Tower Private Advisors
- Barron’s article recap
- New Year’s resolution
Capital Markets Recap
New Years Resolution
I have resolved to not read any of the usual 2014 economic or investment forecasts that come out at this time of year. For one thing, most forecasters are bullish–and probably rightly so, and most predict single-digit returns for equities, in spite of how rarely that has happened in the past, as the chart below, courtesy of Strategas Research Partners, shows.
I did, however, read an interesting interview in this week’s issue of Barron’s. For some reason–I suppose it’s not that unusual–I’m always drawn to the Cinderella story, and the possible Cinderalla story for 2014 has to be bonds. Barron’s interviewed Rick Rieder–yeah, I hadn’t heard of him either–who came to Blackrock from a 21-year stint at Lehman Brothers, and who started up a hedge fund in 2008, which Blackrock purchased in 2009. In the introduction, the story points out that he was hired by Blackrock by 2009 to help shape up its bond fund business. At the time, less than half of Blackrock’s fixed-income funds were ranked in the top half of their categories; now, 68% are. He snatched up Italian and Spanish bonds when they were cheap and called for falling gold prices in 2013. He’s got cred, and here are a few highlights of the interview. For what it’s worth, I learned about plagiarism in college–not from experience, but by admonition–and it’s not my intent to engage in it here. I quote extensively below, and the indentation indicates that . So before you go ratting me out to Barron’s or the CFA Institure, please understand it’s not my intent–isn’t that 3/4 of the law? Only the emphasis is mine. I expand on technical terms with brackets , and I indicate where–in the response–I left out portions with elipses. Finally, he is a bond guy, so he probably likes his asset class; keep that in mind.
How long will rates stay low?
Certainly through 2016, but there is a reasonable chance rates could stay low until 2018. If growth picks up, that could change.
What does that mean for investors?
The asset classes that have come under pressure in the past few months–municipal bonds, emerging markets, and longer-term bonds–are actually attractive. The places people have been hiding, such as intermediate-term bonds, are worth re-evaluating.
The Fed’s bond-buying has some people worried about inflation, but you aren’t concerned. Why?
The Fed is more concerned about deflation and considering a floor on inflation. That’s something that was once inconceivable…There are several reasons inflation is not a significant concern, such as significantly lower growth in Europe…slack in the [U.S.] labor force…[and] energy.
What about jobs?
We are seeing improvement and will continue to see it. But the participation-adjusted employment rate [the employment rate adjusted for the decline in the labor force]…hasn’t moved since 2009.
With rates likely to stay low, where should bond investors go?
With growth picking up, we like shorter-term bonds…we also like longer-term bonds–municipals and Treasuries. While long-term interest rates could drift a bit higher, they will be capped because of the lack of inflation and because short-term rates are likely to stay extremely low for the next couple of years.
What’s especially attractive?
Assets that do well alongside better equity markets. High-yield bonds for instance…We also are upbeat about real estate.
Two areas of the bond market have been hit particularly hard recently–municipal and emerging market bonds…Is this an opportunity?
…We’ve become more favorable in the past few weeksin long-term municipal bonds because of the tremendous demand from insurance and pension firms for higher-rate, long-term bonds.
With a flood of money going into bank loans, should investors be cautious?
It’s one of the best places to generate 4% to 4.5% returns without interest-rate risk, but upside is very muted.
What about the talk of a bond bubble?
It’s a falseholld. As long as demand exceeds or equals supply, there’s no bubble. I woudl argue there’s too much demand today. There are not enough fixed-income assets in the world…
What does the mean for bonds?
Much of the developed world is reducing its debt [deleveraging], so there are not enough bonds. Yet the population is aging, which means pension funds and life insurers want bonds. And the Fed is buying up available supply.
There wasn’t a whole lot going on this week, what with the holiday-interupted week. Initial Jobless Claims were released as usual, and they continue to bump along cycle lows. It seems that every story released with about an economic indicator points out that this is a volatile time of the year with respect to indicators. Plants shut down, vacation is taken, etc. And it seeems this is especially the case for the employment indicators. Regardless, the story remains the same: jobless claims reinforce the idea that layoffs are low; hiring has yet to pick up in a big way. There was a slew of purchasing managers indexes released this week. Most of these are diffusion indexes. Crudely put, they measure responses on a 0-100 scale. So, let’s say I survey 10 people on how their Christmas booty collection went, and for purposes of simplifying the calculation, I require answers to be one of the following five choices: phenomenal; better than expected; about as expected; worse than expected; and coal. I’ll assign values of 100, 75, and 50, 25, and 0, respectively, to their answers.
Here are the replies I get:
- Phenomenal – 2
- Better than expected -1
- About as expected – 4
- Worse than expected – 2
- Coal – 1
Here is the math: (2 x 100) + (1 x 75) + (4 x 50) + (2 x 25) + (1 x 0) = 525 ÷ 10 = 52.5
That’s it, fancy name for what amounts to an average.
Here were this week’s diffusion index readings. Each suggests growing manufacturing economies. Some showed slowdowns in the rate of growth; others increases, but the overall picture is positive for manufacturing.
- ISM Milwaukee – 54.27
- Chicago Purchasing Managers – 59.1
- Markit US PMI – 55.0
- ISM Manufacturing – 57.0
- ISM New York – 63.8
Of course, what matters is the readings–not on their own, but relative to expectations. So here is a look at U.S. economic releases–almost all of them; not just these purchasing managers indexes–relative to expectations based on the Citigroup Economic Surprise index. Economists, as a
herd group continue to underestimate the strength of the economy so the line continues north.
Only one thing matters next week, Friday’s Nonfarm Payrolls report and the data that’s part of it…Unemployment Rate, Hourly Wages, Hours Worked, etc.
Oh, hey, here are my best wishes for a prosperous 2014 for you and yours.
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors