Grand Street Advisors
Market Snapshot
March 2012
We have an update on the state of the economic recovery. We believe accumulated data suggests the US economy has finally breached the Motarin Nebula (thank you Capt. Kirk) or more commonly referred to here as breakaway velocity from the gravitational pull of the horrific near fatal recession. We've recently received the second scoring of fourth quarter GDP which was upgraded from 2.8% to 3%. On the all important real time jobs front we saw our second consecutive reading of 350,000 +/- on weakly jobless claims. GSA believes this figure is more important than the widely followed monthly reported non-farm payroll figure. The non-farm payroll is a figure compiled from the previous month, or from looking in the rear view mirror to gauge the current job environment, whereas unemployment claims are reported weekly. As for the monthly figure to be released this upcoming Friday, the figure should come in above 200,000 once again, setting in place a three month trend analyst won't be able to dismiss any longer.
This sounds great taken with the EU finally coming to consensus on the Greek bailout. Market participants, including myself breathed a collective sigh of relief when the deal was first announced. As we approach the deadline for debt holders to sign on we find out some large investors (hedge funds) are refusing to sign off on the exchange. The purchased deeply discounted Greek debt along with an insurance policy (Credit Default Swaps-CDS) against a possible default Should Greece not receive enough tenders for the debt "restructuring", it would trigger a "credit" event and force payment of the CDS contracts written against the ongoing Greek default. We'll find out tomorrow how this drama ultimately plays out and any ripples from across the pond.
The improving jobs front, increased productivity, the reemergence of the ever resilient US consumer, booming auto sales all point to the US economy being on much firmer footing and ready to resume it's place as the driver of the global economy. We do believe however, the question arising will be, front and center, is this rally in asset prices we've been experiencing solely liquidity driven (Federal Reserve Monetary Policy) or does it have real legs driven by fundamentals and strong sustainable growth? If the prior, look out because as the economy continues to strengthen the need for further Quantitative Easing lessens draining the fuel tank from this bull market. If the latter, that the economy is in a pro-growth sustainable mode where consistent job creation introduces a higher level of consumption into the equation, well all's well in the world and look out above.
GSA believes we are in the late stages of the US economy "coming about" to borrow a nautical term. The turn we've made has been painful, long and drawn out due to the severity of the downturn and size of our economy along with structural imbalances. As the global economy continues to experience the lagging side effects from the near collapse of the global financial system along with the US economy catching a case of the flu, accommodative monetary policy should continue to be the most likely response. This should, barring a severe shock to the market, such as a super spike in oil, lead to a global resumption to consumption and higher corporate revenues and earnings.
On energy. We believe Iran does not wish to enter a war on any front with Israel, the US or its neighbors, but needs to find a way to back away from their Presidents' nuclear ambitions without losing face. Until we are able to see a path forward in this high stakes face-off , oil prices should remain elevated and markets skittish as $4 gasoline or potentially much higher, takes a hefty bite out of discretionary spending for the greater part of America's consumers.
We'll be watching 1.the Greece debt restructuring tomorrow along with weekly unemployment claims. 2. Friday's non-farm payroll number along with the household survey and workweek figures. and 3. The ongoing negotiations between IAEA nuclear inspectors and Iran. Should there be any unpleasant surprises we will be in contact immediately to adjust our equity allocations.
Thank you again for your patience in these ever trying times.
Yours in pursuit of the KWAN!
--
Thursday, March 8, 2012
Thursday, January 12, 2012
GSA 2012 Outlook
As we exit 2011 I’m reminded of the season finale from the television series Dallas. After a whole season of treachery, cheating, back stabbing, love and hate we learn it has all been one long bad dream for Larry Hagman. This year’s markets have experienced it all. We look for 2012 to be the awakening. But, first let’s review.
GSA’s outlook for 2011 went unfulfilled. Earnings came in better than projected, however the earnings multiple afforded the superior growth rates and earnings actually contracted instead of expanding to the historical norm. We don’t take it lightly, but a miss is a miss and we own it. We listed four major risks:
1. Political. The inability of the mainstream Republican Party to find common ground with the tea party faction cost the US its AAA rating. This nearly triggered a credit default event and double dip recession due to consumer angst.
2. Sovereign debt default. We warned about the necessity to be aggressive and progressive abandoning the reactive posture the EU memberships had taken thus far. We warned of a potential 20% haircut on Greek debt of which we were too conservative. It turns out it will be a 50% or greater scalping. Meaning holders of Greek treasury bonds will receive .50 for every $1 they own. The EU membership and ECB never took the necessary pre-emptive steps to fend off the bond vigilantes. Thus the battle lines are now drawn squarely around Italy. This will prove to be the European Union’s Lehman moment. Less talked about, in GSA’s assessment the ECB just went all-in with their latest 3 year term loans program. Step 1. Lending out unlimited Euro’s to the Euro banks. Step 2.The banks can in turn buy Sovereign debt. Step 3.They can use this debt as collateral at the ECB for additional funding. Sound familiar?
3. Inflation. The current benign inflationary period we are enjoying (for those of us that don’t eat, heat our homes or drive) was threatened over the summer when gasoline spiked above $4. The effect on consumer psyche and in turn spending choked off retail sales momentum to near recessionary levels. The stopped clocks (analysts preaching same story ad infinitum waiting to be proven correct) resurfaced en-masse. In short time and with renewed confidence the calls for a super spike in oil and gas came along with the rehash of the useless Peak oil theory. Then Ghadaffi was ousted and Libyan oil began to flow again. Natural gas fracking unleashed enormous amounts of both domestic gas and oil. This deflated the price of Natural gas below $3 and held oil in check below $100. For now.
4. A failed US treasury auction. Not even close here. The US lost its AAA rating and auctioned off a staggering amount of new debt at record low rates. There was in some instances unprecedented demand. The flight to safety trade was incredibly impressive.
We batted .750% and didn’t win the World Series. Our projections were undermined by severe skepticism of global politicians’ backbones and willingness to do what was right and necessary for their respective countries. The US was front and center. Politicians need to do what is necessary vs. worrying about keeping their jobs which in times such as the ones we live in, may prove to be at odds with one another. We were further hamstrung by the collapse of MF Global just as the market was regaining its footing and recovering from the summer Washington political stalemate. Instead of gaining confidence from dramatically improved balance sheets, increased optimism from an improving jobs market and year over year gains in revenues and earnings resulting in a historical P/E or P/E v G we actually witnessed the opposite and the market multiple contracted. The prevalent negative sentiment resulted in investors pulling monies from equity markets globally. In closing, we would like to wish a happy retirement to ex-ECB President Jean Claude (Sleepe’) Trichet, have fun second guessing your successor. Ex-Greek Prime Minister Papandreau, enjoy the two-for-one dolmathes coupons I sent. Ex-IMF chief Strauss-Kahn, lay off the hotel staff. Ex-MF Global CEO Corzine, go back to politics. Finally Ex-Italy PM Berlusconi, now you’ll have plenty of time for your other girl friends. I think I was a teenager living in Rockaway Beach, NY one summer on a bad streak the last time I had this many ex’s in one year. But, in this case anyway I can almost guarantee I’ll be a better person without them.
We’ll look at a few potential major risks to 2012:
Iran. The global community is seemingly finally united in confronting Iran’s nuclear ambitions. Their solution, hit ‘em where it hurts, in their purse. New sanctions on the Iranian Central Bank have prodded Iran to respond with threats of closing the Straits of Hormuz which sees roughly 17 million barrels of energy pass through daily. Should there be an all out blockade we’d most likely see a super spike in oil crippling consumer discretionary spending, at a minimum. The next escalation would mostly be a full blown strike on Iran by the US or Israel. We look forward to the day the Middle East can patrol and protect themselves.
China. The soft landing currently anticipated turns out to be more of a crash which sets off riots among the populace.
The European Union. The EU membership is unable to come to consensus on fiscal policy and backtracks from any rescue package. Greece abruptly exits the EU, followed by Portugal triggering credit events that force EU financials to pay on outstanding CDS contracts punching huge holes in their balance sheets as the credit markets slam shut for new funding to fill those gaps causing cascading defaults, a run on the banks, Italy being frozen out of the credit markets and finally the ultimate destruction of the Euro as a whole.
The Good ole’ US of A. (A) The US economy, fueled by a rejuvenated job market producing 250,000+ new jobs per month allowing for an even greater increase in consumer spending. This light the inflation fuse, the Federal Reserve must adjust policy before previously planned, pushing up sharply borrowing costs across the spectrum. The nascent housing recovery is stifled. The US dollar spikes, reducing our export advantage our current dollar exchange rates affords US multinationals.
The Good ole’ US of A (B). The US “leadership” remains severely partisan and divided in the face of ballooning entitlement programs and we experience another summer of 2011 resulting in an almost inconceivable and insurmountable second ratings downgrade. This second downgrade should cause global investors to seek in earnest another more fiscally responsible safe haven for the monies. This should cause a spike in US borrowing costs and potential QE III which would begin the swirling of the toilet bowl.
Projection:
Global Monetary policy remains highly accommodative. The US Federal Reserve has pledged to maintain the zero interest rate target until mid 2013 and may extend the date if necessary. The European Central Bank under New leadership from Mario Draghi has gone all-in with its offering of unlimited liquidity in the form of 3 year loans at 1%. My concerns surrounding the end of such policies and Quantitative Easing in general as such, are not of a concern for 2012 obviously.
The EU membership has finally begun to work toward fixing their balance sheets. In some cases draconian cuts in social services, downsizing the government work force and reshaping the local labor laws are being fought tooth and nail by the union membership as well as those on the receiving end of these all too generous unsustainable programs. For any of these austerity measures to be successful they must have a growth counterpart. All they need do is look to Ireland as a model of success, which just returned to positive GDP expansion, albeit modest. After a decade of over borrowing and spending beyond their means the EU membership are finally dealing with this debt and spending largess. In the end it may be years before these issues are resolved and they are on firmer footing, but the mere presence of a sound plan should be enough. The Euro-zone economy is expected to dip into a recession in the first quarter of 2012 and end the year modestly positive 1% with Germany and France doing the heavy lifting.
China has hit a slow patch. The dissipation of the inflationary clouds should allow for the stimulus spigots to get turned back on and help this behemoth regain its footing. This managed economy’s plan of build it and they will come has resulted in ghost cities and put strains on their domestic banking system. Doubters need only look to Shanghai as turning out to be just such a success the Chinese leadership hang their hats on. We’ll also continue monitoring how the shift towards a more balanced economy, one of manufacturing and services unfolds. Further, the push to foster domestic consumption is an ongoing story that has made for a good read with reasonable success. The economy is expected to expand at a modestly slower than norm, but enviable rate of 8 ½%.
India heal thy self. Elevated levels of domestic Inflation forced the central bank to hike rates even as the economic growth eased. India needs to reform its tax code and reintroduce a strengthened anti-corruption legislation. Passing this stronger more broad based anti-corruption legislation along with opening the doors for further foreign capital investment should allow the Indian markets to help regain the confidence of investors and capital flows. Like China this country has over 1 billion folks that continue to migrate towards urban living and ultimately become consumers of US goods. The domestic economy, likewise expands a bit slower than last but at an enviable 6 ½-7% rate.
The US economy continues to be exceptionally resilient DESPITE Washington. The ISM Manufacturing Index just released came in +53.7, better than expected, with a strong jobs component and new orders index embedded within. The Leading Economic Indicator increased .05 in November on top of +.09 the prior month. Housing start rose 9.3% in November while permits were a strong +5.7% both highs not seen since March and April of 2010. Perhaps a sign of a bottoming process in housing taking place. The jobs front continues to make gains with this upcoming Friday’s Non-farm payroll number expected to come in a healthy 175,000-200,000. I will look more closely at the household jobs figure to come in +350,000-400,000. as this figure captures small business and self employed not counted in the more popularly reported Non-Farm Payroll number. Capital spending has been robust, exports are exploding, with the US about to be a MAJOR exporter of OIL and GAS. We couple these with virtually pristine balance sheets of non-financial corporations and fortress like balance sheets of the major financials allowing us to be cautious but certainly optimistic for 2012. We see S&P 500 earnings coming in conservatively $106 and due to the pessimistic overhang coming into the year a below historical average market multiple of 13 ½-14 to come up with our year end target range of 1431-1484. Volatility should remain the stubborn family member that refuses to go home after the holidays are over. We may see a strong move above our year end target and brute selling that will test the metal of investors yet again. Should confidence grow the EU has a formidable plan to handle the debt crisis that gripped headlines the last few years along with US politicians making progress with a credible deficit reduction plan our targets may prove to be too conservative.
We maintain our aggressive, balanced investment posture entering 2012 but remain on heightened alert for any setbacks to the EU debt issues and domestic jobs creation front and center. Should the economic environment retrace from the progress already made or the EU hit crisis mode, yet again, we’ll be quick to reassess our cash position and be in contact immediately and act accordingly.
We thank you for your patience and confidence in these extremely challenging times.
Yours in search of the Kwan!
GSA’s outlook for 2011 went unfulfilled. Earnings came in better than projected, however the earnings multiple afforded the superior growth rates and earnings actually contracted instead of expanding to the historical norm. We don’t take it lightly, but a miss is a miss and we own it. We listed four major risks:
1. Political. The inability of the mainstream Republican Party to find common ground with the tea party faction cost the US its AAA rating. This nearly triggered a credit default event and double dip recession due to consumer angst.
2. Sovereign debt default. We warned about the necessity to be aggressive and progressive abandoning the reactive posture the EU memberships had taken thus far. We warned of a potential 20% haircut on Greek debt of which we were too conservative. It turns out it will be a 50% or greater scalping. Meaning holders of Greek treasury bonds will receive .50 for every $1 they own. The EU membership and ECB never took the necessary pre-emptive steps to fend off the bond vigilantes. Thus the battle lines are now drawn squarely around Italy. This will prove to be the European Union’s Lehman moment. Less talked about, in GSA’s assessment the ECB just went all-in with their latest 3 year term loans program. Step 1. Lending out unlimited Euro’s to the Euro banks. Step 2.The banks can in turn buy Sovereign debt. Step 3.They can use this debt as collateral at the ECB for additional funding. Sound familiar?
3. Inflation. The current benign inflationary period we are enjoying (for those of us that don’t eat, heat our homes or drive) was threatened over the summer when gasoline spiked above $4. The effect on consumer psyche and in turn spending choked off retail sales momentum to near recessionary levels. The stopped clocks (analysts preaching same story ad infinitum waiting to be proven correct) resurfaced en-masse. In short time and with renewed confidence the calls for a super spike in oil and gas came along with the rehash of the useless Peak oil theory. Then Ghadaffi was ousted and Libyan oil began to flow again. Natural gas fracking unleashed enormous amounts of both domestic gas and oil. This deflated the price of Natural gas below $3 and held oil in check below $100. For now.
4. A failed US treasury auction. Not even close here. The US lost its AAA rating and auctioned off a staggering amount of new debt at record low rates. There was in some instances unprecedented demand. The flight to safety trade was incredibly impressive.
We batted .750% and didn’t win the World Series. Our projections were undermined by severe skepticism of global politicians’ backbones and willingness to do what was right and necessary for their respective countries. The US was front and center. Politicians need to do what is necessary vs. worrying about keeping their jobs which in times such as the ones we live in, may prove to be at odds with one another. We were further hamstrung by the collapse of MF Global just as the market was regaining its footing and recovering from the summer Washington political stalemate. Instead of gaining confidence from dramatically improved balance sheets, increased optimism from an improving jobs market and year over year gains in revenues and earnings resulting in a historical P/E or P/E v G we actually witnessed the opposite and the market multiple contracted. The prevalent negative sentiment resulted in investors pulling monies from equity markets globally. In closing, we would like to wish a happy retirement to ex-ECB President Jean Claude (Sleepe’) Trichet, have fun second guessing your successor. Ex-Greek Prime Minister Papandreau, enjoy the two-for-one dolmathes coupons I sent. Ex-IMF chief Strauss-Kahn, lay off the hotel staff. Ex-MF Global CEO Corzine, go back to politics. Finally Ex-Italy PM Berlusconi, now you’ll have plenty of time for your other girl friends. I think I was a teenager living in Rockaway Beach, NY one summer on a bad streak the last time I had this many ex’s in one year. But, in this case anyway I can almost guarantee I’ll be a better person without them.
We’ll look at a few potential major risks to 2012:
Iran. The global community is seemingly finally united in confronting Iran’s nuclear ambitions. Their solution, hit ‘em where it hurts, in their purse. New sanctions on the Iranian Central Bank have prodded Iran to respond with threats of closing the Straits of Hormuz which sees roughly 17 million barrels of energy pass through daily. Should there be an all out blockade we’d most likely see a super spike in oil crippling consumer discretionary spending, at a minimum. The next escalation would mostly be a full blown strike on Iran by the US or Israel. We look forward to the day the Middle East can patrol and protect themselves.
China. The soft landing currently anticipated turns out to be more of a crash which sets off riots among the populace.
The European Union. The EU membership is unable to come to consensus on fiscal policy and backtracks from any rescue package. Greece abruptly exits the EU, followed by Portugal triggering credit events that force EU financials to pay on outstanding CDS contracts punching huge holes in their balance sheets as the credit markets slam shut for new funding to fill those gaps causing cascading defaults, a run on the banks, Italy being frozen out of the credit markets and finally the ultimate destruction of the Euro as a whole.
The Good ole’ US of A. (A) The US economy, fueled by a rejuvenated job market producing 250,000+ new jobs per month allowing for an even greater increase in consumer spending. This light the inflation fuse, the Federal Reserve must adjust policy before previously planned, pushing up sharply borrowing costs across the spectrum. The nascent housing recovery is stifled. The US dollar spikes, reducing our export advantage our current dollar exchange rates affords US multinationals.
The Good ole’ US of A (B). The US “leadership” remains severely partisan and divided in the face of ballooning entitlement programs and we experience another summer of 2011 resulting in an almost inconceivable and insurmountable second ratings downgrade. This second downgrade should cause global investors to seek in earnest another more fiscally responsible safe haven for the monies. This should cause a spike in US borrowing costs and potential QE III which would begin the swirling of the toilet bowl.
Projection:
Global Monetary policy remains highly accommodative. The US Federal Reserve has pledged to maintain the zero interest rate target until mid 2013 and may extend the date if necessary. The European Central Bank under New leadership from Mario Draghi has gone all-in with its offering of unlimited liquidity in the form of 3 year loans at 1%. My concerns surrounding the end of such policies and Quantitative Easing in general as such, are not of a concern for 2012 obviously.
The EU membership has finally begun to work toward fixing their balance sheets. In some cases draconian cuts in social services, downsizing the government work force and reshaping the local labor laws are being fought tooth and nail by the union membership as well as those on the receiving end of these all too generous unsustainable programs. For any of these austerity measures to be successful they must have a growth counterpart. All they need do is look to Ireland as a model of success, which just returned to positive GDP expansion, albeit modest. After a decade of over borrowing and spending beyond their means the EU membership are finally dealing with this debt and spending largess. In the end it may be years before these issues are resolved and they are on firmer footing, but the mere presence of a sound plan should be enough. The Euro-zone economy is expected to dip into a recession in the first quarter of 2012 and end the year modestly positive 1% with Germany and France doing the heavy lifting.
China has hit a slow patch. The dissipation of the inflationary clouds should allow for the stimulus spigots to get turned back on and help this behemoth regain its footing. This managed economy’s plan of build it and they will come has resulted in ghost cities and put strains on their domestic banking system. Doubters need only look to Shanghai as turning out to be just such a success the Chinese leadership hang their hats on. We’ll also continue monitoring how the shift towards a more balanced economy, one of manufacturing and services unfolds. Further, the push to foster domestic consumption is an ongoing story that has made for a good read with reasonable success. The economy is expected to expand at a modestly slower than norm, but enviable rate of 8 ½%.
India heal thy self. Elevated levels of domestic Inflation forced the central bank to hike rates even as the economic growth eased. India needs to reform its tax code and reintroduce a strengthened anti-corruption legislation. Passing this stronger more broad based anti-corruption legislation along with opening the doors for further foreign capital investment should allow the Indian markets to help regain the confidence of investors and capital flows. Like China this country has over 1 billion folks that continue to migrate towards urban living and ultimately become consumers of US goods. The domestic economy, likewise expands a bit slower than last but at an enviable 6 ½-7% rate.
The US economy continues to be exceptionally resilient DESPITE Washington. The ISM Manufacturing Index just released came in +53.7, better than expected, with a strong jobs component and new orders index embedded within. The Leading Economic Indicator increased .05 in November on top of +.09 the prior month. Housing start rose 9.3% in November while permits were a strong +5.7% both highs not seen since March and April of 2010. Perhaps a sign of a bottoming process in housing taking place. The jobs front continues to make gains with this upcoming Friday’s Non-farm payroll number expected to come in a healthy 175,000-200,000. I will look more closely at the household jobs figure to come in +350,000-400,000. as this figure captures small business and self employed not counted in the more popularly reported Non-Farm Payroll number. Capital spending has been robust, exports are exploding, with the US about to be a MAJOR exporter of OIL and GAS. We couple these with virtually pristine balance sheets of non-financial corporations and fortress like balance sheets of the major financials allowing us to be cautious but certainly optimistic for 2012. We see S&P 500 earnings coming in conservatively $106 and due to the pessimistic overhang coming into the year a below historical average market multiple of 13 ½-14 to come up with our year end target range of 1431-1484. Volatility should remain the stubborn family member that refuses to go home after the holidays are over. We may see a strong move above our year end target and brute selling that will test the metal of investors yet again. Should confidence grow the EU has a formidable plan to handle the debt crisis that gripped headlines the last few years along with US politicians making progress with a credible deficit reduction plan our targets may prove to be too conservative.
We maintain our aggressive, balanced investment posture entering 2012 but remain on heightened alert for any setbacks to the EU debt issues and domestic jobs creation front and center. Should the economic environment retrace from the progress already made or the EU hit crisis mode, yet again, we’ll be quick to reassess our cash position and be in contact immediately and act accordingly.
We thank you for your patience and confidence in these extremely challenging times.
Yours in search of the Kwan!
Thursday, November 3, 2011
Let 'Em Eat Dolmathes
Let Them Eat Dolmathes! The US markets are being held hostage by a country the size of a postage stamp. Greece accounts for a bit less than 3% of the Eurozone GDP output. The Greek economy is the 32nd largest in the world. Why are we hanging on every rumor? Why do the lights go hot and the cameras fire up every time a Greek student flings a stone at the Greek Parliament building? It started out as contagion fear. It seems so long ago, but remember the PIGS. Portugal, Ireland, Greece and Spain. Portugal received its bailout and is in the process of righting the balance of debt to GDP. Ireland took their EURO-TARP like bailout and backstopped the banks and staunched the bleeding immediately followed up with severe austerity measures. The Celtic tiger is beginning to roar again. Greece, well there is simply an unwillingness of the citizenry to work and pay taxes. Pure and simple. Politicians over the years continued to stuff the public payrolls with unnecessary hires in order secure their cushy seats. The details I read look so very similar to the auto union contracts. Teachers were hired without any classrooms to tend to. Once hired, they were near impossible to fire. People didn't get fired anyway, they were put into a jobs bank. Meaning they sat in a room, collected a check with full benefits and played Sudoku. We saw how well that worked out for our Auto industry. In Greece paying taxes is merely a suggestion. One example, Greece has a pool tax. Meaning if your home has a pool, you must pay a pool tax. Pretty simple. The clever home owners instead called in the interior decorators and had them attach an AstroTurf like cover over the pool so the helicopters flying overhead to count pools would miss them. BRILLIANT! The situation is so poor Greece finally had to attach individual tax bills to monthly electricity bills. They felt this was the only way to begin collecting taxes. The situation is simply unsustainable from both sides. I believe it has come to the point of let them eat their own cooking. The politicians don't want to anger their constituents any further lest they lose their treasured seat. The citizenry believe outsiders are ruining their way of life and don't wish to pay their bills. I believe it is time to let them go. After allowing the global economy to be walked to the edge of the abyss far too many times over the last three years, the EU has finally gotten serious about this financial mess. The formation of the ESFS with over $1 trillion euros ($1.35 trillion US) in firepower was huge. Now that the EU has gotten serious the IMF can be more aggressive in their interventions. Here is a game plan as I see it:
1. Totally wipe out the Greek debt. Forget taking 50% haircuts. Taxes aren't being collected, spending cuts aren't being enacted, entitlement programs aren't being scaled down. Write off the debt completely
.
2. Kick their non-Laissez Faire cans out of the Eurozone. This Greek tragedy has tortured us long enough. Until the Greek citizenry realize it isn't outside forces destroying the country, it is unsustainable social programs and cronyism that is the cancer, no one can help them. Much like an addict that needs to hit rock bottom before he can scrape himself off, pick himself up and begin rebuilding.
3. Initiate operation Euro-Tarp. Direct injections of capital into banks. Back stop financial institutions, guarantee money market funds and flood the system with cash.
Time to rip off the band-aid with one quick yank instead of the slow painful process we're experiencing currently. Either way it takes the same amount of hair off your shin, but the shriek is a heck of a lot shorter.
There is something really positive going on right under our noses and apparently hiding in broad daylight. The US economy is regaining its footing. Third quarter GDP popped up to 2.5%, good not great. Unemployment claims, released this morning dipped below 400,000. The monthly private employment survey released by ADP showed a surprising 110,000 gain for October. Retail sales remain elevated. Finally corporate earnings have not cratered, as some perma-bears have been prognosticating. Companies that have released earnings thus far have beaten 75% of the time. We are on target for $95-$100 earnings per share for S&P 500 companies for 2011. Next years 2012 earnings estimates come in close to $110 per share. If these numbers hold, it becomes the multiple on those earnings we will afford. It would be reasonable to use a 13-15 multiple historically which brings us our target range of 1430-1650. This with a dysfunctional Euro zone. This with the collapse of another Investment bank with $41 billion in assets. Think of the firepower US corporations would have if one of our major trading partners stabilized along with the soon to be announced US austerity measure by the Gang of 12 on or before November 23.
In closing today we continue to be held hostage by Greece and until that gets resolved, we remain cautious and skeptical we can have a meaningful breakout without some resolution. Either way this meal leaves a sour taste in your mouth and one begging for a change in menu.
I'll continue monitoring the data and be in touch should we need to shift out strategy going forward.
Yours in pursuit of the Kwan!
1. Totally wipe out the Greek debt. Forget taking 50% haircuts. Taxes aren't being collected, spending cuts aren't being enacted, entitlement programs aren't being scaled down. Write off the debt completely
.
2. Kick their non-Laissez Faire cans out of the Eurozone. This Greek tragedy has tortured us long enough. Until the Greek citizenry realize it isn't outside forces destroying the country, it is unsustainable social programs and cronyism that is the cancer, no one can help them. Much like an addict that needs to hit rock bottom before he can scrape himself off, pick himself up and begin rebuilding.
3. Initiate operation Euro-Tarp. Direct injections of capital into banks. Back stop financial institutions, guarantee money market funds and flood the system with cash.
Time to rip off the band-aid with one quick yank instead of the slow painful process we're experiencing currently. Either way it takes the same amount of hair off your shin, but the shriek is a heck of a lot shorter.
There is something really positive going on right under our noses and apparently hiding in broad daylight. The US economy is regaining its footing. Third quarter GDP popped up to 2.5%, good not great. Unemployment claims, released this morning dipped below 400,000. The monthly private employment survey released by ADP showed a surprising 110,000 gain for October. Retail sales remain elevated. Finally corporate earnings have not cratered, as some perma-bears have been prognosticating. Companies that have released earnings thus far have beaten 75% of the time. We are on target for $95-$100 earnings per share for S&P 500 companies for 2011. Next years 2012 earnings estimates come in close to $110 per share. If these numbers hold, it becomes the multiple on those earnings we will afford. It would be reasonable to use a 13-15 multiple historically which brings us our target range of 1430-1650. This with a dysfunctional Euro zone. This with the collapse of another Investment bank with $41 billion in assets. Think of the firepower US corporations would have if one of our major trading partners stabilized along with the soon to be announced US austerity measure by the Gang of 12 on or before November 23.
In closing today we continue to be held hostage by Greece and until that gets resolved, we remain cautious and skeptical we can have a meaningful breakout without some resolution. Either way this meal leaves a sour taste in your mouth and one begging for a change in menu.
I'll continue monitoring the data and be in touch should we need to shift out strategy going forward.
Yours in pursuit of the Kwan!
Fourth Quarter Outlook
In the past a major critique of market watchdogs has been that Federal Reserve officials stand idly by watching, even fostering the formation of bubbles instead of acting decisively and preemptively thus saving us all from the ensuing shocks to the system. More importantly the dents to our wallets and investments. Key example was the tech bubble. At the time, Federal Reserve Chairman Greenspan even identified the bubble in the making. His preemptive strike? He searched deep into his arsenal of tools available. Should he raise the Fed Funds Rate? Raise the Discount Rate? Perhaps hike the reserve levels banks are required to hold in order to stem the free flow of credit? No no to arcane and blunt. No this called for all the force he could muster his most powerful tool at his disposal, his exquisite grasp of the English language. Thus he launched his assault and we were buried with "Irrational Exuberance". Oh the pain! No, Chairman Greenspan did nothing but observe and we see ten years later the NASDAQ Index still trades well below fifty percent off the highs.
There is and had been evidence of bubble formation in a few areas. Look no further than commodities. The Federal Reserves easy money policies have consequences. Inflation and possible bubbles. The difference this time is our watchdogs are engaged. In response to the rapid rise and possible speculative bubbles in gold, silver, wheat, corn and oil etc., the regulators have hiked margin requirements on all of these futures contracts numerous times this year alone. Regulators finally acknowledged the last time oil traded up to $140 under the Bush administration it had more to do with hot money and rapid speculation than the fundamental supply and demand equation. Listen when you go to the casino you know you're gambling and more likely than not to come away with a few more vacancies in your wallet or purse. The commodities trading floors are not supposed to be casinos though, and futures contracts are a legitimate tool utilized to help mitigate risk. When speculators drive commodity prices into the stratosphere and completely decoupled from the underlying commodity the effect on the consumer and his spending habits can and have been stifling to the economy. We seem to be shaking out some more of the hot money as witness the price of oil back from $120 to $75, see gold hitting a high of nearly $1900 intra-day and recently tanking to $1560 the same price action can be seen with all the food stocks. I haven't been able to say this about our regulators to often this decade, but WELL DONE!. The battle isn't over but those speculators that were using cheap funding and excess leverage to make huge directional bets on our food sources and energy (basically everyday staples) have been put on alert. There is one more bubble that is being allowed and fostered. That is the one in the US Treasury market. Savers balk when they look at bank CD's yielding 1/2%. Why are investor scrambling to lock up their money for ten years at 1.75% and thirty years at 2.8%? The Federal Reserve has launched operation Twist (Chubby Checker). This entails the Federal Reserve selling off the shorter maturity bonds in the 1-3 year vicinity in their portfolio and purchasing bonds that mature in 6-30 years to push down long term lending/borrowing rates to help stimulate the economy. The Fed is breaking out all the tools in an attempt to support the US economy. The Chairman seems to be the only passenger on this boat with a set of oars, or is it a bucket he's trying to bail us all out of a mess our elected officials seem unable or unwilling to tackle? History will answer whether the Chairman was right. I'm willing to side with him and give him credit for his creativity and willingness to try and do something and near about anything to spark the economy.
The current environment is fraught with danger, amplified by the upcoming election year. At a time where the primary theme for all involved should be "it's the jobs stupid", we're left to scratch our heads at the goings on in Washington. The EPA (Employment Prevention Agency) is on a full frontal assault focusing on Nat Gas and Oil Fracking. Pennsylvania and North Dakota are terrific success stories of states that encouraged companies and the new technology utilized to access these once unreachable resources. Pennsylvania alone boasts 70,000 in job creation along with $2 billion in revenues. North Dakota is a similar story. The EPA response to take on ND with fines for killing 24 ducks while windmills are slaughtering 440,000 birds a year without a blink is again, a head scratcher. Similarly the NLRB is attempting to block Boeing from utilizing good paying high skilled workers in South Carolina instead of Washington state. Whew! What would they say/do if Boeing decided Mexico was a more friendly environment and site for its plant? The message in these instances is the White House and Capitol Hill need to get out of the way of businesses that work and would put some of our 16 million unemployed back to work.
Front and Center. What's infected our economy and markets is rancid debt festering in the Petri dish in Europe. The Greek debt crisis 2 1/2 years and counting is desperate for a soothing financial tonic. The prescription, cultivated here in the US laboratory called Wall Street is what I refer to as Euro-Tarp. Direct injections of capital into the strategically important Euro zone banks. The fiscal and monetary impotence demonstrated by the European Central Bank and the European Union membership in general has left our domestic markets solely reliant on Federal Reserve stimuli. In our current global financial structure the response must be global. Which helps explains the limp response of the markets thus far.
Where we're at. The US economic recovery is progressing as anticipated, below trend expansion. Housing remains a constant drag that must be addressed. Homeowners, with borrowing rates and generational lows, need to have access to refinancing. The Fed has done their part in pounding rates into the dirt. Banks and regulators need to come together to allow underwater borrowers that are current on their payments to refinance. In many cases home owners cannot refinance because the outstanding balance on their mortgage is more than the value of their homes due to the housing market collapse. What needs to be done is 1.banks need to waive a new appraisal .2. banks need to receive a waiver from Fannie Mae and Freddie Mac from putting back any of these mortgage that may default citing lax underwriting. That simple. This would stem the tide of foreclosure along with the flood of supply currently flooding the resale markets depressing values and deterring new home buyers. Allowing homeowners to refinance at today's low rates would put billions of dollars into consumers wallets/purses. Next Euro Tarp and a Greek restructuring needs to happen sooner than later. Lastly the White House and Capitol Hill need to cease this political gamesmanship on Free Trade, Energy Policy, Tax Reform all of which should result in job creation. Do any combination and potentially unleash a tsunami of investment and job creation to steady this, at best, shaky economic recovery.
For now, no surprise, we remain on Euro watch. As Federal Reserve Chairman Bernanke stated in his recent testimony, "in this current situation we, the US, are the tail and the EU is the dog". With the final departure of ECB President Trichet hope springs eternal. We have most recently heard rumors floating in the market a bailout of the banks and Greece is coming and at long last there is a sense of urgency to move with scope and force. Domestically the US economy is anticipated to expand at a 2-2 1/2% GDP pace for the just completed third quarter and 2 1/2-3% for the upcoming fourth quarter. Obviously we have not been able to obtain break away velocity from the pull of the severe recession we are attempting to extricate ourselves from. While worries of a double dip recession have been elevated by the Euro woes, recent data do not support this conclusion. But, again the longer EU zone countries take to address and contain any potential contagion, the greater the risks to the global economy. GSA remains cautious and continues to build out our watch list. We'll wait for the market to signal the time to get fully re-engaged again and continue to monitor this very fluid situation as it develops.
There is and had been evidence of bubble formation in a few areas. Look no further than commodities. The Federal Reserves easy money policies have consequences. Inflation and possible bubbles. The difference this time is our watchdogs are engaged. In response to the rapid rise and possible speculative bubbles in gold, silver, wheat, corn and oil etc., the regulators have hiked margin requirements on all of these futures contracts numerous times this year alone. Regulators finally acknowledged the last time oil traded up to $140 under the Bush administration it had more to do with hot money and rapid speculation than the fundamental supply and demand equation. Listen when you go to the casino you know you're gambling and more likely than not to come away with a few more vacancies in your wallet or purse. The commodities trading floors are not supposed to be casinos though, and futures contracts are a legitimate tool utilized to help mitigate risk. When speculators drive commodity prices into the stratosphere and completely decoupled from the underlying commodity the effect on the consumer and his spending habits can and have been stifling to the economy. We seem to be shaking out some more of the hot money as witness the price of oil back from $120 to $75, see gold hitting a high of nearly $1900 intra-day and recently tanking to $1560 the same price action can be seen with all the food stocks. I haven't been able to say this about our regulators to often this decade, but WELL DONE!. The battle isn't over but those speculators that were using cheap funding and excess leverage to make huge directional bets on our food sources and energy (basically everyday staples) have been put on alert. There is one more bubble that is being allowed and fostered. That is the one in the US Treasury market. Savers balk when they look at bank CD's yielding 1/2%. Why are investor scrambling to lock up their money for ten years at 1.75% and thirty years at 2.8%? The Federal Reserve has launched operation Twist (Chubby Checker). This entails the Federal Reserve selling off the shorter maturity bonds in the 1-3 year vicinity in their portfolio and purchasing bonds that mature in 6-30 years to push down long term lending/borrowing rates to help stimulate the economy. The Fed is breaking out all the tools in an attempt to support the US economy. The Chairman seems to be the only passenger on this boat with a set of oars, or is it a bucket he's trying to bail us all out of a mess our elected officials seem unable or unwilling to tackle? History will answer whether the Chairman was right. I'm willing to side with him and give him credit for his creativity and willingness to try and do something and near about anything to spark the economy.
The current environment is fraught with danger, amplified by the upcoming election year. At a time where the primary theme for all involved should be "it's the jobs stupid", we're left to scratch our heads at the goings on in Washington. The EPA (Employment Prevention Agency) is on a full frontal assault focusing on Nat Gas and Oil Fracking. Pennsylvania and North Dakota are terrific success stories of states that encouraged companies and the new technology utilized to access these once unreachable resources. Pennsylvania alone boasts 70,000 in job creation along with $2 billion in revenues. North Dakota is a similar story. The EPA response to take on ND with fines for killing 24 ducks while windmills are slaughtering 440,000 birds a year without a blink is again, a head scratcher. Similarly the NLRB is attempting to block Boeing from utilizing good paying high skilled workers in South Carolina instead of Washington state. Whew! What would they say/do if Boeing decided Mexico was a more friendly environment and site for its plant? The message in these instances is the White House and Capitol Hill need to get out of the way of businesses that work and would put some of our 16 million unemployed back to work.
Front and Center. What's infected our economy and markets is rancid debt festering in the Petri dish in Europe. The Greek debt crisis 2 1/2 years and counting is desperate for a soothing financial tonic. The prescription, cultivated here in the US laboratory called Wall Street is what I refer to as Euro-Tarp. Direct injections of capital into the strategically important Euro zone banks. The fiscal and monetary impotence demonstrated by the European Central Bank and the European Union membership in general has left our domestic markets solely reliant on Federal Reserve stimuli. In our current global financial structure the response must be global. Which helps explains the limp response of the markets thus far.
Where we're at. The US economic recovery is progressing as anticipated, below trend expansion. Housing remains a constant drag that must be addressed. Homeowners, with borrowing rates and generational lows, need to have access to refinancing. The Fed has done their part in pounding rates into the dirt. Banks and regulators need to come together to allow underwater borrowers that are current on their payments to refinance. In many cases home owners cannot refinance because the outstanding balance on their mortgage is more than the value of their homes due to the housing market collapse. What needs to be done is 1.banks need to waive a new appraisal .2. banks need to receive a waiver from Fannie Mae and Freddie Mac from putting back any of these mortgage that may default citing lax underwriting. That simple. This would stem the tide of foreclosure along with the flood of supply currently flooding the resale markets depressing values and deterring new home buyers. Allowing homeowners to refinance at today's low rates would put billions of dollars into consumers wallets/purses. Next Euro Tarp and a Greek restructuring needs to happen sooner than later. Lastly the White House and Capitol Hill need to cease this political gamesmanship on Free Trade, Energy Policy, Tax Reform all of which should result in job creation. Do any combination and potentially unleash a tsunami of investment and job creation to steady this, at best, shaky economic recovery.
For now, no surprise, we remain on Euro watch. As Federal Reserve Chairman Bernanke stated in his recent testimony, "in this current situation we, the US, are the tail and the EU is the dog". With the final departure of ECB President Trichet hope springs eternal. We have most recently heard rumors floating in the market a bailout of the banks and Greece is coming and at long last there is a sense of urgency to move with scope and force. Domestically the US economy is anticipated to expand at a 2-2 1/2% GDP pace for the just completed third quarter and 2 1/2-3% for the upcoming fourth quarter. Obviously we have not been able to obtain break away velocity from the pull of the severe recession we are attempting to extricate ourselves from. While worries of a double dip recession have been elevated by the Euro woes, recent data do not support this conclusion. But, again the longer EU zone countries take to address and contain any potential contagion, the greater the risks to the global economy. GSA remains cautious and continues to build out our watch list. We'll wait for the market to signal the time to get fully re-engaged again and continue to monitor this very fluid situation as it develops.
Tuesday, July 19, 2011
Third Quarter Outlook Points to More Turbulance But A Positive Outcome
Grand Street Advisors
Market Outlook
Third Quarter 2011
Where we are. Right to it. The US equity market is celebrating its third anniversary of the bull market kick started in early 2009. Top down and bottom up analysis of the economic recovery have been wildly bullish and wildly pessimistic, basically all over the map. This is no more evident in the scorecards for hedge funds over the last twenty four months, negative thirty percent to positive one hundred percent. These are supposed to be some of the best and brightest who put their money where their “black box trading models” are. Just evidence how difficult and challenging it has been in reading the economic tea leaves and investing appropriately.
From my perch analysts are looking at this earnings cycle from the wrong perspective. Many view the earnings momentum as about to peak. In my view, for this to occur, the US economy would need to revert back to the brink on recessionary levels. I just don’t see it. The US economy is growing below trend. Domestically, steps are being taken to stimulate growth with potential tax cuts being discussed in the hallowed halls of Congress as we speak. Thus far emerging market growth has been pulling the US along for the ride reflected in the explosive growth in exports and export related job growth. When the US economy regains its traction and we will, earnings and revenue growth should accelerate up markedly, unemployment should drop precipitously. The austerity measures being negotiated currently up on the hill will push the US back towards a balanced budget and trend rate growth.
I will have to be the first to state I’m wrong (as far as I know anyway) my projections for the market were incorrect. I’ve been far too conservative. Even with unemployment at 9% corporate earnings and productivity have defied gravity. Viewing an accommodative Fed policy for the next two years (due in no small part to the bulbous housing stock), strong export driven growth, lower corporate tax rates and even a modestly expanding job market coupled with pristine corporate balance sheets earnings and revenues should continue their upward trajectory dragging the S&P 500 along for the ride well through 1500 over the next six to twelve months.
Risks.
1. Forget about the 800 lb. gorilla in the room, let’s look at the 1200 lb. polar bear. He’s the one less dangerous looking, highly pet-able and cuddly that will rip my face off if I don’t have a 3” glass partition between us. He’s lurking out there. He’s playing coy in the form of the potential US debt default. Should our fearless leaders dig in their heels and fail to come to a deficit cutting, revenue increasing compromise a US debt default would most assuredly shred any and all portfolio making the Lehman Titanic look like a dingy.
2. The end of the Feds QE II asset purchase program allows natural market forces to identify and dictate where investors are willing to commit capital. If it turns out rates rise precipitously it may choke off any housing recovery.
3. Greece Part Deux. The ECB and Jean Trichet seem to not have learned anything these last few years. The ECB refuses to or is unable to get out in front of this potential financial collapse and/or exit of Greece from the EU.
It is not only Greece the markets fear, it is the potential contagion and bond vigilantes. If Greece fails, the thinking is then Portugal, if Portugal then Ireland/Italy and Spain etc... This would be the equivalent of Lehman squared. There would be nowhere to hide…again.
In the end we have to factor in probabilities. Ex-Lehman our esteemed academics may have run an experiment and re-hash “moral hazard” (hey it was catchy) and let either Greece or the US go thinking they have any collateral damage contained. However, they have experienced the Lehman catastrophe and found out first hand how interconnected the global financial system is no matter how many creative financial derivatives we concoct to “hedge” our risk. We can still see the carcasses in the rear view mirror, we know the claw marks would cut too deep and critically injure any recovery.
So, while we need to be aware of risks and always look for the unexpected, I believe the likelihood of any default to be extremely slim. Going forward I see uneven market gyrations, but ultimately ending with a strong rally to finish up the year and recommend an aggressive posturing to equities. We’ll continue to monitor the data and market. Should our opinion change and we need to alter our strategy I will be in contact immediately.
Thank you again for your patience and confident in these very challenging times.
Yours in pursuit of the Kwan!
Market Outlook
Third Quarter 2011
Where we are. Right to it. The US equity market is celebrating its third anniversary of the bull market kick started in early 2009. Top down and bottom up analysis of the economic recovery have been wildly bullish and wildly pessimistic, basically all over the map. This is no more evident in the scorecards for hedge funds over the last twenty four months, negative thirty percent to positive one hundred percent. These are supposed to be some of the best and brightest who put their money where their “black box trading models” are. Just evidence how difficult and challenging it has been in reading the economic tea leaves and investing appropriately.
From my perch analysts are looking at this earnings cycle from the wrong perspective. Many view the earnings momentum as about to peak. In my view, for this to occur, the US economy would need to revert back to the brink on recessionary levels. I just don’t see it. The US economy is growing below trend. Domestically, steps are being taken to stimulate growth with potential tax cuts being discussed in the hallowed halls of Congress as we speak. Thus far emerging market growth has been pulling the US along for the ride reflected in the explosive growth in exports and export related job growth. When the US economy regains its traction and we will, earnings and revenue growth should accelerate up markedly, unemployment should drop precipitously. The austerity measures being negotiated currently up on the hill will push the US back towards a balanced budget and trend rate growth.
I will have to be the first to state I’m wrong (as far as I know anyway) my projections for the market were incorrect. I’ve been far too conservative. Even with unemployment at 9% corporate earnings and productivity have defied gravity. Viewing an accommodative Fed policy for the next two years (due in no small part to the bulbous housing stock), strong export driven growth, lower corporate tax rates and even a modestly expanding job market coupled with pristine corporate balance sheets earnings and revenues should continue their upward trajectory dragging the S&P 500 along for the ride well through 1500 over the next six to twelve months.
Risks.
1. Forget about the 800 lb. gorilla in the room, let’s look at the 1200 lb. polar bear. He’s the one less dangerous looking, highly pet-able and cuddly that will rip my face off if I don’t have a 3” glass partition between us. He’s lurking out there. He’s playing coy in the form of the potential US debt default. Should our fearless leaders dig in their heels and fail to come to a deficit cutting, revenue increasing compromise a US debt default would most assuredly shred any and all portfolio making the Lehman Titanic look like a dingy.
2. The end of the Feds QE II asset purchase program allows natural market forces to identify and dictate where investors are willing to commit capital. If it turns out rates rise precipitously it may choke off any housing recovery.
3. Greece Part Deux. The ECB and Jean Trichet seem to not have learned anything these last few years. The ECB refuses to or is unable to get out in front of this potential financial collapse and/or exit of Greece from the EU.
It is not only Greece the markets fear, it is the potential contagion and bond vigilantes. If Greece fails, the thinking is then Portugal, if Portugal then Ireland/Italy and Spain etc... This would be the equivalent of Lehman squared. There would be nowhere to hide…again.
In the end we have to factor in probabilities. Ex-Lehman our esteemed academics may have run an experiment and re-hash “moral hazard” (hey it was catchy) and let either Greece or the US go thinking they have any collateral damage contained. However, they have experienced the Lehman catastrophe and found out first hand how interconnected the global financial system is no matter how many creative financial derivatives we concoct to “hedge” our risk. We can still see the carcasses in the rear view mirror, we know the claw marks would cut too deep and critically injure any recovery.
So, while we need to be aware of risks and always look for the unexpected, I believe the likelihood of any default to be extremely slim. Going forward I see uneven market gyrations, but ultimately ending with a strong rally to finish up the year and recommend an aggressive posturing to equities. We’ll continue to monitor the data and market. Should our opinion change and we need to alter our strategy I will be in contact immediately.
Thank you again for your patience and confident in these very challenging times.
Yours in pursuit of the Kwan!
Wednesday, June 22, 2011
The Economy to Regain Its Mojo and Investors Can Look to Coal Play Alliance Resource 5% Yield for Growth and Income
The economy’s recent stutter step may prove to be just that. We have recently got speed bagged by an Ali hammer jab of Japan’s economy screeching to a halt followed by a Frazier left hook by Greece’s near debt default. Taken together it’s no wonder the US economy was left reeling on the ropes. I believe however, while we may have been staggered and given the mandatory eight count, which is what this hiccup in growth may turn out to be, we were not counted out. Evidence of just such a blip being the down tick in Weekly Unemployment Claims, the surprising rise of Leading Economic Indicators and Industrial Production. The Japanese economy shutting down closed off electronics component shipments along with parts for auto suppliers and manufacturing which cost an estimated one full percentage point off of growth. The question remains with Japan factories back humming will we, the US economy, resume its expansionary trajectory. We’ll need more time and data to support either conclusion, but I believe the momentum of the expansion will not be stopped on a dime. The weakness or slow down we’re experiencing being more a temporary downshift due to an external shock and the fundamentals for higher equity valuations remaining in tact.
Greece. As distasteful as it seems, no one entity that may have the characteristics of being “Lehman-esque” (Too Big To Fail-TBTF) will be allowed to fail. No matter the costs or effect on currencies or assets, or to what extreme measures need to be taken to avert the disaster. I’m not saying Greece won’t default, from what I’ve read it most likely will experience a “technical” default. The Greek debt load is far to great for the size and structure of their economy. If this is the case, a plan will have been well thought out, the problem ring fenced thus preventing any contagion from spreading to EU members Ireland, Portugal, Spain and Italy. Now, after Lehman, we were able to witness, real time, what can happen when an entity of such scale is allowed to go under, and the catastrophic repercussions, all Central Bankers are squarely on the same page. They, we witnessed history as it unfolded. Remember back in the early days as the financial crisis was only beginning to take flight. ECB President Trichet warned the markets he may need to hike interest rates on inflation fears at the same exact time Chairman Bernanke was aggressively cutting rates interest rates and converting Investment Banks to Savings Banks to gain access to cheap money. In Trichet’s opinion the financial crisis was a US problem and he had no fears of any contagion. Many of us argued against such a move then and were proven out correct and ultimately Trichet reversed course. The ECB perception was the wide spread proliferation of derivatives had allowed EU Financial institutions to lay off or hedge their risks. Who did he believe the counter party was that the risk was off loaded to? Yes that’s correct AIG, Lehman, Bear Stearns etc. The point being now that we have real time data on how catastrophic such a failure can be, the appetite to run another such experiment is nil. So, as long as Central Banks are reading from the same playbooks and recognized how inter-connected the global financial systems is, expect monetary responses to be of a proportion to meet any catastrophe that threatens the system. The implications being Central Banks and the Federal Reserve will remain committed to debasing our currencies to support the economy and foreigners will continue “buy our tulips”, as we, the US is still the best game in town. I believe we’ll be fine. It’s only when someone refrains from accepting those “tulips” that we follow the path of the Dutch.
The market correction we’ve experienced is normal and may prove a healthy set up for the next leg higher. The market has rallied significantly over the last twenty four months and barring any further aggressive deterioration of the market, remains a healthy correction within the context of a bull market. As we entered 2011 we set out a few wild cards, 1. Greek Default 2. Super Spike in oil 3.Failed US debt auction. None thus far has come to be, nor were they predictions of what would happen to derail the bull market, merely what could. We’ve received enough of a scare on a few so far, but not enough of one to send the bull into hiding. So, GSA stands by our year end target for the S&P 500 of 1410-1450 and look to add to or establish new positions on weakness.
Investors looking for Income and Growth can look no further than Alliance Resource-ARLP to sate their appetite. Alliance Resource continues to bring new production to market while securing long term commitments for up to 75% of production out to 2014 giving clear visibility for the near term. Their last quarterly earnings was yet another stellar performance with revenues up 11% driven by coal prices and production. Alliances is in the the sweet spot with attractive assets and production ramping up at a time where the global distaste for nuclear power after the Japan disaster still taints the palate of many. A potential for a take out is on the table but even without that catalyst earnings and revenue growth coupled with a very attractive 5% yield should allow investors to breathe easy for some time.
Yours in pursuit of the Kwan!
Greece. As distasteful as it seems, no one entity that may have the characteristics of being “Lehman-esque” (Too Big To Fail-TBTF) will be allowed to fail. No matter the costs or effect on currencies or assets, or to what extreme measures need to be taken to avert the disaster. I’m not saying Greece won’t default, from what I’ve read it most likely will experience a “technical” default. The Greek debt load is far to great for the size and structure of their economy. If this is the case, a plan will have been well thought out, the problem ring fenced thus preventing any contagion from spreading to EU members Ireland, Portugal, Spain and Italy. Now, after Lehman, we were able to witness, real time, what can happen when an entity of such scale is allowed to go under, and the catastrophic repercussions, all Central Bankers are squarely on the same page. They, we witnessed history as it unfolded. Remember back in the early days as the financial crisis was only beginning to take flight. ECB President Trichet warned the markets he may need to hike interest rates on inflation fears at the same exact time Chairman Bernanke was aggressively cutting rates interest rates and converting Investment Banks to Savings Banks to gain access to cheap money. In Trichet’s opinion the financial crisis was a US problem and he had no fears of any contagion. Many of us argued against such a move then and were proven out correct and ultimately Trichet reversed course. The ECB perception was the wide spread proliferation of derivatives had allowed EU Financial institutions to lay off or hedge their risks. Who did he believe the counter party was that the risk was off loaded to? Yes that’s correct AIG, Lehman, Bear Stearns etc. The point being now that we have real time data on how catastrophic such a failure can be, the appetite to run another such experiment is nil. So, as long as Central Banks are reading from the same playbooks and recognized how inter-connected the global financial systems is, expect monetary responses to be of a proportion to meet any catastrophe that threatens the system. The implications being Central Banks and the Federal Reserve will remain committed to debasing our currencies to support the economy and foreigners will continue “buy our tulips”, as we, the US is still the best game in town. I believe we’ll be fine. It’s only when someone refrains from accepting those “tulips” that we follow the path of the Dutch.
The market correction we’ve experienced is normal and may prove a healthy set up for the next leg higher. The market has rallied significantly over the last twenty four months and barring any further aggressive deterioration of the market, remains a healthy correction within the context of a bull market. As we entered 2011 we set out a few wild cards, 1. Greek Default 2. Super Spike in oil 3.Failed US debt auction. None thus far has come to be, nor were they predictions of what would happen to derail the bull market, merely what could. We’ve received enough of a scare on a few so far, but not enough of one to send the bull into hiding. So, GSA stands by our year end target for the S&P 500 of 1410-1450 and look to add to or establish new positions on weakness.
Investors looking for Income and Growth can look no further than Alliance Resource-ARLP to sate their appetite. Alliance Resource continues to bring new production to market while securing long term commitments for up to 75% of production out to 2014 giving clear visibility for the near term. Their last quarterly earnings was yet another stellar performance with revenues up 11% driven by coal prices and production. Alliances is in the the sweet spot with attractive assets and production ramping up at a time where the global distaste for nuclear power after the Japan disaster still taints the palate of many. A potential for a take out is on the table but even without that catalyst earnings and revenue growth coupled with a very attractive 5% yield should allow investors to breathe easy for some time.
Yours in pursuit of the Kwan!
Saturday, January 8, 2011
Market Outlook 2011
The New Year is kicking off with a bang! Economic data continues to suggest the US and global economy remain on a positive trajectory. Be it the downward trend in weekly unemployment claims, the ongoing strength reflected in the Purchasing Managers Index, or weekly Leading Economic Indicators, all point to a sustainable economic revival while chances of a double dip seem remote.
The oft written off consumer refused to succumb to pressures to conserve and nest. Hikes in personal incomes and spending lead to robust fourth quarter retail sales from dollar discounters to high end bag producer Coach. New and existing homes sales received a bump in the recently released November numbers. Granted, there is still much work to be done on this front, but analysts are pointing to this just past year as being the trough. As has been noted in this space many times, the deleveraging US consumer simply cannot do all the heavy lifting this go around. The good news has arrived. Importantly emerging markets consumption is gaining traction. History shows between 1998 and 2008 Emerging Market consumer spending rose 66%. That figure represents twice the rate of developed nations. Average per capita spending was 48% higher in 2008 vs. 1998. In 2008 Emerging Market consumer spending represented 27% of worldwide totals. Industry forecasts middle class consumers will grow from 2.5 billion to 4.5 billion by 2025 the majority of which should come from Emerging Markets. The hard work and huge capital investments of the US these last fifty years are finally producing a positive return.
A last fun fact. Since 1947 the ratio of S&P 500 Index to US national Income and product accounts has averaged .86%. It now stands closer to .74%. If profits were to remain constant and the ratios were to revert to the mean the S&P500 would rise above 1400. GSA’s projection for 2011 is slightly higher for the year. Now to the risks, there just may be a few which we’ll now flag.
1. Political. Domestically our newly elected Democrats and Republicans Tea-Party-ers need to take a que from Rocker Prince and “party like it’s 1999”. Federal pay freezes and social security benefits age extensions won’t do it alone. We need to roll back budgets and spending to levels not seen this decade to make meaningful progress on our ballooning deficits and maintain our AAA debt ratings.
2. Sovereign Debt default. When looking for potential landmines abroad, Greece still lurks as potentially the first domino (think Lehman Brothers) to fall and potentially ignite a contagion. The trial balloon has already been set afloat into the market. On a quiet Friday afternoon some weeks back in December, Greece officials whispered the idea of restructuring their debt. Under this scenario bond holders would take a 15-20% haircut to principal along with restructured bonds with lower more favorable interest rates. It was like no one heard or was paying attention and focused too much on the holiday season. Should this restructuring come to fruition, lookout. First it sets precedence and opens to the door for Ireland, Portugal and who knows else to follow suit. Banks are major holders of these sovereign bonds and if forced to write down these investments by 20% once again would result in recapitalization in the hundreds of billions of dollars or Euros. The effect being another choking off of lending. Austerity needs to reign here.
3. Inflation. Since core inflation is benign so we have no worries here. That is if you don’t eat, heat your house drive a car etc. The proliferation of ETF’s coupled with the debasing of the US greenback has sent some commodities parabolic. These spikes push higher prices into the pipeline that eventually may/should work its way to the general economy and pricing of goods. A super spike in oil needs to be monitored as this would surely have a profound impact on consumer spending and sand up the gears of our domestic economic engine.
4. Real Wildcard. The US Treasury has a near failed bond auction. Meaning the Treasury attempts to raise cash, via a usual bond auction. A near failure would be if the bid to cover ratio is less than 2-1. Our typical auctions reflect 2.5 -2.6 dollars in bids for every 1 dollar in bonds being offered. An auction with 1.9 to 1 would be terrific for most any other country, but not the US. This would send shock waves throughout all markets globally.
Projection:
Monetary policy remains highly accommodative and due to continued housing market weakness should remain so throughout 2011. The Federal Reserves current QEII purchase plan may not be fully executed due to the quickening pace of recovery which would/will cause market disruptions and a resumption of volatile market swings. S&P 500 earnings are anticipated to come in close to $94 a share. Being we reside in a low interest rate, low inflation rate deficit cutting environment should allow for P/E expansion closer to 15-15 1/2 This brings us to our target range of 1410-1450 or roughly 12% higher. This also assumes US GDP expansion of 3-3.5%. Should earnings momentum accelerate to the upside we would look to upgrade our targets. GSA believes the challenge, aside from any near term round of profit taking is in handicapping Chairman Bernanke’s ability to identify when and how aggressively to remove any excess liquidity sloshing around the markets in late 2011.
We maintain our aggressive investment posture entering 2011 but remain focused on the progress already made by the markets exiting 2010. Should the market enter into a round of profit taking that appears to be morphing into something more, we will be in contact immediately and act accordingly.
Yours in pursuit of the Kwan!
James Byrne
Chief Investment Officer
The oft written off consumer refused to succumb to pressures to conserve and nest. Hikes in personal incomes and spending lead to robust fourth quarter retail sales from dollar discounters to high end bag producer Coach. New and existing homes sales received a bump in the recently released November numbers. Granted, there is still much work to be done on this front, but analysts are pointing to this just past year as being the trough. As has been noted in this space many times, the deleveraging US consumer simply cannot do all the heavy lifting this go around. The good news has arrived. Importantly emerging markets consumption is gaining traction. History shows between 1998 and 2008 Emerging Market consumer spending rose 66%. That figure represents twice the rate of developed nations. Average per capita spending was 48% higher in 2008 vs. 1998. In 2008 Emerging Market consumer spending represented 27% of worldwide totals. Industry forecasts middle class consumers will grow from 2.5 billion to 4.5 billion by 2025 the majority of which should come from Emerging Markets. The hard work and huge capital investments of the US these last fifty years are finally producing a positive return.
A last fun fact. Since 1947 the ratio of S&P 500 Index to US national Income and product accounts has averaged .86%. It now stands closer to .74%. If profits were to remain constant and the ratios were to revert to the mean the S&P500 would rise above 1400. GSA’s projection for 2011 is slightly higher for the year. Now to the risks, there just may be a few which we’ll now flag.
1. Political. Domestically our newly elected Democrats and Republicans Tea-Party-ers need to take a que from Rocker Prince and “party like it’s 1999”. Federal pay freezes and social security benefits age extensions won’t do it alone. We need to roll back budgets and spending to levels not seen this decade to make meaningful progress on our ballooning deficits and maintain our AAA debt ratings.
2. Sovereign Debt default. When looking for potential landmines abroad, Greece still lurks as potentially the first domino (think Lehman Brothers) to fall and potentially ignite a contagion. The trial balloon has already been set afloat into the market. On a quiet Friday afternoon some weeks back in December, Greece officials whispered the idea of restructuring their debt. Under this scenario bond holders would take a 15-20% haircut to principal along with restructured bonds with lower more favorable interest rates. It was like no one heard or was paying attention and focused too much on the holiday season. Should this restructuring come to fruition, lookout. First it sets precedence and opens to the door for Ireland, Portugal and who knows else to follow suit. Banks are major holders of these sovereign bonds and if forced to write down these investments by 20% once again would result in recapitalization in the hundreds of billions of dollars or Euros. The effect being another choking off of lending. Austerity needs to reign here.
3. Inflation. Since core inflation is benign so we have no worries here. That is if you don’t eat, heat your house drive a car etc. The proliferation of ETF’s coupled with the debasing of the US greenback has sent some commodities parabolic. These spikes push higher prices into the pipeline that eventually may/should work its way to the general economy and pricing of goods. A super spike in oil needs to be monitored as this would surely have a profound impact on consumer spending and sand up the gears of our domestic economic engine.
4. Real Wildcard. The US Treasury has a near failed bond auction. Meaning the Treasury attempts to raise cash, via a usual bond auction. A near failure would be if the bid to cover ratio is less than 2-1. Our typical auctions reflect 2.5 -2.6 dollars in bids for every 1 dollar in bonds being offered. An auction with 1.9 to 1 would be terrific for most any other country, but not the US. This would send shock waves throughout all markets globally.
Projection:
Monetary policy remains highly accommodative and due to continued housing market weakness should remain so throughout 2011. The Federal Reserves current QEII purchase plan may not be fully executed due to the quickening pace of recovery which would/will cause market disruptions and a resumption of volatile market swings. S&P 500 earnings are anticipated to come in close to $94 a share. Being we reside in a low interest rate, low inflation rate deficit cutting environment should allow for P/E expansion closer to 15-15 1/2 This brings us to our target range of 1410-1450 or roughly 12% higher. This also assumes US GDP expansion of 3-3.5%. Should earnings momentum accelerate to the upside we would look to upgrade our targets. GSA believes the challenge, aside from any near term round of profit taking is in handicapping Chairman Bernanke’s ability to identify when and how aggressively to remove any excess liquidity sloshing around the markets in late 2011.
We maintain our aggressive investment posture entering 2011 but remain focused on the progress already made by the markets exiting 2010. Should the market enter into a round of profit taking that appears to be morphing into something more, we will be in contact immediately and act accordingly.
Yours in pursuit of the Kwan!
James Byrne
Chief Investment Officer
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