Emerging Markets in 2009

Tuesday, December 30th, 2008

Michael Hart­nett, Chief Global Emerg­ing Mar­kets Strate­gist, Mer­rill Lynch is inter­viewed by Bloomberg TV, Decem­ber 12, 2008 (click to view below), regard­ing his out­look for Emerg­ing Mar­kets in 2009. Here is a sum­mary of that conversation:

• Volatil­ity of all mar­kets has meant that cor­re­la­tions have been very high.
• It's been fiendishly dif­fi­cult for EM to break away deci­sively from what's going on in Wash­ing­ton and New York.
• China is a big fac­tor that could help the rest of the EM break away.
  • In China there's a rag­ing débâ­cle over what the econ­omy will do next year.
  • Peo­ple are quite pes­simistic about what's happening.
  • If the Chi­nese econ­omy is able to come back more quickly and more strongly than a num­ber of other economies around the world, that prob­a­bly would be the moment you'd see the other EMs break away (from the high correlation).
• (anchor) Jim O'Neill from GS said that he likes China now for the first time in a while.
• We've been over­weight China since the end of August.
  • Its been a good trade thus far, with A shares and Hang Seng up nicely.
  • Its not because China is going to be fab­u­lously strong growth wise — those mar­kets love when they get lots of liquidity.
  • That's what's hap­pen­ing at the moment — There is a big eas­ing of mon­e­tary pol­icy and credit policy.
  • The RMB is expected to remain robust.
  • China is the one equity mar­ket where the banks have outfperformed.
  • It doesn't feel as if there's an imped­i­ment to the stim­u­lus that you're get­ting from the Chi­nese gov­ern­ment — I think the Chi­nese mar­ket will out­per­form next year.
• The con­sumer theme is very strong in China, and Emerg­ing Markets.
  • If you go back a year ago, we were wor­ried about infla­tion. Why?
  • Infla­tion com­pro­mises the pur­chas­ing power of the bil­lions of con­sumers in these markets .
  • They couldn't afford to spend on any­thing but food, and food prices were going through the roof. Its the com­plete oppo­site of that now. Oil is at $40, not $140 and food prices have come down a lot.
  • There's a lot of pur­chas­ing power in China, India — obvi­ously there's a cycle as well — its not as if the num­bers are going mon­strously higher.
  • Today (12/12/08) we saw China report a 20%+ increase in retail year-over-year. That's incred­i­ble when you con­sider that we're in a global recession.
  • We think the demand story is there.
• In non-Emerging Mar­kets there are a lot of US and Euro­pean com­pa­nies that are going to ben­e­fit enor­mously from the con­sumer story in EM.
  • Think­ing lat­er­ally, there are a num­ber of com­pa­nies out­side the EM that can ben­e­fit from that rel­a­tive growth.
• The other story in the EM — You've got a num­ber of coun­tries that are attempt­ing to reflate force­fully — India, Korea, South Africa, Brazil.
  • There are going to be oppor­tu­ni­ties in all of those countries.
• The other thing to think about is the "Best Com­pa­nies," the "Best in Breed," concept.
  • We think the best in breed idea will be a big out­per­former next year.

Where not to invest? (for now)

• There are a num­ber of coun­tries that have large cur­rent account deficits and you have to worry about how they are going to fund those deficits.
• There are some cur­ren­cies, par­tic­u­larly in the East­ern Euro­pean region to avoid.
  • Rus­sia has a big prob­lem right now, as it has destroyed a great deal of share­holder trust.
  • At some point next year, when the rou­ble troughs, and oil prices trough, Rus­sia is going to move up significantly.
  • At the moment we rec­om­mend­ing that our clients take their money out of Russia.
  • They have a big prob­lem there like Saudi Ara­bia; they're a one trick pony.
  • As long as oil prices were strong so was the econ­omy, but with the lower oil price the econ­omy has weakened.
  • Unless we get the oil price mov­ing up in a strong fash­ion, its going to be very hard to per­suade investors to put a large chunk of cap­i­tal there.
• Cer­tain places like Ice­land and Hun­gary have gone to the IMF — its going to be very dif­fi­cult for those economies to come back in a mean­ing­ful way.

Oppor­tu­ni­ties in Emerg­ing Markets?

• India, Korea, Turkey and South Africa were taken to the brink by mar­kets and now there are a lot of swap lines to sup­port them.
  • What they're doing in these coun­tries is some­thing almost revolutionary.
  • They have big deficits, they're cur­ren­cies have gone down a lot, and guess what they're doing?
  • They're cut­ting inter­est rates — (and they have lots of room to do it).
  • If they can con­vince the mar­kets that their inter­est rate cuts can res­cue their growth sit­u­a­tions — those cur­ren­cies are going to do very well.
  • In India for exam­ple, Indus­trial Pro­duc­tion fell and pol­icy for­ma­tion (favours pro­found mon­e­tary easing).
  • India has great companies.
  • our clients are increas­ing their weight­ings from being under­weight most of the last year since mar­kets were over­val­ued and earn­ings expec­ta­tions were too high in con­trast to the idea that the econ­omy could not do well in the con­text of high oil prices.
  • Now oil prices have fallen, and the cur­rent account deficit is improv­ing and they're cut­ting inter­est rates.
  • They are increas­ing their weight­ings to neu­tral, if not, over­weight at the moment.

Rule of Thumb?

o We like large , not small com­pa­nies.
o Look­ing for decent bal­ance sheets, good man­age­ment, and good brand.
o Sur­vivors who can gain mar­ket share from those affected by the global credit crunch.

Click play to view

Tags: Bloomberg Tv, Brazil, BRIC, BRICs, Chinese Economy, Chinese Government, Chinese Market, Correlations, Debacle, Emerging Markets, Food prices, Global Markets, Hang Seng, Impediment, India, liquidity, Merrill Lynch, Michael Hartnett, Monetary Policy, O Neill, Outlook, Purchasing Power, RMB, Stimulus, Strategist, Volatility
Posted in Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, India, Markets, Oil and Gas, Outlook | Comments Off

Memo to All My Valued Employees

Monday, December 29th, 2008

Lis­ten­ing to AM640 here in Toronto today, I heard an excel­lent dis­cus­sion about the let­ter from "The Boss," a truth-be-told debate about the value of tax-cuts, stim­u­lus and tax­a­tion. In the cur­rent cli­mate of gov­ern­ment inter­ven­tion, and neo-socialism, the let­ter is a breath of fresh air for those of us who have made the great­est pro­duc­tive con­tri­bu­tion. Thanks to Charles Adler for post­ing the let­ter at his blog.

To go one step fur­ther, it is rem­i­nis­cent of the world of Ayn Rand's "Atlas Shrugged," in which the story's heroes, the entre­pre­neurs, the inno­va­tors, the cap­tains of indus­try, the prime-movers, decide the best rem­edy is to with­draw, to go on strike, as the world is looted by bureau­crats, social­ists, pseudo-intellectuals, and mys­tics.

Memo to All My Val­ued Employees

Author: The Boss

There have been rum­blings around the office about the future of this com­pany and, more specif­i­cally, your job. As you know, the econ­omy has changed for the worse and presents many chal­lenges. The good news, how­ever, is this: The econ­omy doesn't pose a threat to your job. What does threaten your job, how­ever, is the chang­ing polit­i­cal land­scape in this country.

First, while it's easy to spew rhetoric that casts employ­ers against employ­ees, you have to under­stand that for every busi­ness owner there is a back story. This back story is often neglected and over­shad­owed by what you see and hear. Sure, you see me park my Mer­cedes out­side. You've seen my big home at last year's Christ­mas party. I'm sure all these flashy icons of lux­ury con­jure up ide­al­ized thoughts about my life. But you don't see the back story.

I started this com­pany 12 years ago. At that time, I lived in a 300 square foot stu­dio apart­ment for three years. My entire apart­ment was con­verted into an office so I could put forth 100% effort into build­ing a com­pany, which, by the way, would even­tu­ally employ you. My diet con­sisted of noo­dles because every dol­lar I spent went back into this com­pany. I drove a rusty Toy­ota Corolla with a defec­tive trans­mis­sion. I didn't have time to date. Often times, I stayed home on week­ends, while my friends went out drink­ing and par­ty­ing. In fact, I was mar­ried to my busi­ness — hard work, dis­ci­pline, and sacrifice.

Mean­while, my friends got jobs. They worked 40 hours a week and made a mod­est $50K a year and spent every dime they earned. They drove flashy cars and lived in expen­sive homes and wore fancy designer clothes. Instead of hit­ting Nord­strom for the lat­est fash­ion item, I trolled through the Good­will store extract­ing any cloth­ing item that didn't look like it was birthed in the '70s. My friends refi­nanced their mort­gages and lived lives of lux­ury. I did not. I put my time, my money, and my life into a busi­ness with a vision that, some day, I too, would be able to afford the lux­u­ries my friends had.

So, while you phys­i­cally arrive at the office at 9 a.m., men­tally check in at about noon, and then leave at 5 p..m., I don't. There is no "off" but­ton for me. When you leave the office, you are done and you have a week­end all to your­self. I, unfor­tu­nately, do not have that free­dom. I eat and breathe this com­pany every minute of the day. There is no rest. There is no week­end. There is no happy hour. Every day this busi­ness is attached to my hip like a one-year-old special-needs child. You, of course, only see the fruits of my labor — the nice house, the Mer­cedes, the vaca­tions. You never real­ize the back story and the sac­ri­fices I've made.

Now the econ­omy is falling apart and the guy who made all the right deci­sions and saved his money have to bail out all the peo­ple who didn't. The peo­ple who over­spent their pay­checks sud­denly feel enti­tled to the same lux­u­ries that I earned and sac­ri­ficed a decade of my life for. Yes, busi­ness own­er­ship has its ben­e­fits, but the price I've paid is steep.

Unfor­tu­nately, the cost of run­ning this busi­ness and employ­ing you is start­ing to eclipse the mar­ginal ben­e­fit. Let me tell you why:

I am being taxed to death and the gov­ern­ment thinks I don't pay enough. I have state taxes. Fed­eral taxes. Prop­erty taxes. Sales and use taxes. Pay­roll taxes. Work­ers' com­pen­sa­tion taxes. Unem­ploy­ment taxes. Taxes on taxes. I have to hire a tax man to man­age all these taxes and then, guess what? I have to pay taxes for employ­ing him.

Most of my time is now occu­pied with gov­ern­ment man­dates and reg­u­la­tions and all the account­ing that goes with them. On Octo­ber 15th, I wrote a check to the US Trea­sury for $288,000 for quar­terly taxes. You know what my "stim­u­lus" check was? Zero. Nada. Zilch.

The ques­tion I have is this: Who's stim­u­lat­ing the econ­omy? Me, the guy who has pro­vided 14 peo­ple good-paying jobs and serves more than 2,200,000 peo­ple per year with a flour­ish­ing busi­ness? Or the sin­gle mother sit­ting at home preg­nant with her fourth child wait­ing for her next wel­fare check? Obvi­ously, gov­ern­ment feels the lat­ter is the eco­nomic stim­u­lus of this country.

The fact is, if I deducted (read: stole) 50% of your pay­check, you'd quit and you wouldn't work here. Why should you? That's nuts. Who wants to get rewarded for only 50% of their hard work? Well, I agree, which is why your job is in jeopardy.

Here is what many of you don't under­stand: to stim­u­late the econ­omy you need to stim­u­late what runs the econ­omy. Had sud­denly gov­ern­ment man­dated to me that I didn't need to pay taxes, guess what? Instead of deposit­ing that $288,000 into the Gov­ern­ment black-hole, I would have spent it, hired more employ­ees, and gen­er­ated sub­stan­tial eco­nomic growth. My employ­ees would have enjoyed the wealth of that tax cut in the form of pro­mo­tions and bet­ter salaries. But you can for­get it now.

When you have a comatose man on the verge of death, you don't defib­ril­late by shock­ing his thumb to bring him back to life, do you? No. You defib­ril­late his heart. Busi­ness is at the heart of our econ­omy and always has been. To restart it, you must stim­u­late it, not kill it. Sud­denly, the power bro­kers believe the mud of econ­omy is the essen­tial dri­ver of the eco­nomic engine. Noth­ing could be fur­ther from the truth.

So where am I going with all this? It's quite sim­ple. If any new taxes are levied on me, or my com­pany, my reac­tion will be swift and sim­ple. I'll fire you. I'll fire your co-workers. You can then plead with the gov­ern­ment to pay for your mort­gage, your SUV, and your child's future. Frankly, it isn't my prob­lem anymore.

Then, I will close this com­pany down, move to another coun­try, and retire. You see, I'm done. I'm done with a coun­try that penal­izes the pro­duc­tive and gives to the unpro­duc­tive. My moti­va­tion to work and to pro­vide jobs will be destroyed and, with it, will be my citizenship.

While tax cuts to 95% of the peo­ple sounds great on paper, don't for­get the back story: If there is no job, there is no income to tax. A tax cut on zero dol­lars is zero. Who under­stands the eco­nom­ics of busi­ness own­er­ship and who doesn't? Whose poli­cies will endan­ger your job?

Answer those ques­tions and you should know who might be the one capa­ble of sav­ing your job. While the media wants to tell you "It's the econ­omy, stu­pid," I'm telling you it isn't. If you lose your job, it won't be at the hands of the econ­omy; it will be at the hands of a polit­i­cal hur­ri­cane that swept through this coun­try, steam­rolled the Con­sti­tu­tion, and changed the land­scape for­ever. If that hap­pens, you can find me in South Caribbean sit­ting on a beach, retired, and with no employ­ees to worry about.

Signed,

Your Boss

Who is John Galt?

Tags: Ayn Rand, Breath Of Fresh Air, Bureaucrats, Business Owner, Canadian Market, Captains Of Industry, Charles Adler, Christmas Party, Flashy Icons, Government Intervention, Innovators, Intellectuals, Mystics, Noodles, Political Landscape, Prime Movers, Productive Contribution, Socialists, Square Foot Studio, Stimulus, Studio Apartment, There Have Been Rumblings
Posted in Economy, Markets | 5 Comments »

Jim Rogers: Outlook for 2009

Monday, December 29th, 2008

Jim Rogers speaks can­didly with Bloomberg (Decem­ber 23, 2008) about his out­look for 2009.

• The Amer­i­can econ­omy will likely be the worst since World War II.
• Pol­icy mis­takes could pre­cip­i­tate a depres­sion, as in 1929, when pol­icy mak­ers made hor­ren­dous mis­takes. Politi­cians are get­ting in on the action today as they did then, so its pos­si­ble to have a depres­sion in this period.
  • "I'm neg­a­tively impressed by what I see this time. Its unfath­omable what they're (cen­tral bankers and politi­cians) doing. You would think that some of them had read his­tory, or inter­preted his­tory properly."
• Pres. Obama has made his plat­form to (1) tax cap­i­tal and (2) pro­tect America.
  • "This is a world that is short of capital...what a genius."
  • "Pro­tec­tion­ism led to the Great Depression."
  • "If that hap­pens (tax­ing cap­i­tal and pro­tec­tion­ism) its all over."
• In 1918, The UK was the rich­est coun­try in the world; by 1939, it was a sham­bles; Exchange con­trols, the econ­omy was a wreck; it was a hor­ri­ble period.
  • "The same thing is in the process of hap­pen­ing in Amer­ica and if Amer­ica con­tin­ues to make mis­takes, you're going to see that quick a transition."
• I moved to Asia because I see enor­mous oppor­tu­ni­ties there, and I've got my two lit­tle girls who I want to grow up speak­ing Chi­nese and grow up know­ing Asia as well as they know America.
  • I'm con­vinced that China is going to be the great coun­try of the 21st century.
  • I want to pre­pare my lit­tle girls for that; I don't see how Amer­ica is going to become the great coun­try of the 21st cen­tury again.
• The (biggest issue) right now is that "the Amer­i­can gov­ern­ment is print­ing gigan­tic amounts of money right now and that in the end is going to be the worst problem.
  • They're prop­ping every­one up every­body in sight; through­out his­tory, when you've printed that much money its led to infla­tion, and in some cases run­away inflation.
  • I think in the end, the credit prob­lem is not going to be the seri­ous problem.
• Its too bad the Amer­i­can gov­ern­ment would not let peo­ple fail.
  • The big prob­lem is (a) that they have not let peo­ple fail, and (b) they're print­ing money to try to solve the problem.

Regard­ing Commodities:

• The facts are, dur­ing this period in time the only thing to have its fun­da­men­tals unim­paired is commodities.
  • Farm­ers can't even get loans for fer­til­izer now.
  • The sup­ply of things is going to be in even worse shape com­ing out of this.
  • The IEA recently came out with a study show­ing that the worlds reserves of oil are declin­ing at the rate of 7% per year.
  • you can do the arith­metic, the sup­ply of every­thing is going down; oil and every­thing else;
  • we're going to have seri­ous sup­ply prob­lems before too much longer.

• The fun­da­men­tals for Gen­eral Motors are impaired, the fun­da­men­tals for Bank of Amer­ica are impaired.
• The fun­da­men­tals for Zinc are improv­ing, the fun­da­men­tals for cot­ton are improved
  • Com­modi­ties will be the place to be if and when we come out of this cri­sis, but even if we don't come out of it
  • In the 1970's the economies were bad, but com­modi­ties went through the roof.
  • In the 1930's com­modi­ties were a much bet­ter place to be than stocks, because there was no supply.
• I own some Gold, if gold goes down I'll buy some more, if gold goes up, I'll buy some more.
  • Gold will prob­a­bly go much higher
  • I think I'll make more money in Agri­cul­ture for a while, but I own some gold.
• Plat­inum is more indus­trial, and cer­tainly tied closely to the Auto indus­try; I own some, but not a lot, but when its time to buy Auto­mo­biles again, Plat­inum will be a spec­tac­u­lar play.
  • There are short­ages, and then demand will sud­denly come rac­ing back, and there won't be any inven­to­ries left; this is how economies have always evolved.

His ideas:

• I'm the worlds worst mar­ket timer so don't ask me for the tim­ing of all of this — but we do know that peo­ple are clos­ing mines; we do know that the cost of pro­duc­ing Zinc is below the cost of pro­duc­tion now,
  • Things can stay below the cost of pro­duc­tion for a while, because often it costs more to close a mine than to keep it run­ning at a loss, but even­tu­ally, you will have less sup­ply of every­thing, and you're cer­tainly not going to have any new mines opened in the next sev­eral years because the eco­nom­ics of open­ing a mine are out the win­dow now, and it takes ten years to bring a mine on stream,
  • The sup­ply and reserves are going down so you're not going to have nay new mines com­ing on stream
• I have not sold any of my met­als since the com­modi­ties bull mar­ket began.
  • I was short Fan­nie Mae, short Citibank, still am short the invest­ment banks.
  • My way of invest­ing is: I try to be long the good things where the fun­da­men­tals are improv­ing, and short the things where the fun­da­men­tals are dete­ri­o­rat­ing. That's the way I invest and always have.
  • Rogers is not buy­ing any spe­cific metals
  • Buys his own indices to avoid conflicts
• The best way for investors to invest in com­modi­ties is through ETFs or ETNs or indexes. These are the best ways to invest in any­thing else.
• I amass things for as long as like them and would own them for­ever if pos­si­ble, so long as the fun­da­men­tals are there.
• Cov­ered many of his short posi­tions in the US stock mar­ket in October.
• Has recently been buy­ing more com­modi­ties (which he started buy­ing ten years ago), China, Tai­wan, and the Yen. For met­als, he's been buy­ing the Rogers Met­als Index, and gold coins.

• Oil is crushed, its below the cost of pro­duc­tion in many places, its below the cost of alter­nate sources of energy, so oil is going to make a huge come­back when it does. The IEA con­ducted a mas­sive study of the world's oil fields and con­cluded that oil reserves are declin­ing by 7% per year.
• You can do the arith­metic. In 15 years there isn't going to be any oil left unless some­body dis­cov­ers a lot of oil quickly in acces­si­ble areas, and the price of energy has to go through the roof again.

To Watch the entire inter­view, click on the image:

Tags: 1918, 21st Century, American Economy, American Government, Bloomberg, ETF, Genius, Great Depression, Jim Rogers, Knowing Asia, Obama, Politicians, Precipitate, Prob, Protectionism, Richest Country In The World, Runaway Inflation, Shambles, Taxing Capital, Transition, Two Little Girls, World War Ii
Posted in Commodities, Credit Markets, Economy, Energy & Natural Resources, ETFs, Gold, Markets, Oil and Gas, Outlook | Comments Off

Commodities Performance in 2008

Sunday, December 28th, 2008

Com­mod­ity price per­for­mance has been a wild ride in 2008. The record of price move­ment is out­lined in the table and chart below. For each com­mod­ity, the table details year-to-date (YTD) %-age change, drop from 52-week high, and start of year to the 52-week high.

Oil has had the rough­est ride falling 62% YTD, 75% from its 52-week high, and pre­ceded by a rise of 53% to its 52-week high. This was fol­lowed by Cop­per, Plat­inum, and Nat­ural Gas, which had a mete­oric rise to its 52-week high of 83%.

Most of the com­modi­ties, save Gold, have behaved in kind, thanks to the long-only com­mod­ity indices like GSCI which enabled investors of all kinds to invest naked in long-only bas­kets of com­modi­ties. They all went up together, and they all came down together. Plat­inum and Sil­ver, the other two pre­cious met­als dropped along with other com­modi­ties, while Gold resumed its dual sta­tus as favoured cur­rency and store of value dur­ing peri­ods of turmoil.

Com­modi­ties are indeed more volatile than stocks. When, and if, we see the return of expan­sion­ary and/or infla­tion­ary (or worse, hyper-inflationary) con­di­tions, how­ever, these will be a key asset class to allo­cate to. With all of the print­ing presses at the Fed whirring right now, some would say its inevitable.

Tags: Array, asset class, Baskets, Commodities, Commodity Indices, Commodity Price, Copper, Currency, Dual Status, Gsci, Investors, Kind Thanks, Meteoric Rise, Natural Gas, Periods, Platinum, precious metals, Price Performance, Printing Presses, Table Details, Turmoil, Wild Ride
Posted in Commodities, Energy & Natural Resources, Gold, Markets, Oil and Gas, Silver | Comments Off

Words from the (investment) wise for the week that was (Dec 22 – 28, 2008)

Sunday, December 28th, 2008

Investors spent the holiday-shortened Christ­mas week in an un-merry mood, digest­ing more gloomy eco­nomic data and tak­ing stock of a tumul­tuous 2008.

With the S&P 500 Index and the Dow Jones Indus­trial Index down by 35.8% and 40.6% respec­tively for the year to date, many investors would be anx­ious to wave the old year good­bye. But chang­ing the cal­en­dar dig­its from ’08 to ’09 will regret­tably not make an iota’s dif­fer­ence to the per­ilous nature of the invest­ment envi­ron­ment fac­ing investors as we usher in the New Year.

Come Jan­u­ary 1, investors will not only be hung over from 2008’s mar­ket rout (and pos­si­bly the pre­vi­ous night’s exu­ber­ance), but also still be bat­tling with the impli­ca­tions of the credit cri­sis for the global econ­omy and finan­cial mar­kets, and in par­tic­u­lar with the ques­tion of where to invest for decent returns dur­ing 2009. (Also see my post “Video-o-rama: Will mar­kets bail you out in ’09?”.)

“2008 was the year of the cri­sis of the finan­cial sys­tem. 2009, unfor­tu­nately, will be the cri­sis of the eco­nomic sys­tem,” said Mohamed El-Erian, co-CEO of Pimco in a CNBC inter­view. “So the news is going to be full of unem­ploy­ment, defaults, etc.”

Most mar­kets were down dur­ing the past week (albeit on light hol­i­day vol­ume), with the MSCI World Index (-1.5%), the MSCI Emerg­ing Mar­kets Index (-5.2%), the US Dol­lar Index (-0.3%), the Reuters/Jeffries CRB Index (-1.6%), West Texas Inter­me­di­ate crude (-11.0%) and US gov­ern­ment bonds all clos­ing in the red.

Source: Daryl Cagle

How­ever, not all the Christ­mas stock­ings were left empty. On the equi­ties side, the Japan­ese Nikkei 225 Aver­age (+1.8%) and the Russ­ian Trad­ing Sys­tem Index (+5.8%) con­founded the bears as both coun­tries are faced with a par­tic­u­larly grim eco­nomic sit­u­a­tion. Among fixed-income instru­ments, emerging-market gov­ern­ment debt and cor­po­rate bonds were in demand. Gold (+4.0%) and plat­inum (+4.5%) also fared excel­lently – for the third week run­ning – on the back of a solid supply/demand sit­u­a­tion, store-of-value con­sid­er­a­tions and upbeat chart­ing patterns.

But if Santa has not yet made his way to your invest­ment port­fo­lio, don’t despair. Accord­ing to Jef­frey Hirsch (Stock Trader’s Almanac), the “Santa Claus Rally” nor­mally occurs dur­ing the last five trad­ing days of a year and the ensu­ing first two trad­ing ses­sions of the new year. Dur­ing this seven-day period stocks his­tor­i­cally tended to advance (by 1.5% on aver­age since 1950), but when record­ing a loss, they fre­quently traded much lower in the new year.

Christ­mas Eve trad­ing on Wednes­day marked the start of this year’s Santa Claus Rally period, which ends on Mon­day, Jan­u­ary 5. So far so good, as the com­bined gain for the S&P 500 Index for the first two days (Wednes­day and Fri­day) was 1.1%.

Given the extreme tur­bu­lence that char­ac­ter­ized stock mar­kets dur­ing 2008, most investors would be wish­ing for a calmer 2009. The red line in the chart below shows the daily per­cent­age change in the S&P 500 Index (green line), illus­trat­ing how the volatil­ity has been declin­ing since the panic lev­els of October.

Still on the topic of volatil­ity, the CBOE Volatil­ity Index (VIX) has declined from 80.9 in Novem­ber to 43.4 on Fri­day. It is not uncom­mon for short-term volatil­ity to be at extreme lev­els at bot­tom turn­ing points, and for stocks to improve as the “storm” grows quieter.

Head­ing into the new year, President-elect Barack Obama’s tran­si­tion team is still nego­ti­at­ing the nuts and bolts of its eco­nomic stim­u­lus plan with Con­gress, but the two-year jobs tar­get has in the mean­time been raised by 500,000 to 3 mil­lion. The plan­ning is to have leg­is­la­tion for the pack­age ready by the time Obama takes office on Jan­u­ary 20.

As far as bailout news goes, on Christ­mas Eve the Fed accepted GMAC’s appli­ca­tion to become a bank hold­ing com­pany. The lend­ing unit thereby qual­i­fies for TARP funds and hope­fully won’t have to cut off credit to the Gen­eral Motors (GM) dealerships.

Next, a tag cloud from the dozens of arti­cles I have read dur­ing the past week between Yule-tide activ­i­ties. This is a way of visu­al­iz­ing word fre­quen­cies at a glance. As expected, key­words such as “bank”, “econ­omy”, “finan­cial”, “gov­ern­ment”, “mar­ket”, “mort­gage”, “prices” and “rates” fea­ture prominently.

The debate regard­ing the out­look for the stock mar­ket is still con­cerned with what rep­re­sents good value. Com­stock Part­ners com­mented that the S&P 500’s reported (GAAP) earn­ings esti­mate for 2009 had dropped to just over $42. “In the past, sec­u­lar bear mar­kets troughed at 8 to 10 times reported earn­ings, NOT oper­at­ing earn­ings, which didn’t even exist until 1984. In terms of tim­ing, on aver­age the mar­ket bot­tomed five months before the end of the reces­sion. There­fore the odds are that unless the econ­omy starts to recover five months from the Novem­ber 2008 bot­tom, the mar­ket decline is not over, although a bear mar­ket rally is always a pos­si­bil­ity between now and the even­tual low,” said Comstock.

Richard Rus­sell (Dow The­ory Let­ters) said: “Lowry’s Sell­ing Pres­sure Index is now down sub­stan­tially from its recent high. With the urge to sell sub­sid­ing, all that’s needed now is an increase in the demand for stocks, an increase in the urge to buy … will buy­ers come in? I sus­pect we’ll get the answer to that ques­tion next week.”

Bespoke draws the atten­tion to the Yale Crash Con­fi­dence sur­vey – a sur­vey that mea­sures investor con­fi­dence on a monthly basis, ask­ing investors how con­fi­dent they are that there won’t be a mar­ket crash in the next six months.

“In Novem­ber, the indi­vid­ual Crash Con­fi­dence read­ing reached its low­est level ever at 22.7%. As the green line in the chart shows, the prior low in Crash Con­fi­dence was in Octo­ber 2002, which was the ulti­mate mar­ket low dur­ing the 2000 to 2002 bear mar­ket. This neg­a­tiv­ity is actu­ally a pos­i­tive for the mar­ket going for­ward,” said Bespoke.

Although the Fed and other cen­tral bank actions have resulted in some progress being made to fix the bro­ken credit machine, the thaw­ing of the credit mar­kets still has a con­sid­er­able way to go before liq­uid­ity starts to move freely and the world’s finan­cial sys­tem func­tions nor­mally again (see “Credit Cri­sis Watch – Signs of Progress”). In the mean­time, stock mar­kets stay caught between the actions of cen­tral banks and a wors­en­ing eco­nomic and cor­po­rate picture.

It is too early to tell whether a sec­u­lar stock mar­ket low was recorded on Novem­ber 20 and, fail­ing fur­ther tech­ni­cal and fun­da­men­tal evi­dence, I remain dis­trust­ful of ral­lies. As said before, we are in a wait-and-see mode.

Econ­omy
“Another week and another new record low for global busi­ness con­fi­dence. Busi­nesses are equally pes­simistic in North Amer­ica, South Amer­ica and Europe, and while Asian busi­ness con­fi­dence is not quite as dark, it is weak­en­ing rapidly,” said the lat­est Sur­vey of Busi­ness Con­fi­dence of the World con­ducted by Moody’s Economy.com. The Sur­vey results indi­cate that the entire global econ­omy is mired in recession.

Data reports released in the US dur­ing the past week con­firmed an increas­ingly dire eco­nomic situation.

• The con­trac­tion in real GDP in the third quar­ter – an annu­al­ized decline of 0.5% – was unre­vised in the final report. Real con­sumer spend­ing expen­di­ture declined by 3.8%, knock­ing 2.8% off real GDP growth.

• Per­sonal income fell by 0.2% in Novem­ber, more than expected, after increas­ing by 0.1% in Octo­ber. Wage income fell for the sec­ond time in the last three months, dri­ven by large job losses. The sav­ing rate rose to 2.8% from 2.4% in October.

• Ini­tial job­less ben­e­fit claims increased by 30,000 to a 26-year high of 586,000 for the week ended Decem­ber 20. Ini­tial claims are ele­vated from trends ear­lier in the year, indi­cat­ing per­sis­tent weak­en­ing in the labor market.

• New orders for man­u­fac­tured durable goods fell by 1% in Novem­ber, fol­low­ing an 8.4% decline in Octo­ber. This was the fourth monthly decline in new orders, but was a smaller than expected drop.

• Exist­ing home sales dropped by 8.6% month-on-month in Novem­ber, a read­ing well below expec­ta­tions and a new cycle low. New home sales hit a 17-year low of 407,000 annu­al­ized units. Inven­tory remains ele­vated at more than 11 months.

• In the week ended Decem­ber 19, the Mort­gage Refi­nance Index gained 62.6% on the back of sharply lower mort­gage rates.

A fur­ther indi­ca­tion of the severe pull­back in dis­cre­tionary buy­ing came from CNNMoney.com’s report on MasterCard’s Spend­ing­Pulse Data which esti­mates that total store sales fell about 3% in Novem­ber and Decem­ber com­bined – the worst hol­i­day sales sea­son for retail­ers in decades.

Else­where in the world, the economies con­tin­ued to accel­er­ate to the down­side. A case in point is China and Japan that wit­nessed a num­ber of par­tic­u­larly ugly eco­nomic reports dur­ing the past week.

• On the back of a sharp decline in Chi­nese exports, one of the main engines of its eco­nomic growth, the People’s Bank of China on Mon­day low­ered its one-year lend­ing rate by 27 basis points to 5.31% – the fifth move in three months – and also reduced the pro­por­tion of deposits lenders must set aside as reserves by 0.5 per­cent­age points, accord­ing to Bloomberg. Addi­tional steps to spur con­sumer spend­ing may fol­low the interest-rate cut. (Also see the Vitaliy Katsenelson’s guest post “A Far-east Fiasco?”.)

• Japan’s exports also plunged at a record annual pace of 26.7% year-on-year in Novem­ber. The global eco­nomic slump and surg­ing yen slashed demand for Japan­ese prod­ucts across the board. “The grim out­look could push the Bank of Japan to imple­ment unortho­dox mon­e­tary eas­ing mea­sures as it has lit­tle room left to cut inter­est rates after reduc­ing them to 0.10% last week,” reported Reuters.

Source: Bespoke, Decem­ber 22, 2008.

Sum­ma­riz­ing the eco­nomic sit­u­a­tion, Nouriel Roubini, pro­fes­sor at New York Uni­ver­sity and chair­man of RGE Mon­i­tor, said: “It is going to be a year of eco­nomic stag­na­tion and reces­sion for most of the global econ­omy with defla­tion­ary pres­sures … I expect a global reces­sion and a severe one. I see a reces­sion through­out 2009 … and maybe there will be a return to pos­i­tive eco­nomic growth by 2010.”

Whether or not the reces­sion per­sists into 2010 will depend on how aggres­sive and effec­tive pol­icy actions are, i.e. mon­e­tary and fis­cal pol­icy and efforts to recap­i­tal­ize finan­cial insti­tu­tions in the US and elsewhere.

Still on the topic of the “Bini” – as prob­a­bly the most pro­lific credit-crunch econ­o­mist, it comes as no sur­prise that he was included as one of Prospect’s Pub­lic Intel­lec­tu­als of 2008.

Week’s eco­nomic reports

Click here for the week’s econ­omy in pic­tures, cour­tesy of Jake of Econom­Pic Data.

Source: Yahoo Finance, Decem­ber 26, 2008.

In addi­tion to the Fed­eral Open Mar­ket Com­mit­tee (FOMC) releas­ing the min­utes of its Decem­ber 16 meet­ing (Tues­day, Jan­u­ary 6) and the Bank of England’s inter­est rate announce­ment (Thurs­day, Jan­u­ary 8), the US eco­nomic high­lights for the next two weeks, cour­tesy of North­ern Trust, include the following:

1. ISM Man­u­fac­tur­ing Sur­vey (Jan­u­ary 2): The con­sen­sus for the ISM Man­u­fac­tur­ing Index is 35.5 ver­sus 36.2 in November.

2. Employ­ment Sit­u­a­tion (Jan­u­ary 9): Pay­roll employ­ment is pre­dicted to have dropped by 450,000 in Decem­ber after a loss of 533,000 jobs in the prior month. The unem­ploy­ment rate is expected to have risen to 7.0% dur­ing Decem­ber from 6.7% in Novem­ber. Con­sen­sus: Pay­rolls – –478,000 ver­sus –533,000 in Novem­ber, unem­ploy­ment rate – 7.0% ver­sus 6.7% in November.

3. Other reports: Con­sumer Con­fi­dence (Decem­ber 30), Con­struc­tion Spend­ing, Auto Sales (Jan­u­ary 5), Fac­tory Orders, ISM Non-manufacturing, Pend­ing Home Sales Index (Jan­u­ary 6).

Mar­kets
The per­for­mance chart obtained from the Wall Street Jour­nal Online shows how dif­fer­ent global mar­kets per­formed dur­ing the past week.

Source: Wall Street Jour­nal Online, Decem­ber 26, 2008.

This is another week of a “holiday-shortened” ver­sion of “Words” as I am again skip­ping the cus­tom­ary review of the ups and downs of the var­i­ous asset classes, tak­ing to heart Bill King’s words: “’Tis the time of the year to not overthink …”

Here’s wish­ing you a fes­tive sea­son full of fun, laugh­ter and joy. Let’s remain pos­i­tive and stay focussed on steer­ing our port­fo­lios prof­itably through the some­times murky invest­ment waters. May you have a won­der­ful and calm 2009 (after a calami­tous 2008).

Source: Daryl Cagle

CNBC: Pimco’s El-Erian – back to basics for investors in 2009
“As the melt­down in the econ­omy gains steam, investors in 2009 will need to return to the basics of invest­ing such as diver­si­fi­ca­tion and risk man­age­ment, said Pimco co-CEO Mohamed El-Erian.

“Even though those same prin­ci­ples did not serve investors well in 2008, the com­ing year will present a dif­fer­ent set of obsta­cles that will require a dif­fer­ent strat­egy, he said.

“‘2008 was the year of the cri­sis of the finan­cial sys­tem. 2009, unfor­tu­nately, will be the cri­sis of the eco­nomic sys­tem,’ El-Erian said on CNBC. ‘So the news is going to be full of unem­ploy­ment, defaults, com­pa­nies default­ing, etc.

“’For investors, it’s going to be going back to the three things that work well and that haven’t worked well in 2008.’

“Those three things are diver­si­fied asset allo­ca­tion, good imple­men­ta­tion vehi­cles, and solid risk management.

“’For 2009, every investor should go back to the basics and rec­og­nize that there will be a lot of gov­ern­ment ini­tia­tives,’ El-Erian said. ‘We’re going to see fis­cal stim­u­lus pack­ages going into the tril­lions of dol­lars. We’re going to see sup­port for var­i­ous sec­tors, and despite that the econ­omy will be bumpy.’

“As far as spe­cific bond invest­ment vehi­cles, he iden­ti­fied mort­gages, banks, munic­i­pal bonds, and high-quality invest­ment grade cor­po­rate debt as well as the top emerg­ing markets.

“Invest­ment in stocks will lag, he said, until there’s an increase in con­fi­dence that equi­ties will pro­vide solid rewards with­out all the risk, and the econ­omy shows signs of stability.

“‘What 2008 has told you and what 2009 is telling you is that for the aver­age investor con­di­tions have changed and there­fore the game plan has got to change, which means don’t go and chase what are very attrac­tive val­u­a­tions from a his­tor­i­cal stand­point,’ El-Erian said.

“With the excep­tion of Trea­surys, which are offer­ing his­tor­i­cally low yields, a mul­ti­tude of other invest­ment vehi­cles are likely to be attrac­tive – and pos­si­bly a trap for investors.

“‘But don’t fall into that trap,’ El-Erian said. ‘Rather, go for those assets that are not only dis­lo­cated but where there’s a cat­a­lyst for nor­mal­iza­tion, where you can actu­ally iden­tify what it is that’s going to bring val­u­a­tions back to some­what more rea­son­able lev­els. If you do that you will get both the upside and pro­tec­tion against the down­side. That’s going to be the key issue in 2009.’”

Source: CNBC, Decem­ber 22, 2008.

BNN: Con­ver­sa­tion with BMO’s strate­gist Don Coxe

Source: BNN, Decem­ber 23, 2008.

Bloomberg: Marc Faber pre­dicts 2009 going to be “a cat­a­stro­phe”
“Marc Faber, pub­lisher of the Gloom, Boom & Doom Report, talks with Bloomberg about the out­look for the global econ­omy in 2009 and his invest­ment strategy.”

Click here for Busi­ness Intel­li­gence arti­cle on Faber’s views.

Source: Bloomberg (via YouTube), Decem­ber 22, 2008.

CNBC: Your edge for 2009
“The mar­ket could look a lot dif­fer­ent next year, says David Kotok, Cum­ber­land Advi­sors chairman/CIO.”

Source: CNBC, Decem­ber 26, 2008

Finan­cial Times: Obama expands goals of stim­u­lus
“Barack Obama has expanded the goals of his pro­posed eco­nomic stim­u­lus, with a plan to cre­ate or save an addi­tional 500,000 jobs.

“The president-elect raised his jobs tar­get over the next two years to 3 mil­lion – up from the 2.5 mil­lion goal set last month – after US unem­ploy­ment hit its high­est level for 15 years in November.

“Tran­si­tion offi­cials said Mr Obama had agreed the out­lines of a $675 bil­lion to $775 bil­lion two-year recov­ery plan last week. But the price tag is likely to rise above $800 bil­lion as Con­gress makes its own demands dur­ing the leg­isla­tive process.

“The moves come amid a warn­ing on Sun­day, from the Inter­na­tional Mon­e­tary Fund, that gov­ern­ments must act more aggres­sively to pre­vent a deeper slump.

“Dominique Strauss-Kahn, IMF man­ag­ing direc­tor, told BBC radio that inad­e­quate stim­u­lus mea­sures risked mak­ing the slow­down worse than expected next year. ‘I’m spe­cially con­cerned by the fact that our fore­cast, already very dark … will be even darker if not enough fis­cal stim­u­lus is imple­mented,’ he said.

“The IMF has called for com­bined stim­u­lus mea­sures in 2009 of $1,200 bil­lion – or 2% of global annual eco­nomic out­put – amid fears of the deep­est slump since the Great Depression.

“Under Mr Obama’s pro­pos­als, most of the cash would be spent on tax cuts for the mid­dle class, aid to cash-strapped state gov­ern­ments and invest­ments in infra­struc­ture, ‘green’ energy and other pol­icy priorities.

“Detailed talks have been under way with con­gres­sional lead­ers for the past few days, with a view to leg­is­la­tion being ready for Mr Obama to sign soon after tak­ing office on Jan­u­ary 20.”

Source: Andrew Ward, Finan­cial Times, Decem­ber 21, 2008.

Bloomberg: US banks may turn to Asia bonds to plug fund­ing gap
“US banks includ­ing Cit­i­group, Gold­man Sachs and Mor­gan Stan­ley may sell government-guaranteed bonds in Asia next year, tap­ping grow­ing demand for the region’s local-currency debt to bol­ster their bal­ance sheets.

“US finan­cial insti­tu­tions sold more than $100 bil­lion of government-backed notes in dol­lars, euros and British pounds since Octo­ber 14, when the Fed­eral Deposit Insur­ance Corp. agreed to guar­an­tee their bonds to help them cope with $678 bil­lion of losses and write­downs amid the global credit crunch.

“‘Banks like Mor­gan Stan­ley and Gold­man will have to tap Asian cur­ren­cies because the poten­tial sup­ply is too big for dol­lars, euros and pounds to take on,’ said Arthur Lau, a fund man­ager at JF Asset Man­age­ment in Hong Kong, which over­sees $128 bil­lion. ‘It’s a per­fect prod­uct for insur­ance com­pa­nies in Asia. The bonds offer good yield pick-up, high credit rat­ings, good liq­uid­ity and no cur­rency mismatch.’

“US banks may be forced to fol­low Euro­pean and Aus­tralian banks, which lured fund man­agers to $6.6 bil­lion of government-backed secu­ri­ties in Asia-Pacific since Sep­tem­ber with yields of as much as dou­ble those on sov­er­eign debt, data com­piled by Bloomberg show. Sales of FDIC-backed notes matur­ing in more than a year may reach $450 bil­lion by the end of June, Bar­clays Cap­i­tal ana­lysts said.”

Source: Patri­cia Kua, Bloomberg, Decem­ber 23, 2008.

Finan­cial Times: S&P down­grades 11 of world’s top banks
“Eleven of the world’s biggest banks were down­graded Fri­day by Stan­dard & Poor’s after the rat­ings agency said the cur­rent down­turn could be longer and deeper than pre­vi­ously thought.

“Six major US banks were down­graded, includ­ing JPMor­gan Chase, Bank of Amer­ica and Wells Fargo, as well as five banks in Europe. The agency cut its rat­ings on Cit­i­group, Mor­gan Stan­ley, and Gold­man Sachs by two notches each. In Europe, S&P shaved one notch off the rat­ings of Bar­clays, Credit Suisse, Deutsche Bank, Royal Bank of Scot­land and UBS.

“S&P ana­lyst Tanya Azarchs said that, in addi­tion to the eco­nomic woes, the bank­ing sector’s ‘lax under­writ­ing stan­dards due to excess com­pe­ti­tion mean this cycle will be worse than prior cycles’.”

Source: Jane Croft and Greg Far­rell, Finan­cial Times, Decem­ber 19, 2008.

Wash­ing­ton Post: Paul­son asks Con­gress for sec­ond $350 bil­lion of res­cue pack­age
“Trea­sury Sec­re­tary Henry M. Paul­son said yes­ter­day that Con­gress must release the sec­ond half of the $700 bil­lion finan­cial res­cue pack­age, warn­ing that emer­gency loans to the nation’s automak­ers have all but depleted the funds avail­able to sta­bi­lize the still-fragile finan­cial markets.

“With­out fast action to replen­ish the fund that serves as the pri­mary safety net for the finan­cial sys­tem, Trea­sury offi­cials and oth­ers said, the gov­ern­ment would be ham­pered in its abil­ity to respond to a fresh round of mar­ket turmoil.

“Trea­sury offi­cials are also fac­ing a hard dead­line. Although they had enough to give the car com­pa­nies $13.4 bil­lion yes­ter­day, they need the sec­ond install­ment of the res­cue pack­age to help Gen­eral Motors make another $4 bil­lion debt pay­ment in mid-February.

“Paul­son said the Trea­sury and the Fed­eral Reserve have enough resources to han­dle a cri­sis for the time being. ‘It is clear, how­ever, that Con­gress will need to release the remain­der of the TARP to sup­port finan­cial mar­ket sta­bil­ity,’ he said in a statement.”

Source: David Cho and Lori Mont­gomery, Wash­ing­ton Post, Decem­ber 20, 2008.

Editor’s note: Paulson’s deci­sion rep­re­sents another pol­icy rever­sal, hav­ing said just days ago “we’ve got what we need right now.” See excerpt from Fox News below.

Fox News: Paul­son – finan­cial firms should be sta­bi­lized
“Trea­sury Sec­re­tary Henry Paul­son says he does not expect any more major finan­cial insti­tu­tions to fail dur­ing the cur­rent credit cri­sis. Paul­son also says that he has no plans to ask Con­gress to make the sec­ond half of the $700 bil­lion finan­cial res­cue fund avail­able before the Bush admin­is­tra­tion leaves office.”

Source: Fox News, Decem­ber 16, 2008.

The Wall Street Jour­nal: US devel­op­ers ask for bailout as mas­sive debt looms
“With a record amount of com­mer­cial real-estate debt com­ing due, some of the country’s biggest prop­erty devel­op­ers have become the lat­est to go hat-in-hand to the gov­ern­ment for assistance.

“They’re warn­ing pol­i­cy­mak­ers that thou­sands of office com­plexes, hotels, shop­ping cen­ters and other com­mer­cial build­ings are headed into defaults, fore­clo­sures and bank­rupt­cies. The rea­son: accord­ing to research firm Fore­sight Ana­lyt­ics, $530 bil­lion of com­mer­cial mort­gages will be com­ing due for refi­nanc­ing in the next three years – with about $160 bil­lion matur­ing in the next year. Credit, mean­while, is prac­ti­cally nonex­is­tent and cash flows from com­mer­cial prop­erty are siphon­ing off.”

Source: The Wall Street Jour­nal, Decem­ber 23, 2008.

Safe­Haven: Ron Paul – gov­ern­ment and fraud
“Bil­lions of dol­lars were recently lost in the col­lapse of Bernie Madoff’s self-described Ponzi scheme, in which too-good-to-be-true returns on invest­ments were not really returns at all, but the funds of defrauded new investors. The pyra­mid scheme col­lapsed dra­mat­i­cally when too many clients called in their accounts, and not enough new vic­tims could be found to sup­port these with­drawals. Bernie Mad­off was run­ning a bla­tant fraud oper­a­tion. Fraud is already ille­gal, and he will be fac­ing crim­i­nal con­se­quences, which is as it should be, and should act as an appro­pri­ate deter­rent to poten­tial future crim­i­nals. But it seems every time some­one breaks the law, politi­cians and pun­dits decide we need more laws, even though lack of laws was not the problem.

“The gov­ern­ment itself runs a fraud much big­ger than Madoff’s. Our Social Secu­rity sys­tem is the very def­i­n­i­tion of a Ponzi, or pyra­mid scheme. If the gov­ern­ment truly had an inter­est in pro­tect­ing people’s sav­ings, they would allow peo­ple to opt out of Social Secu­rity alto­gether. We would cut waste­ful spend­ing, such as our over­seas empire, to honor cur­rent oblig­a­tions to seniors, and even­tu­ally phase the pro­gram out. Instead, as with Enron and Sar­banes Oxley, I expect new, unre­lated leg­is­la­tion to be pro­posed that fur­ther dam­ages free­dom in the name of pro­tect­ing us, amidst loud procla­ma­tions that they have made the world safe.”

Click here for the full article.

Source: Ron Paul, Safe­Haven, Decem­ber 22, 2008.

APF: Bank of Spain chief – world faces “total” finan­cial melt­down
“The gov­er­nor of the Bank of Spain on Sun­day issued a bleak assess­ment of the eco­nomic cri­sis, warn­ing that the world faced a ‘total’ finan­cial melt­down unseen since the Great Depression.

“‘The lack of con­fi­dence is total,’ Miguel Angel Fer­nan­dez Ordonez said in an inter­view with Spain’s El Pais daily.

“‘The inter-bank (lend­ing) mar­ket is not func­tion­ing and this is gen­er­at­ing vicious cycles: con­sumers are not con­sum­ing, busi­ness­men are not tak­ing on work­ers, investors are not invest­ing and the banks are not lending.

“‘There is an almost total paral­y­sis from which no-one is escap­ing,’ he said, adding that any recov­ery – pen­cilled in by opti­mists for the end of 2009 and the start of 2010 – could be delayed if con­fi­dence is not restored.

“Ordonez recog­nised that falling oil prices and lower taxes could kick-start a faster-than-anticipated recov­ery, but warned that a deep­en­ing cycle of falling con­sumer demand, ris­ing unem­ploy­ment and an ongo­ing lend­ing squeeze could not be ruled out.

“‘This is the worst finan­cial cri­sis since the Great Depres­sion’ of 1929, he added.”

Source: APF (via Breitbart.com), Decem­ber 21, 2008.

Ambrose Evans-Pritchard (The Tele­graph): Pro­tec­tion­ist domi­noes are begin­ning to tum­ble across the world
“Greece has been in tur­moil for 11 days. The mood seems to have turned – pre-insurrectionary’ in parts of Athens – to bor­row from the Marx­ist handbook.

“This is a fore­taste of what the world may face as the ‘cri­sis of cap­i­tal­ism’ – another Marx­ist phase mak­ing a come­back – starts to turn two hun­dred mil­lion lives upside down.

“We are advanc­ing to the polit­i­cal stage of this global train wreck. Regimes are being tested. Those rely­ing on perma-boom to mask a lack of demo­c­ra­tic or ances­tral legit­i­macy may try to gain time by the usual meth­ods: trade bar­ri­ers, sabre-rattling, and barbed wire.

“Dominique Strauss-Kahn, the head of the Inter­na­tional Mon­e­tary Fund, is wor­ried enough to ditch a half-century of IMF ortho­doxy, call­ing for a fis­cal boost worth 2% of world GDP to ‘pre­vent global depression’.

“‘If we are not able to do that, then social unrest may hap­pen in many coun­tries, includ­ing advanced economies. We are fac­ing an unprece­dented decline in out­put. All around the planet, the peo­ple have reacted with feel­ings going from sur­prise to anger, and from anger to fear,’ he said.”

Source: Ambrose Evans-Pritchard, The Tele­graph, Decem­ber 22, 2008.

Mar­ket­place: Quan­ti­ta­tive eas­ing
“Now the Fed­eral Reserve has effec­tively cut the tar­get lend­ing rate to zero, it only has one more weapon in its arse­nal. Quan­ti­ta­tive eas­ing. Senior Edi­tor Paddy Hirsch explains what this ‘nuclear option’ is, and what the Fed hopes it’ll do.”

Source: Mar­ket­place, Decem­ber 2008.

Asha Ban­ga­lore (North­ern Trust): US Q3 real GDP remains unchanged
“The final esti­mate of third quar­ter GDP was unchanged at a 0.5% drop. The minor revi­sions show con­sumer spend­ing and non-residential invest­ment slightly weaker than the pre­lim­i­nary report, gov­ern­ment spend­ing was mar­gin­ally stronger, and res­i­den­tial invest­ment expen­di­tures fell less rapidly.

“Going for­ward, the fourth quar­ter (-5.0%) and first quar­ter of 2009 are likely to be the weak­est in the cur­rent down­turn. The shut­down of pro­duc­tion at Chrysler, GM, and Ford has increased the risk of a weaker-than-expected drop in GDP in the first quar­ter. Weak busi­ness con­di­tions should trans­late into a fur­ther mod­er­a­tion of prices.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 23, 2008.

Asha Ban­ga­lore (North­ern Trust): Chicago Fed National Activ­ity Index shows fur­ther decline
“The Chicago Fed National Activ­ity Index (CFNAI) declined to –2.47 in Novem­ber from a revised –1.27 read­ing in Octo­ber. The data used to com­pute this index have been pub­lished ear­lier. In Novem­ber, all four major cat­e­gories of the index – employ­ment, pro­duc­tion, income, con­sumer spend­ing and hous­ing – posted declines. The inten­sity of weak­ness in eco­nomic con­di­tions sug­gested by the Novem­ber read­ing is con­sis­tent with other eco­nomic reports which have indi­cated that the cur­rent reces­sion matches the sit­u­a­tion seen in the 1980 and 1981–82 recessions.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 22, 2008.

Asha Ban­ga­lore (North­ern Trust): Con­sumer spend­ing – weak­ness will per­sist
Nom­i­nal con­sumer spend­ing fell 0.6% in Novem­ber, the fifth monthly decline. How­ever, the per­sonal con­sump­tion expen­di­ture price index fell 1.1% and raised real con­sumer spend­ing 0.6%, fol­low­ing five monthly declines. Effec­tively, con­sumer spend­ing in the fourth quar­ter will post a reduc­tion but prob­a­bly slightly smaller than the 3.8% drop seen in the third quarter.

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 24, 2008.

CNNMoney.com: For stores, a very un-merry hol­i­day
“The 2008 hol­i­day sales sea­son is one of the worst for retail­ers in decades, as con­sumers’ con­cerns about the econ­omy and job losses crushed the typ­i­cal year-end shop­ping exuberance.

“‘I don’t see any rea­son for retail­ers to be rejoic­ing at all,’ said Britt Beemer, chair­man and founder of America’s Research Group.

“Among the early sales tal­lies, new esti­mates from MasterCard’s Spend­ing­Pulse Data ser­vice indi­cated that total store sales fell about 3% in Novem­ber and Decem­ber combined.

“That would be sig­nif­i­cantly worse than the orig­i­nal fore­cast from the National Retail Fed­er­a­tion (NRF), which antic­i­pated a 2.2% gain for the period.

“‘It’s really three things that ham­mered retail­ers,’ he said. ‘There were fewer hol­i­day shop­ping days ver­sus last year. We had bad win­ter weather in the final week before Christmas.’

“The third thing that hurt retail­ers, accord­ing to Krug­man, was deep dis­count­ing. Even though the big sales were designed to boost store traf­fic and sales, and ‘min­i­mize the dam­age’, he said that level of dis­count­ing will ulti­mately hurt mer­chants’ bot­tom line.

“The fourth-quarter shop­ping period is crit­i­cal for mer­chants since it can account for as much as 50% of their annual profit and sales. And since con­sumer spend­ing also fuels two-thirds of eco­nomic activ­ity, any sig­nals of a severe pull­back in dis­cre­tionary buy­ing also doesn’t bode well for the over­all economy.”

Source: CNNMoney.com, Decem­ber 26, 2008.

Reuters: US home­own­ers in des­per­ate straits
“The des­per­ate straits of many US home­own­ers showed in new data released on Mon­day, sug­gest­ing efforts to help them are hav­ing lim­ited success.

“As the reces­sion throws more peo­ple out of work, the rate of re-default on mod­i­fied mort­gages is ris­ing and may worsen as the econ­omy dete­ri­o­rates, bank­ing reg­u­la­tors said.

“After much brow­beat­ing from Con­gress, banks and other mort­gage lenders are begin­ning to do more, to mod­ify home loans so that dis­tressed bor­row­ers can avoid foreclosure.

“But the lat­est fig­ures from reg­u­la­tors raise ques­tions about how mod­i­fi­ca­tions are being done and how much they help, even as fore­clo­sure rates hit record-setting levels.

“‘You have to think that it will get worse before it gets bet­ter,’ John Dugan, the US Comp­trol­ler of the Cur­rency, said in an inter­view with Reuters.

“Crit­ics say most loan mod­i­fi­ca­tions up until a few months ago were tem­po­rary and not aimed at pro­vid­ing for sus­tain­able pay­ment plans, so it comes as no sur­prise that home­own­ers are defaulting.

“At the same time, a lenders’ group known as Hope Now warned on Mon­day that the num­ber of US home­own­ers seek­ing help to avoid fore­clo­sure would dou­ble next year to 2 million.”

Source: Kim Dixon and Kevin Draw­baugh, Reuters, Decem­ber 22, 2008.

Asha Ban­ga­lore (North­ern Trust): Home sales and prices con­tinue to decline
“Sales and prices of new and exist­ing homes fell in Novem­ber and inven­to­ries are at ele­vated lev­els. The 8.6% drop in Novem­ber to an annual rate of 4.49 mil­lion is the begin­ning of a new tra­jec­tory. Sales of both multi-family (-13.0%) and single-family (-8.0%) homes fell in November.

The median price of an exist­ing single-family home fell 2.8% from the prior month to $181,300, but down 12.8% from a year ago – a new record.

“The inven­tory of unsold exist­ing homes rose to an 11.2-month sup­ply in Novem­ber from 10.3-months in Octo­ber. The inven­tory sit­u­a­tion of exist­ing homes sug­gests that addi­tional declines in home prices are nearly certain.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 23, 2008.

Mar­ket­Watch: Fixed-rate mort­gages con­tinue to fall
“Fixed-rate mort­gage rates fell again this week, with the 30-year fixed-rate mort­gage set­ting another record low, at least since Fred­die Mac began doing its weekly sur­vey in the early 1970s.

“The 30-year aver­aged 5.14% for the week end­ing Decem­ber 24, down from last week’s 5.19% aver­age, accord­ing to the sur­vey, released on Wednes­day. It was more than a full per­cent­age point below its 6.17% aver­age a year ago, and hasn’t been lower since Fred­die started doing its rate sur­vey in 1971.

“One-year Treasury-indexed ARMs aver­aged 4.95%, up slightly from 4.94% last week yet still down from 5.53% a year ago.

“To obtain the rates, the 30-year fixed-rate mort­gage required pay­ment of an aver­age 0.8 point, the 15-year fixed-rate mort­gage required an aver­age 0.7 point and the ARMs required an aver­age 0.6 point. A point is 1% of the mort­gage amount, charged as pre­paid interest.

“‘Inter­est rates on 30-year fixed-rate mort­gages eased for the eighth straight week and set another record low since Fred­die Mac’s sur­vey began in 1971,’ said Frank Nothaft, Fred­die Mac chief econ­o­mist, in a news release.”

Source: Amy Hoak, Mar­ket­Watch, Decem­ber 24, 2008.

Asha Ban­ga­lore (North­ern Trust): Lower mort­gage rates boost refi­nance activ­ity
“There is some good news from the hous­ing mar­ket. The Mort­gage Pur­chase Index of the Mort­gage Bankers Asso­ci­a­tion rose to 316.5 for the week ended Decem­ber 19 from 286.1 in the prior week. Also, sharply lower mort­gage rates have ini­ti­ated a boom in refi­nanc­ing of mort­gages. The Mort­gage Refi­nance Index rose to 6,758.6 dur­ing the week ended Decem­ber 19 ver­sus 1,254.0 a month ago.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 23, 2008.

Richard Rus­sell (Dow The­ory Let­ters): Unem­ploy­ment could be sur­prise of bear mar­ket
“Rus­sell thoughts: The truth – the mar­ket action isn’t turn­ing me any more opti­mistic, but (sigh) here goes. Every pri­mary bear mar­ket pro­duces its own sur­prises. What was the sur­prise of the Great Depres­sion? I think it was this – between 1929 and 1932, 5,000 banks went out of busi­ness. This rocked the foun­da­tion of Amer­i­can con­fi­dence. It fright­ened hell out of the nation.

“And I ask myself, what could be the sur­prise of this bear mar­ket? My guess is unem­ploy­ment. I’ve warned all along that high and ris­ing unem­ploy­ment is dev­as­tat­ing (and with unem­ploy­ment comes loss of income and an inabil­ity to carry one’s debt).

“In the 1930s peo­ple cut back severely on their spend­ing. Noth­ing was con­sid­ered ‘cheap enough to be con­sid­ered a bar­gain’. But dur­ing the Great Depres­sion, the nation and the Amer­i­can peo­ple were not as indebted as they are today. In the ’30s mort­gages were hated and avoided. Dur­ing the 1930s, the US was still largely agrar­ian. A huge per­cent­age of the pop­u­la­tion lived on farms. Today most Amer­i­cans live in cities. Today, more Amer­i­cans work in the ser­vice indus­tries. Liv­ing in hard times in a city can be a raw and a dis­cour­ag­ing expe­ri­ence. News is more avail­able and life is meaner and more com­pet­i­tive in the cities.

“The world is far more inte­grated today. Today, the US is com­pet­ing with labor and tech­nol­ogy with nations all over the world. The dol­lar is less sta­ble today, and com­pet­i­tive deval­u­a­tions are ram­pant as each nation seeks to export more of its own. It’s a much more com­pet­i­tive world today than it was dur­ing the Great Depres­sion. In the 1930s Japan man­u­fac­tured ‘junk’ items and China wasn’t even a fac­tor nor was India or Brazil. This bear mar­ket will be far more dif­fi­cult for busi­ness than was the case dur­ing the 1930s.”

Source: Richard Rus­sell, Dow The­ory Let­ters, Decem­ber 23, 2008.

The New York Times: More firms cut labor costs with­out lay­offs
“Even as lay­offs are reach­ing his­toric lev­els, some employ­ers have found an alter­na­tive to slash­ing their work force. They’re nip­ping and tuck­ing it instead.

“A grow­ing num­ber of employ­ers, hop­ing to avoid or limit lay­offs, are intro­duc­ing four-day work­weeks, unpaid vaca­tions and vol­un­tary or enforced fur­loughs, along with wage freezes, pen­sion cuts and flex­i­ble work sched­ules. These employ­ers are still cut­ting labor costs, but hang­ing onto the labor.

“And in some cases, work­ers are even buy­ing in. Wit­ness the unusual sug­ges­tion made in early Decem­ber by the chair­man of the fac­ulty sen­ate at Bran­deis Uni­ver­sity, who pro­posed that the school’s 300 pro­fes­sors and instruc­tors give up 1% of their pay.

“‘What we are doing is a sym­bolic ges­ture that has real con­se­quences – it can save a few jobs,’ said William Flesch, the sen­ate chair­man and an Eng­lish professor.

“Some of these coöper­a­tive cost-cutting tac­tics are not entirely unique to this down­turn. But the rea­sons behind the steps – and the ratio­nale for the sharp growth in their pop­u­lar­ity in just the last month – reflect the pecu­liar­i­ties of this reces­sion, its sud­den deep­en­ing and the chang­ing dynam­ics of the global economy.

“Com­pa­nies tak­ing nips and tucks to their work force say this econ­omy plunged so quickly in Octo­ber that they do not want to prune too much should it just as sud­denly roar back. They also say they have been so care­ful about hir­ing and spend­ing in recent years – par­tic­u­larly in the last 12 months when nearly every­one sensed the coun­try was in a reces­sion – that highly pro­duc­tive work­ers, not slack­ers, remain on the payroll.”

Source: Matt Rich­tel, The New York Times, Decem­ber 21, 2008.

Asha Ban­ga­lore (North­ern Trust): Sav­ings rate on the up
“Per­sonal income fell 0.2% in Novem­ber due to sig­nif­i­cant weak­ness in the labor mar­ket. The per­sonal sav­ing rate moved up to 2.8% in Novem­ber, putting the aver­age of the first eleven months of the year at 1.5%, partly boosted by tax rebates of 2008. Assum­ing the Decem­ber sav­ing rate does not alter this aver­age too much, the 2008 sav­ing rate will be the first read­ing above 1.0% since 2004 when the sav­ing rate was 2.1%. The sav­ing rates in 2005, 2006, and 2007 were 0.3%, 0.7%, and 0.5%, respectively.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 24, 2008.

Asha Ban­ga­lore (North­ern Trust): Ini­tial job­less claims post new cycle high
Ini­tial job­less claims for the week ended Decem­ber 19 rose 30,000 to 586,000 , a new cycle high. Con­tin­u­ing claims, which lag ini­tial claims by one week, moved down 17,000 to 4.37 mil­lion and the insured unem­ploy­ment rate held steady at 3.3%. The main mes­sage is that labor mar­ket con­di­tions remain sig­nif­i­cantly weak but it should be noted that the level of these claims should be seen in the con­text of a large labor force today com­pared with the 1980s.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 24, 2008.

Asha Ban­ga­lore (North­ern Trust): Tem­po­rary bounce in non-defense cap­i­tal goods orders
“Durable goods orders fell 1.0% in Novem­ber fol­low­ing a 8.4% drop in Octo­ber. A nearly 38% drop in orders of air­craft, a volatile com­po­nent of this report, accounted for the weak­ness in the head­line num­ber. Exclud­ing trans­porta­tion, durable goods orders were up 1.2% in Novem­ber. Also, orders of non-defense cap­i­tal goods exclud­ing air­craft rose 4.7% in Novem­ber and book­ings of non-defense cap­i­tal goods increased 5.9%. In light of the weak­ness of con­sumer spend­ing and over­all weak­ness of the econ­omy, the strength of these orders appears to be temporary.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 24, 2008.

Hal Weitz­man (Finan­cial Times): Citadel and CME win CDS clear­ing con­sent“The Chicago Mer­can­tile Exchange (CME), the world’s largest futures exchange, and Citadel, the hedge fund, were Tues­day given the green light by Wash­ing­ton reg­u­la­tors to launch a clear­ing house for credit default swaps.

“The CME’s clear­ing solu­tion was given the go-ahead by the Fed­eral Reserve Bank of New York and the Com­mod­ity Futures Trad­ing Com­mis­sion, while the exchange said it had had ‘exten­sive dis­cus­sions’ with the Secu­ri­ties and Exchange Com­mis­sion and was ‘well along in the SEC review process’.

“Reg­u­la­tors on both sides of the Atlantic have been push­ing for a cen­tral clear­ing coun­ter­party to be estab­lished for credit default swaps, which offer insur­ance against the default of banks, com­pa­nies and gov­ern­ment debt.

“The near-collapse of Bear Stearns in March and the bank­ruptcy of Lehman Broth­ers in Sep­tem­ber high­lighted the coun­ter­party risks asso­ci­ated with these types of deriv­a­tives. Reg­u­la­tors remain con­cerned about the effects that fur­ther coun­ter­party fail­ures could have on the finan­cial sys­tem – but cen­tralised clear­ing would reduce those risks.”

Source: Hal Weitz­man, Finan­cial Times, Decem­ber 24, 2008.

Bespoke: Inter­na­tional long-term inter­est rates in down­trends
“As shown in the charts below, long-term gov­ern­ment inter­est rates are in steady down­trends across the globe. While long-term inter­est rates with a ‘one’ han­dle have been exclu­sive to Japan for sev­eral years, other coun­tries, espe­cially the US, are close to join­ing the club.”

Source: Bespoke, Decem­ber 24, 2008.

Richard Rus­sell (Dow The­ory Let­ters): US bonds are grossly over­bought
“With the bonds now over­bought and over­val­ued, it seems to me that this could be the next trou­ble area. If the bonds start head­ing down, inter­est rates will head up, and this is the last thing the Fed wants to see. The Fed has insin­u­ated that if the bonds start falling, they will buy Trea­sury bonds to stem the decline. Buy­ing bonds will inject even more money into the bank­ing system.

“So I’m going to keep a sharp eye on the bonds. Trou­ble in the bond mar­ket could wreak havoc with the frag­ile US econ­omy. By the way, Barron’s Con­fi­dence Index (CI) just dropped to a new low for the year. Thus, the bond mar­ket con­tin­ues to move towards the highest-grade bonds, mean­ing that the bond mar­ket is con­tin­u­ing its trend toward safety (this tells us why the 30 year T-bond is yield­ing such an out­ra­geously low num­ber). As you know the 91-day T-bills yield noth­ing – in effect, the T-bills are sim­ply a way for ner­vous investors to ‘ware­house’ their money with safety while receiv­ing no return.”

Source: Richard Rus­sell, Dow The­ory Let­ters, Decem­ber 23, 2008.

Bespoke: Cor­po­rate bonds are stag­ing recov­ery
“While the S&P 500 and Nas­daq were both noto­ri­ously weak yes­ter­day [Mon­day] given the usual pos­i­tive bias dur­ing the Christ­mas week, not every­thing was down. In the credit mar­kets, cor­po­rate bonds had a strong day, and if these trends con­tinue, it will bode well for stocks.

“As shown below, using the iBoxx ETFs as a proxy, both invest­ment grade (LQD) and high yield (HYG) cor­po­rate bonds had decent gains yes­ter­day after ral­ly­ing nicely over the past week as well.

“The stock mar­ket has really played sec­ond fid­dle to the credit mar­kets dur­ing this down­turn. Many investors have been wait­ing for the cor­po­rate bond mar­ket to show signs of life before get­ting back into more risky assets. From the looks of these two ETFs, the credit mar­kets are finally gain­ing some pos­i­tive traction.”

Source: Bespoke, Decem­ber 23, 2008.

US Global Investors: Oppor­tu­nity in munic­i­pal bonds
“We all know that 2008 has been a rough year for vir­tu­ally all investors, and the munic­i­pal mar­ket has not been immune. Munic­i­pals, how­ever, have weath­ered the storm bet­ter than most asset classes.

“Over the long term, munic­i­pals have ‘pro­vided strong taxable-equivalent returns with lower volatil­ity rel­a­tive to their tax­able coun­ter­parts,’ accord­ing to Bar­clays Cap­i­tal. The chart below shows the rel­a­tive risk and after-tax per­for­mance of major equity and fixed income asset classes.

“Tax-exempt munic­i­pals (marked as ‘TE Muni’ on the chart) have pro­vided higher lev­els of after-tax returns than Trea­suries or cor­po­rate bonds over the past 10 years, and these returns have come with lower volatil­ity, as mea­sured by annual stan­dard devi­a­tion of returns.”

Source: John Der­rick, US Global Investors — Weekly Investor Alert, Decem­ber 26, 2008.

Bespoke: The few, the proud, the win­ners in 2008
“Below we high­light the year to date per­for­mance of the 10 S&P 500 sec­tors with just 6 trad­ing days left in 2008. As shown, Finan­cials are by far the worst with a decline of 57.9% this year. Finan­cials are fol­lowed by Mate­ri­als (-47%), Tech­nol­ogy (-44%), and Indus­tri­als (-43%). The other 6 sec­tors are actu­ally out­per­form­ing the S&P 500 as a whole, which is cur­rently down 39.8% this year. The Con­sumer Sta­ples sec­tor has held up the best this year with a decline of 19.4%.”

Source: Bespoke, Decem­ber 22, 2008.

Bloomberg: BlackRock’s Robert Doll says 2009 to be “year of repair” for stocks
“Robert Doll, chief invest­ment offi­cer of global equi­ties at Black­Rock, talks with Bloomberg about the out­look for the equity mar­ket in 2009.”

Source: Robert Doll, Bloomberg (via YouTube), Decem­ber 23, 2008.

Eoin Treacy (Fuller­money): Keep an eye on diver­gence from 200-day mov­ing aver­ages
“S&P 500 and Dow Jones Indus­trial Aver­age diver­gence from their 200-day mov­ing aver­ages – We first posted this indi­ca­tor on Octo­ber 10. The indi­ca­tor hit his­tor­i­cally over­sold lev­els in early Octo­ber as the S&P 500 and Dow Jones Indus­tri­als hit impor­tant lows. The indices and indi­ca­tor both con­tinue to con­sol­i­date above their Octo­ber lows and mean rever­sion is cer­tainly occurring.

“Although both indices are likely to be well off their lows by the time it occurs; sus­tained moves above their mov­ing aver­ages will indi­cate that a new uptrend has commenced.”

Source: Eoin Tracy, Fuller­money, Decem­ber 22, 2008.

Finan­cial Times: Tokyo talks tough on yen inter­ven­tion
“In a marked sharp­en­ing of Tokyo’s lan­guage on the yen, senior gov­ern­ment offi­cials high­lighted the pos­si­bil­ity of inter­ven­tion to stem the Japan­ese currency’s rise against the dollar.

“Takeo Kawa­mura, the cab­i­net chief sec­re­tary, told a news con­fer­ence that the gov­ern­ment was closely watch­ing the yen’s move­ments, say­ing: ‘We have con­ducted cur­rency inter­ven­tion in the past, and we will take appro­pri­ate mea­sures, which include [intervention].’”

Source: Mure Dickie and Lind­say Whipp, Finan­cial Times, Decem­ber 18, 2008.

Richard Rus­sell (Dow The­ory Let­ters): How much is US dol­lar worth?
“I’m read­ing more and more about the via­bil­ity of the dol­lar, if you can pro­duce an item at no cost through a com­puter, what’s that item worth? Why is the dol­lar worth any­thing at all? Because the US gov­ern­ment man­dates that the dol­lar is legal ten­der and can be used to set­tle all debt. Can the gov­ern­ment back its fiat money? The dol­lar is worth some­thing only because the US gov­ern­ment says it is. ‘I’m from the gov­ern­ment and I’m here to help you.’ That sen­tence is now con­sid­ered a joke, but then why should any­one take the government’s pro­nounce­ment that the dol­lar is ‘legal ten­der’ seriously?

“Then why do peo­ple trust Fed­eral Reserve Notes or fiat dol­lars? Why do peo­ple work for, and save fiat dol­lar? The answer is that many gen­er­a­tions (since 1971) have grown up with fiat dol­lars – they don’t know any­thing else. It never occurs to them that Fed­eral Reserve Notes have absolutely noth­ing behind them but a gov­ern­ment decree.”

Source: Richard Rus­sell, Dow The­ory Let­ters, Decem­ber 23 & 26, 2008.

Busi­ness Report: Don’t bet on decline of SA rand
“UBS with­drew its rec­om­men­da­tion that investors hedge against fur­ther declines in the South African rand ver­sus the dol­lar, euro and yen as a lift in ‘risk appetite’ shores up emerging-market assets.

“The Zurich-based bank is clos­ing bets that the rand may weaken fur­ther at the ‘start’ of 2009, as pol­icy mak­ers in the world’s major economies lower bor­row­ing costs to ease the effects of a global reces­sion, Rod­er­ick Ngotho, UBS’s cur­rency strate­gist for emerg­ing Europe, the Mid­dle East and Africa, said in a report last week.

“‘We feel there could be a short-term pick-up in risk appetite at the start of next year due to the cen­tral bank actions we’ve seen,’ Ngotho said.

“‘In an envi­ron­ment where liq­uid­ity is rel­a­tively thin, the rand could appre­ci­ate along with other cur­ren­cies in emerg­ing Europe, the Mid­dle East and Africa in the short term.’

“The deficit on South Africa’s cur­rent account, which widened to 7.9% of GDP in the third quar­ter, remained a ‘per­sis­tent vul­ner­a­bil­ity’ for the rand, Ngotho said. South Africa relies on for­eign pur­chases of its stocks and bonds to fund the short­fall, inflows that reversed this year as investors sold emerg­ing mar­ket assets amid the worst finan­cial cri­sis since the Great Depression.

“For­eign investors have sold almost R67 bil­lion more than they bought of South African assets this year, data from its stock and bond exchanges show.

“‘Inflows into South Africa’s cap­i­tal account may fall short of the financ­ing required for the cur­rent account deficit in 2009,’ Ngotho said. ‘The deficit would then need to be cor­rected by a sharply weaker currency.’

“The gov­ern­ment may need to access some other source of mul­ti­lat­eral financ­ing to fund the deficit and pre­vent the rand from weak­en­ing fur­ther, accord­ing to UBS. South Africa would qual­ify to bor­row more than $13 bil­lion under the Inter­na­tional Mon­e­tary Fund’s short-term loan facil­ity, the report said.”

Source: Garth The­unis­sen, Busi­ness Report, Decem­ber 22, 2008.

Javier Blas (Finan­cial Times): Has Opec stopped the slide?
“Was Opec suc­cess­ful in stop­ping the slide in oil prices? It depends on how you analyse the numbers.

“A look at the Nymex front-month West Texas Inter­me­di­ate con­tract, the oil market’s main bench­mark, gives the impres­sion of Opec fail­ure. It plunged from $43.60 a bar­rel ahead of the meet­ing to close at a 4½-year low of $33.87 at the end of last week. A drop of $10 sounds very much like a vote of no con­fi­dence in the cartel.

“This view is, how­ever, mis­lead­ing. The Nymex WTI front-month bench­mark – in this case, the Jan­u­ary con­tract – expired last Fri­day, dis­tort­ing prices. The Feb­ru­ary con­tract, which on Mon­day became the market’s bench­mark, was far more sta­ble, los­ing $2 to $42.36.

“But even this mea­sure is incom­plete. To attain a fairer view, it is nec­es­sary to dig deeper into the world of phys­i­cal crude oil contracts.

“As the car­tel pumps mostly lower qual­ity, heavy sour crude, the cuts will affect those grades first. It is there where the mar­ket should look for clues about the impact.

“It seems to be work­ing. The price dif­fer­ence between lower qual­ity, heavy sour crude, such as Dubai – the Mid­dle East bench­mark – and higher qual­ity, light, sweet oil, such as WTI, has nar­rowed sharply, point­ing to a tighter market.

“Opec still faces a daunt­ing job deliv­er­ing its promised cuts amid fast-weakening demand, but investors should not dis­re­gard the car­tel because the WTI Jan­u­ary con­tract was weak.

“For the time being, the phys­i­cal mar­ket is giv­ing Opec a cau­tious thumbs up.”

Source: Javier Blas, Finan­cial Times, Decem­ber 21, 2008.

CNBC: Den­nis Gart­man – down­ward bar­rel
Dis­cussing oil dropp­ping below $40, with Den­nis Gart­man of The Gart­man Letter.

Source: CNBC, Decem­ber 23, 2008.

Richard Rus­sell (Dow The­ory Let­ters): Finally, gold shares show­ing out­per­for­mance
“I’ve been say­ing all along that some­where the gold shares will believe in ris­ing gold rather than a sink­ing stock mar­ket. The evi­dence is seen on the chart below. Here we see GDX divided by Gold, the ratio is finally surg­ing in favor of GDX the gold shares. You can see that the down­trend has been reversed and I expect the gold shares to move with gold from now on. Rel­a­tive strength trends tend to last a long time.”

Source: Richard Rus­sell, Dow The­ory Let­ters, Decem­ber 26, 2008.

Com­mod­ity Online: NCDEX to launch global con­tracts in gold & sil­ver
“NCDEX is all to launch Gold & Sil­ver Inter­na­tional futures con­tracts on the exchange on Mon­day, Decem­ber 29, 2008.

“A press state­ment issued from NCDEX said that these con­tracts named Gold Inter­na­tional and Sil­ver Inter­na­tional can be bought and sold in lots of one kg and 30 kg respectively.

“The con­tract size has been defined keep­ing in view the Indian con­sumer and the recent price trends. These con­tracts will be phys­i­cally set­tled at Ahmed­abad. Con­tracts would be set­tled on the basis of inter­na­tional prices in rupee denomination.

“On account of per­sis­tent mar­ket demand and keep­ing in mind the fact that India is a big importer of bul­lion, NCDEX has now intro­duced these new con­tracts, the state­ment said.”

Source: Com­mod­ity Online, Decem­ber 27, 2008.

David Fuller (Fuller­money): Plan­inum is best value pre­cious metal
“Mar­kets are only effi­cient to the extent that they reflect sen­ti­ment. Today, many savvy investors want some gold in their port­fo­lios. We agree and this site has pre­vi­ously dis­cussed at length the rea­sons for doing so. A minor­ity of pre­cious metal enthu­si­asts also want sil­ver, which Fuller­money has long argued, per­forms like high-beta gold. We too like silver.

“Some of us also think that plat­inum is the best value pre­cious metal today. I will let this ratio chart do the talking.

“Today, the price of plat­inum is only slightly higher than that of gold. Con­se­quently, plat­inum is trad­ing near its low­est level rel­a­tive to gold for at least 22 years. (Bloomberg does not have ear­lier data on plat­inum prices.) In this decade to date, plat­inum has traded at more than 2.2 times the price of gold on three occa­sions. There­fore in terms of rel­a­tive val­ues, we espe­cially like plat­inum today.

“Inevitably, there are rea­sons for such wide price swings. Almost all of the plat­inum pro­duced today comes from South Africa. Sup­ply dis­rup­tions, most recently due to power out­ages, caused the ear­lier scram­bles for scarce sup­plies of plat­inum. This is not a prob­lem today, at least not at the moment. Instead, peo­ple have shunned plat­inum because the global auto­mo­bile indus­try is in a slump. This reduces demand for plat­inum used in the man­u­fac­tur­ing of cat­alytic converters.

“That fac­tor is cer­tainly reflected by today’s low price for plat­inum rel­a­tive to gold. I believe investors are over­look­ing the pos­si­bil­ity of sup­ply dis­rup­tions in South Africa. Mean­while, the white metal’s price has flat lined in prob­a­ble base for­ma­tion development.”

Source: David Fuller, Fuller­money, Decem­ber 24, 2008.

Finan­cial Times: China bat­tles unem­ploy­ment to deter unrest
“Tack­ling unem­ploy­ment among uni­ver­sity grad­u­ates will be China’s pri­or­ity next year as the econ­omy fal­ters, Wen Jiabao, the prime min­is­ter, said at the weekend.

“The atten­tion given by state media to Mr Wen’s visit to a Bei­jing uni­ver­sity was the lat­est sign of the government’s increas­ing fear of wide­spread unrest as growth declines much faster than expected.

“‘We have made find­ing jobs for uni­ver­sity stu­dents our top pri­or­ity and will come out with some mea­sures to make sure all grad­u­ates have some­where con­struc­tive to direct their energy,’ Mr Wen told stu­dents at the Bei­jing Uni­ver­sity of Aero­nau­tics and Astronautics.

“He said the gov­ern­ment was also extremely con­cerned about migrant work­ers who had been laid off in the cities. By the end of Novem­ber, 10 mil­lion migrant work­ers had lost their jobs nation­wide and 4.85 mil­lion of those had returned home, accord­ing to gov­ern­ment figures.

“A sur­vey last week by a gov­ern­ment think tank esti­mated the num­ber of recent grad­u­ates who have been unable to find work at 1.5 mil­lion. Ter­tiary insti­tu­tions are expected to churn out another 6.5 mil­lion grad­u­ates next year.

“In recent weeks, a grow­ing cho­rus of offi­cial voices has raised the spec­tre of unrest. ‘If growth falls below 8% then that will cre­ate enor­mous prob­lems in terms of unem­ploy­ment,’ accord­ing to Zhang Xiao­jing, direc­tor of the Macro­econ­omy Office of the Insti­tute of Eco­nom­ics at the Chi­nese Acad­emy of Social Sciences.

“‘There will be lots of laid-off migrant work­ers return­ing to the vil­lages, not to men­tion the many col­lege grad­u­ates and this will affect social stability.’

“Mr Zhang linked the con­tin­u­ing riots in Greece directly to the global eco­nomic cri­sis and said that Bei­jing was wary of a sim­i­lar sit­u­a­tion erupt­ing in China.”

Source: Jamil Ander­lini, Finan­cial Times, Decem­ber 21, 2008.

Bloomberg: China may spur con­sumer spend­ing after low­er­ing rates
“China may fol­low its lat­est interest-rate cut with steps to spur con­sumer spend­ing as deep­en­ing reces­sions in the US and Europe pum­mel exports, one of the main engines of the world’s fourth-largest economy.

“The People’s Bank of China yes­ter­day low­ered its one-year lend­ing rate by 0.27 per­cent­age point to 5.31% and the deposit rate by the same amount to 2.25%. The cen­tral bank also reduced the pro­por­tion of deposits lenders must set aside as reserves by 0.5 per­cent­age point.

“Chi­nese stocks fell on con­cern the cut was too small to shore up the econ­omy, which may grow at the slow­est pace in two decades next year. Pre­mier Wen Jiabao, who unveiled a $583 bil­lion stim­u­lus pack­age for roads and bridges last month, may also reduce taxes and try to prop up the hous­ing mar­ket, econ­o­mists said.

“Offi­cials ‘will con­tinue to ease mon­e­tary pol­icy and intro­duce addi­tional fis­cal stim­u­lus mea­sures, par­tic­u­larly in sup­port of domes­tic con­sump­tion,’ said Jing Ulrich, head of China equi­ties at JPMor­gan Chase & Co. in Hong Kong.”

Source: Li Yan­ping and Kevin Ham­lin, Bloomberg, Decem­ber 23, 2008.

US Global Investors: China’s fis­cal stim­u­lus rep­re­sents long-term oppor­tu­nity
“China’s infra­struc­ture stim­u­lus rep­re­sents a 23% increase in total con­struc­tion spend­ing, com­pared with 4 per­cent in the US and 2% in Europe. While the impact may not be imme­di­ate, this fis­cal ini­tia­tive con­tin­ues to be a long term oppor­tu­nity for the mar­ket overall.”

Source: US Global Investors — Weekly Investor Alert, Decem­ber 26, 2008.

Finan­cial Times: Japan­ese exports in record 27% fall
“Japan’s exports plunged at a record annual pace in Novem­ber with ship­ments to Asia drop­ping the most since 1986 as a global eco­nomic slump and a surg­ing yen slashed demand for every­thing from autos to electronics.

“While imports fell 14.4% as the Japan­ese econ­omy lan­guished in reces­sion, the 26.7% plunge in exports was large enough to keep the trade bal­ance in deficit for a sec­ond month run­ning. Japan last logged trade deficits two months in a row dur­ing a pre­vi­ous spell of yen strength in 1980.

“The Japan­ese cur­rency has surged around 20% against the dol­lar this year as investors spooked by the global finan­cial cri­sis bailed out of risky assets and brought funds home.

“Ship­ments to the United States sank a record 33.8 per cent on slack demand for auto­mo­biles. The United States is in reces­sion and Amer­i­can demand for Japan­ese goods has been falling for 15 months, ever since US mort­gage defaults started to squeeze global credit markets.

“By con­trast Asian mar­kets held up for much of the cri­sis, but are now crum­bling at dizzy­ing speed. Exports to Asia fell 26.7% in Novem­ber. Ship­ments to China dropped 24.5%, the biggest fall since 1995, on weak demand for semi­con­duc­tors, dig­i­tal cam­eras and other elec­tronic goods, the Min­istry of Finance said.

“‘The drop shows that domes­tic demand in China for Japan­ese goods is not that strong,’ said Kaori Yam­ato, an econ­o­mist at Mizuho Research Insti­tute. The Chi­nese econ­omy is slow­ing sharply as exports to Europe and the United States plunge.”

Source: Mure Dickie, Finan­cial Times, Decem­ber 22, 2008.

Reuters: Japan out­put slumps
“Export-reliant Asian economies showed more signs of weak­ness on Fri­day, with Japan’s indus­trial out­put div­ing at a record pace and South Korea warn­ing it faces an ‘unprece­dented cri­sis’ as global demand wilts.

“Even the once unstop­pable Chi­nese econ­omy is feel­ing the strain, with com­pa­nies record­ing a sharp slow­down in profit growth in the first 11 months of the year.

“On top of Japan’s steep fall in indus­trial out­put in Novem­ber, core con­sumer infla­tion fell faster than fore­cast last month, putting the shrink­ing econ­omy on course for a spell of defla­tion next year.

“The grim out­look could push the Bank of Japan to imple­ment unortho­dox mon­e­tary eas­ing mea­sures as it has lit­tle room left to cut inter­est rates after reduc­ing them to 0.10% last week.

“But Japan’s Eco­nom­ics Min­is­ter Kaoru Yosano said he doubted that any so-called quan­ti­ta­tive eas­ing by the Bank of Japan would directly lead to an increase in loans to com­pa­nies to get the econ­omy mov­ing again.

“Fac­ing the worst inter­na­tional eco­nomic envi­ron­ment in more than eight decades, Yosano said his gov­ern­ment would act flex­i­bly on pos­si­ble addi­tional spend­ing mea­sures if con­di­tions dete­ri­o­rated further.”

Source: Hideyuki Sano and Yuko Yoshikawa, Reuters, Decem­ber 26, 2008.

Reuters: Ire­land to pour bil­lions into 3 main banks
“The Irish gov­ern­ment will invest 5.5 bil­lion euros in the country’s three main lenders, tak­ing major­ity con­trol of Anglo Irish Bank after a loan scan­dal there rocked an already belea­guered industry.

“Investors have been wait­ing for months for a bailout plan to match schemes in other coun­tries, but pres­sure on the gov­ern­ment inten­si­fied this week after Anglo Irish revealed its chair­man had kept share­hold­ers in the dark about 87 mil­lion euros worth of loans he had received from the lender. Its shares slumped to a record low of 19 euro cents and the finan­cial reg­u­la­tor has launched a probe into direc­tors’ loans at all major Irish banks.

“‘This is a new begin­ning. We have to have proper lend­ing, respon­si­ble lend­ing, lend­ing for the real needs of the econ­omy,’ Finance Min­is­ter Brian Leni­han said on Sunday.

“Dublin will invest 2 bil­lion euros each in mar­ket lead­ers Bank of Ire­land and Allied Irish Banks via pref­er­ence shares giv­ing 25% vot­ing rights over what the gov­ern­ment described as ‘key issues’.

“The pack­age will be paid for from funds set aside dur­ing Ireland’s ‘Celtic Tiger’ eco­nomic boom and orig­i­nally intended to meet the state’s future pen­sion obligations.”

Source: Kevin Smith and Carmel Crim­mins, Reuters, Decem­ber 22, 2008.

Tags: Bill Gross, BMO, Brazil, BRIC, BRICs, Christmas Stockings, Cnbc Interview, Corporate Bonds, Crb Index, Credit Crisis, Decent Returns, Dow Jones Industrial, Dow Jones Industrial Index, Emerging Markets, Fixed Income Instruments, Government Bonds, India, Investment Environment, Merry Mood, Mohamed El Erian, Msci Emerging Markets Index, Msci World Index, Nikkei 225, O Rama, oil, Oil Sands, Perilous Nature, Russian Trading System, Us Dollar Index
Posted in Bonds, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, ETFs, Gold, India, Infrastructure, Markets, Oil and Gas, Outlook, Silver, US Stocks | 1 Comment »

Video-Rama: Will Markets Bail You Out in '09?

Saturday, December 27th, 2008

Only four more trad­ing ses­sions remain before we close the door on 2008 – and none too soon, many investors would say. But mov­ing from ’08 to ’09 will unfor­tu­nately not dim the lights on the nature of the invest­ment debate. Come Thurs­day next week, investors will not only be hung over from 2008’s mar­ket rout (and pos­si­bly the pre­vi­ous night’s fes­tiv­i­ties), but also still be grap­pling with the ram­i­fi­ca­tions of the credit cri­sis for the global econ­omy and finan­cial mar­kets, and in par­tic­u­lar with the ques­tion of where to invest dur­ing 2009.

And this seems to be the theme of the video clips that have attracted my atten­tion dur­ing the past few days (between Yule-tide activ­i­ties), mak­ing up this “Video-o-rama” compilation.

The selec­tion includes items vary­ing from Scott Pet­tersen lament­ing “Where’s MY bailout?” (first one up) to the three ver­sions of “Hal­lelu­jah” cur­rently on the sin­gles charts (at the end of com­pi­la­tion). But it is not all about song – the likes of Don­ald Coxe, Marc Faber, Mohamed El-Erian, Gary Schilling, Paul Krug­man, Mark Mobius and Byron Wien give us sub­stan­tial food for thought as we wave the old year goodbye.

YouTube: Where’s MY bailout?

Source: Scott Pet­tersen, YouTube, Decem­ber 22, 2008.

BNN: Con­ver­sa­tion with BMO’s strate­gist Don Coxe

Source: BNN, Decem­ber 23, 2008.

CNBC: Dr Doom – find value in first half “disaster”

Click here for the article.

Source: CNBC, Decem­ber 23, 2008.

CNBC: Pimco’s El-Erian – back to basics for investors in 2009

Click here for the article.

Source: CNBC, Decem­ber 22, 2008.

Barron’s: Have we seen the worst of this bear mar­ket?
“Have we seen the worst of this bear mar­ket? Top strate­gists and chief invest­ment offi­cers com­ment on whether the mar­ket has hit bot­tom yet.”

Source: Barron’s, Decem­ber 20, 2008.

Bloomberg: Mark Mobius sees “begin­ning of next bull phase” in 2009
“Mark Mobius, exec­u­tive chair­man of Tem­ple­ton Asset Man­age­ment, talks with Bloomberg’s Francine Lac­qua about the out­look for emerg­ing mar­kets in 2009.”

Source: Bloomberg (via Blinkx.com), Decem­ber 19, 2008.

Tech Ticker: Get ready to scrimp and save, says econ­o­mist Shilling
“Hop­ing for a quick return to the con­sumer spend­ing habits of past quarter-century, when ‘finan­cial dis­ci­pline’ meant remem­ber­ing to with­draw enough home equity to get a new SUV every two years? For­get about it, says Gary Shilling.”

Source: Henry Blod­get, Tech Ticker, Decem­ber 19, 2008.

Big Think: Paul Krug­man on the return of depres­sion eco­nom­ics
First of a multi-part con­ver­sa­tion with Paul Krug­man, Nobel Prize win­ner, author, econ­o­mist, and Prince­ton pro­fes­sor, who is prob­a­bly best known for his op-ed columns in the New York Times.

Source: Big Think, Decem­ber 17, 2008.

Bloomberg: Fis­cher says worst of “real” reces­sion “yet to come”
“Bank of Israel Gov­er­nor Stan­ley Fis­cher talks with Bloomberg in Tel Aviv about the reces­sion in the US and the response of the Fed­eral Reserve. Fis­cher, 65, for­mer first deputy man­ag­ing direc­tor of the Inter­na­tional Mon­e­tary Fund, also talks about the out­look for the Israeli econ­omy and the IMF’s role in resolv­ing the global finan­cial crisis.”

Source: Bloomberg (via YouTube), Decem­ber 21, 2008.

Mar­ket­place: Quan­ti­ta­tive eas­ing
“Now the Fed­eral Reserve has effec­tively cut the tar­get lend­ing rate to zero, it only has one more weapon in its arse­nal. Quan­ti­ta­tive eas­ing. Senior edi­tor Paddy Hirsch explains what this ‘nuclear option’ is, and what the Fed hopes it’ll do.”

Source: Mar­ket­place, Decem­ber 2008.

CNBC: Byron Wien – falling oil prices
“Thoughts on energy prices, with Byron Wien, Pequot Cap­i­tal chief invest­ment strategist.”

Source: CNBC, Decem­ber 23, 2008.

Reuters: “Hal­lelu­jah” tops Christ­mas chart
“The top two spots in the Christ­mas sin­gles chart were taken by cov­ers of Leonard Cohen’s 1984 song ‘Hal­lelu­jah’, with ‘X Fac­tor’ tal­ent show win­ner Alexan­dra Burke’s new ver­sion beat­ing Jeff Buckley’s 1994 cover on Sunday.

“Burke won this year’s series of the pop tal­ent show that is one of ITV’s biggest rat­ings suc­cesses, and she is the fourth suc­ces­sive ‘X Fac­tor’ win­ner to take the Christ­mas sin­gles title.

“Cohen’s orig­i­nal ver­sion of ‘Hal­lelu­jah’ entered the chart at num­ber 36, while the suc­cess of Buckley’s ver­sion was partly due to a cam­paign on social net­work­ing web­site Face­book among music fans upset at what they saw as the man­u­fac­tured nature of Burke’s career.

“Buck­ley drowned in 1997, and achieved only mod­est sales though sig­nif­i­cant crit­i­cal acclaim dur­ing his lifetime.”

First up is Jeff Buckley.

Next, Alexan­dra Burke.

Lastly, Leonard Cohen:

Source: David Mil­liken, Reuters, Decem­ber 21, 2008.

Tags: Article Source, BMO, Bull Phase, Chief Investment Officers, Cnbc, Credit Crisis, Dim The Lights, Don Coxe, Donald Coxe, Dr Doom, Gary Schilling, Marc Faber, Mark Mobius, Mohamed El Erian, O Rama, Paul Krugman, Singles Charts, Substantial Food, Templeton Asset Management, Trading Sessions, Youtube
Posted in Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, Markets, Oil and Gas, Outlook | 1 Comment »

Credit Crisis Watch: Signs of Progress

Wednesday, December 24th, 2008

Are the var­i­ous cen­tral bank liq­uid­ity facil­i­ties and cap­i­tal injec­tions hav­ing the desired effect of unclog­ging credit mar­kets and restor­ing con­fi­dence in the world’s finan­cial sys­tem? This is pre­cisely what the “Credit Cri­sis Watch” is all about – a reg­u­lar review of a num­ber of mea­sures in order to ascer­tain to what extent the thaw­ing of credit mar­kets is under way.

Updat­ing the report at this time is also to gauge the credit mar­kets’ reac­tion to the Fed­eral Open Mar­ket Committee’s (FOMC) announce­ment of a week ago about a Fed funds rate cut and spe­cific actions that would move the Fed fur­ther towards a quan­ti­ta­tive eas­ing approach to mon­e­tary pol­icy. (Also see my “Words from the Wise” review.)

With the US and some other coun­tries push­ing mon­e­tary pol­icy into an era of Zirp (zero-interest-rate pol­icy), the three-month dol­lar LIBOR inter­est rate that banks charge each other declined sharply to 1.47%. At this level, LIBOR trades at 122 basis points above the upper end of the Fed funds’ tar­get range – still steep com­pared to the 43 basis-point pre­mium at the start of 2008.

Source: StockCharts.com

Impor­tantly, US three-month Trea­sury Bills are still yield­ing almost noth­ing (0.015%) and are sim­ply a way for ner­vous investors to “ware­house” their money with safety while receiv­ing no return.

US three-month Trea­sury Bill yield

Source: The Wall Street Journal

The TED spread (i.e. three-month dol­lar LIBOR less three-month Trea­sury Bills) is a mea­sure of per­ceived credit risk in the econ­omy. This is because T-bills are con­sid­ered risk-free while LIBOR reflects the credit risk of lend­ing to com­mer­cial banks. An increase in the TED spread is a sign that lenders believe the risk of default on inter­bank loans (also known as coun­ter­party risk) is increas­ing. On the other hand, when the risk of bank defaults is con­sid­ered to be decreas­ing, the TED spread narrows.

Since the TED spread’s peak of 4.65% on Octo­ber 10, the mea­sure has eased to 1.46% – a level last seen prior to the Lehman bank­ruptcy in September.

Source: Fuller­money

The dif­fer­ence between the LIBOR rate and the overnight index swap (OIS) rate is another mea­sure of credit mar­ket stress.

When the LIBOR-OIS spread increases, it indi­cates that banks believe the other banks they are lend­ing to have a higher risk of default­ing on the loans, so they charge a higher inter­est rate to off­set that risk. The oppo­site applies to a nar­row­ing LIBOR-OIS spread.

Sim­i­lar to the TED spread, the nar­row­ing in the LIBOR-OIS spread over the past few weeks is also a move in the right direction.

Source: Fuller­money

“Even although the rates at which banks lend to each other have eased from their peaks, banks have cut back sig­nif­i­cantly on the amount of money they are actu­ally lend­ing,” said Eoin Treacy (Fuller­money). The US Depos­i­tory Insti­tu­tions Aggre­gate Excess Reserves con­tinue to sky­rocket far in excess of the amount that banks need to keep on deposit to meet their reserve require­ments (see chart below). This mea­sure indi­cates that the bal­ance sheets of banks remain under pres­sure, espe­cially in view of the fact that the value of some assets is not known. A peak in the Excess Reserves graph should coin­cide with a turn­ing point in the recov­ery of banks.

Source: Fuller­money

Not illus­trated by a chart, the spreads between ten-year Fan­nie Mae and other Gov­ern­ment Spon­sored Enter­prise (GSE) bonds and ten-year US Trea­sury Notes have also tight­ened sig­nif­i­cantly over the past few weeks.

The aver­age rates for a US 30-year fixed mort­gage declined by the end of last week to 5.19 from 6.30% at the begin­ning of Novem­ber. How­ever, the rate is still 372 basis points higher than the three-month dol­lar LIBOR rate. Accord­ing to Bloomberg, this spread aver­aged 97 basis points dur­ing the 12 months pre­ced­ing the cri­sis, indi­cat­ing that lower rates are not being passed on to consumers.

As far as com­mer­cial paper is con­cerned, the A2P2 spread mea­sures the dif­fer­ence between A2/P2 (low qual­ity) and AA (high qual­ity) 30-day non-financial com­mer­cial paper. The spread remains at an ele­vated level of 4.91%, indi­cat­ing a cri­sis environment.

Source: Fed­eral Reserve Release – Com­mer­cial Paper

Sim­i­larly, junk bond yields remain at high lev­els, as shown by the Mer­rill Lynch US High Yield Index. How­ever, a slight decline of 200 basis points has taken place since the Index’s record high of 2,182 on Decem­ber 15. This means the spread between high-yield debt and com­pa­ra­ble US Trea­suries was 1,982 basis points by the close of busi­ness on Tues­day. With the US 10-year Trea­sury Note yield at 2.18%, high-yield bor­row­ers have to pay 22.00% per year to bor­row money for a ten-year period. At these rates it is prac­ti­cally impos­si­ble for com­pa­nies with a less-than-perfect credit sta­tus to con­duct busi­ness profitably.

Source: Mer­rill Lynch Global Index System

Another indi­ca­tor worth keep­ing an eye on is the Barron’s Con­fi­dence Index. This Index is cal­cu­lated by divid­ing the aver­age yield on high-grade bonds by the aver­age yield on intermediate-grade bonds. The dis­crep­ancy between the yields is indica­tive of investor con­fi­dence. A declin­ing ratio indi­cates that investors are demand­ing a higher pre­mium in yield for increased risk. The Index is at an all-time low, indi­cat­ing a lack of con­fi­dence in the economy.

Source: I-Net Bridge

Accord­ing to Markit, the cost of buy­ing credit insur­ance for US, Euro­pean, Japan­ese and other Asian com­pa­nies has improved solidly over the past month, as shown by the tighter spreads (expressed in basis points) for the five-year credit deriv­a­tive indices listed in the table below.

The notable excep­tion has been the Markit iTraxx Europe Crossover Index, made up of 50 mostly high-yield com­pa­nies, that has widened con­sid­er­ably on ris­ing expec­ta­tions of bond defaults among junk-grade names. The increase of 93 basis points in the Crossover spread means an increased cost of €93,000 (up from €915,000 to €1,008,000) to insure €10 mil­lion of debt annu­ally over five years.

• CDX (North Amer­ica, investment-grade) Index: down from 267 to 211

• CDX (North Amer­ica, high-yield) Index: down from 1,546 to 1,233

• Markit iTraxx Europe Index: down from 183 to 181

• Markit iTraxx Europe Crossover Index: up from 915 to 1,008

• Markit iTraxx Japan Index: down from 350 to 295

• Markit iTraxx Asia ex Japan IG Index: down from 452 to 347

• Markit iTraxx Asia ex Japan HY Index: down from 1,375 to 1,263

The graphs of the CDX indices are shown below, with the red line indi­cat­ing the spreads eas­ing over the past month.

Source: Markit

CDX (North Amer­ica, high-yield) Index

Source: Markit

Next, some credit default swap (CDS) sta­tis­tics, cour­tesy of Bespoke. Since a month ago the cost of insur­ing against gov­ern­ment bank­ruptcy through CDSs has risen for all but nine coun­tries in Bespoke’s list of 38 coun­tries. The table below shows the cur­rent CDS prices, together with month-ago and start-of-year prices.

Argentina, Venezuela and Ice­land have the high­est default risk. Inter­est­ingly, Ger­many, Japan and France all have a lower default risk than the US at the moment. It now costs $67 per year to insure $10,000 against US default for the next five years. “While this may not seem high, it was at $8 ear­lier in the year, and $36 one month ago,” said Bespoke.

As shown in Bespoke’s table below, the UK, Greece, the US, Aus­tria and Aus­tralia have seen default risk rise the most over the last month. Notably, the US has risen by 87%.

Still on the issue of CDSs, over the past week Bespoke’s Bank and Bro­ker default risk index has declined by 6%, while it has dropped by 11.5% over the past month. A decline in the finan­cial sector’s default risk is a nec­es­sary require­ment for an improve­ment in confidence.

In sum­mary, the TED spread, LIBOR-OIS spread and GSE mort­gage spreads have nar­rowed markedly since the recent record highs. Fur­ther­more, the CDX and iTraxx credit deriv­a­tive indices have mostly shown a solid improve­ment over the past few weeks. How­ever, US Trea­sury Bills and high-yield spreads are still at dis­tressed levels.

Although the Fed and other cen­tral banks’ actions have resulted in some progress being made to fix the bro­ken credit machine, the thaw­ing of the credit mar­kets still has a con­sid­er­able way to go before liq­uid­ity starts to move freely and the world’s finan­cial sys­tem func­tions nor­mally again.

Tags: Basis Point, Basis Points, Capital Injections, Commercial Banks, Credit Crisis, Credit Markets, Credit Risk, Desired Effect, Fed Funds Rate, Federal Open Market Committee, Fomc, Interest Rate Policy, Libor Interest Rate, Open Market Committee, T Bills, Target Range, Treasury Bill, Treasury Bills, Wall Street Journal, Zero Interest
Posted in Bonds, Credit Markets, Economy, Markets | Comments Off

Madoff's Volatility

Tuesday, December 23rd, 2008

Felix Salmon Writes: A long­time reader of this blog got him­self Bernie Madoff's return series from a Fair­field Sen­try mar­ket­ing doc­u­ment and plugged it into an Excel spread­sheet; he then graphed the one-year rolling volatil­ity of Madoff's returns. The results are interesting:

It seems to me (and the anno­ta­tions are all mine) that this graph is con­sis­tent with Justin Fox's the­ory that Mad­off was arti­fi­cially smooth­ing his returns until the dot-com blowup, at which point he went Full Ponzi.

In other words, Mad­off was never fully legit­i­mate — or at least, look­ing at this chart, he seems to have been pretty ille­git­i­mate from at least 1995 onwards. But he might not have been actively steal­ing his clients' money until he blew up at the begin­ning of this decade, and sub­se­quently moved from being a dis­hon­est fund man­ager to the oper­a­tor of a fully-fledged Ponzi scheme.

Tags: Annotations, Bernie Madoff, Blog, Blowup, Decade, Dot Com, Excel Spreadsheet, Fairfield, Felix, Graph, Justin Fox, Longtime Reader, Marketing, Money, Ponzi Scheme, Salmon, Sentry, Volatility
Posted in Markets | Comments Off

Words from the (investment) wise for the week that was (Dec 15 – 21, 2008)

Sunday, December 21st, 2008

“Amer­i­cans have always been able to han­dle aus­ter­ity and even adver­sity. Pros­per­ity [greed!] is what is doing us in,” said James Reston, for­mer New York Times jour­nal­ist and Pulitzer Prize winner.

Another chap­ter in deal­ing with the cur­rent credit and eco­nomic adver­sity was writ­ten on Tues­day when the US Fed­eral Reserve announced a no-holds-barred set of mea­sures in a deter­mined attempt to fix the bro­ken credit machine, revive eco­nomic activ­ity and stem the defla­tion­ary tide.

The Fed­eral Open Mar­ket Committee’s (FOMC) pol­icy state­ment noted: “The Fed will employ all avail­able tools to pro­mote the resump­tion of sus­tain­able eco­nomic growth … In par­tic­u­lar, the Com­mit­tee antic­i­pates that weak eco­nomic con­di­tions are likely to war­rant excep­tion­ally low lev­els of the Fed funds rate for some time.”

Although the FOMC slashed the Fed funds rate to a tar­get range of 0 to 0.25% – the low­est the cen­tral bank’s key rate has been on record – the Fed was actu­ally sim­ply align­ing its tar­get rate with the effec­tive rate, thereby push­ing the US into an era of Zirp – a zero-interest-rate pol­icy like that used by Japan for six years in its own fight against deflation.

The Fed’s com­mu­niqué also said: “The focus of the Committee’s pol­icy going for­ward will be to sup­port the func­tion­ing of finan­cial mar­kets and stim­u­late the econ­omy through open mar­ket oper­a­tions and other mea­sures that sus­tain the size of the Fed­eral Reserve’s bal­ance sheet at a high level.” The state­ment dis­cussed spe­cific actions that would move the Fed fur­ther towards a quan­ti­ta­tive eas­ing approach to mon­e­tary policy.

Source: Daryl Cagle

President-elect Barack Obama told reporters the fact that the Fed had no more room to cut rates under­scored the case for a big fis­cal stim­u­lus. “We are run­ning out of the tra­di­tional ammu­ni­tion that’s used in a reces­sion, which is to lower inter­est rates,” he said accord­ing to the Finan­cial Times. Word cir­cu­lated that Obama may ask Con­gress next year to approve a stim­u­lus plan of about $850-billion.

Investors’ con­cerns about the out­look for the global econ­omy deep­ened on the back of the Fed’s announce­ment, as seen from gov­ern­ment bond yields plung­ing to record lows and a sharp sell-off in oil prices (despite the announce­ment of the largest sup­ply cut in Opec’s his­tory). Fur­ther­more, the dol­lar also tum­bled on wor­ries about the US’s pub­lic debt expan­sion and the poten­tial infla­tion­ary impli­ca­tions of the “print­ing press”, although a relief rally did take place on Fri­day. (Also see my post “Green­back slumped on the can­vas”.)

As far as stock mar­kets are con­cerned, investors have again been shrug­ging off bad news – a pat­tern seen since the poor man­u­fac­tur­ing and pay­rolls data of more than two weeks ago. “The news­pa­pers may be giv­ing us a parade of bad news, but the stock mar­ket is begin­ning to march to a dif­fer­ent drum­mer,” said ven­er­a­ble newslet­ter writer Richard Rus­sell (Dow The­ory Let­ters). This is evi­denced from the MSCI World Index (+2.4%), S&P 500 Index (+0.9%) and the MSCI Emerg­ing Mar­kets Index (+5.5%) all improv­ing for a sec­ond week running.

The scam­ster Bernard Madoff’s Ponzi scheme also vied for a place in the his­tory books, caus­ing more bil­lions to evap­o­rate to money heaven – yet another exam­ple of how greed clouded the minds of peo­ple dur­ing the hal­cyon days. (Click here to track the fall­out from the fraud.)

Bill King (The King Report), never one to mince his words, com­mented as fol­lows: “Mad­off allegedly engaged in a scheme that is sim­i­lar to what the US gov­ern­ment has been per­pe­trat­ing for years – giv­ing peo­ple ben­e­fits now and promis­ing future ben­e­fits, even though the ben­e­fits are math­e­mat­i­cally impos­si­ble to pay, by using new cash flows from taxpayers.”

On the bailout front, the White House gave Detroit their Christ­mas wish, announc­ing that Gen­eral Motors (GM) and Chrysler will receive $13.4 bil­lion in emer­gency gov­ern­ment loans in exchange for sub­stan­tially restruc­tur­ing their busi­nesses, accord­ing to Bloomberg. “Another $4 bil­lion will be avail­able to GM in Feb­ru­ary pro­vided Con­gress releases the sec­ond half of the $700 bil­lion TARP fund orig­i­nally set up to bail out finan­cial institutions.”

Some cheer has also been seen in the credit mar­kets, with the TED spread (i.e. three-month dol­lar LIBOR less three-month Trea­sury Bills) declin­ing by 43 basis points to 1.48% – the low­est level since the Lehman bank­ruptcy in Sep­tem­ber. Although this mea­sure is mov­ing in the right direc­tion, credit spreads need to nar­row fur­ther to indi­cate that con­fi­dence is return­ing and liq­uid­ity is start­ing to move freely again.

The cost of buy­ing credit insur­ance for US and Euro­pean com­pa­nies also eased as shown by the nar­rower spreads for both the CDX (North Amer­ica, invest­ment grade) Index (down from 263 to 213) and the Markit iTraxx Europe Index (down from 214 to 191). High-yield credit indices also improved.

There is also some encour­age­ment from the weekly aver­age rates for US 30-year fixed mort­gages hav­ing declined to 4.94% from 6.30% at the begin­ning of Novem­ber, accord­ing to Zillow.com.

Next, a tag cloud from the dozens of arti­cles I have read dur­ing the past week. This is a way of visu­al­iz­ing word fre­quen­cies at a glance. The key words include the usual sus­pects such as “bank”, “econ­omy”, “Fed”, “mar­ket”, “prices” and “rate”.

Regard­ing the out­look for the stock mar­ket, the Wall Street Journal’s Mar­ket­Beat blog reported leg­endary money man­ager Jeremy Grantham as pre­dict­ing that beaten-down equi­ties will rally until spring, at which time the bear mar­ket will resume.

“While he said that equi­ties in the last cou­ple of months had reached a level of cheap­ness than had not been seen in years, he still expects more pain to come. Those who can invest with a seven-year time hori­zon should do well, say­ing that ‘we’ve popped all of the big­ger bub­bles’, but he expects ‘we’ll over­run on the downside’.

“He says that the mar­ket will likely con­tinue to rally into the spring, and it ‘will be big enough to con­vince about three-quarters of the play­ers that [the bear mar­ket] is all over’. How­ever, he doesn’t believe it is over – expect­ing a ‘good rally and a dif­fer­ent kind of decline, on the sheer grind­ing of bad news’. He expects some­thing sim­i­lar to 1974, where the mar­ket takes a step for­ward and a cou­ple steps back, and is fed ‘a diet of ugly earnings’.”

From across the pond, David Fuller (Fuller­money) added: “… mar­kets had fallen suf­fi­ciently so that one could nib­ble on weak­ness, tak­ing a long-term view. My guess is that China has not only bot­tomed but is also lead­ing the way back up. How­ever the case is not proven, and will not be until we see base for­ma­tions for China and most other mar­kets, plus breaks above the 200-day mov­ing aver­ages, which have also turned up. At that point, the next bull mar­ket should be well under way.”

The S&P 500 could fall to as low as 600 in 2009 and “alter­na­tive assets” like com­modi­ties and cur­ren­cies will pro­vide no shel­ter for investors, said Gary Shilling in an inter­view on Tech Ticker (hat tip: Clus­ter­stock). “Hav­ing been appro­pri­ately bear­ish head­ing into this year, Shilling sees ‘few good places to hide’ in 2009. His ‘S&P 600’ pre­dic­tion, a 33% drop from cur­rent lev­els, is based on a view that S&P earn­ings will be $40 per share next year (ver­sus the con­sen­sus of $83) and the index will trade at a P/E mul­ti­ple of 15. (Here’s the math: $40 EPS x 15 P/E = 600.)”

Jef­frey Hirsch (Stock Trader’s Almanac) draws our atten­tion to the so-called Santa Claus Rally. This is the trad­ing period from the day after Christ­mas to the close of the sec­ond trad­ing day of the New Year. Dur­ing this period stocks his­tor­i­cally tended to advance, but when record­ing a loss, it was fre­quently a sign of trou­ble ahead.

In my opin­ion, stock mar­kets are still caught between the actions of cen­tral banks pulling out all stops to sta­bi­lize the finan­cial and eco­nomic sit­u­a­tion on the one hand, and a wors­en­ing eco­nomic and cor­po­rate pic­ture on the other. The major US indices seem locked in a short-term trad­ing range, hav­ing fallen back below their 50-day mov­ing averages.

The CBOE Volatil­ity Index (VIX) has declined from more than 80 in Octo­ber and Novem­ber to 44.9 on Fri­day. It is not uncom­mon for short-term volatil­ity to be at extreme lev­els at bot­tom turn­ing points, and for stocks to improve as the “storm” grows qui­eter. It nev­er­the­less remains too early to tell whether a sec­u­lar stock mar­ket low has been recorded on Novem­ber 20 and, fail­ing fur­ther tech­ni­cal and fun­da­men­tal evi­dence, I remain dis­trust­ful of ral­lies. In short, we are in a wait-and-see mode. (Also see my post “Stock mar­kets: is this it?”.)

Econ­omy
“Global busi­ness con­fi­dence con­tin­ues to slide, falling to another new record low last week. Sen­ti­ment is equally neg­a­tive in North Amer­ica, South Amer­ica and Europe, and while Asian busi­ness con­fi­dence is not quite as dark, it is weak­en­ing rapidly,” said the lat­est Sur­vey of Busi­ness Con­fi­dence of the World con­ducted by Moody’s Economy.com. The Sur­vey results indi­cate that the entire global econ­omy is mired in recession.

Eco­nomic reports released in the US dur­ing the past week con­firmed a world of “depres­sion eco­nom­ics” (to coin Nobel Prize win­ner Paul Krugman’s phrase). Accord­ing to Briefing.com, indus­trial pro­duc­tion declined by 0.6% in Novem­ber, hous­ing starts plum­meted by 18.9% (mark­ing the largest decline since March 1984), build­ing per­mits hit a record low, and weekly ini­tial job­less claims held near a 26-year high. Fur­ther­more, the sea­son­ally unad­justed CPI fell 1.9% in Novem­ber, the largest drop since the 1930s.

Else­where in the world, data releases com­pounded anx­i­ety about a severe global reces­sion, as seen from the following:

• Germany’s Ifo Busi­ness Cli­mate Index fell to a record low in Decem­ber. The out­come reflects the ongo­ing stresses in the finan­cial mar­kets and weaker global and domes­tic eco­nomic activ­ity, which have weighed on busi­ness sen­ti­ment. The down­ward trend in the Ifo sug­gests that eco­nomic activ­ity in Ger­many will be very weak in the fourth quar­ter and prospects going for­ward remain bleak.

• BBC News reports that France will enter reces­sion in the first quar­ter of 2009, accord­ing to Insee, the country’s national sta­tis­tics agency. France is the Eurozone’s sec­ond biggest econ­omy, and would be the lat­est major world econ­omy to enter recession.

• The Bank of England’s Mon­e­tary Pol­icy Com­mit­tee voted unan­i­mously in favour of the deci­sion to cut the main repo rate by 100 basis points to 2% at the Decem­ber mon­e­tary pol­icy meet­ing. How­ever, the min­utes revealed that the cen­tral bank had con­sid­ered an even more aggres­sive inter­est rate cut, height­en­ing expec­ta­tions that the UK could fol­low the US in adopt­ing a quan­ti­ta­tive eas­ing policy.

• Con­fi­dence among Japan­ese busi­nesses capit­u­lated dur­ing the fourth quar­ter, with the Tankan Sur­vey Index for large man­u­fac­tur­ers record­ing its biggest decline in more than three decades. Busi­ness sen­ti­ment in Japan is now at its low­est level in more than six years.

• The Bank of Japan fol­lowed the lead of the Fed and moved to a near-zero inter­est rate envi­ron­ment at its Decem­ber mon­e­tary pol­icy meet­ing. The cen­tral bank cut its overnight call rate tar­get by 20 basis points to 0.10%.

• China’s indus­trial pro­duc­tion growth rose only 5.5% year-on-year in Novem­ber, the slow­est gain since 1999 and steeply slower than the 17% growth reported in March, said RGE. Elec­tric­ity pro­duc­tion fell 9.6% – more than in Octo­ber, which had marked the first fall in a decade.

Source: Finan­cial Times, Decem­ber 16, 2008.

Sum­ma­riz­ing the eco­nomic sit­u­a­tion, Nouriel Roubini, pro­fes­sor at New York Uni­ver­sity and chair­man of RGE, said in an arti­cle in Forbes: “The out­look for the US and the global econ­omy is now very bleak and get­ting worse as the global econ­omy expe­ri­ences its worst reces­sion in decades. In the US, reces­sion started last Decem­ber and will last at least 24 months until next Decem­ber – the longest and deep­est US reces­sion since World War II, with the cumu­la­tive fall in gross domes­tic prod­uct pos­si­bly exceed­ing 5%.”

Week’s eco­nomic reports
Click here for the week’s econ­omy in pic­tures, cour­tesy of Jake of Econom­Pic Data.

Source: Yahoo Finance, Decem­ber 19, 2008.

Next week’s US eco­nomic high­lights, cour­tesy of North­ern Trust, include the following:

1. Real GDP (Decem­ber 23): The final esti­mate of third-quarter Real GDP is expected to be left at –0.5%. Con­sen­sus: –0.5%.

2. Exist­ing Sales (Decem­ber 23): Con­sen­sus: 4.90 mil­lion ver­sus 4.89 mil­lion in October.

3. New Home Sales (Decem­ber 23): Con­sen­sus: 420,000 ver­sus 433,000 in October.

4. Durable Goods Orders (Decem­ber 24): Con­sen­sus: –3.0% ver­sus –6.2% in October.

5. Per­sonal Income and Spend­ing (Decem­ber 24): Con­sen­sus: Per­sonal income +0.0% ver­sus +0.3% in Octo­ber; Con­sumer spend­ing: –0.7% ver­sus –1.0% in October.

Click here for a sum­mary of Wachovia’s weekly eco­nomic and finan­cial commentary.

Mar­kets
The per­for­mance chart obtained from the Wall Street Jour­nal Online shows how dif­fer­ent global mar­kets per­formed dur­ing the past week.

Source: Wall Street Jour­nal Online, Decem­ber 19, 2008.

This week I am giv­ing the cus­tom­ary review of the var­i­ous asset class move­ments a skip as fam­ily time calls, espe­cially as we have just moved into a new house (located in the scenic Stel­len­bosch winelands region – about 35 min­utes from Cape Town).

On a dif­fer­ent note, Madoff’s jeer at the invest­ing pub­lic, keeps remind­ing me of the old adage: “If some­thing sounds too good to be true, that must be because it is too good to be true.” Let’s hope that the news items and words from the invest­ment wise below will assist in bring­ing cheer to our port­fo­lios dur­ing 2009.

Thank you for your friend­ship and sup­port in mak­ing Invest­ment Post­cards such a ful­fill­ing expe­ri­ence. Here’s wish­ing you a great fes­tive sea­son full of fun, laugh­ter and joy. May you have a won­der­ful 2009.

Source: Daryl Cagle

Krishna Guha (Finan­cial Times): Fed slashes rates to near
“The Fed­eral Reserve moved deeper into uncharted waters on Tues­day, herald­ing fur­ther uncon­ven­tional mea­sures to sup­port the econ­omy as it slashed inter­est rates from 1% to vir­tu­ally zero.

“In a his­toric state­ment, the US cen­tral bank said it would tar­get a record low inter­est rate, expressed as a range of between zero and 0.25%. It said it expected to keep rates at ultra-low lev­els ‘for some time’ and vowed to use ‘all avail­able tools to pro­mote the resump­tion of sus­tain­able growth and to pre­serve price stability’.

“The Fed said it ‘stands ready’ to step up its planned pur­chases of secu­ri­ties issued by Fan­nie Mae and Fred­die Mac, the mort­gage giants now under gov­ern­ment con­trol. It also said it was ‘eval­u­at­ing the poten­tial ben­e­fits of pur­chas­ing longer-term Trea­sury securities’.

“The aggres­sion of the state­ment caught the mar­kets by sur­prise. Mohamed El-Erian, chief exec­u­tive at Pimco, the bond fund man­ager, said it was ‘an incred­i­bly strong pub­lic dec­la­ra­tion that the Fed will throw every­thing it has in attempt­ing to sta­bi­lize the finan­cial and eco­nomic situation’.

“The US cen­tral bank laid out a strat­egy that aims to drive down actual bor­row­ing costs for house­holds and com­pa­nies. It seeks to do so by sup­port­ing demand for such loans, reduc­ing the risk spreads on them. At the same time, it wants to keep gov­ern­ment bond yields low.

“This means expanded credit and out­right asset pur­chase pro­grams, likely to be funded, at least for now, by expand­ing reserves and there­fore the money sup­ply. Jan Hatz­ius, chief US econ­o­mist at Gold­man Sachs, called this ‘quan­ti­ta­tive eas­ing’. But a senior Fed offi­cial said its pol­icy was dif­fer­ent from the quan­ti­ta­tive eas­ing pur­sued in post-bubble Japan. The Fed pol­icy is dri­ven by its credit oper­a­tions whereas Japan tar­geted bank reserves.

“The Fed said the out­look for eco­nomic activ­ity had ‘weak­ened fur­ther’ and acknowl­edged that ‘infla­tion­ary pres­sures have dimin­ished appreciably’.

“The deci­sion to set a range for inter­est rates reflects an admis­sion that the US cen­tral bank can­not tightly con­trol the actual rate that pre­vails in the mar­ket in cur­rent conditions.

“Barack Obama, president-elect, told reporters that the fact that the Fed had no more room to cut rates under­scored the case for a big fis­cal stim­u­lus. ‘We are run­ning out of the tra­di­tional ammu­ni­tion that’s used in a reces­sion, which is to lower inter­est rates,’ he said.”

Source: Krishna Guha, Finan­cial Times, Decem­ber 17, 2008.

BCA Research: US mon­e­tary pol­icy – uncon­ven­tional eas­ing under­way
“The FOMC clearly crossed over the line into quantitative-easing ter­ri­tory by cut­ting the Fed funds tar­get rate vir­tu­ally to zero, promis­ing to hold it low for a long period, and com­mit­ting to large pur­chases of mortgage-related assets and pos­si­bly long-term Treasurys.

“In the state­ment that fol­lowed, the FOMC shifted empha­sis away from the tar­get rate as the Fed’s pri­mary means of imple­ment­ing mon­e­tary eas­ing in favor of aggres­sively expand­ing its bal­ance sheet to drive pri­vate sec­tor bor­row­ing rates lower.

“Early clues to its lat­est think­ing were pro­vided late last month upon the launch of its agency and MBS pur­chase pro­grams and Term Asset-Backed Liq­uid­ity Facil­ity (TALF). At that time, it promised to increase the size, the scope and the term of its liq­uid­ity facil­i­ties as nec­es­sary to get credit mar­kets mov­ing again. These com­ments were echoed in the FOMC state­ment, which con­firms the Fed is pre­pared to do what­ever it takes to restore order to the finan­cial sys­tem and head off a poten­tially dam­ag­ing bout of deflation.

“The Fed will drive agency and agency-backed MBS yields lower, and will keep Trea­surys well bid. If investment-grade cor­po­rate bond yields do not fall in the com­ing months, the Fed could add new facil­i­ties to sup­port this mar­ket as well.”

Source: BCA Research, Decem­ber 17, 2008.

Nouriel Roubini (Forbes): Heli­copter Ben goes ZIRP!
“The Fed deci­sion to cut the Fed Funds range to 0% to 0.25% has for­mal­ized the fact that, over the last month, the Fed had already moved to a zero-interest-rate pol­icy, or ZIRP, and started a pol­icy of quan­ti­ta­tive eas­ing (QE) as its bal­ance sheet has surged over the last few months from $800 bil­lion to over $2 trillion.

“The Fed is now under­tak­ing even more unortho­dox pol­icy actions. These actions are occur­ring while the US and the global econ­omy are at risk of a pro­tracted bout of ‘stag-deflation’ (stag­na­tion and deflation).

“While it is now fash­ion­able to talk about such defla­tion­ary risks (and the lat­est US Con­sumer Price Index fig­ures con­firm that we are enter­ing into defla­tion), some of us were wor­ry­ing about the com­ing defla­tion well before the main­stream – con­cerned with short-run and unsus­tain­able increases in com­mod­ity prices – dis­cov­ered the defla­tion­ary risks in the global economy.

“It was clear to those who saw, early on, the risks of a severe US and global reces­sion, that defla­tion­ary rather than infla­tion­ary pres­sures would emerge along­side a slack in goods, labor and com­mod­ity mar­kets. Wel­come to the world of stag-deflation or, as Paul Krug­man would put it, the world of ‘depres­sion economics’.

So what is the out­look for 2009? And what is the likely pol­icy response to the risks of a global stag-deflation?

“The out­look for the US and the global econ­omy is now very bleak and get­ting worse as the global econ­omy expe­ri­ences its worst reces­sion in decades. In the US, reces­sion started last Decem­ber and will last at least 24 months until next Decem­ber – the longest and deep­est US reces­sion since World War II, with the cumu­la­tive fall in gross domes­tic prod­uct pos­si­bly exceed­ing 5%.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, Decem­ber 18, 2008.

John Authers (Finan­cial Times): The Fed’s morn­ing after
“Mar­kets expect the Bank of Japan to cut inter­est rats to zero; the Fed’s deci­sion has dras­ti­cally under­cut the dol­lar, oil prices con­tinue to fall despite low rates, a week dol­lar and a cut in output.”

Click here for the article.

Source: John Authers, Finan­cial Times, Decem­ber 17, 2008.

Paul Kedrosky (Infec­tious Greed): ZIRP-ishness around the world
“A quick-and-dirty chart of ZIRP-ishness – the degree to which coun­tries’ nom­i­nal inter­est rates are approach­ing zero – around the world. Note: The whiter the coun­try the more ZIRP-ish it is, while the more orange you are the fur­ther that country’s rate is from zero. Finally, gray means no rate data cur­rently in the dataset.

“It is inter­est­ing how, for the most part, ZIRP neatly breaks down into the BRIC/emerging mar­kets ver­sus the rest of the world.”

Source: Paul Kedrosky, Infec­tious Greed, Decem­ber 18, 2008.

Bloomberg: Obama may seek a stim­u­lus plan exceed­ing $850 bil­lion
“Barack Obama may ask Con­gress next year to approve a stim­u­lus plan of around $850 bil­lion, an amount that has grown as the US econ­omy sinks deeper into reces­sion, an adviser to the president-elect said.

“Obama’s tran­si­tion team believes the amount, about 6% of the US’s $14 tril­lion econ­omy, is needed to reverse ris­ing unem­ploy­ment, said the adviser, who spoke on con­di­tion of anonymity. The sum would exceed ini­tial esti­mates by House Speaker Nancy Pelosi and Sen­ate Major­ity Leader Harry Reid, as well as sur­pass­ing what some econ­o­mists and the Inter­na­tional Mon­e­tary Fund say is required.

“The lat­est pro­posal is cir­cu­lat­ing in Con­gress as Obama’s advis­ers work with law­mak­ers to craft a pack­age aimed at improv­ing roads, bridges and other parts of the US’s crum­bling infra­struc­ture. The plan prob­a­bly will also include state aid for unem­ploy­ment and health-care pro­grams and incen­tives such as tax cred­its to pro­mote renew­able energy pro­duc­tion, law­mak­ers have said.

“The president-elect wants to cre­ate as many as 2.5 mil­lion jobs over the next two years. As unem­ploy­ment has increased, esti­mates of what is needed to pull the nation out of the slump have con­tin­ued to grow, with some econ­o­mists call­ing for a $1 tril­lion spend­ing program.

“They include Ken­neth Rogoff, a Har­vard Uni­ver­sity pro­fes­sor who was an adviser to Repub­li­can pres­i­den­tial can­di­date John McCain, and Joseph Stiglitz, a Nobel Prize win­ner who served in Pres­i­dent Bill Clinton’s White House.

“UBS AG econ­o­mists cal­cu­late a global stim­u­lus of 1.5% of gross domes­tic prod­uct has so far been lined up for next year. The IMF has called for pack­ages of at least 2% of GDP to stem the eco­nomic cri­sis that’s sweep­ing the globe.”

Source: Lor­raine Woellert, Bloomberg, Decem­ber 18, 2008.

Bloomberg: $1 tril­lion stim­u­lus
“Stim­u­lus com­pe­ti­tion grows as com­pa­nies vie for funds; Cater­pil­lar wants a piece of the high­way projects; GE is push­ing to build an elec­tric ‘smart grid’; Daim­ler AG hopes to build new buses for mass tran­sit sys­tems; Obama promises huge infra­struc­ture investment.”

Source: Bloomberg (via YouTube), Decem­ber 18, 2009.

Bloomberg: GM and Chrysler will get $13.4 bil­lion in loans
“Gen­eral Motors and Chrysler will get $13.4 bil­lion in emer­gency gov­ern­ment loans in exchange for sub­stan­tially restruc­tur­ing their busi­nesses, Pres­i­dent George W. Bush announced.

“Another $4 bil­lion will be avail­able to GM in Feb­ru­ary pro­vided Con­gress releases the sec­ond half of the $700 bil­lion Trou­bled Asset Relief Pro­gram fund orig­i­nally set up to bail out finan­cial insti­tu­tions. The automak­ers have until March 31 to meet the con­di­tions of the loans, includ­ing demon­strat­ing they have a plan to become prof­itable, or be forced to repay.

“Win­ning the assis­tance is a reprieve for GM, the biggest US automaker, and No. 3 Chrysler after they said they would run out of oper­at­ing funds as soon as this month. Bush is step­ping in after Sen­ate Repub­li­cans’ refusal last week to take up a House– approved res­cue raised the prospect that the com­pa­nies would fail, cost­ing mil­lions of jobs.

“‘These are not ordi­nary cir­cum­stances,’ Bush said at the White House today. ‘In the midst of a finan­cial cri­sis and a reces­sion, allow­ing the US auto indus­try to col­lapse is not a respon­si­ble course of action.’

“The cost of let­ting automak­ers fail would lead to a 1% reduc­tion in the growth of the US econ­omy and mean about 1.1 mil­lion work­ers would lose their jobs, includ­ing those in the auto sup­ply busi­ness and among deal­ers, the White House said in a fact sheet.

“President-elect Barack Obama endorsed the plan, call­ing it a ‘nec­es­sary step’ to avoid a major blow to the economy.

“‘The auto com­pa­nies must not squan­der this chance to reform bad man­age­ment prac­tices and begin the long-term restruc­tur­ing that is absolutely required to save this crit­i­cal indus­try,’ Obama said in a statement.

“The United Auto Work­ers are ‘dis­ap­pointed’ that Bush added ‘unfair con­di­tions sin­gling out work­ers’, the union’s pres­i­dent, Ronald Get­telfin­ger, said in a state­ment. ‘We will work with the Obama admin­is­tra­tion and the new Con­gress to ensure that these unfair con­di­tions are removed,’ Get­telfin­ger said.

“The pack­age is intended for GM and Chrysler ini­tially. Ford Motor Co., the second-biggest US automaker, has said it can con­tinue oper­at­ing with­out aid for now.”

Source: Roger Run­nin­gen and John Hughes, Bloomberg, Decem­ber 19, 2008.

Bloomberg: Fed becom­ing lender of last resort – inter­view with Mer­rill Lynch chief econ­o­mist David Rosenberg

Source: Bloomberg (via YouTube), Decem­ber 17, 2008.

CNN Money: Econ­omy res­cue — adding up the dol­lars
“The gov­ern­ment is engaged in an unprece­dented — and expen­sive — effort to res­cue the econ­omy. Here are all the ele­ments of the bailouts.”

Click on the thumb­nail for a large table.

Source: CNN Money, Decem­ber 15, 2008.

FT Alphav­ille: Wel­come to debt cen­tral
“US total debt to GDP is begin­ning to worry a num­ber of mar­ket com­men­ta­tors – even those pre­vi­ously con­vinced it wasn’t a prob­lem. Most recently, Den­nis Gart­man of the Gart­man Let­ter, has turned jit­tery on the issue:

“‘We have never been given to wail­ing and gnash­ing our teeth over the US’ grow­ing debt, for dur­ing our nearly six decades of life and three and one half decades of trad­ing in mar­kets, we’ve seen the nation’s debt grow even as the qual­ity of life and wealth of the coun­try grew faster. But now, even we are becom­ing con­cerned; now even we see poten­tial dis­as­ter loom­ing; now even we are depressed … Now even we are con­sid­er­ing that dou­ble hemlock!’

“As can be seen in the chart below, the fig­ure has cer­tainly bal­looned some­what sub­stan­tially of late.

“But Amer­i­cans shouldn’t feel too lonely. There’s at least one other G7 coun­try that can rival the States in the debt to GDP rank­ings. Have you guess which one it is? Some clues: Land of the Great British Krona, home to Team GB … Yes – it’s the grand old United K. Just take a look at this chart from the Spectator.

“And that’s not even total debt, just external.”

Source: Izabella Kamin­ska, FT Alphav­ille, Decem­ber 12, 2008.

CEP News: Lead­ing nations’ GDP poised to decline in 2009
“US, Japan and euro zone GDPs are expected to decline in 2009, accord­ing to the Insti­tute of Inter­na­tional Finance (IIF) global eco­nomic forecast.

“The IIF fore­cast is call­ing for the US econ­omy to decline by 1.3% after ris­ing 1.2% this year, while the euro area economies are pro­jected to decline by 0.9% in 2008 and 1.5% in 2009. Japan’s econ­omy is expected to fall by 1.2% after a flat per­for­mance this year.

“IIF Man­ag­ing Direc­tor Charles Dal­lara said, ‘we now face extra­or­di­nary chal­lenges. The extent of the declines in the major economies in the cur­rent quar­ter and in the next quar­ter or two may be sub­stan­tial, with the US and the euro area likely to see falls in real GDP in the fourth quar­ter of this year of respec­tively 5% and 3%.’

“The IIF is also pre­dict­ing the down­turn in the major economies to impact the lead­ing emerging-market economies. They project the growth in emerg­ing mar­kets to aver­age 5.9% in 2008 and 3.1% in 2009. Weak growth is antic­i­pated to hit cen­tral, east­ern and south­ern Europe with growth of just 0.3% for 2009, while the IIF is fore­cast­ing growth in South Amer­ica to come in at 1% next year.

“Over­all, global economies are poised to grow 2.0% in 2008 and fall 0.4% in 2009.”

Source: Steve Ste­cyk, CEP News, Decem­ber 18, 2008.

The Times: IMF fears unrest with­out action on econ­omy
“Vio­lent unrest may be sparked around the world by a pro­longed global slump unless gov­ern­ments act with greater urgency to jump-start stalled economies, the head of the Inter­na­tional Mon­e­tary Fund said on Monday.

“Dominique Strauss-Kahn sounded a stark warn­ing over the con­se­quences of what he argued was weak and uncer­tain gov­ern­ment reac­tion to the eco­nomic cri­sis. He used a hard-hitting speech in Madrid to sin­gle out euro­zone nations over what he attacked as an inad­e­quate response.

“The broad­side from the IMF’s man­ag­ing direc­tor came as fears over a pro­tracted global reces­sion, and polit­i­cal fall­out, mounted after China said that its fac­to­ries’ out­put reg­is­tered the weak­est growth in almost a decade last month.”

Source: Gary Dun­can, The Times, Decem­ber 16, 2008.

George Mag­nus (Finan­cial Times): Five ways to start the world eco­nomic recov­ery
“After the Min­sky Moment – where eupho­ria tips into cri­sis, named after Hyman Min­sky – the capit­u­la­tion of eco­nomic activ­ity has been rapid and severe. The out­look is as dark as the doom­say­ers assert. The only thing that stands between today’s dire eco­nomic prospects and a lost decade sim­i­lar to Japan’s in the 1990s is the com­pe­tence and author­ity of macro­eco­nomic pol­icy. We have a long way to go, but for five rea­sons, even doom­say­ers can start to feel the force, so to speak.

“First, gov­ern­ments have already acted deci­sively to pre­serve the integrity of the for­mal bank­ing sys­tem, while the so-called shadow bank­ing sys­tem is col­laps­ing. Over $8,000 bil­lion of pro­grammes to stem the col­lapse in credit and hous­ing have been announced but it is too soon to declare vic­tory. To strengthen banks in the reces­sion and sus­tain lend­ing, Euro­pean banks will need a fur­ther $100 bil­lion to $150 bil­lion of cap­i­tal, while US banks, includ­ing regional banks, should quickly be allo­cated most of the unspent Tarp money of $350 billion.

“Sec­ond, gov­ern­ments must con­tinue to facil­i­tate the enor­mous task of sus­tain­ing credit flows and restruc­tur­ing debt. Bank­rupt­cies are inevitable but addi­tional direct lend­ing pro­grammes, asset pur­chases and gov­ern­ment guar­an­tees are needed to keep liq­uid­ity flow­ing to good cor­po­rate and res­i­den­tial bor­row­ers, espe­cially while bank bal­ance sheets are con­strained by the need to soak up bad assets that were pre­vi­ously held off-balance sheet. Equity-for-debt swaps will be required for com­pa­nies with exces­sive debt.”

Click here for the full article.

Source: George Mag­nus, Finan­cial Times, Decem­ber 18, 2008.

CNBC: Feld­stein – dig­ging out of the reces­sion
“An out­look on the econ­omy, with Mar­tin Feld­stein, for­mer Coun­cil of Eco­nomic Advi­sors chairman/National Bureau of Eco­nomic Research pres­i­dent emeritus.”

Source: CNBC, Decem­ber 18, 2008.

Duke Uni­ver­sity: CFO Sur­vey – his­toric reces­sion to last another year
“Chief finan­cial offi­cers in the United States and around the world are more pes­simistic than at any time in the his­tory of the Duke University/CFO Mag­a­zine Global Busi­ness Out­look Sur­vey. The major­ity of chief finan­cial offi­cers in the US and Europe say their firms will slash spend­ing and employ­ment in 2009, and their firms will post losses. The reces­sion will last another year, accord­ing to nearly two-thirds of CFOs.

“These are some of the find­ings of the year-end 2008 quar­terly sur­vey, which asked 1,275 CFOs from a broad range of global pub­lic and pri­vate com­pa­nies about their expec­ta­tions for the economy.

CFO Opti­mism Index: Key Measures

“Weak con­sumer demand is the top cor­po­rate con­cern. CFOs also con­tinue to worry about credit mar­kets, which are dev­as­tat­ing lower-rated firms. Com­pa­nies rated B or lower face inter­est rates that are 225 basis points higher than their cost of bor­row­ing before the cri­sis began.

“The CFO opti­mism index has proven accu­rate in pre­dict­ing future GDP growth, employ­ment and cap­i­tal spend­ing. This quarter’s extreme pes­simism fore­tells a poor econ­omy in 2009. Thirty-nine per­cent say the econ­omy will not begin to recover until 2010.”

Source: Duke Uni­ver­sity, Decem­ber 10, 2008.

Casey’s Charts: For­eign buy­ers help drive rates to zero
“For­eign pur­chases of US Trea­sury Bills hit a record $147 bil­lion in Octo­ber, help­ing drive yields to near zero per­cent on short-term gov­ern­ment debt. Tra­di­tion­ally, for­eign­ers have invested pri­mar­ily in long-term bonds. This sur­pris­ing shift into T-Bills reveals that ner­vous for­eign­ers are trans­fer­ring their mounds of dol­lars into more liq­uid assets. They must think there’s no alter­na­tive – why else would they accept a zero return?”

Source: Casey’s Charts, Decem­ber 17, 2008

The New York Times: Chart of the day — deflation

Source: The New York Times, Decem­ber 17, 2008 (hat tip: Barry Ritholtz).

Asha Ban­ga­lore (North­ern Trust): CPI plunges
“The Con­sumer Price Index (CPI) fell 1.7% in Novem­ber fol­low­ing a 1.0% drop in Octo­ber. On a year-to-year basis, the CPI has fallen 1.1% ver­sus a 4.1% increase in all of 2007 and a cycle high of 5.6% year-to-year increase in July 2008. In Novem­ber 2008, the sea­son­ally unad­justed CPI, which goes back to 1921, fell 1.9%, the largest drop since the 1930s.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 16, 2008.

Asha Ban­ga­lore (North­ern Trust): Money sup­ply growth trims decline of LEI
“The Index of Lead­ing Eco­nomic Indi­ca­tors (LEI) dropped 0.4% in Novem­ber, after a revised 0.9% decline in the prior month. The index has fallen in ten out of the last four­teen months. The October-November aver­age of the LEI as a proxy for the fourth quar­ter is down 3.6% from a year ago, a mag­ni­tude that is com­pa­ra­ble with declines seen in the 1980’s recession.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 18, 2008.

Asha Ban­ga­lore (North­ern Trust): Con­struc­tion of new homes at new low
“Home builders remain reluc­tant to break new ground. Hous­ing starts fell 18.9% in Novem­ber to an annual rate of 625,000, the low­est on record since record keep­ing for this series began in 1959.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 16, 2008.

Wash­ing­ton Post: New poll shows 63% are already hurt by down­turn
“The deep­en­ing reces­sion has eroded the finan­cial stand­ing and opti­mism of a broad swath of Amer­i­cans, nearly two-thirds of whom say that they have been hurt by the down­turn and that the coun­try has slipped into long-term eco­nomic decline.

“A new Wash­ing­ton Post-ABC News poll also found that a rapidly increas­ing share of Amer­i­cans — 66%, up from just over half a year ago — are wor­ried about main­tain­ing their stan­dard of liv­ing. Nearly two in 10 said they or some­one liv­ing in their house­hold had lost a job in the past few months, and more than a quar­ter said they had their pay or hours reduced. And 15% said that at some point in the past year they fell behind on their rent or mortgage.

“The poll cap­tures the widen­ing fall­out from the fal­ter­ing econ­omy that pol­i­cy­mak­ers are strug­gling to contain.

“The poll found that nearly two-thirds of Amer­i­cans sup­port new fed­eral spend­ing to stim­u­late the econ­omy, and majori­ties of both Democ­rats and Repub­li­cans back the idea. Con­cern about deficit spend­ing, how­ever, mutes enthu­si­asm for the stim­u­lus plan. When respon­dents were asked whether they would back the plan if it increased the deficit, sup­port dropped to 47%. Over­all, nearly nine in 10 said they are wor­ried about the size of the fed­eral bud­get deficit, includ­ing nearly half who are ‘very concerned’.”

Source: Michael Fletcher & Jon Cohen, Wash­ing­ton Post, Decem­ber 17, 2008.

Bloomberg: Retail­ers may be weeded out dur­ing “Dar­win­ian” com­pe­ti­tion
The US retail indus­try will undergo a weeding-out process next year as com­pa­nies run out of cash as soon as Jan­u­ary and com­pe­ti­tion forces store clos­ings, accord­ing to private-equity buy­ers and restruc­tur­ing experts.

“‘The United States is mas­sively over-stored in all cat­e­gories,’ Gre­gory Segall, a man­ag­ing part­ner at buy­out firm Versa Cap­i­tal Man­age­ment, said today dur­ing a panel dis­cus­sion held at Bloomberg LP’s New York offices. ‘You could prob­a­bly see 50,000 retail out­lets close and it wouldn’t impact the avail­abil­ity and selec­tion and choice of what you buy.’

“Only retail­ers with healthy bal­ance sheets will sur­vive the reces­sion, said Matthew Katz, a man­ag­ing direc­tor at con­sult­ing firm AlixPartners.‘This is a very Dar­win­ian time,’ Katz said.

“Plung­ing home prices, ris­ing unem­ploy­ment and tight­en­ing credit have led con­sumers to rein in spend­ing, result­ing in what may be the worst hol­i­day sea­son in at least four decades. Macy’s, Kohl’s Corp. and other retail­ers have marked down items 50% to lure cus­tomers, erod­ing mar­gins at a time when store own­ers hope to make a third or more of their annual profit.”

Source: Alli­son Schwartz, Bloomberg, Decem­ber 17, 2008.

Clus­ter­stock: Bernie Madoff’s vic­tims: the slideshow
“The Bernie Mad­off Ponzi scheme is a mess. Bernie him­self says $50 bil­lion has van­ished. The tales of woe seem to fall into four cat­e­gories: Super­rich Indi­vid­u­als, Lit­tle Guys, Funds + Banks, and Char­i­ties + Uni­ver­si­ties + Hos­pi­tals. We’ve selected some of each, along with some scenes of the crime.

Click here to view the slideshow

Click here for a more com­pre­hen­sive text list of Madoff’s victims.

Source: Clus­ter­stock, Decem­ber 14, 2008.

Bespoke: If you ever see a chart like this, run away fast
“We’ve all heard how Bernie Madoff’s returns sounded too smooth and con­sis­tent to be true. In pic­ture form, how­ever, the returns are even more eye­brow rais­ing. The chart below shows the cumu­la­tive returns of $1 invested in the hedge fund Fair­field Sen­try Lim­ited, which was a fund run by Fair­field Green­wich Group that essen­tially directed all of its assets to the stew­ard­ship of Bernie Mad­off. As shown, $1 invested in Mad­off back in 1990 was sup­posed to be worth $6.75 today. NPB Bank, out of Zurich, even offered a ver­sion of this fund with three times the lever­age. Talk about too good to be true.”

Source: Bespoke, Decem­ber 16, 2008.

BCA Research: Still a bond-friendly world
“While most of the upside in gov­ern­ment bonds has likely already been made, we main­tain our long dura­tion call.

“Aggres­sive mon­e­tary eas­ing by each of the major cen­tral banks has helped fuel the rally at the long-end of the curve. While the recent drop in yields leaves most gov­ern­ment bond mar­kets well into over­val­ued ter­ri­tory, we are in no rush to take prof­its on our long dura­tion call. Gov­ern­ment bond prices may not have much more upside but value is not a tim­ing tool and the growth and infla­tion back­drop is likely to keep yields sup­pressed for an extended period.

“How­ever, we do advise clients to shift their long bond allo­ca­tions to high qual­ity non­govern­ment spread prod­uct, as we expect a sig­nif­i­cant nar­row­ing in early 2009. We will await evi­dence that the global econ­omy is begin­ning to sta­bi­lize, which will most likely take until the sec­ond half of 2009, before shift­ing fur­ther down in qual­ity. The time-frame would move up if the Fed sig­naled that it would begin buy­ing cor­po­rates in the interim. While leg­is­la­tion pre­vents the cen­tral bank from directly buy­ing these issues, the Fed could pur­chase cor­po­rate bonds off bal­ance sheet by set­ting up an SIV.”

Source: BCA Research, Decem­ber 15, 2008.

Bespoke: 30-year fixed mort­gage rates down to 5.28%
“Thirty-year fixed mort­gage rates have declined sig­nif­i­cantly in recent weeks, down from 6% on Novem­ber 20 to 5.28% as of yes­ter­day [Wednes­day]. The Fed is def­i­nitely happy to see rates fall, and they’ve still got fur­ther to go to get to the 10-year record low of 4.88% seen in 2003.”

Source: Bespoke, Decem­ber 18, 2008.

CNN Money: Stock picks from the experts
“The crash has dri­ven prices so low that even extreme value investors see some safe buys. The stakes are high when­ever you invest, but they’re extra high when you’re man­ag­ing your money amid a his­toric finan­cial mess and record volatility.

“For advice equal to the task – in a set­ting cho­sen to inspire thoughts of secu­rity – we invited five cham­pion fund man­agers to sit down inside a mas­sive under­ground vault that’s now part of a restau­rant a block from Wall Street: Bob Rodriguez of First Pacific Advi­sors, who man­ages the FPA Cap­i­tal and New Income funds; Susan Byrne, who heads West­wood Hold­ings Group; Leslie Chris­t­ian, pres­i­dent and chief invest­ment offi­cer of Port­fo­lio 21 Invest­ments; Tom Forester, man­ager of the Forester Value fund; and Jeremy Grantham, chair­man of asset man­ager GMO.

“Fortune’s Geoff Colvin led the dis­cus­sion. Edited excerpts fol­low; stock prices are as of Decem­ber 1.

“Let’s get right down to busi­ness. Bob, you’ve held a lot of cash in recent years because stocks looked too expen­sive. Are stocks finally cheap?

“BOB RODRIGUEZ: My value screen went to a new record low in June of 2007, and only 33 com­pa­nies out of 10,000 qual­i­fied. In Jan­u­ary of this year we went north of 200 for the first time since the sum­mer of 2002. We went to 250 in the Bear Stearns cri­sis. And the week of Octo­ber 16, we hit 447 – the most qual­i­fiers in more than 20 years.

“So stocks are cheap by his­tor­i­cal stan­dards. How­ever, we’re being very cau­tious because what we’re expe­ri­enc­ing now is a major shift, the cul­mi­na­tion of failed poli­cies in the reg­u­la­tory sys­tem and the pri­vate sec­tor that have been build­ing up for 30 years.

“Susan, are stocks cheap?

“SUSAN BYRNE: The mar­kets are pro­vid­ing real returns for the risk that you take all along the spec­trum, from equi­ties to debt. So, yes, I think that prices reflect the fact that peo­ple are quite rightly very afraid of the risk in the stock market.

“Jeremy, you’ve writ­ten that stocks will get cheaper.

“JEREMY GRANTHAM: If you look back at 1982 and 1974, the mar­ket was much cheaper than it is today. In ‘74 it was about 40% cheaper, and in ‘82 it was about 60% cheaper. Look at the bad times we had in ‘74 and ‘82, and I think sev­eral of us would con­clude that this time is likely to be as bad – pos­si­bly worse. Bub­bles like this always overcorrect.

“How bad will you feel if you put in your cash reserves and the mar­ket con­tin­ues to go down? You’re going to feel awful. And how will you feel if you don’t buy in the cheap­est mar­ket for 20 years and it runs away and leaves you? Hor­ri­ble. You have to step your way through so that the regret, which is going to be huge any­way, is about neutral.”

Click here for the full article.

Source: Geoff Colvin, CNN Money, Decem­ber 15, 2008.

David Steven­son (Mon­ey­Week): Stock mar­kets might not bot­tom out until 2014
“Tobin’s Q ratio … This is a ratio devel­oped by Nobel Prize-winning econ­o­mist James Tobin to com­pare the mar­ket value of com­pa­nies to the cost of their con­stituent parts, i.e. their real net asset value.

“When the gauge is more than 1.0, it indi­cates that the mar­ket is over­valu­ing com­pany assets, while a read­ing of less than 1.0 sug­gests shares are under­val­ued because it’s cheaper to buy quoted com­pa­nies than build them up.

“The Q ratio on US equi­ties has now dropped to 0.7 from a 1999 peak of 2.9. That could indi­cate shares are now cheap.

“But think again. The ratio needs to fall to 0.3 to sig­nal the final stage of a major bear mar­ket like this one, says Rus­sell Napier at CLSA. How does he know? Because that’s what it did at the end of the four largest US stock price declines in 1921, 1932, 1949 and 1982. That trans­lates into the US S&P 500 index plung­ing another 55% by 2014. Ouch.

“But between now and then, there’s cer­tainly a good chance of a bear mar­ket rally – maybe up to two years long, so those strate­gists may be right about 2009 – as Obama and the US Fed man­age to delay the start of defla­tion with New Deal II. But those efforts will even­tu­ally blow up as bal­loon­ing gov­ern­ment debt deval­ues the dol­lar and prompts a mas­sive share sell-off – on both sides of the Atlantic.

“‘Bear mar­kets always end when they begin ‘pric­ing in’ defla­tion, as the value of assets falls and the value of debt stays up, so equity gets crushed’, say Napier. ‘The results are always hor­rific, and equi­ties will become incred­i­bly cheap.’

“Albert Edwards at Soc­Gen has chris­tened this period the Ice Age. Another bull mar­ket will start in time. But as Edward’s descrip­tion sug­gests, it’s still a long way away.”

Source: David Steven­son, Mon­ey­Week, Decem­ber 11, 2008.

Jef­frey Saut (Ray­mond James): A rally of some import is in the works
“The call for this week: The two ques­tions du jour are: 1) when will the credit crunch end? and 2) how long will the econ­omy remain weak as it attempts to cor­rect the hous­ing situation?

“Speak­ing to the first ques­tion, par­tic­i­pants need to mon­i­tor the credit spreads, which so far have not improved.

“As for ques­tion two, delin­quen­cies and bank repos­ses­sions appear to finally be sta­bi­liz­ing. If the stock mar­ket is a dis­count­ing mech­a­nism, the 50% decline in the S&P 500 may have already dis­counted everything.

“More­over, my sense is that just like par­tic­i­pants were con­di­tioned to believe that any decline would not gather much trac­tion back in 1999 and 2000, they are now being con­di­tioned to believe that any rally will not sus­tain. With stocks’ aggre­gate value cur­rently below the year’s GDP, we con­tinue to think a rally of some import is in the works”.

Source: Jef­frey Saut, Ray­mond James, Decem­ber 15, 2008.

Bespoke: Strate­gists’ 2009 S&P 500 price tar­gets
“Bloomberg recently sur­veyed mar­ket strate­gists for their 2009 S&P 500 price tar­gets, and col­lec­tively, they’re look­ing for a gain of 21.8% from the index’s cur­rent price level.

“As shown below, UBS is the most bull­ish of the group with a year-end 2009 price tar­get of 1,300 (a 47.2% gain). UBS was the most bull­ish last year as well with a 2008 price tar­get of 1,700. Gold­man and Strate­gas are the sec­ond most bull­ish this year with price tar­gets of 1,100. Credit Suisse has a tar­get of 1,050 (for mid-year ‘09), Citi and HSBC are at 1,000, and Mer­rill Lynch is at 975. Mer­rill is the least bull­ish strate­gist of those sur­veyed, but they’re still look­ing for a gain of 10.4% from cur­rent levels.

“For those look­ing for direc­tion from these strate­gists, their 2008 pro­jec­tions should be noted. All were look­ing for gains this year, and their tar­gets at the start of the year are far above where the S&P 500 is cur­rently trading.”

Source: Bespoke, Decem­ber 16, 2008.

King Report: US Dol­lar Index is col­laps­ing
“What does this mean and what are the implications?

“Bernanke can con­tinue to expand the Fed’s bal­ance sheet until a crit­i­cal mass of investors loose con­fi­dence in either Ben or the Fed’s bal­ance sheet. And the con­fi­dence is reflected in the dollar.

“After Ben mon­e­tized an enor­mous amount and assort­ment of assets after the Bear Stearns, GSE, Lehman, AIG and Big Nine ‘prob­lems’ the dol­lar ral­lied sharply. This showed con­fi­dence in Ben and the Fed.

“But now the dol­lar is in col­lapse. This is a clear sign of some­thing other than con­fi­dence in Ben/the Fed. The dol­lar col­lapse implies that Ben and the Fed are now ‘on the clock’ and investors will react neg­a­tively to fur­ther Fed bal­ance sheet hyper expansion.

“Here’s the really big prob­lem with Ben’s gam­bit. It is the same thing that FDR attempted – devalue the dol­lar to avert defla­tion and depres­sion. How­ever, deval­u­a­tion exports defla­tion and depres­sion to other coun­tries and they will retal­i­ate, which they did to FDR. This is another rea­son for The Great Depression.

“So key ques­tions are: How long will it take for China, Japan, Ger­many or oth­ers to retal­i­ate against Ben’s scheme to export defla­tion and depres­sion to them? And what will be the retribution?”

Source: Bill King, The King Report, Decem­ber 18, 2008.

Bespoke: Biggest six-day decline for the dol­lar ever
“The US Dol­lar index fell another 2.2% today [Tues­day] for its biggest 6-day decline ever. As shown in the table below, the cur­rent 6-day decline of 8.07% tops the prior record decline of –7.48% set back in Sep­tem­ber of 1985. If it’s not one asset falling these days, there’s sure to be another.”

Source: Bespoke, Decem­ber 17, 2008.

James Turk (Gold­Money): What­ever it takes
“The Fed­eral Reserve today made clear its inten­tion to con­tinue flood­ing the sys­tem with newly cre­ated dol­lars. It says in effect that it will do what­ever it takes. Its Fed­eral Open Mar­ket Com­mit­tee (FOMC) low­ered the fed­eral funds inter­est rate tar­get to a range of 0%-to-0.25%, which is an his­toric low, but it didn’t stop there. The FOMC also announced that it would “employ all avail­able tools” in an attempt to jump­start the mori­bund econ­omy. That means it will mon­e­tize assets of all sorts. It will turn debt into more US dol­lar currency.

“The con­se­quences of the Fed’s actions will debase the dol­lar, per­haps irrepara­bly so. The dollar’s bear mar­ket rally that began in July ended last month.

“Since last month’s peak in the Dol­lar Index, gold has climbed 6.3%, while sil­ver did even bet­ter. It has climbed 12.6%. These pre­cious met­als are clearly the place to be, given the path of mon­e­tary debase­ment being taken by the Fed.”

Source: James Turk, Gold­Money, Decem­ber 16, 2008.

David Fuller (Fuller­money): Posi­tion­ing for an upside move in gold
“I think all gold bulls are cur­rently onto some­thing. These are scary times. Gold feels com­fort­able in this envi­ron­ment. It is still appre­ci­at­ing against most cur­ren­cies, includ­ing ster­ling, and also stock markets.

“Against this back­ground, gold could spike higher once again – watch out if / when it main­tains a break above that last high just over $900. I am not say­ing a huge move will occur, because I do not know. How­ever I want to be posi­tioned for an upside move in pre­cious met­als at this time. The price charts are increas­ingly show­ing us that gold and gold shares are per­form­ing once again.”

Source: David Fuller, Fuller­money, Decem­ber 15, 2008.

I-Net Bridge: Plat­inum now cheaper than gold
“It is now cheaper to buy plat­inum than it is to buy gold. On Fri­day (Novem­ber 12) the price of gold sur­passed the price of plat­inum for the first time in 12 years.

“Both pre­cious met­als eased despite the dol­lar weak­ness, bring­ing a two-day rally to an end as sen­ti­ment in global mar­kets after plans to bail out the US auto­mo­tive indus­try collapsed.

“The $14 bil­lion bailout for the US auto­mo­tive indus­try, besides being a life­line for fal­ter­ing vehi­cle man­u­fac­tur­ers, would have boosted plat­inum demand.

“Plat­inum, which is mainly used as a com­po­nent in cat­alytic con­vert­ers, is par­tic­u­larly vul­ner­a­ble to a down­turn in the auto­mo­tive sec­tor since the sec­tor makes up 50% of total demand.

“Fail­ure to pro­vide US car­mak­ers with the finan­cial life­line they so des­per­ately need has trig­gered con­cern over addi­tional job cuts and a pos­si­ble indus­try collapse.

“The BullionDesk’s James Moore said gold’s move­ment over the past few days was ‘very encour­ag­ing’, But he said it ‘does raise a few ques­tions about its sus­tain­abil­ity short-term, which we sus­pect won’t be answered until early next year.’

“‘Over­all though we would look for gold to con­tinue trad­ing side­ways to higher as the Fed’s print­ing presses fur­ther erode the value of the green­back,’ Moore said.

“Turn­ing to plat­inum, Moore said while the news from the US auto mak­ers may gen­er­ate some bear­ish sen­ti­ment, the ongo­ing down­grad­ing of pro­duc­tion fore­casts should see the metal remain near equi­lib­rium. He expected plat­inum to remain in the broad $780 to $880 range for the time being.”

Source: I-Net Bridge, Decem­ber 12, 2008.

Bloomberg: Gold­man expects crude to fall to $30 early next year
“Gold­man Sachs cut its fore­cast for oil prices in the first quar­ter by half to $30 a bar­rel as the global eco­nomic slow­down curbs consumption.

“Crude demand will fall by 1.7 mil­lion bar­rels a day in 2009, ana­lysts Jef­frey Cur­rie and Alli­son Nathan said in a note. Gold­man pre­vi­ously expected West Texas Inter­me­di­ate, the US bench­mark oil, to aver­age $62 in the first quarter.

“The world­wide eco­nomic decline has reduced con­sumer spend­ing and weak­ened demand for fuel. Demand growth in China and other non-member states of the Paris-based Orga­ni­za­tion for Eco­nomic Coöper­a­tion and Devel­op­ment is ‘on the cusp of a sharp decel­er­a­tion’, the ana­lysts said.

“Crude has fallen for five straight months since trad­ing at a record $147.27 a bar­rel, as coun­tries includ­ing the US, Japan and Ger­many have entered reces­sions. Gold­man Sachs fore­cast in July that oil would recover to $149 by the end of this year because con­sumer demand was ‘restrained, but not destroyed’.”

Source: Rachel Gra­ham, Bloomberg, Decem­ber 12, 2008.

Bespoke: What a dif­fer­ence seven months makes
“We all remem­ber back in May when Gold­man Sachs issued a report pre­dict­ing that oil’s ‘super spike’ would likely send the com­mod­ity to $200 ‘over the next 6–24 months’.

“Seven months later, Gold­man is now advis­ing clients that ‘oil prices will fall to $30 a bar­rel in the next three months’. If the call for $30 oil is as accu­rate as the call for $200 oil, investors may want to fill up their gas tanks and lock in their heat­ing oil prices asap.”

Source: Bespoke, Decem­ber 15, 2008.

Finan­cial Times: Record oil cut fails to lift prices
“The depth of the world’s eco­nomic down­turn was high­lighted on Wednes­day when the Opec oil car­tel appeared pow­er­less in its quest to drive up prices even after agree­ing a record cut in its production.

“Opec, which con­trols about 40% of the world’s oil sup­plies, announced a fur­ther 2.2 mil­lion bar­rel a day cut on top of the 2 mil­lion b/d it has already pledged since Sep­tem­ber. It said it would cut 4.2 mil­lion b/d from its Sep­tem­ber out­put of 29.045 mil­lion b/d, bring­ing its pro­duc­tion ceil­ing to 24.845 mil­lion b/d in January.

“Rus­sia said its com­pa­nies would be forced to cut another 320,000 b/d early next year only if low oil prices persisted.

“The oil mar­ket, how­ever, took a dim view of Opec’s action. Nau­man Barakat, of Mac­quarie in New York, said: ‘A cut of 2.2 mil­lion b/d is a pretty decent cut but it will take a while for the mar­ket to see the Opec cut actu­ally fil­ter­ing into the market.’

“Even Wash­ing­ton ques­tioned whether Opec mem­bers would com­ply fully with the announced cuts. ‘It’s not clear that Opec’s actions will be effec­tive, given the shift in global demand and the abil­ity of Opec mem­bers to meet the cartel’s tar­gets,’ said Tony Fratto, the White House spokesman.

“‘Regard­less, Opec has an oblig­a­tion to keep the mar­ket well sup­plied and to con­sider the health of the global econ­omy, so efforts to limit the ben­e­fits of lower energy prices are short-sighted,’ he said.

“But Chakib Khelil, Opec pres­i­dent, said Opec had a long-established record in meet­ing the chal­lenges it faced.”

Source: Car­ola Hoyos, Finan­cial Times, Decem­ber 17, 2008.

Bespoke: Baltic Dry Index rally?
“The Baltic Dry Index has been get­ting some atten­tion recently after ral­ly­ing more than 15% from its lows. One head­line we came across even said that ship­ping com­pa­nies were ben­e­fit­ing from the ‘revival’ of the Baltic Index. Revival? While the Baltic Index is indeed up from its lows, it is still down 93.5% from its highs in May, and as the chart below illus­trates, the recent gain is barely even vis­i­ble to the naked eye. Global ship­ping rates will bot­tom at some point, and may have already done so, but to call the action of the last two weeks a revival seems a bit premature.”

Source: Bespoke, Decem­ber 15, 2008.

Finan­cial Times: Ship­ping char­ter rates soar
“One of the world’s key ship­ping mar­kets has begun to recover from a slump, with a revival in Chi­nese demand for iron ore and coal push­ing some aver­age char­ter prices up almost three­fold in the past week.

“The revival in prices, after a dis­as­trous six months for the indus­try in which char­ter rates fell nearly 99% for the largest ves­sels, could encour­age ship own­ers to bring moth­balled ves­sels back into service.

“One par­tic­i­pant said yes­ter­day that some own­ers were able to charge enough to cover the costs of oper­at­ing Cape­size ships, the largest dry bulk car­ri­ers. Aver­age rates for these ships, which move coal and iron ore, have nearly tripled over the past week.

“The return of moth­balled ships to the mar­ket could lead to a repeat of the over-supply which, com­bined with dis­ap­pear­ing demand for coal, iron ore and wheat, depressed prices this year.”

Source: Robert Wright, Finan­cial Times, Decem­ber 14, 2008.

IFO Busi­ness Sur­vey: Busi­ness cli­mate in Ger­many con­tin­ues to decline
“The Ifo Busi­ness Cli­mate for indus­try and trade in Ger­many has clearly fallen in Decem­ber, con­tin­u­ing its decline of more than one year. The dom­i­nant fea­ture of the Decem­ber decline is the wors­en­ing of the firms’ cur­rent busi­ness sit­u­a­tion. With regard to the six-month busi­ness out­look, the scep­ti­cism of the sur­vey par­tic­i­pants remains nearly unchanged. A sim­i­larly low level of the busi­ness cli­mate index was last reached dur­ing the sec­ond oil cri­sis at the end of 1982.

“The down­turn is affect­ing above all the man­u­fac­tur­ers of export and cap­i­tal goods and less, up until now, retail­ing and construction.”

Source: IFO Busi­ness Sur­vey, Decem­ber 18, 2008.

BBC News: France set for 2009 reces­sion
“France will enter reces­sion in 2009, accord­ing to Insee, the country’s national sta­tis­tics agency.

“The agency says the French econ­omy has shrunk by 0.8% in the last three months of 2008 and will con­tract by another 0.4% in the first quar­ter of 2009.

“France is eurozone’s sec­ond biggest econ­omy, and would be the lat­est major world econ­omy to enter recession.

“Fig­ures have already shown that Ger­many and Japan have endured two quar­ters of neg­a­tive eco­nomic growth, while econ­o­mists in the US have declared that its econ­omy has been in reces­sion since ear­lier in 2008.

“France only nar­rowly avoided neg­a­tive eco­nomic growth between July and Sep­tem­ber, post­ing growth of 0.1%.”

Source: BBC News, Decem­ber 18, 2008.

Vic­to­ria Marklew (North­ern Trust): Increas­ingly grim out­look for UK
“The eco­nomic news out of the UK is ever more grim. Today was the turn of employ­ment. Claimant count unem­ploy­ment surged by 75,700 last month, tak­ing the num­ber of unem­ployed by this mea­sure past the psychologically-important one mil­lion mark for the first time since 2001. The broader ILO-basis job­less rate rose from 5.8% in the three months to Sep­tem­ber, to 6.0% in August-October. As unem­ploy­ment is usu­ally a lag­ging indi­ca­tor, the fact that jobs are being shed at this fast a pace this early in the eco­nomic down­turn points to a harsh year ahead for employment.”

Source: Vic­to­ria Marklew, North­ern Trust – Daily Global Com­men­tary, Decem­ber 17, 2008.

Bloomberg: Japan’s Tankan con­fi­dence plunges most in 34 Years
“Sen­ti­ment among Japan’s largest man­u­fac­tur­ers fell the most in 34 years, sig­nal­ing com­pa­nies are likely to can­cel spend­ing plans and cut more jobs, push­ing the econ­omy fur­ther into recession.

“An index that mea­sures con­fi­dence among large mak­ers of cars and elec­tron­ics dropped to minus 24 from minus 3, the Bank of Japan’s quar­terly Tankan sur­vey showed today. A neg­a­tive num­ber means pes­simists out­num­ber optimists.

“The yen’s surge to a 13-year high last week has com­pounded woes for Japan­ese man­u­fac­tur­ers who are already reel­ing from a col­lapse in export mar­kets. Job cuts by com­pa­nies includ­ing Sony and Toy­ota have brought the reces­sion home to house­holds and increased the risk of a pro­longed slump.

“‘The over­seas sit­u­a­tion is wors­en­ing so quickly and so dra­mat­i­cally; it’s really get­ting dan­ger­ous,’ said Tomoko Fujii, head of eco­nom­ics and strat­egy at Bank of Amer­ica in Tokyo. ‘The next few months are going to be a very severe period.’”

Source: Jason Clen­field, Bloomberg, Decem­ber 14, 2008.

Asha Ban­ga­lore (North­ern Trust): Japan – that sink­ing feeling

Source: Asha Ban­ga­lore, North­ern Trust – Daily Global Com­men­tary, Decem­ber 15, 2008.

Reuters: Ecuador defaults – fight­ing “mon­ster” cred­i­tors
“Pres­i­dent Rafael Cor­rea declared a default on Ecuador’s for­eign sov­er­eign bonds on Fri­day, vow­ing to fight ‘mon­ster’ debt-holders in court in one of the most aggres­sive moves against investors in the region for years.

“Ecuador’s dollar-denominated debt prices plunged on news of its sec­ond default in a decade and the first in Latin Amer­ica since Argentina in 2002, although the deci­sion was not expected to lead to sim­i­lar moves around the region.

“Cor­rea, a US-trained econ­o­mist and ally of Venezuela’s anti-US Pres­i­dent Hugo Chavez, refused to make a $31 mil­lion inter­est pay­ment due on Mon­day on 2012 global bonds, say­ing the debt was con­tracted ille­gally by a pre­vi­ous administration.

“‘I gave the order not to pay the inter­est and to go into default,’ Cor­rea said. ‘We know very well who we are up against – real monsters.’

“‘If we have to face inter­na­tional lit­i­ga­tion due to this, we will,’ he added at a news con­fer­ence in the OPEC nation’s largest city of Guayaquil.

“The default is unlikely to have a knock-on effect in other Latin Amer­i­can coun­tries’ debt poli­cies even if some, such as Venezuela, have pledged to inves­ti­gate any irreg­u­lar­i­ties in their own debt …

“Cor­rea, who had often threat­ened to default, will offer bond-holders a tough restruc­tur­ing deal. Last month, Ricardo Patino, a top debt adviser to Cor­rea, said investors should expect a reduc­tion of more than 60% in the nom­i­nal value of the global paper in any negotiations.

“Ecuador’s global bonds – the 2012s, 2015s and 2030s – total $3.8 bil­lion of its roughly $10 bil­lion debt.”

Source: Maria Euge­nia Tello, Reuters, Decem­ber 12, 2008.

Tags: Austerity, Available Tools, Barack Obama, Bill Gross, BRIC, David Rosenberg, Economic Adversity, Effective Rate, Fed Funds Rate, Federal Open Market Committee, Fiscal Stimulus, Fomc Policy, Interest Rate Policy, James Reston, New York Times, oil, Open Market Committee, Open Market Operations, President Elect, Pulitzer Prize Winner, Sustainable Economic Growth, Target Range, Target Rate, Zero Interest
Posted in Bonds, Commodities, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, ETFs, Gold, Infrastructure, Markets, Oil and Gas, Outlook, Silver | Comments Off

Oil Breaks $35: Commodities Snapshot

Friday, December 19th, 2008

It wasn't that long ago, June 19, 2008, we had a con­ver­sa­tion with Stephen Briese, author of the Com­mitt­ments of Traders Bible about the immi­nent burst­ing of the oil and com­modi­ties bub­ble (200 Days of Oil Sup­ply Held Long by Spec­u­la­tors). That was just weeks before the price of oil (and other com­modi­ties) peaked at 147. In that con­ver­sa­tion, Briese made the firm state­ment that oil could drop as low as $30, which is why we are bring­ing it back to your atten­tion. It was very very hard to believe that it could come true, but here we are. Here is that con­ver­sa­tion again:

To Lis­ten, Press Play [MP3] Stephen Briese, CommitmentofTraders.org, June 19, 2008,
9 min. 18 sec.

Oil is trad­ing around $34.71 down $1.51 from yesterday's close, as of the writ­ing of this article.

Here we dis­play Bespoke Invest­ment Groups handy com­modi­ties at a glance roundup. They do an excel­lent job of cre­at­ing graphs like these that make it rel­a­tively easy to see where prices are in rela­tion to their 50-day mov­ing aver­ages. The green shad­ing rep­re­sents two stan­dard devi­a­tions above and below the commodity's 50-day mov­ing aver­age, and moves above this shad­ing are con­sid­ered over­bought or oversold.

Gold, Sil­ver have recently bro­ken out from their over­sold posi­tions very nicely into over­bought ter­ri­tory. In the food seg­ment, Corn and Wheat have also had a break out off their over­sold bot­toms and near­ing over­bought ter­ri­tory. The rest how­ever have con­tin­ued to see weakness.

Tags: Bottoms, Briese, Committments, Commodities, Commodity, Creating Graphs, Gold Silver, Investment Groups, Moving Average, Moving Averages, Oil Supply, Press Play, Price Of Oil, Roundup, Segment, Shading, Snapshot, Speculators, Standard Deviations, Wheat
Posted in Commodities, Energy & Natural Resources, Gold, Markets, Oil and Gas, Silver | Comments Off

Greenback slumped on the canvas

Friday, December 19th, 2008

Bernanke & Co. on Tues­day sig­naled to the finan­cial mar­kets that they were hell-bent on pur­su­ing an “inflate or die” approach to res­cu­ing the ail­ing US econ­omy and fend­ing off the forces of defla­tion. The Fed is now inflat­ing at a level pos­si­bly not seen before by a devel­oped nation since Weimar Germany.

Since the credit cri­sis started inten­si­fy­ing in July, the dol­lar ben­e­fited from a global flight to safety in US Trea­suries and a scram­ble for dol­lars to repay USD-denominated debt. The delever­ag­ing process effec­tively cre­ated a short posi­tion in the greenback.

But more recently, US-specific wor­ries con­cerned with pub­lic debt expan­sion and the poten­tial infla­tion­ary impli­ca­tions of quan­ti­ta­tive eas­ing dawned upon battle-weary investors, caus­ing the dol­lar to reverse the uptrend that had com­menced in July.

The US Dol­lar Index (i.e. a trade-weighted bas­ket) has not only breached its 50-day mov­ing aver­age con­vinc­ingly, but seems to be form­ing a top of at least medium-term sig­nif­i­cance (see chart below). The fall from grace was bru­tal with the Index record­ing its largest six-day decline (from Decem­ber 10 to 17) ever, set­ting up an assault on the key 200-day line (often seen as a crude indi­ca­tor of the pri­mary trend).

The US cur­rency also suf­fered its biggest one-day slide against the euro on Tues­day, and plunged to a 13-year low against the Japan­ese yen. (Also see my weekly “Words from the Wise” review for com­ments on cur­rency movements.)

The table below shows the per­for­mance of the US Dol­lar Index, as well as a num­ber of major and emerging-market cur­ren­cies against the US cur­rency. Gains against the US dol­lar (green) / losses (red) are given for (1) the period since the dollar’s high of Novem­ber 20, (2) the period from the dollar’s July 21 low until the Novem­ber high, and (3) the year to date.

Click on the image for a larger table.

The deval­u­a­tion of the US dol­lar de facto exports defla­tion and depres­sion, rais­ing the ques­tion of how long it will take before other coun­tries retal­i­ate and embark on “beg­gar thy neigh­bor” cur­rency debase­ment. China is already in the process of “man­ag­ing” the ren­minbi lower, Russia’s cen­tral bank has sig­naled it would step up deval­u­a­tion, and the Bank of Japan and oth­ers might also con­sider intervention.

“Either we are going to pay for our pol­icy sins via higher inter­est rates or a weaker dol­lar. And for an econ­omy that is as lev­ered as the one in the US is, the for­mer choice is not an option,” said Stephanie Pom­boy (Macro­Mavens). “So a weaker dol­lar is the nat­ural valve.”

US cred­i­tors — such as China — with large hoards of dol­lars are grow­ing increas­ingly ner­vous, and the dol­lar is likely to come under addi­tional pres­sure if for­eign­ers stop find­ing dol­lar assets an attrac­tive propo­si­tion. The only way the US can attract for­eign cap­i­tal is by offer­ing a higher inter­est rate or mak­ing its assets cheaper through a weaker currency.

Jim Rogers com­mented as fol­lows in a Bloomberg inter­view: “… the dol­lar is a ter­ri­bly flawed cur­rency. I hate to say it, but my good­ness, they’ve messed up the dol­lar badly. So, I don’t like to do it, but I’m going to sell all the rest of my dol­lars some­time in the next few days, weeks, or months … Again, I don’t like say­ing it, but I’m afraid the dol­lar is going to go the way the pound ster­ling went.”

The speed of the dollar’s decline has been such that it is quite likely to see a relief rally before the down­trend resumes. Argu­ing for a tem­po­rary hia­tus from a fun­da­men­tal view­point, Stephanie Pom­boy said: “… right now, we are enjoy­ing some real com­pe­ti­tion in the ugly con­test from the cur­ren­cies of the Euro­pean Union and the United King­dom, and that will prob­a­bly per­sist for a while because they are in pretty bad shape, and they are a lit­tle bit behind the curve rel­a­tive to us.”

Lastly, a sus­tained break in the uptrends of the US dol­lar and the Japan­ese yen – low-yielding cur­ren­cies pre­vi­ously used for fund­ing risky invest­ments – should indi­cate that forced sell­ing due to delever­ag­ing is start­ing to sub­side. As this sit­u­a­tion plays itself out, we should see a return of con­fi­dence and a calmer period for stock mar­kets in gen­eral, and also some sup­port for pre­cious met­als and com­modi­ties. The dol­lar may be down for the count, but could her­ald a sense of nor­malcy in broader markets.

Tags: Canvas, Credit Crisis, Currency Movements, Devaluation, Emerging Market, Fall From Grace, Financial Markets, Global Flight, Greenback, Japanese Yen, Moving Average, November High, oil, Public Debt, Short Position, Treasuries, Uptrend, Us Currency, Us Dollar Index, Weimar Germany, Worries
Posted in Commodities, Credit Markets, Economy, Emerging Markets, Markets | Comments Off

Rio Tinto/BHP Billiton at parity

Friday, December 19th, 2008

Yep, the share prices of the two min­ing giants have crossed. After suf­fer­ing another sick­en­ing fall on Thurs­day, Rio shares (down 10 per cent) are now trad­ing at £10.40, about 4p lower than BHP’s.

This is seri­ously embar­rass­ing for Rio. After all, BHP’s aban­doned bid was pitched at a ratio of 3.4:1.

Of course, the rea­son Rio is being dragged lower is debt. And Rio has a lot of it — $40bn to be pre­cise, against a mar­ket value of $27bn.

The com­pany says it will be able to meet its debt repay­ments ($8.9bn is due next Sep­tem­ber) and does not need a rights issue.

But the mar­ket doesn't believe Rio, and the result is a sink­ing share price.

Since BHP walked away last week, Rio shares have fallen 58 per cent.

Related links:
No respite for Rio - FT Alphaville

Source

Tags: Alphaville, Bhp Billiton, Bid, Debt Repayments, Ft Alphaville, Giants, Lot, Parity, Reason, Respite, Rio 10, Rio Tinto, Share Price, Share Prices, Shares
Posted in ETFs, Markets | Comments Off

Paul Krugman: The Madoff Economy

Friday, December 19th, 2008

The costs of "America's Ponzi Era":

The Mad­off Econ­omy, by Paul Krug­man, Com­men­tary, NY Times: The rev­e­la­tion that Bernard Mad­off — bril­liant investor (or so almost every­one thought), phil­an­thropist, pil­lar of the com­mu­nity — was a phony has shocked the world, and under­stand­ably so. The scale of his alleged $50 bil­lion Ponzi scheme is hard to comprehend.

Yet surely I'm not the only per­son to ask the obvi­ous ques­tion: How dif­fer­ent, really, is Mr. Madoff's tale from the story of; the invest­ment indus­try as a whole?

The finan­cial ser­vices indus­try has claimed an ever-growing share of the nation's income over the past gen­er­a­tion, mak­ing the peo­ple who run the indus­try incred­i­bly rich. Yet, at this point, it looks as if much of the indus­try has been destroy­ing value, not cre­at­ing it. And it's ... had a cor­rupt­ing effect on our soci­ety as a whole.

Let's start with those pay­checks. ... The incomes of the rich­est Amer­i­cans have exploded over the past gen­er­a­tion, even as wages of ordi­nary work­ers have stag­nated; high pay on Wall Street was a major cause of that divergence.

But surely those finan­cial super­stars must have been earn­ing their mil­lions, right? No, not nec­es­sar­ily. The pay sys­tem on Wall Street lav­ishly rewards the appear­ance of profit, even if that appear­ance later turns out to have been an illusion.

Con­sider the hypo­thet­i­cal exam­ple of a money man­ager who lever­ages up his clients' money..., then invests the bulked-up total in high-yielding but risky assets... For a while — say, as long as a hous­ing bub­ble con­tin­ues to inflate — he (it's almost always a he) will make big prof­its and receive big bonuses. Then, when the bub­ble bursts and his invest­ments turn into toxic waste, his investors will lose big — but he'll keep those bonuses.

O.K., maybe my exam­ple wasn't hypo­thet­i­cal after all.

So, how dif­fer­ent is what Wall Street in gen­eral did from the Mad­off affair? Well, Mr. Mad­off allegedly skipped a few steps, sim­ply steal­ing his clients' money rather than col­lect­ing big fees while expos­ing investors to risks they didn't under­stand. ... Still, the end result was the same (except for the house arrest): the money man­agers got rich; the investors saw their money disappear.

We're talk­ing about a lot of money here. In recent years the finance sec­tor accounted for 8 per­cent of America's G.D.P., up from less than 5 per­cent a gen­er­a­tion ear­lier. If that extra 3 per­cent was money for noth­ing — and it prob­a­bly was — we're talk­ing about $400 bil­lion a year in waste, fraud and abuse.

But the costs of America's Ponzi era surely went beyond the direct waste of dol­lars and cents.

At the crud­est level, Wall Street's ill-gotten gains cor­rupted and con­tinue to cor­rupt pol­i­tics... Mean­while, how much has our nation's future been dam­aged by the mag­netic pull of quick per­sonal wealth, which for years has drawn many of our best and bright­est young peo­ple into invest­ment bank­ing, at the expense of sci­ence, pub­lic ser­vice and just about every­thing else?

Most of all, the vast riches ... under­mined our sense of real­ity and degraded our judg­ment. Think of the way almost every­one impor­tant missed the warn­ing signs of an impend­ing cri­sis. How was that pos­si­ble? ... The answer, I believe, is that there's an innate ten­dency on the part of even the élite to idol­ize men who are mak­ing a lot of money, and assume that they know what they're doing.

After all, that's why so many peo­ple trusted Mr. Madoff.

Now, as we sur­vey the wreck­age and try to under­stand how things can have gone so wrong, so fast, the answer is actu­ally quite sim­ple: What we're look­ing at now are the con­se­quences of a world gone Madoff.

Tags: Bernard Madoff, Bubble Bursts, Divergence, Financial Superstars, Housing Bubble, Hypothetical Example, Incomes, Investment Industry, Money Manager, Ny Times, oil, Paul Krugman, Paychecks, Philanthropist, Phony, Pillar, Ponzi, Richest Americans, Risky Assets, Toxic Waste, Wages
Posted in Economy, Markets | 1 Comment »

Healthy Diversion Brings Smiles

Thursday, December 18th, 2008

First Round Cap­i­tal, a VC firm has cre­ated some­thing really spe­cial here that proves that life's sim­ple plea­sures are the best cure. Danc­ing, Laugh­ter and Bust­ing Loose are con­ta­gious. Check it out, click play to see for your­self. Its brilliant.

Merry Christ­mas!

Tags: Christmas, Diversion, Laughter, Merry Christmas, Simple Pleasures, Smiles, Vc Firm
Posted in Markets | Comments Off

Tom Stanley's Investment Philosophy

Thursday, December 18th, 2008

Tom Stan­ley, founder of Res­olute Funds, has earned a stel­lar rep­u­ta­tion as one of North America's great­est investors. This year has not been kind to investors in Canada and as of the end of Novem­ber, it cer­tainly was not kind to Tom Stan­ley either. But then, its been no one's equity mar­ket, except if you've been short. For value investors and con­trar­i­ans, the prob­lem has been that stocks that were deemed to be cheap dur­ing last sum­mer, have become cheaper, and much quicker too than antic­i­pated, as equity mar­ket liq­ui­da­tion con­tin­ued and as eco­nomic fun­da­men­tals dete­ri­o­rated both in Canada and glob­ally. It is dis­ci­pline, how­ever, that sets the best asset man­agers apart from the crowd, and Tom Stan­ley is per­haps one of the best there is.

We would like to share his invest­ment phi­los­o­phy with you. We have gra­tu­itously taken the fol­low­ing infor­ma­tion from the Res­olute Funds website.

About Tom Stan­ley: After earn­ing his under­grad­u­ate degree in Psy­chol­ogy at the Uni­ver­sity of West­ern Ontario, Tom Stan­ley com­pleted his Mas­ter of Busi­ness Admin­is­tra­tion at York Uni­ver­sity. Tom entered the invest­ment indus­try in 1980 and served as an Invest­ment Advi­sor for "reg­u­lar peo­ple". He put a strong empha­sis on edu­cat­ing the pub­lic on good invest­ing prac­tices. To this end, he taught invest­ing at Ryer­son Uni­ver­sity, Seneca Col­lege and at neigh­bor­hood YMCAs. He was also pro­ducer, host and mod­er­a­tor of the TV show "Your Business".

In 1989, Tom became a Port­fo­lio Man­ager and sub­se­quently founded the Res­olute Growth Fund in 1993. He con­tin­ued serv­ing as an Invest­ment Advi­sor until 2004 when he retired from this posi­tion to focus solely on fund man­age­ment. His twelve and a half years of man­ag­ing the Res­olute Growth Fund came to an end in 2006, when Tom made the dif­fi­cult deci­sion to ter­mi­nate the Fund. At its last month end, Res­olute Growth Fund enjoyed the best ten-year per­for­mance track record in North Amer­ica for all funds tracked by Globe­fund & Morn­ingstar. Tom cur­rently over­sees the Res­olute Per­for­mance Fund, a pri­vate mutual fund sold by offer­ing mem­o­ran­dum founded in 2005.

Here as pub­lished by Tom Stan­ley, are Tom Stanley's ideals about investing:

There are many ways to be a suc­cess­ful investor. I have no claim that what has worked for me in the past will con­tinue to work in the future, but I would like to share with you some of the prin­ci­ples I have learned over the past 25 years that have helped me become a bet­ter investor.

1. Be a Long Term Investor
Too much empha­sis is placed on short-term fluc­tu­a­tions. It is eas­ier to antic­i­pate long-term trends.

2. Have a Flex­i­ble Approach
Change is the only cer­tainty and as mar­kets change, one should change as well.

3. Actively Look for Ideas
I find many of my best ideas; they don't find me.

4. Be Skep­ti­cal
Check facts directly. Strive to under­stand the bias and poten­tial con­flicts of inter­est among the sources that pro­vide them.

5. I Eat my Own Cook­ing
My only stock mar­ket invest­ment is the Res­olute Per­for­mance Fund. This aligns my inter­ests with the rest of the unitholders.

6. I Buy my Best Ideas
I pre­fer to buy only my best ideas.

7. Fil­ter out the Noise
One of the great­est chal­lenges is to fil­ter out the noise and use only what is relevant.

8. Be Thrifty
Mod­er­ate costs facil­i­tate mod­er­ate fees. Mod­er­ate fees facil­i­tate performance.

9. Out­per­form by Being Dif­fer­ent
To have a chance of out­per­form­ing the mar­ket, invest dif­fer­ently than the market.

10. Know Your Lim­its
It is just as impor­tant for me to know what I don't know as it is to know what I know.

11. Stay Hum­ble
Stay hum­ble or the mar­ket will make you humble.

12. Being Small is an Advan­tage
It is eas­ier to out­per­form being small.

13. Apply Spir­i­tual Prin­ci­ples
An impor­tant mea­sure of one's suc­cess is how much he ben­e­fited his fel­low man.

14. Invest­ing is Not a Team Sport
The best deci­sions are rarely made by com­mit­tee.

15. A Good Card Player Does Not Show His Hand
Con­fi­den­tial­ity is essen­tial for suc­cess­ful small cap investing.

16. Too Much Empha­sis is Placed on Pre­ci­sion
I don't need exact num­bers to make decisions.

17. Be a Con­trar­ian
Being a con­trar­ian is harder in prac­tice than in theory.

18. Strive for Effec­tive Ratio­nal­ity
Do the home­work; know the facts; and make deci­sions based on the facts.

Here are some more of Tom Stanley's thoughts on invest­ment management:

Tags: Asset Managers, Canadian Market, Degree In Psychology, Difficult Decision, Economic Fundamentals, Flexible Approach, Investment Advisor, Investment Industry, Investment Philosophy, Master Of Business, Master Of Business Administration, Morningstar, Offering Memorandum, Performance Track, Portfolio Manager, Resolute Funds, Resolute Growth Fund, Resolute Performance Fund, Ryerson University, Seneca College, Stellar Reputation, Term Fluctuations, Term Investor, Tom Stanley, University Of Western Ontario, Value Investors, Value Stocks
Posted in Canadian Market, Markets | 1 Comment »

The Yield Curve is Flattening?

Wednesday, December 17th, 2008

Long-term gov­ern­ment bond yields are drop­ping every­where. Is any­body going this way?

Here is what some of the folks in the bond mar­ket are saying:

Eric Las­celles, Chief Eco­nomic and Rates Strate­gist,  TD Secu­ri­ties Inc.: "It is remark­able, the speed at which this is hap­pen­ing," said Eric Las­celles, chief eco­nom­ics and rates strate­gist for TD Secu­ri­ties Inc.

Stew­art Hall, cur­rency and fixed-income strate­gist with HSBC Secu­ri­ties (Canada) Inc.: "I think one of the over­ar­ch­ing themes today is global reces­sion." On a pos­i­tive note, "You have the Fed and other gov­ern­ment agen­cies oper­at­ing in an imag­i­na­tive and inno­v­a­tive fash­ion to throw as much as nec­es­sary [at the prob­lem] to get the econ­omy back in track."

Mark Chan­dler, fixed-income strate­gist with RBC Domin­ion Secu­ri­ties Inc.: “Long-term rates are play­ing catch-up in terms of the decline in yields we have seen in short-term bonds.  There is lim­ited down­side in short-term yields."The rel­a­tively greater drop in yields on long-term bonds com­pared with short-term bonds is a theme that could con­tinue into the first half of 2009, Mr. Chan­dler said. In the par­lance of bond traders, this is known as a yield curve flat­tener, as the dif­fer­ence in yield between short-term and long-term bonds narrows.

The deci­sion by the Fed last week to buy $500-billion (U.S.) of agency guar­an­teed mortgage-backed secu­ri­ties, along with $100-billion of other agency (government-sponsored enter­prises) debt, is a force act­ing to push yields down.

On an increas­ing basis, the Fed has been tak­ing steps to man­age through the U.S. hous­ing cri­sis. The plan injects liq­uid­ity into the sys­tem, and frees up cash avail­able for mort­gage lend­ing, as well as serv­ing to lower U.S. mort­gage rates. The rate of 30-year mort­gages has fallen to 6 per cent last week from 6.5 per cent.

Less than two weeks ago, Fed­eral Reserve Board chair­man Ben Bernanke indi­cated that the Fed could also decide to buy longer-term U.S. Trea­suries, which would reduce bond sup­plies, result­ing in higher prices and a decline in yields.

From Bloomberg:

The 10-year note’s yield fell as much as 14 basis points, or 0.14 per­cent­age point, to 3.37 per­cent. It traded at 3.40 per­cent at 3:04 p.m. in Toronto. The price of the 4.25 per­cent secu­rity matur­ing in June 2018 advanced 84 cents to C$106.86.

The yield on the two-year gov­ern­ment bond dropped six basis points to 1.77 per­cent. The price of the 2.75 per­cent secu­rity due in Decem­ber 2010 rose 12 cents to C$101.95.

The 10-year bond yielded 163 basis points more than the two– year secu­rity, down from 168 basis points yes­ter­day. The so– called yield curve reached 184 basis points on Nov. 6, the steep­est since May 2004.

Our thoughts are that Gov­ern­ment of Canada bond yields which are still higher than those of com­pa­ra­ble US trea­suries will also come down over the next year, as investors seek the refuge of gov­ern­ment secu­ri­ties (and Canada's higher yields), on the Cana­dian as well as global reces­sion trend. The cur­rent blows to the Cana­dian econ­omy come as the Auto indus­try copes with the dif­fi­cul­ties of the Big Three automak­ers, and in the com­modi­ties sec­tor, with the decline in com­modi­ties prices that has led pro­duc­ers to con­sider shut­ting in min­ing and explo­ration projects, and lay­ing off employ­ees. On this basis, it seems far more likely that Canada's yield curve could con­tinue to flat­ten along with the US trea­sury yield curve, lead­ing to higher bond prices and lower yields.

Lev­ente Mady, a fixed-income strate­gist at MF Global Canada Co.: “Infla­tion doesn’t mat­ter any more. It’s defla­tion­ary con­cern that’s under­pin­ning the bid in the long end of the mar­ket. Yields are lit­er­ally grav­i­tat­ing towards zero. It’s almost like it doesn’t mat­ter if the news is good, bad or indifferent.”

Sources: Globe and Mail, Bloomberg

Tags: Array, Ben Bernanke, Bond Traders, Bond Yields, Canada Inc, Canadian Market, Federal Reserve Board, Federal Reserve Board Chairman, Global Recession, Government Bond, Government Sponsored Enterprises, Hsbc Securities, Lascelles, Mark Chandler, Mortgage Backed Securities, Other Government Agencies, Rbc, Rbc Dominion Securities, Rbc Dominion Securities Inc, Td Securities Inc, Term Bonds, Term Yields, Yield Curve
Posted in Bonds, Canadian Market, Commodities, Economy, Markets | Comments Off

Stock Markets: Is This It?

Wednesday, December 17th, 2008

The US Fed­eral Reserve yes­ter­day pulled out all the stops in a fran­tic effort to save the US econ­omy from col­lapse and stem the defla­tion­ary forces. The Fed funds rate was slashed from 1% to a tar­get range between 0 and 0.25% – the low­est the cen­tral bank’s key rate has been since records began in 1954.

In real­ity, the Fed is sim­ply align­ing its tar­get rate with the effec­tive rate and thereby push­ing mon­e­tary pol­icy into an era of Zirp, i.e. a zero-interest-rate policy.

The Fed­eral Open Mar­ket Committee’s (FOMC) state­ment said the “out­look for eco­nomic activ­ity has weak­ened fur­ther” from its pre­vi­ous meet­ing in late Octo­ber, indi­cat­ing that the “Fed­eral Reserve will employ all avail­able tools to pro­mote the resump­tion of sus­tain­able eco­nomic growth and to pre­serve price sta­bil­ity”. The state­ment also dis­cussed spe­cific actions that would move the Fed fur­ther toward quan­ti­ta­tive easing.

In my opin­ion, the Fed’s com­mu­niqué in real­ity sig­nalled the large-scale mon­e­tiz­ing of the US debt markets.

Hat tip: Mish, Global Eco­nomic Analysis

Shar­ing my sen­ti­ments, Bill King (The King Report) com­mented: “Ben Bernanke and the Fed just screwed every­one in the US, and some abroad, that played by the rules, was pru­dent and live on fixed incomes. Ben, just like Easy Al, is once again redis­trib­ut­ing wealth from the pru­dent, the savers and retirees to the reck­less and the boobs that cre­ated this mess. But the Fed, via its com­mu­niqué, is admit­ting that it is pet­ri­fied of what is occur­ring in the econ­omy and finan­cial sys­tem so it is now in all-out money/credit dump mode.”

An e-mail just received from Ben­net Sedacca (Atlantic Advi­sors Asset Man­age­ment) said: The “Fed has declared war on pru­dence and savers and rekin­dled the ‘Moral Haz­ard Card’ – except this time, I believe they have cre­ated the largest moral haz­ard ever seen. Of note is that this inter­ven­tion has occurred in the third week of the month (options expiry for the great­est impact – play­ing games with an already dys­func­tional sys­tem that they cre­ated) and may force pru­dent, risk-avoidance types, to take risk, at pre­cisely the wrong time.

“I respect mar­kets, and will not sell short against this force that seems invin­ci­ble, but as always, will remain cog­nizant of the Big Pic­ture, one that Bernanke and Co. can­not see, it seems. In fact, it feels like they are mak­ing a mock­ery of our sys­tem, that they are des­per­ate and will print enough dol­lars that will force other cen­tral bankers to do the same.

“With stated short-term inter­est rates at 0 (and likely to stay there for the fore­see­able future), 30-year Trea­suries at 2.7% and stocks at gar­gan­tuan price/earnings ratios, we will look to con­tinue to pro­tect our investor’s cap­i­tal as we have done to date. I do not like being forced into a game of ‘Liar’s Poker’.”

With Trea­suries and agency debt poten­tially sub­ject to a great deal of price risk at these lev­els, and the US dol­lar appear­ing to be top­ping out, where does the Fed’s “bet­ting the ranch” pol­icy leave the stock market?

Firstly, for some his­tor­i­cal per­spec­tive, the MSCI World Index and the MSCI Emerg­ing Mar­kets Index have improved by 18.9% and 23.2% respec­tively since the Novem­ber 20 lows. As far as the US mar­kets are con­cerned, the Dow Jones Indus­trial Index has gained 18.2% since the low, the S&P 500 Index 21.4%, the Nas­daq Com­pos­ite Index 20.8% and the Rus­sell 2000 17.1%.

In addi­tion to the Fed’s attempts to inflate asset prices, there are a num­ber of short-term pos­i­tives for equities.

(1) The period post Thanks­giv­ing through the end of the year has usu­ally been a bull­ish time for stocks, based on stud­ies by Jef­frey Hirsch (Stock Trader’s Almanac).

(2) With the excep­tion of the Rus­sell 2000 Index, all the major US indices yes­ter­day breached their 50-day mov­ing aver­ages. Should the bull­ish sea­sonal ten­den­cies pro­vide a fur­ther tail­wind, the next tar­gets for the var­i­ous indices are the Novem­ber 4 highs and the key 200-day mov­ing aver­ages, as shown in the table below. On the down­side, the Decem­ber 1 lows (not shown in the table) must hold for the rally to remain intact.

The num­ber of S&P 500 stocks trad­ing above their respec­tive 50-day mov­ing aver­ages has increased to 53.4% from almost zero in Octo­ber. How­ever, only 5.4% of the index con­stituents are trad­ing above their 200-day lines.

(3) The CBOE Volatil­ity Index (VIX) (green line) has declined from the 80s in Octo­ber and Novem­ber to 52.4 yes­ter­day. It is not uncom­mon for short-term volatil­ity to be at extreme lev­els at bot­tom turn­ing points, and for stocks to improve as the “storm” grows quieter.

(4) I have men­tioned in a pre­vi­ous post that “for a more last­ing mar­ket turn­around to hap­pen, I would like to see … a 90% up-day …” Yes­ter­day was likely another 90% up day, the first since Decem­ber 1. The Lowry’s fig­ures are look­ing bet­ter and the Buy­ing Power Index has just bro­ken out above its declin­ing trend line.

(5) Since the peak of the TED spread (i.e. three-month dol­lar LIBOR less three-month Trea­sury Bills) at 4.65% on Octo­ber 10, the mea­sure has eased to 1.83%. Although this mea­sure is mov­ing in the right direc­tion, credit spreads need to nar­row fur­ther to indi­cate that con­fi­dence is return­ing and liq­uid­ity is start­ing to move freely again.

(6) On a fun­da­men­tal note, it is hard to get a grip on the “E” com­po­nent of price-earnings mul­ti­ples, but it will be remiss to ignore the fact that 39% of the con­stituents of the MSCI World Index sell at a dis­count to share­hold­ers’ equity. “The cash-rich com­pa­nies allow investors to pay noth­ing for future earn­ings streams,” said Jean-Marie Eveil­lard in an inter­view with Bloomberg.

(7) Mar­kets have been shrug­ging off bad news since the poor ISM man­u­fac­tur­ing and pay­rolls data of two weeks ago. I quoted Richard Rus­sell (Dow The­ory Let­ters) in my “Words from the Wise” review on Sun­day, say­ing: “This is all the more dra­matic since this poten­tial upturn has arrived in the face of black-bearish news. Mar­kets bot­tom­ing and ris­ing in the face of bear­ish news are often the most prof­itable ones. I have never seen a bear mar­ket hit its low amid happy news headlines.”

Notwith­stand­ing the improve­ment since the Novem­ber lows, it remains too early to tell whether a sec­u­lar low has been recorded. The chart below shows the long-term trend of the S&P 500 Index (green line) together with a sim­ple 12-month rate of change (or momen­tum) indi­ca­tor (blue line). Although monthly indi­ca­tors are of lit­tle help when it comes to mar­ket tim­ing, they do come in handy for defin­ing the pri­mary trend. An ROC line below zero depicts bear trends as expe­ri­enced in 1991, 1994, 2000 to 2003, and again since Decem­ber 2007.

Stock mar­kets are still caught between the actions of cen­tral banks furi­ously fend­ing off a total eco­nomic melt­down on the one hand, and a wors­en­ing eco­nomic and cor­po­rate pic­ture on the other. The rally may have more legs, but fail­ing fur­ther tech­ni­cal and fun­da­men­tal evi­dence, I remain dis­trust­ful as to whether “this is it”.

Tags: Available Tools, Ben Bernanke, Bill King, Debt Markets, Deflationary Forces, E Mail, Effective Rate, Fed Funds Rate, Federal Open Market Committee, Fixed Incomes, Fomc Statement, Frantic Effort, Global Economic Analysis, Interest Rate Policy, Moral Hazard, Open Market Committee, Sustainable Economic Growth, Target Range, Target Rate, Zero Interest
Posted in Credit Markets, Economy, Emerging Markets, Markets, Outlook, US Stocks | Comments Off

Hugh Hendry: Commodities Stocks to Remain Weak?

Tuesday, December 16th, 2008

Hugh Hendry, the elo­quent and out­spo­ken CIO, Eclec­tica Asset Man­age­ment, in an appear­ance on CNBC's Pow­er­Lunch (Dec. 10) shares his thoughts on agri­cul­ture com­modi­ties stocks such as Potash, and Syngenta.

Among other things, Hendry makes a forth­right con­fes­sion that he was wrong ear­lier this year to make the call to be long com­modi­ties stocks. He con­tin­ues on to say that when he real­ized he was wrong, he promptly sold them too. Hendry runs a long-only Agri­cul­ture fund, as well as his pri­mary hedge fund, and has been con­tro­ver­sial in some of his choices to oppose his funds'  man­dates at times in favour of cash or gov­ern­ment securities.

His main quid pro quo is his cau­tion that although com­mod­ity stocks  could revisit highs, we could be wait­ing as many as 10 years for it. Its a must watch.

In a 7-minute seg­ment ear­lier the same day, Hendry dis­cussed the idea that as the finan­cial cri­sis deep­ens, civil lib­er­ties are cur­tailed by gov­ern­ments eager to put an end to falls in share prices and economies. This is an insight­ful dis­cus­sion, a must-watch.

"The gov­ern­ment has gone to war, it is an eco­nomic war. And in a war the gov­ern­ment takes a larger and larger role in the soci­ety. That's fine, you have to accept that," Hendry said. "What is con­cern­ing is the ero­sion of civil liberties."

The ban on short-selling finan­cial secu­ri­ties in the UK is one exam­ple of ero­sion of civil lib­er­ties, another is a state­ment made in par­lia­ment last week which opens the way to silenc­ing the press dur­ing finan­cial crises.

The Trea­sury Select Com­mit­tee said that it will look at the role of the media in finan­cial sta­bil­ity and whether finan­cial jour­nal­ists "should oper­ate under any form of report­ing restric­tions dur­ing bank­ing crises".

"We're only a year into this and sud­denly, already, our lib­er­ties are being brought back, brought in," Hendry said.

Tags: 10 Years, Agriculture Commodities, Array, Asset Management, Caution, Choices, Civil Liberties, Cnbc, Commodity Stocks, Confession, Economic War, Erosion, Favour, Financial Crises, Financial Crisis, Financial Journalists, Financial Securities, Financial Stability, government securities, Hedge Fund, Hugh Hendry, Mandates, Minute Segment, Potash, Powerlunch, Role Of The Media, Share Prices, Syngenta, Treasury Select Committee
Posted in Commodities, Markets | Comments Off

Donald Coxe on BNN (12/12/2008)

Sunday, December 14th, 2008

Don­ald Coxe, BMO Capital's Chief Invest­ment Strate­gist, appeared on BNN, Decem­ber 12, 2008.

Tags: Array, BMO, Bnn, Capital Investment, Chief Investment Strategist, Don Coxe, Donald Coxe, Img
Posted in Markets | Comments Off

Words from the (investment) wise for the week that was (Dec 8 – 14, 2008)

Sunday, December 14th, 2008

Despite a litany of bleak eco­nomic and cor­po­rate news con­fronting investors dur­ing the past week, global stock mar­kets digested the bear­ish fod­der with a sense of aplomb. The MSCI World Index and the MSCI Emerg­ing Mar­kets Index gained 4.4% and 10.9% respec­tively on the week, with other refla­tion trades such as gold (+9.1%) and oil (+20.4%) also putting in a strong performance.

But investor angst was never com­pletely allayed as seen from the yields on US one– and three-month Trea­sury Bills briefly trad­ing in neg­a­tive ter­ri­tory for the first time since 1940, indi­cat­ing the will­ing­ness of risk-averse investors to pay the gov­ern­ment for the “priv­i­lege” of hold­ing their money. Three-month T-Bills ended the week in pos­i­tive ter­ri­tory but barely so at a minus­cule 0.036% yield, indi­cat­ing that liq­uid­ity was still being hoarded. (Also see my “Credit Cri­sis Watch“.)

Source: Nick Ander­son, Slate

The week kicked off on a pos­i­tive note after US president-elect Barack Obama had spelled out his plans on Sun­day for the biggest infra­struc­ture invest­ment in the US since the 1950s. Accord­ing to CNN, Obama said: “We under­stand that we’ve got to pro­vide a blood infu­sion to the patient right now to make sure that the patient is sta­bi­lized. And that means that we can’t worry short term about the deficit [which might sur­pass $1 tril­lion before his spend­ing plans are included]. We’ve got to make sure that the eco­nomic stim­u­lus plan is large enough to get the econ­omy moving.”

“The resul­tant infra­struc­ture and phys­i­cal assets will be far bet­ter than endow­ing busted banks, insur­ance com­pa­nies and other finan­cial enti­ties with US tax­pay­ers’ cash, which effec­tively goes down a black hole,” remarked Bill King (The King Report).

Finan­cial mar­kets reacted neg­a­tively to the US Senate’s fail­ure to agree on a $14 bil­lion loan to the trou­bled automak­ers. The prospect of the biggest indus­trial fail­ure in US his­tory caused a sell-off on global stock mar­kets, a widen­ing of credit spreads and an onslaught on the US dollar.

How­ever, the US Trea­sury was quick to sig­nal its readi­ness to pro­vide funds to prop up the “Big Three”, as quoted in the Finan­cial Times: “Because Con­gress failed to act, we will stand ready to pre­vent an immi­nent fail­ure until Con­gress recon­venes and acts to address the long-term via­bil­ity of the indus­try.” This indi­ca­tion resulted in an improved tone on finan­cial mar­kets by the close of the week.

Next, a tag cloud from the plethora of arti­cles I have devoured over the past week. This is a way of visu­al­iz­ing word fre­quen­cies at a glance. Key words such as “credit”, “debt”, “econ­omy”, “Fed”, “gov­ern­ment”, “mar­ket”, “rates” and “stock” occur often, but “gold” is also becom­ing increas­ingly prominent.

Back to the issue of mar­kets shrug­ging off bad news for the sec­ond week run­ning. Richard Rus­sell (Dow The­ory Let­ters) com­mented as fol­lows: “On top of every­thing else, Lowry’s Sell­ing Pres­sure Index dropped sub­stan­tially yes­ter­day [Wednes­day] and is now in a def­i­nite declin­ing trend. At the same time, Lowry’s Buy­ing Power Index is trend­ing higher. Thus, the odds are say­ing that the trend of the stock mar­ket is turn­ing up.

“This is all the more dra­matic since this poten­tial upturn has arrived in the face of black-bearish news. Mar­kets bot­tom­ing and ris­ing in the face of bear­ish news are often the most prof­itable ones. I have never seen a bear mar­ket hit its low amid happy news headlines.”

On a fun­da­men­tal note, 39% of the con­stituents of the MSCI World Index sell at a dis­count to share­hold­ers’ equity. “The cash-rich com­pa­nies allow investors to pay noth­ing for future earn­ings streams,” said Jean-Marie Eveil­lard in an inter­view with Bloomberg.

A pos­i­tive for the bulls is that the period post Thanks­giv­ing through the end of the year has usu­ally been a bull­ish time for stocks, based on stud­ies by Jef­frey Hirsch (Stock Trader’s Almanac). Should the bull­ish sea­sonal ten­den­cies pro­vide a tail­wind on this occa­sion, pos­si­ble first tar­gets are the 50-day mov­ing aver­ages of 8,784 for the Dow Jones Indus­trial Index (cur­rent level 8,630) and 910 for the S&P 500 Index (cur­rent level 880).

The last word on equi­ties goes to Hong Kong-based Puru Sax­ena: “I can­not say with any cer­tainty whether we are already in the early stages of the next cycle. Under my best case sce­nario, we are in the very early stages of a new multi-year bull mar­ket. And under my worst case sce­nario, we are going to get a very strong rebound (30% move higher in the S&P 500) over a short period of time, which will prob­a­bly take the mar­kets back to their 200-day mov­ing averages.”

Before high­light­ing some thought-provoking news items and quotes from mar­ket com­men­ta­tors, let’s briefly review the finan­cial mar­kets’ move­ments on the basis of eco­nomic sta­tis­tics and a per­for­mance round-up.

Econ­omy
“Global busi­ness con­fi­dence has been shat­tered. Sen­ti­ment is equally neg­a­tive in North Amer­ica, South Amer­ica and Europe. Asian busi­ness con­fi­dence is not quite as dark, but it is falling rapidly,” said the lat­est Sur­vey of Busi­ness Con­fi­dence of the World con­ducted by Moody’s Economy.com. “Pric­ing power is quickly evap­o­rat­ing and approach­ing that which pre­vailed in 2003, the last time defla­tion was a con­cern.” Accord­ing to the sur­vey results, the global econ­omy is suf­fer­ing a severe recession.

Eco­nomic indi­ca­tors released in the US dur­ing the past week mostly pointed to a deep­en­ing recession.

BCA Research said: “The year-end spend­ing sea­son will be the biggest bust in sev­eral decades, as con­sumers have been hit by a dou­ble whammy: a melt­down in finan­cial and res­i­den­tial asset prices; and a sharp rise in lay­offs. The government’s fail­ure to deliver a fis­cal stim­u­lus plan and unfreeze the credit mar­kets imply that the reces­sion will deepen and any recov­ery will be pushed far­ther into the future.

“The con­trac­tion in pay­rolls and eco­nomic growth will per­sist until there are some signs that pol­icy actions are finally becom­ing effec­tive. The fis­cal stim­u­lus plan needed to sta­bi­lize the econ­omy will be mas­sive and pol­icy rates will stay near zero for a long time.”

The pre­car­i­ous posi­tion of the US con­sumer is illus­trated by a plunge of 21.9 points to 63.7 in the annual aver­age of the Uni­ver­sity of Michi­gan Con­sumer Sen­ti­ment Index — the largest annual aver­age decline in the his­tory of the Index which began in 1952, accord­ing to Asha Ban­ga­lore (North­ern Trust).

The Fed fund futures are pric­ing in a 76% chance of a 75 basis-point cut in rates from 1.0% to 0.25% when the FOMC meets on Decem­ber 16.

How­ever, Bill King ques­tioned the Fed’s approach: “[Effec­tive] Fed funds traded at zero late last night. We have screamed for months that the offi­cial or ‘tar­get’ Fed funds rate was irrel­e­vant because the effec­tive funds rate was much lower, and near zero. Now Fed funds are trad­ing at zero. Yet there will be pun­dits and experts that will assert that the Fed might cut its tar­get funds rate this week to 0.50% or even 0.25% — even though the cut in the tar­get rate is mean­ing­less. Now that the Fed is pay­ing inter­est to banks, why did the Fed allow the funds rate to trade at zero? Yep, they are ter­ri­fied by something.”

Also, the Fed is con­sid­er­ing issu­ing its own debt to fur­ther expand money sup­ply with­out clog­ging up bank bal­ance sheets and mak­ing it harder for the Fed to main­tain inter­est rates at the desired level. RGE Mon­i­tor said: “… there are upper lim­its to Trea­sury issuance and lower lim­its to the amount of Trea­suries the Fed can sell off from the asset side of its bal­ance sheet. One hur­dle to issu­ing Fed bills: The Fed­eral Reserve Act doesn’t explic­itly per­mit the Fed to issue notes beyond currency.”

Else­where in the world, eco­nomic reports com­pounded anx­i­ety about a severe global reces­sion. Specif­i­cally, Chi­nese exports in Novem­ber declined by 2.2% from a year ear­lier as a result of a dras­tic slow­down in demand in many of its main mar­kets. The fig­ures were far below fore­casts and the +19% fig­ure for Octo­ber. “This is the worst col­lapse in Chi­nese exports since 1999 and is prob­a­bly just the begin­ning of a pro­longed export con­trac­tion,” said Isaac Meng, econ­o­mist at BNP Paribas, as reported by the Finan­cial Times.

Week’s eco­nomic reports
Click here for the week’s econ­omy in pic­tures, cour­tesy of Jake of Econom­Pic Data.

Source: Yahoo Finance, Decem­ber 12, 2008.

In addi­tion to inter­est rate announce­ments by the FOMC (Tues­day) and the Bank of Japan (Thurs­day), next week’s US eco­nomic high­lights, cour­tesy of North­ern Trust, include the following:

1. Indus­trial Pro­duc­tion (Decem­ber 15): The 1.4% drop in the man­u­fac­tur­ing man-hours index in Novem­ber sug­gests a 1.0% decline in indus­trial pro­duc­tion. The oper­at­ing rate is pro­jected to have dropped to 75.7. Con­sen­sus: –0.8%; Capac­ity Uti­liza­tion: 75.7 ver­sus 76.4 in October.

2. Con­sumer Price Index (Decem­ber 16): A 0.7% decline in the CPI is fore­cast for Novem­ber ver­sus a 1.0% drop in Octo­ber, reflect­ing largely lower energy prices. The core CPI is expected to have moved up by 0.1% after a 0.1% decline in Octo­ber. Con­sen­sus: 1.3%, core CPI +0.1%.

3. Hous­ing Starts (Decem­ber 16): Per­mit exten­sions for new homes fell by 9.2% in Octo­ber, inclu­sive of a 12.6% drop in per­mits issued for single-family homes. These fig­ures sug­gest a sharp drop in hous­ing starts (730,000). Con­sen­sus: 740,000 ver­sus 791,000 in October.

4. Lead­ing Indi­ca­tors (Decem­ber 18): Interest-rate spread and money sup­ply are the only two com­po­nents likely to make a pos­i­tive con­tri­bu­tion in Novem­ber. Stock prices, ini­tial job­less claims, man­u­fac­tur­ing work­week, con­sumer expec­ta­tions, ven­dor deliv­er­ies, and build­ing per­mits are expected to make neg­a­tive con­tri­bu­tions. Fore­casts of money sup­ply and orders of con­sumer durables and non-defense cap­i­tal goods are used in the ini­tial esti­mate. The net impact is a 0.5% drop in the lead­ing index dur­ing Novem­ber, assum­ing build­ing per­mits fell. Con­sen­sus: –0.5 %

5. Other reports: NAHB Sur­vey (Decem­ber 15), Cur­rent Account (Q4) (Decem­ber 17), Philadel­phia Fed Sur­vey (Decem­ber 18).

Click here for a sum­mary of Wachovia’s weekly eco­nomic and finan­cial commentary.

Mar­kets
The per­for­mance chart obtained from the Wall Street Jour­nal Online shows how dif­fer­ent global mar­kets per­formed dur­ing the past week.

Source: Wall Street Jour­nal Online, Decem­ber 12, 2008.

Equi­ties
Global stock mar­kets ral­lied strongly dur­ing the past week as bargain-hunters looked past the grim eco­nomic and cor­po­rate reports. Both mature and emerg­ing mar­kets par­tic­i­pated in the rally, as shown by the gains of the MSCI World Index (+4.4%) and the MSCI Emerg­ing Mar­kets Index (+10.9%). Notwith­stand­ing the improve­ment, these indices were still down by 47.4% and 58.8% respec­tively since the peaks of Octo­ber 2007.

Par­tic­u­larly note­wor­thy, the MSCI Emerg­ing Mar­kets Index has been out­per­form­ing the Dow Jones World Index since late Octo­ber (ris­ing green line), after a period of solid under­per­for­mance from May to Octo­ber (falling line).

The chart below shows the per­for­mance of the four BRIC coun­tries since the Novem­ber 20 lows. Brazil (orange line), India (green) and Rus­sia (red) have all recov­ered sharply, but China (blue) has under­per­formed after ini­tial out­per­for­mance fol­low­ing the cli­mac­tic[MR2] Novem­ber 10 sell-off.

Click here or on the thumb­nail below for a (pleas­antly green) mar­ket map, obtained from Fin­viz, pro­vid­ing a quick overview of last week’s per­for­mances of global stock mar­kets (as reflected by the move­ments of ADR stocks).

The Dow Jones Indus­trial Index was one of the few major indices to record a neg­a­tive return dur­ing the past week, with US mar­kets in gen­eral lag­ging other bourses as shown by the major index move­ments: Dow –0.1% (YTD –34.95), S&P 500 Index +0.4% (YTD –40.1%), Nas­daq Com­pos­ite Index +2.1% (YTD ‑41.9%) and Rus­sell 2000 Index +1.6% (YTD –38.8%).

The bar chart below shows the US sec­tor per­for­mances over the week, and specif­i­cally how strongly energy and mate­ri­als have recov­ered. Nine of the ten best-performing groups were related to com­modi­ties (diver­si­fied met­als & min­ing, coal & con­sum­able fuel, alu­minum, steel, gold, oil & gas drilling, oil & gas explo­ration & pro­duc­tion, gas util­i­ties[MR3] , and oil & gas equip­ment & services).

Jamie Dimon, JPMor­gan Chase’s (JPM) chief exec­u­tive, prompted a sharp fall in finan­cial shares with a warn­ing that his bank was hav­ing a tough fourth quar­ter after a “ter­ri­ble” Novem­ber and Decem­ber. Gold­man Sachs’ (GS) earn­ings report on Tues­day is keenly awaited.

Based on the out­per­for­mance of emerging-market stocks and the sharp recov­ery of commodity-related groups, it would appear that investors are becom­ing less risk averse. Another exam­ple is the out­per­for­mance of small caps since the Novem­ber 20 lows. A study pub­lished by Bespoke on Decem­ber 8 high­lighted the decile per­for­mance of stocks in the S&P 500 Index based on mar­ket cap. As shown by the chart below, the two deciles of the largest-cap stocks in the S&P 500 increased by about 17%, while the decile of the smallest-cap stocks was 54% higher.

Fixed-income instru­ments
The yields on gov­ern­ment bonds gen­er­ally edged up dur­ing the past few trad­ing days after a record-breaking plunge since the begin­ning of November.

The UK ten-year Gilt yield increased by 17 basis points to 3.60% and the Ger­man ten-year Bund rose by 26 basis points to 3.30%. Although the US ten-year Trea­sury Note yield declined by 7 basis points to 2.59% on the week, the yield edged up from an ear­lier five-decade low of 2.48%.

John Huss­man (Huss­man Funds) expressed his con­cern about the level of Trea­suries: “The prob­lem with Trea­sury yields here is that while there are good eco­nomic rea­sons for the down­ward yield pres­sures, the lev­els are low enough to invite explo­sive spikes that can eas­ily wipe out a year or more of yield-to-maturity in a few days.”

Emerging-market bonds moved in an oppo­site direc­tion to mature bonds, with the JPMor­gan EMBI Global Index gain­ing 2.4% dur­ing the week.

US mort­gage rates were almost unchanged on the week, with the 30-year fixed rate ris­ing by 2 basis points to 5.71% and the 5-year ARM declin­ing by 1 basis point to 5.95%

The CDX and iTraxx credit indices, US Trea­sury Bills and high-yield spreads are still at dis­tressed lev­els. Some improve­ment has been seen as a result of the cen­tral banks’ actions, notably the tight­en­ing of the TED and LIBOR-OIS spreads, and lower mort­gage rates. How­ever, credit spreads need to nar­row fur­ther to indi­cate that liq­uid­ity is mov­ing freely again and credit mar­kets are start­ing to thaw. (Also see my “Credit Cri­sis Watch“.)

Cur­ren­cies
The US dol­lar fell sharply as the recent rela­tion­ship between risk aver­sion and dol­lar strength weak­ened as a result of US-specific fac­tors like the dete­ri­o­ra­tion in the US trade bal­ance and the automaker woes. The green­back plum­meted to a 13-year low against the Japan­ese yen and touched its low­est level against the euro for seven weeks.

As shown by the chart below, the dol­lar has bro­ken below its 50-day mov­ing aver­age and seems to be top­ping out. Are for­eign investors com­ing to the con­clu­sion that the US cur­rency, which briefly last week yielded a neg­a­tive yield, is no longer an attrac­tive option?

Over the week the US dol­lar lost ground against the euro (-5.0%), the British pound (-1.8%), the Swiss franc (-3.6%), the Japan­ese yen (-1.8%), the Cana­dian dol­lar (-2.0%), the Aus­tralian dol­lar (-3.0%) and the New Zealand dol­lar (-2.2%). The US cur­rency also fell against emerging-market cur­ren­cies[MR4] , like the South African rand (-2.0%).

The British pound came under renewed pres­sure as the wors­en­ing eco­nomic sit­u­a­tion trig­gered con­cerns of a cur­rency cri­sis. Sterling’s trade-weighted index fell to its low­est level since record-keeping began in 1981.

Com­modi­ties
The Reuters/Jeffries CRB Index (+8.8%) closed higher by the end of the week — only its sixth pos­i­tive week since com­modi­ties peaked early in July. The Baltic Dry Index — a bench­mark for ship­ping major raw mate­ri­als includ­ing coal, iron ore and grain — bounced by 15.2% from very over­sold levels.

The graph below shows the move­ments of var­i­ous com­modi­ties over the past week, indi­cat­ing an improve­ment across the whole com­plex (with the excep­tion of nat­ural gas) as a weak US dol­lar pushed prices higher.

The Inter­na­tional Energy Agency urged a “sub­stan­tial” cut in Opec out­put when the oil car­tel meets next week, as global oil demand this year is expected to con­tract for the first time in 25 years. The price of West Texas Inter­me­di­ate crude surged by 20.4% in expec­ta­tion of a cut of at least 1 mil­lion to 1.5 mil­lion bar­rels a day.

Gold bul­lion (+9.1%) remained in favor with investors as a result of a solid supply/demand sit­u­a­tion, store-of-value con­sid­er­a­tions and a weaker US cur­rency. The chart below illus­trates the strong inverse rela­tion­ship between gold (green line) and the dol­lar (red line). In addi­tion, gold has bro­ken above its 50-day mov­ing aver­age (blue line) and trades at about the same level it started off in Jan­u­ary 2008 — quite a feat in these dif­fi­cult mar­kets. Plat­inum (+4.9%) and sil­ver (+8.5%) improved in tan­dem with the yel­low metal.

After the storm comes the calm. With only 12 more trad­ing days remain­ing before we wish the tumul­tuous 2008 good­bye, let’s hope the calm lies just ahead. And as Richard Rus­sell reminds us: “Calm after a bear­ish trend is usu­ally bull­ish.” Mean­while, the news items and words from the invest­ment wise below will hope­fully assist in steer­ing our port­fo­lios on a prof­itable course.

That’s the way it looks from Cape Town.

Source: Dave Granlund

YouTube: The twelve days of bailouts
A bailout song for the holidays.

Source: YouTube, Decem­ber 6, 2008.

New York Mag­a­zine: Ora­cles of doom
They always knew the econ­omy would col­lapse. What do they think will hap­pen next?

FORTUNE TELLER: Ger­ald Celente
Trends Research Insti­tute founder; owner of collapseof09.com

TRACK RECORD
Pre­dicted 1987 crash, 1997 Asian cur­rency cri­sis; said in 2007 that US was headed for “eco­nomic 9/11″ in 2008.

CURRENT PREDICTION
“Prod­ucts are going to be cheaper to buy, but guess what? You’re going to need more dol­lars to buy them because your dollar’s going to be worth less. There is no fis­cal or mon­e­tary pol­icy that can save this. You can­not save it by print­ing more money.”

FORTUNE TELLER: Nouriel Roubini
NYU busi­ness pro­fes­sor; chair­man of RGE Monitor

TRACK RECORD
Pre­dicted this year’s cri­sis in 2006, point­ing to a hous­ing bust, oil shocks, and interest-rate increases.

CURRENT PREDICTION
“It’s becom­ing a global reces­sion. I expect it to be the worst US reces­sion of the last 50 years. I expect a cumu­la­tive fall in out­put from the peak of 4% and the unem­ploy­ment rate going all the way to 9%.”

FORTUNE TELLER: Peter Schiff
Pres­i­dent of Euro Pacific Capital

TRACK RECORD
Pub­lished “Crash Proof: How to Profit From the Com­ing Eco­nomic Col­lapse in Feb­ru­ary 2007″; star of YouTube video “Peter Schiff Was Right 2006–2007.”

CURRENT PREDICTION
“I pre­dicted that the econ­omy would col­lapse. The big­ger risk I saw was the government’s attempt to solve the prob­lem by doing exactly what they’re now doing. They’re going to cre­ate another Great Depres­sion, but worse, because the cost of liv­ing will go through the roof.”

FORTUNE TELLER: Richard Rus­sell
Founder of the Dow The­ory Letters

TRACK RECORD
Pre­dicted bot­tom of 1974 bear mar­ket; exited mar­ket before crashes in 1987 and 2000.

CURRENT PREDICTION
“As long as we can hold the Dow above 7,470, I think the sit­u­a­tion is hope­ful. That’s the halfway level from when the bull mar­ket started in 1982 and when it ended in 2007. My guess is that it will break that level. Most bear mar­kets have wiped out more than 50% of a bull market.”

FORTUNE TELLER: Barry Ritholtz
CEO and equity research direc­tor of Fusion IQ; blog­ger at The Big Picture

TRACK RECORD
Pre­dicted down­turn last year.

CURRENT PREDICTION
“In March, the first-quarter num­bers start com­ing out, and that’s poten­tially a prob­lem. It’s just going to be an issue of deal­ing with the mar­ket. If earn­ings con­tinue to drop and you end up with mul­ti­ple con­trac­tions, that basi­cally takes you to a really bad, ugly place, which is an S&P at 400 or 500. I don’t think that’s likely, but it’s cer­tainly possible.”

FORTUNE TELLER: Jeremy Grantham
Co-founder and chair­man, GMO LLC

TRACK RECORD
His 1998 ten-year fore­cast showed severe mar­ket declines in 2007 and 2008; warned of global bub­ble in April 2007.

CURRENT PREDICTION
“I would think, just to guess, that the period of heroic volatil­ity will end pretty soon and will be replaced by a rather 1974-ish envi­ron­ment, where you qui­etly get bit­terly resigned to your steady diet of bad news.”

Source: Jeff Van­Dam, New York Mag­a­zine, Decem­ber 7, 2008.

CNBC: Mer­rill Lynch — out­look for 2009
“An eco­nomic and invest­ment out­look for 2009, with Mer­rill Lynch’s Richard Bern­stein and Davis Rosenberg.

Source: CNBC, Decem­ber 11, 2008.

Finan­cial Times: Obama to focus on stim­u­lus not deficit
“Barack Obama on Sun­day spelled out his plans for the biggest infra­struc­ture invest­ment in the US for half a cen­tury. The president-elect argued that with the econ­omy reel­ing, his incom­ing admin­is­tra­tion could not afford to worry about a spi­ralling bud­get deficit.

“Mr Obama’s pro­pos­als for gov­ern­ment works on roads, bridges, inter­net broad­band and school build­ings, together with energy effi­ciency mea­sures and health spend­ing, are far more detailed than the nor­mal announce­ments dur­ing a time of transition.

“At a time of deep­en­ing eco­nomic gloom — with half a mil­lion jobs lost last month alone — pres­i­dent George W. Bush has been largely absent from the recent eco­nomic debate. Mr Obama is high­light­ing his con­cern at the depth of the reces­sion he will inherit, while fast-tracking his plans to counter it.

“‘Things are going to get worse before they get bet­ter,’ Mr Obama said on Sun­day on NBC’s Meet The Press. He empha­sised that his plans rep­re­sented the largest US infra­struc­ture pro­gramme since the fed­eral high­way sys­tem in the 1950s.

“‘The key is mak­ing sure we jump-start the econ­omy in a way that doesn’t just deal with the short term, doesn’t just cre­ate jobs imme­di­ately, but also puts us on a glide path for long-term sus­tain­able eco­nomic growth.’

“Not­ing the US bud­get deficit might sur­pass $1,000 bil­lion before his spend­ing plans are fac­tored in, Mr Obama added: ‘We under­stand that we’ve got to pro­vide a blood infu­sion to the patient right now to make sure that the patient is sta­bilised. And that means that we can’t worry short term about the deficit. We’ve got to make sure that the eco­nomic stim­u­lus plan is large enough to get the econ­omy moving.’

“He wanted a strong set of finan­cial reg­u­la­tions to make banks, credit rat­ings agen­cies, mort­gage bro­kers and oth­ers ‘much more account­able and behave much more responsibly’.

“‘I am absolutely con­fi­dent that if we take the right steps over the com­ing months that not only can we get the econ­omy back on track but we can emerge leaner, meaner and ulti­mately more com­pet­i­tive and more pros­per­ous,’ Mr Obama said at a sub­se­quent press conference.”

Source: Daniel Dombey, Finan­cial Times, Decem­ber 7, 2008.

Bill King (The King Report): Obama Plan one of the bet­ter plans
“The Obama Plan to spend mas­sive amounts of money on infra­struc­ture in the US is one of the bet­ter plans being prof­fered to keep the US out of a depres­sion. But it has its drawbacks.

“Other stim­u­lus plans put money or enti­tle­ments in US con­sumers’ pock­ets. Most of the money ends up in China, Japan or OPEC. Most infra­struc­ture spend­ing will remain in the US. And instead of just pass­ing out checks or larger enti­tle­ments, jobs, mostly temps, will be cre­ated and per­ma­nent assets will result.

“The resul­tant infra­struc­ture and phys­i­cal assets will be far bet­ter than endow­ing busted banks, insur­ance com­pa­nies and other finan­cial enti­ties with US tax­pay­ers’ cash, which effec­tively goes down a black hole.

“Obama’s Plan will boost blue col­lar employ­ment, pro­vided a lim­ited num­ber of ille­gals are hired. This will pro­duce an income shift to blue col­lar and lower mid­dle class house­holds. But fired employ­ees of finan­cial, high tech and other high-end jobs are unlikely to par­tic­i­pate. So the mul­ti­plier effect of increased income will be less on the econ­omy in general.

“The neg­a­tives of the plan, besides the mas­sive debt and likely cor­rup­tion, is that it does not rem­edy struc­tural prob­lems in the US econ­omy and finan­cial sys­tem. There will be few new indus­tries spawned and there­fore few per­ma­nent well-paying jobs. Noth­ing addresses the sav­ings and invest­ment problems.

“There is too much capac­ity in the world. There are hun­dreds of empty or aban­doned fac­to­ries in China alone. Until excess capac­ity is scut­tled and new indus­tries appear, sta­ble employ­ment is a fantasy.

“The real prob­lem, the one that solons will not address, is the US wel­fare state is busted. The Key­ne­sian and mon­e­tary stim­uli that were abused over many decades to paper over wel­fare state spend­ing are now being esca­lated to an unsus­tain­able degree in a last grand attempt to sal­vage the wel­fare state system.

“Like all state attempts to stave off a debt defla­tion by run­ning the print­ing press and nation­al­iza­tion, it will likely result in a mas­sive infla­tion that destroys the nation’s fab­ric and the finan­cial assets of the upper mid­dle class and elites. The mid­dle and lesser classes have few finan­cial assets.”

Source: Bill King, The King Report, Decem­ber 9, 2008.

Finan­cial Times: Trea­sury sig­nals res­cue for car­mak­ers
“The US admin­is­tra­tion was on Fri­day scram­bling to save Detroit’s trou­bled car indus­try, as Gen­eral Motors said it was clos­ing most of its North Amer­i­can man­u­fac­tur­ing plants for the month of Jan­u­ary in the wake of the Senate’s fail­ure to agree a $14 bil­lion loan for GM and Chrysler.

“The US Trea­sury sig­naled it was ready to step in with funds intended to prop up the finan­cial sys­tem to pre­vent the biggest indus­trial fail­ure in US history.

“‘Because Con­gress failed to act, we will stand ready to pre­vent an immi­nent fail­ure until Con­gress recon­venes and acts to address the long-term via­bil­ity of the indus­try,’ the Trea­sury said.

“GM’s bonds fell to a new low of 9–10 cents on the dol­lar on fears of a bank­ruptcy by America’s largest domes­tic car­maker, before recov­er­ing to 15 cents on the news that the Bush admin­is­tra­tion was look­ing for alter­na­tive financing.

“For weeks George W Bush, the US pres­i­dent, has resisted using the $700 bil­lion trou­bled asset relief pro­gram to pro­vide aid to the car­mak­ers, argu­ing that such an inter­ven­tion­ist step would be a mis­use of funds.

“How­ever, fac­ing the prospect of the col­lapse of one or more of the Detroit com­pa­nies, the White House indi­cated it had few other options. ‘A pre­cip­i­tous col­lapse of this indus­try would have a severe impact on our econ­omy and it would be irre­spon­si­ble to fur­ther weaken and desta­bi­lize our econ­omy at this time,’ said Dana Perino, White House spokes­woman, specif­i­cally not­ing the pos­si­bil­ity of using Tarp funds.

“A Chap­ter 11 bank­ruptcy fil­ing by GM, the world’s biggest car­maker, would mark the biggest indus­trial fail­ure in US history.”

Source: Daniel Dombey, John Reed and Bernard Simon, Finan­cial Times, Decem­ber 12, 2008.

Reuters: Fed mulls issu­ing own debt
“The US Fed­eral Reserve is con­sid­er­ing issu­ing its own debt for the first time, the Wall Street Jour­nal said, cit­ing peo­ple famil­iar with the matter.

“Fed offi­cials have approached Con­gress about the move, which could include issu­ing bills or some other form of debt and would pro­vide the cen­tral bank with more flex­i­bil­ity to tackle the finan­cial cri­sis, the Jour­nal said.

“The Fed can already print as much money as it wants, but issu­ing debt is largely the province of the Trea­sury Department.

“The Fed stepped in with emer­gency credit for invest­ment bank Bear Stearns in March and insurer AIG in Sep­tem­ber, and threw open its direct loan win­dow to Wall Street firms this year in a bid to sta­bi­lize finan­cial mar­kets amid a credit freeze.

“But with the credit cri­sis show­ing no signs of abat­ing, and the nar­row scope for fur­ther inter­est rate cuts from the present lev­els of 1%, econ­o­mists expect the Fed to look at new ways to boost the sup­ply and cir­cu­la­tion of money to avoid a defla­tion­ary slump.”

Source: Reuters, Decem­ber 10, 2008.

Paul Kas­riel (North­ern Trust): The credit rat­ing on a benev­o­lent counterfeiter’s debt — infin­ity A?
“Why would the Fed be con­tem­plat­ing issu­ing its own debt? To soak up in the future some of the mas­sive credit the Fed has cre­ated in the past year or so. Why would the Fed not just sell US Trea­sury secu­ri­ties from its port­fo­lio in order to soak up this excess Fed credit? Because, as shown in the chart below, the Fed’s out­right hold­ings of US Trea­sury secu­ri­ties has dropped from a shade under $800 bil­lion to about $475 bil­lion as Fed credit out­stand­ing has risen from a lit­tle over $800 bil­lion to about $2.1 tril­lion. In per­cent­age terms, the Fed’s out­right hold­ings of US Trea­sury secu­ri­ties has gone from a bit over 90% of reserve bank credit out­stand­ing to about 22–1/2%. The Fed is afraid it might run out of US Trea­sury secu­ri­ties to sell!

“I can see noth­ing sin­is­ter about all this. It is not a con­spir­acy to print money. Just the oppo­site. It is a way to destroy some of the paper the Fed already has ‘printed’.”

Source: Paul Kas­riel, North­ern Trust — Daily Global Com­men­tary, Decem­ber 10, 2008.

Bloomberg: Fed refuses to dis­close recip­i­ents of $2 tril­lion
“The Fed­eral Reserve refused a request by Bloomberg News to dis­close the recip­i­ents of more than $2 tril­lion of emer­gency loans from US tax­pay­ers and the assets the cen­tral bank is accept­ing as collateral.

“Bloomberg filed suit Novem­ber 7 under the US Free­dom of Infor­ma­tion Act request­ing details about the terms of 11 Fed lend­ing pro­grams, most cre­ated dur­ing the deep­est finan­cial cri­sis since the Great Depression.

“The Fed responded Decem­ber 8, say­ing it’s allowed to with­hold inter­nal memos as well as infor­ma­tion about trade secrets and com­mer­cial infor­ma­tion. The insti­tu­tion con­firmed that a records search found 231 pages of doc­u­ments per­tain­ing to some of the requests.

“If they told us what they held, we would know the poten­tial losses that the gov­ern­ment may take and that’s what they don’t want us to know,” said Car­los Mendez, a senior man­ag­ing direc­tor at New York-based ICP Cap­i­tal, which over­sees $22 bil­lion in assets.

“The Fed stepped into a res­cue role that was the orig­i­nal pur­pose of the Treasury’s $700 bil­lion Trou­bled Asset Relief Pro­gram. The cen­tral bank loans don’t have the over­sight safe­guards that Con­gress imposed upon the TARP.

“Con­gress is demand­ing more trans­parency from the Fed and Trea­sury on bailout, most recently dur­ing Decem­ber 10 hear­ings by the House Finan­cial Ser­vices com­mit­tee when Rep­re­sen­ta­tive David Scott, a Geor­gia Demo­c­rat, said Amer­i­cans had ‘been bamboozled’.

Source: Mark Pittman, Bloomberg, Decem­ber 12, 2008.

The Wall Street Jour­nal: May­ors get in line for US funds
“Big-city may­ors will arrive on Capi­tol Hill Mon­day to lobby for more fed­eral spend­ing to be fun­neled to urban areas that they say drive the country’s eco­nomic engine.

“The push comes after a strong Demo­c­ra­tic turnout in met­ro­pol­i­tan areas helped President-elect Barack Obama — who is set to become America’s first urban pres­i­dent in almost half a cen­tury — win by such a deci­sive mar­gin in November.

“A del­e­ga­tion of may­ors, includ­ing Michael Bloomberg of New York and Anto­nio Vil­laraigosa of Los Ange­les, plans to ask the fed­eral gov­ern­ment to dis­trib­ute funds directly to cities instead of going through state gov­ern­ments. The group is set to present a list of more than 4,600 infra­struc­ture projects that they say are ‘ready to go’.

“Tom Cochran, exec­u­tive direc­tor of the US Con­fer­ence of May­ors, which is orga­niz­ing Monday’s event, said the next admin­is­tra­tion has sig­naled that it will coör­di­nate financ­ing for projects for an entire met­ro­pol­i­tan area instead of deal­ing with cities and sub­urbs separately.

“‘I am of the opin­ion, based on our con­ver­sa­tions with President-elect Obama, that he gets it,’ said Mr. Cochran. ‘You can’t just have a trans­porta­tion sys­tem that stops at the city line.’

“Mr. Obama’s tran­si­tion office is draw­ing up plans to cre­ate a White House office on urban pol­icy, which would report directly to the pres­i­dent, to coör­di­nate fund­ing for cities from dif­fer­ent fed­eral agen­cies. Mr. Obama has pledged to pro­vide new fund­ing for job train­ing, edu­ca­tion and grants for local gov­ern­ments and organizations.”

Source: T.W. Far­nam, The Wall Street Jour­nal, Decem­ber 8, 2008.

Bloomberg: Inter­view with Mar­tin Feld­stein
“Har­vard Uni­ver­sity pro­fes­sor Feld­stein dis­cusses auto bailout, how to fix the hous­ing mar­ket as well as Fan­nie and Fred­die, and 3-month T-Bill rates below zero.”

Source: Bloomberg (via YouTube), Decem­ber 9, 2008.

Ambrose Evans-Pritchard (Tele­graph): Defla­tion virus is mov­ing the pol­icy test beyond the 1930s
“Debt defla­tion is tight­en­ing its grip over the entire global sys­tem. Inter­est rates are creep­ing towards zero in Japan, Amer­ica, and now across most of Europe.

“We are beyond the extremes of the 1930s. The fron­tiers of mon­e­tary pol­icy are being pushed to lim­its that may now test via­bil­ity of paper cur­ren­cies and mod­ern cen­tral banking.

“You can­not drop below zero. So what next if the credit mar­kets refuse to thaw? Yes, Japan vis­ited and sur­vived this pol­icy hell dur­ing its lost decade, but that was a local affair in an oth­er­wise boom­ing global econ­omy. It tells us nothing.

“This time we are all going down together. There is no deus ex machina to lift us out. Cer­tainly not China, which is the most vul­ner­a­ble of all.

“As the risk grows, offi­cials at the high­est level of the British Gov­ern­ment have begun to cir­cu­late a six-year-old speech by Ben Bernanke — at the time of its writ­ing, a gar­ru­lous kid gov­er­nor at the US Fed­eral Reserve. Enti­tled ‘Defla­tion: Mak­ing Sure It Doesn’t Hap­pen Here’, it is the man­ual of guer­rilla tac­tics for defeat­ing slumps by mon­e­tary means.

“‘The US gov­ern­ment has a tech­nol­ogy, called a print­ing press, that allows it to pro­duce as many US dol­lars as it wishes at essen­tially no cost,’ he said.

“His point was that cen­tral banks never run out of ammu­ni­tion. They have an inex­haustible arse­nal. The world’s fate now hangs on whether he was right (which is prob­a­ble), or wrong (which is possible).

“As a scholar of the Great Depres­sion, Bernanke does not think that slid­ing prices can safely be allowed to run their course. ‘Sus­tained defla­tion can be highly destruc­tive to a mod­ern econ­omy,’ he said.

“Bernanke’s cen­tral claim is that the big guns of mon­e­tary pol­icy were never prop­erly deployed dur­ing the Depres­sion, or dur­ing the early years of Japan’s bust, so no won­der the slumps dragged on.

“The Fed can cre­ate money out of thin air and mop up assets on the open mar­ket, like a sov­er­eign sugar daddy. ‘Suf­fi­cient injec­tions of money will ulti­mately always reverse a deflation.’

“Bernanke said the Fed can ‘expand the menu of assets that it buys’. US Trea­sury bonds top the list, but it can equally pur­chase mort­gage secu­ri­ties from US agen­cies such as Fan­nie, Fred­die and Gin­nie, or com­pany bonds, or com­mer­cial paper. Any asset will do.

“The Fed can acquire houses, stocks, or a herd of Texas Long­horn cat­tle if it wants. It can even scat­ter $100 bills from heli­copters. (Actu­ally, Japan is about to do this with shop­ping coupons).”

Source: Ambrose Evans-Pritchard, Tele­graph, Decem­ber 9, 2008.

Asha Ban­ga­lore (North­ern Trust): House­hold net worth is shrink­ing rapidly
“House­hold net worth in the third quar­ter of 2008 was $56.5 tril­lion, down 4.7% from the sec­ond quar­ter. This is the largest quar­terly decline since the sec­ond quar­ter of 1962 when net worth of house­holds dropped 5.0%.

“House­hold spend­ing will suf­fer as set­back a house­hold net worth shrinks, which is already vis­i­ble in con­sumer spend­ing data, and the pro­cliv­ity of house­holds to bor­row will show a reduc­tion. The chart below indi­cates that growth of both mort­gage and con­sumer debt have fallen in the third quar­ter. The sharp drop in mort­gage debt (-2.4%) reflects the impact of mort­gage fore­clo­sures and a drop in home pur­chases, while con­sumer debt grew at a 1.2% pace in the third quar­ter ver­sus a 7.2% jump a year ago.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 11, 2008.

Asha Ban­ga­lore (North­ern Trust): Weak tra­jec­tory for retail sales
“Retail sales fell 1.8% in Novem­ber, after a 2.9% decline in the prior month. Retail sales have dropped for five straight months, the longest string of declines since record keep­ing for retail sales began in 1967. The wide swings of gaso­line prices influ­ence the head­line of retail sales. Exclud­ing gaso­line, retail sales dropped 0.2% in Novem­ber after a 1.6% plunge in the prior month. Retail sales exclud­ing gaso­line have recorded six con­sec­u­tive monthly declines. Unit auto sales have fallen in ten out of eleven months of the year.

“The upshot is that with or with­out gaso­line and autos, retail sales show an extra­or­di­nary weak­ness that is seen the over­all con­sumer spend­ing data and this weak tra­jec­tory for retail sales and over­all con­sumer spend­ing is pre­dicted to pre­vail in the near term.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 12, 2008.

Asha Ban­ga­lore (North­ern Trust): Con­sumer spend­ing in post-war reces­sions
“The chart below illus­trates the his­tory of con­sumer spend­ing dur­ing reces­sions. Con­sumer spend­ing typ­i­cally declines in reces­sion­ary peri­ods with the excep­tion of the 1948 and 2001 recessions.

“Our fore­cast includes five con­sec­u­tive quar­terly declines in con­sumer spend­ing, pos­si­bly another record for the books if our fore­cast is accu­rate. The highly lever­aged house­hold bal­ance sheet of house­holds under­lies this prediction.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 8, 2008.

Bloomberg: Inside look — hous­ing cri­sis
“From Hous­ing Forum in Wash­ing­ton D.C.: Inter­view with PIMCO Man­ag­ing Direc­tor Scott Simon.”

Source: Bloomberg (via YouTube), Decem­ber 8, 2008.

Busi­ness­Week: Unre­tired — retirees are back, look­ing for work
“They saved. They planned. Then hous­ing tanked and the mar­kets melted. Now they need jobs, and there aren’t any.

“Six years ago, Paul Nel­son gave up his long career in the defense indus­try for what he thought would be a peace­ful retire­ment in Tuc­son. The weather was mild, the neigh­bors friendly. He had plenty of time to vol­un­teer and garden.

“But retire­ment hasn’t worked out the way he planned. In 2006 his wife of 46 years died unex­pect­edly. He tried to swap their house for a smaller one and lost a chunk of his retire­ment sav­ings in the process. Then this year the stock mar­ket cratered, wip­ing out almost every­thing he had left. Now the 71-year-old is look­ing for work at local hard­ware stores and Home Depot and con­tem­plat­ing fil­ing for per­sonal bank­ruptcy. ‘I have noth­ing left,’ says Nel­son, a for­mer Raytheon engi­neer. ‘I am not alone, I think.’

“Far from it. An increas­ing num­ber of peo­ple who retired in recent years, con­fi­dent they had set aside enough to live on com­fort­ably, are find­ing them­selves strapped. The stock mar­ket plunge and the hous­ing down­turn have affected many Amer­i­cans, of course. But retirees have been par­tic­u­larly pinched because their homes and invest­ments are the pri­mary assets they depend on for income. As a result, many of the country’s elderly are find­ing them­selves in Nelson’s sit­u­a­tion, low on money and look­ing for work. ‘Sud­denly the rug has been pulled out from under them,’ says Ali­cia H. Munnell, direc­tor of the Cen­ter for Retire­ment Research at Boston College.”

Click here for the full article.

Source: Heather Green, Busi­ness Week, Decem­ber 4, 2008.

Asha Ban­ga­lore (North­ern Trust): Oil imports lead to wider trade gap in Octo­ber
“The trade deficit widened to $57.2 bil­lion in Octo­ber from $56.6 bil­lion in Sep­tem­ber. Dur­ing Octo­ber, exports (-2.2%) and imports (-1.3%) of goods and ser­vices fell.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Decem­ber 11, 2008.

Reuters: Jim Rogers calls most big US banks “totally bank­rupt”
“Jim Rogers, one of the world’s most promi­nent inter­na­tional investors, on Thurs­day called most of the largest US banks ‘totally bank­rupt’, and said gov­ern­ment efforts to fix the sec­tor are wrongheaded.

“Speak­ing by tele­con­fer­ence at the Reuters Invest­ment Out­look 2009 Sum­mit, the co-founder with George Soros of the Quan­tum Fund, said the government’s $700 bil­lion res­cue pack­age for the sec­tor doesn’t address how banks man­age their bal­ance sheets, and instead rewards weaker lenders with new capital.

“Dozens of banks have won infu­sions from the Trou­bled Asset Relief Pro­gram cre­ated in early Octo­ber, just after the Sep­tem­ber 15 bank­ruptcy fil­ing by Lehman Broth­ers. Some of the funds are being used for acquisitions.

“‘With­out giv­ing spe­cific names, most of the sig­nif­i­cant Amer­i­can banks, the larger banks, are bank­rupt, totally bank­rupt,’ said Rogers, who is now a pri­vate investor.

“‘What is out­ra­geous eco­nom­i­cally and is out­ra­geous morally is that nor­mally in times like this, peo­ple who are com­pe­tent and who saw it com­ing and who kept their pow­der dry go and take over the assets from the incom­pe­tent,’ he said. ‘What’s hap­pen­ing this time is that the gov­ern­ment is tak­ing the assets from the com­pe­tent peo­ple and giv­ing them to the incom­pe­tent peo­ple and say­ing, now you can com­pete with the com­pe­tent peo­ple. It is hor­ri­ble economics.’

“Rogers said he shorted shares of Fan­nie Mae and Fred­die Mac before the gov­ern­ment nation­al­ized the mort­gage financiers in Sep­tem­ber, a week before Lehman failed.

“Now a spe­cial­ist in com­modi­ties, Rogers said he has used the recent rally in the US dol­lar as an oppor­tu­nity to exit dollar-denominated assets.

“While not say­ing how long the US eco­nomic reces­sion will last, he said con­di­tions could ulti­mately mir­ror those of Japan in the 1990s. ‘The way things are going, we’re going to have a lost decade too, just like the 1970s,’ he said.

” … Rogers said sound US lenders remain. He said these could include banks that don’t make or hold sub­prime mort­gages, or which have high ratios of deposits to equity, ‘all the clas­sic old ratios that most banks in Amer­ica for­got or started ignor­ing because they were too old-fashioned’.

“‘Gov­ern­ments are mak­ing mis­takes,’ he said. ‘They’re say­ing to all the banks, you don’t have to tell us your sit­u­a­tion. You can con­tinue to use your bal­ance sheet that is phony … All these guys are bank­rupt, they’re still wor­ry­ing about their bonuses, they’re still try­ing to pay their div­i­dends, and the whole sys­tem is weakened.’

“Rogers said he is invest­ing in growth areas in China and Tai­wan, in such areas as water treat­ment and agri­cul­ture, and recently bought posi­tions in energy and agri­cul­ture indexes.”

Source: Jonathan Stem­pel, Reuters, Decem­ber 11, 2008.

CNBC: Mered­ith Whit­ney — out­look grim for banks

Source: CNBC, Decem­ber 7, 2008.

Finan­cial Times: Post-Lehman com­pany defaults to soar
“Default rates for spec­u­la­tive grade com­pa­nies are fore­cast to jump three­fold next year fol­low­ing the fall of Lehman Broth­ers, the world’s biggest bank­ruptcy, accord­ing to Moody’s, the US rat­ings agency.

“The implo­sion of Lehman on Sep­tem­ber 15 is widely regarded as a sig­nif­i­cant mile­stone, turn­ing the credit crunch into a fully blown eco­nomic crisis.

“Jim Reid, credit strate­gist at Deutsche Bank, said: ‘We are at a turn­ing point for default rates, with much big­ger monthly rises from now on.

“‘Two or three months after Lehman’s col­lapse, we are start­ing to see the impact on the real econ­omy, par­tic­u­larly for those com­pa­nies on short-term funding.’

“Euro­pean com­pa­nies default­ing on their bonds are also set to out­pace those in the US, although ana­lysts sug­gest this is because the Euro­pean junk-grade mar­ket is smaller, mean­ing any rise in defaults has a greater impact in per­cent­age terms, rather than point­ing to a deeper recession.

“Global default rates are fore­cast to rise to 10.4% by Novem­ber 2009 — from 3.1% last month — to lev­els last seen in 2001 fol­low­ing the dot­com crash. Rates are fore­cast to jump to 4.2% by the end of this year.

“A year ago, the global rate was 0.9 per cent.

“The rat­ings agency’s dis­tressed index, which mea­sures the num­ber of com­pa­nies with bonds trad­ing at more than 1,000 basis points over gov­ern­ment paper, rose to 51.8% at the end of last month, up from 48.5% at the end of Octo­ber, and the high­est level since Moody’s launched the index in 1996. This reflects the deep­en­ing prob­lems for com­pany fund­ing. Even some invest­ment grade com­pa­nies are now trad­ing at dis­tressed levels.”

Source: David Oak­ley and Paul J Davies, Finan­cial Times, Decem­ber 8, 2008.

Bespoke: 10-Year Trea­suries over­bought
“It’s an under­state­ment to say that Trea­suries are over­bought at cur­rent lev­els. We’ve been mon­i­tor­ing the spread between its price and its 50-day mov­ing aver­age, and the 10-year Note has finally got­ten to a level that is usu­ally met with sell­ing pres­sure in the near term. Since 1977, the 10-year has only got­ten more than 12% above its 50-day mov­ing aver­age on three dif­fer­ent occa­sions. As shown in the table below, the returns over the next week, month, and 3 months lean to the neg­a­tive side. The aver­age change of the 10-year over the next three months when get­ting this over­bought has been –3.23%.”

Source: Bespoke, Decem­ber 9, 2008.

Bespoke: Want to lend money to uncle Sam? It’s going to cost you
“What would your reac­tion be if you had a friend who had reached the limit on 20 dif­fer­ent credit cards and then came to you to bor­row $100? Then imag­ine that you actu­ally said yes, and when you went to give your friend the $100, he or she actu­ally asked for $101 just for the priv­i­lege of loan­ing the money. Well, that is exactly what is hap­pen­ing (to a lesser degree) in the US T-bill mar­ket. As just another exam­ple of the crazy times we are liv­ing in, the yield on 3-month Trea­suries went neg­a­tive today. There was a time when an event such as this was unimag­in­able. Today it barely gets noticed.”

Source: Bespoke, Decem­ber 9, 2008.

John Huss­man (Huss­man Funds): Unusu­ally unfavoura­bale yield lev­els for Trea­suries
“In bonds, the mar­ket cli­mate last week was char­ac­ter­ized by unusu­ally unfa­vor­able yield lev­els and gen­er­ally favor­able yield pres­sures. As I have fre­quently noted, yield lev­els are much more impor­tant than mar­ket action in dri­ving sub­se­quent total returns in bonds. This is because bonds are less sus­cep­ti­ble to ‘bub­bles’ as a result of their pay­ment stream being known, so favor­able mar­ket action can’t be taken as evi­dence of favor­able sur­prises in those payments.

“The prob­lem with Trea­sury yields here is that while there are good eco­nomic rea­sons for the down­ward yield pres­sures, the lev­els are low enough to invite explo­sive spikes that can eas­ily wipe out a year or more of yield-to-maturity in a few days.

“Cor­po­rate yields have increased sig­nif­i­cantly, but default rates tend to pick up in the later stages of reces­sions, and there isn’t much his­tor­i­cal evi­dence to sug­gest that cor­po­rate bonds reach their lows any ear­lier than stocks do. For that rea­son, cor­po­rate bonds are essen­tially equity-equivalents here, and the same con­sid­er­a­tions about qual­ity apply as well here as they do for stocks. Gen­er­ally speak­ing, cor­po­rate bonds are cur­rently priced to deliver both lower long-term returns than stocks, but as a group, will prob­a­bly have lower volatil­ity than stocks as well.”

Source: John Huss­man, Huss­man Funds, Decem­ber 8, 2008.

Bloomberg: US Trea­sury risk sur­passes Camp­bell Soup as debt increases
“The cost to hedge against losses on US Trea­suries sur­passed the price of default pro­tec­tion on bonds from Camp­bell Soup and drug-maker Bax­ter Inter­na­tional as gov­ern­ment spend­ing on stim­u­lus pack­ages grows.

“Credit-default swaps pro­tect­ing US gov­ern­ment debt in euros for five years are trad­ing at 65 basis points, accord­ing to CMA Datavi­sion, mean­ing costs 65,000 euros ($84,200) to pro­tect 10 mil­lion euros of debt. Con­tracts on Camp­bell were at 52.5 basis points and Bax­ter con­tracts were 57.5 basis points at the close of trad­ing [on Wednes­day] in New York.

“The Fed­eral Reserve’s assets have more than dou­bled from a year ago to $2.14 tril­lion as the cen­tral bank seeks to revive credit mar­kets. Econ­o­mists includ­ing Har­vard Uni­ver­sity pro­fes­sor Ken­neth Rogoff and Nobel Prize win­ner Joseph Stiglitz say President-elect Barack Obama should push for a stim­u­lus pack­age of at least $1 tril­lion to lift the econ­omy out of a year­long reces­sion. The US government’s total cost to bail out the econ­omy may exceed $4 tril­lion, accord­ing to strate­gists includ­ing Ira Jer­sey at Credit Suisse Group AG in New York.

“Con­tracts pro­tect­ing U.K. gov­ern­ment debt for five years were quoted at a mid-price of 114.75 basis points today [Wednes­day], accord­ing to CMA. Swaps on Italy are at 190, and the Nether­lands at 99.5. France was quoted at 58.75 and Ger­many at 51.5, CMA data show.

“Credit-default swaps pay the buyer face value in exchange for the under­ly­ing secu­ri­ties or the cash equiv­a­lent if a bor­rower fails to meet its debt oblig­a­tions. A basis point on a credit-default swap con­tract pro­tect­ing $10 mil­lion of debt from default for five years is equiv­a­lent to $1,000 a year.”

Source: Shan­non D. Har­ring­ton, Bloomberg, Decem­ber 10, 2008.

Jean-Paul Cala­maro (Deutsche Bank): Credit mar­kets offer stun­ning oppor­tu­ni­ties
“The cri­sis grip­ping finan­cial mar­kets has pro­duced some stun­ning invest­ment oppor­tu­ni­ties in credit mar­kets. Among the best is the returns avail­able on ‘basis trades’ between cor­po­rate bonds and credit default swaps, says Jean-Paul Cala­maro, global head of quan­ti­ta­tive credit strat­egy at Deutsche Bank.

“‘Investors buy a cor­po­rate bond and also buy default pro­tec­tion on the issuer via a CDS. When the basis is neg­a­tive [CDS pro­tec­tion costs less than the bond’s spread to swaps] this pro­duces pro­tected cash flows and fur­ther prof­its if the dif­fer­ence between the bond and CDS nar­rows, or if the issuer defaults. The basis between bonds and CDS has been at his­toric wides recently, giv­ing sig­nif­i­cant returns with­out using lever­age,’ he says.

“‘The trade works for many invest­ment grade and high yield issuers in Europe and the US, but high yield trades look most attractive.

“‘This is because investors can earn high returns more quickly when an issuer defaults and at this point in the credit cycle we think defaults are more likely. The trades also work in invest­ment grade, not because we expect defaults but because we expect the basis between bonds and CDS to narrow.

“‘The major cheap­en­ing of bonds ver­sus CDS across cor­po­rate credit has been due to the height­ened fund­ing cri­sis since the Lehman bank­ruptcy in mid-September. We believe con­di­tions will start to ease after year end, which makes these types of trades unusu­ally attrac­tive now.’”

Source: Jean-Paul Cala­maro, Deutsche Bank (via Finan­cial Times), Decem­ber , 2008.

Bloomberg: Cheap­est stocks since 1995 show cash exceeds mar­ket
“Stocks have fallen so far that 2,267 com­pa­nies around the globe are offer­ing prof­its to investors for free. That’s eight times as many as at the end of the last bear mar­ket, when the shares rose 115% over the next year.

“Bank of New York Mel­lon in New York, Danieli in Italy and Seoul-based Namyang Dairy Prod­ucts hold more cash than the value of their stock and debt as the slow­ing world econ­omy wiped out $32 tril­lion in cap­i­tal­iza­tion this year. Com­pa­nies in the MSCI World Index trade for an aver­age $1.17 per dol­lar of net assets, the low­est since at least 1995, and 39% sell at a dis­count to share­holder equity, data com­piled by Bloomberg show.

“The cash-rich com­pa­nies allow investors to pay noth­ing for future earn­ings streams, pro­vid­ing oppor­tu­ni­ties to buy­ers con­cerned about defla­tion, accord­ing to Jean-Marie Eveil­lard, whose $16 bil­lion First Eagle Global Fund has beaten 98% of com­peti­tors this year. Microsoft and Novo Nordisk, which gen­er­ate the most money com­pared with debt, can expand even if lower con­sumer demand erodes profits.

“‘Cash is king, not nec­es­sar­ily for the investor but for cor­po­ra­tions,’ Eveil­lard said in an inter­view from New York last week. ‘It’s use­ful to sit on a ton of cash, No. 1 to sur­vive, as opposed to going bank­rupt, and No. 2 to seize oppor­tu­ni­ties either to make acqui­si­tions cheaply or to squeeze competitors.’”

Source: Michael Tsang and Alexis Xydias, Bloomberg, Decem­ber 8, 2008.

Richard Rus­sell (Dow The­ory Let­ters): “I’m begin­ning to like what I see”
“If they cre­ate enough of it, will they come and spend it? That’s what Mr. Bernanke is going to find out. The gov­ern­ment has cre­ated over a tril­lion dol­lars of cur­rency. There’s now over $8 tril­lion on the side­lines in money mar­kets and T-bills — all frozen with fear and wait­ing for some­thing bet­ter and safer to come along. There’s too much money now in rela­tion to the quan­tity of goods and mer­chan­dise avail­able. This is the for­mula for infla­tion or even hyper-inflation. What’s hold­ing it all back? Lack of con­fi­dence, fear.

“What would change that? The stock mar­ket ris­ing steadily would bring back con­fi­dence. Which is why I mon­i­tor the stock mar­ket so closely. Yes, it’s quite a game, and it’s the most impor­tant and fas­ci­nat­ing game in the world. No won­der I’m in this busi­ness. I read the mar­kets, and I’m begin­ning to like what I see!

“My guess is that the mar­ket is estab­lish­ing a trade­able bot­tom with a rally that will last into the first quar­ter of next year. What we’re see­ing now might not be the final bot­tom but it will serve until the real one comes along.”

Source: Richard Rus­sell, Dow The­ory Let­ters, Decem­ber 8, 2008.

Richard Rus­sell (Dow The­ory Let­ters): Adding some selected stocks
“Up to now, our favored posi­tion has been cash and gold (prefer­ably phys­i­cal gold). Our new posi­tion is cash, gold and, for the bolder crowd, a few selected stocks (DIA if you’re a fear­less, spec­u­la­tive type).

“Back­ing off: Sub­scribers may think Russell’s lost his mind. He’s turn­ing just a bit bull­ish. The answer is that I’m report­ing exactly what I’m see­ing. And if what I see doesn’t jibe with what I’m read­ing in the news­pa­per and it doesn’t jibe with pre­vail­ing sen­ti­ment, then I think it’s that much more impor­tant. I keep hear­ing the most hor­ren­dous sto­ries about unem­ploy­ment and com­pa­nies in trou­ble, and my thought is always, ‘Has this been dis­counted by one of the worst bear mar­kets since the ’30s?’ Which is why I report every item that I see, every item that might sug­gest that the mar­ket has already dis­counted the bad news. The ques­tion always is ‘cut through the BS, what is the mar­ket saying?’”

Source: Richard Rus­sell, Dow The­ory Let­ters, Decem­ber 11, 2008.

Puru Sax­ena: Sow­ing the seeds
“This nasty bear-market is in its lat­ter stages and I sus­pect that the bulk of the declines are now behind us. Although it is pre­ma­ture to claim that the bear-market def­i­nitely ended on Octo­ber 10, it does look increas­ingly likely that the lows recorded on Novem­ber 21, were in fact a suc­cess­ful ‘test’ of the prior month’s lows.

“His­tory shows that fol­low­ing a major bear-market, it is com­mon for the major indices to retest the lows. In a recent study under­taken to review recov­ery pat­terns, JP Mor­gan exam­ined all the bear-markets going back to 1900 and it came up with a few inter­est­ing obser­va­tions. The study revealed that mar­ket bot­toms were almost always retested and that such ‘tests’ resulted in a new mar­ginal low about 40% of the time.

“The study also found that 75% of the retest­ing events occurred within 44 days of a major bot­tom; so if Octo­ber 10 marked the bot­tom of this bear-market, the retest on Novem­ber 21 was bang on tar­get from a tim­ing perspective.

“At this stage, I am only guess­ing that Octo­ber 10 was the piv­otal turn­around of this bear-market. It may well be that this mar­ket breaks below those lows in the days ahead, how­ever given the favourable tech­ni­cal and sen­ti­ment data, at the very least, there is a strong pos­si­bil­ity that we will get a multi-month rally from these over­sold conditions.

“It is worth not­ing that new bull-markets are always born amidst abject pes­simism; at a time when the major­ity are con­vinced that eco­nomic activ­ity will never pick up again. Fur­ther­more, it is inter­est­ing to note that fright­en­ing eco­nomic news con­tin­ues to sur­face, long after a new bull-market has begun. So, the time to buy is dur­ing such scary times. This was also high­lighted by War­ren Buf­fet who recently wrote — ‘If you wait for robins, spring will be over’.

“Now, I can­not say with any cer­tainty whether we are already in the early stages of the next cycle. How­ever, the recent rout in the mar­kets has set the stage for above-average long-term returns. Under my best case sce­nario, we are in the very early stages of a new multi-year bull-market. And under my worst case sce­nario, we are going to get a very strong rebound (30% move higher in the S&P500) over a short period of time, which will prob­a­bly take the mar­kets back to their 200-day mov­ing averages.”

Source: Puru Sax­ena (via Fuller­money), Decem­ber 10, 2008.

David Fuller (Fuller­money): S&P 500 at extreme diver­gence from its 200-day mov­ing aver­age
“We first posted this indi­ca­tor on Octo­ber 10 when the rel­e­vant spread­sheet was cre­ated for us by a sub­scriber. The indi­ca­tor remains at a his­tor­i­cally low level but has risen con­sid­er­ably from its early Octo­ber nadir. This has been achieved by the rel­e­vant indices hav­ing gone mostly side­ways for the last two months. The mov­ing aver­age is now start­ing to come down towards the price and while it still has a long way to go, mean rever­sion is tak­ing place.

“This is not a guar­an­tee that the mar­ket will not go lower later but, his­tor­i­cally, when the mar­ket has diverged from its mean by such a mar­gin, impor­tant stock mar­ket lows have occurred rel­a­tively soon afterwards.”

Source: David Fuller, Fuller­money, Decem­ber 8, 2008.

Bespoke: Per­cent­age of stocks above 50-day mov­ing aver­ages
“Even though the S&P 500 is in a new bull mar­ket, the per­cent­age of stocks in the index trad­ing above their 50-day mov­ing aver­ages is still at over­sold lev­els. As shown in the chart below, at 26%, this indi­ca­tor has a long way to go before becom­ing overbought.

“On a sec­tor basis, Tele­com, Util­i­ties, and Con­sumer Dis­cre­tionary have the high­est per­cent­age of stocks above their 50-days, while Energy and Finan­cials have the lowest.”

Source: Bespoke, Decem­ber 10, 2008.

Bespoke: Third worst bear mar­ket on record
“The S&P 500 finally had its first 20%+ rally in 408 days yes­ter­day [Mon­day], which means we’re cur­rently in a bull mar­ket by the stan­dard def­i­n­i­tion (20% rally pre­ceded by a 20% decline).

“… below we high­light his­tor­i­cal bear mar­kets for the S&P 500 since 1927. As shown, the bear mar­ket that ran from 10/9/07 to 11/20/08 is the third worst ever with a decline of 51.93%. The bears that ended in June of 1932 (-61.81%) and March of 1938 (-54.47%) are the only two that had big­ger declines with­out a rally of 20%.”

Source: Bespoke, Decem­ber 9, 2008.

Bespoke: US sec­tor and stock buy rat­ings
“Below we high­light the aver­age per­cent­age of buy rat­ings for stocks in each of the ten S&P 500 sec­tors. As shown, Finan­cial stocks have the low­est per­cent­age of buy rat­ings of any sec­tor at 35%, while Energy has the high­est at 63%. Con­sumer Dis­cre­tionary, Mate­ri­als, and Con­sumer Sta­ples are the three other sec­tors (along with Finan­cials) that have below aver­age buy rat­ings com­pared to all stocks in the S&P 500.

Source: Bespoke, Decem­ber 8, 2008.

David Fuller (Fuller­money): Com­modi­ties — are they the most promis­ing asset class today?
“I do think com­modi­ties have sig­nif­i­cant recov­ery poten­tial, despite the global eco­nomic slump, defla­tion threat and depres­sion fears. More­over, I believe that the fun­da­men­tals for com­modi­ties have now improved more than for all other asset classes.

“Con­sider the fol­low­ing bull points:

1. Inter­est rates have fallen, which is cur­rently bet­ter for com­mod­ity spec­u­la­tors than com­mod­ity pro­duc­ers, because con­tan­gos have shrunk con­sid­er­ably, low­er­ing rollover costs.

2. How­ever, the credit crunch means that it is now more dif­fi­cult for com­mod­ity pro­duc­ers to obtain nec­es­sary financ­ing. Con­se­quently, min­ers and oil pro­duc­ers are defer­ring devel­op­ment projects and lay­ing off work­ers, while farm­ers find it more dif­fi­cult to finance the pur­chase of fer­til­iz­ers and equip­ment. These prob­lems are not fully off­set by the lower cost of energy.

3. Prices for all com­modi­ties are much lower today than dur­ing the first half of 2008, not least because spec­u­la­tors have been shaken out and traders are actu­ally short. This is good news for those who wish to buy over­sold com­modi­ties. How­ever it is a big dis­in­cen­tive for com­mod­ity pro­duc­ers, many of whom are now reduc­ing production.

4. While the global eco­nomic slump has reduced demand for com­modi­ties some­what, these are essen­tial resources which the world can­not do with­out, unlike lux­ury goods, the lat­est fash­ions, lav­ish hol­i­days or expen­sive restaurants.

5. The US dol­lar has peaked and com­menced what is likely to be a sig­nif­i­cant retrace­ment of gains seen since July. This is bull­ish for com­modi­ties because most are priced in US dollars.

“What could sig­nif­i­cantly delay or even pre­vent a big rally for com­modi­ties? The refla­tion­ary efforts could fail, or more likely take many more months before they turn a global econ­omy that is still con­tract­ing. If so, there could be some addi­tional down­side risk and base for­ma­tion devel­op­ment would most likely be lengthy. The US Dol­lar Index could fail to main­tain its down­ward break. Improved weather pat­terns could lead to increased sup­plies of agri­cul­tural commodities.

“For these rea­sons, Fuller­money main­tains that com­modi­ties are best pur­chased fol­low­ing set­backs. Posi­tions are most safely built incrementally.”

Source: David Fuller, Fuller­money, Decem­ber 11, 2008.

Finan­cial Times: So long, super-cycle
“The sever­ity of the cri­sis has sur­prised nat­ural resources com­pa­nies’ exec­u­tives, com­mod­ity traders and Wall Street bankers alike. After all, the com­modi­ties boom of 2003-08 has been the most notable for a cen­tury in its mag­ni­tude, dura­tion and the num­ber of com­modi­ties whose prices it has lifted. The sud­den plunge poses a fun­da­men­tal ques­tion: is this just a tem­po­rary blip within an upward trend, with prices likely to rebound in the medium term, or is it the con­clu­sion of another com­modi­ties cycle of boom and bust, with a period of rel­a­tively sta­ble prices com­ing ahead?

“The com­mon belief in the indus­try itself, and among most Wall Street ana­lysts, is that the mar­ket is under­go­ing a cor­rec­tion but that the boom years have not ended. As many point out, the main dri­vers of what many have come to see as a com­modi­ties super-cycle — such as strong pent-up demand in emerg­ing coun­tries and sup­ply con­straints caused by a lack of invest­ment over the past 20 years, along with the rise in resource nation­al­ism — are intact. The cur­rent drop is, in the words of one senior min­ing exec­u­tive, a ‘reset’ of the boom, not the end of it. Prices will rebound, in this view, and con­tinue rising.”

Click here for the full article.

Source: Javier Blas and Krishna Guha, Finan­cial Times, Decem­ber 9, 2008.

Bespoke: Con­sen­sus gold esti­mates
“Below we pro­vide the con­sen­sus price tar­get for gold through 2012. These tar­get prices are based on the median of 21 gold ana­lysts sur­veyed by Bloomberg. As shown, ana­lysts cur­rently aren’t expect­ing a big rally or a big decline in gold over the next few years. By mid-year 2009, ana­lysts are expect­ing gold to be at $825/ounce, which is less than $10 from its cur­rent price of $816. At the end of 2011, ana­lysts expect gold to be down to $790, and then down to $762 by the end of 2012.”

Source: Bespoke, Decem­ber 12, 2008.

Casey’s Charts: Gold stocks — time to bot­tom feed
“The pre­vi­ous low point for the ratio of the XAU gold stock index to the price of gold was 0.16, when gold was trad­ing around $270 an ounce in Octo­ber of 2000. Today, the XAU is trad­ing a mere 57% higher than it was in Octo­ber of 2000, com­pared to a gold price that has increased by 184%. As a gen­eral rule of thumb, any­time the ratio is above the 25-year aver­age is the time to sell, and below its aver­age says gold stocks are cheap. With the ratio bounc­ing off the low­est level since the incep­tion of the XAU index, it sig­nals a SCREAMING buy for gold stocks!

“Pick­ing the bot­tom of any mar­ket is near impos­si­ble, but know­ing when some­thing is grossly under­val­ued can be easy. Gold has long been con­sid­ered a hedge against infla­tion, and with tril­lions of new gov­ern­ment bailout dol­lars ready to cir­cu­late into the sys­tem, buy­ing pre­cious metal stocks at these dis­tressed prices is the chance of a lifetime.”

Source: Casey’s Charts, Decem­ber 5, 2008.

Profit NDTV: Asia beats US in gold futures trad­ing
“Asia, which accounts for 60% of the world gold imports, has over­taken the US in gold futures trad­ing, with Mum­bai and Shang­hai exchanges grow­ing rapidly, lead­ing trade mag­a­zine Futures Indus­try has reported.

“Accord­ing to the lat­est edi­tion of the US-based mag­a­zine, data from the first eight months of this year show that the com­bined vol­umes in gold futures trad­ing at exchanges in Shang­hai, Tokyo, Tai­wan and Mum­bai reached 49.8 mil­lion con­tracts, far ahead of the 34.3 mil­lion con­tracts traded in the US.

“‘From Jan­u­ary through August this year, seven of the top 10 gold con­tracts in the world were Asian,’ it said, adding that much of that growth was in Mum­bai and Shanghai.

“‘Some of the boom is undoubt­edly dri­ven by the search for a safe haven as the value of stock invest­ments con­tin­ues to evap­o­rate,’ the mag­a­zine said not­ing that Asian investors may also have a greater cul­tural pre­dis­po­si­tion toward gold than Westerners.

“Asia imports 60% of the world’s gold and its exports 40%. India is the largest con­sumer of phys­i­cal gold in the world, fol­lowed by the US, and then China. And this year, China became the world’s largest gold pro­ducer — a title south Africa had held for more than 100 years.”

Source: Profit NDTV, Decem­ber 9, 2008.

BBC News: UK eco­nomic slow­down “wors­en­ing”
“The UK econ­omy con­tracted 1% between Sep­tem­ber and Novem­ber, the National Insti­tute of Eco­nomic and Social Research (NIESR) has estimated.

“This fall fol­lowed after a 0.8% drop in the three months to the end of Octo­ber, said the think tank. Indi­cat­ing that the rate of out­put decline is ‘accel­er­at­ing’, the NIESR now expects a fall of more than 1% in the last three months of the year.

“Offi­cial data showed that the econ­omy shrank 0.5% from July to Sep­tem­ber. But it will not be until Jan­u­ary that the Office for National Sta­tis­tics reports on the final quarter’s GDP.

“If it reports a decline for the three months to Decem­ber, then the UK will be in offi­cially in reces­sion under the gen­er­ally accepted def­i­n­i­tion of two con­sec­u­tive quar­ters of decline.

“The NIESR says it has a good track record in fore­cast­ing GDP growth in advance of the offi­cial fig­ures. The lat­est data from NIESR is just the lat­est indi­ca­tion that the UK econ­omy is most prob­a­bly falling into a recession.”

Source: BBC News, Decem­ber 10, 2008.

Vic­to­ria Marklew (North­ern Trust): Swiss rates head toward zero
“The Swiss National Bank (SNB) effec­tively lopped another 50bps off its main pol­icy rate today, low­er­ing its tar­get band for three-month Swiss franc LIBOR to 0.0–1.0% (down from 0.5–1.5%) and aim­ing for the mid-point of 0.5%. This brings the eas­ing total to 225bps since Octo­ber 8.

“The SNB warned that the sharply wors­en­ing global cli­mate will push Switzer­land into reces­sion next year. Chair­man Roth stated that growth is likely to be neg­a­tive, not just in the first two quar­ters of 2009 but for the year as a whole. The bank is now fore­cast­ing a con­trac­tion in real GDP of between 0.5% and 1.0% next year. The infla­tion fore­cast was also revised down, with the bank now see­ing the annual rate aver­ag­ing 0.9% next year and 0.5% in 2010.”

Source: Vic­to­ria Marklew, North­ern Trust — Daily Global Com­men­tary, Decem­ber 11, 2008.

Finan­cial Times: Japan con­tracts faster than expected
“Japan’s gross domes­tic prod­uct con­tracted much more rapidly in the third quar­ter than pre­vi­ously thought, offi­cial data showed on Tues­day, amid new indi­ca­tions of dis­tress in the world’s second-biggest economy.

“The revised GDP data showed a quarter-on-quarter fall of 0.5% for the three months to Sep­tem­ber, com­pared with last month’s pre­lim­i­nary esti­mate of a 0.1% decline.

“The econ­omy con­tracted at an annu­alised rate of 1.8% between July and Sep­tem­ber — a much more pre­cip­i­tous pace than the annu­alised 0.5% decline suf­fered in the same quar­ter by the US, cen­tre of the global finan­cial crisis.

“Ana­lysts said the revi­sion, though big­ger than expected, reflected rel­a­tively tech­ni­cal fac­tors involv­ing inven­to­ries and gov­ern­ment spend­ing rather than wor­ry­ing new infor­ma­tion and so would not dra­mat­i­cally change assess­ments of the economy’s prospects.

“‘The down­grade in head­line growth does not look as bad as the head­line sug­gests,’ UBS said in a research note.

“How­ever, the news the reces­sion was deeper than thought came as the Cab­i­net Office said its lat­est com­pos­ite index of busi­ness con­di­tions showed the econ­omy ‘worsening’.”

Source: Mure Dickie, Finan­cial Times, Decem­ber 9, 2008.

Finan­cial Times: China’s export fall worse than pre­dicted
“The impact of the global finan­cial cri­sis on China became clear on Wednes­day when the gov­ern­ment revealed that exports fell in Novem­ber for the first time in almost seven years.

“With demand in many of its main mar­kets slow­ing sharply, Chi­nese exports declined 2.2% from a year ear­lier. Imports also fell 17.9% from a year ear­lier, accord­ing to Chi­nese cus­toms fig­ures, prompt­ing the gov­ern­ment to announce plans to fur­ther boost the economy.

“The Chi­nese data shocked econ­o­mists. The fig­ures were far below fore­casts, even in the light of sharp slumps in exports in Novem­ber from both Tai­wan and South Korea.

“‘This is the worst col­lapse in Chi­nese exports since 1999 and is prob­a­bly just the begin­ning of a pro­longed export con­trac­tion,’ said Isaac Meng, econ­o­mist at BNP Paribas.

“The drop in imports, the biggest since the early 1990s, helped push the monthly trade sur­plus to a record $40 bil­lion, the fourth month in a row that the sur­plus has bro­ken records.

“The gov­ern­ment pledged on Wednes­day to do every­thing it could to main­tain ‘sta­ble, healthy’ growth next year. At the con­clu­sion of the three-day Cen­tral Eco­nomic Work Con­fer­ence, an annual meet­ing of top policy-makers, offi­cials said they would boost pub­lic spend­ing in order to pro­mote domes­tic demand.

“A report on state radio about the meet­ing said the gov­ern­ment had reaf­firmed its pol­icy of keep­ing the exchange rate ‘basi­cally steady’, but would take other mea­sures to deal with falling domes­tic demand.

“Until last month, China’s exports had held up much bet­ter than most observers had expected, increas­ing by 19% in Octo­ber com­pared to the same month last year.”

Source: Geoff Dyer and Jamil Ander­lini, Finan­cial Times, Decem­ber 10, 2008.

Finan­cial Times: China infla­tion falls as growth slows
“China’s con­sumer price infla­tion fell to a 22-month low of 2.4% in Novem­ber, giv­ing the cen­tral bank free rein to cut inter­est rates fur­ther to off­set an abrupt slump in the world’s fourth-largest economy.

“Econ­o­mists had expected infla­tion to mod­er­ate to 3.0% from 4.0
% in the year to Octo­ber. In the event, the read­ing was the low­est since Jan­u­ary 2007.

“Nie Wen, an ana­lyst with Huabao Trust in Shang­hai, said the plunge meant real, inflation-adjusted inter­est rates in China were now back in pos­i­tive ter­ri­tory even though the econ­omy had run into fierce headwinds.

“‘The gov­ern­ment will become more deci­sive in cut­ting rates,’ Nie said.

“Jing Ulrich, head of China equi­ties at J.P. Mor­gan agreed. ‘We believe there is fur­ther scope for the cen­tral bank to ease mon­e­tary pol­icy in an effort to avoid an exces­sive slow­down and stave off defla­tion,’ she said in a note to clients.

“‘Def­i­nitely we are going to move into a defla­tion­ary envi­ron­ment in China, prob­a­bly through the first six months of the year,’ said Glenn Maguire, chief Asia-Pacific econ­o­mist for Soci­ete Gen­erale in Hong Kong.”

Source: Finan­cial Times, Decem­ber 11, 2008.

Bespoke: Defla­tion com­ing in China?
“It wasn’t too long ago that one of the biggest wor­ries fac­ing the global econ­omy was that improved stan­dards of liv­ing in China would lead to higher wages for its work­ers. This, it was feared, would cause the coun­try to begin export­ing infla­tion around the world. As recently as August, PPI data from China showed that infla­tion was run­ning at a rate of 10.1% year over year (y/y). Since then, how­ever, pric­ing power in China has col­lapsed as evi­denced by last night’s [Tues­day] release of the Novem­ber PPI, which showed that prices are now up by just 2.0% y/y. At this rate, it won’t be long before we start see­ing minus signs.”

Source: Bespoke, Decem­ber 10, 2008.

Finan­cial Times: Rou­ble exo­dus hits Russia’s credit rat­ing
“Rus­sia on Mon­day became the first G8 coun­try since the start of the finan­cial cri­sis to have its credit rat­ing down­graded after Stan­dard and Poor’s took fright at the recent exo­dus from the rou­ble and sharp drop in oil prices.

“S&P said it had low­ered Russia’s for­eign cur­rency credit rat­ing by one notch from BBB+ to BBB because of the ‘rapid deple­tion’ of the country’s for­eign exchange reserves and the ‘dif­fi­culty of meet­ing the country’s exter­nal financ­ing needs’. It said the out­look for the rat­ing was negative.

“Russia’s reserves have fallen by $128 bil­lion since August to $455 bil­lion, as the coun­try bat­tles the cap­i­tal flight that began fol­low­ing the war with Geor­gia and esca­lated as the oil price fell and the global cri­sis worsened.

“S&P said Rus­sia could be forced to spend all $200 bil­lion now parked in its two sov­er­eign wealth funds on recap­i­tal­is­ing the bank­ing sys­tem and cov­er­ing fis­cal deficits in 2009 and 2010.

“The agency expects Rus­sia to run a cur­rent account deficit next year of 2.6% of gross domes­tic prod­uct due to the oil price fall, putting fur­ther pres­sure on the bal­ance of payments.

“‘There are a lot of lay­ers of con­cern,’ said Frank Gill, pri­mary credit ana­lyst at Stan­dard and Poor’s. ‘There are macro­eco­nomic and polit­i­cal risks … and Rus­sia has not oper­ated a cur­rent account deficit since 1997 and that was less than 1% of GDP.’

“The thought of deval­u­a­tion raises the spec­tre of the 1998 rou­ble crash that wiped out Rus­sians’ sav­ings, although econ­o­mists say any deval­u­a­tion this time would be far less severe.”

Source: Cather­ine Bel­ton, Finan­cial Times, Decem­ber 8, 2008.

Tags: Agricultural commodities, Agriculture, Aplomb, Asia, asset class, Australia, Automakers, Bail Out, Bailout, Baltic Dry Index, Bank Of Japan, Banking System, Banks, Barack Obama, Barry Ritholtz, Basis Point, Basis Points, Bear Market, Bear Markets, Bear Stearns, Bernanke, Bill Gross, Bill King, Bill Rates, Blog, Bloomberg, Bonds, Bottoms, Bps, Br, Brazil, BRIC, Bric Countries, BRICs, Brokers, Bullion, Canadian Market, CDS, Cement, Central Banks, Chart, China, Cnbc, Cnn, Coal, Collapse, Commodities, Commodity, contango, Corporate Bonds, COT, CPI, Crash, Credit, Credit Cards, Credit Crisis, Credit Default Swap, Credit Market, Credit Markets, Credit Spreads, Currency, Current, David Rosenberg, Deflation, Diffe, dig, Dollar, Dow, Earnings, Eco, Economic Activity, Economic Indicators, Economic Reports, Economic Stimulus Plan, Economics, Economist, Economists, Economy, eev, Eight Times, Emerging Market, Emerging Markets, energy, Equity Research, Euro, Failure, Fannie Mae, Fed, Federal Reserve, fertilizer, financial stocks, Financial Times, Financials, Financiers, Focus, France, Freddie Mac, FT.com, GDP, GDP Growth, Germany, Global Stock, Global Stock Markets, Gold, Gold Bullion, gold stocks, Government Bonds, government spending, Grain, Health, Hell, high yield, Hong Kong, Housing Market, Img, India, inflation, Information, Infrastructure, Infrastructure Investment, interest rates, International, interview, Investment, Investment Outlook, Investors, Iron Ore, Issuance, Italy, Japan, Jim Rogers, Leading Indicator, Lehman Brothers, Leverage, liquidity, Litany, Loc, Loom, Market Cap, Market Declines, Markets, Measures, Meredith Whitney, Merrill Lynch, Metals, Middle Class, Mining, Monetary Policy, Money, Mortgage, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Natural Gas, Negative Territory, Net Assets, Nick Anderson, Nouriel Roubini, Obama, oil, Oil Prices, Outlook, Outperformance, P500, People, Peter Schiff, Php, Physical Assets, physical gold, PIMCO, Platinum, President Elect, Rally, Raw Material, Recession, REW, RGE Monitor, risk, Rose, Roubini, Russia, S&P 500, S&P500, saa, Sentiment, Setback, Shareholders, Signs, Silver, Slowdown, Societe Generale, South Africa, South Korea, spreads, Squeeze, Stimulus Package, Stock Market, Stock Markets, Stock Prices, Stocks, Switzerland, T Bills, Taiwan, Target, Target Rate, Tarp, The Big Picture, Trading, Treasuries, Treasury Bill, Treasury Bills, Treasury Bonds, Treasury Note, Treasury Securities, Trillion, UK, upw, US Banks, US Dollar, Us Government, Us Senate, Us Treasury, Value, Video, Volatility, Wachovia, Wages, Wall Street, Wall Street Journal, Water, Youtube, Ytd
Posted in Bonds, Canadian Market, Commodities, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, Gold, India, Infrastructure, Markets, Oil and Gas, Outlook, Silver, US Stocks | Comments Off