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Collecting Relics from the Recession
October 07, 2009
Everyone has his own story to tell about the impact of the Great Recession, and the Museum of American Finance wants to use the power of social media to catalog them all.
The museum has set up Recessipedia, a Wikipedia-like site that allows users to write about how the financial crisis and global recession has affected them.
The idea is to gather stories and piece together a comprehensive view of the recession, much in the same way that a natural history museum would collect bones and pottery shards to flesh out the history of a bygone civilization.
One of the first Recessipedia contributors, NINJA Dad (the acronym means No Income, No Job or Assets), wrote about his daughter, an unemployed recent college grad who in 2006 bought a $250,000 house with a no-money-down subprime mortgage.
“She hasn't defaulted ... yet ... but periodically she calls crying her eyes out,” wrote NINJA Dad, who identified himself as a finance executive. “If she defaults, I wonder if she will ever be able to obtain a mortgage again, although her only mistake was to believe the hype about housing prices always going up.”
It’s hard not to feel bad for an individual caught in this situation, but this testimonial sheds some light on irresponsible borrowing decisions that helped inflate the real-estate bubble. Not all of the blame can be heaped onto the lenders. NINJA Dad himself wondered why his jobless daughter didn’t rent instead.
There was also excessive borrowing against home equity that saddled homeowners with crushing amounts of debt when home prices dropped. A University of Chicago study estimates that homeowners borrowed up to 30 cents for every dollar increase in home values during the peak bubble years.
Recessipedia provides an outlet for people to write about their personal experiences, and more stories like NINJA Dad’s may lead to a more inclusive view of what led up to the recession and why it has been so severe.
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History’s Greatest Money Printer
September 30, 2009
This analysis from Dr. Marc Faber is adapted from our exclusive webcast Global Investing Outlook, which originally aired in early September. Dr. Faber, based in Hong Kong, is a prominent international investor and a member of the influential Barron’s Roundtable.
I would argue that the weaker the economy is, the more fiscal stimulus will be applied and the more money printing will take place under Fed Chairman Mr. Bernanke, who is history’s greatest money printer.
As a government, you can print money, increase your debt and put everything on the government’s balance sheet, but it is unlikely to help the typical household in the United States. It may help Wall Street and it may help some asset markets, but not the American standard of living.
If money printing would make countries rich, Zimbabwe would be the richest country in the world.
If you pursue a monetary policy aimed at driving down and keeping interest rates at zero and pushing people into assets, then you can essentially have a weak dollar but have stocks catch up and compensate for that weak dollar.
Going forward, I think there’s a chance that equity prices around the world continue to rally and could rally quite substantially if the dollar is weak. In addition, the more money Mr. Bernanke prints, the more oil and other commodities like precious metals will go up.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Small Stocks Driving the Market
September 28, 2009
This article is adapted from the latest edition of U.S. Global Investors’ Weekly Investor Alert, published each Friday and distributed free to subscribers. Click here to view the entire Investor Alert.
The stock market has been on a tear since bottoming out in early March 2009, with the strongest performance being seen in small-cap stocks.
The Nasdaq, heavy with small-cap companies, was up 65 percent through last Friday’s close from the March 9 low, while the large-cap-loaded S&P 500 Index and Dow Jones Industrial Average had gained 54 percent and 47 percent, respectively, over the same period.
The two charts from RBC Capital Markets below drill down deeper into the inverse relationship between market cap and performance over the past six and a half months.
Figure 1 ranks the performance by capitalization benchmark from the March low through the market close on September 23. Leading the way is the Russell Microcap Index (2,000 small-company stocks with a median market cap of $134 million as of August 31, 2009), which had gained 88 percent. Second is the Russell 2000 Index (median market cap $357 million), up 79 percent.
By comparison, the S&P 100 – big blue-chip companies whose total market cap represents roughly 45 percent of the entire U.S. stock market – were slackers by gaining only 52 percent in the 28-week period.
Figure 2 breaks down the S&P 500 into quintiles, and shows a clear size trend within this broad-market index. The smallest 100 companies in the S&P 500 dramatically outperformed the bigger 400.
The question, of course, is whether or not this trend will persist.
RBC analyzed cycles since 1926 and found that large-cap outperformance cycles on average have lasted 68 months during which large-caps have outperformed small-caps by 17.8 percent annually. But when the small-caps outperform, the cycles have averaged 92 months and the outperformance has been by an average of 18.3 percent.
Business cycle analysis suggests that perhaps we are starting a new leadership cycle for small-caps. If this proves to be the case, it would mark the end of one of the shortest large-cap leadership cycles (beginning in April 2006) since the 1920s.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Russell MicroCap Index is a capitalization weighted index of 2,000 small cap and micro cap stocks that captures the smallest 1,000 companies in the Russell 2000. The broad index is designed to present an unbiased collection of the smallest tradable securities that still meet exchange listing requirements. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization. The S&P 100 Index is a market capitalization-weighted index consisting of 100 large blue chip stocks covering a broad-range of industries that is used as a benchmark to measure the performance of large cap stocks.
The Four Stages of a Bear Market
August 18, 2009
Global markets have been in decline the past several trading days and many are now asking, is the rally over? If history is any guide, a correction is coming but we’re not there yet.
Morgan Stanley recently evaluated the performance of 19 bear markets in different countries around the world. It’s a comprehensive list that includes the bear market in Switzerland during the 1960s, Japan in the 1990s and Australia in the 1980s among others.
What they found is that the median fall from a market’s peak is 56 percent and lasts 29 months. The S&P fell 58 percent over 18 months from its peak in October 2007.
U.S. markets have rebounded roughly 51 percent in 5 months from March lows but the median bear market rebound is 70 percent over 17 months.
This suggests the market rally still has some legs.
However, Morgan Stanley discovered that 12 of 18 equity market rebounds stalled 1 to 3 months prior to interest rates being raised. Their conclusion was that when governments begin to withdraw stimulus, the market begins to falter.
It doesn’t appear that will be a problem in the U.S. The Fed made it clear last week they were prepared to keep interest rates low for an extended period of time and that deflation remained their chief concern.
In addition to our monetary efforts, there are some fiscal policies that should aid us along. With more than half of American Recovery Act money waiting to be distributed, the government has the funds allocated to continue stimulating the economy even if we see conditions improve.
The danger will be if we become too complacent in our recovery before economic strength has been fully restored.
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Speculators Aren’t Wicked, They Keep Market Liquid
August 17, 2009
The Commodities Futures Trading Commission (CFTC) wrapped up its hearings on whether to install position limits on futures trading last week, and like other hot topics being tossed around Capitol Hill, misinformation seems to be running rampant.
One myth is that speculators only bet on prices going higher. The chart below shows both long and short futures positions for all commodities. While it’s definitely not a one-to-one ratio, the chart shows that investing in futures is a two-way street, with investors lining up on both sides.
Another myth is the overall size of the speculative market. According to a recent TIME article, less than three percent of the world’s oil consumption over the next year is under futures contract.
Several U.S. lawmakers have claimed that speculative investors in London are using lax laws to control oil prices. However, data published by the CFTC and the Financial Times disproves that theory.
As of last week, more than 18 percent of oil speculators were trading in New York while only 9.6 percent resided in London. The FT points out that “spread” positions popular with hedge funds are also skewed towards the Big Apple.
Even the “speculator” label sounds sinister when all that is happening is that a bet is being made that a certain investment will either rise or fall in the future. That sounds pretty similar to any other type of investment.
Speculators are important because they provide liquidity for commodity producers, while allowing them to hedge their price risk. Imposing caps on the sizes of these futures positions could significantly limit their ability to hedge commodity risk.
Jeffrey Sprecher, CEO and Chairman of the Intercontinental Exchange, said in his testimony this week that “setting hard position limits across all months could drain market liquidity, impede price discovery and drive market participants off of exchanges.”
Without this liquidity, producers would find it difficult to hedge against commodity price risk, and projects that require more up-front capital, like Canadian oil sands, would be threatened. This would ultimately lead to lower production and higher long-term prices.
This issue is a good example of keeping long-term goals in mind. Imposing position caps on futures positions will only produce minimal short-term benefits while much larger unintended consequences could follow.
None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of 6/30/09. 09-565
Net Asset Value
as of 09/08/2010
- Global Resources Fund
PSPFX $8.78 +0.05 - Gold and Precious Metals Fund
USERX $17.44 +0.03 - World Precious Minerals Fund
UNWPX $20.18 -0.01 - China Region Fund
USCOX $8.61 -0.02 - Eastern European Fund
EUROX $9.11 +0.13 - Global Emerging Markets Fund
GEMFX $8.17 +0.08 - Global MegaTrends Fund
MEGAX $7.71 +0.04 - All American Equity Fund
GBTFX $20.02 +0.09 - Holmes Growth Fund
ACBGX $16.04 +0.15 - Tax Free Fund
USUTX $12.58 -0.01 - Near-Term Tax Free Fund
NEARX $2.26 -0.01 - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change