Global Investing

XL-sized gains for 2009′s best performing U.S. stock

The S&P 500 has closed out its first annual advance in two years, underpinned by strength in the technology and materials sectors on hopes that the economic recovery will spur a rebound in capital spending and fuel demand for natural resources.

The benchmark index ended 2009 up 23.5 percent on the year, reversing a slide of 38.5 percent in 2008. The S&P 500 is now off 28.8 percent from its October 2007 record close.

The run-up in sectors like technology underscores the extent of the damage done to financial stocks in the credit crisis of 2008. Financials were once the largest sector in the S&P 500, but tech is now the biggest. The top 10 S&P 500 stock performers of 2009 do not include a major U.S. bank. Heading the list is Bermuda-based insurer XL Capital.

Citigroup has lost half its value this year, putting it among the S&P 500′s top 10 laggards. But Ford is among the standouts as the automaker continues to steer itself through the turmoil that sent rivals Chrysler and General Motors into bankruptcy.

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See also:  Factbox of major market moves for 2009

Who were the investment winners and losers in 2009?

Let’s not beat about the bush: the winners in this year’s investment stakes were those who cashed out early in the financial crisis, looked at hugely oversold stock markets in March and jumped back in. The losers were those who spent too much time thinking about it or, worse, thought it was a good idea to put all their money in Dubai stocks and  Greek government debt.

For the winners, it all had to do with market timing. Buying MSCI’s emerging market stock index at its March 3 low brought gains of close to 110 percent.  It was “only” a bit above 72 percent for the full year. World stocks as a whole gained around 30 percent for the year and nearly 75 percent from the March low.

Gold bugs grabbed a bit of the spotlight because of the record nominal highs for the metal. But with a gain for spot gold of around 24 percent, you would have done much better buying oil, which gained more than 75 percent.

Time to kick Russia out of the BRICs?

It may end up sounding like a famous ball-point pen maker, but an argument is being made that Goldman Sach’s famous marketing device, the BRICs, should really be the BICs. Does Russia really deserve to be a BRIC, asks Anders Åslund, senior fellow at the Peterson Institute for International Economics, in an article for Foreign Policy.

Åslund, who is also co-author with Andrew Kuchins of “The Russian Balance Sheet”, reckons the Russia of Putin and Medvedev is just not worthy of inclusion alongside Brazil, India and China  in the list of blue-chip economic powerhouses. He writes:

The country’s economic performance has plummeted to such a dismal level that one must ask whether it is entitled to have any say at all on the global economy, compared with the other, more functional members of its cohort.

Booking profits

Last week was one of the worst for global equities in a long time. MSCI’s benchmark all-country index fell 4.3 percent, the most it has lost since the week ending March 8, just before this year’s stunning rally began. Emerging market stocks, meanwhile, dropped 5.6 percent in the week, the largest fall since mid- to late-February.

As if that was not enough, volatility soared. The VIX fear gauge leapt 37.8 percent in the week, nearly 30 percent alone on Friday. Cross-sectional volatility — volatility between stocks as opposed to just the index — is also rising as can be seen  (black line) in the graph to the right.

But might it all simply be a matter of timing? Credit Suisse estimates that 22 percent of mutual funds end their fiscal year at the end of October. So the big sell off could at least in part be due to managers ensuring their end of year profits look good.

Investors break commodities link with equities

Investors smelling profits in commodities are using the sector as an early cycle play, alongside equities, because a lack of production capacity means higher prices sooner rather than later. 

Historically, prices of natural resources lag equities, which typically front run the economic cycle by between 18 to 24 months. The change is also partly due to the tumbling dollar, a major driver in recent weeks.

The natural resources sector is also one of the last to price in economic expansion. But not this time.

“Normal” volatility to help rally?

As the graphic above shows, volatility in U.S. stocks has re-entered what could be called normal territory after soaring higher during the financial crisis. The blue band is plus or minus one standard deviation around the 1990 to 2007 avverage.

There may be an implication for equities beyond the obvious sign that things are calming down. Lower volatility is a buy signal in many trading models.

(Reuters graphic by Scott Barber)

Great earnings, pity about the whispers

It says a lot about the way investors are thinking at the moment that very good earnings from Goldman Sachs were greeted with a mini-stock selloff and a bounce for the dollar. But it is not that people are glum and selling even on good news — more a case of them being so ebullient that anything which is not outlandish is a disappointment.

The top-of-the-pile investment bank was supposed to report quarterly earnings of $4.24 a share.  Instead, it stormed in with $5.25 a share, a good 23 percent higher and an increase of 190 percent over the year earlier figure.

But on the wilder fringes of the market, speculation had been doing the rounds that the earnings-per-share figure would be around $6. It wasn’t, so Wall Street futures tanked, the dollar went positive and world stocks pared gains.

The best of all worlds for investors?

Could it be that equity and bond investors are living in the best of all worlds at the moment?

Tim Bond, head of global asset allocation at Barclays Capital, has hinted that they might be. He says that history shows current conditions to be the best for both assets.

 Since 1925, we find that in those years in which GDP was above trend and inflation below trend, U.S. equities have delivered an average 10.6 percent real return, with 20-year Treasuries delivering a 5.2 percent real return. 

Know when to hold ‘em

If you had bought emerging market stocks exactly at the top of the bubble and sold them exactly at the bottom of the crash, you would have suffered a lot of pain (and probably shouldn’t be in the investment business in the first place).  The loss would have been 67 percent of your principal.

Most people won’t have lost that much, of course, depending on when they bought and sold. But even if an investor did buy exactly at the top, as long as they held on their losses by now would have been pared back considerably. 

The graphic above, created by Scott Barber, shows how much of the crash has been clawed back. The full column represents the maximum loss; the green shows the amount recovered. In points terms, 50 percent of the emerging markets crash losses have been recouped.

from David Gaffen:

Ken Lewis: When Buying the Dips Fails

In a bull market, buying on the dips works like a charm. Pullbacks in the market are quickly cannibalized by hungry investors looking for anything that smells like a bargain.

 

In a bear market, dip-buying does not work so well, as supposed bargains turn out to be value traps. This brings us to Ken Lewis, retiring as CEO of Bank of America. If dip-buying is a disaster in bear markets, Lewis engineered the M&A version of "dip buying" at the worst time not once, but twice.

He struck first with a $2 billion investment in Countrywide Financial in August of 2007, just before stock markets peaked - and after real estate was already teetering. In a good environment, it's a potentially solid investment. Not so much this one, when Countrywide was at $18 a share, and Lewis doubled down with a $4 billion buy (well, rescue) of Countrywide in January of 2008. That's hit the bank hard due to rising defaults in the housing market, which some analysts believe have not peaked.