Author Archive for: ‘Earl’

  • Weekly Financial Markets Update – July 27th

    Equity markets: The S&P 500 rose 1.7% on the week to close at its highest level since early May. Somewhat surprising given the weakness in the highest profile earnings of the week — Apple and Facebook. On Friday word came out that Europe is talking about new steps to fix their ailing financial system. These rumors have become commonplace but for whatever reason the markets bought this one, sending markets soaring.

    Bond markets: The European news was bad news for safe haven assets, with treasuries getting whacked hard. Because of Friday’s move the 10-year treasury yield finished the week at 1.54%, up 0.08% on the week.

    Currency markets: The dollar fell 1% on the week — the bulk of the move happened on Thursday, not Friday, as the head of the European Central Bank eased concern over Spain’s finances, which led to a euro rally and dollar selloff.

    Interbank markets: 12-month LIBOR was unchanged on the week at 1.06%.

    Summary and next week: This week was the epitome of how short-term investors are struggling this year. The two big earnings data points, Apple and Facebook, were weak. The first reading of Q2 GDP came in at 1.5%, in-line with expectations. Yet an unexpected European headline on a quiet summer Friday afternoon led to a market surge.

    Next week is a big data week, with the key ISM manufacturing survey as well as the July nonfarm payrolls report. After that it gets really quiet until Labor Day.


  • Weekly Financial Markets Update – July 20th

    Equity markets: The S&P 500 rose 0.4%, as markets rose early in the week on the back of better than expected earnings in the technology sector (Intel, IBM, eBay, Qualcomm), before falling back on Friday as Europe took its toll once again. On the economic side housing data continued to brighten, with housing starts hitting a 4-year high.

    Bond markets: The 10-year treasury yield fell 0.03% this week, from 1.49% to 1.46%. I plan on writing a post addressing why treasury yields remain so low in the near future.

    Currency markets: The dollar rose 0.3% on the week, as euro weakness persists — since the start of May the euro has fallen from $1.32 to $1.22.

    Interbank markets: 12-month LIBOR was essentially unchanged on the week at 1.06%.

    Next week: The highlights of next week are earnings from two of the most widely-followed companies around — Apple and Facebook — as well as the first reading of second quarter GDP. And there’s this little athletic competition starting in London.


  • Weekly Financial Markets Update – July 13th

    Equity markets: The S&P 500 rose 0.2% on the week. As we begin second quarter earnings season, attention is shifting from European headlines to the performance of US companies. On Tuesday markets fell as Cummins, a diesel engine manufacturer and bellweather of the industrial economy, issued a profit warning. Friday, markets surged as JP Morgan and Wells Fargo reported earnings, with markets reassured that core performance was okay and the JP Morgan “London Whale” trading loss was behind it. Next week starts the heavy part of earnings season, with companies like Intel, Microsoft, Google, and IBM all reporting.

    Bond markets: The 10-year treasury yield fell 0.02% this week, from 1.51% to 1.49%. These low yields seem crazy, but as yields in core European countries continue to fall (Germany 10-year yields fell from 1.32% to 1.26% this week, French yields from 2.43% to 2.23%), US yields look relatively more attractive as a safe haven play.

    Currency markets: The dollar was flat on the week, seesawing with the equity markets.

    Interbank markets: 12-month LIBOR was unchanged on the week at 1.07% (insert Barclays joke).

    Next week: In addition to a full week of earnings, the economic calendar picks up. We get the Empire State Manufacturing survey on Monday, Industrial Production on Tuesday, Housing Starts on Wednesday, and Existing Home Sales and the Philadelphia Fed Manufacturing survey on Thursday. Gear up — the next three weeks basically concludes the working portion of Wall Street’s summer. After earnings season, Q2 GDP released at the end of the month, and the ISM Manufacturing and Non-farm Payrolls releases the first week of August, it’s a ghost town in my world until Labor Day.


  • Weekly Financial Markets Update – June 22nd

    Equity markets: The S&P 500 fell 0.6% on the week. Initial relief over the status quo New Democracy party winning in Greece and optimism about a fresh round of stimulus from the Federal Reserve lifted stocks early in the week. However, when the Fed meeting on Wednesday led to little more than an extension of “Operation Twist” — the Fed working to keep interest rates low by swapping some short-term treasuries for longer-term treasuries — sentiment became more negative.

    Rumors that Moody’s would lower the credit rating of many large banks along with a weaker than expected Philadelphia Fed manufacturing survey, combined with a bearish trading call from Goldman Sachs, knocked stocks down on Thursday, from which they bounced back somewhat on Friday.

    Bond markets: The 10-year treasury yield rose 0.03% this week, from 1.64% to 1.67%. 10-year German bond yields rose 0.14% this week, from 1.44% to 1.58%. The “fear bid” in US and German government bonds was so intense in May and the early part of June that some of this impact is still being unwound. For the time being the intensity of the European crisis has diminished, though all parties agree that no long-term solution is on the near-term horizon.

    Currency markets: The dollar rose 0.8% on the week. The Federal Reserve’s extension of Operation Twist was less than the market expected, giving the dollar a bid, and Thursday’s pummeling of equities along with fears over US bank ratings led to a flight to the greenback.

    Interbank markets: 12-month LIBOR was unchanged on the week at 1.07%.

    Next week: Summer has begun, which generally means less liquidity and the potential for more volatility if news breaks while investors are away from their desks on the beach. As mentioned last week, the news flow should be quiet, with the highlights of the US economic calendar being new home sales on Monday, consumer confidence on Tuesday, another revision of Q1 GDP on Thursday, and the Chicago purchasing manufacturers index on Friday.

    It’s also the last week of the month and the quarter, so there could be some position squaring going on. The following month will be busy as Q2 earnings season kicks off and concern about how much the slowdowns in Europe, China, and the US have impacted corporate profits, so this should be a great week to get some rest before the real fun begins.

    – Earl

  • Financial Markets Update – June 15, 2012

    If Greece leaves the EU

    Equity markets: The S&P 500 rose 1.3% on the week. US economic data, such as it was (jobless claims on Thursday, Empire Manufacturing on Friday), was weak, yet there was renewed optimism on the Greek elections scheduled for Sunday. Additionally, the fear surrounding the disappointing Facebook IPO has finally lifted, with Facebook up 10.7% on the week, and Zynga rose over 10% on Friday.

    Bond markets: The 10-year treasury yield fell 0.06% this week, from 1.64% to 1.58%. 10-year German bond yields rose 0.11%, from 1.32% to 1.43%. As mentioned, here in the US the economic data was disappointing, there were several sovereign rating downgrades in Europe pushing people into treasuries, and lingering uncertainty heading into the Greek elections. The move in German yields is indicative of a short-term improvement in European sentiment.

    Currency markets: The dollar fell a little over 1% on the week, as improving European sentiment and rumors that the G-20 would step in with a big liquidity package if the Greek elections go poorly gave a lift to the euro which hurt the dollar.

    Interbank markets: 12-month LIBOR was unchanged on the week at 1.07%.

    Next week: Monday morning will be all about the reaction to the Greek elections. Markets want the pro-euro New Democracy party to win a decisive victory and look like they can form a governing coalition, so that they can work with European officials to keep the money flowing towards Greece as they continue to enact painful reforms. Should the nationalist SYRIZA party win, there will be concern of a disorderly exit of Greece from the Eurozone, in which case the question will be how much Germany and the ECB are willing to step in to provide liquidity should that scenario unfold.

    The US has a busy week as well, with several housing data points — the NAHB housing market index on Monday, housing starts and building permits on Tuesday, and existing home sales on Thursday. Additionally, the Federal Reserve meets on Wednesday, with everyone focused on if another round of policy easing is in the cards. The following week should be pretty quiet, so next week is when we should get all the action before the end of the month.

  • Weekly Financial Market Update: June 4-8

    APJ is pleased to announce a new weekly article!

    Every Friday, our financial markets expert will be posting on the latest market trends from the past 5 days. If there are any metrics or maret trends you wish to hear about, please let us know in the comments!

    This week’s update:

    Equity markets: The S&P 500 rose 3.7% on the week. There wasn’t any great catalyst for the move. Optimism grew that the Federal Reserve will do another round of quantitative easing if financial conditions worsen. China cut interest rates this week, leading people to think they could begin a new round of stimulus programs. More importantly, after a nearly 10% market decline since the beginning of April, it looks like the selloff from the weak May payrolls report may have finally shaken out enough investors to lead to at least a short-term bottom. We’re now in the stock market’s summer period following Memorial Day, and news flow will be light until the economic data at the beginning of July and Q2 earnings season starting in the middle of July, so any major developments out of Europe may have even more of an impact than normal.

    Bond markets: The 10-year treasury yield rose 0.19% this week, from 1.45% to 1.64%. Again, this was driven by a reduction in fear given the stock market rally, positive developments from the Federal Reserve and China, and a lack of bad European headlines.

    Currency markets: The dollar was little changed on the week, falling about 0.4%. Over the past few years stock market rallies have coincided with dollar selloffs and vice versa, so this is the most logical explanation.

    Interbank markets: 12-month LIBOR was unchanged on the week at 1.07%.

    Next week: News flow will be quiet until Friday, when May industrial production and the Empire Manufacturing reports will be released. Additionally, with Euro 2012 underway (June 8th – July 1st), it’s possible that Europeans will be too distracted to try to crush the US economy over the next few weeks. All in all it should be pretty quiet until the elections in Greece on June 17th.

    – The Earl

  • Real Estate Thoughts From a Stock Market Guy

    Financially, the next 18 months are the best time to buy a house that any of us will see in our lifetimes. Price to rent ratios are back to levels we haven’t seen since the 1990’s, and that’s before factoring in record-low mortgage rates.

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    But that doesn’t mean it’s the best place for your money. Let me explain. 

    I don’t have a real estate background. I’ve never bought a piece of property in my life. My experience is in the financial markets, where there are no bad assets, only bad prices, and every asset is just a different piece of the global capital structure, and it’s my job to figure out where the best place to be is.


    Sometimes that means US treasuries. Sometimes it’s investment grade or corporate bonds. Sometimes foreign bonds. Sometimes US stocks. Sometimes foreign stocks. You get the idea. The relative attractiveness of all of them depends on the safety of cash flows, their growth prospects, how much you’ll have to pay for them, and in the case of foreign assets, your view on currency movements and political stability (sorry, Europeans).


    Right now, with core inflation in the US running at 2.3%, and 10-year treasury notes yielding less than 2%, that means if I buy treasuries I’m locking in a negative real return. And that’s something I’d rather not do. Corporate bonds, with low risk free rates and plenty of liquidity sloshing around, aren’t a whole lot better. Equities, on the other hand, are interesting.


    Baby Boomers have had their nest eggs rocked over the past 15 years between the dot com bust and the 2008 financial crisis, and despite the 100% rally in the markets since early 2009 we continue to see net selling of US equities on the part of ordinary investors nearly every week. That’s created opportunity for those with a stomach for volatility and a long-term time horizon.


    Take a stock like Wal-Mart. Yeah, it’s boring. But despite the bear market we’ve been in for a decade or so, Wal-Mart earnings per share have risen from $1.47 in 2001 to $4.52 last year, an increase of over 200%. That’s not so boring. Will a company with revenues of nearly half a trillion (with a T) dollars a year in revenue grow as quickly going forward as it has in the past? Unlikely. But the company should continue to grow at around the same rate as the US economy, plus they’re expanding overseas. And the price for those cash flows is compelling — as of May 1st it was trading at $59.07 per share, for a price to earnings ratio of 13, or, if you’re a real estate guy, think of it as a cap rate of 7.65%. Okay, so not all the earnings are paid out to shareholders, but a large chunk of them go towards the dividend and buying back the stock, and in theory the rest is going towards growing the business so that cash flows will be even higher down the road.


    In the past 5 years, which hasn’t been the greatest of times for anyone, Wal-Mart earnings per share have risen over 10% per year. Let’s say growth slows going forward, and over the next 10 years averages more like 7% per annum. That means that 10 years from now Wal-Mart would be earning around $9/share. And along the way as an investor I’d be collecting dividend checks, currently $1.60/share per year for a yield of 2.7%, and probably growing at a rate of 5-10% per year if not more.


    So by buying today and holding for 10 years I’m collecting 2.7% per year at today’s prices and 10 years from now own an asset making $9/share per year. And who knows, maybe a decade from now people are feeling good about stocks again and Wal-Mart gets a P/E multiple of more like 15, for a price per share of $135, or a pre-tax return of 130%. Can your property put up that kind of return over the next decade? And remember, in the stock market there are no closing costs, no contracts to sign, no open houses, no leaky roofs to fix, and you can sell tomorrow if you change your mind.


    As a property owner looking to sell, you’re not just competing with other owners or developers, you’re competing with Wal-Mart for my hard-earned capital. You’re competing with General Motors bonds, Greek bonds, and even Facebook stock. The residential side is a bit of a different story because we all need a roof over our heads, but on the commercial side I don’t care if you’re talking about the Empire State Building or Bank of America Plaza — if I don’t think I can make as much money buying your building as I think I can owning a little slice of Bentonville, then either your asking price is too high, or you’re out of luck.


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