CUMBERLAND E' PRONTO A UN MERCATO AZIONARIO IN DISCESA E A UN MERCATO OBBLIGAZIONARIO CHE DARA' SODDISFAZIONI CON DURATION ELEVATA (ESATTAMENTE QUELLO ESPRESSO DA MERCATO LIBERO PRIMA DI ANDARE IN VACANZA)
The Tremendous Benefit To American Business From Central Bank Policy In The Post-Crisis Period Is Coming To An End
articolo di david kotok che puoi leggere qui di seguito, cliccando in basso a sinistra
It has been a busy two weeks. The Leen’s Lodge gathering added an
intense interlude of high-powered conversation and analysis. The
Yellen-Summers headlines now have two added mystery names per President
Obama. The Fed (Federal Reserve) tapering talk adds the question “What
is the policy?” to the question “Who will be making the policy?” Markets
are going through gyrations in both bonds and stocks. And we see
surprising reactions in foreign currencies, with the Japanese yen
strengthening while changes in policy at the Bank of England have
resulted in a market reaction opposite to what the BOE expected.
At Cumberland, there have been a number of strategy changes.
We will summarize here the strategy changes and the reasons for them.
We have raised cash in both US and international equity accounts. The
bottom line is that the risk profile in stock markets is up. There are
questions about the pace of economic recovery, some of the sectors such
as energy or housing, and the impact of the Fed’s talk of tapering and
what it is doing to risk premia and re-pricing in the market. The
possibility of a Summers Fed chairmanship, coupled with Elizabeth Duke’s
departing, Jerome Powell’s term ending next year, Sarah Bloom Raskin’s
leaving for the Treasury, and Janet Yellen’s departing (If she is not
appointed chair?) , leads market agents to conclude that an entirely
different configuration of the Fed board may soon be at hand.
Add to that the retirements of some of the seasoned presidents
(Cleveland Fed president Sandra Pianalto has announced), and the
structure of the US central bank may reach a point where the remaining
experienced and historically seasoned members of the FOMC (Federal Open
Market Committee) are few. New observers and appointees may have seen
the financial crisis from the outside; however, they will not have
acquired firsthand the knowledge and experience gained only through
making decisions under fire. Markets are aware that they face the
biggest US central bank transition in many years.
Bond markets have backed up in yields. This is true in the Treasury,
municipal and taxable bond markets. We have written about how yields
have been distorted and yield spreads have widened enormously. Our
example was a trading day in which the 30-year US Treasury obligation
(federally taxable) traded at 3.62% yield. In the same 24-hour period,
the tax-free New Jersey Turnpike traded at 4.73% yield, and the taxable
New Jersey Turnpike traded at 5.15%. In our view, the tax-free turnpike
bonds are screaming bargains in the present climate. In fact, Cumberland
owns them in clients’ accounts.
Risk management issues loom larger than usual. What do you do when
the stock market has reached your next year’s target? Our target was the
S&P 500 at 1700 by the end of 2014. We are there. What do you do
when the outlook for earnings is starting to deteriorate? We have
ratcheted back our S&P 500 estimates for this year by a couple of
dollars. We still think that earnings will come in around $110, give or
take $2. The picture is trending toward more softness in earnings
growth.
What do you do when the outlook for the future earnings growth rate
is also deteriorating? We base that assessment on the fact that the
profit share of the GDP in the US is at the highest level it has seen in
decades and the labor share is at the lowest level. That means
productivity seems high and earnings that come from that profit share
seem to be strong. Could the profit share go higher? Yes it could. Is
that likely now? We think not. Furthermore, the ratio of the value of
the entire S&P 500 index to the GDP has reached 100%. History (Ned
Davis database) suggests that this is a dangerous level.
We think the profit share of the GDP is rolling over, peaking, and
tipping into what might be a long-term decline from this very high
level. And the labor share may be bottoming and is positioned now to
start a gradual rise over time from this very low level. If this view
is correct, then American companies begin to face headwinds that will
slow the earnings growth rate.
This is not just a day-to-day,
week-to-week or month-to-month rate of change. This is strategic. What
lies before us is a longer-term stretch in which the tremendous benefit
to American business from central bank policy in the post-crisis period
will come to an end.
Lastly, there is the issue of demographic headwinds. Rob Arnott, a
guest at Leen’s Lodge this year, has offered thoughtful analysis on
demographics. He notes, in his serious research, how strongly
demographics have contributed, in the past, to accelerating growth
rates, and he forecasts significant headwinds that demographic change
may introduce into our strategic future.
Put that package together and there emerges a set of circumstances in
which stocks, having risen terrifically, now look less appealing at the
current price level. Certain sectors of the bond market, by contrast,
look more appealing.
We have changed our internal asset-allocation mix at Cumberland
Advisors. In the beginning of this cycle, we were as high as 80% stocks
in balanced accounts. That allocation has been reduced to 60%. We have
taken the bond piece up to 40%. Furthermore, we have extended duration
in individually managed accounts.
We have a cash reserve in our US
equity and international ETF accounts. That cash reserve is higher than
it has been in our accounts in quite some time. And we are going to hold
that cash reserve on the sidelines for a time. We cannot say how long
and we do not know when or how much will be redeployed.
We are now facing the transitional period for the central bank. We do
not know who the next chairman is going to be or what the composition
of the board will be. But we do know that the current wave of
uncertainty will soon be cresting into decisions sure to have cascading
consequences in churning markets. We have seen a lineup of commentary
coming from FOMC members that suggests a form of tapering is coming.
We are not afraid of tapering. Tapering by itself is not an issue if
it is coupled with an extension of the short-term interest-rate
commitment. In other words, the Fed can cut the rate of additional
purchases and use guidance to extend the period before and until the Fed
Funds rate will be elevated from its present 0.0%-0.25% range. Some
members of the FOMC are thinking that tapering means reducing the amount
of stimulus but extending the time period in which it is applied. If
the market grasps that concept, bonds will rally, and tax-free bonds
even more so.
Think about it. If the inflation rate in the US is roughly 1% and
there is a possible downward trend, then a 4.73% tax-free New Jersey
bond is delivering a real return of 3.73% after taxes to a New Jersey
resident. That is a phenomenally high return on an investment for
someone living in New Jersey. The real return is still quite high if the
inflation rate heads up to 2%. This is now a win-win for an individual
investor. There are similar opportunities in jurisdictions throughout
the US.
To sum this up, carefully selected bonds now offer an entry
opportunity and long duration. It is critical to check the quality of
credits, particularly in the municipal bond market.
Stocks require selectivity as to sector activity and many other
characteristics. We have had terrific success in our US ETF portfolios
this year. We do not want to give those strategically achieved profits
back. So we now have a cash reserve until we get through this difficult
period.
Iscriviti a:
Commenti sul post (Atom)
Nessun commento:
Posta un commento