February 8th, 2010

European and U.S. stock markets have taken a hit recently as spooked investors from Shanghai to Sao Paolo were fleeing risky assets amid concern that the financial crisis in Portugal and Greece could spread through the euro zone with vast implications for the fate of the fragile global economic recovery. (Fig. 1)

Liquidate & Buy Dollar

A steep drop in crude-oil prices triggered declines across the commodities spectrum, as investors nervous about the pace of the economic recovery gravitated back to the dollar. Crude oil tumbled to a seven-week low of $71.19 a barrel last Friday, down 14% since the 2010 high of $83.18 reached on Jan. 6.

Investors’ fled for safety drove the U.S. dollar near a nine-month high against the euro. Emerging market currencies also weakened in Asia, while U.S. stocks fell a fourth straight week, the longest streak since July.

A Shift of Sovereign Risk

According to EPFR Global, risk aversion has prompted a withdrawal of $1.6 billion from emerging market equity funds during the week ending Feb. 3, the biggest outflows in 24 weeks, and $516 million has left Asian equities outside of Japan.

The charts from CDR (Credit Derivatives Research) tell the story of this investors’ perception. According to CDR, there has been a dramatic shift of risk in developed nations relative to emerging and less-developed nations when comparing three sovereign risk indexes, SovV, EM and CEEMEA. (Fig. 2)

In SovX, the GIPSI (H/T Zero Hedge) - Greece, Italy, Portugal, Spain and Ireland, represent around 65% of the index risk. In EM, Venezuela accounts for 26%, Turkey, Brazil, and Argentina represents 12% respectively of the EM risk. In CEEMEA, Turkey and Russia represent 49% of the index risk (followed by Hungary and Ukraine each at over 8%).

In addition, CDR finds that the sovereign risks of the emerging economies appear to be closely tied to the price of oil:

“It would appear that the CEEMEA and EM sovereign risk indices are threatened more by commodity price pressures than credit risk currently - and given the ‘relatively’ high price of oil/gas, their risk remains less of a concern than developed nations where the Ponzi appears to be in question.”  (Fig. 3)

Oil Price - A Key Risk Factor

Emerging market countries, such as Brazil, China or India, are evolving since the early 90s. During this period, the issuance of bonds by these countries has increased significantly reflecting their needs for substantial long term and infrastructure investment.

Among the many determinants of risk bonds, the price of oil is a key factor as it plays a significant role in economic growth, inflation, production costs, trade balances and currency. Nine of the 10 economic recessions in the United States since the end of World War II were preceded by a dramatic increase in the price of oil.

A Sensitivity Issue

Oil prices nowadays are extremely volatile, and sharp fluctuations in oil prices contribute to macroeconomic volatility all over the globe. The impact of this volatility on economy varies according to a country’s relative dependence on oil production and exports.

For oil-exporting countries like Russia and Saudi Arabia, a rise in oil prices caused a perception of risk reduction relative to its obligations. Conversely, an oil-importing country sees its risk index increase due to a barrel price shock.

Financial Crisis 2.0?

Last week’s wild commodity price swings underscore how investors aren’t totally convinced that the world economy is on an upward trajectory. Investors are worried that multi-governments’ debt problems will spread globally similar to the subprime crisis in 2008.

In addition to concerns about GIPSI sovereign debt defaults in the 16-nation euro zone, the U.S. is grappling with its own deficits and the high jobless rate, while China began restricting lending last month to prevent high inflation.

Some analysts expect global commodity prices would eventually firm up reflecting economic recovery albeit high volatility; and fundamentals should increasingly dominate expectations and drive prices.

But there are others see the current “correction” as caused by factors very similar those brought on the “financial crisis of 2007-2010” and warned this could signal “a new crisis in development.”

Seeking Negative Beta

In this environment, a defensive play would be to invest or allocate a portion in regions that are less prone to the price of oil, which is a significant sovereign risk factor. Sector wise, agriculture and alternative investment vehicles in real estate or land development should provide some good diversification to any long term portfolios.

Jeff Rubin, Chief Economist at CIBC World Markets pointed out that the United States is less sensitive to oil price volatilities because it is itself an oil producer (5 million barrels out of 19 million barrels the US consumes are produced in the US), so it receives some of the benefit of both higher and lower oil prices. An IEA analysis also indicated that the U.S. should be less affected by oil price shocks than Japan, OECD and Euro zone. (Fig. 4)

This competitive edge probably partly explains how investors still see the U.S. dollar as a safe haven, and Mr. Geithner’s optimism that more debt won’t hurt U.S. credit rating, in spite of the fiscal and economic challenges quite similar to what the Euro Zone is facing.

BRIC minus R

In addition to the United State, GDP growth in Brazil, China and India could get boost from the softening and stabilizing of oil prices and should increase their competitiveness. Brazil and Chindia are all oil producers with aggressive state-sponsored exploration and production efforts and strong economic growth prospect. Brazil, with a new and improved investment grade credit rating, is now largely self-sufficient and has insulated its economy from oil price shock on net basis.

The economic impact of oil prices on oil-importing, developing countries such as China and India could be more pronounced primarily because Chindia are more energy-intensive due to its strong growth rate, and less energy efficient. From that perspective, Chindia, though good prospects could be more of a roller-coaster ride for investors.

Among the emerging economies, lower crude oil prices will be a big dampener for Russian economy. Russia’s two oil wealth funds declined by a total $1.54 billion over the last month, as more funds were transferred to aid federal budget shortfalls. The Reserve Fund, one of Russia’s two oil wealth funds, is expected to run out by the end of 2010.

Hat Tip: Professor Pinch

Tags: Asian Equities, Credit Derivatives, Crude Oil Prices, Derivatives Research, Developed Nations, Dramatic Shift, Emerging Economies, Equity Funds, Euro Zone, Gipsi, Global Risk, Greece Italy, Market Equity, Portugal Spain, Price Of Oil, Risk Aversion, Risky Assets, Sovereign Risk, Sovereign Risks, Steep Drop
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February 8th, 2010

Enjoy! Some of the very best commercials from this year’s Super Bowl.

Audi Green Car Super Bowl Commercial

Betty White

Doritos Kid Talking Smack

Late Show with Letterman, Oprah, and Leno Commercial

Google Impress a French Girl

Kia’s Toy Hangover

Julien approves!

Tags: Audi, Audi Car, Betty White, Car Show, Doritos, French Girl, Funny Car, Funny Commercials, Funny Super Bowl Commercials, Google, Green Car, Hangover, Julien, Kia, Late Show With Letterman, Letterman Oprah, Super Bowl, Super Bowl Commercials, Super Car, Super Kid
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February 8th, 2010

This article is a guest post from Tyler Durden, ZeroHedge.com.

Hugh Hendry, always beautifully opinionated, nails it at the Russia 2010 forum with the following oneliner: “Who cares about anyone’s opinion. You pay money for what they do with that opinion.” We are in complete agreement as this conforms precisely with what one of our former legendary, multi-billionaire, corpulent superiors once said “nobody gives a f*&k about your opinion.” On the other hand presenting amusing observations coupled with engrossing narrative, that nobody seems to have an issue with.

The following clip from the Russia Forum pits one against another Marc Faber, Hugh Hendry, Nassim Taleb, PIMCO’s Michael Gomez, Investec’s Michael Power, resulting in a memorable debate. A few blogs caught this clip and posted it yet few actually watched it, as the biggest news from the panel was not Taleb’s admonition that “every single human being should be short treasuries”, an opinion which Hugh Hendry squashes through the groupthink meatgrinder, but Hugh Hendry’s cryptic disclosure that he has uncovered the ABX trade for the next decade, which has “1.5% downside and 75% upside.” Hendry teases, but until the end refuses to disclose what the specific trade is. And while we realize the futility of recreating others’ opinions, here is the money quote from the Scottish contrarian:

“The problem with the bailout of 2008 and the first quarter of 2009, is that it did nothing to eliminate the debt. The debt is just unprecedented in the western world… We’ve had a tripling in leverage for the last 30 years. That tripling in leverage has produced unprecedented gains. The British stock market up 43 times in nominal terms, the S&P up 25 times. This has left many people still hungry for risk. I have a portfolio today… In the UK we have interest rates which are at a 300 year low, since the bank of England was conceived in 1692. I get paid money every day underwriting the risk that the BOE will cut rates further. I use that to cheapen an option which say “I don’t think the Bank of England, and ECB, is going to raise rates in the next 4 months.” And if nothing happens i make 5 times my money. If they raise rates, I lose my premium. My premium is not a lot. I’ll survive that. On the other side of my book, I have discovered something which is close to the Paulson trade in CDOs in US mortgages in 2005 and 2006. Can you believe that a trade with that kind of dynamic exists today. Can you believe if nothing happens and I am just wrong than again I will lose 1.5% but if I am right I will make 75%. That trade exists today and maybe later on I will tell you about it.”

And continuing with opinions, here is the former GSAM and Odey executive on Treasuries:

“I am hugely intellectually bullish on Treasuries. I am long. I fear the end of QE, the money funds are making on the [curve], I am aware of the issuance, I am aware that the States is going to have to sell $2.5 trillion of this stuff. But that’s the marketplace - the marketplace disseminates the bad stuff. I think there is a lesson in Japan. You think they are going to succeed - Mark [Faber] thinks they are going to create inflation. The precedent of Japan suggest that if you allow leverage in your society to breach a certain level, let’s call it 200 or 230% of GDP, then what happens is monetary policy doesn’t work, fiscal policy doesn’t work. They’ve had helicopters, they have distributed free money to their citizens, they have built bridges to nowhere and prices are falling and look set to fall further. My fear just now is that the community of risk is very short treasuries, and is very long risk: risk assets are the hedge against inflation. Now if something untoward happens, the gamma on that trade bankrupts you.”

Elsewhere, you will hear Taleb’s proposed portfolio composition (if you have read Fooled by Randomness or The Black Swan you won’t be surprised), as well as his escalating and very much justified disdain for economists: “if the number of economists from US universities in a country is high, the country risk is high, if the number is low, the risk is low.”

And a whole lot of debate over China, with Hugh Hendry dismantling Jim O’Neill and the other China bulls. “I love Jim O’Neill. I love that Goldman Sachs guy. He says you either get it, or you don’t. I don’t get it. In the future there will be a Confucius saying: the wise man not invest in overcapacity. The flaw of the business model, at the center of it is a craving for power as opposed to profit.” (Kinda funny, coming from a former Goldmanite.) Please watch Hendry’s view on China beginning 55 minutes into the clip.

For those P&L detectives here is Hugh’s most recent missive. Good luck with extracting what the next ABX trade is.

The full hour + debate can be found here. We think far too highly of our readers’ intellectual ability than to point out that the English audio stream would require hitting the Eng button.

Click on the icon for a link to source.

Tags: Admonition, Amusing Observations, Bailout, Bank Of England, Billionaire, British Stock, Engrossing Narrative, Groupthink, Hugh Hendry, Investec, Marc Faber, Meatgrinder, Michael Gomez, Nassim Taleb, Oneliner, PIMCO, Russia Forum, Squashes, Treasuries, Tyler Durden
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February 7th, 2010

Emerging Markets
Strengths

• Hong Kong’s retail sales rose 16 percent year-over-year in December, the fastest pace in 20 months and ahead of market expectations. The growth was thanks to improving employment and a 14 percent year-over-year increase in tourist arrivals from mainland China.
• South Korea’s exports jumped 47.1 percent in January from a year earlier, the highest growth rate in more than 20 years, as the continued global recovery drove external demand for autos, appliances and electronics.
• Chile’s economic activity expanded by a higher than estimated 3.9 percent year-over-year in December, the country’s highest growth in 15 months, due to a rebound in services and retail sales.

Weaknesses

• China’s official Purchasing Managers’ Index moderated to 55.8 in January from 56.6 in December, partly due to seasonal factors.
• Fitch described Hungary’s fiscal prospect as uncertain ten weeks ahead of the country’s general elections and remained undecided whether to increase its credit rating outlook.
• Emerging market equity funds saw a $1.6 billion outflow in the week ended February 3, the biggest liquidity exodus in 24 weeks. The outflow came amid rising concerns on the sovereign debt situation in such European countries as Greece, Portugal and Spain.

Opportunities

• While China’s city population has been consistently growing in the last decade, over 40 percent of the counties in central China still have an urbanization rate of merely 20-30 percent. According to CEBM, consumer spending can be boosted by more than 45 percent when the urbanization rate rises by 10 percentage points to the 30-40 percent range. Expanded urbanization, especially in inland China, remains one of the policy solutions for stimulating domestic demand and bodes well for consumer plays in the long term.

Threats

• The current rally in the U.S. dollar may continue to be a headwind for investors in Asia given the longstanding negative correlation between the U.S. dollar and Asian equities.

Tags: Central China, City Population, Debt Situation, Emerging Market, Equity Funds, General Elections, Global Recovery, Headwind, Last Decade, Mainland China, Market Equity, Market Expectations, Negative Correlation, Outflow, Policy Solutions, Purchasing Managers Index, Seasonal Factors, Sovereign Debt, Term Threats, Tourist Arrivals, Urbanization Rate
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February 7th, 2010

Energy and Natural Resources Market

Despite Concerns over the Global Economy, Leading Indicators & Global Industrial Production are Improving

Strengths

• The American Iron & Steel Institute reports that for the week ending January 30, steel utilization rates increased to 66.9 percent versus the prior week of 65.6 percent and 42.4 percent last year.
• Prices for Indian iron ore shipments to China jumped $1-2 per metric ton to a range of $127-130 per ton after news broke that India may increase export duties to 15 percent.
• The U.S. Rig Count is up 18 from last week to 1,335 but is still down 64 year-over-year.

Weaknesses

• Commodities such as crude oil and copper declined by 1.3 and 6 percent, respectively, in response to fears that some European nations could default on their debt as budget deficits widen due to the global recession.
• Chinese steelmakers are “almost not profitable” in their main business because of overcapacity and high raw material costs, Nanjing Iron & Steel United Co. said.

Opportunities

• According to the International Copper Study Group, global copper mine capacity will expand to 20.04 metric tons in 2010, versus 19.51 metric tons in 2009.
• An article from Reuters states that Transocean is nearing a deal with Exxon to build a $1 billion arctic drillship. The article mentioned the new rig could be deployed to places such as Greenland, Iceland or offshore Alaska at a rig rate in the range of $650,000 per day.
• Zimbabwe’s platinum exports are set to double after Impala Platinum Holdings Ltd. completed an expansion project in the country during the last quarter of 2009, according to Mines Minister Obert Mpofu.
• Indonesia’s Department of Energy and Natural Resources expects coal exports from the country to fall 1.5 percent in 2010 despite a predicted production rise of 6.3 percent to 270 metric tons. The department expects domestic demand, led by the electricity generation sector, to rise by 34 percent.

Threats

• U.S. Interior Secretary Ken Salazar said that drilling for oil and natural gas on government land will face increased environmental scrutiny and slower approvals under new requirements currently being debated in Congress.

Tags: American Iron, Budget Deficits, Coal Exports, Copper Mine, Drillship, Electricity Generation Sector, Export Duties, Global Recession, Impala Platinum Holdings, Indian Iron Ore, International Copper Study, International Copper Study Group, Leading Indicators, Offshore Alaska, Overcapacity, Raw Material Costs, Rig Count, Steel Institute, United Co, Week Ending January
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February 7th, 2010

Gold Market
For the week, spot gold closed at $1,065.85 per ounce down $15.00 or 1.39 percent. Gold equities, as measured by the XAU Gold & Silver Index gained by 4.27 percent for the week. The U.S. Trade-Weighted Dollar Index gained by 1.07 percent.
Strengths

• The U.K.’s Royal Mint more than doubled gold-coin production last year as investors diversified into physical assets. Output rose to 125,469 ounces from just 46,315 ounces during the previous year, according to data from Bloomberg News. Sales of American Eagle coins by the U.S. Mint increased 66 percent last year to 1.43 million ounces.
• The Russian Gold Industrialists’ Union said Russia’s gold production rose 11.2 percent in 2009 on a year-over-year basis to 205.2 tonnes. Output of gold production by refining the metal from scrap rose 52.4 percent to 12.4 tonnes.
• According to the Indian Bullion Market Association, 37 tonnes of gold were imported during the month compared with 27 tonnes for December and 30 tonnes in November. The increase was primarily attributed to jewelers shifting to the precious metal as record prices began to drop.

Weaknesses

• During the week, gold posted its biggest one-day loss since 2008, hitting a three-month low. This came as risk aversion resurfaced throughout global markets, triggering massive selling in the metal and other commodities. Also, tightening in Chinese monetary policy may have caused the Reserve Bank of Australia to remain reluctant in raising rates once more because of speculation there will be a lack of demand for the region’s commodities, a prime contributor to its overall economic growth.
• The eruption of policy and sovereign credit risk, most notably in the euro zone area, has resulted in a flight-to-quality causing the U.S. dollar to strengthen relative to a faltering euro. Greece’s fiscal imbalances combined with Spain and Portugal’s weak bond auction earlier in the week witnessed rising borrowing costs and credit default swaps for the region. Spreads were further exacerbated on fears that striking Greek workers would hinder Greece’s plan to shrink its massive deficits to acceptable European Union standards.
• Bloomberg has reported that commodity investors in China are reducing their open interest in futures markets ahead of the country’s biggest national holiday. The director of research from Wanda Futures Co. said the exit of funds from commodities is accelerating and that any rally may have to wait until the country’s New Year celebration ends.
• Reserves for the world’s largest bullion-backed exchange-traded fund fell 21.7 tonnes or 1.9 percent in January, against a rise of 63.36 tonnes or 8.1 percent in the same month of 2009.

Opportunities

• Andy Smith, Senior Metals Strategist of Bache & Co., believes the latest correction in the gold price is a very opportunistic event for further sovereign and central bank gold buying. The International Monetary Fund still has 191 tonnes of gold available for purchase. Smith has also said that India, Mauritius and Sri Lanka may buy more gold at depressed prices to average down earlier purchases at much higher prices.
• The World Gold Council has demanded tax benefits for gold investments in India, primarily for working women and the bottom level tax bracket. The Council has also said that gold should play a more significant role in the sustainable growth of the Indian economy.
• The White House has unveiled its plans to double U.S. exports in a bid to boost the economy and reduce the deficit by pledging to pursue more trade agreements, increasing pressure on trading partners to open markets and by the creation of an export promotion cabinet.

Threats

• A Bloomberg news columnist expressed that China’s large foreign exchange reserves pose a severe risk to the global economy. If the dollar were to collapse, actions taken by central banks to sell the currency could shake global markets more than the U.S. credit crisis has. Also, excess reserves can overheat an economy as it sells its currency to increase investments abroad, triggering an imbalance from an excess in the money supply which leads to higher levels of inflation.
• The Reserve Bank of Zimbabwe failed to redeem scheduled bonds it issued to mining companies instead of cash payment for gold deposited with the central bank by mining companies. The central bank has already failed to pay for gold delivered to it by miners in 2007 and 2008, leading to the issuance of the negotiable bonds, and now intends to extend the term of the bonds for six months. This is a major blow to miners as they struggles to recover since they cannot have access to foreign currency to conduct their business.
• The African National Congress of South Africa is pushing for the nationalization of at least 60 percent of the country’s mining sector which will involve expropriation with or without compensation. However, analysts say the proposal is unlikely to become government policy, but it has still managed to rattle investors.
• The U.S. government intends to cut more than $1 trillion from the deficit over the next decade by allowing billions of dollars in tax breaks to expire by the end of the year and possibly sending personal income tax rates to higher levels. Investors may also pay more on their earnings next year as well, with the tax on dividends jumping to 39.6 percent from 15 percent and the capital gains tax increasing to 20 percent from 15 percent.

Tags: American Eagle Coins, Bank Of Australia, Bond Auction, Credit Default Swaps, Dollar Index, Fiscal Imbalances, Gold Coin, Gold Equities, Gold Market, Gold Production, Indian Bullion Market, Physical Assets, Prime Contributor, Reserve Bank Of Australia, Risk Aversion, Royal Mint, Russian Gold, Silver Index, Spot Gold, U S Mint
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February 7th, 2010

The Economy and Bond Market
Treasury yields were mixed this week as the middle part of the curve rallied while the long end rose slightly. Concerns over the potential of a debt default in Greece early in the week quickly spread to wider problems in the euro zone which include similar concerns surrounding Spain and Portugal. The U.S. dollar rallied strongly on these concerns, which helped support the Treasury market.

Two important pieces of economic data were released this week: the ISM Manufacturing Index and the amount of change in nonfarm payrolls in the unemployment report. These two series are graphed below and represent the past 20 years of data and shows how these two series tend to move in tandem. This week the ISM index hit the highest level in more than five years, which bodes well for job growth in the near future if history is any guide.

Strengths

• The ISM Manufacturing Index hit 58.4, well above the economic breakeven level of 50, the highest level in over five years. The jobs index component also rose the highest levels since 2006.
• Retail sales in January broadly beat expectations, reinforcing the idea that the economy is improving and consumers are becoming more confident.
• The ISM Nonmanufacturing Index also rose in January, hitting 50.5 with strength seen in the amount of new orders.

Weaknesses

• Concerns over the potential of a debt default in Greece early in the week quickly spread to wider problems in the euro zone which include similar concerns surrounding Spain and Portugal. These concerns caused risky assets to fall across the board and are a threat to global economic recovery.
• January’s employment report was somewhat disappointing as nonfarm payrolls failed to break into positive territory as the economy lost 20,000 jobs last month.
• Construction spending fell 1.2 percent in December and a record 12.4 percent for the full year.

Opportunities

• The economic recovery is still intact but looks more fragile now than it did just a couple of months ago. This will likely keep the Fed on hold for some time.

Threats

• If one of the euro zone countries were to seriously threaten default, the entire euro currency system could come into question, threatening global financial stability.

Tags: Bond Market, Consumers, Curve, Debt Default, Economic Data, Economic Recovery, Economy, Employment Report, Euro Zone, Greece, Ism Index, Ism Manufacturing Index, Market Economy, More Than Five Years, Nonfarm Payrolls, Retail Sales, Risky Assets, Tandem, Treasury Market, Treasury Yields, Unemployment Report
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February 7th, 2010

Index Summary

• The major market indices were lower this week. The Dow Jones Industrial Index fell 0.55 percent. The S&P 500 Stock Index dropped 0.72 percent, while the Nasdaq Composite finished 0.29 percent lower.
• Barra Growth outperformed Barra Value as Barra Value finished 1.13 percent lower while Barra Growth fell 0.29 percent. The Russell 2000 closed the week with a loss of 1.50 percent.
• The Hang Seng Composite finished lower by 1.73 percent, Taiwan lost 5.53 percent, and the KOSPI declined 2.20 percent.
• The 10-year Treasury bond yield closed at 3.57 percent, down 7 basis points for the week.

Domestic Equity Market

The figure above shows the performance of each sector in the S&P 500 Index for the week. The best-performing sector was materials, up 0.83 percent. Other top-performing sectors include technology and energy. Underperforming sectors were utilities, healthcare and financials.

Within the materials sector the best-performing stock was Airgas Inc., up 44 percent, on news that is was subject of a takeover offer. The other top-five performers in materials were Newmont Mining Corp., Freeport-McMoRan Copper & Gold Inc., Cliffs Natural Resources Inc., and FMC Corp.
Strengths

• The gold group was the best-performing group for the week, up 8 percent, led by its only member Newmont Mining Corp.
• The electrical component & equipment group was the second-best performing group, up 6 percent, driven by its largest member, Emerson Electric Co. The company reported first quarter earnings and issued full-year earnings guidance above the consensus.
• The home entertainment software group was the third-best performing group, up 6 percent. Electronic Arts Inc. announced late on Friday of last week that its new game Mass Effect 2 had sold 2 million copies in its first week and received an average quality score of 96 percent, making it the highest-rated game ever produced by the company.

Weaknesses

• The trucking group was the week’s worst performer, dropping 9 percent. Ryder System Inc. reported a fourth quarter profit below street expectations and issued 2010 earnings guidance below the consensus estimate. In addition, the earnings release referred to “the challenges of the prolonged multi-year freight recession which extended through the fourth quarter.”
• The healthcare facilities group was the second-worst performer, down 8 percent. Tenet Healthcare Corp. had been expected to benefit from the proposed healthcare legislation but its enactment is uncertain at this time.
• The regional banks group underperformed, down 5 percent for the week. There was investor concern that some of these banks would have to raise additional equity money in order to repay the government loans.

Opportunities

• There may be an opportunity for gain in M&A (merger & acquisition) transactions in 2010.
• The recent decline in the market could be an opportunity to initiate positions in selected stocks with good fundamentals which had previously been considered to be overvalued.

Threats

• Should investors’ expectations for an improving economy not come to fruition on a reasonable timeframe, it could be a threat to stock prices.
• As governments around the world begin to wind down the monetary and fiscal stimulus programs put in place during the economic crisis, this will likely present a headwind for stocks.

Tags: 10 Year Treasury, 10 Year Treasury Bond, Airgas Inc, Dow Jones Industrial, Dow Jones Industrial Index, Electronic Arts Inc, Emerson Electric, Emerson Electric Co, Fmc Corp, Freeport Mcmoran, Freeport Mcmoran Copper, Gold Group, Home Entertainment Software, Index Summary, Major Market Indices, Nasdaq Composite, Newmont Mining, Newmont Mining Corp, Quality Score, Treasury Bond Yield
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February 7th, 2010

By Frank Holmes
CEO and Chief Investment Officer

The U.S. dollar is up this week against the euro out of fear of how debt problems in Greece and elsewhere in Europe will be resolved, and as a result gold has had a tough week.

The dollar’s rally appears to be a short-term safe haven move, rather than a response to improving economic conditions in the U.S.

In fact, Friday’s report of a net loss of 20,000 jobs in December (the expectation was for a net gain in employment) and that many thousands more would-be workers have given up looking for jobs is evidence that the economy remains somewhat weak.

This weakness makes it less likely that the Federal Reserve will play it safe by not raising interest rates, and more likely that Congress and the Obama administration will pump more financial stimulus money into the system.

Both keeping rates near zero and expanding the monetary base are negative for the dollar, and thus positive for gold. We’ve seen that after a period of money-supply tightening in December and January, it appears that money is loosening again.

The federal deficit is pegged at more than $1 trillion this year and more than $8 trillion through 2019—this will slowly weigh on the dollar. On top of that, the TARP money being repaid by banks is not being removed from the monetary base—we shouldn’t be surprised if that money is used as a stimulus booster shot ahead of the 2010 midterm elections.

Our gold-dollar oscillator (above) shows that the dollar is approaching being overbought over the past 60 trading days, while the gold is showing signs of being oversold.

The magnitude of the current spread between gold and the dollar typically means that both could be close to a price reversal—dollar heading back and gold back up toward the mean.

In the 1990s, a strong dollar was associated with a strong U.S. economy, but the current one-month dollar rally has been accompanied by a drop in the S&P 500. With most of the world’s economic growth coming in emerging markets, many U.S. companies are relying on overseas sales to drive revenue and profit growth. A stronger dollar hurts U.S. companies trying to thrive in the global marketplace.

This is clearly evident in the illustration below. Here you can see that the world has changed and a strong stock market is aided by a weaker dollar.

Tags: 1990s, Chief Investment Officer, Debt Problems, Economic Conditions, Economic Growth, Expectation, Federal Deficit, Federal Reserve, Frank Holmes, Gold Dollar, Magnitude, Midterm Elections, Monetary Base, Money Supply, Oscillator, Rally, Safe Haven, Stimulus, Strong Dollar, Trillion
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February 7th, 2010

From UBS Financial Services: Cashin’s Comments, February 5 early am

Greece Fire Leads To Flight Into Dollar Resulting In A Global Margin Call – In early afternoon with stocks, gold and oil flat on the canvas, we sent the following email to some trading friends:

Panicky unwinding of dollar carry trade acts like a global margin call which we suggested weeks  ago. Europe a swirl with rumors and speculation. Will there be general strikes in Greece? (Recall ugly street rioting that lasted for months after police killed that youth.) Portugal tries to sell equivalent of Treasury Bills and only gets bids on 60%. Similar concerns and speculation on others in the STUPID acronym.
Euroland starting to sound like U.S. markets between Bear Collapse and Lehman. Looming weekend heightens angst. All we need is a geo-political event to cause a full flight to safety into dollar sparking more margin style liquidation across asset classes. Cross your fingers. Run rate at 1:00 is 1.6 billion.

At the time, the S&P was beginning to break below the critical 1070 support area. There were fears on the floor that a significant breach of that support might trigger trapdoor selling from stop orders and algorithms.

Selling did take the S&P through the support but there was no aggressive follow-through. Nevertheless, stocks closed hard on their lows, grateful that the bell ended the pain.

Decoding The Email – For months we have voiced concern about the growing level in the “dollar carry trade”. Speculators and traders had been borrowing dollars at near zero rates to finance positions in gold, oil and U.S. stocks, among other things. In setting up the carry trade, they would often short the dollar for currency protection.

Back in December, we told Carl Quintanilla that we felt the greatest risk to the market would be a flight to safety into the dollar. If, for example, there was a key geo-political event (Israel/Iran?), the resultant rush into the dollar would result in the equivalent of a global margin call. We said it could drive the Dow down 1000 points in a day. Yesterday, there was a rather mild rush into the dollar and we lost 270 points in a day.

The reference to Greece is self-explanatory. The failed Portuguese auction could have sold the entire offer but at much worse price. Only 60% of the offering received “proper” bids. The “stupid” acronym apparently refers to Spain, Turkey, Ukraine, Portugal, Italy and Dubai (although there are substitutes).

The allusion to analogies with the environment between Bear and Lehman should be self-evident. Then it was financial firms that were the subjects of rumors and contentions. Now it is sovereign nations.

Thursday’s action clearly demonstrated the dominance of the dollar’s influence across asset classes. Let’s hope no geopolitical surprise pops up.

Cocktail Napkin Charting – As noted, the support at 1070 held for a while before clearly yielding as we moved into the final hour. The selloff re-ignited Elliot Wave speculation that we may have begun severe corrective wave C. I wroteyesterday that the market might show its hand by Tuesday. We’ll stick with that timeframe. For today, the napkins look for support in the S&P around 1050/1053. Violating that level could heighten probability that wave C has, in fact, begun. First resistant is broken support at 1070/1075, with a backup at 1087/1092.

Some Eye-Catching Headlines on Bloomberg:
• “Taleb says ‘Every Human’ should short U.S. Treasuries” (Nassim Taleb of Black Swan fame says  shorting treasuries is a “no-brainer” given Fed and Obama policies.) [stay tuned for more on this in Zero Hedge shortly]
• “Biggest Bubble in History is Growing every day” (William Peske on China’s currency reserves)
• “Payrolls probably increased in January…..” (Speculates that this morning’s number may show growth)

A Personal Crusade – While it’s too late to do it this year, I think we should seek to turn Super Bowl Sunday into Super Bowl Saturday. It would be great for the economy. More parties in more places with a chance to sleep in the next day. If you agree, email the NFL.

Consensus – Payrolls may set the tone if the dollar behaves. If the dollar moves, it will dominate the action. Stay very,
very nimble and stimulate the economy by hiring a kid to shovel the snow.

Trivia Corner

Answer - The apples are 25 cents a pound and the apricots are 75 cents a pound.

Today’s Question - Heir today, gone tomorrow. The ancient King of Numeria had a favorite stallion who grew old and was dying. The king offered each of his three sons half the entire kingdom if he would bring a fresh apple to the ailing horse exactly half the time the horse had left. If a son accepted the challenge but was off by more than one day, that son would be out of the will and banished. The oldest son declined saying no one knew how long the horse would live. The youngest son agreed and declined also. The middle son smiled, took the challenge and won easily. What did he probably do?

And the obligatory history lesson:

On this day in 1895, America was in a funny financial spot. Well, it was a bit over a hundred years ago today - so - I guess you deserve an explanation. Let me see….if I remember what Sister Herman Joseph taught me - that different America of a century ago looked something like this:

The economy appeared to be struggling. There was a Democrat in the White House. Congress was divided and squabbling, hostily and uncivilly. Some thought the debates were so coarse and rude they spoke of forming a new political party. Technology was the new mantra even after a bumpy start and telecommunications were exploding (in use if not profitability). Much of the country was in the grip of unusual and extreme weather. And…oh yeah….I almost forgot….suddenly folks had begun talking about gold….can you imagine “gold!”

Anyway, despite what pundits of the day thought, gold had begun to rise. Now, in 1895, the old U.S. was on the old “gold exchange standard.” That meant, whether citizen or foreigner, if you thought public policy was not to your liking, you could hand in your green pictures of dead presidents and get gold - real, glistening, bite into it to check it, gold.

As hard as it is for us to believe today, a goodly number of those citizens distrusted what they saw in Washington. Gold rose and soon began to bubble and the dollar began to slide. The rush to exchange dollars might deplete the gold of the U.S. Treasury and cause a default. Imagine - a time when the government wrestled with the question of default.

So - to avoid chaos - the President sought the help of the one man who could control the banks, who could calm Wall Street, who - in short - could find a way to halt the run on the dollar and government reserves. (No Virginia, it was not Ben Bernanke - there was no Federal Reserve.) Thus, on this day in 1895, the President of the U.S. sat down with a certain J.P. Morgan seeking the latter’s help in saving the country.

Morgan allowed as how he might just happen to know one fellow who could put the government into default that very afternoon. (The President never asked if it was Morgan, himself.) Morgan conveniently recalled some obscure Civil War legislation that allowed the President to issue bonds to buy gold. The same law said the bonds could be sold secretly (without bidding). But who would buy them. Well, Morgan allowed as how it was probably his civic duty (along with that of his syndicate) to not only buy the new secret bonds but to buy up some gold and recycle it to the Treasury for the dollars he paid for the bonds. And all this for just a small commission.

To mark this anniversary recall the words of Warren Buffett - There’s always a silver lining -or was that Jimmy Buffett.

There was a lot of buzz about gold on the floor yesterday but none of it was about a scarcity of the yellow metal.

h/t Back9

Tags: Art Cashin, Asset Classes, Carl Quintanilla, Collapse, Early Afternoon, General Strikes, gold stocks, Greece Fire, Lehman, Lows, Margin Call, Speculators, Stupid Acronym, Stupids, Trapdoor, Treasury Bills, Ubs, Ubs Financial Services, Voiced Concern, Zero Rates
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