The Larger Issue in the Eurozone is Historically Weak Economic Conditions in Italy and Spain
While the situation in Cyprus has dominated the headlines for the past few weeks, what looks to us as a more significant risk to the Eurozone is the potentially destabilizing pressures that will come from the chronic and severe weakness of the Spanish and Italian economies. The steps taken so far by the ECB have been enough to create stabilization of the peripheral financing markets, but those steps have been insufficient to offset the acute deflationary deleveraging forces in these economies. At this point, economic output relative to potential GDP, unemployment, and production readings in both countries are at their worst levels in 50 years, and growth continues to be well below potential. Given current fiscal and monetary policy plans in place, it doesn't appear that conditions will meaningfully improve in the near future. As we'll describe below, there are few historical precedents for countries having endured this level of economic pain for very long without there being a significant change in policy (or conflict resolution). So the current economic depression in the periphery is unlikely to persist for long without some form of change of conditions, even if it's not clear what will be done to improve domestic conditions (i.e., further defaults, more transfers from the north, increased monetization). And while it remains an outside risk, the consequences of the pronounced and sustained decline in economic output could produce further political and social instability, which is the real long-term threat to the Eurosystem.
Thursday, March 28, 2013
Monday, March 25, 2013
It's The Economy Stupid: Bridgewater & Zervos on Cyprus
Bridgewater Daily Observations
Cyprus: “To Kill a Chicken to Scare a Monkey”
Though the terms of the Cypriot deal have evolved from the beginning of negotiations until now and they will certainly evolve over the next few years, the overriding principle that has been followed and we expect to continue to be followed is that only systemically-important entities will be protected – i.e., that the Eurozone's plan for dealing with its debt crisis is a B1 type of plan. While this principle means long, depressed economic conditions in overly-indebted countries, it also means that the long-term risks of unmanaged debt crises and unacceptable inflations are reduced. It is in our view the best balance of the set of difficult choices.
Though there is considerable worry that not providing more support for Cyprus, especially if it means that bank depositors will be hit and Cyprus will exit the euro, will produce unacceptable results, we believe these concerns are exaggerated and that to allow them to drive policy would lead to bigger costs and problems down the road. As conveyed in the actions taken, the principle that the country having the banking crisis will be responsible for the financial consequences before the EU and ECB will be responsible will also be conveyed.
David Zervos, Jefferies & Co.
Bombs diffused, damage done, still hanging in the bunker
The Sunday evening Cypriot bail-in deal shows that the Germans are willing to go to great lengths to secure a political win. And let’s be clear, what was agreed last night was a HUGE win for Merkel. She silenced SPD critics on the issue of bailing out Russian oligarchs. And she looked tough on EMU countries that find themselves over their financial skis. It might have been better if she could have done this with only a month to go before the election; but hey, there are plenty of little countries in the zone for her to pick on as we head into the fall. What we have learned over the last week is that any small EMU country which does fall into line for the political gain of the north is expendable. These countries are all basically sacrificial pawns in a very complex chess game.
While the details of the deal are still sketchy, the most important part is that it does not hit insured depositors. Rather, the resolution of the losses will follow a traditional path of hitting sub/senior creditors and uninsured depositors. While some may applaud this result as “a win”, it is hard for me to be excited about someone doing the right thing. Are we really supposed to jump up and down and cheer that the Europeans did not randomly redistribute the capital structure of the Cypriot banking system. Pulllease! Just opening the discussion of hitting insured deposits, before wiping out the rest of the capital structure, is insane– I refuse to rejoice because they followed the correct legal structure when dealing with a priority of claimants on the banking system.
As for the market reaction, it has NOT been painful to exit risk and sit on the sidelines for the last week: the Euro remains weak; the Yen remains strong; Treasuries trade within last week’s ranges; and Bunds trade amazingly well. Finally, as I sit here and watch spoos bounce around 1555/1560, there is NOTHING about the price action that makes me want to buy. In fact, it feels quite easy to be in the bunker with nothing on the books. For me, it is more tactical than fundemental. We have been pounding the table for risk-on all year (and certainly alot longer than that). We told clients to ignore the sequester and Italian election results with good results. And heading into this Cyprus mess the spoo was +10 ytd and nky was +20 ytd. Its been a great start. Why play with an extremely hard to value tail situation. If you miss 1 to 2 percent in risk because it all calms down then so be it. You are still dealing with a 20 to 30 percent chance of material set back. I just don't like the odds with the market at the highs.
And furthermore, I think the market is WAY too complacent on this one. Bank runs are the scariest phenomenon in financial markets. We don't have any idea how to model or predict them. And we have had limited success stopping them. I would rather watch the banks open in Cyprus and see how the deal evolves before making any BTD recommendations. Good luck trading.
John Broussard
Assistant State Treasurer
Chief Investment Officer
State of Louisiana
Department of the Treasury
Ph: 225-342-0013
Fx: 225-342-9721
Email: jbroussard@treasusry.state.la.us
Street Address:
445 North Blvd, 7th Floor
Baton Rouge, LA 70802
Mailing Address:
P.O. Box 44154 Capitol Station
Baton Rouge, LA 70804-4154
Physical Location:
One City Plaza, 7th Floor
Corner of North Blvd & 4th Street
Exit 1B I-110 Convention Street,
Turn Left to get to North Blvd,
Turn Right on North Blvd
Friday, March 22, 2013
FW: Important Notice re: Bank Holiday Extension in Cyprus
In the 21st Century, how does one exist, in a supposedly developed nation that has a stock exchange, without access to banking? Without access to cash?
John Broussard
Assistant State Treasurer
Chief Investment Officer
State of Louisiana
Department of the Treasury
Ph: 225-342-0013
From: treasury@bnymellon.com
Sent: Friday, March 22, 2013 8:53 AM
Subject: Important Notice re: Bank Holiday Extension in Cyprus
Importance: High
Important Notice |
|
The information contained in this e-mail, and any attachment, is confidential and is intended solely for the use of the intended recipient. Access, copying or re-use of the e-mail or any attachment, or any information contained therein, by any other person is not authorized. If you are not the intended recipient please return the e-mail to the sender and delete it from your computer. Although we attempt to sweep e-mail and attachments for viruses, we do not guarantee that either are virus-free and accept no liability for any damage sustained as a result of viruses.
Please refer to http://disclaimer.bnymellon.com/eu.htm for certain disclosures relating to European legal entities.
FW: Bridgewater Daily Observations on Thursday's economic news
The longer I have worked in financial economics, the more I have become convinced of three things:
1. PIMCO has had and still has the greatest collection of intellects in fixed income (bonds).
2. Don't bet against Goldman Sachs. If you're on the other side of a trade with them you're in trouble.
3. Bridgewater's cult like corporate culture of meritocracy of ideas, where even the most junior of employees are encouraged to be assertive and discussions about disagreements and mistakes are considered an intentional part of the company's culture, produce some of the best ideas in the investment business.
Speed Reading Version
1. "Today's collection of timely statistics for March suggests that US growth continues to be moderately strong..."
2. "The strength in growth has been broad-based..."
3. "...production has accelerated and both the Philly Fed and Markit PMI surveys pointed to continued improvement."
4. "...suggesting the underlying strength of the expansion is even stronger than what we are seeing..."
5. "Initial Claims in Line with Ongoing Gradual Payroll Gains."
6. "Household Demand Growth Remains Moderate Despite Fiscal Drag."
7. "...collection of stats is consistent with continued, moderately strong growth of about
3% in the US."
Bridgewater Daily Observations -
Today's collection of timely statistics for March suggests that US growth continues to be moderately
strong despite the meaningful short-term impact of fiscal policy. The strength in growth has been
broad-based and the figures released today gave another timely indication that this is continuing:
production has accelerated and both the Philly Fed and Markit PMI surveys pointed to continued
improvement. Employment growth has picked up and the initial claims figures through early March
suggest that the employment growth seen in recent months may continue. And while consumer
confidence remains one of the weakest areas of the economy (and ticked down this month), it has
been steadily improving, and household demand continues to be healthy. This growth has come at a
time when the US economy is experiencing the peak impact official tightening; which is producing roughly
a 1 % drag on growth (suggesting the underlying strength of the expansion is even stronger
than what we are seeing). As we noted in Wednesday's Observations, the current pace of growth
has been sufficient to gradually reduce the excess capacity and normalize conditions in the US
economy, which, if continued, may put pressure on the Fed to reduce the current pace of easing; and
the stats through March suggest little adjustment to that picture.
Thursday's March stat releases offered a very up-to-date picture of what's going on in the US
economy. Even though the combination of the Philly Fed survey and initial claims do not directly
include housing and demand, they have historically provided a pretty good and timely read on the US
economy.
Since the start of the year, most economic stats across the US economy have been
consistent with moderate growth. The timeliest stats through March suggest that this pace of growth
is continuing despite the headwind from the fiscal tightening. Confidence surveys have been a bit
weaker than both actual measures of activity and surveys of activity. But this makes sense given that
things that consumers care about, like employment and house prices remain at low levels despite
some recovery.
A significant number of these stat releases have not only been relatively strong but have also come in
better than consensus expectations. Since the start of the year, our index of economic surprises, a
cumulative measure of economic statistics relative to consensus, has risen steadily.
Philly Fed and Markit PMI Consistent With Continued Expansion in Production. The two timely data
points on production growth that we received today - the Philly Fed and Markit
PMI surveys - both point toward a continued expansion in US production. After lagging behind
economic growth for much of 2012, production growth has accelerated for several months and is now
expanding in line with the rest of the economy. This expansion in production is taking place in the
context of an improvement in both domestic and external demand ... Triangulating across several
measures of production growth, today's healthy Philly Fed and Markit PMI surveys for March are also
in line with the recent improvements in the national ISM manufacturing survey for February as well as
February industrial production growth.
Initial Claims in Line with Ongoing Gradual Payroll Gains. Initial jobless claims have been falling at
a steady pace over the past several weeks and continue to recover
from the highs of the financial crisis. Claims are now close to pre-crisis lows as a percentage of the
labor force.
Household Demand Growth Remains Moderate Despite Fiscal Drag. The broader pattern of
consumer confidence improving off low levels that's taken place over the past
couple of years remains intact despite the recent down tick in the weekly Bloomberg Consumer
Sentiment measure. It makes sense that consumer confidence has not been improving as much as
other recent growth stats because consumer confidence tends to be a function of both the level of
conditions (whether things are good or bad) as well as changes in conditions (whether things are
improving or deteriorating). While conditions have been gradually improving lately, the level of some
conditions that matter to consumers, such as employment and housing, remain well below pre-crisis
peaks.
Real household spending growth is running at roughly 2.5% through February, despite the large fiscal
drag. If the impact of the tax increases were removed, household spending growth would likely be
stronger, by our estimates probably over 3%. Once the impact of the fiscal tightening fades later this
year, the US economy may grow at an even stronger pace.
Today's very timely collection of stats is consistent with continued, moderately strong growth of about
3% in the US. This is, of course, taking place despite the headwind caused by the fiscal tightening
that kicked in at the start of the year, and in the absence of a fiscal tightening, US growth would likely
be even stronger. If current conditions continue, as the impact of the fiscal tightening fades later on
this year the US economy looks poised to grow at a reasonably strong pace.
1. PIMCO has had and still has the greatest collection of intellects in fixed income (bonds).
2. Don't bet against Goldman Sachs. If you're on the other side of a trade with them you're in trouble.
3. Bridgewater's cult like corporate culture of meritocracy of ideas, where even the most junior of employees are encouraged to be assertive and discussions about disagreements and mistakes are considered an intentional part of the company's culture, produce some of the best ideas in the investment business.
Speed Reading Version
1. "Today's collection of timely statistics for March suggests that US growth continues to be moderately strong..."
2. "The strength in growth has been broad-based..."
3. "...production has accelerated and both the Philly Fed and Markit PMI surveys pointed to continued improvement."
4. "...suggesting the underlying strength of the expansion is even stronger than what we are seeing..."
5. "Initial Claims in Line with Ongoing Gradual Payroll Gains."
6. "Household Demand Growth Remains Moderate Despite Fiscal Drag."
7. "...collection of stats is consistent with continued, moderately strong growth of about
3% in the US."
Bridgewater Daily Observations -
Today's collection of timely statistics for March suggests that US growth continues to be moderately
strong despite the meaningful short-term impact of fiscal policy. The strength in growth has been
broad-based and the figures released today gave another timely indication that this is continuing:
production has accelerated and both the Philly Fed and Markit PMI surveys pointed to continued
improvement. Employment growth has picked up and the initial claims figures through early March
suggest that the employment growth seen in recent months may continue. And while consumer
confidence remains one of the weakest areas of the economy (and ticked down this month), it has
been steadily improving, and household demand continues to be healthy. This growth has come at a
time when the US economy is experiencing the peak impact official tightening; which is producing roughly
a 1 % drag on growth (suggesting the underlying strength of the expansion is even stronger
than what we are seeing). As we noted in Wednesday's Observations, the current pace of growth
has been sufficient to gradually reduce the excess capacity and normalize conditions in the US
economy, which, if continued, may put pressure on the Fed to reduce the current pace of easing; and
the stats through March suggest little adjustment to that picture.
Thursday's March stat releases offered a very up-to-date picture of what's going on in the US
economy. Even though the combination of the Philly Fed survey and initial claims do not directly
include housing and demand, they have historically provided a pretty good and timely read on the US
economy.
Since the start of the year, most economic stats across the US economy have been
consistent with moderate growth. The timeliest stats through March suggest that this pace of growth
is continuing despite the headwind from the fiscal tightening. Confidence surveys have been a bit
weaker than both actual measures of activity and surveys of activity. But this makes sense given that
things that consumers care about, like employment and house prices remain at low levels despite
some recovery.
A significant number of these stat releases have not only been relatively strong but have also come in
better than consensus expectations. Since the start of the year, our index of economic surprises, a
cumulative measure of economic statistics relative to consensus, has risen steadily.
Philly Fed and Markit PMI Consistent With Continued Expansion in Production. The two timely data
points on production growth that we received today - the Philly Fed and Markit
PMI surveys - both point toward a continued expansion in US production. After lagging behind
economic growth for much of 2012, production growth has accelerated for several months and is now
expanding in line with the rest of the economy. This expansion in production is taking place in the
context of an improvement in both domestic and external demand ... Triangulating across several
measures of production growth, today's healthy Philly Fed and Markit PMI surveys for March are also
in line with the recent improvements in the national ISM manufacturing survey for February as well as
February industrial production growth.
Initial Claims in Line with Ongoing Gradual Payroll Gains. Initial jobless claims have been falling at
a steady pace over the past several weeks and continue to recover
from the highs of the financial crisis. Claims are now close to pre-crisis lows as a percentage of the
labor force.
Household Demand Growth Remains Moderate Despite Fiscal Drag. The broader pattern of
consumer confidence improving off low levels that's taken place over the past
couple of years remains intact despite the recent down tick in the weekly Bloomberg Consumer
Sentiment measure. It makes sense that consumer confidence has not been improving as much as
other recent growth stats because consumer confidence tends to be a function of both the level of
conditions (whether things are good or bad) as well as changes in conditions (whether things are
improving or deteriorating). While conditions have been gradually improving lately, the level of some
conditions that matter to consumers, such as employment and housing, remain well below pre-crisis
peaks.
Real household spending growth is running at roughly 2.5% through February, despite the large fiscal
drag. If the impact of the tax increases were removed, household spending growth would likely be
stronger, by our estimates probably over 3%. Once the impact of the fiscal tightening fades later this
year, the US economy may grow at an even stronger pace.
Today's very timely collection of stats is consistent with continued, moderately strong growth of about
3% in the US. This is, of course, taking place despite the headwind caused by the fiscal tightening
that kicked in at the start of the year, and in the absence of a fiscal tightening, US growth would likely
be even stronger. If current conditions continue, as the impact of the fiscal tightening fades later on
this year the US economy looks poised to grow at a reasonably strong pace.
Thursday, March 21, 2013
It's The Economy Stupid: Jobless Claims
Economic Event | Period | Economic Survey | Actual Reported | Original Prior | Revised Prior |
Initial Jobless Claims | MAR 16 | 340K | 336K | 332K | 334K |
Continuing Claims | MAR 9 | 3050K | 3053K | 3024K | 3048K |
On first glance, it's a yawner. Initial Jobless Claims were 336K, up 2K from the prior periods revised number of 334K. Continuing Claims were 3053K, up 5K from the prior periods revised number of 3038K. So, the numbers just taken alone are not that impressive a change. But there is a larger picture that is showing consistent, if not dramatic, upward changes.
For instance, these numbers are a significant improvement from the 2009 to 2012 jobless claims numbers. The good thing in all these kinds of employment numbers is that the average work week keeps building, to the point where we are back up to the general levels of the hours worked prior to 2008. That's a good fundamental thing because there comes a point where employers have to stop laying workers off and have to start hiring more workers.
ありがとう
Arigatō!
Wednesday, March 20, 2013
It's The Economy Stupid: Ultra-low Interest Rates
We have had ultra-low interest rates for 4 years. Goldman Sachs predicts that we will have ultra-low interest rates for another 3 years, till 2016. I hope they are wrong, but I sure wouldn’t bet against Goldman Sachs. People have turned large sums of money into small sums of money betting against Goldman.
7 years of ultra-low interest rates.
We are Japan.
John Broussard
Assistant State Treasurer
Chief Investment Officer
State of Louisiana
Department of the Treasury
Ph: 225-342-0013
It's The Economy Stupid: Fed Rate Decision
The Federal Reserve will announce its decision on interest rates early this afternoon. They do this in the face of a stubborn U.S. economic recovery and threatening headwinds from Europe.
I am going to go out on the limb and predict that the Fed will not change their interest rate target and they will continue to disadvantage savers and retirees in the U.S in favor of financial institutions and borrowers.
Friday, March 15, 2013
It's The Economy Stupid: CPI/Inflation...the sky is not falling
Economic Event | Period | Economic Survey | Actual Reported | Original Prior | Revised Prior |
Consumer Price Index MoM | FEB | 0.5% | 0.7% | 0.0% | |
CPI Ex Food & Energy MoM | FEB | 0.2% | 0.2% | 0.3% | |
Consumer Price Index YoY | FEB | 1.9% | 2.0% | 1.6% | |
CPI Ex Food & Energy YoY | FEB | 2.0% | 2.0% | 1.9% | |
Consumer Price Index NSA | FEB | 232.482 | 232.512 | 232.108 | |
CPI Core Index SA | FEB | 232.102 | 232.166 | 230.280 | |
CPI (a proxy for inflation) is at 2.0% annual. That’s about it.
What? I need to say more?
The Bloomberg survey of economists pegged the CPI Ex Food & Energy YoY number at 2.0%. Yay for them!
I guess you could say that looking at the February CPI monthly number that the cost of living in the U.S. rose more than projected by economists due to the biggest jump in gasoline prices in more than three years. However, one must point out that gas prices have retreated this month signaling that inflation will hover around this level.
So far, no bigee.
Wednesday, March 13, 2013
It's The Economy Stupid: Import Prices, Retail Sales
Economic Event | Period | Economic Survey | Actual Reported | Original Prior | Revised Prior |
Import Price Index MoM | FEB | 0.6% | 1.1% | 0.6% | |
Import Price Index YoY | FEB | -0.7% | -0.3% | -1.3% | |
Advance Retail Sales | FEB | 0.5% | 1.1% | 0.1% | 0.1% |
Retail Sales Less Autos | FEB | 0.5% | 1.0% | 0.2% | 0.4% |
Retail Sales Ex Auto & Gas | FEB | 0.2% | 0.4% | 0.2% | 0.3% |
Retail Sales "Control Group" | FEB | 0.2% | 0.4% | 0.1% | 0.3% |
More good data. All Import Price and Retail Sales data stronger then the Bloomberg survey of economists. And the prior period numbers were revised upwards and the current period numbers were stronger than the prior period’s revised numbers.
It appears that the consumer has withstood the impact of the increase of the payroll tax hike.
This is good news for the economy.
Monday, March 11, 2013
It's The Economy StupidPreparing for Day When Rates Rise
There is an excellent article in this morning’s Wall Street Journal regarding the eventual rise in interest rates. The long held rule of thumb is that every 100 basis point rise in interest rates will result in an 8% decline in the price of long term Treasury Notes and Bonds.
“…in 1994, when Fed rate increases triggered a wave of selling that left 30-year bond prices down almost 24% in a year.”
John Broussard
Assistant State Treasurer
Chief Investment Officer
State of Louisiana
Department of the Treasury
Ph: 225-342-0013
--------------------------------------------------------------------------------
The Wall Street Journal.
Monday, March 11, 2013
Money & Investing Section
Page C1
Preparing for Day When Rates Rise
By MATT WIRZ
"Don't fight the Fed" has been a market mantra for the past four years. But some bond investors are starting to lace on their gloves.
Figuring that the Federal Reserve won't be able to keep a lid on interest rates forever, large money managers such as BlackRock Inc., BLK -0.08%TCW Group Inc. and Pacific Investment Management Co. are getting ready for the day when rates take their first turn higher.
It isn't coming anytime soon, these investors say. But when it does, they worry, the ascent will be swift and steep.
Rather than trying to guess exactly when that moment will happen, they are pre-emptively making investments that will pay off when it does. The moves include buying debt with floating interest rates that rise as overall rates climb, as well as interest-rate swaps and inflation-protected bonds that will also increase in value.
Other investors are hedging against potential bond losses by making bearish bets on U.S. Treasury bonds through derivatives that gain when rates rise. As rates rise, prices of bonds fall. Because rates are so low now, many investors are worried that even a small rise could be particularly painful for anyone holding Treasurys.
"We don't subscribe to the view that once the fire starts, we'll be able to outrun everybody through the door," said Stephen Kane, managing director for U.S. fixed income at TCW in Los Angeles. "Rates could be up 50 basis points before your traders can get all the sell orders through."
Wagering on rising rates has mostly been a losing bet of late, thanks to the bond-buying spree the Federal Reserve began in late 2008. That has kept interest rates at rock-bottom levels. Ten-year Treasury yields, which hovered above 4% five years ago, have remained below 2.5% for the past 19 months.
But portents of painful losses came in January, when investors began worrying that the Fed might end its bond buying sooner than previously expected. Many investors rushed out of the government bonds, causing long-term Treasurys to lose 3.1% of their value in the first week of the year, wiping out their entire annual yield of 3% in a matter of days.
Upbeat news about employment Friday has helped stoke expectations that the economy is continuing to recover.
The fear is that as expectations of rate increases mount, short-term investors will bolt for the exits as prices drop, causing wild price swings and amplifying losses. The last such exodus took place in 1994, when Fed rate increases triggered a wave of selling that left 30-year bond prices down almost 24% in a year.
At BlackRock, Rick Rieder, co-head of fixed income for the Americas, has placed bearish bets on bond-futures contracts as a hedge against a rise in interest rates. As 2013 began, Mr. Rieder had sold bond-futures contracts valued at about $1.5 billion to protect his bond fund, which had $3.7 billion of assets at the time.
The hedge paid off when Treasurys sold off in January, when the Barclays BARC.LN -1.32%Aggregate Bond Index, a widely used benchmark index for bond funds, fell 0.7%. The BlackRock Strategic Income Opportunities Fund gained 0.81%, according to Morningstar. The decision to hedge, and new investments, helped the fund's assets grow to $4.6 billion as of March 8.
"For 30 years, interest rates had declined and fixed income was the safe part of the portfolio," Mr. Rieder said. "Now fixed income is becoming something you have to be more active in."
To be sure, the end of the Fed's second round of quantitative easing in 2011 also pushed investors to bet interest rates would increase. The maneuver sometimes is called the inflation trade, because central banks raise rates to combat inflation. Bond bears suffered later in 2011 when turmoil in Europe and a third round of easing pushed rates on 10-year Treasurys down to less than 2% from 3.5%.
"I think it's way too early to put on an inflation trade," said Gary Pollack, head of fixed-income trading at Deutsche Asset & Wealth Management, a unit of Deutsche Bank DBK.XE -0.84%AG.
And one popular way to protect against inflation, and rising rates—buying Treasury Inflation Protected Securities, or TIPS—is costing investors money. Investors have snapped up TIPS at government auctions, driving yields so low they have turned negative.
The principal on TIPS rises in line with the U.S. government's consumer price index. But so far, inflation hasn't picked up, leaving investors paying up for protection they haven't needed. In addition, shorting Treasurys can be costly when rates drop. When yields on Treasurys began falling in February, Mr. Rieder's fund suffered, lagging behind the Barclays Aggregate by half a percentage point that month, according to Morningstar. In late February, Fed Chairman Ben Bernanke reiterated his commitment to buying bonds, sending Treasury yields even lower.
While few bond investors have hedged against rising rates as aggressively as Mr. Rieder, some are starting to tackle interest-rate risk now. As a hedge, some investors are reducing duration, or the susceptibility of their holdings to a rise in rates. As interest rates climb, the value of existing bonds declines, and bonds with longer maturities drop the most.
The duration of TCW's MetWest Total Return Bond Fund is 4.2 years, a year less than that of the bonds in the Barclays Aggregate, Mr. Kane said.
At Pimco, a unit of Allianz SA, ALV.XE -0.76%Managing Director Daniel Ivascyn said he has cut the duration of his $22 billion Pimco Income fund to 3.7 years at the end of January from 4.4 years at the start of 2012.
Individual investors who scrambled into bonds after the financial crisis shook their faith in stocks are also showing signs of nerves.
The four-week average of net inflows to mutual funds that buy floating-rate loans hit a record high of $1.2 billion in the last week of February, according to Thomson Reuters Corp.'s TRI.T -0.03%Lipper unit.
"I think people understand that higher rates are coming and that this time around [the rise] could be different," said Shawn McClain, a managing regional director at Natixis Global Asset Management who sells investment products to financial advisers. "We don't have a lot of cushion to absorb volatility if rates go up."
Friday, March 8, 2013
It's The Economy Stupid: What Goes Up Must Come Down
Is the market overheated? Maybe. Will the market correct? Yes, of course. They always do. But if you compare the underlying metrics of the companies in the S&P 500 today to those companies in 2007 when we set the previous record high in the market you can only come to one conclusion. Those companies are in far, far better financial health today than they were in 2007. And conversely, the upward move in the market today has stronger underpinnings than in 2007. Still, I do expect a 10% correction at some point. Heck, a 20% correction is not completely out of the question. But when? Now that’s the trillion dollar question!
S&P 500 Index | |||
Underlying Company Metrics | |||
Field | Current | CY 2007 | |
Price/Earnings, Dil. Cont Ops | 15.21 | 17.35 | Better |
Price/Earnings, Positive | 14.95 | 16.48 | Better |
Price/Cash Flow | 9.19 | 15.7 | Better |
Price/Sales | 1.41 | 1.54 | Better |
Price/Book Value | 2.3 | 2.77 | Better |
EV/Sales | 1.75 | 2.53 | Better |
EV/EBITDA | 9.36 | 10.96 | Better |
Dividend Yield | 2.13 | 2.01 | Better |
Free Cash Flow Yield | 6.15 | 2.26 | Better |
Gross Margin | 45.12 | 44.19 | Better |
Operating Margin | 19.84 | 19.18 | Better |
Profit Margin | 13.32 | 12.92 | Better |
Return on Equity | 25.58 | 21.65 | Better |
Field | Current | CY 2007 | |
Assets per Share | |||
Cash & Equivalents | 328.84 | 193.18 | Better |
Current Assets | 453.4 | 353.02 | Better |
Total Debt | 715.72 | 1208.27 | Better |
Total Liabilities | 2451 | 2826.88 | Better |
Retained Earnings | 275.07 | 198.98 | Better |
Book Value | 670.01 | 530.47 | Better |
Tangible Book Value | 319.56 | 235.08 | Better |
Total Equity | 702.82 | 556.53 | Better |
Subscribe to:
Posts (Atom)