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HomeJune 2009 Market Review
Posted by Larry Doyle on July 1st, 2009 8:52 AM |
A cursory review of market returns for June indicates no dramatic shifts, so let’s go to the sports pages, right? No, don’t do that! In the Brave New World of the Uncle Sam economy, every day, week, and month provides historic developments both above and below the surface. How does one possibly navigate the hills and valleys of the markets and economic landscape? Welcome to Sense on Cents!
I had forecasted in the Sense on Cents May 2009 Market Review:
Add it all up and I think the following will occur:
– equity markets will now move sideways in range bound fashion;
– the bond market will move lower in price, higher in rates;
– the dollar will gradually decline;
– our economy will be filled with more stops than starts.
Let’s review the stat sheet, assess our May calls, and forecast what we see on the horizon. As we move along, let’s continually remember the largest player in our markets – both literally and figuratively – is none other than Uncle Sam himself.
Pimco’s Bill Gross said a few month’s back, “you should keep the big uncle in clear sight and without back turned.” The Wall Street Journal reported just yesterday in Inflation Fears Seem to Be, Well, Inflated:
Given the Fed’s heavy and unpredictable hand in the market lately…
Yes, Uncle Sam is casting an ever larger shadow across our economy and markets. Let’s navigate . . .
Market Returns:
Equities: the major market averages (the DJIA and S&P 500 especially) ended the month largely unchanged. In fact, the S&P 500 ended the month exactly unchanged. That said, the markets had an overall range of approximately 6%-7%. Why so volatile? Primarily a continuation of technical flows of funds, while the economic fundamentals remain decidedly mixed.
The tech heavy Nasdaq continued to outperform given some positive earnings developments (e.g Oracle) and lessened debt burdens. Given the Nasdaq’s dramatic outperformance, I would be reluctant to add exposure to this sector.
Sense on Cents’ self-assessment of May call: very solid
Bonds: while the 10yr Treasury ended largely unchanged on the month, it experienced a major selloff and actually broke above the 4% level for a short stretch mid-month. The upward pressure in rates, about which Sense on Cents wrote extensively, raised major concerns about potential inflation, economic recovery, and the equity markets.
Rates came back down over the last week. Cooler heads prevailed, right? Or did that “heavy and unpredictable hand of the Fed” go to work? Sense on Cents feels strongly that the Fed managed to move rates lower via quantitative easing and working with Treasury which had redefined indirect buying in Treasury auctions (“Turbo-Tim Takes ‘Indirect’ to a Whole New Level”).
While the government bond sector did post slightly negative returns for the month, the credit sensitive sectors of the bond market (corporates, high yield, municipals, and mortgages) did post low single digit returns. What is driving cash into these sectors? The fact that the Fed and banking system at large are holding short term rates (including savings rates and CDs) at near zero or marginally above is literally compelling both consumers and investors to seek some degree of return elsewhere. That money is flowing into these bond funds as investors remain extremely concerned about the economy and equity markets.
Are investors being lured into a potential trap by investing in bonds? I believe they are. I do not see the pressure of global government deficits along with refinancing pressures throughout the economy abating anytime soon.
Sense on Cents’ self-assessment of May call: fair (more…)
Uncle Sam Economy: Not Exactly a Level Playing Field
Posted by Larry Doyle on June 9th, 2009 8:08 AM |
As we navigate the landscape of the Uncle Sam Economy, we will soon realize that the “playing field” is anything but level. What does this mean? How can we most appropriately manage? Will there be opportunities? Let’s break out our compass and project what is on the horizon.
As Bloomberg reports, U.S. Said to Plan Approval for 10 Banks to Repay TARP:
The Treasury is preparing to announce today it will let 10 banks buy back government shares, people familiar with the matter said, signaling confidence some of the largest U.S. lenders won’t again need a taxpayer rescue.
JPMorgan Chase & Co. is among those cleared to repay Troubled Asset Relief Program funds, a person said on condition of anonymity. Goldman Sachs Group Inc., American Express Co. and State Street Corp. are also among those that have sold shares and debt unguaranteed by the government, demonstrating they can raise funds without federal aid.
Allow me to provide further color:
1. Why are these institutions keen to repay TARP funds, which are widely held to be a cheap source of funding?
As none other than Pimco’s Bill Gross said of Uncle Sam, “don’t turn your back on him.” I would agree. Uncle Sam is not a good business partner. His agenda runs much farther afield than the bottom line focus of these institutions.
Make no mistake, the greatest motivation for these institutions to repay TARP funds is to be freed from the shackles of compensation controls. The major assets of financial institutions ride down the escalator and go out the door every evening. Operating under compensation caps is a surefire way for an institution to achieve “extreme mediocrity” over the long haul. Why?
The strongest employees will gravitate toward more attractive and financially rewarding opportunities.
2. From an investment perspective, how should we think of TARP recipients versus prospective non-TARP recipients?
In my opinion, the non-TARP institutions will be viewed much more as “growth” opportunities. Why? They will be able to more aggressively allocate capital and take risk unencumbered by Uncle Sam and his minions.
The TARP recipients may very well gravitate more toward a utility-type of business in which they provide basic services while simultaneously fulfilling elements of Uncle Sam’s social agenda.
Geithner, Bernanke, Obama and team will discount this reality but I believe it is a strong likelihood within the financial industry, much as it will be within the automotive industry.
3. From a borrower’s perspective, how should we think of TARP recipients versus non-TARP recipients?
Perhaps initially there will not be much disparity in the relative pricing of different products, but I do believe the disparity will grow over time. All we need to do is review the undercutting of prices within the insurance industry by AIG to see the potential for the same within the financial industry. As borrowers, we will likely have more opportunities to comparison shop going forward. It is not inconceivable that certain non-TARP institutions decide to exit select businesses as pricing becomes non-economical.
4. The greatest question remains, will any of these institutions, both TARP and non-TARP alike, ever be allowed to fail?
The fear of failure at one point was the greatest motivator for innovation and real long term success. Having violated this moral hazard by unprecedented margins, the cost to capitalism will only be known far down the road.
As such, the need to prudently and proactively navigate the economic landscape will remain of paramount importance. The need for Sense on Cents will grow ever stronger.
That’s a good thing!!
LD
