March 1, 2010
The past few days brought us some observations by a number of financial commentators, who expressed concern about how our economic recovery is coming along. Although none of the following three are ready to start sounding alarms, they all seem to share a similar tone of discouragement.
Don Luskin of The Wall Street Journal ’s Smart Money blog began his February 26 piece with an explanation of how proud he used to be about the accuracy of his May, 2009 declaration that the recession had ended. Although he still believes that he made the right call back then, the most recent economic indicators have muddied the picture:
I made my recession end call in May because of an entirely different set of statistics, designed to be predictive rather than merely to recognize what has already happened. What worries me is that these statistics have all started to get a little worse recently.
Luskin explained that although initial unemployment claims reached their peak in early April, the four-week moving average has risen 7 percent from where it was a few weeks ago.
Over history, upticks like that have no predictive value. There have been many of them, and very few have led to recessions. Still, 7% is a big reversal. In May when I got excited about the drop in claims, that drop was only about 4%!
Luskin found another disappointing trend in the fact that earnings expectations for the S&P 500 are now growing at a much slower pace than they were in April. Two other trends concerned him as well. The fact that the dollar has rallied ten percent in the last couple of months raises the question whether “the fear that gripped world markets in 2008 and 2009” could be returning. Finally, the fact that the credit spread between Treasuries and “junk bonds” is now at six percent after having been below 5%, brings a little discomfort simply because of a move in the wrong direction. Nevertheless, Luskin is still optimistic, although his perspective is tempered with realism:
So is the economic recovery over? I don’t think so. I think it’s just being tested. None of the indicators I use to detect the onset of recession are giving signals. But it’s haunting, nevertheless. After the horrific global recession we went through, you’d think we ought to come roaring back. We’re back, but we’re not exactly roaring.
In Sunday’s Washington Post, Frank Ahrens wrote an article discussing three indicators that “spell trouble for the recovery”. Here’s how he explained them:
— On Wednesday, the Commerce Department reported that January new-home sales dropped 11.2 percent from December, plunging to their lowest level in nearly 50 years.
— On Tuesday, the Conference Board reported that February consumer confidence fell sharply from January, driven down by the survey’s “present situation index” — how confident consumers feel right now — which hit its lowest mark since the 1983 recession. On Friday, the Reuters/University of Michigan consumer sentiment survey also showed a falloff from January to February.
— On Thursday, the government’s report on new jobless claims filed during the previous week shot up 22,000, which was exactly opposite of what economists predicted. Forecasters expected new jobless claims to drop by about 20,000.
Taken together, what do these reports tell us?
We’ve got a long way to go to get out of this economic mess, and we may be actually losing a little ground.
At the conclusion of that piece, Mr. Ahrens added that another factor holding back recovery is the current state of activity in the stock market. Investors seem to be exhibiting caution, uncertainty and “a hard-to-shake sense that we haven’t hit bottom yet”.
As I frequently point out, one of my favorite financial gurus is Jeremy Grantham of GMO. The February 26 issue of Bloomberg Business Week featured an article by Charles Stein concerning Grantham’s career. In the section of the piece discussing Grantham’s current outlook, we see yet another view toward a very lean, slow recovery process:
Grantham’s favorite asset class today is high-quality U.S.stocks, companies defined by high, stable returns and low debt. The allocation fund had 31 percent of its money in that category at year-end, sometimes called blue chips, according to the GMO Web site. In the interview, he said he expects such stocks to return an average of 6.8 percent a year over the next seven years, compared with 1.3 percent for all large-cap U.S. stocks.
Emerging-market stocks may rise about 4 percent annually in the next seven years, as investor enthusiasm for economic growth in developing countries carries the stocks to unsustainable levels, Grantham said.
“Why not go along for the ride?” he said. The MSCI Emerging Markets Index returned an average of 22 percent in the past seven years, compared with a gain of 5.5 percent by the S&P 500 index.
U.S.government bonds will return 1.1 percent a year over the seven-year period, according to the latest GMO forecast. The Bank of America Merrill Lynch U.S. Treasury Master Index rose 4.3 percent from 2003 through 2009.
Grantham said he expects a difficult, not disastrous, period for the economy and investments.
“It will feel like the 1970s,” he said. “One step forward, one step back.”
None of the three gentlemen whom I have quoted here are seeing visions of rainbows and unicorns in our economic future — at least not for the next few years. Be sure to keep the opinions of these experts in mind if the cheerleading by some perma-bull, TV pundit motivates you to “get in on the ground floor of the next stock market rally”. You could save yourself a lot of money and even more pain.
Getting Cozy
April 1, 2010
This week’s decision by the United States Supreme Court, in the case of Jones v.Harris Associates received a good deal of attention because it increased hopes of a cut in the fees mutual funds charge to individual investors. The plaintiffs, Jerry Jones, Mary Jones and Arline Winerman, sued Harris Associates (which runs or “advises” the Oakmark mutual funds) for violating the Investment Company Act, by charging excessive fees. Harris was charging individual investors a .88 percent (88 basis points) management fee, compared to the 45-bps fee charged to its institutional clients.
In his article about the Jones v. Harris case, David Savage of the Los Angeles Times made a point that struck a chord with me:
The lousy job that boards of directors do in protecting the investors they supposedly represent has become a big issue since the financial crisis, as Mr. Savage explained. Think about it: How could the boards of directors for those too-big-to-fail institutions allow the payouts of obscene bonuses to the very people who devastated our economy and nearly destroyed (or may yet destroy) our financial system? The directors have a duty to the shareholders to make sure those investors obtain a decent dividend when the company does well. If the company does well only because of a government bailout, despite inept management by the executives, who should benefit – the execs or the shareholders?
Michael Brush wrote an interesting essay concerning bad corporate boards for MSN Money on Wednesday. His opining point was another reminder of how the financial crisis was facilitated by cozy relationships with bank boards:
Michael Brush contacted The Corporate Library which used its Board Analyst screener to come up with a list of the five worst corporate boards. Here is how he explained that research:
I won’t spoil the surprise for you by identifying the companies with the bad boards. If you want that information you will have to read the full piece. Besides — you should read it anyway.
All of this raises the question (once again) of whether we will see any changes result in the aftermath of the financial crisis that will help protect the “little people” or the not-so-little “investor class”. I’m not betting on it.