Friday, February 27, 2009

Beware of Terminal Paralysis

As the stock market indices are flirting with key charting levels and we are waiting for Mr Market to show his hand, it is useful to get an update on the outlook from Jeremy Grantham.
Grantham, chairman of Boston-based GMO, was a great skeptic between 1999 and October last year when he started propagating “hesitant and careful buying”. His latest thinking has just been reported in an interview with CNN Money as quoted below.

“Meanwhile, GMO chairman Jeremy Grantham is more upbeat - though he does expect more pain to precede any recovery.

“Looking back at historic bear markets, Grantham draws comparisons to 1974 and 1982, when the S&P 500 lost roughly half its value. Since he estimates the current S&P 500 fair value at 900, Grantham puts his worst-case bottom at a hair-raising 450.

“‘That’s fairly scary, but on the one hand we look at the massive stimulus, and then on the other we try to work out the fact that the global economy is in worse shape than it was in ‘74 or ‘82,’ says Grantham. ‘I’d say there are three-to-one odds that we go to a material new low. We should count on [the S&P 500] hitting 600 for a little while, and we should hope like mad it doesn’t get deep into the 500s.’

“Patience rules. Another looming threat is that the market may enter an extended period of drops and rebounds that flatten long-term returns and strand buy-and-hold investors for decades.

“Japan’s stalled stock market is one recent example, but the U.S. has had its shares of quagmires, too. Grantham likes to point out that investors who bought at market crests in 1929 and 1965 had to wait 19 years each time just to break even.

“Still, Grantham says buy-and-hold still makes sense for long-term investors when stocks are trading below fair value. He especially favors U.S. blue chips, and his fund is on a strict, slow schedule to invest as valuations dip even lower.

“‘If you don’t have a schedule for investing, you will not do it,” he says. “When the market goes down, it reinforces the hoarding of cash. By the bottom, you suffer what we called in 1974 terminal paralysis - you cannot pull the trigger. Almost everyone who avoids the great pain is very slow to get back.’

Source: Eugenia Levenson, CNN Money, February 25, 2009

Wednesday, February 25, 2009

Faber Blames Federal Reserve

From here.

Marc Faber the Swiss fund manager and Gloom Boom & Doom publisher blames the federal reserve's monetary policy for the global financial crisis.

Faber believes the additional printing of money across economies for financing such stimulus packages would lead to "higher and higher fiscal imbalances". In such a scenario, he expects precious metals such as gold and silver to outperform assets such as equities in 2009.
In a recent edition of The Wall Street Journal, Faber says: “The world has gone from the greatest synchronised economic boom in history to the first synchronised global bust since the Great Depression," due to monetary policy.

Our currently disastrous global economy may also be attributed to governments that ignored market signals and central bankers who believed in endless booms, Faber says.

"The Fed never truly implemented tight monetary policy [when it was needed]," he said. In January 2001, the Fed began cutting rates, from 6.5% to 1.75% as the year ended, and down to 1% in 2003, Faber points out. These were the wrong moves, Faber suggests, since the US economy began rebounding on its own in November 2001.

Right now, "the best policy response would be to do nothing and let the free market correct the excesses brought about by unforgivable [Fed] policy errors," Faber says.

The economic downturn and uncertainty in the global markets have focussed investors attention to gold as a unique asset class which can play a vital role in providing stability. Gold has risen at a much faster rate than equities and it is expected that this out-performance will continue for the next few years.

Addressing the gold to Dow Jones ratio at a recent Barron's Roundtable, Faber said: "One day the price of gold will be higher than the Dow Jones."

"The CRB, a broad index of commodities, fell for 20 years in nominal terms, from 1980 to 1999. It is now up 12% and is still inexpensive. The Dow and the S&P are up substantially from the 1980s or early 1990s. Everyone thinks fiscal and monetary measures will work to fix the financial system. I don't. They will be disastrous and fuel inflation. But the supply of oil, gas and copper is relatively limited compared to paper money you can print," Faber added.

If one considers that in 1932 and in 1980 the Dow Jones Industrial and the price of an ounce of gold were very close to parity, it is possible to envisage the same happening again during the current cycle.

Thursday, February 19, 2009

People are Going to Save, not Spend

The inevitable outcome.

Wednesday, February 18, 2009

Frontline - The FInancial Crisis

It seems that the video won't embed so here is the link:

Tuesday, February 17, 2009

Debt, debt, and more debt . . . .

From the Financial Post.

VICTORIA - Many Canadian households carry debt loads in the "danger zone," says the executive director of the Ottawa-based Vanier Institute of the Family.

Average household debt rose to more than $90,000 in 2008, Clarence Lochhead told a recent meeting of Victoria's Association of Family Serving Agencies. The Vanier Institute is a non-profit agency promoting the well-being of Canadian families.

The total debt-to-disposable income ratio rose to 140% last year, Mr. Lochhead said, referring to the Institute's report, The Current State of Canadian Family Finances.

Last year, the average household income was $65,200, up by 11.6% from 1990. In that same period, spending jumped by 24.4%, total debt went up more than six times faster than incomes, and annual savings shrank, he said.

The median (mid-point) real earnings of Canadians, when adjusted for inflation, show little increases between 1980 and 2005, he said. Meanwhile, many citizens are overloaded at work.
The reward: "We got credit. We got a lot of credit," he said in reference to interest rates dropping in the past several years.

"But there was a whole, I think, really big cultural shift too in the way we think about spending, the way we feel about money, the way we feel about availability of credit - the push to spend when you don't have money," he said.

When spending outpaces income, families end up close to the edge of their monthly budget. Mr. Lochhead said it can be financially painful if they hit a bump in the road, whether it is due to the fallout from today's recession or a personal reason.

It is not irrational behaviour to pull back on spending, Mr. Lochhead added. He said that not all debt is bad, but rising consumer debt as a percentage of annual income is "problematic."
Looking at the examples from past recessions, Mr. Lochhead said it could take a long time to recover from this recession.

He also had advice for governments that plan stimulus spending, "At the provincial level, why don't we do something about social assistance rates?" That money goes immediately back into the local economy, he said.

"Any analysis of spending at the lower income end will show you that every marginal dollar received will be spent and there is a very high probability that it will be spent locally."

When we are talking about infrastructure, Mr. Lochhead urged looking at more than roads and bridges. "Let's talk about providing supports that are going to help families."

Wednesday, February 4, 2009

Bill Gross - Economy Experiencing Wile E Coyote Moment

Bill Gross, Co-CEO, PIMCO, has published his latest (February) investment outlook, titled BEEP BEEP!

Here are some highlights:

PIMCO's thesis for several years has held that the levered global economy long ago morphed from a banking-dominated regime to one that hid behind securitized lending and structures resembling a shadow banking system. SIVs, hedge funds, CDOs and increasingly levered mortgage and investment banks fueled asset appreciation in all investment markets, which in turn propelled real economic growth and employment to unsustainable levels. But, with U.S. housing prices as its trigger, the delevering process did a Wile E. Coyote and headed over the cliff in mid-year 2007, dragging down almost all asset prices except government bonds. The real economy followed shortly thereafter, not just in the U.S., but globally, proving that linkages work on the down as well as the upside. To PIMCO, the remedy for this deflationary delevering and mini-depression is simple and almost axiomatic: stop the decline in asset prices. If that can be done, the real economy will level out as well. When home prices stop going down, newly created households will be more willing to take a chance on ownership as opposed to renting. If stock prices consolidate, recently burned investors will be more willing to invest, as opposed to stuffing their 401(k) mattresses with Treasury bills. Business investment, jobs, and profits should follow quickly behind.

The simplicity of the solution, however, is not easily achieved once deflationary momentum takes hold. Animal spirits, once dampened, are hard to reignite; fear of fear itself dominates greed. Under such circumstances, the benevolent hand of government is required and Keynes is reincarnated in an attempt to plug the dike via fiscal spending and imaginative monetary policies that support asset prices. PIMCO has recently been contracted to assist in several publically announced programs which have helped in that effort: the CPFF, which has benefitted commercial paper yields, and the Federal Reserve's purchase program for agency-backed mortgage loans, which has lowered 30-year mortgage rates to 4.5% and fostered the affordability of new and secondary housing prices. These two programs, in our opinion, have been the major policy successes to date – not because of our involvement – but because they have supported and increased asset prices whose decline has been the major deflationary thrust behind the real economy. Stop asset prices from going down and with a 12-month lag, unemployment will stop going up, and President Obama's targeted three million new jobs will have a fighting chance of being achieved.

Rather, asset prices securitizing commercial real estate and credit card receivables, as well as plain old-fashioned municipal bonds, must stop going down if the real economy has any chance to revive by 2010.

Example: CMBS or commercial real estate mortgage-backed securities are now priced to yield over 12% vs. 5% in recent years. As real estate financing comes due and rolls over in the next few years, it is imperative these yields return to mid-single digits if shopping centers, retail malls, and office buildings are to remain viable. How best to bring those yields down is debatable: another CPFF-like structure with self-insurance and contributed fees as its equity backstop? A generous portion of remaining TARP billions providing a reserve cushion for Federal Reserve funding? A good bank, bad (aggregator) bank structure? All three are being debated by policymakers and we should have clarity within a week's time. But one thing is certain: an economic recovery is dependent upon commercial real estate prices stabilizing and most retail stores staying open for business in the months and years ahead.

Read the complete newsletter here.

Monday, February 2, 2009

What are the 'experts' investing in right now?

Where are the investing world’s gliterati investing in today’s financial climate.’s Eleanor Laise, has written a timely article. Here is an organized run-down of all the participants’ investments:

Robert Arnott, Research Affiliates “I think this is a marvelous time to be investing,” says Rob Arnott, the 54-year-old chairman of Research Affiliates LLC, an investment-management firm in Newport Beach, Calif. “There are more interesting opportunities out there now than any of today’s investors have ever seen.” “Certain parts of the bond market are priced for a scenario that’s worse than the Great Depression.” One favored area is Treasury Inflation-Protected Securities, or TIPS, (Real Return Bonds in Canada) a type of Treasury bond whose principal is adjusted based on changes in the inflation rate. Ten-year Treasurys currently yield only about 0.9 percentage point more than 10-year TIPS, indicating that investors believe inflation will remain quite low in the coming years. Mr. Arnott says he boosted his TIPS allocation “in a very big way” in his personal taxable account toward the end of last year because he expects a substantial increase in inflation in the next three to five years. Mr. Arnott boosted his allocation to investment-grade corporate bonds in his personal taxable account late last year because the market had reached “irrationally high yields,” he says. Other experts say that emerging-markets stocks, which were hit especially hard last year, are starting to look tempting. If these shares take another dip, they could become “extremely interesting,” Mr. Arnott says.

John Bogle, Vanguard Funds - Tax Exempt Municipal Bonds“I earn my money and spend my money in dollars, and I don’t need to take currency risk.” Municipal bonds also look attractive to many longtime investors. Munis are typically exempt from federal and, in many cases, state and local income taxes. Many are now yielding substantially more than comparable Treasury bonds. In his taxable account, Mr. Bogle holds two muni-bond funds: Vanguard Limited-Term Tax-Exempt and Vanguard Intermediate-Term Tax-Exempt.

Burton Malkiel, Princeton University, author of bestseller, Random Walk Down Wall Street.He has boosted his allocation to highly rated tax-exempt bonds in his taxable account late last year, since yields available on some of these bonds were “unheard of.”

Jeremy Siegel, Wharton School of Finance, and senior advisor to Wisdomtree ETFs“Emerging-markets stocks have ‘gotten cheap enough to really give value now.’”He has recently raised his allocation for junk bonds.“Stocks and high-yield bonds will move together as the crisis passes,” rebounding from their depressed levels, the 63-year-old Mr. Siegel says.Mr. Siegel keeps one-quarter to one-third of his foreign-stock allocation in emerging markets, and “they’ve gotten cheap enough to really give value now,” he says. He has bought some more of these shares as they’ve declined in recent months.Mr. Siegel recently added some U.S. real estate investment trusts to his portfolio, which got “very cheap” after declining sharply last year, he says.

Muriel Siebert, Muriel Siebert & Co.She has recently been buying shares of companies like Pfizer Inc., Altria Group Inc., and General Electric Co. “I don’t mind buying a stock on the bottom and waiting,” says the 76-year-old Ms. Siebert. “But I do think when you get a market like this, you should be paid while you wait.” Pfizer and Altria yield roughly 8%, while GE yields over 9%.

David Dreman, Dreman Value Management LLCThe 72-year-old chairman and chief investment officer of Dreman Value Management LLC, says he has a roughly 70% stock allocation.Some battered stocks in the energy sector also look like bargains, Mr. Dreman says. He likes oil and gas exploration and production companies like Anadarko Petroleum Corp., Apache Corp., and Devon Energy Corp. If we don’t have a long world-wide recession — a scenario that Mr. Dreman thinks oil prices currently reflect — “we’ll see much higher prices for oil again,” he says.

Don Phillips, Managing Director, MorningstarInvests his entire individual retirement account in the Clipper Fund, a large-cap stock fund that lost about 50% last year. Early this year, he made the maximum IRA contribution to that fund, just as he has for the last 20 years. “It’s long-term money, and you have to look at it that way,” he says.

Jim Rogers, Rogers Jim Rogers, a 66-year-old veteran commodities investor, is putting new money into Chinese shares. He’s focusing on sectors of the economy that the Chinese are pushing to develop, such as agriculture, water, infrastructure and tourism. Mr. Rogers is putting some new money into commodities, particularly agricultural commodities. “We’re burning a lot of our food in fuel tanks right now,” he says.

Sunday, February 1, 2009

Timeless Money Wisdom

"The rich rules over the poor, and the borrower becomes the lender’s slave"
(Proverbs 22:7)

"Let the creditor seize all that he [the wicked] has; and let strangers plunder the product of his hand"(Psalm 109:11)

"The wicked borrows and does not pay back, but the righteous is gracious and gives"
(Psalm 37:21)

"But if anyone does not provide for his own, and especially for those of his household, he has denied the faith, and is worse than an unbeliever" (1 Timothy 5:8)

"A good man leaves an inheritance to his children’s children" (Proverbs 13:22)

"The wise man saves for the future, but the foolish man spends whatever he gets"
(Proverbs 21:20, LB)

"Steady plodding bring prosperity" (Proverbs 21:5, LB)

"[The wicked] caused the cry of the poor to come to Him, and that He might hear the cry of the afflicted [judgment result]" (Job 34:28)

"A poor man who oppresses the lowly is like a driving rain which leaves no food" (Proverbs 28:3)

"Like a roaring lion and a rushing bear is a wicked ruler over a poor people" (Proverbs 28:15)

"He who oppresses the poor to make much for himself or who gives to the rich, will only come to poverty" (Proverbs 22:16)

"The righteous is concerned for the rights of the poor, the wicked does not understand such concern"(Proverbs 29:7)