The Treasury yield curve widened to a record, 2.81% amid signs the U.S. economy is strengthening.
Source(s): WSJ, iStockAnalyst.com
Data according to today’s Wall St. Journal survey of various Treasury primary dealers:
§ Forecast for 2-year yield to rise to 1.825% by the end of 2010; current = 0.799%
§ Forecast for 10-year note will yield 4.125%; current = 3.548%.
§ In June 2007, before the credit crunch, the 10-year yield traded above 5.3%.
§ However, the forecast 10-year note’s yield is near past 5-year average (4.1%)
§ YTD, Treasury’s have lost 2%
§ High-yield, high-risk corporate bonds are 2009’s best performing fixed income asset with a return of 57% YTD
Why will bond yields rise?
§ Better economic outlook
§ Fed expected to raise federal funds rate since holding them near zero since December 2008.
§ Large debt issuance by the Treasury, which is forecast to raise $1.4 trillion in the current fiscal year that started in October after selling $1.786 trillion in fiscal 2009
§ The dollar is looking better on a relative basis – see the US Dollar Index (USDX)
§ Euro is declining as “PIIGs” component of euro is experiencing credit perception issues (Portugual, Ireland, Italy and Greece)
§ 60%: Euro is about 60% of USDX
§ US Dollar Outlook: Its technical features appear strong although long term its fundamental are weak due to the US deficit picture
Bottom Line: Consider an investment in UUP, an ETF that is dollar bullish via futures contracts.
Toys “R” Us data:
§ Wal-Mart replaced Toys “R” Us as the largest US toy seller more than a decade ago
§ Toys “R” Us’ strategy is not to compete on price but to compete on service and selection, including high-end toy products (via it’s F.A.O Schwarz acquisition)
§ 849: U.S. Toys “R” Us and Babies “R” Us
§ 700: International stores
Strategic Brilliance or Blunder: Brilliance
§ Introduced to Zhu Zhu Pets (fake hamsters) at the Hong Kong Toys and Games Fair in 2008
§ Key competitive move #1: Determined market response
§ Key competitive move #2: Determined how to make the Zhu Zhu the 09 Christmas story
§ Key competitive move #3: In August 2009, placed large order with Zhu Zhu Pets maker (Cepia, an Australian firm) in preparation for Christmas 2009 shopping season
S&P 500 has recorded one of the most powerful stock rallies ever since 3/9/09:
§ 676.5: S&P low recorded on March 9, 2009
§ 1102.47: S&P price as of December 18, 2009
§ 62.9%: S&P 500 return since March 9, 2009 low which is one of the most powerful rallies on record
§ 22%: YTD S&P 500 stock market return
Other trends according to Barron’s:
§ 15 million job seekers
§ 5 million vacant apartments
§ Economy running at 71% capacity, versus a four-decade average of 81%, will hold wages and prices down.
§ GDP declined 6.4% in 1Q09 but increased 2.8% in 3Q09 - a 9.2% swing
§ Anticipated 2009 S&P 500 Operating Earnings: $61.33
§ Forecasted 2009 S&P 500 EPS = $76 (24% increase)
Where do we go from here?
Investment professionals have varied views:
§ According to Barron’s, "forecasts for gross-domestic-product growth lie between 2.3% and 4%, well below the average 6% rate of economic expansion historically seen in the year following a recession."
§ 20% return: some investment professional forecast a target for the S.& P. 500 in the range of 1300 to 1350 by the end of 2010, or about 20 percent from Friday’s close
§ 10% decline: many investment professionals predict a short term market decline of more than 10 percent
§ 25% decline: some predict a decline in the range of 20 or 25 percent
§ Up and then down Market: S&P 500 increasing to 1300 before it slides to 1250
§ Interest Rates increase: many believe that the central banks, fearing inflation will raise rates in the Spring of 2010, which will negatively impact stocks
§ Avoid Treasuries: since interests will rise, bond prices will fall. Thus, many forecasters are avoiding the Treasury market
§ Market leaders: consumer staples, health care, technology and industrial shares should take leadership (from financial stocks) in 2010
§ Stock Picker’s Market in 2010: big gains won’t be seen in ETFs and Mutual funds as many investors are leveraging these as opposed to individual stocks. Industry leaders should do well: Apple, Goldman, Oshkosh, Green Mountain
§ International Markets Lead the Way in 2010: foreign markets valuations are much lower than the US
§ Treasury yields are poised to climb higher in 2010, with the median forecast calling for the 10-year note to touch 4.125%.
§ Contrarian View: The pessimistic case is an easier one to digest as it’s focused on our current situation. However, the market looks forward.
The Bottom Line(s):
§ Dollar-cost average into State Street Global Advisors’ S&P500 (SPY)
§ Protect against the downside with S&P Index ETF with options (SH)
§ “Double Short” the market with a leveraged Index ETF (SDS)
§ Avoid Treasuries
§ Short Treasures (TBF)
§ Invest in market leaders such as Apple
§ Invest in foreign markets ETF (ishares = EFA) or mutual fund (Vanguard’s VGTSX)
Source(s): NYT, Birinyi Associates, ETF Trend Playing Handbook, Barron's.com, Google.com
Interesting December 2009 data re: Goggle’s primary SaaS: Google Apps below.
§ 3: Google’s Apps business is 3 years old
§ $750M: Google’s App business 2009 revenue
§ 2M: # of businesses using Google Apps
§ $19B: Microsoft’s 2009 office suite revenue
§ $22B: Google’s 2009 revenue
§ 60%: Google’s share of online advertising market
§ 1k: # of Google employees working on enterprise products, largely Apps.
§ $19B: Microsoft’s 2009 office suite revenue
§ 4/1/04: Gmail released to the world
Source(s): Forbes, WSJ, Google.com
§ 2.8%: GDP expanded 2.8% in 3Q09 vs. contracting 6.4% in 1Q09
§ 7.2M: U.S. economy has lost 7.2 million jobs
§ 10%: November 2009 unemployment #
§ 17: Following the previous recession which concluded in November 2001, companies continued to slash payrolls for 17 of the next 21 months
§ 11k: # of payroll jobs lost in November which was the smallest decline since late 2007
§ 474k: first-time unemployment 4 week moving average
§ 86%: business services’ share of job market (vs. manufacturing jobs)
§ $237.6B: the amount (30%) of rescue package money ($787B) invested in the economy since February 2009
Labor-market recovery cycle:
1. Less people are terminated as businesses find solid footing. What is the latest “first-time unemployment” number?
2. When demand increases, business productivity increases. What is the latest productivity number?
3. When new growth is evident, more part-time workers are hired. What is the latest temporary job number?
4. In a growing economy, full-time positions are plentiful. What is the unemployment rate?
Forecasts are typically incorrect:
Often too optimistic at the top, forecasts (and investors) are also frequently too pessimistic at the bottom.
§ In July 2007 forecasters said that housing prices wouldn’t decline.
§ In May 2009 forecasters said the economy would grow at about a 1 percent rate in the second half of 2009. That’s likely to be off by a factor of three.
Source(s): Newsweek, Bureau of Labor Statistics, Business Roundtable
§ 70%: # of mutual funds that charge 12b-1 fees
§ 12b-1 fees: named after the SEC rule that allows them; fees cover marketing and distribution costs (e.g., financial advisor commissions, 401(k) plan administration, mailing prospectuses, etc…)
§ 0.15 To 0.30%: average 12b-1 fee.
§ $140b: Since 1990, investors have paid more than $140 billion in 12b-1s
§ 8.5%: average mutual fund up-front fee (sales load) in 1980s.
In 2010, technology M&A activity should accelerate as technology firms will look to raise capital, divest noncore assets, wind-down sales increase and acquire rivals to improve competitive positioning.
Interesting Technology M&A data points
§ $1B: this year, only 31 technology transactions valued at $1 billion or more have been consummated. This is less than half the level seen in 2005-2007.
§ 0.9x Revenue: Technology start-up valuation in 1Q09
§ 1.4x Revenue: Technology start-up valuation in 4Q09
Interesting Technology M&A Trends
Footprint extension (i.e., vertical integration; value-chain expansion) continues.
§ Software firms are encroaching in the hardware space (e.g., Oracle purchasing Sun)
§ Computational hardware firms are purchasing technology services assets (e.g., Dell purchasing EDS)
§ Services firms investing in software assets (e.g., Cognizant’s Master Data Management software product)
§ Networking firms investing in computational hardware (e.g., Cisco’s server blade)
Source(s): NYT, 451 Group
Salient data points:
§ 23: # of consecutive years of Pepsi Super Bowl advertising
§ 7.3%: Pepsi’s volume decline in first nine months of 2009
§ 2.3%: Soft-drink industry’s volume decline over same period
§ 6.6%: Coke's volume decline over same period
§ $74.6M: Pepsi brand ad investment in 2008
§ 60%: year-over-year (YOY) increase in Pepsi’ online ads in 2010
§ $3M: Cost of 30-second Super Bowl
§ 98.7M: # of 2009 Super Bowl viewers
Strategic Brilliance or Blunder: Brilliance. The TV ad spot is becoming less relevant as “marketing with meaning” is gaining more traction.
Source(s): WSJ, Beverage Digest, TNS Media Intelligence