Columbia Management
Commentary
Geopolitical Risk — The Fear and Reality for Financial Markets
Given the threat of geopolitical risk, it is reasonable to question why global financial markets remain so buoyant. The answer may partly be the constant nature of geopolitical risk. Consider the French proverb “plus ça change, plus c'est la même chose” (the more things change, the more they stay the same).
Commentary
Data Dependence, Broadly Defined - Implications of Last Week’s Fed Meeting
At last week’s meeting, the FOMC made a widely-anticipated but nonetheless important change to the statement, dropping a commitment to be “patient” and thereby creating the option to hike rates at any meeting after April. In the end, this proved to be a sideshow to the more interesting changes in the Fed’s Summary of Economic Projections (SEP)—the forecasts officials’ provide at every other FOMC meeting.
Commentary
Muni market – Favorable environment remains in place
Municipal bond market volatility in early '15 may have investors wondering if they should sell today and lock in their gains from 2014. After 13 consecutive months of positive returns, the muni market turned negative in February and the first two weeks of March as interest rates rose. After such a long and strong run, it is not surprising that the muni market has taken a step backward. That said, we do not see reason to panic and continue to believe that the muni market remains on sound footing due to supportive market fundamentals and technicals, as well as our entrenched high tax environment
Commentary
Q&A with Jeff Knight: What’s in store for 2015?
I believe we are still going through a process that is flattering to financial market returns. But after six years and a tripling of the stock market, recognize that we're getting late in the game. Does Europe hang together? Do events in the Ukraine or Greece disrupt the economic recovery in Europe? Is the Fed’s tightening appropriate, or does it represent a threat to financial markets? Will those who come out on the short end of oil’s dramatic repricing emerge as a threat to capital markets either through default and bankruptcies, or worse through geopolitical tensions?
Commentary
The Pursuit of Pricing Power
Recent oil and commodity price declines have raised concerns about global deflation and price stability. While the circumstances around oil’s precipitous decline are unique, many industries have built up capacity in recent years to serve a level of global growth that is not likely to reappear in the intermediate future.
Commentary
A Very, Very, Very, Very Black Swan?
Nassim Taleb’s book "The Black Swan" effectively demonstrates that seemingly highly improbable events are much more common than expected, often with significant consequences. In fact, experts are often blind to these occurrences because past data is not necessarily a good predictor of the future. Most investors are aware a black swan event hit the Swiss franc earlier this month.
Commentary
Investment themes for a ?Groundhog Day? world
Wall Street strategists and ?financial media pundits have spent much of the last several years foreshadowing a dramatically changing investment environment and telling people what to do about it.
Commentary
Digging Deeper for Market Valuations
Nobody buys a house without looking inside. And nobody should make investment decisions without doing their due diligence on the underlying fundamentals. But that is exactly what happens in an investment world increasingly driven by high-level asset allocation and utilization of passive, index-based products or strategies. Pundits look at aggregate index data and declare one country cheap (or some other action-inducing characteristic) vs. another. Maybe they are right, but maybe they are missing something too.
Commentary
The U.S. Labor Market - Show Me the Money
The U.S. labor market data has improved in the last six months now that many measures have reached cyclical highs. For the Federal Reserve though, this is not enough. They want to see this data feed through to a broader rise in incomes and wages, and ultimately spending. This will be necessary to bend the economic trajectory toward sustainably higher growth.
Commentary
Ramifications of Republican Romp
In our recent midterm election preview, we said that Republicans were likely to gain control of the Senate in a close contest; we also laid out some possible implications of such a win. As it turns out, we did not give the Republican momentum enough credit, as election night turned out to be a clear victory for the GOP across the board.
Commentary
QE Worked, But Not As Advertised
Last week the Federal Reserve announced the end of its bond-buying program, which has been running with only brief interruptions for the last six years. Besides its ultimate size and duration, the striking thing about the Feds experiment with quantitative easing (QE) is that there is still not a firm consensus on exactly how it worked. Academic economists will be busy with this question for years. But from a bond investors point of view, theres enough evidence to make a few tentative conclusions.
Commentary
What to Expect from U.S. Midterm Elections
Next months midterm election battle for control of the U.S. Senate is going to be a dramatically close call. Republicans can gain control of the Senate if they win six new seats. Incumbent Democrats are defending 21 seats, and seven of those are in broadly red states won by Mitt Romney in 2012.
Commentary
To Infinity and Beyond!
To infinity and beyond! is the catchphrase of Buzz Lightyear, the popular character from Disneys Toy Story franchise. The phrase is both whimsical and paradoxical. The character of Buzz was inspired by Apollo 11 astronaut Buzz Aldrin; but the phrase may be a tribute to Stanley Kubricks 2001: A Space Odyssey, in which the concept of Jupiter and beyond the infinite was introduced.
Commentary
Global asset allocation outlook
Recent market performance, particularly in September, has been negative across a widespread array of asset classes as we have seen the U.S. dollar exchange rate rise with increasing intensity in recent months. The worst returns, not coincidentally, were delivered by the very assets that have shown historically high sensitivity to dollar strength. This disruption to currency stability in general, and the particular importance of a rise in exchange value for the worlds reserve currency, represents an important change in capital market conditions.
Commentary
How Plan Sponsors Can Prepare for the Coming Changes to Mortality Tables
The name may sound like something from Star Wars, but RP-2014 is actually the draft mortality tables released by the Society of Actuaries (SOA) earlier this year. These revised tables highlight longer life expectancies and faster increases in mortality improvements, affirming the well-established belief that individuals are living longer. The draft is currently under review by various stakeholders with the expectation that RP-2014 will be formalized this year.
Commentary
Room to Run
The U.S. economy passed a milestone of sorts in August, in that the current business cycle has now surpassed the last one in length. The prior business cycle started in 2001 and continued until the December 2007 peak, lasting 6.8 years. This is longer than the post-war average of 5.6 years, but shorter than the business cycles in the 1980s and 1990s which lasted 9 to 10 years.
Commentary
U.S. rates The Draghi floor
In typical fashion, last weeks European Central Bank (ECB) announcements found a way to bury the lede. The deposit rate cut to -20 basis points from -10 basis points was characterized as a technical adjustment, and the asset purchase program, while important, lacked a specific quantitative targetforcing investors to infer a rough figure from Mario Draghis comments in the press conference.
Commentary
Yellen at Jackson Hole
I must have heard it on the radio recently, because Janet Yellens speech at this years Jackson Hole conference brought to mind lyrics from one of my favorite Beatles songs.
Commentary
Detroit bankruptcy — One year later
In the summer of 2013, Detroit filed the largest municipal bankruptcy in history. One year on, how has the filing played out and what insights can be gleaned?
Commentary
Flexible Income Strategies - Avoiding Side Effects from the Fed’s Medicine
The U.S. economy went into recession in 2008, and it looked serious. As our fiscal deficit piled up, the political appetite for high government spending waned, leaving monetary policy as the primary available weapon to prevent recession from becoming depression. By mid-2011, Treasury bond yields had reached all-time lows. This strong monetary medicine now seems to be working. Many economic statistics have rebounded to peak levels, while some forward-looking ones, like major stock market indices, have hit new highs.
Commentary
Constraints of Convention - Does a Portfolio Design Have to Be Static?
There was a charming story from the world of youth sports featured in Malcolm Gladwells book "David and Goliath: Underdogs, Misfits and the Art of Battling Giants."
Commentary
Turmoil in Iraq — Implications for the Oil Markets
Oil prices and energy security have once again come back into the spotlight as the Islamic State of Iraq and the Levant, the group known as ISIS, has taken control over parts of northern and western Iraq. To date, the impact on oil prices has been fairly muted, but any escalation of violence could pose a serious threat to the stability of global oil markets and has a wide range of implications for future OPEC crude supply growth.
Commentary
U.S. Rates Data Dependence
The June FOMC meeting contained a little bit for everyone and interest rates reacted only marginally after the announcements. But looking across asset marketsincluding nominal and inflation-linked bonds, equities, commodities and the dollarits clear that investors interpreted the news as another dovish surprise from the Fed. We are not sure that is the correct interpretation, and the reason comes down to the issue of data dependence.
Commentary
Finding Opportunity in Chinese Reforms
I spent last week in China, meeting with corporate management teams, government officials and investors in the Chinese markets. One of my motivations for making the trip was to get a better sense of the speed and scope of government reforms. It was a fascinating week, but I cant say that I came away with sweeping, definitive clarity.
Commentary
An Intriguing Six Point Three
The latest jobs report may look pretty bland on the surface, but I can assure you that it will generate plenty of intrigue among close observers of the Fed. After falling sharply in April, the unemployment rate held at 6.3%, in contrast to expectations that it would partially reverse course.
Commentary
Interpreting the bond rally from a multi-asset perspective
If theres one thing investors agreed upon at the beginning of this year, it was that bond yields were heading higher. Over the past few weeks, I have read any number of research reports attempting to understand the reasons for this unexpected rally. Several plausible explanations have been offered, including the growing probability of a policy rate cut by the European Central Bank (ECB).
Commentary
Scarce Growth - Can the Tortoises Continue to Outpace the Hares?
For some time we have suggested that in a world slowly recovering from the 2008 financial crisis, aggregate global growth would be sub-par and that investors would benefit from seeking scarce growth, so long as that growth did not become wildly overvalued. Recent market action has tested that stance severely.
Commentary
Has Dividend Investing Lost its Luster?
With interest rates rising in 2013 and after a number of years of outperformance from high-yield dividend paying equities, investors want to know if dividend investing remains an attractive strategy. With corporate balance sheets looking healthy and dividend payout ratios remaining low by historical standards, we believe dividend growth will continue to be strong. In our view, high-yielding equities will continue to provide strong total returns especially relative to fixed income alternatives.
Commentary
Does a Perfect Policy Portfolio Exist?
The idea of a policy portfolio, the core strategic asset class weightings for an investment portfolio, has evolved significantly during the course of my career as an asset allocation specialist. From the humble beginnings of standard balanced investing (the good old 60/40), investors have searched for the best neutral asset allocation to serve their goals over the long term.
Commentary
A Tepid Cyclical Lift
The S&P 500 Index should grow earnings by about 7% this year, while consensus estimates for the U.S. economy are for 2.5% real growth. One reason for the gap between the two numbers is that the constituent companies of the broad market have a more cyclical tilt than the economy itself, and could be expected to expand faster in a recovery. Fair enough. But are the cyclical drivers like investment and discretionary spending on track to deliver that cyclical boost to earnings? The answer is probably yes, but only if expectations are tempered.
Commentary
What to Make of the Rebound in Emerging Market Equities
A month ago, much of the news from the emerging markets (EM) was negative. We saw headlines highlighting the liquidity headwinds created by U.S. QE tapering, Russia?s aggressive opportunism in the Ukraine, and China?s imminent hard landing.
Commentary
Take an Active Approach to Selecting Your Active Manager
For some time, we have written about the challenges active equity managers face from a market with unusually high cross-correlations. We have also stated our belief that the correlation pendulum would swing back to more normal levels (at least) as the aftershocks of the 2008 financial crisis abated, with a corresponding benefit to active managers. That swing is well under way and a growing number of commentators have begun to echo our observation.
Commentary
Predatory Trading ? Just How Big an Issue is High-Speed Trading?
High-frequency trading (HFT) is a topic institutional investors and traders have been battling for years. A new book titled Flash Boys by author Michael Lewis of Moneyball fame, investigations out of U.S. regulators and a 60 Minutes spot on a recently developed exchange, IEX, brought this topic from Wall Street to Main Street. In this article, we?ll take a walk around the issue, educate our investors, and hopefully, quell any concerns.
Commentary
Q2 fixed income outlook ? Hitting for the cycle
By the middle of this year, the economic expansion in the U.S. will officially turn five years old. By comparison, the average of all business cycle expansions tracked by the National Bureau of Economic Research dating back to the mid-1800s is about three and half years. But like many five year olds, this cycle hardly seems mature. In particular, we have taken notice of three key elements of the business cycle that have distinct implications for bond investing today.
Commentary
What Investors Should Know About Fed Forward Guidance
Last week, at Janet Yellen?s first meeting as Fed Chair, the FOMC revised its forward guidance for the funds rate, dropping its reference to 6.5% unemployment and instead stressing the committee?s qualitative assessment of the economy. The change was a symbolically important step, but did not alter the broader outlook for policy rates, in our view.
Commentary
Beware of Earnings Gimmicks
Since the global financial crisis, economic recovery worldwide has been slow. Over the last three years, annual gross domestic product (GDP) growth in the U.S. was limited to 2.1%, significantly below its long-term average of 3.3%. In this low growth environment, for a majority of companies, churning out high earnings-per-share (EPS) growth rates, either through top-line growth or margin expansion, has become increasingly more difficult.
Commentary
Asset Allocation: The Conundrum of 2014
In 2013, both the S&P 500 Index and the yield on 10-year Treasury bonds finished the year at their highest levels of the calendar year. So ended a year when equity markets dominated the return landscape, while bonds and numerous other assets struggled. The environment apparently changed, though, with the turning of the calendar to 2014. In the New Year, bonds have performed quite well, with yields on 10-year Treasuries, as an example, falling from 3.03% to 2.67% so far this year. Stocks meanwhile, have been volatile, yet stand close to unchanged on a year to date basis.
Commentary
Gut Check: The Outlook on Fixed Income
With nearly two months of the year behind us, we thought now would be a good time to see how the fixed-income market is faring in 2014 and assess our outlook. We asked our investment team five questions to help capture our view on the market today.
Commentary
Gaps, Not Growth
Monetary policy is primarily about "gaps" not growth: the Fed is trying to reduce spare capacity in the economy, not bring about a rapid expansion per se.
Commentary
Puerto Rico's Double-Downgrade
On February 4, Standard & Poors lowered its long-term credit rating on the Commonwealth of Puerto Ricos (PR) general obligation (GO) debt making it the first rating agency to downgrade the Commonwealth to below investment-grade levels. Just three days later, Moodys cut its GO rating by two notches to Ba2; ratings that are capped by or linked to the Commonwealths GO rating were also downgraded two notches, with the exception of the Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds.
Commentary
The Importance of Taking a Long-Term Perspective
For asset allocation decisions, we find great value in maintaining a long-term outlook for major asset classes. Twice a year, in fact, we conduct an extensive update of our five-year return forecasts for several asset classes. The purpose of this exercise is two-fold. First, taking a longer term perspective helps us to set strategic asset allocations and design portfolios for diverse investment goals.
Commentary
Not All Emerging Markets Are Created Equal
Emerging markets (EM) is a term given to a universe of countries that is extremely diverse across a wide number of variables including geography, levels of industrialization and political systems. Despite this diversity, emerging markets are often discussed as if they are a homogenous block, particularly in the context of broad asset allocation decision making. We think thats a mistake. Instead, we see opportunity from applying a more bottom-up approach to country, industry and security selection amidst growing dispersion in outcomes across the emerging world.
Commentary
Rebalancing the U.S. Economy
Its happening again-a fourth quarter bounce in economic activity that extends into the first quarter and supports the view that growth really, finally, has started to accelerate. Such bounces have disappointed so far, although it does appear to be more than just hope this time.
Commentary
When the QE Tide Recedes, Focus on What is Revealed
While there is fierce debate on the ultimate effectiveness of monetary stimulus surging from the central banks, one cannot dispute the boost that it has given to asset prices. While we may be seeing some "green shoots" of overall growth pick-up in the developed world, the post-crisis recovery in asset values has not been primarily driven by economic or earnings growth. Instead, we have been in a high correlation environment where the rising tide lifted most diversified investor boats as repressed "risk-free" rates pushed money out into riskier asset classes.
Commentary
Three Investments that Could Return to Favor in 2014
When investors lose confidence in an asset class, especially one that had been popular enough to attract outsized allocations, subsequent rebalancing generally leads to prolonged periods of underperformance. Technology stocks after 1999, for example, underperformed the S&P 500 in eight of the next 10 years and by a cumulative total of more than 40 percentage points. Today, many believe that interest rate sensitive bonds might have just begun a similar era of waning investor confidence, portfolio reallocation and underperformance.
Commentary
ACA: The Importance of Being Transparent
President James A. Garfield survived an assassins bullet in 1881, only to die several months later of complications from the infection that developed from his doctors probing his healing wound with their unclean hands and instruments, contrary to the developing understanding of the need for sanitary medical treatment. In effect, the President was a victim of his doctors inattention to or ignorance of medical best practices. As well, one cant help inferring that the Presidents doctors were among the best paid in the nation, regardless of their disastrous outco
Commentary
An Update on the Affordable Care Act
Regardless of ones political views, recall that the Affordable Care Act (ACA) passed in early 2010 was a draft House bill approved in late 2009 as a basis for reconciliation with an expected Senate bill. The law was amended only slightly in 2010, and its regulatory and operating deficiencies have become apparent with the troubled launch last month of the federal and state health insurance exchanges, a topic we will address next week.
Commentary
Fed Research on Policy Rules
In a paper for last weeks IMF annual research conference, William English (head of the Federal Reserve Boards Monetary Affairs division) discussed current monetary policy strategy, with a focus on threshold rules and forward guidance. The paper caused a stir in markets but we do not think it signals a fundamental change in Fed communication. Small changes to the so-called Evans Rule are possible, but the basic framework will probably remain in place even as QE tapering begins.
Commentary
Upgrading Non-U.S. Equities
Two performance trends have stood out across world markets during 2013. The first is the strong outperformance by equities over bonds. The second is the strong returns of the U.S. stock market relative to other stock markets around the world. The Table breaks down year to date performance for the S&P 500, Eurostoxx 50, FTSE 100, Topix and MSCI Emerging Market indices. Notice that as of the end of July, equity returns in the Unites States were handily outpacing all other regions except Japan.
Commentary
Fed Outlook for the Short and Longer Run
One of the ironies of Ben Bernankes tenure is that he set out with a goal to improve Fed communication while in office. Immediately after his first meeting as chairman in March 2006, Bernanke set up a subcommittee tasked with facilitating debate around communication issuesincluding inflation targeting, post-meeting statements and minutes and public speeches by individual Fed officials.
Commentary
What a Yellen Fed Could Mean for Interest Rates
A major question among investors after Janet Yellens nomination for Fed Chair is whether she will be too soft on inflation. Part of Yellens dovish reputation stems from a debate among the FOMC in July 1996, in which she warned the committee about the risks of pushing inflation too low. With the passage of time, however, the views Yellen expressed at that meeting now come across as very sensible. Indeed, today they would be considered uncontroversial among most economists. In reality Yellen is closer to the Fed consensus on inflation than her reputation in markets would suggest.
Commentary
Can You Hear Me Now?
Under normal circumstances, I provide insight and analysis on the monthly jobs report at the beginning of each month. This month Washington politics has interrupted my routine with the partial government shutdown postponing several important data releases this week and pessimistically next week as well. Not only that but several agencies have completely shut down their websites denying access to already released data and historical databases, which is completely unnecessary.
Commentary
More Heat Than Light
Following their surprising decision to maintain the current pace of quantitative easing (QE), Fed officials provided more detailed reasoning last week in public remarks and interviews with media outlets. Unfortunately, the latest comments added more heat than light to the QE debate in our view. Much like Chairman Bernankes post-meeting press conference, officials expressed contradictory views on several major policy questions.
Commentary
Give Me Tapering... Just Not Yet
Last week Federal Reserve (the Fed) officials surprised investors by choosing not to begin slowing the pace of quantitative easing (QE) despite months of setup in their public comments. Instead, the latest iteration of the Feds bond buying strategy will continue at $85 billion per month. At this point our best guess is that the decision was a path of least resistance among a divided committee: there seemed to be a number of officials who were concerned about downside risks to growth from fiscal policy uncertainty and higher interest rates.
Commentary
Time to Taper?
The Fed debate this year has largely revolved around a single question: When will the FOMC begin to slow the pace of quantitative easing (QE)? At the start of the year, most analysts thought that the committee would continue its bond buying program at full speed all year, and only taper its purchases in early 2014. However, we began to hear hints from Fed officials as earlier as January that they may stop short of consensus expectations.
Commentary
Unemployment, Participation and the Fed
Despite a mediocre August jobs report, we still expect the Federal Reserve to announce a slowing of the pace of bond purchases when it meets next week. One reason for this view is that Fed officials care more about the level of the unemployment rate than the pace of job creation. We often write that monetary policy is about gaps not growth: the Fed is trying to reduce spare capacity in the economy, not bring about a rapid expansion per se.
Commentary
Don't Lose Your Balance
Last year in a white paper called Engineering a better retirement portfolio1, we demonstrated the long term benefits of investing with a balanced risk profile. Exhibit 1 shows the trailing Sharpe ratios reported in that paper for the S&P 500, a traditional balanced domestic 60/40 portfolio, and a risk balanced strategy invested to equalize the risk contribution from stocks, bonds and commodities. The message from that chart is clear: Better balance leads to more efficient portfolio performance over time.
Commentary
The Speed of Fed Rate Hikes
For the last several months, talk of tapering has dominated the Fed debate. Although there remains some uncertainty around the detailssuch as how large the initial step might bemost observers now expect the Federal Reserve to begin slowing the pace of quantitative easing (QE) at the September 17-18 meeting. Attention is now turning to another major issue on next months agenda: the publication of Fed officials forecasts for the funds rate in 2016. The Fed rolls forward the Summary of Economic Projections (SEP) by one year each September.
Commentary
Fixed Income Investing In a Reality Star World
Reality stars are famous for being famous. We should not begrudge them for recognizing an opportunity, seizing the momentum and exploiting it successfully. However, an approach that emphasizes form over substance can neither be consistent or highly repeatable.
Commentary
Why GDP Deserves Less Attention
Before joining Columbia Management I worked for several years as an economist at a few of the large broker-dealers in New York. One of my primary functions was to maintain an ongoing estimate of growth in the nations gross domestic product (GDP)a so-called GDP bean count. Most investors use GDP as their primary summary measure of overall economic performance, so they are keenly interested in how incoming data are likely to impact the estimates. Our running tally of GDP growth for the current quarter was one of the most sought after pieces of research we produced.
Commentary
Who has the Edge in Race to Head the Fed?
One of the most common mistakes policy analysts make is what I like to call normative biasallowing personal opinions to affect perceived odds of certain outcomes. Saying The Fed is unlikely to introduce quantitative easing because it would lead to high inflation is an example of normative bias. Fed officials do not think quantitative easing (QE) leads to high inflation, and whether you think it does has no bearing on the probability. Personal perceptions are irrelevant for policy analysisthe only things that matter are the perceptions of the decision maker.
Commentary
The Fed's Outlook and Leadership in Flux
Many observers blamed a lack of clarity from the Federal Reserve (the Fed) for the sharp increase in interest rates after the initial signals about tapering. As a result, in recent weeks Fed officials have tried to calm nerves by stressing that the decision to slow the pace of quantitative easing (QE)now expected to begin after the September FOMC meetingdoes not signal anything about the outlook for the funds rate or their broader policy goals. Unfortunately for the Fed, the policy outlook looks increasingly fluid again.
Commentary
What's Next for the U.S. Dollar?
Global government bonds have performed poorly so far this year. Year to date through July 13, the Barclays Global Treasury Index, which covers 30 investment grade domestic government bond markets, is down 5.5% in unhedged U.S. dollar terms. The same index hedged back to U.S. dollars is down 0.6% year to date. This difference in returns highlights a key point.
Commentary
Remember Earnings?
With the ebbing of the quantitative easing taper debate, can we go back to our regularly scheduled programming of earnings driving the stocks? If so, where do we stand? There are certainly some areas where we think estimates are a little high and some where they are too low. But in order to get a better picture of earnings expectations and what is priced in, we need to look at both the earnings and the PE (price-to-earnings) ratio the market has placed on those earnings.
Commentary
Monetary Exit Strategy: Removing The Doubt
In the press conference following last weeks FOMC meeting, Federal Reserve (the Fed) Chairman Bernanke said that the committee was puzzled by the sharp rise in bond yields over the last two months, and that the increase seems larger than can be explained by a changing view of monetary policy. We would argue, in contrast, that the recent increase in bond yields has been almost entirely about a changing view of monetary policy.
Commentary
Outlook for the Global Bond Market
The global economy continues to expand, but seems stuck on a moderate, below-trend trajectory. Lately, the story seems to be more about a growth rotation across regions than a clear-cut acceleration or deceleration at the global level. Looking to 2014, however, we still expect the global economy to accelerate to a more trend-like pace.
Commentary
What the NHL Playoffs Can Teach Investors
The National Hockey League playoffs are marvelous to watch. The leagues best teams play their best hockey with every game more meaningful than those played during the regular season. Playoff games feel much more strategic, and one key aspect of playoff strategy is the importance of playing with the lead. In fact, of the 53 playoff games this season that went to the third period with one team ahead, 43 of those, or 81%, finished in favor of the team that was winning after two periods*. NHL playoff teams know how to protect a lead once they have it.
Commentary
Affordable Care Act Roll-Out: Are “Train Wreck” Fears Justified?
Expect to see a large U.S. Department of Health and Human Services (HHS) advertising and public relations program this summer ahead of the October 1 federal and state health insurance exchanges open enrollment, one of the key features of the Affordable Care Act (ACA). The Administration, Congress and the nation have much riding on successful implementation of the law and the participation of newly-insured individuals.
Commentary
Is Japan's Economic Rebound For Real?
The two phrases Abenomics and the BOJs Shock and Awe Monetary Easing are all over the headlines about Japan. Prime Minister Abe unveiled his economic policy late last year calling for a 3% annual nominal gross domestic product (GDP) growth target and an aggressive monetary easing by the BOJ (The Bank of Japan) to achieve 2% inflation. The BOJ unleashed the worlds most intense burst of monetary stimulus last month promising to double the monetary base to 270 trillion yen ($2.7 trillion) by the end of 2014 to defeat deflation.
Commentary
The Truth about April's Budget Surplus
The Truth about Aprils Budget Surplus
Columbia Management
By Marie Schofield
May 16, 2013
Washington finally had some good news to report, specifically on the budget deficit. The Treasury reported a $113 billion surplus, the biggest in five years. April is a critical month for the budget because of tax filing and payment deadlines. While some attribute the surplus to reduced outlays on sequestration, it was mainly due to growing revenues courtesy of a build in individual and corporate tax receipts.
Commentary
The Effect of Negative Interest Rates in Europe
In his press conference last week, European Central Bank (ECB) President Mario Draghi signaled that policymakers may be more open to a cut in the central banks deposit rate. Although Mr. Draghi acknowledged this move could have negative side effects, he added we will be able to deal with the negative consequences we will look at this with an open mind. Several major central banks considered negative deposit facility rates during and after the financial crisis, but so far, all have determined that the idea did not pass the cost/benefit test.
Commentary
The U.S. Economy A Gain in GDP?
The advance estimate of gross domestic product (GDP) released by the Bureau of Economic Analysis last Friday showed that the U.S. economy grew at an annualized rate of 2.5% in the first quarter, below expectations of an increase of 3.0%. Despite the decent first quarter advance, year-over-year gains in nominal and real GDP are largely unchanged from the prior quarter at 3.4% and 1.8%, respectively. While growth rates at this slow pace in these measures have typically heralded recessions, they appear stable but also underscore a critical problemthe failure to generate escape velocity.
Commentary
What's Behind China's Economic Slowdown?
Chinas economy grew by 7.7% year over year (yoy) in the first quarter of 2013, against the market expectation of 8.0% yoy and a prior quarters 7.9% yoy. Gross domestic product (GDP) expanded 1.6% quarter on quarter (qoq), with an annualized growth rate of 6.6%, a step down from the 2.0% qoq and 8.2% annualized growth seen in 4Q 2012.
Commentary
Is the Fed Eyeing an Earlier End to QE?
Until September of last year, the Federal Reserve structured each of its bond buying programs in the same way: it announced a fixed amount of purchases and a specific target end date. This changed with the latest quantitative easing (QE) program launched last year. This time, instead of stating a specific dollar amount of purchases, Fed officials left the program open-ended: QE would continue as long as needed to ensure a stronger recovery in the labor market.
Commentary
Stockton is Bankrupt: Now What?
Although we have no exposure to Stockton, California debt, we thought it would be useful to comment on the citys financial plight in the wake of the recent bankruptcy court ruling allowing the city to file a plan of adjustment or the equivalent of Chapter 11 reorganization. We, and other municipal bond participants, will be watching this process closely to see how the court treats various creditors.
Commentary
When Does The Great Recession Become the Great Rotation?
Given the strong flows into the bond market over the past few years, many pundits have pondered the beginning of the Great Rotation when bond investors begin to move money into the equity market. Investors fear that this shift could cause losses in bond funds as investors flee. Indeed since the start of the Great Recession in 2008, investors have plowed into bond funds as an alternative to equity volatility.
Commentary
Reacting to All Time Highs
The financial press has been all a-flutter, of late, with talk of new highs across U.S. stock markets. Indeed, the Dow Jones Industrial Average set a new all time closing high in March. Meanwhile, the S&P 500, as of this writing, sits less than one percent below its all time high. The surge in these well known market bellwethers in recent months feels good, and no doubt tempts investors to bask in their portfolio gains, and to ease back in their fussing over the nuances of investment strategy.
Commentary
Playing with Fire in Cyprus
Early Saturday morning, after 10 hours of negotiations, it was announced that Euro Area (EA) finance ministers had agreed upon a bailout package for the government and banking system of Cyprus. The total financing needs of Cyprus are 17 billion euros ($22 billion), which equates to approximately 100% of Cypriot gross domestic product (GDP), making this by far the largest bailout relative to the size of the economy yet in the EA.
Commentary
Coping With Age
Many things in life get better with age, but many others do not. Unfortunately for central banks, the effects of unconventional monetary policy probably fall in the latter category. Unlike traditional monetary policyin which the central bank only sets short-term interest ratesthe impact of unconventional policies likely decays over time. This means that it is not enough for the Federal Reserve to keep its current policies in placeit actually has to take additional action to maintain the same impact on interest rates and the economy.
Commentary
What Are The FOMC Minutes Telling Us?
The release of the minutes of the January Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) caused a tremor in the bedrock of investor euphoria last week. The minutes confirmed that the cost/benefit analysis of quantitative easing (QE) is at center of policy debate right now. However, the minutes did not provide a definitive signal that the program may be cut short. In particular, it is not clear where Chairman Bernanke and Vice Chair Yellen stand. I believe the level of debate slightly raises the odds that QE will end this year.
Commentary
The Postman May Not Ring at All
United States Postal Service is technically insolvent. Last year, the agency exhausted its borrowing capacity and failed to pay $11 billion into its retiree health plan. This year, it will not make a $6 billion contribution. While the current cash balance of $2 billion is sufficient for 10 days of operation, management forecasts a $100 million deficit by October. When payments to employees and suppliers end, so too will the mail.
Commentary
Macroeconomic Risk? That's So 2012
Fourth quarter earnings are modestly beating expectations, albeit by less than the amount expectations were lowered during the quarter. And while every sector and industry is different, the market seemed to give companies (even with their cautious outlook for 2013) the benefit of the doubt they can manage through a tough demand environment. This may be based on a general belief that the risk of extreme events is dropping.
Commentary
What Happens When the Fed Loses Money
The Federal Reserve's exit from ultra-easy monetary policy still looks very far offby most accounts, rate hikes will not begin for more than two years and asset sales for even longer. However, the exit strategy could matter for markets well before that point. Fed officials have said that they will consider the costs and risks associated with quantitative easing (QE) when deciding how long to continue their purchases, and one factor they will be looking at will be whether the program could "complicate the Committee's efforts to eventually withdraw monetary policy accommodation."
Commentary
The Term Premium: Past and Present
Of the many possible explanations for the historically low level of government bond yields, near-zero central bank policy rates should be at the top of the list. However, government bond yields also appear low for reasons beyond central bank policy rates. In particular, todays low rate environment also reflects a depressed "term premium," or the compensation investors receive for taking duration risk.
Commentary
2013 International Outlook
We continue our outlook for 2013 with a review of select international economies and financial markets. Similar to the U.S. the road to recovery will be bumpy and we expect financial markets to continue being affected by macroeconomic uncertainties. While the overall environment remains uncertain, some of the significant headwinds in 2012, e.g. the Chinese leadership transition and a complete disintegration of the eurozone, are perhaps less concerning for markets than they were a year ago.
Commentary
Thanks, Everybody...We'll be Right Back!
The Washington Comedy Club has taken a brief intermission and will be back in session shortly to resume the show. Please enjoy the facilities of this great country, free of charge, while you wait. Ignore the "Nero" character in the far corner playing the fiddle. Apparently, he isn't part of the show. Economic uncertainty emanating from fears of the U.S. fiscal cliff has been deferred but not avoided.
Commentary
Can China Double National Income by 2020?
Xi Jinping, China's newly elected president, was the featured speaker at the recent National Congress. However, I felt the most interesting point to come out of the event was outgoing President Hu Jintao's announcement of a plan to double Chinas national income by 2020. This plan is reminiscent of a similar program launched in Japan in the 1960s, spearheaded by Prime Minister Ikeda, where the goal was also a doubling of national income. The two programs have a number of parallels despite the multi-decade time gap between them.
Commentary
Can The U.S. Afford Its National Credit Card?
With U.S. national debt at all time highs and major Federal programs expiring within weeks, it is no surprise that the focus of investors following the election has quickly shifted back to the upcoming fiscal cliff. Fears of an insolvent government or a U.S. debt crisis have sparked heated debates regarding ways of tackling the budget deficit but just how imminent a threat does it pose?
Commentary
Tango Time
Investors should be prepared for a sizable tax hike in excess of $1 trillion. The Republican position on taxes is untenable. I can find little evidence that a tax yield of approximately 18%/19% harms the economy. I am in the camp of lower tax rates and fewer deductions especially for incomes above $500,000. However spending is at a level not seen since World War 2. I am supportive of the deferral assuming the cuts are specifically identified and the deferral period is explicit. However the ratio of cuts to tax increases needs to be approximately 2 to 1.
Commentary
Fiscal Perdition
Fiscal consolidations are underway across the developed world, and many require large adjustments. At a minimum, countries need to bring their primary budgets into balance in an effort to stabilize growing debt-to-gross domestic product (GDP) ratios. Many are looking at trimming deficits totaling 5% of GDP or more. This will require both spending cuts and tax increases which often work counter to stabilizing debt ratios, as this can brake GDP growth and undermine both the fiscal position and the political fortitude for action.
Commentary
To Invest or Not To Invest? That is NOT the Question!
The question that many investors continue to ask is, "Should I be buying stocks now or not?" This is the question investors trying to time the market ask themselves every day. If they choose not to be in the market, they may idle in cash as their neutral position until they figure out when to get back in. However timing the market is a very difficult game, even for the most accomplished investors.
Commentary
The Fiscal Cliff Comes Into Focus
Investors and economists have been debating the fiscal cliff for more than a year. When budget negotiations fell apart in July 2011, the White House and congressional leaders delegated responsibility for finding additional federal savings to a bipartisan "super committee". However, this group could not bridge the differences between the two parties either, and so the nation's fiscal policy was set to the fallback option: automatically begin cutting spending and allow tax rates to set higher at the start of 2013.
Commentary
Sequestration - What It Means for the Municipal Bond Market
If Congress fails to quickly reach an agreement on deficit reductions, automatic cuts to federal discretionary spending (sequestration) are scheduled to take effect January 2, 2013. On September 14, the U.S. Office of Management and Budget (OMB) released its report detailing how it would implement sequestration, as required by the Budget Control Act of 2011 (Act). Designed to impact defense and non-defense (domestic) program budgets equally, most agencies are subject to cuts between 7% and 11% over the next decade. The exception is Medicare which is subject to a 2% cut.
Commentary
Can Housing Save the U.S. Economy?
After leading the U.S. out of the Great Recession, the manufacturing sector has recently begun to show signs of sputtering. Uncertainty surrounding the election and fiscal cliff in the U.S., decelerating growth in China and a perpetually weak Europe have led to a soft patch in the third quarter. This global hiccup has caused some U.S. companies to catch a cold, most notably those in heavy machinery, transportation, metals and mining, and general industrials.
Commentary
Hiking the Fiscal Cliff
Consider the geology of the current fiscal cliff. It evolved from the confluence of challenging policy decisions built on constantly shifting layers of political sediment. It is the unprecedented stress among these colliding tensions which makes forecasting footing so slippery and challenging this year. Below are the key tectonic guideposts to understand how the interlocking tiers of political stratification could play out during the upcoming lame duck session.
Commentary
The Fed and the Fiscal Cliff
Prospects for this quarter's results are being very closely scrutinized. After healthy growth in Q1, Q2 results proved quite sobering, as sales decelerated and operating leverage proved hard to come by. Given continued disappointing global macro growth, Q3 results seem tracking to be close to flat year over year again. Implicit in the consensus S&P500 estimate of around $103 is a reacceleration in Q4. Implicit in the 2013 consensus of around $115 is renewed healthy growth continuing consistently through the year. Such reacceleration seems highly at risk, which raises a few questions.
Commentary
The Path Toward America's Energy Independence
U.S. energy independence has become a front and center issue during the current presidential campaign. This should be no surprise as reducing our country's dependence on foreign energy sources has been discussed in every election since Richard Nixon introduced his "Project Independence" initiative, in the wake of the OPEC oil embargo and the resulting oil crisis.
Commentary
Third Quarter EPS: A Harbinger for 2013?
Prospects for this quarter's results are being very closely scrutinized. After healthy growth in Q1, Q2 results proved quite sobering, as sales decelerated and operating leverage proved hard to come by.
Commentary
Triskaidekaphobia1 tris-k?-dek-?-f?-b?-? n: Fear of the Number 13
In May of this year, the Congressional Budget Office published a paper outlining the tax increases and spending cuts scheduled to be automatically implemented on January 1, 2013 under current law. The paper illustrates the real risk of recession if Congress fails to address this looming "fiscal cliff" before year end. The markets are telling us not to worry about the fiscal cliff. Are the markets right, or should investors be more concerned that 13, as in 2013, could be an unlucky number for the U.S. economy?
Commentary
Economics is Such a Drag
At least in Europe it is. Central bankers around the world are doing everything they can to try and pump up the global economy. Mario Draghi, President of the European Central Bank, has been incredibly aggressive and creative in trying to rectify the imbalances plaguing Europe.
Commentary
Unemployment Surprise or Conspiracy?
The blogosphere is overflowing with conspiracy theories about the household survey unemployment data in this pre-election period. I do not give any credence to these stories and believe the data is the data. But it needs to be interpreted carefully as it can be complex and volatile.
Commentary
Has Unconventional Policy Helped Lower the Yield Curve?
With the funds rate stuck at zero for nearly four years, the Federal Reserve (Fed) has used a variety of unconventional policy tools in an effort to push longer-term interest rates lower. We think these actions affect markets in a variety of ways, and also that some of their effects may overlap.
Commentary
Is China Becoming Less Competitive?
Concerns about the pace of economic growth in China and the imminent change in leadership have continued to escalate. At the beginning of the year, we highlighted the potential for the rate of economic growth to slow significantly. I recently visited Asia to get a clearer perspective on the situation in China specifically, and Asia generally.
Commentary
The Fed's "X" Factor
The most surprising element in last week's Federal Reserve (Fed) decision was not the announcement of Mortgage Backed Securities (MBS) purchases or the extension of its funds rate guidance to "mid-2015," both of which were signaled fairly clearly in advance. Rather, it was the fact that the aggressive monetary easing occurred alongside an upgrade to the central bank's economic forecasts.
Commentary
Is Europe Fixed? Not Even Close!
Euro Area (EA) equities have rallied 16% since European Central Bank (ECB) President Mario Draghi made his now famous July 26 pronouncement that "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." Does this mean the EA is fixed? Not even close.
Commentary
Rethinking How We Invest
Building portfolios to meet individual objectives is or should be a customized exercise, so this article should not be considered advice for any individual. Instead, it is an alternative philosophy to how investors have traditionally approached building portfolios. For the vast majority of us, we allocate our capital to asset classes with the highest expected returns.
Commentary
Going for Gold: Lessons from London
Fiercely competitive professional athletes were able to join together for a common purpose of achieving gold for the U.S. Small teenagers were prepared to sacrifice family life to win gold for the U.S. If only our politicians could find a way to set aside traditional rivalries and find a team plan to reduce our debt and spur higher levels of growth on a equitable basis. Unfortunately, the opposite is occurring.
Commentary
ECB Policy: Over-Promise and Under-Deliver, Investor Behavior: Over-Anticipate and Over-React
Last week was a good example. Investors anticipated a major announcement from Mario Draghi, President of the ECB on Thursday because of remarks he had made the previous week at a conference in London. When he did not announce any immediate monetary policy changes following the regular meeting of the ECB, the markets demonstrated considerable volatility, declining on Thursday and rising on Friday.
Commentary
Austerity: Damned If You Do, Damned If You Don't!
This glib depiction could be applied to most of the developed world. Much of the world's attention is on the debt imbalances within Europe, but too narrow a focus will miss the fact that aggregate debt levels for the region as a whole are still disturbingly high. The same is certainly true of Japan, and to a lesser extent the U.S.
Commentary
Global Bonds - Where To Now?
Economic data over the past four months show a clear softening trend in global economic activity. From our perspective, the muddle-along, sluggish global growth scenario remains very much intact. Highly accommodative monetary policies by the major central banks are helping support activity and contain downside risk.
Commentary
U.S. Equities - So Far So Volatile
The premise of our 2012 equity market outlook was very modest economic growth in an overall environment fraught with risks, predominantly brought on by the dangerously high debt loads facing the developed world. Within that environment, we have advocated a two-pronged focus.
Commentary
Is Higher Inflation on the Horizon?
For nearly two decades inflation in the U.S. has been fairly contained except for a few periods of moderate acceleration around peak levels of economic activity. More recently, headline inflation as measured by the year-over-year change in the CPI-U (Consumer Price Index for Urban Consumers) declined from 3.9% in September 2011 to 1.7% in May 2012 driven primarily by the slowdown in the U.S. economy and the sharp drop in energy and commodity prices.
Commentary
European Summit - Something for Bulls and Bears
The European summit outcome was fascinating; it had something for everyone, both bulls and bears. The net result was a positive surprise with at least one major concession by Germany. In concurrent news, three of the four semifinalists in the Euro 2012 soccer tournament were PIGS (Portugal, Italy, Greece and Spain) and the other was Germany. Spain won the competition on Sunday, symbolic of the PIGS power within Europe it isnt all about Germany.
Commentary
Running on Empty
In a move that was more anti-climax than comforting, the Federal Reserve (Fed) satisfied the minimum expectation of the markets and extended Operation Twist, or the MEP (Maturity Extension Program), through the end of the year thankfully taking us beyond the election period.
Commentary
A Busy Weekend in Europe
The headline story is the election in Greece. The initial market reaction to the vote result was positive, with the Euro and Asian markets up strongly. Apparently, the market is realizing that though a disorderly Greek exit scenario has been taken off the table, at least temporarily, by the majority given to pro-bailout parties, we are really just back to where we were before, between the rock of an economy in free-fall and the hard place of an unsupportable and expanding mountain of debt.
Commentary
Creative Destruction
Creative Destruction is always at play in competitive markets of all kinds. Given the metamorphic pressures caused by todays over-levered and structurally low- growth global economy, the forces of Creative Destruction are perhaps far greater than normal. Low overall growth and historically high profit margins create a particularly potent environment in which corporations compete for their share of a potential profit pool. Revenue growth is increasingly hard to come by and cost-reduction opportunities may have been stretched to their outer limits.
Commentary
The Tip of the Iceberg For Dividend Stocks
Post-crisis equity investors seek to lower portfolio volatility. Dividend stocks have provided higher returns with less risk compared with non-dividend payers. Baby boomers are retiring now with much smaller nest eggs than they had anticipated. They need reliable sources of income and growth. Cash-rich companies are in a position to pay and potentially grow dividends, while dividend payout ratios are historically low. Active managers leverage in-depth research to uncover promising opportunities among companies likely to initiate or raise dividends.
Commentary
Opportunities in Credit Higher Quality High-Yield Bonds
One of the more compelling opportunities across todays fixed-income landscape is within the higher quality segment of the high-yield market bonds rated BB and B. Strong underlying fundamentals driven by a wave of refinancing and solid operating performance have greatly diminished credit risk among these issuers, as demonstrated by exceptionally low current and expected default rates. Despite this, spreads, or yield premiums relative to Treasuries, are generally higher than long-term averages.
Commentary
Saber Rattling
Tension between Iran and its Gulf Co-Operation Council (GCC) neighbors continues to rise. The GCC was formed in 1981 by the Sunni controlled states to bolster security after the 1979 revolution in Iran and the subsequent war with Iraq. Tension between Shiite Iran and Sunni Saudi Arabia escalated last year after Saudi troops entered Bahrain to quell protests. The members of the GCC held talks to discuss closer political, economic and military union.
Commentary
Searching for Big Foot
For the past few years, the sovereign bond markets have pushed peripheral European countries to reduce public debt. This has meant adopting austerity measures whereby government budgets are slashed and taxes are raised. Such measures meet investors approval. However, the immediate impact of such efforts is less economic growth which is intolerable to the people in Europe. The path to sustainable growth is complicated and requires long-term investments. We believe despite decades of research on the topic, academic efforts have not found a clear answer. Perhaps finding Big Foot will be easier.
Commentary
The Easy Money Has Been Made
As investment professionals, we chafe whenever we hear that expression. Why? Because in this business, there is no such thing as easy money. All our investment decisions are the end result of a great deal of research. Rarely are our greatest expectations realized, but neither are our greatest fears. In either case, it is never easy. Having said that, we feel confident in forecasting that an investment in natural gas (once it bottoms this spring/early summer) will perform substantially better going forward than it has for the last several years and with less risk.
Commentary
Does Quality Matter?
Most investors take comfort in investing in high quality companies. There are several attributes that define quality including strong balance sheets and cash flows. Having a strong balance sheet allows a company to redeploy capital towards growth opportunities rather than debt reductions. We believe that these attributes persist in the market over the market cycle and are virtuous in the pursuit of higher returns. However, recently we asked, where has quality gone? Often an initial snap back in the market after a bear market favors companies with weaker balance sheets.
Commentary
Sell in May and go away?
Sell in May and go away is a popular Wall Street adage referring to the belief that returns from October through April tend to be higher than returns from May through September. We thought it a timely topic to investigate paying particular attention to the election year cycle. Sell in May and go away? Not based on this analysis. The returns for October-April may be higher in general, but the absolute level of returns from May-September is still good, and slightly higher in an election year.
Commentary
Question for the ECB: What Now?
The ECB tipped its hand last week in terms of which direction it is likely to go. Board member Benoit Coeure indicated the ECB could step in and buy Spanish bonds. It is unlikely to be a sustainable solution. It wouldnt be surprising to see renewed stresses emanating from the peripheral sovereign debt markets. There is a limit to how much the ECB is going to be able to do in this situation. Ultimately, the real burden is going to have to be borne by politicians through substantial fiscal adjustments.
Commentary
The Importance of Being Earnest
If the buy low/sell high investing maxim is self-evident, why dont more investors do it? In 2007, corporate pension funds had close to 70% of their assets in stocks, yet at the bottom, bonds and cash accounted for more than half of the mix. As an investor, how can you avoid being part of the buy high/sell low crowd? Fundamentals are more important than themes. Some people can time the markets, but that probably doesnt apply. We prefer a simple, get rich slow strategy, which may be possible if you maintain a disciplined investment approach in concert with a reasonable set of expectations.
Commentary
Investment Grade Bonds Still Attractive
We continue to find investment grade corporate bonds attractive. Even after a strong start to the year, corporate bond spreads are anywhere from 20-90 basis points above their 20 year averages. This historical absolute valuation advantage is also buoyed by attractive relative valuations versus Treasuries spreads as a percentage of overall yield are currently from 1.8 to 2.4 standard deviations above their 20 year averages. Aggregate corporate credit metrics are also basically as good as they have been any time over that 20 year period, and companies maintain tremendous financial flexibility.
Commentary
The Outlook for the U.S. Dollar
On a trade-weighted basis, the U.S. dollar was largely unchanged in the first quarter of 2012. We expect a broadly similar story in both the near- and medium-term, with the balance of structural and cyclical weakness across the major economies providing little clear direction for the U.S. currency. For sure, movements of 5% or more in the trade-weighted dollar are always possible, reflecting short-term swings in investor sentiment and the normal volatility of currency markets. But we do not expect sudden moves in either direction to be sustained.
Commentary
Are You Going to the Doctor Less?
Throughout 2011, the healthcare sector saw another year of reduced medical consumption, measured by doctor visits, hospitalizations, elective surgeries and more use of generic pharmaceuticals over branded products. This led to better earnings for managed care companies (payers) and lower earnings for hospitals and device companies (providers). So far, 2012 looks to be similar, but investors are watching carefully indicators like gross domestic product and employment growth and procedure and pharmaceutical volumes for signs of an uptick in utilization (unit consumption) and trend (price).
Commentary
Money Market Fund Reforms The Debate
When looking back over the last few years at the money market sector it clearly has been a tumultuous period for an industry that had traditionally been viewed as stable and secure, all while providing daily liquidity for shareholders. It became evident, however, when the Reserve Primary Fund Broke the Buck in 2008 that safeguards needed to be enacted in order to protect both shareholders and the industry. There are currently three main schools of thought being debated when it comes to potential additional reforms ahead for the Money Market industry.
Commentary
In Japan, Eventually is Getting Closer
On the anniversary of the devastating tsunami and earthquake in northeastern Japan we wish to express our sympathy and support for the people of Japan. With the rightful attention on the anniversary of this tragedy and on the Greece/European debt/growth challenges, it is easy to forget about the massive structural challenges faced by Japan. Japans total debt load surpasses even the U.S. in absolute terms and is second (and a close second) only to Zimbabwe in terms of debt to gross domestic product (GDP) at over 200%.
Commentary
Fiscal Fantasies
The Congressional Budget Office (CBO) just released updated budget and economic projections for the next 10 years in its monster annual report. The report looks a touch closer to reality in the very near-term, marking down expected growth rates for the economy. Real gross domestic product (GDP) growth of 2% is forecast this year (down from the original estimate of 2.7%), and only 1.1% in 2013 (down from 1.5%). Both these estimates are below those of the Federal Reserve by a third. Much rosier projections are assumed thereafter with no interruption via recession.
Commentary
Dividends: Proposed New Tax Rates
We are in a very attractive period for dividend paying equities. With yields from higher credit quality bonds at historical lows, an investing public hungry for income has to consider an increased allocation to equity income. The backdrop is positive for them to do so with healthy cash flows and historically low payout ratios creating a solid foundation for reliable and growing dividend yields. Given the strong outperformance of the highest current yielders in 2011, we continue to advocate seeking out companies with the ability to grow their dividends sustainably in the future.
Commentary
Greek Austerity Bill Passed But Many Challenges Ahead
Even assuming all the required approvals are garnered, the bailout funding is paid and the debt write-down is imposed, it seems highly unlikely that the situation will have been resolved. The Greek economy is in freefall, and the forced austerity is likely to exacerbate that fact, making any debt/Gross Domestic Product targets unlikely to be reached.
Commentary
The Trend toward Less Economic Freedom
With a sluggish global economy hamstrung by the colossal indebtedness of the developed world, it is crucial to be aware of any changes in the forces that fuel or handicap growth. One issue I am particularly concerned about is the direction of global economic freedoms. Many studies strongly suggest a high correlation between changes in economic freedom and economic growth. Today, there is significant evidence that economic stresses and perceived imbalances are driving governments and politicians around the world in a populist direction that will limit economic freedoms.
Commentary
The Doves are Flying Circles around the Hawks
Most of the members of the FOMC of the Fed remain concerned about the level of economic growth and inflation over the next few years. The Committee expects growth to be modest over coming quarters which appears to be a downgrade from moderate. As a consequence, the FOMC pledged to keep rates near zero into 2014 versus 2013, as previously indicated. Some members were slightly more hawkish. Six members thought monetary policy tightening should begin as early as 2012 or 2013. Five participants chose 2014. Six participants thought 2015 or later.
Commentary
Bull Riding is Risky
One of the most important actions taken by the ECB is the creation of a new liquidity facility for banks known as the Long Term Refinancing Operation which offers 3-year loans against a wide range of collateral. In the first auction, approximately 489 billion euros were borrowed by multiple banks. The second 3-year LTRO auction scheduled for February 29 could have substantially higher interest.This will represent a major de-risking of the banking sector. However, there are two reasons why any continued run-up to that auction may be a good time to take risk off the table.
Commentary
Labor Data: Healthy Gains
The labor market continues to heal slowly and looks sustainable, although the December strength is likely overstated and there will be some payback in January. The drag from the global dynamic has yet to make any mark.
Commentary
Has Gold Lost Its Luster?
In the last few days, the price of gold appears to have found some footing on improved macroeconomic data and a weaker dollar, together with apparent support from physical demand. While recent volatility may have dented confidence in golds safe haven status, golds appeal may ultimately balance on moves toward austerity vs. stimulus. As we head into the new year, the scales appear to be tipped to austerity.
Commentary
Euro Summit V More Sequels Than Rocky
The ongoing series of Euro summits continued on Friday with the fifth installation since the project began back in 2009. The good news is that those who make money off these productions set themselves up nicely for a long run of future sequels. The bad news is that market volatility is unlikely to abate anytime soon as more questions were raised than answered. Not to spoil the movie for those who havent seen it (or any of the four prequels) but little was resolved at Summit V al-though some important steps were taken on the path towards a future fiscal integration of the Euro Area (EA).
Commentary
Treasury Inflation Protected Securities: Whats Next?
TIPS have performed relatively well in 2011. Over the next 12 months we expect TIPS to outperform equivalent maturity U.S. Treasuries, However, given the current historic low level of real interest rates, we believe that absolute returns for the asset class will be only slightly positive. Our view is based on three factors: U.S. economic and policy outlook, recent trends in the components of consumer inflation and current valuations versus our base case assumptions.
Commentary
Should Germany Leave the Eurozone?
For the last few weeks, the debate over the European debt crisis has focused on the need to restructure the eurozone. And the question we keep hearing is how tenable is the position of countries such as Greece. Perhaps the better question is whether Germany should leave the eurozone. Last week Germanys failure to get bids for 35% of the 10-year bonds offered for sale pushed European bond yields higher and global equities and the euro lower. Investors appear to be having second thoughts about the relative safety of investing in German bunds.
Commentary
REITs: A Market Update
The Real Estate Investment Trust market experienced significant volatility during the third quarter with three different +/-15% moves. Global macro events continue to impact the REIT market, and the issues during the summer within the credit markets reminded investors that 2008 was not that long ago. With that said, earnings reported during the third quarter were generally in line or better than expected and most management teams had positive commentary with cautiously optimistic outlooks.
Commentary
Should Greece Leave the Euro Area?
Under the terms of the proposed bailout agreement, the answer is YES, Greece should leave. The consequences of leaving would be extraordinary, almost inconceivable. In fact, legally, there is no mechanism that permits either a forced or voluntary departure from the Euro Area (EA). However, the terms of the currently proposed arrangement are so punitive that it is worthwhile for Greece to leave the EA despite the near-term pain it would cause.
Commentary
Should Greece Leave the Euro Area?
Under the terms of the proposed bailout agreement, the answer is YES, Greece should leave. The consequences of leaving would be extraordinary, almost inconceivable. In fact, legally, there is no mechanism that permits either a forced or voluntary departure from the Euro Area (EA). However, the terms of the currently proposed arrangement are so punitive that it is worthwhile for Greece to leave the EA despite the near-term pain it would cause.
Commentary
Is the U.S. to China what Greece is to Germany?
As the U.S. and peripheral Europe each try to adjust their economies to lower budget deficits, they risk recession over the next year or two. However, the impact on Germany and China may be more prolonged. Each region will struggle or refuse to adapt to a greater balance between external investment/export growth and domestic demand. An important conclusion of the book The American Phoenix Why China and Europe Will Struggle After the Coming Slump, as its title suggests, is that the U.S. will eventually deal with its issues and emerge relatively strong compared to Europe.
Commentary
Breathing Space in an Unhealthy Environment
Within Europe, while breathing space has been achieved, the outlook is still very clouded. The crisis has highlighted the eurozones structural flaws; how does the system work without fiscal and political integration? Achieving this is going to be very difficult and may ultimately lead to a smaller eurozone. Whatever the politicians think about closer integration, winning public support is going to be impossible for many governments. According to reports, for Greece, even with the 50% debt haircut, they are still forecast to have net debt to GDP of 120% by 2020, not exactly sound finances!
Commentary
Whats next for Libya?
Qaddafi has left the stage so we now turn our attention to the myriad of subplots that is Libya in transition. When we think about the oil markets and the impact of Libya's return to production and exports, we invariably turn to both the political possibilities in the country as well as the physical state of their oil and gas infrastructure. We believe the future pace of political progress in Libya and the pace of the recovery in oil production will be related. More political agreement on the disbursement of oil revenues would likely mean a more coordinated and quicker recovery in production.
Commentary
Europe The Plan to Have a Plan
We are at a critical point in Europe and the outcome of the situation has the potential to resonate around the globe and across all the asset classes. When evaluating Europe, there are two main considerations: First, a recession is likely over the course of the next 12 months. Many of the metrics of economic activity in the stronger core markets such as Germany are hovering right on the border of contraction. Second, the ongoing sovereign debt crisis is now morphing into a banking crisis.
Commentary
Global Economic Crisis = Social Unrest
I fear that our fragmented political process may go from bad to worse as polarized factions face off over how to respond to a fraying of the Western social contract. Inefficiency in developing effective policy in that environment is likely to be a further drag on economic growth, potentially creating a negative feedback loop. We run the risk of crossing a dangerous tipping point where economic pain fuels dramatic social unrest, which in turn makes a path to recovery more difficult. I do not see equity risk premiums sustainably falling until we begin to witness that change in direction.
Commentary
Implications of United States Downgrade for Tax-Exempt Market
If negotiations stall or fail to meet intended goals, forced budgetary cuts could have greater impacts on certain credits in the market than under a more thoughtful plan. We continue to believe that broad generalizations of implications in the tax-exempt market are misguided and fundamental credit analysis of each security is crucial. Our credit analysts will continue assessing the credit strength of securities on an individual basis, which has always incorporated the reliance on federal government transfers.
Commentary
Profit expectations in the square root recovery
They always say that in the media, if it bleeds, it leads. Crisis and tragedy is gripping stuff, and there has been plenty to report in the financial press in recent years. Perhaps under-reported and less-celebrated has been the truly remarkable recovery of profits at American businesses in the wake of the Great Recession. Reacting to the pain of the downturn, corporate America did a remarkable job of tightening its cost belt. As a result, the rather modest recovery in economic growth has driven huge profit gains, as margins have leapt back to historical peaks.
Commentary
USA, Inc. ? If it were a stock, would it be a buy, hold or sell?
By 2025, spending on Social Security, Medicare, Medicaid and interest expense will equal the total revenue (tax receipts) of the United States. Remember, it is currently 2011 and so this is only 14 years away. This should make it pretty clear where the highway leads. This speaks louder than fuzzy debt-to-GDP statistics that inevitably lead one to wonder where exactly the tipping point is. Cuts and revenue generating initiatives will need to be made soon. How else will we pay for other government services?
Commentary
What?s ahead for home prices? Searching for a bottom
At a financial analysts meeting in early 2008, I was asked when we would know the financial crisis was truly over. At that point we had no clue. It had only just begun. Many experts believed it would worsen before any improvement would be seen. It was a timely and pertinent question. My own belief was to look to where it started. I responded that I felt it would end when home prices stopped falling. As I reflect on the past three years, I am still of that opinion. We will continue to feel the effects of the financial crisis via the burden of falling home prices for some time to come.
Commentary
The ?Great Recalibration?
Investors who have participated in the municipal market over the last several years are keenly aware of the volatility that the market has experienced. Increased market volatility has resulted from the reaction to subprime exposure; downgrades and eventual disappearance of monoline insurers; the exit of hedge funds and arbitragers from the municipal market; fiscal strains on state governments; and changes in demand dynamics with the intro and eventual elimination of Build America Bonds. As each of these issues came to bear, they were often the subject of sensational headlines.
Commentary
Has the hour of the dividend stock arrived?
Surveying the present financial landscape-what are investors? options? Bonds have been enjoying historic popularity. But they are at market highs and come with return and income potential inherently capped by their coupons. Turning to Treasuries, the price-to-yield is particularly unattractive. Then there?s the specter of interest rate risk. The steep rebound of equities off the crisis bottom ended with the arrival of 2010, and double-digit returns for many formerly cheap stocks went with it. Following a period of volatility, we appear to have settled into the slow-growth stage.
Commentary
An Investment in Infrastructure
Neglecting infrastructure can have tragic consequences. Think about the I-35 bridge collapse in Minneapolis, levees breaking in Missouri or the San Bruno gas pipeline explosion. These and many other examples illustrate the type of destruction that can occur if the country?s aging infrastructure is not addressed. At the same time, demand for new infrastructure is growing exponentially in emerging markets. Data highlighting the scale of construction, transport, logistics and communications development are so large they render relevant context difficult to comprehend.
Commentary
Floating rate: Hedging the interest rate risk in your fixed-income portfolio
Following the Great Recession of 2008, many investors aggressively moved to cash and fixed-income securities in a classic flight to safety. In early 2009, we could point to a historic opportunity to capture significant total return. Much of that correction has already occurred and valuations across the fixed-income market have largely recovered. At this juncture in the business cycle, credit risk has declined dramatically, as evidenced by defaults that are running below long-term averages, robust new issuance and demand for bonds, and healthy corporate balance sheets and earnings.
Commentary
Financial markets don?t worry about government shutdowns ? It?s when they come back we worry!
We examine the implications for the broad economy, financial markets and state and local budgets of a federal government shutdown. The probability of a ?shutdown? this weekend is growing. There appears to have been little real progress in negotiations over the last few days. If anything, the debate about the current crisis has ballooned into an even greater battle about the size of and role of government. It is relatively easy to agree on a target $33 billion or $40 billion of expenditure cuts, it is MUCH more difficult to identify exactly which programs should be cut to meet that target.
Commentary
Small-/Mid-Cap Growth ? Why Today?s Market Cycle is Different
We believe the outlook for small- and mid-cap growth stocks remains bright as we move into the later stages of the economic recovery. While the asset class is typically expected to underperform at this point of an economic rebound, there are three important distinctions that make this cycle different: 1) scarcity of growth, 2) continued M&A activity and 3) commodities inflation.
Commentary
Stock picking is dead? Long live stock picking
A recent frontpage story in The Wall Street Journal was titled ?Macro Forces in Market Confound Stock Pickers.? The article quoted a prominent Wall Street strategist as saying, ?Stock picking is a dead art form.? The article is now prominently displayed on my office bulletin board as I believe it (and similar articles and research notes) marks a high in skepticism regarding active investing. I also believe these sentiments will be proven dramatically wrong in the months and years to come, as certain active investors take advantage of the inefficiencies that this very skepticism is causing.
Commentary
The Secular Case for Convertible Securities
The most common question from potential investors in convertible mutual funds goes something like this: ?Is now a good time to get into convertibles?? The question is sincere and seems very relevant. The usual answer is: ?It?s a pretty good time.? In the end, the usual result of this usual exchange is that most investors think about convertibles for a moment, and take no action. Behind any timing question about convertibles is the assumption that equities and traditional fixed income instruments are the core of a good portfolio and everything else is alternative.
Commentary
Local Municipal Credit Quality Dissected
While we believe there will likely be more credit pressure and some defaults at the local level, including counties, cities, towns and school districts, we don?t believe there are systemic risks in the market that will cause widespread defaults. Most municipalities are making the tough choices to either raise taxes and fees and/or cut expenses to ensure debt service obligations are paid on time and in full. Moreover, ultimate recovery of full principal in the event of default is viewed as very likely.
Commentary
Seeking Equity Dividends: Now More than Ever
The evidence is clear that dividends have been a crucial part of total returns through history and that dividend payers (particularly sustainable dividend growers) have significantly outperformed their non-dividend-paying peers over the long haul. Couple those higher returns with the lower volatility that comes with the dividend-paying class vs. broader equity markets and it makes a clear case for the power of dividends.
