Thursday, December 31, 2009

Outlook 2010

It is this time of the year again... Here is a summary of 2010 forecasts for the S&P500.

Targets for 2010 range from 1120 to 1350 with an average of 1239, up ca 10% from today's level.

As usual to be taken with a grain of salt though last year's bunch of strategists did okay with three of them pretty much on target.

Bloomberg has a similar summary here with the key data pasted below:

The following table presents estimates from strategists at
brokerages for where the S&P 500 will finish 2010 and the
implied percentage change from today’s close of 1,114.11.

Firm Strategist Estimate %Change
Bank of America David Bianco 1,275 14.4
Barclays Barry Knapp 1,120 0.5
Citigroup Tobias Levkovich 1,150 3.2
Credit Suisse Andrew Garthwaite 1,125 1.0
Deutsche Bank Binky Chadha 1,260 13.1
Goldman Sachs David Kostin 1,250 12.2
JPMorgan Thomas Lee 1,300 16.7
Oppenheimer Brian Belski 1,300 16.7
RBC Myles Zyblock 1,200 7.7
UBS Thomas Doerflinger 1,250 12.2
AVERAGE 1,223 9.8


Tuesday, December 29, 2009

A great map of the world

H/T Bill Easterly for the picture. Have my doubt about India's color though.

Chinese Savers

Here is a short summary of the reasons why Chinese are such great savers (ca50% of their income or 2.5tn USD per year). The author goes over Confucianism (Not it reading Chinese philosopher Mozi), the lack of safety nets, demography and finally their undervalued currency.

Monday, December 28, 2009

A lost decade?

Paul Krugman sums up the past decade "The Big Zero":

"It was a decade with basically zero job creation. O.K., the headline employment number for December 2009 will be slightly higher than that for December 1999, but only slightly. And private-sector employment has actually declined — the first decade on record in which that happened.

It was a decade with zero economic gains for the typical family. Actually, even at the height of the alleged “Bush boom,” in 2007, median household income adjusted for inflation was lower than it had been in 1999. And you know what happened next.

It was a decade of zero gains for homeowners, even if they bought early: right now housing prices, adjusted for inflation, are roughly back to where they were at the beginning of the decade. And for those who bought in the decade’s middle years — when all the serious people ridiculed warnings that housing prices made no sense, that we were in the middle of a gigantic bubble — well, I feel your pain. Almost a quarter of all mortgages in America, and 45 percent of mortgages in Florida, are underwater, with owners owing more than their houses are worth.

Last and least for most Americans — but a big deal for retirement accounts, not to mention the talking heads on financial TV — it was a decade of zero gains for stocks, even without taking inflation into account. Remember the excitement when the Dow first topped 10,000, and best-selling books like “Dow 36,000” predicted that the good times would just keep rolling? Well, that was back in 1999. Last week the market closed at 10,520."

Econbrowser explains why the decade was a lost one for stocks as well. Stocks entered the decade massively overvalued. This has now somewhat improved. Don't get too excited though. Looking at Prof Shiller's data when stocks have been more richly valued than now (PE10E of 20.3) stocks have delivered zero real returns a decade later on average.

Time to look forward to the new one!

Monetary Base

Greg Mankiw has reassuring comments on this scary chart:

He writes: "It is true that the monetary base is exploding. See the above graph. Normally, such surge in the monetary base would be inflationary. The textbook story is that an increase in the monetary base will increase bank lending, which will increase the broad monetary aggregates such as M2, which in the long run leads to inflation.

That is not happening right now, however. The broader monetary aggregates are not surging. Much of the base is instead being held as excess reserves.

But, you might ask, won't the inflationary logic eventually take hold as the economy recovers and banks start lending more freely? Not necessarily. Recall that the Fed now pays interest on reserves. As long as the interest rate on reserves is high enough, banks should be happy to hold onto those excess reserves. That should prevent a surge in the monetary base from being inflationary."

Tuesday, December 22, 2009

Real Estate Prices Not Yet Back to Trend

Home prices indices are reportedly dropping again after a shortlived rebound. (H/T CalculatedRisk)
The chart below looks at where home prices stand compared to a continuation of the trend from Jan 76 to Dec 99 (ex bubble years).

Prices are still well above the long term trend (ex bubble) and as the 90's episode illustrates prices have corrected below trend in the past. The rebound in prices might well have been short-lived. If prices stabilize at these level it would take a good 4 years for the trend to get there.

Monday, December 21, 2009

What Went Wrong

Great little wrap up on the crisis from Econbrowser. He highlights the US Treasury's recent proposal for reform of the financial system:
  • Introduce a legal mechanism whereby large financial institutions that are not commercial banks (such as AIG or Bear Stearns) can be liquidated in an orderly manner without bankruptcy or bailouts, analogous to the authority that the FDIC currently has to take over failing banks.
  • Subject the banklike functions of investment banks and structured investment vehicles (that is, the activity of borrowing short and lending long) to the same capital requirements as standard banking.
  • Require either mortgage originators or the mortgage securitizers to retain 5 percent of the product they create. I would take that idea a step farther, endorsing Princeton Professor Alan Blinder's proposal that originators and securitizers should each hold 5 percent.
  • Move the trading of financial derivatives like credit default swaps to centralized exchanges where they would be subject to a robust regime of regulation including conservative capital requirements, margins, and reporting requirements. To the Treasury's proposal, I would also recommend adding stop-loss provisions that regulators could use to limit the promises made and losses suffered by systemically important financial institutions as a result of their trading in financial derivative contracts.
  • Set guidelines for individual compensation systems at systemically important financial institutions in order to better align the personal rewards of traders with the interests of shareholders and the public."

Sunday, December 13, 2009

After the BRIC the BRINK

H/T Paul Kedrosky for pointing out to a new acronym via the WSJ. After the BRIC who defined oil demand in the past decade, the BRINK expected to define oil supply in the next one.
Brazil, Russia, Iraq, Nigeria and Kazakhstan: "Brazil has hosted a string of big discoveries, while Russia has defied expectations by overtaking Saudi Arabia's output. Kazakhstan is expanding three major projects, while a tentative peace is allowing Nigeria to start raising output.
The wild card is Iraq, where more licenses for foreign oil companies were awarded Friday. Contract terms encourage firms to maximize output quickly. Winners to date aim to boost output from five fields 12-fold to 8.5 million barrels per day."

Thursday, December 3, 2009

Pershing Square invests in Nestlé

Dealbook posts Pershing Square's latest quarterly comment in which they disclose their new investment in Nestlé. The stock seems to be the darling of famous investors. After Warren Buffett William A. Ackman has also become an investor. Their rationale can be read here. In Short Nestle, the world's largest food and beverage company has a great brand portfolio, it is gaining share in developped markets and growing in the high single to low teen in emerging markets. Pershing sees 1bn of annual cost cutting potential for the next few years and a 28bn cash bonanza if Nestle puts its Alcan shares to Novartis.

Peak in US Unemployment in 2011?

CalculatedRisk mentions Goldman Sachs' view:
The key features of our 2011 outlook: (1) a strengthening in growth from 2.1% on average in 2010 to 2.4% in 2011, with real GDP rising at an above-potential 3½% pace in late 2011; (2) a peaking in unemployment in mid-2011 at about 10¾%; (3) extremely low inflation – close to zero on a core basis during 2011; and (4) a continuation of the Fed’s (near) zero interest rate policy (ZIRP) throughout 2011.
The peak in unemployment is much later than suggested by CR's own look at housing starts and employment and also much later than what the Fed expects. As Paul Krugman reported here: "Well, the Fed expects unemployment to come down only very gradually — over 9 percent at the end of 2010, over 8 percent at the end of 2011, around 7 percent at the end of 2012. Inflation, meanwhile is expected to remain consistently below the Fed’s target."

Zirp could well last a while longer