Fisher Investments MarketMinder

Fisher Investments MarketMinder: The Industrials Evolution

Originally published by Fisher Investments MarketMinder on: 4/4/2008

The 18th century’s Industrial Revolution ushered in an explosion of social change and improvements in technology, communication, transportation, and manufacturing. The Industrials sector today echoes the Industrial Revolution’s spirit, though less dramatic and more evolutionary than revolutionary.

The Industrials sector is still comprised of sub-industries facilitating communication, transportation, and distribution. We rarely “see” Industrials in action—Industrials products aren’t generally on store shelves—but they’re the driving force behind much of today’s global economic activity. In the US, trains move 70% of all domestically produced automobiles, 40% of freight transportation, 30% of the nation’s grain harvest, and 65% of coal (producing half of the nation’s energy)! Domestic freight hauled by trucks was 10.7 billion tons in 2006.* The first freight ships carried only 59 containers, stacked two-high on the deck. Today’s mega-carrier container ships are a quarter mile long and can transport 14 million cubic feet of cargo. Over the past 40 years, US maritime, railroad, and trucking industries have pursued advancements in intermodal transportation and in the movement of goods domestically and abroad . . . .

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Fisher Investments MarketMinder: The Good, the Bad, and the Not So Bad

Originally published by Fisher Investments MarketMinder on: 4/3/2008

Aggregate economic statistics are comprised of the good, the bad, and the (eh) not so bad. But in times of worry, many fixate on the bad, exaggerate its effects on the whole, and forget about the good and the “eh” entirely. This is one reason economic prognostications are typically off the mark. But rather than fall prey to misperception, we can break it all down and do some good old-fashioned sums.

For at least a year, many have forecasted impending recession. Recession mania reached a fever pitch last month with numerous comparisons between today and the Great Depression. In his testimony to Congress Wednesday, Fed chairman Ben Bernanke indicated the current economic forecast is murky at best, and the economy would likely slow, not grow at all, or contract. (How’s that for hedging your bets?) Mr. Bernanke’s speech did little to instill an already uneasy public with much confidence . . . .

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Fisher Investments MarketMinder: New Rules for the Street?

Originally published by Fisher Investments MarketMinder on: 4/1/2008

As Shakespeare said, “We must take the current when it serves.” Treasury Secretary Henry Paulson may have had a touch of the Elizabethan flu as he took advantage of the intense focus on all things financial to unveil a range of recommendations to overhaul the regulation of U.S. financial markets.

Markets responded positively Monday and there’s been a great deal of reaction to the announcement. As mentioned in our 03/28/08 story, “Goldilocks Government,” governments have attempted to fine-tune economic markets for centuries—usually with unintended negative consequences. So why the cheery response? Paulson’s selling the plan as a streamlining of regulatory burdens. Should we be going all Falstaff and knocking back some mead? (Yes, we realize we’re mixing our Shakespearean metaphors.) Nah. Though we see Paulson’s recommendations as mostly fairly rational, it’s way too early to jump to conclusions.

Part of the positive reaction could be tied to the fact this plan might distract legislators. Debating this plan could forestall some of the more rash, short-term measures that have been kicked around of late—and that in itself is indeed a positive. And Paulson’s plan is no knee-jerk reaction. It’s been long in the works—for almost a year—long before liquidity fears made constant front page headlines . . . .

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Fisher Investments MarketMinder: Trial by Fire

Originally published by Fisher Investments MarketMinder on: 3/14/2008

Free markets thrive on mistakes. Through trial by fire, market participants become smarter, stronger and better able to deal with the rigors of the marketplace. Yet the knee-jerk reaction by government to any problem (real or perceived) is to revoke privileges and regulate, regulate, regulate—as if we’re witless children in need of constant supervision.

So far, politicians’ protectionist rhetoric has failed to materialize, and the Fed’s recent moves to bolster liquidity in capital markets have been generally helpful without being intrusive. (See our past commentary “Pawning Stocks,” 3/12/2008, for more.) We really haven’t seen anything particularly ridiculous from the Beltway since Sarbanes-Oxley. But like Maude Flanders breaking in on Bernanke and the Fed to shrilly query, “Will someone please think of the children!?” recent headlines shout it’s high time our elected officials saved us. Coupled with Bernanke’s call for action in his Congressional testimony last week, Treasury Secretary Paulson’s comments this morning make harmful, potential regulation a threat worth watching.

Thus far, Paulson has seemed staunchly opposed to excessive government intervention. Today he presented a policy statement and recommendations for action from the President’s Working Group on Financial Markets (PWG). The PWG includes representation from the Treasury Department, the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission and was called upon last August to examine perceived trouble in financial markets. (Presidential committees are always a bit of a charade. Of course they recommend action—they exist expressly to recommend action!) . . . .

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Fisher Investments MarketMinder: It’s a Materials World

Originally published by Fisher Investments MarketMinder on: 3/13/2008

As Madonna, a recent inductee to the Rock & Roll Hall of Fame, aptly sang years ago, “You know that we are living in a material world.” How sage. There’s no question ours is a Materials world: Materials insulate our houses, channel electricity to our lamps, make up the pages of our favorite books, and provide the infrastructure and the fuel for our cars. But surging Materials prices have investors fearing our addiction to material goods will only keep prices, and inflation, rising.

Should we fear Materials prices rising forever, propelling inflation into astral territory? While we should expect commodity prices to remain firm and continue to rise in the foreseeable future, higher commodity prices today aren’t symptomatic of runaway inflation and aren’t cause for panic. Commodity prices are driven by imbalances between supply and demand—like any freely traded good—and with today’s demand drivers and supply constraints, recent price increases shouldn’t shock . . . .

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Fisher Investments MarketMinder: Pawning Stocks

Originally published by Fisher Investments MarketMinder on: 3/12/2008

Picture your average musician shuffling into a pawn shop with guitar in hand (maybe that prized sunburst Les Paul), taking a short-term loan to pay the rent when the credit card is maxed out and the paycheck from the last big gig is still in the mail.  It’s not fun to have to trade the trusty axe for cash, but the bills must be paid.

It’s easy to imagine some financial institutions in the same situation.

You may have recently heard the term “de-leveraging.” What exactly is de-leveraging?  It’s the process undertaken to reduce a company's financial leverage. Financial leverage (aka debt relative to equity) is the very basis for a financial institution to generate profits, but if it falls outside certain bounds set by regulators, it needs to be reduced back to “acceptable” levels in short order.

Many big financial institutions invested heavily in relatively obscure vehicles like mortgage-backed securities in recent years.  Following deterioration in their creditworthiness, the market for these securities is almost barren today.  Even small amounts of selling have lead to massive price drops due to a scarcity of bidders.  As the market value (marked-to-market sometimes based on guesswork) of these instruments decline, the leverage ratio of the investor goes up.  In the case of banks, brokers and insurance companies, regulatory requirements mandate leverage be reduced, forcing them to sell any available liquid assets.  In the case of hedge funds, margin calls or investor withdrawals can force the same.  In many instances, stocks have been the best candidate for selling, since they’re more liquid and less useful for capital adequacy requirements than other securities. The titans of Wall Street pawning their stocks to pay the rent! How sad . . . .

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Fisher Investments MarketMinder: America’s Love Affair

Originally published by Fisher Investments MarketMinder on: 2/14/2008

In light of today’s amorous celebration, we’d like to examine America’s love affair with being the global economic leader. Like many great love affairs, the initial circumstances were right: The US had the resources, innovation and leadership to claim independence, industrialize, power through World Wars—making other suitors (Britain) look like chump change in comparison.

Although we had our moments of indiscretion (protectionist policies, closed borders), for the most part we had a monogamous relationship with free trade and a willingness to accept a diverse population within our borders. We realized our openness created wealth for ourselves and for the global economy. We flirted with the idea of being an economic leader and the flirtation turned into a full-blown romance with the global economy falling for our promises of economic and political stability . . . .

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Fisher Investments MarketMinder: Housing Humdrum

Originally published by Fisher Investments MarketMinder on: 1/29/2008

Despite today’s healthy market performance, bad housing news just keeps on coming. Troubled lender Countrywide reported a big loss for Q4, home prices are dropping, and then there was this headline on CNNMoney.com: Foreclosures up 75% in 2007

Yes, foreclosures are rising, which spells trouble for those particular homeowners. But does it spell trouble for the broader economy?  Though the foreclosure rate is hitting fresh highs, it’s still below 1%—hardly alarming. And that’s not even 1% of total homes, but total mortgages—many homes are owned outright.

But isn’t the rising foreclosure rate proof positive we’re in a credit crunch? In a true credit crunch, we’d see rising rates across the board and a drop in lending activity. But lending in all categories rose in Q4 2007—right when we were supposed to be in the throes of a credit crisis. (See “Debt Disbelief,”01/23/2008.) And though junk rates are higher, borrowing rates for average and above-average public firms are lower than 6 and 12 months ago. Junk bonds represent a relatively small portion of overall credit markets—just about 10%. On a weighted basis, borrowing rates overall have fallen—even for private individuals! Fixed rate mortgages are hitting new lows too, and with the Fed’s recent cut (and another cut possibly looming tomorrow), other forms of borrowing are cheaper too. What we’re seeing isn’t a credit crunch, but a credit reallocation to less risky borrowers, as is quite normal in a maturing bull market.

What about this scary headline by CNNMoney.com? Home Ownership in Record Plunge

Year-over-year we had the biggest drop in homeownership since 1965, which sounds bad, until you realize we’ve gone all the way back to the homeownership rate we had in . . . 2002. There was nothing troubling about the rate of homeownership in 2002, and there’s nothing troubling about it now. Throughout history, we’ve had lower rates of homeownership, coinciding with perfectly fine periods for the economy and stocks. It’s only recently the idea developed that GDP was so closely intertwined with homeowners’ fates.

Is it? The largest component of GDP is driven by consumer spending, which ties much more closely with wage growth than any other factor. And American wages and per-capita net worth are at record highs—even after the drop in home prices. (See “Feel the Flow,” 12/11/2007.) But a slowdown in home construction has to impact GDP materially, right? Not really—residential homebuilding constitutes just 4.5% of overall GDP. If all homebuilding were to stop, immediately, that would give GDP a good one-time whack. But what are the odds homebuilding ceases in its entirety? Pretty slim. Plus, commercial real estate has been growing leaps and bounds, more than making up for the slowdown in residential real estate—a fact you don’t hear very often.

We continue to believe the fear of a housing slowdown and incumbent credit crisis are bigger than the things themselves—and that fear is contributing to near-term volatility. Fear is very powerful in the short-term, but in the longer-term, fundamentals tend to win. (See “A Question of Semantics,” 01/28/2008.)

Folks have been predicting recession for over a year—yet when GDP growth comes in positive they say, “Well, not this past quarter, but this next quarter surely is when doom arrives.” They can play this game forever, and eventually they’ll be right—stopped clocks and all. But that doesn’t mean they’ll be right today. We’ll know how Q4 fared soon enough, but we remain confident that, even if Q4 was more sluggish than rip-roaring Q3, overall growth in 2008 will likely beat today’s meager expectations.

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