The US economy is slowing, which would argue for falling prices. Yet crude oil is making new highs, gold is nearing $1,000 and cereal is becoming a luxury item now that spring wheat is up 90% in this year alone. What’s going on here? Well, I finally have an explanation for the market: it’s a leap year!
Leap years are needed to keep our calendar in alignment with the earth's revolutions around the sun. To do so, one extra day must be inserted, or intercalated (this is a new word for me and I am going to try to use it more!), at the end of February. A leap year consists of 366 days, whereas other years, called common years, have 365 days. In the Gregorian calendar, the calendar used by most modern countries, the following three criteria determine which years will be leap years:
Every year that is divisible by four is a leap year;
of those years, if it can be divided by 100, it is NOT a leap year, unless
the year is divisible by 400. Then it is a leap year.
Of course this is no ordinary leap year, because in February, 2008, we have enjoyed five Fridays–the month begins and ends on a Friday. Between the years 1904 and 2096, leap years that share the same day of week for each date repeat only every 28 years. The most recent year in which February comprised five Fridays was in 1980, and the next occurrence will be in 2036. I hate to bring this up, but in 1980, the average inflation rate for the year was 13.58%. On the other hand, the Dow Jones Industrial Average closed at 963.99, up 14.97% for the year, so maybe we’re on to something.
Perhaps it’s not the leap year at all, but the phenomenon known as the Presidential Cycle, where the fourth year of a President’s term, which is also an election year, is better than the other three. After analyzing the average election year S&P 500 data for 19 election years, from 1928 through 2000, Investopedia.com found that the average election year monthly return was 16.2%, compared to 12.88% for all years. If the trend holds, we could see a rising market this summer because most of the gains in leap/election years occur from June-August.
The leap/election year spike has often been attributable to the fact that often the fourth year of the cycle is when lawmakers shower voters with stimulus packages intended to increase disposable income and when the Fed has a propensity to lower interest rates. Sound familiar? Before you get too giddy, I am here to remind you that there could be a price to be paid for all of this fun. Most of the worst recessions and depressions occur the year following an election, when according to The Traders' Almanac, the “post-Presidential Election Syndrome” kicks into gear, a condition in which the U.S. economy suffers from a collective fiscal hangover. Of course, there are always new trends that break old cycles, but I couldn’t resist rolling out all of this arbitrary data to celebrate Leap Year, 2008!
Friday, February 29, 2008
Thursday, February 28, 2008
2.5% -- Here we come!
Talk about a buzz-kill…yesterday, Federal Reserve Chairman Ben Bernanke delivered an economic forecast before the House Financial Services Committee that sounded about as downbeat as we have heard since the depths of the 2001-02 economic retrenchment. But you have to love the “silver lining of every cloud” aspect of investors: you can tell them that the world is falling apart and stocks can still hang in there.
Here are some excerpts of Bernanke’s testimony: “The economic situation has become distinctly less favorable since the time of our July report. Strains in financial markets, which first became evident late last summer, have persisted; and pressures on bank capital and the continued poor functioning of markets for securitized credit have led to tighter credit conditions for many households and businesses…The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries…
The jump in the price of imported energy, which eroded real incomes and wages, likely contributed to the slowdown in [consumer] spending, as did the declines in household wealth associated with the weakness in house prices and equity prices. Slowing job creation is yet another potential drag on household spending, as gains in payroll employment averaged little more than 40,000 per month during the three months ending in January, compared with an average increase of almost 100,000 per month over the previous three months.”
The preceding reminds of one of my favorite sayings from a real estate mogul that I know: we like good news too! Well, there was not much good news in Bernanke’s downbeat assessment, yet stocks held firm as he testified. The reason is fairly simple: when the Fed chief says that he is more concerned about slowing growth than inflation, investors actually hear “WE’RE LOWERING INTEREST RATES AT THE NEXT FOMC MEETING IN MARCH!” It is now widely believed that the Fed will drop rates by ½ point at that meeting, which would mean that Fed Funds would be at 2.5%.
Yet with oil over $100 and agricultural commodities soaring (spring wheat is up 90% year-to-date, while soybeans, corn and rice are all up 50-60% since last summer), Mr. Bernanke hedged a bit on the inflation outlook. Clearly prices have increased (see yesterday’s article) and despite Bernanke’s assertion that “inflation could be lower than we anticipate if slower-than-expected global growth moderates the pressure on the prices of energy and other commodities or if rates of domestic resource utilization fall more than we currently expect,” he also was forced to acknowledge that recent data “suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month.” Investors seemed content to focus on the cuts, rather than the potential inflationary pressures…at least for now.
Investors probably heard correctly when they took in BB’s testimony: in order to forestall a potentially massive debt-unwinding event, the Fed has decided to abandon the inflation fighting half of its dual mandate. The consequences of these actions are likely to reverberate for some time. As we anxiously await 2.5%, potentially on our way to 2%, I can’t help but think that the credit crisis we are in right now is the result of the Fed’s previous reflation strategy from 2001-2004. But that’s a topic for another article.
Here are some excerpts of Bernanke’s testimony: “The economic situation has become distinctly less favorable since the time of our July report. Strains in financial markets, which first became evident late last summer, have persisted; and pressures on bank capital and the continued poor functioning of markets for securitized credit have led to tighter credit conditions for many households and businesses…The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries…
The jump in the price of imported energy, which eroded real incomes and wages, likely contributed to the slowdown in [consumer] spending, as did the declines in household wealth associated with the weakness in house prices and equity prices. Slowing job creation is yet another potential drag on household spending, as gains in payroll employment averaged little more than 40,000 per month during the three months ending in January, compared with an average increase of almost 100,000 per month over the previous three months.”
The preceding reminds of one of my favorite sayings from a real estate mogul that I know: we like good news too! Well, there was not much good news in Bernanke’s downbeat assessment, yet stocks held firm as he testified. The reason is fairly simple: when the Fed chief says that he is more concerned about slowing growth than inflation, investors actually hear “WE’RE LOWERING INTEREST RATES AT THE NEXT FOMC MEETING IN MARCH!” It is now widely believed that the Fed will drop rates by ½ point at that meeting, which would mean that Fed Funds would be at 2.5%.
Yet with oil over $100 and agricultural commodities soaring (spring wheat is up 90% year-to-date, while soybeans, corn and rice are all up 50-60% since last summer), Mr. Bernanke hedged a bit on the inflation outlook. Clearly prices have increased (see yesterday’s article) and despite Bernanke’s assertion that “inflation could be lower than we anticipate if slower-than-expected global growth moderates the pressure on the prices of energy and other commodities or if rates of domestic resource utilization fall more than we currently expect,” he also was forced to acknowledge that recent data “suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month.” Investors seemed content to focus on the cuts, rather than the potential inflationary pressures…at least for now.
Investors probably heard correctly when they took in BB’s testimony: in order to forestall a potentially massive debt-unwinding event, the Fed has decided to abandon the inflation fighting half of its dual mandate. The consequences of these actions are likely to reverberate for some time. As we anxiously await 2.5%, potentially on our way to 2%, I can’t help but think that the credit crisis we are in right now is the result of the Fed’s previous reflation strategy from 2001-2004. But that’s a topic for another article.
Wednesday, February 27, 2008
Real life inflation
Agricultural commodities like soybeans, wheat and corn are on a tear. You probably have felt that sting yourself when visiting the grocery store. For quite some time, people have asked, “How can inflation be as low as the government says it is when I am paying more for everything?” That is a very good question, especially in light of yesterday’s release of the January Price Index and last week’s Consumer Price Index.
According to the data, consumer prices have risen +4.3% year-over-year, the biggest increase since September 2005. Additionally, the core rate of inflation, which strips out the volatile food and energy sectors (also known as the stuff you actually need every day), has increased at an annual rate of a 3.1% annual rate. Yesterday we found out why consumer prices increased more than expected: the prices that wholesalers paid (PPI) surged 1.0% in January, while the core jumped 0.4%, despite the slowdown gripping the US economy.
To measure the real effects of these numbers, Fox Business News has created a great new feature called the “Fox Business 32-Item Shopping Cart”. [To read more about the Fox Shopping Cart, go to www.foxbusiness.com/markets/economy/article/fox-business-shopping-cart-48-cents-january_492165_3.html] Senior Economist Mark Lieberman got his shopping list together and decided that it was time to track the true experience of inflation in our lives. The FOX Business Shopping Cart includes basic food items -- milk, butter, eggs, bread, meat, fruit and vegetables -- as well as fun foods such as potato chips, chocolate chip cookies, soda, beer and ice cream. Liebman found that “the price for the FOX Business Shopping Cart…rose 48 cents from December to January to $73.72. The basket costs $4.32 more than it did in January 2007.” In other words, the rate of inflation for the items in the Fox Shopping cart is running almost 7%, versus the government figure of 4.3%.
Before you become a conspiracy theorist, remember that there are in fact many things that you purchase that have dropped in price---computers, TVs and cars, to name a few. The problem is that since we do not buy those items day in and day out, we tend to focus on the more obvious price increases like food, gasoline and health care. That’s why when the Fed monitors inflation data, it uses three broad measures: surveys of households, forecasts by business economists, and market-based measures. Although all three have ticked up recently, they remain muted in terms of long-term views on inflation. That’s the good news---unfortunately, you can’t take it with you to the store.
According to the data, consumer prices have risen +4.3% year-over-year, the biggest increase since September 2005. Additionally, the core rate of inflation, which strips out the volatile food and energy sectors (also known as the stuff you actually need every day), has increased at an annual rate of a 3.1% annual rate. Yesterday we found out why consumer prices increased more than expected: the prices that wholesalers paid (PPI) surged 1.0% in January, while the core jumped 0.4%, despite the slowdown gripping the US economy.
To measure the real effects of these numbers, Fox Business News has created a great new feature called the “Fox Business 32-Item Shopping Cart”. [To read more about the Fox Shopping Cart, go to www.foxbusiness.com/markets/economy/article/fox-business-shopping-cart-48-cents-january_492165_3.html] Senior Economist Mark Lieberman got his shopping list together and decided that it was time to track the true experience of inflation in our lives. The FOX Business Shopping Cart includes basic food items -- milk, butter, eggs, bread, meat, fruit and vegetables -- as well as fun foods such as potato chips, chocolate chip cookies, soda, beer and ice cream. Liebman found that “the price for the FOX Business Shopping Cart…rose 48 cents from December to January to $73.72. The basket costs $4.32 more than it did in January 2007.” In other words, the rate of inflation for the items in the Fox Shopping cart is running almost 7%, versus the government figure of 4.3%.
Before you become a conspiracy theorist, remember that there are in fact many things that you purchase that have dropped in price---computers, TVs and cars, to name a few. The problem is that since we do not buy those items day in and day out, we tend to focus on the more obvious price increases like food, gasoline and health care. That’s why when the Fed monitors inflation data, it uses three broad measures: surveys of households, forecasts by business economists, and market-based measures. Although all three have ticked up recently, they remain muted in terms of long-term views on inflation. That’s the good news---unfortunately, you can’t take it with you to the store.
Tuesday, February 26, 2008
KISS
In 1987, I took an advanced options theory class with a legendary Wall Street quant. The young wanna-be traders filed into a classroom and noticed that there was only one word written on the blackboard: “KISS”. We imagined that it was some sophisticated anagram that would help us utilize the Black-Scholes pricing model to make money for our firms. Instead our instructor said, “Do you know what that word means? It means KEEP IT SIMPLE, STUPID!” That’s it? Yup, that was it and it was probably the best advice I received before I stepped on to the trading floor.
I couldn’t help but smile when I heard another legendary investor invoke “KISS” recently in an interview in the New York Times (2/17/08). David F. Swensen, who has run the Yale endowment since 1988 with amazing success (the endowment earned 28 percent in its last fiscal year, which ended June 30, beating all other endowments. It finished the year with $22.5 billion), reminded us earlier this month that keeping it simple may truly be the brass ring of investing after all.
Oh sure Swenson and his staff comb through sophisticated investment strategies employed by genius financial engineers, but he recommends that most individual investors eschew these sexy model-driven portfolios and instead rely on tried and true investment rules of thumb like diversification, low costs and rebalancing that is in line with your long-term goals. “The only people who should get involved [with esoteric strategies] are sophisticated individuals who have significant resources and a highly qualified investment staff.” I have written about Swenson previously after he published his book, “Unconventional Success: A Fundamental Approach to Personal Investment” in 2005, which essentially paid out his KISS strategy for investors. At that time, I noted that Swenson was happy to pull back the curtain and demonstrate that the so-called “Wizard” was simply not there.
In fact, if investors were able to act without emotions and stick to their game plans, they would find far greater success than trying to follow self-promoting Wizards like Jim Cramer, the CNBC host, who lure you into thinking that there is magic in the world of investing. “There is nothing that Cramer says that can help people make intelligent decisions,” Mr. Swensen said. “He takes something that is very serious and turns it into a game. If you want to have fun, go to Disney World.” Amen to Mr. Swenson and his healthy reminder that in a very complicated world, sometimes the reminder of “Keep it Simple, Stupid” can reap terrific rewards.
I couldn’t help but smile when I heard another legendary investor invoke “KISS” recently in an interview in the New York Times (2/17/08). David F. Swensen, who has run the Yale endowment since 1988 with amazing success (the endowment earned 28 percent in its last fiscal year, which ended June 30, beating all other endowments. It finished the year with $22.5 billion), reminded us earlier this month that keeping it simple may truly be the brass ring of investing after all.
Oh sure Swenson and his staff comb through sophisticated investment strategies employed by genius financial engineers, but he recommends that most individual investors eschew these sexy model-driven portfolios and instead rely on tried and true investment rules of thumb like diversification, low costs and rebalancing that is in line with your long-term goals. “The only people who should get involved [with esoteric strategies] are sophisticated individuals who have significant resources and a highly qualified investment staff.” I have written about Swenson previously after he published his book, “Unconventional Success: A Fundamental Approach to Personal Investment” in 2005, which essentially paid out his KISS strategy for investors. At that time, I noted that Swenson was happy to pull back the curtain and demonstrate that the so-called “Wizard” was simply not there.
In fact, if investors were able to act without emotions and stick to their game plans, they would find far greater success than trying to follow self-promoting Wizards like Jim Cramer, the CNBC host, who lure you into thinking that there is magic in the world of investing. “There is nothing that Cramer says that can help people make intelligent decisions,” Mr. Swensen said. “He takes something that is very serious and turns it into a game. If you want to have fun, go to Disney World.” Amen to Mr. Swenson and his healthy reminder that in a very complicated world, sometimes the reminder of “Keep it Simple, Stupid” can reap terrific rewards.
Monday, February 25, 2008
Punt Putnam Again?
Five years ago, I wrote an article querying, “Should You Punt Putnam?” I posed this question not because of the mutual fund late trading scandal, which implicated Putnam and a dozen other major fund companies, but due to the environment at Putnam which allowed severe underperformance despite its high fees while the CEO was pulling down hundreds of millions of dollars. Well, the CEO was fired, fees were lowered but performance has once again become a problem.
In an article last Friday, the Wall Street Journal’s Diya Gullapalli cut to the chase: “Through the end of last month, Putnam's three biggest funds were in the bottom 25% of their peer groups for the one- and five-year periods. Even the firm's $550 million Putnam Research Fund, which is supposed to encompass analysts' best stock picks, is down 12% in the past year and at the bottom of its category.”
Of course there is an explanation---the firm carried big positions in some of the hardest hit housing-related and financial companies, including Countrywide, Bear Stearns, MGIC Investment, Ambac and E*Trade in many of their largest funds, including Putnam Growth & Income and Putnam Voyager, both of which are trailing the S&P 500 index. It appears that Putnam fund managers did not follow their own advice that appears in all of their materials: “You should carefully consider the investment objectives, risks, charges, and expenses of any investment before investing”; “There is always the risk that you may lose money with your investment, regardless of your level of investment diversification”; and the old favorite, “past performance does not indicate future results.”
What kind of firm makes the exact same mistake of over-concentration and following the crowd within a mere five years? Then it was tech, telecom and internet stocks, today it is the new bubble contenders-housing, mortgage-related securities and financials. Is there anyone at Putnam who knows how to sell an asset once it has risen beyond all rational levels? That is the question that Kevin Cronin, Putnam’s new head of investments, will have to ask as he attempts to turn things around.
In the category of understatement, Cronin said, “I was not happy with the returns” in large US stocks, and he is now asking himself whether the firm needs “to make some changes.” If you own Putnam funds, you should ask yourself whether you can afford to wait for Cronin and the firm to complete the process, which may or may not be successful.
In an article last Friday, the Wall Street Journal’s Diya Gullapalli cut to the chase: “Through the end of last month, Putnam's three biggest funds were in the bottom 25% of their peer groups for the one- and five-year periods. Even the firm's $550 million Putnam Research Fund, which is supposed to encompass analysts' best stock picks, is down 12% in the past year and at the bottom of its category.”
Of course there is an explanation---the firm carried big positions in some of the hardest hit housing-related and financial companies, including Countrywide, Bear Stearns, MGIC Investment, Ambac and E*Trade in many of their largest funds, including Putnam Growth & Income and Putnam Voyager, both of which are trailing the S&P 500 index. It appears that Putnam fund managers did not follow their own advice that appears in all of their materials: “You should carefully consider the investment objectives, risks, charges, and expenses of any investment before investing”; “There is always the risk that you may lose money with your investment, regardless of your level of investment diversification”; and the old favorite, “past performance does not indicate future results.”
What kind of firm makes the exact same mistake of over-concentration and following the crowd within a mere five years? Then it was tech, telecom and internet stocks, today it is the new bubble contenders-housing, mortgage-related securities and financials. Is there anyone at Putnam who knows how to sell an asset once it has risen beyond all rational levels? That is the question that Kevin Cronin, Putnam’s new head of investments, will have to ask as he attempts to turn things around.
In the category of understatement, Cronin said, “I was not happy with the returns” in large US stocks, and he is now asking himself whether the firm needs “to make some changes.” If you own Putnam funds, you should ask yourself whether you can afford to wait for Cronin and the firm to complete the process, which may or may not be successful.
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