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Parallels Between The 1997 Asian Financial Crisis And U.S. Growth Today

Richmond Fed President Lacker has reminded us of the U.S. recovery in 1997 and 2003 in the face of overwhelming Asian economic troubles. The lesson of the Asian Financial Crisis is briefly recapped with the actual impact on U.S. growth and inflation shown. After the U.S. recovered in 2010, it is European Sovereign Debt Crisis which darken the economic cloud but this shouldn’t derail us from the bigger economic picture. SPY with its collection of big chip companies like AAPL and XOM would be an excellent vehicle to ride the U.S. recovery. SPY has paused in its price range as European woes prevent its raise but this should not be the case for long. Potential catalyst for SPY is stated. I quote the following from Richmond Federal Reserve President Jeffrey M. Lacker during his speech earlier this month to the Virginia Bankers Association and Virginia Chamber of Commerce. The economic outlook can change rapidly, and judgments about appropriate policy need to respond accordingly. It’s not hard to find historical examples: The outlook for real activity shifted dramatically from late 1998, when overseas turmoil was thought to jeopardize U.S. growth, to early 1999, when it became clear that the effects would be minimal and activity was accelerating. Similarly, the outlook for growth and inflation shifted significantly from mid-2003, when inflation seemed to be sinking below 1 percent, to early 2004, when growth and inflation were clearly rising. Arguably, the Fed fell at least somewhat behind the curve in each case. President Lacker provided a very good example of the recency bias where people tend to focus on the recent events to the extent where they are too absorbed to look into the future. The 1997 Asian Financial Crisis and the 2003 SARS health crisis hit Asia which resulted in concerns over growth in the United States which were blown out of proportion. There are draw parallels with the economic situation today if we replace Asia with Europe as the economic source that is dragging down the U.S. It would be instructive to look at the actual economic growth and inflation in the U.S. during this period. This is the best example for the Fed’s insistence that low energy prices are transitory in nature and the need to see the bigger picture and to get ahead of the curve. 1997 Asian Financial Crisis The 1997 Asian Financial Crisis started in Thailand where speculators were successful in pushing down the value of the Thai baht to the point where it became virtually worthless. Other Asian countries follow suit to devalue their currencies to protect their vulnerable export sector with the notable exception of Malaysia which implemented currency control. Hot capital flows fled Asia and growth in the U.S. was negatively impacted as seen in the chart below before and after the crisis. (click to enlarge) If we were to look at these growth numbers with today’s eyes, it will look like a pretty solid growth trajectory to us. Then again, we have to remember that this is 2 decades ago where the U.S. is still the engine of growth globally and China was just emerging as the manufacturing hub with its low labor cost. The IMF intervention in July 1997 for Thailand marks the beginning of a serious crisis and we saw growth in the U.S. dropped from 6.2% in the second quarter of 1997 to 5.2% in the third quarter and 3.1% in the fourth quarter of 1997. As a sign of the emergencies of the times, Indonesia had to asked the IMF and World Bank for help in October 1997 after its rupiah dropped by 30% in 2 months (which puts the 1 day 40% CHF decline in perspective after the surprise SNB decision to abandon the EURCHF 1.2 floor on 15 January 2015.) and by January 1998 Indonesians were stockpiling necessities. In May 1998, President Suharto had to resign after 32 years in power due to widespread public discontent with riots on the streets. This was the beginning of serious concerns over a widespread financial crisis engulfing the U.S. and the world. However on hindsight, it was exaggerated as the real impact of the Asian Financial Crisis never really reached the shores of the U.S. in the manner which it affected South Korea, Thailand, Indonesia and Russia. (click to enlarge) Inflation dropped drastically between 1997 and 1998 as the crisis heats up from 3.25% to less than 1.5% within a year. The Fed responded by cutting interest rates by 0.25% on October and November 1998 and by then at the end of 1998, the crisis has largely passed. The Fed went on to reverse its rate cut decision in 1998 by increasing it by 0.25% each in August and November 1999 back to 5%. So the crisis of 1997 shows that the impact can come quickly and it passed quickly. By the time, the worst of the crisis was exaggerated and reported in the market, the crisis has passed and growth had returned. Current Situation The difference between 1997 and the 2007 Credit Crunch that led to the Great Recession of 2008 and 2009 is that they had their source in the housing bubble in the United States. This lead to a longer recovery period but we can see from the chart below that growth has returned in 2010 after the contraction of 2008 and 2009. (click to enlarge) Also the difference between then and now is that after the U.S. recovered in 2010, it is Europe’s turn to get into trouble with their sovereign debt crisis. In contrast, Asia was able to recover relatively quickly after the crisis with a V shape recovery from 1999. This is why the current U.S. recovery took a longer period of time and at such a low rate of economic recovery. However we must acknowledged that enough time has passed and there has been substantial improvement for the U.S. economy. (click to enlarge) We can see in the overlay of GDP growth (listed on the left hand side) and inflation (on the right side). GDP growth has hit 5% in the third quarter of 2014 and this is an 11 year high. On 30 January 2015, we will see the advance estimate for the fourth quarter of 2014 and it is expected to come in strongly at 3.0%. Overall growth for year 2014 should be between 2.5% and 3%. This is a strong economic growth and the U.S. is the only major developed economy to hit this growth rate. The only difference is that the inflation rate has divergence and gone down. There are some pundits that will see this as signs of future economic weakness due to weakening of global demand. This is unlikely to be case as we know that this is due to increase supply of oil from the U.S. due to advances in technology and the unwillingness of OPEC to reduce their output of oil. Benefiting From U.S. Growth The way which investors can benefit from a strong and sustained U.S. growth is to gain exposure to a diversified portfolio of U.S. stocks by the way of the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). SPY gathers the best companies in the U.S. which are likely to receive the bulk of the increased expenditure when the U.S. recovery gathers steam. Think of company like Apple (NASDAQ: AAPL ) which is the top company in this ETF with 3.54%. AAPL is the company you think of when you want to purchase a new phone or laptop. The next on the list is Exxon Mobil (NYSE: XOM ) with 2.14% of the ETF. XOM has both upstream and downstream activities and its greatest brand for the public is probably the petrol pump of Mobil. While XOM will be pressured during this period of the low energy prices, we can be sure that it is here for the long run and will benefit when smaller competitors are chased out of the market. I could go on but the point is that SPY contains the blue chip companies of the U.S. and you can’t go wrong with it. Its growth might be lesser than if you picked the next Google but you have lesser chance of losing money on a mistake and this is where you should park the bulk of your wealth. SPY is heavily tilted towards technology companies with 17.89% weighting, financial services at 15.25%, healthcare at 14.71%, industrials at 11.18% and consumer cyclical at 10.59% to round up the top 5. Its price is also reasonable at 17 times earnings. (click to enlarge) We can see that after dip of ‘the buy and go away’ month of October, we have seen strong growth in the SPY in November. From December onward to this month, SPY has been in a range of $197 to $210. This represents market worry about the European contagion. As we have seen in the Asian Financial Crisis which the Richmond Fed President has kindly reminded us, this is likely to be overblown in the media. The U.S. recovery has started since 2010 and it has already been 4 years. It has withstood criticism of the quality of the recovery and the tapering of the Fed’s QE which is thought to artificially inflate the equity market. After the Fed formally ended QE3 in October 2014, there was some pullback in the equity market (also due to investor psychology and also bearish articles such as this Forbes article urging readers to stay in Cash.) but it has largely corrected itself. There will always be negative news in the market and we should look beyond them to the bigger picture and trend that has built up over time. The U.S. recovery has been strong and today we had the benefit of looking it through a recent historical perspective. This should guide us in our investment decision framework going forward. A potential catalyst for the SPY would be a good Advance fourth quarter GDP reading exceeding expectations of 3.0% on 30 January 2015. If you are going to take a long position on SPY, it would be advisable to do so before that.

Fund Watch: Gotham, Transamerica, Highland, ALPS And More

In this edition of Fund Watch, we preview new fund filings from: Eccles Street Event-Driven Opportunity ETF Transamerica Event Driven Fund ALPS Advanced Put Write Strategy ETF Gotham Index 500 and Total Return Funds Highland Files for 17 Alternative ETFs Eccles Street Event-Driven Opportunity ETF Eccles Street Asset Management filed paperwork with the Securities and Exchange Commission (SEC) on January 9, announcing its intention to launch the Eccles Street Event-Driven Opportunity ETF. Eccles Street will invest the fund’s assets in “event-driven” credit instruments, mostly corporate bonds and bank loans with an average maturity of 3-5 years. The instruments are considered “event-driven” because their issuers are involved in corporate “events,” such as mergers, acquisitions, bankruptcies, credit downgrades, proxy fights, or other restructuring. The Eccles Street Event-Driven Opportunity ETF will also invest in equities, especially credit-related ETFs and ETNs. Investments will be selected after Eccles Street Management, the fund’s sub-advisor, performs a credit analysis of the issuers of potential investments. The fund’s objective will be current income, with a secondary objective of capital appreciation. Transamerica Event Driven Fund Transamerica Funds filed a Registration Statement with the SEC for the Transamerica Event-Driven Fund on January 15. The fund will be sub-advised by Advent Capital Management, and it will pursue an event-driven strategy by investing in companies involved in corporate events or special situations. Absolute return is the fund’s objective. The Transamerica Event-Driven Fund will be available in A- and I-class shares, with net-expense ratios of 1.6% and 1.35%, respectively. Advent Capital Management’s Odell Lambroza, Tracy Maitland, and Doug Teresko are listed as the fund’s portfolio managers. ALPS Advanced Put Write Strategy ETF On January 6, ALPS ETF Trust filed a Form N-1A with the SEC announcing its plan to launch the ALPS Advanced Put Write Strategy ETF. The fund will seek total return, with an emphasis on income, by writing one-month put options on the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) . To write a put option is the same thing as short-selling a put option, and the ALPS Advanced Put Write Strategy ETF earns income by writing (short-selling) puts, effectively on the S&P 500. Put options rise in value as the value of their underlying instrument declines, and fall in value as their underlying instrument appreciates. The objective of a put writer is for the put contracts he or she sells short to expire worthless. The ALPS Advanced Put Write Strategy ETF will give investors the opportunity to earn income from unrealized fears as the S&P 500 climbs higher. Gotham Index 500 and Total Return Funds On January 15, Fundvantage Trust filed paperwork with the SEC for a pair of new alternative mutual funds: the Gotham Index 500 Plus Fund and the Gotham Total Return Fund. Author and former hedge-fund manager Joel Greenblatt is a co-portfolio manager of both funds. The Gotham Index 500 Plus Fund seeks to outperform the S&P 500 over most investment periods by using a long/short equity strategy. In addition to shares of common stock, its investments may include preferred stock, convertible bonds, rights, and warrants – all of which are featured in portfolio manager Joel Greenblatt’s 1997 book You Can Be a Stock-Market Genius . The Gotham Total Return Fund will be a non-diversified fund aiming to outperform the top-ranked university endowments over a full market cycle. Its assets will be allocated across other Gotham mutual funds, particularly the Gotham Absolute 500 Fund, the Gotham Enhanced 500 Fund, the Gotham Neutral Fund, and the new Gotham Index 500 Plus Fund. The fund’s long equity exposure is expected to be between 40% and 80%. Highland Files for 17 Alternative ETFs Highland Capital Management has made a big commitment to liquid alternatives space with a new filing for 17 ETFs that span across four broad hedge funds styles, including equity hedge, event driven, macro and relative value. The full list of funds is as follows: Highland Equity Hedge Fundamental Growth ETF Highland Equity Hedge Fundamental Value ETF Highland Equity Hedge Multi-Strategy ETF Highland Equity Hedge Technology ETF Highland Equity Hedge Healthcare ETF Highland Event-Driven Activist ETF Highland Event-Driven Credit Arbitrage ETF Highland Event-Driven Merger Arbitrage ETF Highland Event-Driven Multi-Strategy ETF Highland Macro Discretionary Thematic ETF Highland Macro Multi-Strategy ETF Highland Relative Value Fixed-Income Asset Backed ETF Highland Relative Value Fixed-Income Convertible Arbitrage ETF Highland Relative Value Fixed-Income Corporate ETF Highland Relative Value Fixed-Income Sovereign ETF Highland Relative Value Volatility ETF Highland Relative Value Multi-Strategy ETF Highland currently has one ETF in the market, the Highland iBoxx Senior Loan ETF (NYSEARCA: SNLN ), along with a range of alternative strategy and alternative income mutual funds. The launch of 17 alternative ETFs will make Highland one of the largest managers of alternative ETFs in the market.

Go Long SPY Now – Market Turn At Hand

The market has accounted for its fear of the ECB and Greece year-to-date, and I believe stocks have mostly sold off in 2015 because of rumors around these events. But as rumor fades into news, stocks are poised to enjoy a relief rally, and SPY is already off its lows marked on January 15. While the Greek election results are likely to revive some fear next week, I am already taking long stakes in stocks and view SPY okay to buy in increments. It’s time to start going long the SPDR S&P 500 Trust ETF (NYSE: SPY ), aka the U.S. market, as I see a turn sometime between last week’s low and the end of the month. If I am correct that the European Central Bank (ECB) action and the Greek election and its potential repercussions have greatly swayed currencies, commodities and stocks year-to-date, then a turn may be in store in the very near-term. My reasoning is based on my belief that stocks have mostly priced in worst case scenario fueled fear, and that reality will be much less scary than expectations. Stocks seem to have already found stability, with a recent bottom marked on January 15 for SPY; and many names are rising into their earnings events now, some of which I have taken long stakes in over the past week. I’ll talk about those in dedicated articles. The market has priced in a ton of fear year-to-date, I believe around the Greek election and its potential election to drop out of (or be dropped out of) the euro-zone thereafter if the big demands of its expected new leadership are not met. But, I expect the end result of events in Greece will prove much less threatening than the market has priced in, offering opportunity for relief rally as events unfold this weekend and next month. Thus, we appear to have set up for a sell the rumor, buy the news turn of events, and it’s about time to start buying in increments here. Volatility has dropped off significantly over the last two trading days, and I’m pulling my hair out for not taking that short position in the iPath S&P 500 VIX Short Term Futures ETN (NYSE: VXX ) I had been contemplating through put options. We may get another spike in the VXX Monday after the Greek election results come in, so there could be another opportunity yet. But as for the market generally, I think it’s okay to start taking stakes in stocks again and the SPDR S&P 500 is a great way to do that. I surveyed some of my Greek contacts and have contemplated the situation; there seems to be the possibility that risk may have been overly priced into stocks around the Greek election due on Sunday. The new disruptive political party Wall Street and Brussels are concerned about, Syriza, is not the threat to European and global stability our press indicates it is. Yes, Syriza will push for renegotiation of the terms of the money Greece owes its European partners and other parties, but it will not default on that debt in my view. In other words, a Grexit is not going to happen as far as I see it. SPY’s page at Seeking Alpha shows it is only down 1.2% year-to-date after gaining back roughly 2.9% since the January 15 close. Many pundits I’ve seen talk about the market seem to conclude the valuation of the S&P 500 Index is not so cheap, with an index P/E multiple of roughly 18.8X, versus historical mean closer to 15.5X. However, the index multiple on forward estimates is 16.65X according to the WSJ page linked to above. Let’s not forget that our economy is growing at an accelerating pace and that the unemployment rate has been decreasing at a better than expected rate. Europe has its stimulus now, but the region’s decline and even China’s slowing growth are not a huge a threat to our economy anyway; that is especially true now that gasoline prices have come down so much (I’m looking for oil prices to stabilize and rise soon). My friends, I say face fear and start buying stocks now in increments and more so as we get passed this Greek election event. It will drive fear again into stocks next week, but I expect that would only open further opportunity for U.S. investors to buy SPY and stocks generally for benefit later this year. This thing has been overblown. My mouth is watering over some of the valuations I see considering this economy’s strength, so I’m gritting my teeth and buying stocks.