I saw a funny thing on the way to Thursday's market meltdown. Two little
pieces of data caught my eye.
First, our friends at CPMS put together a chart that shows how,
historically, flows into investment funds have been lowest just as the
equity market is beginning to rebound. Let's see if "sell low, buy high"
repeats itself.
I’m watching weak economic numbers roll out, and listening to the pundits about how deep this recession could be, and whether this has been priced into global equity markets. I’m wondering where things are headed, and it makes me recall some words I have read both recently and not so recently.
This week we take a break from the anguish in the capital markets to look at the far more life-affirming topic of water (don't worry, you can still make money on it). But why water you ask? How can that be a profitable venture? The stuff falls from the sky, comes out of the tap cheaply, and nearly 60% of our beings are water. All true, but ultimately water is subject to the laws of supply and demand, and now, after decades of wastefulness, rising water demand is causing a major re-think in the provisioning and pricing of this essential good, and therein lies the opportunity.
This week we take a look at the economic proposals from Barack Obama and John McCain as they pertain to the ten major sectors of the equity markets. Before we delve too deeply into this subject however let's keep a few things in mind:
- Each candidate is currently playing to their party base, meaning the Republicans are generally espousing lower taxes and less regulation while the Democrats are promoting higher taxes on the wealthy, greater regulation and a clearer environmental policy; on the whole, a Republican victory would be better received by the stock market as they are the traditional pro-business/low tax party.
- Campaign promises are like smiles at McDonalds... free. Putting flesh to bone requires navigating the Congressional process and finding ways to pay for new legislation.
- Quite simply, the election is slipping away from the Republicans. Slate.com's rather accurate Election Scorecard points to gathering momentum for the Democrats, with the all-important swing states of Florida, Ohio, Virginia and Pennsylvania swinging away from John McCain. In addition, it would appear that the Democrats will maintain control of the House and manage a majority in the Senate. As Yogi Berra would say though, "it ain't over till it's over", and until the polls close on November 4th, it ain't over.
So with those disclaimers in place, let's investigate the key policy differences between the two candidates:
As we close in on four weeks since the Lehman Brothers bankruptcy bombshell, it appears that the pieces are now in place for financial markets stability. Broadly speaking we have seen four sets of extraordinary measures taken in recent weeks on the part of public and private actors: enormous liquidity made available to financial institutions under various programs from the world's central banks; the passing of the $700 Billion Troubled Asset Relief Program to purchase illiquid mortgage-backed securities; billions of dollars of direct capital injections into U.S. and European banks; and coordinated interest rate cuts across the world (including the European Central Bank, whose recalcitrant leader Jean-Claude Trichet was last seen rearranging the deck chairs on the Titanic as it took on water). These actions seem to be having diminishing positive impacts on the global capital markets however, as credit markets are still far from functioning normally and equity markets have been in freefall. Investors are understandably nervous and this is reflected in the VIX index, which measures expected future volatility, which has surged to two-decade highs... higher than in the days after 9/11, higher than the Long-term Capital Management debacle, higher than the Asian Currency Crisis... you get the picture (see "It will fluctuate" - JP Morgan, when asked what the stock market would do - August 1st for more on the rise of volatility). Nonetheless, financial markets will survive and eventually will get back to doing what they're supposed to be doing, distributing capital to investment opportunities. The economy on the other hand, is another matter.
As the financial bailout bill (we mean rescue bill) finally made it over the finish line in the U.S. House of Representatives today, investors are now asking themselves if this marks the bottom of the stock market. To us, this extraordinary legislation (we say trillion dollars because we include both the $700 billion in the Treasury Plan and the money already committed to Fannie Mae, Freddie Mac, etc.) will likely have the following benefits:
"All other swindlers upon earth are nothing to the self-swindlers, and with such pretenses did I cheat myself. Surely a curious thing. That I should innocently take a bad half-crown of somebody else's manufacture, is reasonable enough; but that I should knowingly reckon the spurious coin of my own make, as good money!"
- Charles Dickens, Great Expectations
Like so many things in life, equity markets run on optimism, and there's nothing more central to this optimism than the expectation for corporate profits, and more specifically, profit growth. While the past several quarters in global equity markets have been characterized by underwhelming profit growth, thanks in large part to massive charges taken by financial institutions as they wrote down the value of their assets, and the current economic environment can at best be described as challenging (more likely recessionary), Wall Street analysts remain confident in the ability of U.S. companies to grow profits. We've done some digging through the published estimates and have found what amounts to almost unbridled optimism. Here's the scoop:
"We experience moments absolutely free from worry. These brief respites are called panic." - Cullen Hightower
This week the financial markets had all the chaos of a twelve-year-old's birthday party, the terror of a malfunctioning roller-coaster, the promise of a summer long-weekend, and the disappointment of catching your prom date kissing your best friend. Let's sift through the wreckage by topic:
A lot has been written about North America's love of the automobile and the freedom of hitting the road (thanks in no small part to the myth-making and dream-selling departments at the major automakers), but in these historically-high gas price, heightened environmental concern, energy-security-conscious days, one has to wonder what the future holds for the internal combustion engine and its adherents. While it may not be going away any time soon (although the chart of Total U.S. Auto Sales below may suggest otherwise as sales have plunged to levels not seen since the early 90s), it seems inevitable that the fuel used in the engine will continue to evolve, and Bioethanol looks like it will play a significant role. Bioethanol you say? But isn't that driving up the cost of food and producing only modest energy gains? Well, no, not when you're talking about cellulosic ethanol. Here's the scoop:
Author Clive James once commented on tennis star John McEnroe in the following manner:
"The Benson and Hedges Cup was won by McEnroe ... he was as charming as always, which means that he was as charming as a dead mouse in a loaf of bread."
For commodity investors, this past summer has been equally as charming.
In brief, since July 1st the TSX Energy Sub-Index is down 19.5% and the Materials Sub-Index is down a 29.3%. This compares to the first six months of the year where Energy was up 22.5% and Materials were up 25.6%. Building on several of the points (and several of the blogs) we've been making over the past few months, let's take a moment to figure out how we got here and where we go from here.
