Monday, November 30, 2009

Seminars on the High Seas

By Vahan Janjigian - As promised, I am reporting on today’s speakers on the 16th Forbes Cruise for Investors. We spent the day at sea on our way to St. Croix and listened to three excellent presentations.

Steve Forbes gave a compelling talk defending capitalism. He argued that the financial crisis was the result of misguided government policies. He explained how the Federal Reserve drove interest rates excessively low and kept them low for too long. This prompted investors to channel money to housing and commodities, causing bubbles in those asset classes. He also blamed Fannie Mae and Freddie Mac for guaranteeing $1.6 trillion worth of suspect mortgages. These two government-sponsored entities were not subject to same reporting rules that other public corporations had to abide by. He warned that the Federal Housing Administration is now falling into the same trap by guaranteeing mortgages with only 3% down payments. He even blamed George W. Bush for pushing the idea of home ownership for everyone and promoting no money down mortgages. He blamed mark-to-market accounting and government sanctioned credit agencies that were not subject to market forces. The government simply ignored contract law during the GM bankruptcy, which made investors very wary to lend. As a result, the Fed is the only entity today willing to buy mortgage-backed securities.

Bond expert Marilyn Cohen explained how corporate balance sheets are getting stronger. Several years ago, corporations were engaging in share repurchases. Today, they are issuing stock, paying down debt, and rolling over high interest rate debt at much lower rates. At the same time, municipalities around the country are struggling with lower tax revenues. As a result, she considers corporate bonds safer than municipals right now. She also explained how the Build America Bonds (BABs) are crowding out traditional municipals. BABs are taxable municipal bonds. The interest rates are higher, but the municipality gets a subsidy from the federal government. As a result, there are fewer traditional municipals bonds available. This has caused investors to bid up their prices and reduce their yields even though credit quality has deteriorated.

Barry Ritholtz also gave a compelling talk. Barry is a political independent and is frequently criticized by members of both major parties. Barry believes tax rates in the U.S. are low in comparison to rates in most other countries. He thinks this is not compatible with the high level of spending. This is why the government has had to borrow so much money. He argued that either tax revenues must go up or spending must go down. He is worried about the employment situation. Average work hours per week have fallen to just 33. This means that we are likely to have a jobless economic recovery. Corporations will not have to hire new workers for a long time because they could easily ask their current employees to put in more hours. Barry also argued that from a historical perspective, the current rally in stocks is only about three-quarters of the way through. He expects the stock market to eventually roll over and go lower, but until it goes higher first.

Sunday, November 29, 2009

All Aboard the Crystal Serenity

By Vahan Janjigian - I just arrived in Miami and boarded the Crystal Serenity for the 16th Forbes Cruise for Investors. The Internet connection is not always reliable, but I will try to keep you up to date on the discussions aboard. Steve Forbes gives his talk tomorrow morning.

Thursday, November 26, 2009

Thanksgiving in the U.S. and Turkeys in Dubai

By Vahan Janjigian - Dubai shook global financial markets today when it announced its intention to delay payment on some of its debt. This caused investors worldwide to suddenly demand greater compensation for taking on risk. They sold stocks all over the world. U.S. markets were closed due to the Thanksgiving holiday, but all the European indexes closed at least 3% lower. This is the kind of event that could shake confidence in the hope that global economies were beginning to recover. If Dubai were to actually default on any of its debt, stocks worldwide will go much lower.

Friday, November 13, 2009

Trade Deficit Climbs; Sentiment Falls

By Vahan Janjigian - Two pieces of economic data that came out this morning were not particularly encouraging. First, the Commerce Department said September's trade deficit rose to a greater-than-expected $36.5 billion. The good news is that exports were up from $128.3 billion in August to $132.0 billion in September. However, imports surged from $159.1 billion in August to $168.4 billion in September. While it is certainly nice to see that world trade is picking up, we still are a long way from where we were a year ago. In September 2008, exports and imports amounted to $152.0 billion and $212.1 billion, respectively. Furthermore, given the tremendous devaluation in the U.S. dollar, it is extremely disappointing that exports are not rising faster than imports.

The second item was November's Michigan Sentiment Index, a measure of consumer confidence. This metric was expected to climb marginally to 71.0, but instead dropped to 66.0. The rising stock market, which typically makes consumers feel better, wasn't enough to offset their anxiety over the lack of jobs. As yesterday's initial claims report showed, corporations are still laying off workers at a rapid clip.

All in all, there is not much economic news to explain the strong rally we've seen in stocks. Things might be getting worse at a slower rate, but they are getting worse nonetheless. A few corporations are reporting year-over-year revenue gains, but most are telling us that business is down. They are squeezing out profits by cutting costs. In other words, they are eliminating jobs. With more and more people out of work, I don't see where the consumer spending that is needed to revive the economy is going to come from.

Thursday, November 12, 2009

Buffett Authors Appear on CNBC

By Vahan Janjigian - Warren Buffett and Bill Gates appeared together today at a forum at Columbia University. At the same time, I appeared on CNBC with Alice Schroeder, the author of another Buffett book. It made for an interesting discussion. Click here to watch the video.

Thursday, November 05, 2009

Hey Fed: Put Your Money Where Your Mouth Is

By Vahan Janjigian - If Ben Bernanke and members of the Federal Open Market Committee really believed that "economic activity has continued to pick up", they would have increased interest rates by now. They can say the economy is on the mend until they are red in the face, but serious investors won't believe them until they actually start tightening.

Monday, November 02, 2009

Like the Nobel Peace Prize, Q3 GDP Report was Undeserved

By Vahan Janjigian - Economists hoping for signs of an economic recovery were not disappointed when the third quarter Advance GDP report showed 3.5% growth over the second quarter on an annualized and seasonally adjusted basis. Perhaps the biggest surprise was the 3.4% jump in personal consumption expenditures. Despite rising unemployment and a shorter average workweek, consumers somehow managed to find the resources to go shopping.

However, this GDP report felt like the Nobel Peace Prize—somewhat undeserved. It turns out that taxpayers subsidized much of the shopping. Spending on durable goods surged 22.3%, but that was in large part due to the “cash for clunkers” program. Unfortunately, for the United Auto Workers, most of those sales went to foreign manufacturers. As a result, imports jumped 16.4%. That outweighed the 14.7% rise in exports. Now that every person who entertained the idea of buying a new car in the next year or two has probably done so, auto sales in the current (fourth) quarter will no doubt plummet.

Furthermore, the rise in exports is probably due to the 20% plunge in the U.S. dollar over the past year. Economic adviser Lawrence Summers argues that exports are key to an economic recovery. That may be so, but debasing the currency to boost exports does not sound like sound economic policy. Summers insists that the White House is committed to a strong dollar policy, yet I suspect that at least some members of the Obama administration are not too upset to see the dollar lose its value.

While government subsidies helped boost car sales, the $8,000 first-time homebuyer tax credit appears to have been less effective. New home sales had risen five months in a row through August, but they unexpectedly fell to just 402,000 in September. One prominent economist who advises the White House in an unofficial capacity said he was surprised to see how weak the figure was. No doubt, it would have been worse without the controversial tax credit, yet the fact that it was this bad is a sign that the housing market is still very sick. Although the 20-city composite S&P/Case-Shiller Index, which measures housing prices, is up four months in a row, it continues to fall on a year-over-year basis. According to the latest figures, housing prices were 11% lower in August than they were a year ago.

These are just some of the reasons why I suspect this recovery lacks legs. The recession may have indeed ended sometime during the third quarter, but I fear the chances are good that a second (double-dip) recession is on the way. While I realize that employment is a lagging indicator, I do not see how an economy as dependent on consumer spending as ours can grow in a long-lasting manner until consumers feel secure about their jobs. As I recently pointed out on my blog, small businesses are still having trouble accessing capital on reasonable terms. Because they account for most of the job growth in this country, the employment picture cannot improve until small businesses start hiring again. The long-awaited sell-off in stocks has not yet arrived, but I still advise maintaining a conservative asset allocation for the time being.