Here’s an interesting post based on a Citi Group Global Strategy Team analysis. It argues that there’s a fairly regular credit cycle that can be divided into four parts. Part 4 is a recession, stock market decline, and so forth. It argues that we’re somewhere in part 3 and heading towards four. Its main point is that if you’re using leverage you should consider unwinding some of it. I largely agree with the analysis and have stated in Retirement Watch recently that we’re past the midpoint of this business cycle that began in 2009. There still is a reasonable amount of time before part 4, but it is not a time to be taking more risk. An important point is that each cycle is unique in some ways, so you can’t approach the analysis mechanically.
While equity returns can be healthy in Phase 3, they become increasingly unstable. We have previously noted a close relationship between equity market volatility and credit spreads. As spreads rise, so we would expect the Vix to follow. That is exactly what has happened in recent weeks. Investors should continue to buy the equity market dips, but these dips are likely to get bigger. Leveraged investors should also take note. The time to raise leveraged exposure to equities is the more stable Phase 2, not the increasingly unstable Phase 3.
We have also found that Phase 3 is prone to equity market bubbles (Figure 11). The late 1980s version was dominated by Japan, which rose to 44% of global market cap (now 8%), the late 1990s saw global TMT stocks rising to unprecedented levels. The last cycle saw a sharp rerating of EM equities. The recent rise (and fall) of the US Internet/Biotech stocks is typical, although much smaller in scale than those seen in previous cycles.
Many analysts, including the National Association of Realtors Affordability Index, will tell you that despite the surge in home prices in recent years, especially 2013, housing still is close to historic affordable levels. Not so fast, says this post. Traditional analysis of affordability doesn’t take into account changes since 2007. Foremost among the change are the requirement for much higher down payments and the more rigorous credit evaluation. Relatively few borrowers qualify for the posted mortgage rates. Those without the top credit scores pay the higher rates. Bottom line: Maybe residential housing isn’t all that affordabe.
“While focusing on the median family is one way of gauging housing affordability, another way is to focus on the marginal buyer who is arguably more relevant for determining house prices,” write Goldman economists Marty Young and Hui Shan. “Put differently, the prices that we observe should be determined by how much the marginal buyer is willing and able to pay.”
Marginal borrowers differ from the median borrower in two key ways: Their incomes aren’t as strong, and their credit isn’t as good.
Economist Brad DeLong pushes back against the notion that stocks are overvalued and a bad investment at this point. The article is a little long and makes a number of points. He attacks a number of commonly-held views, such as that mean reversion is normal and inevitable, and that the long-term average of valuations is what we should expect as normal. Refer back to this each time you read a gloom and doom piece.
But is there any reason to think that the central tendency of the CAPE today is the same as what it was in the 1880s or the 1950s? There is no unchanging machine buried in the earth for the past 120 years throwing dice to determine the CAPE. It would be much better to say that extreme values of the CAPE are followed by reversion not to but toward the previous historical mean. And dividends and earnings shift too. A much better graph than the CAPE graph is the cumulative reinvested return graph.
The Securities and Exchange Commission apparently believes that golf courses and country clubs are major sources of illegal insider trading in stocks. As this article explains, the SEC makes that clear in its latest enforcement action. The SEC says it is putting club members and golfers on notice that courses and clubhouses are not sanctuaries from the law and it is watching closely.
“Country clubs or similar venues may give people a false sense of security that leads them to think they can get away with trading on unlawful stock tips,” Paul Levenson, director of the SEC’s Boston office, said in a statement. “But as in any social setting, people who trade securities based on confidential information they receive are taking a huge risk that their illegal tipping and trading will be identified by the SEC.”
In the most recent complaint, the SEC highlights the social nature of O’Neill’s relationship with Bray, noting that “they were both golfers and members of the same local country club and they socialized at the country club’s bar.” The government adds that Bray’s construction company at one point paid O’Neill’s then college-aged son to create a computer rendering of a townhouse that the company later built.
The college financial aid process is more mysterious than even the tax code. But there are a few people who know some of the secrets and share them. You can read a few key ones in this blog post. Much is it isn’t intuitive.
* Watch Your Capital Gains.
“Selling assets can yield capital gains, which will increase income and decrease eligibility for need-based aid. Sell bad investments at the same time to offset the capital gains with capital losses. ”
Former PIMCO co-CIO Mohammed El-Erian is bearish on Europe and European stocks. In a recent column for Bloomberg.com, El-Erian criticizes investors who bid up stock prices after the release of a stack of bad economic data from Europe. While the data make the European Central Bank more likely to take strong monetary action, El-Erian isn’t convinced it will be enough to help the economy or stock prices.
The bottom line is simple yet consequential: Today’s poor economic data will push the ECB to do more. As such, markets are right to initially treat the disappointing numbers as good news for artificially-bolstered financial asset prices. But further ECB actions, on their own, will prove insufficient to decisively change the euro area’s economic situation. So financial markets are really betting on is: 1) a better regional policy response to the fundamental causes of the muted recovery and 2) an easing of geo-political tensions surrounding Russia. Unfortunately, there is little to suggest that either of these will materialize, let alone the two together.
There’s something of a circle of life feel to this article on the U.S. counties showing big moves. One table shows the counties the millenials are leaving the most, and another table shows the counties the boomers are leaving the most. While the article doesn’t have a table on the places the millenials are entering, it does mention that other census data indicate the millenials are flocking to the places boomers are leaving.
Millennials—those born between the years 1977 to 1992—are the most likely group to move (roughly one in five do)—and that’s especially true if they live in certain types of places, according to a new analysis by real-estate firm RealtyTrac. In general, millennials are moving away from counties with smaller populations (average population of 178,277) and to counties with larger populations (average population of 587,522), the report revealed. That’s likely because they’re trying to get out of areas with fewer and low-paying jobs, explains Daren Blomquist, vice president of RealtyTrac.
Here’s a very good summary (subscription might be required) of the factors that currently worry investors these days. It includes high stock prices and valuations, the Fed’s policy, weak earnings growth, and geopolitics.
Corporate profits are rising at a single-digit percentage pace, down from big double-digit gains earlier in the recovery. Mr. Wren has been telling clients these gains are fine and sustainable, but they still hold more money in cash than he recommends, he said.
“Ultimately,” said Mr. Parker at Morgan Stanley, “the trajectory of earnings is what matters” for the future of stock prices and “I don’t know of anybody who thinks earnings are going down in the second half of the year.”
For some time now in Retirement Watch I’ve said that the main risks to the markets are from outside the markets and economy. The highest risks probably are from geopolitical events. We saw that in the details of recent consumer sentiment surveys. While consumers generally are positive about their current situations (and the economic data backs this up), they are lowering future expectations. I suspect this lower of expectations is due largely to geopolitics and especially to the possibility that the combination of the Russia-Ukraine crisis and recent events in the Middle East will either draw the U.S. into another large war or two or will disrupt the global economy. Of course, there are long-term problems within the U.S. that aren’t being solved, such as Social Security and Medicare, and people are becoming more concerned about the long-term consequences of the Affordable Care Act.
Here’s a post with some interesting animated graphics. It shows how the age distribution of the U.S. has changed since 1900. As you’d expect in 1900 there weren’t too many older people. The population was heavily weighted to younger people. With improvements in medicine, nutrition, sanitation, and other factors, we have more older people. But what’s interesting is that in coming decades there’s likely to be a resurgence to the younger bias in the population.
There are many interesting points – the Depression baby bust (that started before the Depression), the baby boom, the 2nd smaller baby bust following the baby boom, the “echo” boom” and more.
What jumps out at me are the improvements in health care … and also that the largest cohorts will all soon be under 40.