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Posted on Thursday, April 15, 2010 - by Henry Walter
April 2010 Roundup
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.
Since a picture is worth a thousand words, here are some “pictures” of the financial markets and economy you may find of interest.
To avoid becoming complacent, remember what happened in 2007-8. Things can get ugly in a hurry. As an ancient Chinese Zen Master said: “Hope for the best, prepare for the worst, and expect the unexpected!” The chart below shows the Standard & Poor’s 500 Index, courtesy BigCharts.com, for the last three years.
By some measures, stocks are still expensive. This chart, courtesy of The Wall Street Journal, shows that while the current price/earnings ratio is well below the 44.20 reached in late 1999, at 20.34, it is still well above the long-term average of 16.36.
The next chart, courtesy www.decisionpoint.com shows that what investors are willing to pay for dividends or earnings streams, fluctuates widely over time. The top panel shows the S&P 500, the middle panel the price/earnings ratio, and the lower panel the dividend yield, all since 1926.
This chart from www.chartoftheday.com (04/03/2010) shows that the recovery of jobs since the recession began is much slower than after previous recessions.
Solid red line – job losses following the beginning of the current recession
Dashed gold line – job losses following the beginning of the last recession
Dashed blue line - line – job losses following during the average recession (1950-1999)
We think that the Economic Cycle Research Institute (ECRI) is one of the best forecasters of economic growth. The recent data raises a yellow flag. We will be watching it closely.
Since the market lifted off in March 2009, emerging markets have performed much better than the U.S. market. (Source: Martin Weiss, Money & Markets 04/05/10.)
Gold has been resting for a few months, but as investors worry about inflation and fiat money many believe that prices are headed higher.
The price of crude has recovered from below $40 to above $80. Demand for oil and gasoline is growing rapidly in most countries outside of the U.S. and Europe. In addition, much of the world’s reserves are in unstable countries.
Natural gas prices continue to be weak as the U.S. now has a surplus based on new technology that enables companies to produce it from shale in areas such as the so-called Marcellus play. As we have noted, now may be a good time to accumulate high quality natural gas companies at reasonable prices.
Back in late 2009, investors were willing to loan money to the government for 10 years and accept a return as low as 2%. Not any longer. Interest rates are creeping up as investors view the massive borrowing by the Treasury and deficits as far as the eye can see. This chart plots the interest rate on the 10-year Treasury Note (place a decimal point between the two digits on the right).
Finally, a couple of charts based on information from the Employee Benefits Research Institute (EBRI) that are self-explanatory.
In the next issue, if the information is available, we will report on the Eastman Kodak Pension Fund for 2009.
For questions or additional information on this blog entry, please contact us.
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Posted on Wednesday, February 17, 2010 - by Henry Walter
February Roundup
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you. - International Monetary Fund (IMF) Global Forecast
- President Obama’s 2011 Budget
- World Oil Outlook
- Energy, a Historical Perspective - Will natural gas fill the void?
- Goods Producing Workers vs. Government Payroll
- In Brief
INTERNATIONAL MONETARY FUND (IMF) GLOBAL FORECAST
In its latest forecast, published on January 26, 2010, the IMF said that the global economy is recovering faster than previously anticipated with world growth bouncing back from negative territory in 2009, to a forecast 3.9% in 2010 and 4.3% in 2011.
But the recovery is proceeding at different speeds around the world, with emerging markets led by Asia relatively vigorous, but advanced economies remaining sluggish and still dependent on government stimulus measures.
Detailed projections will be found in the table at the end of this article.
As noted above, world output is forecast to grow 3.9% in 2010 with emerging market and developing markets forecast to grow a healthy 6.0% in 2010 and advanced economies a weak 2.1%. For reference, in 2009 world output fell 0.8%, with the advanced economies down 3.2% and emerging market and developing economies up 2.1%.
Within the emerging market category, it should come as no surprise that in 2010 China is forecast to lead the pack with a 10% growth rate projected, followed by India at 7.7%.
Trailing the pack is the Euro area (1.0%), United Kingdom (1.3%), Japan (1.7%), Canada (2.6%), and the United States (2.7%). The Euro and UK areas could be even weaker with the possibility of a default in Greece and worries about deficits in Spain, Portugal and the UK.
For the full report go to http://www.imf.org/external/pubs/ft/survey/so/2010/NEW012610B.htm
PRESIDENT OBAMA'S 2011 BUDGET - A BLEAK OUTLOOK FOR 2011, 2012, 2013, 2014, 2015, …
In a New York Times News Analysis on President Obama budget, David E. Sanger has some interesting and worrisome comments (New York Times, February 2, 2010, page 1).
Two numbers stand out as particularly stunning as Sanger reviewed the federal budget filled with mind-boggling statistics. “The first”, he writes, “is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output (see chart below). That is not unprecedented: During the Civil War and World War II, the United Sates ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated.”
Sanger continues, “But the second number, buried deeper in the budget’s projections, is the one that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 – years after Mr. Obama has left the political scene, even if he serves two terms – they start rising again sharply, to more than 5% of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.”
Finally Sanger points out the possibility that the US could begin to suffer the same disease that has afflicted Japan over the past decade, with debt growing more rapidly than income, Japan’s influence around the world eroded.
WORLD OIL OUTLOOK
The Paris-based International Energy Agency (IEA) recently updated its forecast for global oil production from its current level of 85 million barrels per day to 105 million barrels per day by 2030. (Source: World Energy Outlook 2009 – fact sheet.)
This is in stark contrast to a forecast by Uppsala University in Sweden. Kjell Aleklett, professor of physics, and co-author of a new report ‘The Peak of the Oil Age’, states “oil production is more likely to be 75 million barrels a day by 2030 than the ‘unrealistic’ 105 million used by the IEA.” Most American are not familiar with Uppsala , but it is a research university founded in 1477 and for centuries has been one of Europe’s most renowned seats of learning and is associated with 15 Nobel Prize Laureates. (Source: The Uppsala World Energy Outlook.)
Many other experts in the oil patch agree with Professor Aleklett. Matthew Simmons, an investment banker specializing in energy, and a prominent oil-industry insider, make this point in his book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (Wiley, June 5, 2006). According to Simmons and others, OPEC’s reserves are grossly overstated due to the quota system which is tied to reserves encouraging members to exaggerate their reserves.
If there is any truth to these assertions, world leaders and energy specialists must be prepared for the consequences of increased scarcity and high costs of oil that support our modern society. In addition to reserves, National Oil Company (NOCs) restrictions, terrorist activities, armed conflicts could also restrict the supply of oil putting further pressure on prices.
This is all positive for well-run oil companies with substantial reserves.
ENERGY, A HISTORICAL PERSPECTIVE - WILL NATURAL GAS FILL THE VOID?
An interesting article by Steven C. Leuthold, founder and Chief Investment Officer of the Leuthold Group, an investment management and institutional research firm, titled Taking Part in Another Revolution was recently posted on Morningstar’s Web site (January 19, 2010). In it, Leuthold notes that the U.S. and world are in the midst of a great energy revolution, but also makes the point the revolution is hardly unprecedented.
During the Renaissance, 500 years ago, wood was the critical energy component in England and other European economies. Then, in the 1600s as the price of wood soared due to shortages, coal became the preferred fuel especially for industrial uses. Then in the 1800s it was whale oil, but as the whale pods were decimated, prices rose. Then in 1858, Colonel Drake found oil in Titusville, Pa., and Kerosene became the fuel of choice as the U.S. entered the Petroleum Age. And now it looks like the next revolution will be to alternative sources of green energy like solar power, wind, nuclear, biofuels, hydro, hydrogen, etc.
It will likely take many decades for alternatives to replace fossil fuels, but during the long transition period it’s a good bet that natural gas will play an even more important role than it does today for several important reasons.
First, due to new technology, natural gas is plentiful. Second, it is less polluting than oil or coal. Third, it can now be transported by sea in tankers as liquefied natural gas (LNG). Fourth, oil is getting difficult and expensive to find and recover. The world has consumed all the low hanging fruit. We covered natural gas in a fair amount of detail in our July 2009 Roundup, with a follow-up article in the August 2009 Roundup (see Bulletin Archives on the right of your screen).
In the July Bulletin we noted that XTO was a good quality independent with a major stake in natural gas. Subsequently it is being acquired by Exxon at a substantial premium. Another company that should be on your radar is Talisman Energy (TLM). It holds substantial acreage in the Marcellus play, rich in natural gas, covering two-thirds of Pennsylvania and extending north into New York, west into Ohio, and south into West Viginia, Virginia and Kentucky. Reserves are equivalent to total U.S. natural gas consumption for 25 years or more. The company also controls big acreage in the Utica formation, in Quebec. One positive of both Marcellus and Utica is that they are close to the eastern seaboard where most gas is consumed.
GOODS PRODUCING WORKERS VS. GOVERNMENT PAYROLLS
The chart below tells a lot about what is happening in our economy. You will have to draw your own conclusions!
IN BRIEF
January Indicator
This is the time of the year when a lot of ink is spilled over the so-called January Indicator. We think that Robin Carpenter of www.CarpenterAnalytix.com does the best job each year of analyzing its value in predicting performance for the rest of the year, as reported by Michael Santoli in Barron’s (February 1, 2010, page 13). The indicator, Carpenter says, “really says an up-January has very strong implications, but a down-January pretty much says, Don’t expect too much, because anything could happen.” This year we had a down-January, so your guess is as good as ours.
Trillions and Trillions
Many investors are having difficulty getting their arms around a trillion dollars. Here is one way to look at it. A stack of one trillion one dollar bills would be 67,000 miles high, 30% of the distance to the moon. (A one-dollar bill is 0.0043 inches thick.)
Required Minimum Distributions (RMDs)
Rep. Joe Sestak, D-Pa., introduced HR 4421 which would extend the moratorium on retirement accounts into 2010. Currently the chances of passage are slim. Congress is not hearing from senior citizens, and given the deficits, this isn’t appealing legislation. If we have a double-dip, however, things could change rapidly. (Investment News, February 5, 2010.)
Social Security
According to Allan Sloan, in an article posted on Yahoo on February 4, 2010 and provided by Fortune on CNNMoney, Social Security is next in line for a bailout. For the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits. Social Security hasn’t been cash-negative since the early 1980s, when it came so close to running out of money that it was making plans to stop sending out benefit checks. That led to the famous Greenspan Commission report, which recommended trimming benefits and raising taxes, which Congress did.
Luck Versus Skill
Two prominent academics, Eugene F. Fama, University of Chicago and Kenneth R. French, Dartmouth College, published a 42-page paper in November 2009 with the title Luck Versus Skill in the Cross Section of Mutual Fund Returns. To access, Google the full title adding ‘working paper No. 2009-56’.
Eastman Kodak
Finally we draw your attention to a less than favorable article in Barron’s on Kodak’s future by Kopin Tan who writes The Trader each week (Barron’s February 8, 2010, page M5). The last sentence of the article reads: “Kodak’s moment has passed”.
For questions or additional information on this blog entry, please contact us.
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Posted on Thursday, January 21, 2010 - by Henry Walter
January Roundup
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you. - Review of 2009
- Review of the Decade
- Forecast for 2010
- What to watch for
- Steady Savers come out ahead
REVIEW OF 2009
After a precipitous fall in the first two months of the year, the market made a stunning comeback, and finished with its best annual gain since 2003.
Specifically, the S&P 500 was up 23% for the year, after rallying 65% from its March 9th lows. The chart below graphically shows the path. The other major indexes followed a similar pattern with the Dow Industrials up 19%, the NASDAQ Composite up 24%, and the Russell 2000 up 25%.
Foreign markets performed even better with the Europe, Australia, and Far East (EAFE) index up 28%. But the real action was in the developing markets with Russia (RSX) gaining 138%, Brazil 83%, India 81% and China 80%. Note these are all the so-called BRIC countries. To illustrate, below is a chart of China’s Shanghai Composite.
REVIEW OF THE DECADE
The 2000s were not a good decade for most investors. On the chart below you can see that the S&P 500 (SPX) closed well below where it started in January 2000. The annualized return over the ten years was -0.7%. However, investors in commodities like gold and oil did very well.
The following chart shows the performance of the Dow by decade, and you will note that the performance in the 2000s was the worst since the 1930s. By some measures, the performance in the 2000s was the worst since records were kept. Adjusted for inflation it is the worst, because inflation in the 2000s was positive, while deflation reigned during the 1930s. According to Charles Jones, finance professor at North Carolina State University, adjusted for inflation, during the 1930s, the average annual gain of the S&P 500 was 1.8%, while during the 2000s the S&P 500 lost 3.3% per year on average. (Source: “Investors Hope the ‘10s beat the’00s” by Tom Lauricella, Wall Street Journal, December 21, 2009.
Mutual fund investors might be interested to know that the best fund of the decade was Ken Heebner’s very volatile CGM Focus, while Fairholme, one of the writer’s favorites, was 5th.
FORECAST FOR 2010
There is a temptation for those who write investment columns to issue a forecast for the New Year. Maybe they think that if they nail it they will become famous! Any way, we resisted the temptation and will rely on Kopin Tan, who writes the Trader column for Barron’s, for some insight. In the December 28th issue, (Stocks Hit ’09 High and a Critical Milestone) he reported that he found three striking things as he plowed through thousands of pages of Market Outlooks issued by Wall Street firms.
The first observation that struck him was how quickly a consensus has formed that 2010 will get off to a strong start but a feeble finish. Those with a contrary persuasion take note.
The second striking thing was the range of divergent, fierce forecasts for both inflation and deflation. Tan’s comment, “But if the masochistic market exists to thwart the greatest number of people, perhaps neither inflation nor deflation will burgeon in 2010.”
And his third striking thing was how many people like gold. Again, contrarians take note.
So we don’t disappoint those who like hard number, below is a table put together by the Bespoke Investment Group. It is updated from time to time, so check in at www.bespokeinvest.typepad.com.
WHAT TO WATCH FOR
Rising interest rates generally have a negative effect on fixed-income investments like bonds, bond funds, and other securities that pay a fixed amount of interest. Rising interest rates also make it more expensive for individuals and corporations to borrow. At the beginning of 2009, the 10-year Treasury note, as shown below, yielded 2.21%. At the end of the year it was 3.84%. A significant and sustained move above 4.0% could be troublesome.
Similarly for the price of oil. The U.S. no longer drives the price of oil, all the growth in demand comes from the developing countries. The rapidly growing middle classes in China, India, and other developing countries want to enjoy the same standard of living enjoyed in the West. Here are some numbers that show the potential demand for oil. Automobiles per 1000 population: USA 765, Taiwan 200-300, Indonesia 21, China 17, India 12. We show Taiwan because it is culturally similar to China. If oil prices continue to rise, as predicted by many economists, it could dampen global economic growth or even abort the recovery.
It is a good idea to keep an eye on gold prices as shown below. An increase to new highs tells a lot about global investors’ confidence or rather lack of confidence in fiat money, and the ability of policy-makers to manage the global economy.
There are a host of other things to worry about such as the second wave of mortgage defaults likely in 2010 and 2011, unemployment, commercial real estate, to name a few.
STEADY SAVERS COME OUT AHEAD
The chart below was prepared by Vanguard and included in an article by Ron Lieber (“For Savers it Was Hardly a Lost Decade” in the January 2, 2010 issue of the New York Times. It demonstrates that making regular contributions and rebalancing annually can produce good results even in a poor decade. But most of the gains came from contributions, you may ask? Yes, but think about the great results this approach would deliver in a good decade like the 1990s. For the full story Google “Steady savers still come out ahead by Ron Lieber, New York Times”.
In the decade ahead there will undoubtedly be a multitude of crises, but also many opportunities for those that don’t slavishly follow the crowd, are flexible, and think for themselves.
We wish all our readers a happy, healthy and prosperous New Year.
For questions or additional information on this blog entry, please contact us.
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