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.

MY TAKE

  • 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 Maplight.org 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.