Quarterly Review and Outlook: Second Quarter 2007
July 16, 2007
This week in Outside the Box, we take a closer look at the bond market and its underlying drivers. HMIC's Van Hoisington and Dr. Lacy Hunt anticipate lower inflationary pressures on account of faltering consumer spending and further deterioration in the housing market.
Hoisington Investment Management Company focuses on long-term investment strategies based on Economic Analysis. The firm is a registered investment advisor specializing in fixed income portfolios with over $3.5 billion under management for large institutional clients. Van R. Hoisington is the President and Chief Investment Officer and has produced an outstanding fifteen-year performance record. Dr. Lacy Hunt, an internationally known economist, joined the firm in 1996 adding depth and expertise with his in-depth research and analysis.
Today's article is from their Second Quarter Review and Outlook which I am delighted to present to you with their consent. While constructing their assessment for bonds, Van and Lacy walk through each building block, providing analysis on the predominant driving factors in the bond market and their respective implications.
US Equity Returns: What To Expect
June 18, 2007
This week's letter is by good friend Dr. Prieur du Plessis, who is managing director of Plexus Asset Management based in Cape Town, South Africa. What kind of returns can we expect from US equities over the next ten years? It turns out that while you can get an average number, the range of actual historical returns is actually larger than you might think. Thus, past performance is not indicative of future returns, but past performance and current valuations can give us some hints.
This is one of a series of postings that Prieur does at a blog site called Investment Postcards from Cape Town, which is starting to get the international notice that it deserves, as I see references popping up in more and more places. You can see his work at http://investmentpostcards.wordpress.com/. (The last two posts are about gold and gold stocks, which I also find very interesting.)
Plexus Asset Management is the "Morningstar of South Africa." They track all the various funds in South Africa, host annual awards and do a lot of very sophisticated research. (I should note that I am a partner with Plexus in some businesses in South Africa.) I trust you find today's material truly Outside the Box.
Why the Big Money in Gold Shares Still Lies Ahead
June 11, 2007
This week in Outside the Box we take a quizzical gander at the gold market, its growth-to-date, and potential future investment opportunity. We have witnessed a significant rise in the gold market from a July 1999 price of $252 an once, to $653 an once today, an increase of 159%. David Galland, of Casey Research, provides an intriguing analysis of the gold market today and the inherit investment opportunity existent on account of severely curtailed research exploration, institutional obstacles, NGOs, and rising global demand, driven primarily from the emerging market economies.
I have known Doug and David a very long time. I made my first dollar on gold stocks back in the mid-1980s when Doug Casey personally called me up and told me to by a particular stock. It was quite a home run and I have paid attention to what Doug says on gold stocks ever since. They take their research on gold stocks very seriously, and have been quite successful over the past years. If you are interested in specific gold stocks and gold stock investing, I really suggest you subscribe to Doug Casey's letter. They will send you his recent update, which covers in-depth all the stocks he likes and a few he says to avoid. For more information on how to subscribe, please click here.
How We Learned to Stop Worrying (so much) and Love "Da Bomb"
May 21, 2007
Humans, by nature, tend to let things worry them a bit more than they ought to. Whether it's a job situation, relationship issue or investment decision, we all tend to blow the small things out of proportion and lose sight of the bigger picture at hand. In this week's Outside the Box, PIMCO Managing Director Bill Gross does an excellent job at explaining why we need to worry less and grab a hold of some of the larger trends behind today's markets.
In his article "How We Learned to Stop Worrying (so much) and Love 'Da Bomb,'" Bill discusses the four big picture topics of globalization, technology, freer markets/financial innovation and favorable public policy as well as show how these forces will affect economies across the globe. He also points out some potential threats that could disrupt the asset markets overall. One particular point that I found of interest was Bill's explanation of a shift in the credit creation process from that of the Central Bank's to those of more private agents such as hedge funds.
Bill always does a superb job of taking a lot of variables and boiling them down to their key metrics. I trust that you will enjoy his commentary and find it to be both valuable and "outside the box."
An Optimistic Route to a Poor Market Outlook
May 14, 2007
Value is a big and well-known strategy within the investment world. Many
analysts and investors alike rely heavily on the P/E ratio as a metric to
determine the value of a stock, indices or other form of security. But just as
with any other investment metric, the data can be skewed if not viewed within
the proper context. This week's Outside the Box is by John Hussman where he
discusses the importance of analyzing P/E ratios under the backdrop of the
earnings cycle. John shares his view on "normalized" earnings as well as
explains how he calculates the averages over a 5 year period.
Dr. Hussman is the president and principal shareholder of Hussman Econometrics
Advisors, the investment advisory firm that manages the Hussman Funds. He is
also the President of the Hussman Investment Trust. Prior to managing the
Hussman Funds, Dr. Hussman was a professor of economics and international
finance at the University of Michigan. He continues to write his "Weekly Market
Comment" that provides both excellent insight and analysis into the current
market climate.
I trust that you enjoy Hussman's research and find it to be valuable to thinking
"outside the box."
Grim Reality
April 9, 2007
As I glanced over at the TV in my office this morning, the latest news on the ticker wire was that American Home Mortgage Investment Corp. (AHM) is trading down over 16%. While the company is not of any particular importance to me, it spurred my thinking regarding how the housing market will affect the economy throughout the remainder of the year. And as I have written it is not really a matter of the housing market affecting the economy so much as it is a matter of tightening credit spreads that will do the damage.
This week's Outside the Box is written by PIMCO Managing Director Bill Gross where he discusses his views regarding the correlation between housing, credit spreads, the bond market and FED policy. In his article "Grim Reality," he goes on to point out that losses on loans, in and of themselves, are not the real monster lurking in the night for this economy, but rather it's the tightening of credit standards the could have a materially adverse effect. Bill does an excellent job explaining this as he so often does with his usual great style and wit.
I believe that you will find this Outside the Box to be a good read on what the implications behind a decline in the housing market really are.
If Fed Funds Rate ‘Fails’ to Fall
February 5, 2007
Today's Outside the Box is by my good friend and PIMCO's Managing Director, Paul McCulley. In his article "If Fed Funds Rate 'Fails' to Fall," Paul discusses the mindset behind the decision making of central banks and how they determine policy. From there he goes on to explain that the markets have "priced-in" expectations of the Fed easing rates sometime later this year. But what if the Fed doesn't decide to make a rate cut? Paul takes a quick look at both scenarios.
Paul writes a monthly commentary, the Global Central Bank Focus that, because of its well-researched and unique perspective, is always at the top of my reading list. As a Managing Director at PIMCO, he is an intelligent economist and forward thinker who always provides a valuable perspective.
I trust that you will find this piece interesting and an "Outside the Box" take on the Fed's policy over the coming months.
Quarterly Review and Outlook - Fourth Quarter 2006
January 8, 2007
On Friday, I wrote my annual forecast, "The Goldilocks Recession," on what investment themes I expect in the coming year. This week's Outside the Box will follow up on the subject with an excellent piece written by Van Hoisington and Dr. Lacy Hunt. In their fourth quarter review of 2006, they address how the current status of the bond market measures up against historical interest rates and inflation. From there, each of the six major sectors of the economy, Personal Consumption Expenditures (PCE), Residential Investment, Nonresidential Fixed Investment, Government Expenditures, Inventory Investment, and Net Exports, are covered specifically and analyzed to depict the trends for 2007.
This letter is one of the more in-depth and fundamentally heavy articles I've featured as it is chock-full of data, or what I like to call the "hard facts." Van Hoisington and Dr. Lacy Hunt have done a stellar job collecting a great deal of information and dissecting it to form some well-thought investment conclusions. For those of you unfamiliar with Hoisington Investment Management, the firm is a registered investment advisor specializing in fixed income portfolios for large institutional clients. Located in Austin, Texas, the company has over $3.5-billion under management, composed of corporate and public funds, foundations, endowments, Taft-Hartley funds, and insurance companies.
Each year presents its own set of both opportunities and risks for us investors. I trust that you will find value in this Outside the Box and use it to form your own independent investment conclusions.
Global Transitions
December 11, 2006
With a new year just weeks away, investors are weighing expectations and asking questions about what lies ahead. Each year presents its own set of opportunities and challenges, especially in are ever-increasing global economy. Today's "Outside the Box" features a letter by Stephen Roach on the impending transitions of this interconnected marketplace.
Stephen S. Roach is Managing Director and Chief Economist of Morgan Stanley, and is widely recognized as one of Wall Street's most influential economists. His published research has covered a broad range of topics, with recent emphasis on globalization, the emergence of China, productivity, and the capital market implications of global imbalances. In his letter "Global Transitions," Roach analyzes the sources of past growth amidst the backdrop of a global economy and highlights the forthcoming changes on where to expect it from next. In addition, he addresses the growing "consensus" of the soft-landing scenario for U.S. housing.
On a side note, Roach mentions a companion piece by his normally bullish colleague, Richard Berner. In "It's a 'Growth Recession,' Not a Lasting Downturn," Richard not only forecasts lower growth but also lower profits. To view the article, click here and then scroll down.
I hope these articles help to form your investment outlook from a global viewpoint...enjoy. For what it's worth, I will be on CNBC at 7:45 this Tuesday morning talking about hedge funds.
Alpha/Beta Anemia
November 27, 2006
After a great holiday weekend, I hope that everybody is enjoying the recurring challenge of finding new ways to creatively eat turkey leftovers. For today's "Outside the Box," we turn our attention towards an interesting piece by Bill Gross on the changing investment landscape over the next decade. In his article "Alpha/Beta Anemia," Bill discusses his outlook for several asset classes and explains their implications on risk premiums in the marketplace.
Bill is a Managing Director at PIMCO where he has become regarded as the most prominent figure in the fixed income sector. He serves at the helm of the largest bond fund in the world, the PIMCO Total Return Fund. In the 90's he penned 2 books on investing: Everything You've Heard About Investing Is Wrong! and Bill Gross on Investing.
May you have a pleasant week and find this reading to be valuable to your financial education.
Beyond The Horizon: Economics & EPS
November 20, 2006
I am excited to present to you today a very interesting piece by my good friend and local Dallas resident, Ed Easterling. Ed has performed an in-depth study on how several key fundamentals have performed over time and how they are likely to perform over the next several years. His analysis shows how EPS and corporate profit margins have correlated to the business cycle dating all the way back to 1950. I find his study to be very insightful and dead on in the midst of the current market climate.
For those of you unfamiliar with Ed and his work, he is the author of Unexpected Returns: Understanding Secular Stock market Cycles and President of an investment management firm. In addition, Ed is a member of the adjunct faculty at SMU's Cox School of Business where he teaches a course on alternative investments and hedge funds for MBA students. Mr. Easterling is most known for publishing provocative research on the financial markets which can be viewed at www.CrestmontResearch.com.
I trust that you will find his "Beyond the Horizon" to be very compelling research and an "outside the box" point of view. May you enjoy!
Time-Varying Variables Vary
October 30, 2006
Last Friday, I wrote about That Stubborn Yield Curve in my Thoughts from the Frontline letter. In it, I quoted a few paragraphs by Pimco's Paul McCulley, but upon reflection, I feel that his whole letter is worthy of taking a look at more in-depth. Paul writes a monthly commentary, the Global Central Bank Focus that, because of its well-researched and unique perspective, is always at the top of my reading list. As a Managing Director at PIMCO, Paul is an intelligent economist and a self-proclaimed "religious Keynesian."
In his article "Time-Varying Variables Vary" (quite the tongue twister), Paul looks back upon his forecast for the Fed Funds rate and evaluates the "Taylor" formula. But one of the things that I like best about Paul is that, despite his lengthy analysis, he is a bottom-line kind of guy who always boils it down to the end result, which in this case, is the future decision making of the Fed.
With Morgan Stanley and Goldman Sachs each weighing in on opposing sides of the interest rate debate, I believe that you will find Paul's piece to be a truly "outside the box" point of view.