El-Erian on Sandy’s Economic Impact

Just what impact will Hurricane Sandy end up having on the economy? PIMCO’s Mohamed El-Erian recently tackled that question in a piece for CNBC.com.

One of El-Erian’s key points was that the government likely won’t be able to play its usual role in the recovery, with more being required of the private sector. “In more normal times, we would look to federal, state and local governments to increase spending, particularly on reconstruction and rehabilitation of infrastructure,” he writes. “Indeed, government assistance to the uninsured and less well-off sectors — both personal and small business — has proven especially valuable in curtailing negative social and economic effects. But budgets are already under pressure. Meanwhile, the Federal Reserve has already floored policy rates, limiting its ability to assist unless it goes even more unconventional.” The result, he says, will be that the recovery will be less front-loaded and less comprehensive, and spread out over a longer period.

El-Erian also discusses how different sectors of the economy will be impacted. Some, like insurers and retailers, should take a hit. Others, like construction companies and infrastructure firms, should benefit.

With its hands somewhat tied at a terrible time because of budget constraints, will Congress finally be moved to get its act together and address the country’s fiscal problems? El-Erian isn’t optimistic. “If history is a guide, and notwithstanding the significant devastation created by Hurricane Sandy, there should be limited expectation that even this stark situation will prompt Congress to take concerted and meaningful action,” he writes, though he does think Americans will come together to address the crisis. “In the immediate term, American communities will rally their considerable resolve and resilience, and they will summon their culture of giving to help victims of the storm,” he says. “The challenge is also to facilitate the longer-term ability to harness fully resources of private and public sectors currently undermined by deep political divisions, thus removing what has been a constant dampener of entrepreneurship and value creation.”

 

Icahn Finding Value in Netflix

While Netflix shares have been pummeled over the past year-and-a-half, hedge fund guru Carl Icahn is betting on them to rebound, perhaps due to Netflix’s attractiveness as a takeover target.

In a regulatory filing, Icahn announced that he has acquired nearly 10% of the firm. “Netflix may hold significant strategic value for a variety of significantly larger companies that are engaging in more direct competition with one another due to the evolution of the internet, mobile and traditional industry,” Icahn reported in the filing, according to The Wall Street Journal.

Icahn said in the filing that he thinks Netflix’s shares are undervalued, citing its “dominant market position” and “international growth prospects” as reasons for his bullishness.

 

What Bogle Sees For Stocks & Bonds In The Next Decade

Vanguard Founder Jack Bogle says he expects stocks to earn real returns of about 4.5% per year for the next decade, and bonds to earn virtually no real return. Bogle divides returns into two categories: investment returns, which are determined by the market’s dividend yield and corporate earnings growth, and speculative returns. Today’s dividend yield is around 2%, and he sees earnings growing at about 5% per year over the coming decade, which would make for a 7% investment return over the next ten years. In terms of the speculative part of the equation, he says price/earnings ratios are around 16 right now, and he doesn’t see that rising or decreasing significantly over the next decade, leaving the total return he expects from stocks to be about 7% annually. Bogle is also expecting about 2.5% inflation over the next decade, which means those 7% or so nominal returns would translate to real returns of about 4.5%, he says. As for bonds, Bogle expects nominal returns of about 2.5%, which, after inflation, means 0% gains.

 

Grantham Keeping Head Down Amid Headwinds

In an interview with Charlie Rose for Bloomberg BusinessWeek, GMO’s Jeremy Grantham says he’s going to be quite cautious in 2013.

“I am going to be careful, particularly for the first half of next year,” Grantham says. “Great brands of blue chips are not so bad in the U.S. Emerging countries are about fair price. Beaten-down European stocks, particularly the so-called value stocks, are probably a little cheap, although risky. And resource stocks, once they reflect the weak economy — and we’ll get another whack-down — will be a wonderful long-term purchase. Farmland and forests, which should be the backbone of any long-term, serious portfolio. … It will also be a good time to buy in.”

Grantham says he’s a big believer in the Presidential Cycle being a driver of returns, and that the first years of the four-year cycles tend to be weak for stocks. He adds that with Republicans threatening to add fiscal constraints to an already weak U.S. economy, and Europe’s and China’s troubles lingering, 2013 should be “a really good year to keep your head down.”

Grantham also says he thinks the U.S. debt situation is “exaggerated”, and that education levels, capital spending, the quality of innovation, and technology are issues that should be focused on. And he discusses how soaring resource prices have shaved three points off global GDP in the past decade.

Cooperman Growing Less Bullish on Stocks, But Sees Few Alternatives

Hedge fund guru Leon Cooperman has become a bit less bullish on stocks, though he thinks they are still the best asset class available for investors. Cooperman tells CNBC’s Larry Kudlow that the market is in “a zone of fair valuation”, and that he isn’t aggressively bullish or bearish. The main reason he’s become more neutral on stocks, he says, is that he thinks the profit cycle is peaking. He says, however, that with the Federal Reserve keeping interest rates so low, there aren’t better options than stocks right now. He also says that with many investors still de-risking and mindful of what happened in 2008, stock valuations remain reasonable.

PIMCO Boss: Years of Balance Sheet “Rehabilitation” Ahead

PIMCO Chief Operating Officer Doug Hodge says that monetary easing alone isn’t enough to repair the U.S. economy, and that America is “in for a slow period of balance sheet rehabilitation” that will take years.

“What we’ve learned though is that monetary policy alone, it’s necessary but it’s not sufficient,” Hodge tells FOX Business Network. “And that’s why we’re in the third round of quantitative easing. So we’re in for a slow period of balance sheet rehabilitation, and this is going to take years. There is no simple way out, we need a couple of things. We need policy that reins in some of the spending in the deficits, that delivers consistent revenues and that promotes growth, and we are suffering on all three right now.”

Hodge also discussed the U.S. “fiscal cliff”. He says that the cuts involved with the fiscal cliff would account for about $720 billion dollars in spending, or 4.5% of gross domestic product. “No one believes that that’s what’s going to happen,” however, he says. “They’ll be some negotiated settlement, whether it’s Republicans, Democrats, we’ve done the analysis, our estimates, and I think they are basically consensus, we’re looking at about $250 billion dollars of fiscal tightening, which is about 1.5% of GDP.”

But with the economy growing at about 1.5% to 2.0%, Hodge says that would put us in “something that feels like recessionary conditions”.

Oberweis: Follow Ben’s Lead

Newsletter guru Jim Oberweis says that investors can make some nice profits by following the Fed.

“Government policies shape markets, turn winners into losers and, unfortunately, can distort the invisible hand of the market,” Oberweis writes in his latest Forbes column. “Only a fool would ignore the moves of Uncle Sam, particularly with government spending higher than ever.”

Oberweis says that several companies are “exploding” because of Ben Bernanke and the Federal Reserve’s  easy money policies, which he says don’t appear to be ending anytime soon. And, though he warns that a “day of reckoning seems almost certain” because of the easy money policies, there are companies whose solid products will allow them to remain strong even when that far-off day comes, he says. He looks at four such picks, including online real estate marketplace company Zillow.