Good Month – Day 537

Posted on April 1, 2009 by patrickmullins

US stocks represented by S&P500 were up 8.44% for the month of March. The Canadian S&P TSX60 grew by 7.99%. Morgan Stanley’s EAFE was 3.74% higher. While we are still 49% lower than the high in November of 2007, we have rallied 8% off the low point earlier in March.

While most of the worries and economic turmoil persists, there has been some measure of relief to the stock markets. We are at a point of growing divergence between wall street and main street. More evidence is expected of shrinking economies in North America and overseas yet these backward looking measures were not reflected in the recent buoyant return to stocks across the world.

The short term return to investment returns is random but momentum trends do make themselves known. For this positive return environment to continue investors will have to ignore the results from main street. They will have to ignore the fact that consumers are saving more and deferring large purchases. The market will have to rally in the face of lower earnings reports from companies and yes more bankruptcies and higher unemployment figures. There are no assurances, risk is pervasive even from these price levels. If this is the beginning of a turnaround in fortune for the stock markets then it would be consistent with the beginning of other bull markets, shrugging off the bad news and climbing higher in spite of the evidence.

Filed under: financial markets, investing, portfolio | Tagged: , | Leave a Comment »

Return to Risk – Day 529

Posted on March 24, 2009 by patrickmullins

We are learning more about the US Feds efforts to improve securitized mortgage markets. Specifically, the legacy loans program and the legacy securities program are designed to entice private investment involvement in turning around the credit crises. There is a good review of the Toxic-asset proposal in today’s Wall Street Journal.

The incentives have to be generous enough so as to attract private investors but not so generous that a risk free return is funded by tax dollars to the benefit of private interests. So what is a reasonable return for assuming this risk? How will these prices be established?  The public purse will be best served by a wide and broad market with many participants. Some will get better deals than others but on average many participants will serve to get the prices right and move the market to an equilibrium position, balancing risk assumed and return yielded. If we end up with a closed shop -where access is limited to a few players, then the likelihood of a subsidy from taxpayers to a small number of market dominant players is enhanced.  PIMCO spokesman Bill Gross has already voiced his firm’s intention to support the program.

Joint ventures between government and private investors are complex and rightly the subject of increased scrutiny by all interested parties. If you are a tax payer then you are a stakeholder. There is a big cost to focusing on limiting return through regulation.  There have been a series of announcements from AIG that executives will return some bonuses. These relatively small victories act as a dis-incentive to those that are considering participation. There is a view that so called excessive future gains may be clawed back by government after the fact. Increased perceived risk (regulation) will require an offsetting increased future return.

In my view, well executed programs will result from a large number of independent private interests bidding for these assets. More participants results in better asset pricing. Better asset pricing will reduce the likelihood of subsidies to private interests from taxpayers.  It is in all of our interest that the program become accessible to all parties willing and able to assume the risk. We need many participants and we should encourage bidders. We have had enough focus on punishing executives and managers of financial firms. It will not help to discourage their participation. We need to get past the need to find and punish the  parties responsible for this mess and instead focus on the task at hand. Increased effort to identify and pursue manager bonuses is an unnecessary additional cost to the bailout.

Filed under: Economics, financial markets | Tagged: , , , , , | Leave a Comment »

Day 525 – confusion reigns

Posted on March 18, 2009 by patrickmullins
S&P 500 Decline
9-Nov-07 1565
9-Mar-09 676 57%
18-Mar-09 778 50%

Well as the above math indicates, the markets have improved so now they are  fully half of what they once were.

There are so many opinions/recipes/predictions for fixing the financial system:

Do Mark to Market assets on company balance sheets to improve visibility and certainty about earnings; or

Don’t mark to market assets as these add to volatility in earnings and in the end are estimates only

Buy equities, the recession is ending in 2009; or

Do nothing, the recession is deeper than expected and mid 2010 is the earliest relief point

Since the public purse is bailing out AIG (Citigroup, Bank America…) the new owners should protect us by reneging on employee bonuses. The principle is one of fairness to those who are preventing these companies from disappearing entirely; or

Pay the bonuses, keeping the companies whole will pay off in the future as a more valuable asset is sold. These bonuses represent insignificant dollar values

New expanded monetary policy is helpful in the short term and disastrous later; or

The US economy is expected to drive world recovery, the reasonable  cost of this effort is more US dollars in circulation

I expect many of you find all of these conflicting views compelling even as they are source of argument. I  usually find both sides of the noise plausible and somewhat meaningless as a result. The loudest opinion is unlikely to be the most helpful, or best considered. In times as these, we need to have some reasonable basis for  making investment decisions.

There seems to be a quest to define the moment of inertia, when the economy begins to grow instead of shrink.  If we could guess the day what would we do exactly? Search for a new job… buy an investment property? Maybe we could pick that exact moment to buy stocks in our retirement accounts.

Unfortunately,  we would probably be late to the party for stock markets.   If we look at the most severe recessions in the past 40 years for Japan, UK, US and Germany at the official end of each recession the local stock market had rebounded from a low of 31% in US markets in March of 1975 to a high of 137% in the UK in December of 1975. Of course the end of recessions are defined by looking back 6 months. Not helpful if you are trying to time a stock entry point or major purchase.

Good judgement starts with clearly understanding your unique situation. Investment activities should be added to after accounting for and funding cash requirements and perhaps reducing debt. In this way you will not be forced to turn what should be a positive into a negative investment experience.

Filed under: Asset Allocation, Economics, financial markets | Tagged: , , | 1 Comment »

Day 523 – Lenders follow – they don’t lead

Posted on March 16, 2009 by patrickmullins

The term ‘credit crisis’ seems to imply that we can expect a resumption to normal market conditions, and economic growth, as a direct result of increased lending by banks…maybe, but things haven’t worked out that way before.

Much of the recession fighting efforts by central bankers and global political administrations is focused on a forced expansion of credit. In 2007-2008, a ceasing of credit markets was crippling to economic activity. De-leveraging of global markets resulted in a sharp reduction in economic output and a pervasive global recession. The reaction by central bankers was to create conditions where bank-to-bank lending was possible again. To a great extent, and at incredible expense,  this has been accomplished. Indeed in the past few weeks we have seen credit market spreads expand. A positive indicator, since banks are probably using their own capital to lend to clients rather than simply passing on the fire hose of cash flow from the Fed.

While resumption of a normalized credit market is a precondition to ending this recession, the evidence suggests that credit expands only after the economy has rebounded. The effect is to further fuel an already expanding economy. In every recession since 1960 real bank credit didn’t peak until several quarters after the end of each recession. While this time may be different, it is likely that the same economic principles apply today as they have the past 50 years. Banks typically tighten credit as a result of loan losses. This is a reasonable response to limit losses and participate less to the downside of an economic cycle. These normal incentives operate to limit the expansion of credit prior to some clear evidence of economic expansion. When the economy begins to expand lenders expand their efforts to capture the growing market shares. It is unlikely that policy makers will be able to engineer conditions where lenders will lead a meaningful expansion in the economy. At some point incentives should switch in favour of the consumer and creating conditions for expanded demand to replace liquidity concerns as the primary focus of economic leaders.

Here is  a related short essay by Kevin Kliessen, Economist with the  Federal Reserve Bank of St. Louis  http://research.stlouisfed.org/publications/mt/20090301/cover.pdf

Filed under: Economics, Leadership, financial markets | Tagged: , , , | Leave a Comment »

Day 507 – 6 financial principles you can rely on

Posted on March 2, 2009 by patrickmullins
S&P 500 Decline
9-Nov-07 1565
2-Mar-09 735 53%

Today’s  Opening Value

We posted new lows last week and the S&P 500 is priced at less than half of the value in November 2007.  The recent investment experience has been brutal. Last week was one of the worst in terms of stock market performance that we have seen in the past couple of years and just about everyone is looking for the misery to continue.

Last Thursday Bank of Montreal economist Douglas Porter, suggested the worst was over and we should begin to consider the prospects of a better economy by the end of 2009. His opinion wasn’t appreciated by those that offered comment. Practically no one agreed with his point of view. The average opinion was outright critical and many dismissed his thoughts as someone who is shilling for a bank, his opinion therefore bought and paid for. I don’t know Douglas Porter other than by his reputation as a good economist.  I do have some respect for his decision to release information to the hostile crowd. He was, I think,  aware of the probable feedback. So what is going on here? Is everyone so sure that they know the future will be a continuation of the recent past? Is Porter simply rolling the dice with other people’s money (risk) to generate profit for his bank? It seems to me that investors understand there is higher risk in the investment markets. Their recent experience is bad and they look for this to continue. The idea that economists or financial analysts can predict the bottom for investment markets is a source of irritation bordering on anger.

For the sake of clarity here are some basic financial principles in which we can rely:

  • Higher return comes with higher risk. The risk premium or compensation for risk is higher when things are not going well.
  • Investment decisions should be made on a forward-looking basis not by looking at the recent past as prologue.
  • It is improbable to predict or time the turn in the investment markets.
  • Short term returns from a trough, or market low,  is very high.
  • Selling after a significant drop in prices means you will probably give up significant short term return when the market recovers.
  • Some short term traders will correctly predict the turn in the market but only by chance.

Filed under: Economics, financial markets, investing | Tagged: , , , | Leave a Comment »

day 500- a financial advisors journey

Posted on February 23, 2009 by patrickmullins
  S&P 500 Decline
9-Nov-07 1565  
21-Nov-08 752 52%
23-Feb-09 753 52%

 

It’s 3 o’clock, an hour before the close of the markets. I really don’t prescribe to technical analysis for stock trading, but like reading your horoscope, it makes you feel better to see a five star day.  We are currently equal to the old low from last November. Optimists (bulls) cling to the notion that this value represented a low level from which the markets would slowly and carefully resume an new upward trajectory. So to avoid a problem I am posting this before the close of market trading. Maybe the market (world) cares about the S&P 500 staying above 752 or maybe not. Intellectually I know it doesn’t make any difference. Emotionally I could use the boost.

Filed under: financial markets, investing | Tagged: , , | Leave a Comment »

Day 496 – Questions for our Leaders

Posted on February 19, 2009 by patrickmullins
S&P 500 Decline
9-Nov-07 1565
21-Nov-08 752 52%
18-Feb-09 788 50%

U.S. President Barack Obama is visiting my cold and overcast city today. With this visit Canada becomes the first foreign destination for the new President. This has generally been the case for his predecessors as well. I understand that we won’t get to see him as he will be hidden from view for the 6 hours or so that he spends on Canadian soil. From a foreign policy perspective our hope is that this is the start of a friendly and mutually beneficial relationship between President Obama and Prime Minister Harper. Everyone needs someone they can confide in, especially when the challenges are many (to use Obamaspeak). This is just a meet and greet but if we could submit some questions…

For President Obama

1. Why stimulus? Are tax cuts simply a non starter?  The Regan-Thatcher years were a required response to big deficits and inflation problems of the 1970 and 80s.  Could we jump to a solution that actually worked?

2. How long do we hold the spigot open? Financials, Autos  … who is next?

3. Could we just give the auto workers the money and cut out the middleman? Would this cost less? Has anyone done the math?

4. What engineering superiority are we protecting by maintaining the auto industry as currently configured?

5. How does cutting salaries for Bank Presidents repair the economy?

For Prime Minister Harper

1.  What’s the plan for minimizing the environmental impact of the Alberta Tar Sands? How can we continue to supply this enormous quantity of oil at prices that we do not control without properly matching  all of the costs to the revenue stream?

2. Do you have a plan for Cap and Trade?

3. Do we believe in the gains from trade? What is the Canadian government doing to improve our position in emerging markets like India and China?

4. Now that the North American stock markets are down again this year, any more market timing suggestions you would like to share with us?

5. Who is going to win hockey’s  Stanley Cup this year?

Filed under: Uncategorized | Tagged: , , , | Leave a Comment »

Unsexy Virtues

Posted on February 16, 2009 by patrickmullins

The top rated banking system in the world – Canada, really?  I guess it had to happen sometime. It seems after the recent global carnage, banks that leveraged their assets the least have won. European Banks had borrowed more than fifty times their assets to increase the size of their operating business.  So a 2% loss in net operations pretty much wiped out their equity. The U.S. banks levered north of 25 times so it took a 4% net asset write off. Canada at 15 times has a 6 % cushion. It should be noted that much of the global bank liabilities are guaranteed through deposit insurance, reducing the risk. As we have recently found, relatively small, highly risky ventures can spin out of control. You and I can’t get a loan with 2% equity backing the note. If we did we might be too big to fail as well.

Last week Chancellor of Queen’s University and former Governor of Bank of Canada, David Dodge spoke at a lunch presented by the Canadian International Council (CIC). His topic -Rebuilding the Global economic and financial Order. He had a couple of insightful statements about leverage. In his view changes to accounting standards (FASB)  are adding volatility to stock markets in marking assets to market while leaving debt largely at cost. If debt isn’t repriced  as equity on the balance sheet then you get bigger reductions in earnings in recessions and larger growth in earnings in good times.  Higher highs and lower lows add risk without a corresponding increase in return since debt and equity will end up priced at liquidation value in any case. Transparency is always desired but only if  assets and liabilities ares  treated equally. Mark-to-market is really made up numbers since you only really know what something is worth when someone else pays to buy it.

Mr. Dodge is also a proponent of good regulation. He thinks that Canadian Banks may have ended up in a deeper problem without strong  federal guidelines. He concludes that upcoming G20 meetings present the best opportunity to co-ordinate meaningful global improvements in the economy.

In my opinion,  Canadian Banks would find themselves in the same position as  U.S. Banks had they been allowed to operate unfettered from regulation. For example, foreign ownership limits are federally imposed on the sector. Canadian banks lobbied to have them removed so that they might merge and invite larger interests to invest. It is lucky for them that they were unsuccessful in that effort.

Filed under: Leadership, financial markets | Tagged: , | Leave a Comment »

Day 492

Posted on February 14, 2009 by patrickmullins
S&P 500 Decline
9-Oct-07 1565
21-Nov-08 752 52%
13-Feb-09 835 47%

All good and bad things come to an end. This financial crisis will as well. So to track the progress we have to first define the beginning. My metric is the last high of the market as defined by the S&P 500.  So the bear market began October 9, 2007 closing at 1565. A bear market is commonly defined as a 20 percent decline in the index. This is the 7th bear market of the past 40 years and by measure of decline the only S&P 500 drop to exceed 50%.  The lowest point was 741 on November 21, 2008, a 52% decline. Today we are down 47% from the 2007 high. Stock prices are immediate measures and are often referred to as leading indicators or predictors of where the economy might be going.

This bear market began as a financial problem and is now a full blown world wide recession. A recession is 2 consecutive quarters of negative real GDP. Recessions are backward looking measures as it takes time to collect the data.  This predictive ability comes with a degree of error as many more recessions have been predicted by the market than have come to pass.

The U.S. recession officially began in December 2007. The  National Bureau of Economic Research publishes some good data on past recessions. Peak to trough since the Second World War, the average recession has lasted 10 months. The range is large however: the longest peak to trough was experienced through the U.S. Civil War at 65 months. In the 1930s the duration was 43 months.  Unfortunately, there isn’t enough computing power in the world to confidently predict the end of a recession. The economy is simply too complex.

I think the stock markets will rebound. Optimism has always won in the end. The S&P 500 first hit 100 in 1968. Today, we worry as the Index has fallen below 900. This isn’t gravity, it’s a measure of growth in the economy. The economy is larger, the population has grown, companies make  more money, and these fundamentals are eventually reflected in the value of the index.

In future posts I will continue to review the evidence to try to determine when the uphill swing begins. Stay tuned…

Filed under: Economics, financial markets | Tagged: , | Leave a Comment »

Are You lucky at Demographics ?

Posted on February 9, 2009 by patrickmullins

I recently finished reading Outliers by Malcolm Gladwell. This current best seller is written by author of The Tipping Point and Blink. It’s a short read that is, in my opinion, worth the effort.  The central theme is success . Outliers, for the purposes of this book, are people who have achieved exceptional results in their professional pursuits compared to those who have perhaps underperformed.   There were a couple of notions that I found especially useful.  Gladwell claims that there is plenty of evidence suggesting that it takes 10,000 hours to master a profession. Based on a 2000 work year that adds up to about 5 years. He looks to the life works of masters like Mozart and Gates to demonstrate this time line. He concludes that intelligence, to a degree, plays a roll in the success, in that a minimum standard is required.  More importantly, demographics, timing and perhaps luck are the key contributors.

There is a Darwinian notion here for me. Outcomes are, to an extent, predetermined. Outliers appear continually and their impassioned exploits are rejected or rewarded based on things that are largely out of their control.  Demographics,  perhaps like natural selection, decide the timing for these mutations.  Gladwell concludes that the individual player has less to do with the outcome than we might give credit for… so I think I’ll wait for the unifying theory.

disco-ball1These notions can be considered when looking at our new generation of leaders.  The Jones Generation refers to that portion of the  population born between 1955 and 1964. They are the lost generation, sandwiched between Boomers and Gen Xs. President Obama and Prime Minister Harper are part of Gen Jones.  This generation had the shared experience of starting their careers in the recession of the early eighties. There  is a certain shared frustration as a result of  high expectations for success meeting 20% interest rates.  The view is that their older boomer brothers and sisters had an easier road.  Apparently, once they did manage to get a toehold on careers and families, the Joneses turned into perhaps  the greatest consumer generation of all time. It seems that as leaders the Joneses should remember some of the lessons of the early eighties. Tough times require a willingness to compete. Perhaps 10,000 hours working through a previous recession will serve as great training for this current group of leaders to succeed in the task at hand.

Filed under: Economics, Leadership | Tagged: , , , , | Leave a Comment »

Next Page »