Sandpoint Financial Services, Sandpoint ID

A Tail of Two Worlds

Williams, Parsons & Schiller — Mon, 07 May 2012 15:46:31 +0000

5/4/12

U.S.equity markets started off 2012 with a consistent upward trajectory, but disturbing trends are beginning to form. The divergence between the U.S. economy and the Eurozone economy has been quite striking recently. While the U.S. hasn’t added jobs at a pace we would hope, we are consistently adding 100,000 to 200,000 jobs per month. The past two months have been at the lower end of that range, with 115,000 jobs created in April. That aggregate spending power does help the economy. The Eurozone, however, reached 10.9% unemployment in March, which is the highest level of unemployment since the 17-nation union was formed in 1999. The Eurozone lost 169,000 jobs in March. Unemployment in Spain stands at 24.1%. The disruptions caused by debt problems in Greece were troubling. The current fear is that larger economies such as Spain and Italy will soon be staring down the barrel of unsustainable borrowing costs, causing a crisis far larger than the Greek saga.

The policies of Eurozone officials have exacerbated the crisis by focusing too much on debt reduction through austerity measures. How long can an economy push its citizens towards a depression before civil unrest increases dramatically? Greek citizens are being forced into a depression, not a recession. What is going to happen in Spain? In Italy? Policies focused on growth must be part of the solution. Thankfully European officials are shifting towards growth policies, but time is of the essence.

How long can the U.S. economy continue on a path of growth, albeit slow, while parts of the Eurozone continue to be in, or head towards, recession and increasing turmoil? Can the U.S. maintain slow, steady growth in a world that is more interconnected than ever? Or will the U.S. be pulled back into recession? This is the investing world we face today.

There are no safe-havens that provide a reasonable return to maintain purchasing power. With inflation officially running north of 2%, where can you invest “safely” and earn greater than 2% without tying money up for years? Conservative savers have been punished to say the least. The risk-reward balance doesn’t appear to be very good at the moment. According to Rogoff & Reinhart’s book “This Time is Different: Eight Centuries of Financial Folly,” which analyzes past financial crises around the world, debt crises take an average of 7-10 years to work through before breaking free from sluggish growth and more frequent recessions. We are only about 4 years into the process. We will continue to exercise patience, rather than speculation, in looking for better points to add to equity positions. Opportunities will come as we expect some turbulent financial markets over the next several months. We still believe in the resiliency of the U.S. people and hope that continued strength at home will trump the weakness across the pond.

A Tail of Two Worlds from Sandpoint Financial Services, Sandpoint ID

Is Housing on the Mend?

Williams, Parsons & Schiller — Thu, 08 Mar 2012 17:19:09 +0000

In January, existing home sales reached their fastest pace in the past 20 months, according to data released by the National Association of Realtors. According to the release, more Americans than forecast signed contracts to buy homes in January. The data point that peaked my interest in the NAR data was the inventory of homes listed for sale, which fell to 6.1 months worth of supply at the current sales pace. This is down from a peak of 12.1 months supply in July of 2010, and the lowest level since the bubble was nearing its peak in April of 2006.

Although housing may not be a great addition to economic growth yet, it appears that the tables are turning and at least it is not a detriment to growth. Adding to economic growth will take time as foreclosures and other inventory is cleared, potential buyers save for stricter down payment requirements, and buyers become more convinced we are finally at (or very near) the bottom of this housing cycle. As of today, with the economy continuing to improve coupled with record low mortgage rates, I feel we are very near the bottom.

Don’t expect a rapid recovery, however. This will be a slow process. The pool of buyers with enough savings to cover a 20% down payment is drastically smaller than the pool of buyers five year ago. I feel a lot of “would be” buyers see the value at today’s housing prices, but need time to save for a down payment. There is demand at today’s prices, just not the financial ability to make the purchase in many cases. Barring any derailment of the broader economic recovery, look for the housing market to stabilize and gradually build strength as more “would be” buyers save and become “real” buyers in the next couple years.

Is Housing on the Mend? from Sandpoint Financial Services, Sandpoint ID

Jobless Claims are Headed in the Right Direction

Williams, Parsons & Schiller — Fri, 17 Feb 2012 01:21:26 +0000

New jobless claims reported on Thursday continued to move in the right direction, down. Initial jobless claims stood at 348,000, down from the previous week’s 361,000. This data series can fluctuate quite a bit, so a better barometer of jobless claims is the four week moving average, which now stands at about 365,000. To put that number in perspective, six months ago the four week moving average stood at 421,000. Keep in mind these are new weekly unemployment claims. So a reduction of 56,000 jobless claims, on average, every week is a significant improvement.

The drop in jobless claims marked a near four-year low, suggesting the labor market is finally gaining some strength. Most economists consider jobless claims below the 350,000 level as an indicator of sustained employment growth. For the time being, we are headed in the right direction on the employment front. But we are nowhere near where we need to be. We still have nearly 24 million Americans either out of work completely, or underemployed. There are no job openings for nearly three out of every four unemployed Americans. Part of the reason for this disconnect is a mismatch of skills demanded by employers and skills possessed by the unemployed. Manufacturers and specialized skills industries want to add employees, but are having a difficult time finding qualified help. Like most of the economic data we see each month, there is a positive side coupled with some sort of anchor. Whether we can convincingly break free from the anchors in the month’s ahead remains to be seen.

Jobless Claims are Headed in the Right Direction from Sandpoint Financial Services, Sandpoint ID

Europe Steps Back from the Cliff

Williams, Parsons & Schiller — Thu, 02 Feb 2012 23:53:26 +0000

The three-year loans provided by the European Central Bank (ECB) to banks in the ECB system in late December have been encouraging. The ECB’s LTRO (long-term refinancing operation) effectively lets European banks in the ECB’s system borrow money from the ECB at an interest rate of 1% over a three-year period. The LTRO also allows banks to borrow with less than perfect collateral, or assets that do not carry higher credit ratings, such as Italian or Spanish sovereign debt. In the Euro zone in 2012, sovereign countries need to roll over between 1.1 trillion and 1.3 trillion Euros in debt. To make sure these countries are able to roll over this debt effectively, European banks need to have access to cheap funding to be able to take up these auctions.

The ECB has effectively staved off the potential for a systemic “Lehman Bros.” type of event in the near-term. At a minimum, the LTRO buys Europe time to formulate a credible solution to their sovereign debt situation. The uptrend in the financial markets recently is a result of good earnings reports at home and a sigh of relief that the Euro scare is temporarily resolved. The LTRO provides a solution for liquidity in the short-term, but it does not solve the problem of solvency longer-term.

One of the biggest concerns for Europe is the continued focus on austerity. One of the greatest lessons from the Great Depression was that stimulating the economy until “out of the woods” is a better path than slashing spending today. Forcing more austerity on countries already suffering from lack of economic growth is largely counterproductive. Spending cuts lead to less economic growth which leads to less tax revenue which leads to calls for more spending cuts. The cycle is not a pretty one. Growth initiatives and stimulus must accompany any austerity plan. Spending cuts should be instituted in a long “glide path” manner so they don’t stifle economic growth. We hope the indebted nations of the world read the history books and understand the dangers of an austerity-only solution. Time will tell.

Europe Steps Back from the Cliff from Sandpoint Financial Services, Sandpoint ID

What Will 2012 Bring?

Williams, Parsons & Schiller — Wed, 01 Feb 2012 01:17:59 +0000

2012 is off to a good start so far. What will the rest of the year bring? How do we make an informed decision about how to position investments? Let us start by taking a brief look at 2011.

It was a good year for earnings at US companies, with earnings on the S&P 500 companies rising about 16%. That makes what happens to stock prices a little puzzling (blame Europe I guess), since the S&P 500 index started 2011 at 1257.64 and ended the year at 1257.60. As a result, the aggregate Price-to-Earnings ratio for the index declined from 15.03 at the start of the year to 12.96 at the end. The 80-year average P/E ratio of the S&P 500 is about 15. From that perspective, stocks are slightly undervalued.

It was an even better year for cash flows: dividends on the S&P 500 companies rose 12.5%, but share buybacks surged more than 80%. The total dollar buybacks in 2011 (at least for the four quarters ending September 2011) almost matched buybacks in 2006, though they still remained well below the historic highs set in 2007. While the dividend yield on the index remained anemic (2.07%) the total cash flow (including buybacks) yield on the index was 5.90%, again well above the ten-year average of 4.72%.

The ten year Treasury bond which started the year at 3.29% ended the year at 1.87%, the first time it has ended a year at below 2% in the last 50 years. The decline in yield was largely a result of the “flight to safety” trade following another Eurozone debt scare. The drop in the rates also made US treasuries one of the better investments for the year, with the ten year bond returning 16.04% for the year; the price appreciation component accounted for 12.75%. Ironic, don't you think? After all, this was the year of the great S&P downgrade of the US sovereign rating. Are lower interest rates good news? Usually not. When investors accept low rates of return on Treasury bonds, it usually means they are expecting slow growth or deflation. Neither of which is promising for the stock market.

So much for last year! What does all this tell us about 2012? The earnings and cash flows point to a recovery, at least in corporate earnings (main street seems to be a different story), the Treasury bond market is awfully pessimistic about future growth and the stock market vacillates between euphoria and despair. While the current level of corporate earnings is by no means guaranteed, the economic backdrop in terms of the US economy remains stable to positive currently. The anchor that is holding us back is the European sovereign debt situation. At the moment, we still have a mixed bag globally. However, as legitimate solutions to the Europe situation form in the months ahead, I would expect the Treasury bond market to grudgingly acknowledge higher economic growth prospects and yields to move up (which means price comes down as bond price and yield have an inverse relationship). Share buybacks and dividends should stay strong but will stabilize and earnings growth will moderate. The net effect will likely be that the stock market will be a more hospitable place to invest and the bond market a less attractive investment. In the short-term this may not be correct as the Europe situation can flare up at any time. Longer-term, however, we see better days ahead for stocks vs. government bonds. So we continue to monitor the European saga and remain patient in establishing target equity allocations. We hope you have a great 2012 regardless of what the financial markets do.

What Will 2012 Bring? from Sandpoint Financial Services, Sandpoint ID

Appearances Can Be Deceiving

Williams, Parsons & Schiller — Tue, 17 Jan 2012 22:20:02 +0000

Global stock markets are signaling all is well in Europe right? Well, not exactly. We’ve been here before. In the past few years we have seen several instances of a European debt scare, followed by a “relief” rally as a result of some type of response coordinated by central banking officials, only to see the crisis pop up again several months down the road.

The Europe situation reminds me of a kid told to clean their room. They retreat to their room for five or ten minutes, then exit and proclaim everything is picked up and put away. As a parent, you glance into the room and everything appears to be neat and tidy. No visible mess…until you open the closet and find a pile of clothes, books, and toys.

In my mind, Europe is very similar. Just because the room looks clean at the moment doesn’t eliminate the fact that there is a mess in the closet. Just like your kids have to access that closet at some point, the struggling European economies have to access funds via the bond market. When investors purchasing those government bonds see a mess they will demand interest rates that compensate them for their risk. Eventually the situation snowballs and it becomes unaffordable to borrow for economies with an unsustainable debt path. And the party can be over suddenly and unexpectedly. So we remain cautious and patient. There will be a time to be more heavily invested in equities, but the risk-reward trade-off doesn’t appear to be favorable at this time despite the fact that U.S. economic data has been fairly positive.

Mark

Appearances Can Be Deceiving from Sandpoint Financial Services, Sandpoint ID

January 2012 Market Commentary

Williams, Parsons & Schiller — Mon, 09 Jan 2012 16:50:15 +0000

2011 was another year characterized by fear and volitility in the financial markets. The European situation continues to plague the global economy and the best path forward is still under debate. To read our January market commentary please click on the link below.

January 2012 Market Commentary

January 2012 Market Commentary from Sandpoint Financial Services, Sandpoint ID

Fear, Greed, & Time Horizons

Williams, Parsons & Schiller — Fri, 19 Aug 2011 22:09:04 +0000

Fear, Greed, and Time Horizons
8/19/11

Warren Buffett’s mantra over his long and storied investment career has been “be greedy when others are fearful, and be fearful when others are greedy.” There is no question that market action the past several weeks is indicative of fear. European sovereign debt issues, declining manufacturing readings, increased inflation risks, and poor job growth are the main factors bringing recession fears to the forefront again.

Market history has proven that the best times to invest for long-term returns are times when nothing “feels” very good economically and fear is at heightened levels. The CBOE S&P 500 Volatility Index (VIX), which is commonly referred to as the market’s “fear gauge,” is nearing a reading in the mid 40s. In March of 2009, the recession low for the S&P 500 stock index, the VIX reading was also in the mid 40s. A VIX reading above 30 is typically a bullish sign for stocks. The last time the VIX had a reading above 40 was last spring when Euro debt fears caused a large selloff in global equity markets. In that selloff from 4/23/10 to 7/2/10 the S&P 500 fell about 16%. A year later, on 7/1/11, the S&P 500 was up over 31% from its 7/2/10 level of 1022.

Typical contrarian indicators are favorable to stock markets right now. Consumer sentiment is at multi-year lows. There has been a mass exodus out of equity mutual funds (the so-called “dumb money” running for the sidelines). The VIX “fear gauge” is approaching extreme fear levels. The equity markets are at extremely oversold levels.

Our point is not to throw rose-colored glasses on the situation at hand. Recession risks have risen, and we take that very seriously. Our point is to think more about your investment time horizon, which should always trump day-to-day news and the fear (and greed) short-term swings tend to create. Re-establishing positions at a time like this is counterintuitive to how our brains are wired. We cannot expect to get the timing exactly right, but times of extreme fear are often good times to add to equity positions.

The stop-loss orders that triggered in early August allowed our clients to avoid some of the pain of the recent selloff. We have begun to re-buy some of those holdings and look to reposition to more defensive allocations. We are watching economic indicators very closely. Of particular interest are weekly unemployment claims each Thursday morning, ISM Manufacturing survey 9/1, and the Employment Situation Report on 9/2. Please click on the link below to read another article posted today touting the positive side of a negative three week stretch.

http://www.cnbc.com/id/44206921

Disclaimer:
This information is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon each client’s investment objectives. It is the responsibility of any person or persons in possession of this material to inform themselves of and to take appropriate advice regarding any applicable legal requirements and any applicable taxation regulations which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.

This information does not constitute a solicitation in any jurisdiction in which such a solicitation is unlawful or to any person to whom it is unlawful. Moreover, this information neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to the document by making an offer to enter into an investment agreement.

Fear, Greed, & Time Horizons from Sandpoint Financial Services, Sandpoint ID

Profits and Politics

Williams, Parsons & Schiller — Thu, 11 Aug 2011 21:36:49 +0000

Profits and Politics

We really wanted to call this week’s segment “Earnings and Idiots,” but thought that might be too harsh on our politicians. Ok, I guess we said it anyway!

The week ended 7/22 was characterized by pretty solid 2^nd quarter earnings reports, particularly from the technology sector. We hope this trend continues and confirms our theory that corporations will continue to try and get more productivity out of fewer workers and invest a large fraction of their massive cash holdings in technology improvements and upgrades. The S&P 500 ended the week up a little over 2%. The technology sector was up about 3% for the week.

The anchor attached to the generally positive start to earnings season has been the inability of our politicians to reach a compromise on raising our debt limit. Although it was expected this will go down to the wire, we still have a hard time believing an agreement isn’t at least close to being reached. We are watching this situation very closely. Politicians have not been known to seek out career suicide, so we do expect at least a temporary solution to pass before the August 2^nd deadline.

Disclaimer:

This information is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon each client’s investment objectives. It is the responsibility of any person or persons in possession of this material to inform themselves of and to take appropriate advice regarding any applicable legal requirements and any applicable taxation regulations which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.

This information does not constitute a solicitation in any jurisdiction in which such a solicitation is unlawful or to any person to whom it is unlawful. Moreover, this information neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to the document by making an offer to enter into an investment agreement.

Profits and Politics from Sandpoint Financial Services, Sandpoint ID