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.

Is global growth slowing? Accordign 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.

Sunday, June 12, 2011

Seeking certainty during uncertain times

It was another rough week in the markets as investors continued to confront a growing and persistent list of headwinds which include 1) Eurozone sovereign debt issues (Greece has garnered significant short-term attention, but other countries are also at risk), 2) the recovery of Japan after the earthquake, 3) the end of the QE2 stimulus effort, 4) how U.S. policy makers will resolve the debt ceiling and long term budget issues, 5) the potential for a global economic slowdown, 6) instability in the North Africa and Middle East regions and 7) inflation in developing countries.

MY TAKE: Historically, the summer months have been a time of weakness for many markets - “sell in May and go away”. However, uncertainty is not the friend of investors and the level of fundamental uncertainty has increased in recent weeks. In mid-May, I suggested a cautious approach to investing was warranted. Most of the market indicators I monitor (global equities, volatility, commodities, credit default swap and currency indexes) continue to suggest maintaining this stance.

Can we still invest for the long run?

While there are many ways to pursing the process of investing, the following components are critical to all successful strategies: 1) understanding a diversity of market dynamics, 2) assessing probable outcomes and 3) managing risk. Proper execution requires hard work and discipline.

MY TAKE: Given the heightened level of uncertainty currently in the markets, it is worth considering the thoughts of the late financial historian and economist Peter Bernstein from a February 25, 2009 Financial Times piece titled “Insight: The flight of the long run" where he commented, "The unknown today seems more than usually unknown. Then my whole point remains the same. The long run is an impenetrable mystery. It always has been." He also cites John Maynard Keynes' observation about the future: "We simply do not know."

Sunday, June 5, 2011

More economic storm clouds move in

This past week, 1) the U.S. Labor Department reported that unemployment climbed to 9.1 % in May, with payrolls increasing by a weaker than expected 54,000 jobs (165,000 was expected); 2) the U.S. manufacturing index dropped to 53.5 (the slowest pace in 8 months), 3) the Case-Shiller Home Price Index in the U.S. dropped below 2009 levels, down 33% from the 2006 peak (and a larger decline than during the Great Depression), 4) the European Central Bank (ECB) and the International Monetary Fund (IMF) continue to work on the Greek government’s debt mess, 5) the U.S. Congress continues to dance around the debt ceiling, austerity measures and other monetary issues and 6) investment strategists and rating agencies are more cautious/negative on various banks and governments.

MY TAKE: In mid-October of last year, Ben Bernanke said the U.S. Federal Reserve "is prepared to take new action to boost the economy, because inflation has been too low of late and unemployment is poised to come down too slowly" and also noted, "there are clearly many challenges in communicating and conducting monetary policy in a low-inflation environment, including the uncertainties associated with the use of nonconventional policy tools". As the end of QE2 approaches, many economic issues remain under stress and tolerance for additional stimulus efforts among policy makers seems quite low. In this environment, many global markets are likely to adjust to valuations associated with heighted levels of uncertainty. Expect the bumpy ride to continue.

Economic decoupling - with this time be different?

Prior to the financial crisis, it was widely believed that economic decoupling would take place between the developing and developed economic regions as dependence on economies such as the U.S declined. However, during the collapse, all economic regions were negatively impacted.

MY TAKE: There are many factors that drive positive and negative market performance – at the top of the list are economic growth and inflation trends. As the level of uncertainty increases in several major markets, global investors will continue to seek higher yield. Short term performance in developing equity markets such as Chile, Colombia, Egypt, Indonesia, Malaysia, New Zealand, Philippines, South Africa, Singapore, and Taiwan have been better than most. I will explore this topic in more detail in the future.