The recent earthquake and subsequent tsunami in Japan has naturally caught the world’s attention. Our thoughts are with the people of Japan during this time of great human suffering.
One of our management teams, Signature Global Advisors, has provided me with their view on how this natural disaster will impact the Japanese economy. Below is a brief commentary from Drummond Brodeur, Portfolio Manager from our Signature team who specializes in Asian securities. Drummond also discusses their funds’ exposure to Japanese securities.
At this time, many uncertainties remain and the key risks of further aftershocks and nuclear accidents are impossible to quantify.
In terms of our portfolio exposure, all of our funds were significantly underweight in Japan compared to their respective benchmarks. Beyond our global and international funds, no fund has a direct exposure greater than 1%.
We do expect there to be several short-term implications as markets asses the scale of damage and policy responses. From a macro perspective, there will clearly be a near-term hit to Japan’s fledging economic recovery, as many factories and facilities close for varying lengths of time to asses and repair any damage. In the medium-term, there will be an offset as significant disaster recovery and infrastructure rebuilding commences. The earthquake and tsunami hit to the north of Tokyo while the core of Japan’s industrial heartland is to the south. Overall, most of Japan’s key global industries and international trade infrastructure remains operational. The region covered by the disaster is estimated to account for about 6% of Japan’s GDP.
The Japanese government will be required to fund significant rebuild programs and given their massive debt and deficit, how these get funded is unclear. Certainly, some will come from various reserves designed for such purposes, but it will also likely require additional borrowing, which could potentially be funded through further easing by the Bank of Japan (BOJ) or quantitative easing as the U.S. calls it. I have argued for many years that with structural deflation and a strong Yen, the BOJ should be printing more money regardless and such a tragedy may be a catalyst for more aggressive policy. While the Japanese government may have a massive debt, we cannot forget that Japan as a nation has massive net savings and continues to run a current account surplus, so policy options do exist. As for the currency, initial strength is expected as funds are repatriated by companies and financial institutions. Think of insurance companies facing significant claims needing to sell and repatriate some of their overseas holdings. By later in the year, I would expect any Yen strength to reverse as weaker economic numbers and low rates weigh on the currency, particularly if the U.S. recovery continues to gain traction. The ultimate pace and direction for the currency will be dependent on Japan’s policy decisions over the coming months, which we will continue to monitor.
One area of particular concern is the damage to nuclear facilities. While the extent of damage and radiation leakage remains unclear, at the very least, one and possibly two plants have been rendered permanently inoperable while several more have been shut down to asses any potential damage and will be offline for months. In the near-term, Japan will have to rely on a significant increase in gas, oil and coal fired power generation, thereby increasing demand for oil, gas and coal imports. One likely consequence of the unfolding nuclear plant accidents will also be an increased aversion globally to expanding nuclear power generation, particularly in the West.
Several refineries have also been closed, so we can expect a decline in crude imports and an increase in refined product demand, leading to an overall tightening in these markets. For the electronic components and auto industries, there will be some specific disruptions in supply chains, but for the most part, these industries are globally diversified and supply will be sourced from alternative sources and existing inventories, thereby also tightening up several of these markets as well.
We were lucky to have a very limited exposure to the areas directly impacted by this disaster. All of our portfolio managers and analysts continue to look into the potential implications in their sectors and holdings, and will interpret information as it becomes available. In short, the unpredictable nature of such events only underscores the need for well diversified portfolios, across regions, sectors and asset classes, where appropriate, such as those managed by the Signature Team.
Drummond Brodeur, Signature Global Advisors
Tuesday, March 15, 2011
Thursday, March 3, 2011
A Glass Half Full
Please see below some excerpts from a commentary on the situation in Europe by Richard J Wylie, Vice President Investment Strategy for Assante Wealth Management. In his comments he highlights the reforms that have taken place by the European Union to help Greece, Ireland, Portugal and Spain restructure their debt in an orderly manner.
Recent European history seems to be full of financial crises. In the fall of 2008, Iceland’s three major commercial banks collapsed, and that was followed by more turmoil on the continent. However, even though Europe has seen plenty of shocks, signs of improvement have appeared. As with most industrialized nations, the major European economies have found that global growth, driven by the developing world, has translated into stronger exports. In addition, the region-leading German economy has seen considerable improvement since the end of the recession.
Debt and deficit
Most of the headline-grabbing news in Europe has been with respect to what is now being called the “sovereign debt crisis.” As the original creation of the Eurozone raised the interconnectivity of those countries that use the euro, so too did it increase the risk of contagion spreading if financial problems were to emerge. Greece’s borrowing problems became a headline issue in early 2010. Worries quickly spread to include nations that would eventually be branded the “PIIGS” – Portugal, Ireland, Italy, Greece and Spain. After the introduction of the euro in Greece in 2001, the country was able to borrow at lower interest rates than had previously been possible under the nation’s former currency, the drachma. However, new
borrowing at lower interest rates was not used to retire higher interest rate debt: Greece’s overallindebtedness continued to climb, along with heavy social spending.
Debts and deficits among the so-called PIIGS were significant economic issues in 2010. The global financial crisis that began in 2008 and the subsequent widespread recession had a particularly large effect on Greece. Real gross domestic product (GDP) declined by 2.0% in 2009 and the International Monetary Fund expects the Greek economy will have contracted by an additional 4.0% during 2010. Eventually, government austerity measures and a European Union loan arrangement helped to restore some stability to the Greek government’s finances. Similarly, Ireland was on the receiving end of a €67.5 billion bailout later in 2010. As worries over the plight of Portugal arose in the wake of the Irish crisis, a framework for assisting member nations emerged. To shore up longer-term confidence in the euro, European Union finance ministers also agreed on a permanent mechanism that from 2013 onward would allow a country to restructure its debts once it has been deemed insolvent.
Currency implications
Interestingly, if the PIIGS were applying today to enter the Eurozone and use the euro as their common currency, they would not meet the Maastricht criteria, which are the requirements for membership:
1. The ratio of government deficit to GDP must not exceed 3% and the ratio of government debt to GDP must not exceed 60%.
2. There must be a sustainable degree of price stability and an average inflation rate, observed over a period of one year before the examination, which does not exceed by more than one and a half percentage points that of the three best performing member states in terms of price stability.
3. There must be a long-term nominal interest rate which does not exceed by more than two percentage points that of the three best performing member states in terms of price stability.
4. The normal fluctuation margins provided for by the exchange-rate mechanism must be respected without severe tensions for at least the last two years before the examination.
Source: European Central Bank
However, today’s practical realities of maintaining the Eurozone have allowed for flexibility. Debt and deficit targets as opposed to unbending requirements have become part of the bailout packages. As well, because these nations are members of the Eurozone, they cannot unilaterally stimulate their respective economies with monetary policy. They are not free to independently pursue policies like lowering interest rates or using quantitative easing if they desire – options that are available to nations like Canada and the U.S., for example, which do not have linked currencies. Eurozone countries face the catch-22 of wanting to stimulate their economies but having to adopt austerity measures to qualify for the bailout packages.
Germany generates robust growth
While much recent market attention has been focused on the travails of the PIIGS, significant improvements have been seen in Europe, particularly in Germany. By the close of 2010, Germany recorded a new 18-year low in unemployment, declining to 6.8% – and itsemployment level exceeded the pre-recession peak. In line with the employment gains, wages and salaries rose 3.8% during 2010. However, consumption edged up only 0.5% over the year.
Despite the relatively soft growth in Germany's domestic spending, the economy recovered surprisingly quickly from the economic crisis, revealing some disparity between it and other European nations. German gross domestic product (GDP) advanced at roughly twice the pace of the Eurozone economy as a whole for 2010. In fact, Germany's overall economy grew at its strongest rate since the country's reunification in 1990. Significantly, trade was key to the nation’s improving circumstances. Exports in 2010 surged 14.2% in inflation-adjusted terms, while imports rose 13.0%. This followed on the heels of declines of 14.3% and 9.4%, respectively, in 2009. Not surprisingly, developing nations where economic growth has been strongest were providing growing demand for German exports. In particular, well-recognized luxury brands experienced strong export growth. Chinese demand for luxury autos has been especially robust. According to marketing research firm J.D. Power and Associates, China’s
luxury car segment expanded by more than 40% in 2010 and nine of the top-selling luxury models in China are German, led by Audi.
Elsewhere
While China is not the only destination for European exports, it does stand out as one of the fastest growing. Global management consulting firm Bain & Company estimated that the Chinese luxury market grew by more than 23% in 2010. As this suggests, one of the paradoxes of this communist country is that luxury exports from Europe are in very high demand. Italy’s Ferrari announced its 999th Chinese customer in January 2010, something that would have been impossible before China began its economic reformation. Also, retail outlets for other well-known European luxury goods providers, from clothing to jewelry, are becoming more commonplace within the country. The United Kingdom, France and the other nations that
export these goods will derive increasing benefit from this trend. Avoiding protectionism and fostering improved trade ties should eventually benefit all of Europe.
Conclusions
• The European sovereign debt issue will continue to take time to play out. Additional bailout funds and austerity measures may yet be required, but in the end the fiscal and monetary lessons learned will provide a firmer base for the region’s economic expansion.
• Germany stands as an example of how good economic and financial market news can be drowned out by other events within the region. Good prospects for continued expansion in trade will further bolster overall economic growth for Europe.
• Looking beyond the headlines for investment opportunities can bear fruit.
• Investors can capture opportunities if they use a disciplined approach, professional advice and welldiversified portfolios.
Recent European history seems to be full of financial crises. In the fall of 2008, Iceland’s three major commercial banks collapsed, and that was followed by more turmoil on the continent. However, even though Europe has seen plenty of shocks, signs of improvement have appeared. As with most industrialized nations, the major European economies have found that global growth, driven by the developing world, has translated into stronger exports. In addition, the region-leading German economy has seen considerable improvement since the end of the recession.
Debt and deficit
Most of the headline-grabbing news in Europe has been with respect to what is now being called the “sovereign debt crisis.” As the original creation of the Eurozone raised the interconnectivity of those countries that use the euro, so too did it increase the risk of contagion spreading if financial problems were to emerge. Greece’s borrowing problems became a headline issue in early 2010. Worries quickly spread to include nations that would eventually be branded the “PIIGS” – Portugal, Ireland, Italy, Greece and Spain. After the introduction of the euro in Greece in 2001, the country was able to borrow at lower interest rates than had previously been possible under the nation’s former currency, the drachma. However, new
borrowing at lower interest rates was not used to retire higher interest rate debt: Greece’s overallindebtedness continued to climb, along with heavy social spending.
Debts and deficits among the so-called PIIGS were significant economic issues in 2010. The global financial crisis that began in 2008 and the subsequent widespread recession had a particularly large effect on Greece. Real gross domestic product (GDP) declined by 2.0% in 2009 and the International Monetary Fund expects the Greek economy will have contracted by an additional 4.0% during 2010. Eventually, government austerity measures and a European Union loan arrangement helped to restore some stability to the Greek government’s finances. Similarly, Ireland was on the receiving end of a €67.5 billion bailout later in 2010. As worries over the plight of Portugal arose in the wake of the Irish crisis, a framework for assisting member nations emerged. To shore up longer-term confidence in the euro, European Union finance ministers also agreed on a permanent mechanism that from 2013 onward would allow a country to restructure its debts once it has been deemed insolvent.
Currency implications
Interestingly, if the PIIGS were applying today to enter the Eurozone and use the euro as their common currency, they would not meet the Maastricht criteria, which are the requirements for membership:
1. The ratio of government deficit to GDP must not exceed 3% and the ratio of government debt to GDP must not exceed 60%.
2. There must be a sustainable degree of price stability and an average inflation rate, observed over a period of one year before the examination, which does not exceed by more than one and a half percentage points that of the three best performing member states in terms of price stability.
3. There must be a long-term nominal interest rate which does not exceed by more than two percentage points that of the three best performing member states in terms of price stability.
4. The normal fluctuation margins provided for by the exchange-rate mechanism must be respected without severe tensions for at least the last two years before the examination.
Source: European Central Bank
However, today’s practical realities of maintaining the Eurozone have allowed for flexibility. Debt and deficit targets as opposed to unbending requirements have become part of the bailout packages. As well, because these nations are members of the Eurozone, they cannot unilaterally stimulate their respective economies with monetary policy. They are not free to independently pursue policies like lowering interest rates or using quantitative easing if they desire – options that are available to nations like Canada and the U.S., for example, which do not have linked currencies. Eurozone countries face the catch-22 of wanting to stimulate their economies but having to adopt austerity measures to qualify for the bailout packages.
Germany generates robust growth
While much recent market attention has been focused on the travails of the PIIGS, significant improvements have been seen in Europe, particularly in Germany. By the close of 2010, Germany recorded a new 18-year low in unemployment, declining to 6.8% – and itsemployment level exceeded the pre-recession peak. In line with the employment gains, wages and salaries rose 3.8% during 2010. However, consumption edged up only 0.5% over the year.
Despite the relatively soft growth in Germany's domestic spending, the economy recovered surprisingly quickly from the economic crisis, revealing some disparity between it and other European nations. German gross domestic product (GDP) advanced at roughly twice the pace of the Eurozone economy as a whole for 2010. In fact, Germany's overall economy grew at its strongest rate since the country's reunification in 1990. Significantly, trade was key to the nation’s improving circumstances. Exports in 2010 surged 14.2% in inflation-adjusted terms, while imports rose 13.0%. This followed on the heels of declines of 14.3% and 9.4%, respectively, in 2009. Not surprisingly, developing nations where economic growth has been strongest were providing growing demand for German exports. In particular, well-recognized luxury brands experienced strong export growth. Chinese demand for luxury autos has been especially robust. According to marketing research firm J.D. Power and Associates, China’s
luxury car segment expanded by more than 40% in 2010 and nine of the top-selling luxury models in China are German, led by Audi.
Elsewhere
While China is not the only destination for European exports, it does stand out as one of the fastest growing. Global management consulting firm Bain & Company estimated that the Chinese luxury market grew by more than 23% in 2010. As this suggests, one of the paradoxes of this communist country is that luxury exports from Europe are in very high demand. Italy’s Ferrari announced its 999th Chinese customer in January 2010, something that would have been impossible before China began its economic reformation. Also, retail outlets for other well-known European luxury goods providers, from clothing to jewelry, are becoming more commonplace within the country. The United Kingdom, France and the other nations that
export these goods will derive increasing benefit from this trend. Avoiding protectionism and fostering improved trade ties should eventually benefit all of Europe.
Conclusions
• The European sovereign debt issue will continue to take time to play out. Additional bailout funds and austerity measures may yet be required, but in the end the fiscal and monetary lessons learned will provide a firmer base for the region’s economic expansion.
• Germany stands as an example of how good economic and financial market news can be drowned out by other events within the region. Good prospects for continued expansion in trade will further bolster overall economic growth for Europe.
• Looking beyond the headlines for investment opportunities can bear fruit.
• Investors can capture opportunities if they use a disciplined approach, professional advice and welldiversified portfolios.
Wednesday, September 1, 2010
Time to Take Advantage of Gloomy US Markets
Good Morning,
I came across this article from Larry Sarbit which really caught my eye. What is interesting is this money manager has been the eternal pessimist over the past decade. For the past decade most of his portfolios have been invested in cash....at one point at AIC he was holding 3 stocks with Waste Management being his largest and the rest was on cash at over 70%. His fund is now 15% cash and 85% stocks -the eternal pessimist is jumping in with both feet. Larry Sarbit is the CEO and Chief Investment Officer for Sarbit Advisory Services and sub-advisor to IA Clarington Sarbit US Equity Fund. Here are some excerpts:
Time to take advantage of gloomy U.S. equity markets
You should be buying American now: The sale won't last forever
I remember John Templeton on the PBS show, Wall Street Week in the summer of 1982 when the U.S. markets were trading at ridiculous bargain prices. The gloom at the time was so thick you couldn’t help but feel it.
Mr. Templeton’s advice cut through it all: Stocks are at fire-sale prices – they won’t be this low again for a generation. And he was right.
Moments like that are rare but we are living in one now.
They tend to happen when the available evidence looks so lopsided that you simply have to cut through it all if you are going to figure out what to do. And right now the task is cutting through the fear and loathing around the idea of investing in anything American. To put it bluntly: You should be buying American now.
'Clients won’t buy anything in the U.S. – period.'
Why do I say that? Well, clients usually give you a range of opinions about what they like or don’t like. A consensus view might rise up from time to time, but generally the outlook is mixed or divided. Not now.
I just got off the road talking to advisers, planners and brokers. Every single visit the exact same message was delivered: “Clients won’t buy anything in the U.S. – period. If it has any U.S. content, they won’t touch it!" Meanwhile, U.S investors, according to the Investment Company Institute, have withdrawn a staggering $33.12-billion (U.S.) from domestic stock market mutual funds in the first seven months of the year.
The sort of unanimity of opinion of the masses that the U.S. markets are radioactive, is exceptional, to say the least. I’ve been in the investment business for 31 years and I’ve seen a few such circumstances – the market bottom of 1982, the gold and precious metals buying panic in the late 1970s and early 80s, the tech madness at the beginning of this century, to name a few.
Now, we have seen some dire circumstances strike fear into the hearts of investors – the financial crisis did start in the U.S. after all; there is a lot of debt is piling up at all levels of government; the stimulus package seems to not quite be doing enough; unemployment remains stubbornly high; and on and on it goes.
It’s worse in a way for Canadian investors since anyone holding unhedged U.S. investments has been clobbered by the loonie’s rise against the greenback. There have been terrific returns here at home as well. From the sound of things, it seems that a lot more Canadians intend to keep their loonies here at home. Wrong move.
Before we relegate America to the trash heap of other fallen economic and military empires, remember that they have been through worse. It will undoubtedly take time and cost to get over the current mess. But America is a vibrant nation, composed of an entrepreneurial, adaptable people who don’t easily accept being second rate.
As usual, people mistakenly conclude that what has happened in the past is indicative of what the future will look like.
Warren Buffett, referring to pension fund managers, said back in a 1979 article, that they “continue to make investment decisions with their eyes firmly fixed on the rearview mirror. This generals-fighting-the-last-war approach has proved costly in the past and will likely prove equally costly this time around."
Canadian Stocks
Ten years ago, all clients wanted were U.S. and global investments, after they had achieved a fantastic appreciation over the previous 18 years. Canada? You couldn’t give Canadian investments away a decade ago. Fixed income, balanced funds, and dividend funds – at the time, all out of favour.
And which categories outperformed over the next 10 years? We all know the answer. Canadian equities have comfortably outperformed U.S. and global stocks.
In August, 1999, I wrote an article in this paper in which I said, “The only predictive statement I feel comfortable in making is that I’d be shocked if the next 20 years’ worth of returns even slightly resemble the past 15 to 20 years."
I went to large cash positions in our U.S. investment vehicle because I couldn’t find what I was looking for – wonderful businesses at bargain prices. Many investors didn’t appreciate this stance but I’ll let my track record speak for itself. We protected our clients from losses and actually made money over the decade. That was not too bad, especially compared with the no-return world of the average U.S. business during the same period.
There are rare occasions when the evidence is so overwhelming, that you can make such broad pronouncements. So, here’s my prediction: I’d be shocked if you don’t make a lot of money in U.S. stocks over the next decade.
Bargain Prices
As usual, I can’t begin to forecast what will happen in the short term. What I do know is that for the first time in years, I’m finding fantastic businesses for sale at what I know are bargain prices. Are you all sitting down? I’m over 70 per cent invested (in the early 2000s I reached peak cash at about 90 per cent), and buying more U.S. equities almost every day.
Mr. Buffett brilliantly summed up our current situation from his perch in 1979: “There may well be some period in the near future when financial markets are demoralized and much better buys are available in equities; that possibility exists at all times. But you can be sure that at such a time the future will seem neither predictable nor pleasant. Those now awaiting a ‘better time’ for equity investing are highly likely to maintain that posture until well into the next bull market."
In my opinion, there currently exists an exceptional opportunity for investors to pick up some real bargains in the U.S. equity markets. When economic conditions are this dismal, at some point, the environment will begin to turn positive and a lot of money will be made. But remember: The opportunity won’t last forever.
Our investment philosophy remains committed to well diversified portfolio that includes exposure to US companies. We must be careful not to confuse exposure to the US Economy with exposure to US companies. We all agree the US economy has a long way to recover and most liekly will do so at a slow pace. It is important that we expose our portfolios to good US companies which are multi national in scope but just happened to be headquartered in the US. Our managers focus on strong companies who derive a significant amount of thieir revenue outside the US ie. the emerging markets. These companies have a lot of free cash on their balance sheets, little or no debt, have the ability to buyback shares, pay dividends and have been increasing their dividends each year. Some examples of companies we are investing in the US are: American Express, IBM, Coca Cola, Walmart, etc
Please forward any questions or comments
I came across this article from Larry Sarbit which really caught my eye. What is interesting is this money manager has been the eternal pessimist over the past decade. For the past decade most of his portfolios have been invested in cash....at one point at AIC he was holding 3 stocks with Waste Management being his largest and the rest was on cash at over 70%. His fund is now 15% cash and 85% stocks -the eternal pessimist is jumping in with both feet. Larry Sarbit is the CEO and Chief Investment Officer for Sarbit Advisory Services and sub-advisor to IA Clarington Sarbit US Equity Fund. Here are some excerpts:
Time to take advantage of gloomy U.S. equity markets
You should be buying American now: The sale won't last forever
I remember John Templeton on the PBS show, Wall Street Week in the summer of 1982 when the U.S. markets were trading at ridiculous bargain prices. The gloom at the time was so thick you couldn’t help but feel it.
Mr. Templeton’s advice cut through it all: Stocks are at fire-sale prices – they won’t be this low again for a generation. And he was right.
Moments like that are rare but we are living in one now.
They tend to happen when the available evidence looks so lopsided that you simply have to cut through it all if you are going to figure out what to do. And right now the task is cutting through the fear and loathing around the idea of investing in anything American. To put it bluntly: You should be buying American now.
'Clients won’t buy anything in the U.S. – period.'
Why do I say that? Well, clients usually give you a range of opinions about what they like or don’t like. A consensus view might rise up from time to time, but generally the outlook is mixed or divided. Not now.
I just got off the road talking to advisers, planners and brokers. Every single visit the exact same message was delivered: “Clients won’t buy anything in the U.S. – period. If it has any U.S. content, they won’t touch it!" Meanwhile, U.S investors, according to the Investment Company Institute, have withdrawn a staggering $33.12-billion (U.S.) from domestic stock market mutual funds in the first seven months of the year.
The sort of unanimity of opinion of the masses that the U.S. markets are radioactive, is exceptional, to say the least. I’ve been in the investment business for 31 years and I’ve seen a few such circumstances – the market bottom of 1982, the gold and precious metals buying panic in the late 1970s and early 80s, the tech madness at the beginning of this century, to name a few.
Now, we have seen some dire circumstances strike fear into the hearts of investors – the financial crisis did start in the U.S. after all; there is a lot of debt is piling up at all levels of government; the stimulus package seems to not quite be doing enough; unemployment remains stubbornly high; and on and on it goes.
It’s worse in a way for Canadian investors since anyone holding unhedged U.S. investments has been clobbered by the loonie’s rise against the greenback. There have been terrific returns here at home as well. From the sound of things, it seems that a lot more Canadians intend to keep their loonies here at home. Wrong move.
Before we relegate America to the trash heap of other fallen economic and military empires, remember that they have been through worse. It will undoubtedly take time and cost to get over the current mess. But America is a vibrant nation, composed of an entrepreneurial, adaptable people who don’t easily accept being second rate.
As usual, people mistakenly conclude that what has happened in the past is indicative of what the future will look like.
Warren Buffett, referring to pension fund managers, said back in a 1979 article, that they “continue to make investment decisions with their eyes firmly fixed on the rearview mirror. This generals-fighting-the-last-war approach has proved costly in the past and will likely prove equally costly this time around."
Canadian Stocks
Ten years ago, all clients wanted were U.S. and global investments, after they had achieved a fantastic appreciation over the previous 18 years. Canada? You couldn’t give Canadian investments away a decade ago. Fixed income, balanced funds, and dividend funds – at the time, all out of favour.
And which categories outperformed over the next 10 years? We all know the answer. Canadian equities have comfortably outperformed U.S. and global stocks.
In August, 1999, I wrote an article in this paper in which I said, “The only predictive statement I feel comfortable in making is that I’d be shocked if the next 20 years’ worth of returns even slightly resemble the past 15 to 20 years."
I went to large cash positions in our U.S. investment vehicle because I couldn’t find what I was looking for – wonderful businesses at bargain prices. Many investors didn’t appreciate this stance but I’ll let my track record speak for itself. We protected our clients from losses and actually made money over the decade. That was not too bad, especially compared with the no-return world of the average U.S. business during the same period.
There are rare occasions when the evidence is so overwhelming, that you can make such broad pronouncements. So, here’s my prediction: I’d be shocked if you don’t make a lot of money in U.S. stocks over the next decade.
Bargain Prices
As usual, I can’t begin to forecast what will happen in the short term. What I do know is that for the first time in years, I’m finding fantastic businesses for sale at what I know are bargain prices. Are you all sitting down? I’m over 70 per cent invested (in the early 2000s I reached peak cash at about 90 per cent), and buying more U.S. equities almost every day.
Mr. Buffett brilliantly summed up our current situation from his perch in 1979: “There may well be some period in the near future when financial markets are demoralized and much better buys are available in equities; that possibility exists at all times. But you can be sure that at such a time the future will seem neither predictable nor pleasant. Those now awaiting a ‘better time’ for equity investing are highly likely to maintain that posture until well into the next bull market."
In my opinion, there currently exists an exceptional opportunity for investors to pick up some real bargains in the U.S. equity markets. When economic conditions are this dismal, at some point, the environment will begin to turn positive and a lot of money will be made. But remember: The opportunity won’t last forever.
Our investment philosophy remains committed to well diversified portfolio that includes exposure to US companies. We must be careful not to confuse exposure to the US Economy with exposure to US companies. We all agree the US economy has a long way to recover and most liekly will do so at a slow pace. It is important that we expose our portfolios to good US companies which are multi national in scope but just happened to be headquartered in the US. Our managers focus on strong companies who derive a significant amount of thieir revenue outside the US ie. the emerging markets. These companies have a lot of free cash on their balance sheets, little or no debt, have the ability to buyback shares, pay dividends and have been increasing their dividends each year. Some examples of companies we are investing in the US are: American Express, IBM, Coca Cola, Walmart, etc
Please forward any questions or comments
Friday, May 7, 2010
Potential Error on NASDAQ Causes Market Selloff
On Thursday, the Dow Jone plunged nearly 1000 points in mid afternoon trading. Going into yesterday's trading session, global markets were already jittery due tot he Sovereign Debt situation in Greece (see previous post). Shares we trading lower during the early afternoon due to these concerns, but without any apparent trigger at approximately 2:45pm EST Proctor and Gamble's stock fell 10% to $56 on the New York Stock Exchange (the NYSE sets prices on which all other stock markets work from). This triggered a "circuit breaker" which slowed the trading of the stock for less than a minute. During that time other stock exchanges were allowed to trade the stock on their own without getting the price from the NYSE. According to Proctor and Gamble and the NYSE, the NASDAQ stock exchange may have may have misprinted a quote of $39.37 per share. It is also possible that the electronic trades actually occurred (trader may have incorrectly entered an inflated sell number - 1 billion instead of 1 million) but were made in error.
Other companies like Apple and Accenture were also affected as automated trading took over. Due to the irregular stock prices and trading patterns, the NASDAQ said all trades executed between 2:00 and 3:00 p.m. ET greater than or less than 60% of the stock price as of 2:40 p.m. ET or immediately prior to that time will be cancelled. The SEC said they "are working closely with the other financial regulators, as well as the exchanges, to review the unusual trading activity that took place briefly this afternoon. We are also working with the exchanges to take appropriate steps to protect investors pursuant to market rules."
By the end of the day the market returned to levels before the sharp sell off began. While many retail investors were not aware of this activity it underscores the importance of maintaining a disciplined approach to your investment strategy and the need to focus on the fundamentals in the market and the economy where the indicators have been pointing in the direction of continued recovery. This morning Canada announced 108,000 jobs were created in April (4 times more than expected) and the unemployment rate fell to 8.1%. The issues that happened yesterday will be investigated and corrected like in the past.
Source: The Globe and Mail, CNN Money
Other companies like Apple and Accenture were also affected as automated trading took over. Due to the irregular stock prices and trading patterns, the NASDAQ said all trades executed between 2:00 and 3:00 p.m. ET greater than or less than 60% of the stock price as of 2:40 p.m. ET or immediately prior to that time will be cancelled. The SEC said they "are working closely with the other financial regulators, as well as the exchanges, to review the unusual trading activity that took place briefly this afternoon. We are also working with the exchanges to take appropriate steps to protect investors pursuant to market rules."
By the end of the day the market returned to levels before the sharp sell off began. While many retail investors were not aware of this activity it underscores the importance of maintaining a disciplined approach to your investment strategy and the need to focus on the fundamentals in the market and the economy where the indicators have been pointing in the direction of continued recovery. This morning Canada announced 108,000 jobs were created in April (4 times more than expected) and the unemployment rate fell to 8.1%. The issues that happened yesterday will be investigated and corrected like in the past.
Source: The Globe and Mail, CNN Money
Monday, May 3, 2010
The Credit Crisis in Greece Explained
During the past few months, there has been concern in the global economy that some countries in the European Union will not be able to honor their debt obligations due to their rapidly increasing budgetary deficits. In the case of Greece, in December 2009 they announced a budget deficit of 12.7% of GDP which was a result of existing budget deficits, election year spending and a stimulus plan created in response to the financial crisis. European Union member nations are supposed to keep their annual budget deficits to no more than 3% of GDP. Other countries that also may have issues with their budget deficits are Portugal and Ireland.
In response to this budget deficit, the yields (interest rate) on Greek bonds increased from 3.5% to 8% within months. Even though the the Greek government has wisely financed this debt over the long term, it still has to roll over US $30 billion in debt maturities and finance a US $30 billion deficit - for a total US $60 billion in annual funding requirements.
Last week, stock markets around the world moved lower after ratings agency Standard and Poors downgraded it's sovereign credit rating for Greece to "junk" status and also lowered Portugal by two notches. The downgrades reflected growing fears that the southern European governments will prove unable to implement promised reform measures in the face of determined domestic opposition, raising the danger of the sovereign debt crisis spreading to the world’s major economies.
With the adoption of the Euro, Europe's weaker countries like Greece, Spain, Portugal, Ireland and Italy saw their interest rates converge with the rest of the Eurozone falling from double to single digits. This interest rate decline triggered housing booms, leading to rising employment, growth, wage inflation, bigger government and more generous pensions and entitlements. This debt-financed growth was funded by financial institutions in the core countries of France and Germany, which enjoyed strong exports.
Germany and France ran current account surpluses (exports more than imports) while the countries on the periphery of the Eurpzone ran deficits. The surplus countries funded the property booms in the periphery. These imbalances were masked by the single currency, because the Eurozone as a whole was running current account surpluses. The access to funds for the borrowers is being cut off and these countries need to re-establish its competitiveness compared to Germany, but they lack the option of currency devaluation. As a result, wages and asset values in these countries need to fall, and this will be accompanied by government cutbacks and lower growth.
This past weekend Greece was able to secure a US $150 billion bailout that will help protect the country from debt speculators and restore confidence in the ailing Euro. The EU is contributing $80 billion of the total at an interest rate of 5% while the IMF is supplying the rest. These lenders have demanded sweeping reforms in Greece that will most likely cause the recession in Greece to last longer and cause a social backlash. This will include tough spending cuts and tax increases. The measures will include the extension of a public sector wage freeze until 2014, the elimination of a bonus equivalent to two months salary for many civil servants, a sin tax and a boost in the value added tax (similar to GST in Canada) from 21% to 23%.
Many critics would argue that there is no need to bailout a country which has brought on a lot of it's current difficulties itself. However, saving Greece from bankruptcy may be necessary for preserving the European economic union, countries have an even more compelling reason to prop up the debt-ridden state. Foreign banks are exposed to $236.2-billion (U.S.) of public and private debt in Greece, nearly a third of it ($75.2-billion) held by French banks. A Greek collapse would ripple throughout the EU and beyond.
When looking at the situation in Greece one must keep these events in context. A US $150 billion dollar aid package for the country is still smaller than the US $173 billion bailout of AIG - much of which went to Bear Stearns and a number of European banks.
WHAT ARE THE GLOBAL IMPLICATIONS
The Greek crisis highlights several important global trends. First, investors are now more attuned to sovereign credit risk, especially for countries with more generous social welfare schemes. The financial crisis resulted in a double hit to government finances through lower revenues and costly stimulus schemes, with the result that debt-to-GDP ratios have soared by 20% across the board.
In the same vein, differentials in the credit risk between countries are now becoming more pronounced. For example, Canada is perceived to have kept its fiscal house in relatively good order, so Canadian government bond yields are 30 basis points less than their U.S. equivalents. These shifts will continue. "(higher yields are attached to more risky bond issues)
The recovery has a structural weakness that poses a potential risk for investors. Government authorities have fired both fiscal and monetary bullets at the financial crisis. They appeared to have hit their mark, but there are no bullets left.
Source: Signature Global Advisor, World Socialist Website, Globe and Mail, Bloomberg News
In response to this budget deficit, the yields (interest rate) on Greek bonds increased from 3.5% to 8% within months. Even though the the Greek government has wisely financed this debt over the long term, it still has to roll over US $30 billion in debt maturities and finance a US $30 billion deficit - for a total US $60 billion in annual funding requirements.
Last week, stock markets around the world moved lower after ratings agency Standard and Poors downgraded it's sovereign credit rating for Greece to "junk" status and also lowered Portugal by two notches. The downgrades reflected growing fears that the southern European governments will prove unable to implement promised reform measures in the face of determined domestic opposition, raising the danger of the sovereign debt crisis spreading to the world’s major economies.
With the adoption of the Euro, Europe's weaker countries like Greece, Spain, Portugal, Ireland and Italy saw their interest rates converge with the rest of the Eurozone falling from double to single digits. This interest rate decline triggered housing booms, leading to rising employment, growth, wage inflation, bigger government and more generous pensions and entitlements. This debt-financed growth was funded by financial institutions in the core countries of France and Germany, which enjoyed strong exports.
Germany and France ran current account surpluses (exports more than imports) while the countries on the periphery of the Eurpzone ran deficits. The surplus countries funded the property booms in the periphery. These imbalances were masked by the single currency, because the Eurozone as a whole was running current account surpluses. The access to funds for the borrowers is being cut off and these countries need to re-establish its competitiveness compared to Germany, but they lack the option of currency devaluation. As a result, wages and asset values in these countries need to fall, and this will be accompanied by government cutbacks and lower growth.
This past weekend Greece was able to secure a US $150 billion bailout that will help protect the country from debt speculators and restore confidence in the ailing Euro. The EU is contributing $80 billion of the total at an interest rate of 5% while the IMF is supplying the rest. These lenders have demanded sweeping reforms in Greece that will most likely cause the recession in Greece to last longer and cause a social backlash. This will include tough spending cuts and tax increases. The measures will include the extension of a public sector wage freeze until 2014, the elimination of a bonus equivalent to two months salary for many civil servants, a sin tax and a boost in the value added tax (similar to GST in Canada) from 21% to 23%.
Many critics would argue that there is no need to bailout a country which has brought on a lot of it's current difficulties itself. However, saving Greece from bankruptcy may be necessary for preserving the European economic union, countries have an even more compelling reason to prop up the debt-ridden state. Foreign banks are exposed to $236.2-billion (U.S.) of public and private debt in Greece, nearly a third of it ($75.2-billion) held by French banks. A Greek collapse would ripple throughout the EU and beyond.
When looking at the situation in Greece one must keep these events in context. A US $150 billion dollar aid package for the country is still smaller than the US $173 billion bailout of AIG - much of which went to Bear Stearns and a number of European banks.
WHAT ARE THE GLOBAL IMPLICATIONS
The Greek crisis highlights several important global trends. First, investors are now more attuned to sovereign credit risk, especially for countries with more generous social welfare schemes. The financial crisis resulted in a double hit to government finances through lower revenues and costly stimulus schemes, with the result that debt-to-GDP ratios have soared by 20% across the board.
In the same vein, differentials in the credit risk between countries are now becoming more pronounced. For example, Canada is perceived to have kept its fiscal house in relatively good order, so Canadian government bond yields are 30 basis points less than their U.S. equivalents. These shifts will continue. "(higher yields are attached to more risky bond issues)
The recovery has a structural weakness that poses a potential risk for investors. Government authorities have fired both fiscal and monetary bullets at the financial crisis. They appeared to have hit their mark, but there are no bullets left.
Source: Signature Global Advisor, World Socialist Website, Globe and Mail, Bloomberg News
Thursday, April 8, 2010
2010 Nova Scotia Budget
Finance Minister Graham Steele tabled the 2010 Nova Scotia provincial budget on April 6, 2010. After an initial forecast of $592 million, the deficit for the just completed 2009-2010 fiscal year is estimated to be $488 million. The minister indicated that after consultations with the public and the report of the experts on the Economic Advisory Panel, it was necessary to “get back to balance.” The government laid out its four-year plan to return to balanced budgets by the 2013-2014 fiscal year. The budget projects a deficit of $222 million for the 2010-2011 fiscal year, notwithstanding significant efforts at expenditure control. The four-year planning horizon calls for cumulative savings of $772 million, including reducing the size of the civil service by 10% by 2013.
The government also intends to secure the public service pension plan by borrowing $536 million at today’s low interest rates to eliminate the unfunded pension liability. In addition, there are expected annual savings of between $150 and $200 million by limiting pension increases to 1.25% per year for each of the next five years. Annual increases from 2016 and on will only be made if the plan is in a surplus position.
On the tax side, there were tax increases for high-income earners, a drop in the small business corporate tax rate, and an increase in the harmonized sales tax.
We have summarized the changes announced in the budget. Please note that these changes are still proposals until passed into law by the provincial government.
Personal income tax rates
The budget proposes to change the personal tax rates and tax calculation for high-income Nova Scotians. The first element of the change is the suspension of the high-income surtax until the budget returns to balance. Effective January 1, 2010, the 10% surtax that applies to provincial income tax payable in excess of $10,000 will be eliminated. Also effective January 1, 2010, is the creation of a fifth personal income tax bracket applicable to taxable income in excess of $150,000. The provincial tax rate for this new bracket will be 21%, resulting in a combined federal-provincial marginal tax rate of 50%. Both of these measures are temporary and are only planned to be effective until the budget is balanced. The table below shows Nova Scotia tax rates for 2010.
Taxable income range 2010 tax rates
$8,231 - $29,590 8.79%
$29,591 - $59,180 14.95%
$59,181 - $93,000 16.67%
$93,001 - $150,000 17.5%
Over $150,000 21%
Basic personal amount
The basic personal amount is equivalent to the amount of income you can earn without paying any tax. In 2006 the government implemented legislation to increase the personal amount by $250 in each of the four subsequent years. The final $250 increase, to $8,231, is effective for the 2010 tax year.
Other Non-Refundable Credits
Other non-refundable credits will increase proportionately to the basic personal amount (3.13% for 2010).
The list of affected credits is as follows:
• spouse or common-law partner;
• dependent;
• pension income;
• disability;
• caregiver;
• age; and
• infirm adult dependents.
Low-income tax reduction
The budget proposes that, effective January 1, 2010, the definition of adjusted family income for the purposes of the low-income tax reduction will exclude the guaranteed income supplement (GIS). This should result in GIS recipients not being liable for provincial income tax.
Equity tax credit
The budget proposes to increase the equity tax credit rate from 30% to 35%, effective January 1, 2010. In addition, the maximum annual credit is increased from $15,000 to $17,500, and the expiration date is extended by two years to December 31, 2011. The tax credit is designed to assist small businesses, co-operatives and community economic development initiatives in obtaining equity financing by offering a personal income tax credit to individuals investing
in eligible businesses.
Labour sponsored venture capital tax credit
The labour sponsored venture capital tax credit was scheduled to expire on December 31, 2009. The budget proposes to extend the expiry date by two years, to December 31, 2011.
Graduate retention tax rebate
The budget confirms the government’s intention to proceed with the previously announced graduate retention tax rebate. This program will provide a tax rebate for university graduates of up to $15,000 over six years, to a maximum of $2,500 per year. College graduates will be eligible for up to $7,500 over six years, to a maximum of $1,250 per year. These rebates are available to individuals who graduate in 2009 and subsequent years if they choose to live and work in Nova Scotia.
Harmonized sales tax
The budget proposes to increase the harmonized sales tax (HST) by 2%, to 15%, effective July 1, 2010. This will be accomplished by increasing the provincial portion of the HST from 8% to 10%. The government will have transitional rules to assist consumers and suppliers in implementing this change.
Point-of-sale HST rebates
Effective July 1, 2010, point-of-sale rebates will be available for the provincial portion of the HST on the following products:
• children’s clothing;
• children’s footwear;
• children’s diapers; and
• feminine hygiene products.
The current point-of-sale rebates on books and home energy will continue with adjustment for the new HST rate. The rebates for public sector organizations and first-time home buyers will also continue, although there may be some changes in administrative practice.
Affordable living tax credit
Low- and modest-income households will be eligible to receive a refundable tax credit payment beginning in July 2010. The credit will be payable on a quarterly basis in conjunction with the federal GST credit, and will require the filing of a personal income tax return in the prior year to qualify. The credit will be available to households earning less than $34,800 per year. The annual credit will be $240 per household plus an additional $57 per dependant child under age 19 living in the household. The full credit will be available for family incomes of $30,000 or less. Every $1 of income in excess of $30,000 will result in a five cent reduction of the credit, until it is completely eliminated at an income level of $34,800.
Poverty reduction credit
In addition to the affordable living credit, the budget proposes a new poverty reduction credit, to be effective July 1, 2010. This new credit is aimed at providing quarterly tax-free payments totalling $200 per year to about 15,000 low-income Nova Scotians, many of whom have a disability. To qualify, an individual must:
• be over the age of 19;
• have no dependants;
• be receiving social assistance through the income assistance program as their main source of income; and
• have total annual income of $12,000 or less for the previous tax year.
Sales tax measures
Effective July 1, 2010, tax on the sale of used motor vehicles, boats and aircraft in Nova Scotia will be 15%, up from the current 13% rate. The proposal to increase the rate to 15% makes purchases of used vehicles and other property subject to the same tax rate as purchases of new motor vehicles.
Out of province medical treatment assistance
The budget proposes to provide assistance for patients who need medical treatment that is not available in the province. These patients may be eligible to receive up to $1,000 for round trip travel and $1,500 for accommodations for up to 12 medical visits per year.
Source:
Jerry S. Rubin, B.E.S., B.Comm.(Hons), CMA, TEP, CFP,
Vice-President, Wealth Planning Group,
United Financial, a division of CI Private Counsel LP
The government also intends to secure the public service pension plan by borrowing $536 million at today’s low interest rates to eliminate the unfunded pension liability. In addition, there are expected annual savings of between $150 and $200 million by limiting pension increases to 1.25% per year for each of the next five years. Annual increases from 2016 and on will only be made if the plan is in a surplus position.
On the tax side, there were tax increases for high-income earners, a drop in the small business corporate tax rate, and an increase in the harmonized sales tax.
We have summarized the changes announced in the budget. Please note that these changes are still proposals until passed into law by the provincial government.
Personal income tax rates
The budget proposes to change the personal tax rates and tax calculation for high-income Nova Scotians. The first element of the change is the suspension of the high-income surtax until the budget returns to balance. Effective January 1, 2010, the 10% surtax that applies to provincial income tax payable in excess of $10,000 will be eliminated. Also effective January 1, 2010, is the creation of a fifth personal income tax bracket applicable to taxable income in excess of $150,000. The provincial tax rate for this new bracket will be 21%, resulting in a combined federal-provincial marginal tax rate of 50%. Both of these measures are temporary and are only planned to be effective until the budget is balanced. The table below shows Nova Scotia tax rates for 2010.
Taxable income range 2010 tax rates
$8,231 - $29,590 8.79%
$29,591 - $59,180 14.95%
$59,181 - $93,000 16.67%
$93,001 - $150,000 17.5%
Over $150,000 21%
Basic personal amount
The basic personal amount is equivalent to the amount of income you can earn without paying any tax. In 2006 the government implemented legislation to increase the personal amount by $250 in each of the four subsequent years. The final $250 increase, to $8,231, is effective for the 2010 tax year.
Other Non-Refundable Credits
Other non-refundable credits will increase proportionately to the basic personal amount (3.13% for 2010).
The list of affected credits is as follows:
• spouse or common-law partner;
• dependent;
• pension income;
• disability;
• caregiver;
• age; and
• infirm adult dependents.
Low-income tax reduction
The budget proposes that, effective January 1, 2010, the definition of adjusted family income for the purposes of the low-income tax reduction will exclude the guaranteed income supplement (GIS). This should result in GIS recipients not being liable for provincial income tax.
Equity tax credit
The budget proposes to increase the equity tax credit rate from 30% to 35%, effective January 1, 2010. In addition, the maximum annual credit is increased from $15,000 to $17,500, and the expiration date is extended by two years to December 31, 2011. The tax credit is designed to assist small businesses, co-operatives and community economic development initiatives in obtaining equity financing by offering a personal income tax credit to individuals investing
in eligible businesses.
Labour sponsored venture capital tax credit
The labour sponsored venture capital tax credit was scheduled to expire on December 31, 2009. The budget proposes to extend the expiry date by two years, to December 31, 2011.
Graduate retention tax rebate
The budget confirms the government’s intention to proceed with the previously announced graduate retention tax rebate. This program will provide a tax rebate for university graduates of up to $15,000 over six years, to a maximum of $2,500 per year. College graduates will be eligible for up to $7,500 over six years, to a maximum of $1,250 per year. These rebates are available to individuals who graduate in 2009 and subsequent years if they choose to live and work in Nova Scotia.
Harmonized sales tax
The budget proposes to increase the harmonized sales tax (HST) by 2%, to 15%, effective July 1, 2010. This will be accomplished by increasing the provincial portion of the HST from 8% to 10%. The government will have transitional rules to assist consumers and suppliers in implementing this change.
Point-of-sale HST rebates
Effective July 1, 2010, point-of-sale rebates will be available for the provincial portion of the HST on the following products:
• children’s clothing;
• children’s footwear;
• children’s diapers; and
• feminine hygiene products.
The current point-of-sale rebates on books and home energy will continue with adjustment for the new HST rate. The rebates for public sector organizations and first-time home buyers will also continue, although there may be some changes in administrative practice.
Affordable living tax credit
Low- and modest-income households will be eligible to receive a refundable tax credit payment beginning in July 2010. The credit will be payable on a quarterly basis in conjunction with the federal GST credit, and will require the filing of a personal income tax return in the prior year to qualify. The credit will be available to households earning less than $34,800 per year. The annual credit will be $240 per household plus an additional $57 per dependant child under age 19 living in the household. The full credit will be available for family incomes of $30,000 or less. Every $1 of income in excess of $30,000 will result in a five cent reduction of the credit, until it is completely eliminated at an income level of $34,800.
Poverty reduction credit
In addition to the affordable living credit, the budget proposes a new poverty reduction credit, to be effective July 1, 2010. This new credit is aimed at providing quarterly tax-free payments totalling $200 per year to about 15,000 low-income Nova Scotians, many of whom have a disability. To qualify, an individual must:
• be over the age of 19;
• have no dependants;
• be receiving social assistance through the income assistance program as their main source of income; and
• have total annual income of $12,000 or less for the previous tax year.
Sales tax measures
Effective July 1, 2010, tax on the sale of used motor vehicles, boats and aircraft in Nova Scotia will be 15%, up from the current 13% rate. The proposal to increase the rate to 15% makes purchases of used vehicles and other property subject to the same tax rate as purchases of new motor vehicles.
Out of province medical treatment assistance
The budget proposes to provide assistance for patients who need medical treatment that is not available in the province. These patients may be eligible to receive up to $1,000 for round trip travel and $1,500 for accommodations for up to 12 medical visits per year.
Source:
Jerry S. Rubin, B.E.S., B.Comm.(Hons), CMA, TEP, CFP,
Vice-President, Wealth Planning Group,
United Financial, a division of CI Private Counsel LP
Monday, November 30, 2009
Debt Restructuring by Dubai World
Last weeks news that Dubai World defaulted on a significant portion of its debt initially caused concerns over financial system stress and the markets reacted negatively. It is expected that debt refinancings will require reorganizations and equity injections for the next three years or so. The debt restructuring by Dubai World, which appears unable to refinance a large bond maturity next month, is precisely the sort of activity that we expect to see.
Dubai was the poster child for extravagant debt financing and conspicuous consumption – with palm leaf islands and towers to the sky – and its default should not be huge surprise.
U.S. financial institutions are not big players in the Gulf. Asian, European, local banks and insurers were the major lenders and are the ones most exposed to the risk. Overall, the debt refinancing problem in Dubai is a positive development for the U.S. since it will likely dampen blind and fearless enthusiasm for emerging markets.
A recovery in the U.S. depends primarily on interest rates staying low for an extended period of time to support the affordability of housing. But low interest rates were at risk of causing an asset price bubble in emerging markets. In some emerging markets, foreign speculative capital rushed in and caused overheated conditions. Policy makers needed and wanted a disruption in speculative flows.
Underlying these risk-seeking inflows were outflows from America. Associated U.S. dollar weakness was fueling inflation expectations as evidenced by the rising price of gold and other commodities.
We believe the real risk would be to have no shock occur to break this cycle. No shock would result in accelerated U.S. dollar declines, commodity increases and potentially cause a premature rate hike in the U.S. If American consumers were faced with rising commodity prices, particularly oil, and rising interest rates, they would be in trouble. The default of Dubai World buys more time for the U.S. Federal Reserve to heal the housing market without putting pressure on the dollar, interest rates or causing increases in commodities.
These short-term shocks and corrections to the market will help to keep speculation in check and build a longer, slower, and likely more sustainable recovery.
Source: Eric Bushell, James Dutkiewicz, Drummond Brodeur, Signature Global Advisors
Dubai was the poster child for extravagant debt financing and conspicuous consumption – with palm leaf islands and towers to the sky – and its default should not be huge surprise.
U.S. financial institutions are not big players in the Gulf. Asian, European, local banks and insurers were the major lenders and are the ones most exposed to the risk. Overall, the debt refinancing problem in Dubai is a positive development for the U.S. since it will likely dampen blind and fearless enthusiasm for emerging markets.
A recovery in the U.S. depends primarily on interest rates staying low for an extended period of time to support the affordability of housing. But low interest rates were at risk of causing an asset price bubble in emerging markets. In some emerging markets, foreign speculative capital rushed in and caused overheated conditions. Policy makers needed and wanted a disruption in speculative flows.
Underlying these risk-seeking inflows were outflows from America. Associated U.S. dollar weakness was fueling inflation expectations as evidenced by the rising price of gold and other commodities.
We believe the real risk would be to have no shock occur to break this cycle. No shock would result in accelerated U.S. dollar declines, commodity increases and potentially cause a premature rate hike in the U.S. If American consumers were faced with rising commodity prices, particularly oil, and rising interest rates, they would be in trouble. The default of Dubai World buys more time for the U.S. Federal Reserve to heal the housing market without putting pressure on the dollar, interest rates or causing increases in commodities.
These short-term shocks and corrections to the market will help to keep speculation in check and build a longer, slower, and likely more sustainable recovery.
Source: Eric Bushell, James Dutkiewicz, Drummond Brodeur, Signature Global Advisors
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