December 28th, 2008 by Prieur du Plessis, Investment Postcards from Cape Town

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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.

Date	Time (ET)	Sta­tis­tic	For	Actual	Brief­ing Forecast	Mar­ket Expects	Prior
Dec 23	8:30 AM	Chain Deflator-Final	Q3	3.9%	4.2%	4.2%	4.2%
Dec 23	8:30 AM	GDP–Final	Q3	–0.5%	–0.5%	–0.5%	–0.5%
Dec 23	10:00 AM	Exist­ing Home Sales	Nov	4.49M	4.95M	4.93M	4.91M
Dec 23	10:00 AM	New Home Sales	Nov	407K	415K	415K	419K
Dec 23	10:00 AM	Michi­gan Sentiment-Revised	Dec	60.1	58.8	58.8	59.1
Dec 24	8:30 AM	Durable Orders	Nov	–1.0%	–3.5%	–3.1%	–8.4%
Dec 24	8:30 AM	Ini­tial Claims	12/20	586K	545K	558K	556K
Dec 24	8:30 AM	Per­sonal Income	Nov	–0.2%	0.1%	0.0%	0.1%
Dec 24	8:30 AM	Per­sonal Spending	Nov	–0.6%	–0.8%	–0.8%	–1.0%
Dec 24	10:35 AM	Crude Inven­to­ries	12/20	–3.1m	NA	NA	NA

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.

Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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Comments

One Response to “Words from the (investment) wise for the week that was (Dec 22 – 28, 2008)”

1. Ian Mellor Says:
   January 3rd, 2009 at 1:10 pm

   This is very infor­ma­tive with excel­lent research on a global basis. Well Done!