Market Perspectives

Spring Of Surpises Up Ahead

It’s has been tough go over the last few weeks. It’s been all about Greece, the stability of the Euro and the entire notion of European unity and solidarity. The interesting, and most obvious point that we have been telling our clients is that, despite what mood was on Wall St. Greece has NOT officially defaulted! Of course the world’s business media would have you think otherwise, but no, last time we checked Greece had not defaulted, that isn’t to say the situation is grave, it is – but this situation is being addressed by the EU and we believe a solution will certainly be crafted for Greece, it is in the best interest of the Euro Zone to make sure Greece is saved.

Amongst the chatter of Greek tragedy, traders and the market also began to fret about other heavily indebted EU states, Portugal, Spain and Italy. Gasp, it suddenly seemed that the Euro Zone was in deep trouble and the fear spread fast, so did the selling across global equity markets.  The Euro has certainly taken it on the chin, selling off against the U.S. dollar to it’s lowest level in 9 months, which really doesn’t make much sense given that the U.S. deficit is much larger then the combined deficits of the EU member states mentioned.

We have always told our clients that there are two distinct corrections in the market – corrections based on fundamentals and those based on emotions. This first true correction since the 2009 March lows was based on the latter. The emotion of fear running rampant. Why? The unknown.  Which banks might have exposure to the sovereign debt of these EU member states?  What “if” they defaulted?  Of course China’s policy tightening added fuel to the fire over the last few weeks as investors wondered, Will growth slow? This correction period from mid January to February proved that the market is still rattled by the simplest, yet obviously answered questions, but instead of rationale thinking, irrational fear still rules the trading day.

The truth for all investors that is common knowledge is 2010 will be a challenging year in terms of matching 2009 returns in global equities.The latest GDP data out Germany showed stagflation for Q4 in 2009, and overall Euro Zone growth was anemic in Q4. China continues to defy the global economy and fiscal prudence should be met with cheer not gloom – the Chinese can always reserve bank tighten if needed, but growth will remain robust even with additional policy measures to cool lending and the ever dire consequences of a brusting credit and property bubble.

In the U.S., the reading of March ISM data is positive, slightly. The ISM is still above 50, but it is now telling a story of more moderate growth ahead in the manufacturing sector.  We are also closely watching developments U.S. financial and heath care policy and how these could affect U.S. corporate earnings in the latter half of 2010 and beyond. For now, it’s full steam ahead Asia and with Greece passing it’s austerity measures earlier this week things are looking somewhat more stable for global equity markets in the near term.  It promises to be a spring of surprises. Stay tuned.

Market and Macro Themes for 2010

Welcome to 2010. Welcome to a new decade. Welcome to the year of the Tiger. Can we have another roaring year such as 2009? The answer to this question depends on a few key factors that global investors and our clients are now turning their attention to. The key question on minds of many is to try to figure out the full extent of the global recovery and attempt to accurately predict the strength or weakness of it and the factors that may or may not influence the recovery.

Everyone from Wall St. to Bay St. is pre-occupied with the Fed’s exit strategy this year – this could after all be perhaps the biggest market mover of the year. But in truth there is no such strategy because it is evident that the economy will never be able to recover without sustained doses of government stimulus – after all U.S. Q3 GDP growth and the yet to be released Q4 U.S GDP have all been supported by government spending and programs. This leads to believe that interest rates are either going to be in a trading range or trend lower in the U.S.

Our note to clients in November noted that the bearish stance on the U.S. dollar was too broad and overdone and that we could see a near-term counter trend rally that would cause a reversal in commodity prices and gold, which would open up a nice buying opportunity; that time has come, however soon we feel U.S. dollar will continue it’s decline, especially once U.S president Barack Obama outlines his budget on February 1.

Is the recession over? Might not just yet.

Quote of the month goes to the former National Bureau of Economic Research (NBER) dean of dating business cycles, Martin Feldstein:

“The recession isn’t over.” In a Bloomberg Radio interview on December 17th.

Now that’s blunt, isn’t it? But he may be on to something here.

Imagine that the best we could do with the massive fiscal and monetary stimulus was a 2.2% annualized growth in real GDP in the third quarter (real Gross Domestic Income (GDI) was closer to a 1% annual rate!). This result must be put into three perspectives:

1. It came in the face of $100 billion of real stimulus out of the U.S. This means that 90% of the growth in Q3 came courtesy of U.S. governments generous help. Looking at it another way, the economy was basically flat in the third quarter when GDP is measured “organically”.

2. Normally, it should be noted that during the first quarter of post-recession growth is that real GDP expands at a 7.3% annual rate; 2.2% is really nothing to get excited about — it’s actually should be a warning sign that perhaps the double may indeed still arrive our doorsteps in the second half of 2010.

3. Never in recorded history has growth coming out of a string of declines been as weak as what we just witnessed. Considering all the government efforts to usher in a V-shaped recovery, what unfolded in the real economy in Q3 – was admittedly a decoupling from the massive rally in global financial markets – was, in a word, sad and perhaps a bit scary of what may still come.

Perhaps we have been a bit too gloomy on the facts it should be noted as we sit here in Shanghai, China and witness the massive construction efforts across the city and around the region and indeed around the country we are reminded that China and in fact many economies in Asia will continue to support the global economic recovery and growth story in 2010.

It is the year of the Tiger and China is ready to keep roaring ahead.

Equity Upside: Investing In The Global Recovery

It is the calm after the storm and the dust is only now beginning to settle. As we enter the early stages of the recovery investors are continuing to ask how best to participate in the global economic recovery through equity exposure.

Overall, the outlook is for strong global growth going into 2010. With the expected continuation of accommodative monetary policy for another year, 2010 should see continued growth in corporate earnings as consumers and the private sector in OECD economies being to experience a re-balancing of consumption and demand. We see the strongest growth in Asia and other emerging economies.

From our perspective, as there is a strong potential for growth to be stronger then market consensus, markets will continue to rally, albeit the upside velocity will be more muted then from the huge upside witnessed since the March 2009 lows until today.

Other key factors to note:
-Low rate/Strong growth has in the past resulted expansion of earning multiples
-Credit is at fair value; the current deleveraging is driving a steady spread-narrowing trend

Key growth data based on forecasts from Barclays Capital:

-U.S GDP expected to grow 3.5% in Q3, 4% in Q4 and 5% in Q1 2010
-Average U.S GPD growth in 2010 expected to be 3.6%
-Global GDP expected to peak at 4.9% by the end of Q4 2009 and average 3.9% on an annualized basis
-Overall growth to be slower then in pervious recoveries due the severity of the recession

One thing investors must be aware of is that the current accommodative monetary policy has lead to a new credit cycle. Excess liquidity and low interest rates are fueling corporate restructuring, M&A activity, debt reduction and balance sheet repair.

There has been massive deleveraging across the board and both consumer and corporate balance sheets have improved, this has been reflected in credit spreads, however many believe that equities are lagging the credit markets and do not reflect the surge in corporate bonds.

In the equity space we suggest establishing exposure to:
-Small Caps
-Value Stocks
-High Beta Stocks
-Early Cycle Sectors

In fixed income we suggest establishing exposure to:
-High Yield Corporate Bonds

In commodities we suggest establishing exposure to:
-Precious Metals
-Industrial Metals

A New Asset Bubble?

Over the last month we have been consulting with clients and continue to focus on selecting value and quality in equities. Investors should be aware of the U.S. recovery weakness, downside risks and the effect of current U.S monetary policy on equity valuations and the risks of a new asset bubble and future inflation through the dollar carry-trade and monetary inflation of the U.S. economy

Supporting this new fear of the risk of this new bubble rates turned negative on some bills maturing in January this week. The three-month bill rate was at 0.0051 percent, the least this year. Six-month bill rates dropped to the lowest since 1958. Treasury bills turned negative last December for the first time since the government began selling them in 1929 as investors scrambled to preserve principal and were willing to sacrifice returns in the months following the collapse of Lehman Brothers Holdings Inc.

Bill Gross who manages the world’s biggest bond fund at Pacific Investment Management Co. (PIMCO), said the “systemic risk” of new asset bubbles is rising with the Fed keeping interest rates at record lows.

“The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on PIMCO’s web site today. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.”

While we are cautious on the global recovery and outlook, our focus is to look beyond the U.S. “centric” focus where indeed valuations maybe getting overdone due to the U.S dollar carry trade inflating risky asset classes and creating bubble like conditions.

Rather we are encouraging clients to focus on our key theme for 2010 and beyond of the “Asian Century”. On that front, Postro Wealth will be giving clients a closer look into the Asian growth story as we visit Shanghai in December 2009. We will be taking an in-depth look at the Chinese capital markets, participate in tours of several manufacturing hubs in the Shanghai region and have the opportunity to speak with our industry colleagues on the ground in the world’s fast growing economic region and powerhouse.