Wednesday, March 31, 2010

Beyond the Sound Bite: An Interview with Jason Zweig

Before earnings season consumes most of your attention, my interview with the well-regarded columnist for the Wall Street Journal and author of "Your Money and Your Brain: How the Science of Neuroeconomics Can Help Make You Rich" includes the emerging investment field of neuroeconomics and behavioral finance, attributes of good investors, and what constitutes a good investment attitude. Investors seeking to take a step back and reflect on the investment decision-making process and understand why we do what we do will find this interview a most rewarding experience.

Beyond the Sound Bite podcast interviews can be found at
To listen to this week's interview, click here

Tuesday, March 30, 2010

Rising Long-term Interest Rates + China + Protectionism = Stock Market Correction

In the coming weeks the din from earnings season should provide the perfect cover for what may turn out to be the single most important risk to equities: rising interest rates.

Good results (at or above consensus) are virtually baked into the earnings season cake. Yet, it is the risk from a rising long-term interest rate environment that is poised to function as the technical analysis catalyst for a meaningful stock market correction.

Should long-term rates rise (as in above 4% in the 10 year US Treasury), there will be two factors at work that could turn rising long-term rates into the catalyst for the long overdue (and healthy) stock market correction:

1 – The direct hit to valuation models via an increase in the discount rate
2 – The technical analysis hoopla around the completion of a multi year head and shoulders bottom in the 10 year US Treasury rate (see chart)

Should long-term rates rise, the usual suspects would be the threat of inflation and the mountain debt to be issued for the foreseeable future. What many investors may miss, however, is the geopolitical collision between “American pragmatism”*, an emboldened Democratic Party and assertive President Obama, and China that results in a diminished purchase of long-term US debt and a concurrent rise in the rate. Here’s how this may turn out:

In just 217 days, voters in the US will head to the polls for the all-important mid term elections. Fresh off their healthcare bill victory, President Obama and the Democrats are feeling their oats, exemplified by Obama’s “Go for it” taunt to Republicans and his recess appointments just announced. Bye bye bi-partisanship, hello hardball politics.

To help stoke the newfound Democratic machismo will be the jobs picture. It is not advisable for investors to let this Friday’s good jobs number (if they occur) distract from the reality that global macro forces (be it globalization and the labor arbitrage or protectionism and diminished global economic growth) are likely to produce a sub par jobs growth environment in the US once again. Such an outcome in a highly political year will almost certainly produce assertive actions by the US focused squarely at the number one villain in this evolving protectionist drama – China.

So, what are the Chinese leaders likely to do if US rhetoric elevates to the point of action similar to what was noted in a recent Economist magazine commentary (“Tricky Dick and the Dollar”)? Take like the Germans did back then? I doubt it.

As Dr. Ian Bremmer (Eurasia Group) so astutely noted in yesterday’s FT article commentary (“China knows the time for lying low has ended”), the moment for just a touch of Chinese muscle flexing appears to be at hand. Moreover, the seemingly disconnected actions re Google and Rio Tinto are more likely part of the overall move (“state capitalism”**) toward a more assertive seat at the global table than a few isolated instances of Chinese governmental activism.

Yet, all pale in comparison to the one instrument of real leverage that China has that, with prudence, can be exercised against the US – its capital. China buys less US debt, diversifies away into other assets, and chooses to assist its own domestic growth needs.

On this last point, with its stimulus money all but fully spent and the need to maintain a high single digit growth rate (to avoid social unrest), China’s leaders can accomplish two goals with one act: aid and abet its domestic growth needs and demonstrate to the US that it can, and will, exercise some of its economic muscle via a diminished US debt purchasing. Weaker demand + greater supply is usually the prescription for lower prices and higher rates.

Investment Strategy Implications

Rising long-term rates cut across all markets and economic sectors. In the coming weeks, should stocks fail to capitalize on a near certain good earnings season the technical analysis stage will be set for the catalyst to produce a meaningful correction in equities. Rising long-term rates will more than fit that bill.

*Listen to my recent podcast interview with Dr. George Friedman on this topic.
**Dr. Bremmer’s soon to be published book, “The End of the Free Market”

Friday, March 26, 2010

Beyond the Sound Bite: An Interview with Lawrence G. McDonald

In a most thought provoking interview with the Managing Director of Pangea Capital Management and author of "A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers", we began by discussing the recently issued report on Lehman Bros. and Repo 105. We then moved on to key elements in his book including several truly inside experiences such as the brass knuckles tactics of senior management and how "they silenced their best talent when they needed them most". We also discussed Larry's views on how big banks today are "too big to succeed" and the risk exposure to the US economy (62% of GDP) that the top 6 banks represent.

Beyond the Sound Bite podcast interviews can be found at
To listen to this week's interview, click here

Wednesday, March 24, 2010

Beyond the Sound Bite: An Interview with Dr. George Friedman

In my interview with the founder and CEO of STRATFOR and author of "The Next 100 Years: A Forecast for the 21st Century" we explore the provocative views that are a hallmark of Dr. Friedman's work. Challenging the status quo of conventional thinking, this interview will stretch your intellectual horizons as Dr. Friedman describes the consequences of the coming global population bust, the disruptive role technology will play, the geopolitical fault lines that lie ahead, the philosophy that is American pragmatism and its conflict with European metaphysics, and the current rift between the US and Israel.

Beyond the Sound Bite podcast interviews can be found at
To listen to this week's interview, click here

Friday, March 19, 2010

Beyond the Sound Bite: An Interview with Lord Robert Skidelsky

My interview with Lord Robert Skidelsky, author "Keynes: The Return of the Master", begins the rare and valuable perspective on a vital issue that few investors take the time to stop and consider: what economic philosophy will emerge as the dominant approach to managing capitalistic economies?

In light of the shattering of what has been known as American-style capitalism (what some have labeled "cowboy capitalism"), having a clear understanding of which economic philosophy will dominate in the years ahead is essential to all investors. (This point will become more clear re China and "state capitalism" when my interview with Dr. Ian Bremmer is posted in early May.)

For those investors interested in truly going beyond the sound bite of economic matters, the 15 minutes 32 seconds spent listening to this interview will be time very well spent.

Beyond the Sound Bite podcast interviews can be found at
To listen to this week's interview, click here

Thursday, March 18, 2010

New High. Now What?

Due to travel, just a quick follow on to last week's commentary ("Happy Anniversary. Now What?"):

* New highs not confirmed by most major indices outside the US.
* Strength in near term indicators (Momentum and MACD) prevent a correction call right now.
* Short term overbought condition (along with profit taking) will likely produce a minor pullback in the next few days.

It will be after such a minor pullback and the perfunctory subsequent rally to higher highs at the start of and into earnings season which will likely produce deteriorating near term readings (Momentum and MACD). Should that occur AND the other global indices DO NOT make new confirmation highs, the stage will be set for the 2Q into 3Q major correction - or as I stated on "Taking Stock with Pimm Fox" back on February 2, "The Big Enchilada". (>10% in the US, >20% elsewhere).

Wednesday, March 17, 2010

Beyond the Sound Bite: An Interview with Marisa DiNatale

My interview with the Director and Economist with Moody's includes a +2.8% full year real GDP forecast (skewed more toward the second half of the year due in part to the compositional factors of the stimulus and a diminution of the inventory rebuilding cycle in the 1H10), the dynamics of growing economy in a weak jobs market, and the state of the (US) states.

Beyond the Sound Bite podcast interviews can be found at
To listen to this week's interview, click here

Friday, March 12, 2010

Beyond the Sound Bite: An Interview with Tom McManus

My interview with the well known and highly respected investment strategist includes the secular trends for the economic "new normal", US consumer and employment outlook, corporate profitability, and P/E levels for the equity markets.

Beyond the Sound Bite podcast interviews can be found at
To listen to this week's interview, click here

If interested in reaching Tom, click here

Wednesday, March 10, 2010

Happy Anniversary. Now What?

Yesterday marked the one-year anniversary of the bear market low in stocks and the subsequent bull rally. Therefore, a review of where we were, where we are now, and, importantly, where we are likely to be headed, seems to be in order.

To refresh your memory, let’s go back to March of last year and note the following excerpts from commentaries made by yours truly regarding the end of the world as we knew it:

March 5 – “Bears Out of Momentum”
“…are we headed non stop to 600? Before I get to why the 600 call is unlikely right now, let me address 2 factors - one fundamental, the other, a market dynamic.”
To read the complete commentary, click here

March 12: “Why Divergences Work”
“Tuesday’s big up-market demonstrated a tried-and-true investment axiom: When market conditions are ready, a catalyst is all that's needed to get the show on the road. The show, in this case, is a cyclical bull rally. And the catalyst was the Citigroup's earnings statement. Here are some of the particulars….”
To read the complete commentary, click here

March 26: The Cyclical Bull Within the Secular Bear
“In stocks, we seem to have a cyclical bull within the secular bear. Investors (and the world economy) have been given a reprieve - that is, until next year, when all the money and all the regulatory changes thrown at the economy and the financial system must evolve into greater private market participation.

In the case of the US economy, capex must take the economic handoff from government and become the principal driver of economic growth, as US consumer spending continues at a more muted pace. For the consumer, balance-sheet repair will almost certainly continue as its largest component -- the aging baby boomers -- set aside real savings out of income to provide for themselves in the rapidly approaching retirement years.

Therefore, as the US economy goes through its transition from its overly leveraged consumer bias to a greater level of corporate activity -- driven largely by exports to the real growth engine of the next decade and longer, emerging economies -- investors should consider repositioning their portfolios to include more emerging-markets investments.”

To read the complete commentary, click here

The rest is history. Stocks rallied, emerging markets did best, and investors were rewarded for their courage and wisdom in relying on time tested market tools, such as the valuation parameters and the divergences principle described above.

Okay, now what?

Investing is a game of “What have you done for me lately?”. In accordance with that game, investors cannot sit on their laurels and revel in the joy of their courage and wisdom. When it comes to investing, the past is always prologue. And it functions as a guide to what is likely to be.

In attempting to predict where markets are headed, it is just not enough to use the past as a valuable guide to what will be. It is also necessary to remember that markets are driven by investors, and investors are people whose tendencies have a certain predictive dynamic due to the simple fact that they are human. This is just another way of saying that human nature doesn’t change; we, as investors, just emphasize different things at different times. Moreover, the principles of asset values are also a reliably consistent tool, one that enables an investor to estimate what the fair value for any given asset might be.

Taken together, the three principles to follow – history as a guide, the constancy of human nature, and estimates of fair value – enable an investor to apply the same tools and principles that got the above noted rally forecast correctly and apply them to today’s market environment. With that said, let’s first briefly consider where we came from and what it means for the equities markets going forward.*

Back From the Brink

The massive capital infusion governments around the world threw at the financial then economic crisis enabled the world economy and markets to step back from the abyss of global collapse and regain some sense of stability. However, government stimuli are good for only so long. Eventually, end user demand must take over and drive the world economy, which will drive the world’s equity markets higher. In this regard, the jury is still out as to whether such an economic handoff will actually occur.

The US consumer, engine of end user demand for most of the past several decades, remains in the throes of balance sheet repair. Paying down debt and building sufficient cash reserves for that rainy day is still priority number 1. Occasional episodes of spending beyond their means will occur from time to time (as it may have last month based on the surprising increase in consumer borrowing). But with the bulk of baby boomers bordering on retirement, balance sheet repair will remain the secular trend for the foreseeable future.

Therefore, the hope that an emerging middle class in developing economies can pick up much of the global growth slack left by the reduction in US consumer demand. This, along with a sustained level of infrastructure and corporate capital spending (capex) rebuilding vital to both developing and developed economies, are central to a sustainable growth phase for the world economy. However, a hope is not a certainty, and whether the handoff will occur and just how robust will it be is one of the key areas to focus on going forward.

At present, the odds do favor such an occurrence, but many obstacles remain in place not the least of which is confidence. For example, in order for infrastructure and corporate capex spending to occur in earnest, policy makers must muster the political will and organize their priorities and corporate senior management must believe that current long range spending plans will result in future growth rates and profitability in excess of their cost of capital. This is one of the key areas where the analytical focus must be centered.

*In my next commentary, I will address the second and third areas – fundamental valuation models and market intelligence readings. Until then, enjoy the ride.

Friday, March 5, 2010

Beyond the Sound Bite: An Interview with Adam Parker, Ph. D.

In my interview with the Chief Investment Strategist for Sanford C. Bernstein, Mr. Parker describes how the second half of the year is likely to result in a modestly below consensus view for 2010 operating earnings for the S&P 500, why a 13 to 15 P/E is more appropriate for the current market climate, some of the issues involved with the Fed's exit strategy and the economic handoff from government stimulus to sustainable private sector growth, and the prospects for a strong capex spending cycle and technology.

Beyond the Sound Bite podcast interviews can be found at
To listen to this week's interview, click here

Wednesday, March 3, 2010

Beyond the Sound Bite: An Interview with Christian Menegatti

In my interview with Nouriel Roubini's Head of Global Economic Research Mr. Menegatti expressed a cautiously optimistic outlook for the US economy with few signs of a double dip, a stagnant Eurozone outlook, limited concern re contagion from the Greek tragedy, key risks to global trade, and why Gold appears to be in a win/win situation.

Beyond the Sound Bite podcast interviews can be found at
To listen to this week's interview, click here