Valuations of Global Stock Markets

From the most recent Argus Research Market Watch:
The U.S. dollar has fallen in recent years, thus helping returns of foreign markets – which continue to beat those of U.S. markets. Bulls on foreign stocks note that they remain cheaper than U.S. stocks based on lower price multiples of estimated earnings; they also have higher dividend yields. But analyzing data supplied by Bloomberg, we noticed that the valuation and yield gaps between the major, developed market indices are not really that great. Most broad stock market indices trade at 13- to 16-times estimated 12-month earnings, with dividend yields of 2%-3%. Emerging markets are a different story in some cases. The market indices for India and China sport forward P/Es of 20- to 30-times, although this is down from 30- to 40-times about a year ago. What is most noticeable is the dramatic decline in the forward P/E of the Nikkei 225 stock index. Last year at this time, that index traded for nearly 30-times forecasted earnings versus 17-times today.


Source: Argus Research Company, Market Watch, May 29, 2008

Economy Not That Bad

From the most recent Daily Spotlight from Argus Research Company:
A recent study conducted by BIGresearch for The American Pulse found that roughly three in five Americans (62.3%) think the economy is in the worst shape they’ve experienced in their lifetime. That’s incredible, since economic conditions are nowhere near as poor as they were in 1990, the early 1980s or the mid-1970s. According to the ‘Misery Index,’ an economic indicator calculated by adding the inflation rate (CPI) and the unemployment rate,conditions aren’t as bad as was the case in relatively recent years. Economists have found that when there is a rise in the twin evils of unemployment and inflation, consumers feel disgusted and reduce spending — which ultimately sends the macroeconomy into a slump. As of April 2008, the Misery Index was 8.8% — a far cry from the 19%-plus postings in the mid-1970s or the above 20% readings in the early 1980s. The 20-year average for the index is 8.5%.

Source: Argus Research Market Watch, May 28, 2008.

Federal Reserve intent on not letting inflation spiral out of control

The Federal Reserve is intent on not letting inflation spiral out of control, even as the economy teeters on the brink of recession, according to a top Fed policy-maker. Data shows more economic weakness almost certainly lies ahead, but that would not automatically point to a need for more rate cuts -- indeed, rate increases could be some ways off, said Janet Yellen, president of the San Francisco Federal Reserve Bank. This suggests the Federal Open Market Committee (FOMC) has reached an inflection point in its interest rate policy, and could start an extended pause in rate moves at its next meeting June 24-25 . "At a time when commodity prices are rising as rapidly as they are, inflation is a concern," she said. Those price hikes, especially for energy and food, are taking "a huge toll on households." The residential housing market is likely to remain weak, she said, and might not hit rock-bottom until next year.

The U.S. central bank has slashed its benchmark interest rate to 2 percent currently from 5.25 percent since mid-September. This is in response to the housing and credit market crunch that has pushed economic growth down to minimal levels. The rate cuts, along with the federal tax rebate stimulus program, "should be sufficient to promote a step up to moderate economic growth later this year," Yellen said. She said the tax rebate checks should make a notable difference in the second and third quarters of this year.

Opposition to rate cuts within the FOMC has become increasingly pointed in recent months. Minutes from the Fed's April 30 policy meeting show that the directors of seven of the 12 regional Federal Reserve banks wanted to hold the discount rate -- that charged on direct Fed loans to banks -- steady at 2.5 percent. In the end, the Fed's board approved a quarter-point cut in the rate to 2.25 percent, matching a quarter-point cut in the fed funds rate. Financial markets suggest the FOMC will keep benchmark rates steady for now, before possibly starting to raise rates in the fourth quarter. Prospects for a quarter-percentage point rate increase in October are running at about 50 percent.

Buffett Scouts Europe for Investment Opportunities

Warren Buffett is scouting Europe for investement opportunities that match his unique investment criteria; similar to how Crew Capital invetments. His goal is, as always, to increase shareholder value with a focus on "Long-Term" results. The following clip highlights his reasoning:

Dollar Set to Recover

From the most recent Argus Research Market Watch:

The U.S. dollar may be on track for some degree of appreciation on a tradeweighted (TWI) basis. The Federal Reserve appears to have ended its rate cutting campaign – or is at least is in the ninth inning of that game – and the worst of the credit crisis, housing recession, and economic slump may be behind us. All of these factors had been weighing heavily on the greenback. If we are correct in assuming the worst is behind us, the dollar should regain a great deal of its respectability — and subsequently rise with respect to the currencies of other nations. This would mean that prices of commodities denominated in U.S. dollars, like oil and gold, would fall — which would take a great deal of pressure off of inflation, thereby boosting real values of consumer spending and overall economic activity. We expect a mild 5.0% appreciation in the Broad Currency TWI, to 100.2 by year end (from the current 95.5).

Q1 S&P 500 Earnings Announcement Update

As of last night 469 companies have reported earnings for Q1 2008. The cumulative results show earnings contracting 16.9%. If we exclude the financial sector, the remaining 371 companies' earnings advance 10.7%. This points to the magnitude of the effect financials are having on the markets.

Jamie Diamond, JP Morgan's CEO recently stated that "the credit crisis is 75% over, but the recession is just beginning." Noting this, the financial sector becomes an interesting investment opportunity. It may be a little early, but I'd rather be at the party when it starts than enter after much of the fun has occurred.

The housing sector is still in disarray. Based on all the data - excess inventory, negative sales growth and falling prices - this is an area to avoid. The party has ended and the hangover is still on.

Transportation is an area of additional interest. Rails are up over 29% year to date.

I will be posting an interesting piece later today regarding Warren Buffett so be sure to check back for it.

Credit Card Spending Rises

From the most recent Argus Research Market Watch:

Total outstanding consumer credit rose an annualized 7.2% during March, which followed a 3.1% increase in February. Meanwhile revolving, or credit card, spending was up 7.9% in March versus a 5.0% increase in February. To date, consumers have been quite resilient in the face of the credit crisis. While the current environment may force many to pull back — and we’ve seen examples of just that behavior — it may not be wise to bet that consumers will toss in the towel. We’ve had 65 consecutive quarters of positive consumer spending, and consumers continued to spending during the 4Q07 (2.3%) and1Q08 (1.0%) quarters. If a person is truly concerned with the state of underlying economic affairs, it seems unlikely that that same person will pull out his or her credit cards and ring up a storm. That sounds like a possibility on paper, but in real life it just doesn’t happen on a normal basis.

Banks Tighten Standards

From the most recent Argus Research Market Watch:

According to the latest Federal Reserve Senior Loan Officer Survey on Bank Lending Practices, banks tightened lending conditions on essentially all loan categories and were “close to, or above, historical highs.” Clearly lenders are rattled by the implosion of the subprime lending situation and the subsequent credit crisis. This isn’t encouraging news since borrowing is a vital component of future economic activity. No lending/borrowing, no growth. The Fed reported that, on net, lending standards “increased significantly for consumer and commercial and industrial (C&I) loans.” Demand for loans by households and businesses weakened even further over the past three months, which suggests that consumers are also spooked by the uncertainties in the credit markets. About 30% of domestic banks reported tightening standards on credit card loans over the last three months.

Dow Theory: Transports vs. Industrials

From today's Argus Research Market Watch:

Market bulls will take cheer from the increasing correlation in trend between the Dow Jones Transportation Average and the Dow Jones Industrials Average. The DJIA is an index of 30 blue-chip stocks with a market value of over $4 trillion, or roughly one-third of the U.S. market. The “Transports” is an index of 20 stocks with a market value of about $250 billion and membership including railroads, truckers, airlines and shipping companies. Adherents to Dow Theory believe that you should not trust a rally in Industrials without a similar rally in the Transports. Back in the late 1990’s, this held true. The Industrials rallied to new highs during that period while Transports stayed largely range-bound, perhaps an early signal of slower economic times to come. But since the market bottom in late 2002/early 2003, the Industrials and Transports have moved in closer lock-step. Just last week, the Transports hit a new all-time high though the broad indices are still several percentage points from hitting new highs themselves.

Mathematical Risk Models Missing Human Behavior

I recently read an article that highlighted how many mathematical risk models are misunderstanding human behavior. This in and of itself would cause one to wonder the value of the models, if they don't consider human behavior. I believe that the mathematical models do provide some value; but are not complete in determining risk. Humans are social beings and those require the study of behavior in addition to math. A balancing of qualitative and quantitative risk management.

Investing management and thus risk management is an art and a science. In addition, it is fluid, changing with the variables of life.

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080508/REG/116795595/1036

Big Mac PPP (Purchasing Power Parity) What Does it Mean?

There's a simple way to look at exchange rates. Its called the Big Mac PPP (or Purchasing Power parity).

Purchase power parity (PPP) is the theory that currencies adjust according to changes in their purchasing power. With the Big Mac PPP, purchasing power is reflected by the price of a McDonald's Big Mac in a particular country. This measure gives an impression of how overvalued or undervalued a currency is. So, where do we get the data? It comes from a survey recently undertaken by The Economist. This survey determines what a country's exchange rate would have to be for a Big Mac in that country to cost the same as it does in the United States.

Investopedia Says...The calculation of the Big Mac PPP-adjusted exchange rate looks at the price of a Big Mac in a given country and divides it by the price of a U.S. Big Mac. Let's say that we are looking at the Big Mac in China. If a Chinese Big Mac is 10.41 renminbi (RMB) and the U.S. price is $2.90, then - according to PPP - the exchange rate should be 3.59 RMB for US$1. However, if the RMB was actually trading in the currency market at 8.27 RMB for US$1, the Big Mac PPP would suggest that the RMB is undervalued.

The driving factor for the difference is the country's interest rate. As interest rate goes down so will its currency, all else being equal. As the interest rate rises so will the value of its currency, again all else being equal.

The Fed's current focus is recession, not inflation. As such, the Fed is willing to erode the value of the dollar to deter or lessen a recession. As recession fears decline, inflation will become of greater importance and cause interest rates to climb.

For more information please contact us.

First-Quarter Earnings Update

As of Monday May 5, about 80% of S&P 500 companies had reported first quarter earnings. The major retailers will report results over the next few weeks. The stock market has rallied during the earnings season, mostly on relief that results and guidance were not worse. Excluding Financials, earnings are up 11% over the first quarter of last year. While still above average, this growth rate is down from the 16% year-over-year pace of the previous quarter, again excluding Financials. Also of note was strength in the Technology sector, with earnings up 22% over last year — the same growth rate as was seen in the Energy sector. Still, we are concerned about a market in which earnings of Consumer Discretionary (-22%) and Financial (-67%) stocks are falling sharply while leadership is largely coming from the inflationary sectors of Energy (22%) and Basic Materials (18%). Earnings for Industrials are up just 5% this quarter, the weakest pace in years.

From Argus Research: ISMs Signal Strengthening

The Institute for Supply Management’s (ISM) surveys of manufacturing (ISM-M) and Non-Manufacturing (ISM-N) painted a much brighter picture of economic conditions in April. Last month, the ISM-M was unchanged at 48.6 — just shy of the expansion-contraction level of 50, but a far cry from the 40-42 rage usually associated with an overall macroeconomic recession. Increases were registered in the ISM-M Production, Imports and New Export Orders indices. Meanwhile, the services economy fared much better as the ISM-N jumped to 52.0 in April from 49.6 in March — its highest reading since December (53.2). The ISM-N Business Activity, New Orders, Employment and Imports were all in expansionary (above 50) territory. While these reports were favorable, the inflation barometers continued to move upward from already lofty levels. But end of day, it doesn’t look as if the economic slump will end in catastrophe as many had feared.

Real Estate Bubble - POP!

Real Estate prices are in a free fall. "Of the homeowners nationwide who purchased when the U.S. home values peaked in 2006, one out of every two (51.6%) now owes more on their mortgage than their home is currently worth." The following outlines by year of purchase the percent of home that are underwater, i.e. mortgage is greater than the current value of the house:

• 2003 7%
• 2004 16%
• 2005 42%
• 2006 51.6%
• 2007 45%

Las Vegas and Stockton, CA are the worse hit. According to Zillow.com homes purchase in Las Vegas, 2006 have fallen 25%. 90% of the homeowners now owe more than their homes than they are worth. Stockton, CA ( the unofficial foreclosure capital of the U.S.A.) is worse with 96% of the homes purchased in 2006 underwater.

One of the primary reasons for this problem is "too low of down payments", which have averaged 2%. A few of the others are manic appreciation and speculation. After the dot.com mania and speculation one would think we'd learn and adjust our behavior. Not so.

This is a primary reason why a professional advisor is need - they provide objectivity, which is paramount. They look at the whole picture not just the wins mentioned over cocktails. It's amazing how many times I have people discuss the wins but forgetting to net out the losses. People act irrational. It's interesting to note that the Fidelity Magellan Fund, which as a good track record has had over 50% of its shareholders loose money. Why because they bought high and sold low. The opposite of what is required to make money.

I strongly suggest a more rational course. See are website, crewcapital.com for more information. We are founded in the belief that the best way to outperform the market is to learn from those who have done so in the past.

Q 1 Earnings Update

Q1 earnings are reported down 12.8%, with 393 of the 500 companies reporting so far. If we exclude companies in the financial sector from the Q1 earnings report, earnings are up 10.5%. Financials so far represent 80 of the 393 companies reporting, or 20% of the composite.

This highlights the reasoning for the Fed's dramatic steps over the past seven months. First, by lowering interest and then, in March, by opening up the short-term window to infuse cash. These steps were needed to jump start a faltering US economy. The following provides additional evidence of the potential problem and why the Fed took the steps it did.

From Angus Research: Consumer Debt Manageable?

Against long odds, consumer spending advanced once again in the first quarter. Consumer spending has grown in every quarter since the early 1990’s. But delinquency and loss rates are rising towards recessionary levels across a range of consumer loan products. If consumers are struggling to pay debts, they are less likely to be out ringing the registers. We charted the Fed’s Household Debt Service ratio, which is simply the ratio of all consumer debt to disposable personal income. While the ratio has trended higher for the past decade or so, it remains only about 14%. But the Fed does not break this ratio out by income groups. If it did, we suspect that this ratio would be far higher for all but the wealthiest Americans. Before the recent downturn, home prices had soared. So despite low interest rates, many Americans are spending one-third to one-half, if not more, of their income on their mortgage.

Buffett recipe for success

The following article documents Warren Buffett's recipe for 30+ years of investment success. Using Berkshire Hathaway as a proxy, Mr. Buffett has produced almost a 20% annualized return for the past 20 years, while the S&P 500 produced 11% for the same period.


http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ59PXAZGDHw&refer=home