Fund performance

The last two weeks have been a heart-stopping roller coaster ride for investors. But don’t assume that the ride is necessarily over, said Michael Ryan, chief investment strategist at UBS.

The persistently weak economy and new regulations are preventing investment management firms from growing, according to a survey of 100 executives by KPMG.

Hedge funds have been holding their own amid the severe market swings of the past week, with the Dow Jones Credit Suisse Core Hedge Fund Index declining only -3.66% month-to-date through Aug. 14. By comparison, the Dow Jones Industrial Average fell -11.58% in that time, and the S&P 500 declined -13.18%.

It is ironic that Standard & Poor's, one of the three major credit rating agencies at the heart of the financial crisis, would downgrade the United States' credit rating from triple-A to AA+. After all, S&P should have properly assessed the asset-backed housing securities that led to the Great Recession not as investment-grade but what they actually were. Junk.

As the financial markets hit investors with gale-force gyrations last week, most advisers are telling their clients to drop anchor.

There’s more bad news for the economy and the stock market after a report from Thomson Reuters and the University of Michigan found that their Consumer Confidence Index in early August plunged to its lowest point since May of 1980.

CFOs Expect Strong Earnings But Inflation Fears Abound: SurveyBy Larry BarrettAugust 10, 2011Chief financial officers in the U.S. and Europe are largely optimistic about sales and earnings for their individual companies through the rest of the year, but rising commodity prices and extreme volatility in the equities markets has most convinced inflation is on the rise and will likely hinder any substantial recovery in the overall economy.Like what you see? Click here to sign up for Financial Planning's daily newsletter to get the latest on advisor market trends, investment management, retirement planning, practice management, technology, compliance and new product development.The CFO Outlook survey, conducted last month by Financial Executives International and Baruch College’s Zicklin School of Business, interviewed 228 corporate CFOs based in the U.S., 78 corporate CFOs from Italy and 44 CFOs from France.The survey found that while U.S. CFOs are slightly more optimistic than their European counterparts, concerns about the impact of raising the debt ceiling and the possibility of a double-dip recession are prompting most to extend their forecasts for the start of a U.S. economic recovery by more than a year to the second half of 2012 or beyond. The second quarter CFO Optimism Index for the global economy experienced a decline for U.S. CFOs from the previous quarter (61.70 to 59.40 in Q2), but remained higher than European CFOs, which also dipped (58.90 to 55.10 in Q2). U.S. CFOs’ optimism in their own companies remained consistent with the previous quarter (72), and demonstrated a higher level of confidence in their businesses than did European CFOs (down to 63.20 from Q1’s 66.10). However, the confidence among U.S. CFOs in the U.S. economy weakened. The index dropped five points from the previous quarter (59.00 from Q1’s 64.10) and dropped below their optimism for the global economy. Over the next 12 months, U.S. CFOs are forecasting a 21% increase in their net earnings, an 11% increase in revenue and a 15% increase in capital spending, while CFOs in Europe anticipate more modest increases in revenue and net earnings (6% each) and only a 4% increase in capital spending."Globally, CFOs continue to display caution. Inflation concerns and fears about the recovery may further delay new hiring and investing," John Elliott, Dean of the Zicklin School of Business at Baruch College, said in the report. "While U.S. CFOs have high expectations for earnings growth and generally hold a more positive outlook than Europeans about the global economy and the future of their businesses, their declining confidence in the U.S. economy reflects uncertainly.""Decisions from Congressional leadership and the President will be especially significant for U.S. businesses in the coming months," he added.Mainly due to rising commodity prices, inflation levels continue to be a major area of concern for CFOs. When asked to rate their inflation concerns on a scale of one to five (with five being the highest level of concern), 70% of U.S. CFOs and 66% of European CFOs selected a three or higher. The report found that while more than half feel their level of concern was unchanged from last quarter, over a third of both U.S. CFOs (39%) and European CFOs (36%) expressed more concern this quarter.From a big-picture perspective, the survey discovered that because of these formidable macroeconomic obstacles, a relatively lower number of U.S. CFOs feel the U.S. is in the midst of, or drawing close to, a recovery. Twenty-seven percent of U.S. CFOs believe that a recovery has occurred, and more than half (55%) predict that a recovery will not take place until the second half of 2012 or beyond.For nearly half of U.S. CFOs (47%), a lowered U.S. unemployment rate was perceived to be the most telling indicator of an economic recovery, which is followed by a rising gross domestic product (GDP) (22%) and a rise in consumer spending (17%).

WASHINGTON—Standard & Poor's downgrade of U.S. debt last week is likely to hasten the replacement of credit ratings within bank regulatory requirements.

Market volatility and an uneven path for the economic recovery are set to continue for years, according to Towers Watson. What’s more, all asset classes will face higher-than-average volatility, Towers Watson said.

The August reading of the Consumer Reports Index fell to 43.3, its lowest level since December 2009. Falling 5.1 points from 48.5 in July, the index registered its sharpest drop in two years.

The Conference Board Employment Trends Index declined slightly in July to 100.6, down 0.3 percentage points from June’s 100.9. However, from a year ago, the July index is up 4%.

S&P Downgrades DTCC SubsidiariesPrinter Friendly Email Reprints Reader Comments Share | August 8, 2011Chris Kentouris Just hours after it said that Standard & Poor's downgrade on the triple A rating of U.S. government debt would not impact its valuations on collateral, Depository Trust & Clearing Corp was hit with its own downgrade.Like what you see? Click here to sign up for Securities Technology Monitor's weekly newsletter to get the latest news and analysis that matters to the effective operation of capital markets.S&P downgraded its triple-A rating on DTCC's subsidiaries Depository Trust Company, Fixed Income Clearing Corp and National Securities Clearing Corp to double A+, the same as U.S. government debt.The three organizations are critical to the U.S. financial market: DTC is the U.S. central depository system which settles U.S. equity and fixed income transactions while FICC and NSCC clear those transactions. In 2010 alone, DTC settled nearly $1.66 quadrillion worth of trades.S&P's decision to downgrade DTCC and its subsidiaries was pretty much expected based on the rating agency's announcement on Friday evening. S&P made it clear that its move to downgrade U.S. government debt could affect insurers, mortgage agencies and securities clearinghouses. At the time S&P characterized the target organizations as "entities with direct links to, or reliance on, the federal government."In a statement issued on Monday morning DTCC downplayed the impact of S&P's downgrade. "We do not anticipate any changes in our operations as a result of this revision of our credit rating," said DTCC. The market-owned utility also cited comments made by S&P that the ratings downgrade of its depository and clearinghouses did not reflect a change in S&P's view of the "fundamental soundness" of DTC or the clearinghouses but incorporate "potential incremental shifts in the macroeconomic and long term stability of the U.S. capital markets as a consequence of the decline in the creditworthiness of the federal government."Prior to the downgrade today, DTC and NSCC had received S&P's Triple A rating for nine consecutive years and FICC for siJust hours after it said that Standard & Poor's downgrade on the triple A rating of U.S. government debt would not impact its valuations on collateral, Depository Trust & Clearing Corp. was hit with its own downgrade.S&P downgraded its triple-A rating on DTCC's subsidiaries Depository Trust Company, Fixed Income Clearing Corp. and National Securities Clearing Corp. to double A+, the same as U.S. government debt.

Hold on to your hat. We may be headed for a double-dip recession. In fact, when more current economic data arrives a few months from now, it may turn out that we're already in one, according to a pair of economists at Moody's Capital Markets Research Group.

A majority, 63%, of middle-class Americans thinks that the U.S. is in a doubledip recession, the First Command Financial Behaviors Index shows, up from 50% who thought the U.S. had reverted back into recession last summer.

Taking Stock: Northern Trust, BlackRock Say Little ChangedPrinter Friendly Email Reprints Reader Comments Share | August 8, 2011Tom Steinert-ThrelkeldAs securities markets in the United States prepare to open widely lower Monday morning, Northern Trust and BlackRock each said that the decision by the Standard & Poor’s bond ratings agency to downgrade U.S. Treasury debt for the first time would not affect their views of the U.S. bond market or the solvency of the U.S. government.Like what you see? Click here to sign up for Securities Technology Monitor's weekly newsletter to get the latest news and analysis that matters to the effective operation of capital markets.Chief Investment Officer Bob Browne said Northern Trust has no plans to sell U.S. Treasuries as a result of the downgrade.“Northern Trust does not see any fundamentally new information in the downgrade about the state of the U.S. economy and the country’s capacity to pay its debt,” said Browne.Using credit default swaps as a guide, U.S. beats Wal-Mart.Underscoring Mr. Browne’s position, Northern Trust’s Chief Investment Strategist, Jim McDonald, last week released a research commentary in which he analyzed the deal to raise the government debt ceiling and the political environment that created it. McDonald noted that U.S. fiscal problems, if left unaddressed, were likely to manifest themselves through a weaker dollar rather than higher bond yields. The U.S. government’s financial strength still remained higher than that of almost any other nation and of major corporations, including Wal-Mart (see chart).Northern Trust investment experts believe that growth and inflation expectations will determine U.S. bond yields over the next few years much more than the level of deficits.“Looking globally, S&P downgraded Japan to AA- in January of this year; that country's bond yields have declined since then and remain substantially below those of the United States," Browne said.With regard to money market funds, Browne noted that short-term ratings of the U.S. remain unchanged by S&P, remaining at A1+, the highest level. A Northern Trust report can be found here.BlackRock, in a statement, said the downgrade of U.S. sovereign credit by S&P“reflects facts that have been well known to the market for some time. So, it does not imply a fundamental increase in risk, and we don’t believe that investors should change their behavior based solely on the downgrade. However, in combination with continued economic weakness and regulatory uncertainty, this may provide a signal to some investors to reassess their risk appetite.”BlackRock said it had been preparing for the possibility of downgrade over the past month, and, the firm has no need to execute any “forced selling of securities” in response to the S&P downgrade.BlackRock said it also is prepared for “continued downgrades into next week of the many other issuers and issues that derive their rating from the U.S. government rating – including governmental entities and corporate issues.Weakness in labor markets, when combined with only modest levels of growth, argues for a high likelihood that the Federal Reserve will maintain its Fed Funds policy range at historically accommodative levels for at least another year and perhaps through 2012, BlackRock said.BlackRock said:Nonetheless, we think it is vital to underscore the fact that the U.S. Treasury sector remains the largest and most liquid fixed income market in the world with the greatest degree of price transparency and few genuine alternatives.As securities markets in the United States prepare to open widely lower Monday morning, Northern Trust and BlackRock each said that the decision by the Standard & Poor’s bond ratings agency to downgrade U.S. Treasury debt for the first time would not affect their views of the U.S. bond market or the solvency of the U.S. government.

Consumer confidence, as measured by the Discover U.S. Spending Monitor, fell for the second straight month in July, to its lowest level in two years. Since January, the monitor, based on a daily poll of 8,200 consumers, has dropped 11 points, to 82.7.

Even though the government reached an agreement to raise the debt ceiling, 54% of Americans surveyed said the debate over the debt ceiling has made them feel less confident in the economy, the RBC Consumer Outlook Index for August found.

International Funds Set to Outpace Domestic Counterparts: S&PBy Dave LindorffAugust 4, 20112011 has not been a great year for international equity mutual funds, especially compared to domestic U.S. fund counterparts. But this situation could very well change and investors in the near future, according to analysts at Standard & Poor's Equity Research.Like what you see? Click here to sign up for Financial Planning's daily newsletter to get the latest on advisor market trends, investment management, retirement planning, practice management, technology, compliance and new product development.First the numbers.After having two great years, in the first half of 2011 through the end of June, the average gain for international equity funds was a paltry 1.7%. This compared to an average gain of 3.4% for funds invested exclusively in U.S. domestic stocks.But Alec Young, an S&P international equity strategist, and colleague Todd Rosenbluth, an S&P mutual fund analyst, said that a slowing U.S. economy going forward could make it hard for domestic-invested funds to continue outperforming international funds -- especially if the dollar continues its slide against the Euro and other currencies (it’s down 7% so far this year).As Young explains, international funds that invest in companies that denominate their overseas returns in local currencies see their returns rise when those overseas earnings in foreign currencies get converted to dollars.Even so, he said that for international stocks and international mutual funds to really take off in the second half would require a convergence of a number of factors, not all of which are looking particularly likely.These factors, he said, would include an easing of sovereign debt “stress,” greater momentum in international manufacturing, commodity price stabilization, and a more robust U.S. recovery. With both the U.S. and global economies looking weaker, Young told On Wall Street that there were “still two things that could happen that would help international equities funds: a QE3 program by the Federal Reserve, or an expansion of the European Economic Stability Fund.” The Fed at the end of June ended its latest quantitative easing program, called QE2, of buying Treasuries and, at that time, Fed Chairman Ben Bernanke said he did not anticipate having the Fed engage in a third such program.But some economists and Fed watchers think that the dramatic change in the outlook of the U.S. economy evident in recent days may make him rethink that view. Also, there are many experts in Europe who think that the economic stability fund established to prop up the economies of Greece, Portugal and other weaker Euro Zone states is too small and may need to augmented. Looking at the universe of international funds available to investors, S&P’s analysts are recommending three which they say are both top performers and which are invested in companies with strong credit profiles and/or a history of earnings and dividend stability. They include:-- Lazard International Equity Portfolio fund (LZIOX), a relatively small fund with only $38 million in assets that has returned 5.8% so far in 2011 with below average volatility.-- Templeton Foreign Fund (TEMFX), up 5.3% this year, and a fund with relatively low turnover.-- MFS Research International Fund (MRSAX), up 5.1% this year, and a fund that has outperformed its peers for the past five calendar years.

PIMCO's Gates: Even After Debt Deal, Bigger Issues Still Haunt U.S. EconomyBy Dave LindorffAugust 3, 2011Don’t count Bill Gross, managing director of the giant investment management firm PIMCO, among those expressing relief at the government’s recent debt ceiling compromise or any subsequent package of budget cuts that may materialize over the next 10 years.Like what you see? Click here to sign up for Financial Planning's daily newsletter to get the latest on advisor market trends, investment management, retirement planning, practice management, technology, compliance and new product development.Gross, whose company manages more than $1 trillion in assets, said the deal -- which he characterized as a display of “dysfunctional government -- scarcely touches the current year’s $1.5 trillion deficit.Worse yet, he said that even if the scheme to have 12 members of a “super committee” of six House and Senate Republicans and six House and Senate Democrats does manage to come up by with another $1.5 trillion worth of budget cuts over the next decade, it would only reduce future deficits “at most by 0.5%”The cuts made in the debt deal are predicted by the Congressional Office of Management and Budget to bring down the country’s “official” total debt/GDP ratio from a current level of 100% to around 90%, with the deficits in 2012 and 2013 averaging 7% to 8% of GDP each year.But that drop in the debt/GDP ratio, Gross warns, is premised on an assumption that the U.S. economy will grow in 2012 and 2013 at a rate in excess of 3% per year.But as Gross said, “Recent trends give pause to these estimates, as does PIMCO’s New Normal, which believes 2%, not 3%, is closer to reality.”The bad news: If growth is closer to 2% per year instead of 3%, “deficits move right back up to near double-digit percentages of GDP.”And there’s another catch.The rosier scenario for the debt/GDP ratio assumes interest rates hold at current 2% levels. If rates were to rise, either because of inflation or to defend a falling dollar, for example, Gross said every 100 basis point increase “raises the deficit by 1% and erases any hoped for gains.”The government’s action on the deficit this week pales almost to insignificance, Gross warns, when one looks at the net present cost of future liabilities in the Medicare, Social Security and Medicaid programs, which he puts at a staggering $66 trillion.These enormous future debts can be addressed, he said, but not without taking steps to improve the efficiency of our healthcare system, reduce benefits, raise retirement ages, and, yes, increase tax rates, “or a combination of all of the above.” Gross said the government also has the option of depreciating the currency and/or maintaining artificially low or even negative real interest rates.Not a pretty picture to be sure.Gross’s advice to investors: favor countries with higher real interest rates like Canada, Mexico, Brazil and Germany. Diversify equity and fixed income investments out of the dollar and into developing nations “with stronger growth prospects. He also advocates investors buy commodity-based real assets “before reserve surplus nations do,” and “above all, don’t be lulled to sleep by congressional law makers that promise a change in Washington.” Don’t count Bill Gross, managing director of the giant investment management firm PIMCO, among those expressing relief at the government’s recent debt ceiling compromise or any subsequent package of budget cuts that may materialize over the next 10 years.

Is the U.S. Already in a Double-Dip Recession?By Dave LindorffJuly 29, 2011Hold on to your hat. We may be headed for a double-dip recession. In fact, when more current economic data arrives a few months from now, it may turn out that we’re already in one, according to a pair of economists at Moody's Capital Markets Research Group. Like what you see? Click here to sign up for Financial Planning's daily newsletter to get the latest on advisor market trends, investment management, retirement planning, practice management, technology, compliance and new product development.“We are in a very perilous situation,” Moody’s Chief Economist John Lonski told On Wall Street in an interview Friday. "What scares me is that, because of the weakened condition of the federal government, there is less confidence in the philosophy of 'too big to fail'-- the idea that the government will come in and back up any financial company that runs into trouble -- so in case of a renewed recession, you could see a contraction of financial liquidity that could be even more serious than what caused the collapse of Lehman Brothers," he said.Lonski and his colleague at Moody’s Capital Markets Research Group, economist Ben Garber, just released a new report titled “Double Dip Risk Rises as DC Standoff Continues,” in which they warn, “The U.S. may be closer to a double-dip recession than commonly thought.”They note that the U.S. economy “continues to soften,” and said that evidence of a recovery in the second half of this year is “proving elusive.” And that’s “assuming a reasonable resolution of the debt standoff” between Republicans and Democrats in Washington and, increasingly, even among Republicans themselves."Even with a market-friendly resolution of the debt standoff, a double-dip recession is far from unlikely," they wrote in the report.As the Moody’s report was released, so too was new and pretty gloomy data from the U.S. Commerce Department. The new government data show that growth in the last quarter of 2010 was actually running at an anemic 2.3% annual rate, not the more robust 3.1% rate initially reported.Annualized growth rates for the first and second quarters of this year were also revised downward to 0.4% and 1.3% respectively. As Ryan Sweet, a senior economist at Moody’s Analytics put it, “The economy essentially came to a grinding halt in the first half of the year.”Lonski and Garber said that at present it is hard to find any good news, with regional manufacturing statistics “hinting of stagnation” and the housing market still unable to “find a bottom.”They also note that the Chicago Federal Reserve’s National Activity Index (CFNAI), in its latest three month moving average for the last quarter, registered -0.60. They warn that in five of the last nine times the CFNAI fell to this low level “recession was often impending, or was already present."Furthermore, they said that the U.S. cannot expect much help this time from the rest of the world, which is also experiencing a slowdown in growth -- though not as severe as the U.S.A big concern among many economists is that politicians in Washington, focused as they are now in both parties on cutting the budget deficit, could make things worse. Noting that Britain’s new Conservative Party-led government responded to a debt downgrade warning by slashing domestic spending and bringing on a double-dip recession, Lonski says, “Even [Fed Chairman] Ben Bernanke has said it’s very important not to bring on budget cuts until we can be reasonably certain that the U.S. economy is self-sustaining.”Many politicians these days, in what Lonski said is “political theater,” are calling for immediate cuts in social spending programs like Social Security, Medicaid, welfare and education -- among others -- but he said, “the problem with the U.S. budget is not what is being spent now, but what will be required when the Baby Boom population is all in retirement.”The irony, he noted, is that if government inaction on raising the debt ceiling, or on overly-aggressive near-term budget cutting, helped usher in a double-dip recession, it would have the perverse effect of worsening the debt as tax receipts would plunge.