Category Archives: Recent Market Action

the December 2014 FOMC

December 19, 2014 By in Federal Reserve, Portfolio management, Recent Market Action, Strategy Tags: , , , , , Leave a comment

The US stock market has rallied strongly since the Fed released a statement from its Federal Open Market Committee meeting on Tuesday-Wednesday and Chairperson Janet Yellen had her accompanying press conference.

The broad picture:

In October, the Fed ended a long period of continually upping the level of monetary stimulation of the US economy.  It is still in a period of applying extreme stimulation but is no longer increasing the amount.  And it is now starting to focus on the nuts and bolts of how to begin to wean the economy from excessive monetary stimulus, a process the Fed envisions will take several years.

Janet Yellen’s main points:

–there’s no set timetable for withdrawing excess stimulus.  The process consists in gradually raising the Fed Funds rate for overnight money from the current zero to a normal level of 3%+.  Most FOMC members think the first rate rise should come during 2015, but the Fed is prepared to slow down the process if the economy is weaker than expected, and vice versa.

Wall Street fears that the Fed will willy-nilly raise rates according to a predetermined formula and without regard to economic conditions is completely misplaced.  The Fed will be patient in this process (the Fed estimate of where Fed Funds will be at the end of 2015 continues to come down and is now at 1.15%; speculation is that the figure Ms. Yellen has in mind is lower).  The major goal is not to disrupt growth.

–inflation is not a current problem.  The Fed has been trying hard with every tool in its arsenal to create conditions where inflation is a possibility for six years without much success.  The Fed did say that it expects inflation will only gradually rise toward its 2% target.  Wall Street fears of runaway inflation are unrealistic.

–deflation isn’t a concern, either.   Investors worried about deflation are making the rookie mistake of confusing headline inflation figures, which contain lots of transitory elements, with core inflation–which is what really counts and which is steady at somewhat under 2%.

–lower oil prices are a net plus for the US, because the country is still a large oil importer.  A Russian recession is more a trouble for the EU than the US.  US trade with Russia is very small; US holdings of Russian portfolio and capital assets are tiny.

Other than its comments about oil, almost nothing the Fed said breaks new ground.  Given the tragic example of Japan’s mistaken attempts to remove economic stimulus too soon, it’s not surprising that the Fed said it will not repeat them here.  The main takeaway from the meeting statement/press conference is that the Fed said this explicitly and in detail, leaving little for the Wall Street rumor mill to worry about.

Russia as the new Malaysia?

December 18, 2014 By in Portfolio management, Recent Market Action Tags: , , , , , , 1 Comment

To me, what made Malaysia noteworthy during the Asian financial crisis of the late 1990s was how vigorously the country defended the interests of a small cadre of insiders who had amassed mega-fortunes over the prior decade or more.  Political connections + aggressive use of financial leverage–after all, what local bank would deny them a loan?–were the keys to  their success. In the end, Kuala Lumpur imposed capital controls lasting about a year to prevent foreigners from selling assets and withdrawing the funds from the country.  That action gave Malaysian financial markets a long-lasting black eye, something that could have been avoided if Malaysia had chosen to raise interest rates to achieve the same end instead.  But doing so would have bought down more than one of the local moguls.

In current crisis among oil-producing countries, Russia is already taking the first step down the Malaysian path.  Last week Moscow orchestrated a $11+ billion sale of bonds by oil giant Rosneft.  The issue had a coupon below that of government debt.  It was reportedly taken up mostly  (entirely?) by state-owned banks.  The central bank promptly declared itself willing to accept the bonds as collateral for loans to be made at rates below the bond coupons.  Indirectly, then, the funds Rosneft raised come from the Russian equivalent of the Fed.

That President Putin should protect his cronies shouldn’t come as any surprise.  But if this is a chief aim of his government, which it appears to be,  investors have to at least consider the possibility that Moscow may be forced to impose capital controls at some point.  For you and me, this implies checking to make sure we know what exposure we may have through emerging markets or yield-hungry fixed income funds/ETFs.

Shaping a portfolio for 2015 (i): a look back at 2014

December 3, 2014 By in Portfolio management, Recent Market Action, Shaping a portfolio for 2015, Strategy Tags: , , , , Leave a comment

Yes, we’re barely into December.  But within ten trading days Wall Street will be closing up for the year.  There’s little professional investors can do at this point to influence how their year will pan out, other than to avoid possibly mucking things up through short-term trading.  The accountants will be eager to get a start on closing the books. So they’re happier if accounts don’t trade in the second half of the month.  In particular, they won’t want trades to happen that will hang over, unsettled, into 2015.  As a practical matter, the last two weeks of the year are the best chance professionals have to rest–and virtually everyone takes advantage of the opportunity.

In other words, we’re already close enough to the end of the Wall Street year to draw some conclusions about how the year has gone.

Well, then, how did my Strategy for 2014 hold up?

what went well…

–To start with the most basic, this time last year I thought stocks would produce gains again in 2014, although on a more modest scale than in 2013.  I expected a rise of 7% – 8% for the S&P 500 (not counting dividends), driven by earnings growth and with basically none of the price earnings multiple expansion that characterized 2013.

That has more or less turned out, although earnings have been better than I had anticipated.  Before the start of trading today, the S&P is up by 11.8% since January 1st.

–I thought outperformance would come from a mix of growth stocks, which usually do progressively better as the economic cycle matures, and high dividend payers.  My rationale for the latter was that a yield of 3%+ would be a good start on a total return that would come in at 10%-.  I mentioned MSFT as a particularly interesting company of this sort–but I also suggested looking in Utilities, Telecoms and master limited partnerships (assuming a tolerance for a messy tax return).  MSFT has done extremely well, thanks in large part to jettisoning Steve Ballmer.  Utilities have also been stars, at +21% as a sector ytd.  On the other hand, Telecoms have been caught in the winds of structural change and are little better than flat. The MPLs I’ve looked at have generated income but little in the way of capital gains.

–I also thought short-term volatility would be high for stocks.  It has been   …and I think this will continue to be true in 2015.

…and not so well

–I thought that the EU would be showing increasing signs of life—not robust growth, but at least a healthier pulse–as the year progressed.  I also expected the Chinese economy to bottom out sometime in the first half and begin to strengthen in the second.  Both areas have been weaker than I thought.

I was more than bailed out in the case of the Shanghai (+31% ytd) and Shenzhen (+19%) exchanges, which were driven higher by the recent Beijing announcement of a trading link between Shanghai and Hong Kong.  But Hong Kong is flat ytd.  More important, around mid-year, evidence began to emerge that the EU was starting to slow down, not pick up.  Subsequent market and currency declines have made Europe a very tough place to make money this year.  The biggest issue was not how to deal with a rising euro, as I expected a year ago, but how to defend yourself against a falling one.  There was plenty of time to reverse course on the EU, but the fact remains that I didn’t see the slowdown coming.

other stuff

A year ago, I expected Staples to perform well, on the same rationale as MSFT   …but also because the sector has outsized exposure to the EU.  Despite my mistake on the EU the sector has outperformed.  But that’s because of a fall in agricultural raw materials prices.  So this one is a case of better to be lucky than good.

I haven’t been a big fan of Energy for some time.  That’s mostly because the big oils generally get little benefit from rising petroleum prices.  Also, I’ve been too lazy/uninterested to do the work needed to sort out winners from losers in the shale oil/gas business in the US.  Still, I was surprised that the oil price has fallen so far.  This is a net positive for stocks, in my view.  There’ll also be a time to take the contrary view on Energy and buy.  I don’t think we’re there yet, however.

a letter grade?

I’d give myself some sort of a B.  A big mistake on the question of US vs. rest of the world, but offset somewhat by the idea of rmeaining positive on on stocks.

 

 

 

economy performance vs. stock market performance

November 24, 2014 By in Portfolio management, Recent Market Action, Strategy, the SEC Tags: , , , , , Leave a comment

Th financial media often talk about the prospects for the stocks market as closely liked to the prospects for the overall economy.   Is this right?

in a general way, yes

The most important investors in developed markets tend to be citizens, or at least residents, of the country in question.  This is partly because doemstic securities are the ones individual investors feel most comfortable with and can easily get the most information about.  It’s also partly because institutional investors like pension funds or insurance companies both want to match their domestic liabilities with domestic assets, and because they are most often legally required to do so.

When a country is booming, employment is high and wages are rising, money tends to flow into stocks.  When times are bad, not so much.  In particular, it’s been my experience as a global investor that stocks in high GDP growth countries tend to do better than very similar stocks headquartered in low GDP growth nations.

looking a little more closely, no

This is the easiest to see in Europe.  Switzerland has annual GDP of about $650 billion.  Germany’s is six times that.  Yet, the two countries have stock markets of just about the same size.  How so?

Two reasons:

–the Swiss market is dominated by international pharma and financial companies.  Only a tiny amount of their business is done in Switzerland.

–large chunks of Germany’s very important export-oriented industrial sector are unlisted.  The German stock market leaders are banks, public utilities and the autos.

In neither case–tiny country with enormous multinationals, or big countriy without many domestice companies listed on the stock exchange-os there a strong relationship between economy and stock market.

the US

–The US is the country where, thanks to the SEC, the most information about the geographical breakout of earnings is available.  Slightly over half of the companies in the S&P 500 provide geogrpahical earnings data.  If we assume that the structure of the rest of the index mirrors that of the reporting companies (a whopper of a leap, but I’m not sure what else we can do), then the earnings of the S&P break out about as follows:

US      50% of reported earnings

Europe  25%

Rest of the world    25%.

–Large parts of the US economy, like construction/property and autos have minimal representation in the S&P 500.  In the former sector, lots of companies remain private.  In the latter, a lot of the activity is by foreign companies.

significance?

If we just look at likely GDP growth for the US in 2015, we’d probably be predicting a pretty good year for stocks.  GDP may be up by 3% real, 5% nominal.  Money will likely flow into stocks.  The Fed will probably be careful not to rock the boat by raising interest rates too quickly.

However, we have two other issues to factor in:

–economic activity in the EU, Japan and emerging markets may not be so great and the dollar has been strong vs. foreign currencies.  This may mean that US-domiciled multinationals may not look so good, especially after their foreign results are translated back into dollars.

–In addition, we have to consider how we can find publicly traded stocks that are tied to potential hotspots for 2015 growth.