Posts tagged ‘Bloomberg’

Rams Butting Heads: Rosenberg vs. Paulsen

Source: Photobucket

After a massive decline in financial markets during 2008, followed by a significant rebound in during 2009, should it be a surprise to anyone that economists hold directly opposing views? Financial markets are Darwinian in many respects, and Bloomberg was not bashful about stirring up a battle between David Rosenberg (Chief Economist & Strategist at Gluskin Sheff)  and James Paulsen (Chief Investment Strategist at Wells Capital Management). The two economists, like the equivalent of two rams, lowered their horns and butted heads regarding their viewpoints on the economy. Rams butt heads (two words) together as a way to create a social order and hierarchy, so depending on your views, you can determine for yourself whom is the survival of the fittest. Regardless of your opinion, the exchange is an entertaining  clash:

Paulsen’s Case (see also Unemployment Hypochondria): Paulsen makes the case that although the recovery has not been a gangbuster, nonetheless, the rebound has been the strongest in 25 years if you look at real GDP growth in the first year after a recession ends. He blames demographic atrophy in labor force growth (i.e., less job growth from Baby Boomers and fewer women joining the workforce relative to the mid-1980s) for the less than stellar absolute number.

Rosenberg’s Case: Rosenberg explains that the last two recoveries bear no resemblance to the recent recovery. The recent recession was one of the worst of all-time, therefore we should have experienced a sharper V-shaped recovery. All the major economic statistics are at dismal levels, and nowhere near the levels experienced in late 2007.  He goes on to add that the stimulus, monetary policy, and bailouts have not produced the bang for our buck. Rosenberg says he will put on his bull hat once we enter a credit creation cycle that allows the economy to grow on an organic, sustained basis without artificial stimuli.

Like other pre-crisis bears who have floated to the top of the media mountain, Rosenberg has had difficulty adjusting his doom and gloom playbook as markets have rebounded  approximately +80% from March 2009. Rosenberg maintained his pessimistic outlook as he transitioned from Merrill Lynch to Gluskin Sheff and has been wrong ever since. How wrong? Let’s take a look at Rosenberg’s first letter at his new employer, Gluskin Sheff (dated May 19th 2009):

Statement #1: “It stands to reason that this was just another counter-trend rally.” Reality: Dow Jones Industrial Average was at 8,475 then, and 11,114 today.

Statement #2: “It now looks as though the major averages are about to embark on the fabled retesting phase towards the March lows.” Reality: Dow never got close to 6,470 and stands at 11,114 today. 

Statement #3: “It is unlikely that we have crossed the Rubicon into new bull market terrain and that the fundamental lows have been put in.” Reality: Dow just needs to fall -42% and Rosenberg will be right.

Statement #4: “[Unemployment] looks like we will likely get back to that old peak of 10.8% in coming quarters.” Reality: We peaked at 10.1% in October a year ago, and stand at 9.6% today.

Statement #5: “Deflation risks continue to trump inflation risks, at least over the near- and intermediate-term.” Reality: Commodity prices are dramatically escalating (CRB commodity index skyrocketing) across many categories, including the four-Cs (copper, corn, cotton, and crude oil).

I don’t pretend to be whistling past the graveyard, because we indeed have serious structural problems (deficits, debt, unsustainable entitlements, high unemployment, etc., etc., etc.), but when was there never something to worry about? See 1963 article? Like the endless “double dip” economists before him (see also Double-Dip Guesses). As the evidence shows, Rosenberg’s anything-but-rosy outlook is a tad extreme and has been dead wrong…at least for the last 1 and ½ years or almost 3,000 Dow Points. Just a few months ago, Rosenberg raised the odds of a double-dip recession from 45% to 67%.

Perhaps the sugar high stimulus will wear off, the steroid side-effects will kick in, and the Fed’s printing presses will break down and cause an economic fire? Until then, corporate profits continue to swell, cash is piling higher, valuations have been chopped in half from a decade ago (see Marathon Investing), and money stuffed under the mattress earning 0.5% will eventually leak back into the market.

I do however agree with Rosenberg in a few respects, and that revolves around his belief that banking industry will not be the leading group out of this cyclical recovery, and housing headwinds will remain in place for a extended period of time. Moreover, I agree with many of the bears when it comes to government involvement. Artificially propping up sectors like housing makes no sense. Why delay the inevitable by flushing taxpayer money down the toilet. Did you see the government running cash for clunker servers and storage in 2000 when the tech bubble burst? Does incentivizing capacity expansion with free money in an industry with boatloads of excess capacity already really make sense? Although media commentators and gloomy economists like Rosenberg paint everything as black and white, most reasonable people understand there are many shades of gray.

Gray that is…like the color of two rams butting heads.

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper.  

www.Sidoxia.com

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.

October 29, 2010 at 12:37 am 3 comments

Ross Warns of Commercial Shoe Drop

take care!

The next shoe to drop in commercial real estate has been highly telegraphed for some time now. Wilbur Ross, restructuring specialist and founder of WL Ross & Co, has a long track record of success and he weighs in with his views regarding the impending crash in commercial real estate through several recent interviews.

What exactly is Mr. Ross worried about? He sees a correlation of what happened in the residential mortgage markets to what we are now beginning to see in the commercial real estate markets:

Wilbur Ross CNBC

Fast forward to minute 4:20 to hear real estate commentary

Click Hear to See CNBC Interview with Wilbur Ross

“I have felt for quite some time that the same reckless lending that characterized the subprime mortgage business in residential was also characterizing what had gone on in commercial real estate in the mid-2000s. You had properties being bought at a 3% cash-on-cash yield. You had properties being financed at on such an aggressive basis that the lenders had to give them an advance – several years worth of interest – because there wasn’t enough cash coming from the properties even to pay the interest. And the theory was that rent rolls would go up, occupancy would go up, and eventually the property would grow its way into paying interest. Well now that clock is ticking – rents haven’t gone up, they’ve gone down; occupancy hasn’t gone up, it has gone down; and capitalization rates that people require from properties have gone up. So everything is going in the wrong direction, and I think we are going to see quite a lot of tragedies in that sector. “

Although Mr. Ross unequivocally sees a “huge crash in commercial real estate,” he puts his pessimistic views on impending destruction into perspective (read more about pessimism). The size of the commercial real estate market is quite a bit smaller than residential:

“The total of commercial mortgages is only about $3.5 trillion versus $11 trillion for residential mortgages.”

The commercial crash is already happening and forecasts for commercial property are expected to drop to the lowest levels in nearly two decades, according to according to property research firm Real Capital Analytics Inc. The sign of the times is evident by the recent Chapter 11 bankruptcy filing by Capmark Financial Group Inc., a company that originated about $60 billion in commercial real estate loans in 2006 and 2007 (Bloomberg). Anecdotally, at a professional event I just attended in southern California, I bumped into a real estate broker who informed me on the state of the market. The property across the street from the event location had a 50% vacancy rate and a glut of hedge funds were bidding on the building for 50% of its replacement value…ouch!

Reis Inc., a property research firm also notes:

“U.S. office vacancies hit a five-year high of almost 17 percent in the third quarter, while shopping center vacancies climbed to their highest since 1992.”

And from a fiscal response and taxpayer liability standpoint Ross is less worried because he thinks Washington, for the most part, will be watching the train wreck from the sidelines, with a bag of popcorn in hand:

“I don’t think the federal government’s going to do much to help the commercial building side because individual homeowners vote but buildings don’t vote.”

As Wilbur Ross has definitively communicated, he’s confident the commercial real estate mortgage market will cause the next surprising shoe to drop. Fortunately though, he feels the crash will be manageable. With all these shoes dropping, maybe I can find a new pair of shoes to wear?

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

 

DISCLOSURE: 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.

November 9, 2009 at 2:00 am 6 comments

Dry Powder Piled High

Flour-Powder

Money goes where it is treated best. Sometimes idle cash contributes to the inflation of speculative bubbles, while sometimes that same capital gets buried in a bunker out of fear. The mood-swing pendulum is constantly changing; however with the Federal Funds Rate at record lows, some of the bunker money is becoming impatient. With the S&P 500 up +60% since the March lows, investors are getting antsy  to put some of the massive mounds of dry powder back to work – preferably in an investment vehicle returning more than 1%.

How much dry powder is sloshing around? A boatload. Bloomberg recently referenced data from ICI detailing money market accounts flush with a whopping $3.5 trillion. This elevated historical number comes despite a $439.5 million drop from the record highs experienced in January of this year.

From a broader perspective, if you include cash, money-market, and bank deposits, the nation’s cash hoard reached $9.55 trillion in September. What can $10 trillion dollars buy? According to Bloomberg, you could own the whole S&P 500 index, which registers in at a market capitalization price tag of about $9.39 trillion. The article further puts this measure in context:

“Since 1999, so-called money at zero maturity has on average accounted for 62 percent of the stock index’s worth. … Before the collapse of New York-based Lehman Brothers Holdings Inc. last year, the amount of cash never exceeded the value of U.S. equities.”

 

Cash levels remain high, but the 60% bounce from the March lows is slowly siphoning some money away. According to ICI data, $15.8 billion has been added to domestic-equity funds since March. Trigger shy fund managers, fearful of the macro-economic headlines, have been slow to put all their cash to work, as well. Jeffrey Saut, chief investment strategist at Raymond James & Associates adds “Many of the fund managers I talk to that have missed this rally or underplayed this rally are sitting with way too much cash.”

With so much cash on the sidelines, what do valuations look like since the March rebound?

“The index [S&P 500] trades for 2.18 times book value, or assets minus liabilities, 33 percent below its 15-year average, data compiled by Bloomberg show. The S&P 500 was never valued below 2 times net assets until the collapse of Lehman, data starting in 1994 show. The index fetches 1.15 times sales, 22 percent less than its average since 1993.”

 

On a trailing P/E basis (19x’s) the market is not cheap, but the Q4 earnings comparisons with last year are ridiculously easy and companies should be able to trip over expectations. The proof in the pudding comes in 2010 when growth in earnings is projected to come in at +34% (Source: Standard & Poor’s), which translates into a much more attractive multiple of 14 x’s earnings. Revenue growth is the missing ingredient that everyone is looking for – merely chopping an expense path to +34% earnings growth will be a challenging endeavor for corporate America.

Growth outside the U.S. has been the most dynamic and asset flows have followed. With some emerging markets up over +100% this year, the sustainability will ultimately depend on the shape of the global earnings recovery. At the end of the day, with piles of dry powder on the sidelines earning next to nothing, eventually that capital will operate as productive fuel to drive prices higher in the areas it is treated best.

Read the Complete Bloomberg Article Here.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

October 9, 2009 at 2:00 am 1 comment

Momentum Investing: Riding the Wave

Riding the Momentum Wave Can Be Dangerous

Riding the Momentum Wave Can Be Dangerous

As famed trader Jesse Livermore (July 26, 1877 — November 28, 1940) stated, Prices are never too high to begin buying or too low to begin selling.”

For the most part, the momentum trading philosophy dovetails with Livermore’s mantra. The basic premise of momentum investing is to simply buy the outperforming stocks and sell (or short) the underperforming stocks. By following this rudimentary formula, investors can generate outsized returns.  AQR Capital Management and Tobias Moskowitz (consultant), professor at Chicago Booth School of Management, ascribe to this belief too. AQR just recently launched the AQR Momentum Funds:

  • AQR Momentum Fund (AMOMX – Domestic Large & Mid Cap)
  • AQR Small Cap Momentum Fund (ASMOX – Domestic Small Cap)
  • AQR International Momentum Fund (AIMOX – International Large & Mid Cap)

Professor Moskowitz Speaks on Bloomberg  (Thought I looked young?!)

As I write in my book, How I Managed $20,000,000,000.00 by Age 32, I’m a big believer that successful investing requires a healthy mixture of both art and science. Too much of either will create negative outcomes. Modern finance teaches us that any profitable strategy will eventually be arbitraged away, such that any one profitable strategy will eventually stop producing profits.

A perfect example of a good strategy, gone bad is Long Term Capital Management. Robert Merton and Myron Scholes were world renowned Nobel Prize winners who single handedly brought the global financial markets to its knees in 1998 when it lost $500 million in one day and required a $3.6 billion bailout from a consortium of banks. Their mathematical models weren’t necessarily implementing momentum strategies, however this case is a good lesson in showing that even when smart people implement strategies that work for long periods of time, various factors can reverse the trend.

I wish AQR good luck with their quantitative momentum funds, but I hope they have a happier ending than Jesse Livermore. After making multiple fortunes and surviving multiple personal bankruptcies, Mr. Livermore committed suicide in 1940. In the mean time, surf’s up and the popularity of quantitative momentum funds remains alive and well.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

August 4, 2009 at 4:00 am 7 comments

Are Two Stimulus Packages Really Enough?

 

Plenty of talk of a 2nd stimulus adrenaline shot.

Plenty of talk of a 2nd stimulus adrenaline shot.

Am I the only one getting nauseated with all this debate regarding another potential stimulus package? Laura Tyson (Obama advisor), James Galbraith (collegiate professor), Paul Krugman (economist), and Warren Buffett, among other pundits, have recently suggested that the current multi-hundred billion plan doesn’t pack enough punch.  I think I’m going to jump in front of all these experts and start screaming for a 3rd stimulus package. Why stop at two when we can just print some more money.

Isn’t the gargantuan $11 trillion in debt and massive projected $1.8 trillion budget deficit large enough? Call me crazy, but if we currently have only spent 10% of the current $787 billion package, then shouldn’t we focus on spending the other $700 billion first before we plan a 2nd stimulus and choke our children and grandchildren with $100s of billions in additional debt. Judging by the slow implementation of stimulus disbursements and spending, I guess we still need to buy all the shovels at The Home Depot before all the “shovel-ready” projects commence.

Click Here for Bloomberg Interview with James Galbraith

Here’s another thought – perhaps we can cut wasteful inefficient spending that has grown out of control and invest those dollars into innovative research and education. Investing into the brainpower of our country will create jobs now and even higher paying ones in the future. Of course cutting spending (and jobs) doesn’t get you more votes and lobbyists are quick to remind our elected officials of this fact. We live in a society that desires instant gratification, but before lurching into a panicked state let’s collectively take a deep breath and realize this economic mess took us a while to get into and therefore will take a while to get out.

Rather than spending more in additional stimulus, possibly the current spending programs can be more efficiently prioritized. Not all spending is created equally, and therefore temporarily stuffing our houses with more cars, TVs, and clothing probably is not going to sustainably grow our economy in a country dealing with harsh realities. For example, globalization, energy dependence, and escalating healthcare costs are just a few issues that our nation needs to address.

If none of these ideas seem to gain traction, then you can join me at the trough in a push for a 3rd economic stimulus.

Wade W. Slome, CFA, CFP®          www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management and client accounts do not have direct positions in BRKA/B or HD at the time the article was published. 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.

July 13, 2009 at 4:00 am Leave a comment

U.S. the Next Zimbabwe? Faber Thinks So…

hot air balloon - firing the burner

Imagine paying $2 for a tube of toothpaste today and then $4,600,000 for that same tube one year from now – well that’s what happened in Zimbabwe.  Zimbabwe is the first country in the 21st century to hyperinflate. In February 2007, Zimbabwe’s inflation rate topped 50% per month and according to Bloomberg, the latest official figures on Zimbabwe’s inflation rate registered 231 million percent in July 2008.

“I am 100 percent sure that the U.S. will go into hyperinflation,” Marc Faber, a.k.a. “Dr Doom”, creator of  the Gloom Boom & Doom Report said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”
                                 Dr. Gloom - Marc Faber

Dr. Gloom - Marc Faber

Click Here For Video (Bloomberg)

Faber goes on to say the U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Faber said. Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.

I’m not sure if the United States should be included in the same camp as Zimbabwe? Haven’t check recently, but do they have a comparable financial system producing the likes of Microsoft, Genentech, Starbucks, and Pfizer? I think not. Our economic situation is no box of chocolates, as our deficits expand and national debt balloons, but our problems are well documented. More appropriately, I would say we are the tallest midget (or “little people” to be politically correct) and some growth hormone is on the way.

June 12, 2009 at 5:30 am Leave a comment


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