Sentinel News
Thought of the Week: More traction...just look through the earnings season, 10.22.2012
View All Previous TOTW Articles| Christian W. Thwaites President and Chief Executive Officer Sentinel Asset Management, Inc. Last week saw an important debate on how the US has fared in the post recession recovery. The short answer is, "not well" if measured by a return to GDP growth trends or per capita income. But the counter, as explained by Reinhart and Rogoff, is "faster than you would expect." We're in the second camp. The nature of the 2008 recession was a systemic financial crisis. These permeate the entire financial system from banks, mutual funds, insurance companies, real estate and debt. And measured by depth, duration and dispersion, the crisis was the worst in living memory. In those recessions it takes about 5 years, in the post war period, and 10 years in all other depression periods, to recover lost ground. This makes it very different from a Fed induced recession to curb inflation or growth (e.g. 1981, 1992 or 2001). In those recessions, a return to growth happens in around four quarters. And these are the types of recession that we got used to in the last 30 years and against which the current generation of financial managers grade. The average growth rates from financial recessions are around 1.2% and by that measure, the US has done well. How well?: i) we're still around 2% below the GDP per capita rate of 2007 but at one point we were nearly 7% below ii) we're at 7.8% unemployment or about 3% above the 2007 level but prior crises saw unemployment triple and stay that way for many years and iii) the US has grown a lot faster than other countries hit with the same problems. You can see the US story here, which measures wage growth and benefit costs. Benefit costs remain very sticky but wages have yet to regain all of their current ground after the big hit in 2009 to 2010.  Source: Federal Reserve Bank of St. Louis, Economic Research US and Budget Deficits: Terrible, no? No. They're in good shape. The US ran a surplus in September for the second time this year. Total spending for the fiscal year just ended was down 1.6% and the deficit down 15%. In GNP terms, it fell from 8.5% to 7%. Receipts were up and spending in four of the big 5 agencies (so that's Social Security, Medicare, Medicaid, Defense and Interest payments) was down. Any fiscal concerns are about drag, not ability to fund or out-of-control spending. And that's why the bond market is relaxed about the deficit...which is not quite the same as being relaxed about the "Fiscal Cliff." That's a political will not a funding capability issue. We also saw a few pick up signs of growth after the dismal summer months. Starting with housing starts which were up 26% YOY and there were more starts in the first nine months of 2012 than for all of 2010. Here they are, with a long way to go until we ever see bubble levels, thankfully, and the continued growth in 5-units or more.  Source: Federal Reserve Bank of St. Louis, Economic Research
'Now Lina, you've been reading all those fan magazines again!...You shouldn't believe all that banana oil. . .the columnists dish out. Now try to get this straight. There is nothing between us. There has never been anything between us. Just air.'
For now it doesn't matter that these are all "policies in waiting", unimplemented and mostly air. We can witness the economic numbers falling but also see i) a successful auction of Italian bonds ii) a steepening of the Spanish yield curve from the horrific 2-year 7% rate back in July and iii) confirmation of Spain's credit rating. Don't expect much and we're certainly not active in the bonds because we see Bunds as overpriced. But some non-financial equities are looking more attractive. Bonds: Credit has been on fire as investors continue to clamor for bonds. Issuance is light due to earnings blackout. The Barclays US credit index[1] is 20bps tighter for the month to close last week at 123bps and the Moody's BAA[2] spread is down to 280bps from 324bps in August. High quality paper is being taken down and there's plenty of foreign buying. Here's the Moody's spread against 10-year treasuries in the last couple of months:  Source: Federal Reserve Bank of St. Louis, Economic Research Equities: We saw low volumes for the last couple of months but there's been a recent pick up. We have also seen modest multiple expansion, rather than earnings growth so the market has gotten a little more expensive. But the basic drivers of the market are positive:
Not expecting too much this quarter because of a weak Europe and US nominal GNP. There's strength in housing stocks and data. Plus there are more positive tones from Europe. This may well be a turn. We're at the upper end of the ranges...SPX at 1456...next resistance will be at 1475. The market is still moving on a few big days. Since July, the 120 point gain has been done on about 6 trading days. So this is still a market trading on big, mostly economic news events. Bottom Line: Continue to like the equity trade. Treasuries have bounced around a 20bp range and every time equities correct, we get a gain in bonds. Foreign buying steps into the bond market on any weakness. Sources: "This Time is Different, Again..." , Carmen Reinhart and Kenneth Rogoff, Harvard University, October 2012; TrendMacro; Federal Reserve Bank of Philadelphia; Federal Reserve Bank of New York; Federal Reserve Bank of St. Louis; US Treasury Department; Bureau of Labor Statistics; Federal Reserve Board; ISI; High Frequency Economics; Capital Economics; Empirical Research Partners; Goldman Sachs; Singin' in the Rain, Betty Comden and Adolph Green; Bloomberg; Sentinel Asset Management, Inc. [1] The Barclays Capital U.S. Credit Index is an unmanaged index that measures the U. S. investment grade fixed-rate bond market, with index components for US corporate and specified foreign debentures and secured notes. An investment cannot be made directly in an index. [2] Moody's Seasoned Baa Corporate Bond Yield, source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis, Economic Research [3] Standard & Poor's 500 Index is an unmanaged index of 500 widely held US equity securities chosen for market size, liquidity, and industry group representation. An investment cannot be made directly in an index. |
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