Brighton Perspective

Hedge Fund vs. Mutual Fund

I've been rather asked frequently lately "what is a hedge fund?". The following chart does a good job of highlighting the key differences between a hedge fund and a mutual fund. The key is that mutual funds are regulated by the SEC under the Investment Advisors Act of 1940 while most hedge funds are not. In fact, most hedge fund are established as private placements which is why most are only available to "accredited investors". More "40 Act" funds are employing hedge strategies today and are, thus, bringing "hedge funds" to non-accredited investors. They're also bringing lower fees, more transparency and greater liquidity as well. I am a proponent of alternative strategies and have no issues with hedge funds but I do like to use the "40 Act" funds when I can. Differences between Hedge Funds and Mutual Funds Mutual Funds Hedge Funds SEC oversight SEC imposes numerous requirements, including reporting, etc. Minimal SEC registration Required Not required Minimum investment Depends on fund, but is typically less that $10,000 Depends on fund, but is typically $250,000 or more Investor qualifications Anyone can invest as long as a fund's minimum investment is met Must be an "accredited" investor with a net worth of $1 million or more and a consistently high level of income ($200,000+) Reporting requirements Must disclose investment objective and strategy, holdings, performance statistics No reporting required; a fund may keep its strategy and methods secret even from its own investors Investing strategy Typically invest "long" (buys securities outright) A fund may use multiple investing techniques, including complex hedging strategies, arbitrage, leverage, and use of derivatives Investment performance measurement Typically, fund aims to replicate or beat a given benchmark Typically, fund aims to produce positive returns under any market conditions Table Source: Forefield, Inc.

Weekly Update

Market Week: August 31, 2009

The Markets The last full week of August is typically a relatively sleepy time for the markets, and last week was no exception. Compared to the pace of recent months, the equity markets seemed to level off as though they were stretching out at the beach. Except for the Global Dow, the major indexes ended the week a fraction of a percent (mostly positive) from where they started. The bond market continued resilient in the face of a new round of Treasury issuance. Market/Index 2008 Close Prior Week As of 8/28/09 Week Change YTD Change DJIA 8776.39 9505.96 9544.20 .4% 8.75% NASDAQ 1577.03 2020.90 2028.77 .39% 28.64% S&P 500 903.25 1026.13 1028.93 .27% 13.91% Russell 2000 499.45 581.51 579.86 -.28% 16.10% Global Dow 1526.21 1819.50 1841.91 1.23% 20.69% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.57% 3.45% -12 bps 121 bps Last Week's Headlines Consumer spending rose 0.2% in July, but three-fourths of the increase was spurred by the "Cash for Clunkers" program. Wages and salaries rose 0.1%; in June, they had fallen by 0.3%. Not counting food and energy, inflation rose at an annual rate of 1.4%--slightly less than the previous month, and well within the 1.5%-2% Fed target. Home prices rose in June for the second month in a row, though the S&P/Case-Shiller national home price index is still at levels last seen in 2003 and is down 30% from the 2006 high. The index rose 2.9% in the second quarter--the first quarterly increase in three years. And though prices were down 14.9% from the previous year, the year-over-year decline was less than Q1's 19.1% decline. July new-home sales rose more than expected. The 9.6% increase was accompanied by a drop in the nation's inventory of unsold homes, which fell to a 7.5-months supply--the lowest since April 2007. Large orders for aircraft helped push durable goods orders up 4.9% in July. However, excluding such defense spending, orders for nondefense capital goods fell 0.3%. The Conference Board's measure of consumer confidence reversed course in August, rising to 54.1%; it had dropped to 47.4% in July. However, statisticians with Reuters/University of Michigan obviously weren't talking to the same people; their index of consumer sentiment fell in August to its lowest point in four months. Ben Bernanke avoided joining the ranks of the unemployed as President Obama nominated him for another term as chairman of the Federal Reserve Board. Eye on the Week Ahead During the run-up to the Labor Day weekend, any traders left in the office will be watching employment data to see if the rate of job loss continues to slow. Auto sales figures are expected to reflect the impact of "cash for clunkers." Key data releases: Manufacturing activity, auto & home sales (9/1); productivity (9/2); unemployment (9/4). Data source: Includes data provided by Forefield, Inc. & Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Have you rebalanced your 401k yet?

How many investors entered September of 2008 with a heavy overweight in domestic equities? How many ignored their 401k's during the six month decline that followed? How many benefited as a result, over the last 5 months as equities have recovered (still 25% below the early September level and roughly 33% below the October 07 S&P peak)? How many moved to cash at some point during the decline and are still sitting in cash now?

Whether you "cashed-out" or stayed in equities, the asset allocation you had established 12 months ago is most certainly out of sorts now. Take time to review your allocation now and consider what it should be in light of the current market and economic environment. Also consider your risk tolerance - to what extent did the 9/08 to 3/09 decline clarify for you what your true risk tolerance is? If you went to all cash quickly, you probably have a much lower threshold than you thought.

Strive for true diversification - look for exposure globally rather than just domestic and ensure you have exposure to asset classes other than equities. Use the asset allocation tools on your plan provider's website and research the options available in your plan. Take advantage of the improvement in financial markets to reduce your risk (if you're still overweight equities) or to improve your return potential (if you're 100% cash). Going forward, try to revisit your 401k asset allocation quarterly and make changes as necessary.

The Stimulus Is Definitely Working?! - Forbes.com

The Stimulus Is Definitely Working?! - Forbes.com.

Excellent commentary on the current arguments for and against the true effect of the stimulus on the current state of the economy. At best, one can claim a "placebo" effect (borrowing on Romer's use of medical terminology) on the economy. Essentially, things are getting better because participants believe things are getting better, not because they actually are yet. Participants believe they've been given a medicinal cure and that cure has made them better, when, in reality, the illness has or is simply running its course without any benefit from the placebo. So little of the stimulus has actually entered the economy that it's nearly impossible to claim it's materially driven the nascent recovery.

I continue to believe the stimulus will prove inflationary as it increases money supply just as the economy truly gains momentum in the later half of 2010 or early 2011. The recently announced increased in the expected deficit is also cause for concern. It seems probable that the dollar will weaken as global participants consider safer havens elsewhere. Also keep in mind, many of suggested a deliberately weakened dollar as a method of "inflating" the economy.

Bottom line - it's highly unlikely the stimulus has had any material impact yet on the economy, good or bad, but will likely have a big impact in the next 18 months to 2 years and it's more likely that impact will not be beneficial.

Weekly Update

Market Week: August 24, 2009

The Markets The equity markets staged their own V-shaped recovery last week. After Monday's plunge (prompted in part by selloffs in the Chinese stock market), they spent the rest of the week recuperating nicely--and then some. Highs for the year were everywhere you looked. The Nasdaq recaptured the 2000 mark, while the Dow closed above 9500, which it hasn't done since last year's presidential election. The S&P is now up nearly 52% from its March closing low, while the Nasdaq is up almost 60%. Market/Index 2008 Close Prior Week As of 8/21/09 Week Change YTD Change DJIA 8776.39 9321.40 9505.96 1.98% 8.31% NASDAQ 1577.03 1985.52 2020.90 1.78% 28.15% S&P 500 903.25 1004.09 1026.13 2.20% 13.60% Russell 2000 499.45 563.90 581.51 3.12% 16.43% Global Dow 1526.21 1803.83 1819.50 .87% 19.22% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.56% 3.57% 1 bps 133 bps Last Week's Headlines The Producer Price Index, which measures wholesale prices, declined 0.9% in July, and is down 6.8% from a year ago. However, the so-called core index, which doesn't include food and energy, dropped by only 0.1%, and was 2.6% higher than last year. Housing starts, which had risen 6.5% in June, fell 1% in July, and were 37.7% lower than last July. The biggest decline--16.3%--was in the country's northeast region, while starts in the midwest actually increased almost 13%. Sales of existing homes rose in July for the fourth straight month, hitting the highest level since August 2007. The 7.2% increase was the biggest monthly jump in 23 years, according to the National Association of Realtors. However, the inventory of unsold homes also rose by 7.3%. The chief economist for the International Monetary Fund (IMF) declared the global recession is officially at an end. However, he added that actual growth and recovery will be low and slow, and that rebalancing levels of public and private spending could take years. Six of the ten leading economic indicators monitored by the Conference Board were up in July, pushing the index up 0.6% for the month. This was the index's fourth straight monthly gain. Nearly one in every eight mortgages in the country were delinquent or behind one payment during the second quarter, according to the Mortgage Bankers Association. Of that record number, one of every three were prime fixed-rate mortgages, up from one in five a year ago. Five more bank failures were announced on Friday, bringing the total number of failures this year to 81--more than three times the 24 banks that went under during all of 2008. Anticipation of economic recovery plus some dollar weakness helped push oil prices up by 6% last week to almost $74 a barrel--a high for the year. Eye on the Week Ahead More data on consumer mood, income, and spending highlight August's last week to sizzle. Investors will be watching to see whether the indexes will maintain their scorching pace or flame out. Key data releases: Home prices, consumer confidence (8/25); durable goods orders, new home sales (8/26); gross domestic product (8/27); personal income and spending (8/28). Data source: Includes data provided by Forefield, Inc. & Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

You Should Use a Retirement Plan Consultant

The last twelve months have left many retirement plan participants less confident in their ability to successfully manage their accounts. In fact, the survey found 76% of participants believed that making investment advice more available would have a strong positive impact on employees and 44% believed it would also have a strong positive impact on the company. Ask yourself the following questions:

1)    Does your plan have a QDIA?

2)    Does your plan have at least one option in domestic large cap, mid cap and small cap equity, foreign equity, core fixed income, high yield, short-term, intermediate term and long-term government fixed income, foreign fixed income, emerging markets (equity and debt) commodities, real estate and at least one QDIA option?

3)    Do you know the average expense ratio for the fund options in your plan lineup?

4)    Do your participants have 24/7 access to their accounts?

5)    Are you using a financial advisor to provide plan consulting and employee educational services?

6)    Is it time for a plan check-up?

A retirement plan consultant can help address all of these questions. Plan sponsors have a fiduciary duty to manage the plan in the best interests of plan participants. Consultants can help plan sponsors meet their duties by:

1)    Writing the Investment Policy Statement – one of the first documents requested by the DOL when auditing a plan.

2)    Selecting or guiding the selection of investment options – helping to ensure that the plan has at least one QDIA and offers diversification among investment options – asset classes, styles, firms, etc.

3)    Providing on-going evaluation and performance analysis of the investment options and recommending changes when needed.

4)    Providing guidance on plan design, selection and implementation including retaining the plan administrator.

5)    Providing on-going educational services to plan participants.

It isn’t necessary or required to use a consultant, but it can be highly beneficial. After all, the primary business of most plan sponsors is not retirement plan management. Thus, using a consultant, while not absolving the plan sponsor of fiduciary responsibility, can enable the plan sponsor to do what it does best – grow the business.

How I Manage Portfolios

Traditional asset allocation focuses on building a portfolio which maximizes expected return while minimizing risk associated with that return expectation. Asset classes are typically limited to equity and fixed income and within each asset class, strategies are defined by nine style categories. Investors build their asset allocation by selecting strategies from these categories and assigning portfolio weights which aggregate to the overall equity and fixed income portfolio weights. For example, the overall target allocations may be 60% equity and 40% fixed income. Within equities, the allocation could be 50% domestic large cap, 25% domestic small cap and 25% international. Within fixed income, the allocation could be 50% core fixed income, 30% foreign fixed income, 10% high yield and 10% short-term fixed income. Implementation is achieved using a variety of vehicles such as open-end, closed-end and exchange-traded mutual funds. Rebalancing is done periodically to bring allocations back to the target allocations. The process is straight-forward, easy to understand but does have drawbacks. The primary drawback is common exposures increase the correlations among the holdings leading to portfolio which are frequently less diversified than owners may believe. Secondary considerations are rebalancing frequency and costs.

Core/satellite asset allocation is an alternative to the traditional approach to asset allocation. This approach assigns strategies to either the “Core” component of the portfolio or to the “Satellite” component of the portfolio. The core component of the portfolio is often low volatility, passively managed strategies. These strategies are intended to anchor the portfolio and are traded infrequently. The core often comprises 60% to 70% of total assets. The satellite component of the portfolio is often comprised of higher volatility, higher expected return strategies and is rebalanced more frequently in an attempt to take advantage of investor insights or expectations for strategy out-performance. This approach has become popular because it has the potential to reduce portfolio volatility without reducing potential return and is typically very cost efficient. Variants on core/satellite include anchoring the core with lower volatility, active strategies and including alternative strategies.

My investment management process involves implementing a core/satellite portfolio. The core component typically consists of lower volatility strategies, often employing hedging techniques. The core will have equity and fixed income exposure and is rebalanced strategically, that is, infrequently. Reasons for rebalancing can include manager or firm turnover, change in management style, and poor absolute and relative performance. The satellite component consists of higher volatility strategies with higher expected return potential. This component is rebalanced tactically, that is, frequently. Reasons for rebalancing include changing underlying fundamentals, trailing total return meeting or exceeding expectations, and better potential return opportunities elsewhere. The typical portfolio has 10-12 positions, including cash, of which 7 to 9 are core and 3 to 5 are satellite positions. The intent with both components is to construct a portfolio of holdings with poor correlations. Hedged strategies and long/short strategies fit very well in this context. Satellite strategies tend to be very specific – a single sector, country, type of security, etc.

Consistent with core/satellite theory, I use open-end, closed-end and exchange-traded funds for implementation, leaning toward open-end for most of the portfolio because they typically offer better liquidity, transparency and fees. As the ETF universe continues to expand, I fully anticipate using these vehicles more frequently as well. Unless you’re highly tolerant of volatility and are focused exclusively on maximizing your potential return, give this approach some thought. A well constructed core/satellite portfolio can provide potentially lower volatility and lower expenses without sacrificing expected return.

Greg Mankiw's Blog: The Town Pier

Greg Mankiw's Blog: The Town Pier.

Read this post by Prof. Mankiw and think "Public Option". The analogy, most likely unintended, is apt. Private enterprise competes with a public enterprise which keeps prices low as a matter of "fairness" but under-prices it such that demand far exceeds supply. The consequence is that the public option becomes available only by "lottery". Those left out can seek the private option which becomes exceedingly expensive because there is no alternative. Because it is expensive, some of the "middle class" such as the boat captain, get left out. They lose out on the lottery and can't afford the private slip. If the public option becomes more expensive, the private option will become less expensive (seeking equilibrium), but that would mean that those originally covered by "fairness" might be priced out of the public option. As a result, the public enterprise is unlikely to raise prices. A lottery may work (debatable at that) for boat slips, but elsewhere?

Weekly Update

Market Week: August 17, 2009

The Markets After a few head fakes in both directions over the course of the week, the equity markets settled down a bit--literally--after four straight weeks of gains. The S&P 500 ended the week still clinging to the 1000 mark, but the Nasdaq reversed last week's push above 2000. The Global Dow remained in positive territory (barely), aided by reports of higher than expected growth in Germany and France. Though corporate spreads widened slightly, the bond markets were generally heartened by benign inflation data and strong demand at auctions of $75 billion of Treasuries. Market/Index 2008 Close Prior Week As of 8/14/09 Week Change YTD Change DJIA 8776.39 9370.07 9321.40 -.52% 6.21% NASDAQ 1577.03 2000.25 1985.52 -.74% 25.9% S&P 500 903.25 1010.48 1004.09 -.63% 11.16% Russell 2000 499.45 572.4 563.90 -1.48% 12.9% Global Dow 1526.21 1801.78 1803.83 .11% 18.19% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.85% 3.56% -29 bps 132 bps Last Week's Headlines The cost of food, energy, and shelter fell in July, but prices for practically everything else rose enough to keep inflation flat for the month, putting the annual inflation rate at 3.4%. That's 2.1% lower than this time last year, largely because of lower energy costs, and the steepest yearly decline since 1950. The late-July launch of the "cash for clunkers" program couldn't prevent July retail sales from falling 0.1% (without it, the decline would have been 0.6%). That's 8.3% lower than last July, and a disappointment given June's 0.8% increase. The Fed plans to wind down its purchases of Treasury bonds gradually before completing them by the end of October. However, it will continue to buy mortgage-backed and agency debt to support the housing market. Saying the economy is beginning to level off, it nevertheless feels conditions warrant leaving interest rates at "exceptionally low" levels. The U.S. trade deficit widened by $1 billion in June to $27 billion, though that's still less than half the level of this time last year. Exports were up, but imports rose even more. Business productivity rose by an unexpectedly high annualized rate of 6.4% in the second quarter, assisted by labor costs that fell at an annual rate of 5.8%. The productivity gain was the highest in almost six years. Industrial production also rose by 0.5% in July, the first increase in nine months, helped by GM and Chrysler emerging from bankruptcy and revving up manufacturing. July foreclosures rose by 7%, according to RealtyTrac; that's up 32% from last year, and is the third record high in five months. Filings in California, Florida, Arizona, and Nevada accounted for almost 57% of the total. Consumer sentiment as measured by the Reuters/University of Michigan index fell to 63.2 in July, the second decline in a row and its lowest level since March. Eye on the Week Ahead With economic data light, investors should have little to react to other than earnings reports during the winding down of earnings season. However, options expirations at week's end could bring some increased volatility. Key data releases: Housing starts, wholesale prices (8/18); oil inventories (8/19); leading indicators (8/20); existing home sales (8/21). Data source: Includes data provided by Forefield, Inc. & Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Project Syndicate

Project Syndicate.

"Asia may be willing to sponsor the west for now, but not in perpetuity.  Eventually Asia will find alternatives in part by deepening its own debt markets.  Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three.  As painful as it may seem, it would be far better to start bringing fundamentals in line now.  Restoring confidence has been helpful and important. But ultimately we need a system of global financial regulation and governance that merits our faith."

Assuming the author is correct, what can investors do to hedge these risks?

1) Higher taxes - investors can look for methods of reducing taxable income. This can be through participating in deferred compensation plans (if offered). Accelerate income into current years to avoid higher taxes to come. Invest in tax-exempt municipal bonds, ETFs, or funds. Invest in tax-managed strategies designed to reduced tax liabilities. Invest in tax credit strategies if available such as low income housing or historic tax credit funds (mostly limited partnerships and likely only available via secondary markets). Maximize your 401k contributions. Or, borrowing from "Atlas Shrugged", work less.

2) Inflation - consider investments such as bank loans, TIPS, commodities, stocks and real estate. All will offer some inflation hedge by benefiting from rising rates.

3) Default - this is least likely in the U.S. for many reasons. The most important may be the damage a default would do to the U.S. dollar as the global business currency and to the U.S. position as a global economic leader. But, if the government does default, avoiding Treasuries will offer some protection. I'd expect a default would be damaging to all U.S. investments and to local markets where the local government has heavily invested in Treasuries (China?!).

I see Rogoff's first two points as most likely - higher taxes and inflation as the economy is unlikely to grow its way out of the debt burden we now have.

S&P 1150?

I read somewhere that is the prediction of Abby Joseph Cohen as to where the S&P 500 will close 2009. Yesterday, the Fed held rates steady while acknowledging that they will likely hold rates at low levels for "an extended period" despite their judgment that the economy is "leveling out". Today, Walmart beats expectations and continuing jobless claims fell but new claims increased, surprising analysts and foreclosures continued to increase. So what to make of these competing data?

My opinion remains that the economic recovery will be low and slow. The economy will begin to grow again, hopefully already has if Barclay's is to be believed, but the rate of growth will be anemic and the recovery will take an "extended period". I continue to believe that corporate capital spending in plant, property, equipment and human capital will need to increase first. We haven't seen that yet. Corporations continue to run down existing inventory and implement other cost containment strategies to enable them to meet significantly reduced earnings estimates. Keep in mind, the S&P estimate for aggregate S&P 500 earnings for 2009 is roughly $39 a share. That is almost 50% below actual earnings for 2007! It will still be a feat if we finish 2009 at 950 which is the estimate I gave at the beginning of 2009. I continue to suggest investors remain skeptical of equity markets, at least domestically, and continue to hedge their downside risk.

Hussman Funds: Earnings Growth Forecasts May Require a Robust Economic Recovery

Hussman Funds: Earnings Growth Forecasts May Require a Robust Economic Recovery.

An add-on piece from Hussman's head of research - also consistent with my thoughts.

Hussman Funds

Hussman Funds.

Excellent commentary from an "under the radar" investment manager (by media standards). Of course, it's consistent with my thinking on economic and market prospects currently!

Weekly Update

Market Week: August 10, 2009

The Markets The S&P and Nasdaq both captured the flag Monday, reaching the psychological milestones of 1000 and 2000 respectively. Even more encouraging, they hung onto those levels at week's end, fueled in part by Friday's relatively encouraging unemployment number. Since their March lows, the S&P has now risen just over 49% and the Nasdaq is up nearly 58%. A decline in the unemployment rate, renewed appetite for risk, and a continued flow of new Treasury bonds helped take bond prices down. Market/Index 2008 Close Prior Week As of 8/7/09 Week Change YTD Change DJIA 8776.39 9171.61 9370.07 2.16% 6.76% NASDAQ 1577.03 1978.50 2000.25 1.10% 26.84% S&P 500 903.25 987.48 1010.48 2.33% 11.87% Russell 2000 499.45 556.71 572.4 2.82% 14.61% Global Dow 1526.21 1773.69 1801.78 1.58% 18.06% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.50% 3.85% 35 bps 161 bps Last Week's Headlines The unemployment rate dropped in July for the first time in 17 months, going from 9.5% to 9.4%. Though 247,000 jobs were lost, that's only a third of the jobs lost in January. Personal incomes in June were the mirror image of May. Incomes dropped 1.3% from the previous month, when they rose 1.3% because of a one-time Social Security stimulus package. However, consumer spending increased 0.4% during the month, largely because of higher gas prices. Individuals saved an average of 4.6% of their June disposable income. That's down slightly from May's 6.2% annualized rate but still dramatically higher than it was when the recession began. U.S. manufacturing activity neared the point at which it would no longer be considered contracting. The Institute for Supply Management's July index hit 48.9, up from June's 44.8. A number below 50 represents contraction. However, service industries shrank for the 10th consecutive month, and the pace of their decline accelerated slightly. Helped by the "cash for clunkers" program, which received a new infusion of $2 billion, U.S. auto sales rose to their highest level in 11 months. Ford reported July's sales were up 2.4% from last year--its first year-over-year gain in almost two years. GM and Chrysler's 19.4% and 9.4% monthly declines were still their best sales figures this year. Bank repayments of TARP loans will enable the Treasury to borrow $109 billion less during the third quarter than it had anticipated. Second-quarter Treasury debt also was less than expected--$343 billion instead of $361 billion. The $406 billion anticipated third-quarter debt would bring the total issued this year to $1.39 trillion. The Treasury announced plans to expand sales of Treasury Inflation-Protected Securities (TIPS), in part because of demand from overseas investors concerned about the future value of their stockpiles of ordinary Treasury debt. Eye on the Week Ahead Inflation and retail sales data are likely to dominate the dog days of summer as investors watch to see when--and whether--back-to-school shopping kicks in. Also in the air will be speculation about whether the S&P and Nasdaq can hold their recent gains or whether the sharp rally of recent weeks will bring on profit-taking. Key data releases: Productivity (8/11); balance of trade, Treasury budget, FOMC meeting (8/12); retail sales (8/13); inflation, industrial production, consumer sentiment (8/14). Data source: Includes data provided by Forefield, Inc. & Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

The Becker-Posner Blog: The World Recession is Ending: What Next? Becker

The Becker-Posner Blog: The World Recession is Ending: What Next? Becker.

Well written discussion (of course, written by Gary Becker!) suggesting the global recession has ended but issues do remain. Becker believes the Fed actions were generally beneficial while the fiscal policy decisions (Treasury of both administrations) were at best mixed. A recent stat shows that the "stimulus" passed by the Obama Administration earlier this year has contributed a grand total of $12 per person. The administration is, of course, taking credit for the potential end of the recession, but the more likely reality is that the recession ran its natural course, albeit, more severely than in recent memory.

Corporate profits have improved and have exceeded expectations but meaningful equity market growth (beyond current levels) shouldn't be expected until we see an increase in capital spending and top-line revenue growth. Continue to hedge downside risk.

Consumers Continue to Reduce Debt

Data released today by the Federal Reserve shows that consumers cut back on debt for 5th consecutive month. Given we're in a recession, that shouldn't be surprising. However, the five month streak is the second longest in the 65 year history of data available from the Fed and is part of a longer streak of 9 of the past 12 months. That matches the first year of data - 1943 - just after the U.S. entered WWII. The longest streak is is 7 months (from 6/91-12/91) and was part of a streak of 13 monthly declines in 18 months. Consumers began cutting debt 6 months into the 90-91 recession and didn't start adding meaningfully until June of 1993, 15 months after the recession ended (per NBER). Look at the following chart:

Consumers steadily increased from June of 93 through August of 08 and have now switched gears. If 90-91 serves as a guide, and I think its reasonable given the attention being paid to credit during this recession, consumers are unlikely to open their collective wallet and spend meaningfully for an extended period, possibly as much as another 12-15 months. The economy should start to recover ahead of that but don't be surprised if GDP growth is below 1% during this period. Consumers account for roughly 70% of GDP so it won't grow meaningfully until consumer spending meaningfully.

Are There Bright Spots Amid the Global Recession? - Forbes.com

Are There Bright Spots Amid the Global Recession? - Forbes.com.

Generally, Roubini is very pessimistic about the global economy and the U.S. in particular. Here he focuses on those countries/regions that look healthy to him. The list is consistent with the regions I discuss in my 2Q outlook as offering potentially better investment opportunity - emerging markets. He does mention a few developed markets, such as Canada, but the majority of countries would be defined as emerging.

These countries typically had healthier balance sheets entering the recession and thus are/were better positioned to recover earlier and more quickly. Most likely, any uptick in commodity prices will also be beneficial as many are commodities producers. Emerging markets have performed well over the last 3-4 months but may still offer more upside over the next 12-18 months than developed markets.

Weekly Update

Market Week: August 3, 2009

The Markets The equity markets ended a remarkable July on a high note. Though the sharp increases of the previous two weeks leveled off a bit, the direction was still positive, helped along by some key economic and housing statistics. The Dow saw its best month since October 2002, and the S&P 500 racked up its fifth straight month of gains. The Nasdaq continued to add to its year-to-date lead over other markets. Market/Index 2008 Close Prior Week As of 7/31/09 Week Change YTD Change DJIA 8776.39 9093.24 9171.61 0.86% 4.50% NASDAQ 1577.03 1965.96 1978.50 0.64% 25.46% S&P 500 903.25 979.26 987.48 0.84% 9.33% Russell 2000 499.45 548.46 556.71 1.50% 11.46% Global Dow 1526.21 1747.64 1773.69 1.49% 16.22% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.67% 3.50% -17 bps +126 bps Last Week's Headlines The nation's plunging gross domestic product (GDP), a measure of economic health, slowed its descent in the second quarter. The initial estimate fell at an annualized rate of 1%. Though that's still a decline, it's a dramatic improvement from prior months--especially considering that estimates for Q1 GDP were revised to -6.4% instead of the earlier -5.5%. Slower declines in exports and business spending accounted for much of the improvement. However, core PCE (personal consumption expenditures not counting food and energy, which the Federal Reserve monitors as an inflation gauge) rose 2%. The 11% jump in June sales of new homes was the biggest monthly increase in eight years, though it was still 21.3% below last year's figure. At the current sales rate, it would take 8.8 months to sell all the new homes currently on the market. (That's better than last June, when the new-home inventory would have taken 10.7 months to sell out and sales fell 0.6% from the month before.) In other relatively good housing-related news, May home prices in 20 major cities were up by 0.5% from April--the first monthly gain in the Case-Shiller index since July 2006. The index was still down 17.1% from May 2008, though that decline is the best year-over-year comparison in the last nine months. Hampered by auto factory shutdowns and lower defense spending, June orders for durable goods fell 2.5%--the first decline in three months for the notoriously volatile figure. However, not counting autos and airplanes, the number actually rose by 1.1% from May. Consumer confidence was down from the previous month; the Conference Board's measure dropped from 49.3 to 46.6. New York Attorney General Andrew Cuomo's report on the $33 billion in bonuses paid last year by financial companies that received TARP funds raised some eyebrows--not to mention questions about the extent to which taxpayer money helped support that compensation. Eye on the Week Ahead Unemployment figures for July will be watched to see whether they follow through on last month's disappointing numbers or improve on them. Also, investors will keep an eye on the S&P 500 to see whether it can capture and hang on to the nice round 1,000 level, which it last saw on Oct. 6. Key data releases: ISM manufacturing, construction spending, auto sales (8/3); personal income/spending, pending home sales (8/4); factory orders, oil inventories, ISM services (8/5); unemployment, consumer credit (8/7). Data source: Includes data provided by Forefield, Inc. & Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Economic View - How a Little Inflation Could Help a Lot - NYTimes.com

Economic View - How a Little Inflation Could Help a Lot - NYTimes.com.

Interesting concept regarding monetary focus on inflation. Many people believe, including me, that the key to the emergence from the recessions of the early 80's was Paul Volcker's commitment to reducing inflation. In this case, Sumner is proposing the Fed focus on creating inflation - at least to the extent that it commit to maintaining inflation at 2 to 3%. In this economy, that would mean creating inflation to counter the deflationary trend.

While attractive as an idea, modest inflation is better than deflation, the concern would center on the Fed's ability to maintain the target without overshooting. Higher inflation isn't attractive either. Managing expectations to create a self-fulfilling prophecy is a daunting effort. Sort of like herding cats.