Archive for January, 2015

HYMAN & KIM: NEW YEAR OUTLOOK 2015, PART ONE TRANSCRIPT

January 9, 2015

We continue WEALTHTRACK’s annual tradition of discussing the outlook for the economy, business, policy and markets with Evercore ISI’s Chairman, Ed Hyman, Wall Street’s reigning number one economist for an unprecedented 35 years running. Hyman will be joined by another exclusive guest, New York Life’s Vice Chairman and Chief Investment Officer, John Kim, who oversees over $500 billion in assets at the life insurer, one of the oldest and largest in the world. In this first of a two part series, Hyman and Kim will focus on the outlook for the U.S. economy and markets.

CONSUELO MACK: This week on WEALTHTRACK, charting your course for the New Year. We’ll have our exclusive, annual outlook with ISI’s superstar economist Ed Hyman and New York Life’s Chief Investment Officer John Kim. What do these two financial pros see in our investment future? Their predictions and strategies are next on Consuelo Mack WEALTHTRACK. Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack.

How are you feeling about the U.S. economy and stock market?

If you are like most Americans the answer is better than you did a year ago.

According to Wall Street’s top ranked economist and exclusive WEALTHTRACK guest Ed Hyman, consumer confidence is almost back to its normal expansion level, having made a slow recovery since the 2009 financial crisis.

That confidence is key to the durability and health of the U.S. economic recovery which is heavily dependent upon consumer spending. It accounts for about 70% of GDP…

Another positive, the now nearly six year old bull market.

According to Standard and Poor’s, the 70 month run since the market’s bottom in early 2009 is the fourth longest since World War Two.

Last year the S&P 500 scored its third consecutive double digit gain with a better than 11% advance, nearly 14% when dividends were added.

Other big game changers, that we have covered numerous times on WEALTHTRACK are the dramatic declines in crude oil and gasoline prices, saving families’ hundreds of dollars in annual energy costs, and the ongoing trend of low interest rates. The yield on the benchmark, Ten-Year Treasury note closed at 2.173% at the end of the year, well below the 3% plus level of a year ago.

What’s the outlook for this year?

Joining us for an exclusive annual interview, as he has for nine of the last ten years is Ed Hyman, the legendary economist who has been ranked Number One on Wall Street by institutional investors for an unprecedented 35 years in a row. Ed is now the Chairman of Evercore Group, having recently sold International Strategy and Investment, the firm he co-founded in 1991 to Evercore Partners, a leading investment banking advisory firm.

Our other exclusive guest is John Kim, Vice Chairman and Chief Investment Officer of New York Life Insurance Company where he now oversees more than $500 billion in global stock, bond, cash, and alternative investment assets.

Prior to New York Life Kim was President of Prudential Retirement, Cigna Retirement and Investment Services and Chief Investment Officer of Aetna Life Insurance and Annuity Company.

New York life is a WEALTHTRACK sponsor but Kim is here on his own merits for his long-term, multi-asset global perspective.

I began the interview by asking each of them how they feel about the health of the U.S. economy as we enter 2015.

ED HYMAN: The numbers are looking better. Say confidence is up. Loan growth is up. Car sales are up to pick three things that have just come out, and that’s been going on now going into the sixth year. I am influenced a lot by my travels around the U.S., and almost every place I go to is doing better. New York is doing better. Boston is doing better. Miami is booming. I go to Tampa, and it’s doing better, Nashville.

CONSUELO MACK: Different reasons? Different economies? Regional?

ED HYMAN: Every time is different. Every time is different, and you go to places like San Francisco they say, “Well, it’s just different. It’s booming.”

CONSUELO MACK: What’s going on?

ED HYMAN: It’s just six years of growing. I’m not trying to paint an economy that is booming but it’s very solid. I like the idea of torque versus speed if you know the difference. One is pulling power. I like the idea of the U.S. economy being a plow horse versus a racehorse, and so I think we’re in for a pretty good stretch here.

CONSUELO MACK: John, from your perspective at New York Life.

JOHN KIM: I would pick up on Ed’s comment characterization of a solid economy. I would say it’s a very solid economy. If you’ve got household America with a job prospect that is much better coming into 2015 than it’s ever been since the financial crisis, when you’ve got a rebound in the housing sector which is still the primary asset of household America, having recovered not fully but close to fully recovered, when you’ve got now a huge windfall benefit from much lower oil prices and gasoline at half the price that it was just six, seven months ago, it’s hard not to be optimistic here, and i agree with ed. In my travels throughout the country, I see the anecdotal optimism throughout, although Cleveland might be optimistic as a result of Lebron James rather than the economy.

ED HYMAN: They did mention that.

CONSUELO MACK: Well, one of the things that has discouraged the mainstream for instance has been the job picture. I mean, job growth has picked up, but wages have really not. So how do explain the fact that wages have still remained relatively moderate and flat for about, I don’t know, five years, Ed?

ED HYMAN: So I can give you a simple and a more complex answer. The more complex answer is that technology and the global economy and intense competition is keeping downward pressure on wages.

CONSUELO MACK: That’s a secular trend. It’s just we’ve got to live with it.

ED HYMAN: Those would be secular. A simpler answer and one that we will see if it works is that in the last two cycles, the’ 90s and the 2000s, wages did not pick up until unemployment came below five and a half, and then they picked up. So some time this year unemployment’s likely to go below five and a half, and in those periods wages just didn’t creep up. They went from two to four, two percent, four percent. They went up sharply. So I’ll wait and see.

CONSUELO MACK: And John, wage inflation is one of those statistics that you’re keeping a very close eye on as well. Why?

JOHN KIM: We are. Well, because wage inflation can cause general inflation pressures in the system, and it’s important to me but importantly it’s very important to the Federal Reserve. So as they consider their tightening policy, monetary tightening, I think if they see wage inflation, to Ed’s point, as unemployment rate falls below five and a half percent which almost it certainly will do during the course of the year, they might overreact to a higher wage inflation print during the course of 2015.

CONSUELO MACK: With the stock market having done as well as it’s done over the last six years, why isn’t market psychology more robust? Ed.

ED HYMAN: We survey hedge funds, and they’re neutral in their positioning, and individuals have been pretty absent from this rally in the stock market. So I think that because of the dramatic or traumatic situation that we went through in ’09, there’s still a concern about things, and now people say, “I missed it.” The market’s gone way up, and P/Es are now back to normal, so they say, “Well, I should do something different. Sit on my cash or whatever.”

CONSUELO MACK: John, have we missed it?

JOHN KIM: I don’t think we’ve missed it. I think we still have more to go but just on the point, Consuelo, of market psychology here. We need to recognize that the great recession of 2008 was significant psychologically for two reasons. One is that from an institutional perspective those insiders like the two of us here know we came very close to the abyss here of actually not recovering, and if it was not for the actions of various central banks around the world, we could very well be in a global depression today. So people know that here. The other factor especially in the U.S. is that we basically had the front end of the baby boom generation just only a couple years before their retirements years face one of the biggest corrections or crashes to their personal investment portfolio, and I think this was their basically depression era for them, and as a result of that I don’t think they ever want to take as much risk especially now as they move formally into retirement as they would have had they been younger and this correction or bear market occurred.

CONSUELO MACK: And is that risk aversion do you think misplaced at this point? John, what do you think?

JOHN KIM: Well, I think it’s been misplaced because not only have they not invested in stocks as they should have prior to the crisis. In my humble opinion, they went into the wrong asset class, which is bonds here. Admittedly bonds have done well, but they’re basically locking in record low interest rates. So as a long-term investor, if you stay in bond funds that are basically yielding two, three, four percent and you have some resumption of normal inflation, you’re basically locking in near zero interest rates. So that’s what I get concerned about. It’s not so much that they went out of stocks. They went out of stocks at the wrong time, and they went into likely bonds at record low interest rates in the history of sort of U.S. interest rates.

CONSUELO MACK: Let me ask you two about inflation and, Ed, I think at one point at Evercore ISI that you mentioned the fact that we actually could see a negative reading in the U.S. CPI on inflation. Could inflation be this low, possibly negative for the foreseeable future?

ED HYMAN: Well, I don’t think for the foreseeable future, but it’s linked directly to the plunge in oil prices, and I think you’ll get a bounce at some point, a double or something like that in oil prices, but it’s hard to know when that point is. The item that you’re asking about, the U.S. CPI will probably decline in December and January, and if our estimates are right it will take the year-to-year change down to about point three which is basically the lowest on record if you don’t go back into the ‘50s, and there have already been six CPIs reported around the world that are negative month to month like Spain, Korea. And the euro zone CPI will probably be negative year to year in December. So that’ll be a big headline. Euro zone slips into deflation. I think it’s transitory but I can’t tell whether that’s going to end in third quarter or January. It depends on when the price of oil stops declining.

CONSUELO MACK: And John, it’s so interesting because in previous conversations with you you’ve talked about how New York Life, you look at kind of these outlier events. One of the events that you’ve been concerned about is the fact that we do have this precipitous drop in energy prices, and most people are saying that’s a positive for me at the gas pump, but you’re saying the dislocation. You’re concerned about possible dislocations. Right?

JOHN KIM: So clearly the fundamentals of a drop in energy prices should help the world economies here because it is a trillion and a half at this point wealth transfer from the energy- producing countries and economies to the energy-consuming economies and countries, but the shift here is what I get concerned about here, because when you have such a precipitous drop as we have witnessed here from $110 to $50 it actually causes major capital flows, and the dramatic shift in the flows in and of themselves could create some systemic risk in the system, so less so about whether the Middle East or Venezuela is going to suffer or Russia. It’s clearly in a deep recession here, but how the movement of the dollars invested in those economies and those markets move out of their market into other markets can cause some disruption and actually cause some liquidity crises. That’s what I get worried about, and today it’s actually not just about oil prices. It’s about the dollar strengthening to multiyear highs versus the euro versus the yen and also as a result of energy prices declining, perhaps a slowdown in the global economy, what U.S. interest rates are doing.

CONSUELO MACK: Financial crisis? Is that a possibility, Ed?

ED HYMAN: Well, I’ll be surprised if we don’t have a financial crisis.

CONSUELO MACK: Because?

ED HYMAN: Of the plunge in oil prices. So you have to look at the situation in totality. We talked about the U.S. economy being solid or very solid.

CONSUELO MACK: Solid. Sustainable.

ED HYMAN: We’re fortunate that we can look back at previous drops like this. There are some things like quantitative easing. There’s no history to follow. On this you can look back at ’86 for example. Brent went from $30 to $10.

CONSUELO MACK: Brent crude, the international standard of oil.

ED HYMAN: Oil prices went from 30 to 10 dollars, and growth in that year in ’86 was about three percent.

CONSUELO MACK: In the U.S.

ED HYMAN: In the U.S., excuse me. And the S&P went up 15 percent, and you also had ripping through the country the S&L crisis which more than half was centered in Texas.

CONSUELO MACK: So it was connected.

ED HYMAN: It was connected to it.

CONSUELO MACK: I see.

ED HYMAN: And so the past two big plunges in oil have been 60, 70 percent. The one I mentioned, ‘86, and then in ’96, ’98 you also had a huge plunge, and that was associated with Russia having a crisis, and then as the liquidity flows come around, something you don’t expect to happen which was LTCM, long term capital management, had a meltdown and that ruled the markets for a while. You have to get back to what you think are basics, and this drop in oil is a very positive thing for the global economy. It’s just if you’re in the wrong spot in the global economy you’re in trouble.

CONSUELO MACK: John, New York Life Insurance. You’re in the insurance business. You’re in assessing risk. That’s what you do for a living. What do you do as the Chief Investment Officer of a $500 billion portfolio that you’re overseeing? How do you protect yourself or are you taking steps to protect yourself?

JOHN KIM: We always take steps to protect ourselves, Consuelo. Basically we look at first-order effects and second-order effects here. So the first-order effect, and I absolutely agree with Ed, is likely related to the precipitous drop in oil, but there is probably some crisis that we are either in right now that’s not been fully revealed or we will be in shortly. The question is, can the world economies and markets respond rationally to that crisis and overcome it? Or would we actually succumb ourselves to something that would cause some major correction in the world markets? I don’t know the answer to that, but I think this is an environment while, despite the fact that as noted we are comfortable with the growth in the U.S. economy …

CONSUELO MACK: U.S. economy.

JOHN KIM: We’re narrowing in, reining in our risk posture whether it’s equity-oriented risk, whether it’s a credit exposure in our very large bond portfolio that we have. So we are managing the risk more conservatively coming into 2015 that we have in prior years. The second-order effect would be some of the collateral damage that might be caused as a result of this, the drop in oil prices, for example, from 110 to 50. If you look at all the states that are in the United States here, only eight states are actually negatively impacted by the drop in oil.

CONSUELO MACK: So those are the Texases and the North Dakotas and Louisiana.

JOHN KIM: North Dakota, Colorado, exactly. Forty-two states including the District of Columbia are a big beneficiary of oil price decline, but you need to be mindful of your exposure in the oil- producing regions, those states, to make sure that you overexpose in any part of those states and the economies there.

ED HYMAN: I might add in terms of this conversation which strikes me as a very relevant conversation to what policymakers are thinking about is that because inflation is low, policymakers are not leaning toward tightening. They’re leaning toward easing. By that I mean …

CONSUELO MACK: Even here in the U.S.

ED HYMAN: If I could leave the U.S. to the last. ECB is going to go this month. Japan is going every month, January, February, March, April, May.

CONSUELO MACK: Easing, stimulating.

ED HYMAN: Both.

CONSUELO MACK: Whatever, quantitative easing. They’re buying bonds.

ED HYMAN: Quantitative easing, fiscal stimulus, and China has now turned the corner and is moving toward easing. The U.S. has ended tapering and now has rates at zero, and they will read the situation week by week to see if they should go in June or September, but this is happening in an environment that is generally quite nurturing of economic activity. Policies generally are pretty easy around the world.

CONSUELO MACK: Overseeing a gigantic bond portfolio, what do you do if you’re looking out and you’re saying interest rates are going to stay low for the foreseeable future given everything that you two just have been talking about? Where do you go for income? Where do you go for return?

JOHN KIM: Corporate spreads actually have widened out, increased in yield vis-à-vis treasuries over the past six months, and it’s not just the energy-related, both high grade and high yield corporate bonds, corporate bonds in general. Financials, for example, have widened out.

CONSUELO MACK: So that means that the corporates, the yields are going higher. Prices are declining.

JOHN KIM: That’s right.

CONSUELO MACK: Vis-à-vis the Treasury, equivalent Treasury maturity.

JOHN KIM: Treasury. Exactly right. Despite the fact that we are back below two percent on the U.S. 10-year, the spread has widened such that a 10-year corporate is actually more attractive today than it was six months ago. So I do think on a selective basis to buy a high-quality portfolio of corporate bonds would be the right move here as long as you do your credit homework and make sure that you’re comfortable with the creditworthiness of each of the bonds that you hold.

CONSUELO MACK: U.S. stock market, Ed. How do you assess its valuation? Is it fairly valued, fully valued, extremely expensive? What’s your view?

ED HYMAN: Sir John Templeton, the legendary investor, had the market cycle from terror to pessimism to skepticism to optimism to euphoria, and so each of us can decide where were are.

CONSUELO MACK: Where do you think we are?

ED HYMAN: I think we’re still skeptical, some optimism. People are concerned about the things we’ve talked about.

CONSUELO MACK: Are we early days in this bull market?

ED HYMAN: I think we’re early days.

CONSUELO MACK: I mean, six years in? And what about in the economic recovery?

ED HYMAN: We’re early days in both. I mean, the economy has been growing for six years but like housing starts are still basically at a multiyear low, and so the cyclical components of the economy are like they typically are at the beginning of a recovery. It’s just that we came back from the abyss in ’09. So I think the next recession is a long ways out.

CONSUELO MACK: Years out.

ED HYMAN: Years out.

CONSUELO MACK: I remember you telling me years out.

ED HYMAN: Five or seven years out, and I think that what’s happening right now in oil is resetting the economy. It might have been getting ready to take off, and now you have this drop in oil, and it will sort of hold it back some. So I think we’re in for a long haul here. I think people are still skeptical about the market, and with rates where they are, it seems like the stock market is a good place.

CONSUELO MACK: As we wrap up this first show of a two-part series with you, what’s your take on the U.S. stock market, John?

JOHN KIM: I’m actually relatively optimistic about the U.S. stock market as well. I may disagree and not consider this early days here, but we’re certainly not in the later phases. So this bull market should continue.

CONSUELO MACK: Where do you see an opportunity for us as investors, and we ask at the end of each WEALTHTRACK for One Investment for a long-term diversified portfolio. What should we all own at least a little bit of in a portfolio? John, do you want to make a recommendation?

JOHN KIM: I do think that the large cap sector may suffer a bit as a result of the dollar strengthening and the multinational status of many of the large cap stocks. So I might go into the mid cap sector, and I might suggest a mid cap ETF for example as an attractive opportunity. If you believe as I do that the economy is going to rebound nicely in 2015, I think the bank sector will benefit from that. I would stay away from money center, so I might suggest a regional bank sector ETF as another option.

CONSUELO MACK: All right. Ed, do you have a recommendation for a U.S.-focused investment?

ED HYMAN: Consuelo, the advice I would share with you and your viewers is that in this environment where interest rates are so low and I think we’re still fairly early days in the cycle and the economy is growing, I think that you want to own assets whether it’s stocks in the U.S. I’ll let each person, but don’t sit on cash too much and I don’t much like bonds. You could buy a place in Florida but be exposed to something that can appreciate because I feel strongly that we’ll look back at this period five years from now and you’ll say, “I should have done it.”

CONSUELO MACK: Stocks, real estate, U.S.

ED HYMAN: Ferraris. Whatever you want to buy.

CONSUELO MACK: Oh, assets in general.

ED HYMAN: Assets in general. I happen to think that publicly traded equities are probably the least loved asset class there is out there.

CONSUELO MACK: Still. So that would be a good place to start. So Ed Hyman, John Kim, great to have you for the first part of our exclusive interview with you on WEALTHTRACK and next week we’ll do Part Two. Thank you.

Next week join us for part two of our exclusive interview with Evercore ISI economist Ed Hyman and New York life’s Chief Investment Officer John Kim. We will discuss international economies and markets and where they the two of them see the best investment opportunities.

In the meantime to see this interview again please visit our website wealthtrack.com and while you are there check out our EXTRA feature for some business insights from John Kim and Ed Hyman that we did not have time to include in the program.

Have a great weekend and make the week ahead a profitable and a productive one.

CORNERSTONE MACRO: 12 FAVORITE CHARTS

January 2, 2015

As we begin the New Year, we are revisiting an enlightening conversation we had with Tom Gardner, Co-Founder and CEO of The Motley Fool. Can investing be light hearted and lucrative at the same time? Brothers David and Tom Gardner founded the online investment advisory service, The Motley Fool, in 1993 to help people become better investors, while having fun doing it. 20 plus years later their Stock Advisor Growth and Value portfolios have beaten the market by a wide margin. We talked about their unusual approach and impressive track record. You can watch that episode again here.

Nancy Lazar and her leading economic team at independent research team, Cornerstone Macro picked their “12 Favorite U.S. Charts” for their institutional clients just before the New Year. In the spirit of the holidays, they all reflect positive trends for the U.S. economy, trends which Lazar and her team spotted early on, winning her our “Best Calls” award for 2014. She agreed to share them with our WEALTHTRACK audience. Continue Reading »

BERNSTEIN: BULL MARKET BELIEVER

January 1, 2015

After several years of outstanding performance, 2015’s lackluster results have been disappointing for many U.S. investors. Lest we forget, despite this essentially flat year, the S&P 500 has more than doubled since its 2009 lows! All the while investors have been abandoning U.S. stocks. This week’s guest, award winning strategist and macro funds’ manager Richard Bernstein explains why he believes the U.S. bull market still has plenty of room to run. Continue Reading »

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