capital market 1st quarter 2010
TRANSCRIPT
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Gene Pospicil, CFP®
111 Green Street Huntsville, AL. [email protected]
Securities offered throughRaymond James Financial Services, Inc.,member FINRA/SIPC.
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Material prepared by Raymond James for use by its advisors.
Capital Markets Review
Q1 2010Reviewing the quarter ended December 31, 2009
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Economic ReviewGross Domestic ProductEmploymentConsumer ConfidenceInflation Key Interest RatesHousing Market
CAPITAL MARKETS REVIEW Capital MarketsIndex ReturnsAsset Class Returns Money Market Fund BalancesS&P 500 Sector ReturnsEquity StylesU.S. TreasuriesFixed Income YieldsMBS/Treasury SpreadsPrice-Earnings RatioForeign Exchange RatesCommodity Prices
Expert CommentaryChief Economist Dr. Scott J. BrownChief Investment Strategist Jeff Saut
Disclosure
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GROSS DOMESTIC PRODUCT Quarterly Change in GDP (Annualized)
Signaling a possible recovery, change in real GDP was positive for the first time since Q2 2008.
Source: FactSet, as of 9/30/09
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EMPLOYMENT
As expected, unemployment remains high, but job losses are falling, indicating the worst may be over.
Source: FactSet and Bureau of Labor Statistics, as of 12/31/09
Civilian Unemployment Rate Monthly Payrolls Changes
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CONSUMER CONFIDENCE
Consumer confidence is higher for the year, and retail sales showed slight growth year-over-year.
Source: FactSet, as of 12/31/09 Source: FactSet, as of 11/30/09
Consumer Confidence Retail Sales
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INFLATION Change in Consumer Price Index
No signals have emerged indicating near-term inflationary pressure.
Source: FactSet, as of 11/30/09
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KEY INTEREST RATES
Key interest rates remain very low, but a shift in Fed policy in 2010 cannot be ruled out.
Source: FactSet and Federal Reserve, as of 12/31/09
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HOUSING MARKET
Through October, housing prices rose for the fifth straight month on a national level.
Top 5 Housing Markets
Quarterly %Change*
North Dakota 42.3%Rhode Island 26.5%Pennsylvania 25.6%District of Columbia 21.1%Oregon 20.5%
*Seasonally Adjusted Sales (Annual Rate, Q209 vs. Q309)
Source: Standard & Poor’s, as of 10/31/09
Home Prices
Bottom 5 Housing Markets
Quarterly %Change*
Minnesota -15.7%Alaska -7.8%Nevada -2.0%Idaho -1.5%Arizona -0.5%
Largest States by Population
Quarterly % Change*
California 10.2%Texas 9.8%New York 8.2%Florida 7.9%Illinois 17.5%
Source: National Associationof Realtors, as of 11/30/2009
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INDEX RETURNS Growth of a Dollar
Source: Callan, as of 12/31/09. Investors cannot invest directly in an index. Past performance is not indicative of future results. See asset class benchmarks on slide 28.
YTD 1-Year 3-Year 5-Year 10-YearU.S. Equity 27.61 27.61 -5.6 0.65 -0.26
Non-U.S. Equity 34.39 34.39 -4.85 4.56 2.04
Fixed Income 5.93 5.93 6.04 4.97 6.33Real Estate 38.25 38.25 -12.39 2.00 9.21
Cash and Equivalents 0.18 0.18 2.22 2.88 2.84Alternatives: Commodities 18.91 18.91 -3.83 1.96 7.13
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ASSET CLASS RETURNS
Underperforming asset classes in 2008, such as Real Estate and Non-U.S. Equity, showed leadership in 2009.
Source: Callan, as of 12/31/09. Annual Returns for Key Asset Classes (2000-2009). See asset class benchmarks listed on slide 28.
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MONEY MARKET FUND BALANCES Institutional vs. Retail
Cash continues multi-month trend of leaving money market funds as investors move back into other assets.
Source: Federal Reserve, as of 11/1/09
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ASSET CLASS RETURNS
Source: Russell, Barclays Capital, Dow Jones, JP Morgan, Callan and Associates. Past performance is not indicative of future results.
In 2009, risky classes, such as emerging markets and high-yield credit, were top performers.
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S&P 500 SECTOR RETURNS
Source: Callan. Returns are based on the GICS Classification model. Returns are cumulative total return for stated period, including reinvestment of dividends. Past performance is not indicative of future results.
IT led the quarter and the year; only financials lost money in Q4.
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EQUITY STYLES
12 Months ending 12/31/09Q409
Style box returns based on the GICS Classification model. All values are cumulative total return for stated period including reinvestment of dividends. The Indices used from left to right, top to bottom are: Russell 1000 Value Index, Russell 1000 Index, Russell 1000 Growth Index, Russell Mid-cap Value Index, Russell Mid-cap Blend Index, Russell Mid-cap Growth Index, Russell 2000 Value Index, Russell 2000 Index and Russell 2000 Growth Index. Past performance is not indicative of future results.
Growth led value in 2009, and mid-caps were the best performing segment.
4.2% 6.1% 7.9%
5.2% 5.9% 6.7%
3.6% 3.9% 4.1%
Large
Mid
Small
Value Blend Growth
19.7% 28.4% 37.2%
34.2% 40.5% 46.3%
20.6% 27.2% 34.5%
Large
Mid
Small
Value Blend Growth
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U. S. TREASURIES
A dramatically steepening Treasury yield curve from a year ago should encourage investors to evaluate their fixed income holdings going into 2010.
Source: U.S. Treasury, as of 12/31/09 Source: FactSet, as of 12/31/09
Treasury Yield Curve 2YR/10YR Treasury Spreads
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FIXED INCOME YIELDS
Credit yields continue to fall with high investor demand as Treasury yields rise, contributing to tighter spreads.
Source: FactSet and Barclays Capital, as of 12/31/09
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MBS/TREASURY SPREADS
Government intervention pushed MBS spreads to their lowest levels ever in Q3.
Source: Barclays Capital, as of 12/31/09
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PRICE-EARNINGS RATIO S&P 500
P-E ratios continue to increase since the market lows of 2008/2009.
Source: Standard and Poor’s, as of 12/31/09
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FOREIGN EXCHANGE RATES Exchange Value of the U.S. Dollar
The U.S. dollar made gains in Q4 in a reversal from a dollar selloff during most of 2009.
Source: Federal Reserve, as of 12/31/09
Source: FactSet as of 12/31/09 12/31/08 12/31/09Japanese Yen (¥) / U.S. Dollar ($) 91.28 93.10
Euro (€) / U.S. Dollar ($) 0.72 0.70
British Pound (£) / U.S. Dollar ($) 0.67 0.62
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COMMODITY PRICES
Gold and oil prices rose in Q4 and 2009, with oil tied to expectations of economic growth.
Source: FactSet, as of 12/31/09
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ECONOMIC COMMENTARY
Published January 5, 2010
Recent data continue to suggest that the U.S. economy is in a gradual recovery. Inflation-adjusted GDP is likely to have advanced at more than a 4% annual rate in 4Q09, although much of that is inventories (inventories do not have to rise to add to GDP growth in 4Q09, they only have to fall at a slower rate). Excluding inventories, growth appears to have been relatively lackluster (positive, but not strong). GDP growth for 2010 is expected to be about 3% to 3.5% (4Q10-over-4Q09), which would be good growth in normal times, but would be a disappointment given the magnitude of the recent downturn (we need to see GDP growth of 4% to 5% or more for a number of years to put much of a dent in the unemployment rate). Most data suggest a moderate economic expansion in the first half of 2010, but the second-half outlook is somewhat cautious, especially heading into 2011.
The job market was especially weak in 2009, but the pace of job losses slowed over the course of the year and particularly in the fourth quarter. New hiring has not picked up much, but should build in the near term. Hiring for the 2010 census will add some support for the labor market in the first half of the year, which could help boost consumer and business sentiment – but these jobs will be shed in the second half of the year. Given the outlook for moderate economic growth, little improvement in the unemployment rate is seen for this year.
By Chief Economist Dr. Scott J. Brown
Chief Economist Scott Brown, Ph.D., joined the Raymond James Equity Research Department in July 1995 following two years as an economist in the firm's Fixed Income Research Department. Earlier, he was manager of economic research at Pacific First Bank in Seattle, director of economic research at San Diego-based First Imperial Advisor, and an economist with San Diego Gas & Electric Company.He earned his doctorate in economics in March 1986 from the University of California, San Diego, where he studied time series analysis and forecasting under Nobel Laureates Robert F. Engle and Clive W.J. Granger. He also holds a Master of Science in statistics from the University of Illinois.He has served on the Economic Advisory Committee of the American Bankers Association and is a member of the Bond Market Association's Economic Advisory Committee and the Governor's Council of Economic Advisors for the state of Florida.
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ECONOMIC COMMENTARY (continued)
By Chief Economist Dr. Scott J. Brown
The fiscal stimulus has provided important support for the economy in the last few quarters. However, the stimulus will be ramping down in the second half of the year and into 2011 – effectively acting like a drag on GDP growth. Ideally, the private-sector economy will continue to improve, offsetting the decrease in government stimulus. The Bush tax cuts are scheduled to sunset at the end of this year. Raising taxes in a fragile economic recovery is not a good idea, and we are likely to see some efforts to ease the transition, such as an extension of some of these tax cuts. However, concerns about the size of the federal budget deficit and political bickering could lead to an end for most of the Bush tax cuts, which would act as a drag on GDP growth into early 2011.
Fed Chairman Ben Bernanke is an expert on the Great Depression, and is well aware of the danger of removing policy stimulus too soon. The Federal Open Market Committee has indicated that economic conditions are likely to warrant exceptionally low levels of the federal funds rate “for an extended period,” which we interpret as meaning into the second half of the year. The Fed’s policy outlook is conditioned on an elevated unemployment rate, low core inflation and well-anchored inflation expectations. The unemployment rate is likely to remain high and core inflation should remain low in 2010, allowing the Fed to stay on hold through most of the year and probably into the early part of 2011.
Long-term interest rates normally creep higher in an economic recovery, but we are likely to see some back and forth along the way. The dollar will get some support when the Fed begins to raise rates, but that’s not likely to happen anytime soon.
There is no assurance any of the trends mentioned will continue in the future.
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INVESTMENT STRATEGY
By Chief Investment Strategist Jeff Saut
Chief Investment Strategist Jeffrey Saut joined Raymond James in September 1999, as managing director of research. Earlier, he held at the same position at Roney & Co., later acquired by Raymond James. Prior to his tenure at Roney, he served as managing director of equity capital markets at Sterne, Agee & Leech, Inc. In 1973, Saut joined E.F. Hutton, and subsequently worked as a securities analyst for Wheat First Securities as well as Branch Cabell, where he also served as director of research and portfolio manager for the firm’s affiliate, Exeter Capital Management. As director of research, he built the research and institutional sales departments for the regional brokerage firm Ferris, Baker, Watts, Inc.Jeff appears frequently on Wall Street Week, CNBC, Bloomberg TV, USA Networks, Fox TV, NPR, and other electronic and print media outlets.
Published January 5, 2010
Charles Dickens’ classic novel A Tale of Two Cities begins with the quote, “It was the best of times, it was the worst of times.” That quote is certainly reflective of the stock market in the year gone by as 2009 should go down in the books with that moniker. To be sure, 1Q09 was ugly with the S&P 500 surrendering nearly 30%. From those March “lows,” however, the SPX has gained some 69%. For those who targeted the “lows,” it has been a great year. For those who didn’t, it has truly been “the worst of times,” for after losing ~58% in the SPX from the intra-day highs of October 2007 into the intra-day lows of March 2009, they have not come close to recouping the monies lost in that downdraft. The lesson that should have been gleaned is that if participants would have managed the risk (read: not allow positions to go too far against them before taking some kind of action; i.e., hedge, sell, etc.), they would have missed much of the SPX’s 2008/2009 downside debacle and in turn done pretty well over the past two years. As often referenced in these missives, investors need to manage the risk, for as Benjamin Graham espoused in his book The Intelligent Investor, “The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept.”
Investors should keep that quote on their walls so they don’t forget the major lesson of 2008/2009. Yet, there are other lessons to be remembered. To that point,
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Merrill Lynch lost two of its best and brightest in 2009 as Richard Bernstein and David Rosenberg left for less constrainedenvironments. During their final weeks at Merrill, they wrote about lessons they have learned. To wit:
Richard Bernstein’s Lessons
1. Income is as important as are capital gains. Because most investors ignore income opportunities, income may be more important than are capital gains.
2. Most stock market indicators have never actually been tested. Most don’t work.
3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.
4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.
5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.
6. Balance sheets are generally more important than are income or cash flow statements.
7. Investors should focus strongly on GAAP accounting, and should pay little attention to “pro forma” or “unaudited” financial statements.
8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.
9. Investors should research financial history as much as possible.
10. Leverage gives the illusion of wealth. Saving is wealth.
By Chief Investment Strategist Jeff Saut
INVESTMENT STRATEGY (continued)
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David Rosenberg’s Lessons
1. In order for an economic forecast to be relevant, it must be combined with a market call.
2. Never be a slave to the data – they are no substitutes for astute observation of the big picture.
3. The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom.
4. Fall in love with your partner, not your forecast.
5. No two cycles are ever the same.
6. Never hide behind your model.
7. Always seek out corroborating evidence.
8. Have respect for what the markets are telling you.
There was another sage that left Merrill Lynch, but that was 18 years ago. At the time, Bob Farrell was considered thebest strategist on Wall Street, and while he still pens a stock market letter, his “lessons learned,” written back then, are astimeless today as they were in 1992.
1. Markets tend to return to the mean over time.
2. Excesses in one direction will lead to an opposite excess in the other direction.
3. There are no new eras – excesses are never permanent.
4. Exponential rising and falling markets usually go further than you think.
5. The public buys the most at the top and the least at the bottom.
By Chief Investment Strategist Jeff Saut
INVESTMENT STRATEGY (continued)
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6. Fear and greed are stronger than long-term resolve.
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chips.
8. Bear markets have three stages.
9. When all the experts and forecasts agree – something else is going to happen.
10. Bull markets are more fun than bear markets.
With these lessons in mind, we wish you good investing in the new year.
By Chief Investment Strategist Jeff Saut
INVESTMENT STRATEGY (continued)
As we enter the new year, we are once again turning cautious because the Treasury market is breaking down (higher rates) and the U.S. dollar is rallying. Therefore, we think it prudent to “bank” some trading profits and hedge some investment positions as we approach the new year. Moreover, one of the lessons we have learned is that the beginning of a new year is often punctuated with head fakes, both on the upside as well as the downside. One of the greatest upside head fakes was in January 1973 when in the first two weeks of that year the DJIA rallied to a new all-time high of 1051.70 before sliding ~20%. While we are clearly not predicting that, what we have indeed experienced since the March “lows” is the second greatest percentage rally (69%), adjusted for time (nine months), since the 1933 rally. Following that 1933 explosion of 116% in just five months came a pretty decent downside correction. Since we tend to be “odds players,” prudence suggests some short-term caution is warranted even though we continue to think on a longer-term basis the S&P 500 trades into the 1200 to 1250 zone.
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DISCLOSURE
Data provided by Raymond James Asset Management Services.
This material is for informational purposes only and should not be used or construed as a recommendation regarding any security outside of a managed account.
There is no assurance that any investment strategy will be successful or that any securities transaction, holdings, sectors or allocations discussed will be profitable. It should not be assumed that any investment recommendation or decisions made in the future will be profitable or will equal any investment performance discussed herein.
Please note that all indices are unmanaged and investors cannot invest directly in an index. An investor who purchases an investment product that attempts to mimic the performance of an index will incur expenses that would reduce returns. Past performance is not indicative of future results.
Fixed income securities are subject to interest rate risk. Generally, when interest rates rise, bond prices fall, and vice versa. Specific-sector investing can be subject to different and greater risks than more diversified investments.
The Consumer Price Index (CPI) is a measure of inflation.
Gross Domestic Product (GDP) is the annual total market value of all final goods and services produced domestically by the United States.
Investing in small-cap and mid-cap stocks generally involves greater risks, and, therefore, may not be appropriate for every investor. International investing also involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility.
High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer’s credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of your portfolio. Commodities trading is generally considered speculative because of the significant potential for investment loss.
U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.
Fixed Income Sectors: Returns based on the four sectors of Lehman Global Sector Classification Scheme: Securitized (consisting of U.S. MBS Index, the ERISA-Eligible CMBS Index and the fixed-rate ABS Index), Government Related (consisting of U.S. Agencies and non-corporate debts with four sub sectors: Agencies, Local Authorities, Sovereign and Supranational), Corporate (dollar-denominated debt from U.S. and non-U.S. industrial, utility, and financial institutions issuers), and Treasuries (includes public obligations of the U.S. Treasury that have remaining maturities of one year or more).
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INDEX DESCRIPTIONS
Asset class and reference benchmarks:
The Dow Jones AIG Commodity Index: Composed of futures contracts on 19 physical commodities traded on U.S. Exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange. The index serves as a diversified and highly liquid benchmark for the commodity futures market.
The Dow Jones-UBS Commodity IndexesSM: Composed of exchange-traded commodity futures contracts rather than physical commodities.
Barclays Capital Aggregate Index: Measures changes in the fixed-rate debt issues rated investment grade or higher by Moody’s Investors Service, Standard & Poor’s, or Fitch Investor’s Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices.
Barclays Capital U.S. Aggregate Index: Represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
BC Global Aggregate ex-U.S. Dollar Bond Index: Tracks an international basket of bonds that currently contains 65% government, 14% corporate, 13% agency, and 8% mortgage-related bonds.
BC High Yield: Covers the universe of fixed-rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC-registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures and 144-As are also included.
Citigroup 3-Month T-Bill Index: This is an unmanaged index of three-month Treasury bills.
FTSE EPRA/NAREIT Global Real Estate Index Series: Designed to represent general trends in eligible listed real estate stocks worldwide. Relevant real estate activities are defined as the ownership, trading and development of income producing real estate.
MSCI All Country World Index Ex-U.S.: A market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. It includes both developed and emerging markets.
Asset Class Benchmark Used
Cash and Cash Equivalents Citi 3-month T-Bill
Fixed Income BC Aggregate
U.S. Equity Russell 3000
Non-U.S. Equity MSCI World, Ex-U.S.
Real Estate FTSE EPRA NAREIT Global Real Estate
Alternatives: Commodities DJ UBS Commodity Index
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INDEX DESCRIPTIONS (continued)
MSCI EAFE (Europe, Australasia, Far East): A free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. The EAFE consists of the country indices of 21 developed nations.
MSCI EAFE Growth: Represents approximately 50% of the free-float adjusted market capitalization of the MSCI EAFE index, and consists of those securities classified by MSCI as most representing the growth style.
MSCI EAFE U.S. Dollar: An unmanaged capitalization-weighted index of companies representing the stock markets of Europe, Australasia and the Far East.
MSCI EAFE Value: Represents approximately 50% of the free-float adjusted market capitalization of the MSCI EAFE index, and consists of those securities classified by MSCI as most representing the value style.
MSCI Emerging Markets: Designed to measure equity market performance in 25 emerging market indexes. The three largest industries are materials, energy and banks.
MSCI Local Currency: A special currency perspective that approximates the return of an index as if there were no currency valuation changes from one day to the next.
Russell 1000: Measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 90% of the investible U.S. equity market.
Russell 1000 Value Index: Measures the performance of those Russell 1000 companies with higher price-to-book ratios and lower forecasted growth values.
Russell 1000 Growth Index: Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell Mid-cap: Measures the performance of the 800 smallest companies of the Russell 1000 Index, which represent approximately 30% of the total market capitalization of the Russell 1000 Index.
Russell Mid-cap Value Index: Measures the performance of those Russell Mid-cap companies with lower price-to-book ratios and lower forecasted growth values.
Russell Mid-cap Growth Index: Measures the performance of those Russell Mid-cap companies with higher price-to-book ratios and higher forecasted growth values.
Russell 2000: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell 2000 Value Index: Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
Russell 2000 Growth Index: Measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 3000® Index: measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
Standard & Poor’s 500 (S&P 500): Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. Represents approximately 68% of the investable U.S. equity market.
© 2010 Raymond James & Associates, Inc. member New York Stock Exchange/SIPC© 2010 Raymond James Financial Services, Inc. member FINRA/SIPC 09-BDMKT-0057 1/10
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Gene PospicilCo-Branch Manager
256-705-0300Toll-Free: 866-765-0300
Stephanie MadaySenior Operations Manager
256-705-0300Toll-Free: 866-765-0300
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256-705-0300Toll-Free: 866-765-0300
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