Stock Inflows Beat Bonds First Time in 10 Weeks, Citigroup Says – Bloomberg 11-29-12

Salient to Investors:

Markus Rosgen and Yue Hin Pong at Citigroup said EPFR Global reported stock funds this week had their second-largest weekly inflows in 2012 and more than the inflows into bond funds, while US funds reversed an outflow trend and Asia attracted the second-largest inflows this year.

Pong said most economic data have positively surprised, and more people are starting to believe the US fiscal cliff may turn out to be ok. Pong said it would take more time for equities to gain full speed against bonds given lingering issues in Europe and weak global trade.

Global investors say the world economy is in its best shape in 18 months

Strategists at three of the world’s biggest banks are advising investors to buy Asian equities most tied to economic growth after valuations fell and the global economy showed signs of recovery.

Niall MacLeod at UBS  predicts technology, industrial and materials stocks will climb in 2013 as China’s expansion accelerates and fiscal-cliff concerns fade. Jonathan Garner at Morgan Stanley said valuations for cyclical shares are 40 percent lower than defensive equities, including household-products makers. Rosgen said an improving earnings outlook will help lure investors.

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Goldman Pushes Subprime ABX Index as Housing Rebounds: Mortgages – Bloomberg 11-29-12

Salient to Investors:

Goldman Sachs said homebuilders have already priced in the housing recovery, so investors need to look beyond these stocks for the ripple effects of housing stabilization – like certain versions of the ABX and US domestic banks.

Kyle Bass at Hayman Capital Mgmt said senior-ranked subprime debt offer a very safe place to make double-digit returns, and are virtually bulletproof because even if the housing market declines by 10 percent, investors won’t take a principal hit on their bonds.

Clayton DeGiacinto at Axonic Capital sees significant risks in the market, including loan servicers forgiving principal for delinquent homeowners.

John Sim at JPMorgan Chase sees better value in subprime cash bonds.

Buck Horne at Raymond James  said the housing recovery may be hitting headwinds, including new financial regulation likely to emerge in 2013.

John Dolan cautioned that new-home construction and property values may not move at the same pace or in the same direction, and mortgage-bond prices can be linked to unrelated issues such as benchmark rates and how individual loan servicers deal with bad debt. Dolan said ABX contracts are a good viable way of expressing a view on home prices.

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Foreclosure Wave Averted as Doomsayers Defied: Mortgages – Bloomberg 11-29-12

Salient to Investors:

The flood of foreclosures predicted by experts two years ago has failed to materialize. Instead, the number of properties for sale shrank to the fewest in a decade, prices appreciated at the fastest pace since 2005, and the gradual healing of the housing market helped boost consumer confidence and the economy.

Banks have stepped up foreclosure alternatives to avoid legal challenges, while Investors are purchasing foreclosed homes in bulk before they even hit the market, further limiting new supply.

Susan Wachter at Wharton said she was wrong to fear a wave of foreclosures when the settlement came, while changes to Obama’s loan-modification program had the biggest impact on reducing pending foreclosures since late 2010 by creating a template that lenders followed. Wachter said an estimated 1 million homeowners qualify for payment-plan changes with principal reductions under Obama’s guidelines.

Joshua Rosner at Graham Fisher said slowing the foreclosure process has allowed banks to avoid booking losses on non-performing loans – the goal all along for banks, servicers and the government was to slow walk the whole thing.

S&P/Case-Shiller Index showed home prices in 20 U.S. cities rose 3 percent in September from a year earlier, the most since 2010. The median price of an existing home sold last month jumped 11 percent from a year earlier, the steepest annual increase since November 2005, while the number of previously owned homes on the market in October fell to the fewest since December 2002.

The shadow inventory of pending foreclosures is shrinking as new defaults decline and banks work through their backlog of bad loans.

Vishwanath Tirupattur at Morgan Stanley said distressed properties brought to market over the next year won’t be enough to depress values, and the shadow inventory has declined faster than expected.

Nela Richardson at Bloomberg Government said the shadow inventory still looms but won’t emerge all at once.

Mark Fleming at CoreLogic said the best, lasting legacy of the crisis is that the industry has created a more nuanced approach to loss disposition – the idea of evaluating a delinquent borrower for all different alternatives is here to stay.

Robert Shiller at Yale said the inventory of potential foreclosures remains a threat across the US and could result in a new wave of defaults and depress home values, especially if the economy slows. Shiller wonders why people have so much confidence in the recovery as history shows that these markets are hard to predict.

Anthony Sanders at George Mason University said delaying the process may be hindering a faster recovery – the best cure for any market meltdown is to let prices fall to their natural level Sanders said the wisdom of delaying foreclosures etc. was more a political act than an economic act.

The vacancy rate for rental homes is at its lowest rate since 2002, and the vacancy rate for owner-occupied properties is at a level last seen in 2005.

Foreclosures are attracting investors, many of which aim to turn them into rentals. Private-equity firms are raising as much as $8 billion to buy single-family homes. All-cash sales represented 29 percent of existing-home deals in October, while investors purchased 20 percent of homes in October.

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Bond Investor Gundlach Buys Stocks, Sees ‘Kaboom’ Ahead – Bloomberg 11-29-12

Salient to Investors:

Jeffrey Gundlach at DoubleLine Capital says:

  • The first phase of the coming debacle was the 27-year buildup of corporate, personal and sovereign debt to 2008.
  • The third phase will be deeply indebted countries and companies defaulting sometime after 2013.
  • Buy gemstones, art and commercial real estate and other hard assets.
  • Chinese companies, US natural gas producers and gold-miners are bargains.
  • His Total Return Bond Fund is 78 percent in low duration residential mortgage-backed securities including the low duration nonguaranteeds, which Philip Barach at DoubleLine said would have few defaults if higher interest rates meant the economy was improving and housing prices recovering. Sarah Bush at Morningstar cautioned on July 18 about the use of volatile mortgage-backed derivatives such as inverse floaters.
  • No country will default in 2013. However, Japan is running out of policy tools.
  • Inflation could rise by 2 percent if the Fed buys more government debt.
  • Obama will not be able to reach an accord with Congress to make significant cuts in the deficit. Tax hikes on the wealthy won’t bring in enough to have a significant impact and politicians won’t cut entitlement programs much because the public overwhelmingly supports them.
  • There will be no grand compromise on the fiscal cliff if an agreement isn’t reached by January, so expects politicians to push the deficit issues into 2013 and beyond. Obama won’t give on anything, and the Republicans won’t roll over.
  • There are opportunities in emerging-markets equities, particularly in China.
  • Demographics in some emerging markets will support their sustained growth. Developed nations will have fewer than 3 workers for every retiree by 2025 versus 6 to 7 for Brazil, India and Mexico.
  • US companies don’t have much potential for growth.
  • Gold-miners and natural gas producers are cheap.
  • Apple will struggle to reach its earnings potential without an innovator like Steve Jobs at the helm.
  • Investing in natural gas is similar to buying gold in 1997.

Jeffrey Sherman at DoubleLine said Chinese stocks make up the majority of the 6.7% of international equity holdings in his fund.

Luz Padilla at DoubleLine said the only reason asset prices are up is because of all the liquidity in the system, but this could turn very quickly.

Larry Fink at BlackRock says the US banking system is in good shape and the large supply of natural gas in the US will create jobs, and is long-term very bullish on the US.

Richard Pildes at NYU said the constitutionality of Congress creating independent agencies like the Fed has been long settled.

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U.S. Economy Grew at 2.7% Rate, More Than First Estimated – Bloomberg 11-29-12

Salient to Investors:

Chris Rupkey at Bank of Tokyo-Mitsubishi UFJ said the economy is growing moderately, and the disappointing pace of consumer spending is less worrisome as other sectors of the economy are doing better, like housing.

The median economist expects consumer spending to be at a 1.9 percent pace in Q3, and GDP to have grown at a 2.8 percent rate.

Two-thirds of global investors say the global economy is either stable or improving, the most since May 2011.

Jan Hatzius at Goldman Sachs said Sandy may trim as much as 0.5 percent from Q4 GDP, but reconstruction may add as much as 0.75 percent in Q1 2013.

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World Economy in Best Shape for 18 Months, Poll Shows – Bloomberg 11-29-12

Salient to Investors:

Andrea Guzzi at IST Investmentstiftung fuer Personalvorsorge said the global economy is recovering and healing, thanks to the US and the emerging markets – more people are becoming wealthy, less and less are poor. Guzzi said many countries have oversized banking sectors.

Gala Prada at Fiatc Mutua de Seguros y Reaseguros expects QE4 or more asset purchases if the economy doesn’t improve.

Christian Thwaites at Sentinel Investment says US companies have better profit potential, balance sheets and access to capital.

In a Bloomberg global poll:

  • Two-thirds of investors see the global economy as either stable or improving. the most since May 2011.
  • The US offered the best opportunity over the next year for the eighth straight quarter, China ranked second, and the EU offering the worst returns.
  • Over 1 in 3 forecast say equities offer the best returns in the coming year, with real estate second, and bonds offering the worst returns.
  • 75% expect the Fed to begin outright purchases of Treasurys after its plan for swapping short-dated securities for longer-dated ones expires. 40% expect the Fed to continue QE3 into 2014.
  • 70% expect large banks to reduce payrolls further in the next year, citing regulatory changes.
  • 75% expect a short-term agreement to avert the fiscal cliff. The OECD says the world economy would go into recession if the US fails to act.
  • Near 50% of investors plan to increase equities over the next 6 months, while more than 50% expect the S&P 500 to will rise during the period.
  • More than 60% say housing values will be higher in six months.
  • 12 percent see commodities as the best-performing asset class over the next year versus 18 percent in September.
  • 48% intend to reduce T-bonds over the next 6 months, while 50% say Treasuries are safer than AAA-rated corporates.
  • Over 40% say EU markets offer the least opportunities over the next year, 23% say Japan, 17 percent say the Middle East.
  • 40% are less likely to put money into Egypt.
  • 50% don’t expect a military strike against Iran in 2013.

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Stocks Rise as Commodities Rally on U.S. Budget Optimism – Bloomberg 11-29-12

Salient to Investors:

Two-thirds of investors surveyed by Bloomberg described the global economy as either stable or improving. the most since May 2011. The investors said the US offered the best opportunity over the next year for the eighth straight quarter.

Goldman Sachs recommended buying Indian stocks.

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Japan Stocks After Goldman Says Election May Help Shares – Bloomberg 11-28-12

Salient to Investors:

Koji Toda at Resona Bank said people are buying Japanese shares because prices are too low, even with the economy in a rut.

Kathy Matsui at Goldman Sachs predicts the Topix will reach 930 within a year and profits will rise 20 percent in the fiscal year starting in April. Matsuis expects the LDP, if it takes power as polls suggest, to combat deflation with public works investment, possible corporate tax cuts, and a re-think of the nuclear phase-out plan.

The Topix trades at 0.9 times book versus 2.1 for the S&P 500 Index and 1.5 for the Europe Stoxx 600 Index.

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Fiscal Cliff Avoided in Poll Seeing Market Gain Deal – Bloomberg 11-28-12

Salient to Investors:

In a Bloomberg global poll of investors:

  • 75% expect a short-term agreement to avert the fiscal cliff, 6% expect to go over the cliff and into a recession. 40% expect financial markets to rise after a short-term tax-and-spending deal, 28% see no significant market reaction, 26% say markets would fall. 7% see no sweeping accord, 50% see a package that reduces the deficit over 10 years, 38% expect no significant cut in federal debt.
  • 52% are optimistic about the impact of Obama on the investment climate, 51% said his re-election was good for the financial markets. 30% of US investors are optimistic about Obama, 68% pessimistic.
  • 65% of non-US investors endorse Obama’s policies. 55% approve of Obama, 33% approve of  Boehner. 26% of US investors approve of Obama, 73% disapprove.  54% approve of Boehner. 65% approve of Bernanke.
  • 46% say the US economy is improving, versus 34% in September. 53 % of non-US investors say economic growth is getting better, versus 34% of US investors.
  • 62% expect house prices to be higher in 6 months, 9 % expect a renewed decline.
  • 88% say taxes are going up. 51% say returning top marginal tax rates to Clinton levels will help the economy, 35% say it will hurt growth. 35 percent of US investors say higher taxes will help, 60% of non-US investors agree.
  • In response to the 3.8% tax on unearned income on Jan 1, 2013, 25% are taking profits, 13% are moving into tax-favored investments, 11% are selling dividend-paying shares, 9% are exercising stock options, and 38% are standing pat.

Philippe Giordan at KBL Monaco Private Bankers and the University of Paris Dauphine said tax increases won’t hurt as recovery will first come from real estate and mass consumption.

Kenichi Katsuhara at Aozora Bank said the problem is the fundamental difference in political philosophy. Uzi Zimmerman at Ventura Capital Mgmt said Obama’s policies have been and will be damaging to the US economy.

Nessan O’Carroll at Mizuho Corporate Bank doesn’t expect significant reallocation of investment outside the US or a significant hit to wealthy entrepreneur affected by the tax increases.

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