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Archive for April 201021 April 2010 by Richard Haskell.
In response to the needs of our growing reader base, we’ve created a new blog site for Signature Update and invite you to visit www.signatureblog.net to read new issues of Richard Haskell’s Economic and Market Commentary. The new site uses the WordPress blogging format and incorporates a number of enhancements to make it easier for readers to respond, make comments and enjoy the site’s content. You can also read economic and market commentary by Richard Haskell on the following sites: Signature Management Signature Update Posted in Signature Update | Print | No Comments » Looking for Conviction in the Markets16 April 2010 by Richard Haskell.
April 15, 2010 Edition, Volume IV Inside Signature Update
THE MARKET – Looking for Conviction in the Markets With the DOW squarely over the 11,000 point level, investors are looking for clear signs the index is headed higher. Recent economic reports representing increasing factory orders and retail sales suggest 1st and 2nd quarter GDP gains may be better than expected, but the labor market continues to offer concerns. Federal Reserve Chairman Ben Bernanke has stepped-up the tone of his comments regarding growth expectations, now calling for “moderate growth” rather than “slow growth” for the remainder of the year. These and other factors have helped move the major markets indexes by some 5% year-to-date, but there continues to be a significant amount of investor capital resting outside of the markets and concerns that lower market volumes may suggest a lack of investor confidence have some wondering if the current market levels may soon suffer from a lack of conviction. Many investors have become curious at what some consider Many forget that the NYSE single-day volume crossed 200 million shares for the first time in early 1984 and it wasn’t until the year 2000, some sixteen years later, that the daily volume reached one billion shares. Even though 2010 volume levels appear low when compared to those of 2008 and 2009, they’re more than four times higher than those of only a decade ago; at the height of the dot com craze. On Monday, April 12th, 2010 the DOW crossed over the 11,000 point mark and invigorated investor hopes for meaningful market gains in 2010. Volume levels, as the index approached and then exceeded 11,000, THE ECONOMY – Bank Size is Not the Danger Some Believe The “Too Big to Fail” issue continues to be at the center of financial industry regulatory reform and rightfully so; neither the American people nor the economy are prepared to endure another capital markets crisis like that experienced in 2008 and 2009. At the heart of the issue is whether Congress should seek to limit the size and impact of major consumer and investment banks or should measures be adopted that allow for greater strength and stability at banks of any size and type. The battle lines aren’t as clearly separated by party lines as many might suppose. Certainly, free-market conservatives want to see as little legislative intervention as possible, while those more interested in central planning remain committed to long-term nationalization of the banking industry. Fortunately, neither of these groups are likely to prevail. This is truly one of those issues where a more moderate, centrist compromise will likely best serve the nation’s economy and citizens. There remains a fallacy in the “Too Big to Fail” concept. It’s not only the size of an institution that may offer risk to the economy if it is allowed to fail, but how interconnected the bank’s products are with other banks, in both the global and domestic markets. All one has to do is recall that Lehman Brothers accurately wasn’t considered “Too Big to Fail”, but it was so interconnected with investment and consumer banks the world over for its failure to send the global markets into a tail spin. Without significantly curtailing the capital market activity of our banks there is virtually no way to avoid this inter-connective exposure. Placing the sort of regulatory constraints on US capital market makers that might possibly minimize the impact would cripple the economy. There are other solutions, of course. The problem we experienced wasn’t one of size, it had to do with strength and stability. The current legislative proposals requiring greater reserve requirements and capitalization ratios for those banks involved in the capital markets hold credible solutions to the problem. Not only would placing such requirements on our nation’s banks create sufficient strength to lessen the possibility of future crises, but it would also make it less likely for banks to become large enough to be of concern. Those legislators seeking graduated reserve and capital ratios on banks are, in effect, able to limit the size of the bank without placing specific limits on a bank’s size. Additionally, legislation has been proposed that would require the formation of a “super” FDIC of sorts – an insurance pool funded through transaction fees that would be available to “bail out” troubled investment banks rather than needing to seek tax payer assistance. While there are pros and cons to this concept, it could be a sensible complement to increased capital and reserve requirements. It would take a substantial length of time before such a fund were to become of sufficient size to be impactful, but once established it may offer numerous benefits to the banking system and the economy. It could also become a tempting resource for legislators and would need to have every possible safeguard associated with it’s independence to protect it from those looking for fiscal advantages. Important to remember, however, is that any additional pressure put on the What is left is a classic conundrum: the national and global economy need to be free from the potential damaging affect of an under resourced banking system and the national and global economy need the lending resources of a banking system with limited constraints. Fortunately, the type of compromise that it may take for Congress to bring current legislative proposals towards becoming law will take time; hopefully enough time to allow reason and sensibility to gain the upper-hand over party politics and extreme action. THE TAKEAWAY – Higher Interest Rates Can Hurt and Help
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC Posted in Signature Update | Print | No Comments » Earnings Expectations and Tobin’s Q6 April 2010 by Richard Haskell.
April 6, 2010 Edition, Volume IV Inside Signature Update
THE MARKET – Earnings Expectations and Tobin’s Q Market earnings expectations and ratios As the DOW approaches the 11,000 point mark, market observers begin to wonder just how far the index can climb before the market becomes overvalued. It’s a difficult question to answer and has everything to do with corporate earnings and how investors value the future earnings potential of firms as the economy recovers.
The index’s current P/E ratio (price to earnings ratio) sits at 21.7 – meaning that for every dollar of earnings there is $21.70 of index value. That may seem high, but when compared to forward earnings expectations the ratio drops dramatically. Market analysts expect to see aggregate, per-share earnings for those stocks comprising the index of $83-$85 for 2010 and $90 for 2011; compared to current earnings of $51.74 for 2009. Based on the current earnings ratio of 21.7, these earnings estimates, if reached, would indicate the S&P at a lofty 1,800 by the end of 2010. Perhaps a more realistic expectation is based on the index’s mean (average) ratio of 15.73, which would indicate the S&P 500 index at 1,305. This represents an increase of 10% from current levels and falls directly in line with our 2010 estimates for the domestic equities markets. Earnings Reports and Tobin’s Q In the coming weeks publically held corporations will begin to release 1st Quarter 2010 earnings reports. Some investors and observers find themselves confused as to why some stocks will post gains in the face of strong earnings, while others might decline: the answer lies within Tobin’s Q. In 1969, Nobel prize winning economist, Dr. James Tobin ( The issues of supply and demand, business cycles, global markets, etc. weren’t included in valuation models before Tobin published his theory, and most investors were simply left with P/E ratio and dividend yields when attempting to make good investment decisions. Based on Tobin’s theory and the complex mathematical formulas he developed to model it, market values rise and fall based on the aggregate affect of these factors, rather than simply on changing economic interest rates. While most investors won’t apply available data to the model, there’s sufficient recognition in the markets of those factors impacting values that the model is used implicitly to support price levels and predict future valuations. When a company announces earnings estimates, the value of their shares change in direct relation to how the estimates compared with analyst expectations. Similarly, when earnings are reported, the actual is compared to estimates and expectations and share values may adjust accordingly. If good earnings are already expected, the share price has already risen to meet the expectation, and once actual earnings are reported the share value will only change if actual results differ from those anticipated. When firms report their earnings, they normally update the firm’s guidance, or expected performance, against their business plan. This can also impact share values as investor and analyst expectations are heavily based on a firm’s guidance; if the firm has a track record of accuracy and reliability. For those firms that have a poor track record when it comes to meeting the expectations their own leadership cultivated, the market will rarely respond to a new set of optimistic expectations, but will react sharply to negative guidance. Ready availability of information and a liquid market The key to Tobin’s valuation concepts and to how today’s investors and markets value investments lies in the ready availability of information and a liquid market. Since Tobin formulated his theories these market elements have improved dramatically and market valuations have become more statistically significant than at any time in history. Likewise, expectations for earnings growth, though becoming more optimistic than in recent months, have solid foundations and are based more on observed trends than anticipation and hope. THE ECONOMY – Is a “Double Dip” off the Table? Mounting evidence and some optimistic expectations There’s mounting evidence that the economy will continue to grow at a 3% to 5% pace for 2010; with some expectations reaching as high as 6% based on March 2010 economic activity reports. Factory orders and retail sales continue to make important gains and the labor market is just beginning to see the first signs of meaningful improvement. Inventory levels reflect demand-driven patterns as manufacturing increases and wholesale orders are only barely outpacing consumer demand. There is now enough upward momentum that many economists believe the Perhaps the most important sign of real growth comes from the Federal Reserve itself. The Fed’s February 18th increase of the discount rate to .75% and other recent comments by Fed policy makers point to the agency’s firming belief that the Market reactions to higher rates While the immediate stock market response of such an increase will most likely be negative, the longer term reaction will almost certainly be strong and to the upside; as investors accept that the Fed is committed to only raising rates in the presence of economic strength. The current 0%-1/4% Fed Funds target is so low that investors have little incentive to invest in interest bearing or dividend yielding instruments. As the rate environment shifts to more sustainable levels, investors will come back to the markets yet more aggressively than already experienced; first to bonds and then to stocks, as long as targets don’t rise above 3%-4%. As a result, the capital markets, so critical to business lending and capital formation, will open up and funds needed for growth will be widely available for the first time in years. The bond markets will certainly respond negatively to rising rates, due to the inverse relationship between rates and bond prices. Higher interest rates also drive the dollar higher and as a result, commodities prices for agricultural products, precious metals and oil will rise in response to higher rates. The aggressiveness of rate increases will reflect the Fed’s concern over possible inflation. Moderated increases of ¼ to ½ point per announcement will suggest the Fed is simply trying to react to a stabilizing market; while aggressive increases of ¾ point or more are likely to signal the Fed moving into inflation fighting mode. Federal Reserve Chairman Bernanke and other Fed Governors have already stated that when rate increases begin they’re likely to be meaningful. Though this may have been in response to inflation concerns, the markets will breathe a sigh of relief when the time comes. This is one of those issues that the market recognizes must be faced in order for the economy to move past the recovery stage and into longer-term growth. Once the announcements are made and the market digests the material impact, the mounting anticipation will likely give way to higher equity values and real post-recession growth. THE TAKEAWAY – There’s More to Come
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC Posted in Signature Update | Print | No Comments » Facebook’s Backdoor Business Model for the ‘New Economy’2 April 2010 by Daniel G Newell.
Facebook first achieved a positive cash flow in September 2009. This was the first month that Facebook earned more money than it spent to stock the break room with milk & cookies and energy drinks, keep their data servers online, and pay their programmers to dream the little dreams they dream.Market watchers generally assume that Facebook will remain a free service and that profitability will come through advertising revenue. You are probably already thinking about those ads that appear in the far right column of the site when displayed in a standard browser on a PC or a Mac. (Mobile user’s secret: Facebook on iPhone/iTouch/mobile devices is ad free.) I’m going to do some reading of the tealeaves here and tell you that Facebook’s future revenue streams (I mean the major ones) are not going to come from these or similar types of ad spaces within the Facebook interface itself. Would Facebook Actually Deface Itself? Facebook may very well continue to make usability mistakes in the implementation of minor improvements and attempts to unify PC and mobile experiences. Strategically, however, the last thing Facebook wants is to disrupt the flow of what its users (presumably you and me) are already doing. What exactly are we doing on Facebook? Generating a ton of highly granular and personalized data that can be used, and is already being used, to “enhance” experiences that lie outside of Facebook itself. In addition to adding personal content to Facebook, we are increasingly using Facebook as a “portal” to other websites and integrated “applications” which today means games, but that will change. Pretty soon we’ll be buying stuff on these sites and feeling pretty good about it because we’ll be dragging our friends and our personal profiles along with us. The Two Faces of Facebook Front-door Facebook conducts business straightforwardly as the developer of a social-media website and, thus, a connector of people and a publisher and of their thoughts and audio-visual creations. They staple a few ads to a small portion of their simple-and-open page design, which, one assumes, enables you to keep using Facebook for free. Front-door Facebook already knows why you’ve come to Facebook and keep coming back. It’s not just because the door is open, but because the décor stands in stark contrast to the techno-gothic clutter of AOL, MySpace, Yahoo!, and Hotmail. And if backdoor Facebook is successful, the front end will likely remain the same. Backdoor Facebook, you might say the Facebook of the future, is really a data-collection and database company. Don’t get me wrong; Facebook is not going become an Oracle- or Microsoft-like maker of database software. No, I’m talking Google—or better yet, the Census Bureau, a company that owns an ocean of awesome profile data. What kinds of data have we helped Facebook develop? Not just vanilla-flavored mailing lists and “six-degree” social maps to virtually anyone on the planet with a computer, but also profile data that can be cross-linked to behavioral data. Various retailers, service providers, entertainers, and others can use this data for potentially any number of purposes (including academic research). They can use it, that is, if only they can get their hands on it. That’s where backdoor Facebook comes in: to help these people (perhaps you and me) get their hands on it (or at least some of it)—with restrictions, of course, and, most definitely, for a price. Hiding In Plain Sight Under the heading “Pre-Approved Third-Party Websites,” Facebook’s draft policy states that
Of course, Facebook also states that there will be a way for users to opt out and that Facebook will screen its partners based on “an approval process” and have them sign separate agreements to protect your privacy, etc. & etc. What Facebook does not say is that they will, I believe, be charging these pre-approved third-party websites for their privileges. What Facebook also does not say (and why would they?) is that in the context of such agreements “your privacy” is really just a code for “our data.” But that is not necessarily a bad thing for users. My Face Is Your Face But, to be a stickler about it, as far as the choo-choo-choo of the (anti-)privacy train goes, the instant that “private data” is shared with any third party, it has been by that very fact been diminished in its privateness. To share “private data” with anyone is, by definition, the opposite of protecting it. We’ve all done this with our real, live, fleshy friends at some point in our adolescence, right? Facebook is doing two things at once. Facebook is certainly not protecting private data from people who pay to see it. But Facebook will assuredly protect private data from the people who DO NOT pay to see it. That’s just business. Failing to protect “you” from “fourth parties” would be ridiculously self-defeating. You want to use “my” (I mean Facebook’s) data for free? I don’t think so. You want to pay me for access to my data and then use it in a way that discourages my users from continuing to grow and perfect my database? I don’t think so. If users stop making friends, stop chatting with each other, and stop posting pictures of the new baby for mom and dad to see, the Facebook ocean will evaporate. The Threat of Multiple Personality Disorder Truth be told, I think most people who read the news know the basic landscape of the privacy debate. For better or worse, this is hardly a debate at all among younger people and will likely not be for some time. It is an easy bet that most Facebook users will continue to do what they have always been doing regardless how far Facebook expands the circle of secret holders. Facebook might lose me. They might lose you. But, that does not mean that we are not going to be keen on investing in Facebook or buying data from them (or similar ventures). So, let’s take the frosty path and consider what the prospects are for the leasing of Facebook’s data mines in exchange for cold hard cash from third parties. The Face that Launched a Thousand (Cargo) Ships Can Facebook determine that!? The technology does exist, along with ability to make correlations with other online behaviors. My widget works equally awesome for everyone, everywhere. But if you have the impression it was designed especially for you, you may suddenly need two of them. Otherwise, you’re just not a one-size-fits-all kind of person. You could use my widget, but you don’t want it. Marketers of course can tell want kind of person you are (in narrow terms) by correlating even a subset of your profile data with your past behavior. Do you have “a lot” of friends? How many of those have a lot of friends? Are you a super connector? If so, your “enhanced” offsite experience deserves special attention. My marketers need you to feel especially good about us. Did you leave feedback? Your feedback will be far more important than feedback from the cave dweller with twelve friends who just left us a 15-page expose on why our logo colors are wrong. A Smiling Face for Everyone Backdoor Facebook wins by charging for access to this data. Front-door Facebook wins by moving additional advertising, sales, and other third-party interaction “off-site” without disruption to its user base—all those “eyeballs” connected to fingers that “click” to make payments. Third-party sites win by using Facebook data for targeted messaging and potential access to private social networks of common interest and buying habits. Front-door Facebook users win by continuing to get Facebook for free, by experiencing the pleasure of “being known” no matter where they are, by receiving fewer, more highly targeted advertisements that reduce overall noise, and by being able to bring their friends along. Right now, it seems that most business people are still trying to wrap their heads around what it means to get “on” Facebook, but the real smart ones are already thinking about getting under it. Indeed, it is a hard case to make that it is not a good idea to get a glimpse every once in a while of what’s bubbling up to the surface, how fast it is rising, and what it is feeding on. Is Facebook a guaranteed business success in the making? Can it really deliver the kind of marketing intelligence that marketers think it can provide? Having just barely transformed itself from seed to sprout, its first fruit is obviously yet to come. But a few things are certain: it has plenty of water and will almost certainly get lots of sun. Additional Reading: A report on GigaOM by Matthew Ingram, Facebook Data Deleted After Lawsuit Threat, which I noticed subsequent to finishing this article, substantiates most of the assumptions I am making. Indeed, the focus of the research and the data set discussed in Ingram’s reporting is miniscule compared to the aggregate data that Facebook itself holds. Posted in Daniel Newell | Print | 1 Comment » Think Twice Before Moving to the Sidelines1 April 2010 by Richard Haskell.
Think Twice Before Moving to the Sidelines April 1, 2010 Edition, Volume IV Inside Signature Update
THE MARKET – Investors Should Think Twice Before Moving to the Sidelines Over the past few weeks we’ve experienced too many trading sessions where the DOW has climbed to double and triple digit gains before settling in with only modest improvement on the day. In some markets, this sort of activity is a sign the market is topping out and a correction is likely to follow. In others, it’s simply a response to other economic activity, news events or political issues. Regardless, it’s something to pay attention to. A market correction of 5-10% is often the precursor to a rally sufficient to take the market to new heights; such as the correction and ensuing rally we experienced earlier this winter. The DOW closed at over 10,700 in mid January before pulling back to just above 9,900 in early February; the index closed Tuesday (3/30/2010) at over 10,900 and appears to be headed towards 11,000 or higher. In this case, the correction led to a healthy rally that has the markets at near-term highs. Investors pay little attention to corrections and rarely attempt to participate in the type of activity traders employ in an effort to exploit market dynamics. Barring unexpected political events or natural disasters, our expectation is that the DOW will continue to climb through the 11,000 level and close out 2010 well above current levels – perhaps 1,000 points higher than Tuesday’s close. Most of us are familiar with the adage “Sell in May and go away”; it’s an old stock market saying, suggesting that investors should sell out of their portfolio’s in May, presumably after a Spring rally, and then buy back into the market in the latter part of the Summer or Fall, after an expected decline in market values. More often than not this strategy yields higher returns than investors might have experienced had they simply maintained a particular position in a given stock, but it’s highly dependant on when you sell, when you buy back in and whether or not you have the discipline to follow the markets movements. In truth, it’s not a strategy most investors should employ unless they’re prepared to monitor the markets closely or have an advisor with whom they’re closely aligned and who utilizes tactical trading models. Such activity certainly has its risks and even savvy investors should carefully weigh them against the possible rewards. Traders, on the other hand, love the concept. Not only does it give them the potential for greater gains, but it lets them focus on other activities for the summer. The “Sell in May” strategy has its roots in our nation’s agricultural history. From the 17th to mid-20th centuries, those institutions prepared to lend capital to farmers typically did so in time for them to purchase seed before the spring planting season. They would often sell other investments to raise the cash to do so, and in the fall, after the crops were harvested and farmers repaid their short-term loans plus profits and interest, these same institutions would put their resources back into the markets for the winter. The act of liquidating investments to raise cash would put downward pressure on market values and by the end of May markets often began to show declines. When funds would then be reinvested in the fall, including profits, market values would increase due to the net capital inflows. Even though today’s markets aren’t subject to the same forces they were when the US was principally an agrarian economy, some still rely on the same market cycle to govern their holdings. It’s an out-dated strategy that becomes less statistically meaningful with every passing year. Most investors aren’t prepared to do this of course, but for those that are the statistics are only sometimes in their favor. There are years, like 2009, when this strategy would have been very costly. In the July 2, 2009 issue of Signature Update we discussed the problem of selling off a portfolio in the face in of a recovering market. The DOW closed at just over 8,600 at the end of May 2009 and opened October 1st at over 9,700 – those employing the “Sell in May” strategy could have left 1,100 points of What about in other market years more similar to 2010? The data offers a mixed bag, with far too many variables to develop a reliable regression model. What is clear is that the forces that helped coin the term, “Sell in May and walk away” were more dominate in decades and centuries past than they are in our current economic era. Our markets and economy are still in recovery mode and will be for several years to come. We continue to assert that even though we’ll experience short-term market corrections, perhaps a few more times this year, the markets have a long way to go before topping out and becoming overvalued. P/E ratios on large caps are comparatively low, earnings remain robust, dividends are increasing, and the Treasury Yield Curve remains steep. This is a time of opportunity and growth and certainly not a time to “walk away” or move to the sidelines. THE ECONOMY – Spring Economic Potpourri
The March survey showed that 8.6% of those polled feel the economy is “good”; up from 6.8% last month. Not surprisingly, consumer spending offered a sufficient increase in March to yield a 1st quarter gain of 3.8%, adding to the 4.2% improvement in the 4th quarter 2009. The factors most likely driving the improvement are the labor markets, stock market gains and Spring. Better weather and rising stock market values are always welcome signs and provide a meaningful improvement in consumer confidence levels, especially this year as we’ve recently passed the one year anniversary of the market lows that followed the economic crisis and resultant recession. Analyst expectations for March job gains, to be reported at the end of the week, run as high as 200,000 for the month. The ADP report released this week shows a decline in private, non-farm, non-seasonally adjusted jobs of 23,000. At the same time, the Department of Labor reported initial jobless claims fell by 6,000. The difference between the reports and analyst expectations can be seen in government jobs, including those offered by the BLS (Bureau of Labor Statistics) for the 2010 Census. By May 2010, the 2010 Census effort will require as many as 800,000 part-time, temporary workers in addition to those full-time workers already hired. These numbers aren’t likely to have any significant impact on the BLS’s unemployment statistics due to their seasonal and part-time attributes, but may contribute as much as ¼% to 2nd Quarter GDP. Newspapers reported a February increase of 13.1% in employment related classified ads and internet based classifieds rose by 19.6%. The results won’t drive the unemployment figure down as much as we might hope, but for those households in which workers returned to the ranks of the employed, the recession is finally over. Inflation remained moderate in the face of a March personal income increase of .7%. The personal consumption expenditure price index (PCE) year-over-year gain fell to 2.1% versus 2.4% reported in February. Though “Inflation Hawks” and “Gold Bugs” The 1st Quarter 2010 ISM Report (Institute for Supply Management) reflected continued growth in the overall economy for the 11th straight month, with the manufacturing sector having gained for in each of the last 8 months. Notably, for the first time in 46 months inventories edged up slightly.
THE TAKEAWAY – Just What Were They Thinking?
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC Posted in Signature Update | Print | No Comments »
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The 11,000 point mark on the DOW is less of a technical benchmark than it is an emotional one; the S&P 500 is another story.
