Académique Documents
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20 Years of Challenges
Page 2
Evidence
Page 3
Selected Asset Classes 12-month Returns (Oct 21, 2011 Oct 19, 2012)
0.0% 6.0% 7.04%
CDN 5-7y Bonds CDN Cash CDN High Yield Bonds S&P 500
14.42% 18.33%
NASDAQ 100 US C10y Bonds US 5-7y Bonds US Cash 0.48% 5.07% 4.53%
16.03%
16.18%
4.83%
CDN Corp AA
CDN Equities
2% 0%
5 Year
US Cash
4%
US Equities
US C10y Bonds
US Corp AAA
CDN Cash
10 Year
20 Year
Page 5
1000
100
Great Depression
10
&
Deflation
Bond Market losses
0.1
Jan-13 Jan-20 Jan-27
Jan-34 Jan-41 Jan-48 Jan-55 Jan-62 Jan-69 Jan-76 Jan-83 Jan-90 Jan-97 Jan-04
S tock Real
Source: CIBC World Markets Inc.
Bond Real
Bill Real
S eries4
Page 6
Why?
Page 7
Page 8
Page 9
Page 10
How?
Page 11
1.
Click to edit Master title style Record U.S. Government Debt GDP +
2. Record Consumer Debt 2/3 of Economic Growth Due Consumer Self-restraint from spending, but , not yet! + 3. Record Current Account Deficit
Interest Rates
Stock Prices (
P/Es )
Interest Rates
Stock Prices
( P/Es )
Page 13
The Positive Correlation Warned Loudly of the Risks of Deflation and a Potential Debt Crisis Starting in 1998
Only Times in History Previously: The Long Depression & The Great Depression Thus: Lower P/Es, Average Returns & Higher Vol
History States: That Falling Bond Yields and Falling Stock Prices
Page 15
US Real Rates & Positive Bond Yield/Stock Price Correlation Click to edit Master title style 14
Long Depression Great Depression 12 10
-2
-4
-6
Oct1977 Jul1918 May1905 May1984 Dec1911 Sep1931 Nov1944 Aug1964 Dec1990 Jul1997 DEC1832 JAN1800 AUG1806 APR1859 JAN1879 MAR1813 AUG1885 MAR1892 NOV1865 OCT1819 SEP1852 JUN1872 JUL1839 MAY1826 OCT1898 FEB1846 Sep2010 Apr1938 Jun1951 Feb1925 Jan1958 Mar1971 Feb2004
positive bond yield/stock px correlation and falling bond yield on annual basis
M1 Mutiplier
Source: Bloomberg, U.S. Federal Reserve and CIBC World Markets Inc.
Page 16
Investment Implications
Page 17
Page 18
P/E Differences Between 80s/90s and Today Click to edit Master title style 1980s / 1990s After 2003
P
E
x 14%
P
E
x 8% 10%
P = 18% p.a.
P = 8% p.a.
Page 19
P/E COMPRESSION on Average S&P 500 Prices Up BUT S&P 500 P/Es Down
Expand, Compress, Panic; (9 Times Earnings by 2015?) Also Since 1998: Risk Premia and Credit Spreads Increased
1800
Price UP
1600 1400 1200 20 1000 15 800 600 400 200 30 25
10 5
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Index
Jan-11
P/E
Dec-70
Dec-72
Dec-74
Dec-76
Dec-78
Dec-80
Dec-82
Dec-84
Dec-86
Dec-88
Dec-90
Dec-92
Dec-94
Dec-96
Dec-98
Dec-00
Dec-02
Dec-04
Dec-06
Dec-08
Dec-10
Perfectly Correct
Jan-32
Jan-34
Jan-36
Jan-38
Jan-40
Page 22
AVOID TORPEDOS
1980s/1990s
20 stock portfolio +30% but one torpedo VERSUS +6% ave and
Page 23
The Long Term Problem Facing Pensions SAS, Cash on Balance Sheets, +Correlation Economy or Pensions
Higher Rates? NO
Page 25
Pension Implications of Low Returns & Positive Correlation (Need for Twist) Click to edit Master title style IF TSX & S&P 500 return of 8.1% coincides with: 3% bond yield & $ Parity
TSX 13,150 S&P 500 1,480 Bond Yield 3%
i.e.
Income & Growth = 3.76% (Asset Mix: 55/40/5) Growth = 4.79% (Asset Mix: 65/30/5)
HALF of S&P 500 companies have pension net funding ratios of LESS than 70%
Page 26
Page 27
1833
Second Bank of United States Wall Street NOW Unregulated !!! Economic Swings amplified
1837 1846
1857
1861
186971
1873-79
The long Depression 1873 1896 (23 years) EDISON GENERAL ELECTRIC & 50 yrs Finance Power Deflation 1869 1896 Yet rising Global Industrial Production
1906
Page 29
Page 30
Third Time Lucky? Secularly Lower Rates, Safe Haven Status QEs, Operation Twists and Major Events
1600
1200
1000
800
600
QE1
400
19 95
19 96
19 97
19 98
19 99
20 00
20 01
20 02
20 03
20 04
20 05
20 06
20 07
20 08
20 09
20 10
20 11
20 12
Dont Confuse Risk ON and Secular Growth TSX Versus S&P 500 (1982 - Present)
Aug-82
Aug-84
Aug-86
Aug-88
Aug-90
Aug-92
Aug-94
Aug-96
Aug-98
Aug-00
Aug-02
Aug-04
Aug-06
Aug-08
Aug-10
Page 33
Even Recently 50-60% of Stock Returns Correlated with Market Thus with Rates
Page 34
60% of the Return, on Average, from Individual US Stocks is the Direct Result of Rallies and Declines in the S&P500 INDEX!!!
0.7
0.6
0.5
0.4
0.3
0.2
0.1
May-00
May-01
May-02
May-03
May-04
May-05
May-06
May-07
May-08
May-09
May-10
May-11
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Market
Market + Sector
Sep-11
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Page 36
Floor/Ceiling
US Bond Yield Peaks (Ceilings) and Troughs (Floors) Have Defined the Stock Market Rebounds and Collapses Never forecast anything you can calculate
S&P 500 Buy & Hold since 1998 low Bond Buy & Hold TSX Buy & Hold Bond B&H Canada
1800 1600 1400 1995 ceiling 1997 ceiling 2003 ceiling (5.9%) SELL 5.2% ceiling 4.8% ceiling 2002 ceiling 800 600 400 200 0 4% 1997 floor BUY 4.1% 4 3.5% Excess debt floor BUY 3.0% Desired long term average 3 2 1 0 SELL 2000 ceiling
+57%
+94%
-57%
+109%
9 8 7 6
1200 1000
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
* TPP - Equity returns are peak to trough, bond returns match equity peak to trough dates but Bond TPP are in brackets
Source: CIBC World Markets Inc., Bloomberg (Updated Jan 5, 2012. Data as of Jan04)
2012
Page 38
3.65%
Bond Yield Floors The Main Concern at Present is the Expected Inflation Component vs Default Premium Last Exit before Drug Inspection Station
1997 Can Bond Yields Fall Without Lower Inflation or Deflation? Example Secular to edit Master title style Inflation 2010 Bond Yield Floors: It Doesnt Add Click Up
7% 50 bps CDS Premia 100 bps IRP Growing Debt Crisis 5% Floor
50 bps CDS Default Premia 3% to 3.25% 50bps 50 bps CDS Default Premia 200bps 10-year TIPS Expected Inflation Rate 50 bps IRP If Expected Inflation Becomes 1% 100bps Term Premium
Deflation Still Bond Yield stuck at 2% to 3% 2.5% 100bps to 200bps CDS Premia Depending on TRP, TS 50 bps IRP??
50 bps IRP
Expected -200bps Deflation boosts real rate but usually a disaster for growth, therefore, REAL rate 4.00% to 4.5% with 2% Deflation & 200bps other components
Page 39
1/24/2010
3/24/2010
5/24/2010
7/24/2010
9/24/2010
1/24/2011
3/24/2011
5/24/2011
7/24/2011
9/24/2011
1/24/2012
3/24/2012
11/24/2009
11/24/2010
Term Premium
Ex pected Inflation
CDS Premium
11/24/2011
5/24/2012
5.0%
4.0%
3.0%
2.0%
1.0% Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
Page 41
Important US Bond Yield Reference Levels (Jan 2012) The US Safe Haven Advantage--The Key to Timing Stocks: Combination of Yield Levels & ROE Trends
Ceiling 4.1%
Click toBonds edit Master style Buy if US$ Stable & title ROE Falling
SAFE
HAVEN
Probable FED two year target if globally coord action 2.0% US Safe Haven Levels
Page 42
Confidence A
Page 44
US Housing Inventories
Click to edit Master title style
Page 45
U.S. Bank Security Holdings As % Of Bank Assets And U.S. 10y1y Yield Spread Click to edit Master title style
30 29 28 27 1 26 0 25 -1 24 23 22 Securities as a % of Bank Lending 21 Jan-73 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 US 1s10s -4 -2 -3 4 3
Page 46
Flatten Yes BUT Not The Same As Tilt & Long End Down May Contribute to Economic Growth
++
Page 47
(in thousands)
100 80 60 40
50 0
20 0
Sep-90
Sep-92
Sep-94
Sep-96
Sep-98
Sep-00
Sep-02
Sep-04
Sep-06
Sep-08
Sep-10
Sep-12
(in thousands)
1500
150
1000
100
500
50
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Page 52
Rank*
1
Currency
ROE/GDP
S&P 500 ROE: Still up but losing momentum - Neutral GDP: Remain positive low level Neutral or Negative
Default Premium
Weekly Momentum: Positive Monthly Momentum: Positive Weekly Momentum: Positive Monthly Momentum: Positive Though the momentums remain positive, they are diminishing
Overall
* Positive:1, Negative:5
RORO
Sustainable Yield U.S. Dividend Yield v.s. 10 year Govt Bond Yield
Dec-70
Dec-72
Dec-74
Dec-76
Dec-78
Dec-80
Dec-82
Dec-84
Dec-86
Dec-88
Dec-90
Dec-92
Dec-94
Dec-96
Dec-98
Dec-00
Dec-02
Dec-04
Dec-06
Dec-08
Dec-10
20 18 16 14 12 10 8 6 4 2 0
Dec-70
Dec-72
Dec-74
Dec-76
Dec-78
Dec-80
Dec-82
Dec-84
Dec-86
Dec-88
Dec-90
Dec-92
Dec-94
Dec-96
Dec-98
Dec-00
Dec-02
Dec-04
Dec-06
Dec-08
Dec-10
Page 57
Apr-09
Dec-09
Aug-10
Apr-11
Dec-11
Page 58
Page 59
Earning Surprise
Page 60
12 10 8 6 4 2 0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
New
Source: CIBC World Markets Inc., Reuters
TSX
Page 61
2011
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
SPX Ver. 1
Source: CIBC World Markets Inc., Reuters
SPX
Page 62
2011
0.5
99 8
99 9
00 0
00 1
00 2
00 3
00 4
00 5
00 6
00 7
00 8
00 9
01 0
01 1 0/2 9/3
0/1
0/1
0/2
0/2
0/2
0/2
0/2
0/2
0/2
0/2
0/2
0/2
0/2
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
0/2
01 2
99 8
99 9
00 0
00 1
00 2
00 3
00 4
00 5
00 6
00 7
00 8
00 9
01 0
01 1 0/2 9/3
0/1
0/1
0/2
0/2
0/2
0/2
0/2
0/2
0/2
0/2
0/2
0/2
0/2
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
9/3
0/2
01 2