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Employment report disappoints Wall Street
Posted by Louis Navellier on 7/2/09 11:29 am
Ouch! Economists expected a decline of 322,000, so this is a big disappointment.
News Alert
from The Wall Street Journal
Nonfarm payrolls fell by 467,000 in June, the U.S. Labor Department said Friday. The unexpectedly large drop came amid widespread declines across manufacturing, construction and professional services. The unemployment rate, calculated using a survey of households as opposed to companies, increased 0.1 percentage point to 9.5%, the highest level since August 1983. Read More
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Regional banks could be signaling rough waters ahead
Posted by Patrick O'Connor on 7/1/09 12:22 pm
U.S. regional banks have been a reliable leading indicator for the S&P 500's future performance in recent months. These banks collectively fell 51% in 28 days starting December 8, according to Bloomberg. The decline preceded the S&P 500's 28% slide to its 12-year low in March by about two months. Moreover, the group's all-time high reached in February 2007 came seven months before the S&P peaked.
Why am I bringing this up? Regional banks have declined about 23% from their May 8 rebound off the bottom. Read more.
KBW Regional Banking Index
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Bonds and Stocks Re-enact Aesop’s Rabbit vs. Turtle Run
Posted by Gary Alexander on 7/1/09 10:28 am
Recently, there has been a friendly debate between Professor Jeremy “Stocks for the Long Run” Siegel and financial analyst Robert Arnott, who has triumphantly pointed out that bonds have outperformed stocks over the last 40 years. Arnott showed that an investor in 20-year Treasury bonds in February 1969 (rolling those bonds into the nearest 20-year bond and reinvesting all income) edged out generic stock investors as of February 2009, at the market’s recent bottom.
Bond gains are even more dramatic in the last decade, since stocks are still down from their 1999 levels. Stretching back 20 years, from June 1989 to June 2009, the S&P 500 returned 7.7% per year (+341% total), while Treasuries with maturities of 10 years or more returned 8.7% per year (+430%). That time span obviously includes the rapid rise in S&P stocks from 1994 to 1999.
From this array of shocking results, it appears that the long-term race between stocks and bonds resembles Aesop’s classic fable of the Tortoise and the Hare: Given enough time, the plodding old turtle (bonds) beats the rapid stop-start volatility of the rabbit (stocks). The truth, however, is that there’s no reason to pick sides. Savvy investors have always invested in both, along the “efficient frontier” of return vs. risk when allocating their assets between stocks and bonds.
Click chart to expand or print
There’s also the question of stock-selection and bond-selection as part of the investor’s eternal quest to beat the averages. (As Louie often says, “It’s un-American to aspire to be average.”) Navellier analysts have been grading stocks along a risk-reward continuum for a long-time. That is the secret behind the success of Navellier.
In recent years, Navellier stock grades have been made available to the public via the Stock Grader, updated each week. So far, we don’t have such an elaborate grading system for rating bonds, but we have examined where the “sweet spot” in bonds is, from time to time. The bottom line is that we don’t seek “average” bond gains. There is no sense in settling for generic U.S. Treasury long bonds (the measuring rod in Arnett’s study) when the universe of bond choices is just as rich as the stock market – you have corporate vs. Treasury, long vs. short or intermediate, high-grade vs. junk, tax-free vs. taxed, foreign vs. domestic. Bond choices are just as rich as stock choices.
Seeking the Sweet Spot of the Bond Market
Right now, Navellier statisticians have identified the “sweet spot” in bonds as the intermediate term (3-5-year) low-end investment-grade corporate bonds, now yielding around 8%. These bonds, generally rated BBB by S&P (or Baa by Moody’s), are returning three times the income of equivalent 3-5-year Treasury securities. As Patrick O’Connor reported Monday, U.S. Treasury yields have fallen for several straight days in late June, widening the gap further.
The spread between Treasuries and corporate bonds obviously widens during times of investment fear, such as we’ve seen lately. Last November, for instance, the spread between investment-grade corporate bonds and same-maturity Treasuries peaked at 6.1%. (The previous peak spread was 2.5 points during the steep market collapse of 2002.) As of May 31, the gap was 3.89%.
Click chart to expand or print
The gap between high-yield (“junk”) bonds and U.S. Treasuries is roughly 11%, which is also historically high, reflecting fear of corporate default rates climbing in a prolonged recession. That gap verges on the edge of the irrational fear that 8% to 10% of such corporations will default in any given year. Investors seemingly fear a Greater Depression, as reflected by this 11% gap.
Bond investors now expect default rates of 8% per year on investment-grade bonds, according to Simon Ballard of CreditSights, but even in the Great Depression, the default rate on investment grade bonds was only 1.6% per year. (See “The Case for Bonds,” Forbes, July 13, 2009.)
There is another factor pushing this spread wider for the time being. The Treasury is trying to sell unprecedented amounts of new debt – $102 billion last week alone and about $1.8 trillion this calendar year – so the Fed and other central bank officials are trying to keep long rates down by purchasing Treasuries and mortgage bonds. There is now speculation on Wall Street that the Fed might purchase most of this year’s new debt (c. $1 trillion) to try to keep long rates down, easing the rapidly growing burden on the federal budget, where interest on the national debt is always a major threat to bloat the deficit. That’s why the Fed is artificially suppressing 2-10 year yields.
Investment Implications
There is no free income lunch in life. Investors who wanted – indeed, demanded! – yields of 13% to 15% without risk have suffered the same sad fate as Bernie Madoff’s investors. Hedge funds that promised such yields from U.S. Treasury instruments at the peak of the hedge fund boom in 2007 were hawking phony promises built on high leverage and dubious statistical parameters of risk. When these hedge funds eventually collapsed, as any high-risk venture must, investors got mere pennies on the dollar, whereas any honest unleveraged bond fund risks only a small overall default rate, combined with the generic economic risk of rising inflation and rising interest rates.
Investors who think that the current recession just might be less onerous than the 1930s Great Depression would do well to look at corporate bond yields reverting to the mean (vs. Treasury yields). If rates converge, then corporate bonds are now the “sweet spot” in the bond universe.
Rate spreads have shrunk since last winter, but they are still historically high. For instance, the Vanguard High-Yield Corporate Bond fund (VWEHX) is up 31% (total return) in the six months since its bottom last December. It invests in the high-end “junk” bond market, at the low risk end of the pool. Similar funds like T. Rowe Price High Yield (PRHYX) are also up 30%.
For investment-grade bonds at the highest-yielding end (BBB, as rated by S&P), Advisors Corporate Trust has assembled Series 1 of a High-Income Opportunities Portfolio of BBB-rated corporate bonds, with maturities ranging from 3 to 5 years, and yields averaging 7.791%. The weighted average cumulative yield is 7.63%. The highest yields are from Wyndham Worldwide (9.875%), Ingersoll-Rand (9.5%), Time Warner (9.125%) and Black & Decker (8.95%).
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Treasury yields fall for third straight day
Posted by Patrick O'Connor on 6/29/09 11:01 am
U.S. Treasury yields continued to fall today after Chinese central bank Governor Zhou Xiaochuan said his country will not abandon its foreign-currency reserve policy anytime soon. China holds the most U.S. dollar reserves of any foreign country in the world.
Treasury yields were also pressured lower today by quarter-end window dressing, when managers like to show how stable their holdings are. Read more
10-year U.S. Treasury Yield
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Street’s “fear gauge” returns to pre-Lehman bust levels
Posted by Patrick O'Connor on 6/29/09 10:34 am
The Chicago Board Options Volitility Index, or VIX, today fell to its lowest level since the September 12 closing value of 25.66. The VIX is commonly referred to as the "fear gauge". The higher the number in the index, the more fear in the market. The VIX hit an intraday high of 89.53 on October 24. Going back to 1990, the index has averaged 20.18, according to Bloomberg. Typically readings above 30 represent sell signals for stocks. The index fell to 25.53 today, a bullish sign for stocks.
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Swiss banks to end secrecy protection for U.S. customers
Posted by Patrick O'Connor on 6/29/09 10:15 am
The IRS is stepping up its attempts to find an estimated $50 billion in taxes owed by U.S. citizens living abroad or from those stashing money in Swiss banks. The agency set a deadline of September 23 for all taxpayers to declare offshore accounts or face possible criminal prosecution.
Bloomberg
Swiss Banks Shun Americans as U.S. Compels Disclosure
By Warren Giles
June 29 (Bloomberg) -- Swiss banks are shutting the accounts of Americans as the U.S. Internal Revenue Service accelerates the hunt for tax dodgers.
UBS AG and Credit Suisse Group AG, the country’s biggest banks, have told Americans to move their money into specially created units registered in the U.S., or lose their accounts. Smaller private banks such as Geneva-based Mirabaud & Cie. are closing all accounts held by U.S. taxpayers.
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Fed Chairman Bernanke on the hot seat
Posted by Patrick O'Connor on 6/25/09 10:45 am
If you missed today’s live broadcast of Fed Chairman Bernanke getting grilled by members of Congress about BofA’s acquisition of Merrill Lynch, you may watch it here. Bernanke seems to have conveniently acquired amnesia!
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The Fed’s shell game will continue
Posted by Louis Navellier on 6/24/09 9:57 am
The Fed finally saw some “green shoots”, but plans to continue its quantitative easing. Policymakers will buy up to $300 billion of Treasuries by autumn. If the government’s estimated $1.85 trillion deficit is accurrate, the planned Treasury purchases means the Fed will buy approximately 16% of the government’s deficit with funny money, that is money created ex nihilo, within the next few months.
The Fed also plans to purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, again using money created out of thin air.
Wisely, the Fed avoided mentioning anything about an eventual exit strategy, which is something that should never have come up at the G8 meeting in Italy. Widespread inflation concerns at this point of the recovery are nonsense, despite rising commodity prices. The Fed acknowledged this:
“The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”
In a nutshell, the Fed’s continued quantitative easing will pressure the dollar lower and push commodity prices higher. This will benefit our commodity-related stocks, export stocks, and U.S.-based multinational stocks. International stocks will have an advantage as well. The market is narrow, so go where the strength is.
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Believe it or not, there’s not enough liquidity in the marketplace to drive stocks higher
Posted by Patrick O'Connor on 6/23/09 11:29 am
There has been a lot of fear surrounding this week’s record amount of Treasuries being auctioned, and rightly so. The more than $100 billion in Treasuries scheduled to flood the market this week is an amount that has been seen for an entire year in the past for fiscally irresponsible periods. As such, if there are not sufficent bids this week, the economic rebound could be in jeopardy since yields would have to rise to attract buyers. Higher interest rates would be a disaster at this stage of the recovery. The so called green shoots would turn brown. Borrowing rates would climb higher, including mortgages, credit cards, auto loans, you name it. The economy would be headed for a “double dip.” So what can the Fed and Treasury Department do to encourage bids for all these Treasuries? I’ll answer that question in a second.
The problem is there is only so much liquidity in the marketplace to drive up asset prices, whether they be homes, stocks, bonds, precious metals, whatever. Mind you, the amount of liquidity is at mind-boggling levels, but so are the deficits at some of the world’s biggest economies, like the U.S. and U.K. As such, the liquidity is, believe it or not, still not high enough to drive all of the depressed asset prices higher, especially since a significant amount of the liquidity is sitting at banks and not being lent. That said, finance officials around the world are attempting to move money around to put out fires here and there. After first unfreezing the credit markets by bailing out all the irresponsible banks, they moved toward shoring up the stock markets. Yes, the rebound off the March lows was mostly the result of this artificial liquity getting allocated toward stocks, which eventually stimulated the green shoots, much like a big dose of nitrogen in a garden.
As stock prices continued to rebound, investors became less risk averse, driving stocks prices even higher, and pushing bond yields higher, too, since many were selling bonds to get into stocks. This process began to pinch the recovery. After all, the idea was to put a tourniquet on the housing market by driving yields into the basement and keeping them there for an extended period. Obvously, higher interest rates are no help for a recovery that is being artificially induced.
Now, back to answering the question. The Fed and Treasury have to re-inject fear into the market to sell all this debt. And they’re doing a good job. At the G8 meeting in Italy last week, they obviously convinced a lot of finance ministers to jawbone the dollar higher and say nice things about U.S. Treasuries. Even Russia, which had recently openly discussed diversifying away from dollars, was suddenly supportive, and China was conveniently quiet. Then, this week, the World Bank followed up with a big downward revision in global GDP estimates.
These efforts have been effective thus far. Today’s two-year Treasury auction found eager bidders for $40 billion in debt. 68.7% of the bidders were foreign central banks, the bid to cover ratio was 3.19 (the average has been 2.48 for the past 10 sales, according to Bloomberg), and the sale drew a yield of 1.151% for the notes, significantly lower than the 1.20% expected by a survey of economists from Bloomberg. Perhaps you’re wondering why the stock market didn’t rebound after such a successful auction. There’s not enough liquidity! Blogger Karl Denninger from the Market Ticker, one of my favorite bloggers, says “[The] 7-day window has $165 billion in issuance. The entire S&P 500 - all 500 stocks - has been trading in the $2-2.5 billion a day range for the last month or so. That’s the capital flow that is represented by all trades in all 500 stocks.”
It will be interesting to read the Fed’s statement tomorrow. Will it water the green shoots? We’ll see.
Another thing to be watchful of is tomorrow’s five-year auction. The government is set to auction $37B in five-year notes.
“It may go poorly for the five-year tomorrow, which is an hour ahead of the Fed,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities LLC, one of 17 primary dealers required to bid at Treasury auctions. “To the extent those indirect bidders spent their powder at the two- year auction, the five-year auction might be a more dealer-owned affair, which might be a bit problematic,” he said in a Bloomberg interview.
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A falling dollar delivers superior profits in international stocks…for American investors
Posted by Gary Alexander on 6/23/09 9:39 am
While America is clearing the decks to celebrate the end of a challenging quarter with a festive July 4th weekend, very few will honor the birthday of America’s first currency. On June 22, 1775, the 13 American colonies were running dangerously short of money, so on this early summer day, while fighting a desperate and undeclared war against the world’s greatest army, Congress printed the first installment ($2 million) of “Continentals,” a small slice of paper backed by faith alone.
Since these tiny new pasteboards were not backed by gold or any other hard assets, merchants demanded more and more Continentals for the same amount of goods. General Washington complained that “a wagonload of currency will hardly purchase a wagonload of provisions.” By the end of the war in 1781, the Continental was virtually worthless. The bills were ultimately redeemed by the new U.S. government at 1% of their face value. Because of this experience, the phrase “not worth a Continental” became a common way to describe anything of no real value.
This painful lesson in paper money inflation convinced our Founding Fathers to insist that any currency issued by the states be fully redeemable in gold or silver — a requirement that became part of our Constitution and was honored for 180 years, until President Nixon closed the gold window in 1971. As a result, the dollar basically held its value for well over a century. But now, in gold terms, the dollar is worth just about two cents, since gold has risen from $20 to $920.
Today, our currency is once again backed by just “the full faith and credit of the government,” which may explain why it continues to fall. Over the long-term, the dollar is worth just a penny or two vs. 19th century prices. Here are two examples from printed menus in the 19th Century:
• In 1826, the first printed restaurant menu in America was issued by New York’s Delmonico’s Restaurant, listing a steak dinner at 12 cents.
• From an ad in the April 15, 1894 Chicago Tribune: You can enjoy ham and eggs or Swiss cheese and steak sandwiches for 10 cents, or a plain ham or egg sandwich for 5 cents.
If you substitute a dollar sign for the penny prices of the 1800s, the dollar has fallen 98% to 99%, but in super-slow motion, so that its erosion in buying power is not evident one day to the next.
Did you notice, for instance, that the average national price of a gallon of gas rose for 54 straight days from late April to late June of 2009? Probably not, since the average daily gain was only 1.2 cents. But the cost of an equivalent fuel (kerosene) in the 1890s was just 3-cents per gallon.
Will the Dollar Fall Further?
At the G8 meetings in Italy (June 12-13), leading finance ministers uniformly praised the dollar: Japanese Finance minister Kaoru Yosano said that Tokyo’s trust in the dollar was “absolutely unshakeable,” and Russia’s Finance Minister Alexei Kudrin said the dollar’s role as the world’s main reserve currency was not going to change in the “next few years.” Even the Managing Director of the International Monetary Fund (IMF) said the dollar was “correctly valued” now.
The problem with all this happy talk is that they were singing hymns to the dollar on Sunday and then behaving more rationally in the real world during the following week. Despite their kind words, Russia and Japan each reduced their holdings of Treasury paper. China is stockpiling raw materials, not dollars. The message is clear. Foreign governments don’t want more U.S. dollars.
This week will test the world’s allegiance to the dollar, as the U.S. Treasury will try to auction over $100 billion in new debt in three consecutive days: (1) $40 billion in 2-year notes Tuesday, (2) $37 billion 5-year notes on Wednesday and (3) $27 billion in 7-year notes on Thursday. If there are not enough buyers at current rates, especially now that China is no longer actively participating in Treasury auctions, the Federal Reserve will likely bid on the debt.
China is not only out of the bidding, but they are slowly unloading their dollar hoard. Bloomberg announced last week that China has reduced its holdings of U.S. Treasury securities to $763.5 billion in April, down from $767.9 billion in March. Considering that the U.S. Treasury must hawk at least $2 trillion in new debt the next year, the loss of the biggest dollar bidder will likely push long-term rates up, thereby weakening the dollar and pushing deficit financing costs higher. In fact, U.S. bond yields have already doubled this year, rising at the fastest pace in 15 years!
Here at home, there is nowhere near enough domestic savings to fund the government’s voracious new appetites. Washington is slowly waking up to the fact that nobody wants to own our massive tsunami of new debt. In practical fact, that means there are limits to how much Washington can borrow and spend, even though politicians usually ignore these signals. Recently, Fed chairman Ben Bernanke warned Congress that the ratio of U.S. debt to GDP will rise from 40% (before the financial crisis) to 70% by 2011 – the highest debt-to-GDP ratio since just after World War II.
Investment Winners: Overseas Markets (for U.S. investors) and Commodity Stocks
If the Federal Reserve is forced to monetize a large part of America’s debt, inflation will return, amidst global stagnation, yielding “stagflation.” As in the 1970s, commodity stocks will benefit while other sectors languish. Wholesale prices rose 2.9% in May, reflecting the start of that trend.
An even better investment for most Americans will be in overseas stock markets. When the dollar falls, American investments in overseas stocks are leveraged through a currency “tailwind.”
Put these two trends together and the best investment in a weak-dollar world, with rising commodity prices, will be stocks in nations rich with natural resources. Some examples:
| Market | Gain in local currency | Gain in U.S. dollars | Dollar advantage |
|---|---|---|---|
| Brazil | +35.9% | +58.8% | +22.9% |
| Chile | +31.3% | +51.9% | +20.6% |
| South Africa | +2.0% | +16.0% | +14.0% |
| Norway | +24.8% | +35.9% | +11.1% |
| Canada | +12.0% | +21.0% | +9.0% |
Source: The Economist, June 20, 2009, based on year-to-date national stock indexes through June 17, 2009
The best market gains so far this year are in the BRIC countries: Brazil (+58.8%), Russia (+64.3%), India (52.4%) and China (+65.8%). By comparison, the Dow is down 5.6% year-to-date, while the S&P 500 is off 1.4%. As the dollar continues to slide, U.S. investors might consider investing in commodity-rich national stock markets for inflation-beating returns.
Dollar drops most in six weeks
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Important Disclosures Regarding Navellier Blogs (updated April 2008)
Blogs found at this site are sponsored blogs created or supported by Navellier & Associates, Inc. For questions about any Navellier blog, please contact Patrick O’Connor, .
The views and opinions expressed on this blog are purely the blog owners, and not necessarily those of Navellier & Associates, Inc. If we claim or appear to be experts on a certain topic or non-Navellier product or service area, we will only endorse such products or services that we believe, based on our expertise, are worthy of such endorsement. Any non-Navellier product claim, statistic, quote or other representation about a product or service should be verified with the manufacturer or provider.
Navellier & Associates, Inc., seeks to retain the freedom of expression of its blog owners. However, Navellier & Associates, Inc., is a registered investment advisor and is in the business of selling investment advice. This creates inherent conflicts of interest insofar as our blogs are partly designed to promote our own investment advice, services, products, and strategies. In that regard, Navellier blogs do contain content which present conflicts of interest.
Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested.
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