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Capital Markets Recap
If you woke up on the right side of the grass today you must know that the biggest story of today–and the past couple of weeks–is and has been Egypt. With today’s annoucement that Hosni Mubarak would be leaving the building–maybe we should make sure he clears the door before we bid him a-dew–one would have expected the risk of insuring against an Egypt default would have fallen. While it has fallen over the past several weeks, the risk is still pricey, reflecting the same question as when the dog finally catches the car: what now? The risk is now priced like it was in mid-January, as shown below.
It looks a lot like the Google search interest, which is shown below.
In response. the Market Vectors Egypt ETF rallied nicely today, but it failed to recover like the CDS did.
What’s more, while Egypt was widely seen as a reason for emerging markets stocks to take a breather, ol’ Hosni’s departure, and the subsequent rebound in Egypt stocks, has been no balm for emerging market stocks, also as shown below.
I’m mid-way through a paper from Alliance Bernstein–one of those where the analyst gets paid by the number of pages produced. It’s titled, Deflating Inflation; Redefining the Inflation-Resistant Portfolio. Here’s my synopsis of the first half.
- There are many asset classes that may provide protection against inflation, and they vary in three different ways: their effectiveness, their reliability, and their cost to a portfolio. The chart below shows the effectiveness of various asset classes in dealing with inflation. Not surprisingly, longer-term bonds are most sensitive; commodities, the least.
- All inflation hedges, however, are not created equal, and that’s especially the case with commodities. The chart below disentangles some of the aggregate data above and looks at how reliably various asset classes have combatted inflation, historically. The chart below suggests that commodities, themselves, are pretty lousy hedges, and the worst of the bunch are precious metals, which have the worst record for reliability. As the report puts it, “then there’s the highest-inflation beta groups, such as commodity and precious metals futures, which had reliability akin to a coin flip.”
The paper doesn’t include a similar chart for cost effectiveness, but they do include the handy summary, below, divided into three categories that Alliance Bernstein favors for the analysis: Real Cash, Real Bonds, and Real Assets. (Click to enlarge.)
If you’ve stuck with me this far you might have come to the same conclusion as the authors:
“A real asset portfolio with a diversified mix of commodity futures and commodity and real estate stocks, as well as foreign exchange exposure (to protect against the threat of a domestic-only versus global inflation shock) and perhaps a small amount of cgold, provides a far better balance of sensitivity, reliability, and cost-effectiveness than any of the individual components alone.”
Next week I’ll tackle the rest of the research piece, which will cover how–as in how much–to incorporate the inflation protection, and when–as in when–to incorporate the protection.
. . . the few reports there were this week tended to be on the strong side of things. Initial Jobless Claims fell below 400,000–that’s the 15-year old demarcation line between an expanding (below) and contracting (above) job market–to 383,000. A few weeks ago, claims for unemployment insurance jumped markedly. That was blamed on bad weather. This time they fall sharply, and guess what, it gets blamed on weather. A common smoothing of the weekly numbers is the 4-week moving average, which also fell. The drop to 383,000 takes claims back to July 2008 levels.
NFIB Small Business Optimism rose to the highest level since the end of 2007, but the index remains about 5% below its long-term average.
University of Michigan Consumer Confidence also crept higher, but in like fashion it also reflects a subdue consumer. To do my part to address that I googled “soothing colors” and came up with the following version of the consumer confidence chart. I’m thinking it doesn’t really work.
A whole bunch of stuff gets thrown at us next week. Here it is by importance, IMO.
Key indicators to watch
- Producer Price Index (Wednesday) – January
- Industrial Production (Wednesday) – January
- Capacity Utilization (Wednesday) – January
- Minutes of January FOMC meeting (Wednesday)
- Consumer Price Index (Thursday) – January
- Initial Jobless Claims (Thursday) – weekly
- Leading Economic Indicators (Thursday) – January
‘Might as well keep our eyes on Advance Retail Sales for January. There seems to be a sense that the economy might be picking up some real steam, that employment might be ready to pick up. If so, we should see it in retail sales, especially of the discretionary sort.
- Mortgage Delinquencies – Q4
- MBA Mortgage Foreclosures – Q4
- NAHB Housing Market Index (Tuesday) – February
- Housing Starts – (Wednesday) – January
- Building Permits – (Wednesday) – January
Regional activity indexes
- Empire State Manufacturing
- Philadelphia Federal Reserve
If you made it this far, thanks for reading.
Graig Stettner, CFA, CMT
Vice President & Portfolio Manager
Tower Private Advisors