This commentary appreared in the Clarion Ledger on 21 Sep. 2008
September 21, 2008
COMMENTARY — Historic Wall Street woes: Building back from bust
Three of nation's top five investment banks collapsed with two more in merger talks
Ashby M. Foote III
Special to The Clarion-Ledger
Watching the conflagration that is consuming Wall Street one is reminded of the famous words of New York baseball manager and philosopher, Casey Stengel: "Can anybody here play this game?"
Casey was describing his 1962 Mets team, arguably the worst baseball team in major league history, but compared to today's Wall Street investment banks the 1962 Mets look like all-stars. 2008 began with five top tier investment banks and less than 10 months later only two are left standing on their own with one of those in merger discussions.
Bear Stearns collapsed in March and was sold for pennies on the dollar to J.P. Morgan. On Sept. 14, Lehman Brothers declared bankruptcy and that same day Merrill Lynch, under duress, accepted a buyout offer from Bank of America for half of its Jan. 1 value.
The two remaining investment banks, Goldman Sachs and Morgan Stanley, have lost 44 percent and 56 percent of their market value respectively.
Add to that carnage the demise of the insurance giant AIG and mortgage titans Fannie Mae and Freddie Mac and you have the biggest bank panic that anyone can remember.
Investment banks have taken the biggest fall in this financial panic but there is plenty of blame and pain to spread around. In short, there has been a systemic breakdown in the fiduciary checks and balances that govern the relationships from borrowers to mortgage brokers to appraisers to underwriters to securitizers to rating agencies to bond insurers to investors.
At the nub of this crisis is a glut in residential real estate and what is now a two-year decline in home prices. The Case-Shiller U.S. home price index peaked in the Spring of 2006 and has declined 18 percent since then.
In the early 1980s a hot political issue was the plight of the homeless. Twenty-five years later, America is the best-housed and, unfortunately, the most over-housed country in the world. Don't let it be said that capitalism can't deliver the goods.
Alas, grand production untethered from prudence and market disciplines can result in gross oversupply and the busts that inevitably follow.
What makes this bust so insidious and seemingly intractable is the large role residential real estate plays as collateral for trillions of dollars of complex pools of debt in bank, insurance and pension portfolios. This is how a housing bust has become a credit calamity.
The genesis of this over-build of residential real estate can be traced back to 2003-2004 when the Federal Reserve, fearing deflation, dropped its key interest rate, the Federal Funds Rate, to 1 percent and kept it there for a year.
Ben Bernanke had presaged this move with a November 2002 speech entitled, Deflation: Making Sure "It" Doesn't Happen Here.
With stocks still suffering from post bear market blues and bonds offering paltry returns, super cheap money gushed into the asset class that was performing best and seemed the most reliable - real estate, especially residential real estate.
This gusher of investment into tangible assets was further supercharged by new levels of clever financial engineering in the form of complex pools of securities with acronyms like CDOs (collateralized debt obligations) and SIVs (structured investment vehicles).
No discussion of today's panic would be complete without mention of the credit rating agencies Standard & Poor's, Moody's and Fitch and the complicit role they have played.
These are public companies compensated by the underwriters to provide ratings on securities being issued but because of rules governing bank and insurance portfolios the rating companies become de-facto regulators.
When the market for CDOs and SIVs took off in 2004 and 2005 the rating agencies gave investment-grade ratings to most of these new structures that included large chunks of junk debt and sub-prime loans.
With yields 4 to 5 percent higher than similar rated corporate bonds, sales of CDOs mushroomed to $500 billion by 2006.
By the end of 2006, CDOs had become the most profitable and fastest-growing portion of the rating agencies business.
The symbiotic relationship between underwriters and rating agencies is an unhealthy one and a major contributor to the proliferation of CDOs in institutional portfolios worldwide. It is fair to say that we are witnessing in real time the end of an era. Investment banks and their bankers have been the castles and crown princes of Wall Street. Need advice for corporate strategy, mergers and acquisitions or how to invest a billion?
It was to investment banks that big companies and big investors turned. Investment bankers have had their detractors as well - portrayed in movies like Wall Street and books like Bonfire of the Vanities as masters of the universe, the egotistical key-masters and gatekeepers to the really big money of capitalism.
As events and companies have unfolded and unraveled over the past eight months it has become clear that investment banks have been pushed to reinvent their business models over the past five years. For some it worked, but mostly it didn't.
Information technologies and especially the Internet have flattened the investment arena, squeezing profits in some areas and allowing hedge funds, private equity and boutique research firms to compete in areas investment banks once dominated.
In a classic response to such disruptive innovation, the investment banks moved up market to more complex products where better profit margins could still be maintained. In retrospect it is clear now that in many cases they were pursuing complexity for complexities sake rather than for improvement in their product or service offering. In so doing they violated the old G.I. axiom "keep it simple, stupid," and they have paid the consequences. Lastly is leverage. Lehman Brothers and Bear Stearns succumbed to the same fatal flaw: making outsized bets with outsized debt.
Both firms morphed into huge hedge funds, at times utilizing 30- to-1 ratios of debt to equity in an effort to juice returns. Markets and leverage mixed with hubris makes for a powerful concoction. But get the recipe wrong and it can wipe you out. Stengel had counsel for such folly: "Been in this game 100 years, but I see new ways to lose 'em I never knew existed before."
This column appeared in the Clarion Ledger on 6 July, 2008
July 6, 2008
'Dirty' work has some companies cleaning up
Ashby M. Foote III /
Special to The Clarion-Ledger
Career advice for 2008 college grads: Want to get filthy rich? Find a dirty job! Michael Rowe and the Discovery Channel stumbled across this goldmine of an idea three years ago with their surprise hit TV show Dirty Jobs. Lost, Survivor and Fear Factor are other TV hits that found similar success by offering viewers escape from their air-conditioned Dilbert cubicles with settings heavy in sweat, dirt, slime and bugs.
This counterintuitive media magic harkens back to the 1930s when motion picture-goers mired in the drudgery of Dust Bowl and Depression lived vicariously at the Bijou with the glitz and glamour of box office champs Fred Astaire and Ginger Rogers.
This would be a quirky showbiz footnote were it not for a similar phenomenon now roiling through the American economy.
'Dirty' jobs in demand
Stock market action the past 12 months provides some insight into which industries are shedding workers and which need to expand. Of the S&P 500 top 25 performing stocks (all up more than 44 percent) for the past year, 24 are related to the dirty work of extracting forms of carbon out of the Earth. Of the bottom 20 stocks (all down more than 66 percent), 18 are in the white-collar world of high finance.
It comes as no surprise that the world of high finance is now writing off assets by the tens of billions and laying off workers by the tens of thousands. Meanwhile, dirty industries from oil and gas to mining to steel mills to fertilizer production to row crop farming are enjoying their biggest boom in memory.
Such wide disparities in returns usually indicate serious mismatches between demand and capacity and that is the case here. The term "glut" fails to capture the magnitude of gross excesses in credit creation that are now piled up on the doorstep and back alleys of Wall Street and the major banks.
The boom in the dirty sectors of the economy is the flip side - too much demand from here and abroad and woefully insufficient capacity to meet that demand.
The 1970s saw the passage of the Clean Air Act (1970) and Clean Water Act (1977) and the creation of Environmental Protection Agency (1970) and Department of Energy (1977). In the intervening decades the quest to clean up America for both health and esthetic reasons has enjoyed extraordinary success.
Put on some overalls
The dirty little secret of economics version 2008 is that necessary parts of the economy are by definition messy and dirty. We outlaw, offshore or ostracize them at our peril and cost. Bugged about the meteoric rise in gasoline and copper prices? Try getting a permit to build a new refinery or copper mine. Over the past 30 years, there has been one new copper mine built in the U.S. and no new refineries.
Further complicating the "dirty" capital investment arena is the entanglement between the political legal and scientific communities over the contentious issue of climate change and global warming. In April of 2007, the U.S. Supreme Court in a 5-4 decision ruled that carbon dioxide was a pollutant and subject to regulation by EPA.
The key promoter of anthropogenic (man-made) global warming, which is the rationale for declaring carbon dioxide a pollutant, is the United Nations' Intergovernmental Panel on Climate Change. Yes, the same organization that mangled the Food for Oil program and seems incapable of paying its parking tickets in New York City is now angling to become the global manager of the world's supply of carbon dioxide. Citizens of the world, take heed.
All of which leads us to a brave new world of carbon offsets, carbon sequestration, carbon footprints and carbon credits. In an ironic twist to the "carbon cycle," carbon credit trading may breathe new life into the now moribund trading desks of Wall Street. The same folks whose financial engineering brought us securitized sub-prime mortgages may soon be cooking up for sale collateralized carbon credits. Caveat emptor.
Can our post industrial, Dilbert-cubicled economy find and release its inner Li'l Abner and Popeye? Can we don overalls, gulp down some spinach and tackle the dirty work that needs to be done? We have little choice: The planet's carbon-based ecosystem compels it.
this article appeared in the Clarion Ledger on May 25, 2008
Tap our own resources? Food, fuel and foreign policy
Antiquated domestic farm, energy policies contributing to growing world food prices
Ashby M. Foote III
Special to The Clarion-Ledger
in the past six months there have been riots over food prices or food shortages in Mexico, Haiti, Ivory Coast, Cameroon, Indonesia, Bangladesh, Uzbekistan and the Philippines.
In Egypt, riots erupted over the price of cooking oil. Josette Sheeran, head of the United Nation's World Food Program warns that global food reserves are at the lowest level in 30 years - 53 days of emergency supplies versus 169 days worth in 2007. If market prices are a reliable indicator of supply-demand imbalances there could be severe challenges for the food supplies in 2008 and beyond.
Consider that over the past two years the price of corn is up 148 percent, soybeans up 136 percent, soy oil (marketed as vegetable oil) up 140 percent and wheat up 66 percent, as a group easily surpassing the 86 percent rise in crude oil during the same period.
Rice, the primary food staple for half the world, is also in tight supply as major exporters like India and Vietnam restricted exports to ensure sufficient supplies locally. This reached U.S. shores when Sam's and Costco stores in California began rationing rice sales this spring.
Before stockpiling our pantries, breaking ground on Victory gardens or adding another expensive government "solution," we should re-examine existing agriculture policies for their relevance in today's riot hungry world.
Three old policies that stand out like scarecrows in a cornfield are the Conservation Reserve Program, ethanol and the Arctic Natural Wildlife Refuge.
Conservation reserve
The Conservation Reserve Program, first authorized in the 1985 farm bill allows previously cultivated farmland to be "retired" by way of contracts with the Farm Service Agency that run from 10 to 15 years. There are almost 35 million acres now under CRP contracts with annual rental payments from the government estimated at $2 billion at an average of $60 an acre. The penalty for resuming cultivation before the contract expires is payback of all past rental income plus interest.
With corn and soybeans doubling in price the past two years, you don't have to attend a food riot to find frustration with the CRP program. In January, 45 associations from across the U.S. including the American Bakers Association, the National Grain and Feed Association and the Mississippi Poultry Association, petitioned Secretary of Agriculture Ed Schafer requesting that farmers who wished to put "retired acres" back into cultivation could do so without contract penalties.
With this year's plantings coming to an end, all penalties remain in place and the acres remain retired. Of the 34.7 million acres of U.S. farmland under CRP contract, 900,575 acres are in Mississippi.
It is worth noting that since the CRP was signed into law 23 years ago the world's population has grown by 36 percent to 6.6 billion, while the world's arable land remains static at about 3.7 billion acres. Add to that fact the billion or so folks striving mightily to join the middle class and enjoy the improving lifestyles and diets that come with such status.
Corn-based ethanol
The first subsidy for ethanol-blended gasoline appeared in the Energy Tax Act of 1978. In the subsequent 30 years, government has expanded the program to include mandated use, bigger subsidies and tariffs against imported ethanol.
This past December, the bi-partisan "Energy Independence and Security Act of 2007" was signed into law which extended and expanded mandates for production of renewable fuels to 36 billion gallons by 2022, of which 15 billion gallons must be corn-based. The American Coalition for Ethanol estimates it will require 35.7 million acres of corn to produce those 15 billion gallons.
That would equal 41 percent of the 86 million acres corn growers plan to plant in 2008. Such huge mandates require huge capital investment and the private sector has stepped up, investing over $5 billion in ethanol processing plants in recent years.
There are now 139 plants in production with capacity to produce 7.2 billion gallons with another 62 plants under construction.
Alas, the skyrocketing price of corn has made many of the ethanol business plans uneconomic. As a result, some of the plants have been closed waiting and hoping for lower corn prices.
Drilling ANWR?
When the government mandated corn ethanol for fuel, the Arctic Natural Wildlife Refuge became a farm policy issue. The political battle over ANWR has been long and tortuous. In 1960, President Dwight D. Eisenhower declared 8.9 million acres in northeast Alaska as a protected wildlife refuge. The size was increased to 19.6 million acres in the 1980s. In 1995, Congress authorized oil drilling on the coastal plain portion of ANWR, but the bill was vetoed by President Bill Clinton.
Numerous attempts since then to open ANWR for drilling have been defeated by vote or filibuster. ANWR's 19.6 million acres sits on 16 billion barrels of crude oil and 10 trillion cubic feet of natural gas, making it one of the largest untapped reservoirs of oil and gas on the planet.
The few hearty inhabitants (260 Inupiat Eskimos) of ANWR reside in the village of Kaktovik. The Inupiat strongly favor drilling in ANWR. George Tagarook, the vice-mayor of Kaktovik, has harsh words for those opposed to drilling: "Step by insidious step, outsiders pushed us aside, set up rules that made it harder and harder for us to use our lands and waters. The worst thing they have done is to declare part of our homelands 'wilderness.' The management rules for such places make it impossible for us to continue to use them.
"Now they want the entire coastal plain made 'wilderness.' That is code for finally removing us from our homelands. That is code for genocide," said Tagarook. Russia's version of ANWR is called Siberia and is famous as a locale for gulags and dissidents.
In an irony worthy of Tolstoy, George Tagarook and his fellow Inupiats now find themselves in a "green" gulag, modern day dissidents stymied by forces far away and beyond their control.
In summary: CRP, ANWR and corn-based ethanol are policies ill suited for today's resource hungry world. In fact they manifest a level of dysfunction that would make Rube Goldberg grin.
For readers born after 1970, Rube Goldberg was a Pulitzer Prize-winning cartoonist famous for his depictions of complicated machinery that performed very simple tasks in an indirect and convoluted way. They put America on the wrong side of history, mandating meager existences for Eskimos while our president travels to Arabia asking kings to pump more oil. What the people of Cameroon, Haiti and Bangladesh grasp that we have yet to, is that in the world of 2008, arable land is the precious scarce resource in the food and energy debate.
Rather than something to be retired and sent out to pasture, arable land is a vital and strategic resource, valuable for both economic and humanitarian reasons. Rather than flying across the globe, our president should ride across town and notify the bean counters at the U.S. Department of Agriculture to set aside the "set asides" and let America's farmers make hay while the sun is shining.
There is a whole lot to be said for fruited plains and amber waves of grain.
http://www.clarionledger.com/apps/pbcs.dll/article?AID=/20080525/OPINION/805250322/1046
On November 27 & 28, 2007, the Communication Information Technology Organization of Mississippi held a conference on High Technology at the Telecom Center in Jackson, MS. Ashby was asked and honored to give a presentation on the Future of the National Technology and Innovation Economy.
The PowerPoint presentation (slides only) from Ashby's presentation can be accessed by clicking the following link:
and then clicking on
"Conference on High Technology presentation on the Future of Technology by Ashby Foote."
Click on the link below to read Ashby's article on the May 2007 market rally which appeared on the American Spectator website:
Read Ashby's thoughts on the recent market volatility in the linked article that ran in the Clarion Ledger on March 30, 2007:
The following commentary by Ashby on the AT&T BellSouth merger ran in the Clarion Ledger on 11 January 2007:
October 2006 Jobs report:
The highly anticipated Labor Dept. Jobs Report was released today (11/3/06) with a big upside surprise in positive revisions and the lowest unemployment rate in 5 years at 4.4%. This along with rising tax receipts, strong corporate profit growth and even rising stock prices, supports the case for a continued economic expansion well into 2007. The bond market, which has been pricing in rate cuts by early next year, sold off sharply on the news. AMF
THIRD QUARTER 2006 INVESTMENT UPDATE
October 3, 2006
Several events suggest that the 3rd quarter of 2006 could be pivotal for the economy and financial markets. For the first time in over two years the Federal Reserve held a meeting without raising overnight interest rates. In September, the hedge fund Amaranth Advisors imploded after a leveraged position in natural gas futures lost over $7 billion. That proved to be the "canary in the coal mine" for the energy markets which saw huge losses for the quarter: oil -15%; natural gas -29%; and unleaded gasoline -30%. Despite the criticism heaped on the oil and gas industry the past few years, we should tip our hats to the people and companies that produce, refine and deliver these vital products for what has been accomplished in the wake of Hurricane Katrina. It has only been 13 months since Katrina and Rita ravaged the energy facilities in the Gulf of Mexico and on the coast, but today, most production is back on-line and supplies are plentiful. The best evidence of this is the price action in the energy complex since Hurricane Katrina: oil -10%, unleaded gasoline -41%, and natural gas -67%.
STOCKS: Buoyed by the fall in energy prices and the pause in rate hikes from the Fed, the major stock indices posted gains for the 3rd quarter: the Dow Jones Industrial Average +4.7%; the S&P 500 +5.2%; and the NASDAQ Composite +4.0%. There was significant rotation in the market away from small cap, natural resource, energy, and cyclical stocks toward large cap and stable growth companies. The best performing sector, however, was technology, +8.2%, which is counterintuitive to a "slowdown" scenario. The message might be that the economy is more resilient and durable than some expect.
BONDS: After 17 "measured rate increases" from the Federal Reserve, the bond bulls finally got the pause they had been anticipating. The result was a relief rally with prices moving up and rates moving down across the yield curve. But this respite from rising short term rates may be transitory. The Federal Reserve's key inflation metric, the Personal Consumption Expenditure (PCE) Deflator, currently +2.5%, is well above their comfort zone of 1-2%. We maintain a defensive posture toward bonds.
Ashby M. Foote, III
MARKET COMMENTS: A column by Ashby Foote appeared on National Review Online's website on 14 September 2006. Please click on the link below to read his thoughts.
National Review Online Artlicle: September 2006
September 13, 2006 -
Conference update: September 7th and 8th were spent at the Morgan Keegan Equity Conference in Memphis, TN. It is always a good opportunity to see some new companies and sense the current sentiment of portfolio managers from across the country. The rough patch in the market the past three months also meant that many of the stocks were trading at reasonable prices. Some themes we picked up: 1) Companies in the industrial sector felt very good about the economy and had positive outlooks for the rest of 2006. 2) Everyone except the energy companies welcomed the recent slide in oil and natural gas prices. 3) The biggest concern of the 5 trucking companies that presented was the serious shortage of qualified drivers. This is, no doubt, an indicator of an overall tight labor market. Our thanks to the folks at Morgan Keegan for hosting another excellent conference. Ashby M. Foote, III
22 August 2006 -
There is quite a divide today between the outlook of the demand-siders and the supply-siders views of the year ahead economic prospects. The former see the glass as half empty with all the juice from tax cuts and home equity extraction exhausted. I happen to side with the supply-siders like Wesbury, Malpass, Forbes etal and believe that the economy still has plenty of legs for the next 12 months. The tax cuts and their extension until 2010 is a powerful force for continued capital formation but in the current "Fed centric" view of the world they lost in long shadow of Greenspan. Also below many radar screens is the dynamism found at the grass-roots of the economy that is using cheap new technology to fashion new businesses and new business models. Consider this anecdote from "An Army of Davids" by Glenn Reynolds: "There are over 724,000 people in the U.S making a living by way of E-Bay, while WalMart, America's biggest employer, has a work force of 1,100,000." This example is further supported by the Bureau of Labor Statistics Household Survey employment data over the past 4 years which has consistently reported better job growth than the companion Establishment Survey, which started up a year later and has grown at 1.5% versus 1.9% for the Household. Both are samples but it is the Establishment numbers that get the headlines. The critical flaw of the demand side view is the exclusion of creativity in the wealth creation process. While supply-siders can't predict what will be created they at least are prepared if not anxious to be surprised. Ashby M. Foote, III
24 July 2006 -
Some comments on Qualcomm(QCOM): we don't normally comment on individual stocks, but, because of the recent sell-off, here are some observations on what we feel is the best positioned technology company in the world:
Not long ago, QCOM raised guidance, sounding very optimistic about the growth of earnings, which continue to grow at strong, double-digit rates. Yet QCOM's PE ratio has never been lower (22-25). The market is apparently extremely concerned about two recent developments: 1) Nokia's decision to walk away from CDMA, and 2) Intel's assertion that its WiMax technology will eventually supplant Qualcomm's CDMA. We believe these fears are groundless. Today the stock trades for $35, 30% below its price from two months ago. Upside potential on the stock is at least 50% if the market's fears are proved groundless.
Nokia has been trying for years to do an end-run around Qualcomm and they have finally given up. The company has made a series of bad decisions and has not been able to innovate technologically. Their stock price is down 65% from its 2000 high, and flat for the past few years. They think they can be successful by selling cheap, low margin phones using obsolete GSM technology in India. This is a losing strategy, and not a threat to Qualcomm. Nokia also thinks it can succeed with variants of WCDMA, but it has been unsucessful to date, and, in any event, QCOM not only controls key patents for WCDMA, but is the dominant chip supplier.
Intel has been trying for years to get into the wireless business, but its only success to date is to put WiFi on its chips (Centrino). Now, Intel thinks it can promote WiMax as a successful alternative to CDMA. Qualcomm, however, demonstrated years ago that WiMax was an inferior technology for mobile applications. WiMax is not able to compete with QCOM's high-speed wireless data technology (EVDO), which, by the end of this year, will be the best on the planet. It has proven to work exactly as promised in applications all over the world. Intel does not have the technology smarts to compete with Qualcomm in the wireless arena, and is highly likely to fail in this endeavor.
Fear, Uncertainty and Doubt (FUD) generated by competitors now cloud the outlook for QCOM. This has occured several times over the past decade, and each time it has represented an excellent investment opportunity for investors who understand the technology. Ashby M. Foote, III
17 July 2006 -
The stock market got some good economic news today with the release of Industrial Production for June (+.8%), twice the expected +.4%. That may not seem like much, but combined with April and May it represents the best quarter since the 4th quarter of 1999. It was highlighted by strong output at mines, factories and utilities. Capacity Utilization, another widely followed statistic, also hit a six year high at 82.4%. Both are further evidence of continuing strong economic conditions. Ashby M. Foote, III
MID-YEAR 2006 INVESTMENT UPDATE
July 7, 2006
The 2nd Quarter of 2006 was rough on stocks and bonds. The honeymoon for new Federal Reserve Chairman Ben Bernanke came to an a brupt end and before the quarter had closed, both stocks and bonds had thrown major tantrums over the uncertainty of Federal Reserve policy. The economy continues to do very well, especially in the old economy industrial sector as typified by Caterpillar Tractor. Caterpillar has been the best performing Dow Jones 30 stock for the past 1 year (+54%) and 5 year (+181%) periods.
STOCKS: Stocks got whipsawed in the second quarter and what had been the best performing sectors got hit the hardest. Corporate earnings continue to hit all time highs both in total profits and in profits as a percentage of Gross Domestic Product (8.5%). The end result is stocks trading very cheap to current earnings. The current P/E on the S&P 500 is 16.1, which equates to an earnings yield of 6.2%. Our outlook is for higher equity prices by year-end.
BONDS: Interest rates moved higher across the yield curve during the quarter. The only winners in the rate hiking cycle have been certificate of deposit and money market investors who are finally seeing yields reach levels that would be considered normal. We still expect more rate hikes and maintain our defensive posture on bonds.
Ashby M. Foote, III
June 16, 2006 -
A Wild Week for the Market:
After 5 weeks of pain and agony the stock market bounced back with a vengence this week, gaining 315 points from Wednesday's low to Thursday's close and then breaking even Friday. The catalyst for the turn around was a culmination of comments from members of the Federal Reserve that getting inflation under control was their number one priority. Encouraging for stocks is the continuing good data on the economy and a number of raised earnings expectations from companies like Best Buy, Nucor and Qualcomm. The drop in commodity and precious metals prices is an indication that the risk of runaway inflation, which had spooked the markets, is receding. With short term rates still below their average level for the past 22 years of 5.5% there is no reason to expect a slowdown in the near term. Ashby M. Foote III
-- The following guest commentary by Ashby ran in The Clarion Ledger on June 2nd, 2006. Please click on the link below to read his thoughts. As always, your comments are appreciated.
Clarion Ledger Commentary: June 2006
16 May 2006 -
Ben Bernanke's First Test
It has now been 100 days since Ben Bernanke was sworn in as Fed Chairman and gold has rocketed up $146 or 25%!! The market is giving the new Fed Chairman a test unlike anything he administered at Princeton. While I applaud his goal of more transparancy, he still has some work to do on style. Passing monetary policy info through Mario Bartiromo at Saturday evening cocktail parties can generate global nausea faster than the avian flu. How was Alan Greenspan faring at the 100 day mark? He was trying to clean up the debris from the massacre of Black Monday that had collapsed the market on October 19th, 1987. He took the chairmanship in August 1987. In some eerie ways, the volatility and political harranguing over tax-cuts and currencies is reminiscent of that time. The trigger for Black Monday was Treasury Secretary James Baker, speaking in Germany, threatening a lower dollar to address the trade deficit. It was as bad of a policy
prescription then as it would be today. Greenspan and the Reagan brain-trust had a meeting of the minds and pulled the economic cart out the ditch in 1987 - lets hope Bernanke's test result and any remedial training is less painful.
Ashby M. Foote, III |
| 60 reads 0 replies |
FIRST QUARTER 2006 INVESTMENT UPDATE
April 5, 2006
The 1st Quarter of 2006 was excellent for stocks but very difficult for bonds. Numerous economic data points surprised on the upside and confounded the skeptics. Here and abroad, the fundamentals for prosperity and wealth creation have rarely been better. Our economic model, which continues to forecast a strong and durable expansion, performed very well for the quarter. Client equity portfolios enjoyed double digit returns easily surpassing the returns of the major U.S. stock indexes: S&P 500 +3.7%, Dow Jones Industrials +3.7% and the NASDAQ Composite +6.1%.
BONDS: The bond market suffered a reality check in the 1st Quarter with interest rates rising across the maturity spectrum, as hopes for an early end to Fed tightening dissipated. The Fed, with Ben Bernanke as its new Chairman, increased rates twice to 4.75%, the highest level for fed funds in almost 5 years. The end of this extended rate hiking cycle is closer, but the action of gold and commodity prices suggests the potential for more rate hikes ahead. We maintain our defensive outlook for the bond market and expect higher bond yields by year-end.
EQUITIES: The best performing sector in the 1st quarter was Telecom +13.4%, and the best performing industry was Steel +50%. The industrialization of the world¡¯s most populous countries is a strong tailwind for the global economy. The biggest beneficiaries so far have been energy, and other industrial commodities. Corporate profits are growing faster than the economy and in the 4th quarter reached 11.5% of Gross Domestic Product (GDP), the highest share since 1966.
OUTLOOK: Stocks, at 15 times forward earnings, remain cheap relative to bonds. Conditions for economic activity remain positive with falling unemployment, reasonable interest rates, and modest inflation of 2 to 3%. One item to watch, which will impact the markets, is legislation to extend the 2003 tax cuts on dividends and capital gains. Failure of the extension would present significant risk for U. S. stocks.
Ashby M. Foote, III
-- A Guest Editorial by Ashby on state franchise laws and the proposed merger of AT&T and BellSouth appeared in The Clarion Ledger on Saturday 25 March 2006. Please click on the link below to read his thoughts:
Clarion Ledger Editorial: March 2006
-- A column by Ashby on Monetary policy and Alan Greenspan's 18 year tenure at the Federal Reserve appeared in The Clarion Ledger on 3 February 2006. Please click on the link below to read his thoughts:
Clarion Ledger Column: February 2006
-- The lead story in The Clarion Ledger's "Business" section on Sunday, January 8, 2006, featured Ashby and some other local investment professionals. Use the three links below to read the story and related 2006 outlooks for the market:
Links to Clarion Ledger Article: January 2006
Link 1 Link 2 Link 3
2005: A BRIEF OVERVIEW
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