First, there was government spending. Then, there was the natural snap-back from a too-steep sell-off in 2008.
But, to us, the lack of employment gains, and continued job losses, coupled with rising productivity, suggested a 'jobless business recovery' which was missing US consumer demand.
However, two credible opinion pieces in the last few days have modified my perspectives, and I shared them with my partner at our weekly lunch meeting yesterday.
The first was a short presentation by Larry Kudlow on his CNBC program Tuesday evening. He noted the broad, recent strength in the ISM numbers, and continued low Fed funds rates. Coupled with clearly-rising commodity prices, Kudlow made a convincing case as to why inventories are growing. It's to beat price increases in inputs.
The next morning, Zachary Karabell wrote an excellent editorial explaining why he is optimistic for US equity prices in the year to come.
Essentially, Karabell notes something which I've contended for years, yet missed applying in the current situation. It's the fact that, by owning the S&P500, or larger members thereof, an investor is buying global exposure and growth.
Right now, that means exposure to faster growth and recovery in other product/markets. It also means that S&P500 profits can rise in ways which are unrelated to US economic conditions, and irrespective of US employment levels.
Mr. Karabell then adds some fairly conventional, but reasonable, logic, i.e., corporate cash levels are very high, investor cash levels are high, and bond yields are not compelling relative to equities.
Taken together, Karabell paints a picture of large, healthy, productive US companies growing globally, hiring overseas and booking profits while the US employment and economic picture remains clouded by government takeovers of private sectors, expensive, debt-fueled pump-priming, and anemic employment numbers. Plus, just yesterday, falling levels of consumer debt, implying a continued restraint in spending.
Karabell's outlook also dovetails with Kudlow. The latter didn't say, necessarily, that the GDP growth would all benefit US workers. If the S&P500 constituents make and sell more products, but those sales are exports, it still registers as US growth, but employment can remain stuck in neutral, as can US consumer spending and sentiments.
In short, it's a US investor's recovery, but not necessarily a US employee's recovery.
Thus, I told my partner, based on Kudlow's and Karabell's analyses, we can expect several months of call option portfolios with fairly decent returns.
2 comments:
It is true that corporate cash levels are high, and bond yields are not compelling. However, investor cash levels are not necessarily high. ICI estimates that cash levels in equity funds are at very low levels, and cash levels in bond funds are at high levels because the public has been throwing money at them chasing income due to the as yet deflationary environment and pension funds have been adopting liabity directed investment strategies, to comply with certain pension rules, driving them to invest in long term bonds and/or credit derivatives. Additionally, the banks have high reserves but lots of trashy level three assets and even more if you take into account their off balance sheet entities, so they don't necessarily have cash to continue bidding up assets, unless the Fed, FRE, FNM, or FHA buy up more assets from them at inflated prices with quantitative easing.
I fully concede though that corporations have lots of cash for stock redemptions or M&A, and that could drive the market further. Further, historically, equities don't necessarily have trouble competing with treasuries until yields get to 5 or 6%, and that could also keep the rally going. That said, the rally may slow, with rotation from trashy stocks to higher quality stocks, since quality has lagged in the rally.
I imagine that Obama and Geithner will try to pump up employment by using command and control techniques. Like environmental regulations and taxes to try to force a wave of capital expenditures to comply with the regulations and avoid the energy taxes. Trying to find sub rosa ways of assisting states to try to minimize layoffs at the state and local government level. But it's hard to imagine that these command and control tactics will do much to actually grow the economy.
Thanks for your comment.
I agree with you that the 'command and control' economy approach won't work.
Thus, the international component of S&P500 performance would be driving whatevr healthy growth there will be.
-CN
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