2010

Foreclosure processing update

In my October 10 note, I highlighted the home foreclosure processing problems in the US and that while most participants wanted to minimize the financial impact to themselves and to the economy, there remained a challenge in balancing the desire for expediency with “rule of law” processes. On November 16, the US Congressional Oversight Panel released the report “Examining the Consequences of Mortgage Irregularities for Financial Stability and Foreclosure Mitigation” and stated the following: “Allegations of ‘robo-signing’ are deeply disturbing and have given rise to ongoing federal and state investigations. At this point, the ultimate implications remain unclear. It is possible, however, that “robo-signing” may have concealed much deeper problems in the mortgage market that could potentially threaten financial stability and undermine the government's efforts to mitigate the foreclosure crisis.”

MY TAKE: Foreclosure processing will likely proceed at a slow pace as judges, along with state and federal regulators, continue their reviews. The implications for large money center banks and their investors, as well as the financial system remain unclear.

Socially responsible, sustainable and hopefully profitable investing

Historically, socially responsible investing (SRI) has been associated with a strategy of avoiding companies involved in “vices” such as guns, gambling, alcohol and tobacco. A more modern view also focuses on ethics (perhaps avoiding firms that negatively affect the global economy) and sustainability (protecting the environment and managing the planet’s limited natural resources). As a result, today’s more expanded view includes investment opportunities in areas such as water treatment, energy conservation, agricultural production and pollution management.

MY TAKE: The broad array of SRI and sustainable investment opportunities include innovative emerging companies and industries (such as alternative energy) as well as the transformation of traditional industries (such as transportation and oil production). As investors, we must understand the risks. As with most investing activities, the SRI and sustainable themes do not guarantee profits. Issues to consider include 1) the negative impact of the credit and financial crises on project funding, 2) regulatory confusion, 3) the potential for pricing pressure and commoditization and 4) weak business models. I look forward to discussing this important topic with you in more detail as we move into the New Year.