Unpacking US market’s wild ride this week: Value offered – value grabbed

Ginsglobal Index Funds MD, California-based Anthony Ginsberg, talks to’s Alec Hogg about a week in which US equities rebounded strongly after being hit by the Chinese stock market meltdown. It was a week in which some US Blue Chips were briefly available at bargain prices – but if you missed the opportunity, it’s unlikely to present itself again soon. Ginsberg points to a positive economic outlook to support his still bullish view on US stocks. – Alec Hogg

This special podcast is brought to you by Standard Bank Webtrader. Anthony Ginsberg, the managing director of Ginsglobal Index Funds is with us on the line from an early morning in California. Anthony, I think that with the week you had, you probably need a little bit of beauty sleep to try to get over the stresses that emanated from China and then big moves on the U.S. market.

Yes Alec, we’ve had a rollercoaster ride. We’re almost back at last Friday’s levels and one of the big moves that occurred was the second quarter GDP being revised upwards because it really helped set the U.K. markets back in motion on a positive trend. As you’ve seen in the last two days, we’ve recovered about 1000 points just on the Dow Jones and we’re back out at [inaudible 00:59] territory, in fact. The U.S. GDP as you know was revised up from a two-point-three percent in the second quarter up to three-point-seven, so it’s a heck of a rerating by the U.S. Commerce Department.

Just explain that. How can there be such a big jump? Another way you’d want to put it: it’s 50 percent higher. As you say, two-point-three percent to two-point-seven percent.

Yes, it’s a bit of a problem with the U.S. Statistical Service. What happens was that in fact, the first quarter was also revised upwards. The first quarter typically, due to the weaker weather here, has a very low number. These are surveys Alec, and they actually come out within 30 days typically, maybe 45 days after the quarter ends so they typically, do revise both the GDP data and the employment data within a 90-day period. They go back and look at the numbers and do a further revision, so it’s fairly typical but this was a rather large upgrade – mostly, led by increased corporate spending and exports as well, which is very positive. Largely, across the board, from personal consumption to construction and business investment: that really powered it and I think it’s very positive, in both the real estate and the construction spending.

Sitting here in California, I can tell you that you see a lot more cranes, a lot more buildings, a and a lot more housing activity than we’ve seen in the past six/seven years. It’s actually not that surprising, being here in the U.S., to see these numbers being revised upwards.

It certainly came at a good week. After China had given everybody the heebie-jeebies, you had the revision in these GDP numbers and Wall Street reacted.

I wouldn’t look at these numbers in isolation. We look at these numbers relative to way the jobless claims have come way down from levels of over 300,000 U.S. jobless claims, down to about 270,000 that just came out this past week as well. That’s almost at six/seven-year lows and when you look at electricity consumption and you look at the unemployment levels (at this point, we’re basically at full employment of around five-and-a-half percent), and adding 200,000 to 250,000 new jobs each month…it’s not that surprising that the GDP numbers are in the three percent range. We’re actually looking for total GDP growth in the U.S. to be just slightly ahead of three percent.

Are you still bullish on the U.S. market, in particular? We have a lot of South Africans invested there and clearly, Ginsglobal is an Index Funds business. If the market as whole improves, so do your investors.

Yes, we’re spread rather globally. In fact, our largest holdings are really, tracking the MSCI World Index, which is really both the developed markets. We also have clients who are more exposed to emerging markets, so we look at the whole picture. When I look at the developed market and you look at the dividend yields versus the bond yields, you find that we’re not that unattractively priced in the developed markets. Places like Germany, France, and the U.K.: it’s quite a strange situation where you find the dividend yields actually outpacing the bond yields. Germany has a situation where the dividend yields are over three percent and the bonds are yielding around one-and-a-half percent. The U.S. is fairly equal. Both are at about two percent on the bonds and on the dividend yields, whereas in France, U.K. and Japan you find the dividend yields often significantly outweighing bonds.

Really, it’s the [inaudible 05:01] cost play and at the moment, until the Feds and the other Central Banks start raising rates, there’s not a lot of alternative ranking.

Volatility is high, though.

Yes. We expect volatility to increase, actually and to be at these levels. There was a unique period in the last four to five months where the S&P500 only played in a very narrow band. We had BRICS at historically low levels of 12 to 13 percent. Interestingly, with the PE when you started, you had a volatility level of around 20 percent. On historical measures, if we’re in the 20 percent range on BRICS, we’re not that out of whack. Earlier this week, we were over at levels of in the 30’s, 40’s, and the low 50 percent range on the BRICS but it’s come back. We’re actually in the mid to high 20’s at this point, so it would probably wold remain in the 20 percent range. We don’t expect it to reduce that much.

Anthony, are you advising your clients to remain fully invested? Specifically looking at the United States at the moment, inflation’s down, interest rates are low, energy prices big beneficiaries of the cuts there… Are you happy with the level of the U.S. stock market?

The short answer is ‘yes’ because if you look at the insider transactions ratio, which is actually talking about the large shareholders and directors of U.S. corporates, it’s at the bullish level. Basically, it means that net/net they are not net sellers, but rather net buyers of stock. This is from the insider point of view. If you look at the low energy prices, which is really a tax break for Americans (probably around $2000.00 to $2500,00 tax break) at this point per year, just with the oil sitting at about $30.00 per barrel. The short answer is ‘yes’. We’re actually fully invested in the U.S. It’s pretty difficult to define the market. Obviously, there were certain bargains to be had on some of the largest Blue Chip names in the U.S. earlier this week. However, from a long-term perspective, yes, we remain bullish that the U.S. is not anywhere close to recession.

In fact, we hope the Feds do go ahead and raise the rates by December by at least 25 basis points. It’s going to be a very slow raise on the Fed level over the next 12 to 18 months. We’re not expecting massive gyrations and looking at probably 25 basis points this year – around probably 50 to 75 beeps (maximum) next year. As you say, the inflation rates are very low. The levels are really benign at this point and there really isn’t much concern that the U.S. economy is overheating in any way. In fact, wages are stagnant here, which is an interesting perspective so although you have very low unemployment of around five-point-three percent (and you’re adding 200,000 to 250,000 jobs per month), there’s significant capacity to actually absorb these new positions and not spike inflation.

So this would have been a week, if you had your wits about you, where you could have picked up some Blue Chips – I suppose the likes of Apple and Google stocks – at pretty good prices.

Yes, we saw an unusual situation where Tim Cook, the CEO of Apple wrote an email to one of the CNBC journalists here and added 80-billion to the market cap by saying that his Chinese exposure remained positive and in fact, they were getting high levels and record numbers out of China for their iPhones and whatnot. We’re actually not as negative on the Chinese story and that’s probably partly why we feel that large U.S. multinationals such as the Honeywell’s, and the Coca Cola’s for instance, remain well positioned. Yes, China is slowing down. They’re gravitating away from the infrastructure-led boom to a more domestic consumption structure and obviously, with the crackdown on corruption you find far less gift giving, which is probably limiting the purpose of certain luxury goods that affect folks like LVMH and Richemont to some extent.

Ultimately, China is still growing. It may not be growing at the seven, eight, or ten percent levels that we’re used to but most analysts still believe that China is in the positive GDP levels – probably close to five or six percent – which, relative to the rest of the world, is not too bad.

Anthony Ginsberg is the managing director of Ginsglobal Index Funds and this special podcast was brought to you by Standard Bank Webtrader.

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