April Fool's Day is celebrated in different countries on April 1st every year. In France and Italy, children and adults traditionally tack paper fish on each other's back as a trick and shout 'April Fish' in their local language. The earliest recorded association between April 1 and foolishness can be found in Chaucer's Canterbury Tales (1392). Sometimes referred to as ALL FOOL'S DAY, April 1 is not a holiday, but is widely recognized and celebrated as a day when people play practical jokes and hoaxes on each other.
The first quarter ended on Friday March 30th - two days before All Fool's Day. The robust first quarter of 2012 registered the strongest return since 1998. The Dow Jones Industrial average rallied over 1,000 points (9%) in a persistent and orderly manner - without even an average correction. The DJIA was led by very strong moves in the industrial, financial, and retail sectors. The Nasdaq led by heavily weighted Apple (19%) powered up over 21%. The S&P tacked on almost 150 points (12%) in relentless orderly & calm trading.
Going into Jan 1st 2012 it is fair to say that at best the consensus of brokerage analysts and collective street wisdom was cautiously bearish. The very few and most optimistic upside prognostications called for marginal gains of not more than 10% for the entire year! It is also fair to say the vast majority of investors were 'all fooled' for most of the first quarter preferring to stay 'on the sidelines' and 'in cash or bonds' to ensure their return of capital. As a result most missed very attractive quarterly returns in what was a significant rally on somewhat lighter volume. It appears that caution is still the watchword as investors now are fearful of being 'fooled' into buying a market after it has rallied! The rather large 'end of the world' bearish community remain resolute and steadfast in their grim convictions. The DJIA is now just a scant 7% from registering all time record highs.
The first quarter focused primarily on the European credit conditions, or the lack thereof, and an expected 'hard landing' in Asia. The jury is still deliberating on sub 8% Chinese growth. European bankers have politically and methodically had their coffers 'refilled' courtesy of EU taxpayers.
Greece appears to have been effectively 'papered over' for at least another year or so despite being on track to default on 'Foreign-Law Bonds' as early as May 15. However, as we have seen, key bond maturity dates and covenants are now nothing more than a negotiating points. Debts are 'creatively' being 'rolled over' but are unlikely to ever be totally repaid barring an inflationary realignment. The early European bankruptcy hysteria of Q1 has been replaced by an eerie sense of calm & complacency.
The spot light now shines on the other over levered southern European countries of Portugal, Spain, and Italy. The price of poker now becomes substantially higher. Debt to GDP ratios remain at alarmingly dangerous levels. Rates of economic growth are beginning to plunge.
The Spanish housing market continues to implode and the economy is mercilessly contracting. The IMF notes that it may take another 4 years to clear the inventory of unsold units. Only one in four Spanish home owners have positive equity in their homes. Heavily front loaded maturing Spanish debt will need to be refinanced within the next two years. Unemployment is at a painful 23% with youth joblessness of over 50%. Spanish private sector debt is very high and their banks are extremely vulnerable to any future financial dislocation. Bond yields have 'normalized' somewhat but remain high relative to northern Europe and North America. Portugal, Italy, and even France are all exposed to similar internal weaknesses -and to make matters worse they are all exposed to each other having lent and borrowed from one another.
Total European unemployment has just surpassed 10% - a 14 year high. It is likely we will be hearing alot more about Euro credit issues during 2012. Since 1800 Portugal has defaulted on its national debt 5 times, Greece 5 times, and Spain no less than 7 times. Union strikes and austerity protestations have begun in most of these 'have not' jurisdictions with the expectation of a volatile hot summer season. It might be 'foolish' to expect that these protests will remain 'peaceful' for very long!
In the US, the economy has been buoyed and responded positively to various forms of financial quantitative stimulation - most recently being the controversial operation twist strategy which recently ended. Multiple trillions of dollars remain stubbornly on the 'side lines' absorbing negative rates of return and zero upside potential. Taxable bond funds continue to receive $5-6 billion in new inflows every week. M2 is growing above its long term average annual rate of 6%. The largest source of growth of M2 is savings deposits. They have increased by over $2T since late 2008 and have growth at a blistering 15% annualized pace in Q1. Corporate profitability and manufacturing did almost everything one could hope for in the Q1. After tax corporate profits have returned to the record 2007 levels. Corporate profitability as a percentage of GDP has surged into multi-decade highs of over 10%. The US housing market appears to have bottomed but new construction spending continues to remain tepid. New auto sales have been very strong based on substantial pent up demand, great new models, and attractive financing rates. The S&P 500 price to earnings ratio remains in the average level of 15-16x's. Consumer confidence and employment levels are beginning to slowly recover from the financial Armageddon of 2008-09. Seasonally adjusted unemployment claims continue to precipitously decline from the hyper extended levels of 2009. Optimism remains in the cautious to negative levels of 2009. From my perch this ' US bull market' rally appears to remain largely intact fueled by historic liquidity levels and despite the threats Europe, rising bond yields, and persistently high energy prices.
In Commodities, the expectations of a Chinese hard landing has muted the excitement in the hard asset sector. Gold and silver continues to consolidate 10% percent below the record levels of mid 2011. Sort term movements are now being held captive to the weekly comments from Fed head Ben Bernake. Crude Oil prices are consolidating solidly at levels only 5% below levels of 2011 - and despite advertised levels of ample inventory. Natural Gas has imploded to just above the US$2.00/mmbtu level on chronic over supply levels and limited storage capacity. The Agra complex has consolidated during Q1 with the exception of record recovery highs in the blistering Soybean market.
In Canada, the S&P/TSX Composite Index lagged behind its US counterpart in Q1 registering a muted 3% gain. Correcting Financial and Energy sectors in March limited Q1 TSX gains. Material and Metal issues were mixed to significantly lower on the expectation of slowing world economies. The 'frothy' Canadian housing market is showing signs of price increase deceleration to 6.5% in the latest Jan reading. Warmer than normal temperatures and special mortgage rate offers continue to contribute to price gains. Canadian GDP growth remains muted with slight increases of 0.1% in Jan as manufacturing struggles to gain significant momentum. Canadian economic growth is tracking at a modest 1.8% annualized rate. The 2012 Canadian Budget offered modest relief for tax payers and limited job creation proposals. The 2011-12 deficit is estimated at $24.9b - $6b less than November's update. OAS/GIS pension eligibility was raised from 65 to 67 starting in 2023 and will have limited impact on retirees for the next 10 years. Canadian inflation is set to increases in the 2.4% range for 2012.
In closing, the first quarter in 2012 has scaled a formidable wall of doubt and scepticism. Tremendous pools of liquidity remain unemployed on the sidelines garnering negative rates of return. As markets move higher the intensity of negativity and concern appears to accelerate. Persistently record high gasoline costs and a vulnerable treasury market provides tow primary concerns for investors. A normal 5 -8% correction would be healthy for continued upside but it is quite possible that it may have to wait for higher levels for that to occur. An extremely 'accommodating' FED awaits on the sidelines to provide the necessary support to fuel markets upward for the balance of 2012. Very few upside 'surprises' have been factored into the value of most major markets. I continue to believe that fear and caution remains embedded in investor psychology. It may take new record highs in major indexes to bring those investors back into the market!
Impossible is a word only to be found in the dictionary of fools. - Napoleon
Tuesday, April 3, 2012
Monday, March 19, 2012
Mid March - Back In The Saddle
It has been four months since I last penned my random thoughts about the assorted machinations in this wacky investment world. My blog will now become a twice-a-month presentation for all those readers who suffer from trading withdrawl.
I had started my last letter on November 18/11 which was entitled the 'Pain in Spain.' The thrust of the note centered on the bond bully vigilante types who were systematically attacking vulnerable credit jurisdictions forcing interest rates to nose bleed levels. At that memorable time, over indebted socialist Euro regimes were being taken behind the woodshed one 'quasi' default after another. Credit calmness currently reigns supreme as one Euro bank is bailed out after another by the unknowing socialist Euro tax payer (oxymoron note). Since mid 2011 the ECB's balance sheet has exploded to US$4T almost 33% larger than the FED's largess - and with an economy which is 15% smaller! However, I did not get to finish that well crafted note ...
Just after my last complete letter (Week Ending Nov 11/11,) and on the day of my unfinished Nov 18/11 message, I recieved the parental nightmare phone call that my son was involved in a very serious sensational car accident while on his way back home from university. A very graphic experience which turns one life upside down. Thankfully and very gratefully to us he survived intact and is on the 'slower road' to recovery. He sure is the toughest hombre I've ever met! Such milestone events certainly refocus key priorities in one's life very quickly!
Since that eventful mid November 2011 period, a lot of economic and political water has passed under the proverbial bridge loan. Equity markets throughout the world finished the year on a flat and rather negative note. Professional fund managers were very happy to see the 2011 year come to an end with returns (if lucky) that left much to be desired.
A fairly robust domestic Christmas retail performance was over shadowed by the seemingly never ending Euro credit concerns. The frighteningly levered European picture appears to have been sufficiently 'papered over' by recent ECB credit largess in order to avoid the much anticipated global economic cooling prognostications.
With the exception of the much maligned Greek Financial Tragedy bond yields in the southern European jurisdictions appear to be normalizing back to much more reasonable/realistic levels. The sooner Greece wraps it's head around the drawbacks and deficiencies of it's failing socialist model/system the better! Until then Greece can expect to remain financial 'personna non gratas' for a very long time. This is the 11th time in Greece's history that they have defaulted. In modern economic times Greece has been in some form of insolvency/austerity for more time than not!
Creatively and coherently stimulating positive economic growth, employment, and collecting the subsequent tax revenue will be key challenges for ALL the PIGS this year. Hopefully the pride and excitement of the 2012 London Olympic Games will be the catalyst needed to inspire all of the weaker and winded back sliding Euro economies to train, compete, and win!
In the US, positive economic growth has accelerated impressively since mid November 2011 and major market indexes have scaled a formidable wall of worry. Our good friends at the US Treasury announced that private employers have added 3.7 million jobs over the last 23 months. The have also calculated that the US economy has grown for 10 straight quarters from the low of -8.9% in Q4 of 2008 to a moderate +3.0% in Q4 of 2011. Overall business investment has grown to a +29% from the 2009 lows. Corporate profits are up a lusty record +76% since Q1 of 2009. Critical exports have risen 23% since Q1 of 2009. Unemployment has fallen but remains high with a record low participation rate combined with declining medium household income over the past decade. Housing appears to have finally risen from the canvas after almost being knocked out permanently. The controversial TARP funding program has generated positive returns especially for the formerly tapped out banking sector. The auto industry has risen like the proverbial Phoenix from the bankruptcy ashes. Miraculously the auto industry had added almost 210,000 jobs since the post-restructuring of GM & Chrysler. The threat of insolvency has generated an entire host of hot and desirable rides!
Alas, every silver cloud has a grey lining as public indebtedness has stretched into the stratospheric proportion. Helicopter Ben will have his hands more than full should interest rates decide to normalize back to average historic levels. Significant tremors are currently being experienced in the 'twisted' Treasury market suggesting that the days of negative return bonds may be over!
Since Nov 18th the DJIA has rallied almost 2,000 points (17%) in a very persistent and orderly manner based primarily on vastly improving broad based economic data. The S&P has tacked on over 200 points (17%) to mutli year highs a shade over 1,400 and only a few whiskers away from the record all-time highs of the go-go year of 2007! The NASDAQ has very impressively penetrated 3,000 for the first time since the Tech Ultra-Bubble of 2000. All it took was for Apple to exceed US$600/share and US$US600b in market cap - ahem - more than the entire US retail sector COMBINED (no typo)! I was told when I was very young that money does not grow on trees - but it sure looks like it grows on Apples! Apple currently is generating US$16b of net free cash per quarter - now that's a lot of turnovers!
A veritable potential tsunami of cash continues to reside on the sidelines and in the Treasury market. A number of shell shocked investors left over from the credit debacle point to low VIX levels and low stock volume levels during this impressive rally as a potential bubble precursor. I am not sure what they will be saying when major indexes reach into all-time high record territory? This controlled bull market seems to be supported by fairly strong legs as far as I can see. The possible threat of a 'vaporizing' bond and 'frozen' credit market are the only major threats that keep me up at night.
Widespread fear and systemic hysteria appears to have been overcome. Solid confidence and attitude is still lacking! I have been around long enough to know that a market top has not been 'officially' reached until most of the money comes off the safety of the sidelines and the bull begins to swagger! That may take some time! In the meantime - enjoy the ride!
In commodities, a cooling China, subdued inflation data, and recent bond market profit taking has contracted the valuations of the majority of metals and material shares. The standout exception has been the powerful energy rally and the associated Iranian attack dividend being paid. The IEA reports that OPEC crude oil production has risen for 5 straight months to the highest level in 3 years. Crude Oil has been consolidating very impressively in the US$105-110/bl level for the past two months. An improving economy and an early driving season could press prices toward US120/bl before long. My previous and now former 'favorite' Natural Gas has been crushed to a snick over US$2.25/mmbtu on a combination of balmy North American temperatures and bulging inventory levels. Gold is up a paltry 5% since Jan 1st. I would not be surprised to see Gold retest the US$1,525/oz support level before the Leaf's raise ticket prices! Precious metals with an industrial use have outperformed Gold with Silver, Platinum, and Palladium leading the charge and may be the place to be. Increasing demand and falling supply have been the main contributing factors. Doctor Copper continues to consolidate just under US$4/lb based on steadily increasing consumption levels. A strong move above US$4/lb would imply a retest of the all-time record high level of just over US$4.50/lb. The Agra/Grain sector has been mixed led by Soybeans as the stalwart standout on the upside. Wheat supplies and inventories have remained high with prices remaining near recent low territory.
In Canada, markets have been primarily led by the financials and other interest sensitive issues. The bifurcated S&P/TSX index is up +5% since Jan 1st. Overall valuations remain attractive with the expectation of a robust M&A season this spring for the junior and mid cap resource producing issues. Currently the wagons have circled Viterra (VT) ,the former Saskatchewan Wheat Pool, tacking on a 40+% premium to fortunate shareholders.
President Obama kicked the decision on the contentious Keystone Pipeline purposal safely past the upcoming November battle for the Whitehouse. In the meantime, the Warren Buffet owned railways are being kept very busy shipping the excess crude at a much higher cost and over the aquifers to the Gulf of Mexico.
The TSX appears to be heading through a period of relative under performance to the NYSE and other industrial based jurisdictions. This period looks to last until at least until the beginning of summer - a period of reaccelerating resource demand. The threat of a higher interest rate structure appears to having a greater short term negative effect for the TSX than for both the European and US markets. The combination of a weaker national economic rebound, huge Provincial deficits, and record high personal household indebtedness levels may be the main issues resulting in a sub performing S&P/TSX index during the next few months.
Bottom Line, equity markets continue consolidate and climb the wall of worry. Impressive improvements in US economic data, a very accommodating dovish FED policy, reasonable/fair valuations, and an astonishingly resilient consumer has fueled this advance. Euro zone swap spreads have narrowed which is a excellent indication of improved liquidity and reduced systemic risk. The main head wind risks are sharply rising interest rates and the unlikely release of 'surprising' inflationary data. Consumer price inflation remains moderate but US$5+/gal unleaded gasoline for a sustained period could change that equation very quickly.Very strong US Manufacturing stats have been aided by low Natural Gas prices and significant pent up consumer auto demand.
I remain positively disposed to the US equity market which is well supported by very excessive liquidity levels and the pending November Presidential free-for-all! I expect an orderly move (to begin with) from the low yielding interest and dividend paying issues into the more levered industrial, auto, housing, and consumer issues. The powerful DJIA and S&P rally is a tad over bought in the near term and maybe vulnerable to a 'normal' profit taking correction.
After the last 3 wild and wooly years, I, for one, will indeed be astonished when the DJIA and the S&P registers new record all time high territory sometime this year - even though I have been expecting it for a while!
'To accomplish our destiny it is not enough to merely guard prudently against road accidents. We must also cover before nightfall the distance assigned to each of us.'
Alexis Carrel (1873-1944)
I had started my last letter on November 18/11 which was entitled the 'Pain in Spain.' The thrust of the note centered on the bond bully vigilante types who were systematically attacking vulnerable credit jurisdictions forcing interest rates to nose bleed levels. At that memorable time, over indebted socialist Euro regimes were being taken behind the woodshed one 'quasi' default after another. Credit calmness currently reigns supreme as one Euro bank is bailed out after another by the unknowing socialist Euro tax payer (oxymoron note). Since mid 2011 the ECB's balance sheet has exploded to US$4T almost 33% larger than the FED's largess - and with an economy which is 15% smaller! However, I did not get to finish that well crafted note ...
Just after my last complete letter (Week Ending Nov 11/11,) and on the day of my unfinished Nov 18/11 message, I recieved the parental nightmare phone call that my son was involved in a very serious sensational car accident while on his way back home from university. A very graphic experience which turns one life upside down. Thankfully and very gratefully to us he survived intact and is on the 'slower road' to recovery. He sure is the toughest hombre I've ever met! Such milestone events certainly refocus key priorities in one's life very quickly!
Since that eventful mid November 2011 period, a lot of economic and political water has passed under the proverbial bridge loan. Equity markets throughout the world finished the year on a flat and rather negative note. Professional fund managers were very happy to see the 2011 year come to an end with returns (if lucky) that left much to be desired.
A fairly robust domestic Christmas retail performance was over shadowed by the seemingly never ending Euro credit concerns. The frighteningly levered European picture appears to have been sufficiently 'papered over' by recent ECB credit largess in order to avoid the much anticipated global economic cooling prognostications.
With the exception of the much maligned Greek Financial Tragedy bond yields in the southern European jurisdictions appear to be normalizing back to much more reasonable/realistic levels. The sooner Greece wraps it's head around the drawbacks and deficiencies of it's failing socialist model/system the better! Until then Greece can expect to remain financial 'personna non gratas' for a very long time. This is the 11th time in Greece's history that they have defaulted. In modern economic times Greece has been in some form of insolvency/austerity for more time than not!
Creatively and coherently stimulating positive economic growth, employment, and collecting the subsequent tax revenue will be key challenges for ALL the PIGS this year. Hopefully the pride and excitement of the 2012 London Olympic Games will be the catalyst needed to inspire all of the weaker and winded back sliding Euro economies to train, compete, and win!
In the US, positive economic growth has accelerated impressively since mid November 2011 and major market indexes have scaled a formidable wall of worry. Our good friends at the US Treasury announced that private employers have added 3.7 million jobs over the last 23 months. The have also calculated that the US economy has grown for 10 straight quarters from the low of -8.9% in Q4 of 2008 to a moderate +3.0% in Q4 of 2011. Overall business investment has grown to a +29% from the 2009 lows. Corporate profits are up a lusty record +76% since Q1 of 2009. Critical exports have risen 23% since Q1 of 2009. Unemployment has fallen but remains high with a record low participation rate combined with declining medium household income over the past decade. Housing appears to have finally risen from the canvas after almost being knocked out permanently. The controversial TARP funding program has generated positive returns especially for the formerly tapped out banking sector. The auto industry has risen like the proverbial Phoenix from the bankruptcy ashes. Miraculously the auto industry had added almost 210,000 jobs since the post-restructuring of GM & Chrysler. The threat of insolvency has generated an entire host of hot and desirable rides!
Alas, every silver cloud has a grey lining as public indebtedness has stretched into the stratospheric proportion. Helicopter Ben will have his hands more than full should interest rates decide to normalize back to average historic levels. Significant tremors are currently being experienced in the 'twisted' Treasury market suggesting that the days of negative return bonds may be over!
Since Nov 18th the DJIA has rallied almost 2,000 points (17%) in a very persistent and orderly manner based primarily on vastly improving broad based economic data. The S&P has tacked on over 200 points (17%) to mutli year highs a shade over 1,400 and only a few whiskers away from the record all-time highs of the go-go year of 2007! The NASDAQ has very impressively penetrated 3,000 for the first time since the Tech Ultra-Bubble of 2000. All it took was for Apple to exceed US$600/share and US$US600b in market cap - ahem - more than the entire US retail sector COMBINED (no typo)! I was told when I was very young that money does not grow on trees - but it sure looks like it grows on Apples! Apple currently is generating US$16b of net free cash per quarter - now that's a lot of turnovers!
A veritable potential tsunami of cash continues to reside on the sidelines and in the Treasury market. A number of shell shocked investors left over from the credit debacle point to low VIX levels and low stock volume levels during this impressive rally as a potential bubble precursor. I am not sure what they will be saying when major indexes reach into all-time high record territory? This controlled bull market seems to be supported by fairly strong legs as far as I can see. The possible threat of a 'vaporizing' bond and 'frozen' credit market are the only major threats that keep me up at night.
Widespread fear and systemic hysteria appears to have been overcome. Solid confidence and attitude is still lacking! I have been around long enough to know that a market top has not been 'officially' reached until most of the money comes off the safety of the sidelines and the bull begins to swagger! That may take some time! In the meantime - enjoy the ride!
In commodities, a cooling China, subdued inflation data, and recent bond market profit taking has contracted the valuations of the majority of metals and material shares. The standout exception has been the powerful energy rally and the associated Iranian attack dividend being paid. The IEA reports that OPEC crude oil production has risen for 5 straight months to the highest level in 3 years. Crude Oil has been consolidating very impressively in the US$105-110/bl level for the past two months. An improving economy and an early driving season could press prices toward US120/bl before long. My previous and now former 'favorite' Natural Gas has been crushed to a snick over US$2.25/mmbtu on a combination of balmy North American temperatures and bulging inventory levels. Gold is up a paltry 5% since Jan 1st. I would not be surprised to see Gold retest the US$1,525/oz support level before the Leaf's raise ticket prices! Precious metals with an industrial use have outperformed Gold with Silver, Platinum, and Palladium leading the charge and may be the place to be. Increasing demand and falling supply have been the main contributing factors. Doctor Copper continues to consolidate just under US$4/lb based on steadily increasing consumption levels. A strong move above US$4/lb would imply a retest of the all-time record high level of just over US$4.50/lb. The Agra/Grain sector has been mixed led by Soybeans as the stalwart standout on the upside. Wheat supplies and inventories have remained high with prices remaining near recent low territory.
In Canada, markets have been primarily led by the financials and other interest sensitive issues. The bifurcated S&P/TSX index is up +5% since Jan 1st. Overall valuations remain attractive with the expectation of a robust M&A season this spring for the junior and mid cap resource producing issues. Currently the wagons have circled Viterra (VT) ,the former Saskatchewan Wheat Pool, tacking on a 40+% premium to fortunate shareholders.
President Obama kicked the decision on the contentious Keystone Pipeline purposal safely past the upcoming November battle for the Whitehouse. In the meantime, the Warren Buffet owned railways are being kept very busy shipping the excess crude at a much higher cost and over the aquifers to the Gulf of Mexico.
The TSX appears to be heading through a period of relative under performance to the NYSE and other industrial based jurisdictions. This period looks to last until at least until the beginning of summer - a period of reaccelerating resource demand. The threat of a higher interest rate structure appears to having a greater short term negative effect for the TSX than for both the European and US markets. The combination of a weaker national economic rebound, huge Provincial deficits, and record high personal household indebtedness levels may be the main issues resulting in a sub performing S&P/TSX index during the next few months.
Bottom Line, equity markets continue consolidate and climb the wall of worry. Impressive improvements in US economic data, a very accommodating dovish FED policy, reasonable/fair valuations, and an astonishingly resilient consumer has fueled this advance. Euro zone swap spreads have narrowed which is a excellent indication of improved liquidity and reduced systemic risk. The main head wind risks are sharply rising interest rates and the unlikely release of 'surprising' inflationary data. Consumer price inflation remains moderate but US$5+/gal unleaded gasoline for a sustained period could change that equation very quickly.Very strong US Manufacturing stats have been aided by low Natural Gas prices and significant pent up consumer auto demand.
I remain positively disposed to the US equity market which is well supported by very excessive liquidity levels and the pending November Presidential free-for-all! I expect an orderly move (to begin with) from the low yielding interest and dividend paying issues into the more levered industrial, auto, housing, and consumer issues. The powerful DJIA and S&P rally is a tad over bought in the near term and maybe vulnerable to a 'normal' profit taking correction.
After the last 3 wild and wooly years, I, for one, will indeed be astonished when the DJIA and the S&P registers new record all time high territory sometime this year - even though I have been expecting it for a while!
'To accomplish our destiny it is not enough to merely guard prudently against road accidents. We must also cover before nightfall the distance assigned to each of us.'
Alexis Carrel (1873-1944)
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