Each January I am energized by the prospect of fresh new ground to plow (metaphorically speaking) in the capital markets. Although long-term investors need not mark the passing of an old year in any special way (if you think about it, December 31 is no more special than July 4 or any other day for the long-haul investor), we tend to do exactly that. Along with all of the traditional holiday trappings which accompany the end of the year, we also see the obligatory forecasts from Wall Street strategists giving their best guesses for the new year. I often wonder why in our industry we tout the virtues of investing for the long run and we (investment professionals) send out quarterly performance statements!
So here we sit with most of 2009 still ahead of us and the train wreck that was 2008 still etched in our minds, ringing in our ears, and still visible in our rear view mirrors and yet I feel somewhat hopeful and quite positive. Granted, the news on the economy is unlikely to be anything but horrid for a while, but eventually this too will improve. More important than the headline news on how the economy is doing, is what we are seeing at the micro level at corporations. Although the bulk of corporate activity is still mostly negative, we are seeing some very early, very preliminary signs that inventories are being worked through and that here and there we are seeing a few new orders. This is probably not enough to make the front page (after all gloom and doom still seems to sell newspapers), but it may be something for the stock market to begin paying attention to.
Thursday, January 29, 2009
Friday, January 9, 2009
Perspective on the Employment Report
This morning the US Labor Department reported that 524,000 jobs were lost in December and that the unemployment rate rose to 7.2%. Expectations had been for around 550,000 jobs lost and a rate of 7.0%. The job loss figures for October and November were both revised upward. Despite these numbers, the stock market has opened mixed – suggesting that these figures are not significantly out of line with expectations.
The media seems to have difficulty in putting these figures into any kind of context. They seem to suggest that evil forces are at work oppressing the US worker ; they try to portray a sense of hopelessness and futility and point to the government as the “only hope” for the American worker. Clearly, this is nonsense. Recessions come and go and one of the benefits of them is “creative destruction.” Companies and industries which are no longer competitive will fail in a recession. The human and financial capital, management talent and creativity which was formerly deployed in these efforts will find new areas to bloom. I often think of the imagery of the dinosaurs being lead to extinction by some catastrophe followed by the emergence of small, furry mammals as the dominant form of life on earth.
The US economy has a rich history of entrepreneurship and this allows the nations to rebound quickly from financial and other crises. Most commentary today suggests that the current recession will be a long one (16 months or so), but that means that it should be ending sometime in the summer. This is consistent with James Swanson’s view. It’s to reflect on the idea that the stock market usually tries to discount the future. We also know that bear markets always end during the recession (it’s happened every time since 1929). These two facts suggest the equity market has the potential to be the best place to put one’s money right now.
One final comment about the employment report from the New York Times, “But for all the job losses, the current recession, now in its 14th month, falls short of the mid-’70s and early ’80s recessions, at least so far. The total number of men and women at work declined 2.7 percent in the 1974-75 recession and by 3.1 percent in 1981-82. In the current recession, the loss through November was under 2 percent.” It’s also good to note that the December employment report was marginally better than November’s.
Some might look at this and think, “Well, things can get a lot worse.” I would submit that the fundamental nature of the economy is different now vs. then – the economy is much less linked to energy consumption and manufacturing and more export and service oriented. This suggests a greater resilience to cyclical forces (it’s easier to re-train service workers than factory workers, for example) and a resumption in growth in large developing nations such as China and India may provide a much greater benefit to US mulit-nationals than would have happened in the 1970s or 1980s.
We can expect much of the economic data to be reported over the next few weeks and months to show a weak economy. I would be surprised to see the majority of data suggesting a weakening economy. Remember that the stock market does not need good news to recovery, but simply news that is “less bad” than before.
The media seems to have difficulty in putting these figures into any kind of context. They seem to suggest that evil forces are at work oppressing the US worker ; they try to portray a sense of hopelessness and futility and point to the government as the “only hope” for the American worker. Clearly, this is nonsense. Recessions come and go and one of the benefits of them is “creative destruction.” Companies and industries which are no longer competitive will fail in a recession. The human and financial capital, management talent and creativity which was formerly deployed in these efforts will find new areas to bloom. I often think of the imagery of the dinosaurs being lead to extinction by some catastrophe followed by the emergence of small, furry mammals as the dominant form of life on earth.
The US economy has a rich history of entrepreneurship and this allows the nations to rebound quickly from financial and other crises. Most commentary today suggests that the current recession will be a long one (16 months or so), but that means that it should be ending sometime in the summer. This is consistent with James Swanson’s view. It’s to reflect on the idea that the stock market usually tries to discount the future. We also know that bear markets always end during the recession (it’s happened every time since 1929). These two facts suggest the equity market has the potential to be the best place to put one’s money right now.
One final comment about the employment report from the New York Times, “But for all the job losses, the current recession, now in its 14th month, falls short of the mid-’70s and early ’80s recessions, at least so far. The total number of men and women at work declined 2.7 percent in the 1974-75 recession and by 3.1 percent in 1981-82. In the current recession, the loss through November was under 2 percent.” It’s also good to note that the December employment report was marginally better than November’s.
Some might look at this and think, “Well, things can get a lot worse.” I would submit that the fundamental nature of the economy is different now vs. then – the economy is much less linked to energy consumption and manufacturing and more export and service oriented. This suggests a greater resilience to cyclical forces (it’s easier to re-train service workers than factory workers, for example) and a resumption in growth in large developing nations such as China and India may provide a much greater benefit to US mulit-nationals than would have happened in the 1970s or 1980s.
We can expect much of the economic data to be reported over the next few weeks and months to show a weak economy. I would be surprised to see the majority of data suggesting a weakening economy. Remember that the stock market does not need good news to recovery, but simply news that is “less bad” than before.
Monday, September 29, 2008
"Panic is not a investment strategy" Liz Ann Sonders - Chief Investment Strategist - Charles Schwab & Co.
For the last few weeks, decision makers all over the world have been grappling with the far-reaching implications of the current credit crisis. Today, the narrative took a decidedly turn for the worst as the US House of Representatives failed to pass the legislation that would have set up a $700 billion loan to shore up the weak mortgage security market. In our view, the crisis has morphed from a financial crisis into a leadership crisis. Those representatives who voted against this legislation appeal to have done so out of some bizarre notion that their constituencies did not back the plan because it was a "Wall Street Bailout." Not only does this concept underscore a totally lack of understanding of the plan by the average "man of the street," (ultimately we think this plan is in every possible way a "Main Street Bailout") but shows a complete rejection of the fiduciary responsibility Congress has to provide leadership and make the tough decisions the "man in the street" is ill-equipped to make.
The fact that partisan politics has also raised it ugly head in the midst of this critical time for the US economy and its capital markets is also a grave concern for us. We are loathe to lay blame for any decision anyone makes in good faith, but this lack of leadership in this time of crisis is unforgivable. We think that those who voted against this plan will have a lot of explaining to do, if fundamentals quickly deteriorate.
While we are in the mood to lay blame (against our better nature), let's review the guilty parties of this financial crisis:
1) Anyone who bought a home with no money down or without documented proof of income and who expected to "flip" it quickly to make a short-term profit. Guilt is multiplied by the number of homes bought and sold this way.
2) Any bank or mortgage lender to who loans to any home buyer without an adequate down, payment, adequate documentation and/or proof of income. Loan officers share the blame with their managers who were likely encouraging this behavior.
3) Any bank who sold these mortgages to someone else. This has been standard practice for a long time - if banks had to keep the mortgages they made, we would expect that the lending standards might have been kept more reasonable.
4) Any investment bank or financial intermediary who then packaged bundles of these mortgages into CDOs and other like securities and sold them to investors.
5) Any bond rating agency who rated these securities "AAA" (best quality) knowing that some portion of the mortgages in these bundles would go bad as the home buyers (see #1) eventually would begin to default.
6) Any investor who bought these securities - this huge list would include mutual funds, banks, investment banks, hedge funds, pension funds, 401k advisors, corporations, etc.
7) Any manager of firms included in #6 who pushed their fund managers or treasury staff to "get more yield" on fixed income securities. The admonition to "get more yield" pushed many decision makers to buy these bundles of mortgages.
8) Anybody who thought one could receive a higher yield on a security without a higher degree of risk.
9) Anyone who said (after the fact), "Hey, I thought it was rated 'AAA'" (see #5).
10) Anyone in the government who encouraged home ownership as an unalienable part of the American Dream.
11) Anyone who might call into question the urgency of the this crisis for political gain.
Clearly, laying blame is a non-productive activity at this point in the crisis, but for many talking heads featured in the media, it seems to be only important thing.
At this point, we think the market is being driven purely by fear (nothing fundamental changed for the economy today) and this is often the tell-tale sign of a selling climax. Very often, the end of a bear market is marked by a dramatic event that creates a huge vortex a negativity that overwhelms all reason and objectivity. Today's market action has that feel about it.
We cannot quantify the impact this kind of fear can have on the markets, but we are confident that when this fear abates, the markets can resume their normal path to recovery. We continue to think that the market is offering a vast quantity of very high-quality stocks at massive discounts to their fair value. We, like most long-term professional investors we know, are using this market turmoil to upgrade the quality of our holdings, use cash to buy equities and in some cases, move from bonds to stocks.
In our view, economic fundamentals have not changed today. The US economy continues to face a number of challenges, but one of the more troubling challenges (the credit crunch) could be largely addressed by the simple passage of the Paulson/Bernacke proposal. When this happens, we expect the global stock markets to response very favorably.
The fact that partisan politics has also raised it ugly head in the midst of this critical time for the US economy and its capital markets is also a grave concern for us. We are loathe to lay blame for any decision anyone makes in good faith, but this lack of leadership in this time of crisis is unforgivable. We think that those who voted against this plan will have a lot of explaining to do, if fundamentals quickly deteriorate.
While we are in the mood to lay blame (against our better nature), let's review the guilty parties of this financial crisis:
1) Anyone who bought a home with no money down or without documented proof of income and who expected to "flip" it quickly to make a short-term profit. Guilt is multiplied by the number of homes bought and sold this way.
2) Any bank or mortgage lender to who loans to any home buyer without an adequate down, payment, adequate documentation and/or proof of income. Loan officers share the blame with their managers who were likely encouraging this behavior.
3) Any bank who sold these mortgages to someone else. This has been standard practice for a long time - if banks had to keep the mortgages they made, we would expect that the lending standards might have been kept more reasonable.
4) Any investment bank or financial intermediary who then packaged bundles of these mortgages into CDOs and other like securities and sold them to investors.
5) Any bond rating agency who rated these securities "AAA" (best quality) knowing that some portion of the mortgages in these bundles would go bad as the home buyers (see #1) eventually would begin to default.
6) Any investor who bought these securities - this huge list would include mutual funds, banks, investment banks, hedge funds, pension funds, 401k advisors, corporations, etc.
7) Any manager of firms included in #6 who pushed their fund managers or treasury staff to "get more yield" on fixed income securities. The admonition to "get more yield" pushed many decision makers to buy these bundles of mortgages.
8) Anybody who thought one could receive a higher yield on a security without a higher degree of risk.
9) Anyone who said (after the fact), "Hey, I thought it was rated 'AAA'" (see #5).
10) Anyone in the government who encouraged home ownership as an unalienable part of the American Dream.
11) Anyone who might call into question the urgency of the this crisis for political gain.
Clearly, laying blame is a non-productive activity at this point in the crisis, but for many talking heads featured in the media, it seems to be only important thing.
At this point, we think the market is being driven purely by fear (nothing fundamental changed for the economy today) and this is often the tell-tale sign of a selling climax. Very often, the end of a bear market is marked by a dramatic event that creates a huge vortex a negativity that overwhelms all reason and objectivity. Today's market action has that feel about it.
We cannot quantify the impact this kind of fear can have on the markets, but we are confident that when this fear abates, the markets can resume their normal path to recovery. We continue to think that the market is offering a vast quantity of very high-quality stocks at massive discounts to their fair value. We, like most long-term professional investors we know, are using this market turmoil to upgrade the quality of our holdings, use cash to buy equities and in some cases, move from bonds to stocks.
In our view, economic fundamentals have not changed today. The US economy continues to face a number of challenges, but one of the more troubling challenges (the credit crunch) could be largely addressed by the simple passage of the Paulson/Bernacke proposal. When this happens, we expect the global stock markets to response very favorably.
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