The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Initial Jobless Claims surprised to the downside again to 364k, 16k less than expected and down from 368k last week (revised up by 2k). It’s at the lowest level since Apr ’08 and the 4 week avg fell to 380k from 388k. Continuing Claims fell by 79k and Extended Benefits were down by a net 136k. Bottom line, the downward trend in initial filings over the past three weeks is a definite positive in terms of firings while we still await the big jumps in hiring’s. Due to what I believe will be a deep, not mild, recession in Europe, the pace of hiring’s in 2012 will likely still be mediocre. While old news, Q3 GDP was revised lower to a gain of 1.8% from 2.0%, led by a downward revision to Personal Consumption which grew at the 2nd slowest rate since Q4 ’09.

Here are this mornings Santa Claus rally reading material:

• Herr Draghi or Signor Draghi, and the ECB’s Santa Rally (Telegraph) see also A Central Bank Doing What It Should (NYT)
• From whence comes ‘Kicking the Can Down the Road’ ? (WSJ)
• Five Questions: Michael Price on Problems at the NYSE (Institutional Investor)
• Signs Point to Economy’s Rise, but Experts See a False Dawn (NYT) see also It’s a Recession Everywhere (Slate)
• Hirst, Warhol Prices Outperform S&P 500 in Art-Investment Index (Businessweek)
• ETFs: More Funds Dying for Fresh Blood (WSJ)
• The Corporations that “Occupy Congress” (Reuters)
• Argentina’s Lessons for a Crisis-Ridden Europe (Spiegel.de) see also Greece’s Creditors Resist Push for More Losses (Bloomberg)
• Correcting Data Error, Realtor Group Revises Existing-Home Sales Downward (NYT)
• AmEx Looks Beyond Credit Cards (WSJ)

What are you reading?

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Source: WSJ

Can the European Union be saved? Should it be? Fusion IQ CEO Barry Ritholtz discusses the outlook for 2012 with Paul Vigna.

Dec. 21, 2011

The Wall Street Journal – Dividend Stocks Become the Heroes

This year, the 100 stocks in the Standard & Poor’s 500-stock index with the highest dividend yields are up an average of 3.7% before dividend payouts, according to Birinyi Associates. The 100 lowest-yielding stocks are down an average of 10%. Dividend yield is calculated by dividing a company’s annual per-share dividend by share price. In the third quarter, share-price returns on high-dividend payers exceeded those of lower-paying companies by 17 percentage points, AllianceBernstein calculates. Investors hungry for stock-price gains have been barreling into dividend-paying shares, long regarded as “widow-and-orphan stocks” because of their steady but stodgy performance. Some analysts say such stocks are the most “crowded” trade around these days. Investors have been dazzled by dividend yields of more than 4% on many utilities, household-goods manufacturers and telecommunications companies. That is twice as much as recent paltry yields on 10-year Treasurys. Dividend-stock fans say the unusually strong performance is likely to last as long as volatility driven by Europe’s debt crisis and the global economic fits and starts continues to grip financial markets. Stocks that pay steady dividends tend to fall less than others when times are tough.

Comment

We offered our thoughts on dividend-paying stocks in an October post:

In our current uncertain and volatile environment, investors are seeking safety. So, it should come as no surprise that dividend stocks have gained in popularity especially since many blue-chip stocks pay higher dividend yields.

However, any case for a new era of dividend investing may be a bit overstated. Dividend stocks should simply be viewed as a slightly less risky form of stock investing. As such, we should expect dividend-paying stocks to outperform during bear markets and underperform during bull markets.

By comparing the S&P Dividends Aristocrats Total Return Index and the S&P Equal Weight Total Return Index, we can see this is indeed the case. The S&P Dividends Aristocrats Index measures the performance of stocks in the S&P 500 that have consistently increased dividends for at least 25 consecutive years. The index is equally weighted, so we compare its total return to that of the S&P 500 Equal Weight Index.

During the bear market from October 11, 2007 to March 6, 2009, dividend-paying stocks outperformed the S&P 500 Equal Weight Index by 11.6%. On an annualized basis, dividend stocks returned -35.74% versus -46.10% for the S&P Equal Weight Index.

Click to enlarge charts:

During the bull market from March 6, 2009 to May 2, 2011, dividend-paying stocks underperformed the S&P 500 Equal Weight Index by 42.4%. On an annualized basis, dividend stocks returned 44.38% versus 56.64% for the S&P Equal Weight Index.

Finally, during the bear market from May 2, 2011 through last yesterday’s close, dividend-paying stocks outperformed the S&P 500 Equal Weight Index by 10.56%. On an annualized basis, dividend stocks returned -3.25% versus -13.81% for the S&P Equal Weight Index.

To be sure that these past few bull/bear markets were the rule and not the exception, we also compared total returns of these two indices on all days when the S&P Total Return Index was up versus all days when the S&P Total Return Index was down. With data going back to the beginning of 1990, dividend-paying stocks returned an average of 66 basis points per day on days the stock market was up. The S&P Equal Weight Index returned an average of 77 basis points per day on those same days. On days the stock market was down, dividend-paying stocks returned an average of -67 basis points per day. The S&P Equal Weight Index returned an average of -80 basis points per day.

Rather than being concerned with reaching for yield, the charts and data above suggest dividend stocks outperform during bear markets and underperform during bull markets. However, if investors are savvy enough to know which way the market was heading in general, why even bother distinguishing between dividend-paying stocks and non-dividend-paying stocks?

Source: Arbor Research

Following the large take from the ECB lending window from European banks, ECB Pres Draghi speaks at 11am along side BoE Gov King and he’ll likely emphasize the success of the 3 yr lending facility as to distract attention from those who want him to act more forcibly, aka more aggressively buy European sovereign debt and not sterilize the purchases. There is a daily debate on the euro with the question always asked ‘how can the euro be at 1.30 and not much lower vs the US$ in light of everything going on in Europe?’ and I continue to say, in terms of currency debasement, the ECB has not behaved like the Fed, for now. The Italian Senate will vote today and likely approve the Monti budget after the lower house voted yes last week. Monti gave an ‘Uncle Sam needs you’ line by saying its essential that Italians buy government bonds. Greek creditors are pushing back against the IMF’s call for them to accept a below 5% coupon on newly exchanged bonds. With the Greek 2 yr note trading at .25 on the euro, these creditors should be thankful they are getting back .50. In Asia, the Shanghai index fell for the 14th day in the past 17 to just shy of the lowest level since Mar ’09.

This is what I want for Christmas:

Click to enlarge:

Source:
Aston Martin One-77 Launches at Virgin Galactic’s Spaceport America
Flickr Classic Driver, December 2011
More photos here

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Josh Brown takes the JPM CEO to school:

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Dear Jamie Dimon,

I hope this note finds you well.

I am writing to profess my utter disbelief at how little you seem to understand the current mood of the nation. In a story at Bloomberg today, you and a handful of fellow banker and billionaire “job creators” were quoted as believing that the horrific sentiment directed toward you from virtually all corners of America had something to do with how much money you had. I’d like to take a moment to disabuse you of this foolishness.

America is different than almost every other place on earth in that its citizenry reveres the wealthy and we are raised to believe that we can all one day join the ranks of the rich. The lack of a caste system or visible rungs of society’s ladder is what separates our empire from so many fallen empires throughout history. In a nation bereft of royalty by virtue of its republican birth, the American people have done what any other resourceful people would do – we’ve created our own royalty and our royalty is the 1%. Not only do we not “hate the rich” as you and other em-bubbled plutocrats have postulated, in point of fact, we love them. We worship our rich to the point of obsession. The highest-rated television shows uniformly feature the unimaginably fabulous families of celebrities not to mention the housewives (real or otherwise) of the rich. We don’t care what color they are or what religion they practice or where in the country they live or what channel their show is on – if they’re rich, we are watching.

When Derek Jeter was toyed with by the New York Yankees when it came time for him to renew his next hundred million dollar contract, the people empathized with Derek Jeter. Sure, this disagreement essentially took place between one of the wealthiest organizations in the country and one of the wealthiest private citizens – but we rooted for Jeter to get his money. Nobody begrudged him a penny of it or wanted a piece of it or decried the fact that he was luckier than the rest of us. In the American psyche, Jeter was one of the good guys who was deservedly successful. He was one of us and an example of hard work paying off.

Likewise, when Steve Jobs died, he did so with more money than you or any of your “job alliance” buddies – ten times more than most of you, in fact. And upon his death the entire nation went into mourning. We set up makeshift shrines to his brilliance in front of Apple stores from coast to coast. His biography flew off the shelves and people bought Apple products and stock shares in his honor and in his memory. Does that strike you as the action of a populace that hates success?

No, Jamie, it is not that Americans hate successful people or the wealthy. In fact, it is just the opposite. We love the success stories in our midst and it is a distinctly American trait to believe that we can all follow in the footsteps of the elite, even though so few of us ever actually do.

So, no, we don’t hate the rich. What we hate are the predators.

What we hate are the people who we view as having found their success as a consequence of the damage their activities have done to our country. What we hate are those who take and give nothing back in the form of innovation, convenience, entertainment or scientific progress. We hate those who’ve exploited political relationships and stupidity to rake in even more of the nation’s wealth while simultaneously driving the potential for success further away from the grasp of everyone else.

Here in New York, we hated watching real estate and financial services elitists drive up the prices of everything from affordable apartments to martinis in midtown with the reckless speculation that would eventually lead to mass layoffs, rampant joblessness and the wreckage of so many retirement dreams. No one ever asked the rest of us if we minded, it just happened. I’m sure people across the country can tell similar stories.

So please, do us all a favor and come to the realization that the loathing you feel from your fellow Americans has nothing to do with your “success” or your “wealth” and it has everything to do with the fact that your wealth and success have come at a cost to the rest of us. No one wants your money or opportunities, what they want is the same chance that their parents had to attain these things for themselves. You are viewed, and rightfully so, as part of the machine that has removed this chance for many – and that is what they hate.

America hates unjustified privilege, it hates an unfair playing field and crony capitalism without the threat of bankruptcy, it hates privatized gains and socialized losses, it hates rule changes that benefit the few at the expense of the many and it hates people who have been bailed out and don’t display even the slightest bit of remorse or humbleness in the presence of so much suffering in the aftermath.

Nobody hates your right to make money, Jamie. They hate how you and certain others have made it.

Don’t be confused on this score for a moment longer.

Facinating piece from SocGen’s Cross Asset Research looking at expectations for global earnings in 2012. It is subtitled “Death by a thousand cuts; double digit downgrades for Eurozone and Japan” — so do not expect cheerleading.

The highlights:

• Recent earnings forecasts cut by 4.9% and 6.9% for 2011 and 2012, respectively.

• Severe downgrading of both 2011 and 2012 consensus forecasts, with Japan and the Eurozone seeing double-digit percentage cuts to
next year’s earnings;

• US stands out with only minor cuts to 2012 forecasts.

Note that on an ex-financial basis, US 2012 forecasts have seen just a 2% cut, which SocGen describes as “hardly consistent with a recessionary or low growth outlook.”

So either we will miss a recession in the US, or analysts are too optimistic.

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Global earnings revisions and historical earnings growth
click for ginormous chart

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Source:
Global Earnings Estimates Analysis: Death by a thousand cuts; double digit downgrades for Eurozone and Japan (PDF)
Societe Generale, December 22, 2011  
www.sgresearch.com

Christian Noyer
David R. Kotok
December 21, 2011

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This week, financial market observers witnessed Christian Noyer, France’s central bank governor, clearly and firmly discuss some issues involving rating agencies. He defended the AAA rating of his country. And he described the economics of the United Kingdom as a comparison. Why did he do this?

A central banker does not often specifically comment in the manner of the remarks we saw from Christian Noyer. In this case, they seem warranted. They were precise and supported by statistics. Essentially, Noyer said that if you are thinking about downgrading the creditworthiness of France, you must also analyze the economics that drive the ratings for others like the UK. He offered economic comparisons that measure the creditworthiness of the UK in a poorer light than that of France.

What Noyer did not say, but what market observers clearly saw, was that the frustration demonstrated in these comments had its origin in the actions of the UK. They effectively worked to undermine the position of the UK within the European Union. And they make EU financial-market repairs more difficult. For those who did not follow the events, of the 27 members of the European Union, 26 of them agreed or indicated commitment to the development and preservation of the European Union. The UK, under the leadership of Prime Minister David Cameron, cast the only negative vote.

It seems clear that Prime Minister Cameron is motivated by the political lobbying force of the financial sector in the UK. Known as “the City,” the financial sector in Britain is the home turf of many of the wealthiest people in the country. It has a very high per-capita income. What Cameron does not say is that the rest of the British population lives at a standard somewhat lower than Italy, yet higher than Greece. In other words, the UK is divided between the wealthy financial/economic types in or associated with the City, and all the rest. Clearly, Cameron’s politics and his decision to take the UK out of participation in EU decisions will weaken its status with respect to the European Union. The EU is dealing with the financial repairs that must take place in Europe. Cameron has hurt his country’s ability to influence that process. He succumbed to political pressures and lobbying of the same type that we see in the United States.

Let’s take this even farther. Within a couple of days, Cameron, was soundly criticized in editorials and commentaries. Then he faced a second embarrassing moment. The revelations of MF Global in terms of hypothecation and re-hypothecation in London have become widely known. For contrast note that Canada was not exposed to MF Global losses thanks to its regulations and rule making. The US also has tighter rules than the City. In fact, the City is now tainted with very serious questions concerning its capacity to regulate, to maintain safety of securities, and to supervise financial agents. All of this comes on the heels of Cameron’s politically-driven strategic gaffe and negative vote, and haunts the Prime Minister.

Readers may not know that the European Union is busily working on another approach to sovereign debt ratings. For good reason, agents in the EU and around the world find the behavior of the rating agencies to be a puzzle. One agency downgraded the creditworthiness of the United States, a bizarre rating that is still not completely understood. Other rating agencies took different approaches.

If you read Norbert Gaillard’s book, A Century of Sovereign Ratings, you can see how he outlines the very recent history of rating agencies dealing with sovereign debt. The conclusion is simply that they do not have much experience doing it, they have not done it for a very long period of time, and they very rarely get it right. So, relying on the rating agencies to assess the capability of sovereigns to pay, and to evaluate their governance, is a problematic exercise before they even begin. The rating agencies have failed investors and institutional players for several years. Their credibility is terribly damaged, and their behaviors of threatening ratings changes and issuing warnings dealing with sovereign debt have called into serious question their capabilities in this area.

Let’s get back to Christian Noyer. He has watched the evolution of the euro from the beginning. He was involved on behalf of his country in the early stages, before the euro was launched. He then joined the first European Central Bank president, Wim Duisenberg, in the leadership of the launch of the euro. Noyer was the ECB vice-president during its first five years. He was intimately and actively involved in its creation. His motivation was to make it a success, to bring about convergence, to bring about integration in Europe. He wanted to blunt the forces of European history that have shown themselves to surface when Europe is under economic stress. In Europe this has often ended in bloodshed. The Nazi occupation of France happened after the rise of Hitler and the collapse of the Weimar regime. Noyer is a student of his history. He knows that a thousand years of history says Europe is a very dangerous place when it is not involved in peaceful integration of finance and commercial activity.

Now, Noyer is in the throes of a tremendous test of the durability of the European Union. This is a fight for preservation of the concept of cooperation rather than confrontation. Christian Noyer functions in his capacity as the governor of the central bank of the second largest country in the euro zone. And he confronts rating agencies that are not credible but that can cause damage. And he sees behavior from the UK that defies logic and explanation.

Noyer therefore speaks out and forthrightly confronts the economics that drive the decisions of rating agencies. He is right, and he deserves to be applauded for it.

A personal disclosure is in order at the end of this commentary. During the past decade, I have chaired the central banking series of the Global Interdependence Center, www.interdependence.org. In that capacity, I have personally come to know a number of central bankers throughout the world. One of them is Christian Noyer. We have broken bread together. We have attempted to advance the dialogue that originates from seeking the goals of increased transparency, rather than opacity, and more integrity in our financial and economic world. Christian Noyer is a recipient of the GIC’s Global Citizen Award; and he has been a participant, speaker, and supporter of GIC events throughout the world. He is my personal friend.

He did the right thing. But I am biased by friendship some critics may say.. He said what was necessary. But my opinion is biased some would argue. He articulated clarity about the division that is occurring in Europe. He’s right. He stated his pro-Europe, pro-rapprochement (cooperation), strategic view of policy. He is right again. He chastised rating agencies. Right again. Dear reader, when it comes to this issue, I am not a fence sitter. A divisive breakup of this marvelous European experiment would be a disaster. It must be avoided. Noyer is right.

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David R. Kotok, Chairman and Chief Investment Officer