Professional Documents
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We are also hearing that policymakers are working behind the scenes to see it
that state governments begin to receive federal bankruptcy protection. What
that means for bondholders remains to be seen since recovery rates may end up
being 100% at the end of the day but for the public sector unions and their
workers, this can’t be very good news, especially those with massive unfunded
pension liabilities because one can be sure that contribution rates — taxes by
another name — are going to go up and up by a whole lot. The gravy train is
over. And the accelerating cutbacks in this critical part of the economy are going
to prove to be very deflationary. Maybe this is why investor reception to
yesterday’s TIPS auction was so tepid (the bid-to-cover ratio of 2.37 was the
weakest since April 2009 when the economy was knee deep in recession).
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January 21, 2011 – BREAKFAST WITH DAVE
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January 21, 2011 – BREAKFAST WITH DAVE
I refuse to be labelled a perma-bear even if I have been bearish for a long time.
Having been a bull in the 80s and 90s I do know what it feels like to wear rose- The reality is that U.S. policy
coloured glasses. But the reality is that U.S. policy has been adrift for over a has been adrift for over a
decade and it looks like all we have are measures that merely kick the can down decade and it looks like all we
the proverbial road. So it looks like 2012 will be the critical inflection point if have are measures that merely
there is one, not unlike, hopefully, what 1980 ushered in which was a complete kick the can down the
about-face from the ruinous policies dating back to the early 1970s. What we proverbial road
have on our hands right now is a recovery built of straw instead of bricks. An
economic expansion and bull market built on rampant expansion of the Fed and
Federal governments’ balance sheet is neither sustainable nor desirable. I am
desperately looking for reasons to turn more optimistic, but to do so, some
major policy shifts have to take place, like the ones above.
I am convinced that we will, before long, be replaying something along the lines
of the reversal of the tech mania and the reversal of the housing mania, which
were equally unsustainable. Those fully invested in the stock market today
thinking they have it all figured out are going to be faced with a deep quandary
and are putting their clients at huge risk.
No doubt there are some opportunities and we have identified them and they
include large-cap companies with impressive cash flow streams, trade
inexpensively, have nice dividend payouts and are non-cyclical in nature. We
also like basic materials for the longer term, and hedging out the inherent
volatility via long-short strategies makes perfect sense. And since corporate
balance sheets are still in reasonably good shape, it also is completely sensible
to be deriving income gains from the credit universe.
But now is the time, with the S&P 500 doing in 22 months what it took 60
months in the last bear market rally to accomplish (which is to double from the
recession lows), to start reassessing the beta and risk in the overall portfolio and
what your tolerance level is at the highs. Remember, we have witnessed a bear We have witnessed a bear
market rally, not the onset of a full-fledged secular bull market where you can
market rally, not the onset of a
full-fledged secular bull market
close your eyes and go to sleep for 16-18 years as opposed to nimble trading
where you can close your eyes
strategies to get you in and out. If and when we see the sort of policy shifts that
and go to sleep for 16-18 years
deliver secular growth, as we did in the 1950s and the first half of the 1960s
and again in the 1980s and 1990s, then it will be time to re-evaluate the
landscape and, dare I say …. become secular bulls!
Rest assured nobody is looking forward to that day more than yours truly. Until
then, the bond-bullion barbell and S.I.R.P. strategies (safety and income at a
reasonable price) are perfectly acceptable investment themes, and can be
captured across every asset class, even in equities!
Finally, it is worth stating that my concern over the sustainability of the current
economic expansion is not without support from some fairly impressive
individuals, even those that worked for President Obama. I strongly feel that
Peter Orszag’s column today on page 9 of the FT is a must-must read (America
Must Brace Itself For Turbulence).
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January 21, 2011 – BREAKFAST WITH DAVE
His conclusion:
“The bottom line is that there may well be U.S. public debt tremors this year,
both during federal debate over raising the debt ceiling and with at least a Claims are about 20k below
limited number of crises in local and city governments. The bigger problem, the December nonfarm
though, lies beyond 2011, as the unsustainability of the federal government’s reference week so we should
fiscal trajectory becomes increasingly clear. I hope it does not ultimately require see this translate into a
a crisis to restore fiscal sustainability at the federal level, but I fear it will. “ somewhat better payrolls
report when the data are
LEI: LESS THAN MEETS THE EYE released on February 4
The U.S. leading economic indicator (LEI) rose by an eye-popping 1.0% MoM in
December (nearly double the median expectation), following on the heels of a
1.1% increase in November. There was a strong contribution from the ‘financial’
variables ― the S&P 500 and yield curve together accounted for 50% of the
gain. Not only that but building permits, which surged by 17% MoM in
December but was likely a one-month wonder ahead of building code changes,
added four-tenths of a percentage point. So these three components accounted
for 90% of the increase ― hardly a show of strength.
Moreover, the coincident-to-lagging index, which tends to lead the LEI, fell 0.1%
MoM and continues to roll-over on a year-over-year basis; now at 1.3%,
significantly off from the 6.2% peak in April.
SOME GOOD NEWS ON THE HOUSING FRONT, BUT STILL A LONG WAY TO GO After the disappointing U.S.
After the disappointing U.S. housing starts data a few days ago, we did see some housing starts data a few days
better numbers out of the existing home sales report, which rose 12.3% MoM in ago, we did see some better
December. This was better than the 4% penciled in by economists, but was numbers out of the existing
partially telegraphed by pending home sales (which tend to lead existing home home sales report
sales). We wouldn’t classify this as a ‘clean’ number in the sense that there may
have been one-off factors boosting the December figure. For one there was an
increase in distressed sales (+35%) after a recent moratorium and mortgage
rates jumped by 50bps, which may have pushed some buyers off the fence.
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January 21, 2011 – BREAKFAST WITH DAVE
Months supply ticked down to 8.1 months from 9.5 ― but by no means is this a
balanced market (i.e. it still favours buyers). This may explain why home prices What wasn’t as convincingly
continued to dip (down six months in a row) and negative on a year-over-year strong was the six-month
basis. outlook, which slipped by
nearly six points
PHILLY FED SLIPS IN JANUARY BUT ISM STILL ON TRACK FOR A GAIN
The Philly Fed survey pulled back slightly in January, slipping to 19.3 from 20.8.
This is one of those surveys where the details don’t add up to the headline ...
and the details for the most part were on the strong side. New orders jumped
13-points to 23.6 (highest in over six years), while current shipments rose by
eight points. The number of employees index also rose sharply, to the best level
in over four years. Overall, along with the Empire Index that was released earlier
this week, so far these two surveys suggest that the ISM will rise when released
on February 1.
What wasn’t as convincingly strong was the six-month outlook, which slipped by
nearly six points. Within the details, we noted a decline in expectations of the
number of employees. The Special Question this month dealt with factors
influencing hiring plans over the next six-to-12 months. Amongst those firms
planning on increasing hiring over the medium term, the number one factor (by a
very large margin) was the expected growth rate of sales. Similarly, for those
firms not increasing hiring, the number one factor cited was sales growth (labour
costs came in third). So the message is that sales growth (and not much else)
will be critical for these firms hiring plans for 2011.
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January 21, 2011 – BREAKFAST WITH DAVE
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