The Many Splendors of Boobs, and other Weekend Reads

Friday, October 14th, 2011

Here are this weekend's read­ing diver­sions for your per­sonal enlighte­ment. Have a great weekend!

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Octo­ber is Breast Can­cer Aware­ness Month

Your best part­ner in the fight against breast cancer

Breast can­cer is the most fre­quently diag­nosed can­cer in Cana­dian women. We esti­mate 23,200 women in Canada will be diag­nosed with breast can­cer and 5,300 women will die from the dis­ease in 2011.

The Cana­dian Can­cer Soci­ety fights back against can­cer by lead­ing breast can­cer pre­ven­tion ini­tia­tives, offer­ing infor­ma­tion and sup­port ser­vices for breast can­cer patients and their fam­i­lies, fund­ing world-class breast can­cer research and advo­cat­ing for cancer-related issues.

Pre­ven­tion
We fight breast can­cer by doing every­thing we can to pre­vent can­cer from ever hap­pen­ing in the first place. As part of CCS' mis­sion work, we cre­ate aware­ness of the Ontario Breast Screen­ing Pro­gram and edu­cate women about breast screen­ing through CCS' Thingam­a­boob tool.

Read more: http://www.cancer.ca/ontario/about%20us/od-mark%20your%20calendar/october%20is%20breast%20cancer%20awareness%20month.aspx?sc_lang=en

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The Many Splen­dors of Boobs

Octo­ber is Breast Can­cer Aware­ness Month, so it's a good time to take stock of how to take care of our breasts, our­selves and our sis­ters who are bat­tling this insid­i­ous disease.

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Dr. Pamela Peeke: The Health Perks Of Caffeine

Thanks to a new analy­sis from the famous Har­vard Nurse's Health Study, I have a mile-wide smile as I pour my morn­ing cof­fee. This par­tic­u­lar study looked at caffeine's effect on depres­sion in over 50,000 women who worked in health­care. It showed that women who con­sumed two to three cups of caf­feinated cof­fee per day were 15 per­cent less likely to develop depres­sion com­pared to those who drank one cup. Women who drank at least four cups per day had a 20 per­cent lower risk of depression.

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7 Sur­pris­ing Rea­sons You Wake Up Tired | Caring.com

When you can't sleep, you know it. But what about when you can, yet you wake up feel­ing tired and achy or you're groggy again a few hours later? What's that about? All too often, it turns out, the prob­lem is one that doesn't keep you awake but does sab­o­tage your sleep in more sub­tle ways, so the hours you spend in bed don't refresh and revi­tal­ize you the way they should. Here are seven signs that you have a sleep prob­lem that's secretly steal­ing your rest.

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Menopause and Over­ac­tive Blad­der: How They're Con­nected | Caring.com

One com­fort: You're in good com­pany. Stud­ies show over­ac­tive blad­der affects at least — and prob­a­bly more than — 17 per­cent of women in the U.S. Why more? Because this prob­lem is vastly under­re­ported, due to the embar­rass­ment fac­tor. (It's not the eas­i­est thing to talk to your doc­tor about.) But help is avail­able. In the mean­time, here's what you should know about the con­nec­tion between OAB and menopause — along with avail­able treatments.

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Women Who Exer­cise Often Hit Menopause Ear­lier | Fox News

Women who spend a lot of time exer­cis­ing or eat a heart-healthy diet appear to reach menopause ear­lier, a new Japan­ese study shows.

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Groom­ing Tips From Age­less Men | Fox News

Take a les­son from the reced­ing hair­line of 48-year-old Tom Ford. He has effort­lessly fought tem­po­ral hair loss by keep­ing a rel­a­tively close cut with a slightly longer cen­ter that juts out like a tongue as though he’s qui­etly laugh­ing in the face of male pat­tern bald­ness. It’s Ford’s clas­sic style from which we could all learn

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Gluten-Free Recipe: Lemon Poppy Seed Loaf

Now, more than ever, peo­ple real­ize elim­i­nat­ing gluten from their diet — even for a week or two — can lead to some pos­i­tive health changes (no more bloat­ing, eczema or acne!). A great exam­ple of some deli­cious gluten-free fare is this lemon poppy seed loaf — star­ring quinoa!

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Con­fused About Vit­a­min Safety? Here's Some Advice From Experts

Vit­a­mins have long had a "health halo." Many peo­ple think they're good for you and at worst might sim­ply be unnec­es­sary. The indus­try calls them an insur­ance pol­icy against bad eating.

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Eat­ing­Well: 8 Foods That Can Reduce Breast Can­cer Risk

Stay­ing lean and mov­ing more are at the top of my list, because one of the most impor­tant ways to reduce breast can­cer risk is to avoid gain­ing weight, accord­ing to a review arti­cle in the jour­nal Can­cer. And other research has found that reg­u­lar, stren­u­ous exer­cise may help lower risk too.

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A Bed­time Mem­ory Build­ing Exercise

If knowl­edge is power and your mind is the con­tainer of this knowl­edge, then the more you improve your mind’s mem­ory capac­ity, the more knowl­edge your mind will retain and the more power you will have at your dis­posal. At least that’s what I keep telling myself.

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Tags: Breast Cancer, Breast Cancer Awareness, Breast Cancer Awareness Month, Breast Cancer Patients, Breast Cancer Prevention, Breast Cancer Research, Canadian, Canadian Cancer Society, Canadian Market, Canadian Women, Cancer Awareness Month, Cancer Breast, Diversions, Easiest Thing, Enlightement, Fox News, Good Company, Health Study, Insidious Disease, Lee Woodruff, Menopause, More Subtle Ways, Morning Coffee, Oab, Ontario Breast Screening, Ontario Breast Screening Program, Overactive Bladder, Prevention Initiatives, Seven Signs, Splendors, Wide Smile, Www Cancer
Posted in Canadian Market, Markets | Comments Off

Realities, Opportunities During Tough Markets

Friday, October 14th, 2011

by Cap­i­tal Inter­na­tional Asset Management

Many recent events trou­bling investors can be attrib­uted to the same thing — - the "debt super­cy­cle," explains fixed-income port­fo­lio man­ager, Jim Mulally, in this video clip:

"There are still incred­i­ble amounts of lever­age in the sys­tem. Some was writ­ten off in 2008–2009, but a lot of it was just pushed onto the government...We reshuf­fled the deck, but the debt is still there."

Jim is an econ­o­mist by train­ing and worked at the U.S. Fed­eral Reserve before join­ing Cap­i­tal in 1980.

In other clips, Cap­i­tal Research and Man­age­ment Com­pany port­fo­lio man­agers Mar­tin Jacobs, Greg John­son, Wes­ley Phoa and Brad Freer share their views about gov­ern­ment efforts in var­i­ous coun­tries, the mar­kets' response and poten­tial oppor­tu­ni­ties for investors.

Mar­kets, investors at a cross­roads
VIDEO (16:28)
TRANSCRIPT

Copy­right © Cap­i­tal Inter­na­tional Asset Management

Tags: Capital Research And Management Company, Company Portfolio, Countries, Crossroads, Economist, Federal Reserve, Government Efforts, Income Portfolio, International Asset Management, Investors, Leverage, Martin Jacobs, Mulally, Phoa, Portfolio Manager, Portfolio Managers, Realities, Supercycle, Video Clip
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Prediction? Pain (PIMCO)

Friday, October 14th, 2011

​The Rocky series is a mod­ern update of the famil­iar Hor­a­tio Alger tale of the under­dog tri­umph­ing over adver­sity. Part of what made Rocky Oscar-worthy was that Rocky ulti­mately does not win. Of course this sets the stage for Rocky II, where the hero tri­umphs over his oppo­nent, adver­sity and his own foibles to win the cham­pi­onship. Rocky III brought us a champ who had become com­pla­cent, overindul­gent, and a bit lazy, and who is sav­agely beaten down by a new, hun­grier chal­lenger, Club­ber Lang.

There was per­haps no bet­ter vil­lain in the eight­ies than Mr. T’s chis­eled, mohawked, snarling Club­ber Lang, and few bet­ter in movie his­tory. Club­ber Lang launched Mr. T as a cul­tural icon and there are rel­a­tively few so dis­tinctly of that era who have endured so long and are still so rec­og­niz­able. In Octo­ber 2010, Mr. T made a mem­o­rable appear­ance on Bloomberg Tele­vi­sion, extolling the virtues of his favorite invest­ment – gold. Near­ing sixty, he is no longer the fear­some pres­ence he once was. Thirty years of wear­ing a golden yoke of up to 45 pounds and five years beat­ing can­cer will do that, but he looked quite good for his age and those fol­low­ing his invest­ment advice would more than likely have ben­e­fited. Gold is up more than 15% since his appear­ance (despite the recent pull­back), accord­ing to COMEX, far out­pac­ing the aver­age pen­sion asset return (rep­re­sented by the Mil­li­man 100 Pen­sion Fund­ing Index), which has been slightly neg­a­tive over the same period.

Unfor­tu­nately, pen­sion plans are cur­rently expe­ri­enc­ing some­thing syn­ony­mous with Mr. T’s Club­ber Lang char­ac­ter. Pain. The bearded vil­lain this time is not Mr. T, but Dr. B. – Ben Bernanke. The pain comes only par­tially from the asset side; in addi­tion, the Fed’s new Oper­a­tion Twist (sell­ing short-term Trea­suries in exchange for longer-term) has pushed down the long end of the yield curve, spik­ing the present value of plan lia­bil­i­ties and widen­ing the fund­ing chasm. By our esti­mates (based on Credit Suisse pen­sion data for the S&P 500 uni­verse), the drop in Trea­sury yields com­bined with equity mar­ket declines added roughly $80 bil­lion in under­fund­ing in the few days fol­low­ing the announce­ment of the pol­icy. This brings the cumu­la­tive under­fund­ing of cor­po­rate pen­sions to some­thing north of $400 billion.

The pain of the pen­sion com­mu­nity shows up most obvi­ously in funded sta­tus esti­mates from equity strate­gists and con­sul­tants, which give mid-year fore­casts based on com­pa­nies’ 2010 10-K data and mar­ket changes over the year to date. As past is pro­logue, the fund­ing hole gives us our start­ing point and helps set our course for the direc­tion for­ward. Deficits imply con­tri­bu­tions and pos­si­bly changes of course that reflect new cir­cum­stances. One would hope greater aware­ness and vis­i­bil­ity would lead to bet­ter invest­ment strate­gies and tighter asset-liability man­age­ment. While this has been the case among a grow­ing num­ber of plans, over­all move­ment has been slow and the asset allo­ca­tion strate­gies have in aggre­gate not changed all that much. Data for S&P 500 com­pa­nies going back to 1994, when the SEC clar­i­fied the FASB (Finan­cial Account­ing Stan­dards Board) dis­count rate guide­lines, reveals some inter­est­ing pat­terns. Fig­ure 1 shows the Moody’s long-term AA index – which is gen­er­ally a  good proxy for the aver­age plan dis­count rate – along with the year-end 10-year Trea­sury yield and the dif­fer­ence between the aver­age assumed plan return (source: UBS and Credit Suisse data on long-term expected plan returns) and the dis­count rate proxy. The pat­tern for the two yield series is abun­dantly clear and well known: Bond yields have fallen over the past 17 years. The arc of the long AA index series is smoother than the Trea­sury yield series largely because credit spreads are typ­i­cally coun­ter­cycli­cal. Trea­suries spike down on flights to qual­ity while spreads tend to rise.

The plan asset return vs. dis­count rate spread tends in the oppo­site direc­tion, ris­ing from 0.78% in 1994 to 2.64% at the end of 2010 and we expect it may trend higher through 2011 given recent mar­ket activ­ity. This is because the assumed returns have fallen more slowly than dis­count rates. For 1994, plans’ expected long-run return was 9.4% (source: Credit Suisse). Over the years this has trended down to an aver­age 8%, and we believe it will drop fur­ther by the end of 2011. The ris­ing spread indi­cates that plans expect their risk assets to work harder and carry more now than they have expected his­tor­i­cally. It seems para­dox­i­cal that expec­ta­tions should be greater for con­tri­bu­tions from risk assets going for­ward when they have dis­ap­pointed so much over the past decade.

Given the data above and the pen­sion plan asset allo­ca­tions pre­sented in spon­sors’ annual reports, we can derive a sponsor-assumed equity risk pre­mium (ERP) over the 10-year Trea­sury. Fig­ure 2 shows the implied equity risk pre­mium val­ues esti­mated for the S&P 500 plans in aggre­gate (based on Credit Suisse data). The time series mir­rors the asset-discount spread ris­ing over the past 17 years. What is more notable is the degree to which it rises and the ERP cur­rently implied. The implied ERP rises from a low of 2.4% in 1994 to a pre­vi­ous high of 9.6% in 2008. Assum­ing rates hold their cur­rent lev­els and aggre­gate S&P 500 plans’ expected returns drop to 7.5%, the cur­rent implied ERP would be 11% (as of Sep­tem­ber 2011). If expected returns instead remain unchanged from year-end 2010, the implied ERP would be 12%.

Aside from the extrem­ity of these implied ERP lev­els, note the pat­tern of volatil­ity. The equity risk pre­mia dis­play local peaks in 2002 and 2008 at the depths of reces­sions and local troughs in 1999 and 2006 at the end of cycli­cal expan­sions. This is con­sis­tent with both the coun­ter­cycli­cal nature of the 10-year Trea­sury yields and the notion that equi­ties (rep­re­sented by S&P 500) tend to be cheaper at times of great strife and despair and tend to be rich­est after runs of prosperity.

More wor­ri­some is the rise in the implied risk pre­mium and its cur­rent level. For com­par­i­son, we can use Pas­tor and Stambaugh’s esti­mates of equity risk pre­mia from 1834–2000: They find a range of 3.9%–6.0% over that long period. Cur­rent esti­mates for con­sul­tants and asset allo­ca­tion prac­ti­tion­ers vary quite a bit depend­ing on mod­els and biases, but are largely spanned by a 3%–7% range.

What do these lev­els imply? In the early nineties, plan spon­sors, if biased in their fore­cast, were gen­er­ally biased toward con­ser­vatism. From 1997 through 2007, expec­ta­tions, although a bit rosy at times, were largely within the realm of rea­son­able­ness. In our view, a long-run equity risk pre­mium of 11% is pure jibber-jabber. It is wish­ful think­ing. I dare not pre­dict the level of the S&P 500 ten years out, but an ERP this high sug­gests the S&P would have to reach unprece­dented lev­els. If this is what plan spon­sors are count­ing on, I, like Club­ber Lang, pre­dict Pain.

Rocky III was released Memo­r­ial Day week­end, May 1982. Times were tough – real tough. The U.S. was in the depths of reces­sion. Infla­tion was at 7% and the 10-year Trea­sury was priced to yield 13.7%. Unem­ploy­ment was at 9.4% and head­ing higher. Part of the rea­son Rocky III res­onated with its audi­ence and was a box office smash was they too were beaten down and over­com­ing obsta­cles to rise against adversity.

Rocky rebounded from his loss to Club­ber Lang, but he did not rely on hope in prepar­ing for his rematch. Hope is nei­ther a train­ing plan nor an invest­ment strat­egy. Any­one famil­iar with the Rocky series’ ubiq­ui­tous train­ing mon­tages will know the keys to suc­cess are hard work, sweat, an adrenaline-firing score, and some mea­sure of pain. The answers to our pen­sion prob­lems are not all that dif­fer­ent. I pity the fool who expects an eas­ier answer.

Copy­right © PIMCO

Tags: Bloomberg Television, Clubber Lang, Comex, Equity Risk Premium, Foibles, Gold, Horatio Alger, Investment Advice, Investment Gold, Memorable Appearance, Mr T, Pension Funding, Pension Plans, PIMCO, Plan Liabilities, Present Value, Pullback, Rocky Ii, Rocky Iii, Rocky Series, Yield Curve
Posted in Gold, Markets | Comments Off

Hedge Funds Target "Expensive" Canadian Banks

Friday, October 14th, 2011

Accord­ing to the Globe and Mail, it appears to large hedge funds (look­ing for some­thing to short) that our bor­ing, tried and true, and rel­a­tively stronger Cana­dian banks have become "expen­sive" rel­a­tive to their less well run global peers. It might be a good idea to keep an (objec­tive) eye on Cana­dian bank shares' short inter­est levels.

Here are some highlights:

• The country's five biggest banks trade at some of the high­est price-earnings mul­ti­ples in the global bank­ing indus­try. That's partly because their shares have held up rel­a­tively well this year, while their peers world­wide got clob­bered on con­cerns related to Europe's debt cri­sis and a pos­si­ble reces­sion in the U.S.
• "The hedge fund com­mu­nity has shown an increased inter­est in short­ing Cana­dian bank shares of late," RBC Domin­ion Secu­ri­ties Inc., the bro­ker­age unit of Royal Bank of Canada, said in a research note this week. "While we rec­og­nize down­side risks in a reces­sion­ary sce­nario, we ulti­mately believe Cana­dian banks will hold up rel­a­tively bet­ter than other sec­tors in the event of a downturn."
• "The key invest­ment con­cern from U.S.-based investors is the Cana­dian consumer's health, and the level of indebt­ed­ness in the mort­gage mar­ket," said Cheryl Pâté, a New York-based ana­lyst with Mor­gan Stan­ley, which has a "neu­tral" rat­ing on Canada's bank­ing indus­try. "We are look­ing broadly for a slow­down, but I would say it's a slow­down to a nor­mal­ized level."
• While the banks may look expen­sive against their global coun­ter­parts, other mea­sures show their val­u­a­tions haven't devi­ated from his­tor­i­cal trends. Cana­dian banks now trade at an aver­age of 11.5 times earn­ings, ver­sus an aver­age of 11 for the past decade.
• Ver­i­tas Invest­ment Research, an inde­pen­dent firm in Toronto, eval­u­ated the bank stocks by look­ing at their cur­rent prices against their aver­age inflation-adjusted earn­ings over the past 10 years. This price-earnings gauge, devel­oped by the econ­o­mist Robert Shiller, strips out the effects of the busi­ness cycle on profits.
• "His­tory sug­gests that investors with a five-year or longer time hori­zon have gen­er­ally made very good returns buy­ing the Cana­dian banks at the kind of Shiller P/E ratios avail­able today," Ohad Led­erer and Yut­ing Liu said in a report last month.
• "The Cana­dian banks are great com­pa­nies with very durable busi­ness mod­els, but we would be care­ful with the idea that the Cana­dian banks are immune to global events," said Rob Wes­sel, man­ag­ing part­ner at Hamil­ton Cap­i­tal, a Toronto-based fund man­ager spe­cial­iz­ing in finan­cial ser­vices stocks.

Global Bank Valuations

Source: Hedge funds take aim at Cana­dian banks, Nico­las John­son, The Globe and Mail, Octo­ber 14, 2011

Tags: Bank Of Canada, Bank stocks, Banking Industry, Biggest Banks, Canadian, Canadian Banks, Canadian Market, Debt Crisis, Downside Risks, Global Banking, Globe And Mail, Independent Firm, Interest Levels, Morgan Stanley, Mortgage Market, Objective Eye, Price Earnings, Rbc Dominion Securities, Rbc Dominion Securities Inc, Robert Shiller, Royal Bank Of Canada, Short Interest
Posted in Canadian Market, Markets | Comments Off

Chinese Inflation Falls Slightly, while Lending Falls to 3 Year Low. Meanwhile, European Inflation Surges.

Friday, October 14th, 2011

Some inter­est­ing data from over­seas, com­pli­cat­ing some of the tasks of cen­tral bankers.  As always, take gov­ern­ment data with many grains of salt, espe­cially the Chi­nese type.  But "offi­cially" infla­tion fell from 6.2% to 6.1%.  This is down from the peak 6.5% seen this sum­mer, but food infla­tion con­tin­ues to be an issue at 13.4% — flat with the pre­vi­ous month.  Looks like some bad weather in China was an issue on the food front.

• Food prices rose 13.4 per­cent in Sep­tem­ber from a year ear­lier, the same pace as in August, as pork costs jumped 44 per­cent, today’s report showed. Non-food infla­tion cooled to 2.9 per­cent from 3 percent.

More inter­est­ing, is Chi­nese lend­ing fell to its low­est level in 3 years.  Of course part of this is pur­pose­ful as the gov­ern­ment has been try­ing to slow down the econ­omy, but it will be inter­est­ing to see how far they take it, and when they reverse course.

• China’s bank lend­ing last month was the least since 2009 as infla­tion stayed above the government’s tar­get, high­light­ing the risk that efforts to tame prices will trig­ger a slow­down.  New loans were 470 bil­lion yuan ($73.7 bil­lion), cen­tral bank data showed today.
• M2, the broad­est mea­sure of money sup­ply, rose 13 per­cent from a year ear­lier, the least in almost a decade, and data for foreign-exchange reserves pointed to cap­i­tal outflows.
• The cen­tral bank “is now between a rock and a hard place,” said Liu Li-Gang, an econ­o­mist at Aus­tralia & New Zealand Bank­ing Group Ltd. (ANZ) in Hong Kong. “Infla­tion is high which means mon­e­tary con­di­tions need to be tight but with a lot of bank lend­ing hap­pen­ing off balance-sheet, con­di­tions in real­ity aren’t as tight as would appear from this data.”

Over in Europe an inter­est­ing dilemma — the ECB has a sin­gle man­date; price sta­bil­ity.  Infla­tion has surged to the high­est level in 3 years — yet pres­sure is on the ECB to cut rates.   That's a bit of a rock and a hard place, but as we've seen in the UK, they've dis­missed lev­els of infla­tion far above tar­get for many quar­ters in a row, and con­tinue to ease.  Now Ger­mans are not British, but with an Ital­ian headed to the top of the ECB next month, we'll see how influ­en­tial the hawks are.

• Euro­pean infla­tion accel­er­ated to the fastest in almost three years in Sep­tem­ber on soar­ing energy costs, com­pli­cat­ing the Euro­pean Cen­tral Bank’s task as it com­bats the region’s sovereign-debt crisis.
• The euro-area infla­tion rate jumped to 3 per­cent last month from 2.5 per­cent in August, the Euro­pean Union’s sta­tis­tics office in Lux­em­bourg said today. That’s the biggest gain since Octo­ber 2008 and in line with an ini­tial esti­mate pub­lished on Sept. 30. Energy costs jumped 12.4 per­cent in the period.
• Euro-region core infla­tion, which excludes volatile costs such as energy, quick­ened to 1.6 per­cent in Sep­tem­ber from 1.2 per­cent in the pre­vi­ous month, the sta­tis­tics office said.
• In Ger­many, Europe’s largest econ­omy, infla­tion quick­ened to 2.9 per­cent in Sep­tem­ber from 2.5 per­cent in the pre­vi­ous month.
• The ECB, which aims to keep annual gains in con­sumer prices just below 2 per­cent, said last month that euro-region infla­tion would prob­a­bly aver­age 2.6 per­cent this year and 1.7 per­cent in 2012.
• ECB Pres­i­dent Jean-Claude Trichet, who will be replaced by Italy’s Mario Draghi when he retires at the end of the month, said last week that euro-region infla­tion is “likely to stay above 2 per­cent over the months ahead” before eas­ing. Risks to the price out­look are “broadly bal­anced,” he said.

Tags: Anz, Bad Weather, Chinese Type, ECB, European Inflation, Food prices, Foreign Exchange Reserves, Government Data, Li Gang, Liu Li, Monetary Conditions, Money Supply, New Zealand Banking Group, Outlook, Price Stability, Rock And A Hard Place, Rose 13, Slowdown, Target, Weather In China, Yuan
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Why Equities Look Cheap, but Healthcare Does Not

Friday, October 14th, 2011

by Russ Koes­terich, Chief Invest­ment Strate­gist, iShares

Call #1: Main­tain long-term over­weight equities

While Friday’s unem­ploy­ment report was not great, it does sug­gest that the United States is not on the verge of another reces­sion — and there­fore, equi­ties look cheap. Stock val­u­a­tions are now close to multi-decade lows, and equi­ties look inex­pen­sive par­tic­u­larly rel­a­tive to bonds.

The Sep­tem­ber report — the lat­est eco­nomic report sug­gest­ing the risk of US reces­sion is abat­ing — was a sig­nif­i­cant improve­ment over August. The labor force didn’t grow fast enough last month to lower the unem­ploy­ment rate, but the 100,000 new jobs cre­ated were well ahead of expec­ta­tions. Equally impor­tant, August’s pay­roll growth fig­ure was revised upwards to +57,000 jobs, mean­ing that month’s ini­tial report of no new jobs cre­ated was incorrect.

When you take into account September’s num­ber, the year-over-year change in pay­rolls is now +1.15%, the high­est level since June of 2007. This is crit­i­cal. As I’ve men­tioned before, job growth is much more impor­tant than con­fi­dence when it comes to con­sump­tion. If the labor mar­ket is sta­bi­liz­ing, as appears to be hap­pen­ing, it should sup­port per­sonal spend­ing. And sup­port for spend­ing is what we need if the United States is to avoid another recession.

I still expect soft growth for the remain­der of 2011 and early 2012, and the sit­u­a­tion in Europe will leave finan­cial mar­kets volatile for the fore­see­able future. But in the mean­time, a lower chance of a US reces­sion means that earn­ings will slow less than the mar­ket is dis­count­ing. (Poten­tial iShares solu­tions: IVV and IWV)

Call #2: Neu­tral on healthcare

One sec­tor that no longer looks cheap: healthcare.

In light of the market’s increased volatil­ity, I first advo­cated over­weight­ing health­care as a defen­sive play back in April, near the mar­ket top. Since then, many investors have flocked to the defen­sive sec­tor. As a result, health­care in the United States and glob­ally no longer looks cheap rel­a­tive to the broader market.

While health­care stocks have fallen since April, they have held up much bet­ter than the broader mar­ket. From April through last Thurs­day, health­care lost around 6%, roughly half the S&P 500’s losses. This out­per­for­mance, how­ever, has led to a more expen­sive rel­a­tive val­u­a­tion for the sec­tor. US health­care, for instance, is now trad­ing at a 20% pre­mium to the broader mar­ket, as mea­sured by price-to-book value. As a result, I’m end­ing my over­weight view of health­care and am mov­ing to a neu­tral stance.

Call #3: Neu­tral on Peru

Finally, I’m end­ing my under­weight view of Peru­vian equi­ties. I first went under­weight Peru in late June based on what appeared to be an over­val­ued equity mar­ket. But since then, Peru has actu­ally out­per­formed other emerg­ing mar­kets. Most eco­nomic indi­ca­tors in Peru are also hold­ing up rel­a­tively well. As such, Peru no longer looks expen­sive rel­a­tive to other emerg­ing mar­ket countries.

Source: Bloomberg

Past per­for­mance does not guar­an­tee future results.

In addi­tion to the nor­mal risks asso­ci­ated with invest­ing, inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. Emerg­ing mar­kets involve height­ened risks related to the same fac­tors as well as increased volatil­ity and lower trad­ing vol­ume.  Secu­ri­ties focus­ing on a sin­gle coun­try and nar­rowly focused invest­ments may be sub­ject to higher volatility.

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Tags: Bonds, Cheap Healthcare, Cheap Stock, Chief Investment Strategist, Economic Report, Financial Markets, Foreseeable Future, Initial Report, Ivv, Iwv, Lows, New Jobs, Payroll, Recession, Russ, Significant Improvement, Stock Valuations, Unemployment Rate, Unemployment Report, Verge, Volatility
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The U.S. Recovery's Catch-22

Friday, October 14th, 2011

by Russ Koes­terich, Chief Invest­ment Strate­gist, iShares

As the iShares global chief invest­ment strate­gist and a found­ing mem­ber of the Black­rock Invest­ment Insti­tute, I have the oppor­tu­nity to work with world class investors through­out the firm and access their research and work, includ­ing a recent Insti­tute paper “From Keep­ing Up with the Jone­ses to Keep­ing Above Water: The Sta­tus of the US Con­sumer.”

The paper weighs in on the debate regard­ing whether the US con­sumer can help fuel a recov­ery and argues that no, con­sumer spend­ing is not likely to help. This is because the US con­sumer faces many head­winds includ­ing mas­sive debt, a weak job mar­ket and stag­nant income, not to men­tion the pos­si­ble curb­ing of trans­fer pay­ments as the gov­ern­ment tries to get its fis­cal house in order.

But what I found most inter­est­ing in the paper, and wor­thy of shar­ing in a quick post, was the idea in the con­clu­sion that the US recov­ery today is a Catch-22.

Here’s the gist. With the con­sumer sec­tor unlikely to fuel a US recov­ery, that leaves the cor­po­rate sec­tor as the engine of growth. At first glance, this would seem to be a safe bet. As I men­tioned in early Sep­tem­ber, the sil­ver lin­ing of today’s slow growth envi­ron­ment con­tin­ues to be the strong finan­cial posi­tion of many US com­pa­nies. Cor­po­rate mar­gins are at record highs and lever­age lev­els are near record lows.

But here’s the catch: The domes­tic cor­po­rate sec­tor relies on the US con­sumer. To con­tinue grow­ing over the next few years, com­pa­nies need con­sumer spend­ing to pick up. But of course, such an upswing in con­sumer demand is unlikely to hap­pen in the near term because of all the head­winds fac­ing the US con­sumer (think those men­tioned above). This leads us to “the great eco­nomic Catch-22 of our time,” as the Black­Rock paper’s con­clu­sion describes the situation.

So, where does that leave the US recov­ery? One idea floated in the paper is that spend­ing on US goods by for­eign con­sumers could help cor­po­ra­tions be the needed growth engine. But as the paper notes, exports are unlikely to grow enough to com­pletely make up for lower US con­sumer demand. As a result, in my opin­ion, this prob­lem­atic sit­u­a­tion is just more evi­dence that the US recov­ery is likely to be a long slog, char­ac­ter­ized by lack­lus­ter growth.

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Tags: Blackrock, Catch 22, Chief Investment Strategist, Consumer Sector, Consumer Spending, Corporate Sector, Early September, Financial Position, First Glance, Founding Member, Gist, Growth Environment, Ishares, Keeping Up With The Joneses, Massive Debt, Record Highs, Record Lows, Safe Bet, Silver Lining, Transfer Payments, Upswing
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David Rosenberg: The Action Is Always At The Margin... And The Margin Is Not Pretty

Friday, October 14th, 2011

David Rosen­berg has issued yet another piece of blis­ter­ing com­mon sense (which most main­stream and sell­side econ­o­mists seem to lack in whole­sale amounts these days), in which he explains why the action at the mar­gin is all that mat­ters for asset prices and all that fol­lows. As he says "this is about change, not lev­els" — a jab directly at the Fed­eral Reserve, whose core under­ly­ing premise is that "stock" is all that mat­ters, whereas "flow" (or change) is irrel­e­vant. This is arguably one of the biggest errors that Fed chair­man after Fed chair­man per­pet­u­ates, and fur­ther explains why the Fed will always have to be engaged in some (ever greater) form of mon­e­tary inter­ven­tion in order to sim­ply keep asset prices con­stant as the "stock" the­ory is dis­proven time and time again. Alas, since we are deal­ing with bril­liant PhD Econ­o­mists they will never admit their fool­ish the­ory is flawed until it is too late. In the mean­time, for every­one else who does not live in Bernanke's ivory tow­ers, here is Rosenberg's expla­na­tion why what hap­pens at the mar­gin is all that matters.

Change Is At The Margin

One of the ques­tions we have been asked recently was what under­pinned our once-controversial but now more main­stream call that this econ­omy was head­ing for a severe slow­down, which it cer­tainly has this year. Our main mes­sage all along was that the debt binge of the past three decades was unsus­tain­able. The pun­dits who insist that the Amer­i­can con­sumers will never retrench have been con­di­tioned by the mag­ni­tude of the run of the super-credit cycle and are con­fus­ing "resilience" with "lever­age". Mean­while, only a recent decline in the per­sonal sav­ings rate has pre­vented more notable ero­sion in spend­ing growth in recent months.

In order to fore­cast where we are going, it is essen­tial to thor­oughly under­stand where we have been. We came off the most pro­nounced credit cycle in his­tory. Between the end of the 2001 reces­sion and the end of the 2007 expan­sion, the aggre­gate house­hold debt-to-disposable income ratio surged from 100% to a record of 136%. In just over six years, the per­sonal sec­tor was able to tack on as much debt to this ratio as in the prior 40 years com­bined. This six per­cent­age point run-up per year was triple what was "nor­mal" in other eco­nomic up-cycles. Most of this, as we found out in such dra­matic fash­ion, were loans extended to house­holds who were either dra­mat­i­cally expand­ing their real estate port­fo­lio or tap­ping home equity through loans for con­sumer spend­ing in other areas apart from housing.

Exces­sive debt has remained a prob­lem across the full spec­trum of house­holds. The uni­ver­sal con­fi­dence in the qual­ity of real estate as col­lat­eral fos­tered an envi­ron­ment in which bor­row­ers and lenders alike were will­ing to aban­don pru­dence in the rapid cre­ation of res­i­den­tial mort­gage debt. Sub-prime lend­ing, to house­holds with no stated income, no assets and poor credit his­tory, was just the most glar­ing exam­ple of how wide­spread credit avail­abil­ity became dan­ger­ous in the face of the par­a­bolic rise in home prices. In the mania, par­tic­i­pa­tion was extremely broad. The hous­ing bub­ble was never about "con­sumer resilience". It was about lever­age — unfet­tered access to credit. And we con­tinue to pay the price for this largesse today as house­holds con­tinue in this defla­tion­ary delever­ag­ing cycle and home­builders con­tinue to try and work off lin­ger­ing excess inventory.

Those who assess the macro and mar­ket scene at the mar­gin seem to con­sis­tently have an advan­tage over those who don't. In other words, this is about change, not lev­els. Arthur Zeikel, the renowned for­mer pres­i­dent of Mer­rill Lynch Asset Man­age­ment, pre­sented a leg­endary report in the late 1980s titled On Think­ing that illus­trated the impor­tance of under­stand­ing that change occurs at the margin.

Sup­ply and demand at the mar­gin in the real estate mar­ket con­sists of those who have "For Sale" signs on the lawn and those who are actively look­ing to buy. The price of the entire mar­ket is in their hands, not in the hands of those who are con­fi­dently sit­ting tight. This is impor­tant because it was the action at the mar­gin that took prices par­a­bolic, and all home­own­ers ben­e­fited dur­ing the bub­ble. Every­one except the 30% that rent felt the wealth loss as house price gains reversed course, even those with no mort­gage debt out­stand­ing. More sell­ers plus fewer buy­ers equals home price defla­tion, and that is still the excess sup­ply back­drop pre­vail­ing today, fully four years fol­low­ing the ini­tial det­o­na­tion in res­i­den­tial real estate.

The movie is run­ning back­wards now because, at the mar­gin, there are still many more sell­ers at all points on the spec­trum, and fewer buy­ers as well. As a result, all home­own­ers will very likely con­tinue to expe­ri­ence the effects of home price defla­tion in many urban areas. Yet, because home prices are such an emo­tional topic, most econ­o­mists are afraid to con­sider what a sus­tained depre­ci­a­tion in hous­ing prices will do to their fore­cast. In our opin­ion, they place their clients at a disadvantage.

From Arthur Zeikel;

"As all of us were taught, but most of us have long since for­got­ten, eco­nomic change occurs at the mar­gin, where the action takes place... indi­vid­u­als who can think on the mar­gin always have an advan­tage over those who cannot."

Tags: American Consumers, Asset Prices, Binge, Common Sense, David Rosenberg, Economists, Erosion, Fed Chairman, Federal Reserve, Ivory Towers, Jab, Leverage, Magnitude, Personal Savings Rate, Premise, Pundits, Recession, Resilience, Slowdown, Three Decades
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