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Monday, June 6, 2011
US house price fall 'beats Great Depression slide'
The ailing US housing market passed a grim milestone in the first quarter of this year, posting a further deterioration that means the fall in house prices is now greater than that suffered during the Great Depression.
The brief recovery in prices in 2009, spurred by government aid to first-time buyers, has now been entirely snuffed out, and the average American home now costs 33 per cent less than it did at the peak of the housing bubble in 2007. The peak-to-trough fall in house prices in the 1930s Depression was 31 per cent – and prices took 19 years to recover after that downturn.
The latest Case-Shiller house price index was just one of a slew of disappointing economic data from the US yesterday, which suggested ebbing confidence in the recovery of the world's largest economy. The Chicago PMI manufacturing index showed a sharp slowdown in the pace of expansion in May, missing Wall Street forecasts and sending the index to its lowest since November 2009.
And in the latest Conference Board consumer confidence survey more people expressed uncertainty over their future economic prospects. The confidence index fell unexpectedly to 60.8 from a revised 66.0, when economists had expected it to rise to 67.0. Falling house prices and negative equity combined with high petrol and food prices and a still-weak jobs market to raise consumers' fears for the future.
Thomas Di Galoma, the managing director of government securities at Oppenheimer & Co, said: "Based on the weakness in housing prices, Chicago PMI and consumer confidence, it appears as though the economy could be headed for a double dip, especially as federal and state spending slows rapidly over the next six months."
Economists warned not to expect any immediate relief to the gloom from the housing market. Banks continue to demand high deposits from potential buyers and are pressing on with foreclosures against those who have fallen behind on mortgages, adding to the glut of unsold homes on the market.
Prices are back to their 2002 levels, according to the Case-Shiller National House Price Index out yesterday. "The national index fell 4.2 per cent over the first quarter alone, and is down 5.1 per cent compared to its year-ago level," David Blitzer, the chairman of the Index Committee at S&P Indices, said. "Home prices continue on their downward spiral with no relief in sight."
http://www.independent.co.uk/news/business/news/us-house-price-fall-beats-great-depression-slide-2291491.html
The brief recovery in prices in 2009, spurred by government aid to first-time buyers, has now been entirely snuffed out, and the average American home now costs 33 per cent less than it did at the peak of the housing bubble in 2007. The peak-to-trough fall in house prices in the 1930s Depression was 31 per cent – and prices took 19 years to recover after that downturn.
The latest Case-Shiller house price index was just one of a slew of disappointing economic data from the US yesterday, which suggested ebbing confidence in the recovery of the world's largest economy. The Chicago PMI manufacturing index showed a sharp slowdown in the pace of expansion in May, missing Wall Street forecasts and sending the index to its lowest since November 2009.
And in the latest Conference Board consumer confidence survey more people expressed uncertainty over their future economic prospects. The confidence index fell unexpectedly to 60.8 from a revised 66.0, when economists had expected it to rise to 67.0. Falling house prices and negative equity combined with high petrol and food prices and a still-weak jobs market to raise consumers' fears for the future.
Thomas Di Galoma, the managing director of government securities at Oppenheimer & Co, said: "Based on the weakness in housing prices, Chicago PMI and consumer confidence, it appears as though the economy could be headed for a double dip, especially as federal and state spending slows rapidly over the next six months."
Economists warned not to expect any immediate relief to the gloom from the housing market. Banks continue to demand high deposits from potential buyers and are pressing on with foreclosures against those who have fallen behind on mortgages, adding to the glut of unsold homes on the market.
Prices are back to their 2002 levels, according to the Case-Shiller National House Price Index out yesterday. "The national index fell 4.2 per cent over the first quarter alone, and is down 5.1 per cent compared to its year-ago level," David Blitzer, the chairman of the Index Committee at S&P Indices, said. "Home prices continue on their downward spiral with no relief in sight."
http://www.independent.co.uk/news/business/news/us-house-price-fall-beats-great-depression-slide-2291491.html
More Americans Think Economy Will Never Recover
The mixed signals regarding the economy's health are taking a toll.
Americans are growing increasingly doubtful about direction of the US economy, according to the latest survey from business-advisory firm AlixPartners.
In fact, an increasing number, some 61 percent, say they don't expect to return to their respective pre-recession lifestyles until the spring of 2014, if ever.
What's worse, a full 10 percent said they expect they will never return to pre-recession spending.
That's a more pessimistic view than last year, when those surveyed expected that they could be back to pre-recession spending levels by the middle of 2013.
"Americans continue to push their expectations for return to a pre-recession 'normal' further and further into the future—close enough for comfort, but far enough away to seem realistic," said Fred Crawford, CEO of AlixPartners. "But as that happens, more and more it seems normal is actually where we are right now."
The latest employment report, which showed that U.S. employers hired far few workers than expected in May, only serves to reinforce these attitudes.
"It's a vicious cycle," Crawford said. "Americans need to see a significant decrease in unemployment to feel confident in the economic recovery, but companies are waiting to see increased demand for their products and services before they begin hiring and making job-creating capital expenditures."
In the latest survey, some 63 percent of Americans said they feel "not good" or "bad" about the state of the US economy, representing a significant increase from May 2010 when only about 49 percent of those polled felt this gloomy.
The survey also found that Americans overwhelmingly expect to delay by at least 12 months major purchases and expenditures such as spending on new cars, home repairs and vacations.
There have already been signs of this in the latest retail sales reports that came out earlier this week from a handful of major retailers.
Overall, sales at stores open at least a year rose 5.0 percent in May, which is below the 5.4 percent increase that Wall Street expected, according to Thomson Reuters data.
While some analysts used a number of excuses, including high gasoline prices, poor weather, and lackluster merchandise, to explain away the disappointing results, the findings of the survey may suggest that consumers are hunkering down amid the uncertainty.
The view was expressed Thursday by Target CEO Gregg Steinhafel, who said that traffic at Target stores slowed in the second half of the month.
"Our guests continue to shop cautiously in light of higher energy costs and inflationary pressures on their household budgets," Steinhafel said, in the company's monthly sales press release.
AlixPartners is by no means the first organization to recognize this growing pessimism.
Goldman Sachs economist Jan Hatzius said the number of consumers who believe they have a chance to bring home more money one year from now is at its lowest level in 25 years, based on his analysis of the University of Michigan and Thomson Reuters consumer sentiment poll.
http://m.cnbc.com/us_news/43268037
Americans are growing increasingly doubtful about direction of the US economy, according to the latest survey from business-advisory firm AlixPartners.
In fact, an increasing number, some 61 percent, say they don't expect to return to their respective pre-recession lifestyles until the spring of 2014, if ever.
What's worse, a full 10 percent said they expect they will never return to pre-recession spending.
That's a more pessimistic view than last year, when those surveyed expected that they could be back to pre-recession spending levels by the middle of 2013.
"Americans continue to push their expectations for return to a pre-recession 'normal' further and further into the future—close enough for comfort, but far enough away to seem realistic," said Fred Crawford, CEO of AlixPartners. "But as that happens, more and more it seems normal is actually where we are right now."
The latest employment report, which showed that U.S. employers hired far few workers than expected in May, only serves to reinforce these attitudes.
"It's a vicious cycle," Crawford said. "Americans need to see a significant decrease in unemployment to feel confident in the economic recovery, but companies are waiting to see increased demand for their products and services before they begin hiring and making job-creating capital expenditures."
In the latest survey, some 63 percent of Americans said they feel "not good" or "bad" about the state of the US economy, representing a significant increase from May 2010 when only about 49 percent of those polled felt this gloomy.
The survey also found that Americans overwhelmingly expect to delay by at least 12 months major purchases and expenditures such as spending on new cars, home repairs and vacations.
There have already been signs of this in the latest retail sales reports that came out earlier this week from a handful of major retailers.
Overall, sales at stores open at least a year rose 5.0 percent in May, which is below the 5.4 percent increase that Wall Street expected, according to Thomson Reuters data.
While some analysts used a number of excuses, including high gasoline prices, poor weather, and lackluster merchandise, to explain away the disappointing results, the findings of the survey may suggest that consumers are hunkering down amid the uncertainty.
The view was expressed Thursday by Target CEO Gregg Steinhafel, who said that traffic at Target stores slowed in the second half of the month.
"Our guests continue to shop cautiously in light of higher energy costs and inflationary pressures on their household budgets," Steinhafel said, in the company's monthly sales press release.
AlixPartners is by no means the first organization to recognize this growing pessimism.
Goldman Sachs economist Jan Hatzius said the number of consumers who believe they have a chance to bring home more money one year from now is at its lowest level in 25 years, based on his analysis of the University of Michigan and Thomson Reuters consumer sentiment poll.
http://m.cnbc.com/us_news/43268037
Bank of America Gets Pad Locked After Homeowner Forecloses On It
Collier County, Florida -- Have you heard the one about a homeowner foreclosing on a bank?
Well, it has happened in Florida and involves a North Carolina based bank.
Instead of Bank of America foreclosing on some Florida homeowner, the homeowners had sheriff's deputies foreclose on the bank.
It started five months ago when Bank of America filed foreclosure papers on the home of a couple, who didn't owe a dime on their home.
The couple said they paid cash for the house.
The case went to court and the homeowners were able to prove they didn't owe Bank of America anything on the house. In fact, it was proven that the couple never even had a mortgage bill to pay.
A Collier County Judge agreed and after the hearing, Bank of America was ordered, by the court to pay the legal fees of the homeowners', Maurenn Nyergers and her husband.
The Judge said the bank wrongfully tried to foreclose on the Nyergers' house.
So, how did it end with bank being foreclosed on? After more than 5 months of the judge's ruling, the bank still hadn't paid the legal fees, and the homeowner's attorney did exactly what the bank tried to do to the homeowners. He seized the bank's assets.
"They've ignored our calls, ignored our letters, legally this is the next step to get my clients compensated, " attorney Todd Allen told CBS.
Sheriff's deputies, movers, and the Nyergers' attorney went to the bank and foreclosed on it. The attorney gave instructions to to remove desks, computers, copiers, filing cabinets and any cash in the teller's drawers.
After about an hour of being locked out of the bank, the bank manager handed the attorney a check for the legal fees.
"As a foreclosure defense attorney this is sweet justice" says Allen.
Allen says this is something that he sees often in court, banks making errors because they didn't investigate the foreclosure and it becomes a lengthy and expensive battle for the homeowner.
http://www.digtriad.com/news/watercooler/article/178031/176/Florida-Homeowner-Forecloses-On-Bank-Of-America
Well, it has happened in Florida and involves a North Carolina based bank.
Instead of Bank of America foreclosing on some Florida homeowner, the homeowners had sheriff's deputies foreclose on the bank.
It started five months ago when Bank of America filed foreclosure papers on the home of a couple, who didn't owe a dime on their home.
The couple said they paid cash for the house.
The case went to court and the homeowners were able to prove they didn't owe Bank of America anything on the house. In fact, it was proven that the couple never even had a mortgage bill to pay.
A Collier County Judge agreed and after the hearing, Bank of America was ordered, by the court to pay the legal fees of the homeowners', Maurenn Nyergers and her husband.
The Judge said the bank wrongfully tried to foreclose on the Nyergers' house.
So, how did it end with bank being foreclosed on? After more than 5 months of the judge's ruling, the bank still hadn't paid the legal fees, and the homeowner's attorney did exactly what the bank tried to do to the homeowners. He seized the bank's assets.
"They've ignored our calls, ignored our letters, legally this is the next step to get my clients compensated, " attorney Todd Allen told CBS.
Sheriff's deputies, movers, and the Nyergers' attorney went to the bank and foreclosed on it. The attorney gave instructions to to remove desks, computers, copiers, filing cabinets and any cash in the teller's drawers.
After about an hour of being locked out of the bank, the bank manager handed the attorney a check for the legal fees.
"As a foreclosure defense attorney this is sweet justice" says Allen.
Allen says this is something that he sees often in court, banks making errors because they didn't investigate the foreclosure and it becomes a lengthy and expensive battle for the homeowner.
http://www.digtriad.com/news/watercooler/article/178031/176/Florida-Homeowner-Forecloses-On-Bank-Of-America
Delaware government: Traffic studies bill hits nerve
DOVER -- A legislative effort to put developers on the hook for improving roads that become congested by their projects ran into opposition Wednesday from Delaware's Department of Transportation, Delaware's counties, business groups and unions.
Rep. Deborah Hudson said her bill was prompted by DelDOT and New Castle County's leniency in allowing the development of a major office and commercial complex at Barley Mill Plaza without a full traffic impact study.
Click HERE to read the rest of this article.
Rep. Deborah Hudson said her bill was prompted by DelDOT and New Castle County's leniency in allowing the development of a major office and commercial complex at Barley Mill Plaza without a full traffic impact study.
Click HERE to read the rest of this article.
Chicago cancels July 4 fireworks, leaves shows to Navy Pier
Chicago is getting out of the Independence Day fireworks business.
There will be no city-run July 3rd or July 4th fireworks show this year — not even a scaled-down version — thanks to former Mayor Richard M. Daley’s decision to hand off the Taste of Chicago to the Park District to reverse $7 million in festival losses over the last three years.
That means Chicago’s only official fireworks will be the previously scheduled show at 9 p.m. July 4 at Navy Pier. That 15-minute show is paid for by the Metropolitan Pier and Exposition Authority.
Chicago Park District spokesperson Jessica Maxey-Faulkner said the decision to cancel even last year’s smaller fireworks at three lakefront locations was a sacrifice demanded by the economic times.
It’s the same reality that forced the Park District to fold the city’s four least-popular music festivals — Viva Chicago, Country Music, Gospel and Celtic fests — into the Taste as one-day events focusing on local acts instead of making them stand-alone weekend fests with big-name talent.
“When the Chicago Park District inherited the Taste, we did so with an eye on cutting expenses and bringing the focus back to a family-friendly food festival,” Maxey-Faulkner said, noting that last year’s show cost $110,000, not including police expenses.
“Knowing that Navy Pier has fireworks shows scheduled for July 2 and July 4, we felt that was a reasonable expense to cut.”
Last year, declining city revenues and disappearing corporate sponsors claimed the annual July 3 fireworks extravaganza in Grant Park.
Instead of having one fireworks show on July 3 that drew more than 1.2 million people and stretched city services to the brink, Chicago held smaller synchronized fireworks shows on July 4: at Montrose Harbor and 59th Street to coincide with the previously scheduled show at Navy Pier.
City Hall hoped to cut security costs by making the switch, but it didn’t quite work out that way.
Policing three fireworks venues cost $756,476, including $251,377 in “regular tour pay,” $444,251 worth of “accumulated compensatory time” and $60,846 in overtime, records show.
The only venue that drew an overflow crowd was Navy Pier, where attendance was so big, police were forced to shut off access for the first time in history.
The Pier closing started at 7:20 p.m. and continued for “two or three hours,” barring even those who had reservations at Navy Pier restaurants.
“We stopped counting at 250,000” people, Navy Pier spokesman Jon Kaplan said of the record crowd on that day.
“Only employees working in Navy Pier stores and people with tickets to the theater or tickets previously purchased for boat cruises were allowed in.”
Two years ago, Venetian Night, the annual parade of illuminated boat floats, was sunk by Daley’s cost-cutting, ending a 52-year-old summer tradition.
Viva Chicago, Country Music, Gospel and Celtic Fests were next on the chopping block — at least as stand-alone festivals.
Now, there’s no more city fireworks show.
“The city is broke. We can’t afford the circuses. Perhaps fireworks are a luxury we can do without,” said Ald. Joe Moore (49th).
Civic Federation President Laurence Msall agreed that the fireworks fizzle is “a sign of the financial distress the city finds itself in.”
But, he said, “Although we understand the need to cut expenses, we’d like to see it tied to a long-term plan for all the city’s special events and promotional activities when it comes to encouraging people to come downtown and enjoy the lakefront.”
http://www.suntimes.com/5700733-417/chicago-cancels-july-4-fireworks-leaves-shows-to-navy-pier.html
There will be no city-run July 3rd or July 4th fireworks show this year — not even a scaled-down version — thanks to former Mayor Richard M. Daley’s decision to hand off the Taste of Chicago to the Park District to reverse $7 million in festival losses over the last three years.
That means Chicago’s only official fireworks will be the previously scheduled show at 9 p.m. July 4 at Navy Pier. That 15-minute show is paid for by the Metropolitan Pier and Exposition Authority.
Chicago Park District spokesperson Jessica Maxey-Faulkner said the decision to cancel even last year’s smaller fireworks at three lakefront locations was a sacrifice demanded by the economic times.
It’s the same reality that forced the Park District to fold the city’s four least-popular music festivals — Viva Chicago, Country Music, Gospel and Celtic fests — into the Taste as one-day events focusing on local acts instead of making them stand-alone weekend fests with big-name talent.
“When the Chicago Park District inherited the Taste, we did so with an eye on cutting expenses and bringing the focus back to a family-friendly food festival,” Maxey-Faulkner said, noting that last year’s show cost $110,000, not including police expenses.
“Knowing that Navy Pier has fireworks shows scheduled for July 2 and July 4, we felt that was a reasonable expense to cut.”
Last year, declining city revenues and disappearing corporate sponsors claimed the annual July 3 fireworks extravaganza in Grant Park.
Instead of having one fireworks show on July 3 that drew more than 1.2 million people and stretched city services to the brink, Chicago held smaller synchronized fireworks shows on July 4: at Montrose Harbor and 59th Street to coincide with the previously scheduled show at Navy Pier.
City Hall hoped to cut security costs by making the switch, but it didn’t quite work out that way.
Policing three fireworks venues cost $756,476, including $251,377 in “regular tour pay,” $444,251 worth of “accumulated compensatory time” and $60,846 in overtime, records show.
The only venue that drew an overflow crowd was Navy Pier, where attendance was so big, police were forced to shut off access for the first time in history.
The Pier closing started at 7:20 p.m. and continued for “two or three hours,” barring even those who had reservations at Navy Pier restaurants.
“We stopped counting at 250,000” people, Navy Pier spokesman Jon Kaplan said of the record crowd on that day.
“Only employees working in Navy Pier stores and people with tickets to the theater or tickets previously purchased for boat cruises were allowed in.”
Two years ago, Venetian Night, the annual parade of illuminated boat floats, was sunk by Daley’s cost-cutting, ending a 52-year-old summer tradition.
Viva Chicago, Country Music, Gospel and Celtic Fests were next on the chopping block — at least as stand-alone festivals.
Now, there’s no more city fireworks show.
“The city is broke. We can’t afford the circuses. Perhaps fireworks are a luxury we can do without,” said Ald. Joe Moore (49th).
Civic Federation President Laurence Msall agreed that the fireworks fizzle is “a sign of the financial distress the city finds itself in.”
But, he said, “Although we understand the need to cut expenses, we’d like to see it tied to a long-term plan for all the city’s special events and promotional activities when it comes to encouraging people to come downtown and enjoy the lakefront.”
http://www.suntimes.com/5700733-417/chicago-cancels-july-4-fireworks-leaves-shows-to-navy-pier.html
Bull Market in Stocks Is Ending: Strategists
The bull market in stocks, which began two years and two months ago on the tail end of the deepest recession since the Great Depression, has handed investors gains of 80 percent.
But, according to fund managers and analysts including Standard & Poor's Chief Technical Strategist Mark Arbeter and Capital Advisors Chief Executive Officer Keith Goddard, the end is nigh.
Europe's tumultuous debt woes, Japan's recession, the end of the U.S. Federal Reserve's massive bond-buying program and peak profits among American companies signal a slowdown in the pace of equity gains that may, in a worst-case scenario, result in a decline of as much as 20%.
Calling stock-market tops and bottoms is more art than science, though in a research note last week, S&P's Arbeter said stocks will fall 15% to 20%, perhaps more, with a slide extending into next year.
His evidence: A breakdown in commodities, a potential intermediate- to longer-term bottom in the U.S. Dollar Index, lagging emerging markets and a rise in Treasury yields. All of which raise costs for U.S. businesses, crimping profits.
"In our opinion, this reflects concerns about the economy, and many times, is a bearish omen for the overall stock market," Arbeter writes, noting recent outperformance in sectors like consumer staples, health care, telecom and utilities.
Although Arbeter made his call through the prism of market technicals, other stock-market watchers agree with his bearish assessment. Nouriel Roubini, the economist who rang the warning bell ahead of the global financial crisis in 2008, recently said unemployment will continue to rise in the U.S. over the next year. Roubini has frequently warned of global economic woes, and he continues to see problems in Europe as a threat to a global recovery.
The threats to the future of the bull market read like a laundry list of events set to occur at the end of days. Inflation from rising commodity, agriculture and materials costs is a major concern, as is the end of the Federal Reserve's purchase of $600 billion in U.S. Treasurys, known as QE2, which provided a massive boost of liquidity that helped to increase asset prices.
There are several other concerns that aren't mentioned nearly as much as inflation and the end of the second round of quantitative easing. Fitch Ratings cut Greece's credit rating on Friday due to the risk of a sovereign default. Last year, the European Union and International Monetary Fund bailed out Greece, but even that rescue may not be enough to help the country manage its debt and deficit. Worry continues to mount over a potential debt restructuring.
In the U.S., economic reports have suggested sluggishness ahead. Unemployment remains at 9%, and new jobless claims have stayed stubbornly above 400,000 each week.
First-quarter GDP has been initially pegged at 1.8%, which is anything but robust.
And in the past week, the Conference Board said leading economic indicators fell 0.3% in April, the first decline since June 2010, and a separate report showed housing starts and building permits continue to drop.
Bullish investors have pointed to earnings performance as one reason the market still has legs. But the excitement over first-quarter earnings, which recently wrapped up with Wal-Mart's [ WMT 53.76 +0.10 (+0.19%) ] release, doesn't quite match reality.
Bespoke Investment Group's market analysis says out of 2,132 U.S. companies that reported earnings this quarter, 59.5% beat estimates.
"This is by far the lowest quarterly 'beat rate' reading of the bull market, and it's 7 percentage points below the 'beat rate' last quarter," Bespoke writers noted in last week's post.
There has also be a shift in leadership, another potential sign of an impending market swoon. Lower-quality stocks led the equity market higher until about a month ago. Both the Russell 2000 and the S&P 500 ($INX) are up 6% this year — a far cry from bear-market territory — but the small-cap index is down 2% over the past month as the S&P 500 has held steady.
Despite mounting evidence, there is much conflict about whether this is the end of the bull market's run.
"Bull markets, as they say, have been killed historically by restrictive monetary policy. I'm not aware of a bull market being killed my anything else," says Mark Schultz, fund manager at M&T Bank. "We're a little ways away from that, according to the authorities at the Fed."
Other fund managers and investment advisors are a little more concerned. TheStreet spoke with several bullish and bearish investors and got their take on whether the bull market is dying. Their views are presented on the following pages.
Brian Peery, Hennessy Cornerstone Growth Fund
"It's not about timing the market, it's about time in the market," says Brian Peery.
"I've never been good at picking tops or bottoms. I'm going to invest for the long term, so I want to pick high-quality companies that are going to be around in five years and make sure I'm not paying too much for them."
Peery is the co-portfolio manager of the Hennessy Cornerstone Growth Fund (HFCGX), a $200 million fund with a tilt toward small- and mid-cap equities such as Mercer International (MERC) and Atlas Energy (ATLS).
"There's always going to be that wall of worry. You could make a case for the end of the world being near," Peery says.
"But if you can separate the individual companies and their performance from the overall economy, there are a lot of cash-rich companies that are making a lot of money that are sitting on this capital."
Peery is solidly in the bullish camp of investors, as he says a hypothetical 20% market pullback would "be a huge buying opportunity." But even he acknowledges the challenge investors face with the weak economic rebound.
"We're not in an environment where the economy is rip-roaring, so you're only getting incremental growth on the top line," he says. "The economic numbers haven't been all that great. If you don't have a job, the recession is still going on. But people are feeling more secure about spending and they're loosening the purse strings a little."
Peery says it will still be a stock pickers' market, and that investors have to look for high-quality companies selling at a discount. He says there are an abundance still out there, including Dell [ DELL 15.905 +0.315 (+2.02%) ] and, in particular, Chevron [ CVX 99.68 -1.32 (-1.31%) ].
"Chevron is making a truckload of money," Peery says. "What do you do with that $12 of earnings per share? You could increase your dividend, you could invest in infrastructure to make yourself more profitable, or you could do some M&A. We're seeing companies like Chevron that are yielding high."
Peery advises people to take a long-term approach, as it's still early in this bull market in his eyes.
"We could have a dip along the way and have continued growth, so I would look at any time the market comes down as potential buying opportunities," he says. "I still think valuations are relatively low."
Keith Goddard, Capital Advisors
Keith Goddard, president and CEO of Capital Advisors, says there are two important things that are making the climate more difficult for investors: the end of QE2 and the peaking of profit margins.
Based in Tulsa, Okla., with $900 million in assets under management, Goddard says that while investors will debate whether interest rates will rise or fall on the termination of the Fed's quantitative easing in June, there is no debating the market will transition from an environment of easy monetary policy to one of incremental tightening.
Secondly, Goddard argues that profit margins are peaking. "We're right up against records, and that series is mean-reverting. It's one of the most mean-reverting elements of capitalism," he says. "Profit margins will come down at some point. We think it's starting."
Rising interest rates are never good for stocks, and that coupled with idea that companies will begin negative earnings preannouncements in June is something that scares Goddard.
"The risk in your portfolio goes up because you'll have more stocks that don't make it through earnings season without a drop," he says.
"If you get both of those things beginning in June and July, it will make the second half of the year that much harder."
Goddard says his firm is getting more defensive, although he's not quite expecting a bear market yet. He is calling for "an old-fashioned earnings-based correction sometime in the next 30 to 60 days based on a resetting of expectations for lower corporate profits."
Capital Advisors is navigating the market by looking for stable earners that are high-quality companies with global diversification and solid balance sheets, Goddard says. He also looks to find companies that have a thin margin between analysts' estimates. If the spread is narrow, it's more likely that analysts have a good handle on the business and therefore the earnings estimates can be relied upon.
Some of these names are PepsiCo [ PEP 68.89 -0.08 (-0.12%) ], Procter & Gamble [ PG 65.50 +0.07 (+0.11%) ], Johnson & Johnson [ JNJ 66.05 -0.04 (-0.06%) ] and Wal-Mart [ WMT 53.76 +0.10 (+0.19%) ].
But Goddard says he also has very high conviction in Ford [ F 13.91 -0.10 (-0.71%) ] for a different reason altogether: analyst estimates are too low.
"Ford earned $1.91 a share when auto sales were below 12 million. Consensus estimates for 2011 and 2012 are around $2 a share, but we expect auto sales to hit 15 million by 2012," Goddard says.
"If we hit 15 million in auto sales, they're going to earn more than $2 a share. I'll eat my hat if they don't."
The wild card, though, is a third round of quantitative easing by the Fed, according to Goddard. He says that the market is already feeling its way through the dark with QE2, and that there comes a point where QE2 or QE3 ceases to be beneficial to asset prices.
"The Fed has been buying two-thirds of all Treasurys issued since November, so it is not logical to assume that rates will not react to that buyer walking away," Goddard says. "But it is debatable whether the markets will cheer QE3 or not. QE3, if it happens, will smell more like monetizing the national debt than inflating asset prices."
Even if there is a negative market reaction to QE2, that correction won't grow to 20%, Goddard says.
"There is too much on the sidelines that has been waiting for an entry point for two years. I don't think they'll wait for 20% to start buying. We saw a 7% pullback related to the Japan situation this spring, and the buyers came in."
Jeff Sica, Sica Wealth Management
A handful of investment managers say the market has been overvalued for some time and that the decline is just beginning.
Jeffrey Sica, president and chief investment officer of New Jersey-based SICA Wealth Management, is one of those investors. He is currently predicting a 15% to 20% decline by the end of the summer, as the economy doesn't support more gains.
Sica says the market is now dependent on added liquidity and the willingness of the Fed to further inflate stock prices. He says that even an artificial boost by another round of quantitative easing by the Fed won't fix the problem.
"If the economy should slip into trouble, there was a willingness to do a QE3," Sica says, referencing the recently released minutes from the last meeting of the Federal Open Market Committee. "The problem will be the inflation spring."
Sica, whose firm manages about $1 billion in assets, says the Fed is in a no-win situation. If the central bank raises interest rates, they risk slowing the economy. However, there is also an inflation factor.
When Sica sees GDP estimates at 1.8% for the first quarter, he says he begins worrying about stagflation — stagnant economic growth mixed with inflation, a combination that tends to destroy investments.
In order to invest during stagflation, investors must have no willingness to buy and hold. "We're bearish because we're seeing that these initiatives will have a negative impact on the overall economy, creating greater inflation which will cause increased interest rates," Sica says.
Sica is recommending that investors purchase gold, silver or other precious metals like platinum due to the lack of faith in currency and lack of faith in government to preserve the value of currencies.
"I certainly think we have another 25% up on gold. Silver could be in the mid-$40s," Sica says. "We're still buying it and we're going to continue to buy it."
Sica also contends that the bond bubble "is absolutely ready to burst. No matter what the Fed does, they can't initiate enough stimulus to stop interest rates from going up. So we think it is a good time to be ultra-defensive and to short the U.S. Treasury market as rates go up."
For that reason, Sica has been looking to the ProShares Short 7-10 Year Treasury ETF [ TBX 38.2832 +0.1132 (+0.30%) ], the ProShares UltraShort 20+ Year Treasury ETF [ TBT 33.56 +0.46 (+1.39%) ] and the ProShares UltraShort 3-7 Year Treasury ETF [ TBZ 37.50 +0.05 (+0.13%) ] to capitalize on the inevitable rise in interest rates.
For now, Sica says he plans to stick to this short-term trading style. "Things have to change a lot for me to go back to buy and hold. I think those days are over," he says.
"The economy, the deficit, the dollar, and the global view — a lot has to improve."
Kevin Mahn, Hennion & Walsh Asset Management
The stock market typically advances nine months before any true economic gains. Without sustainable economic growth, Kevin Mahn argues that this market recovery has rallied too high, too fast absent fundamentals.
"I have a great deal of reservation with respect to how we're going to continue to grow our economy in light of higher material costs, higher agricultural costs and higher energy costs on consumers that are already stressed," says Mahn from his Parsippany, New Jersey-based office.
Mahn argues that market bulls are overestimating the strength of the U.S. consumer as well as the ability and the willingness of the developed world to continue to provide financing for fiscally lead economic stimulus.
Consumer spending accounts for over two-thirds of economic growth in the U.S., and Mahn questions how willing is this U.S. consumer to continue to spend at the rate that we need to grow our economy.
"Inflation isn't here? Try and tell Mr. and Mrs. Smith, who are paying more for bread and milk and can't afford to fill up their gas tank more than once per month," Mahn says.
"That's real inflation that we need to concern ourselves with. Not to mention, there are still 400,000 new people who have filed for unemployment."
Looking at equities specifically, Mahn asserts that the rate of companies beating earnings expectations cannot continue at the current clip of roughly 70%, and he adds that forward-looking forecasts from many of these companies are not as promising.
"If you were just a pure large-cap-centric investor, you should brace yourself for some bumps in the road ahead," Mahn says. "That said, there are a tremendous amount of opportunities for individual investors if you look outside of the U.S. and you don't stay in large-cap stocks."
Mahn says he is looking at alternative asset classes, such as ETFs to play commodities and agriculture, REITs, and investments that stand to benefit from a rebuilding of Japan. Mahn says he still favors multinationals that pay strong, consistent dividends.
http://m.cnbc.com/us_news/43167897
But, according to fund managers and analysts including Standard & Poor's Chief Technical Strategist Mark Arbeter and Capital Advisors Chief Executive Officer Keith Goddard, the end is nigh.
Europe's tumultuous debt woes, Japan's recession, the end of the U.S. Federal Reserve's massive bond-buying program and peak profits among American companies signal a slowdown in the pace of equity gains that may, in a worst-case scenario, result in a decline of as much as 20%.
Calling stock-market tops and bottoms is more art than science, though in a research note last week, S&P's Arbeter said stocks will fall 15% to 20%, perhaps more, with a slide extending into next year.
His evidence: A breakdown in commodities, a potential intermediate- to longer-term bottom in the U.S. Dollar Index, lagging emerging markets and a rise in Treasury yields. All of which raise costs for U.S. businesses, crimping profits.
"In our opinion, this reflects concerns about the economy, and many times, is a bearish omen for the overall stock market," Arbeter writes, noting recent outperformance in sectors like consumer staples, health care, telecom and utilities.
Although Arbeter made his call through the prism of market technicals, other stock-market watchers agree with his bearish assessment. Nouriel Roubini, the economist who rang the warning bell ahead of the global financial crisis in 2008, recently said unemployment will continue to rise in the U.S. over the next year. Roubini has frequently warned of global economic woes, and he continues to see problems in Europe as a threat to a global recovery.
The threats to the future of the bull market read like a laundry list of events set to occur at the end of days. Inflation from rising commodity, agriculture and materials costs is a major concern, as is the end of the Federal Reserve's purchase of $600 billion in U.S. Treasurys, known as QE2, which provided a massive boost of liquidity that helped to increase asset prices.
There are several other concerns that aren't mentioned nearly as much as inflation and the end of the second round of quantitative easing. Fitch Ratings cut Greece's credit rating on Friday due to the risk of a sovereign default. Last year, the European Union and International Monetary Fund bailed out Greece, but even that rescue may not be enough to help the country manage its debt and deficit. Worry continues to mount over a potential debt restructuring.
In the U.S., economic reports have suggested sluggishness ahead. Unemployment remains at 9%, and new jobless claims have stayed stubbornly above 400,000 each week.
First-quarter GDP has been initially pegged at 1.8%, which is anything but robust.
And in the past week, the Conference Board said leading economic indicators fell 0.3% in April, the first decline since June 2010, and a separate report showed housing starts and building permits continue to drop.
Bullish investors have pointed to earnings performance as one reason the market still has legs. But the excitement over first-quarter earnings, which recently wrapped up with Wal-Mart's [ WMT 53.76 +0.10 (+0.19%) ] release, doesn't quite match reality.
Bespoke Investment Group's market analysis says out of 2,132 U.S. companies that reported earnings this quarter, 59.5% beat estimates.
"This is by far the lowest quarterly 'beat rate' reading of the bull market, and it's 7 percentage points below the 'beat rate' last quarter," Bespoke writers noted in last week's post.
There has also be a shift in leadership, another potential sign of an impending market swoon. Lower-quality stocks led the equity market higher until about a month ago. Both the Russell 2000 and the S&P 500 ($INX) are up 6% this year — a far cry from bear-market territory — but the small-cap index is down 2% over the past month as the S&P 500 has held steady.
Despite mounting evidence, there is much conflict about whether this is the end of the bull market's run.
"Bull markets, as they say, have been killed historically by restrictive monetary policy. I'm not aware of a bull market being killed my anything else," says Mark Schultz, fund manager at M&T Bank. "We're a little ways away from that, according to the authorities at the Fed."
Other fund managers and investment advisors are a little more concerned. TheStreet spoke with several bullish and bearish investors and got their take on whether the bull market is dying. Their views are presented on the following pages.
Brian Peery, Hennessy Cornerstone Growth Fund
"It's not about timing the market, it's about time in the market," says Brian Peery.
"I've never been good at picking tops or bottoms. I'm going to invest for the long term, so I want to pick high-quality companies that are going to be around in five years and make sure I'm not paying too much for them."
Peery is the co-portfolio manager of the Hennessy Cornerstone Growth Fund (HFCGX), a $200 million fund with a tilt toward small- and mid-cap equities such as Mercer International (MERC) and Atlas Energy (ATLS).
"There's always going to be that wall of worry. You could make a case for the end of the world being near," Peery says.
"But if you can separate the individual companies and their performance from the overall economy, there are a lot of cash-rich companies that are making a lot of money that are sitting on this capital."
Peery is solidly in the bullish camp of investors, as he says a hypothetical 20% market pullback would "be a huge buying opportunity." But even he acknowledges the challenge investors face with the weak economic rebound.
"We're not in an environment where the economy is rip-roaring, so you're only getting incremental growth on the top line," he says. "The economic numbers haven't been all that great. If you don't have a job, the recession is still going on. But people are feeling more secure about spending and they're loosening the purse strings a little."
Peery says it will still be a stock pickers' market, and that investors have to look for high-quality companies selling at a discount. He says there are an abundance still out there, including Dell [ DELL 15.905 +0.315 (+2.02%) ] and, in particular, Chevron [ CVX 99.68 -1.32 (-1.31%) ].
"Chevron is making a truckload of money," Peery says. "What do you do with that $12 of earnings per share? You could increase your dividend, you could invest in infrastructure to make yourself more profitable, or you could do some M&A. We're seeing companies like Chevron that are yielding high."
Peery advises people to take a long-term approach, as it's still early in this bull market in his eyes.
"We could have a dip along the way and have continued growth, so I would look at any time the market comes down as potential buying opportunities," he says. "I still think valuations are relatively low."
Keith Goddard, Capital Advisors
Keith Goddard, president and CEO of Capital Advisors, says there are two important things that are making the climate more difficult for investors: the end of QE2 and the peaking of profit margins.
Based in Tulsa, Okla., with $900 million in assets under management, Goddard says that while investors will debate whether interest rates will rise or fall on the termination of the Fed's quantitative easing in June, there is no debating the market will transition from an environment of easy monetary policy to one of incremental tightening.
Secondly, Goddard argues that profit margins are peaking. "We're right up against records, and that series is mean-reverting. It's one of the most mean-reverting elements of capitalism," he says. "Profit margins will come down at some point. We think it's starting."
Rising interest rates are never good for stocks, and that coupled with idea that companies will begin negative earnings preannouncements in June is something that scares Goddard.
"The risk in your portfolio goes up because you'll have more stocks that don't make it through earnings season without a drop," he says.
"If you get both of those things beginning in June and July, it will make the second half of the year that much harder."
Goddard says his firm is getting more defensive, although he's not quite expecting a bear market yet. He is calling for "an old-fashioned earnings-based correction sometime in the next 30 to 60 days based on a resetting of expectations for lower corporate profits."
Capital Advisors is navigating the market by looking for stable earners that are high-quality companies with global diversification and solid balance sheets, Goddard says. He also looks to find companies that have a thin margin between analysts' estimates. If the spread is narrow, it's more likely that analysts have a good handle on the business and therefore the earnings estimates can be relied upon.
Some of these names are PepsiCo [ PEP 68.89 -0.08 (-0.12%) ], Procter & Gamble [ PG 65.50 +0.07 (+0.11%) ], Johnson & Johnson [ JNJ 66.05 -0.04 (-0.06%) ] and Wal-Mart [ WMT 53.76 +0.10 (+0.19%) ].
But Goddard says he also has very high conviction in Ford [ F 13.91 -0.10 (-0.71%) ] for a different reason altogether: analyst estimates are too low.
"Ford earned $1.91 a share when auto sales were below 12 million. Consensus estimates for 2011 and 2012 are around $2 a share, but we expect auto sales to hit 15 million by 2012," Goddard says.
"If we hit 15 million in auto sales, they're going to earn more than $2 a share. I'll eat my hat if they don't."
The wild card, though, is a third round of quantitative easing by the Fed, according to Goddard. He says that the market is already feeling its way through the dark with QE2, and that there comes a point where QE2 or QE3 ceases to be beneficial to asset prices.
"The Fed has been buying two-thirds of all Treasurys issued since November, so it is not logical to assume that rates will not react to that buyer walking away," Goddard says. "But it is debatable whether the markets will cheer QE3 or not. QE3, if it happens, will smell more like monetizing the national debt than inflating asset prices."
Even if there is a negative market reaction to QE2, that correction won't grow to 20%, Goddard says.
"There is too much on the sidelines that has been waiting for an entry point for two years. I don't think they'll wait for 20% to start buying. We saw a 7% pullback related to the Japan situation this spring, and the buyers came in."
Jeff Sica, Sica Wealth Management
A handful of investment managers say the market has been overvalued for some time and that the decline is just beginning.
Jeffrey Sica, president and chief investment officer of New Jersey-based SICA Wealth Management, is one of those investors. He is currently predicting a 15% to 20% decline by the end of the summer, as the economy doesn't support more gains.
Sica says the market is now dependent on added liquidity and the willingness of the Fed to further inflate stock prices. He says that even an artificial boost by another round of quantitative easing by the Fed won't fix the problem.
"If the economy should slip into trouble, there was a willingness to do a QE3," Sica says, referencing the recently released minutes from the last meeting of the Federal Open Market Committee. "The problem will be the inflation spring."
Sica, whose firm manages about $1 billion in assets, says the Fed is in a no-win situation. If the central bank raises interest rates, they risk slowing the economy. However, there is also an inflation factor.
When Sica sees GDP estimates at 1.8% for the first quarter, he says he begins worrying about stagflation — stagnant economic growth mixed with inflation, a combination that tends to destroy investments.
In order to invest during stagflation, investors must have no willingness to buy and hold. "We're bearish because we're seeing that these initiatives will have a negative impact on the overall economy, creating greater inflation which will cause increased interest rates," Sica says.
Sica is recommending that investors purchase gold, silver or other precious metals like platinum due to the lack of faith in currency and lack of faith in government to preserve the value of currencies.
"I certainly think we have another 25% up on gold. Silver could be in the mid-$40s," Sica says. "We're still buying it and we're going to continue to buy it."
Sica also contends that the bond bubble "is absolutely ready to burst. No matter what the Fed does, they can't initiate enough stimulus to stop interest rates from going up. So we think it is a good time to be ultra-defensive and to short the U.S. Treasury market as rates go up."
For that reason, Sica has been looking to the ProShares Short 7-10 Year Treasury ETF [ TBX 38.2832 +0.1132 (+0.30%) ], the ProShares UltraShort 20+ Year Treasury ETF [ TBT 33.56 +0.46 (+1.39%) ] and the ProShares UltraShort 3-7 Year Treasury ETF [ TBZ 37.50 +0.05 (+0.13%) ] to capitalize on the inevitable rise in interest rates.
For now, Sica says he plans to stick to this short-term trading style. "Things have to change a lot for me to go back to buy and hold. I think those days are over," he says.
"The economy, the deficit, the dollar, and the global view — a lot has to improve."
Kevin Mahn, Hennion & Walsh Asset Management
The stock market typically advances nine months before any true economic gains. Without sustainable economic growth, Kevin Mahn argues that this market recovery has rallied too high, too fast absent fundamentals.
"I have a great deal of reservation with respect to how we're going to continue to grow our economy in light of higher material costs, higher agricultural costs and higher energy costs on consumers that are already stressed," says Mahn from his Parsippany, New Jersey-based office.
Mahn argues that market bulls are overestimating the strength of the U.S. consumer as well as the ability and the willingness of the developed world to continue to provide financing for fiscally lead economic stimulus.
Consumer spending accounts for over two-thirds of economic growth in the U.S., and Mahn questions how willing is this U.S. consumer to continue to spend at the rate that we need to grow our economy.
"Inflation isn't here? Try and tell Mr. and Mrs. Smith, who are paying more for bread and milk and can't afford to fill up their gas tank more than once per month," Mahn says.
"That's real inflation that we need to concern ourselves with. Not to mention, there are still 400,000 new people who have filed for unemployment."
Looking at equities specifically, Mahn asserts that the rate of companies beating earnings expectations cannot continue at the current clip of roughly 70%, and he adds that forward-looking forecasts from many of these companies are not as promising.
"If you were just a pure large-cap-centric investor, you should brace yourself for some bumps in the road ahead," Mahn says. "That said, there are a tremendous amount of opportunities for individual investors if you look outside of the U.S. and you don't stay in large-cap stocks."
Mahn says he is looking at alternative asset classes, such as ETFs to play commodities and agriculture, REITs, and investments that stand to benefit from a rebuilding of Japan. Mahn says he still favors multinationals that pay strong, consistent dividends.
http://m.cnbc.com/us_news/43167897
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