Marietta Market Update

19 July 2010, 5:23 pm

IMF Rejects Recession, boosts 2010 Global GDP Outlook

Tags: International Monetary Fund (IMF)

Reflecting stronger global growth in the first half of 2010, the International Monetary Fund (IMF) on July 8 bumped its 2010 global GDP forecast from 4.2% to 4.6%, and restated their 2011 forecast of 4.3%. This upward revision supports the Marietta view presented in our July 5 Outlook that the global economic recovery will emerge from a current slowdown and enjoy a multiyear expansion.

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7 July 2010, 5:32 pm

Review of the Second Quarter 2010

Tags: International Monetary Fund (IMF)Quarterly Review

As the quarter opened, optimism regarding the global economic recovery helped propel equity and commodity markets to post recession highs. The International Monetary Fund (IMF), for example, raised its forecast for 2010 global GDP growth from 3.8% to 4.2% and reiterated its prediction of 4.3% in 2011 (see our April 23 blog “Global Growth Accelerating”). Other elements of the positive case for stocks, including strong corporate earnings reports, very low inflation and interest rates, and assurances from the Federal Reserve that they would continue their accommodative policy for an extended period, also fueled the rally. For the Standard & Poor’s 500 Index, the high water mark was reached on April 23, at which point this benchmark had soared 79.9% since the beginning of the rally on March 9, 2009.

For the remainder of the quarter, global financial markets were buffeted by relentless negative headline news emanating mostly from Europe and the U.S. The major focus was on the debt problems of Greece, Portugal, Spain and several other Euro Area countries, which generated fears of sovereign defaults, a Euro Area banking crisis, and a retreat into recession as governments turned to austerity programs to redress their budgetary woes. Nightly reports of the rampaging BP oil spill in the Gulf of Mexico and scenes of suffering wildlife and crippled local businesses contributed to the gloomy mood. Another headache was the heightened tension between South and North Korea, which raised the specter of a military conflict that might involve nuclear weapons. The final blow was a disappointing U.S. employment report in early June which, coupled with discouraging housing and other economic data as the quarter drew to a close, pointed to at least a slowdown (and maybe something worse) in the U.S. economy.

The aggressive, speculative, and unregulated pursuit of short-term profit by U.S. and international hedge funds exacerbated the severity of the May and June decline in equity and commodity markets. Armed with powerful computers programmed to react almost instantaneously, often with leverage, to the latest news release or to shifting price and volume patterns in financial markets, the hedge funds’ high-frequency trading strategies created unnerving market volatility (see our May 24 blog “Global Financial Market Turmoil”). On one memorable early May afternoon, runaway computers unleashed, in 15 minutes of spellbinding shock, a 700 point intraday plunge in the Dow Jones Industrial Average, whereupon the market recovered the entire 700 points in the next hour. The jump in market volatility in May and June heightened investor anxiety, which then seemed to feed upon itself. As the financial media, in heated competition for ratings, fanned speculation of a double-dip recession and a new bear market, pessimism became fashionable. By the end of June, the long-term positive case for stocks, which had dominated markets in April and was still arguably relevant, was completely eclipsed.

Another consequence of the computer-driven, hedge-fund trading during the quarter was the inter-connectedness of global equity, commodity, bond, and currency markets. An event in one country could quickly cause a chain reaction around the world. For example, each new indication of debt problems in Greece or Spain triggered a jump in these countries’ bond yields and declines in the euro and European stock markets, which led to an immediate rise in the U.S. dollar and U.S. Treasury prices and a plunge in U.S. stock prices, which prompted a decline in commodity prices and a selloff of stocks in the leading emerging economies of China, India, and Brazil. U.S. investors were forced to recognize that global economies and financial markets had become so intertwined that seemingly obscure events in far off places could profoundly impact U.S. stock and bond prices.

The Standard & Poor’s 500 Index slumped -11.9% for the quarter, and the EFA Developed Countries ETF, which consists primarily of Europe and Japan, plummeted -16.9%. The EEM Emerging Economies ETF declined -11.4% despite booming economic growth and healthy financial institutions in China, India, and Brazil. Also on the losing side was the CRB Index of commodity prices, which fell -5.4% paced by a -8.1% slump in oil prices. A notable winner was the U.S. dollar, which traded inversely to the U.S. stock market and rose 6.1% against a basketful of currencies. A flight to safety by risk-averse investors was especially beneficial to the perceived safe havens of gold and U.S. Treasury notes and bonds. Gold tracked the rise of the U.S. dollar (and decoupled from other commodities) as its price soared from $1115/ounce to $1244/ounce. The yield on the benchmark 10-year U.S. Treasury note dove from 3.83% to 2.94%, while its European safe-haven counterpart, the 10-year German government bond, fell to 2.59%.

Within the S&P 500 Index, 7 of the 10 industry sectors, representing 88% of the Index, posted declines ranging from -10.1% to -14.5%, and all 10 sectors had negative returns. The largest setbacks were in the economy-sensitive energy (-14.5%), consumer discretion (-14.0%), and materials (-13.2%), whereas the least impacted were the recession-resistant sectors of telecommunications (-0.5%), utilities (-5.3%), and consumer staple (-6.2%). Many individual stocks suffered plunges: 97 stocks were off 20% or more, and 24 of these stocks plummeted 30% or more. Size did not offer safety: the 23 largest companies (those with market capitalizations in excess of $100 billion), recorded an average loss of -12.3%. Apart from the S&P 500 Index, the Dow Jones Industrials were down -10.0%, the Russell 2000 Index of small company stocks shed -10.2%, and the NASDAQ Composite (mostly technology stocks) retreated -12.0%. Of the 24 international country ETFs we monitor closely, 19 were down more than -10.0%, 4 of the leading emerging economies (China, Hong Kong, India, and Singapore) fell single digits, and 1 (Chile) managed a 3.2% gain. There were few places to hide in either the U.S. or international stock markets.

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21 June 2010, 5:31 pm

China Indicates Confidence in Global Growth

On June 19 the Peoples Bank of China announced that it was removing the peg between the yuan (100 yuan = 1 renminbi) and the U.S. dollar (i.e. the currency would be allowed to fluctuate) following 2 years of a fixed exchange rate.

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8 June 2010, 4:19 pm

Small Business Confidence Rising; ISI Remains Optimistic

Tags: International Monetary Fund (IMF)Quarterly ReviewISI

We share the view of most economists that the major deterrent to a strong and sustainable U.S. economic expansion is the lack of healthy job growth. High unemployment and underemployment has dampened consumer confidence and spending, and is clearly having a serious negative impact on stock prices. The key to employment gains in this as in past economic recoveries will be small businesses. According to the U.S. Small Business Administration, its members represent more than 99% of all U.S. employers and have created 64% of all new jobs in the past 15 years. The problem is that small business owners have been very reluctant to hire in the current economic recovery.

The announcement on June 8 by the National Federation of Independent Business that their small business optimism index increased from 90.6 to 92.2 in April, which marks a 20 month high, is a very encouraging sign. 7 of 10 components in the index rose, led by a significant gain in expectations for business conditions six months down the road. Most noteworthy is that job creation plans registered the first positive reading in 19 months. Other positive responses include an improvement in profits, plans to increase capital spending, and an expectation of easing credit conditions.

A caveat is in order: even with April’s advance, the Index trails levels reached in past economic rebounds. On the other hand, a pick up in hiring led by small businesses would be a powerful antidote to the currently fashionable thesis that the U.S. economy is heading into a double-dip recession.

Separately, The International Strategy and Investment Group (ISI), highly respected and influential among institutional investors, has taken a strong stand against the prospects of a double-dip. On June 7, ISI distributed their forecast for U.S. GDP growth of 3.5% in 2010 with an additional 3.0% in 2011. Key to this forecast is their weekly survey of companies, which last week rose to a new high and indicates that “a powerful, broad-based recovery is unfolding.”

ISI is well aware of the headwinds: the Eurozone economy is likely to see a double-dip, U.S. tax rates are headed up, U.S. state and local budget cuts and tax hikes are likely, and they foresee a slowing in China real GDP to 7.5%. Despite these and other negatives, they cite continued strength in manufacturing, strong corporate balance sheets and profit growth, lean inventories, low inflation and interest rates, and an accommodating Federal Reserve in addition to their company surveys to support their positive outlook.

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24 May 2010, 2:54 pm

Global Financial Market Turmoil

We are troubled by the recent turbulence in global stock, bond, commodity and currency markets. Especially disturbing is the plunge and heightened volatility in the U.S. stock market. Nevertheless, we believe the current storm will pass through without serious negative impact on the global economic recovery and we continue to recommend that investors maintain discipline with a positive outlook for global equities.

A consensus of financial market observers attributes the turbulence to the highly publicized debt problems of Greece, Portugal and Spain and the clumsy, unsynchronized response to the crisis by the Euro Area governments and European Central Bank (ECB).  Our view is that the policy makers cannot afford the risks of sovereign bond defaults, which could well lead to a freezing of the European banking system reminiscent of the credit crisis conditions in the U.S. in early 2009. Europe has an even larger “too big to fail” banking problem than the U.S. Although a bailout of Greece and possibly other countries in the Euro Area is repugnant to many taxpayers, especially in Germany, we expect the finance ministers and the ECB will soon hammer out a solution sufficient to calm jittery markets.

An additional important factor exacerbating market upheaval is the aggressive and speculative pursuit of profit by U.S. and international hedge funds. Their trading desks are armed with powerful computers programmed to react almost instantaneously, often with leverage, to the latest news release or to shifting trading patterns in financial markets. The result can be a barrage of buy or sell orders in a chain reaction impacting stock, bond, commodity and currency markets around the world. For example, a recent worker protest in Greece against government austerity measures triggered a jump in European bond yields and a plunge in the euro and European stock markets, an immediate increase in U.S Treasury bond prices and a sudden drop in U.S. stock prices, a rise in the U.S. dollar and a sharp decline in commodity prices, and a selloff of stocks in the leading emerging economies of China, India, and Brazil.

Whereas hedge funds embrace heightened volatility as an opportunity to increase profits, long term investors are frightened by the risk to their portfolios and governments are alarmed by the destabilizing effects on their economies. Something must be done to prevent the hedge funds from converting financial markets into casinos and in the process driving serious, long term investors out of the markets. By some estimates, “high frequency” trading by hedge funds already accounts for more than 50% of U.S. stock market volume. Coordinated government regulation is urgently needed. We think that governments and regulatory agencies around the globe are finally recognizing the severity of the problem and will take appropriate remedial action. In the U.S., we expect the Securities and Exchange Commission (SEC) to finally wake up from its decade long stupor and incompetence.

As we emphasized in our Review of the Fourth Quarter and Year 2009, we are convinced that equity strategies based on a 6-12 month horizon are more often correct and easier to implement successfully than short-term, market-timing strategies. We share the view of U.S. Treasury Secretary Geithner that a slowdown in Europe will not be great enough to derail the U.S. and global economic recovery. That is, we continue to forecast a multiyear global expansion similar to but not as strong as the 2003-07 expansion, and we continue to think this expansion will be accompanied by a bull market in equities and commodities.

The current European upheaval may have limited economic impact, but it will have important investment consequences. The most debt-burdened European countries will be forced to implement budget austerity programs, which will damage the euro and retard economic growth. Some countries may well sink into a double-dip recession, although the crippled euro will provide a partial offset by benefiting export-oriented companies. The upheaval diminishes the attractiveness of European stock markets, which to us had very limited appeal prior to the crisis. U.S. exporters to Europe will be impacted negatively by a shrinking market for their products and services and a strong dollar will hurt their competitive pricing capability. On the other hand, the American economy will benefit from reduced commodity prices (especially gasoline), lowered inflation expectations, and lower mortgage and corporate borrowing rates. A weakened European economy and currency will similarly slow exports from China, India, and Brazil to Europe (Europe is China’s largest export market), but we see this as a positive. As we pointed out in our May 12 blog on international stock markets, the major problem here is that these economies are overheating, and their governments are reacting to the increased fear of inflation and asset bubbles by adopting restrictive policies. The consequence has been a painful retreat in their stock markets. Slower exports to Europe will cool these economies, reduce inflation worries, and possibly lead policy makers to move to the sidelines. This, in turn, could provide a green light to the leading emerging economy stock markets even as the European markets are flashing yellow.

We are not complacent regarding our positive outlook. Financial markets have been rocked by numerous unanticipated developments over the past 2 years and more may be coming. We remain vigilant and flexible.



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14 May 2010, 3:56 pm

Fed Watch

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal Reserve

In recent Outlooks and blogs, we have emphasized the importance of Federal Reserve policy in influencing the direction of the U.S. stock market and the relative performance of industry sectors and investment styles. In particular, we have pointed out that in 1994 and again in 2004 the Fed reversed accommodative, anti-recession, low-rate policies and raised rates as economic recoveries gathered steam. In both cases, the Fed rate hikes abruptly halted powerful stock market rallies and led to rotational shifts in investor stock preference. We have also noted the negative impact thus far in 2010 on the prior stock market rallies in China, India, and Brazil as governments and central banks tightened credit in an effort to ward off potential inflation and asset bubbles.

To most Fed watchers, the question not whether the Fed will raise rates but when will they raise rates. For months the Fed has indicated its intention to keep rates low for “an extended period” even though the country has emerged from recession and the recovery has strengthened. At the end of 2009, we expected the Fed to raise rates late in the 2nd quarter or early in the 3rd quarter, by which time we anticipated that job growth would be the catalyst to trigger a change in Fed policy. In April, we subsequently pushed back our expectation to November when the Fed acknowledged economic growth, but stated its concern for the sustainability of the recovery and left in place its “extended period” language in statements regarding their interest rate deliberations. A Wall Street Journal survey of economists, disclosed in a May 12 article, finds that the consensus view in early April was for a hike in November, but now 42% expect the Fed to hold off on tightening until at least 2011. The WSJ attributes their shift in opinion to the European debt crisis, which “underscores the fragility of the global financial system and the risk, however small, of outside shocks derailing the recovery.” As a support to this view, on May 14 Chicago Federal Reserve President Charles Evans stated “I think the risks, obviously, with the global situation make things a little bit more uncertain than we were expecting…so, if anything, I am even more comfortable with my assessment that accommodation continues to be important.”

As the WSJ article points out, low inflation under 2% combines with the European turmoil to provide the Fed with room to keep policy on hold. We presume that the Fed prefers to avoid a rate increase in the politically sensitive months leading up to the national elections in November and thus welcomes this breathing space. On the other hand, the Fed is also painfully aware of the criticism of former Fed Chairman Greenspan and the Fed’s “too little, too late” rate raising policy coming out of the last recession, which permitted the creation of the housing bubble. We will monitor closely and comment on developments at the Fed in future blogs.

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12 May 2010, 1:14 pm

International Stock Markets: Searching for Goldilocks

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal ReserveThe Economist, International

Heading into 2010, we shared the view of a majority of international investors that the best performing stock markets this year would be China, India and Brazil. This expectation was based on the consensus forecast of economists polled in December by The Economist that these 3 countries would enjoy 2010 GDP growth of 8.6%, 6.3% and 3.8% respectively. In contrast, the major developed economies of the U.S., Europe and Japan were projected to experience anemic, subpar growth ranging from 0.6% to 2.4%. Since then, the economic performance of each of these leading emerging economies has exceeded expectations, and growth estimates in the latest poll of The Economist have been raised to 9.9%, 7.7% and 5.5% respectively. Nevertheless, the stock markets in these countries have been disappointing: for 2010 through May 10, the Shanghai Index (CSEX) has retreated -17.6%, the India Sensex (IBSI) is off -0.8% and the Brazil Bovespa (BSPI) has fallen -8.3%. In the much slower growth U.S., where 2010 GDP growth is currently pegged at 3.1%, the S&P 500 Index is down only -0.4%.

Why is this happening?

The problem with the stock markets of China, India and Brazil is that their economies are too hot. That is, accelerating growth is giving rise to fears of excessive inflation and asset bubbles. In China, for example, the government recently announced that April year-over-year consumer prices rose a more-than-expected 2.8%, producer prices jumped 6.8%, and property prices soared 12.8%. Consumer prices in Brazil are projected to rise 5.2% in 2010, and India inflation could top 12%. In response, the central banks in these countries have initiated policies designed to cool their economies. Some observers think the steps taken by the policy makers are too little and too late, and the result will be the dreaded inflation and asset bubbles. A contrary opinion is that the central bankers will be excessively restrictive and cripple economic growth. It is normal in the economic cycle for governments and central banks to reverse stimulative polices in the aftermath of recessions as recoveries gain strength. It is also normal for investors to question the outcome of a change in policy, and there is ample historical precedent in the U.S. and abroad of investors pulling back to wait and see if the policy makers are able to pilot a soft landing.

At the opposite extreme are the economies of Europe and Japan, which are too cold. Growth outlooks for these countries were weak at the beginning of the year, and the future now appears to be even bleaker. The highly publicized debt problems of Greece, Portugal and Spain will surely lead to austerity measures that will further retard growth, and quite possibly push the countries back into recession. Italy, Ireland and even Great Britain also have severe deficits that will require government action. The massive holdings of these countries sovereign bonds held by the leading banks of Germany, France, and Switzerland could spark a further crisis if the debt laden countries are unsuccessful in implementing adequate austerity programs. The consensus foresees 2010 Euro and GDP growth of only 1.1%, and we suspect that this gloomy assessment may be revised downward. It thus comes as no surprise that for 2010 through May 5 the Euro Area (FTSE Euro 100) stock index suffered a -9.6% decline. As for Japan, we expect another year of very modest growth (2.0%) and debilitating deflation (-1.0%).

Positioned comfortably between the too-hot Asian economies and the too-cold Euro Area and Japan, the U.S. economy is providing a propitious environment for common stocks. Favorable employment, consumer spending and manufacturing data indicates that the recovery is picking up steam, and the 2010 GDP growth outlook is now above 3%. Corporate profits have been above Wall Street expectations, and research analysts are raising significantly their 2010 earning estimates. On the other hand, growth has not been so strong that inflation forecasts have become ominous and, of great importance to investors, the Federal Reserve has repeatedly expressed its intention to keep interest rates at a historically low level “for an extended period.” To be sure, the major headwinds buffeting the U.S. stock markets thus far in 2010 have emanated from Asia, South America and Europe.

What lies ahead? Can investors anticipate a change?

We think the policy makers in China, India and Brazil will successfully guide their economies to a soft landing, and will then halt their restrictive measures in order to usher in long-term sustainable economic growth with controlled inflation. The Economist’s latest poll supports this view: consensus 2011 GDP forecasts for China, India and Brazil are 8.1%, 8.0% and 4.5% respectively. We expect the governments and central banks to complete their braking activities some time in the next 6 months, and investors will likely anticipate this green light and restore bull markets for the duration of a multiyear expansion. It makes sense that investors will migrate back to these geographic areas where growth is greatest once government and central bank policies are no longer threatening.

We are less positive regarding the stock market prospects of the developed countries over the next year. Japan and the Euro area will simply not have sufficient growth to attract investors. On the other hand, some of Europe’s leading export-oriented companies, aided by the weak euro, deserve investors’ attention. We expect the U.S. stock market, which has rallied for 14 months without a 10% correction, to stall, or possibly retreat, when the Federal Reserve signals its decision to gradually restore long-term norm interest rates from the current recession lows. There is much debate as to when this might occur, but most Fed watchers believe it will be within the next 9 months. We think the Fed may wait until after the November election, by which time job growth and a stabilized housing market will put the recovery on firmer footing. We further expect the Fed to alert investors of a new tightening policy several months in advance by eliminating the “extended period” language in statements regarding their interest-rate deliberations. Worth noting is that 1-2 years into the past 2 recoveries from recession, in 1994 and again in 2004, the Fed commenced to hike rates, and on each occasion stock market rallies abruptly halted as investors turned more cautious.

We remain convinced that investors who take a global perspective will be amply rewarded.

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23 April 2010, 5:44 pm

Global Growth Accelerating

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal ReserveThe Economist, InternationalThe Economist, International Monetary Fund (IMF)

In yet another indication that the global economic recovery is gaining momentum, the International Monetary Fund (IMF) has again raised its projections (see our January 28 blog). On April 21 the organization bumped its 2010 global GDP forecast from 3.9% to 4.2% and reiterated its prediction of 4.3% in 2011

The IMF continues to emphasize that the expansion will be lead by the leading emerging economies of China, India and Brazil with growth increases of 10.0%, 8.8%, and 5.5% respectively. The IMF also continues to anticipate sluggish growth in the Euro Area (1.0%) and Japan (1.9%) but they are becoming more optimistic regarding the U.S. with GDP growth raised from 2.7% to 3.1%.

The IMF forecast is supported by a consensus of economists that the latest monthly polling by The Economist foresees modest 2010 GDP growth in the Euro Area (1.2%) and Japan (1.9%), slightly higher growth in the U.S. (3.1%) and robust growth in China (9.7%), India (7.7%) and Brazil (5.5%). Worth noting is that these economists anticipate a broad-based as well as a multiyear expansion. The consensus expects positive 2010 growth in 38 of the 42 countries included in the survey (negative growth is projected for Greece, Spain, Hungry and Venezuela) and additional gains in 2011 for 40 of the 42 (Greece and Venezuela are the exceptions).

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7 April 2010, 1:31 pm

Review of the First Quarter 2010

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal ReserveThe Economist, InternationalThe Economist, International Monetary Fund (IMF)Quarterly Review

Global stock markets in the U.S. and abroad weathered a temporary setback in January and early February and then rallied to extend beyond one year the new bull market. In its best 1st quarter since 1999, the Standard and Poor’s 500 Index rose 4.9%. This marked the 4th consecutive positive quarter without a correction in excess of 10% and increased to 72.9% the advance dating back to March 9 of last year. Despite fears of inflation and central bank tightening in China, India, and Brazil, the ishares Emerging Markets ETF (EEM) rose 1.5%, which increased its advance from last March to 111.0%. Although Europe was plagued with sluggish growth and a sovereign debt crisis, the ishares Developed Countries ETF (EFA) was up 1.3% for an overall gain of 76.6%.

The catalysts for the early quarter’s correction, which amounted to declines of -8.1% for the S&P 500 Index, -12.9% for the EFA, and -14.7% for the EEM, originated in China and Greece. In January, the Chinese government, concerned that strong economic growth would accelerate rising prices for real estate and food, introduced curbs on excessive bank lending. Alarmist speculation from some China watchers that the Chinese policy makers were about to prick a bubble economy triggered profit taking. The inflation contagion spread quickly to the Indian and Brazilian markets, where fears mounted that interest rate hikes by their central banks might choke economic growth. The storm passed quickly and all three markets recovered, but inflation clouds were still visible on the horizon as the quarter came to a close.

If the problem in China, India, and Brazil was that their economies were too healthy, the problem in Greece, Portugal, and Spain was that their economies were too sick. Many of the Euro area governments resorted to huge budget deficits to fight the recession, but national debts measured as a per cent of GDP were most worrisome in these countries. Although there was widespread agreement that a Greek default was unacceptable, the crisis was exacerbated by fierce worker resistance to belt tightening measures proposed by the Greek government and ugly bickering among Euro area governments as to who would finance a solution to the problem. As European stock markets trembled and the euro dropped like a stone, government leaders, the European Central Bank (ECB), and the International Monetary Fund (IMF) finally worked out a compromise. By the end of March, European stock markets recovered and the euro stabilized, but the potential for debt headaches down the road persisted.

Despite high unemployment, anemic consumer spending, a weak housing market, humongous federal deficit projections, and unseemly, vicious partisan squabbling in Congress, U.S. stock investors focused on positive developments. Driving optimism in the U.S. stock market upward were fresh data showing economic recovery, strong and above-expectation 4th quarter corporate profit reports, and comforting statements by the Federal Reserve that inflation was under control and an accommodative policy would be maintained for “an extended period.” An indication of investors’ confidence was that the best performing S&P 500 industry sector was consumer discretion (+11.8%) followed by industrials (+9.3%). On the bottom rungs of the ladder were the relatively conservative telecommunications (-2.5%) and utilities (-2.9%). In their optimism, investors preferred low-quality stocks, and their appetite for many of the big blue-chip stocks was meager: suffering declines were Exxon Mobil (-1.8%), Microsoft (-3.9%), AT&T (-7.8%), Pfizer (-5.7%) and Coca-Cola (-3.5%).

An interesting and noteworthy development in the 1st quarter was that the gain in the U.S. stock market was accompanied by a rise in the dollar. Since early 2008, the dollar and stock prices had exhibited a pronounced inverse relationship, and for both to move up together was seen by many investors as a positive sign that recession fears had subsided. Commodity prices usually fall when the dollar rises, and the CRB Commodity Index declined 3.5% during the quarter. On the other hand, gold gained $15.50/ounce to $1115.50/ounce and oil rose from $79.36/barrel to $83.76/barrel.

The bond market was relatively calm during the quarter: the yield on the benchmark 10-year U.S. Treasury note started the quarter at 3.84%, never rose above 3.88% nor fell below 3.56%, and ended the quarter at 3.83%. Thirsty for yield, individual investors continued to pour money into investment-grade and high-yield bond mutual funds despite the huge borrowing needs of the government and expectations that the Federal Reserve will push interest rates higher later in the year. As a result, the spread between U.S. Treasury notes and corporate bonds narrowed to levels not seen since late 2007. An ominous development in March was that both investment-grade and high-yield “junk” corporate bond issuers increased significantly their issuance of new bonds, thereby indicating their view that yields will most likely rise (and prices fall) in the future.

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1 April 2010, 12:06 pm

Good Reading: Lords of Finance

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal ReserveThe Economist, InternationalThe Economist, International Monetary Fund (IMF)Quarterly ReviewGood Reading, Financial Times

Good reading: Lords of Finance: The Bankers Who Broke The World by Liaquat Ahamed (Penguin Press, 2009), 505 pp.

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24 February 2010, 4:12 pm

Laning Addresses Investment Symposium

At an investment symposium held on Tuesday at the University Club of Milwaukee, Marietta portfolio manager Bruce Laning presented the positive case for a multiyear global economic expansion and a further, if bumpy, rise in equity prices. He pointed out that the U.S. recovery will likely be modest, due in large part to sluggish consumer spending and continued bank credit issues, whereas prospects for the leading emerging economies are much brighter. He concluded that diversification is now very important and urged attendees numbering about 50 to take a global perspective in structuring their portfolio.

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17 February 2010, 1:11 pm

Threats to Global Economy and Markets

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal ReserveThe Economist, InternationalThe Economist, International Monetary Fund (IMF)Quarterly ReviewGood Reading, Financial TimesThe Economist, The Wall Street Journal, International

The blood pressure of the investment community has been elevated several notches in recent weeks as threats to the global economic recovery have surfaced. Stock markets around the world have slumped with unnerving volatility, even though a consensus of economic forecasters have reassuringly continued to project a solid if not spectacular global recovery in 2010 and the latest batch of corporate earnings reports have been well above analysts’ expectations. Creating additional palpitations has been a sharp drop in commodity prices and a corresponding rise in the dollar as risk-averse investors have responded with a flight to safety.

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4 February 2010, 12:32 pm

Today is the 10th Anniversary of Marietta Investment Partners

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal ReserveThe Economist, InternationalThe Economist, International Monetary Fund (IMF)Quarterly ReviewGood Reading, Financial TimesThe Economist, The Wall Street Journal, InternationalMarietta, 10th Anniversary

Today, Thursday, February 4th, Marietta Investment Partners is celebrating it's 10th anniversary. We thank our clients for their support though the challenging and, at times, difficult last decade, which included two brutal recessions and two bone-crushing bear markets. We remain dedicated to serving our clients and we are confident the next decade will provide satisfying investment returns.

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2 February 2010, 5:15 pm

Five Star Best in Client Satisfaction Award

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal ReserveThe Economist, InternationalThe Economist, International Monetary Fund (IMF)Quarterly ReviewGood Reading, Financial TimesThe Economist, The Wall Street Journal, InternationalMarietta, 10th AnniversaryAwards, Milwaukee Magazine


In 2009, Milwaukee Magazine surveyed Milwaukee-area consumers, financial services professionals and subscribers to identify financial advisors considered to be the best in providing client satisfaction. All 3 of Marietta's portfolio managers were among the 7% of the area's wealth managers to be honored.

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28 January 2010, 4:14 pm

Stronger Global Growth Expected



On January 26, the International Monetary Fund (IMF) hiked its 2010 global GDP forecast from 3.25% as of last October to 3.9%. This projection is now above our year-end forecast of 3.5%, which in turn is slightly above the 3.2% year –end estimate issued by The Economist. The IMF continues to endorse the consensus view that 2010 growth will be driven by the emerging and developing economies (+6.0%, with a further acceleration to 6.3% in 2011), whereas the advanced economies will remain sluggish (2.1% in 2010, with a rise to 2.4% in 2011).

The IMF’s revised 2010 growth projections for individual countries are close to those in our January 4, 2010 Outlook.


 


Source: IMF staff estimates; www.imf.org

The IMF report is in many respects encouraging:  economies are accelerating more quickly than expected, equity markets have recovered faster than expected, stability has been restored to credit markets and commodity prices have rebounded. A possible concern lies in the IMF’s 2010 inflation forecast:  an expected inflation rate of 1.3% in the advanced economies will provide central banks in these countries with considerable flexibility is setting monetary policy, but the 6.2% forecast in the emerging and developing economies may trigger restrictive policies.

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20 January 2010, 4:17 pm

Corporate Earnings Season

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal ReserveThe Economist, InternationalThe Economist, International Monetary Fund (IMF)Quarterly ReviewGood Reading, Financial TimesThe Economist, The Wall Street Journal, InternationalMarietta, 10th AnniversaryAwards, Milwaukee MagazineEarnings

The corporate earnings season is fully underway and we are tracking closely the results on a company-by-company basis. We have combed through the S&P 500 Index and the S&P 400 MidCap Index and have selected 134 stocks that meet our criteria for inclusion in client portfolios. We have similarly screened over 440 international stocks that trade with American Depositary Receipts (ADR’s) and have market capitalization of at least $1 billion, and have identified 116 stocks that merit close attention. In coming days and weeks we will review carefully the revenues and earnings progress of the 250 companies in our “universe,” together with the CEOs' comments on business conditions and future expectations. We will also monitor the response of research analysts and the reaction of the markets. Our review will have a direct and immediate bearing on our purchase and sale of stocks in client portfolios.

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11 January 2010, 11:08 am

China and Brazil Watch

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal ReserveThe Economist, InternationalThe Economist, International Monetary Fund (IMF)Quarterly ReviewGood Reading, Financial TimesThe Economist, The Wall Street Journal, InternationalMarietta, 10th AnniversaryAwards, Milwaukee MagazineEarningsThe Economist, International, China, Financial Times, Brazil

In our January 4 Outlook, we contrasted the accelerating economic strength of China, India, and Brazil with the struggling U.S. and European recoveries. Fresh evidence of Chinese prosperity is the surprising surge in both exports and imports in data released overnight. Another indication may be found in today’s Financial Times in an article “China lenders eclipse U.S. rivals.” The article reveals that all 7 of the world’s top valued banks (ranked by bank share price to book value) are Chinese or Brazilian, and concludes the data “reflect growing [investor] confidence in emerging markets, particularly China and Brazil.” In 2000, 5 of the top 6 highest valued banks were American. To highlight the contrast among economies, another article on the same page of the Financial Times, “Lingering doubts over recovery keep European inventories low” reveals that European business executives continue to have very low confidence in their own economic future. To be sure, the latest The Economist poll of forecasters (1/9/2010) foresees an anemic 1.4% real GDP growth for Euro area in 2010.

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7 January 2010, 3:15 pm

Review of the Fourth Quarter and Year 2009

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal ReserveThe Economist, InternationalThe Economist, International Monetary Fund (IMF)Quarterly ReviewGood Reading, Financial TimesThe Economist, The Wall Street Journal, InternationalMarietta, 10th AnniversaryAwards, Milwaukee MagazineEarningsThe Economist, International, China, Financial Times, BrazilQuarterly Review

Amid further evidence of global economic recovery, many of the trends dominating financial markets since early March were extended through the 4th quarter. The U.S. and international stock markets rose, including gains of 5.5% in the Standard & Poor’s 500 Index, 6.7% in the EEM Emerging Markets ETF, and 1.1% in the EFA Developed Countries ETF. Most commodity prices continued their ascent, including a hike from $70.61/barrel to $79.36/barrel in the price of oil and a pop from $996/ounce to $1,100/ounce in the price of gold. The yield rose (and price fell) on the benchmark 10-year U.S. Treasury note and the interest rate on most money-market funds remained at or below 1.0%. A notable new development was a December rally in the dollar against major currencies, which may be attributed to surprisingly positive U.S. economic data suggesting that the recovery might be accelerating. An immediate consequence of the dollar’s bounce was to reverse partially the upward surge in commodity prices, and in particular gold, and to reduce the relative attractiveness of international investments.

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4 November 2009, 1:46 pm

Review of the Third Quarter 2009

Tags: International Monetary Fund (IMF)Quarterly ReviewISIThe Wall Street Journal, Federal ReserveThe Economist, InternationalThe Economist, International Monetary Fund (IMF)Quarterly ReviewGood Reading, Financial TimesThe Economist, The Wall Street Journal, InternationalMarietta, 10th AnniversaryAwards, Milwaukee MagazineEarningsThe Economist, International, China, Financial Times, BrazilQuarterly ReviewQuarterly Review

In defiance of the laws of investment gravity, equity markets around the world soared during the 3rd quarter. The Standard & Poor’s 500 Index, for example, surged 15.0% without a setback greater than -4.4%. Including the gains dating back to its nadir on March 9, the S&P 500 rally measured a whopping 53.6%; the largest correction was a modest -6.7% between June 9 and July 10. The Dow Jones Industrial Average, also up 15.0%, enjoyed its best quarter since 1998 and its best 3rd quarter since 1939. The geographical breadth of the rally is evidenced by the even larger advances in the international markets. The EFA Developed Markets ETF galloped 19.4% in the quarter, which increased its advance to 72.5% from its March low; the EEM Emerging Market ETF shot up 20.7% in the last quarter and posted an incredible 95.1% rocket ride from its March low.

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