Investment Themes for Q4 Earnings Season

January 19, 2012
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Investment Themes for Q4 Earnings Season

Fourth quarter earnings season is upon us while the market is off to a torrid start to the year. While the S&P 500 is up 4% year-to-date, there are a number of riskier indexes and sectors doing considerably better. The NASDAQ is up 6.3%, the Russell 2000 5.2%, the Hang Seng 7.6%, the Brazilian BOVESPA 9%, and the S&P Homebuilders up 17%. These are stunning returns over a two-week period relative to how difficult it was to simply earn flat index returns plus the dividend yield for all of 2011. The market did this last year in January and February so there is a bit of a deja-vu feel to the start of the year. From higher valuations, it was a rough rest of the year from February on...

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Inflation in Europe is Sticky – Another Reason the ECB to Remain Balanced

January 12, 2012
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Inflation in Europe is Sticky – Another Reason the ECB to Remain Balanced

December inflation data was released this morning in France and Germany. In both countries, the inflation rate was higher than expected and failed to come down relative to prior months. EU harmonized German inflation was reported at 2.3% and EU harmonized French inflation was 2.7%. Two large economies yet to report inflation data are Spain (to be released on Jan 13th) and Italy (to be released on Jan 16th). The stickiness of inflation shouldn’t be a complete surprise because part of the higher inflation in Europe is structural based on labor market and corporate sector rigidities. The process of implementing the structural reforms which have been described as essential will take a long period of time. The positive flow through to inflation dynamics could take years. Despite inflation remaining...

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Philippine Central Bank – Another Emerging Market Set to Ease Monetary Policy in the First Quarter

January 11, 2012
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Philippine Central Bank – Another Emerging Market Set to Ease Monetary Policy in the First Quarter

The Philippines is a very large nation that is off the radar of most mainstream economic analysis. The country has a population of 93 million, and the economy has enormous potential but exhibits inconsistent growth. The economy of the Philippines has a decently developed electronics/semiconductor industry and a large export industry for fruits, palm oil, and coconut oil. The World Bank estimates that the Philippines is the 43rd largest economy in the world yet many investors would be shocked to learn that it is forecast to be top 20 in the world by 2050. Economic growth in the Philippines is volatile based on agricultural gearing and dependence on inflows of overseas remittances. While the Philippines is not a member of the BRICS-2 (CIVETS) it is a member on what...

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Negative German Yields – Implications for Risk Averse Financial Markets

January 10, 2012
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Negative German Yields – Implications for Risk Averse Financial Markets

On Monday, Germany gained entrance to a rarified club of sovereign nations paid to borrow money. This US accomplished this feat during the depths of the financial crisis. Now Germany is able to achieve the same feat during the Eurozone sovereign debt crisis. In a debt auction on Monday, Germany was able to sell 3.9B EUR worth of six-month debt priced at an average yield of -0.0122%. The auction was almost 2x oversubscribed. Investors were willing to pay Germany a little over a basis point to take money for six months and simply give it back. These are fascinating times within financial markets, where there is no term premium for money and such extreme risk aversion. There are a number of items which will have implications for financial markets...

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On Paranormal – A Review of the “New-New Normal”

January 6, 2012
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On Paranormal – A Review of the “New-New Normal”

PARANORMAL: beyond the range of normal experience or scientific explanation, not in accordance with scientific laws. A great friend of mine, and incredibly savvy investor, recently pointed me to Bill Gross’ January 2012 Investment Outlook: “Towards the Paranormal”. He suggested it was an intriguing, provocative, and worthwhile read. After reading the four page monthly I immediately agreed with all of those qualifications even though aspects of the paranormal thesis don’t sit with me. After pondering for a couple of days, here are my observations (Bill Gross, if you are a Crackerjack Finance reader, please feel free to comment at any time). Now would be the time to read the original piece on the PIMCO website to get much more out of today’s thoughts. The financial markets are slowly imploding...

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Spain & Germany – In Sickness and in Health

January 4, 2012
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Spain & Germany – In Sickness and in Health

The plan forward with the Eurozone crisis is the German plan forward. Germany proposed closer fiscal union and increased austerity for EU-17 nations with high deficits and/or high debt burdens. This path suits German interests well because there is little that needs to be changed. Unfortunately from Spain’s standpoint, the German path forward is not what Spain needs. This dynamic is highlighted with yesterday’s unemployment releases. Spain hit a 22.8% unemployment rate, which is an all-time high, while Germany released a 6.8% unemployment rate, which represents a new low since German reunification. It is clear that Spain needs dramatically lower interest rates relative to appropriate monetary policy set rates for Germany. It is also clear that Spain needs a drastically lower currency value relative to the currency value which...

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2012 Global Investment Themes and Predictions

January 3, 2012
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2012 Global Investment Themes and Predictions

In 2011, the stock market experienced some dramatic swings, heightened volatility, managed some months of tremendous strength and sickening weakness. After an exhausting ride, the S&P 500 index returned to precisely where it started. For those who appreciate extreme precision, the market was down on the year based on the second decimal point of the index. The S&P 500 started the year at 1,257.64 and officially closed at 1,257.60. That is about a third of a basis point down and the reason the final index return has been recorded as: (0.00%). Of course the actual return that investors received includes dividends, and on this measure the S&P 500 total return was 2.11%. After clarifying the details, the market essentially tread water for the year. We commence 2012 with much...

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Sears Holdings (SHLD) – Flawed Strategic Experiment Results in Retailing Train Wreck – AutoZone and Sears Comparison

December 28, 2011
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Sears Holdings (SHLD) – Flawed Strategic Experiment Results in Retailing Train Wreck – AutoZone and Sears Comparison

Sears Holdings pre-reported Q4 results which showed a rapid deterioration yesterday. The most alarming item in the press release was the rapid deterioration in sales trends at both Sears and Kmart. Sears comparable store sales trends ran -3.3% in the YTD period (which is a month away from the full year) while the trends through the first two months of the 4th quarter came in at -6.0%. Kmart sales slowed from -1.8% to -4.4% in the YTD to QTD period. Retailing is tough and you can’t run a retailer without regard for the shopping experience. Eddie Lampert attempted to replicate the magic formula he applied to AutoZone (AZO) with Sears Holdings. The experiment has failed in spectacular fashion. In order to understand what went wrong with Sears it is...

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Santa Hits the Beach as Warm Weather Continues in December

December 22, 2011
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Santa Hits the Beach as Warm Weather Continues in December

The warmth and subtle humidity in the air stirs emotions as one envisions heading to the ball park for opening day, preparing for the start of a new fishing season, or produces visuals (perhaps with dread) of how that new swimsuit or bikini will fit. Oh wait, it’s December 22nd! The northeast part of the United States feels like spring, it has been this way all through the month of December. While quite enjoyable and enabling a number of extra runs, outdoor tennis, and pleasurable strolls through the park, the weather is unseasonable enough to impact typical economic seasonal patterns. It’s been somewhat of a running joke in New York City: “Don’t worry it will eventually get really cold, it always does!” Adages be damned, as Mother Nature has surprised us...

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Lack of Confidence – A Key Driver of Investment Returns in 2011 – An Opportunity and Risk for 2012

December 20, 2011
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Lack of Confidence – A Key Driver of Investment Returns in 2011 – An Opportunity and Risk for 2012

2011 has been a difficult year for most investors. Market sentiment oscillated throughout the year and generating returns has been exceedingly difficult to come by, let alone maintain. The world experienced at least three distinct crisis; Japanese nuclear disaster, Arab Spring, and Sovereign Debt contagion through Europe. All three of these events were enough to knock the market down for a spell but the global economy was resilient enough to keep growing. Growing global GDP created an environment where corporate earnings rose, achieving new highs on the year. S&P 500 earnings will come in at close to $97 in 2011, up from about $86.50 in 2010. Earnings will register double digit growth of around 12% while the S&P is down 4% ytd. It isn’t difficult to see that the...

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China Moves Towards Opening Domestic A-Share Equity Market and Hints of Policy Easing Continue

December 16, 2011
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China Moves Towards Opening Domestic A-Share Equity Market and Hints of Policy Easing Continue

China had an interesting announcement after the close of trading last night which entails opening up the mainland securities markets to Hong Kong investors. According to regulators, China National Radio reports the government is going to trial quota issuance to Hong Kong securities firms for mainland investment. Securities brokerages and fund management firms will be able to use Yuan proceeds raised in Hong Kong to invest in domestic securities markets. China is approving 20 billion Yuan for the initial trial of quota which will be investible up to 80% in fixed income markets and 20% in equity markets. There isn’t much information out at this stage, but opening the domestic market up to a wider array of investors is the first step towards opening the market in general. The...

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Investing Ahead of a European Recession

December 14, 2011
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Investing Ahead of a European Recession

Investing ahead of a recession is like a trip to the dentist for a filling when the Novocain isn’t quite right. You know you are in for some pain, but it’s unclear just how much, and how long it will last. Europe is accepting the German path forward, which will at a minimum, lead to plenty of pain for many countries. Spain, Portugal, Greece, Belgium, Italy, and France are all experiencing, or likely to experience, a recession. Forward looking indicators are declining, confidence is dashed, austerity being implemented, European financial assets down sharply, and interest rates higher. The ECB is taking a minimalist approach to fighting the recession and the 17 countries in the Eurozone have different agendas, interests, and policy aims. In the background of the economic recession, there...

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The Rest of Europe Can’t be German

December 12, 2011
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The Rest of Europe Can’t be German

The EU Summit and ECB meeting which transpired last week are likely to be the final supporting actions by Eurozone officials this year. The tack forward for Europe has been clarified; move ahead with the long and arduous process of fiscal unification, supported by a reactive ECB. The path ensures two outcomes; that there will be flare ups along the way which will negatively impact sovereign debt/currency markets, and that Europe’s economies will continue to slow as the mending process is drawn out. The way forward will be the German way forward, and the rest of Europe will need to accept it in the near term. Germany has the strongest and most robust economy in the Eurozone. German unemployment is low and the euro has already depreciated to levels...

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ECB Cuts Rates 25 Basis Points to 1% – Hawkish Press Conference Q&A Squashes Hopes of Sovereign Debt Purchases in Larger Amounts

December 8, 2011
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ECB Cuts Rates 25 Basis Points to 1% – Hawkish Press Conference Q&A Squashes Hopes of Sovereign Debt Purchases in Larger Amounts

The ECB issued a terse press release detailing an interest rate cut for the main refinancing operations of the Eurosystem (from 1.25% to 1.0%) commencing on December 14th. In addition, the ECB cut rates on the marginal lending facility and deposit facility by 25 basis points. This move was widely expected and had a limited impact on the euro or equity markets. The press conference and Q&A (45 minutes later) with financial reporters was where the real action took place. The only market friendly outcome was the announcement to extend lending to European banks from a one-year to a three-year term. The collateral requirements for these loans are also being loosened. The press conference was predominantly hawkish. When asked about hints earlier in the week that the ECB could...

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Standard & Poors Places Europe on Negative Credit Watch – World Set for Downgrade!?

December 6, 2011
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Standard & Poors Places Europe on Negative Credit Watch – World Set for Downgrade!?

I find it rather ironic that Standard & Poors placed the EU-17 on negative credit watch on the same day the market provided the strongest one-day positive assessment to peripheral Europe’s sovereign credit outlook since August (borrowing costs were down sharply on Monday). I have no issue with actually conducting a downgrade of the entire EU-17, but question how this is of any meaning or particular use to investors? Standard & Poors changed its methodology, and incorporated its own political forecasts into the ratings process, which renders the conclusions difficult to interpret. Not that the ratings were of much predictive use in determining credit quality before this change (see 2008). The question now arises; how does one utilize information from a mostly backward looking set of ratio based credit...

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Mario Monti Announces Serious Austerity Plan for Italy – 2013 Balanced Budget Target Leads to Sovereign Debt Rally

December 5, 2011
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Mario Monti Announces Serious Austerity Plan for Italy – 2013 Balanced Budget Target Leads to Sovereign Debt Rally

Italian Prime Minister, Mario Monti, announced sweeping austerity measures and reforms, bolstering confidence in Italian sovereign debt markets. Monti’s plan includes tax increases, government spending cuts, pension savings and raising the retirement age. Italy needs to enact these reforms over the next couple of years, and there are some political risks to implementation, but the immediate market response is positive for this round of announcements as opposed to the cynical reactions in the summer and fall. Italian 10-year borrowing costs dropped from 6.68% to 6.10%. While it is dangerous to extrapolate any daily changes in sovereign debt yields due to the vagaries of European markets, this change is driven by a major announcement which would impact actual fundamentals (again if implemented) and the change in yields is simply a...

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CJF Read of the Week – Acting Man: “The ECB and Balance Sheet Recessions”

December 4, 2011
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CJF Read of the Week – Acting Man: “The ECB and Balance Sheet Recessions”

Pater Tenebrarum, writer for Acting Man, did a great job of putting together a timely and comprehensive update on Mario Draghi’s speech to European Parliament. He highlights the hints that Mario Draghi and the ECB are moving closer towards monetary pump priming. Some great charts, relevant excerpts, and good humor. Click for the full piece at Acting Man    

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