by Matt Malick
Last week, the Standard & Poor's 500 Stock Index fell 2.3% to cap a five-week losing streak, the longest since July 2008. Overall, the market has fallen 4.7% from its April 29, 2011 three-year high of 1,363.61. Meanwhile, the S&P Goldman Sachs Commodity Index has fallen 8.4% from its April 8, 2011 high.
Treasuries, on the other hand, have flourished. The price of the two-year has risen each of the last eight weeks with the yield falling to 0.43%, the lowest level since November 9, 2010. Meanwhile, the ten-year benchmark bond has once again fallen below 3% to yield 2.99%.
Given the tense negotiations between Republicans and Democrats over the near-term debt ceiling limit and long-term structural deficit problems, people are only willing to accept these low yields as a “safe haven” investment (return of capital instead a return on capital).
Clearly, recent economic indicators ranging from employment to manufacturing activity have demonstrated an economy that has slowed.
We wrote on April 15, 2011 in The Hijacking of Ben Bernanke that “we disagree with some analysts who anticipate continued commodity inflation as far as the eye can see. We fear that a sustained rise in food and gas prices will stall the nascent recovery, leading to another economic slowdown that would itself drive down commodity prices.” In our view, this is exactly what has come to fruition.
Given the level of pessimism among investors and market pundits and the reasonable valuation of stocks (Bloomberg data calculates the S&P 500 trading for 14.8 times earnings), we still believe we are in the midst of a multi-year bull market. The recent pullback is most likely a healthy breather for a market that has avoided a noticeable correction for too long.
Monday, June 6, 2011
Wednesday, March 16, 2011
Update: Japan
by Ben Atwater and Matt Malick
Every market correction has a catalyst, which this time may be the horrific earthquake and tsunami in Japan. These unfortunate events are certainly tragic and we hope the human toll gets no worse.
For more benign reasons, beginning in April of last year, the market underwent a fairly frightening slide amidst below-consensus economic data and substantial media coverage highlighting the continuing European debt problems. During this period, the market quickly dropped 17% and stocks were once again not for the faint of heart. But, the slide ended as quickly as it began and the market produced above average returns in 2010.
When the S&P 500 hit its recent peak of 1,343.01 on February 18th, the index was trading 4% above its 50-day moving average, 8% higher than its 100-day moving average and 13% over its 200-day moving average, all signs of a frothy market.
It is not unusual to see market corrections that challenge these moving averages, so a technical correction (a 10% to 20% drop from the peak) may be underway with the S&P closing today at 1,281.87, almost 5% below the February 18th high.
The Japanese stock market has fared far worse. According to The Wall Street Journal, “the Nikkei Stock Average finished 11% lower [on Tuesday] at 8,605.15 after sliding more than 14% earlier in the day, pressured by news of explosions at Tokyo Electric Power Co.'s Fukushima Daiichi nuclear power plant's No. 2 and No. 4 reactors, on top of previous blasts at the Nos. 1 and 3 reactors. Coming on top of a 6.2% fall Monday, the performance is the Nikkei's worst since its Oct. 16, 2008, drop of 11.4%, in the aftermath of the global financial crisis.”
CNBC.com reported yesterday that “Japan’s earthquake couldn’t have come at a worse time for U.S. investors hoping for resurgence in the country’s market and economy. Last month, they poured over $1 billion into Japanese exchange-traded funds, second only to U.S. energy funds . . . according to Biriniyi Associates data.” It is always unpredictable why, how and when the contrarian case will play out, but it usually does.
Clearly, all bets are off until there is some resolution, or at least de-escalation, of the emergency at the Fukushima Daiichi plant. However, absent a more intense nuclear disaster, we believe that a correction will offer unique near-term buying opportunities among certain equities.
Every market correction has a catalyst, which this time may be the horrific earthquake and tsunami in Japan. These unfortunate events are certainly tragic and we hope the human toll gets no worse.
For more benign reasons, beginning in April of last year, the market underwent a fairly frightening slide amidst below-consensus economic data and substantial media coverage highlighting the continuing European debt problems. During this period, the market quickly dropped 17% and stocks were once again not for the faint of heart. But, the slide ended as quickly as it began and the market produced above average returns in 2010.
When the S&P 500 hit its recent peak of 1,343.01 on February 18th, the index was trading 4% above its 50-day moving average, 8% higher than its 100-day moving average and 13% over its 200-day moving average, all signs of a frothy market.
It is not unusual to see market corrections that challenge these moving averages, so a technical correction (a 10% to 20% drop from the peak) may be underway with the S&P closing today at 1,281.87, almost 5% below the February 18th high.
The Japanese stock market has fared far worse. According to The Wall Street Journal, “the Nikkei Stock Average finished 11% lower [on Tuesday] at 8,605.15 after sliding more than 14% earlier in the day, pressured by news of explosions at Tokyo Electric Power Co.'s Fukushima Daiichi nuclear power plant's No. 2 and No. 4 reactors, on top of previous blasts at the Nos. 1 and 3 reactors. Coming on top of a 6.2% fall Monday, the performance is the Nikkei's worst since its Oct. 16, 2008, drop of 11.4%, in the aftermath of the global financial crisis.”
CNBC.com reported yesterday that “Japan’s earthquake couldn’t have come at a worse time for U.S. investors hoping for resurgence in the country’s market and economy. Last month, they poured over $1 billion into Japanese exchange-traded funds, second only to U.S. energy funds . . . according to Biriniyi Associates data.” It is always unpredictable why, how and when the contrarian case will play out, but it usually does.
Clearly, all bets are off until there is some resolution, or at least de-escalation, of the emergency at the Fukushima Daiichi plant. However, absent a more intense nuclear disaster, we believe that a correction will offer unique near-term buying opportunities among certain equities.
Sunday, January 23, 2011
More Millionaires than Australians
Two articles from a Special Report on Income Inequality in the latest issue of the Economist.
More millionaires than Australians: http://www.economist.com/node/17929057
The rise and rise of the cognitive elite - Brains bring ever larger rewards:
http://www.economist.com/node/17929013
More millionaires than Australians: http://www.economist.com/node/17929057
The rise and rise of the cognitive elite - Brains bring ever larger rewards:
http://www.economist.com/node/17929013
Thursday, January 13, 2011
Globetrotters
Written by: Ben Atwater and Matt Malick
Most investment strategies today include at least a modest allocation to foreign equity markets.
While specific percentage recommendations will vary among advisors, a logical starting point is the fact that the United States currently represents about 40% of the global stock market. This rationale would lead to 60% of a portfolio’s equity exposure devoted to international markets, perhaps a bit too bold for most investors.
For a more realistic proxy of how managers allocate their clients’ portfolios, Morningstar reports that the typical target date mutual fund allocates somewhere between 20% and 45% of its total equity holdings outside the U.S.
Why do so many investors look overseas?
For starters, many point to the potential diversification benefits from allocating capital to all corners of the globe. Theoretically, economies and stock markets around the world should not flourish or decline in tandem.
Furthermore, international investing has exploded simply because that is where the growth has been. While United States gross domestic product (GDP) contracted at a 2.6% rate in 2009, India expanded at a 7.4% clip and China grew by an impressive 9.1%.
As a result, emerging market mutual funds are now enormously popular, a contrarian indicator. According to Bloomberg News, “Individual investors are pouring money into emerging-market stocks at the fastest pace since 2007. The last time investors were this bullish, the MSCI Emerging Markets Index sank 11 percent in three months, data compiled by EPFR Global and Bloomberg show.”
Overall we would not quibble with the notion that international diversification is favorable when constructing a portfolio. We do take issue, however, with the method by which most financial advisors seek access to global markets.
Readers of our past market commentaries are familiar with our distaste for “outsourced” investment management, i.e. financial products such as mutual funds, due to limited transparency, high fees and tax inefficiency. Yet in our experience, most portfolios rely heavily on international and emerging market mutual funds for exposure to companies that trade directly on foreign stock exchanges.
Drawing a distinction between domestic and foreign equity investing is hardly as black and white as one might think. According to the below chart from Ned Davis Research, of companies in the S&P 500 that report foreign earnings, 30.9% of their revenue and 54.4% of their profits were derived from overseas in 2009, a significant rise from 2000. Moreover, 507 non-U.S.-domiciled multinational companies currently trade on the New York Stock Exchange, as well as many thousands of American multinationals. In today’s integrated world economy, an investor can strategically seek international diversification through individual companies.
MetLife (MET), for example, recently closed a $15.5 billion acquisition of Alico from the beleaguered insurance giant, American International Group (AIG). AIG sold Alico, an otherwise healthy business, to help repay its taxpayer-funded bailout. The deal allows MET, already the largest U.S. life insurer, to significantly expand its presence in Asia, Europe and Latin America. Nearly all of Alico’s business is outside the United States. The company recently predicted that operating results would rise as much as 45% next year, helped by the acquisition.
A recent Bloomberg Businessweek article profiled Coca-Cola (KO), and its attempt to expand its African beverage business. “Coke has been in Africa since 1929 and is now in all of its countries; it is the continent’s largest employer, with 65,000 employees and 160 plants. In 2000 about 59 million African households earned at least $5,000, which is the point when families begin to spend half their income on nonfood items, according to a recent McKinsey report. The study suggests that number could reach 106 million households by 2014. Coke plans to spend $12 billion in the continent during the next 10 years, more than twice as much as in the previous decade,” according to Bloomberg Businessweek.
For Diageo (DEO), the British spirits maker, Africa was among its fastest growing regions last year, growing 10 percent and representing 13 percent of total sales. At a time when Diageo is shuttering factories in Ireland and Scotland as a meager European economy takes its toll, they intend to invest 100 million pounds ($158 million) to expand in Africa next year.
We have more confidence in Coke and Diageo’s ability to uncover opportunity in Africa than we do in an emerging market mutual fund manager sitting at a desk in Minneapolis.
Among our portfolio of companies, perhaps Procter & Gamble (PG) maintains the most ambitious plan for international expansion. P&G has articulated a growth strategy of, “touching and improving the lives of more consumers in more parts of the world, more completely.” Put in more measurable terms, P&G would like to sell its products to 5 billion consumers by 2015 and achieve $175 billion in sales by 2025. And the 173-year-old company appears to be on the right track, increasing its global household penetration – the percentage of households using at least one P&G product – nearly two percentage points in its most recent quarter, to 61%.
A significant contributor to international investment returns is often currency exchange rates. For example, let us consider an American investor who purchases shares of a mutual fund that invests in Mitsubishi UFJ Financial Group, the largest bank in Japan. In times when the U.S. dollar drops relative to the Japanese yen, this investor should prosper as the profits Mitsubishi UFJ earns in yen are repatriated to U.S. dollars. Obviously, the opposite holds true as a strong dollar hinders returns.
Yet by investing in individual companies that do business overseas, we benefit or suffer from the very same currency effects. For instance, Coach (COH), the New York-based maker of handbags and leather goods, booked 22% of its fiscal 2009 sales in Japan. In its most recent quarter, Coach’s Japanese sales rose 13.8% to $173.1 million, which included a 10.6% positive impact from currency translation.
The most compelling argument in favor of multi-national American companies may be their track record for allocating capital overseas before most Wall Street strategists see an opportunity. For instance, Procter & Gamble began marketing its brands in China in 1988, long before emerging markets became en vogue among asset allocators. Today, P&G is the largest consumer products company in China, with about $5 billion in annual sales and a strong record of profit growth.
By owning individual businesses rather than investment products, an investor can essentially cut out the middle man and the commensurate extra layer of management fees. Individual, multinational companies offer the geographic and currency diversification that come from foreign investing, along with the transparency, tax efficiency and control that are so often lost in investment products.
Most investment strategies today include at least a modest allocation to foreign equity markets.
While specific percentage recommendations will vary among advisors, a logical starting point is the fact that the United States currently represents about 40% of the global stock market. This rationale would lead to 60% of a portfolio’s equity exposure devoted to international markets, perhaps a bit too bold for most investors.
For a more realistic proxy of how managers allocate their clients’ portfolios, Morningstar reports that the typical target date mutual fund allocates somewhere between 20% and 45% of its total equity holdings outside the U.S.
Why do so many investors look overseas?
For starters, many point to the potential diversification benefits from allocating capital to all corners of the globe. Theoretically, economies and stock markets around the world should not flourish or decline in tandem.
Furthermore, international investing has exploded simply because that is where the growth has been. While United States gross domestic product (GDP) contracted at a 2.6% rate in 2009, India expanded at a 7.4% clip and China grew by an impressive 9.1%.
As a result, emerging market mutual funds are now enormously popular, a contrarian indicator. According to Bloomberg News, “Individual investors are pouring money into emerging-market stocks at the fastest pace since 2007. The last time investors were this bullish, the MSCI Emerging Markets Index sank 11 percent in three months, data compiled by EPFR Global and Bloomberg show.”
Overall we would not quibble with the notion that international diversification is favorable when constructing a portfolio. We do take issue, however, with the method by which most financial advisors seek access to global markets.
Readers of our past market commentaries are familiar with our distaste for “outsourced” investment management, i.e. financial products such as mutual funds, due to limited transparency, high fees and tax inefficiency. Yet in our experience, most portfolios rely heavily on international and emerging market mutual funds for exposure to companies that trade directly on foreign stock exchanges.
Drawing a distinction between domestic and foreign equity investing is hardly as black and white as one might think. According to the below chart from Ned Davis Research, of companies in the S&P 500 that report foreign earnings, 30.9% of their revenue and 54.4% of their profits were derived from overseas in 2009, a significant rise from 2000. Moreover, 507 non-U.S.-domiciled multinational companies currently trade on the New York Stock Exchange, as well as many thousands of American multinationals. In today’s integrated world economy, an investor can strategically seek international diversification through individual companies.
MetLife (MET), for example, recently closed a $15.5 billion acquisition of Alico from the beleaguered insurance giant, American International Group (AIG). AIG sold Alico, an otherwise healthy business, to help repay its taxpayer-funded bailout. The deal allows MET, already the largest U.S. life insurer, to significantly expand its presence in Asia, Europe and Latin America. Nearly all of Alico’s business is outside the United States. The company recently predicted that operating results would rise as much as 45% next year, helped by the acquisition.
A recent Bloomberg Businessweek article profiled Coca-Cola (KO), and its attempt to expand its African beverage business. “Coke has been in Africa since 1929 and is now in all of its countries; it is the continent’s largest employer, with 65,000 employees and 160 plants. In 2000 about 59 million African households earned at least $5,000, which is the point when families begin to spend half their income on nonfood items, according to a recent McKinsey report. The study suggests that number could reach 106 million households by 2014. Coke plans to spend $12 billion in the continent during the next 10 years, more than twice as much as in the previous decade,” according to Bloomberg Businessweek.
For Diageo (DEO), the British spirits maker, Africa was among its fastest growing regions last year, growing 10 percent and representing 13 percent of total sales. At a time when Diageo is shuttering factories in Ireland and Scotland as a meager European economy takes its toll, they intend to invest 100 million pounds ($158 million) to expand in Africa next year.
We have more confidence in Coke and Diageo’s ability to uncover opportunity in Africa than we do in an emerging market mutual fund manager sitting at a desk in Minneapolis.
Among our portfolio of companies, perhaps Procter & Gamble (PG) maintains the most ambitious plan for international expansion. P&G has articulated a growth strategy of, “touching and improving the lives of more consumers in more parts of the world, more completely.” Put in more measurable terms, P&G would like to sell its products to 5 billion consumers by 2015 and achieve $175 billion in sales by 2025. And the 173-year-old company appears to be on the right track, increasing its global household penetration – the percentage of households using at least one P&G product – nearly two percentage points in its most recent quarter, to 61%.
A significant contributor to international investment returns is often currency exchange rates. For example, let us consider an American investor who purchases shares of a mutual fund that invests in Mitsubishi UFJ Financial Group, the largest bank in Japan. In times when the U.S. dollar drops relative to the Japanese yen, this investor should prosper as the profits Mitsubishi UFJ earns in yen are repatriated to U.S. dollars. Obviously, the opposite holds true as a strong dollar hinders returns.
Yet by investing in individual companies that do business overseas, we benefit or suffer from the very same currency effects. For instance, Coach (COH), the New York-based maker of handbags and leather goods, booked 22% of its fiscal 2009 sales in Japan. In its most recent quarter, Coach’s Japanese sales rose 13.8% to $173.1 million, which included a 10.6% positive impact from currency translation.
The most compelling argument in favor of multi-national American companies may be their track record for allocating capital overseas before most Wall Street strategists see an opportunity. For instance, Procter & Gamble began marketing its brands in China in 1988, long before emerging markets became en vogue among asset allocators. Today, P&G is the largest consumer products company in China, with about $5 billion in annual sales and a strong record of profit growth.
By owning individual businesses rather than investment products, an investor can essentially cut out the middle man and the commensurate extra layer of management fees. Individual, multinational companies offer the geographic and currency diversification that come from foreign investing, along with the transparency, tax efficiency and control that are so often lost in investment products.
Wednesday, December 8, 2010
What are we doing?
- I thought that most of the Republicans who won seats in this past election were in favor of decreasing the deficit and national debt? That's also what most of my Republican friends were complaining about and why they decided to vote against Obama and his agenda for the last two years. The only right thing Republican supporters can do now is denounce the Republicans as hypocrites [read "politicians"].
- Bush made the argument, when he proposed his tax cuts in 2001, that the average American family would see a tax decrease of approximately $1800. Everyone cheered and middle class America said “thank you”. Only problem was that most middle and low income households got nothing from the Bush tax cuts while the top 1% of households saved tens of thousands. Shame on us for not understanding basic math (although not a surprise - see http://www.nytimes.com/2010/12/07/education/07education.html). But how does that infamous Bush-ism go…(click on YouTube video below)
- Obama said yesterday, in defense of his deal with Republicans, that if the Bush tax cuts were to expire on December 31st of this year, the average American household would pay $3000 more in taxes. WHAT? Are you kidding me? I can't believe Obama is using the same deceptive math to defend keeping the Bush tax cuts (what am I saying, of course I believe it). I guess George was wrong... or was he right?... we can't get not fooled again?
http://www.nytimes.com/2010/12/08/us/politics/08impact.html
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