Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
It's entirely understandable that our markets are twitching on receipt of each dispatch from Athens or Cannes or Brussels, or any other Old World spot where government emissaries and central bankers are debating what might be done, or avoided, to keep European sovereign finances from unraveling. This process can define the difference between the fear of devastating "tail risk," and its reality. We get it.
Yet this fixation on Europe has nearly excluded from our attention other telling indicators of economic and investment conditions. Here are a few underappreciated trends that help explain where we are, especially for those who are puzzled at the way U.S. stocks have held up as well as they have.
•While government debt yields in "peripheral" Europe test new euro-era highs, the U.S. corporate-credit market has remained wide open for business. New issuance has surged in response to heavy demand by cash-heavy, stability-seeking investors, and interest-rate spreads have remained tame. This wouldn't last through a sovereign-debt meltdown, but for now implies some resistance here against debt contagion.
• Despite the predominant tone of lament about the ruptureof the heaven-bestowed post-War run of prosperity and market strength in the U.S., several key measures are undergoing a period of "surprising normalcy." Domestic light-auto sales this month are seen hitting a 13.4 million annual rate, well on their way back to the 30-year average of 14.6 million. Real, nondefense capital goods orders have been running right near their average level since the mid-'90s. Household debt payments relative to disposable income are as low as in the early '80s.
• Regarding equity values, Tobin's Q ratio—a slow-moving and rather stringent measure of equity-market value versus corporate net-asset value–sat right on its 40-year average at the end of the third quarter, according to a valuable quarterly-data compendium by David Kelly at JPMorgan Asset Management. Since the early-'90s, it has been lower only in the months surrounding the March 2009 market low.
• Even employment, Exhibit A in most indictments of this substandard recovery, hasn't behaved much differently than in the previous two post-recession convalescences. After another OK-but-not-great payroll report, the average monthly net gain in private-sector jobs over the past year was 152,000, notes CEO Michael Shaoul of Oscar Gruss & Son–roughly the same as in mid-1993 and 2004. The difference with this employment cycle and the other domestic economic data cited here, of course, is that the last downturn was so much worse that "normal" rates of recovery simply haven't done enough to recoup the production and jobs that were lost. This explains why things feel so lousy, but also underscores that the period of "abnormalcy" is two-to-three years past.
• The housing market has quite likely bottomed. This has nothing to do with last month's uptick in home builder sentiment, which sent a brief charge into the related stocks. It is simply that the magnitude of below-trend new home-supply the past five years—the degree of "under-building"—has probably exceeded the amount of over-building of the prior six or so years, based on some persuasive analyses. The main publicly-traded home builders have recently reported double-digit increases in orders (off, admittedly, pathetically low levels).
• Of course, localized gluts of unsold homes, a crowded and slow foreclosure pipeline and tight mortgage-origination standards will prevent housing from becoming a driver of the economy. Yet, with home-affordability levels at 35-year highs and the average rent on vacant properties now 28% higher than an average mortgage payment, time has brought healing to this sector. Shares of any home builder or lumber producer that has survived the past couple of years should amply reward an investor who assumes something as quaint as a five-year investment horizon.
• Finally, an off-the-radar cautionary item. Commodity traders for months have been fretting over the clog in the typically routine flow of bank letters of credit, which grease the gears of global trade, and the issue was picked up in a brief Wall Street Journal item last week. European banks are outsize providers of these guarantees. Their own funding stresses and regulatory moves to force banks to reserve against LoCs have restricted the supply. This could be seen most directly in potential spot shortages of some commodities, should supplies be prevented from moving readily to meet demand.
In a hyper-correlated global-asset market—where commodities already lift along with equity markets sniffing out economic improvement (see crude oil, up 20% from its early-October low)—price spikes unrelated to local demand would be especially unwelcome in a still-fragile macro climate.
E-mail: michael.santoli@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
The IAC/InterActiveCorp chairman bought after a multiyear high.
Though shares are at an all-time high, strong quarterly results point to a latte upside for the coffee giant.
Lazard Capital likes Universal Health, HCA and Vanguard.
By Richard C. Morais Business folk and financiers who need to reinvent a tired business should seek inspiration in the birthplace of so much radical and artistic reinvention: Barcelona.
The energy explorer's production growth constantly required more capital.
Credit Suisse likes Kansas City Southern, Canadian Pacific and Union Pacific.
The drug giant is aggressively cutting costs.
Shares of the gas pipeline and E&P company sport a rich, rising dividend. And an upcoming spinoff should create more value.
Even in this challenging environment, the packaged-food giant is successfully boosting prices amid rising costs.
J.P. Morgan likes Texas Instruments, Xilinx, Intel and others.
Regulators say BNY Mellon was cheating clients in currency trades. The potential lessons for retail forex traders.
Austerity might be painful for Greece, but reverting to a newly defaulted drachma could be worse.
Special Report on Brazil: The powerhouse of South America faces some new challenges, such as resurgent inflation and a weaker market. Has the music stopped or just paused momentarily?
Stocks weighed down by concerns over whether Greek bailout would succeed.
The decline in the cable outfit's shares is overdone. Investors are ignoring the company's strengths and its ultimate ace-in-the-hole: the possibility that it will be sold.
Buying options during periods of market calm will save you money and stress.
Greece's default is now only a matter of time. Even a new coalition government may confound efforts to extend the lifeline for Athens. A top economist speaks out.
How the government agency mislaid 104,000 jobs for September.
Best known for credit scores, the consumer-data gatherer has launched more than 100 products here and abroad in the last two years. The perfect recovery play?
Amid the political turmoil, two-year Greek debt yields 112%
Chicago real-estate developer Sam Zell on why apartments and RV parks look attractive—and why office buildings and malls do not.
Groupon's founder has surrounded himself with Amazon alumni, but Bezos's company is a different animal.
The California Investment Equity Income Fund favors long-term success stories. Why it likes McDonald's and ConocoPhillips.
The Commodities Futures Trading Commission has set new limits on mutual, hedge and exchange-traded funds' exposure to commodity-based trades. How much will they hamper managers' moves? That remains to be seen.
Did Diamond Foods push walnut costs forward to make fiscal 2011 earnings look good ahead of its acquisition, for stock, of Procter & Gamble's Pringles brand?
Another week of big inflows into high-yield ETFs
Read Full Article »
