Source: Federal Reserve statistical release,
9/17/09
Meredith Whitney believes that the credit contraction in the private sector will
continue as banks cut credit lines and households and businesses reduce debt.
She estimates that credit card lines of credit, a common source of borrowing for
small businesses, have been cut by $1.25 trillion during the last two years.
She expects another $1.5 trillion of credit card lines of credit to be
eliminated by the end of 2010.
In spite of the decline in
economic activity and the contraction of credit for the private sector, the
financial markets have performed well. Have the financial markets gone too far
too fast?
David Rosenberg, Chief
Economist and Strategist at Gluskin Sheff & Associates, thinks the US stock
market is already priced for a dramatic expansion of the economy. He writes
that the “S&P 500 is already trading at valuation levels that would ordinarily
be consistent with an economic expansion that is five years old as opposed to a
recovery that, at best, is in its infancy stages…. On an operating basis
(excluding write-downs), the trailing P/E multiple on the S&P 500 has expanded a
massive 10 points from the March lows, to stand at 27.6X….going back 60 years,
there have only been 14 months when the trailing multiple was as high as it is
today, and that covers 10 recessions. This implies that the market is in the
top 2% expensive terrain historically, and those other times basically covered
the tech mania of a decade ago.”
Eric Sprott and David
Franklin of Sprott Asset Management offer an explanation for the divergence
between the economy and the financial markets:
It is our view that the world’s combined
government stimuli have completely distorted the global economy in the short
term, and have encouraged a false sense of hope in the stock market. While the
market was rallied, the real economy continues to struggle, and is notably worse
in many areas. Rates of employment, corporate revenues, US housing prices and
retail sales all continue to decline in the face of ‘shock and awe economics.’
In our assessment of recent economic data, there are only two possible
explanations for the recent market rally. Either investors are discounting an
incredible economic recovery that is just around the corner (hard to believe),
or the extra liquidity injected into the economy has found its way into the
stock market. We’re leaning towards the latter alternative.
In the meantime, plans are being made to restructure the global currency
framework. In an article that has received much attention, “The Demise of the
Dollar” by Robert Fisk of the UK Independent, Fisk describes the beginning of a
revolt of foreign creditors of the United States. The Arab nations comprising
the Gulf Co-operation Council (Saudi Arabia, Abu Dhabi, Kuwait, and Qatar),
China, Russia, Japan, France, and Brazil are making plans to no longer sell oil
for US dollars. Instead, they would like to settle transactions in a new global
currency based upon a basket of currencies including the euro, Chinese yuan,
Japanese yen, gold, and a new currency for the Gulf Co-operation Council.
Representatives of the US and UK have not been invited to the discussions.
According to Fisk, the planned currency transition will happen in 2018 but most
observers think it will happen much sooner.
Additions
China Mobile Limited (CHL)
provides mobile telecommunications and related services primarily in China and
currently has approximately 503 million customers. CHL currently sells at a P/E
ratio of approximately 12X trailing earnings and has a dividend yield of 3.4%.
Positions in IShares Silver
Trust (SLV) and SPDR Gold Shares (GLD) were increased during the quarter. Both
precious metals should be able to maintain purchasing power as central banks and
governments pursue expansionary monetary and fiscal policies. Gold is likely to
be an important component of any new global currency framework.
Tortoise Capital Resources
Corp. (TTO) was purchased for additional accounts during the quarter. TTO is a
closed-end fund that invests primarily in privately-held and micro-cap public
companies providing energy infrastructure services such as transmission
pipelines. The net asset value is estimated on a quarterly basis and was $8.91
per share at the end of May. The current price is $6.72 per share and the
current dividend yield is 7.7%.
Government bonds of the
Netherlands, Australia, and Germany were purchased during the quarter.
Positions in the American Century International Bond Fund (BEGBX), which invests
primarily in European government bonds, were also increased for many accounts.
The US Congressional Budget Office has reported that the preliminary federal
government budget deficit for the fiscal year ending 9/30/09 was $1.4 trillion
(9.9% of GDP). The US dollar will most likely continue to decline.
Deletions
Tortoise North American
Energy Corp. (TYN) was sold. The closed-end fund sold at a 4% premium to net
asset value. The proceeds were used as a source of cash for the purchase of a
related fund, Tortoise Capital Resources Corp. (TTO).
Remaining positions in the
John Hancock Patriot Premium Dividend Fund II (PDT) were sold. PDT is a
leveraged fund and was sold at a discount of approximately 8% of net asset
value.
First Trust/Aberdeen Global
Opportunity Income Fund (FAM) and Nuveen Multi-Currency Short-Term Government
Income Fund (JGT) were sold. FAM and JGT sold at discounts to net asset value
of approximately 9-10% at the time of sale. FAM is a leveraged fund. JGT has
approximately 59% of its assets invested in US Agency bonds. Proceeds were used
to purchase individual foreign government bonds and BEGBX.
Remaining positions in the
common and preferred shares of Gramercy Capital Corp. (GKK) were sold after loss
estimates for 2009 and 2010 increased. During the second quarter, GKK had a
provision for loan losses of $167 million and an impairment charge of $42
million. Given the current level of loss estimates, additional large provisions
for loan losses and impairments are likely.
Apartment Investment and
Management Company (AIV) was sold for a short-term profit. Although there have
not been any significant changes in the business fundamentals, the stock price
rose rapidly. The projected return is now much lower than it was at the time of
purchase.
Updates
Nuveen Investments announced
that Nuveen Florida Quality Income Municipal Fund (NUF) will be merged into a
larger national closed-end municipal bond fund, Nuveen Premium Income Municipal
Fund 2, Inc. (NPM). The exchange of shares will take place on October 16 and
will be based upon the net asset value of the funds.
If you have any questions regarding your accounts,
please contact me.Sincerely,
Robert G. Kahl
CFA, CPA, MBA
Sabino
Investment Management, L.L.C.