Category: Chart of the Week

What To Do With All That Cash?

This week’s chart of the week examines the cash holdings of companies in the S&P 500 following the recession. Since 2007, the cash per share for the S&P 500 index has risen to $329.01 for a compounded annual growth rate of 11.5%.

This week’s chart of the week examines the cash holdings of companies in the S&P 500 following the recession. Since 2007, the cash per share for the S&P 500 index has risen to $329.01 for a compounded annual growth rate of 11.5%. This was the result of companies protecting themselves against another economic downturn, but as the S&P 500 has hit record highs, cash and other short-term investments have continued to grow.

Investors often view high levels of cash as a sign of inefficiency. If companies have no favorable projects to invest their cash in, it should be returned to the shareholders. The most apparent instance of this was when shareholder activists began demanding Apple (AAPL) pay out some of its cash to investors. While Apple has announced it will return $100 billion to shareholders, it partially financed this buyback with debt to avoid taxes on its overseas cash. Although these high levels of cash are often viewed negatively, it could provide investors with opportunity if and when businesses decide to use these holdings. In addition to being paid out to shareholders, this cash could be reinvested in the firm or used to make new acquisitions, both theoretically leading to increased growth for the company. However, issues such as Apple’s international taxation may continue to discourage businesses from dispersing these positions. Furthermore, holding high amounts of cash may be the new norm as companies look to avoid liquidity problems during any decline the economy might face.

Comparing Consumer Debt to Federal Debt

This week’s Chart of the Week focuses on debt levels of the U.S. consumer and federal government. The Federal debt has increased significantly since the 3rd quarter of 2008 (onset of the Global Financial Crisis), and appears to be maintaining this trajectory. On the other hand, while consumers’ household debt has increased in absolute terms, there have not been dramatic spikes in the debt level.

This week’s Chart of the Week focuses on debt levels of the U.S. consumer and federal government. For consumer debt, all forms of debt other than mortgages are included in the analysis. As of the fourth quarter of 2012, U.S. consumers collectively held debt of $2.8T. Over the 32 year time frame since 1981 (when data was first collected), consumer debt has increased from $378B to $2.8T, a whopping increase of 635%. However, this still constitutes a relatively small percentage of U.S. debt, and has hovered between 5 and 10% over the years.

On the other hand, federal debt has not only been a much higher dollar amount (not surprising), but has also been a much more volatile component of overall U.S. debt. As of the fourth quarter of 2012, the Federal Government’s debt was $11.6T. In the 32 year time frame, Federal debt has increased from $821B to $11.6T, an even larger jump of 1313%. Federal debt has averaged 22% of total U.S. debt ranging from a low of 16% to a high of 29%.

The chart above depicts these four debt data points: households’ consumer credit dollar amount, Federal government’s dollar amount, consumer debt percentage of total U.S. debt, and Federal debt percentage of total U.S. debt. The takeaways are quite evident. The Federal debt has increased significantly since the 3rd quarter of 2008 (onset of the Global Financial Crisis), and appears to be maintaining this trajectory. On the other hand, while consumers’ household debt has increased in absolute terms, there have not been dramatic spikes in the debt level. Additionally, it has maintained its weight in the overall debt picture. Given the disparity in both dollar amount and share of overall debt, the level (and trend) of federal debt will continue to have a much more notable impact on the economy and financial markets than consumer debt.

Further Support for Emerging Market Equities

This week’s Chart of the Week examines historical and projected contributions to total world Gross Domestic Product (GDP) based on Purchasing Power Parity (PPP) at exchange rates prevalent in the United States.

This week’s Chart of the Week examines historical and projected contributions to total world Gross Domestic Product (GDP) based on Purchasing Power Parity (PPP) at exchange rates prevalent in the United States. The International Monetary Fund (IMF) in its April 2013 release of the World Economic Outlook report shows the share of total world GDP between advanced economies and emerging and developing economies from 1980 through 2018. As seen in the above graph, advanced economies’ share of world GDP has steadily declined since the early 1990’s with emerging and developing economies comprising an increasingly larger percentage of world GDP over this time.

2013 is the first year that emerging and developing economies are expected to contribute a larger share of total world GDP than advanced economies. In addition, emerging market countries typically have lower levels of government debt and more favorable demographics than their advanced economy counterparts. While emerging market stocks have underperformed in recent years compared to other equity markets, their growing contribution to world GDP offers a compelling case for continued allocations to this asset class.

 

Has The Volcker Rule Affected Loan Syndication Activity?

This week’s chart looks at current U.S. Syndicated Loan Underwriting Volume in comparison with the new business environment created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd Frank was enacted by President Obama in 2009 – 2010 with stated objectives of increasing financial accountability and transparency, ending “too big to fail” institutions requiring corporate bailouts, and protecting consumers.

This week’s chart looks at current U.S. Syndicated Loan Underwriting Volume in comparison with the new business environment created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd Frank was enacted by President Obama in 2009 – 2010 with stated objectives of increasing financial accountability and transparency, ending “too big to fail” institutions requiring corporate bailouts, and protecting consumers. However, the ability of the Act’s provisions to accomplish these goals has been the subject of fierce debate. Amidst many new regulations imposed on the Financial Services Industry, Dodd-Frank restricts the types of proprietary trading activities that financial institutions are allowed to practice. This restriction comprises part of what is known as “The Volcker Rule”, which was implemented on July 21, 2012.

One of the major criticisms of the Volcker Rule has been one voiced by Canadian, British, and Japanese government finance ministers and bankers. These countries say the Volcker Rule is a disincentive for their banks to transact with their American counterparts because the Volcker Rule exempts U.S. government securities from its restrictions on proprietary trading but leaves similarly-rated foreign institutions out of the exclusion. Volcker Rule proprietary trading prohibitions would thus apply even if a transaction were between foreign parties wherein an American bank is involved only in an ancillary (ex. clearinghouse) capacity. Under this theory, in order to avoid this interference, foreign banks may avoid syndicating with U.S. banks.

Given that as of 1Q2013, North American deals constitute 82.1% of all Global Syndicated Loans1, the number of domestically-originated syndicated loans which receive financing should be significantly affected if these doomsayers’ warnings ring true. However, per this week’s chart, over three quarters have passed since the Volcker Rule has become effective, and U.S. Syndicated Loan Underwriting Volume has recovered to pre-subprime crisis levels. Thus, while Dodd Frank and Volcker will continue to be scrutinized along other lines, it would seem that the hypothesized downward pressure on syndicated deals has been much to do about nothing.

1Bloomberg

Household Wealth Rises, Will Job Growth Follow?

This week’s chart illustrates recent shifts in the personal savings rate and household net worth. As seen in the graph, household wealth is approaching its pre-recession level as the recovery in the stock and housing markets has helped repair household finances.

This week’s chart illustrates recent shifts in the personal savings rate and household net worth. As seen in the graph, household wealth is approaching its pre-recession level as the recovery in the stock and housing markets has helped repair household finances. The Federal Reserve’s tactics of holding interest rates low and offering stimulus in the form of Treasury and mortgage purchases seem to be creating its intended wealth effect, albeit slower than anticipated.

As household finances improve, consumers will be less inclined to save and more likely to purchase goods and services. Currently, the personal savings rate is hovering around 2.5% which is substantially less than its recession high of 6%. If the current rallies in the stock and housing markets continue, we should see a trickledown effect to many sectors of the economy, most notably jobs. In theory, an increase in consumer demand should lead to an increase in labor demand as companies ramp up production in response to more consumer spending. Additionally, labor demand will increase wages, further perpetuating the wealth effect.

Valuation of the S&P 500 at Prior Bear Market Inflection Points

On April 30, 2013 the S&P 500 Index closed at a level of 1597.57, which is the all time record high for the index. The new record high in the S&P 500, coupled with the fact that the index is up more than 105% during the four year rally since the March 9, 2009 low, has caused many market observers to speculate that the market is due for a significant correction.

On April 30, 2013 the S&P 500 Index closed at a level of 1597.57, which is the all time record high for the index. The new record high in the S&P 500, coupled with the fact that the index is up more than 105% during the four year rally since the March 9, 2009 low, has caused many market observers to speculate that the market is due for a significant correction. This week’s Chart of the Week takes a look at the trailing 12 month Price to Earnings Ratio (P/E Ratio) of the S&P 500 at inflection points of the five bear market corrections (defined as a drawdown of at least 20%) since 1970.

As the chart illustrates, with the exception of the bear market correction that began in 1980, the current 15.68 P/E Ratio of the S&P 500 is significantly lower than the valuation of the index at the inflection points of the past five bear market corrections. To put the current valuation of the S&P 500 in context, the average P/E Ratio of the S&P 500 at the end of the past five bull market runs has been 19.91, and the average P/E Ratio of the index since 1970 has been 16.39.

To be sure, the current P/E Ratio of the S&P 500 by no means guarantees that the current bull market run will continue. It does however indicate that if P/E Ratios were to return to their longer term averages (not to mention the average levels at prior inflection points), there is still significant upside potential for the U.S. equity market.

The Continuing Case for Emerging Market Stocks

This week’s Chart of the Week examines the relative performance of equity markets from a global perspective. Since January 1, 2013, U.S. large-cap stocks have returned a cumulative 10.03%, international large-cap stocks have returned a cumulative 4.38% and emerging market stocks have returned a disappointing -1.92% through March 31, 2013.

This week’s Chart of the Week examines the relative performance of equity markets from a global perspective. Since January 1, 2013, U.S. large-cap stocks have returned a cumulative 10.03%, international large-cap stocks have returned a cumulative 4.38% and emerging market stocks have returned a disappointing -1.92% through March 31, 2013.

Many factors can be attributed to the underperformance of emerging markets including countries’ management of their monetary policies. With slowing global demand and inflationary pressure taking a toll on emerging markets, countries have been forced to adjust their monetary policies. Brazil has increased interest rates to combat inflation, which has impacted the Brazilian Real. More generally, a combination of slowing demand for their products and rising inflation has weakened the export market for emerging market countries. In contrast, Japan’s recent activity to devalue the Yen had made its exports significantly more attractive, thus boosting its competitiveness, a move that has benefitted returns for the MSCI EAFE index.

Currently, emerging markets trade at a price-to-earnings ratio of 12 compared to 15 for U.S. large-cap stocks. This favorable valuation level relative to U.S. stocks combined with superior long–term growth prospects continue to make emerging market stocks an attractive investment option, despite recent market struggles.

U.S. Stock Market Continues Its Upward Climb

This week’s chart takes a look at the S&P 500 index in direct correlation to corporate profit earnings. Thriving on corporate profits, the S&P 500 index closed at 1593.37 this past Thursday, its highest level in history. Profits by corporations, in addition to a recovering housing market have helped expand the economy for 14 consecutive quarters.

This week’s chart takes a look at the S&P 500 index in direct correlation to corporate profit earnings. Thriving on corporate profits, the S&P 500 index closed at 1593.37 this past Thursday, its highest level in history. Profits by corporations, in addition to a recovering housing market have helped expand the economy for 14 consecutive quarters. Corporate profits can be attributed to the elevated growth in emerging economies in conjunction with the positive contribution of drastically lower interest rates to the bottom line.

With corporate spreads tightening and record low interest rates, investors seeking higher returns are diverting from secure investments and saving accounts to riskier investments such as stocks. The preceding 10 months have demonstrated that stocks have advanced approximately 25%, as measured by the S&P 500, with $6 trillion of wealth created for U.S. households, institutional investors, and corporations.

With corporate profits blooming, the U.S. stock market is becoming one of the strongest bull markets in 50 years. Charged by growing signs of a recuperating economy, the S&P 500 has now recouped more than all of its losses since the financial collapse and crisis of 2008.

S&P 500 Rally to Continue or Treasury Yields to Rise?

In this week’s chart we look at the historical gap between the earnings yield of the S&P 500 and the ten year Treasury yield. The larger the gap is between the earnings yield and 10 year Treasury rate, the more attractive equities appear relative to bonds.

In this week’s chart we look at the historical gap between the earnings yield of the S&P 500 and the ten year Treasury yield. The earnings yield of the S&P 500 is the inverse of the P/E ratio and shows the percentage return in earnings for each dollar invested. We can compare this to the 10 year Treasury yield as one method to measure the difference in valuations between bonds and equities. The larger the gap is between the earnings yield and 10 year Treasury rate, the more attractive equities appear relative to bonds.

As shown in the chart, the difference between earnings yield and interest rates has been hovering near 5% for the past year. The previous time this surpassed 5% was in February 2009 which was followed by the S&P 500 bottoming that March and the beginning of a bull market. Currently, the gap is again elevated as the earnings yield has remained relatively high while ten year Treasury rates are near record lows. Could this signal that the current bull market still has plenty of room to run or that Treasury yields must soon begin to rise? This is a dynamic that bears watching over the rest of 2013.

Banking on Bank Loans

This week we look at the historic net asset flows for bank loans courtesy of Morningstar’s Asset Flows report. February 2013 saw the largest ever monthly net asset inflow for bank loan mutual funds and ETFs.

This week we look at the historic net asset flows for bank loans courtesy of Morningstar’s Asset Flows report. February 2013 saw the largest ever monthly net asset inflow for bank loan mutual funds and ETFs. This tops the previous best, January 2011, by 14%. Investors undoubtedly have been attracted to spreads well above the historic median.

In late 2011 with historically wide spreads, high yield experienced its largest net asset inflows and carried that momentum into the following year. Investors were paid off with double digit returns in 2012. Based on net asset flow data, investors are now banking on bank loans to produce strong returns in 2013. Net flows have been positive for eight straight months including the February high. Of course, investments can quickly change course as seen in 2011. The previous largest net inflow for bank loans occurred in January 2011 and was followed by the largest net outflow seven months later leading to disappointing returns that year. Thus while valuations appear compelling and fund flows have been positive, just like anything when it comes to investments, positive returns are not guaranteed!