Market Update – January 18, 2013

2013 January 17
by SJ Leeds

A few things that I found interesting in my reading…


Interesting Bloomberg article about concern over Fed policy. 

1. K.C. Fed President Esther George recently said, “Prices of assets such as bonds, agricultural land, and high yield and leveraged loans are at historically high levels.  We must not ignore the possibility that the low interest rate policy may be creating incentives that lead to future financial imbalances.”

2. Credit Suisse’s index of 1,500 junk bonds hit a record low 5.9% last week.  It was at 8% a year ago.

3. Junk bond yields are 8 basis points lower than what is paid on leveraged loans.  As recently as June, junk bonds yielded 114 basis points more than more senior leveraged loans.

4. Bonds are expensive compared to stocks.  The price that investors are paying for  income from bonds is more than 50X (in other words, paying $1000 for 1.82% yield on 10-year UST) while they’re paying just 14.8 times earnings for stocks.  This disparity is close to the highest level since 1920.  (Of course, this is a somewhat misleading comparison; earnings are not dividends and involve greater risk.)

5. Non-irrigated cropland prices were up 25% from a year earlier and irrigated land values advanced more than 20 percent.


Some Other Stats and Ideas

Downgrade potential.  Fitch warned that failure to raise the debt ceiling would very likely result in a downgrade of our credit rating.  Of course, S&P downgraded the U.S. back in August 2011.


Unfunded liabilities.  Cities employing nearly half of U.S. municipal workers saw their pension and retiree health-care funding levels fall from 79% in FY 2007 to 74% in FY 2009.


More slow growth.  The World Bank said it expects the global economy to expand just 2.4% this year.  They predicted that the U.S. would grow 1.9%.  (This could be lower if “political paralysis” sets in.)  Developing economies are expected to grow 5.5% this year, higher than last year’s 5.1%, but much slower than the past decade.


A disconnect between markets and the economy.  World Bank Chief Economist Kaushik Basu sounded like Howard Marks (see Monday’s blog).  He said, “Financial markets are calmer, but there is no pickup in growth.  You can keep markets calm for one or two years, but if this is not backed up with real growth you could get another round of financial risks coming in.”


China is losing low cost manufacturing.  China is losing their competitive edge as a low-cost manufacturing base.  They want to shift to higher-value production and see incomes rise.  Total foreign direct investment flowing into China fell 3.7% in 2012.  (Direct investment in manufacturing contracted by 6.2%; investment in the service sector, excluding the property market, increased by 4.8%.)  By contrast, foreign direct investment into Thailand grew by 63% in 2012 and Indonesia investment up 27% in the first nine months of last year.


Comment on Notre Dame.  Here’s a line that I lifted from Notre Dame athletic director Jack Swarbrick’s press conference.   Mr. Swarbrick said:

“Was there somebody trying to create an NCAA violation at the core of this? Was there somebody trying to impact the outcome of football games by manipulating the emotions of a key player? Was there an extortion request coming?”

If this is what ND thought, it surprises me that they would not immediately contact law enforcement.  Law enforcement has much greater ability to investigate a case than a private investigator.  (For example, the government can get search warrants.)  In addition, if this was a sophisticated hoax (as they described), ND would need to think about other potential victims.  After the Penn State scandal, I’m surprised that the first call would not be to the FBI or local law enforcement.


Must watch video.  Here’s a great video about some brothers that you need to watch.  One of my former teachers (and a mentor of mine) sent it to me.




Have a great weekend.

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