Posts filed under ‘Themes – Trends’
Markets Race Out of 2012 Gate
Article includes excerpts from Sidoxia Capital Management’s 2/1/2012 newsletter. Subscribe on right side of page.
Equity markets largely remained caged in during 2011, but U.S. stocks came racing out of the gate at the beginning of 2012. The S&P 500 index rose +4.4% in January; the Dow Jones Industrials climbed +3.4%; and the NASDAQ index sprinted out to a +8.0% return. Broader concerns have not disappeared over a European financial meltdown, high U.S. unemployment, and large unsustainable debts and deficits, but several key factors are providing firmer footing for financial race horses in 2012:
• Record Corporate Profits: 2012 S&P operating profits were recently forecasted to reach a record level of $106, or +9% versus a year ago. Accelerating GDP (Gross Domestic Product Growth) to +2.8% in the fourth quarter also provided a tailwind to corporations.
• Mountains of Cash: Companies are sitting on record levels of cash. In late 2011, U.S. non-financial corporations were sitting on $1.73 trillion in cash, which was +50% higher as a percentage of assets relative to 2007 when the credit crunch began in earnest.
• Employment Trends Improving: It’s difficult to fall off the floor, but since the unemployment rate peaked at 10.2% in October 2009, the rate has slowly improved to 8.5% today. Data junkies need not fret – we have fresh new employment numbers to look at this Friday.
• Consumer Optimism on Rise: The University of Michigan’s consumer sentiment index showed optimism improved in January to the highest level in almost a year, increasing to 75.0 from 69.9 in December.
• Federal Reserve to the Rescue: Federal Reserve Chairman, Ben Bernanke, and the Fed recently announced the extension of their 0% interest rate policy, designed to assist economic expansion, through the end of 2014. In addition, Bernanke did not rule out further stimulative asset purchases (a.k.a., QE3 or quantitative easing) if necessary. If executed as planned, this dovish stance will extend for an unprecedented six year period (2008 -2014).
Europe on the Comeback Trail?
Source: Calafia Beach Pundit
Europe is by no means out of the woods and tracking the day to day volatility of the happenings overseas can be a difficult chore. One fairly easy way to track the European progress (or lack thereof) is by following the interest rate trends in the PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain). Quite simply, higher interest rates generally mean more uncertainty and risk, while lower interest rates mean more confidence and certainty. The bad news is that Greece is still in the midst of a very complex restructuring of its debt, which means Greek interest rates have been exploding upwards and investors are bracing for significant losses on their sovereign debt investments. Portugal is not in as bad shape as Greece, but the trends have been moving in a negative direction. The good news, as you can see from the chart above (Calafia Beach Pundit), is that interest rates in Ireland, Italy and Spain have been constructively moving lower thanks to austerity measures, European Central Bank (ECB) actions, and coordination of eurozone policies to create more unity and fiscal accountability.
Political Horse Race
Source: Real Clear Politics via The Financial Times
The other horse race going on now is the battle for the Republican presidential nomination between former Massachusetts governor Mitt Romney and former House of Representatives Speaker Newt Gingrich. Some increased feistiness mixed with a little Super-Pac TV smear campaigns helped whip Romney’s horse to a decisive victory in Florida – Gingrich ended up losing by a whopping 14%. Unlike traditional horse races, we don’t know how long this Republican primary race will last, but chances are this thing should be wrapped up by “Super Tuesday” on March 6th when there will be 10 simultaneous primaries and caucuses. Romney may be the lead horse now, but we are likely to see a few more horses drop out before all is said and done.
Flies in the Ointment
As indicated previously, although 2012 has gotten off to a strong start, there are still some flies in the ointment:
• European Crisis Not Over: Many European countries are at or near recessionary levels. The U.S. may be insulated from some of the weakness, but is not completely immune from the European financial crisis. Weaker fourth quarter revenue growth was suffered by companies like Exxon Mobil Corp (XOM), Citigroup Inc. (C), JP Morgan Chase & Co (JPM), Microsoft Corp (MSFT), and IBM, in part because of European exposure.
• Slowing Profit Growth: Although at record levels, profit growth is slowing and peak profit margins are starting to feel the pressure. Only so much cost-cutting can be done before growth initiatives, such as hiring, must be implemented to boost profits.
• Election Uncertainty: As mentioned earlier, 2012 is a presidential election year, and policy uncertainty and political gridlock have the potential of further spooking investors. Much of these issues is not new news to the financial markets. Rather than reading stale, old headlines of the multi-year financial crisis, determining what happens next and ascertaining how much uncertainty is already factored into current asset prices is a much more constructive exercise.
Stocks on Sale for a Discount
Source: Calafia Beach Pundit
A lot of the previous concerns (flies) mentioned is not new news to investors and many of these worries are already factored into the cheap equity prices we are witnessing. If everything was all roses, stocks would not be selling for a significant discount to the long-term averages.
A key ratio measuring the priceyness of the stock market is the Price/Earnings (P/E) ratio. History has taught us the best long-term returns have been earned when purchases were made at lower P/E ratio levels. As you can see from the 60-year chart above (Calafia Beach Pundit), stocks can become cheaper (resulting in lower P/Es) for many years, similar to the challenging period experienced through the early 1980s and somewhat analogous to the lower P/E ratios we are presently witnessing (estimated 2012 P/E of approximately 12.4). However, the major difference between then and now is that the Federal Funds interest rate was about 20% back in the early-’80s, while the same rate is closer to 0% currently. Simple math and logic tell us that stocks and other asset-based earnings streams deserve higher prices in periods of low interest rates like today.
We are only one month through the 2012 financial market race, so it much too early to declare a Triple Crown victory, but we are off to a nice start. As I’ve said before, investing has arguably never been as difficult as it is today, but investing has also never been as important. Inflation, whether you are talking about food, energy, healthcare, leisure, or educational costs continue to grind higher. Burying your head in the sand or stuffing your money in low yielding assets may work for a wealthy few and feel good in the short-run, but for much of the masses the destructive inflation-eroding characteristics of purported “safe investments” will likely do more damage than good in the long-run. A low-cost diversified global portfolio of thoroughbred investments that balances income and growth with your risk tolerance and time horizon is a better way to maneuver yourself to the investment winner’s circle.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in XOM, MSFT, JPM, IBM, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
2011: Beating Batter into Flat Pancake
As it turns out, 2011 can be characterized as the year of the pancake…the flat pancake. While the Dow Jones Industrial Average (Dow) rose about 6% this year (its third consecutive annual gain), the S&P 500 ended the year flat at 1257.6 (-0.003%), the smallest yearly move in more than four decades. Along the way in 2011, there was plenty of violent beating and whipping of the lumpy pancake batter before the flat cake was cooked for the year. With respect to the financial markets, the 2011 lumps came in the form of various unsavory events:
* Never-Ending Eurozone Financial Saga: After Ireland and Portugal sought bailouts, Greece added its negligent financial storyline to the financial soap opera. Whether European government leaders can manage out-of-control deficits and debt loads will determine if Greece and other peripheral countries will topple larger countries like Italy and Spain.
* Credit Rating Downgrade: Standard & Poor’s, the highest profile credit rating agency, downgraded the U.S.’s long-term debt rating to AA+ from AAA due to high debt levels and Congressional legislators inability to hammer out a deficit-reduction plan during the debt ceiling negotiations.
* Japanese Earthquake and Tsunami: Japan and the global economy were rocked by a magnitude 9.0 earthquake and tsunami on March 11, 2011, which resulted in 15,844 people dead and 3,451 people missing. The ripple effects are still being felt through large industries like the automobile and electronics industries.
* Arab Spring Protests: Protesters throughout the Middle East and North Africa provided additional uncertainty to the global political map as demonstrators demanded regime change and more political freedoms. In the long-run, removing oppressive leaders like Hosni Mubarak (Egypt’s leader for 30 years), Muammar Gadaffi (Libya’s leader for 42 years), and Zine al-Abidine Ben Ali (Tunisia’s president for 23 years) should be beneficial for global stability, but in the short-run, how the new leadership vacuum will be filled remains ambiguous.
* Occupy Movement Voices Disapproval: The Occupy Wall Street movement began on September 17, 2011 in Liberty Square in Manhattan’s Financial District, and spread to over 100 cities in the U.S. There has not been a cohesive articulated agenda, but a common thread underlying all the Occupy movements is a sense that 99% of the population is being treated unfairly due to a flawed corrupt system controlled by Wall Street that is feeding the richest 1%.
All these lumps experienced in 2011 were not settling to investors’ stomachs. As a result individuals continued the trend of piling into bonds, in hopes of soothing their investment tummies. Long-term Treasury prices spiked upwards in 2011 (+29% as measured by TLT Treasury ETF) and soaring 10-year Treasury note prices pushed yields (1.87%) below yields on S&P 500 equities (2.1%). Despite a more than 3,400 point increase in the Dow (+39%) since the end of 2008, investors have still poured $774 billion into bonds versus $33 billion yanked from equities, according to EPFR Global. Over-weighting bonds makes sense for some, including retirees on fixed budgets, but many investors should brace for an inevitable reversal in bond prices. Eventually, the sweet taste of safety achieved from bond appreciation will turn to heartburn, once interest rates reverse their 30 year trend of declines.
Syrupy Factors Help Sweeten Pancakes
Although the aforementioned factors lead to historically high volatility and flat flavors in 2011, there are also some countering sweet reasons that make equities look more palatable for 2012. Here are some of the factors:
* Record Corporate Profits: Even with the constant barrage of fear, uncertainty, and doubt distributed via the media channels, corporations posted record profits in 2011, with an estimated increase of +16% over last year (and another forecasted +10% rise in 2012 – Source: S&P).
* Historic Levels of Cash: Record profits mean record cash, and all those riches have been piling up on non-financial corporate balance sheets at historic levels. At the beginning of Q4 the figure stood at $2.12 trillion. Companies have generally been stingy, but as the recovery progresses, they have increasingly been spending on technology, equipment, international expansion, and even the beginnings of hiring.
* Interest Rates at 60 Year Lows: Interest rates are at record lows and home affordability has never been better with 30-year fixed rate mortgages hovering below 4%. Housing may not come screaming back, but the foundation for a recovery is being laid.
* Improving Economic Variables: Whether you’re looking at broader economic activity (Gross Domestic Product up for nine consecutive quarters); employment growth (declining unemployment rate and 21 consecutive months of private job creation), or consumer spending (consumer confidence approaching multi-year highs), all major signs are currently pointing to an improving outlook.
* Near Record Exports: While the U.S. dollar has made some recent gains against foreign currencies because of the financial crisis in Europe, the relative value of the dollar remains historically low versus the major global currencies. The longer-term depreciation of the dollar has buoyed exports of U.S. goods to near record levels despite the global uncertainty.
* Unprecedented Central Bank Support Globally: Ben Bernanke and the U.S. Federal Reserve is committed to keeping exceptionally low levels of lending interest rates at least through mid-2013, while also implementing “Operation Twist” and potential further quantitative easing (QE3). Translation: Ben Bernanke is going to do everything in his power to keep interest rates low in order to stimulate economic growth. The European Central Bank (ECB) has pulled out its lending fire trucks too, with an unparalleled three-year lending program to extinguish liquidity fires in the European banking sector.
* Improving Mergers & Acquisitions Environment: We may not be back to the 2006 buyout “hay-days,” but U.S. mergers and acquisitions activity increased +24% in 2011. What’s more, high profile potential IPOs like an estimated $100 billion Facebook offering may help kick-start the new equity issuance market in 2012.
* Tasty Fat Dividends: Rarely have S&P 500 dividend yields (currently 2.1%) outpaced the interest rates earned on 10-year Treasury note yields, but now happens to be one of those times. Typically S&P 500 stock dividends have averaged about 40% of the yield on 10-year Treasury notes, and now it is 112%. In Q3 of 2011, dividend increases rose +17% and expectations are for nearly a +11% increase in 2012, said Howard Silverblatt, senior index analyst at S&P.
Any way you cut it (or beat the batter), 2011 was a volatile year. And despite all the fear, uncertainty, and doubt, profits continue to grow and sovereign nations are being forced to deal with their fiscal problems. Unforeseen risks always exist, but if Europe can contain its financial crisis and the U.S. recovery can continue into this new election year, then opportunities in the 2012 attractively priced equity markets should sweeten the flat equity pancake we ate in 2011.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, including a short position in TLT, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
2011 Sidoxia – IC Greatest Hits
There was some entertaining dancing going on early in 2011, but for the most part, the year brought a lot of rock ‘n’ roll on its way to what looks like a flattish year on a return basis. Sidoxia Capital Management and Investing Caffeine (IC) followed everything from the Royal Wedding and Charlie Sheen to the debt ceiling debate and the Arab Spring. Amongst all the celebration and chaos, IC pounded away at the keyboard and reported on the financial markets and the virtues of investing. Out of the 80 or so postings at IC this year, here are my top 11 favorites of 2011:
• Spoonfuls of Investment Knowledge: Classic investment quotes and tenets.
• 10 Ways to Destroy Your Portfolio: Investment mistakes to avoid.
• Solving Europe and Your Deadbeat Cousin: Putting the European financial crisis in context.
• A Serious Situation in Jackson Hole: The “Situation” meets Ben Bernanke.
• It’s the Earnings, Stupid: Stock prices and the inextricable ties with earnings.
• Innovative Bird Keeps All the Worms: Innovative not first mover gains the prize.
• Snoozing Your Way to Investment Prosperity: How to invest and sleep well during financial market mayhem.
• The Fallacy of High P/E’s: Sustainably high earnings growth can trump high P/E ratios.
• Gospel from 20th Century Investment King: Investment maxims from legend Sir John Templeton.
• The 10 Investment Commandments: Charles Ellis passes down key laws to investment disciples.
• Share Buybacks and Bathroom Violators: Pet peeves in the bathroom and share repurchase.
Happy Holidays and Happy New Year from Investing Caffeine and Sidoxia Capital Management!
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Buying Bathing Suits in Winter
Buying fire insurance when your neighbor’s house is on fire or flood insurance as your car floats down your driveway can be a very expensive proposition. Stuffing money under the mattress in money market accounts, savings accounts, CDs, and low-yielding bonds can be a very expensive proposition too, as inflation eats away at the value and the auspice of higher interest rates looms. However, buying things when they are out of favor, like bathing suits in the winter, is an opportunistic way of cashing in on bargains when others are uninterested.
Speaking of uninterested, CNBC recently conducted a survey regarding the attractiveness of stock investing, and according to the participants, there has never been a worst time to invest (as long as the survey has been conducted). Despite consumers planning to spend +22% more on gifts this year, the national mood has not been worse since the financial crisis began in earnest during 2008. Specifically, as it pertains to stocks, 53% of Americans believe it is a bad time to invest in the stock market (SEE VIDEO BELOW).
CLICK TO TO ENLARGE
Not a very happy picture. The study filtered through 4,600,000,000 expressions posted by 63 million unique Twitter social media users and graphically displayed people’s happiness (or lack thereof).
Endless Number of Concerns
There is no shortage of concerns, whether one worries about the collapse of Europe, declining home values, or an uncertain employment picture. But is now the time to give up and follow the scared herd? The best time to follow the herd is never. As the old saying goes, “the herd is led to the slaughterhouse.” Investing is game like chess where one has to anticipate and be forward looking multiple moves in advance – not reacting to every shift and move of your competitor.
Certainly, investing in stocks may not be appropriate for those investors needing access to liquid funds over the next year or two. Also, retirees needing steady income may not be in a position to handle the volatility of equities. However, for many millions of investors who are planning for the next 5, 10, or 20+ years, what happens over the next few months or next few years in Italy, Greece, or Spain is likely to be meaningless. As far as our economy goes, the U.S. averages about two recessions a decade, and has done quite well over the long-run despite that fact – thank you very much. Investors need to understand that investing is a marathon, and not a sprint.
December may not be the best time to head the beach in your swim trunks, bikini, or thong, but winter is now upon us and incredible deals abound (see deals for women & men). It may also be windy outside with frigid conditions in the water for stock investors too, but with winter beginning this week, the amount of bargains for long-term investors continue to heat up no matter how chilly the sentiment remains.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in Twitter, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Innovative Bird Keeps All the Worms
Source: Photobucket
As the old saying goes, “The early bird gets the worm,” but in the business world this principle doesn’t always apply. In many cases, the early bird ends up opening a can of worms while the innovative, patient bird is left with all the spoils. This concept has come to light with the recent announcement that social networking site MySpace is being sold for a pittance by News Corp. (NWS) to Specific Media Inc., an advertising network company. Although Myspace may have beat Facebook to the punch in establishing a social network footprint, Facebook steamrolled Myspace into irrelevance with a broader more novel approach. Rather than hitting a home run and converting a sleepy media company into something hip, Rupert Murdoch, CEO of News Corp. struck out and received crumbs for the Myspace sale (News Corp. sold it for $35 million after purchasing for $540 million in 2005, a -94% loss).
Other examples of “winner takes all” economics include:
Kindle vs. Book Stores: Why are Borders and Waldenbooks (BGPIQ.PK) bankrupt, and why is Barnes and Noble Inc. (BKS) hemorrhaging in losses? One explanation may be people are reading fewer books and reading more blogs (like Investing Caffeine), but the more credible explanation is that Amazon.com Inc. (AMZN) built an affordable, superior digital mousetrap than traditional books. I’ll go out on a limb and say it is no accident that Amazon is the largest bookseller in the world. Within three years of Kindle’s introduction, Amazon is incredibly selling more digital books than they are selling physical hard copies of books.
iPod vs. Walkman/MP3 Players: The digital revolution has shaped our lives in so many ways, and no more so than in the music world. It’s hard to forget how unbelievably difficult it was to fast-forward or rewind to a particular song on a Sony Walkman 30 years ago (or the hassle of switching cassette sides), but within a matter of a handful of years, mass adoption of Apple Inc.’s (AAPL) iPod overwhelmed the dinosaur Walkman player. Microsoft Corp.’s (MSFT) foray into the MP3 market with Zune, along with countless other failures, have still not been able to crack Apple’s overpowering music market positioning.
Google vs. Yahoo/Microsoft Search: Google Inc. (GOOG) is another company that wasn’t the early bird when it came to dominating a new growth industry, like search engines. As a matter of fact, Yahoo! Inc (YHOO) was an earlier search engine entrant that had the chance to purchase Google before its meteoric rise to $175 billion in value. Too bad the Yahoo management team chose to walk away…oooph. Some competitive headway has been made by the likes of Microsoft’s Bing, but Google still enjoys an enviable two-thirds share of the global search market.
Dominance Not Guaranteed
Dominant market share may result in hefty short-term profits (see Apple’s cash mountain), but early success does not guarantee long-term supremacy. Or in other words, obsolescence is a tangible risk in many technology and consumer related industries. Switching costs can make market shares sticky, but a little innovation mixed with a healthy dose of differentiation can always create new market leaders.
Consider the number one position American Online (AOL) held in internet access/web portal business during the late nineties before its walled gardens came tumbling down to competition from Yahoo, Google, and an explosion of other free, advertisement sponsored content. EBay Inc. (EBAY) is another competition casualty to the fixed price business model of Amazon and other online retailers, which has resulted in six and a half years of underperformance and a -44% decline in its stock price since the 2004 peak. Despite questionable execution, and an overpriced acquisition of Skype, eBay hasn’t been left for complete death, thanks to a defensible growth business in PayPal. More recently, Research in Motion Ltd. (RIMM) and its former gargantuan army of “CrackBerry” disciples have felt the squeeze from new smart phone clashes with Apple’s iPhone and Google’s Android operating system.
With the help of technology, globalization, and the internet, never in the history of the world have multi-billion industries been created at warp speed. Being first is not a prerequisite to become an industry winner, but evolutionary innovation, and persistently differentiated products and services are what lead to expanding market shares. So while the early bird might get the worm, don’t forget the patient and innovative second mouse gets all the cheese.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Performance data from Morningstar.com. Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, AAPL, AMZN, and GOOG, but at the time of publishing SCM had no direct position in BGPIQ.PK, NWS, YHOO, MSFT, SNE, AOL, EBAY, RIMM, Facebook, Skype, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Curing Our Ills with Innovation
Fareed Zakaria thoughts have blanketed both traditional and internet media outlets, spanning everything from Newsweek to Time, and the New York Times to CNN. With an undergraduate diploma from Yale and his PhD from Harvard, Dr. Zakaria has built up quite a following, especially when it comes to foreign affairs.
In his latest Time magazine article, Can America Keep Pace?, Zakaria addresses the role of innovation in the U.S., “Innovation is as American as apple pie.” The innovation lead the U.S. maintains over the rest of the world will not evaporate over night because this cultural instinct is bred into our DNA – innovation is not something you one can learn directly from a textbook, Wikipedia, or Google (GOOG). With that said, the innovation gap is narrowing between developed and developing countries. New York Times columnist Tom Friedman captured this sentiment when he stated the following:
“French voters are trying to preserve a 35-hour work week in a world where Indian engineers are ready to work a 35-hour day.”
The fungibility of labor has pressured industries by transferring jobs abroad to much lower-cost regions like China and India, and that trend is only expanding further into countries with even lower labor cost advantages. Zakaria agrees:
“America’s future growth will have to come from new industries that create new products and processes. Older industries are under tremendous pressure.”
The good news is the United States maintains a significant lead in certain industries. For instance, we Yankees have a tremendous lead in fields such as biotechnology, entertainment, internet technologies, and consumer electronics.
The poster child for innovation is Apple Inc. (AAPL), which arose from the ashes of death ten years ago with its then ground-breaking new product, the iPod. Since then, Apple has introduced many innovative products and upgrades as a result of its research and development efforts, including the recently launched iPad.
The Education Engine
Where we are falling short is in education, which is the foundation to innovation. In a country with a high school system that Microsoft Corp.’s (MSFT) founder Bill Gates calls “obsolete,” society is left with one-third of the students not graduating and nearly half of the remaining graduates unprepared for college. In this instant gratification society we live in, the long-term critical education issue has been pushed to the backburner. Other emerging countries like China and India are churning out more college graduates by the millions, and also dominating us in the key strategic count of engineering degrees.
Government’s Role
With the massive debt and deficits our country currently faces, an ongoing debate about the size and role of government persists. Zakaria makes the case that government must place a significant role when it comes to innovation. Unfortunately, the U.S. wastes billions on pork-barrel projects and suboptimal subsidies while dilly-dallying in political gridlock over critical investments in education, infrastructure spending, basic research, and energy policies. In the meantime, our fellow competing countries are catching up to us, and in certain cases passing us (e.g., alternative energy investments – see Electric Profits).
Zakaria makes this point on the subject:
“The fastest-growing economies are all busy using government policy to establish commanding leads in one industry after another. Google’s Eric Schmidt points out that ‘the fact of the matter is, other countries are putting a lot more money into nurturing new industries than we are, and we are not going to win unless we do something like what they’re doing.’”
As a matter of fact, an ITIF (Information Technology & Innovation Foundation) study measuring innovation improvement from 1999 to 2009, as it related to government funding for basic research, education and corporate-tax policies, ranked the U.S. dead last out of 40 countries.
Not All is Lost – Pie Slice Maintained
Source: Carpe Diem
Although the outlook may sounds bleak, not all is lost. In a recent Wall Street Journal interview with Bob Doll Chief Equity Strategist at the world’s largest money management company (BlackRock has $3.6 trillion in assets under management), he makes the case that the U.S. remains the leading source of technological innovation and home to the greatest universities and the most creative businesses in the world. He sees this trend persisting in part because of our country’s relative demographic advantages:
“Over the next 20 years, the U.S. work force is going to grow by 11%, Europe’s going to fall by five, and Japan’s going to fall by 17. This alone tells me the U.S. has a huge advantage over Europe and a bigger one over Japan for growth.”
So while emerging markets, like those in Asia, continue to gain a larger slice of the global GDP pie, Mark Perry at Carpe Diem shows how the U.S has maintained its proportional slice of a growing global economic pie, over the last four decades.
Growth is driven by innovation, and innovation is driven by education. If America wants to maintain its greatness, the focus needs to be placed on innovation-led growth. The world is moving at warp speed, and our neighbors are moving swiftly, whether we come along for the ride or not. The current, sour conversations regarding deficits, debt ceilings, entitlements, wars, and unemployment are all essential discussions, but more importantly, if these debates can be refocused on accelerating innovation, the country will be well on its way to curing its ills.
See also Our Nation’s Keys to Success
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, GOOG, and AAPL, but at the time of publishing SCM had no direct position in MSFT, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Economic Tug-of-War as Recovery Matures
Excerpt from No-Cost June 2011 Sidoxia Monthly Newsletter (Subscribe on right-side of page)
With the Rapture behind us, we can now focus less on the end of the world and more on the economic tug of war. As we approach the midpoint of 2011, equity markets were down -1.4% last month (S&P 500 index) and are virtually flat since February – trading within a narrow band of approximately +/- 5% over that period. Investors are filtering through data as we speak, reconciling record corporate profits and margins with decelerating economic and employment trends.
Here are some of the issues investors are digesting:
Profits Continue Chugging Along: There are many crosscurrents swirling around the economy, but corporations are sitting on fat profits and growing cash piles owing success to several factors:
- International Expansion: A weaker dollar has made domestic goods and services more affordable to foreigners, resulting in stronger sales abroad. The expansion of middle classes in developing countries is leading to the broader purchasing power necessary to drive increasing American exports.
- Rising Productivity: Cheap labor, new equipment, and expanded technology adoption have resulted in annualized productivity increases of +2.9% and +1.6% in the 4th quarter and 1st quarter, respectively. Eventually, corporations will be forced to hire full-time employees in bulk, as bursting temporary worker staffs and stretched employee bases will hit output limitations.
- Deleveraging Helps Spending: As we enter the third year of the economic recovery, consumers, corporations, and financial institutions have become more responsible in curtailing their debt loads, which has led to more sustainable, albeit more moderate, spending levels. For instance, ever since mid-2008, when recessionary fundamentals worsened, consumer debt in the U.S. has fallen by more than $1 trillion.
Fed Running on Empty: The QE2 (Quantitative Easing Part II) government security purchase program, designed to stimulate the economy by driving interest rates lower, is concluding at the end of this month. If the economy continues to stagnate, there’s a possibility that the tank may need to be re-filled with some QE3? Maintaining the 30-year fixed rate mortgage currently around 4.25%, and the 10-year Treasury note yielding around 3.05% will be a challenge after the program expires. Time will tell…
Slogging Through Mud: Although corporate profits are expanding smartly, economic momentum, as measured by real Gross Domestic Product (GDP) growth, is struggling like a vehicle spinning its wheels in mud. Annualized first quarter GDP growth registered in at a meager +1.8% as the economy weans itself off of fiscal stimulus and adjusts to more normalized spending levels. An elevated 9% unemployment rate and continued weak housing market is also putting a lid on consumer spending. Offsetting the negative impacts of the stimulative spending declines have been the increasing tax receipts achieved as a consequence of seven consecutive quarters of GDP growth.
Mixed Bag – Euro Confusion: Germany reported eye-popping first quarter GDP growth of +5.2%, the steepest year-over-year rise since reunification in 1990, yet lingering fiscal concerns surrounding the likes of Greece, Portugal, and Italy have intensified. Fitch, for example, recently cut its rating on Greece’s long-term sovereign debt three notches, from BB+ to B+ plus, and placed the country on “rating watch negative” status. These fears have pushed up two-year Greek bond yields to over 26%. Regarding the other countries mentioned, Standard & Poor’s, another credit rating agency, cut Italy’s A+ rating, while the European Union and International Monetary Fund agreed on a $116 billion bailout program for Portugal.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
It’s the Earnings, Stupid
Source: MaxMillionaire.WordPress.com
Political strategist James Carville famously stated, “It’s the economy stupid,” during the 1992 presidential campaign. Despite a historic record approval rating of 90 by President George H.W. Bush after the 1991 Gulf War victory, Bush Sr. still managed to lose the election to President Bill Clinton because of a weak economy. President Barack Obama would serve himself well to pay attention to history if he wants to enter the “two-termer” club. Pundits are placing their bets on Obama due to his large campaign war chest, a post-Osama bin Laden extinguishment approval bump, and a cloudy Republican candidate weather forecast. If however, the unemployment rate remains elevated and the current administration ignores the spending/debt crisis, then the President’s re-election hopes may just come crashing down.
Price Follows Earnings
The similarly vital relationship between the economy and politics applies to the relationship of earnings and the equity markets too. Instead of the key phrase, “It’s the economy stupid,” in the stock market, “It’s all about the earnings stupid” is the crucial guideline. The balance sheet may play a role as well, but at the end of the day, the longer-term trend in stock prices eventually follows earnings and cash flows (i.e., investors will pay a higher price for a growing stream of earnings and a lower price for a declining or stagnant stream of earnings). Ultimately, even value investors pay more attention to earnings in the cases where losses are deteriorating or hemorrhaging (e.g. a Blockbuster or Enron). Another main factor in stock price valuations is interest rates. Investors will pay more for a given stream of earnings in a low interest rate environment relative to a high interest rate environment. Investors lived through this in the early 1980s when stocks traded at puny 7-8x P/E ratios due to double-digit inflation and a Federal Funds rate that peaked near 20%.
Source: HaysAdvisory.com – S&P 500 earnings growth keeps chugging along despite worries.
Bears Come Out of Hibernation
Today, earnings portray a different picture relative to the early eighties. Not only are S&P 500 operating earnings growing at a healthy estimated rate of +17% in 2011, but the 10-year Treasury note is also trading at a near-record low yield of 3.06%. In spite of these massively positive earnings and cash flow dynamics occurring over the last few years, the recent -3% pullback in the S&P 500 index from a month ago has awoken some hibernating bears from their caves. Certainly a slowing or pause in the overall economic indicators has something to do with the newfound somber mood (i.e., meager Q1 real GDP growth of +1.8% and rising unemployment claims). Contributing to the bears’ grumpy moods is the economic debt hangover we are recovering from. However, a large portion of the fundamental economic expansion experienced by corporate America has not been fueled by the overwhelming debt still being burned off throughout the financial sector and eventually our federal and state governments. Companies have become leaner and meaner – not only paying down debt, but also increasing dividends, buying back stock, and doing more acquisitions. The corporate debt-free muscle is further evidenced by the $100 billion in cash held by the likes of IBM, Microsoft Corp. (MSFT), and Google Inc. (GOOG) – and still growing.
At a 13.5x P/E multiple of 2011 earnings, perhaps the stock market is pricing in an earnings slowdown? But as of last week, about 70% of the S&P 500 companies reporting Q1 earnings have exceeded expectations. If this trend continues, perhaps we will see James Carville on CNBC rightfully shouting the maxim, “It’s the earnings, stupid!”
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and GOOG, but at the time of publishing SCM had no direct position in IBM, MSFT, Blockbuster, Enron, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
End of the World Put on Ice
Our 3.5 billion year old planet has received a temporary reprieve, at least until the next Mayan Armageddon destroys the world in 2012. Sex, money, and doom sell and Arnold, Oprah, and the Rapture have not disappointed in generating their fair share of advertising revenue clicks.
With 2 billion people connected to the internet and 5 billion people attached to a cell phone, every sneeze, burp, and fart around the world makes daily headline news. The globalization cat is out of the bag, and this phenomenon will only accelerate in the years to come. In 1861 the Pony Express took ten days to deliver a message from New York to San Francisco, and today it takes a few seconds to deliver a message across the world over Twitter or Facebook.
The equity markets have more than doubled from the March 2009 lows and even previous, ardent bulls have turned cautious. Case in point, James Grant from the Interest Rate Observer who was “bullish on the prospects for unscripted strength in business activity” (see Metamorphosis of Bear into Bull) now sees the market as “rich” and asserts “nothing is actually cheap.” Grant rubs salt into the wounds by predicting inflation to spike to 10% (read more).
Layer on multiple wars, Middle East/North African turmoil, gasoline prices, high unemployment, mudslinging presidential election, uninspiring economic growth, and you have a large pessimistic poop pie to sink your teeth into. Bearish sentiment, as calculated by the AAII Sentiment Survey, is at a nine-month high and currently bears outweigh bulls by more than 50%.
The Fear Factor
I think Cullen Roche at Pragmatic Capitalism beautifully encapsulates the comforting blanket of fear that is permeating among the masses through his piece titled, “In Remembrance of Fear”:
“The bottom line is, stay scared. Do not let yourself feel confident, happy or wealthy. You are scared, poor and miserable. You should stay that way. You owe it to yourself. The media says so. And more importantly, there are old rich white men who need to sell books and if you’re not scared by them you’ll never buy their books. So, do yourself a favor. Buy their books and services and stay scared. You deserve it.”
Here is Cullen’s prescription for dealing with all the doom and gloom:
“Associate with people who are more scared than you. That way, you can all sit in bunkers and talk about the end of days and how screwed we all are. Think about how much better that will make you feel. Misery loves company. Do it.”
All is Not Lost
While inflation and gasoline price concerns weigh significantly on economic growth expectations, some companies are taking advantage of record low interest rates. Take for example, Google Inc.’s (GOOG) recent $3 billion bond offerings split evenly across three-year, five-year, and ten-year notes with an average interest rate of 2.3%. Although Google has languished relative to the market over the last year, the market blessed the internet giant with the next best thing to free money by pricing the deal like a AAA-rated credit. Cash-heavy companies have been able to issue low cost debt at a frantic pace for accretive EPS shareholder-friendly activities, such as acquisitions, share buybacks, and organic growth initiatives. Cash rich balance sheets have afforded companies the ability to offer shareholders a steady diet of dividend increases too.
While there is no question high oil prices have put a wet towel over consumer spending, the largest component of corporate check books is labor costs, which accounts for roughly two-thirds of corporate spending. With unemployment rate at 9.0%, this is one area with no inflation pressure as far as the eye can see. Money losing companies that go bankrupt lay-off employees, while profitable companies with stable input costs (labor) will hire more – and that’s exactly what we’re seeing today. Despite all the economic slowing and collapse anxiety, S&P 500 operating earnings, as of last week, are estimated to rise +17% in 2011. Healthy corporations coupled with a growing, deleveraged workforce will have to carry the burden of growth, as deficit and debt direction will ultimately act as a drag on economic growth in the immediate and intermediate future.
Fear and pessimism sell news, and technology is only accelerating the proliferation of this trend. The good news is that you have another 18 months until the next apocalypse on December 21, 2012 is expected to destroy the human race. Rather than attempting to time the market, I urge you to follow the advice of famed investor Peter Lynch who says, “Assume the market is going nowhere and invest accordingly.” For all the others addicted to “pessimism porn,” I’ll let you get back to constructing your bunker.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and GOOG, but at the time of publishing SCM had no direct position in Twitter, Facebook, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Bin Laden Killing Overshadows Royal Rally
Excerpt from No-Cost May Sidoxia Monthly Newsletter (Subscribe on right-side of page)
Before the announcement of the killing of the most wanted terrorist in the world, Osama bin Laden, the royal wedding of Prince William Arthur Philip Louis and Catherine Middleton (Duke and Duchess of Cambridge) grabbed the hearts, headlines, and minds of people around the world. As we exited the month, a less conspicuous royal rally in the U.S. stock market has continued into May, with the S&P 500 index climbing +2.8% last month as the economic recovery gained firmer footing from the recession of 2008 and early 2009. As always, there is no shortage of issues to worry about as traders and speculators (investors not included) have an itchy sell-trigger finger, anxiously fretting over the possibility of losing gains accumulated over the last two years.
Here are some of the attention-grabbing issues that occurred last month:
Powerful Profits: According to Thomson Reuters, first quarter profit growth as measured by S&P 500 companies is estimated at a very handsome +18% thus far. At this point, approximately 84% of companies are exceeding or meeting expectations by a margin of 7%, which is above the long-term average of a 2% surprise factor.
Debt Anchor Front & Center: Budget battles remain over record deficits and debt levels anchoring our economy, but clashes over the extension of our debt ceiling will occur first in the coming weeks. Skepticism and concern were so high on this issue of our fiscal situation that the Standard & Poor’s rating agency reduced its outlook on the sovereign debt rating of U.S. Treasury securities to “negative,” meaning there is a one-in-three chance our country’s debt rating could be reduced in the next two years. Democrats and Republicans have put forth various plans on the negotiating table that would cut the national debt by $4 – $6 trillion over the next 10-12 years, but a chasm still remains between both sides with regard to how these cuts will be best achieved.
Inflation Heating Up: The global economic recovery, fueled by loose global central bank monetary policies, has resulted in fanning of the inflation flames. Crude oil prices have jumped to $113 per barrel and gasoline has spiked to over $4 per gallon. Commodity prices have jumped up across the board, as measured by the CRB (Commodity Research Bureau) BLS Index, which measures the price movements of a basket of 22 different commodities. The CRB Index has risen over +28% from a year ago. Although the topic of inflation is dominating the airwaves, this problem is not only a domestic phenomenon. Inflation in emerging markets, like China and Brazil, has also expanded into a dangerous range of 6-7%, and many of these governments are doing their best to slow-down or reverse loose monetary policies from a few years ago.
Expansion Continues but Slows: Economic expansion continued in the first quarter, but slowed to a snail’s pace. The initial GDP (Gross Domestic Product) reading for Q1 slowed down to +1.8% growth. Brakes on government stimulus and spending subtracted from growth, and high fuel costs are pinching consumer spending.
Ben Holds the Course: One person who is not overly eager to reverse loose monetary policies is Federal Reserve Chairman, Ben Bernanke. The Chairman vowed to keep interest rates low for an “extended period,” and he committed the Federal Reserve to complete his $600 billion QE2 (Quantitative Easing) bond buying program through the end of June. If that wasn’t enough news, Bernanke held a historic, first-ever news conference. He fielded a broad range of questions and felt the first quarter GDP slowdown and inflation uptick would be transitory.
Skyrocketing Silver Prices: Silver surged ahead +28% in April, the largest monthly gain since April 1987, and reached a 30-year high in price before closing at around $49 per ounce at the end of the month. Speculators and investors have been piling into silver as evidenced by activity in the SLV (iShares Silver Trust) exchange traded fund, which on occasion has seen its daily April volume exceed that of the SPY (iShares SPDR S&P 500) exchange traded fund.
Obama-Trump Birth Certificate Faceoff: Real estate magnate and TV personality Donald Trump broached the birther issue again, questioning whether President Barack Obama was indeed born in the United States. President Obama produced his full Hawaiian birth certificate in hopes of putting the question behind him. If somehow Trump can be selected as the Republican presidential candidate for 2012, he will certainly try to get President Obama “fired!”
Charlie Sheen…Losing! The Charlie Sheen soap opera continues. Ever since Sheen has gotten kicked off the show Two and a Half Men, speculation has percolated as to whether someone would replace Sheen to act next to co-star John Cryer. Names traveling through the gossip circles include everyone from Woody Harrelson to Jeremy Piven to Rob Lowe. Time will tell whether the audience will laugh or cry, but regardless, Sheen will be laughing to the bank if he wins his $100 million lawsuit against Warner Brothers (TWX).
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain commodity and S&P 500 exchange traded funds, but at the time of publishing SCM had no direct position in SLV, SPY, TWX, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
