Posts tagged ‘Interest Rate Observer’
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.
Metamorphosis of a Bear into Bull
Picture Source: The Wall Street Journal (Mick Coulas)
James Grant, a self-admitted, “glass half-full kind of fellow,” recently contributed a Wall Street Journal article predicting the economic recovery will be a “bit of a barn burner.” Traditionally a pessimist, he recently experienced the metamorphosis from a bear to a bull. James Grant is a multi-book author who has written for the Interest Rate Observer for more than 25 years with thoughtful observations on economics and interest rates. With a value-tilted investment philosophy, Mr. Grant prides himself as a contrarian and anti-CNBC advocate.
Current Environment
Markets have transitioned from sheer panic (what Grant calls the “bomb shelter”) to a manageable utter fear – meaning a lot of investors still have cash stuffed under the mattress in low yielding money market and CD (Certificates of Deposit) accounts. This bed cash will ultimately act as dry powder to ignite the market higher, should earnings and macroeconomic variables continue to improve. Despite the approximate 60% index bounce from the March 2009 lows, the S&P 500 still remains more than 30% below the late 2007 highs.
Glass Half Empty Crowd
Skeptics of the market advance generally fall into one of the following buckets:
1) Armageddon is coming, just wait. Our country is choking on too much debt.
2) The stock market advance is merely a bear market rally within a secular bear market.
3) Rally fueled by temporary stimulus, which once it dries up will lead to another recession and bear market.
4) Earnings results that are coming in better than expected are merely coming from unsustainable cost-cutting.
Grant’s Rose-Colored Glasses
James Grant has a different view of the unfolding recovery in light of historical cycle patterns:
“Growth snapped back following the depressions of 1893-94, 1907-08, 1920-21 and 1929-33. If ugly downturns made for torpid recoveries, as today’s economists suggest, the economic history of this country would have to be rewritten.”
Consistent with Mr. Grant’s views, Michael T. Darda, chief economist of MKM Partners stated “The most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period.” Grant goes on to compare the current recession with the 1981-82 variety:
“[During] the first three months of 1982, real GDP shrank at an annual rate of 6.4%, matching the steepest drop of the current recession, which was registered in the first quarter of 2009. Yet the Reagan recovery, starting in the first quarter of 1983, rushed along at quarterly growth rates (expressed as annual rates of change) over the next six quarters of 5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%. Not until the third quarter of 1984 did real quarterly GDP growth drop below 5%.”
Further support for a stronger than anticipated recovery is provided via data supplied by the Economic Cycle Research Institute:
“The institute’s long leading index of the U.S. economy, along with supporting sub-indices, are making 26-year highs and point to the strongest bounce-back since 1983. A second nonconformist, the previously cited Mr. Darda, notes that the last time a recession ravaged the labor market as badly as this one has, the years were 1957-58 —after which, payrolls climbed by a hefty 4.5% in the first year of an ensuing 24-month expansion.”
Mr. Grant does not promise as large a recovery implied by Mr. Darda, but historical standards point in that direction, especially when you factor in vast pools of cash and cautious prognosticators and economists such as Ben Bernanke, Warren Buffett, and Paul Volcker. These financial “giants” have not deterred Mr. Grant’s metamorphosis from a bear to a bull.
Click Here to Read Full Grant WSJ Article
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, and at the time of publishing had no direct positions in BRKA/B. 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.
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