The Swiss team have changed their stance a little. The recent strength providing evidence that the pull back, when it comes, will be shallow and not severe. From their technical perspective, they judge, this move will likely therefore run to the end of March or early April and score a higher high across the broad equity indexes. Near term a pull back still likely though now no more than a technical pull back before the next leg up. Financial cos have made a major low and this is a ‘game changer’, according to them. Worthy of note are their comments on gold, on which they have turned medium term bullish until mid summer. Prefer euro gold and miners to usd gold due to their bearishness on the euro. Report here:
When the sea is calm and the wind steady there is no point in tinkering around too much with your rigging and so it is that, I’ve been quiet to comment too much, on asset markets. I’ve been letting things run using the time in stead to do some homework on company fundamentals. To my mind you cannot ignore the fundamentals and deal with the technicals alone. The Chinese and US lending data as commented on the release of the data end of 2011 and very early 2012 was crucial as was the ECB monetary injection. These three issues overwhelmed the bearish case, for now at least.
I’ve gone through my own list of assets with a fine comb making a few changes here and there. Overall exposure has edged down a few percent as ive trimmed a few issues in preparation for a pull back if she occurs. The portfolio is fairly income generative and yet maintains a high exposure to precious metals (around 12% of total net wealth with a split between the metals and miners of 30% metals and 70% miners). I’d ideally like the cash exposure to pms higher but i would struggle to maintain sufficient income from such a portfolio allocation. Occassional leverage the only way to get the beta on this element as and when needed. Indeed maintaining 12% of total net wealth in precious metals is hard enough. This represents a 29% allocation of the investment capital and even more than this given i carry a little cash for a rainy day. The remaining 71% investment has an average net yield of 5.2% or so. This is far from stella but the yield is well covered by earnings to the downside and yet offers upside inflation protection and even a beta depending on how things play out. Energy issues are a significant cash generating allocation providing over 3 times their weighting in terms of yield. Property reits, telecos and a few specialist financial related cos produce much of the income. For disclosure, I have little pm leverage now given a reduction in futures and the clearing of the 2012 option exposures.
Fund valuation wise, January has, thus far, been pretty stella with the total fund netting nearly 5% growth for the 3 weeks, out performing the wider equity indexes. Its just 3 weeks running a naked long small leveraged position. Petty meaningless i must confess but nice to see nonetheless.
I wanted to pick up on corporate profitability and why we are recently seeing such an out performance by the large caps so here below is some analysis.
Its been a feature of these recent markets that you’ve been able to find single digit pe cos that are growing earnings yoy by either single or double digits as well as paying shareholders 5% plus yields. (In some cases much more than this). 2011 saw a significant low point in valuations, imo, in this respect. Its important to be clear that these large cap companies have achieved their high profitability without highly gearing their balance sheets. Good companies have and continue to trim their cost bases. Wages are generally falling, inflation adjusted whilst home markets see nominal growth due to money printing or money supply growth via the banking system. Overseas markets see real growth. All along this cycle dividends have been increasing above inflation rates. Importantly finance yields have been falling and large companies with strong balancesheets have been switching away from variable rate credit facilities to fixed rate long maturity bonds locking in low rates whilst they can. All these factors provide very clear upside to corporate earnings (and therefore distributions to shareholders).
This chart doesn’t show the latest data but the ECB 3yr 1% loans have done wonders for the investment grade corporate fixed income debt markets. These securities can be swapped with the ECB for cheap loans and so is it any wonder that rates are making new lows at the investment grade end of the corporate market. The loser, aside from the debasement of currency issues, are the corporate loans market. The situation in the SME market is pretty much as it was. The liquidity bonanza is felt at the top end of the market only. Anything outside of investment grade is shunned. Here a chart of the ‘leverged, or junk, coporate loan market.
And here a more recent chart using the CSFB leveraged loan index care of Bloomberg.
The junk bond volume and yields are struggling for obvious reasons.The UK picture is no different.
And plenty of leveraged loans fall due in 2012. For the corporates with leverged loans they will switch to issuing corporate debt with the bottom line positive implications that this will bring.
The relative out performance by large caps is for a multiple of reasons not least the debt markets. Intervension by government and central banks is pushing participants to lend to investment grade corporate securities markets. Once again we have another misallocation. The premium end of the debt markets are awash with capital. Participants are chasing yield at any price.Here the FT “Bond Bonanza”
http://www.ft.com/intl/cms/s/0/f9546700-3e01-11e1-ac9b-00144feabdc0.html#axzz1kNwVUThv
Or here the WSJ: http://professional.wsj.com/article/SB10001424052970203750404577171341742782200.html
Credit markets are where the whole thing broke down and credit markets will be where the reflation trade takes off. Large cash rich corporates can borrow at 3% interest rates for decades at a fixed rate. This is clearly madness but this is what is occuring care of central banks flooding the investment grade market with liquidity. For us this means teh beest corporates earnings will increase significantly as their cost of funds is reduced. Even those with surplus funds are issuing bonds as they see the opportunity. Why not raise capital at these prices then distribute excess cash to shareholders? Why not indeed. A wise CEO would do this and many are. Here the Dow Corporate Bond Index showing a new all time low cost of borrowing. (Borrowing costs are inversely linked to the price of the bond index so as the index moves higher the cost of borrowing moves lower).
So it is that the central planners are once again allocating capital in stead of the markets freely allocating capital. Chairman Ben, Mario Draghi, King etc are directing capital towards the world’s largest corporate entities. Just as regulation tilts the deck towards the largest cos now we see monetary issues tilting the deck toward these oligopolistic cos. The costs of this misallocation will be paid for years ahead as markets need fair competition. Smaller players are normally the innovators and yet they are being starved of capital whilst the larger players have too much. Its a paradox in a sea of paradoxes im afraid. For investors you cannot fight the monetary central planners and regulators. Large corporate entities will do very very nicely due to these monetary policies. Earnings will grow as costs are cut. Excess liquidity and these policy actions will inevitably drive the wall of capital sitting in bonds as well as cash into the large cap equities. A bubble will form whose popping will be expensive for all and demand another monetary bailout. Bubbles should be bought at first.
During the third quarter, 2011 the S&P 500 companies managed to make a new quarterly earnings record as well as break the record for trailing twelve month earnings. 2012 expectations are for earnings to hit or get very close to the $100 mark for the sp500. With the corporate bond rates likely to make new lows in the coming quarters and plenty of corporate leveraged loans needing to be rolled over (and likely rolled over into low yielding corporate bonds, i cant see why this earnings trend shouldn’t continue even if revenues declined. Lets worry about the ‘popping’ later. For now corporates are cheap for a multitude of reasons. Don’t misunderstand me, I wouldn’t chase equities right here today but i would add on some shallow retracement of the recent leg higher keeping some ammunition free for some disasterous news event or other than policy makers are likely to provide mid year.
Rich
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