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Charles Lieberman
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Dr. Charles Lieberman serves as chief investment officer for Advisors Capital Management L.L.C., a money management and investment advisory firm, servicing financial advisors and private clients throughout the country. Dr. Lieberman has overall responsibility for managing its three primary types... More
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  • Still, Plenty Good

    March payroll employment was disappointing, although economic gains cannot be expected to move in a smooth ascending growth curve. Economic trends remain solid. There is little reason to expect monetary policy to change as yet, although the latest figures reinforce the Fed's concern that job growth is insufficient to reduce unemployment as much and as quickly as they would prefer. So, there's every reason to expect policy to remain highly accommodative. A few months ago, this employment report would have been taken as good news. That it is now disappointing is a good measure of how far we've come.

    Equity markets declined last week, catching their breath after a major ascent, while concerns over Europe's finances were given renewed life by a poor auction in Spain. Such setbacks are likely to continue. Europe is in recession, so progress in reducing government budget deficits will be slow, at least until some sort of economic recovery, even a weak one, is in place. Add in upcoming elections and a random public protest now and then and it is doubtful bad news out of Europe will remain off the front pages.

    Earnings reports will begin this week and gains are likely, reflecting solid growth in the first quarter. GDP Q1 growth is expected to be soft, but job growth was quite solid and it is doubtful firms would be hiring if sales were disappointingly weak. Unemployment claims continue to decline, while the composition of the hiring looks better. Fewer people are working part time involuntarily. There is some modest hiring in the construction sector. And job losses have slowed for government workers. So, all the trends seem desirable, even if the pace of job growth may still be somewhat irregular.

    Investors remain very cautious. It takes very little for Treasury bonds to rally and interest rates remain quite low. Some analysts suggest this is only because of substantial buying of longer-term bonds by the Fed, but private capital flows still favor bonds overwhelmingly compared to stocks. So, companies continue to take advantage of these favorable market conditions by issuing bonds at a record pace to repurchase their own shares, if they are not paying off maturing debt. Stock prices should work their way higher over the course of the year, as long as growth continues, which seems by far the most likely path for the economy. Now we turn to the Q1 earnings report, beginning this week.

    Apr 12 10:40 AM | Link | Comment!
  • The Path Of Least Resistance Is Up

    There is so much skepticism with respect to stocks that most everyone who might be scared out of the market has already exited. Investors fear a credit meltdown in Europe following a Greek default. They also fear a weakening domestic economy. As a result, stock prices are depressed, despite solid earnings growth and a healthy corporate sector. If investor's fears are not fulfilled, stocks should move higher.

    Investors have been anticipating a credit market collapse in Europe since March 2010. The risks of a meltdown have not been resolved as yet, despite the ongoing collaborative efforts of Germany and France, so this has become very old news. Investors should be well prepared for anything, except a total credit meltdown. Similarly, domestic growth slowed in response to rising energy costs and higher food prices, which weakened discretionary income, and industrial production declined due to parts shortages as a result of Japan's tsunami. The expansion regained some vigor in the fourth quarter despite these adverse shocks. And with the housing market now beginning to recover, a new impetus for growth will help.

    The equity market became considerably cheaper in 2011, as earnings maintained a strong upward trajectory and stock prices failed to follow suit, so stocks became cheaper. Yields on Treasury bonds declined, which tilted the pre-existing balance favoring stocks even more in that direction. Investors are simply not positioned for this mix. Many retail investors have fled stocks for the safety of Treasury bonds, yet interest rates are unsustainably low, so the risk of owning Treasuries is high. Investors did not bargain for losses when they fled into the safe haven of Treasury bond investments.

    Monetary policy remains highly supportive on both sides of the Atlantic. The ECB has engaged in quantitative easing, even if it wasn't characterized as such. Domestically, the Fed is also committed to economic recovery and will keep interest rates low until this outcome is assured. Therefore, all the key variables are aligned to promote a rebound in stock prices, barring any adverse shocks. Even then, the economy has demonstrated its resilience. So we remain attracted to the more cyclically sensitive parts of the equity market and we are steering clear of U.S. Treasury bonds.

    Jan 25 9:26 AM | Link | Comment!
  • One More Step Forward

    Markets remain priced for economic weakness, with some possibility of a financial market meltdown, despite improving conditions.  Stock prices remain very low compared to bond prices, while government bond prices remain very high compared to corporate bond prices.  Both comparisons speak to a high degree of caution on the part of investors.  The economy is not playing along, however.  Barring an unexpected adverse shock out of Europe, which remains the market’s primary concern, the economy and the equity market would likely gather momentum over 2012.

    Every measure suggests that investors remain fearful.  The earnings yield is extremely high compared to Treasury interest rates.  Stocks are cheap compared to bonds.  High yield bonds are cheap compared to high grade bonds.  Actual reported profits consistently beat earnings forecasts.  Price earnings multiples are low historically.  Consumer confidence remains low.  Such a high level of pessimism sets the stage for markets surprises, namely that bond prices may fall, while equities rally.  Investors are not positioned for such a possibility, pulling money out of stocks funds for three years running and depositing even larger sums in bond funds.  As the equity market rallies to reflect the strength in corporate profits, investors will be pressed to get back into equities to participate and to avoid losing money in bonds.  So, the stock market, which was nearly flat in 2011, has enormous upside potential.

    The primary risk to this potential being realized is the possibility of financial problems worsening in Europe.  They are working on their issues, although painfully slowly.  But if they can recapitalize the banks and reduce sovereign deficits, this concern should fade.  Everyone will be watching, of course.

    Domestically, monetary policymakers seem to be looking for an opportunity to inject more cash to buy mortgages to promote a stronger housing market.  As Fed Chairman Bernanke has stated, the housing market needs more help.  A new program to permit homeowners to refinance has been rumored and investors also think the Fed could announce a major mortgage buying program.  In fact, the housing market looks like it has already begun to recover.  Rents are rising, home construction starts have strengthened, and housing is already adding to GDP.  Still, a strong housing recovery would be very welcome.  It would also set the stage for a significantly stronger economy that produces more than 200,000 jobs consistently each month.  Even so, any new policy initiative out of the Fed is quickly becoming less likely, although a mortgage refinancing initiative remains possible.  Either way, the economic environment continues to improve.  Imagine when housing psychology catches up to reality.

    Jan 09 5:27 PM | Link | Comment!
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