With so much discussion about healthcare reform and proposed legislation in the news, we thought it would be helpful to list some links to websites about healthcare reform so you may have a better understanding of the proposals and legislation being discussed. Below are a few links to websites covering discussions and facts about current healthcare reform. You will need to cut and paste the links into your browser.
http://www.opencongress.org/bill/111-h3200/show
http://www.healthreform.gov/
http://www.aarp.org/health/articles/health_reform_get_the_facts.html
http://healthcarereform.nejm.org/
Have a nice weekend and happy reading!
Friday, October 30, 2009
Friday, October 23, 2009
Third Quarter Update
After a brief pullback to start the third quarter of this year, the global markets continued higher, again turning in one of the best quarterly performances in over 10 years after a significant rally in the second quarter. The quarter was marked by town hall meetings on health care reform, speculation concerning Iran’s actual nuclear capabilities, and the Cash for Clunkers program, which helped drive sales at the automakers. The Federal Reserve held interest rates at zero, while the dollar continued its decline against most major currencies.
To be perfectly honest, we have been very surprised by the 50% move in the U.S. markets in the past 6 months – the sharpest on record. We underestimated the sharpness of the recovery off the March lows and the liquidity impact of government stimulus in the capital markets. For what it’s worth, after the October 1987 crash (which could be considered similar to October 2008 in terms of magnitude and impact), it took the market about 21 months to move 50%.
As we move toward 2010, many of the same uncertainties regarding consumer demand and global economic growth are still with us. However, it is important to remember that markets can disconnect from economic fundamentals if there is a collective perception the global economy is recovering and corporate earnings are improving; which is currently happening. This doesn’t signal economic improvement is certain or uncertain for that matter. It is the collective perception of improvement or non-improvement that typically moves markets at any given time. At the moment any possible fundamental concerns have been put aside by most market participants who seem to be placing more emphasis on bottom line cost cutting, which has improved short-term profits. Whether companies are able to achieve longer term profitability growth remains to be seen and will be important to watch moving into 2010.
In addition, both the stock and bond markets are benefiting from a surge of liquidity into those markets, based on a Federal Reserve zero interest rate policy on cash, which essentially forces market participants to accept more risk in order to earn any return.
Our current assessment is that the US market averages (based on S&P 500) are at the higher end of fair valuation based on current earnings estimates for 2009 and forward estimates for 2010. As we move toward the end of a given year, focus tends to move to earnings in the following year – in this case 2010. As of October 1, 2009 earnings estimates for the S&P 500 are $54.75 for 2009 and $73.50 for 2010 – a 34% increase. While we do believe earnings will likely increase in 2010, a 34% increase in factoring for a very sharp, robust recovery and significant revenue growth. While this result is certainly achievable, we should keep an open mind toward other possible outcomes. Analysts tend to be most optimistic regarding future earnings estimates at the end of the preceding year and adjust accordingly as the year progresses. Earnings estimates for 2010 have remained in a rather tight range over the past few months; estimates are not being raised, but they are also not being lowered.
Going forward, we are likely entering a highly complex and unpredictable period with various possible outcomes - both positive and negative. What makes the environment difficult is that the most obvious concern may not be the one that we actually need to watch for. Given this environment, while we can certainly hope for one, it is highly unlikely we will see another 50% rally in the markets over the next 6 months. The overall direction of the stock markets will likely be impacted by which outcome ultimately plays out.
To be perfectly honest, we have been very surprised by the 50% move in the U.S. markets in the past 6 months – the sharpest on record. We underestimated the sharpness of the recovery off the March lows and the liquidity impact of government stimulus in the capital markets. For what it’s worth, after the October 1987 crash (which could be considered similar to October 2008 in terms of magnitude and impact), it took the market about 21 months to move 50%.
As we move toward 2010, many of the same uncertainties regarding consumer demand and global economic growth are still with us. However, it is important to remember that markets can disconnect from economic fundamentals if there is a collective perception the global economy is recovering and corporate earnings are improving; which is currently happening. This doesn’t signal economic improvement is certain or uncertain for that matter. It is the collective perception of improvement or non-improvement that typically moves markets at any given time. At the moment any possible fundamental concerns have been put aside by most market participants who seem to be placing more emphasis on bottom line cost cutting, which has improved short-term profits. Whether companies are able to achieve longer term profitability growth remains to be seen and will be important to watch moving into 2010.
In addition, both the stock and bond markets are benefiting from a surge of liquidity into those markets, based on a Federal Reserve zero interest rate policy on cash, which essentially forces market participants to accept more risk in order to earn any return.
Our current assessment is that the US market averages (based on S&P 500) are at the higher end of fair valuation based on current earnings estimates for 2009 and forward estimates for 2010. As we move toward the end of a given year, focus tends to move to earnings in the following year – in this case 2010. As of October 1, 2009 earnings estimates for the S&P 500 are $54.75 for 2009 and $73.50 for 2010 – a 34% increase. While we do believe earnings will likely increase in 2010, a 34% increase in factoring for a very sharp, robust recovery and significant revenue growth. While this result is certainly achievable, we should keep an open mind toward other possible outcomes. Analysts tend to be most optimistic regarding future earnings estimates at the end of the preceding year and adjust accordingly as the year progresses. Earnings estimates for 2010 have remained in a rather tight range over the past few months; estimates are not being raised, but they are also not being lowered.
Going forward, we are likely entering a highly complex and unpredictable period with various possible outcomes - both positive and negative. What makes the environment difficult is that the most obvious concern may not be the one that we actually need to watch for. Given this environment, while we can certainly hope for one, it is highly unlikely we will see another 50% rally in the markets over the next 6 months. The overall direction of the stock markets will likely be impacted by which outcome ultimately plays out.
Friday, October 16, 2009
Puzzle Pieces
In determining where to allocate funds, there must be an understanding of the interaction of asset classes given certain scenarios. Outcomes can be vastly different from one scenario to the next. Understanding the interactions between asset classes is a bit like discovering puzzle pieces in a random box and trying to fit them together without really knowing what the finished puzzle is supposed to look like, because there is no finished picture to reference.
Right now, there are essentially two primary scenarios and most analysts and theorists are stating some version of these scenarios.
Scenario 1: Dollar decline, lower bond prices, higher stock prices, higher commodity prices, higher gold
Scenario 2: Dollar rises (as of function of deleveraging), higher bond prices, lower stock prices, lower commodity prices (as a function of a reduction in global demand.)
These two scenarios are conventional wisdom in the marketplace. Some believe scenario 1 is happening right now. Some believe scenario 1 has already occurred and is currently in the end stages before scenario 2 prevails. Some believe scenario 2 will be coming shortly, followed by scenario 1. So far the scenario 1 camp has been right, but what comes next? More of 1 or the beginning of 2?
It is a little troublesome when there seems to be such confidence in each of the opposing camps. Essentially, these sides represent the extremes for each scenario - one side the hyperinflationary theorists; and on the other are the deflationary depression forecasters. The reality is that we likely find a path somewhere in between. We could even move between the two scenarios for various periods of time. How the pieces of the puzzle come together will ultimately determine asset class selection.
Right now, there are essentially two primary scenarios and most analysts and theorists are stating some version of these scenarios.
Scenario 1: Dollar decline, lower bond prices, higher stock prices, higher commodity prices, higher gold
Scenario 2: Dollar rises (as of function of deleveraging), higher bond prices, lower stock prices, lower commodity prices (as a function of a reduction in global demand.)
These two scenarios are conventional wisdom in the marketplace. Some believe scenario 1 is happening right now. Some believe scenario 1 has already occurred and is currently in the end stages before scenario 2 prevails. Some believe scenario 2 will be coming shortly, followed by scenario 1. So far the scenario 1 camp has been right, but what comes next? More of 1 or the beginning of 2?
It is a little troublesome when there seems to be such confidence in each of the opposing camps. Essentially, these sides represent the extremes for each scenario - one side the hyperinflationary theorists; and on the other are the deflationary depression forecasters. The reality is that we likely find a path somewhere in between. We could even move between the two scenarios for various periods of time. How the pieces of the puzzle come together will ultimately determine asset class selection.
Friday, October 9, 2009
Risk Control
One of the keys to achieving superior investment returns is to know when to follow the herd and when not to follow the herd. If one is wrongly positioned relative to the herd, the hope is not to be eaten alive! In other words, one needs to know when to add risk and when to decrease risk.
For example, if you are a zebra and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think conditions are safe, the outside of the herd is best, for there the grass is green and fresh, while the middle sees only grass that is eaten and trampled down. The aggressive zebras, on the outside of the herd, eat much better. On the other hand, there comes a time when lions approach. The outside zebras end up as lunch while the skinny zebras in the middle of the herd may eat less, but they are still alive.
We believe there are still multiple underlying fundamental concerns that could hold negative implications for longer term corporate profit and economic growth. It is hard to envision a self sustaining economic recovery over the next business cycle, that is unless the government continues to provide endless amounts of stimulus, which could be a possibility. We must be aware of the posssible short-term benefits as well as long term implications of such action.
At the moment these fundamental concerns have been put aside by most market participants who seem to be placing more emphasis on bottom line cost cutting, which has improved short-term profits. In addition, both the stock and bond markets are benefiting from a surge of liquidity into those markets, based on a Federal Reserve zero interest rate policy on cash.
That said, risk control can be almost as important as being positioned properly when it comes to producing above average investment returns. If one has not lost too much capital at any given time, even if wrongly positioned versus the herd, one can be well-positioned and take advantage of opportunities when one gets back on track. The key to success is moving within the confines of the herd, but not living in the very middle or on the extreme outside.
For example, if you are a zebra and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think conditions are safe, the outside of the herd is best, for there the grass is green and fresh, while the middle sees only grass that is eaten and trampled down. The aggressive zebras, on the outside of the herd, eat much better. On the other hand, there comes a time when lions approach. The outside zebras end up as lunch while the skinny zebras in the middle of the herd may eat less, but they are still alive.
We believe there are still multiple underlying fundamental concerns that could hold negative implications for longer term corporate profit and economic growth. It is hard to envision a self sustaining economic recovery over the next business cycle, that is unless the government continues to provide endless amounts of stimulus, which could be a possibility. We must be aware of the posssible short-term benefits as well as long term implications of such action.
At the moment these fundamental concerns have been put aside by most market participants who seem to be placing more emphasis on bottom line cost cutting, which has improved short-term profits. In addition, both the stock and bond markets are benefiting from a surge of liquidity into those markets, based on a Federal Reserve zero interest rate policy on cash.
That said, risk control can be almost as important as being positioned properly when it comes to producing above average investment returns. If one has not lost too much capital at any given time, even if wrongly positioned versus the herd, one can be well-positioned and take advantage of opportunities when one gets back on track. The key to success is moving within the confines of the herd, but not living in the very middle or on the extreme outside.
Dollar Devaluation
Over the last several months there has been a very close, some could argue almost perfect correlation between the US dollar and the US stock market, as measured by the S&P 500. As the dollar declines against other currencies, US exports become cheaper to foreign buyers, in turn increasing US corporate revenues. At the same time a weaker dollar typically turns investors towards riskier assets such as stocks.
If this correlation continues, any increase in the value of the dollar could correspond to a decline in the stock market. Conversely, if the dollar continues to decline, we should expect the stock market to continue to rise; as long as the correlation exists.
(Click on chart for larger image)
If this correlation continues, any increase in the value of the dollar could correspond to a decline in the stock market. Conversely, if the dollar continues to decline, we should expect the stock market to continue to rise; as long as the correlation exists.
(Click on chart for larger image)
Friday, October 2, 2009
Baltic Dry Index Update
The Baltic Dry Index (BDI) is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for shipping contracts.
The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are typically backward looking, meaning they examine what has already occurred. The BDI offers as close to a real time glimpse at global raw material and infrastructure demand as any indicator. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move the cargo.
Below is the most recent chart of the Baltic Dry Index. The BDI has been declining since June of this year, just as many economists believe a global economic recovery is underway. While the latest decline may be a pause in shipping activity before countries such as China begin restocking raw materials for the end of the year, the BDI should be monitored as it is a leading indicator of economic activity. If the BDI continues to decline in the coming weeks and months, it could be an indication that economic growth forecasts may be too optimistic.
The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are typically backward looking, meaning they examine what has already occurred. The BDI offers as close to a real time glimpse at global raw material and infrastructure demand as any indicator. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move the cargo.
Below is the most recent chart of the Baltic Dry Index. The BDI has been declining since June of this year, just as many economists believe a global economic recovery is underway. While the latest decline may be a pause in shipping activity before countries such as China begin restocking raw materials for the end of the year, the BDI should be monitored as it is a leading indicator of economic activity. If the BDI continues to decline in the coming weeks and months, it could be an indication that economic growth forecasts may be too optimistic.
Subscribe to:
Posts (Atom)