Spring continues with signs of renewed growth in the economy. Earnings reports are down but not as bad as expected; JP Morgan successfully raised some capital with Goldman Sachs in hot pursuit; some banks are even talking about paying back their government aid and the NYSE enjoyed a successful IPO. The world as we know it, may in actual fact not come to an end right now. With the panic subsiding the sobering reality of a generation’s lost savings – the vision of a large leisure industry catering for early retiring baby boomers, now a distant memory – needs to be addressed. This will require a realistic and quite possibly a painful assessment of projected investment returns over the next 5, 10, 15 and 20 years as the baby boomers move into their twilight years. Absolute returns and as importantly volatility (pain that can be endured during market price fluctuations) will no doubt become extremely important and ratios such as the Sharpe and Sortino ratios, both measuring returns and volatility could become household words.

Here’s one of Wall Street’s best-kept secrets: If you were investing 30 years ago, your best choice, for the long run, would have been super-safe Treasury bonds. That’s where the money turned out to be. Investors erred in their religious belief that stocks always outperform bonds, over holding periods of 10 years or more. If you rush to safe havens today, though, you may get it wrong again. Looking forward, the opportunities probably lie in risk -- bonds as well as stocks. It’s easy to see that bonds have done better than stocks for the past 12 years. For that matter, so has your mattress. Stocks have surrendered all the gains they made since 1997, in what investors are calling their “lost decade.” And that’s not the half of it, says Robert Arnott, founder of Research Affiliates LLC, an investment management firm based in Newport Beach, California. It’s more like a lost generation. Starting in 1979, and taking any month you choose, rolling 20-year Treasuries have beaten the Standard & Poor’s 500 Index with income reinvested. “Astounding,” is how Arnott describes it. There’s even a specific period when 20-year Treasuries did better over 40 years (February 1969 to February 2009). His research will be published in the May/June Journal of Indexes, which covers index investing and trading. Far Better Story Arnott’s point isn’t that bonds will continue to be the best investment for the long run. Stocks are a far better story today, with valuations low and T-bonds yielding 3 percent. He’s reminding you that it’s not the asset that matters but the price you pay for it. When you buy high, you can’t count on coming out ahead no matter how long you hold. Today, the overpriced asset appears to be fixed-rate Treasuries. There’s no default risk but a high risk that you will lose money after taxes and inflation. On the other hand, Treasury inflation-protected securities - - Treasury bonds whose principal value rises with inflation -- are looking cheap. Twenty-year TIPS are priced for an average inflation rate of a bit more than 1 percent over all those years. That seems pretty low, considering the government’s vigorous attempts to re-inflate the failing economy. Policy makers will need an inflation rate of 3 percent or 4 percent to grow the economy and end the debt destruction, says TIPS enthusiast and bond expert Bill Gross, co-chief investment officer of Pacific Investment Management Co. in Newport Beach, California. Conservative investors were stunned when their corporate- bond funds took double-digit losses in the frightening market collapse of September-October 2008. Long-term corporate bonds fell 16 percent through October, according to Ibbotson Associates -- their worst performance on record. That wasn’t supposed to happen. In bad stock markets, investors expect their bonds to rise in price or at least hold flat. Instead, for the first time, all the major asset classes fell together. In February, they were all savaged again.

For the entire article from BLOOMBERG NEWS click here:

Rates on 30-year mortgages dipped this week after rising a week earlier, and remain just above record lows. Mortgage finance giant Freddie Mac said Thursday that average rates on 30-year fixed-rate mortgages fell to 4.82 percent this week, down from an average of 4.87 percent last week. Rates have been below 5 percent for five consecutive weeks. The all-time low of 4.78 percent was recorded on the week of April 2. Freddie Mac’s survey dates back to 1971. Low rates have sparked a surge in refinancing activity, with nearly 80 percent of new home loan applications coming from borrowers seeking to refinance. Freddie Mac’s sibling company, Fannie Mae, refinanced $77 billion in loans last month, nearly double February’s level and the best month for such activity since 2003, when the housing market was still surging.

For the entire article from MSNBC click here:

A measure of home-builder sentiment rose this month, offering another possible sign that the housing market is beginning to stabilize. The National Association of Home Builders/Wells Fargo Housing Market Index, which is based on a survey of home builders' perceptions about the housing market, rose to 14 in April from 9 in March following months of dismal readings. Partly driving the unexpectedly large rise this month was the builders' brightening outlook for sales over the next six months. Builders said in recent weeks that sales have been improving because of low mortgage rates and government efforts to spur purchases by first-time buyers, such as an $8,000 tax credit. The rise in the NAHB index, which is seasonally adjusted to account for the typical uptick in spring sales, follows other signs that the market is nearing a bottom, including a rise in existing and new home sales and single family housing permits in February. Some analysts said Pulte Home Inc.'s recent acquisition of Centex Corp., to form the nation's largest home-building company, may have been partly driven by a belief that the market was bottoming. "We have a lot of little signals here and there that there has been a bottoming in sales," says David Crowe, the NAHB's chief economist. The shares of some battered home builders rose as much as 20% on Wednesday, but many analysts warned that the optimism may prove short-lived if banks dump additional foreclosed houses on the market at steep discounts and unemployment worsens.

For the entire article from THE WALL STREET JOURNAL click here:

Stocks posted small gains Friday as investors breathed a sigh of relief that earnings reports and a consumer sentiment survey were better than expected. Some investors feared first-quarter earnings releases would puncture the recent stock-market rally. But so far, reports have supported the bulls' argument that the economy and financial system are tentatively finding their feet. After earnings reports from Google, Citigroup and General Electric Friday, the market notched its sixth straight week of gains. Major indexes traded in a tight range and pulled back from late-afternoon gains. After being up more than 60 points, the Dow Jones Industrial Average added 5.9 to 8131.33. The gains left the Dow up 0.6% for the week, its first six-week winning streak since May 2007. The S&P 500 was up 4.3 at 869.6, marking its longest winning streak since May 2007. The technology-oriented Nasdaq Composite Index was up 2.63 at 1673.07, the longest weekly gaining streak since the seven week run ended Dec. 2, 2005. Dow and S&P components General Electric and Citigroup both beat analyst estimates with their first-quarter results. The results were another sign of thawing in the long-running credit crisis after recent upbeat reports from J.P. Morgan Chase, Wells Fargo and Goldman Sachs Group, said Steve Auth, executive vice president at Federated Global Investment Management Corp.

For the entire article from the WALL STREET JOURNAL click here:

CLAIMS of clairvoyance, particularly when they come from economists, deserve a sceptical reception. Hal Varian, a professor of economics at the University of California, Berkeley who also happens to be Google’s chief economist, has no such pretensions, but he does believe that data on internet searches can help predict certain kinds of economic statistics before they become available. In a new paper written with Hyunyoung Choi, a colleague at Google, he argues that fluctuations in the frequency with which people search for certain words or phrases online can improve the accuracy of the econometric models used to predict, for example, retail-sales figures or house sales. Actual numbers for such things are usually available only with a lag. But Google’s search data are updated every day, so they can in theory capture shifts in consumer behaviour before official numbers are released. How widely could this idea be applied? For some things, like retail sales, the categories into which Google classifies its search-trend data correspond closely to what people may want to predict, such as the sales of a particular brand of car (see chart). For others, like sales of houses, things are less clear. It appears that searches for estate agents work better than those for home financing. But anything that makes the crystal ball less cloudy is welcome.

For the entire article in THE ECONOMIST click here:

The rapid pace of the eurozone’s economic contraction shows few signs of slowing, with industrial production down almost 20 per cent year-on-year in February and inflation dissipating, official data showed on Thursday. The 18.4 per cent fall in output in the 16-country region – the largest since records began in 1990 – highlighted the severity of the global slowdown. Monthly comparisons offered little sign of stabilisation, with the 2.3 per cent drop in February compared with January only slightly lower than the 2.4 per cent fall reported the month earlier. Compared with the US or UK, the “glimmers of hope are less prevalent in the eurozone”, said Colin Ellis, European economist at Daiwa Securities SMBC. In the US, there was evidence that the inventory cycle was turning more positive for growth, but in the eurozone higher levels of stocks could act as a brake on activity until the second half of the year, Mr Ellis said. The data suggested that the rate of contraction in the eurozone might even have accelerated. First-quarter gross domestic product could have declined faster than the 1.6 per cent fall reported in the last three months of 2008, economists said.

For the entire article from the FINANCIAL TIMES click here:

From PAT OLIPHANT

 

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