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Letters to the Editor
by Various,
Readers respond to three recent articles and commentaries: Wade Pfau's article, GLWBs: Retiree Protection or Money Illusion?, which appeared on December 13; PIMCO's commentary, Hot Potato, which appeared on December 21; and Kay Conheady's commentary, Does the Trend Matter?, which appeared on December 20.
Gundlach on the Key Threat to Global Economies
by Robert Huebscher,
If class warfare is to be the dominant theme in next year?s presidential campaign, it will revive the premise of Ernest Hemingway's 1937 novel, To Have and Have Not, which he wrote in the midst of the second downturn of the Great Depression. That was also the title Jeffrey Gundlach gave his conference call with investors last week, during which he warned that wealth inequality will threaten European and domestic economies. Last week also saw Morningstar pass over Gundlach as a candidate for its fixed-income manager of the year award, so we?ll look at whether that decision made sense.
Letters to the Editor
by Various,
Readers respond to several articles: GLWBs: Retiree Protection or Money Illusion?, Did Congress Cash In on Insider Stock Trading?, and Can this be Serious?, all which appeared last week, and to John Mauldin's commentary, The Center Cannot Hold, which appeared on Saturday.
GLWBs: Retiree Protection or Money Illusion?
by Wade Pfau,
One of the most popular variable annuity riders is the guaranteed lifetime withdrawal benefit (GLWB), which offers downside protection through lifetime income, upside potential with step-ups based on market performance, and minimal surrender penalties. But, examining historical data, I have found that those riders carry a cost that will not be readily apparent to retirees: their cash flows rapidly decrease on an inflation-adjusted basis.
Markets Rolling Look For More Of The Same
During the last two weeks, global markets have moved their way to higher ground and indications point to a healthier finish than expected to an otherwise sickly 2011. We see several developments supporting a continued equity market rally. They have to do with measures taken in China, Europe, and by central bankers around the globe. The Canadian and Singapore dollars are well-managed currencies in countries with conservative banking systems. They are good candidates for continued long- term appreciation versus the Euro and U.S. dollar.
Storm Clouds Across the Globe
Major world equity markets had their best weekly performance in three years, boosted by economic numbers from the US, and by hopes that European leaders may find a solution to the debt crisis. U.S. manufacturing showed signs of regaining momentum, with both new orders and exports coming on strong. At weeks end, jobs numbers for November indicated that the open unemployment rate had dropped from 9.0% to 8.6%. Healthy sales on Black Friday (November 25), the traditional beginning of the holiday shopping season, also cheered investors during the following week.
And That's The Week That Was
by Ron Brounes of Brounes & Associates,
One week does not make a trend, especially since politicos across the globe have been more than capable of messing up a good thing in the past. Black Friday came and went, but hopefully the holiday spirit remains and shoppers still frequent the malls. The grand plan in Europe surely could ease the recurring tensions of the past few years, but grand plans have had a way of fizzling in the past. Dont put it past Congress to rain on the market parade. Do all investors celebrate the Santa Clause rally, regardless of religious affiliation?
Crafting a Country Call
by Russ Koesterich of iShares Blog,
For nearly a year, Russ has made weekly investment calls about markets across the globe. Heres a quick look at the macroeconomic approach behind his country views and a summary of where his calls now stand. Generally underweight in countries where prevailing macroeconomic conditions cannot explain high or expensive valuations, and he is typically overweight in countries where prevailing macroeconomic conditions cannot explain low or inexpensive valuations.
No Direction Home
The conceit of Ancient Rome: In Imperial Rome, roads out of the city marked only the distance from the city, not to anywhere. All that counted was how far or near you were from it. The ECB adopts a similar centricity: all that matters is to keep prices stable. Nothing else. Which is why euro bonds continue to retreat with Italy and Spain hitting the 7% club for their 10-year paper. Unemployment can remain at 10% for three years. Growth can slow to 0.2%. But while inflation stays above the 2% target, all bets are off to ease the pain.
No Direction Home
The conceit of Ancient Rome: In Imperial Rome, roads out of the city marked only the distance from the city, not to anywhere. All that counted was how far or near you were from it. The ECB adopts a similar centricity: all that matters is to keep prices stable. Nothing else. Which is why euro bonds continue to retreat with Italy and Spain hitting the 7% club for their 10-year paper. Unemployment can remain at 10% for three years. Growth can slow to 0.2%. But while inflation stays above the 2% target, all bets are off to ease the pain.
Bill Gross' Revised Paradigm: The New Normal Minus
by Robert Huebscher,
Following the financial crisis of 2008, PIMCO articulated its 'new normal' forecast of slow growth and mediocre capital market returns. Appending the even drearier modifier 'minus' to that outlook, Bill Gross said that expectations now appear worse than even he previously feared. Gross was pessimistic in both the near and long terms, and he startled the audience with his premonition that 'capitalism is at risk.'
The Political Season Heats Up
U.S. presidential elections are a year away, while France and many other countries will be staging elections within the next twelve months. We can expect continued volatility as politicians around the globe say things to benefit their re-election chances which can have a negative impact on stock prices globally over the short run. This has made and will continue to make the tried and true method of buying and holding specific stocks for the long term a difficult road to travel anywhere in the world.
Asia-Pacific Portfolio Committee Discusses Cyclical Outlook for Globe and Region
China will likely focus more on rebalancing of the investment-focused domestic economy this time, rather than on reflating of the economy to engineer higher growth as it has done in 2008 to 2009.
Japans fiscal policy will need to be expansionary to facilitate reconstruction efforts.
We believe Australian government bonds have the potential to outperform U.S. Treasuries on a local currency basis, particularly in a left-tail global economic scenario.
How a Trivial Oversight Created a Big Problem
by Dan Richards,
Over 25 years working with advisors, I've learned that while you need to get the big things right, small issues are often much more important than they appear on the surface. Last week I met with a 25-year industry veteran who told me about a big price he paid for a seemingly minor oversight.
Global Equity OutlookFourth Quarter 2011
by Team of American Century Investments,
In this edition of Weekly Market Update, presents the teams outlook for global equity markets, based on the latest research and discussions with companies from industries and countries across the economy and the globe. The team focuses on individual security selection, building portfolios from the bottom up, rather than making top-down judgments about the economy. In their view, economic trends matter to the extent that they relate to corporate earnings power. As a result, the outlook focuses on corporate earnings and other areas they deem important to successful global equity investing.
Europe The Plan to Have a Plan
by Fred Copper of Columbia Management,
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.
Volatility Rears its Ugly Head
The major debate in the financial markets today revolves around whether or not the U.S. is going to experience a double-dip recession. We do not expect a recession, but if that does happen it should be a shallow one. We remain cautiously optimistic that the politicians in the US and Europe will eventually do the right thing as the consequences of not acting in a prudent and responsible manner are not pretty. We anticipate that markets will continue to be volatile until Europe finds resolution for its problems and until politicians across the globe learn to compromise across party lines.
The Happiness Dilemma
by Kevin Feldman of iShares Blog,
Princeton professor Angus Deaton studies the impact of the financial crisis on Americans state of mind. The good news? We may be unhappier than we should be. We all know that the financial crisis has been difficult, and I imagine its made most of us unhappy at various times. 60% of American households saw their wealth decline between 2007 and 2009. Deaton wanted to examine more precisely the relationship between the crisis and American happiness-self-reported subjective well-being, or SWB. Which parts of the crisis hit people the hardest?
Boomer Demographics: The Shift Ahead
I looked at developments in U.S. demographics from 1980 to the present with a focus on the Boomer bulge. Then I examined current day demographics for several major countries around the globe. I've developed a set of population pyramids for the U.S. that start with 1981 and span7 decades at 10-year intervals using the U.S. Census Bureau data. Let's look at some comparative numbers for these seven snapshots. I've calculated the Elderly Dependency Ratios for each. As this ratio shifts higher, the productive population is increasingly burdened by the cost of entitlement programs.
Thomas Friedman's View of the Future of the US
by Michael Edesess,
Andy Rooney once said, 'It's just amazing how long this country has been going to hell without ever having got there.' Our country's roughly 30-year march to perdition is the subject of Thomas Friedman's and Michael Mandelbaum's new book, That Used to Be Us. Rooney may still be right, though - the authors identify, albeit not all that convincingly, a path to salvation.
A Q3 Client Letter Drawing on Buffett?s Optimism 'The U.S. is coming back now' - and why three inves
by Dan Richards,
Since 2008, each quarter I have posted a template for a letter to clients; these are consistently among my most popular articles. This quarter's letter provides clients with perspective on the recent market turmoil.
A Critical Look at Obama?s Economic Team
Confidence Men is an exposé, by the reporter Ron Suskind, of what he claims is incompetence, infighting, and insubordination at the highest levels of economic leadership in the Obama administration during the global financial crisis. Those accusations are largely misdirected. After all, there was no playbook for the administration's economic thinkers to work from - the rapidly unfolding crisis forced them to improvise.
Value Investing Lessons from Moneyball
Is baseball a metaphor for life, as many literati have suggested, or for value investing? Michael Lewis' 2003 bestseller Moneyball argues the latter. More recently, the book has been adapted to make a thoughtful movie that will be of special interest to investors who believe in trying to find hidden bargains.
Is the End Near for the Eurozone?
by Team of Knowledge @ Wharton,
Warning signs are flashing red. Bond markets are projecting a 98% chance of default on Greece's debt. Stock prices for French banks, heavily invested in that debt, have plunged 10% in recent days. Has the European debt crisis hit the breaking point, with Greece -- and perhaps others -- soon to exit the eurozone? Or, will officials once more cobble together new agreements that keep Greece in the club and prevent a huge contagion effect likely to cripple an already slowing global economy? Wharton finance professors Franklin Allen and Bulent Gultekin offer their insight.
The Risks of Exchange-Traded Products
by Dennis Gibb,
Every major financial crisis has been foretold by timely but ultimately ignored warnings. At the end of mania, the rush to secure more fees, investment performance and status trumps common sense. In the last few months, the drumbeats of warnings from financial journals and regulators about exchange-traded funds have been sounding. Few seem to be listening.
The Money Pit
Zero net non-farm jobs were created in August. Likewise, QE1 and QE2 have not boosted economic growth and we certainly do not need a QE3. The Fed has nothing left, and it is not their job to stimulate the economy. Policy decisions coming from Washington will be instrumental in determining our economic recovery. Intentionally or not, Fed policies are propping up our stock market. With the daily bombardment of bad news around the globe you would think equity prices would be in a free-fall. However, corporate earnings are relatively strong and we are still the safest haven for investor money.
Time to Embrace a new round of Quantitative Easing
by Chris Maxey of Fortigent,
As we head into the fall, investors should prepare for a continuation of this summers volatility.While August is viewed as a challenging month for the markets, September reigns supreme as the worst month for market performance historically. Dominating the headlines this week will be an announcement by President Barack Obama on Tuesday regarding plans for boosting job growth and increasing budget savings. Across the globe, services PMIs will be released this week, and akin to the global manufacturing PMIs, declines are expected.
No Way Out
by Michael Lewitt,
There aren't enough Steve Jobs and Mark Zuckerbergs to innovate our way out of the Everest of debt we have built for ourselves (and will continue to build for the foreseeable future). The good news (a purely relative evaluation) is that astute investors will find enormous opportunities in today's markets as they increasingly reflect unsustainable fiscal and monetary imbalances.
The Summer Wind
by Jeffrey Saut of Raymond James,
Just like the surfer interviewed over the weekend who grabbed a board and leapt into the Irene-induced waves, investors need to grab a board and catch a wave if they want to achieve success. But to do that, first you need to get into the water! The time to stand on-shore was months ago, not after a ~20% decline in the S&P 500 (SPX/1176.80) from its intraday high on May 2 to its intraday low on August 9. While we have been pretty conservative in our stock recommendations over the past three weeks, we would become more aggressive if the SPX can break out above the recent rally-high of ~1208.
No More Cowbell
Since 2008, fiscal and monetary authorities around the globe have been clamoring for more and more cowbell, government generated stimulus and financial support. But there are increasingly clear signs now that the effectiveness of more cowbell is on the wane while opposition to more cowbell is on the rise. In a world with no more cowbell, cash and high quality assets are good places to hide out in anticipation of greater opportunities to profit from market uncertainty. While it may be true that we should not fear the Reaper, a healthy dose of skepticism is essential.
Weekly Market Commentary
A new political dynamic is overspreading the globe. It's a force not only of political will, but fiscal interests. It sets up a defensive, cash-only paradigm which favors no one but those who have capital. Ironically, this new renaissance is concentrated not in regions of vast wealth already, but in the more distressed areas of the globe. The implications are vast. Foreign investment in these regions in agriculture, water purification, industrial development, and manufacturing could prove to be the next revolution in capital spending that saves the markets and people in need at the same time.
What to Make of Todays Market Moves?
The 10-year Treasury has hit an important threshold while equity markets across the globe are off 4-5%. The 10year Treasury hit an intra day low yield today of 1.97%, which was last seen on 12/30/08. This is important in that it is a historical low yield and invites the question whether a secular double bottom might just be taking place. It also begs the question whether this flight to quality is another knee jerk reaction to a stumbling of political processes; or is it an environment where historically low interest rates are semi permanent? Could the answer be yes to all of them?
Weekly Market Commentary
Has the markets crisis been averted because Congress passed a debt-ceiling bill or because the bear panic last week wiped out a lot of doubters? Not at all. One can forget the immediate knee-jerk responses. The most powerful ally we have now is time. The indecision and ambiguity which triggered the panic is still firmly entrenched in boardrooms and kitchens around the globe. Multiple solutions only confuse the markets direction. While spending and stimulus are probably whats needed to avert a recession, neither is going to happen in this climate of political intractability.
Global Overview
by Team of Thomas White International,
Economic outlook softens further as the fiscal crisis in the developed countries escalates. While the European debt crisis continues unabated, the unprecedented downgrading of U.S. debt has shaken investor confidence across the globe. Policy responses to the growing crisis so far are widely perceived to be ineffective, as deep ideological and political divisions make compromises inevitable. Monetary policy is also constrained as central banks have limited tools left to effectively address the slowdown in economic activity.
Why This Cycle Is Different
by Milton Ezrati of Lord Abbett,
Back in 2009, when the recovery from the subprime crisis was just beginning, the International Monetary Fund produced a remarkable study of past economic cycles. The analysts there made a point of distinguishing the behavior of cycles caused by financial crises from the behavior of cycles with other causes. Their work made clear that recessions associated with financial crises were deeper and lasted longer than others and that the subsequent recoveries were slower. And that when cyclical forces were synchronized across the globe, as they were in 0809, these differences were even greater.
Clueless
In Greece and Italy national debt now exceeds GDP. Spain and Ireland are not far behind. It is causing turmoil in equity markets across the globe. Meanwhile, here in America Congress pats themselves on the back for finally agreeing to their own debt solution. They must not have been reading the papers as our debt just surpassed our GDP and Standard & Poors dropped our credit rating from AAA to AA+. Our debt is now like the Titanic waiting for an iceberg. So what did Congress accomplish? Its not clear. The best we can tell is Congress agreed to cuts of $900 billion over ten years.
Weekly Aisa Update
by Robert J. Horrocks of Matthews Asia,
Italys government bond yields have been spiking as investor concerns threaten to become self-fulfilling prophecies that raise the specter of default in Italy and dismemberment of the euro. While, China is stepping more than a little lightly on the monetary brakes, along with other countries across Asia, over fears that inflation is getting out of control. And the markets response is to push up the price of U.S. bonds and sell down equities across the globe. Obviously, slowing growth is of far greater concern to investors than the opinion of the rating agencies.
Does Government Intervention in Financial Markets Slow Economic Growth?
by Michael Edesess,
As we saw with the Dodd-Frank legislation and the Consumer Financial Protection Bureau, the question underlying the debate over financial regulation is whether it stifles economic growth. Leo F. Goodstadt's book, Reluctant Regulators, provides useful insights from the experiences of Hong Kong and China. It also causes us to ponder whether our measurement of economic growth is fundamentally flawed.
Gold is the True Reserve Currency
The reliance upon the U.S. dollar as the worlds reserve currency and safe haven asset has created a perverse, but deeply entrenched, mindset among global investors. In fact, many believe the major financial players have no alternatives to owning U.S. debt and dollars. They argue that the market for U.S. dollars and Treasuries is the only financial pool large enough to handle the massive liquidity that sloshes around the globe on a daily basis. This idea makes a mass exodus from U.S. debt holdings seem impossible.
Solving the REAL Debt Crisis
Now that the debt ceiling impasse (circus) has been resolved, it's time to address this country's real debt crises. Our leaders need to conquer the far more daunting entitlement issues we face. Our choice is simple - either reduce costs and face austerity, or raise taxes. Those alternatives need not be as painful as you or they might think, as I will demonstrate.
Comfort is Rarely Rewarded; Maverick Risk and False Benchmarks
Conventional investment strategies, while affording the investor at least a temporary degree of comfort, are destined to produce mediocre results. Only by distancing themselves from the ordinary approach ? as Jeremy Grantham and Seth Klarman have ? can asset managers achieve superior performance and truly fulfill their fiduciary duties by acting as proper stewards of their clients? capital.
Second Quarter Preserves First Quarter Market Gains: We're Still Above Water and Treading
by Ron Surz,
In his award-winning commentary, Ron Surz looks at how the US market performed and then how foreign markets fared. He concludes on a lighter note with a couple of videos that address key topics in the investment arena.
Golub Group Quarterly Commentary
by Michael Golub of The Golub Group,
What does it take to achieve a secure retirement? We all have many goals, financial and otherwise, but securing a comfortable retirement is one we all share. It doesn?t matter if we are in our twenties and just beginning our professional lives or if we have already been enjoying retirement for 20 years. What does matter is, have you defined what is important to you, what you will need, what you want it to look like? Have you done a thorough assessment of your current situation and what you?re doing to improve it? The time to start thinking, planning, and acting on this is NOW.
Playing Cat and Mouse with Global Oil
Oil markets took another dose of global geopolitics this week when the International Energy Agency (IEA) unexpectedly announced that it would be releasing 60 million barrels of oil from strategic petroleum reserves (SPR) around the globe. Thursday?s surprise announcement gave oil prices a 4.5 percent hair cut and oil prices closed Friday at $91.25, down 20 percent from their April 29 peak.
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