January 22, 2010 Edition, Volume IV
Inside Signature Update
- The Market & Economy – Not a Good Time for Anti-Business Rhetoric
- The Takeaway – There’s Opportunity in Pullbacks
THE MARKET & ECONOMY – Not a Good Time for Anti-Business Rhetoric
We often discuss the equities market as an indicator of economic activity six to nine months in the future; and while this is largely accurate, it doesn’t mean the markets won’t offer short-term reactions to contemporary events. The volatility in the markets this week has been a mixture of short-term reactions and longer-term concerns.
Since the earliest days of the Obama administration, the President and his advisors have been unable to maintain a consistent posture regarding business. Whether through Senior Economic Advisor Larry Summers, Treasury Secretary Timothy Geithner, Chief of Staff Rahm Emanuel, Chairperson of the White House Council of Economic Advisors Christina Romer, or the President himself, the administration has vacillated between pro and anti-business rhetoric. The back and forth has confused the markets and now tends to yield more downside volatility than anything else. The markets appear to have come to generally accept the administration as being anti-business, regardless of what the President or his advisors may offer in the media. It’s unfortunate and not at all necessary; but after more than a year of observing the President and his aides, US businesses have come to realize that they may need to defend themselves against the administration rather than rely on it to help move the nation’s economy forward. The Supreme Court’s recent allowance for business and unions to open up their wallets in support of election campaigns may become the tool used by businesses for their defense.
The most recent barrage from policy makers has been aimed squarely at the banking and investment industry. Twice since the beginning of the year, the administration has either announced or backed plans to limit and tax that part of the economy which extends credit to households and firms and creates value for investors - a growing number of whom are current or near-term retirees. Each time the administration or congress announces plans contrary to the well being of corporate America, the markets react with volatility and short-term losses. Invariably, within a short-time period, administration officials then issue statements or leak comments to the press in support of business in an effort to undo the damage. Each time, the weight of the damage makes it harder for the markets to bounce back.
When the administration announced the 2009 Economic Stimulus Package, administration officials claimed passage and implementation of the plan would keep unemployment levels from rising above 8%. Now, with unemployment at 10% the President’s party is under pressure; and rightfully so. Regardless of how effective the stimulus package may or may not have been, businesses have had to deal with a host of credit, employee benefits, and taxation concerns effectively limiting potential growth and putting a damper on hiring plans.
The President’s early January announcement of a plan to impose higher fees on banks in an effort to recapture TARP funds may ultimately be the most effective way of applying the requirement imposed by the original legislation, but the time could not have been much worse. Likewise, his announcement on Thursday to limit banking’s ability to create profits only serves to exaggerate ongoing credit market concerns by limiting the resources available for borrowers. The administration’s outward intent has been to bring long-term stability to an industry now proven to have the ability to bring the nation’s economy to its knees, but the shorter-term reality is more likely to be one of exaggerated deleveraging.
In the wake of the 2008 credit crisis, we saw US businesses and households deleverage, or reduce borrowing, so rapidly that the economy was pushed to the brink of collapse. After deft action on the part of the Treasury and Federal Reserve, credit resources slowly began to work their way back into the markets. Unfortunately, the impact on the labor markets became inevitable as businesses lost needed volumes and revenues to keep workers employed. While reducing the use of credit may offer long-term benefits, both for households and businesses, it’s dangerous to attempt to engineer such a move during brittle economic times. The Chinese announced plans this week to slow down their economy by curtailing lending in an attempt to keep their economy from overheating, but overheating isn’t exactly a problem in the US. We’re still working to keep the fire lit rather than being concerned that it may be out of control.
Some of the recent plans announced have been to limit the size and impact of any particular bank so as not to allow for ‘too big to fail’ operations. These plans call for a separation of a bank’s depository and capital market operations, not unlike the intent of the now defunct Glass-Steagall Act of 1933. While the intent may be appropriate, policy makers must understand that it has been the capital market operations of these banks that have returned them to profitability and improved banks’ capital ratios required to expand lending operations. There are numerous ways in which the government or marketplace can safeguard the economy against failing banking operations without limiting their ability to create capital - the FDIC’s recent proposal being one of them.
The US markets experienced three triple digit loss/gain days on the DOW this week, largely in response to the administration’s announcements and Chinese plans. The markets, already into a meaningful earnings reporting season, would likely have pushed forward through the week. Now they’re simply trying to keep from dropping below January 1st levels.
The upset pulled off by Scott Brown in winning Edward Kennedy’s Senate seat is being hailed as a blow to the Democratic Party and the President’s agenda, and many suggest it’s the second round in a shift back towards conservative control of the House and Senate - the first round being the November election of Bob McDonnell (R-VA) and Chris Christie (R-NJ) to their states’ Governor’s offices. While it remains to be seen if the Republicans can turn these events into a trend, it appears clear that the country is beginning to understand that small and large businesses, though possibly overly generous in handing out bonus compensation, are the engine of our economy and need support rather than disparagement.
The markets have been in recovery mode for over nine months now and have a long way to go before reaching 2007 highs. While many expect 2010 to see the DOW break past 12,000, most recognize that it’s likely to be a few years before we see 14,000+. The economy needs to experience multiple quarters of GDP growth in excess of 4% or 5% and unemployment below 6% before policy makers need to consider efforts to cool things down. In the mean time, we need to make sure our elected representatives understand that the only way to return millions of the nation’s unemployed to the workforce is to keep pressure off of businesses, especially those responsible for creating the credit capital so necessary in a capitalist market system.
THE TAKEAWAY – There’s Opportunity in Pullbacks
- The recent pullback in the market has been led by the banking sector and may represent a buying opportunity for investors confident that banks and investment operations aren’t likely to be separated by Obama administration plans.
- Encouraging signs at GE, American Express, Google and other market bell weathers offer hope for employment gains, despite December and January job losses. Top line sales growth continues to be the most sought after hope of recovery in employment.
- The Senate’s composition after the election of Scott Brown may be enough to keep healthcare and banking legislation from passing, but likely doesn’t represent as much cause for celebration as many conservatives might suppose. There’s a long way to go before the mid-term elections in November and both parties are well known for their inability to ‘handle the ball’ during times of potential opportunity.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Friday, January 22, 2010
Thursday, January 21, 2010
It's All About Gold!
A Special Edition of Signature Update
January 21, 2010 Edition, Volume IV
Gold – a Commodity to Treasure
The run up in the price of gold over the past several years has been nothing short of impressive - perhaps even exciting - for those already holding the precious metal. Though a longer-term view of the commodity’s value may offer a different perspective, one thing is certain: Gold has been, and likely always will be, a commodity to treasure - if not for economic reasons, then for sentiment or perhaps even safety.
In recent months, as interest in gold has reached historic levels, solicitations to buy and sell gold in varying forms have become pervasive throughout the media. A few of these are represented by serious investors or market analysts, while most others are from speculators and opportunists. Those who proclaim the virtue of holding gold as an asset are often referred to as Gold Bugs, and rightly so. Like many other types of insects, they can be prolific, tend to present themselves at the height of opportunism, and scramble for safety when bright light is focused on their activities.
All of this begs the question: Is gold an important investment to hold, and is this the right time to buy it? To clearly consider the answers, we need to discuss the formation of bubbles in a market, how gold is valued, and what drives people to own the commodity.
The Next Bubble … Gold?
First, we need to discuss the concept of a bubble in our economy. Most recognize that a bubble forms in a particular asset class as interest in the asset heats up beyond reasonable levels, and then may often times explode with humbling consequences. In the late 1990’s the bubble was in tech stocks; in 2006 it was real estate; and in 2008 it was oil. Many consumers may argue that it’s difficult to tell when a bubble is forming in asset values as opposed to rational price appreciation. However, there are a few basic observations that can be used to differentiate:
- When consumers are getting into a market typically dominated by professionals because everyone in that market is making money – that likely represents the formation of a bubble in that market.
- When marketers and promoters expand their advertizing campaigns for seminars, workshops and newsletter subscriptions – that probably represents a bubble in its advancing stages.
- When large numbers of people begin to employ an unreasonable amount of leverage (debt) in order to take advantage of an opportunity – that’s almost always a bubble preparing to burst and take out many of those who recently bought their way into the market.
- When your brother-in-law who hasn’t been able to earn his way out a paper bag comes to you with a sure thing… well, that may not be a bubble, but the outcome is likely to be the same.
Unless you happen to be a professional in a market exhibiting the characteristics of a bubble, or have a trusted advisor with whom you or a close associate may have worked for many years to help guide you through that market, stay away from bubbles. It is the rare individual who has the expertise to keep from being harmed when bubbles burst, and believe me… all bubbles burst!
What Drives the Price of Gold
Gold is priced in the open markets based on the value of the US Dollar and the influence of basic supply and demand principles. The recent run up in gold pricing has been driven largely by the depreciation of the dollar, rather than increasing demand. The Fall 2009 announcement that several large hedge funds had entered into the gold market was seen as a bullish (positive) sign by some; others understood it to be an affirmation that speculative forces had already been at work. Demand decreased in 2008 and 2009 with the weakened economy, but gold’s price continued its climb. Low interest rates extended over a long period of time reduced the dollar’s buying power in domestic and foreign markets. Consequently, the nominal value of commodities such as gold and oil have increased. But just as the value of oil spiked in the summer of 2008 due to speculative forces well beyond the relative strength of the dollar, gold has experienced unsustainable price increases; and interest in the commodity has only increased. Likewise, the price of an ounce of gold, while possibly headed higher in the near-term, will more than likely tumble as a result of shifting market forces.
The dollar is likely to gain value as the economy continues to improve, GDP increases, and interest rates are adjusted upwards. Gold will almost certainly move downwards in near lockstep fashion. An argument can be made that an improved economy means a greater demand for the precious metal, and while this is certainly the case, the production of gold through mining activities remains sufficiently strong to keep increased demand pressures from supporting unreasonably high prices. Certain manufacturing and industrial concerns use gold in their products, but the search for alternatives has yielded some cost-effective choices. Even the consumer demand for gold being experienced in Asia isn’t enough to sustain current pricing given the world’s supply of the precious metal.
Why Gold?
There are few reasons individuals purchase gold. Most people who own it do so because of its value as a sentimental product. Many of us wear wedding rings or other jewelry fashioned from gold without really considering its intrinsic value. Others want to hold the commodity as a tradable currency in the event our economy and society are reduced to ruin by some form of calamity. Finally, there are those who hold gold as an investment, and look for it to provide an increasing value or hedge as part of an asset allocation methodology.
A Currency for Exchange
Owning gold as a tradable commodity or currency is tricky. In order to affect an efficient exchange, the holder needs to have a way to assert the purity of the metal being offered as currency and have flexible units of measure. In the mid-1800’s, assay offices offered measuring services for this very purpose. Today, sophisticated laboratories analyze the metal and determine its characteristics in minute detail. As it turns out, gold isn’t necessarily gold. It may look like gold, feel like gold and even be bitten into like we’ve seen in the movies, but gold comes in a variety of purities most often measured in carats and its value can vary widely.
When purchasing gold coins, jewelry or even ingots and small bars, consumers need to understand that there can be a wide disparity between what a dealer may charge for the item compared to what they would be willing to pay for it. This spread in pricing, or transaction cost, is necessary to offer the business a margin from which to profit, but too many people mistake the value of an item to be what they paid for it. In truth, the value is what you can get for it if you’re selling the item. What you may have paid has little relevance - just ask anyone who purchased Red Hat (NYSE RHT) at the opening in 1999 or a condo in Florida in 2005. It’s not uncommon to find a 20-30% margin between the purchase and sale price for gold coins and small bars, and the mark-up on jewelry is higher still.
Though the need to store gold for the purpose of trade is unlikely, the recent events in Haiti bring this more clearly into focus than at any time in recent memory. Gold may seem to be a broadly acceptable commodity for this purpose; but if we’re in a state of calamity, give me food, water and fuel with which to barter rather than gold. Sometimes we forget that currency is only as useful as what it can buy; and while cash may be king, in the midst of disaster it’s water that keeps us alive.
An Asset Allocation Resource
Many investors expect gold to be a long-term part of their portfolio and may choose to alter the portion of their holdings in gold as market forces shift. These are investors, not simply consumers, and they rarely hold the commodity itself. Gold can be purchased through ETF’s (exchange traded funds), ownership in traditional mutual fund shares, holdings of stock in a corporation involved in the mining or processing of the metal, or through commodities contracts. Each of these offer much greater liquidity and lower transaction costs than holding the commodity itself and as such, present entirely different levels of risk. Gold held in these forms as an investment is still subject to the market forces presented previously, but the ease of transaction and the available data regarding the asset is far superior to what most can experience with the physical commodity itself.
Sometimes, speculators can impact the value of a commodity through these mechanisms, but the regulatory environment in which we now live makes that increasingly less likely. Interestingly enough, it’s rare to see an elaborate marketing campaign for these forms of ownership in gold.
Will gold climb to $2,000 an ounce? Perhaps, but it’s far more likely to tumble from current levels than it is to continue its rise. In the meantime, most would be wise to remember the adage: bulls make money and bears make money, but hogs get slaughtered. Oh… and bugs can get crushed.
(This is not a solicitation to buy or sell any investment of any kind. Consult with your financial advisor before buying or selling any investment or financial instrument. The purchase of commodities in any form may involve a high degree of risk. Past performance is no indication of future gains.)
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
January 21, 2010 Edition, Volume IV
Gold – a Commodity to Treasure
The run up in the price of gold over the past several years has been nothing short of impressive - perhaps even exciting - for those already holding the precious metal. Though a longer-term view of the commodity’s value may offer a different perspective, one thing is certain: Gold has been, and likely always will be, a commodity to treasure - if not for economic reasons, then for sentiment or perhaps even safety.
In recent months, as interest in gold has reached historic levels, solicitations to buy and sell gold in varying forms have become pervasive throughout the media. A few of these are represented by serious investors or market analysts, while most others are from speculators and opportunists. Those who proclaim the virtue of holding gold as an asset are often referred to as Gold Bugs, and rightly so. Like many other types of insects, they can be prolific, tend to present themselves at the height of opportunism, and scramble for safety when bright light is focused on their activities.
All of this begs the question: Is gold an important investment to hold, and is this the right time to buy it? To clearly consider the answers, we need to discuss the formation of bubbles in a market, how gold is valued, and what drives people to own the commodity.
The Next Bubble … Gold?
First, we need to discuss the concept of a bubble in our economy. Most recognize that a bubble forms in a particular asset class as interest in the asset heats up beyond reasonable levels, and then may often times explode with humbling consequences. In the late 1990’s the bubble was in tech stocks; in 2006 it was real estate; and in 2008 it was oil. Many consumers may argue that it’s difficult to tell when a bubble is forming in asset values as opposed to rational price appreciation. However, there are a few basic observations that can be used to differentiate:
- When consumers are getting into a market typically dominated by professionals because everyone in that market is making money – that likely represents the formation of a bubble in that market.
- When marketers and promoters expand their advertizing campaigns for seminars, workshops and newsletter subscriptions – that probably represents a bubble in its advancing stages.
- When large numbers of people begin to employ an unreasonable amount of leverage (debt) in order to take advantage of an opportunity – that’s almost always a bubble preparing to burst and take out many of those who recently bought their way into the market.
- When your brother-in-law who hasn’t been able to earn his way out a paper bag comes to you with a sure thing… well, that may not be a bubble, but the outcome is likely to be the same.
Unless you happen to be a professional in a market exhibiting the characteristics of a bubble, or have a trusted advisor with whom you or a close associate may have worked for many years to help guide you through that market, stay away from bubbles. It is the rare individual who has the expertise to keep from being harmed when bubbles burst, and believe me… all bubbles burst!
What Drives the Price of Gold
Gold is priced in the open markets based on the value of the US Dollar and the influence of basic supply and demand principles. The recent run up in gold pricing has been driven largely by the depreciation of the dollar, rather than increasing demand. The Fall 2009 announcement that several large hedge funds had entered into the gold market was seen as a bullish (positive) sign by some; others understood it to be an affirmation that speculative forces had already been at work. Demand decreased in 2008 and 2009 with the weakened economy, but gold’s price continued its climb. Low interest rates extended over a long period of time reduced the dollar’s buying power in domestic and foreign markets. Consequently, the nominal value of commodities such as gold and oil have increased. But just as the value of oil spiked in the summer of 2008 due to speculative forces well beyond the relative strength of the dollar, gold has experienced unsustainable price increases; and interest in the commodity has only increased. Likewise, the price of an ounce of gold, while possibly headed higher in the near-term, will more than likely tumble as a result of shifting market forces.
The dollar is likely to gain value as the economy continues to improve, GDP increases, and interest rates are adjusted upwards. Gold will almost certainly move downwards in near lockstep fashion. An argument can be made that an improved economy means a greater demand for the precious metal, and while this is certainly the case, the production of gold through mining activities remains sufficiently strong to keep increased demand pressures from supporting unreasonably high prices. Certain manufacturing and industrial concerns use gold in their products, but the search for alternatives has yielded some cost-effective choices. Even the consumer demand for gold being experienced in Asia isn’t enough to sustain current pricing given the world’s supply of the precious metal.
Why Gold?
There are few reasons individuals purchase gold. Most people who own it do so because of its value as a sentimental product. Many of us wear wedding rings or other jewelry fashioned from gold without really considering its intrinsic value. Others want to hold the commodity as a tradable currency in the event our economy and society are reduced to ruin by some form of calamity. Finally, there are those who hold gold as an investment, and look for it to provide an increasing value or hedge as part of an asset allocation methodology.
A Currency for Exchange
Owning gold as a tradable commodity or currency is tricky. In order to affect an efficient exchange, the holder needs to have a way to assert the purity of the metal being offered as currency and have flexible units of measure. In the mid-1800’s, assay offices offered measuring services for this very purpose. Today, sophisticated laboratories analyze the metal and determine its characteristics in minute detail. As it turns out, gold isn’t necessarily gold. It may look like gold, feel like gold and even be bitten into like we’ve seen in the movies, but gold comes in a variety of purities most often measured in carats and its value can vary widely.
When purchasing gold coins, jewelry or even ingots and small bars, consumers need to understand that there can be a wide disparity between what a dealer may charge for the item compared to what they would be willing to pay for it. This spread in pricing, or transaction cost, is necessary to offer the business a margin from which to profit, but too many people mistake the value of an item to be what they paid for it. In truth, the value is what you can get for it if you’re selling the item. What you may have paid has little relevance - just ask anyone who purchased Red Hat (NYSE RHT) at the opening in 1999 or a condo in Florida in 2005. It’s not uncommon to find a 20-30% margin between the purchase and sale price for gold coins and small bars, and the mark-up on jewelry is higher still.
Though the need to store gold for the purpose of trade is unlikely, the recent events in Haiti bring this more clearly into focus than at any time in recent memory. Gold may seem to be a broadly acceptable commodity for this purpose; but if we’re in a state of calamity, give me food, water and fuel with which to barter rather than gold. Sometimes we forget that currency is only as useful as what it can buy; and while cash may be king, in the midst of disaster it’s water that keeps us alive.
An Asset Allocation Resource
Many investors expect gold to be a long-term part of their portfolio and may choose to alter the portion of their holdings in gold as market forces shift. These are investors, not simply consumers, and they rarely hold the commodity itself. Gold can be purchased through ETF’s (exchange traded funds), ownership in traditional mutual fund shares, holdings of stock in a corporation involved in the mining or processing of the metal, or through commodities contracts. Each of these offer much greater liquidity and lower transaction costs than holding the commodity itself and as such, present entirely different levels of risk. Gold held in these forms as an investment is still subject to the market forces presented previously, but the ease of transaction and the available data regarding the asset is far superior to what most can experience with the physical commodity itself.
Sometimes, speculators can impact the value of a commodity through these mechanisms, but the regulatory environment in which we now live makes that increasingly less likely. Interestingly enough, it’s rare to see an elaborate marketing campaign for these forms of ownership in gold.
Today’s Gold Market
The price of gold rose to over $1,140 in late trading Tuesday (1/19/2010) as the US dollar continued to sink amid fears over inflation. Many now recognize a market bubble in precious metals with gold leading the way, just as oil did last year, real estate before that, and tech stocks before that. In recent months, we’ve seen and heard more from Gold
Bugs than at any time since the late 1970’s and early 1980’s. You may recall that this was when gold topped $1,000 an ounce before falling by more than 65%. A quick look at gold’s value shifts from the early 1970’s to today shows clear indications of a bubble in gold pricing. Is this a good time to buy gold? In this case, the picture speaks for itself.
We’re all too familiar with the enticing charts showing increases in stock and real estate prices in the 1990’s and 2000’s respectively. We also know what followed as markets plummeted. It only takes a glance at a similar chart of gold valuation to see what could possibly be in store.
Advocates for gold ownership may suggest that the recent increase in US spending, the attending trillion dollar deficits, and eventual inflation pressures will all but mandate an ongoing increase in gold’s value. Possibly, but what is missed is the deflationary impact the recent recession has already had on the price of goods and services. Many economists project that inflationary forces are already included in today’s price levels; some fear future deflation far more than possible inflation.
Advocates for gold ownership may suggest that the recent increase in US spending, the attending trillion dollar deficits, and eventual inflation pressures will all but mandate an ongoing increase in gold’s value. Possibly, but what is missed is the deflationary impact the recent recession has already had on the price of goods and services. Many economists project that inflationary forces are already included in today’s price levels; some fear future deflation far more than possible inflation.
Will gold climb to $2,000 an ounce? Perhaps, but it’s far more likely to tumble from current levels than it is to continue its rise. In the meantime, most would be wise to remember the adage: bulls make money and bears make money, but hogs get slaughtered. Oh… and bugs can get crushed.
(This is not a solicitation to buy or sell any investment of any kind. Consult with your financial advisor before buying or selling any investment or financial instrument. The purchase of commodities in any form may involve a high degree of risk. Past performance is no indication of future gains.)
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Tuesday, January 12, 2010
FDIC Chief Sheila Bair Steps Up
January 12, 2010 Edition, Volume IV
Inside Signature Update
- The Market – Earnings Season Upon Us Once Again
- The Economy – FDIC Chief Sheila Bair Steps Up
- The Takeaway – 2010 Gets Ready to Heat Up
THE MARKET – Earnings Season Upon Us Once Again
The US stock markets have been relatively calm this past week. As of Monday’s close the DOW was well over 10,600 and the gold and oil markets were holding their own. About what we expect as we enter into 4th Quarter 2009 earnings reporting season for publically held companies. Trading volumes have been light to moderate and there is a growing amount of investor cash on the sidelines once again. Traders and investors are waiting to make their moves; some would ask, “what are they waiting for?”
On one hand, the current calm is to be expected; on the other it’s surprising. The markets don’t appear to be bracing for negative reports; rather, a few strong earnings releases could send the market swiftly higher. Alcoa (AA) was one of the first companies to report and their earnings were disappointing. Adjusted for one-time-events and charge-off’s, the company reported a profit of one cent per share versus an expected 5 cents, but their sales (gross revenues) were up. The market reacted by handing Alcoa shareholders an 11% loss on the day; while the DOW only moved downwards by only .34%; an indication that Alcoa’s poor results weren’t expected to be repeated across industry segments.
Supervalu Stores (SVU) shares dipped .22% along with the broader market on reports that the chain had swung to profitability and beat their full-year earnings estimates; while rival A&P (GAP) dropped by more than 20% as 4th quarter results disappointed at both the top and bottom lines.
Most companies reporting early either have good news they can’t wait to share or bad news they want to get out of the way: Alcoa’s numbers were a little bit of each. JP Morgan Chase, Cargill and Intel are all scheduled to release later this week and numerous financials, retailers and industrials are scheduled for the week following. Until then, the markets may well hold steady as we look for confirmation that signs of growth in the 4th quarter translated into profitability at the corporate level.
THE ECONOMY - FDIC Chief Sheila Bair Steps Up
FDIC Chief Sheila Bair drew fire from bankers Tuesday morning as the agency announced plans aimed at altering compensation and risk management among the nation’s bankers. Others cheered the announcement, and here’s why: the proposal offers compensation, without limits, to executives and managers based on long-term stock performance rather than all-cash payouts. This is exactly what we’ve recommended since before executive compensation and bonus rewards came into focus in the wake of the financial crisis. Bair is doing without legislative interference which is what the agency is empowered to do: regulate the risk profiles of those banks covered by the FDIC. The proposal is focused and addresses the relevant issues without over-reaching; something very difficult for legislators and political appointees to accomplish. Also something White House Pay Czar Kenneth Feinberg has been unable to do after more than six months on the job.
The FDIC plan is linked to an earlier plan to increase fees and depository insurance premiums for those banks insistent on maintaining aggressive risk structures. Though the move may be controversial, it’s consistent with the assessment of other risk insurance premiums throughout the financial services industry. It’s about time.
The December 4th, 2009 issue of Signature Update addressed executive compensation as the Obama administration moved to limit compensation at those firms that accepted TARP resources. The article noted that “The Administration has wisely chosen to avoid direct impact on compensation for executives at firms outside of those most dependant on TARP, but no one expects the impact of recent policy to be contained to only a few firms.” The FDIC’s most recent proposal takes on compensation beyond the scope of TARP recipients, but does so in such a manner as to not directly impact banks’ ability to compete in the compensation market and it does so just as the debate is set to heat up once again.
Goldman Sachs CEO, Lloyd C. Blankfein, has become one of the most visible executives in the compensation debate. Though the top 30 executives at Goldman (GS) will accept stock in lieu of cash for their 2009 bonuses, the firm, like many others, is battling shareholder groups over the right to set compensation policy. Many Wall Street firms, even those that are publically held, continue to act as partnerships and distribute substantial portions of their revenues to talented managers and executives. In good times the practice was tacitly approved by shareholders as profits masked the dynamics of the problem; that was then. Boards of Directors are tasked with overseeing major policy initiatives for large corporations and serve in much the same capacity as do elected legislative representatives for the population at large. Industry leaders correctly argue that shareholders have the right to influence management decisions by virtue of their votes for board members and point out that without competitive executive compensation the firms would be at a disadvantage and shareholder value may be more adversely affected than it is by disbursing billions in incentive bonuses.
It’s a valid argument, and one for which Bair may have provided a meaningful influence across the spectrum of corporate America. In the end, shareholders may well be judged deserving of the right to contravene in the decisions of the firm’s management, though they may also live to regret the possible adverse effects. In the mean time, let’s hope executives, managers and policy makers are listening.
THE TAKEAWAY – 2010 Gets Ready to Heat Up
- Just as we’re now seeing 4th quarter earnings reports for publicly held corporations, we’re also about to see US GDP forecast revisions for the 4th quarter and full-year 2009. Look for better-than-expected GDP figures, possibly exceeding 5% for the 4th quarter.
- The market’s reaction to recent employment, revenue and earnings reports bodes well for the bulls. The yield curve continues to be strong and steep, and suggests extended gains for US equities.
- Look for legislative representatives to jump on executive compensation as the debate comes back to the forefront. Their positions will likely have less to do with shareholder rights than social engineering, but shareholder advocacy groups will almost certainly applaud their efforts.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Inside Signature Update
- The Market – Earnings Season Upon Us Once Again
- The Economy – FDIC Chief Sheila Bair Steps Up
- The Takeaway – 2010 Gets Ready to Heat Up
THE MARKET – Earnings Season Upon Us Once Again
The US stock markets have been relatively calm this past week. As of Monday’s close the DOW was well over 10,600 and the gold and oil markets were holding their own. About what we expect as we enter into 4th Quarter 2009 earnings reporting season for publically held companies. Trading volumes have been light to moderate and there is a growing amount of investor cash on the sidelines once again. Traders and investors are waiting to make their moves; some would ask, “what are they waiting for?”
On one hand, the current calm is to be expected; on the other it’s surprising. The markets don’t appear to be bracing for negative reports; rather, a few strong earnings releases could send the market swiftly higher. Alcoa (AA) was one of the first companies to report and their earnings were disappointing. Adjusted for one-time-events and charge-off’s, the company reported a profit of one cent per share versus an expected 5 cents, but their sales (gross revenues) were up. The market reacted by handing Alcoa shareholders an 11% loss on the day; while the DOW only moved downwards by only .34%; an indication that Alcoa’s poor results weren’t expected to be repeated across industry segments.
Supervalu Stores (SVU) shares dipped .22% along with the broader market on reports that the chain had swung to profitability and beat their full-year earnings estimates; while rival A&P (GAP) dropped by more than 20% as 4th quarter results disappointed at both the top and bottom lines.
Most companies reporting early either have good news they can’t wait to share or bad news they want to get out of the way: Alcoa’s numbers were a little bit of each. JP Morgan Chase, Cargill and Intel are all scheduled to release later this week and numerous financials, retailers and industrials are scheduled for the week following. Until then, the markets may well hold steady as we look for confirmation that signs of growth in the 4th quarter translated into profitability at the corporate level.
THE ECONOMY - FDIC Chief Sheila Bair Steps Up
FDIC Chief Sheila Bair drew fire from bankers Tuesday morning as the agency announced plans aimed at altering compensation and risk management among the nation’s bankers. Others cheered the announcement, and here’s why: the proposal offers compensation, without limits, to executives and managers based on long-term stock performance rather than all-cash payouts. This is exactly what we’ve recommended since before executive compensation and bonus rewards came into focus in the wake of the financial crisis. Bair is doing without legislative interference which is what the agency is empowered to do: regulate the risk profiles of those banks covered by the FDIC. The proposal is focused and addresses the relevant issues without over-reaching; something very difficult for legislators and political appointees to accomplish. Also something White House Pay Czar Kenneth Feinberg has been unable to do after more than six months on the job.
The FDIC plan is linked to an earlier plan to increase fees and depository insurance premiums for those banks insistent on maintaining aggressive risk structures. Though the move may be controversial, it’s consistent with the assessment of other risk insurance premiums throughout the financial services industry. It’s about time.
The December 4th, 2009 issue of Signature Update addressed executive compensation as the Obama administration moved to limit compensation at those firms that accepted TARP resources. The article noted that “The Administration has wisely chosen to avoid direct impact on compensation for executives at firms outside of those most dependant on TARP, but no one expects the impact of recent policy to be contained to only a few firms.” The FDIC’s most recent proposal takes on compensation beyond the scope of TARP recipients, but does so in such a manner as to not directly impact banks’ ability to compete in the compensation market and it does so just as the debate is set to heat up once again.
Goldman Sachs CEO, Lloyd C. Blankfein, has become one of the most visible executives in the compensation debate. Though the top 30 executives at Goldman (GS) will accept stock in lieu of cash for their 2009 bonuses, the firm, like many others, is battling shareholder groups over the right to set compensation policy. Many Wall Street firms, even those that are publically held, continue to act as partnerships and distribute substantial portions of their revenues to talented managers and executives. In good times the practice was tacitly approved by shareholders as profits masked the dynamics of the problem; that was then. Boards of Directors are tasked with overseeing major policy initiatives for large corporations and serve in much the same capacity as do elected legislative representatives for the population at large. Industry leaders correctly argue that shareholders have the right to influence management decisions by virtue of their votes for board members and point out that without competitive executive compensation the firms would be at a disadvantage and shareholder value may be more adversely affected than it is by disbursing billions in incentive bonuses.
It’s a valid argument, and one for which Bair may have provided a meaningful influence across the spectrum of corporate America. In the end, shareholders may well be judged deserving of the right to contravene in the decisions of the firm’s management, though they may also live to regret the possible adverse effects. In the mean time, let’s hope executives, managers and policy makers are listening.
THE TAKEAWAY – 2010 Gets Ready to Heat Up
- Just as we’re now seeing 4th quarter earnings reports for publicly held corporations, we’re also about to see US GDP forecast revisions for the 4th quarter and full-year 2009. Look for better-than-expected GDP figures, possibly exceeding 5% for the 4th quarter.
- The market’s reaction to recent employment, revenue and earnings reports bodes well for the bulls. The yield curve continues to be strong and steep, and suggests extended gains for US equities.
- Look for legislative representatives to jump on executive compensation as the debate comes back to the forefront. Their positions will likely have less to do with shareholder rights than social engineering, but shareholder advocacy groups will almost certainly applaud their efforts.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Friday, January 8, 2010
Oil's Influence and Domestic Agriculture
January 5, 2010 Edition, Volume IV
Inside Signature Update
- The Market – Starting the Year Off on the Right Foot
- The Economy – Oil’s Influence and Domestic Agriculture
- The Takeaway – A Time for Full Investment
THE MARKET – Starting the Year Off on the Right Foot
Starting the Year Off on the Right Foot
The US equities markets opened the New Year with the right start Monday as the DOW closed up by over 155 points representing gains across the boards. Trading in Tuesday’s market, though choppy, largely held onto the gains as investors looked past weakness in the housing markets and shifted focus to intraday strength in the dollar and good news from higher-than-expected December retail spending estimates, a sharp rise in sales at Ford, and Google’s unveiling of a new smart phone.
Many believe the direction and volume of trading the market sets at the first of the year establishes a trend that the remainder of the year will follow. While it’s a nice thought, there are simply too many influencing factors to take the notion seriously.
Just as 2009 was a year of calamity and recovery (partial) for the markets, 2010 is likely to be a year of sustained, though temperate, improvement. Some of the more popular market forecasters have already weighed in and their prognostications are all over the board. There are nearly as many calls for substantial gain as meaningful decline, and some suggest the markets will remain flat. In truth, no one knows. But here are a few things to be aware of:
Unemployment isn’t likely to dip below 8% in 2010; if it does, the markets will reward the movement handsomely. As long as we don’t rise above current levels we should be out of the woods relative to meaningful market declines below current levels.
The Federal Reserve, already under pressure to raise key interest rates to stop the dollar’s decline is showing very few signs of meaningful change. Increases in rates will strengthen the dollar and so far, stronger dollar momentum has offered declines in the equities markets.
Rising energy costs could threaten corporate earnings by increasing manufacturing and transportation costs and putting pressure on household budgets. Though this could be offset by employment gains, no one other than OPEC likes to see oil prices climb much beyond current levels.
The current presidential administration and the US Congress aren’t likely to be any more productive in 2010 than they were in 2009 and there won’t be a recession to blame for the lack of results. There are too many policy makers from both sides of the aisle who’ve taken positions they’re unwilling to move off of. It’s hard to see a scenario where any joint action of the House and Senate could offer substantive impact on the markets until after the 2010 elections.
Signs are already shaping up for technology, healthcare, commodities, and agriculture to be winners for 2010. Emerging markets and financials have already rebounded with such strength that they’re likely to perform well as a global recovery continues, but ought not to offer the excitement they provided in 2009 – thank goodness!
Real estate inventories aren’t likely to improve dramatically as lenders have large portfolios they’ve yet to put on the market. They’re smart, they’ve learned to keep these assets out of the market in an effort to maintain current price levels and avoid write downs.
Positive game changers could include a surprisingly accommodating congress (not at all likely), a break in the correlation of dollar and equities market moves (it could happen), and deft activity by the Fed to support the dollar while leaving rates low (possible, but tricky).
Negative breaks could come at the hands of Iran or Israel as tensions mount (anyone’s guess). Likewise, potential weakness in China could upset the current flow of export goods from the US to Asian markets (not all that likely).
THE ECONOMY – Oil’s Influence and Domestic Agriculture
Oil Trading over $80 per Barrel
With the price of oil having once again breached the $80 per barrel mark, consumers and businesses are preparing for higher energy prices that are likely to remain for an extended period of time. The good news is that the economic recovery has clearly improved corporate production and earnings, and has begun to take the edge off of unemployment. The bad news is that it will still be months before the labor market feels any meaningful benefit and higher manufacturing output and consumer confidence levels quickly gives rise to higher energy demand; we all know what happens when demand rises – prices rise in direct association.
Though we’re not suggesting we’re likely to see triple digit oil prices soon, it’s a possibility worth noting. Any increase has an immediate impact on household budgets and corporate earnings. With the economy still relatively brittle, increasing prices have an almost immediate impact on demand – the offsetting pressure should be enough to keep prices from rising to uncomfortable levels. Additionally, the speculator and hedge fund activity that pushed oil towards $150 a barrel in 2008 may not be an active threat in the current market.
The airlines, which have enjoyed relative calm in the oil markets for over a year, are gearing up for rising costs by structuring fare increases and maintaining various surcharges once thought unsustainable; they now appear to be a long-term part of the cost of air travel. Trucking and rail transports, many of which never abandoned fuel surcharges, continue to adjust these pricing elements in an attempt to maintain viable business models while still remaining competitive. It’s a delicate balance at a tricky time in the economy.
Domestic Agriculture on the Rise
Also worth noting is a trend we’re likely to see emerge in the foods markets. Though much of the food product we consume is produced domestically, there are still major imports from Central and South America, Europe, China and other parts of Asia. Much of the import activity is based on business models dependant on lower costs of production and transportation of bananas, coffee, chocolate, fish, shellfish, apple juice, cashew nuts, spices, and other imported foods. Those models have now been under pressure for over a year as a decreasing dollar has increased the real price of all import goods and due to the high cost of transporting foods around the world.
In decades past, rising real estate prices, low exchange rates and cheap oil allowed the US to increasingly abandon food production. As exchange rates and transportation costs began to rise in recent years some producers began to gear up for future domestic production, but faced enormous pressure due to still rising real estate values. Today the trend is in full reversal and hundreds of thousands of acres previously thought prime for development are being readied for production.
Already focusing on sustainable crop development, domestic producers and suppliers see opportunities for more local and regional production and consumption patterns. For the first time in generations the number of small farms has shown marked increase. In February 2009 the US Census Bureau reported an increase from 588,000 small farms in the US to over 700,000. The increase, once thought to accommodate increased demand for organic produce, now appears to have more momentum.
The 2010 Census Report shows a slowing in the decrease of US farmlands from 987 million acres in 1990, to 945 million in 2000 to 931 million in 2007. USDA estimates reflect an increase to 933 million for 2009 – the first increase in agricultural land use in decades!
Coupled with the demand for organic goods and sustainable production, the affordability of domestic agricultural output due to exchange rate changes and transportation cost increases may not only offer hope to US farmers, but also represents a potentially meaningful contribution to much needed US GDP gains.
THE TAKEAWAY – A Time for Full Investment
This should be a year for full investment – if you’re on the sidelines you’ve missed out on meaningful gains, but you may have also avoided an unacceptable level of risk.
Those able to take advantage of improved ROTH IRA conversion benefits should consider the merits of tax-free income in the future. The likelihood of future tax rate increases makes this even more attractive.
Healthcare legislation will pass this year and reward very few of us. Energy legislation has little chance of seeing a full vote in either house of congress.
The mid-term elections this fall could offer a shift in the balance of legislative power. In general, the country is more upset right now with the left than the right, but it’s early and that pendulum can swing back and forth with ease before Election Day.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Inside Signature Update
- The Market – Starting the Year Off on the Right Foot
- The Economy – Oil’s Influence and Domestic Agriculture
- The Takeaway – A Time for Full Investment
THE MARKET – Starting the Year Off on the Right Foot
Starting the Year Off on the Right Foot
The US equities markets opened the New Year with the right start Monday as the DOW closed up by over 155 points representing gains across the boards. Trading in Tuesday’s market, though choppy, largely held onto the gains as investors looked past weakness in the housing markets and shifted focus to intraday strength in the dollar and good news from higher-than-expected December retail spending estimates, a sharp rise in sales at Ford, and Google’s unveiling of a new smart phone.
Many believe the direction and volume of trading the market sets at the first of the year establishes a trend that the remainder of the year will follow. While it’s a nice thought, there are simply too many influencing factors to take the notion seriously.
Just as 2009 was a year of calamity and recovery (partial) for the markets, 2010 is likely to be a year of sustained, though temperate, improvement. Some of the more popular market forecasters have already weighed in and their prognostications are all over the board. There are nearly as many calls for substantial gain as meaningful decline, and some suggest the markets will remain flat. In truth, no one knows. But here are a few things to be aware of:
Unemployment isn’t likely to dip below 8% in 2010; if it does, the markets will reward the movement handsomely. As long as we don’t rise above current levels we should be out of the woods relative to meaningful market declines below current levels.
The Federal Reserve, already under pressure to raise key interest rates to stop the dollar’s decline is showing very few signs of meaningful change. Increases in rates will strengthen the dollar and so far, stronger dollar momentum has offered declines in the equities markets.
Rising energy costs could threaten corporate earnings by increasing manufacturing and transportation costs and putting pressure on household budgets. Though this could be offset by employment gains, no one other than OPEC likes to see oil prices climb much beyond current levels.
The current presidential administration and the US Congress aren’t likely to be any more productive in 2010 than they were in 2009 and there won’t be a recession to blame for the lack of results. There are too many policy makers from both sides of the aisle who’ve taken positions they’re unwilling to move off of. It’s hard to see a scenario where any joint action of the House and Senate could offer substantive impact on the markets until after the 2010 elections.
Signs are already shaping up for technology, healthcare, commodities, and agriculture to be winners for 2010. Emerging markets and financials have already rebounded with such strength that they’re likely to perform well as a global recovery continues, but ought not to offer the excitement they provided in 2009 – thank goodness!
Real estate inventories aren’t likely to improve dramatically as lenders have large portfolios they’ve yet to put on the market. They’re smart, they’ve learned to keep these assets out of the market in an effort to maintain current price levels and avoid write downs.
Positive game changers could include a surprisingly accommodating congress (not at all likely), a break in the correlation of dollar and equities market moves (it could happen), and deft activity by the Fed to support the dollar while leaving rates low (possible, but tricky).
Negative breaks could come at the hands of Iran or Israel as tensions mount (anyone’s guess). Likewise, potential weakness in China could upset the current flow of export goods from the US to Asian markets (not all that likely).
THE ECONOMY – Oil’s Influence and Domestic Agriculture
Oil Trading over $80 per Barrel
With the price of oil having once again breached the $80 per barrel mark, consumers and businesses are preparing for higher energy prices that are likely to remain for an extended period of time. The good news is that the economic recovery has clearly improved corporate production and earnings, and has begun to take the edge off of unemployment. The bad news is that it will still be months before the labor market feels any meaningful benefit and higher manufacturing output and consumer confidence levels quickly gives rise to higher energy demand; we all know what happens when demand rises – prices rise in direct association.
Though we’re not suggesting we’re likely to see triple digit oil prices soon, it’s a possibility worth noting. Any increase has an immediate impact on household budgets and corporate earnings. With the economy still relatively brittle, increasing prices have an almost immediate impact on demand – the offsetting pressure should be enough to keep prices from rising to uncomfortable levels. Additionally, the speculator and hedge fund activity that pushed oil towards $150 a barrel in 2008 may not be an active threat in the current market.
The airlines, which have enjoyed relative calm in the oil markets for over a year, are gearing up for rising costs by structuring fare increases and maintaining various surcharges once thought unsustainable; they now appear to be a long-term part of the cost of air travel. Trucking and rail transports, many of which never abandoned fuel surcharges, continue to adjust these pricing elements in an attempt to maintain viable business models while still remaining competitive. It’s a delicate balance at a tricky time in the economy.
Domestic Agriculture on the Rise
Also worth noting is a trend we’re likely to see emerge in the foods markets. Though much of the food product we consume is produced domestically, there are still major imports from Central and South America, Europe, China and other parts of Asia. Much of the import activity is based on business models dependant on lower costs of production and transportation of bananas, coffee, chocolate, fish, shellfish, apple juice, cashew nuts, spices, and other imported foods. Those models have now been under pressure for over a year as a decreasing dollar has increased the real price of all import goods and due to the high cost of transporting foods around the world.
In decades past, rising real estate prices, low exchange rates and cheap oil allowed the US to increasingly abandon food production. As exchange rates and transportation costs began to rise in recent years some producers began to gear up for future domestic production, but faced enormous pressure due to still rising real estate values. Today the trend is in full reversal and hundreds of thousands of acres previously thought prime for development are being readied for production.
Already focusing on sustainable crop development, domestic producers and suppliers see opportunities for more local and regional production and consumption patterns. For the first time in generations the number of small farms has shown marked increase. In February 2009 the US Census Bureau reported an increase from 588,000 small farms in the US to over 700,000. The increase, once thought to accommodate increased demand for organic produce, now appears to have more momentum.
The 2010 Census Report shows a slowing in the decrease of US farmlands from 987 million acres in 1990, to 945 million in 2000 to 931 million in 2007. USDA estimates reflect an increase to 933 million for 2009 – the first increase in agricultural land use in decades!
Coupled with the demand for organic goods and sustainable production, the affordability of domestic agricultural output due to exchange rate changes and transportation cost increases may not only offer hope to US farmers, but also represents a potentially meaningful contribution to much needed US GDP gains.
THE TAKEAWAY – A Time for Full Investment
This should be a year for full investment – if you’re on the sidelines you’ve missed out on meaningful gains, but you may have also avoided an unacceptable level of risk.
Those able to take advantage of improved ROTH IRA conversion benefits should consider the merits of tax-free income in the future. The likelihood of future tax rate increases makes this even more attractive.
Healthcare legislation will pass this year and reward very few of us. Energy legislation has little chance of seeing a full vote in either house of congress.
The mid-term elections this fall could offer a shift in the balance of legislative power. In general, the country is more upset right now with the left than the right, but it’s early and that pendulum can swing back and forth with ease before Election Day.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
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