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
No comments:
Post a Comment