Sunday, December 18, 2011

2011: a Rough and Tumble Year, with Plenty of Market Volatility

Events challenging many investors this year included: 
  • the catastrophic Japan earthquake
  • political unrest in North Africa and the Middle East
  • the persistent European sovereign debt crisis,
  • concerns about China's growth, along with inflation concerns,
  • the strength of the U.S. recovery which confronts fiscal deficit issues and persistent unemployment and
  • severe floods in Thailand
Actions (sometimes just meetings) by political leaders, policy makers and central bankers, along with the release of economic data, often triggered sharp positive and negative market swings. The most recent news item, from this past week, was that the Fitch credit agency lowered its view on the governments of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus and reported that France is at risk of a downgrade.

Many of these events are reshaping our expectations of global growth for years to come. While the breath of the global economic crisis is well understood, the depth of its damage (which includes the scale of additional deleveraging needed by banks and governments, along with the road map for recovery) are less clear. As market uncertainty dissipates, the ability to assess probable outcomes (a critical component of successful investment strategies) should improve.

Sunday, December 11, 2011

Tough Eurozone Talk could be Good News for Investors

Tough talk and sleepless nights accompanied the 15th Eurozone economic summit in two years in Brussels. Each rumor and comment sent markets strongly up and down throughout the week. In the end, agreements pointed toward improved government budgetary rules within the European Union and additional European Central Bank assistance to European commercial banks. German Finance Minister Wolfgang Schaeuble said, "I am certain that we will be able to handle the debt crisis in Europe with the agreed, far-reaching measures on institutional reform of the European currency union". On Friday, investors welcomed the good news.

It may be premature to provide an “all is clear” signal, but any progress in the Eurozone is good news. Details need to be worked out and the summit may not have adequately addressed Eurozone sovereign debt risks. Initial commentary has been skeptical, but recently the markets have absorbed a lot of bad news. Eurozone leaders need to address the concerns of the skeptics (and avoid internal disputes) during the next few weeks in order to assure their credibility and stabilize markets.

Will 2012 be the Year for Clean Energy Investing?

The United Nations’ 2007 Intergovernmental Panel on Climate Change reported that global sea levels would increase two feet by 2100. Recently, the study’s authors stated that their estimate was too low and sea levels will increase by least six feet (examples of potential impact - Mumbai, India would be under water and the New York City subway system would be flooded). This week, in Durban, South Africa, United Nations negotiators met to obtain an emissions reduction treaty by 2020. Contentious negotiations lead to an agreement between proponents of improved regulation (which included Brazil, South Africa and European Union countries) and the leading emission producing countries (the U.S., India and China).

The need to minimize environmental damage (and reduce dependence on fossil fuels) has not diminished. However, while energy, technology and infrastructure are high areas of investor interest, this year has not been kind to the clean technology sector. Drivers of negative performance include: 1) credit and financial crises related issues, 2) regulatory confusion, 3) pricing pressure and commoditization and 4) weak business models. The evolving global environmental challenges will drive both preventive (clean technology) and adaptive (seawalls, relocations, etc.) infrastructure spending. A review of potential clean technology investment ideas may be a good way to start the New Year.

Sunday, December 4, 2011

Global Central Banker Trigger Massive Market Moves

On Wednesday, in an effort to reduce escalating stress in the global financial system, the U.S. Federal Reserve, the Bank of England, the European Central Bank and the central banks of Canada, Switzerland and Japan reduced lending terms to its member banks. In addition, China eased it monetary policy and Brazil reduced its benchmark interest rate for the third time since August. Markets responded enthusiastically to these actions with the FTSE 100 (Europe) up 3.1%, the S&P 500 (U.S) up 4.3% and the Hang Sang (China) up 5.6% for the day. On Friday, while addressing Germany’s parliament, Chancellor Angela Merkel said, “The future of the euro is inseparable from European unity. The journey before us is long and will be anything but easy.”

These actions by central banks reinforce the view that significant global economic issues persist. As France and Germany move closer to finding some common ground, resolving the Eurozone’s sovereign debt crisis requires consensus among a large set of players (another economic summit will take place on Friday). Debates continue on the impact of slowing economic growth in China. While in the U.S., as many politicians remain focused on 2012 election campaigns, addressing the federal deficit and financial system problems remain elusive. As Angela Merkel has suggested, we are a long way from resolving many of these problems. Uncertainty and volatility will likely continue and investors will confront more market mood swings.

U.S. Unemployment Rate Declines, Weak Labor Participation Rate Suggests Structural Change

On Friday, the U.S. Department of Labor announced that the unemployment rate fell to 8.6%, from 9.0%, and payrolls increased by a weaker than expected 120,000 in November. At the same time, the labor force participation rate (people in the U.S. either working or looking for work - 16 years and older) was 64% - close to the lowest level since 1984, and increases in hourly wage and number of hours worked continue to be muted.

Global markets, while volatile, have benefited from strong corporate profits and the effects of U.S. Federal Reserve stimulus efforts. The unemployment rate may continue to decline as job seekers exit the market, but a recovery in the labor participation rate (which has been in decline since 2000) seems less certain. Improving the labor trends will reduce the risk of stagnation in economic growth and corporate profitability.

Sunday, November 27, 2011

As expected, U.S. Super Committee fails - markets take a hit

As the U.S. congressional “super committee” failed in its objective to identify $1.4 trillion in U.S. budget cuts by its November 23 deadline, politicians pointed fingers at each other and Standard & Poor's and Moody's Investors Service said they would not downgrade the credit rating of the U.S. as long as the planned automatic spending cuts did not change.

MY TAKE: It is broadly understood that addressing the U.S government’s debt crisis requires increases in revenue (more taxes) and decreases in government spending (affecting defense and entitlement budgets). Repeated failures by the U.S. Congress to deal with these issues highlight shortcomings in both Congressional processes and many legislative participants. Regarding the impact on investors, market uncertainty continues to increase and this past week’s negative market action reflects the current investor mood. The global economy is traveling a path where the arrival of unexpected consequences can continue to deliver swift and negative moves. In the short term, positive holiday sales trends may provide market stability.

At Portugal Debt is Downgraded, the Eurozone Drama Continues

This past week, Fitch Ratings cut Portugal’s debt rating to “junk” status, Standard & Poor’s cut Belgium’s rating to AA from AA+ and Moody’s Investors Service lowered Hungary’s debt rating to junk. Additionally, more European countries have their 10-year bond rate over 7%, a level where the probability of a financial bailout significantly increases. On Friday, 10-year bond rates for notable European countries included: Greece 28%, Portugal 12.3%, Ireland 9.5%, Hungary 9.4%, Italy 7.2%, Spain 6.6%, Belgium 5.8%, France 3.6% and Germany 2.2%. In addition, hopes for a Eurozone bond, which would combine some of the $8 trillion in Eurozone debt, faded when the idea was rejected by Germany.

There are no easy solutions to the Eurozone mess. It is understandable that Germany does not want to become further entangled by participation in a Eurobond offering – driven by a fear of lowering its creditworthiness. However, extracting itself from the Eurozone structure would be a painful process. In the meantime as the Eurozone crisis evolves, France, with its significant financial exposure to several of the weaker players, is increasingly at risk of a credit rating downgrade – such an event would be significantly negative.

Sunday, November 20, 2011

Globally connected banking system still seems like risky business

On Wednesday, the Fitch Ratings service said, “unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen” and “the risks of a negative shock are rising". This news triggered a swift and negative reaction in U.S. markets with the S&P 500 closing down 1.7% for the day. Against this backdrop, senior U.S. financial executives struggle to explain and defend their “limited” exposure to Eurozone
MY TAKE: The global banking system seems to remain a beast that is difficult to analyze and understand. Limiting investor trust are 1) poor disclosure of potential risks, 2) the general complexity of financial structures, 3) the continued use of derivatives and 4) often suspect “off-balance sheet” issues . In addition, MF Global Holding’s ill-fated European sovereign debt bet, along with its attempt to use of hundreds of millions of dollars in customer funds to shield itself from its inevitable bankruptcy, is not reassuring. These dynamics support continued market volatility as investors respond with “sell first, ask questions later” trading.

As U.S. Super Committee deadline approaches, Rep. Gabrielle Giffords shares some thoughts

After traditional U.S. congressional processes were ineffective in determining $1.4 trillion in U.S. budget cuts, the process was “outsourced” to a smaller group of legislators called the “super-committee”. With its November 23 deadline approaching, there is limited evidence that this group has made progress and political bickering continues.

Interesting, Rep. Gabrielle Giffords R-Arizona (still recovering from an assassination attempt), along with 14 Democrats and 11 Republicans submitted a letter to the committee this past Thursday recommending that congressional salaries should be cut by 5% citing that 1) members of Congress have not taken a pay cut since April 1, 1933, 2) U.S. Congressional compensation is among the highest in the world (only exceeded by Japan) and 3) “gold-plated member retirement benefits” should be curbed.

MY TAKE: With low expectations for the committee’s efforts, some investors believe the negative news is priced into the market. However, markets often do not take the negative hit until the news is finally released. Hopefully, the committee delivers some positive
results, otherwise the markets may take control. Note: Eurozone members, having poorly managed their economic problems, are currently learning the lessons of market control.

Sunday, November 13, 2011

More markets swing, during U.S. road trip

Last week, as global markets encountered broad swings - driving initially by concerns and then by progress related to political leadership issues in Greece and Italy, I traveled across the U.S. on a road trip from San Francisco to the western gulf coast of Florida. Phoenix, AZ provided its version of Occupy Wall St. within its downtown sector. Driving through the Midland/Odessa area of Texas provided a chance to hear the local react to Gov. Rick Perry's Oops moment (not supportive), along with exposure to Post-Katrina New Orleans and other southern U.S. locations.

Sunday, November 6, 2011

Reckless CEO Jon Corzine trashes investment firm

In March 2010, Jon Corzine, a former Goldman Sachs CEO and New Jersey U.S. Senator and Governor, joined MF Global as CEO to turn it into a major investment banking force. In an apparent effort to get big fast, he placed a $6.3 billion bet on the recovery of sovereign debt from Belgium, Ireland, Italy, Portugal and Spain. Additionally, the firm was leveraged at a ratio of about 40:1. This week, as investor confidence eroded, the firm’s stock collapsed, bankruptcy was filed, Corzine resigned and up to 2,000 staff members are likely out of work.

Excessive leverage frequently results in economic disaster. As discussed in previous notes, in 2004 the U.S. Securities and Exchange Commission provided an exemption to five investment banks to increase their leverage ratio to 40:1, up from the industry standard of 12:1. The firms were Lehman Brothers, Bear Stearns, Merrill Lynch, Goldman Sachs and Morgan Stanley – each either collapsed or needed significant government bailouts. Corzine’s mix of excessive leverage and speculative bets demonstrated minimal regard for risk management. Hopefully, the investment industry and its varied regulators (in this case, the U.S. Commodity Futures Trading Commission) will learn from this incident.

More travel, but minimal Eurozone progress from G-20 leaders.

As Greek Prime Minister George Papandreou shocked global markets with his suggestion that Greece might not follow through on its bailout plan, G-20 leaders gathered in Cannes, France for yet another summit to discuss Eurozone issues. Comments from summit attendees included 1) Australian Prime Minister Julia Gillard: "Europe needs to get its own house in order", 2) Canadian Prime Minister Stephen Harper: "We see absolutely no reason why Canada, or frankly why any range of other countries, would need to contribute to such a bailout" and 3) Japanese Finance Minister Jun Azumi: "The focus of debate is how to set up a firewall but we consider that the IMF should become one big wall." Additionally, Kenneth Rogoff, a former International Monetary Fund (IMF) chief economist said, “the new plan relies on a questionable mix of dubious financial-engineering gimmicks and vague promises of modest Asian funding.”

MY TAKE: It seems that hopes for a resolution of the Eurozone’s problems are turning into policymaker fatigue. With the can being kicked into early 2012 – it is likely that global markets will take matters into their own hands. Heightened unpredictability will continue.

Sunday, October 30, 2011

Eurozone cleanup process continues, but it's still a mess

On Thursday, global markets responded with an ”emotional” and positive reaction to the “rescue” news that Eurozone leaders had a “comprehensive package” to address the two-year-old crisis - consisting of a mix of 1) more funding for troubled borrowers, 2) a draft plan to stabilize European banks and 3) reducing Greece’s debt.

To understand some to the Eurozone’s economic challenges, consider the following. When the Eurozone was set up in 1992, a condition for membership was that a country’s gross government debt to GDP ratio should not exceed 60%. The current figures for Eurozone members include: Greece 166%, Italy 121%, Ireland 109%, Portugal 106%, France 87%, Germany 83%, and Spain 56%. (Note: figures for Japan 233%, U.S. 100%, U.K. 81% and China – unknown).

MY TAKE: The Eurozone financial recovery plans released last week are fragile and short on details. On Friday, Germany’s Constitutional Court ruled that the process used to allocate funds to the Eurozone mess was unconstitutional. Additionally, Italy is entering center stage of the crisis as Prime Minister Silvio Berlusconi provides limited direction on addressing its significant financial issues. Global investors will continue to walk on a delicate tightrope.

Q3 earnings - good, U.S. GDP - reasonable, Supercommittee progress - unknown

After 293 companies in the S&P 500 have reported third quarter earnings, the average growth in revenue is 11% and growth in earnings is 19%. Additionally, third quarter U.S gross domestic product (GDP) was 2.5% - suggesting that recession is averted for now, but some of its sub-components are less clear on its strength. However, there are concerns that the U.S. Congress’ "Super Committee", appointed to determine $1.4 trillion in U.S. budget cuts by late November, is not making progress.

MY TAKE: In an environment of heighted uncertainty, the corporate earnings and GDP results are reassuring. Hopefully, the Super Committee can avoid partisan bickering and provide constructive budgetary guidance. Anything less, from the U.S. Congress, may result in another set of U.S. credit downgrades and more market turbulence.

Sunday, October 23, 2011

In Europe, as another deadline moves back - "curb your enthusiasm"

Last week’s post suggested avoiding optimism about the G20’s statement that on Oct. 23 the European Union (EU) will "decisively address the current challenges through a comprehensive plan”. Recent comments suggest that the situation is worsening and the Oct. 23 deadline has evolved into a multiday planning session. An unnamed European official, cited by the Financial Times, said; “We’ve lost the main parachute and we’re on the reserve chute and we’re not sure that will even work.” German Chancellor Angela Merkel said they are working with “a technically complex process” but expects a breakthrough on Oct. 26.

MY TAKE: Europe and the global economy confront a broad set of complex and multidimensional problems. While some investors believe that Europe will “muddle along”, the probability of unexpected consequences from near term policy actions, or perhaps inaction, seem to have increased the market risks. With Eurozone leaders poorly managing the Eurozone crisis for about two years, a “wait and see” approach to this week’s events seems prudent.

Sunday, October 16, 2011

After another G-20 meeting, the Eurozone is still looking for a plan

This weekend, finance ministers from the “Group of 20” (Argentina, Australia, Brazil, Canada, China, European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, U.K. and the U.S., along with the International Monetary Fund and the World Bank) met in Paris to discuss the Eurozone financial crisis. A statement released from the meeting suggested that on October 23 the European Union will "decisively address the current challenges through a comprehensive plan”.

MY TAKE: While optimism has recently increased about a positive outcome, fundamental issues presenting significant headwinds include 1) high unemployment, 2) tightening financial conditions, 3) high debt levels and 4) a broad Eurozone economic slowdown. After a two year process of underestimating Eurozone problems, European leaders seem stuck in a “we have a plan for a plan” mode. Separately, the U.S Congress seems to be in its own “working on a plan for a plan” mode with its “Supercommittee” addressing significant federal government budget issues. Let’s not become too optimistic.

Sunday, October 9, 2011

High Frequency Trading, 3rd Quarter Earnings and Looking for Light at the End of the Tunnel

Since late July, global markets have moved wildly, driven by a broad set of global economic concerns. In addition, an article in today’s New York Times noted that regulators are concerned that high-frequency trading is increasing market volatility. This week, the 3rd quarter earnings season begins with financial results from firms such as Alcoa Inc., Google Inc., Infosys Technologies Ltd., JP Morgan Chase & Co. and PepsiCo, Inc.

While investors are justifiably concerned about economic uncertainty, a lot of the bad news is well understood (a lack of transparency in the banking system mixed with poor political responses). The earnings season commentary from hundreds of companies in the coming weeks will be critical components in assessing short and intermediate term economic and investment trends. Given the almost universally negative tone in the markets, perhaps a short term bottom has been established. Regarding high-frequency trading, it is about time this significant problem is addressed.

Occupy Wall Street Enters the Stage

On Friday, as the U.S. Bureau of Labor Statistics reported that unemployment remained at 9.1%, the Occupy Wall Street movement continued to gain momentum and expand across the country. While critics suggest it lacks a clear message (most early stage grassroots movements confront this challenge), its initial concerns are well understood: 1) “Wall Street”- known for obtaining government bailouts with minimal benefit to average citizens and 2) corporate profits - at a record high as U.S. wage growth stagnates and jobs are outsourced.
In addition to government debt and foreclosures issues, the U.S. socio-economic landscape also includes the following challenges:
  • High unemployment among the young - employment among 16-to-24-year-olds this past summer was 48.8%, the lowest on record (back to 1948),
  • a 15.1% poverty rate - the highest since 1993 and
  • a record-high 45.3 million citizens participating in the Supplemental Nutrition Assistance Program (aka food stamps). While media pundits jockey for attention and politicians position for effective fundraising, grass-roots organizations such as Occupy Wall Street will likely become more relevant.
Note: Well-known investor Jeremy Grantham, chief strategist at GMO (with $100 billion in assets) recently sharing a colorful perspective of Wall Street at a Council of Institutional Investors conference calling the financial sector “a blood sucker” which provides little economic value and accused bankers of “obfuscating and bamboozling” clients. Democracy is messy; it may get messier.

Sunday, October 2, 2011

What are some of the world's largest investors doing?

Pension funds are among the largest investors in the world and generally have a long-term investment focus. Last week, Takahiro Mitani, president of Japan’s Government Pension Investment Fund (GPIF), the world's largest public pension fund with $1.49 trillion of assets under management said it would begin investing in emerging market equities by March 2012. Additionally, Joe Dear, Chief Investment Officer of the $221.3 billion California Public Employees' Retirement System (CalPERS) said that meeting its targeted investment return of 7.75% this year would be difficult. In the short run, CalPERS plans to increase its exposure to hedge funds and other alternative investment strategies to compensate for stock market losses and poor Treasury bond returns. (Note: CalPERS has 70% of the funds needed to meet its pension obligations).

MY TAKE: While pension funds are not immune to investment mistakes, it is important to understand the strategic changes taking place among these significant institutional investors. With global markets increasingly integrated, it remains to be seen if economic decoupling by emerging markets occurs.

ECRI calls for U.S. recession

On Friday, the Economic Cycle Research Institute (ECRI) a research firm widely followed because of its “better than most” ability to pick economic turns, said, “A new recession isn’t simply a statistical event. It’s a vicious cycle that, once started, must run its course. Under certain circumstances, a drop in sales, for instance, lowers production, which results in declining employment and income, which in turn weakens sales further, all the while spreading like wildfire from industry to industry, region to region, and indicator to indicator. That’s what a recession is all about.” and “because the “Great Moderation” of business cycles (from about 1985 to 2007) was now history, the resulting combination of higher cyclical volatility and lower trend growth would virtually dictate an era of more frequent recessions.”

MY TAKE: Globally, the economic healing process will require the passage of time, a lot of hard work and many difficult decisions. During this period, a focus on capital preservation is essential. In the short term, long only equity investors may increase cash levels (potentially driving markets down further), value/deep value investors are seeing more opportunities, and investors with the ability to navigate current global equity volatility and credit market trends are
likely not feeling much pain. The playbook for many investors continues to be rewritten.

Sunday, September 25, 2011

Concerned about copper, credit and confidence

Copper’s price is an important gauge of global economic health because of its broad use in construction and manufacturing – its price declined about 16% last week (down 25% since August 1). Corporate grade credit-default swaps continue to rise as investor confidence deteriorated. Additionally, World Bank President Robert Zoellick said, “The events of August have started to show the signals of contagion to emerging markets,” and “A new and larger risk looms. The drop in markets and confidence could prompt slippage in developing countries' investment and a pull-back by their consumers too”.

MY TAKE: Investors, business leaders and consumers are in a vicious cycle - lacking confidence in the future, participation in their respective markets will remain constrained. Additionally, the recent broad market swings (both up and down) is reducing investor conviction. A strong rebound, similar to the one from the March 2009 low, seems unlikely. Serious flaws are being exposed in many investment strategies – and the margin for error is contracting. However, patient and disciplined investors are finding an increasing set of opportunities to consider.

Comments from Soros, IMF, U.S. Fed, WTO and Rio Tinto CEO seem downbeat

There was no shortage of negative commentary last week including: 1) billionaire investor George Soros on a double dip recession - “I think we are in it already”, 2) International Monetary Fund managing director Christine Lagarde saying the global economy is entering a “dangerous place”, 3) the U.S. Federal Reserve stating that the U.S. economic outlook contains “significant downside risks”, 4) Tom Albanese, CEO of mining firm Rio Tinto - “It is noticeable that markets are somewhat weaker” and 4) the World Trade Organization reducing its 2011 estimate for global goods trade to 5.8%, down from There was no shortage of negative commentary last week including: 1)6.5%. At the same time, a statement from G-20 finance ministers said: “We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required.”

MY TAKE: While some pundits suggested that the week’s significant market pullback was based on dissatisfaction with the U.S. Federal Reserve’s “Operation Twist”, these observations support a view that global growth is slowing and investment risks persist. Unfortunately, the G-20’s “generic” comment suggests that policy makers remain in a reactive mode and may lack the capacity to address the challenges.

Sunday, September 18, 2011

From Sir John Templeton: Thoughts for the Frustrated Investor

From the early 1980s through late 2007, investors benefited from an "equity friendly" market but the current era requires a new playbook. The late Sir John Templeton, a pragmatic value investor who predicted the U.S. housing crisis and focused on buying stocks at the level of maximum pessimism, had a very insightful observation:
“The stock market is broken, and it will take some time, maybe years, to repair it. Mass media, especially TV today is so short-term that few in its audience grasp the lasting damage and corrective impact which will continue to linger from the greatest financial crash in world history." 
He liked government bonds in countries with no trade or fiscal deficits and a high savings rate and he had a bias toward industrial stocks.


  • While Sir John would not like the current investment landscape, he would understand it.
  • Today’s high-speed trading environment quickly reacts to changes in news flow, price direction and sentiment.
  • On Friday’s market close, the risk monitor moved to “risk on” for equities in several markets including Brazil, Canada, Finland, India, Mexico, Portugal, South Africa, Taiwan, Turkey, U.K. and the U.S. But investors should note that: 1) small and midcap stocks are weaker on a relative basis, 2) U.S. and European credit markets, while improving, remain under stress and 3) prices for copper, gold and other metals are weak. 
  • Bottom line: An improving but mixed picture, with an upward bias for equities in selected markets.

Markets improve as mixed news flow continues

The good news: the European Central Bank announced it would work with the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to provide three-month loans to banks through the end of this year. The mixed news: while attending a meeting of European finance ministers in Poland, U.S. Treasury Secretary Timothy Geithner said, “Governments and central banks have to take out the catastrophic risk from markets”. In response, Austria’s finance minister Maria Fekter said, “I found it peculiar that even though the Americans have significantly worse fundamental data than the Eurozone, that they tell us what we should do and when we make a suggestion ... that they say no straight away”. The bad news: UBS, Switzerland's largest bank, announced that a London based trader lost the firm $2 billion.

MY TAKE: Global markets welcomed the news of short-term funding efforts to the Eurozone economic mess but managing a longer-term solution is still elusive. Additionally, the UBS event reminds us of issues within the global banking system. Markets will continue to move on both the hopes for crisis resolution and recognition that more work needs to be done. This week, the U.S Federal Reserve discusses Operation Twist (yes, the name comes from the Chubby Checkers song ).

Sunday, September 11, 2011

Managing investment risk from the top

With the U.S. Federal Reserve’s QE2 stimulus efforts behind us, 2011 has become a year of divergent investment results. Illustrating the extremes are the performances of John Paulson’s main fund, which declined 34% through the end of August, while Ray Dalio's Bridgewater Associates is up 25%. Paulson’s firm, which manages $35 billion, was positive on an economic recovery, with bets on banks (ouch) and a fraudulent Chinese company (bigger ouch). Dalio’s $122 billion firm had a more negative economic view with positions in a broader set of asset classes.

MY TAKE: With global markets increasingly interconnected, investors need a global process to manage risk and identify opportunities. Unlike “bottom-up” stock picking approaches, which identify good and bad companies and investment themes, a global macro approach monitors changing trends in GDP growth, inflation, currency exchange rates, and changes in political structures and other public policy dynamics. Style based strategies, such as growth versus value, or large cap versus small cap allocation are less effective in managing loss.

Global economic drama/recovery continues

As rumors circulated about an imminent default of Greece, Germany’s representative to the European Center Bank, Jürgen Stark, resigned – perhaps frustrated by the direction of varied Eurozone bailouts. Other noteworthy events during the week included 1) a speech by U.S. Federal Reserve Chairman Ben Bernanke which did not suggest addition stimulus actions, 2) U.S. President Obama’s high profile “jobs plan” speech, 3) the first meeting of the congressional Super Committee” appointed to determine $1.4 trillion in U.S. budget cuts by late November, 4) the potential that Moody's Investor Service will downgrade BNP Paribas, Societe Generale and Credit Agricole and 5) the financial collapse and closure of solar technology firm Solyndra LLC – a recipient of a $535 million U.S. Department of Energy loan in addition to $1billion in private sector investments.

MY TAKE: Concerns are increasing that the politicians and central bankers that poorly managed economic growth over the past decade are increasingly challenged in addressing the complexities of the current economic mess. While we may be closer to a market bottom, the path will be bumpy and uneven. Stay focused!

Sunday, September 4, 2011

With U.S. employment growth near zero, politicians ramp up the rhetoric

On Friday, the U.S. Department of Labor said the unemployment rate remained at 9.1%, with zero job growth during July. At the same time, the labor force participation rate (people in the U.S .either working or looking for work - 16 years and older) was 64.0% - the lowest level since 1984, with no increases in hourly wages or number of hours worked. On Wednesday of this week, leading Republican presidential contenders will debate their views on the path forward. On Thursday night, President Obama will present his jobs plan to a joint session of the U.S. Congress.

MY TAKE: Until recently, many market pundits, investors, and politicians found comfort in strong corporate profits and a global market stimulated by Federal Reserve-driven monetary intervention. Now, the U.S., along with many other developed countries may be facing longer-term structural changes to income distribution and economic stability. With voter cynicism increasing, this week’s political rhetoric should be assessed within an “actions speech louder than
words” context. While political finger-pointing will remain at heightened non-constructive levels, research by suggests that most political outcomes are still determined by which side has the largest financial backing. A quote popularized by Watergate era informant Deep Throat may still be relevant: “Follow the money”.

Big banks get busted, again....

Also on Friday, the U.S. Federal Housing Finance Agency (which oversees Fannie Mae and Freddie Mac) filed a lawsuit related to about $200 billion worth of problematic mortgage backed securities originated by Ally Financial Inc. / GMAC, LLC, Bank of America Corp., Barclays Bank PLC, Citigroup, Inc., Countrywide Financial Corp., Credit Suisse Holdings (USA), Inc., Deutsche Bank AG First Horizon National Corp., General Electric Co., Goldman Sachs & Co., HSBC North America Holdings, Inc., JPMorgan Chase & Co., Merrill Lynch & Co. / First Franklin Financial Corp, Morgan Stanley, Nomura Holding America Inc., Royal Bank of Scotland Group PLC and Société Générale.

MY TAKE: Factors negatively affecting the banking sector include 1) the fall-out of no-documentation loans and no-documentation foreclosure processing, 2) the challenges by both insiders and investors in assessing complex and opaque financial structures, 3) litigation that could take years to resolve and 4) reduced financial performance. In the process, thousands of banking employees will join the unemployed and “bubble era” senior managers may be playing golf.

Sunday, August 28, 2011

Fed Chairman Bernanke's comments at Jackson Hole

Last Friday, U.S. Federal Reserve Chairman Ben Bernanke provided a widely anticipated speech at the Jackson Hole Economic Policy Symposium, an event where policy experts and academics annually gather to exchange views on emerging issues and trends. Below are selected excerpts from the speech - the complete text is at

“Our population is aging, like those of many other advanced economies, and our society will have to adapt over time to an older workforce. Our K-12 educational system, despite considerable strengths, poorly serves a substantial portion of our population. The costs of health care in the United States are the highest in the world, without fully commensurate results in terms of health outcomes.”

“the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.”

“The quality of economic policymaking in the United States will heavily influence the nation's longer-term prospects. To allow the economy to grow at its full potential, policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies.

MY TAKE: The problems in the U.S. are well documented, but the road ahead remains unclear. While Chairman Bernanke also indicated that the Fed has additional tools to stabilize the economy, members of the Fed are divided on what actions to take (investors are hoping for more stimulus). Additionally, the ability for the current U.S. Congress and the President to address the hardest challenges of a generation is still a poorly executed work in progress. Investing involves assessing probable outcomes while navigating future uncertainties – coherent political leadership could reduce the uncertainty.

Sunday, August 21, 2011

The focus moves to Jackson Hole

Since 1978, central bankers, policy experts and academics have annually gathered at the Jackson Hole Economic Policy Symposium to exchange views on emerging issues and trends. Last year at this event, while global markets were under stress, Chairman Bernanke announced the QE2 stimulus plan that triggered a multi-month rally in risk assets such as commodities and equities. Since this past July, markets have significantly pulled back, and global economic dynamics remain unstable. Chairman Bernanke’s presentation at this year’s event will take place on Friday August 26.

MY TAKE: It is unlikely that an encore performance of QE2 will be announced at this event. In today’s environment, there is: 1) increasing distrust of central bankers, 2) less consensus among central bankers on how to address the challenges, 3) confusion within the political leadership of many G-20 nations and 4) a balancing act between deleveraging and insolvency among some global commercial banks. Resolving this global economic mess will likely require significant changes in political leadership and alterations to policy initiatives that will occur over a protracted period of time.

Sunday, August 14, 2011

Lessons from a wild week in the markets

Illustrating the past week’s global market gyrations are the following moves in the S&P500: Monday down 6.6%, Tuesday up 4.7%, Wednesday down 4.4%, Thursday up 4.6%, Friday up 0.5% and down 1.7% for the week. News driving the ups and downs included 1) the Standard & Poors downgrade of the U.S. long-term federal debt to AA+, from the top grade of AAA, 2) continued concerns about the Eurozone’s financial system, 3) slightly better than expected U.S. retail sales during July, 3) a decrease in U.S. consumer confidence, 4) the U.S Federal Reserve announcing that it plans to keep interest rates low until the middle of 2013, 5) a slight improvement in U.S. unemployment claim trends and 6) increased trading by high-frequency systems.

MY TAKE: Investing is a dynamic process requiring continual adaptation. As global markets showed increased stress in recent weeks, adhering to risk management strategies helped navigate the turbulence as “storm clouds” appeared. However, last week’s gyrations likely exposed flaws within some investment strategies. Learn from the markets – avoid taking reactive actions while in the middle of a storm. While we may have passed through its center, we are still in the storm.

Is volatility the "new normal"?

The VIX volatility index, considered a measure of market uncertainty, spiked to a level of 48 on Monday, driven by several of the factors mentioned above. By Friday, the VIX remained at a heightened level of 36. The last time the VIX reached 48 was during the “Flash Crash” on May 6, 2010.

MY TAKE: Some traders and investors thrive in "fast paced" markets when volatility rises above 20, but this environment can be challenging for longer term investors. While "buying on the dips” may work for some investors, this seems like a time to 1) remain cautious in the short-term, 2) research new investment ideas and 3) wait for a bit more market stability.
NOTE: In recent months, high frequency trading accounted for slightly over 50% of daily trading in the U.S. equity markets. Estimates suggest this level increased to 80% during August. These sub-second trading systems, which leverage high performance algorithms, computational servers and optimized communication services, often benefit from high volatility. Their increased presence many be magnifying it as well.

Sunday, August 7, 2011

Managing Risk Means Not Having to Say You are Sorry

In recent weeks, the consensus view in the investment community has quickly retrenched from expecting a strong second half for 2011 and beyond to concerns about: 1) limited visibility into 2012, 2) the Eurozone having its “Lehman moment” and 3) the potential for an economic double dip. Comments by Emerson Electric Co. CEO David Farr, this past week, captured the mood: "We're looking at slower growth” and "I can't tell you right now what the second half will be, I can't tell you what 2012's going to be, so don't bother to ask”.

Investing is a complex and multifaceted endeavor where success requires both having and executing a solid risk management strategy which assesses many factors that can alter the investment landscape. Please note that: 1) not every investment strategy is effective in all parts of the economic cycle and 2) diversification IS NOT risk management. More on this topic later.

Global Leaders Add to the Uncertainty

This week, as the U.S. Congress passed its “less than half baked” debt ceiling solution:

  • a CNN poll found that 77% of American respondents thought that members of Congress "acted like spoiled children." 
  • On Friday, the S&P rating agency downgraded the U.S. debt and China’s news agency said “To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means”. (Note: China it is the largest foreign holder of U.S. debt). 
  • At the same time, as the Eurozone’s financial problems increase, there is no clear leadership. When European Commission President Jose Barroso requested a review of Europe’s financial rescue fund, Rainer Bruederle, a former German Finance minister said the suggestion was “frantic ranting”. In Italy, in perhaps an act of “let’s shoot the messenger”, the government raided two rating agencies that were critical of the Italian government’s bonds.
The notion that the global economy is weak and fragile is not new news. Unfortunately, it is becoming evident that leadership and solutions are in short supply. In this environment, changes can be quick, unexpected and negative. Markets and investor Hate uncertainty. Proceed with caution.

Sunday, July 31, 2011

Is China's high-speed rail system about to slow down?

A week ago, two high-speed trains collided in the eastern province of Zhejiang (the first stopped by a lighting strike, while the second crashed after passing a defective warning signal). The government, in an attempt to “manage” the situation, started to bury the evidence at the scene, which led to outcries by the press and negative comments share across the Internet. This incident follows dismissals earlier this year of China's railway minister,Liu Zhijun, and a leading engineer, Zhang Shuguang, for potential corruption.


  • The accident is tragic and the government’s handling is, at best, misguided. While China’s high-speed rail system (consists of a build out of approx. 2,800 miles of track since 2007) has been a symbol of its economic ascendance; corruption, poor construction and questionable financing are tarnishing its image. 
  • This incident joins other large public works projects around the world that are populated with hoodlums and mishaps. 
  •  However, China’s crowded roads and canals need transportation alternatives. Expansion may slow in the short term, but progress will continue.

U.S. economic reality check

As the world looks on in amazement at the U.S. Congress’ process for addressing the August 2nd debt ceiling deadline, the U.S. Commerce Department, on Friday, reported that 2nd quarter GDP grew at a lower than expected 1.3% annual rate (1.8% was expected). Additionally, 1st quarter growth was reduced to 0.4%, from a prior 1.9% rate. (Note: GDP growth of 3% or more is needed to reduce the heightened levels of unemployment).

MY TAKE: While the poor GDP numbers surprised many Wall Street players, these unfortunate results likely affirm the broader view held on Main Street. This economic setback will increase tension in the polarized debate on how the U.S. addresses its financial challenges. In the short-term, a debt resolution will likely be reached by Congress and signed by the President consisting of vaguely defined multi-trillion dollars cuts, with details set by committees at a later date. In the longer term, hard choices are unavoidable in the areas of health care and retirement entitlement cuts and government downsizing. Winston Churhill’s view that "Americans can always be counted on to do the right thing...after they have exhausted all other possibilities" is facing a serious test. A more likely outcome is that clarity will remain elusive and can-kicking will continue.

Sunday, July 24, 2011

U.S. Congress plays Chicken with Global Economy

Global markets rallied in recent days as progress was made in dealing with the Greece debt mess and expectations that the U. S. Congress would raise the debt ceiling in a timely manner. However, recent “on-again, off-again” news flow from Washington feels more like labor negotiators positioning for a walkout rather than a process to address the most significant economic challenge of a generation.

With budget discussion swinging between the potential for President Obama to override Congress by enacting provisions of the 14th Amendment (suggested by Bill Clinton and others), and the idea that a default may be the only path forward (supported by Congressman Ron Paul), it seems that rational discourse is not in play. At best, a hasty and half-baked solution

Dodd-Franks and the financial crisis - have lessons been learned?

A year ago last week, the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law. While positioned as the most significant financial regulation changes since the Great Depression, debates persist on its interpretation and how new agencies such as the Financial Stability Oversight Council, the Office of Financial Research, and the Bureau of Consumer Financial Protection will be funded.

MY TAKE: High level contributing factors to the financial crisis included a lack of oversight and accountability by policymakers, businesses and consumers. Specific contributing factors included: 1) the expanding power and influence of Fannie Mae and Freddie Mac, 2) the November 1999 repeal of Glass-Steagall Act which regulated the financial services industry for 60 years, 3) interest rate cuts by Fed Chairman Alan Greenspan to stabilize the economy after the 9/11 attack – which lead to the “punchbowl” era of monetary policy, 4) an SEC exemption, in 2004, that allowed 5 investment banks to increase their leverage ratio to 40:1, up from 12:1 (they were Lehman Brothers, Bear Stearns, Merrill Lynch, Goldman Sachs and Morgan Stanley – each either collapsed or needed significant bailouts) and 5) a declining saving rate by U.S consumers. Sometimes simplicity is a good indication that lessons were learned from past mistakes. In 1933, the Glass- Steagall Act passed in Congress without controversy and its length was 30 pages. Dodd-Frank is 2,300 pages long, and its regulatory interpretations continue to expand. Perhaps we have more learning to do.

Sunday, July 17, 2011

Is the "Murdoch mess" symptomatic of larger global economic issues?

The phone-hacking scandal at Rupert Murdoch’s News Corp., which resulted in 1) the resignations of Dow Jones CEO and Wall Street Journal publisher Les Hinton and U.K. newspaper head Rebekah Brooks, 2) the collapse of a takeover bid for the U.K.’s BSkyB network and 3) recognition that Scotland Yard either overlooked or suppressed information on the potential hacking of nearly 4,000 people, is reshaping many lines of business and political influence.

MY TAKE: While Britain’s Labor Party leader Edward Miliband said “It’s not just about one individual, it’s about the culture of an organization”, it is likely that the culture of abuse, poor judgment and lack of oversight includes some government and political leaders as well. As global policymakers attempt to manage a broad array of debt crises, many are constrained by alliances with interest groups, political ideologies, or poor comprehension of the challenges. In the Eurozone, questions persist on the validity of the banking stress tests released on Friday. In the U.S., policymakers continue to dance around the $14 trillion deficit. NOTE: on Friday, Pimco’s Bill Gross said people do not understand what is going on, “The U.S. has a $60 trillion net present value liability burden, and that constitutes Medicare, Medicaid and Social Security in combination. That is 4-5 times GDP and it certainly exceeds those liabilities in Greece, Portugal and Spain. Ultimately, the U.S. has a big, big problem.”

Sunday, July 10, 2011

U.S. jobs data: good, bad or ugly?

Last Thursday, the closely watched ADP National Employment Report showed that the U.S. labor market added 157,000 new jobs in May - this beat estimates of about 70,000. On Friday, the U.S. Bureau of Labor Statistics reported that only 18,000 new jobs were added - the lowest increase in nine months. Responding to the poor results, President Barack Obama renewed his focus on investing in roads, bridges and railways and commented, “Right now, there are over a million construction workers out of work after the housing boom went bust, just as a lot of America needs rebuilding”.

MY TAKE: While many economists and investors were caught off guard by the difference in the two reports, it is important to understand that the ADP report surveys the private sector (about 340,000 companies), while the U.S. Labor Department surveys about 140,000 businesses AND government agencies. While these conflicting reports are unsettling, there are signs of improvements in retail sales, along with increases in North American rail traffic. However, the lack of clarity from Washington policy makers on debt ceiling and other budgetary issues continues to contribute to global economic uncertainty.

As Earnings Season Begins, It's All about the Forward Outlook

OK – you have heard it all before, investors are concerned about: 1) problems in the U.S. housing market, 2) federal, state and municipal government budgets issues, 3) Eurozone financial bailouts, 4) inflation in developing countries, 5) Middle East and North African political conflicts and 7) supply chain issues related to Japan’s earthquake/tsunami. This week, 2nd quarter earnings season begins with financial results from firms such as Alcoa Inc. (US: AA), Citigroup Inc. (US: C), Google Inc. (US: GOOG), Infosys Technologies Ltd. (India: INFO), JP Morgan Chase & Co (US: JPM), Tata Consultancy Services Ltd (India: TCS) and Yum! Brands Inc. (US: YUM).

At this time last year, equity markets under stress and the U.S. Federal Reserve responded by turning on the printing press with its QE2 stimulus efforts. Today, with the QE2 process over, the management commentary from hundreds of companies in the coming weeks will be critical components in assessing short and intermediate term economic and investment trends.

Sunday, July 3, 2011

Some mixed messages from global manufacturers

The purchasing managers index (PMI) is a significant indicator of economic sentiment. A PMI reading above 50 suggests economic expansion, but the direction of change from the prior month is also important. On Friday, the U.S. PMI rose to 55.3 in June, up from 53.5 in May (a decline to 52 was expected). In China, the PMI was 50.9 in June, down from 52 in May - its lowest level since February 2009. In India, PMI fell to 55.3 in June - a nine-month low. In South Korea, PMI dipped to 51.1 in June - a six-month low. In the U.K, PMI decreased to 51.3 in June from 52 in May - a 21-month low. For the Eurozone region, PMI dropped to 52.0 in June, down from 54.6 in May – an 18-month low. Additionally, the Bank of Japan’s quarterly Tankan index of manufacturing sentiment fell to minus 9 in June from 6 in March (a negative number suggests a more pessimistic mood).

MY TAKE: While most of these results suggest slower levels of economic growth, they do not point to contraction. Contributing factors to the weakness may include supply chain disruptions from Japan’s tsunami, as well as efforts by some governments to manage inflation. Until unemployment levels, wage stagnation, and sovereign debt issues improve, economic expansion will be constrained and global markets will likely remain volatility

Greece's tragedy continues

With its government debt of about €350 billion approaching 160% of GDP, Greece desperately needed cash to keep its government working and fund its interest and principal payments. This past Wednesday, the Greek parliament approved a new austerity plan, which was required by the European Central Bank (ECB) and the International Monetary Fund (IMF) in order for euro-zone countries to provide a second funding package of about €120 billion. Additionally, part of the austerity plan includes a privatization fire sale of about €50 billion of government owned assets, consisting of land, airports, companies, etc.

MY TAKE: While markets rallied on these short-term fixes, the intertwined relationships among unions, politicians and other interest groups continue to bog down effective long-term solutions to the country’s dysfunctional mess. This socio-economic tragedy is not over yet.

Sunday, June 26, 2011

Paying the bills: Greece, the U.S., California New York and New Jersey, et al.

In Greece, Prime Minister George Papandreou won a vote in Parliament for additional austerity measures. In the U.S Congress, with the August 2 debt default approaching, House Majority Leader Eric Cantor and Senator Jon Kyl walked out of U.S budget negotiations. In California, Controller John Chiang decided to withhold state legislators' pay for each day they fail to send a balanced budget to Governor Jerry Brown after missing a June 15 deadline. In New Jersey, Governor Chris Christi and the legislature are moving forward with plans for substantially higher health insurance contributions from state workers. In New York, Governor Andrew Cuomo has told the state employee unions how much money needs to saved and has threatened layoffs if an agreement is not reached.

MY TAKE: Unfortunately, the economic response to many stimulus efforts has been muted. Now, as government entities, both large and small, struggle with budget gaps, high health care expenses and pension obligations; we are moving into the “no pain, no gain” stage of the economic cycle. Some efforts will succeed and others will fail. While this stage of the “recovery” may be protracted and painful, at least we are moving forward.

Wow - a release of strategic oil reserves, where did that come from?

On Thursday, the International Energy Agency (IEA), which represents the interests of 28 countries, surprised investors by saying it would release 60 million barrels of oil from its stockpile over a 30-day period to ensure a “soft landing for the world economy”. The only other times the IEA released oil from its reserves was 1) after the invasion of Kuwait in 1999 and 2) after the Hurricane Katrina in 2005. The rationale behind the announcement relates to the oil production disruption in Libya and the potential negative impact to the current summer “driving seasons”.

MY TAKE: The timing of the IEA announcement was interesting – one day after U.S. Federal Reserve Chairman Ben Bernanke acknowledged that the U.S. economy had hit a “soft patch”. The bull case for the IEA’s actions is that it will help to lower oil prices- a process that should reduce one headwind facing the global economy. The bear case is that world leaders are becoming less sure about their control over economic dynamics. Perhaps the day will come when energy and economic policies seem coherent. Until then, short-term oil price fixing is
just that – short term.

Sunday, June 19, 2011

Another stressful week for global policymakers

Another stressful week for policymakers. In Athens, Greece, 100,000 citizens marched and rioted to protest against harsh austerity measures needed to resolve their financial crisis. The Eurozone community is once again concerned about the stability of Portugal, Ireland, Italy and Spain. The International Monetary Fund’s director of monetary and capital markets José Viñals, said “we are entering a new phase of the crisis – I would call it the political phase of the crisis – and now time is of the essence to take the political decisions that are needed to avoid problems down the road,” and “sovereign risk is an issue in Europe, it’s an issue in the United States.” California’s Governor Jerry Brown vetoed the state’s budget (the first by a governor since at least 1901) because it did not address the state’s budget challenges – the state’s controller could be issuing IOUs within two weeks.

MY TAKE: Against this backdrop, an increasing number of business leaders, politicians and policymakers are becoming more cautious. While the scale of these challenges is significant, it is likely the lack of a shared vision on how to move forward that will perpetuate an environment of conflict and uncertainty.

Is global growth slowing? According to Glencore, Yes, in the short term

Glencore International PLC’s history extends back to 1974 and today it has a global network of mining operation and it is the world's largest commodities trading company (during 2010, it controlled the trading of about 60% of the zinc market, 50% of the copper market, 9% of the grain market and 3% of the oil market). Last week, when the Swiss-based firm announced its earnings for the first time as a publicly traded company, CEO Ivan Glasenberg had the following comments: “We see a pullback in China and it will continue,” and in the U.S., there had been a “slight slowing down”. In the hope that the slowdown is short term, he also said “these are short-term ebbs which we see from time to time” and “we still believe in the underlying strong fundamentals, with demand continuing to grow in Asia, particularly China and India.”

MY TAKE: Given the firm’s global reach in both mining and commodity trading, the CEO’s comments should be heeded. There is also some concern that the timing of the firm’s IPO on May 24, 2011 may be indicative of smart players top ticking the market. NOTE: France’s President Nicolas Sarkozy is becoming increasingly concerned about the negative economic impact by speculative trading activity among large commodity market players.