This past weekend's Financial Times contained an excellent column from John Authers. Authers (great name for an, ummm. . . author, eh?) writes the FT's Long View column every Saturday along with serving as FT's Investment Editor and penning other columns. In his Long View columns over the past three years, he has repeatedly referenced long-term valuations in general and the "q" and P/E ratios in particular. The point has been to try to get a feel for the extent to which stock prices have deviated from their long-term norms.
In his weekend column, Authers points out that stock markets reached extreme levels of overvaluation in 1929 and 2000 and extreme levels of undervaluation in 1932 and 1982.
One of the reasons we have yet to make a 'back up the truck' kind of re commitment to stocks in our client portfolios is that neither of these measures reached the kind of extreme level of undervaluation last year that presages the 'once in a lifetime' kind of bull market for which we are all looking. Unless and until we see such undervaluation, we expect stocks to experience tepid returns over the next few years or a return to last year's stock market lows, if not lower. Until we see those extreme levels of undervaluation, we are likely to maintain our modest (hedged) exposure to common stocks.
The full column is a short an easy read. We highly recommend it.
Learn from the past but be rooted in the present
John Authers
FT Weekend
2/6/2010
Monday, February 8, 2010
Sunday, January 31, 2010
GDP: Strong Headline Number
Friday morning, the Bureau of Economic Analysis (BEA) provided its advance estimate of 4Q09 GDP and the headline number appeared to be a very strong one. Real (after inflation) gross domestic product (the output of goods and services produced by labor and property in the United States) increased at an annual rate of 5.7% during 4Q09.
As usual, there will be revisions to this number as the BEA continues to evaluate the data. But there can be no argument that +5.7% is not a strong number. 3Q09 GDP growth, for example, was up a more pedestrian +2.2%. After a brief morning rally (1%+), the US stock market rolled over and suffered a decline of a little over 1%.
Nine months ago, the stock market was rallying strongly on economic data that was truly bad, but 'less bad' than it had been. Now we get truly 'good' economic data and the market tanks. What gives?
Two points. First, having rallied ~70% from the March 2009 lows, the financial markets are now discounting a very vigorous recovery - if not today, then in the very near future. In order for stocks to continue to run higher we must get economic data which clearly demonstrates that the recovery is indeed vigorous and that it is already happening.
That brings us to the second point. This report left a lot to be desired in terms of the 'vigorous-ness' and 'imminence' of any economic recovery.
The +5.7% annualized rate of growth preliminarily measured for 4Q09 was goosed by a significant increase in inventories. Nearly 2/3 of the +5.7% annualized rate of growth was a result of companies adding to their inventories (as opposed to sell-through to end users).
Granted, inventories had been run down during the most worrisome phase of last year's panic and needed to be rebuilt to some extent. Moreover, even a +2.2% rate of annualized growth (estimated GDP net of the inventory build) is better than the +1.5% recorded for 3Q09. But we worry that even the ex-inventory 4Q09 GDP number may not represent a sustainable rate of economic activity.
One of the problems with using GDP to measure economic prosperity is that it measures spending. One does not build wealth by spending.
We turn, then, to methods by which we could measure earnings. The Nelson A. Rockefeller Institute of Government tracks and analyzes state fiscal conditions, tax policies, fiscal capabilities and spending trends. In its latest release (full report here), the Institute noted a -10.9% decline in state tax collections through 9/30/09. Moreover, the early read of 4Q09 data suggests the decline in tax collections continues, albeit at a slower pace. For the 38 states reporting early data, personal income tax collections fell -6.5% in the first two months of 4Q09.
While we are not eager to spit into the wind nor tug on Superman's cape, we nonetheless take issue with the conventional wisdom that the recession is over. The Rockefeller Institute data suggests that personal income continues to lag the economic statistics being reported. It will be tough to have much of a recovery unless and until the consumer sees some stabilization to his/her income. . . much less growth.
In our view, a slower less vigorous recovery is more likely than the kind to which we have become accustomed over the past 50-60 years. That's not necessarily a bad thing. We need time for consumers and corporations to rebuild their respective balance sheets. Such a period of retrenchment and rebuilding will lay a strong foundation for a sustainable recovery.
Government policies, should therefore focus on saving and investing rather than spending.
As usual, there will be revisions to this number as the BEA continues to evaluate the data. But there can be no argument that +5.7% is not a strong number. 3Q09 GDP growth, for example, was up a more pedestrian +2.2%. After a brief morning rally (1%+), the US stock market rolled over and suffered a decline of a little over 1%.
Nine months ago, the stock market was rallying strongly on economic data that was truly bad, but 'less bad' than it had been. Now we get truly 'good' economic data and the market tanks. What gives?
Two points. First, having rallied ~70% from the March 2009 lows, the financial markets are now discounting a very vigorous recovery - if not today, then in the very near future. In order for stocks to continue to run higher we must get economic data which clearly demonstrates that the recovery is indeed vigorous and that it is already happening.
That brings us to the second point. This report left a lot to be desired in terms of the 'vigorous-ness' and 'imminence' of any economic recovery.
The +5.7% annualized rate of growth preliminarily measured for 4Q09 was goosed by a significant increase in inventories. Nearly 2/3 of the +5.7% annualized rate of growth was a result of companies adding to their inventories (as opposed to sell-through to end users).
Granted, inventories had been run down during the most worrisome phase of last year's panic and needed to be rebuilt to some extent. Moreover, even a +2.2% rate of annualized growth (estimated GDP net of the inventory build) is better than the +1.5% recorded for 3Q09. But we worry that even the ex-inventory 4Q09 GDP number may not represent a sustainable rate of economic activity.
One of the problems with using GDP to measure economic prosperity is that it measures spending. One does not build wealth by spending.
We turn, then, to methods by which we could measure earnings. The Nelson A. Rockefeller Institute of Government tracks and analyzes state fiscal conditions, tax policies, fiscal capabilities and spending trends. In its latest release (full report here), the Institute noted a -10.9% decline in state tax collections through 9/30/09. Moreover, the early read of 4Q09 data suggests the decline in tax collections continues, albeit at a slower pace. For the 38 states reporting early data, personal income tax collections fell -6.5% in the first two months of 4Q09.
While we are not eager to spit into the wind nor tug on Superman's cape, we nonetheless take issue with the conventional wisdom that the recession is over. The Rockefeller Institute data suggests that personal income continues to lag the economic statistics being reported. It will be tough to have much of a recovery unless and until the consumer sees some stabilization to his/her income. . . much less growth.
In our view, a slower less vigorous recovery is more likely than the kind to which we have become accustomed over the past 50-60 years. That's not necessarily a bad thing. We need time for consumers and corporations to rebuild their respective balance sheets. Such a period of retrenchment and rebuilding will lay a strong foundation for a sustainable recovery.
Government policies, should therefore focus on saving and investing rather than spending.
Thursday, January 28, 2010
Housing
The Commerce Department reported yesterday that new home sales fell to a seasonally-adjusted rate of 342,000 units in December, 7.6% below November's rate of 370,000.
Equally worrisome is news that the inventory of new homes for sale has jumped back up to 8.1 months from 7.6 months in November. As a result, it is now taking home builders almost 14 months to sell a home, on average, versus about four months back during 'the good old days'.
Most news sources called the weak sales report "unexpected" or some similar adjective suggesting surprise. From our perspective, it is surprising that folks are surprised that home sales remain tepid.
We built too many. We borrowed too much. Largely as a result of a well-intentioned but misguided federal policy of subsidization, we put more people into home ownership than can maintain ownership - particularly through a financial crisis. It takes time to rectify such imbalances. Moreover, when the government steps in to 'cushion the blow' of this crisis, the short-term pain may indeed be blunted, but at the expense of dragging out the process.
Those well-intentioned policy choices also distort efforts to measure activity (or lack thereof) in the real estate markets. The S&P/Case-Shiller Home Price Index released this past Tuesday was worse than expected but nonetheless revealed that the rate of decline in home prices continues to slow. The problem with this data is knowing how much the readings are distorted by the first-time home buyer credit and other temporary factors.
The smart folks over at Annaly recently took a shot at sorting out what is happening. In doing so, they reference the Federal Reserve's preferred measure of national home prices: the LoanPerformance National Home Price Indices. While not perfectly correlated on a month-to-month basis, the LoanPerformance data tends to match the readings of the Case-Shiller home price data over time.
As the Annaly blog post notes:
In the mean time, we continue to believe expectations for real estate activity - and therefore prices - should be kept modest.
Equally worrisome is news that the inventory of new homes for sale has jumped back up to 8.1 months from 7.6 months in November. As a result, it is now taking home builders almost 14 months to sell a home, on average, versus about four months back during 'the good old days'.
Most news sources called the weak sales report "unexpected" or some similar adjective suggesting surprise. From our perspective, it is surprising that folks are surprised that home sales remain tepid.
We built too many. We borrowed too much. Largely as a result of a well-intentioned but misguided federal policy of subsidization, we put more people into home ownership than can maintain ownership - particularly through a financial crisis. It takes time to rectify such imbalances. Moreover, when the government steps in to 'cushion the blow' of this crisis, the short-term pain may indeed be blunted, but at the expense of dragging out the process.
Those well-intentioned policy choices also distort efforts to measure activity (or lack thereof) in the real estate markets. The S&P/Case-Shiller Home Price Index released this past Tuesday was worse than expected but nonetheless revealed that the rate of decline in home prices continues to slow. The problem with this data is knowing how much the readings are distorted by the first-time home buyer credit and other temporary factors.
The smart folks over at Annaly recently took a shot at sorting out what is happening. In doing so, they reference the Federal Reserve's preferred measure of national home prices: the LoanPerformance National Home Price Indices. While not perfectly correlated on a month-to-month basis, the LoanPerformance data tends to match the readings of the Case-Shiller home price data over time.
As the Annaly blog post notes:
It’s clear now that there was nothing organic about the pick-up in sales activity or prices in the back half of 2009. We look forward to seeing how S&P/Case-Shiller and LoanPerformance home price indices respond to this lower level of demand when we receive December data.We will point out the LoanPerformance December data as soon as it is released.
In the mean time, we continue to believe expectations for real estate activity - and therefore prices - should be kept modest.
Wednesday, January 13, 2010
Working Man Blues
Last Friday, the US Bureau of Labor Statistics (BLS) released the December Employment Situation report. It was generally received by the market as mixed to positive news, largely because a) after peaking at 10.1% in October, the unemployment rate has leveled off at 10.0% for November and December; and b) the previously-released November employment data was revised from the originally-reported loss of 11,000 jobs to a gain of 4,000 jobs.
To be sure, there were worries immediately following the release of the data, the two positive data points above notwithstanding. Most significant of the concerns was the fact that analysts' consensus forecast was for a modest gain in jobs during December but the shocking reality was a loss of 85,000 jobs. After a brief scare, the stock market ultimately 'decided' that those two positive data points above outweighed the December job losses and prices ended the day higher.
After spending much time with this data and calling on some 'friends' to check our sanity, we are writing to caution that the conventional wisdom on the current 'employment situation' might have it wrong.
Dead wrong.
First, the easy one. That the surprising loss of jobs in December was canceled out by the revision to November's data is nonsense. The December loss of jobs above expectations was several orders of magnitude greater than jobs 'saved' by the November revision.
Most concerning to us is the fact that the US civilian labor force declined by 661,000 in December. What that means is that 661,000 Americans gave up on finding a job last month and are no longer considered for statistical purposes to be "unemployed". But let's be clear: they are not employed.
To put this in perspective, consider that the number of civilians leaving the labor force in November was 134,000. December's number was nearly five times that.
Further, understand that the number of American civilians considered to be in the US labor force comprises the denominator of the unemployment calculation. The numerator is comprised of the number of civilians receiving unemployment benefits. So let's have a little fun with numbers: If the number of people leaving the labor force in December had merely matched November's -134,000, the unemployment rate would have spiked to 10.3% instead of holding steady at 10.0%.
From where we sit, that pretty much eliminates any consolation we should take from December's 'steady' unemployment rate.
Moreover, we believe this development suggests the US unemployment rate will find it very difficult to drop out of the double-digits. We say this because we would expect these "discouraged" workers to begin swiftly reentering the work force as the employment picture stabilizes, likely causing the denominator in the unemployment calculation to remain stubbornly large.
Seems Bob Dylan has more and more company singing his Working Man Blues.
To be sure, there were worries immediately following the release of the data, the two positive data points above notwithstanding. Most significant of the concerns was the fact that analysts' consensus forecast was for a modest gain in jobs during December but the shocking reality was a loss of 85,000 jobs. After a brief scare, the stock market ultimately 'decided' that those two positive data points above outweighed the December job losses and prices ended the day higher.
After spending much time with this data and calling on some 'friends' to check our sanity, we are writing to caution that the conventional wisdom on the current 'employment situation' might have it wrong.
Dead wrong.
First, the easy one. That the surprising loss of jobs in December was canceled out by the revision to November's data is nonsense. The December loss of jobs above expectations was several orders of magnitude greater than jobs 'saved' by the November revision.
Most concerning to us is the fact that the US civilian labor force declined by 661,000 in December. What that means is that 661,000 Americans gave up on finding a job last month and are no longer considered for statistical purposes to be "unemployed". But let's be clear: they are not employed.
To put this in perspective, consider that the number of civilians leaving the labor force in November was 134,000. December's number was nearly five times that.
Further, understand that the number of American civilians considered to be in the US labor force comprises the denominator of the unemployment calculation. The numerator is comprised of the number of civilians receiving unemployment benefits. So let's have a little fun with numbers: If the number of people leaving the labor force in December had merely matched November's -134,000, the unemployment rate would have spiked to 10.3% instead of holding steady at 10.0%.
From where we sit, that pretty much eliminates any consolation we should take from December's 'steady' unemployment rate.
Moreover, we believe this development suggests the US unemployment rate will find it very difficult to drop out of the double-digits. We say this because we would expect these "discouraged" workers to begin swiftly reentering the work force as the employment picture stabilizes, likely causing the denominator in the unemployment calculation to remain stubbornly large.
Seems Bob Dylan has more and more company singing his Working Man Blues.
Wednesday, December 30, 2009
Gold: Protective Hedge or Bubble?
John Hathaway, Senior Managing Director of Tocqueville Asset Management, penned a column entitled "A Contrarian's Dilemma" in which he discusses the two sides of our question above. His conclusion:
In the 2005 Year-End Review and Outlook for Tocqueville's gold fund, Hathaway wrote that bull markets can be measured in four stages: the beginning, the end of the beginning, the beginning of the end, and the end. In this most recent column, he notes that the second stage of the gold bull market likely ended as the price of gold crossed above $1,000, marking the beginning of the end (stage three). From the column:
The greatest difficulty we have had in owning gold over the past year has been the juxtaposition of our 'contrarian' nature and the popularity of owning gold. When financially-challenged stars like Ed McMahon and MC Hammer are on television pimping the services of something called Cash4Gold, our contrarian 'Spidey-antennae' start buzzing. We checked and rechecked our work and decided to stick with our position. So far, so good. Mr. Hathaway states the case eloquently:
A Contrarian's Dilemma
Tocqueville Asset Management, LP
December 7, 2009
Gold is a bubble only for those who maintain faith in the ability of politicians and financial authorities to swim against the tide of deflation. For the rest of us, it is protection against monetary damage still to come.Having said that, he also acknowledges that the bull market in gold is no longer in its early stages.
In the 2005 Year-End Review and Outlook for Tocqueville's gold fund, Hathaway wrote that bull markets can be measured in four stages: the beginning, the end of the beginning, the beginning of the end, and the end. In this most recent column, he notes that the second stage of the gold bull market likely ended as the price of gold crossed above $1,000, marking the beginning of the end (stage three). From the column:
The first two stages took a full ten years. The latter two stages will take years but we doubt a full decade.For our part, we have been talking about the bull market in gold as a baseball game, noting that we are probably in the fourth or fifth inning. It's not early, but it's not late.
The greatest difficulty we have had in owning gold over the past year has been the juxtaposition of our 'contrarian' nature and the popularity of owning gold. When financially-challenged stars like Ed McMahon and MC Hammer are on television pimping the services of something called Cash4Gold, our contrarian 'Spidey-antennae' start buzzing. We checked and rechecked our work and decided to stick with our position. So far, so good. Mr. Hathaway states the case eloquently:
"For the contrarian, life has become more difficult even as it has become more gratifying. The commotion surrounding gold makes the contrarian strand of thought harder to detect. It is not that we don’t welcome the “Johnny come latelys” to the hard money cause. They are, for the most part, elite investment thinkers who have a history of sound decision making. However, we no longer enjoy the luxury of peace and quiet or as much time to reflect. Our periodic sanity checks, based on the makeup of the opposition, are somewhat less frequent and perhaps not as reliable. Still, we perceive that gold continues to be under owned and misunderstood by most. While it is no longer enough to observe that the metal is of interest based on universal apathy, it is safe to say that it has a long way to go before it becomes mainstream."
A Contrarian's Dilemma
Tocqueville Asset Management, LP
December 7, 2009
Wednesday, December 2, 2009
But The Banks Are 'On The Mend', No?
In a word, "no".
We are tardy in highlighting John Hussman's latest Sunday night column, which is one of his best. First, he has important things to say about the sustainability of both the current economic pause (sorry, we just cannot yet apply the term "recovery") and the huge rebound in the prices of financial assets (but - notably - not real assets).
But before we go there, we were pleased to read the latest blog entry from the bright folks at Annaly Capital Management. They point out the nonsense that are the present US bank financial statement practices. It is a quick (and excellent) read.
Back to the Hussman column, for which you should set aside some quiet time:
But then Dr. Hussman (he's a Ph.D.) itemizes three policy actions we enthusiastically support:
It is time to stop
a) the unilateral subsidization of bank bondholders at the expense of this country's taxpayers; and
b) the banks' charade in valuing and reserving for loan losses.
We can 'handle the truth', although the banks' stock prices may not.
We are tardy in highlighting John Hussman's latest Sunday night column, which is one of his best. First, he has important things to say about the sustainability of both the current economic pause (sorry, we just cannot yet apply the term "recovery") and the huge rebound in the prices of financial assets (but - notably - not real assets).
But before we go there, we were pleased to read the latest blog entry from the bright folks at Annaly Capital Management. They point out the nonsense that are the present US bank financial statement practices. It is a quick (and excellent) read.
Back to the Hussman column, for which you should set aside some quiet time:
Banks are contracting their loan portfolios at a record rate, according to the latest FDIC Quarterly Banking Profile. Even so, new delinquencies continue to accelerate faster than loan loss reserves. Tier 1 capital looked quite good last quarter, as one would expect from the combination of a large new issuance of bank securities, combined with an easing of accounting rules to allow “substantial discretion” with respect to credit losses. The list of problem institutions is still rising exponentially. Overall, earnings and capital ratios have enjoyed a reprieve in the past couple of quarters, but delinquencies have not, and all evidence points to an acceleration as we move into 2010.(emphasis ours) See the full column for details.
But then Dr. Hussman (he's a Ph.D.) itemizes three policy actions we enthusiastically support:
First, the FDIC should be given regulatory authority to take non-bank financials into conservatorship the way they should have been able to do with Bear Stearns and Lehman.Such a policy would have rightly shifted the losses from the Bear Stearns implosion onto Bear's bondholders rather than on we taxpayers, as is the fact.
Second, bank capital requirements should be altered to require a substantial portion of bank debt to be of a form that automatically converts to equity in the event of capital inadequacy.Remember the term "CoCos". These are the the 'contingent convertible' bonds of which Dr. Hussman writes. You will probably be hearing more about them and, as in his first proposal, this one would protect taxpayers from shouldering the losses created by failed banks - again rightly shifting such losses back where they belong - on the banks' shareholders and bondholders.
Finally, Congress should be clear that government funds will be available only to protect the interests of depositors, not bondholders.A third layer of protection for we taxpayers.
It is time to stop
a) the unilateral subsidization of bank bondholders at the expense of this country's taxpayers; and
b) the banks' charade in valuing and reserving for loan losses.
We can 'handle the truth', although the banks' stock prices may not.
Tuesday, December 1, 2009
It's Just a Flesh Wound!
Bear with us. We will connect the famous quote from Monty Python and the Holy Grail to the US economy. . . eventually.
The National Bureau of Economic Research (NBER) is the ultimate arbiter of when a recession begins or ends in the United States. In doing so, the NBER considers a number of factors. The four most common factors cited by the NBER are employment, real personal income (excluding government transfers such as Social Security), industrial production and real sales.
Let's take a look at each of these in more detail.
Employment
The most recent weekly report (as of 11/21) showed a large decline in unemployment claims - but only because it was a seasonally-adjusted number. Let's be honest, employment stinks. Even the seasonally-adjusted weekly claims of 466,000 is a historically-high number. That anyone would point to it as an improvement betrays just how ugly employment is right now. And it is not getting appreciably better anytime soon.
Real Personal Income
If employment is weak, personal income must also be weak. Between unemployment and under-employment (part time work), personal income has taken a hit since peaking in late 2000. The decline since 2005 is particularly steep. This year, personal income has been stuck around a -2% to -4% year-over-year decline. Not pretty.
Industrial Production
The only factor out of the four that offers any hope of having bottomed, industrial production recently logged a -13% year-over-year reading in June before stabilizing over the past four months.
Real Sales
The US Bureau of Economic Analysis provides "real final sales" data within its GDP data, defined as GDP less the change in private inventories. In other words, it is US GDP adjusted for the extent to which businesses allow inventories to accumulate or run down - i.e. it is the actual amount of goods and services purchased by end users. The latest report on retail sales (aside from auto sales that have been seriously disrupted by government incentives) continues to reveal very weak demand.
So of the four data points most often cited by the NBER for recession calls, three remain VERY weak.
Tying this back to the Holy Grail, it is as if the Black Night has had three of his four limbs severed.
The National Bureau of Economic Research (NBER) is the ultimate arbiter of when a recession begins or ends in the United States. In doing so, the NBER considers a number of factors. The four most common factors cited by the NBER are employment, real personal income (excluding government transfers such as Social Security), industrial production and real sales.
Let's take a look at each of these in more detail.
Employment
The most recent weekly report (as of 11/21) showed a large decline in unemployment claims - but only because it was a seasonally-adjusted number. Let's be honest, employment stinks. Even the seasonally-adjusted weekly claims of 466,000 is a historically-high number. That anyone would point to it as an improvement betrays just how ugly employment is right now. And it is not getting appreciably better anytime soon.
Real Personal Income
If employment is weak, personal income must also be weak. Between unemployment and under-employment (part time work), personal income has taken a hit since peaking in late 2000. The decline since 2005 is particularly steep. This year, personal income has been stuck around a -2% to -4% year-over-year decline. Not pretty.
Industrial Production
The only factor out of the four that offers any hope of having bottomed, industrial production recently logged a -13% year-over-year reading in June before stabilizing over the past four months.
Real Sales
The US Bureau of Economic Analysis provides "real final sales" data within its GDP data, defined as GDP less the change in private inventories. In other words, it is US GDP adjusted for the extent to which businesses allow inventories to accumulate or run down - i.e. it is the actual amount of goods and services purchased by end users. The latest report on retail sales (aside from auto sales that have been seriously disrupted by government incentives) continues to reveal very weak demand.
So of the four data points most often cited by the NBER for recession calls, three remain VERY weak.
Tying this back to the Holy Grail, it is as if the Black Night has had three of his four limbs severed.
What are you gonna do, bleed on me?We remain unconvinced that the recession has ended and continue to recommend that you structure you spending and saving accordingly.
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