Search Results
Results 51–94
of 94 found.
Digbys Umbrella and a Dinner to Remember
The US economy is on a painfully slow road. It is recovering. Jobs numbers are better, even though some hiring in the first quarter may have been brought forward by mild weather. Production, manufacturing and exports, all signs of regained competitiveness in the US, are showing steady improvements. And the government sector is contracting. Not on purpose mind you, but jumping off a cliff and letting inertia do the work result in the same end. Above all of this, we have a Fed using every monetary policy at their disposal to try and promote growth and employment.
Trading For Now, No Breakout Yet
Markets seem to be taking the broader economic news in their stride. The FOMC confirmed its policy, so no new buying but also no unwind on the balance sheet. The demand for safe assets remains very high and that leads us straight to MBS where we maintain a very over-weight position. Equities are drifting higher, which we like as we increased the position some weeks ago. It helps that positive surprises outnumber negative surprises by 3:1 so far this earnings season. The market tends to overreact to news which suggests there's lack of conviction. But at least there's no over-valuation.
Hold In There...Still Good News
First quarter markets flirted with euphoria. Jobs numbers were good, the Fed kept its head and confirmed a stable policy, Europe was quieted through the LTRO feedstock and corporate earnings looked good with the bank stress tests and a California fruit company powering ahead. But, understandably, and as with any attention disorder patient, markets need caring support. The catalyst for the recent drops was surprisingly benign: Spain and Italy are finding it tough to implement austerity, the Fed is not promising QE and earnings are going to be spotty. Still we haven't changed our outlook.
Policy, Numbers and Markets. Still good.
Commentary continues to use pre-2008 data as a baseline, whether for economic data, household behavior or corporate prosperity. This is a mistake. We remain in a liquidity trap. This happens 1) when asset prices fall 2) the private sector delevers 3) credit demand becomes inelastic, i.e. immune to price 4) savings increase 5) income balances between the private, corporate, net export and government sectors distort and vi) the reluctant leakages destroy aggregate demand. Throw in higher credit standards and necessary re-regulation and you can see why austerity economics is the final bullet.
Good Quarter. More to Come.
Good week ending an even better quarter. We like this rally because i) large cap stocks were in line with small and mid, that means less speculative juice and more reality investing ii) GTs came unglued fast but iii) Baa spreads came in thanks to low net issuance and high demand, again crushing the crowding out theorists but, no matter, iv) Europe came back from the brink and fewer daily catastrophe headlines and v) the Fed gave plenty of information to not expect a policy reversal. This is solid stuff and markets feel better than this time in 2010 and 2011 when we saw spring sell offs.
The demise of risk-on / risk-off and the emergence of heteroscedasticity
by Jason Doiron of Sentinel Investments,
I estimate that I inadvertently watch 12 hours of financial news programming per day. Too much television? perhaps, but for a portfolio manager it has become an occupational necessity. One of the greatest benefits to watching this much television is that I can recite verbatim every commercial that plays on CNBC with no clue which company is sponsoring the ad - pig on a skateboard anyone? The other benefit is that I am provided with a front row seat to a rogues gallery of pundits who describe the complexities of the financial markets through sound bites.
A Turning Point
Bottom Line: Bonds are now outside of the recent range, especially in the 30-year. We could see another 10bp retrace to 3.50%. Equities have had a good run but still have reasonable valuations. New money goes to IG bonds. Spreads are approaching their long-term mean but demand from natural buyers is high.
Will he? Won't he?
Will oil prices hurt the economy? No Recent good news on the economy has come with warnings of possible demand destruction from higher oil. First, lets stress that QE does not cause higher oil prices. There are too many iterations between increasing bank reserves and the trading firepower needed to drive spot oil prices sharply higher. And while we have seen an increase since September, we're no higher than a year ago. During that time economic prospects dimmed then brightened MENA troubles flared, receded and then grew, and Asian demand steadily rose. But there are reasons to be sanguine.
Big Headlines...Not Much Action
Bottom Line: Volume: There's still no major conviction in the rally. Too many cautious investors out there keeping a wary eye on their gains. Russell 2000: has broken down recently; the mega caps have overshadowed it. Employment: Still the most sensitive number. Anything above 150,000 is fine but confidence will be shaken if it's much below. AAPL: The most over-owned stock in the market and accounted for about 20% of February gains. The Fed is sticking to its script: and with the growth numbers, this means that GT10s are likely to remain exactly where they are today.
Brute Force and Two Serious Problems
The brute force of liquidity driven markets is waning. Earnings season draws in and there were enough negative surprises, about 30% of reporting companies, to take the edge off the rally. As of writing, we're up over 6% YTD on SPX [1] but with little decisive break out in the last three weeks. Why? Well, the culprits are: Greece: Greece has been punching well above its weight as a pain for some time. China: After a pretty awful 2011, when stocks fell 20% and remain at about half the 2007 peak, inflation, housing and net exports remain a problem.
No Inflation and Plenty of Money
We are still fighting: worldwide fiscal drag (aka the dogma of expansionary austerity) with accommodative money polices. The PBOC joined in with some RRR cuts, although these do not mean much in the Chinese loan-quota system. And the BOJ took steps to weaken the yen. CBs are in control. Government fiscal policies remain ineffectual. Bottom Line: US government bonds remain in a tight band of 190-210. The New Issue Market is strong with low end investment grade names trading at less than 314 over GT10s. We continue to like US equities.
Savers Are Not A Special Class
The self-reinforcing struggles between risk appetite and liquidity continued this week. Since the FOMC meeting, LTRO kicking in, easier policies from the ECB and a run of good economic numbers, we're in rally territory for equities here and abroad. The good news is that this has not come at the expense of other asset classes...so gold, bonds, US$, commodities are all holding up well. The liquidity push cannot have come at a better time. Private sectors are still building precautionary savings and public deficits are closing...
Fed Policies Pay Off
The forces of disillusion have glowed recently. We have had unsubtle debates on the Fed debasing money, the ECB providing unwarranted support and threats that the economy was going to lurch into a double dip (a reasonable but narrow view) or accelerate into hyperinflation (yes, really). So this was a week of unequivocal good news.
Sentinel's Top 10 Predictions For 2012
i) the US is emerging stronger from this recovery than any other major economy ii) Europes woes are temporarily eased and iii) China is past the worst of its inflation scares. If that sounds muted, it is. The damage done to the economies through irresponsible lending and uncontrolled asset price inflation (the US) or unencumbered vendor financing and overvalued exchange rates (EU) was immense. Both meant huge banking messes. And households are the only ones who clean up banking messes. In time. Slowly. And thats where the world stands.
When Two Percent is Good
FOMC marked new ground by placing a date on any change in the fed funds rate out to 2014, a full year beyond the date put out last year. This is exactly the playbook described by the Fed Chairman nearly ten years ago. He is shaping interest conditions as obviously as he can. He would prefer a policy of conditionality, say to unemployment or inflation (the case for nominal GDP is probably too radical for now) but, if nothing, he is a pragmatist and knows he would not carry all the board with him. So the next best thing is a fixed period.
Animate and Repress
Europe is in a state of suspended animation, neither moving nor acting on policy. After weeks of spurious deadlines, the markets settled into quiet acceptance that Greece is a hopeless case but that, for now, imminent collapse is not in the cards. Some of the best performing bond markets this week have been the worst of the worst...Ireland, Italy and Greece long bonds are up over 5%. It's not all good. Greek CDS have virtually ceased to exist and notional amounts on the peripherals have shrunk. No one wants to stand behind a restructuring, posing as PSI haircut, masquerading as default.
In Praise of Radhanath Sikdar
This week we saw: France and Austria downgraded, Greece take a step closer to default, new bond auctions from Spain and Italy that, while below last month's, had pitifully low bid/cover ratios and Hungary lurch again in its bond prices and currency...down 11% and 22% in last 3 months. On the other side of the trade, Germany auctioned 6-month paper at a negative 0.012%. So this is what happens: fiscal consolidation hits private consumption and investment without (because of a pegged exchange rate system) a rise in net exports or higher lending. Mr. Sikdar would have figured this out long ago.
Bad Medicine, Bad Policies
We can see the results of sensible monetary policy and not so sensible fiscal policy: slow recovery of manufacturing and service jobs, decline in all government jobs and gradually lower participation rates. Expect these trends to continue. We find 30-year bonds with a near 20 duration very tradable. The YTD price swing is already over 4% and with a 3.0% yield; we must be careful that price changes not wipe our coupon returns. Stocks offer attractive entry points but we look at individual companies, balance sheets and management more than the overall asset class.
Somali Sense of Humor
The fifth review on the Greek financing package makes grim reading: 1) bank deposit outflows equivalent to 15% of GDP 2) privatization sales proceeds revised down to less than 3% of GDP 3) GDP to fall more in 2011 than estimated and again next year, bringing the cumulative shrinkage to 15% but 4) debt to remain at over 140% for most of the next decade, assuming a 4% paid rate not the 34% market rate and 5) labor productivity deteriorating. In another sign of euro dysfunction, the Bundesbank refused to participate in a general IMF trust for the eurozone.
Teutoburg Forest Remembered
The European Council agreed to some startling actions to stem the crisis: 1) all fiscal deficits not to exceed 0.5% of GDP 2) excessive deficit rules to come into effect when they breach 3% of GDP 3) the Commission to sign off on national budgets and 4) enforce sanctions if debt exceeds 60% of GDP with 5) fiscal integration to follow and 6) EFSF and ESM capital to remain at around 500bn with another 200bn committed to the IMF. The markets' reactions were generally favorable but I doubt any of this will hold.
Engines of Doctrine
European leaders have a tough time stringing together a coherent sentence but the words go roughly like this: 1) drive down deficits 2) pummel inflation 3) encourage companies to invest more and 4) households to spend more and, thus, fingers crossed, 5) create employment. The problem with this is that output gaps drive down aggregate demand and prices. And no business executive will invest while demand is leaking. And so will not increase employment. This standard trap is exacerbated when there is no central bank that can do what central banks do.
No Direction Home
The conceit of Ancient Rome: In Imperial Rome, roads out of the city marked only the distance from the city, not to anywhere. All that counted was how far or near you were from it. The ECB adopts a similar centricity: all that matters is to keep prices stable. Nothing else. Which is why euro bonds continue to retreat with Italy and Spain hitting the 7% club for their 10-year paper. Unemployment can remain at 10% for three years. Growth can slow to 0.2%. But while inflation stays above the 2% target, all bets are off to ease the pain.
No Direction Home
The conceit of Ancient Rome: In Imperial Rome, roads out of the city marked only the distance from the city, not to anywhere. All that counted was how far or near you were from it. The ECB adopts a similar centricity: all that matters is to keep prices stable. Nothing else. Which is why euro bonds continue to retreat with Italy and Spain hitting the 7% club for their 10-year paper. Unemployment can remain at 10% for three years. Growth can slow to 0.2%. But while inflation stays above the 2% target, all bets are off to ease the pain.
Colditz and the Trevi Fountain
Bottom Line: Keeping volatility down. Raising cash and using the trading opportunities in bonds. Trimming international especially Europe; DAX is 11% off October lows; but sentiment is very negative. This bond rally is all about the need to cover much higher margins on repos for European and Italian bonds but could have more to go.
Troubles Not Shrinking
US employment was unequivocally better in October despite the headline NFP of 80,000. Revisions in recent months mean that since June, the economy created 466,000 new jobs against first estimates of 318,000. Since March in 2010, the private sector created 3.9m new jobs while the government sector lost 1m. The ratio of government to private jobs is back to where it was in 2002. This is not a jobless recovery. It is a slow recovery with the private sector doing well under contorted and aimless fiscal drag. Corporate Profits: Productivity rose again in Q3.
Debarred from Certainty
The innocent pre-2008 are days gone. Expect volatility. Markets distrust most of the news and theres little conviction in any one direction. Vanilla investors are on the sidelines. Day to day trading is mostly position covering and range bound investing. Thats fine with us. The more algos and high frequency trading noise, the easier to spot fundamental anomalies. The challenge is to keep fluid between seemingly different but highly correlated markets.
Separate Tables
About two thirds of companies have beaten expectations and growth is around 16%. If the market holds at 1280 pixel-time level, we will have seen a 17% retracement of the 22% summer correction. Equities look well supported but NFLX, AMZN and GMCR [1] show how fragile is confidence. The ever-reliable Fed surveys from Richmond, Chicago and Kansas all showed improvements with very little sign of price increases. Bottom Line: Some worry that the sell off in bonds may be too rapid but we're comfortable with domestic stocks and, increasingly, international.
A Matter of Sentiment
Greece is no longer the issue. It's a proxy for how to manage the other sovereign debts and recapitalize the banks. In this, all roads lead to Germany. It is the only economy capable of leading or backstopping the various funding institutions. In the last week, bond markets almost gave up on France. Until Germany agrees to some sort of European-wide bond or bank recapitalization, expect more of the same. Meanwhile, banks will reduce their loans to replenish capital and the economy will teeter on recession.
Crossing and Recrossing
Heading into another G20 weekend meeting. There are plenty of ideas around: IMF backing, strategic defaults, broader EFSF guarantees and infusions of bank capital. We would put the probability of any breakthrough at less than 10%, which means more drift. Bond spreads narrowed and the 30-year auction bid-to-cover ratio was significantly better. So much for crowding out. The market rallied but does not feel particularly underpinned.
The Mists Disperse
In both bonds and equities, we're back to mid-August levels. It was not a pleasant ride. The trigger was the debt shenanigans (never good to threaten wage earners) and the European Spartans vs. Sybarites argument. It's quieter now, which gives us thinking time... As Jason wrote here last week, we're not sanguine on rates. Bull market sell-offs are ugly affairs. GT10s could hit 2.25% without touching the sides. With earnings season coming up, we are on the hunt for equity bargains financed with long bonds.
There's More to the Truth Than Just the Facts
by Jason Doiron of Sentinel Investments,
It is typical for investors to develop a sanguine view on interest rate risk during market environments such as these. This point is compounded by the unprecedented involvement by the Federal Reserve in all tenors of the yield curve. Operation Twist has allowed the Fed to manipulate the entire term structure of interest rates in the hope of stimulating additional economic activity. Although the old adage of "don't fight the Fed" certainly holds true for now, we would caution investors on developing an overly sanguine view of interest rate risk.
Yield Ahead
So far this month the equity strategy teams of both Morgan Stanley and Bank of America Merrill Lynch have published pieces in which they extolled the current attractiveness of dividend paying stocks. At Sentinel, we couldn't agree more with the timeliness of this sentiment, although the notion of "yield support" might offer little comfort to equity investors experiencing a daily decline in stock prices equivalent to a year's worth of dividend income. Prospects for global growth have become decidedly less certain of late and corporate earnings growth expectations are being tempered.
Diogenes in the Barrel
Its a good time to sit tight and stay with cash. Its not uncertainty. We can live with that. Its the certainty of temporary impasse. Heres why. When Europe gets it wrong it gets it really wrong. The cycle of tighter budgets, lower growth, higher deficits and higher bond yields is so manifest that you would think some coordinated policy response would be front and center. Not a bit of it. Greece is fast approaching the point where a declining economy cannot support debt repayments. It does not matter if the country embraces frugality or not. There is simply not enough juice to pay off debt.
Thought of the Week: Confused Alarms
Analysts are revising earnings forecasts down. Savings are merely funding deficits. They're not headed into productive assets or consumption. Here's why. Bruising in Europe: This is no vigilante raid. Markets are no more organized than your average riot. But they can still inflict damage. Bearish sentiment prevails. We're stuck in a low yield curve environment, which means that quality assets will stabilize or rally. Eventually. We're liquid and picking up stocks in mid cap.
Are We There Yet?
A rogue summer. Markets fretted, politicos dissembled, bankers flinched. So that leads us to growth fears: 3Q is of course weaker but not enough to tip into recession. Why? i) there's no pressure in the economy and volatile measures like inventories and orders are holding up ii) personal and disposable income are barely moving; confidence is flat but that does not mean wholesale retrenchment iii) no inflation, either at the PCE, broad deflator, core or CPI level. The cumulative one year jobs story so far: private +1.7m and government -0.5m.
A quick update on the S&P downgrade
Bond investors like nothing more than low growth, high unemployment and low inflation. In an asset class of finite return, their only concern is to be paid in real, non-depreciated currency. Fine. Japan is an example where gov bonds returned 600% in the two recent decades to a dollar investor, and stocks fell by two thirds. Many commentators are seemingly fine with that. We disagree. Some fiscal stimulus and inflation can be very good for the economy at large. Bond vigis have a visceral fear of both. If nothing else, the downgrade can start a sensible discussion on the growth/debt trade off.
The Brightening Air
A casual empiricist would conclude that the US economy is troubled: weak GNP, employment, housing and slowdowns in the important ISM and Fed surveys. But a longer perspective shows this is entirely in keeping with a recovery from a deep-seated financial and borrowing crisis. There are many signs that the US is picking itself up: manufacturing productivity, private sector job creation, corporate profitability and household deleveraging. Monetary policy has saved the economy from the insidious threat of deflation. Fiscal policy is meandering. Some of the answers are right in front of us.
Tolerable Accuracy
It paid to be practical in 2010. We started the year with relief that we averted catastrophe but were dimly aware it would be tough. How could it not be? Financial markets were in disrepair and the economy looked like it had only just made it through a re-stocking cycle. All other parts of the economy looked down for the count. But in the end, despite euro sovereign emergencies, deflationary fears and a phony currency war, both the real economy and financial assets had a strong year.
Look For the Silver Lining
It is not a good time to buy and hold but there should be excellent one-to-two-year holding periods. Pick stocks with strong financials. Be prepared to reallocate. Stay invested in bonds: With the Fed ready to become buyer of first resort, we could see the 10-year yield fall below 2.5 percent. Real yields are high. However, do not let the search for yield compromise liquidity. The market trades on a narrow front and low volume. Less than 112 stocks account for 50 percent of turnover. That leaves thin numbers for the remaining 17,000 listed companies. Expect volatility.
Back to the Old Homestead
America is learning the hard way that a home was meant to be a place of dwelling, family, and community and not an ATM or piggy bank. Sure, lots of people made a boatload of money as the housing market appreciated, but many more are suffering with its downturn. As such, there are many calls for reforms in the U.S. mortgage-finance system. Sentinel's David Brownlee and Jason Doiron share their thoughts on proposed reforms for mortgage-debt forgiveness programs, mortgage-backed securities and mortgage origination.
Pay No Attention to the Headlines
Market valuations are attractive, especially after the recent correction to below 1,100 on the S&P. What should work is buying companies with strong and sustainable cash flows and proven management. What will not work is chasing risk, and investing in companies that dilute shareholders and operate with high leverage. Don't look for an immediate catalyst. This is a market where stealth, opportunity buying and stock picking work. If you hear the word 'momentum,' run.
Market Insights
Christian W. Thwaites takes a deeper look at some of todays big issues. He answers the question Inflation or Deflation, investigates the Eurozone collapse and explains the plight of the U.S. consumer. As the summer begins, Thwaites gives his outlook on the market and some simple rules to follow for a strong financial future.
Deconstructing the Great Inflation Myth
by Jason Doiron of Sentinel Investments,
Inflation does not seem to be a serious risk, at least in the near term. Significant decreases in the velocity of money are offsetting the impact of any increase in the money supply as a result of fiscal and monetary stimulus. Capacity utilization remains at about 74 percent of potential output. And about 17 percent of workers are still either unemployed or underemployed.
Results 51–94
of 94 found.
