View From the Bridge

European Debt and Deficit Projections Driven by Overly Optimistic Growth Estimates

2012-02-17T15:00:00.006-05:00

The Euro-zone economy contracted a less than expected 30bps, quarter-over-quarter, during the 4th quarter of 2011. Relative bright spots were Germany and France. In the former, economic activity declined 20bps, less than the expected 30bps contraction. In the latter, the economy unexpectedly expanded 20bps while consensus estimates indicated it would contract by that amount. While the Euro-zone

Standard & Poor's Downgrades Nine Euro-zone Nations

2012-01-18T11:46:00.003-05:00

On Friday, January 13th, S&P lowered its credit ratings on nine Euro-zone countries. Credit ratings on Cyprus, Italy, Portugal, and Spain, were all lowered two levels while those of Austria, France, Malta, Slovakia, and Slovenia were lowered one level. Cyprus and Portugal lost their investment grade standing as their ratings were cut from BBB and BBB-, respectively, to BB+ and BB, respectively.

Italian 3rd Qtr GDP Contracts; ECB Offers Massive Liquidity

2011-12-22T10:32:00.005-05:00

We have long suspected that Italy would enter recession either during the 4th quarter of this year or the 1st quarter of 2012. However, it is now likely that the Italian economy entered a new recession during the 3rd quarter of this year as GDP contracted 20bps during the quarter and expanded a mere 20bps over the trailing 12 months. If indeed a new recession has begun, it would be the fifth one

Further Declines In The Euro Ahead

2011-12-15T16:15:00.008-05:00

The Euro closed below $1.30 last week for the first time since January 11th of this year. The Euro is likely to deteriorate further as the European debt crisis deepens and we would not be shocked to see it fall well below $1.20 and possible even reach par with the US Dollar. To put that potential move in perspective, the Euro has not traded below $1 since the fourth quarter of 2003 and it last

European Sovereign Debt Crisis Update

2011-09-28T16:04:00.001-04:00

"Do or do not. There is no try." Yoda, Star Wars character The EU and ECB could learn a little something from the old Jedi master. For the last 18 months the European sovereign debt crisis has swirled around global markets like a vulture waiting for an injured animal to die. Europe has responded with timid, half measures, rather than bold initiatives. The

2nd Qtr Earnings Surpass Expectations

2011-09-13T13:13:00.000-04:00

Despite relatively weak economic growth, S&P 500 earnings once again outperformed consensus expectations during the 2nd quarter. According to Smith Group Asset Management, after 93% of the benchmark’s constituents had reported, 77% of companies outperformed consensus earnings expectations while 74% exceeded consensus sales expectations. The median earnings surprise surpassed expectations by 3.4%

Implications of Downgrade of US Debt

2011-08-10T16:59:00.005-04:00

Late Friday Standard and Poor’s downgraded the long-term credit rating of the United States from AAA to AA+ while affirming the nation’s short-term rating of A-1+. For the time being, the US maintains its AAA rating with Moody’s and Fitch. The downgrade stems from S&P’s assessment that the debt reduction agreement reached last week will not stabilize the government’s debt over the medium term.

US Debt Ceiling: A Political Rather Than Financial Crisis

2011-07-29T10:04:00.004-04:00

The debt ceiling crisis is disconcerting for investors. Raising the debt ceiling in conjunction with a credible deficit reduction program would have removed the issue from the investment landscape and benefited our nation’s economy. We have long believed that a credible plan would need to address both revenue increases and reductions in expenditures. Along these lines, a plan that would include

An Update on Equal-weighted vs. Cap-weighted Performance

2011-06-09T15:38:00.000-04:00

Last December we published an article discussing the relative performance of equal and cap-weighted benchmarks (Lost Decade for US Equity Markets? Hardly!), concluding that while the first decade of the millennium had been a “lost decade” for the cap-weighted benchmarks, the average stock produced positive absolute returns as well as positive returns after adjusting for inflation. As a quick

Earnings Train Rolls On

2011-05-09T17:16:00.002-04:00

While it remains relatively early in the 1st quarter reporting season, S&P 500 earnings continue to outperform analysts’ expectations. Smith Group Asset Management recently reported that with 56% of the S&P 500 having reported 1st quarter earnings, 80% of those reported beat consensus earnings estimates while 74% surpassed consensus sales estimates. The median earnings surprise was 4.8% better

Disaster in Japan Unnerves Global Markets

2011-03-18T17:07:00.002-04:00

Global capital markets, already unsettled by geopolitical upheaval in the Middle East, have been battered in the last week by the natural disaster that has struck Japan. The human suffering caused by the earthquake, and the tsunami it spawned, has been horrific. As if the initial devastation were not enough, the nation has been forced to battle furiously to prevent a full-blown nuclear disaster

S&P 500 Earnings Continue to Surprise to the Upside

2011-03-07T11:01:00.000-05:00

With earnings season all but concluded, S&P 500 earnings have once again exceeded consensus estimates. According to Smith Group Asset Management, with 93% of S&P 500 companies having reported 4th quarter 2010 earnings, 75% exceeded consensus earnings estimates while 69% exceeded sales estimates. The median earnings surprise was 3.7% while the median sales surprise was 1%. The median earnings

The Fed, the Banks, Money Creation, Inflation, and the Bond Market

2011-02-21T12:51:00.000-05:00

For more than a year now, we have heard rumblings that the bond market is the next bubble about to burst, following on the heels of the US equity, credit and housing bubbles. In what can only be described as a classic twist of irony, bond funds have experienced massive inflows of capital in the wake of a collapsing credit bubble and high yield bonds have been one of the best performing asset

Are Dividend Paying Stocks Poised to Outperform?

2011-02-16T17:26:00.000-05:00

Domestic equities have rebounded dramatically from their lows of March 9, 2009. From its close on that date through the end of 2010, the total return on the Russell 1000 has been 96.73%, or 45.22% annually. The total return on the Russell 2000 has been 134.03%, for an annualized gain of 59.81%. Initial rallies from bear market lows are often characterized as “junk” rallies, led by companies with

Services, Manufacturing Growth Accelerates; Employment Report Mixed

2011-02-04T16:22:00.000-05:00

Along with ice and snow, this week brought with it the first reports of US economic activity in 2011. Most of the news was good, but employment data remained, as Churchill once said of Russia, “a riddle wrapped in a mystery inside an enigma.” Growth in the US services and manufacturing sectors accelerated in January, significantly surpassing consensus expectations. The manufacturing sector, which

Consumers Repairing Balance Sheets

2011-01-06T16:44:00.000-05:00

As the US entered its worst economic downturn since the Great Depression, consumer balance sheets were laden with debt. Household debt as a percentage of GDP, less than 49% in 1980, had risen to more than 96% by the end of 2007. The doubling of this debt ratio was supported by a secular decline in both savings and interest rates, a doubling of bank leverage ratios, which itself was supported by

Tax Bill Boosts Near-term Growth, Leaves Long-term Questions Unanswered

2010-12-21T13:07:00.000-05:00

Last Friday President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, generally referred to as an extension of the “Bush era tax cuts.” Below we delineate the main provisions of this stimulus program along with the associated costs, including both additional expenditures from, and lost revenue to, the federal government, through 2012. Costs

S&P 500 Earnings Continue to Exceed Expectations

2010-12-09T12:26:00.003-05:00

Third quarter earnings season has all but ended and once again S&P 500 earnings outstripped analysts’ expectations. A report from Smith Group Asset Management indicates that after 94% of the benchmark’s constituents had reported, 77% had beaten consensus operating earnings estimates with a median upside surprise of 4.2%. Meanwhile, 67% of those reporting surpassed consensus sales estimates with a

Lost Decade for US Equity Markets? Hardly!

2010-12-03T11:08:00.001-05:00

Tune into any financial news network and you are likely to hear that the first decade of the millennium was a lost decade for US equity investors. Most investors and investment professionals likely sit back, nodding their heads in agreement. Of course they are right, aren’t they? Didn’t the NASDAQ Composite and the S&P 500 produce negative annualized returns over the decade while the return on

Short Week for the Markets is Full of US Economic Data

2010-11-24T17:21:00.001-05:00

The Thanksgiving Holiday brings with it a truncated week for US equity markets, which are closed Thursday and have a shortened session on Friday. However, it has been a busy week for economic data, with numerous economic releases yesterday and today. Here is a quick look at what has been reported. US 3rd Quarter GDP:Yesterday the government released the second of three estimates of 3rd quarter

Chinese Inflation Battle Likely to Include Yuan Appreciation

2010-11-17T11:58:00.002-05:00

For most of its history, the Chinese Yuan has been pegged to the US Dollar. The currency underwent a dramatic devaluation as China began to liberalize its economy from 1980 through the first half of the 1990s. From the mid 1990s through 2005 the peg to the US Dollar remained relatively stable. However, as China’s export power surged in the late 1990s and into this decade, the country faced

Bond Market Weighs in On QEII

2010-11-16T13:36:00.001-05:00

America went to the polls the day before the Fed announced a second round of quantitative easing, dubbed QEII. Over the subsequant two weeks, the bond market has been in retreat as fixed income investors have voted on Fed policy with their feet. The yield curve has undergone a bear steepening as long-term rates have risen more than short-term rates. However, the shift along the three to 10-year

QEII Boosts Global Asset Prices

2010-11-04T22:26:00.002-04:00

Global capital markets rallied dramatically today on the back of yesterday’s announcement by the FOMC that the Fed will expand its balance sheet by another $600 billion though the purchase of US Treasuries at a rate of $75 billion/month. This is in addition to the announcement in August that the Fed would reinvest principle payments from its portfolio of mortgage-backed securities. In total, the

Market Returns and the Election Cycle

2010-11-03T21:35:00.004-04:00

GMO has studied the relationship between US equity market returns and the US presidential election cycle back to 1932. In his recent quarterly letter, Jeremy Grantham, one of the firm’s founders, provided data on election cycle market performance from 1964 through 2007. His work indicated that, compared with the average, changes in Fed Funds in year-three of the election cycle were negative, i.e.

Will the Recovery be Jobless?

2010-08-30T10:56:00.005-04:00

As the new millennium dawned, Americans greeted it with joy, hope, and the expectation of a bright and prosperous future. The country was at peace, the economy was growing robustly, the stock market was reaching new highs, and the government budget was in surplus. Unfortunately, the first decade of the new millennium turned out to be one Americans would just as soon forget. The bursting of the

High Quality Stocks Positioned for a Comeback

2010-08-06T08:14:00.003-04:00

While various market cycles share characteristics with one another, each one is unique in its own right. The bear market at the onset of the decade was largely a function of a bubble in technology stocks and a recession driven by a collapse in corporate profits. The recent bear market resulted from the bursting of a credit bubble and the ensuing collapse of housing prices and consumer spending.

Correction or Return of the Bear?

2010-06-24T19:38:00.009-04:00

As we entered 2010, global equity markets had already staged an impressive rally from their March lows. With the Greek debt crisis becoming front page news, US equities, and risk-oriented assets in general, declined in January. However, despite Europe’s sovereign debt crisis, domestic equity markets regained their footing in February and rallied through the third week in April before declining

The US Budget Deficit – Its More Than Just Government Spending

2010-03-28T13:20:00.018-04:00

The above quote, often misattributed to Abraham Lincoln, is from a letter written by General MacArthur to Republican Congressman Albert Lewis Miller, who was attempting to draft the general to run for president in the 1944 election. Its misattribution to Lincoln likely arises from the fact that MacArthur himself attributed this faith in the populace to the Great Emancipator by prefacing the above

Consumer Spending and the US Economy

2009-10-02T16:01:00.004-04:00