Video-Rama: Global Economy Banked Into Recession

Friday, January 30th, 2009

While finan­cial mar­kets remained mired in uncer­tainty, the who’s who of global eco­nom­ics descended on Davos in Switzer­land for the annual meet­ing of the World Eco­nomic Forum. This week’s har­vest of video clips there­fore includes a num­ber of inter­views set against the back­drop of the snow-covered Alps.

The over­all mes­sage of the video footage is aptly con­veyed by titles such as “Moun­tains of doom” (Nouriel Roubini) and “Wall Street win­ter blues” (Robert Shiller). Also dis­cussing aspects of Pres­i­dent Obama’s stim­u­lus plan, the mooted bad bank, and other crisis-related issues are Jamie Dimon, Edmund Phelps, Steve Forbes, Joseph Stiglitz, Barry Ritholtz, Chris Whalen, George Soros, Stephen Roach, Ken­neth Rogoff, Jack Welch, Jan Hatz­ius, George Fried­man and Michael Lewis.

But although gloom pre­vails, money-making oppor­tu­ni­ties do exist as high­lighted by John Mur­phy (StockCharts.com), who expects gold bul­lion to be the best invest­ment for 2009.

In lighter vein, this week’s com­pi­la­tion is rounded up by Bunny and Mimi (the Pinky Show) with a clip enti­tled “Banked into submission”.

CNBC: Dimon on eco­nomic recov­ery
“Jamie Dimon, JPMor­gan chair­man and CEO, tells CNBC’s Maria Bar­tiromo when he’s expect­ing an eco­nomic recovery.”

Source: CNBC, Jan­u­ary 29, 2009.

CNBC: Orszag on Obama’s stim­u­lus plan
“Peter Orszag, direc­tor of the Office of Man­age­ment and Bud­get, dis­cusses Obama’s stim­u­lus pack­age and what the final prod­uct will look like.”

Source: CNBC, Jan­u­ary 28, 2009.

Bloomberg: Edmund Phelps says US needed “more coher­ent” stim­u­lus
“Edmund Phelps, a pro­fes­sor at Colum­bia Uni­ver­sity and win­ner of the 2006 Nobel Prize in eco­nom­ics, talks with Bloomberg’s Francine Lac­qua and Erik Schatzker about the US government’s plans to stim­u­late the econ­omy and ease the credit cri­sis. Phelps, speak­ing at the World Eco­nomic Forum meet­ing in Davos, Switzer­land, also dis­cusses mea­sures to remove toxic assets from banks’ bal­ance sheets and the out­look for US housing.”

Source: Bloomberg, Jan­u­ary 28, 2009.

Fox Busi­ness: Steve Forbes talks stim­u­lus, econ­omy & Geithner

Source: Fox Busi­ness, Jan­u­ary 28, 2009.

CNBC: Stiglitz on the econ­omy
“Oppor­tu­ni­ties for your money at the World Eco­nomic Forum, with Joseph Stiglitz, Colum­bia Uni­ver­sity pro­fes­sor and Nobel Prize win­ner, and CNBC’s Becky Quick.”

Source: CNBC, Jan­u­ary 28, 2009.

CNBC: Barry Ritholtz — nation­al­ize the banks

Source: CNBC, Jan­u­ary 29, 2009.

Yahoo Finance: Chris Whalen — give money to healthy banks, let FDIC’s Bair han­dle the dying
“Why should tax­pay­ers have to keep bail­ing out banks that aren’t lend­ing and are black holes? Why can’t Con­gress just force these banks to write down their bad debt then recap­i­tal­ize them? Why doesn’t the gov­ern­ment cre­ate a bank that does not have toxic assets and will fill the void of much needed loans to busi­nesses who need them?

“‘Lack of polit­i­cal courage [and] igno­rance of finance’ in Con­gress are the answers to these and related ques­tions, accord­ing to Chris Whalen, man­ag­ing direc­tor and co-founder of Insti­tu­tional Risk Ana­lyt­ics. ‘Our friends in Wash­ing­ton who’ve been receiv­ing a lot of money from Wall Street don’t want to put these peo­ple out of work.’

Click here for the article.

Source: Aaron Task, Yahoo Finance, Jan­u­ary 21, 2009.

BBC News: Soros on get­ting out of the global cri­sis
“Financier George Soros has out­lined his recipe for sta­bil­is­ing the global econ­omy to the BBC’s Busi­ness Edi­tor, Robert Peston. Speak­ing against the back­drop of the World Eco­nomic Forum in Davos, he said the present prob­lem was ‘big­ger’ than in the 1930s.He was asked if he thought there were any signs of recov­ery in sight.”

Source: BBC News, Jan­u­ary 28, 2009.

CNBC: Roubini — moun­tains of doom
“Dis­cussing the stim­u­lus and the dis­as­ter that is the world econ­omy, with ‘Dr. Doom’, Nouriel Roubini, RGEMonitor.com chairman.”

Source: CNBC, Jan­u­ary 28, 2009.

Bloomberg: Roach sees “longer and deeper” reces­sion, weak recov­ery
“Stephen Roach, chair­man of Mor­gan Stan­ley Asia, talks with Bloomberg’s Betty Liu about the out­look for the global econ­omy. Roach, speak­ing from Zurich, also dis­cusses the US reces­sion and the state of the Chi­nese and Indian economies. Mario Gabelli, chief exec­u­tive offi­cer of Gamco Investors, also speaks.”

Source: Bloomberg, Jan­u­ary 27, 2009.

Fox Busi­ness: Rogoff — 80’s cri­sis a “baby” com­pared to now

Source: Fox Busi­ness, Jan­u­ary 28, 2009.

CNBC: Jack Welch on the econ­omy
“Per­spec­tives on the government’s stim­u­lus plan, with Jack Welch, for­mer GE chairman/CEO.”

Source: CNBC, Jan­u­ary 29, 2009.

Bloomberg: Hatz­ius says Fed will likely buy trea­suries even­tu­ally
“Jan Hatz­ius, chief US econ­o­mist at Gold­man Sachs, talks with Bloomberg’s Betty Liu about the like­li­hood the Fed­eral Reserve will buy US Trea­suries. Hatz­ius, speak­ing from New York, also dis­cusses the out­look for mon­e­tary pol­icy and need for a ‘large’ stim­u­lus package.”

Source: Bloomberg, Jan­u­ary 28, 2009.

John Authers (Finan­cial Times): Hous­ing and the Fed
“If there is a sin­gle key vari­able to deter­mine when the cri­sis in the US bank­ing sys­tem can be brought under con­trol, it is house prices. The fur­ther they fall, the higher the likely default rate on the mortgage-backed secu­ri­ties that banks now hold on their bal­ance sheets.”

Click here for the article.

Source: John Authers, Finan­cial Times, Jan­u­ary 27, 2009.

Barron’s: Santoli’s mar­ket out­look: 8,000 and 800
“Barron’s Mike San­toli explores whether the Dow hov­er­ing around 8,000 and the S&P around 800 car­ries a cer­tain sig­nif­i­cance and what this could mean.”

Source: Barron’s, Jan­u­ary 26, 2009.

CNBC: Robert Shiller — Wall Street win­ter blues

Source: CNBC, Jan­u­ary 28, 2009.

CNBC: Steve Forbes dis­cusses out­look for stocks

Source: CNBC, Jan­u­ary 28, 2009.

Bloomberg: StockCharts’s Mur­phy sees gold at $1,000 by year end
“John Mur­phy, chief tech­ni­cal ana­lyst at StockCharts.com, talks with Bloomberg’s Bren­nan Loth­ery about the out­look for the gold price in 2009. Mur­phy also dis­cusses com­mod­ity prices, the US equity mar­ket and invest­ment strategy.”

Source: Bloomberg, Jan­u­ary 27, 2009.

BBC News: Trichet — sys­tem must be more resilient
“The pres­i­dent of the Euro­pean Cen­tral Bank, Jean-Claude Trichet, has warned about imbal­ances in the global econ­omy for some time. He told the BBC’s Tanya Beck­ett that it was a ques­tion of ensur­ing that by being extremely bold in the short term, long term con­fi­dence was not hampered.”

Source: BBC News, Jan­u­ary 29, 2008.

CNBC: China — the next world super­power?
“China is unlikely to replace the US as the world’s dom­i­nant super­power, says George Fried­man, CEO of Strat­for. He tells Kirby Daley from the Newedge Group & CNBC’s Amanda Drury why. He also reveals the other key chal­lenges we may face in the next 100 years.”

Source: CNBC, Jan­u­ary 30, 2009.

YouTube: Michael Lewis on how to avoid bankruptcy

Source: YouTube, Jan­u­ary 28, 2009.

Pinky Show: Banked into sub­mis­sion
“Part III of the glob­al­iza­tion comic series. In this mini-episode, Bunny tells Mimi about the World Bank and IMF and how won­der­ful they are.”

Source: Pinky Show (via YouTube), March 21, 2007.

Tags: 2006 Nobel Prize In Economics, Barry Ritholtz, Credit Crisis, Davos Switzerland, Director Of The Office Of Management And Budget, Edmund Phelps, Emerging Markets, George Friedman, George Soros, Gold, Gold Bullion, India, Jamie Dimon, Joseph Stiglitz, Kenneth Rogoff, Maria Bartiromo, Nobel Prize In Economics, Peter Orszag, Stephen Roach, Steve Forbes, Stimulus Package, Stockcharts, World Economic Forum
Posted in Credit Markets, Economy, Emerging Markets, Gold, India, Markets, Outlook | Comments Off

Jeremy Grantham: Riveting Interview with Steve Forbes

Thursday, January 29th, 2009

Whoa! Jeremy Grantham gives a riv­et­ing, in-depth, spe­cific and elo­quent must-see inter­view. It is a clear and enlight­en­ing dis­cus­sion with one of the finest and quiet geniuses in the invest­ment world.

Sub­se­quent to pub­li­ca­tion of Jeremy Grantham’s quar­terly newslet­ter a few days ago, Steve Forbes con­ducted this inter­view with the chair­man of Boston-based GMO. The video clip and tran­script are pub­lished below.

Click here or on the image to view the video.

Click here for the tran­script of the interview.

Here are the top­i­cal head­ings from the interview:

• Steve: China's Long Tale
• Grantham's Big Call
• A Whole New Bubble
• Time To Buy
• Cheap­est in 20 Years
• Japan A Blue Chip?
• Emerg­ing Markets
• Buy Big US Stocks
• Stim­u­lus!
• Our Lead­ers Failed
• Dys­func­tional Markets
• China Bub­ble

Here are a few paragraphs:

Steve Forbes: Well thank you, Jeremy, for join­ing us today. First, since you have brag­ging rights in this sit­u­a­tion, what made you a bear, [a] great skep­tic? Between 1999 until about a cou­ple of months ago, you were say­ing, "Stay out."

Jeremy Grantham: Well, really very sim­ple. Not rocket sci­ence. We take a long-term view, which makes life, in our opin­ion, much easier.

Steve Forbes: Well every­one says it, but you cer­tainly prac­ticed it.

Jeremy Grantham: We actu­ally do it. Well, we tried the short-term stuff and it was so hard; we thought we'd bet­ter do the long-term. We just assume that at the end, in those days, of 10 years, profit mar­gins will be nor­mal and price-earnings ratios will be nor­mal. And that will cre­ate a nor­mal, fair price. And more recently, we've moved to seven years, because we've found in our research that finan­cial series tend to mean revert a lit­tle bit faster than 10 years–actually about six-and-a-half years. So we rounded to seven.
And that's how we do it. And it just hap­pened from Octo­ber '98 to Octo­ber of '08, the 10-year fore­cast was right. Because for one sec­ond in its flight path, the U.S. mar­ket and other mar­kets flashed through nor­mal price. Nor­mal price is about 950 on the S&P; it's a lit­tle bit below that today.

And on my birth­day, Octo­ber the 6th, the U.S. mar­ket, 10 years and four trad­ing days later, hit exactly our 10-year fore­cast of Octo­ber '98, which is worth talk­ing about if only to enjoy spec­tac­u­lar luck. The P/E was a lit­tle bit lower than aver­age and the profit mar­gins were a lit­tle bit higher, so they beau­ti­fully off­set. And given our method­ol­ogy, that would mean that on Octo­ber the 6th, the mar­ket should have been fairly priced on our cur­rent approach. And indeed it was–that was even more remarkable–950, plus or minus a cou­ple of percent.

Steve Forbes: And what did you see dur­ing that 10-year period that made you feel–other than your own models–that this was some­thing highly abnor­mal, that this couldn't last?

Jeremy Grantham: Well, first of all, the mag­ni­tude of the over­run in 2000 was leg­endary. As his­to­ri­ans, you know we've mas­saged the past until it begs for mercy. And we saw that it was 21 times earn­ings in 1929, 21 times earn­ings in 1965 and 35 times cur­rent earn­ings in 2000. And 35 is big­ger than 21 by enough that you'd expect every­one would see it. Indeed, it looks like a Himalayan peak com­ing out of the plain.
And it begs the ques­tion, "Why didn't every­body see it?" And I think the answer to that is, "Every­body did see it." But agency risk or career risk is so pro­found, that even if you think the mar­ket is glo­ri­ously over­priced, you still have to get up and dance. Because if you sit down too quickly–

Steve Forbes: Famous words of Mr. Prince.

Click here for the tran­script of the interview.

Source: Forbes, Jan­u­ary 23, 2009.

Down­load the Forbes: Jeremy Grantham Brief­ing Book here.

Tags: Blue Chip, Boston, Bragging Rights, China, Dysfunctional, Emerging Markets, Few Days, Flight Path, Geniuses, Gmo, Half Years, Interview Source, Investment World, Japan, Jeremy Grantham, Paragraphs, Price Earnings Ratios, Profit Margins, Quarterly Newsletter, Rivetting, Rocket Science, S Market, Seven Years, Skeptic, Steve Forbes, Steven Forbes, Stimulus, Stocks, Topical Headings, Video Clip
Posted in Emerging Markets, Markets | Comments Off

David Swensen on Charlie Rose

Thursday, January 29th, 2009

David Swensen, leg­endary port­fo­lio man­ager and CIO of the Yale Endow­ment speaks to Char­lie Rose in a rare 15-minute inter­view. The first inter­view fea­tures Sen. Chuck Schumer. David Swensen fol­lows. To get to David Swensen, advance the video using the arrow indi­ca­tor to 38:40 mins.

Tags: Arrow, Charlie Rose, Chuck Schumer, Cio, David Rose, David Swensen, Minute Interview, Portfolio Manager, Rose David, Yale Endowment
Posted in Markets | Comments Off

Baltic Dry Index Up 7 Straight Days Bullish Sign

Wednesday, January 28th, 2009

The Baltic Dry Index, the indi­ca­tor of global ship­ping activ­ity is now sit­ting at 1014, hav­ing hit its low of 663 Decem­ber 5, 2008. This is a valu­able mea­sure of global trade activ­ity, and it is indi­cat­ing a resump­tion of trade. It is still a long way off its all-time high of 11,793 of last spring, down 91.4% from the top, but up over 50% off its bottom.

We'll keep watch­ing this. This is bull­ish for both fin­ished exports and com­modi­ties. Its still early, and this is a promis­ing sign. The loss expe­ri­enced in the index includes the value dif­fer­en­tial owing to the crash in com­mod­ity prices expe­ri­enced dur­ing the last 6 months. The BDI Index fell off a cliff in Sep­tem­ber which coin­cided with the col­lapse of Lehman Broth­ers, which hap­pened to be a large under­writer of trade related financ­ing. With other banks unwill­ing to take Lehman's place, trade fell into the crater left behind.

Global trade credit froze along with the credit mar­ket as it became very dif­fi­cult, if not impos­si­ble to trade, with banks unwill­ing to issue let­ters of credit.

This is a sign that the trade finance mar­ket is thaw­ing and that ship­ping can resume. A con­tin­u­a­tion of this trend should be con­sid­ered bull­ish, par­tic­u­larly for China exports, global trade, and for com­modi­ties pro­duc­ing com­pa­nies and countries.

The Baltic Dry Index does not mea­sure the price of oil, although it does include the price of fuel as a com­po­nent of the ship­ping cost.

Chart: Bespoke Invest­ment Group

Tags: Baltic Dry Index, Banks, Bdi, Bdi Index, China Exports, Collapse, Commodities, Commodity Index, Commodity Prices, Commodity Producers, Crash, Differential, Failure, Finance Market, Global Shipping, Global Trade, Investment Group, Last Spring, Lehman Brothers, Letters Of Credit, Price Of Oil, Promising Sign, Resumption, Shipping Activity, Shipping Cost, Straight Days, Trade Finance, Underwriter
Posted in Commodities, Credit Markets, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Where Credit's Due

Wednesday, January 28th, 2009

Michael Gre­gory, Senior Econ­o­mist, BMO Finan­cial Group, posits in the lat­est issue of Focus that recov­ery in credit for­ma­tion has and will be key to eco­nomic recovery.

The typ­i­cally rapid tran­si­tion from decel­er­at­ing to accel­er­at­ing credit growth results in a v-shaped credit cycle, a crit­i­cal char­ac­ter­is­tic that effec­tively fuels eco­nomic recov­ery (Chart 1).

How­ever, the global credit cri­sis has impaired credit cre­ation processes around the world, par­tic­u­larly in the U.S. and the U.K. The cost of credit to con­sumers and busi­nesses was ini­tially hoisted higher than it oth­er­wise would have been because of bank fund­ing costs.

Note: Cana­dian money mar­ket spreads have been very healthy, indi­cat­ing their strong finan­cial position.

Just as the global finan­cial cri­sis unfolded in four waves (Chart 2), with the lat­est surge the most dam­ag­ing, the pol­icy responses by cen­tral banks and gov­ern­ments have had four dis­tinct themes, all designed to repair and prime their local credit mar­kets, with the lat­est tac­tics tar­get­ing the asset root of the problem.

First, pol­icy rates have been cut to his­toric lows (Chart 3). In cases where rates are already effec­tively zero (e.g., U.S., Japan), cen­tral banks are pro­vid­ing much more liq­uid­ity than required to prod banks into loan­ing out the excess-the essence of "quan­ti­ta­tive easing".

Sec­ond, some cen­tral banks (Fed, BoJ, BoE) are par­tic­i­pat­ing directly in local com­mer­cial paper markets-which were among the first casu­al­ties of the global credit crisis-and pur­chas­ing mortgage-backed and other securities.

Despite the "credit eas­ing" mea­sures, banks have not eased up on lend­ing require­ments. (Chart 4)

The third pol­icy theme has been to ensure banks have ade­quate access to cap­i­tal and other fund­ing at rea­son­able rates. Gov­ern­ments are guar­an­tee­ing bank lia­bil­i­ties and, in some cases, directly inject­ing capital.

While gov­ern­ment is able to use moral sua­sion to twist banker's arms to lend, it is not able to assuage con­cerns that the deep­en­ing reces­sion could lead to more losses, which is keep­ing lend­ing tight.

House­hold delever­ag­ing (Chart 5) means that con­sumers are start­ing to save more and spend less, reduc­ing con­sump­tion in the econ­omy. Non-financial busi­nesses are doing the same. This rever­sal in credit for­ma­tion means deflat­ing assets, and lower cap­i­tal expenditure.

Thus, the fourth pol­icy theme is to bol­ster the asset side of bal­ance sheets. This week, the U.K. gov­ern­ment intro­duced an "Asset Pro­tec­tion Scheme" designed to par­tially pro­tect finan­cial insti­tu­tions against future credit losses.

In the U.S., there's grow­ing talk of estab­lish­ing an "aggre­ga­tor" bank that would pur­chase trou­bled assets from banks, as the new Obama Admin­is­tra­tion is promis­ing action on a "dra­matic scale" to strengthen banks and revive credit markets.

The longer the econ­omy stays starved of credit, the greater the risk of a defla­tion­ary out­come, with Japan's "lost decade" quickly com­ing to mind (Chart 6).

You can read the entire report here.

Tags: Array, BMO, Canadian Market, Canadian Money Market, Casualties, Central Banks, Creation Processes, Credit Creation, Credit Crisis, Credit Markets, Distinct Themes, Economic Recovery, Economic Research, Economist, Financial Group, Financial Position, Global Credit, Global Financial Crisis, liquidity, Lows, Michael Gregory, Monetary And Fiscal Policy, Moral Suasion, Paper Markets, Policy Actions, Policy Responses, Rapid Transition, Recessions, Waves
Posted in Credit Markets, Economy, Markets | Comments Off

Albert Edwards: Back in the bear camp

Wednesday, January 28th, 2009

Albert Edwards, London-based strate­gist of Société Générale, has always been a firm favourite among Invest­ment Post­cards’ read­ers. His lat­est research report appeared a few days ago and saw him firmly back in the bear camp after turn­ing short-term bull­ish at the end of Octo­ber. (See the pre­vi­ous posts “Albert Edwards: Turn­ing More Bull­ish” [Octo­ber 24] and “Mar­ket Fun­da­men­tals are Appalling” [July 5]).

Edwards’s “Global Strat­egy” report is sub-titled “Tech­ni­cals say it is time to bail out. Cut expo­sure and pre­pare for rout. US depres­sion look­ing likely. China’s 2009 implo­sion could get ugly.” The exec­u­tive sum­mary below pro­vides the gist of his thinking.

“After increas­ing our equity expo­sure at the end of Octo­ber we believe that the mar­ket is set to quickly slide sharply towards our 500 tar­get for the S&P. While eco­nomic data in devel­oped economies increas­ingly reflects depres­sion rather than a deep reces­sion, the real sur­prise in 2009 may lie else­where. It is becom­ing clear that the Chi­nese econ­omy is implod­ing and this raises the pos­si­bil­ity of régime change. To pre­vent this, the author­i­ties would likely devalue the Yuan. A sub­se­quent trade war could see a re-run of the Great Depression.

• Eco­nomic data has been truly dread­ful through the fourth quar­ter. Over a year ago we fore­cast deep US reces­sion. As it had not suf­fered one since the early 1980s, we thought this out­turn would shock. Yet recent data has been con­sis­tent with some­thing far worse than deep reces­sion. There is no agreed def­i­n­i­tion of a “depres­sion” as opposed to a deep reces­sion. But The Econ­o­mist mag­a­zine is prob­a­bly more qual­i­fied than many to take a view. They con­sider a peak-to-trough decline in GDP in excess of 10% a rea­son­able def­i­n­i­tion. We had been think­ing of deep GDP declines of the order of 5% peak to trough but we are now think­ing that this view might be too optimistic.

• But, until yes­ter­day, equity mar­kets had been pad­dling quite hap­pily side­ways for most of the last few months. They have been broadly flat since we increased our equity weight­ing sharply on 23 Octo­ber. Within that time the intra-day peak-to-trough rally in the S&P was a cred­itable 28% from 740 low of Novem­ber 21, but we do not claim to have cap­tured that. Nev­er­the­less we feel very com­fort­able that the tech­ni­cals at the end of Octo­ber cried out to close our extreme under­weight equity expo­sure. They now tell us to cut expo­sure again.

• 2008 was a shock for investors. But 2009 could be an even big­ger shock. There is evi­dence that the Chi­nese econ­omy is implod­ing. Investors should con­sider what would hap­pen if China descends into social chaos. Yuan deval­u­a­tion could spark a 1930’s style trade war. Do you really trust the politi­cians to ‘do the right thing’?”

Source: Albert Edwards, Global Strat­egy Weekly, Société Générale, Jan­u­ary 15, 2009 (hat tip: David Fuller, Fuller­money).

Tags: Bear Camp, Chinese Economy, Economic Data, Economist Magazine, Equity Exposure, Gist, Global Strategy, Great Depression, Implosion, Market Fundamentals, October 24, Recession, Regime Change, Rout, Societe Generale, Strategist, Strategy Report, Target, Trade War, Trough
Posted in Credit Markets, Economy, Markets | Comments Off

Nouriel Roubini: "The worst is yet to come."

Tuesday, January 27th, 2009

Nouriel Roubini, or RGE Mon­i­tor and NYU Stern School of Busi­ness, appeared on CNBC, Jan­u­ary 15, 2009, to dis­cuss his out­look for 2009. Roubini's best-case call is a U-shaped recov­ery from this now syn­chro­nized global reces­sion we're in, if the author­i­ties can turn around the sit­u­a­tion in the finan­cial sec­tor, which is by his account, "effec­tively insol­vent." If not, we could enter into a period of eco­nomic stag­na­tion com­bined with defla­tion, sim­i­lar to Japan. He is joined by 2001 Nobel Lau­re­ate, Michael Spence.

Roubini clings to the notion that "the worst is yet to come."

To watch the video, click play:

Tags: Authorities, Cnbc, Deflation, Economic Stagnation, Financial Sector, Global Recession, Japan, Michael Spence, Nobel Laureate, Notion, Nouriel Roubini, Nyu Stern School, Nyu Stern School Of Business, Outlook, RGE Monitor, School Of Business, Stag, Stern School Of Business, Turnaround
Posted in Markets, Outlook | Comments Off

Hugh Hendry: Outlook for 2009

Tuesday, January 27th, 2009

Hugh Hendry vis­ited CNBC on Jan­u­ary 12, 2009, and the entirety of the avail­able footage of his com­men­tary is wor­thy of your atten­tion. In pre­vi­ous arti­cles we par­tially cov­ered this. As usual, Hendry's com­mand and per­spec­tive is stark, and sen­si­ble, and to date, canny and accu­rate. We have found the com­plete video excerpts from Jan­u­ary 12, 2009, and share it with you below. Its fresh and com­pelling for 2009; don't miss out on view­ing this.

Hugh Hendry, Jan­u­ary 12, 2009, Part 1 of 6

Hugh Hendry, Jan­u­ary 12, 2009, Part 2 of 6

Hugh Hendry, Jan­u­ary 12, 2009, Part 3 of 6

Hugh Hendry, Jan­u­ary 12, 2009, Part 4 of 6

Hugh Hendry, Jan­u­ary 12, 2009, Part 5 of 6

Hugh Hendry, Jan­u­ary 12, 2009, Part 6 of 6

Tags: Cnbc, Hugh Hendry, Outlook, Perspective, Video Excerpts
Posted in Markets, Outlook | Comments Off

Cast Your Vote: Recession or Depression?

Tuesday, January 27th, 2009

This post is a guest con­tri­bu­tion by Ben­net Sedacca*, Pres­i­dent of Atlantic Advi­sors Asset Management.

As unpop­u­lar as it may have been over the past sev­eral years, I have been writ­ing about the impend­ing Reces­sion in the United States and in other nations. I am rather used to crit­i­cism as a “perma-bear”, as it relates to our asset-based, over-leveraged mess that we call our econ­omy. It has been no fun what­so­ever to be the one to “call ‘em as you see ‘em”, but to be per­fectly frank, an out­lier view has been a nec­es­sary evil, and one that I have been proud to have had the guts to provide.

And so now I will say what the biggest risk of all is in my view. There is no doubt, whether it is in ret­ro­spect as most econ­o­mists sug­gest or not, that (shh­h­h­hhh …) we are in a Reces­sion … Oh my Good­ness, what an unpop­u­lar view — that the econ­omy can actu­ally shrink. And shrink it has, it is, and likely will con­tinue to do. The ques­tion on my mind, as it has been over the past sev­eral months, is if we are going through a tra­di­tional Reces­sion or a once-in-a –life­time Depres­sion? I have actu­ally HOPED that Reces­sion as the result of the unprece­dented credit unwind would end up as just a nasty Reces­sion at best. Sadly how­ever, I feel that a Depres­sion is either upon us, or soon will be upon us.

To be truth­ful or dar­ing is impor­tant in mar­kets and other parts of life. To be truth­ful, you must suck it up. To be dar­ing is to avoid the bad news that is so obvi­ous, but not at all too fun or excit­ing to focus on. There is no thought clearer in my mind, as I have stated many times over the past year, that we are in a Reces­sion, or quite likely much worse. I hate to say this, as unpop­u­lar as it may seem (so what’s new with what I write?), WELCOME TO THE DEPRESSION. For my rea­son­ing, please read on.

Click here for Bennet’s full report.

* Pres­i­dent of Atlantic Advi­sors Asset Man­age­ment, Ben­net Sedacca brings with him more than 26 years of secu­ri­ties indus­try expe­ri­ence. From 1981 to 1997 he worked for sev­eral major invest­ment banks, spe­cial­iz­ing in high-grade fixed-income secu­ri­ties mar­ket­ing, trad­ing and port­fo­lio man­age­ment. In 1997 he formed Sedacca Cap­i­tal Man­age­ment focus­ing on port­fo­lio man­age­ment for high-net worth indi­vid­u­als and small to mid-sized institutions.

Tags: Asset Management, Bad News, Depression, Economists, Economy, Focus, Fun, Guts, Impending Recession, Lifetime, Nasty Recession, Necessary Evil, No Doubt, Oh My Goodness, Retrospect, risk, United States, Unpopular View, Vote
Posted in Credit Markets, Economy, Markets | Comments Off

Teresa Lo's Rules of Market Survival

Monday, January 26th, 2009

Teresa Lo, founder of Invivo­An­a­lyt­ics, retired from the secu­ri­ties indus­try in 1998 after a twelve-year career.  Since then, she has helped thou­sands of indi­vid­ual investors, traders and invest­ment advi­sors achieve their goals and secure their finan­cial futures. She is cur­rently the port­fo­lio man­ager for a pri­vate invest­ment fund. You can find out more by vis­it­ing invivoanalytics.com.

We found this par­tic­u­lar ref­er­ence piece writ­ten by Ms. Lo to be an excel­lent set of rules for investing.

I've [Teresa Lo] been work­ing on this post for a long time, and might come back to edit the rules on this page from time to time.

1. TEMPERAMENT TRUMPS INTELLIGENCE
You don't have to be a rocket sci­en­tist to suc­ceed. It's a cer­tain com­bi­na­tion of intel­li­gence and per­sonal qualities.

Suc­cess in invest­ing doesn't cor­re­late with IQ once you're above the level of 25. Once you have ordi­nary intel­li­gent, what you need is the tem­per­ment to con­trol the urges that get other peo­ple in trou­ble invest­ing. — War­ren Buf­fett, The Real War­ren Buffett

Stay­ing the course requires a cer­tain sto­icism and balance:

From Max­imus I learned self-government, and not to be led aside by any­thing; and cheer­ful­ness in all cir­cum­stances, as well as in ill­ness; and a just admix­ture in the moral char­ac­ter of sweet­ness and dig­nity, and to do what was set before me with­out com­plain­ing. I observed that every­body believed that he thought as he spoke, and that in all that he did he never had any bad inten­tion; and he never showed amaze­ment and sur­prise, and was never in a hurry, and never put off doing a thing, nor was per­plexed nor dejected, nor did he ever laugh to dis­guise his vex­a­tion, nor, on the other hand, was he ever pas­sion­ate or sus­pi­cious. He was accus­tomed to do acts of benef­i­cence, and was ready to for­give, and was free from all false­hood; and he pre­sented the appear­ance of a man who could not be diverted from right rather than of a man who had been improved. I observed, too, that no man could ever think that he was despised by Max­imus, or ever ven­ture to think him­self a bet­ter man. He had also the art of being humor­ous in an agree­able way. — Mar­cus Aure­lius, The Med­i­ta­tions of Mar­cus Aure­lius, Book One

2. NEVER LOSE MONEY
This one is sim­ple enough:

Rule No. 1: Never lose money. Rule No. 2: Never for­get rule No. 1 — War­ren Buf­fett, The Real War­ren Buffett

3. WHERE THERE'S SMOKE, THERE'S FIRE
Another obvi­ous one:

I fol­low the old dic­tum: There's never just one cock­roach in the kitchen. — War­ren Buffett

4. DIVERSIFY, DIVERSIFY, DIVERSIFY
They all say they do, but no one ever does. Then they are sorry:

You have to diver­sify against the col­lec­tive igno­rance. I think nobody is in a posi­tion to react to these big macro-issues. Where is the dol­lar going to be or what is G.D.P. growth going to be in China? For every smart per­son on one side of the ques­tion, there is another smart per­son on the other side." — David F. Swensen

5. PERCEPTION IS EVERYTHING
Refuse to become intel­lec­tu­ally bank­rupt. Avoid dogma:

Facts per se can nei­ther prove nor refute any­thing. Every­thing is decided by the inter­pre­ta­tion and expla­na­tion of the facts, by the ideas and the the­o­ries. — Lud­wig von Mises

Have the courage to see the world as it is:

The glass is not half-full or half-empty. It's just a half glass. — Teresa Lo

6. THE PARTY ALWAYS ENDS SOONER THAN YOU THINK
Dance close to a work­ing fire exit at the end of the night:

The one eter­nal aspect of every mar­ket top is that it occurs before we're ready for it. — Justin Mamis, The Phi­los­o­phy of Tops

7. FOLLOW THE LEMMINGS
When the lead lem­ming dis­ap­pears from view, assume he's fallen over the cliff:

[I]t may often pay 'smart money' to fol­low ‘dumb money' rather than to lean against it. — Mul­lainathan & Thaler

8. THE MARKET IS A BEAUTY CONTEST (or Why High School Never Ends)
John May­nard Keynes had opin­ions on issues other than deficit spending:

[P]rofessional invest­ment may be likened to those news­pa­per com­pe­ti­tions in which the com­peti­tors have to pick out the six pret­ti­est faces from a hun­dred pho­tographs, the prize being awarded to the com­peti­tor whose choice most nearly cor­re­sponds to the aver­age pref­er­ences of the com­peti­tors as a whole; so that each com­peti­tor has to pick, not those faces which he him­self finds pret­ti­est, but those which he thinks like­li­est to catch the fancy of the other com­peti­tors, all of whom are look­ing at the prob­lem from the same point of view. It is not a case of choos­ing those which, to the best of one's judg­ment, are really the pret­ti­est, nor even those which aver­age opin­ion gen­uinely thinks the pret­ti­est. We have reached the third degree where we devote our intel­li­gences to antic­i­pat­ing what aver­age opin­ion expects the aver­age opin­ion to be. And there are some, I believe, who prac­tise the fourth, fifth and higher degrees. — John May­nard Keynes, The Gen­eral The­ory of Employ­ment, Inter­est and Money, Chap­ter 12

9. IT'S NEVER DIFFERENT THIS TIME
No mat­ter what they say, don't believe ‘em:

Stock prices have reached what looks like a per­ma­nently high plateau. — Irv­ing Fisher, 1929

It's always the same shit, dif­fer­ent day:

What is bad­ness? It is that which thou hast often seen. And on the occa­sion of every­thing which hap­pens keep this in mind, that it is that which thou hast often seen. Every­where up and down thou wilt find the same things, with which the old his­to­ries are filled, those of the mid­dle ages and those of our own day; with which cities and houses are filled now. There is noth­ing new: all things are both famil­iar and short-lived. — Mar­cus Aure­lius, The Med­i­ta­tions of Mar­cus Aure­lius, Book Seven

10. HOPE IS A FOUR-LETTER WORD
How many accounts have gone to zero because the investor was too stub­born to do the right thing?

The mar­ket can stay irra­tional longer than you can remain sol­vent." — attrib­uted to John May­nard Keynes

11. INVESTING IS ANOTHER TERM FOR TRADING
It's just a dif­fer­ent time frame:

Thus the pro­fes­sional investor is forced to con­cern him­self with the antic­i­pa­tion of impend­ing changes, in the news or in the atmos­phere, of the kind by which expe­ri­ence shows that the mass psy­chol­ogy of the mar­ket is most influ­enced. . . . The social object of skilled invest­ment should be to defeat the dark forces of time and igno­rance which envelop our future. The actual, pri­vate object of the most skilled invest­ment to-day is "to beat the gun", as the Amer­i­cans so well express it, to out­wit the crowd, and to pass the bad, or depre­ci­at­ing, half-crown to the other fel­low. — John May­nard Keynes, The Gen­eral The­ory of Employ­ment, Inter­est and Money, Chap­ter 12

10. LEVERAGE IS A BLACK HOLE
Not even light can escape it:

We've got to think harder about all the embed­ded lever­age. I mean, it's a lit­tle shock­ing that not more peo­ple under­stood that if you take a 30:1 lev­ered, struc­tured prod­uct and you put it on a 30:1 lev­ered bal­ance sheet, you're not talk­ing about 30:1 lever­age. You're talk­ing about 900:1 lever­age and you can mag­nify gains and losses pretty dra­mat­i­cally when you do that. So the risk man­age­ment sys­tem, the cap­i­tal rules just haven't kept up with the instru­ment innovations-another decade has gone by. — Peter Fisher

Ten Rules for Trader Longevity

This list is for traders but also applies to investors.

1. Rec­og­nize men­tal blocks. If you believe that the finan­cial mar­kets are rigged, stay away. Bias is blind­ing. If your ego requires con­stant feed­ing and vin­di­ca­tion, do not trade. If being right is more impor­tant than mak­ing money, steer clear of the stock mar­ket. If you must be dog­matic, direct your energy into fol­low­ing these rules.

2. There is no nee­dle in the haystack. There's no reli­able way of pick­ing a sin­gle win­ner from the thou­sands of stocks listed on the exchanges. Resist bet­ting it all on the long­shot because the out­come is based purely on luck. Dr. Ziemba explains the math­e­mat­ics of horse rac­ing. The point is that the bet­tor is bet­ter off with horses that fin­ish the race "in the money". They don't have to come in first.

3. Diver­sify. Spread your bets around. It's the only way to be on board the winner.

4. Trade small. Bet only a small frac­tion of your equity on each posi­tion. You must take risk to get reward, but ruin is cer­tain if you take insane risk. It's defined in Fortune's For­mula. Think Adven­tures in Con­di­tional Probability.

5. Press the win­ners. You must com­pound a win­ning streak.

6. Never throw in good money after bad. Never dou­ble down. Ever.

7. Do not ratio­nal­ize. Down is NOT up. Red is NOT the new black. If the account equity is shrink­ing, your bets are in the wrong direction.

8. Estab­lish a stop loss. Place it in the appro­pri­ate loca­tion (except just above the swing high or under the swing low where every­one else put theirs), a place where you can be sta­tis­ti­cally con­fi­dent that the move in the present direc­tion is over. Don't use a tight stop for lack of equity. The mar­ket doesn't care about how much is in your account, so trade a smaller posi­tion size and put the stop in the proper place.

9. Use the stop loss. Just do it. Imme­di­ately. No excuses. Hav­ing a "men­tal" stop loss is the same as lying. There's no point, because the longer you let it slide, the deeper the doo-doo.

10. Observe Rule Nine. Always. Don't go to the bath­room with­out it.

The Role of Luck

Leg­endary hedge fund man­ager Jim Simons was inter­viewed by Hal Lux for the Novem­ber 2000 issue of Insti­tu­tional Investor:

When he does open up, Simons can seem exas­per­at­ingly coy in describ­ing his suc­cess. "Luck," he told a gath­er­ing of poten­tial investors last spring in Green­wich, Con­necti­cut, "is largely respon­si­ble for my rep­u­ta­tion for genius. I don't walk into the office in the morn­ing and say, ‘Am I smart today?' I walk in and won­der, ‘Am I lucky today?'"

In fact, Simons is being straight­for­ward. Luck may be the residue of design to base­ball minds, but to a math­e­mati­cian it's the twin of prob­a­bil­ity, which can be approached through sta­tis­ti­cal studies.

Last, but not least, my hero, the Roman emperor Mar­cus Aure­lius thanked the gods, "that, when I had an incli­na­tion to phi­los­o­phy, I did not fall into the hands of any sophist, and that I did not waste my time on writ­ers of his­to­ries, or in the res­o­lu­tion of syl­lo­gisms, or occupy myself about the inves­ti­ga­tion of appear­ances in the heav­ens; for all these things require the help of the gods and fortune."

While he was cer­tainly not refer­ring to the stock mar­ket but he might as well have for he summed it up well. Very well.

Tags: Amazement, Bad Intention, Beneficence, Cheerfulness, Falsehood, Financial Futures, Individual Investors, Investment Advisors, Maximus, Moral Character, Personal Qualities, Portfolio Manager, Private Investment Fund, Rocket Scientist, Securities Industry, Self Government, Stoicism, Temperment, Vexation, Warren Buffett
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World Markets Performance 2009 YTD

Monday, January 26th, 2009

Year-to-date equity mar­ket per­for­mance has been bleak, con­sid­er­ing that out of 84 coun­tries, 19 are up and the remain­der are down. 17 coun­tries are down more than –10%. China is the sec­ond best per­form­ing equity mar­ket so far, up 9.3%, and Brazil is the only other of the BRIC that is up, with a smaller gain of 2.49%.

Canada is the best per­form­ing G7 coun­try with a smaller than the rest YTD loss of –3.50%.

Chart: Bespoke Invest­ment Group

Tags: Brazil, BRIC, Canadian Market, China, Equity Market, G7 Country, Investment Group, Market Performance, Remainder, World Markets, Year To Date, Ytd
Posted in Canadian Market, Markets | Comments Off

Meredith Whitney: Banks Not Facing the Music

Monday, January 26th, 2009

Mered­ith Whit­ney, Man­ag­ing Direc­tor, CIBC Oppen­heimer has sub­mit­ted an op-ed to FT.com, America's Banks Need to Hold a Yard Sale, in which she opines that America's banks are not act­ing quickly enough to liq­ui­date assets in an orderly fash­ion in order to raise cash for Tier 1 reserves.

Here are a few excerpts:

... it appears as if US banks are set­ting out to make some of the same mis­takes of the past 18 months all over again.

When the we find our­selves in duress, we have to sell stuff. Why should we sup­port the behav­iour? Where is our bailout? The banks have had noth­ing but time, but they do not seem to be fac­ing the music.

Now, when the aver­age tax­payer finds him or her­self overex­tended, he or she is forced to back­track and, in sit­u­a­tions of duress, sell stuff (oth­er­wise known as a yard sale). In these cases, sell­ing a set of snow skis for $15 or a prized record col­lec­tion for $10 is not desir­able but is nec­es­sary. Why should the US tax­payer be forced to fund behav­iour that he or she would never have the lux­ury of indulging in?

Whit­ney posits that what she is indeed writ­ing about is the need for the banks to get on with the obvi­ous need of sell­ing assets, their "crown jew­els," in order to get back on side, and pro­vide relief back to the taxpayer.

The fact is that there is money on the side­lines look­ing for oppor­tu­ni­ties to invest. One con­stant ques­tion I get from investors, who need some­where to put their money, is: if I had to own some­thing, what would it be? I am not very help­ful to them at the moment as my answer is that I would own noth­ing. I do tell them that I believe that later in the year there will be fab­u­lous oppor­tu­ni­ties to invest in new com­bi­na­tions of busi­nesses that are cur­rently “off the menu” to indi­vid­u­als. What I mean by this is that the sys­tem will even­tu­ally force dis­pos­als of assets: here I am just argu­ing that we need to get to it sooner rather than later.

Whit­ney recently shared her views last week on CNBC, that the banks would be need­ing more fund­ing which would take us into 2010. To watch the video, click the image.

“Banks may need another round of fresh cap­i­tal this year, says Mered­ith Whit­ney, Oppen­heimer & Co. direc­tor of research.”

So far, Whit­ney has yet to be proven wrong about the sys­temic prob­lems, and the banks are drag­ging their feet about what needs to be done in order to restore sta­bil­ity to the finan­cial sys­tem. The longer they take, the harder it gets to reverse the damage.

Tags: Backtrack, Bailout, CIBC, Cnbc, Combinations, Crown Jewels, Disposals, Duress, Excerpts, Fabulous Opportunities, Facing The Music, Invest One, Managing Director, Meredith Whitney, Nothing But Time, Oppenheimer, Orderly Fashion, Sidelines, Snow Skis, Tier 1, Yard Sale
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Words from the (investment) wise for the week that was (January 19 – 25, 2009)

Sunday, January 25th, 2009

Fears about the inten­sity of the global reces­sion and renewed skep­ti­cism regard­ing the belea­guered finan­cial sec­tor fueled a flight to safety dur­ing the past holiday-shortened trad­ing week. Pres­i­dent Obama’s inau­gu­ra­tion offered only a brief respite from the dread­ful eco­nomic and earn­ings data and pound­ing of the stock markets.

Com­men­ta­tors were in agree­ment that Mr O com­menced his tenure against the worst eco­nomic back­ground in liv­ing mem­ory and had his work cut out to res­ur­rect Amer­ica from its eco­nomic morass. I wish him well with this daunt­ing task.

As investors piled into the per­ceived safety of gold (+6.9%), the US dol­lar (+1.8% in the case of the US Dol­lar Index) and the Japan­ese yen (+2.1% against the US dol­lar), global stock mar­kets recorded a third straight week of losses. West Texas Inter­me­di­ate Crude (+9.2%) also ended higher, join­ing a broader rally in com­modi­ties (+2.1% in the case of the Reuters/Jeffries CRB Index).

The MSCI World Index and the MSCI Emerg­ing Mar­kets Index declined by 4.7% (YTD –10.3%) and 5.7% (YTD –10.5%) respec­tively. Buck­ing the down­trend, the Shang­hai Com­pos­ite Index rose by 1.9% over the week and, with a gain of 9.3%, is also the best-performing global stock mar­ket since the start of 2009.

Else­where, the yields of long-dated gov­ern­ment bonds in the US, UK and Euro­zone rose sharply as large issuances of sov­er­eign debt looms. For exam­ple, the yield of the US ten-year Trea­sury Note jumped by 28 basis points to 2.62% and that of the 30-year Trea­sury Bond by 40 basis points to 3.32% — the high­est weekly points rise since April 1987. On the other hand, short-dated yields in a num­ber of Euro­pean coun­tries declined as a result of expec­ta­tions of fur­ther rate cuts.

The UK was a case in point with the two-year Gilt declin­ing by 12 basis points to 1.0% on doubts about the government’s new res­cue plan for the bank­ing sys­tem and a dete­ri­o­ra­tion in the country’s pub­lic finances. The pound crum­bled to a 23-year low against the green­back and an all-time low against the yen.

The finan­cial tur­moil and the var­i­ous actions by cen­tral banks reminded me of a quote from 1867 by Karl Marx: “Own­ers of cap­i­tal will stim­u­late the work­ing class to buy more and more expen­sive goods, houses and tech­nol­ogy, push­ing them to take more and more expen­sive cred­its, until their debt becomes unbear­able. The unpaid debt will lead to bank­ruptcy of banks, which will have to be nation­al­ized, and the State will have to take the road which will even­tu­ally lead to communism.”

“TARP has been an abject fail­ure,” said Thomas Bar­rack Jr, bil­lion­aire and founder of Colony Cap­i­tal, in Busi­ness­Week. “I com­pare the sit­u­a­tion to a fire on a Savan­nah plain: Let it rip and burn, and the mar­ket will reju­ve­nate so much faster — try to con­trol or impede it, and there will be more and longer suf­fer­ing before renewal. Japan expe­ri­enced two decades of eco­nomic paral­y­sis by exper­i­ment­ing with fire con­trol of a sim­i­lar unpro­duc­tive sort.”

And here is Peter Schiff’s (Euro Pacific Cap­i­tal) pre­scrip­tion for how the US can dig itself out of the cur­rent mess, as reported by For­tune Mag­a­zine: “Shrink the gov­ern­ment rad­i­cally, can­cel all bailouts imme­di­ately, take plenty of tough med­i­cine, and let the free mar­ket do its job — how­ever harsh it may be for, say, autowork­ers in the meantime.”

Accord­ing to Sheila Bair of the FDIC, as reported by The Wall Street Jour­nal, there will soon be a new gov­ern­ment bank­ing agency, the Aggre­ga­tor Bank, to buy trou­bled assets from finan­cial insti­tu­tions. For a bit of fun, I tried to reg­is­ter this domain last week. Alas, another aspi­rant banker pipped me to the post. His reselling price? $100,000! Need­less to say, I swiftly ter­mi­nated the negotiations.

Next, a tag cloud of my week’s read­ing. This is a way of visu­al­iz­ing word fre­quen­cies at a glance. Key words such as “bank”, “gov­ern­ment”, “econ­omy”, “mar­ket”, “finan­cial”, debt” and “cri­sis” topped the list.

The graph below shows the per­for­mance of var­i­ous S&P sec­tor SPDRs for the year to date. With Finan­cials hav­ing declined by 28.2%, the market’s weak­ness was quite strongly con­cen­trated in one sec­tor. In addi­tion to Finan­cials, only Indus­tri­als (-11.9%) and Con­sumer Dis­cre­tionary (-8.8%) have under­per­formed the S&P 500 Index (-7.9%) since the begin­ning of the year.

“Dur­ing prior declines dur­ing this bear, losses were broad based and once they become more con­cen­trated (as they are now), it’s a sign that the mar­ket is begin­ning to sep­a­rate the even­tual win­ners from the losers,” said Bespoke.

Con­sid­er­ing the out­look for the stock mar­ket, Richard Rus­sell, 84-year-old author of the Dow The­ory Let­ters, said: “Recently, the Trans­ports broke below their Novem­ber 20 bear mar­ket low. The Indus­tri­als have refused (so far) to con­firm the Trans­ports. Will the Indus­tri­als break down and confirm?

“No one can pos­si­bly know. But the longer the time elapses that the Indus­tri­als refuse to con­firm, the more hope­ful the sit­u­a­tion. As a rule, the closer in time the two Aver­ages, Trans­ports and Indus­tri­als, break through pre­ced­ing lev­els, the more author­i­ta­tive the sig­nal. The Trans­ports broke to new lows on Jan­u­ary 20. The longer Indus­tri­als hold above their Novem­ber 20 low of 7,552, the bet­ter the odds that they will not confirm.”

Key resis­tance and sup­port lev­els for the major US indices are shown in the table below. The imme­di­ate upside tar­get is the 50-day mov­ing aver­age, fol­lowed by the early Jan­u­ary highs. On the down­side, the Decem­ber 1 and all-important Novem­ber 20 lows must hold in order to pre­vent con­sid­er­able tech­ni­cal damage.

A num­ber of global stock mar­kets — Ger­many, France, Bel­gium, Fin­land, Ire­land and Venezuela — have actu­ally already bro­ken below their Novem­ber 20 lows. Although a retest of the lows is often a fea­ture of base for­ma­tion devel­op­ment, it can also be a har­bin­ger of the resump­tion of a downtrend.

Don­ning his cus­tom­ary bear­ish out­fit, Albert Edwards of Société Générale, a favorite mar­ket strate­gist among Invest­ment Post­cards’ read­ers, said: “After increas­ing our equity expo­sure at the end of Octo­ber we believe that the mar­ket is set to quickly slide sharply towards our 500 tar­get for the S&P 500.

“While eco­nomic data in devel­oped economies increas­ingly reflect depres­sion rather than a deep reces­sion, the real sur­prise in 2009 may lie else­where. It is becom­ing clear that the Chi­nese econ­omy is implod­ing and this raises the pos­si­bil­ity of régime change. To pre­vent this, the author­i­ties would likely devalue the yuan. A sub­se­quent trade war could see a re-run of the Great Depression.”

Accord­ing to Jef­frey Hirsch (Stock Trader’s Almanac), the Decem­ber Low Indi­ca­tor says that should the Dow Jones Indus­trial Index close below its Decem­ber low any­time dur­ing the first quar­ter, it is fre­quently an excel­lent warn­ing sign. This came to pass on Tues­day when the Dow closed below its Decem­ber low of 8,149 (recorded on Decem­ber 1).

Also of con­cern to Hirsch is the Jan­u­ary Barom­e­ter, stat­ing “As Jan­u­ary goes, so goes the year”. Every down Jan­u­ary since 1950 has been fol­lowed by a new or con­tin­u­ing bear mar­ket or a flat year. On Fri­day the S&P 500 closed at 832, 7.9% lower than the Decem­ber 31 close.

From across the pond David Fuller (Fuller­money) com­mented that one could not rule out an over­cor­rec­tion by the S&P 500 to 600 (as sug­gested by Jeremy Grantham in his lat­est quar­terly newslet­ter), “although the down­side move to date is still quite over­stretched rel­a­tive to the 200-day mov­ing aver­age. Fun­da­men­tals will not deter­mine the actual low, in my opin­ion, whether already seen or pend­ing. That will be deter­mined by sen­ti­ment and liq­uid­ity, as always. Cur­rently, sen­ti­ment is dia­bol­i­cal but liq­uid­ity is increas­ingly abundant.

“From an invest­ment per­spec­tive, my pre­ferred strat­egy would be to nib­ble on high-quality equi­ties with decent and well-covered yields.”

On the back of the bul­lion price increas­ing by 6.9%, the Gold Bugs Index (+10.6%) was one of the top-performing indus­try groups for the week. The ven­er­a­ble Richard Rus­sell said: “The [gold] mar­ket always does what it’s sup­posed to, but never when. Is it ‘when time’ for gold? It looks like the long erratic cor­rec­tion in gold is over.

“Gold is push­ing up con­sis­tently now — the first upside tar­get is to bet­ter the 900 level which will take gold above the two pre­ced­ing peaks. If gold can move above the 900 level (we’re close), I think there is a good chance it will test the highs. Up until now, gold’s progress has been halted, every advance cor­rected. Gold appears to advance more eas­ily now and the gold stocks are going along with the bullion.”

Accord­ing to US Global Investors — Weekly Investor Alert, David Rosen­berg of Mer­rill Lynch on Fri­day sent out a research note titled “The case for gold”, explain­ing that gold’s value is enhanced by declin­ing bul­lion sup­ply and increas­ing money supply.

James Mon­tier of Société Générale added: “Gold kind of scares me because very often the peo­ple involved with it seem to be slightly insane. My other prob­lem is I don’t know how to value it. That said, I can cer­tainly see why gold could be con­sid­ered some­what of an insur­ance pol­icy, if not an invest­ment in its own right. Any kind of sys­temic eco­nomic tur­moil is likely to drive gold prices higher.”

For more dis­cus­sion about the direc­tion of stock mar­kets, also see my post “Video-o-rama: Wish­ing you well, Mr O“.

Econ­omy
“Global busi­nesses remain darkly pes­simistic. Sen­ti­ment was at its worst in mid-December, but has improved only mar­gin­ally since then,” said the lat­est Sur­vey of Busi­ness Con­fi­dence of the World con­ducted by Moody’s Economy.com. “Euro­pean and South Amer­i­can busi­nesses are most wor­ried, fol­lowed by North Amer­ica; Asian com­pa­nies are neg­a­tive but less so. Pric­ing power has col­lapsed, sug­gest­ing that defla­tion is increas­ingly likely.”

The lat­est US eco­nomic reports also indi­cate that the inten­sity of the eco­nomic down­turn shows no sign of let­ting up. Home­build­ing descended to an unprece­dented post-war low, the National Asso­ci­a­tion of Home Builders (NAHB) hous­ing mar­ket index again reached a new low, and the ABC/Washington Post Con­sumer Con­fi­dence Index remained near its all-time lows. Inter­est­ingly, no pres­i­dent has entered office with such a poor level of con­sumer con­fi­dence since the begin­ning of the Sur­vey in 1985.

Regard­ing the meet­ing of the Fed­eral Open Mar­ket Com­mit­tee (FOMC) on Jan­u­ary 27 and 28, Asha Ban­ga­lore (North­ern Trust) said: “The pol­icy state­ment will be the first fol­low­ing the zero inter­est rate pol­icy adopted at the last meet­ing. The explicit hint about the Fed’s future course of action in the Decem­ber 16, 2008 pol­icy state­ment read as follows:

‘The Fed­eral Reserve will employ all avail­able tools to pro­mote the resump­tion of sus­tain­able eco­nomic growth and to pre­serve price sta­bil­ity. In par­tic­u­lar, the Com­mit­tee antic­i­pates that weak eco­nomic con­di­tions are likely to war­rant excep­tion­ally low lev­els of the fed­eral funds rate for some time.’

“We will be pay­ing close atten­tion to whether the Fed will retain or rephrase this part of the pol­icy state­ment. With regard to the Fed’s views about eco­nomic growth and infla­tion … we do not expect rad­i­cal mod­i­fi­ca­tions of the entire pol­icy statement.”

Else­where in the world, evi­dence mounted that the reces­sion was spread­ing and deepening.

• The UK’s real GDP con­tracted by 1.5% in the fourth quar­ter, fol­low­ing a 0.6% decline in the third quar­ter. The data con­firmed the first UK reces­sion since 1991.

• China’s real GDP declined by 6.8% year on year in the fourth quar­ter. How­ever, when recal­cu­lat­ing China’s growth rate on a quarter-on-quarter annu­al­ized basis, like most other coun­tries do, com­men­ta­tors are of the opin­ion that the Chi­nese econ­omy might already be contracting.

• Japan recorded a fifth con­sec­u­tive monthly trade deficit in Decem­ber, mark­ing the worst year for exports on record. Exports con­tracted by 35% year on year, com­pared with a 16% expan­sion as recently as July.

Sum­ma­riz­ing the eco­nomic sit­u­a­tion, Nouriel Roubini (RGE Mon­i­tor) said: “The US econ­omy is, at best, halfway through a reces­sion that began in Decem­ber 2007 and will prove the longest and most severe of the post-war period. Credit losses of close to $3 tril­lion are leav­ing the US bank­ing and finan­cial sys­tem insol­vent. And the credit crunch will per­sist as house­holds, finan­cial firms and cor­po­ra­tions with high debt ratios and sol­vency prob­lems undergo a sharp delever­ag­ing process.

“Worse, all of the world’s advanced economies are in reces­sion. Many emerg­ing mar­kets, includ­ing China, face the threat of a hard land­ing. Some fear that these con­di­tions will pro­duce a dan­ger­ous spike in infla­tion, but the greater risk is for a kind of global ‘stag-deflation’. We’re likely to see vul­ner­a­ble Euro­pean mar­kets (Hun­gary, Roma­nia and Bul­garia), key Latin Amer­i­can mar­kets (Argentina, Venezuela, Ecuador and Mex­ico), Asian coun­tries (Pak­istan, Indone­sia and South Korea), and coun­tries like Rus­sia, Ukraine and the Baltic states fac­ing severe finan­cial pressure.

“The world’s first global reces­sion is just get­ting started.”

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

Source: Yahoo Finance, Jan­u­ary 23, 2009.

In addi­tion to the inter­est rate announce­ment by the FOMC (Wednes­day, Jan­u­ary 28), the US eco­nomic high­lights for the week, cour­tesy of North­ern Trust, include the following:

1. Lead­ing Indi­ca­tors (Jan­u­ary 26): Con­sen­sus: –0.3% ver­sus –0.4% in November.

2. Exist­ing Sales (Jan­u­ary 26): Con­sen­sus: 4.40 mil­lion ver­sus 4.49 mil­lion in November.

3. New Home Sales (Jan­u­ary 29): Con­sen­sus: 400,000 ver­sus 407,000 in November.

4. Durable Goods Orders (Jan­u­ary 29): Con­sen­sus: –2.0% ver­sus –1.5% in November.

5. Real GDP (Jan­u­ary 30): North­ern Trust: –4.5% Con­sen­sus: –5.4% ver­sus –0.5 in Q3.

6. Other reports: Con­sumer Con­fi­dence (Jan­u­ary 27); Con­sumer Sen­ti­ment Index and Employ­ment Cost Index (Jan­u­ary 30).

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, Jan­u­ary 23, 2009.

Bernard Baruch said: “If you get all the facts, your judg­ment can be right; if you don’t get all the facts, it can’t be right.” Hope­fully the “Words from the Wise” reviews offer assis­tance to Invest­ment Post­cards‘ read­ers in com­pil­ing the facts.

That’s the way it looks from Cape Town.

Bespoke: Inter­est­ing pre­dic­tion mar­ket con­tracts
“Pre­dic­tion mar­ket web­site Intrade has some inter­est­ing finance-related con­tracts trad­ing at the moment, and below we high­light charts of them. The first con­tract is whether Apple CEO Steve Jobs will depart as CEO by the end of 2009. As shown, the con­tract peaked when the com­pany announced Mr. Jobs’ leave of absence ear­lier this month, but it has since declined a bit to its cur­rent level of 60% (traders are putting the odds at 60%).

“The sec­ond con­tract is whether the unem­ploy­ment rate in the US will be higher than 8.5% by Decem­ber 2009. The unem­ploy­ment rate is cur­rently at 7.2%, and the odds for it to be higher than 8.5% by year end are at 55%.

“Intrade also has a con­tract on whether the US will default on its debt on or before 12/31/09. Traders are cur­rently putting the odds of this occur­ring at 3.5% on Intrade, which seems low, but is actu­ally pretty high con­sid­er­ing what the impli­ca­tions would be if this happened.

“And back in early Decem­ber, Intrade traders were putting the odds of a GM bank­ruptcy before the end of Q1 ‘09 at greater than 60%. After gov­ern­ment inter­ven­tion for the automak­ers hap­pened a few weeks later, those odds dropped sharply and now stand at just 10%.

“Liq­uid­ity in these mar­kets is low, so mak­ing big bets is hard to do, but ana­lyz­ing these con­tracts gives some unique insight into what some peo­ple think will or will not hap­pen in the near future.”

Source: Bespoke, Jan­u­ary 22, 2009.

CNBC: Barack Obama will help the econ­omy, but don’t expect miracles

Click here for the article.

Source: CNBC, Jan­u­ary 18, 2009.

Reuters: Soros — US stim­u­lus not enough, TARP bailout mis­used
“The stim­u­lus plan the US gov­ern­ment is cur­rently con­sid­er­ing is nec­es­sary to help Amer­i­can cit­i­zens, but it will likely not reverse the country’s eco­nomic decline, hedge fund man­ager and bil­lion­aire phil­an­thropist George Soros said on Monday.

“‘It is not enough to turn the sit­u­a­tion around,’ Soros told the US Con­fer­ence of May­ors about the $850 bil­lion pro­posal to increase spend­ing and cut taxes.

“The plan, which was intro­duced in the US House of Rep­re­sen­ta­tives last week and will likely be passed by next month, will help state and local gov­ern­ments bal­ance their bud­gets and pre­serve impor­tant social ser­vices, Soros said.

“At the same time, the $700 bil­lion finan­cial bailout known as TARP for Trou­bled Assets Relief Pro­gram had been car­ried out in a ‘hap­haz­ard and capri­cious way’ and ‘with­out proper plan­ning’, he said.

“‘Unfor­tu­nately it was mis­used and the way it was done has poi­soned the well. It has cre­ated tremen­dous ill will toward putting up more money,’ Soros said.”

Source: Lisa Lam­bert, Reuters, Jan­u­ary 19, 2009.

Casey’s Charts: What the banks did with the lat­est bailout
“The red line in the graph below shows that, since August, banks have built their cash posi­tion in the form of Trea­suries, agen­cies and deposits at the Fed by $865 bil­lion, while their loans and leases have increased by only $325 billion.

“In other words, rather than lend­ing the bil­lions of dol­lars received from the Treasury’s Trou­bled Asset Relief Pro­gram (TARP), as was orig­i­nally intended, the recip­i­ent banks have squir­reled away the bailout funds in order to shore up their bal­ance sheets.

“Con­cur­rently, the Fed­eral Reserve is exchang­ing its excess reserves for toxic waste from the finan­cial institutions.

“The com­bined affect is a ‘cir­cu­lar bailout’ with the Trea­sury bor­row­ing … in order to lend money to banks … that then lend it back by pur­chas­ing more Trea­suries. Of course, the expense of this entire bailout scheme ulti­mately falls onto the back of the tax-paying public.”

Source: Casey’s Charts, Jan­u­ary 20, 2009.

Reuters: US and UK on brink of debt dis­as­ter
“The United States and the United King­dom stand on the brink of the largest debt cri­sis in his­tory. While both gov­ern­ments exper­i­ment with quan­ti­ta­tive eas­ing, bad banks to absorb non-performing loans, and state guar­an­tees to restart bank lend­ing, the only real way out is some com­bi­na­tion of wide­spread cor­po­rate default, debt write-downs and infla­tion to reduce the bur­den of debt.

“To under­stand the scale of the prob­lem, and why it leaves so few options for pol­i­cy­mak­ers, take a look at the chart below which shows the growth in the real econ­omy (mea­sured by nom­i­nal GDP) and the finan­cial sec­tor (mea­sured by total credit mar­ket instru­ments out­stand­ing) since 1952.

“The solu­tion must be some com­bi­na­tion of poli­cies to reduce the level of debt or raise nom­i­nal GDP. The sim­plest way to reduce debt is through bank­ruptcy, in which some or all of debts are deemed unre­cov­er­able and are sim­ply extin­guished, ceas­ing to exist.

“But wide­spread bank­rupt­cies are prob­a­bly socially and polit­i­cally unac­cept­able. The alter­na­tive is some mech­a­nism for refi­nanc­ing debt on terms which are more favor­able to bor­row­ers (replac­ing short term debt at higher rates with longer-dated paper at lower ones).

“The remain­ing option is to tol­er­ate, even encour­age, a faster rate of infla­tion to improve debt-service capac­ity. Even more than debt nation­al­iza­tion, infla­tion is the ulti­mate way to spread the costs of debt work­out across the widest pos­si­ble sec­tion of the population.”

Source: John Kemp, Reuters, Jan­u­ary 21, 2009.

Finan­cial Times: Win­ter bites in EU but with some bright spots
“Win­try con­di­tions are grip­ping Europe’s economies as the bit­ing winds caused by finan­cial mar­ket storms lead to deep and pro­tracted reces­sions, but regional vari­a­tions are still distinguishable.

“The lat­est Finan­cial Times eco­nomic weather map for Europe shows a fur­ther sub­stan­tial dete­ri­o­ra­tion since it was last pub­lished in Octo­ber, when the dev­as­tat­ing impact on the global econ­omy of the col­lapse of Lehman Broth­ers, the invest­ment bank, was only just becom­ing apparent.

“Euro­pean indus­trial pro­duc­tion col­lapsed in Novem­ber, data this month have shown, and busi­ness con­fi­dence sur­veys sug­gest the bot­tom of the reces­sion — set to be among the worst since the sec­ond world war — has not yet been reached.”

Source: Ralph Atkins and Ben Hall, Finan­cial Times, Jan­u­ary 19, 2009.

CNBC: Buf­fett & Brokaw
“Insight on the finan­cial and eco­nomic tur­moil, with War­ren Buf­fett, Tom Brokaw, NBC News spe­cial cor­re­spon­dent, and CNBC’s Erin Bur­nett and Mark Haines.”

Source: CNBC, Jan­u­ary 19, 2009.

RGE Mon­i­tor: Esti­mated $3.6 tril­lion loan and secu­ri­ties losses in US
“Nouriel Roubini and Elisa Parisi-Capone of RGE Mon­i­tor released new esti­mates for expected loan losses and write­downs on US orig­i­nated securitizations.

“Loan losses on a total of $12.37 tril­lion unse­cu­ri­tized loans are expected to reach $1.6 tril­lion. Of these, US banks and bro­kers are expected to incur $1.1 trillion.

“Mark-to-market write­downs based on deriv­a­tives prices and cash bond indices on a fur­ther $10.84 tril­lion in secu­ri­ties reached about $2 tril­lion. About 40% of these secu­ri­ties (and losses) are held abroad accord­ing to flow-of-funds data. US banks and bro­ker deal­ers are assumed to incur a share of 30–35%, or $600–700 bil­lion in secu­ri­ties writedowns.

“Total loan losses and secu­ri­ties write­downs on US orig­i­nated assets are expected to reach about $3.6 tril­lion. The US bank­ing sec­tor is exposed to half of this fig­ure, or $1.8 tril­lion (i.e. $1.1 tril­lion loan losses + $700 bil­lion writedowns.)

“FDIC-insured banks’ cap­i­tal­iza­tion is $1.3 tril­lion as of Q3 2008; invest­ment banks had $110 bil­lion in equity cap­i­tal as of Q3 2008. Past recap­i­tal­iza­tion via TARP 1 funds of $230 bil­lion and pri­vate cap­i­tal of $200 bil­lion still leaves the US bank­ing sys­tem bor­der­line insol­vent if our loss esti­mates materialize.

“In order to restore safe lend­ing, addi­tional pri­vate and/or pub­lic cap­i­tal in the order of $1 — 1.4 tril­lion is needed. This mag­ni­tude calls for a com­pre­hen­sive solu­tion along the lines of a ‘bad bank’ as pro­posed by pol­icy mak­ers or an out­right restruc­tur­ing through a new RTC.

“Back in Sep­tem­ber, Nouriel Roubini pro­posed a solu­tion for the bank­ing cri­sis that also addresses the root causes of the finan­cial tur­moil in the hous­ing and the house­hold sec­tors. The HOME (Home Own­ers’ Mort­gage Enter­prise) pro­gram com­bines a RTC to deal with toxic assets, a HOLC to reduce home­ow­ers’ debt, and a RFC to recap­i­tal­ize viable banks.”

Source: RGE Mon­i­tor, Jan­u­ary 22, 2009.

Asha Ban­ga­lore (North­ern Trust): Home build­ing activ­ity posts new low
“Starts of new homes fell 15.5% in Decem­ber to an annual rate of 550,000. The annual aver­age of new homes started in 2008 is 902,000, the low­est on record. Starts of new single-family homes dropped 13.5% to an annual rate of 398,000, the low­est on record.

“The peak-to-trough decline in hous­ing starts, both total and single-family, is the largest on record since record keep­ing began for these series in 1959 (see table 1). The dura­tion of the weak­ness in home con­struc­tion (peak was in Jan­u­ary 2006) is also the longest on record.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Jan­u­ary 22, 2009.

Asha Ban­ga­lore (North­ern Trust): Hous­ing Mar­ket Index spells more gloom
“The Hous­ing Mar­ket Index (HMI) of the National Asso­ci­a­tion of Home Builders fell to 8.0 in Jan­u­ary 2009 from 9.0 in Decem­ber 2008. Before the onset of the cur­rent reces­sion, the record low for the HMI was 20.0 dur­ing the 1990–91 reces­sion. The ques­tion now is: What is the low for the HMI? The answer is unknown, but we can say that the sever­ity of the hous­ing mar­ket sit­u­a­tion grows in leaps and bounds everyday.

“The HMI is strongly cor­re­lated with sales of new single-family homes. Based on this his­tor­i­cal rela­tion­ship, it appears that a pickup in new sales in the near term is unlikely.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Jan­u­ary 21, 2009.

Shad­ow­stats: Decline in retail sales worst since World War II
“Annual real retail sales fell by 9.09% in Decem­ber, ver­sus a 9.11% con­trac­tion in Novem­ber, the steep­est annual declines since 1952. On a three-month moving-average basis the Decem­ber and Novem­ber declines were 8.88% and 7.87%, respec­tively. The Decem­ber annual moving-average decline was the deep­est in the his­tory of the two most recent retail series, mak­ing the results the worst of the post-World War II era. The annu­al­ized real con­trac­tion for fourth-quarter 2008 retail sales was 17.1%.”

Source: Shad­ow­stats, Jan­u­ary 2009.

BCA Research: US defla­tion — this time it’s for real
“Annual US head­line CPI dipped to zero in Decem­ber. Core CPI is still pos­i­tive (1.7% annual growth), albeit is falling steadily.

“The decline in head­line infla­tion is due largely to sharply falling energy (and food) prices. Under­ly­ing infla­tion moves with the busi­ness cycle, though it lags eco­nomic growth by sev­eral quar­ters. The econ­omy decel­er­ated steadily last year before implod­ing in the autumn. Thus, core CPI is on track to fall fur­ther as eco­nomic slack builds. Already, retail prices are falling.

“The cur­rent defla­tion­ary threat is much more seri­ous than the pre­vi­ous episode in 2002, given the speed and mag­ni­tude of the credit and eco­nomic crunch. Thus, pol­i­cy­mak­ers will need to work hard to anchor infla­tion expec­ta­tions in pos­i­tive ter­ri­tory, and ensure that a defla­tion­ary mind­set among con­sumers and busi­nesses does not set in.”

Source: BCA Research, Jan­u­ary 19, 2009.

Paul Kedrosky (Infec­tious Greed): Banks are just a cir­cle of their for­mer selves
“Nice graphic of how the major banks are just a frac­tion of their for­mer selves, at least as mea­sured by mar­ket value.”

Click on the image below for a larger graph.

Source: Paul Kedrosky, Infec­tious Greed, Jan­u­ary 21, 2009

Bespoke: Long-term charts of the finan­cial sec­tor
“A look at long-term charts of the S&P 500 Finan­cial sec­tor is down­right depress­ing. The first chart below dates back to 1990, and as shown, the sec­tor closed at its low­est level since March 1995 yes­ter­day. The sec­tor is now down 79% from its highs in 2007. A chart of the sec­tor all the way back to 1940 shows just how much the sec­tor has fallen in such a short period of time.”

Source: Bespoke, Jan­u­ary 21, 2009.

Eoin Treacy (Fuller­money): Will bank indices be lead­ing indi­ca­tors?
“The down­ward breaks expe­ri­enced by a num­ber of West­ern bank­ing indices over the last week are sig­nif­i­cant and sug­gest we can expect fur­ther moves by the respec­tive gov­ern­ments to shore up their finan­cial sec­tors. This rel­a­tive weak­ness poses a head­wind for their wider markets.

“When bank indices began to under­per­form in 2007, they had an incred­i­bly large weight­ing in most coun­try indices. The per­for­mance of bank shares was impor­tant both in terms of their high rel­a­tive weight­ings and because of their sta­tus as lead indi­ca­tors. How­ever, bank sec­tors are now a con­sid­er­ably smaller weight­ing in most indices. This lessens the intrin­sic impor­tance of the banks sec­tor to the per­for­mance of the wider mar­ket, but the psy­cho­log­i­cal impact is undiminished.

“The per­for­mance of bank sec­tors is a major drag on sen­ti­ment. Div­i­dends are being elim­i­nated and a process of nation­al­i­sa­tion is under­way in a num­ber of West­ern coun­tries. How­ever, one should not for­get that many other com­pa­nies will not need gov­ern­ment sup­port, will not elim­i­nate their div­i­dend and as such are likely to be rel­a­tive per­form­ers in this environment.

“In addi­tion, an inter­est­ing dichotomy exists between mar­kets where banks are under­per­form­ing and where they are out­per­form­ing. Bank indices in the USA (S&P500 Banks, Philadel­phia Banks, Regional Banks), Europe (DJ Euro Stoxx Banks), the UK, France, Ger­many, Nor­way, Fin­land, Swe­den, Italy and Ire­land all made new lows in the last week. Inter­na­tion­ally, the Chi­nese bank index is clos­est to the upper side of its range. No other bank index, I know of, is show­ing such rel­a­tive strength. All Asian bank indices remain within their ranges. The marked under­per­for­mance of the USA and much of Europe is a clear indi­ca­tion that this is where the bulk of finan­cial risk is focused.”

Source: Eoin Treacy, Fuller­money, Jan­u­ary 20, 2009.

Brian Bel­ski (Banc of Amer­ica Securities-Merrill Lynch): Liq­uid­ity is key
“US equity investors should con­cen­trate on com­pa­nies, indus­tries and sec­tors that have the means to fund them­selves, says Brian Bel­ski, strate­gist at Banc of Amer­ica Securities-Merrill Lynch.

“He notes that areas in the mar­ket exhibit­ing strength recently have been dom­i­nated by low-quality com­pa­nies with higher debt lev­els. But he says fun­da­men­tal con­di­tions do not sup­port a move to low qual­ity. ‘If 2008 taught us any­thing, attempts to get ahead of an even­tual stock mar­ket and eco­nomic recov­ery were pre­ma­ture and misguided.’

“He acknowl­edges that credit mar­ket con­di­tions have improved but is not con­vinced the worst is over. ‘Remem­ber, even though credit spreads have nar­rowed, they still remain con­sid­er­ably above the peaks exhib­ited dur­ing prior credit cycles which we believe is a con­se­quence of the loss of con­fi­dence both from investors and lenders.

“‘This is par­tic­u­larly trou­bling to us because we expect US cor­po­rate bond issuance to decline in 2009, yet a sig­nif­i­cant amount of bonds are expected to mature for S&P 500 com­pa­nies. As a result, areas within the mar­ket that rely on lever­age to fund oper­a­tions are likely to strug­gle in the com­ing year and the tra­jec­tory of cor­po­rate bank­ruptcy fil­ings over the past sev­eral years cer­tainly appears to sup­port this notion. There­fore, investors should con­tinue to focus on areas demon­strat­ing strong liq­uid­ity in the form of high cash bal­ances and free cash flow.’”

Source: Brian Bel­ski, Banc of Amer­ica Securities-Merrill Lynch (via Finan­cial Times), Jan­u­ary 20, 2009.

Bespoke: Volatil­ity Index shows more com­pla­cency
“Below we high­light a chart of the VIX volatil­ity index along with the S&P 500. One dif­fer­ence between the cur­rent decline and the declines in Octo­ber and Novem­ber is that the VIX has not spiked nearly as much. Many think of the VIX as an indi­ca­tion of fear in the mar­ket, and whether it’s good or bad, there seems to be more com­pla­cency dur­ing the most recent downturn.”

Source: Bespoke, Jan­u­ary 23, 2008.

Bloomberg: Roubini, Edwards pre­dict slump in S&P 500 on China
“Stocks will retreat around the world because of shrink­ing demand from China as growth in the third– biggest econ­omy slows, said Nouriel Roubini, the New York Uni­ver­sity pro­fes­sor who pre­dicted last year’s finan­cial crisis.

“Global equi­ties will fall 20% this year from cur­rent lev­els as China, which con­tributed 19.5% to total growth in 2007, con­tends with its slow­est expan­sion in seven years, he said. Wall Street strate­gists pre­dict the Stan­dard & Poor’s 500 Index, down 8.4% so far, will rise 17% in 2009.

“Roubini, an eco­nom­ics pro­fes­sor at NYU’s Stern School of Busi­ness, said China already is in a ‘reces­sion’ despite gov­ern­ment data show­ing a 6.8% fourth-quarter growth rate, as power out­put declines and man­u­fac­tur­ing shrinks.

“‘Demand is falling in China, they’re over-invested in capac­ity and there’s a global sup­ply glut,’ Roubini said in a tele­phone inter­view. ‘It has very, very impor­tant implications.’

“Roubini’s view is shared by Soci­ete Gen­erale global strate­gist Albert Edwards, who was cor­rect in fore­cast­ing in March that a US con­trac­tion would spur a bear mar­ket in equi­ties. Edwards says the China slow­down will reduce earn­ings at indus­trial, energy and raw-materials com­pa­nies, spark­ing a sell­off in emerg­ing and developed-market stocks that may send the S&P 500 down 40% to 500.

“‘Peo­ple should be think­ing really hard about this rather than stick­ing their heads in the sand,’ said Edwards, a London-based strate­gist and mem­ber of the top-ranked global invest­ment strat­egy team in Thom­son Extel’s sur­veys the past three years. ‘We’re just point­ing out when the emperor doesn’t have any clothes on.’”

Source: Michael Pat­ter­son and Adam Haigh, Bloomberg, Jan­u­ary 23 2009.

Bloomberg: Mobius to invest more in China, emerg­ing mar­kets
“Mark Mobius, who over­sees about $26 bil­lion in emerging-market stocks at Tem­ple­ton Asset Man­age­ment, said he plans to buy more shares of con­sumer and com­modi­ties com­pa­nies in emerg­ing markets.

“‘Val­u­a­tions are attrac­tive,’ Mobius, Templeton’s exec­u­tive chair­man, said at a brief­ing in Kuala Lumpur today. ‘We feel that this year would be a year of recov­ery of the stock mar­kets in the emerg­ing markets.’

“Mobius said ris­ing income in China, India and other parts of Asia will spur spend­ing on con­sumer goods, while com­mod­ity prices are now ‘too low’. The two nations, Brazil, South Africa and Turkey offer best invest­ment oppor­tu­ni­ties, he said.

“‘There is an incred­i­ble build-up of for­eign reserves in the emerg­ing mar­kets, and the increase in money sup­ply is quite dra­matic,’ the exec­u­tive chair­man said. ‘We’ve seen a very big increase of money com­ing into markets.’

“The emerging-markets gauge trades at 8.2 times its com­pa­nies’ reported earn­ings, 36% cheaper than its aver­age val­u­a­tion last year, accord­ing to data com­piled by Bloomberg. The devel­oped mea­sure trades for 10.8 times profit.

“The US econ­omy and other economies will rebound in 2010, said Mobius, whose biggest hold­ings are in Asia.”

Source: Soraya Per­matasari, Bloomberg, Jan­u­ary 17, 2009.

Bespoke: S&P 500 Q4 ‘08 earn­ings now expected to fall 28.2%
“At the start of the fourth quar­ter, ana­lysts were expect­ing S&P 500 earn­ings to grow by 30% ver­sus Q4 ‘07. While this seems out­landish now, remem­ber that growth in Q4 ‘07 was extremely poor as well, and ana­lysts thought many com­pa­nies would begin to turn the cor­ner by Q4 ‘08. As we all know, the econ­omy pretty much came to a halt last Octo­ber. As a result, ana­lysts quickly began to cut growth esti­mates for the fourth quar­ter after it became appar­ent that things weren’t going to get bet­ter any­time soon.

“Fast for­ward a few months, and now ana­lysts are expect­ing those same Q4 ‘08 earn­ings to be 28% weaker than the fourth quar­ter of 2007. With the direc­tion that these esti­mates have been head­ing, when all is said and done, it’s likely that this num­ber will get even worse.”

Source: Bespoke, Jan­u­ary 21 2009.

Bespoke: Pick your poi­son — stocks or bonds
“While we all know that invest­ing in stocks has been painful, some read­ers may be sur­prised to learn that Trea­suries haven’t pro­vided a much bet­ter alter­na­tive. While the S&P 500 is down 8% so far this year, long-term Trea­suries (as mea­sured by the US Long Bond future) are down almost 6%. With the recent break below their 50-day mov­ing aver­age, bonds are hardly look­ing like a ‘safe’ alter­na­tive in the cur­rent environment.”

Source: Bespoke, Jan­u­ary 22, 2009.

Finan­cial Times: Bar­clays Capital’s Larry Kan­tor says keep assets liq­uid
“The sit­u­a­tion in many mar­kets and economies is so ten­u­ous now because we don’t know what the poli­cies are going to be. The next month or two are crit­i­cal. Investors should keep an ‘arse­nal of liq­uid assets to deploy’, at some point it is pos­si­ble that there could be a very big upswing in the econ­omy and in equi­ties, which investors should be ready for.

“In the mean­time, debt of strong com­pa­nies appears to be a good invest­ment, espe­cially as the Fed­eral Reserve is con­sid­er­ing buy­ing cor­po­rate debt, together with other assets it is already buy­ing, such as com­mer­cial real-estate backed bonds.”

Source: Finan­cial Times, Jan­u­ary 18, 2009.

Bloomberg: “Time to sell” Trea­suries, biggest Korean fund says
“A rally that sent US Trea­suries to their best year since 1995 is com­ing to an end, South Korea’s National Pen­sion Ser­vice, the country’s biggest investor, said.

“US gov­ern­ment efforts to com­bat the reces­sion will prompt the Fed­eral Reserve to raise inter­est rates this year, said Kim Heeseok, who over­sees $160 bil­lion as head of global invest­ments for the ser­vice in Seoul. The decline would snap a surge that sent the secu­ri­ties up 14% last year, accord­ing to Mer­rill Lynch & Co.’s US Trea­sury Mas­ter index, as investors sought the rel­a­tive safety of debt.

“‘It’s time to sell US Trea­suries,’ said Kim, who took over as head of invest­ments at the start of the year. ‘The stim­u­lus plan may cause infla­tion. The US will raise the bench­mark inter­est rate.’”

Source: Wes Good­man, Bloomberg, Jan­u­ary 19, 2009.

John Huss­man (Huss­man Funds): The case for TIPS
“The way to think about the rela­tion­ship between TIPS yields and straight Trea­sury yields is that the nom­i­nal yield on a secu­rity is equal to the ‘real’ yield plus expected infla­tion. At present, we have extra­or­di­nar­ily depressed nom­i­nal yields, but rel­a­tively high real yields, which means that the infla­tion rate implied in TIPS is extra­or­di­nar­ily low. Indeed, in order for TIPS to achieve the same total return as straight Trea­suries over the next decade, we would need to observe a slight but sus­tained defla­tion over that period.

“My impres­sion is that we are not near the point where there is any real risk of infla­tion, and we may very well observe neg­a­tive near-term infla­tion rates (which is why it is impor­tant to be care­ful with TIPS that trade at a sub­stan­tial pre­mium to par, since the appar­ently high ‘real’ yields on near-term TIPS can be eroded by defla­tion). TIPS can’t mature at less than par, but if there is a defla­tion, the accrued infla­tion adjust­ment on these secu­ri­ties can be whit­tled down.

“Suf­fice it to say that we are hold­ing TIPS not because we antic­i­pate a near-term resur­gence of infla­tion, but because the real, inflation-adjusted yields avail­able over the next decade are quite high on a his­tor­i­cal basis, and will ade­quately pro­vide for the main­te­nance and growth of pur­chas­ing power over time, regard­less of the near-term course of con­sumer prices.”

Source: John Huss­man, Huss­man Funds, Jan­u­ary 19, 2009.

Steve Bar­row (Stan­dard Bank): Dol­lar hon­ey­moon won’t last
“The arrival of a new US pres­i­dent often sees an ini­tial rise in the dol­lar — although the hon­ey­moon does not always last long and it is doubt­ful whether this time will be dif­fer­ent, says Steve Bar­row, cur­rency strate­gist at Stan­dard Bank.

“He says it is pos­si­ble that the mar­ket might buy into new hope offered by an incom­ing president.

“‘There’s lit­tle doubt that Barack Obama cam­paigned on a pledge to bring new hope to the Amer­i­can peo­ple. It is also pos­si­ble that the Democ­rats’ strong posi­tion in Con­gress will give Mr Obama more scope to impose his will than Pres­i­dent Bush did.’

“But Mr Bar­row doubts any early dol­lar strength in Mr Obama’s pres­i­dency will last. He says the US bud­get deficit is set to bal­loon due to the reces­sion and likely $775 bil­lion stim­u­lus plan and notes that the last pres­i­dent to over­see such huge deficit expan­sion was Ronald Rea­gan in 1980–1988.

“‘Dol­lar strength at the start of Mr Reagan’s term gave way to a down­trend that lasted until 1995. The Rea­gan camp ini­ti­ated this weak­ness with dol­lar sales in 1985. We doubt Mr Obama will do the same, but in one respect, the new pres­i­dent will be seek­ing a weaker dollar.

“‘The Chi­nese ren­minbi remains a thorn in the side of the US trade bal­ance. Mr Obama has vowed to con­tinue the fight for flex­i­bil­ity — and hence strength — in the ren­minbi as ini­ti­ated by Pres­i­dent Bush. In order to see the dol­lar weaken against the ren­minbi, the dol­lar may have to fall elsewhere.’”

Source: Steve Bar­row, Stan­dard Bank (via Finan­cial Times), Jan­u­ary 19, 2009.

Jim Rogers: Ster­ling in peril
“The pound is a cur­rency with no under­pin­ning and should fall against the dol­lar and the euro, says Jim Rogers, chair­man of Rogers Hold­ings and co-founder of the Quan­tum Fund with George Soros.

“He says his view reflects the UK’s dire eco­nomic sit­u­a­tion: ‘It’s sim­ple, the UK has noth­ing to sell.’

“Mr Rogers says the two main pil­lars of sup­port for ster­ling have been North Sea oil and the strength of the UK finan­cial ser­vices sec­tor, in par­tic­u­lar, the City of London’s role.

“But Mr Rogers says just as North Sea oil is run­ning out, so London’s stand­ing as a major finan­cial cen­tre is set to suffer.

“‘I don’t think there is a sound UK bank now, at least, if there is one I don’t know about it,’ he says.

“‘The City of Lon­don is fin­ished, the finan­cial cen­tre of the world is mov­ing east. All the money is in Asia. Why would it go back to the West? You don’t need Lon­don,’ says Mr Rogers.

“Mr Rogers thinks the pound is more vul­ner­a­ble than the dol­lar or the euro. He says the UK hous­ing mar­ket is arguably in a worse state than that of the US, given pock­ets of strength in the US and prices that are slid­ing across the board in the UK.

“Mean­while, he says, the UK is in worse shape eco­nom­i­cally than the euro­zone, where most coun­tries are not big debtors and do not run huge trade deficits. ‘If the UK dis­cov­ers more North Sea oil, I might change this view,’ he says. ‘But I don’t see that happening.’”

Source: Jim Rogers (via Finan­cial Times), Jan­u­ary 21, 2009.

Bespoke: British pound crum­bles
“The US dol­lar is clearly back in rally mode after suf­fer­ing a set­back in Decem­ber. As shown in the first chart below, the Dol­lar Index has now bro­ken well above its 50-day mov­ing aver­age and appears to be head­ing back to its Novem­ber highs. Unfor­tu­nately, ral­lies in the dol­lar have recently coin­cided with declines in riskier assets like equities.

“But the big­ger news in cur­ren­cies is the dra­matic fall that the British pound has recently expe­ri­enced. Today the pound is suf­fer­ing another big drop, and as shown in the first chart below, the cur­rency broke below recent sup­port lev­els as well as the $1.40 mark. And the bot­tom chart shows just how much the pound has fallen in such a short period of time. In late 2007, the pound was trad­ing at record highs ver­sus the US dol­lar. Now it is trad­ing very close to its low­est level since 1991. Any­one in the US that has the money to go to Eng­land can stay there on the cheap­est tab in decades.”

Source: Bespoke, Jan­u­ary 20, 2009.

Eoin Treacy (Fuller­money): Test­ing times for euro
“All coun­tries in the Euro­zone are now see­ing their gov­ern­ment bond spreads widen rel­a­tive to Ger­man yields. This is an indi­ca­tion that all coun­tries took part in the access to abun­dant credit made pos­si­ble by the launch of the Euro and are now suf­fer­ing the consequences.

“Some are being more affected than oth­ers. Spreads for Spain, Greece, Italy and Ire­land have expanded most. These were some of the coun­tries where bor­row­ing costs had fallen most in order to join the Euro and where most use was made of the abil­ity to access cheap credit. With­out the sin­gle cur­rency they would never have been able to bor­row at such low rates, but they are now con­stricted by being unable to devalue their cur­ren­cies in order to help them through the crisis.

“This is the first real test for the sin­gle cur­rency. If it can sur­vive the credit / sol­vency cri­sis with­out see­ing some coun­tries drop­ping out or its effi­cacy being called into ques­tion; then it stands a good chance of sur­viv­ing for the longer-term as a viable entity. This may well depend on how long the cri­sis drags on.

“Spreads of more than 250 basis points over Bunds, for Greek gov­ern­ment bonds are not encour­ag­ing for its long-term par­tic­i­pa­tion. Investors will no doubt remem­ber there were sig­nif­i­cant ques­tions about the Greek government’s finan­cial pro­bity in the fig­ures sub­mit­ted to the Euro­pean Com­mis­sion prior to its entry into the sin­gle cur­rency. Time will tell, but it will be a worth­while exer­cise to mon­i­tor these spreads going forward.

“It is also inter­est­ing to see that in the UK, where con­trol of inter­est rates is main­tained by the BOE, that the brunt of the country’s risk reassess­ment has been borne by the pound rather than gov­ern­ment bonds. The spread over Bunds has been in a volatile down­trend since late 2005 and tested par­ity recently. The gov­ern­ment bond spread has been con­tract­ing in line with the pound’s decline against the Euro; both appear to have turned around the same time.”

Source: Eoin Treacy, Fuller­money, Jan­u­ary 19, 2009.

CEP News: Trea­sury Sec­re­tary Gei­th­ner takes hard­line stance on China
“In tune with the ‘change’ mantra heard through­out the US Pres­i­den­tial cam­paign, the Obama admin­is­tra­tion sig­nalled a new stance on China. But given the eco­nomic cli­mate, ana­lysts ques­tion the strat­egy of adopt­ing a hard­line posi­tion with the biggest pur­chaser of US debt.

“In com­ments to the Sen­ate Finance Com­mit­tee released Thurs­day, newly-confirmed Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner said, ‘Pres­i­dent Obama — backed by the con­clu­sions of a broad range of econ­o­mists — believes that China is manip­u­lat­ing its cur­rency.’ He added later that Obama will aggres­sively push the Asian coun­try to change its poli­cies on for­eign exchange.

“‘The com­ments from the new admin­is­tra­tion sug­gest a more robust posi­tion on China than the for­mer admin­is­tra­tion,’ said Shaun Osborne, chief cur­rency strate­gist at TD Secu­ri­ties. ‘It remains to be seen what China’s response will be, but the US is in a very del­i­cate posi­tion at the moment.’

“In Sep­tem­ber, China over­took Japan as the largest for­eign holder of US debt, but that appetite may shrink as China’s growth has slowed dra­mat­i­cally in the global recession.”

Source: Patrick McGee, CEP News, Jan­u­ary 22, 2009.

John Authers (Finan­cial Times): Cur­rency inter­ven­tions loom­ing
“Unprecen­dented shifts in forex mar­kets last year is fuel­ing rumors of cur­rency inter­ven­tions in the com­ing weeks.”

Click here for the article.

Source: John Authers, Finan­cial Times, Jan­u­ary 22, 2009.

US Global Investors: Rosen­berg — the case for gold
“Gold was, of course, one of the invest­ment world’s few bright spots in 2008, and after a slow start in 2009, it began a rally that climbed above $900 an ounce on Fri­day. This is gold’s high­est price since early October.

“David Rosen­berg at Mer­rill Lynch sent out a short but use­ful research note Fri­day titled ‘The Case for Gold’ that explains that gold’s value is enhanced by declin­ing bul­lion sup­ply and increas­ing money supply.

“‘It’s the only cur­rency not going up in sup­ply. Pretty sim­ple. South African gold out­put declined 14% last year in the steep­est decline since 1901. US pro­duc­tion was down 2%. The lead­ing pro­ducer in terms of growth last year was China at +3% (and global cen­tral bank sell­ing activ­ity dropped 42% in 2008 to 279+ tons, the low­est since 1996).

“‘Mean­while, money sup­ply is up more than 10% YoY in the USA (M2); +16% in Aus­tralia (M3); almost 11% in Ger­many (M2); 18% in the UK (M2); almost 9% in Italy (M2); 13% in Canada (M2); 14% in Korea (M2); 18% in India (M2); 12% in Sin­ga­pore; and 18% in China (M2).

“‘Out­side of gold, the only coun­try where money is not being poured into the finan­cial sys­tem as if it was water from the tap is Japan, where trends in the mon­e­tary aggre­gates are flat-to-negative. Be that as it may, and in view of all the prob­lems in the US bank­ing sec­tor, we think the dol­lar is unlikely to lose its reserve cur­rency sta­tus any time soon … Con­fi­dence in the abil­ity of Euro­pean gov­ern­ments to ser­vice their sov­er­eign debt is being called into ques­tion in the debt mar­kets (‘in the land of the blind …’ ).’”

Source: US Global Investors — Weekly Investor Alert, Jan­u­ary 23, 2009.

Richard Rus­sell (Dow The­ory Let­ters): Gold — very bull­ish action
“Dur­ing the great gold bull mar­kets of the 1970s to 1980, gold topped out at a price of 850 per ounce. For months now, gold has been ‘test­ing’ the 850 level, first ral­ly­ing above 850 and then slid­ing below 850. Cur­rently, Feb­ru­ary gold is trad­ing at 891. I con­sider this to be very bull­ish action. The cur­rent gold action is tak­ing place in the sec­ond phase of the new gold bull mar­ket. The sec­ond phase has seen many hedge funds and a small seg­ments of the pub­lic become inter­ested in gold.
“I believe the third spec­u­la­tive phase of the cur­rent gold bull mar­ket lies ahead. This is the phase where the pub­lic jumps whole­sale into the mar­ket. It’s the phase where I expect to see a much higher, even fren­zied, gold price. This final phase of the gold bull mar­ket will be accom­pa­nied by inter­na­tional doubt regard­ing the value and via­bil­ity of fiat cur­rency.
“Fiat money is being cre­ated in great quan­ti­ties by almost every cen­tral bank in the world. Imag­ine, the fool­ish­ness of try­ing to ward off insol­vency by cre­at­ing ever-larger quan­ti­ties of paper money. The worse off the economies of the world, the more fiat cur­rency will be created.”

Source: Richard Rus­sell, Dow The­ory Let­ters, Jan­u­ary 23, 2009.

Finan­cial Times: UK move to boost cash sup­ply
“Britain paved the way towards uncon­ven­tional mon­e­tary pol­icy in Europe on Mon­day when the gov­ern­ment gave the Bank of Eng­land author­ity to cre­ate money and buy a vari­ety of pri­vate sec­tor assets.

“Although there is no sign the Bank’s mon­e­tary pol­icy com­mit­tee wants to intro­duce US-style quan­ti­ta­tive eas­ing imme­di­ately, it now has the power to buy assets rang­ing from cor­po­rate bonds to asset-backed secu­ri­ties with newly cre­ated money.

“The pol­icy, if intro­duced, seeks to ease the flow of finance to com­pa­nies, dri­ving down com­pany bor­row­ing costs and boost­ing the sup­ply of cash in the econ­omy. The Fed­eral Reserve prefers the term ‘credit eas­ing’ to describe sim­i­lar moves.

“The deci­sion comes as part of a pack­age designed to ease pres­sure on lend­ing in the UK econ­omy and put a brake on deep­en­ing reces­sion. On Mon­day, the Euro­pean Com­mis­sion said Britain had one of the most exposed economies in the world to the global reces­sion, pre­dict­ing its econ­omy would con­tract by 2.8% this year with stag­na­tion con­tin­u­ing in 2010.

“Other ele­ments of the pack­age were heav­ily trailed. An insur­ance scheme stands at its heart, designed to restore some cer­tainty to banks’ finances by pro­vid­ing cover against cat­a­strophic losses. This will be imple­mented from Feb­ru­ary on a case-by-case basis.

“From April, the gov­ern­ment will pro­vide guar­an­tees to wrap around sim­ple asset-backed secu­ri­ties issued by banks con­tain­ing high-quality mort­gage and cor­po­rate assets. Sub­ject to state aid approval from the Euro­pean Com­mis­sion, it is also plan­ning to extend its cur­rent guar­an­tee of short-term fund­ing for banks to the end of the year.

“For the first time since the cri­sis began, the Bank of Eng­land will also explic­itly accept cor­po­rate credit risk when it begins a $74 bil­lion pro­gramme of asset pur­chases from the pri­vate sec­tor in return for gov­ern­ment paper in February.”

Source: Chris Giles, Finan­cial Times, Jan­u­ary 19, 2009.

Finan­cial Times: UK tries to break reces­sion­ary dynamic
“The gov­ern­ment on Mon­day launched its sec­ond bank res­cue pack­age, inject­ing bil­lions of pounds more of the taxpayer’s money into sav­ing Britain’s banks. Chris Giles, FT’s eco­nom­ics edi­tor, tells Daniel Gar­ra­han that the new bank res­cue pack­age is designed to res­cue the econ­omy as well as the banks.”

Source: Finan­cial Times, Jan­u­ary 19, 2009.

BCA Research: Last chance for UK banks
“Mea­sures by UK author­i­ties to shore up the bank­ing sys­tem brings the prospect of full scale nation­al­iza­tion one step closer if they fail to re-ignite lending.

“The BoE’s abil­ity to pur­chase assets out­right will effec­tively help in recap­i­tal­iz­ing the bank­ing sys­tem and should also pro­vide a valu­able fil­lip to the cor­po­rate debt mar­ket. For now, the Trea­sury has stopped short of set­ting up a ‘bad bank’ to coral all the poor qual­ity assets, prob­a­bly for fear of what this might mean for the UK’s belea­guered pub­lic finances in the event of default. Based on cur­rent gov­ern­ment esti­mates the deficit will stay above 3% of GDP until the mid­dle of the next decade.

“Bot­tom line: At this stage, pol­i­cy­mak­ers are lim­it­ing their actions to ‘qual­ity assets’. How­ever, it is prob­a­ble that the next step is a ‘bad bank’ and full scale nation­al­iza­tion, given that out­put is fore­cast to fall this year at the fastest pace since 1946 and lend­ing is likely to stay weak for a pro­longed period.”

Source: BCA Research, Jan­u­ary 21, 2009.

James Pressler (North­ern Trust): Japan — no sale!
“Two items of sig­nif­i­cance regard­ing the Japan­ese mar­ket hit the wire this morn­ing — the end-year trade bal­ance and the Bank of Japan (BoJ) pol­icy meet­ing announce­ment. With the overnight call rate already down to 0.10%, another rate cut would hardly be a news-maker, but the state of Japan’s exports usu­ally makes the front page. And unfor­tu­nately, the news was not good.

“Nobody expected the export mar­ket to make a mirac­u­lous turn­around, but some hope existed for less ero­sion in over­seas sales or fewer imports, thereby sup­port­ing net exports. Nei­ther occurred. Decem­ber imports con­tracted by 21.5% on the year and were up by 7.9% for 2008 as a whole, but exports fared much worse, post­ing respec­tive changes of –35.0% and –3.4%. This dragged the annual trade bal­ance down to $20.4 bil­lion, a level not seen since 1983 and a far cry from the 2007 tally of $92.1 billion.

“We have said it before and we will say it again — our offi­cial fore­cast for Q4 GDP in Japan is ‘abysmal’.”

Source: James Pressler, North­ern Trust — Daily Global Com­men­tary, Jan­u­ary 22, 2009.

Soci­ete Gen­erale: Japan­ese exports fall 35%
“Strik­ingly, Japan­ese exports to the US were down some 37% yoy. But we can­not high­light strongly enough how truly mind­bog­gling Japan’s col­lapse in exports to China are. Last July they were expand­ing at a 16% yoy pace. Now they are con­tract­ing at a 35% yoy rate! This is a phe­nom­e­non through­out the region. Hence despite the noto­ri­ously manip­u­lated Chi­nese GDP data show­ing a shock­ing slow­down in GDP growth to 6.8% yoy. I would eat my hat if the Chi­nese econ­omy was doing any­thing other than con­tract­ing right now.”

Source: Soci­ete Gen­erale, Jan­u­ary 2009.

Nouriel Roubini (RGE Mon­i­tor): China — why 0% growth is the new size 6.8%
“The Chi­nese came out today with their 6.8% esti­mate of Q4 2008 growth. China pub­lishes its quar­terly GDP fig­ure on a year over year basis, dif­fer­ently from the US and most other coun­tries that pub­lish their GDP growth fig­ure on a quar­ter on quar­ter annu­al­ized sea­son­ally adjusted (SAAR) basis.

“When growth is slow­ing down sharply the Chi­nese way to mea­sure GDP is highly mis­lead­ing as quar­ter on quar­ter growth may be neg­a­tive while the year over year fig­ure is pos­i­tive and high because of the momen­tum of the pre­vi­ous quar­ters’ pos­i­tive growth.

“Indeed if one were to con­vert the 6.8% y-o-y fig­ure in the more stan­dard quar­ter over quar­ter annu­al­ized fig­ure Chi­nese growth in Q4 would be close to zero if not negative.

“Other data con­firm that China was in a bor­der­line reces­sion in Q4 and that it may be in an out­right reces­sion in Q1: pro­duc­tion of elec­tric­ity plunged 7.9% in y-o-y basis; the Chi­nese PMI has been below 50 and close to 40 for five months now.

“And with man­u­fac­tur­ing being about 40% of GDP , man­u­fac­tur­ing is cer­tainly in a sharp reces­sion (neg­a­tive growth) and the over­all econ­omy may be close to a recession

“So the 6.8% growth was actu­ally a 0% growth — or pos­si­bly neg­a­tive growth — in Q4; and the Q1 fig­ures look even worse. So China is in a reces­sion regard­less of what the highly mas­saged offi­cial num­bers claim.”

Source: Nouriel Roubini, RGE Mon­i­tor, Jan­u­ary 22, 2009.

Bryan Crowe (North­ern Trust): Brazil — 100 is the new 75
“In a sur­prise to the major­ity of fore­cast­ers, Brazil’s cen­tral bank low­ered its bench­mark rate by a larger-than-expected 100bps on Wednes­day after an offi­cial vote of 5–3 (the three voted for a 75 bp cut), bring­ing the overnight Selic rate down to 12.75%. This move was jus­ti­fied after a sub­dued infla­tion read­ing for Decem­ber, but the committee’s main rea­son for the move was a sig­nif­i­cant dete­ri­o­ra­tion in domes­tic conditions.”

Source: Bryan Crowe, North­ern Trust — Daily Global Com­men­tary, Jan­u­ary 22, 2009.

Tags: 30 Year Treasury, 30 Year Treasury Bond, Basis Points, Brazil, BRIC, BRICs, Canadian Market, Crb Index, David Rosenberg, Earnings Data, Economic Background, Economic Morass, Emerging Markets, ETF, Global Recession, Global Stock Market, Global Stock Markets, Gold, Gold Bullion, Government Bonds, India, Japanese Yen, Living Memory, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, oil, Shanghai Composite Index, Sovereign Debt, Us Dollar Index, West Texas Intermediate
Posted in Bonds, Commodities, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, ETFs, Gold, India, Markets, Oil and Gas, Outlook, US Stocks | Comments Off

Jeremy Grantham: Obama and the Teflon Men, and other Short Stories

Friday, January 23rd, 2009

In Octo­ber last year peren­nial bear Jeremy Grantham, chair­man of Boston-based GMO, said: “We are rec­on­ciled to buy­ing too soon, but we rec­og­nize that our fair value esti­mate of 975 on the S&P 500 is, from his­tor­i­cal prece­dent, likely to over­run on the down­side by 20% to 40%, giv­ing a range of 585 to 780 on the S&P as a prob­a­ble low.

“The world faces unavoid­able declines in eco­nomic activ­ity and profit mar­gins, so this over­run is unlikely to be much less painful than aver­age, although you never know your luck.”

Given Grantham’s fore­cast, it was with keen inter­est that I have been await­ing his lat­est quar­terly newslet­ter enti­tled “Obama and the Teflon Men, and Other Short Sto­ries. Part 1“. The fol­low­ing para­graphs are a sum­mary of his invest­ment rec­om­men­da­tions from this report:

“The cur­rent dis­as­ter would have been easy to avoid by mak­ing a move against asset bub­bles early in their life­cy­cle. It will, in con­trast, be dev­il­ishly hard to get out of. But, we are deep in the pickle jar, and it seems likely that, in terms of eco­nomic pain, 2009 will be the worst year in the lives of the major­ity of Amer­i­cans, Brits, and oth­ers. So break a leg, everyone!

“Slowly and care­fully invest your cash reserves into global equi­ties, pre­fer­ring high qual­ity US blue chips and emerg­ing mar­ket equi­ties. Imputed 7-year returns are mod­er­ately above nor­mal and much above the aver­age of the last 15 years. But be pre­pared for a decline to new lows this year or next, for that would be the most likely his­tor­i­cal pat­tern, as mar­kets love to over­cor­rect on the down­side after major bub­bles. 600 or below on the S&P 500 would be a more typ­i­cal low than the 750 we reached for one day.

“In fixed income, risk finally seems to be attrac­tively priced, in that most risk spreads seem attrac­tively wide. Long gov­ern­ment bond rates, though, seem much too low. They reflect the short-term fears of eco­nomic weak­ness and the need for low short-term rates. We would be short long gov­ern­ment bonds in appro­pri­ate accounts.

“As for com­modi­ties, who knows? There were a few months where they looked like a high-confidence short, but now they are half-price or less, and are much lower con­fi­dence bets.

“In cur­ren­cies, we know even less. It is easy to find cur­ren­cies to dis­like, and hard to find ones to like. There are no high-confidence bets, in our opinion.

“For the long term, research should be directed into port­fo­lios that would resist both infla­tion­ary prob­lems and poten­tial dol­lar weak­ness. These are the two seri­ous prob­lems that we may have to face as a con­se­quence of flood­ing the global finan­cial sys­tem with gov­ern­ment bailouts and gov­ern­ment debt.”

Click here for the full report on Grantham’s views.

Tags: Blue Chips, Bond Rates, Cash Reserves, Economic Activity, Economic Pain, Economic Weakness, Emerging Market, Global Equities, Government Bond, Income Risk, Investment Recommendations, Jeremy Grantham, Keen Interest, Lows, Obama, Overrun, Pickle Jar, Profit Margins, Quarterly Newsletter, Value Estimate
Posted in Bonds, Commodities, Emerging Markets, Markets | Comments Off

Interview: Marc Faber Downbeat on Bailouts

Thursday, January 22nd, 2009

Marc Faber, the pub­lisher of the Gloom, Doom and Boom Report, told CNBC that the new bank bailouts are not likely to work because they are run by the same peo­ple who pro­longed the eco­nomic agony by throw­ing money at weak com­pa­nies rather than allow­ing them to fail and encour­ag­ing the strong ones.

Faber expresses his opin­ions on the finan­cial cri­sis, the dan­ger of gov­ern­ment bonds being down­graded in the wake of mas­sive bailout plans, as well as the out­look for stock mar­kets, cur­ren­cies and commodities.

Click here or on the image below to view the first part of the interview.

Click here for the sec­ond part of the interview.

Click here for the article.

Source: CNBC, Jan­u­ary 19, 2009.

Tags: Agony, Article Source, Bailout, Cnbc, Commodities, Currencies, Downbeat, Financial Crisis, Gloom Doom And Boom, Government Bonds, Image, January 19, Marc Faber, Money, Publisher, Stock Markets
Posted in Bonds, Commodities, Markets, Outlook | Comments Off

Obama's Honeymoon Faces Daunting Tasks

Wednesday, January 21st, 2009

The fol­low­ing para­graphs from Nouriel Roubini’s RGE Mon­i­tor pro­vide an insight­ful look at the daunt­ing eco­nomic and geo-political chal­lenges fac­ing Pres­i­dent Obama.

Now that Barack Obama has taken the oath and become the 44th Pres­i­dent of the United States, he faces great expec­ta­tions at home and abroad to steer the U.S. and global econ­omy out of the great­est post-war reces­sion and finan­cial cri­sis, to re-align the U.S. for­eign pol­icy stance and global stand­ing on issues like finan­cial sec­tor reg­u­la­tion, cli­mate change, trade talks and nuclear pro­lif­er­a­tion. He — and his team — enters with large amounts of polit­i­cal capital.

Obama’s pub­lic acknowl­edg­ment that the country’s eco­nomic woes will remain chal­leng­ing in the near-term and will involve great adjust­ments, and his choice of a strong eco­nomic team are signs of opti­mism that the admin­is­tra­tion will be quick with pol­icy mea­sures. While the domes­tic econ­omy (espe­cially pass­ing a fis­cal stim­u­lus pack­age) will take most of his time in the short-term, the Israel-Gaza offen­sive indi­cates for­eign pol­icy con­cerns — espe­cially in the Mid­dle East and South Asia will also demand atten­tion from the begin­ning of the Obama presidency.

Fis­cal Stim­u­lus
Sig­nif­i­cant growth con­trac­tion in Q4 2008 and Q1 2009 along with mount­ing job losses, declin­ing asset incomes, cor­po­rate bank­rupt­cies and tight credit con­di­tions, mean Obama’s first pri­or­ity will be to pass the fis­cal stim­u­lus pack­age by Feb­ru­ary 2009. The pay­roll tax relief, exten­sion of unem­ploy­ment insur­ance and food stamps for low-income house­holds included in the pack­age will cush­ion vul­ner­a­ble groups from the reces­sion and boost con­sumer spend­ing. How­ever, these poli­cies may do lit­tle to boost growth in the short-term. With only about US$100bn of around US$500bn in planned infra­struc­ture spend­ing expected to kick in within the first three months, the ini­tia­tive may not be timely in spite of being poten­tially effec­tive in boost­ing the econ­omy dur­ing late 2009 and 2010.

While tax cuts will be timely, house­holds fac­ing finan­cial pres­sure will save the pro­ceeds rather than boost spend­ing just as they did dur­ing Q2 2008, lim­it­ing effec­tive­ness. Sim­i­larly, tax cred­its for busi­nesses to hire work­ers and invest in new equip­ment will be inef­fec­tive in stim­u­lat­ing invest­ment since firms fore­cast­ing a pro­longed slump in domes­tic and export demand and high credit costs will cut capex plans.

How­ever, given that state and local gov­ern­ments sup­port greater spend­ing and jobs than the fed­eral gov­ern­ment, grants for the reces­sion– and budget-deficit hit states will be more effec­tive in pre­vent­ing cut backs in pub­lic ser­vices, infra­struc­ture projects and jobs, and also partly off­set declin­ing tax rev­enues and slump in debt financing.

But given our esti­mated con­trac­tion in pri­vate demand of around US$700bn in just 2009 alone, the US$800bn-plus stim­u­lus pack­age dis­trib­uted over two years (2009–10) might not be enough to off­set the con­trac­tion in GDP in 2009. Also, the extent of job cre­ation via the stim­u­lus might be lim­ited as infra­struc­ture projects will, at best, absorb work­ers from real estate con­struc­tion and low-end man­u­fac­tur­ing while ser­vices and man­u­fac­tur­ing in gen­eral will con­tinue to wit­ness hir­ing freezes due to low demand. More­over, invest­ment in infra­struc­ture, renew­able energy and R&D will sim­u­late the econ­omy and cre­ate jobs only in the medium to long run.

Hence, the pro­longed slump and a very slug­gish eco­nomic recov­ery might actu­ally neces­si­tate a sec­ond stim­u­lus pack­age. More impor­tantly, unless the gov­ern­ment addresses prob­lems of bank cap­i­tal­iza­tion and mort­gage cri­sis, any fis­cal stim­u­lus will be inef­fec­tive in steer­ing the econ­omy out of this crisis.

Con­tin­ued bank bailouts have sig­naled to the admin­is­tra­tion that fur­ther bank write­downs are immi­nent and the bank­ing sys­tem as a whole might be insol­vent. Cap­i­tal injec­tion on an ad-hoc basis, or even after banks write down bad debt to estab­lish asset val­ues, might only delay a broader solu­tion for toxic assets while mak­ing inef­fi­cient use of the TARP funds. One pos­si­ble solu­tion would be the cre­ation of a ‘bad bank’ that can buy toxic assets from banks to ease pres­sure on their bal­ance sheets and help stim­u­late lend­ing to the pri­vate sector.

An alter­na­tive might be to use the remain­ing TARP funds to extend gov­ern­ment insur­ance to banks’ toxic assets. Obama’s eco­nomic team also has voiced con­cerns that the TARP funds have been inef­fi­ciently used by banks so far in order to absorb losses on their bal­ance sheets, fund acqui­si­tions and pay for com­pen­sa­tion rather than fuel credit growth in the econ­omy. The new admin­is­tra­tion will likely direct the remain­ing funds towards unclog­ging credit mar­kets and renew­ing lend­ing to house­holds and firms by tar­get­ing con­sumers and munic­i­pal­i­ties — credit cards, mort­gages, auto loans, stu­dents loans and muni bonds. Total loan losses are expected to hit US$1.6 tril­lion and addi­tional neg­a­tive feed­backs on MBSs and other ABSs are immi­nent, espe­cially as the reces­sion raises default by house­holds and corporates.

Tight credit con­di­tions and finan­cial head­winds for house­holds will con­tinue to raise fore­clo­sures and mort­gage defaults. Increase in the excess home sup­ply now poses the risk of over-correction in home prices thus lead­ing to fur­ther bank losses and con­trac­tion in con­sumer spend­ing. As a result, Con­gres­sional Democ­rats and the Obama admin­is­tra­tion will have to work on mod­i­fy­ing the trou­bled mort­gages and refi­nanc­ing them into longer term low inter­est loans. But given the lim­ited effec­tive­ness of past gov­ern­ment pro­grams, the new gov­ern­ment needs to reduce the mort­gage prin­ci­pal to fix the prob­lem of home­own­ers’ insol­vency rather than just extend­ing the matu­rity period or reduc­ing the inter­est rate.

To encour­age greater lender par­tic­i­pa­tion, the gov­ern­ment will have to share the cost of mod­i­fy­ing the loans and offer lenders a share in future home appre­ci­a­tion and share any losses from default on the mod­i­fied loans. While Democ­rats favor using some of the remain­ing TARP funds for this pur­pose, esti­mates sug­gest that the cost of such a pro­gram might be as much as US$600bn to US$1 tril­lion, espe­cially as home prices over­cor­rect down­ward, more homes fall into neg­a­tive equity and defaults on the refi­nanced mort­gages con­tinue. To con­tain fis­cal costs, the gov­ern­ment should be the senior debt holder in the mod­i­fied mort­gages to ben­e­fit from future home appreciation.

Con­tin­ued bank bailouts, fis­cal stim­u­lus pack­ages and refi­nanc­ing at-risk mort­gages will likely push up the fis­cal deficit to over US$1.3 tril­lion in FY2009. While these counter-cyclical spend­ing mea­sures are war­ranted to address the cri­sis and Obama might also delay his plan to raise taxes, the U.S. will have to con­sider fis­cal con­sol­i­da­tion dur­ing the recov­ery phase. Unless the gov­ern­ment reforms the tax sys­tem, reduces health care costs and finances Social Secu­rity and defense needs, a struc­tural bud­get deficit will con­tinue to pose risks to the U.S. debt financ­ing needs and the dol­lar for many years to come.

Trade
Global trade talks might take a back­seat in 2009 as the U.S. and other economies remain occu­pied with domes­tic counter-cyclical fis­cal and mon­e­tary poli­cies. How­ever amid slump­ing exports, more and more gov­ern­ments might impose import restric­tions, offer trade dis­tort­ing fis­cal stim­u­lus to domes­tic firms, pre­vent stim­u­lus leak­ages via imports, bail out national cham­pi­ons and favor under­val­ued cur­ren­cies. Esca­lat­ing trade pro­tec­tion­ism dur­ing the Great Depres­sion actu­ally wors­ened the global eco­nomic cri­sis. In such a sce­nario, the U.S. would need to take the lead to renew global trade talks and estab­lish WTO guide­lines to pre­vent coun­tries from pur­su­ing pro­tec­tion­ist mea­sures. How­ever, this will be a longer term objective.

Mean­while the dis­cus­sion on NAFTA is likely to re-emerge in light of the President’s visit to Canada, report­edly his first for­eign trip. While pol­icy on trade agree­ments, the Chi­nese rem­inbi and inward-investment by for­eign gov­ern­ments might take a back­seat in the ini­tial days of the new admin­is­tra­tion, China’s bias for an under­val­ued cur­rency to sup­port exports and the need for invest­ments from for­eign gov­ern­ments in the face of U.S. bank and cor­po­rate bank­rupt­cies might rekin­dle these issues. More­over, as imports and exports shrink for deficit and sur­plus coun­tries respec­tively, U.S. will lead the world in the painful unwind­ing of global imbalances.

Energy and Cli­mate Change
Although cli­mate change is a major pri­or­ity and the new mem­bers of Obama’s energy team are focused on increas­ing energy effi­ciency and the share of alter­na­tive fuels in the U.S. energy mix, com­ing to con­sen­sus on these issues may be dif­fi­cult — and com­pre­hen­sive cli­mate change leg­is­la­tion might not come to the fore until 2010. In the short-term, the most sig­nif­i­cant poli­cies to sup­port alter­na­tive fuels may come through other eco­nomic pack­ages — the fis­cal stim­u­lus, the terms of the sup­port to the auto sec­tor are some examples.

Pres­i­dent Obama has empha­sized that the fis­cal stim­u­lus will include sup­port for ‘green jobs’ — jobs that sup­port alter­na­tive energy and help to wean the U.S. from fos­sil fuels that are increas­ingly sourced abroad from unsta­ble coun­tries, but these will take time to have effect. How­ever, polit­i­cal momen­tum glob­ally may build as the next cli­mate change con­fer­ence approaches at the end of 2009. Steven Chu and other mem­bers of Obama’s energy team are expected to push for sig­nif­i­cant energy pol­icy changes towards renew­able and fed­eral cli­mate change leg­is­la­tion, includ­ing an economy-wide cap-and-trade pro­gram how­ever the sever­ity of the eco­nomic reces­sion may make a gas tax unpalat­able even if it is matched by off­set­ting pay­roll tax cuts.

Despite the fall in demand as global out­put con­tracts, there are obsta­cles in diver­si­fy­ing both the source of energy sup­plies and the type will be dif­fi­cult, par­tic­u­larly in the short-term. Not only do the costs of alter­na­tive energy remain high, par­tic­u­larly as tech­nolo­gies are still being devel­oped. Gov­ern­ment poli­cies might off­set this gap.

The reduc­tion in oil prices may deter some of the demand for drilling off the U.S. coast­line even as it deters invest­ment in alter­na­tive tech­nolo­gies. Sim­i­larly, envi­ron­men­tally costly fuel from Canada’s oil sands may find U.S. mar­kets less wel­com­ing, even if it spurs invest­ment in car­bon seques­tra­tion in the long-term. Already the fall in gaso­line prices has deterred the pur­chases of hybrid vehi­cles, pos­si­bly revers­ing some of the behav­ioral changes that led to lower petro­leum con­sump­tion in mid-2008.

For­eign Pol­icy
Despite the administration’s focus on pass­ing a fis­cal stim­u­lus and domes­tic pol­icy issues, Pres­i­dent Obama has inher­ited a com­plex set of for­eign pol­icy issues from Pres­i­dent Bush that will occupy him, his Sec­re­tary of State Hilary Clin­ton and their teams. Polit­i­cal and secu­rity issues in the Mid­dle East and South Asia are par­tic­u­larly urgent. Obama comes to power with sig­nif­i­cant polit­i­cal cap­i­tal and a set of expe­ri­enced offi­cials deter­mined to increase diplo­matic efforts to counter global threats given the lim­i­ta­tions of hard power to solve global issues.

The Gaza cri­sis pushed the Mid­dle East and espe­cially the Israeli-Palestinian con­flict to the top of the Pres­i­dent Barack Obama’s agenda. In par­tic­u­lar the focus will be on try­ing to pre­vent a pre­car­i­ous cease­fire from con­tribut­ing to regional insta­bil­ity. The cease-fire in Gaza could present a fresh oppor­tu­nity for medi­at­ing a peace process, but Obama will be faced with a set of chal­lenges nev­er­the­less that may absorb a lot of U.S. polit­i­cal cap­i­tal in the region.

The con­flict had deep­ened a rift between the Pales­tin­ian rival polit­i­cal fac­tions — Hamas and Fatah — and the lack of national unity may con­tinue to impede the seri­ous advance­ment of the Israeli-Palestinian peace process, as will divi­sions between Arab states. Fur­ther­more, Israel holds par­lia­men­tary elec­tions on Feb 10 and the com­mit­ment of the Israeli gov­ern­ment to the peace process will vary. Finally, bro­ker­ing a suc­cess­ful Mid­dle East peace process involves a broad regional approach and an effort to address regional play­ers, such as Syria and Iran and involv­ing both tra­di­tion power bro­kers like Egypt, Jor­dan and Saudi Ara­bia and newer entrants like Qatar.

A set of elec­tions in the Mid­dle East, espe­cially in Israel, Iraq and Iran in the first half of 2009 may pro­vide test­ing times. The reduc­tion of U.S. troops in Iraq and trans­fer of power to Iraqi author­i­ties is already well under way but more details are yet to emerge regard­ing the exit of U.S. troops. While Obama pledged to with­draw troops from Iraq with 16 months of tak­ing office, they might remain for some time. The Pres­i­dent has empha­sized a new approach to deal with Iran includ­ing the pos­si­bil­ity of lower-level diplo­matic engage­ment, but the country’s empha­sis on nuclear pro­lif­er­a­tion may be dif­fi­cult to shake. With the fall in the price of oil, Iran’s abil­i­ties to fund its prox­ies in Iraq, Lebanon and Pales­tine may be reduced as main­tain­ing domes­tic sup­port becomes paramount.

Regional secu­rity con­tin­ues to dete­ri­o­rate in South Asia with the resur­gence of the Tal­iban in Afghanistan, grow­ing hos­til­i­ties between India and Pak­istan, and a weak­en­ing alliance with Pak­istan against the war on ter­ror. Obama has reg­u­larly echoed the need for more troops to be deployed and the Sen­ate has agreed to send addi­tional troops almost dou­bling Amer­i­can troops on the ground. How­ever, the daunt­ing task of con­struct­ing a com­pre­hen­sive new strat­egy for a region defined by endemic cor­rup­tion and the lack of basic ameni­ties remains — and the eco­nomic cri­sis might make it more dif­fi­cult to con­vince fel­low NATO mem­bers to also increase their mil­i­tary pres­ence. By con­trast, despite the per­sis­tence of North Korea’s nuclear pro­gram, East Asia is unlikely to grab as much atten­tion. Eco­nom­ics will likely con­tinue to dom­i­nate the U.S. China rela­tion­ship par­tic­u­larly now that China’s exports are con­tract­ing and China, like the U.S. faces a hard landing.

Pres­i­dent Obama will seek to strengthen transat­lantic ties that have weak­ened fol­low­ing the Iraq war. Wash­ing­ton will work together with EU closely together to respond to the finan­cial and eco­nomic crises, peace and secu­rity issues, and to stop and reverse cli­mate change. But con­vinc­ing NATO allies to increase mil­i­tary pres­ence in Afghanistan may be dif­fi­cult. U.S.-Russia rela­tions have been strained by NATO’s east­ward expan­sion, war in Geor­gia, gas pol­i­tics, Kosovo’s inde­pen­dence to name a few. Despite a warn­ing that Rus­sia might deploy short-range mis­siles in the Baltic region if Wash­ing­ton pro­ceeded with its mis­sile defense shield in East­ern Europe, Moscow has sig­naled its will­ing­ness to reex­am­ine rela­tions with the U.S. under the new administration.

The U.S. and Rus­sia may be able to make com­mon cause regard­ing the nuclear threat from Iran, helped per­haps by Obama’s ambiva­lence about the mis­sile defense and rul­ing out of a speedy NATO mem­ber­ship track for Ukraine and Geor­gia. Yet nei­ther coun­try will be will­ing to com­pro­mise on its core inter­ests, and a divided Europe may make respond­ing to a poorer, but still deter­mined, Rus­sia more difficult.

Source: RGE Mon­i­tor, Jan­u­ary 21, 2009.

Tags: 44th President, Barack Obama, Canadian Market, Corporate Bankruptcies, Domestic Economy, Economic Team, Economic Woes, Emerging Markets, First Three Months, Fiscal Stimulus, Food Stamps, Income Households, India, Nouriel Roubini, Nuclear Proliferation, Oil Sands, Payroll Tax, Policy Measures, Policy Stance, Political Challenges, Public Acknowledgment, Sector Regulation, Stimulus Package, Tight Credit
Posted in Bonds, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, India, Infrastructure, Markets, Oil and Gas | Comments Off

Is Wall Street Responsible for 2008's Oil Bubble?

Tuesday, January 20th, 2009

Back in late June, we [GreenLightAdvisor.com] inter­viewed Stephen Briese, a sea­soned com­modi­ties trader, who, based on CoT (Com­mit­ments of Traders) reports, pub­lished reg­u­larly by the CFTC, posited that there was an esti­mated 200-days of paper oil held by investors/speculators, among them some of the large endow­ments and pen­sion funds, as well as sov­er­eign wealth funds re-investing their oil prof­its back into none other than the paper stuff. Briese is the author of The Com­mit­ments of Traders Bible.

Is Wall Street to blame for 2008's oil bub­ble? Steve Kroft, from CBS' 60 Min­utes inves­ti­gates:
Click play to watch the CBS 60 Min­utes story aired on Jan­u­ary 8, 2009. This is a must see story.

Dan Gilli­gan of the Petro­leum Mar­keters Asso­ci­a­tion says it is naked futures investors via indexes that are more inter­ested in invest­ing in paper oil for profit.

As the pres­i­dent of the Petro­leum Mar­keters Asso­ci­a­tion, [Dan Gilli­gan] rep­re­sents more than 8,000 retail and whole­sale sup­pli­ers, every­one from home heat­ing oil com­pa­nies to gas sta­tion owners.

When 60 Min­utes talked to him last sum­mer, his mem­bers were get­ting blamed for goug­ing the pub­lic, even though their costs had also gone through the roof. He told Kroft the prob­lem was in the com­modi­ties mar­kets, which had been invaded by a new breed of investor.

"Approx­i­mately 60 to 70 per­cent of the oil con­tracts in the futures mar­kets are now held by spec­u­la­tive enti­ties. Not by com­pa­nies that need oil, not by the air­lines, not by the oil com­pa­nies. But by investors that are look­ing to make money from their spec­u­la­tive posi­tions," Gilli­gan explained.

Gilli­gan said these investors don't actu­ally take deliv­ery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery."

"They're try­ing to make money on the mar­ket for oil?" Kroft asked.

"Absolutely," Gilli­gan replied. "On the volatil­ity that exists in the mar­ket. They make it going up and down."

Hedge fund man­ager, Michael Mas­ters says that for every bar­rel of oil actu­ally con­sumed in the US, there were 27 bar­rels traded every day, and inter­est in com­modi­ties indexes grew from $13-billion to $300-billion in 5 years.

About the same time, hedge fund man­ager Michael Mas­ters reached the same con­clu­sion. Mas­ters' exper­tise is in track­ing the flow of invest­ments into and out of finan­cial mar­kets and he noticed huge amounts of money leav­ing stocks for com­modi­ties and oil futures, most of it going into index funds, bet­ting the price of oil was going to go up.

Asked who was buy­ing this "paper oil," Mas­ters told Kroft, "The Cal­i­for­nia pen­sion fund. Har­vard Endow­ment. Lots of large insti­tu­tional investors. And, by the way, other investors, hedge funds, Wall Street trad­ing desks were fol­low­ing right behind them, putting money — sov­er­eign wealth funds were putting money in the futures mar­kets as well. So you had all these investors putting money in the futures mar­kets. And that was dri­ving the price up."

In a five year period, Mas­ters said the amount of money insti­tu­tional investors, hedge funds, and the big Wall Street banks had placed in the com­modi­ties mar­kets went from $13 bil­lion to $300 bil­lion. Last year, 27 bar­rels of crude were being traded every day on the New York Mer­can­tile Exchange for every one bar­rel of oil that was actu­ally being con­sumed in the United States.

There were no dis­rup­tions to sup­ply, and India and China did not sud­denly increase their con­sump­tion overnight. In fact, sup­ply was ris­ing and demand falling.

Michael Green­berger, a for­mer direc­tor of trad­ing for the U.S. Com­mod­ity Futures Trad­ing Com­mis­sion, the fed­eral agency that over­sees oil futures, says there were no sup­ply dis­rup­tions that could have jus­ti­fied such a big increase.

"Did China and India sud­denly have gigan­tic needs for new oil prod­ucts in a sin­gle day? No. Every­body agrees supply-demand could not drive the price up $25, which was a record increase in the price of oil. The price of oil went from some­where in the 60s to $147 in less than a year. And we were being told, on that run-up, 'It's supply-demand, supply-demand, supply-demand,'" Green­berger said.

A recent report out of MIT, ana­lyz­ing world oil pro­duc­tion and con­sump­tion, also con­cluded that the basic fun­da­men­tals of sup­ply and demand could not have been respon­si­ble for last year's run-up in oil prices. And Michael Mas­ters says the U.S. Depart­ment of Energy's own sta­tis­tics show that if the mar­kets had been work­ing prop­erly, the price of oil should have been going down, not up.

"From quar­ter four of '07 until the sec­ond quar­ter of '08 the EIA, the Energy Infor­ma­tion Admin­is­tra­tion, said that sup­ply went up, world­wide sup­ply went up. And world­wide demand went down. So you have sup­ply going up and demand going down, which gen­er­ally means the price is going down," Mas­ters told Kroft.

Invest­ment banks fuelled the energy market.

Mas­ters believes the investor demand for com­modi­ties, and oil futures in par­tic­u­lar, was cre­ated on Wall Street by hedge funds and the big Wall Street invest­ment banks like Mor­gan Stan­ley, Gold­man Sachs, Bar­clays, and J.P. Mor­gan, who made bil­lions invest­ing hun­dreds of bil­lions of dol­lars of their clients’ money.

"The invest­ment banks facil­i­tated it," Mas­ters said. "You know, they found folks to write papers espous­ing the ben­e­fits of invest­ing in com­modi­ties. And then they pro­moted com­modi­ties as a, quote/unquote, 'asset class.' Like, you could invest in com­modi­ties just like you could in stocks or bonds or any­thing else, like they were suit­able for long-term investment."

Its an impor­tant infor­ma­tive piece of jour­nal­ism. Make sure you watch it, in case you missed it.

Tags: Briese, Cbs 60 Minutes, Cftc, Commitments Of Traders, Commodities Trader, Emerging Markets, Endowments, Futures Markets, Gas Station Owners, Gilligan, Home Heating Oil, India, New Breed, oil, Oil Companies, Oil Contracts, Oil Profits, Pension Funds, Petroleum Marketers Association, Speculators, Steve Kroft, Volatility, Wholesale Suppliers
Posted in Bonds, Commodities, Emerging Markets, Energy & Natural Resources, Gold, India, Markets, Oil and Gas | Comments Off

Warren Buffett Interview (01/19/2009)

Tuesday, January 20th, 2009

War­ren Buf­fett is inter­viewed by Tom Brokaw, Jan­u­ary 18, 2009, on Date­line NBC.

Click play to watch:

Here is an excerpt from the transript:

For the com­plete tran­script, click here.

TOM BROKAW, NBC NEWS:

Last fall, War­ren a poll­ster told me that the elec­tion was between hope and fear. When it comes to the econ­omy, who's win­ning, hope or fear?

WARREN BUFFETT:

Well, right now fear is. I mean, you're see­ing it every­place. You saw it at– in the sales of almost every item at– at Christ­mas. There's a lot of fear through­out the coun­try. Even– even with peo­ple whose jobs are fine, and who have money in the bank. But they– they're worried.

BROKAW:

I've been describ­ing this as the domes­tic equiv­a­lent of war. Is that an overstatement?

BUFFETT:

Well, actu­ally, in Sep­tem­ber I said– this is an eco­nomic Pearl Har­bor. I– that was the time con­gress had made it in. It really is an eco­nomic Pearl Har­bor. It– the– the coun­try is fac­ing some­thing it hasn't faced since World War II.

And they're fear­ful about it. And they don't know quite what to do about it. And the point is– and– and it– and tem­porar­ily it looks like we're los­ing. It has that– that same aspect. Inter­est­ingly enough, we were los­ing for a while after Pearl Har­bor. But the Amer­i­can peo­ple never doubted that we'd win. I mean, we had that atti­tude then. I think, right now, that they're sort of paralyzed.

BROKAW:

Is Barack Obama the right com­man­der in chief for the economy?

BUFFETT:

He's the absolute right com­man­der in chief. That– you know, that's another thing the Amer­i­can peo­ple seem to do, occa­sion­ally, is that we elect peo­ple that are right for the times. You know, whether it was Lin­coln, Roo­sevelt. And– and I would say Obama– you– you couldn't have– any­body bet­ter in charge.

BROKAW:

But why is he right for the times?

BUFFETT:

Well, he's– he– he's smart, he's got the right val­ues, but he also– he under­stands eco­nom­ics very well. He's cool. He's– he's– he's ana­lyt­i­cal. But then, when he gets it all thought through, and he's fast– he can con­vey to Amer­i­can– the Amer­i­can peo­ple what needs to be done. Not to expect mir­a­cles. That it's gonna take time. But that we're gonna get to the other end. And– and I– I– I don't think there's any­body bet­ter for the job than– than– the president-elect.

BROKAW:

He often cites you as an advi­sor. And I know that you've been in touch with his eco­nomic team. But what often hap­pens to some­body who gets elected to that office, par­tic­u­larly, they're more to you to tell you what they know than they are to lis­ten. Does he listen?

BUFFETT:

He's a lis­tener. I– I first met him, maybe, four years ago, or some­thing like that. He was a lis­tener then, he's a lis­tener now. But, on the other hand, he makes up his own mind. He will– he will not be– his team won't run him. He'll use his team, he'll use them very effec­tively. He'll syn­the­size, he'll– he'll– he'll ana­lyze. But, in the end, it'll be his decision.

Tags: Attitude, Barack Obama, Commander In Chief, Dateline Nbc, Economics, Economy, Excerpt From, Hope And Fear, Lincoln, Money In The Bank, Nbc, Nbc News, Overstatement, Pearl Harbor, Pollster, Roosevelt, Time Congress, Tom Brokaw, Warren Buffett, World War Ii
Posted in Economy, Markets | Comments Off

Words from the (investment) wise for the week that was (January 12 – 18, 2009)

Sunday, January 18th, 2009

Investor sen­ti­ment around the globe was neg­a­tively impacted dur­ing 2009’s sec­ond full week of trad­ing as a bar­rage of bleak eco­nomic and cor­po­rate news offered more con­fir­ma­tion of a deep­en­ing reces­sion, bring­ing risk aver­sion to cen­ter stage.

The US dol­lar and gov­ern­ment bonds (exclud­ing emerg­ing mar­kets and coun­tries on the periph­ery of the Euro­zone) gained, but global equi­ties and com­modi­ties were on the defen­sive as ner­vous investors tried to gauge the likely dam­age of the eco­nomic malaise.

Global bourses con­cluded a whip­saw week with hefty losses, but stemmed some of the down­side as a relief rally came to the res­cue towards the end of the week. The MSCI World Index and the MSCI Emerg­ing Mar­kets Index declined by 6.2% and 5.8% respectively.

The US indices all dropped over the week as shown by the major index move­ments: Dow Jones Indus­trial Index –3.7% (YTD –5.6%), S&P 500 Index –4.5% (YTD –5.9%), Nas­daq Com­pos­ite Index –2.7% (YTD –3.0%) and Rus­sell 2000 Index –3.1% (YTD –6.6%). As a mat­ter of inter­est, the year-to-date returns at the same point last year (i.e. after 11 trad­ing days) were –6.0% for the Dow and –6.5% for the S&P 500.

Adding a spark of hope on Thurs­day, the US Sen­ate voted to release the sec­ond and final $350 bil­lion tranche of the TARP funds, whereas the House Democ­rats unveiled a much-awaited $825 bil­lion stim­u­lus pack­age aimed at halt­ing the eco­nomic rot. Mean­while, in a speech at the Lon­don School of Eco­nom­ics, Fed Chair­man Ben Bernanke said Barack Obama’s eco­nomic pack­age could pro­vide a “sig­nif­i­cant boost” to the US economy.

Source: Daryl Cagle

But back to the stock mar­ket. The bar chart below shows the US sec­tor per­for­mance for the past week, and specif­i­cally how defen­sive sec­tors such as con­sumer sta­ples, health­care and util­i­ties out­per­formed other sec­tors on a rel­a­tive basis.

The finan­cial sec­tor plum­meted by 16.3% as sev­eral US bank­ing shares fell to multi-year lows amid grow­ing con­cerns that they will bat­tle to cope with increas­ing credit losses as the global reces­sion intensifies.

Source: StockCharts.com

The nascent earn­ings sea­son saw a glut of fourth-quarter losses. These included larger-than-expected losses from Bank of Amer­ica (BAC) and Cit­i­group ©, result­ing in their respec­tive share prices plung­ing by 44.7% and 48.2% over the week.

Citi announced plans to break up the bank into two busi­nesses, fol­low­ing the deci­sion to sell a con­trol­ling inter­est in the valu­able Smith Bar­ney bro­ker­age to Mor­gan Stan­ley (MS). On the other hand, Bank of Amer­ica will receive an addi­tional $20 bil­lion of TARP funds to bed down its trou­ble­some acqui­si­tion of Mer­rill Lynch, as well as a guar­an­tee on $118 bil­lion of poten­tial losses on dis­tressed assets. Else­where, the Irish gov­ern­ment nation­al­ized Anglo Irish Bank, and HSBC was rumored to be seek­ing fresh cap­i­tal of $30 billion.

As far as the US hous­ing sit­u­a­tion is con­cerned, I am keep­ing a close eye on the mort­gage sit­u­a­tion. Accord­ing to Fred­die Mac’s Pri­mary Mort­gage Mar­ket Sur­vey, the national aver­age rates for a US 30-year fixed mort­gage last week declined to 4.96% from 5.33% two weeks ago and 6.46% in Octo­ber last year. How­ever, the rate is still 378 basis points higher than the three-month dol­lar LIBOR rate. This spread aver­aged 97 basis points dur­ing the 12 months pre­ced­ing the cri­sis, indi­cat­ing that lower rates are not being passed on to consumers.

Despite the inter­bank lend­ing rates hav­ing declined from their peaks, banks have sig­nif­i­cantly cur­tailed the amount of money they are actu­ally lend­ing. The US Depos­i­tory Insti­tu­tions Aggre­gate Excess Reserves con­tinue their ascent at lev­els 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. (Also see my post “Credit Mar­ket Watch“.)

Source: Fuller­money

Next, a quick tex­tual analy­sis of my week’s read­ing. No sur­prises here with key­words such as “econ­omy”, “mar­ket”, “bank”, “China”, finan­cial” and “prices” fea­tur­ing prominently.

On the issue of cor­po­rate bonds, I received a num­ber of ques­tions after refer­ring to the iBoxx Invest­ment Grade Cor­po­rate Bond Fund (LQD) and High Yield Cor­po­rate Bond Fund (HYG) in last week’s “Words from the Wise” review. In the short term, a fur­ther cor­rec­tion of both investment-grade and high-yield cor­po­rate bonds looks likely, but the sec­tor is worth watch­ing for oppor­tu­ni­ties aris­ing at lower lev­els. Also, the high-yield instru­ments — under intense pres­sure because of an avalanche of defaults pre­dicted by the ultra-wide spreads — could see spreads con­tract­ing markedly if the defaults are not as bad as priced in.

Turn­ing to the out­look for the stock mar­ket, Ben­net Sedacca (Atlantic Advi­sors Asset Man­age­ment) issued a short-term buy sig­nal on Thurs­day: “We are once again increas­ing expo­sure to equi­ties from 0% to a near fully invested pos­ture. I fully rec­og­nize the bad news that is out in the mar­ket­place, but given Trea­suries at 0–2.25% and Mort­gage Backed Secu­ri­ties at 3–4%, high qual­ity large cap growth stocks (self-financing com­pa­nies pur­chased via IVW — the S&P large cap growth ETF) look attrac­tive to me.

“We also like health­care via PPH (pharma hold­ers ETF), USO (oil ETF), XLV (broader health­care ETF), but have a neg­a­tive bias towards bonds and have taken sub­stan­tial prof­its in recent days in the Mort­gage Backed Secu­ri­ties space, where gov­ern­ment inter­ven­tion has led to arti­fi­cially high bids. We also added a small­ish posi­tion in XLF (finan­cials). We believe qual­ity is king and that ‘a’ low , but not THE low has been reached in stocks.”

Key resis­tance and sup­port lev­els for the major US indices are shown in the table below. The imme­di­ate upside tar­get is the 50-day mov­ing aver­age, fol­lowed by the Novem­ber 4 highs about 16% to 18% from cur­rent lev­els (not shown on table). On the down­side, the Decem­ber 1 and all-important Novem­ber 20 lows must hold in order to pre­vent con­sid­er­able tech­ni­cal damage.

An analy­sis of the num­ber of stocks trad­ing above their 50-day mov­ing aver­ages makes for inter­est­ing read­ing. “With the S&P 500 back into over­sold ter­ri­tory and even approach­ing its Novem­ber lows, it’s actu­ally sur­pris­ing to see this breadth mea­sure at 40%,” said Bespoke. “At the prior lows, the num­ber got down to zero! The fact that the over­all declines have been lim­ited to a smaller area of the mar­ket is a pos­i­tive for those hop­ing that the lows will hold.”

“As Jan­u­ary goes, so goes the year”, is one of the most fre­quently quoted sea­sonal trends of the stock mar­ket. With the S&P 500 down by 5.9% after two weeks of the month, Jan­u­ary is not off to a promis­ing start. Accord­ing to Jef­frey Hirsch (Stock Trader’s Almanac), every down Jan­u­ary since 1950 has been fol­lowed by a new or con­tin­u­ing bear mar­ket or a flat year. Fur­ther research is pro­vided by Jay Kaep­pel of Optio­net­ics.
The last word goes to Charles Kirk (The Kirk Report): “With the mar­ket closed Mon­day to observe Mar­tin Luther King Jr., we are set to have another four-day work week and, in my expe­ri­ence, they tend to be some of the tough­est. Not only will we have Obama’s inau­gu­ra­tion, but lots of earn­ings reports to sort through.

“While the mar­ket man­aged to end the week above S&P 850, we still have a lot of work to do to con­firm that we can man­age at least a decent counter-trend rally dur­ing earn­ings sea­son. We are still over­sold, but we need to see the buy­ers return in force and with con­fi­dence. Both have been miss­ing so far in 2009.”

For more dis­cus­sion about the direc­tion of stock mar­kets, also see my post “Video-o-rama: Gloomy news bat­ters investor sen­ti­ment“.

Econ­omy
“Global busi­ness con­fi­dence remains very neg­a­tive, but has improved a bit since hit­ting bot­tom at the very end of 2008. It is still too early to con­clude that sen­ti­ment is improv­ing in any mea­sur­able way,” said the lat­est Sur­vey of Busi­ness Con­fi­dence of the World con­ducted by Moody’s Economy.com. “Busi­nesses are nearly equally pes­simistic across the globe and across all indus­tries. Hir­ing inten­tions have turned par­tic­u­larly neg­a­tive in recent weeks. Pric­ing power has col­lapsed, sug­gest­ing that defla­tion is a sig­nif­i­cant threat.”

As far as the US is con­cerned, the Fed’s Jan­u­ary Beige Book indi­cated con­tin­ued and broad-based weak­en­ing through­out the nation. The lat­est round of eco­nomic data also con­firmed that the reces­sion was intensifying.

• Indus­trial pro­duc­tion declined by 2% in Decem­ber, with out­put falling in all three major cat­e­gories — util­i­ties, min­ing and man­u­fac­tur­ing — for the first time since Octo­ber. For the fourth quar­ter as a whole, indus­trial pro­duc­tion fell at an annual rate of 11.5%, more than twice as fast as at any time dur­ing the 2001 reces­sion. All indi­ca­tions are that man­u­fac­tur­ers will fur­ther reduce pro­duc­tion in order to bring inven­to­ries in line with free-falling final sales.

• Retail sales in Decem­ber were sig­nif­i­cantly worse than expected, plung­ing by 2.7% — the sixth con­sec­u­tive month of falling sales.

• The US trade deficit nar­rowed sub­stan­tially to $40.4 bil­lion (con­sen­sus $51.5 bil­lion) in Novem­ber, mark­ing the fourth straight month of declin­ing gross exports and gross imports.

News on the US infla­tion front was rel­a­tively good with both the PPI and CPI con­tin­u­ing to retreat in Decem­ber, falling by 1.9% and 0.7% respec­tively. Core prices barely man­aged to stay in pos­i­tive ter­ri­tory, with core CPI ris­ing by 0.1% for 2008 — the low­est increase since 1954.

Jamie Dimon, chief exec­u­tive of JPMor­gan Chase, pre­dicted in an inter­view with the Finan­cial Times that the US finan­cial and eco­nomic cri­sis would worsen this year as hard-hit con­sumers default on credit cards and other loans. “The worst of the eco­nomic sit­u­a­tion is not yet behind us. It looks as if it will con­tinue to dete­ri­o­rate for most of 2009,” said Mr Dimon.

Source: Daryl Cagle

Else­where in the world, evi­dence mounted that the reces­sion was wide­spread and deepening.

• In a sign that the decline in eco­nomic activ­ity in Japan was wors­en­ing, core machin­ery orders by Japan­ese busi­nesses slumped by 16.2% in Novem­ber — the sharpest monthly con­trac­tion since records began in 1987.

• Germany’s coali­tion par­ties agreed on a sec­ond eco­nomic stim­u­lus pack­age total­ing €50 bil­lion (includ­ing €36 bil­lion in infra­struc­ture invest­ment and tax cuts), to be put into place in an effort to pull the econ­omy out of its worst reces­sion since the end of the Sec­ond World War, accord­ing to CEP News. The pack­age also includes a €100 bil­lion “Ger­many fund” that would guar­an­tee the debt raised by cash-starved businesses.

• The Euro­pean Cen­tral Bank on Thurs­day cut its main pol­icy inter­est rate by 50 basis points to 2% — the low­est level ever. The total reduc­tion since mid-October amounts to 225 basis points and high­lights the Euro­zone slip­ping deeper into reces­sion and infla­tion drop­ping sharply.

• Euro­zone man­u­fac­tur­ing con­tin­ued to fell for the sev­enth straight month in Novem­ber, amount­ing to a decline of 7.7% in year-ago terms.

Source: Moody’s Economy.com

The Inter­na­tional Mon­e­tary Fund’s man­ag­ing direc­tor, Dominique Strauss-Kahn, “chided Euro­pean lead­ers for fail­ing to grasp the depth of the com­ing slump in their region, cre­at­ing the risk of social upheaval,” said Bloomberg.

RGE Mon­i­tor reported that China had revised its 2007 GDP growth up to 13% from the 11.9% it pre­vi­ously reported. “With Chi­nese exports, indus­trial pro­duc­tion and other eco­nomic indi­ca­tors slow­ing sharply, there is spec­u­la­tion that Chi­nese offi­cials might smooth growth sta­tis­tics. Uncer­tainty about Chi­nese eco­nomic sta­tis­tics has led many ana­lysts to use prox­ies for eco­nomic out­put which are more dif­fi­cult to doc­tor. These prox­ies include elec­tric­ity demand, con­struc­tion, etc. How­ever, there is a con­sen­sus that Chi­nese eco­nomic sta­tis­tics have improved,” said Nouriel Roubini’s research team.

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

Source: Yahoo Finance, Jan­u­ary 16, 2009.

In addi­tion to the Bank of Japan’s inter­est rate announce­ment (Thurs­day, Jan­u­ary 22), the US eco­nomic high­lights for the week, cour­tesy of North­ern Trust, include the following:

1. Hous­ing starts (Jan­u­ary 22): Per­mit exten­sions for new homes fell 15.8% in Novem­ber, inclu­sive of a 11.9% drop in per­mits issued for single-family homes. The weak­ness in per­mits is indica­tive of fewer hous­ing starts in Decem­ber (595,000 ver­sus 625,000 in Novem­ber). Con­sen­sus: 615,000.

2. Other reports: NAHB Sur­vey (Jan­u­ary 21).

Click the links below for the fol­low­ing reports:

• Wachovia’s Weekly US Eco­nomic & Finan­cial Com­men­tary (Jan­u­ary 16, 2009)

• Wachovia’s Global Chart­book (Jan­u­ary 2009)

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, Jan­u­ary 16, 2009.

Chi­nese philoso­pher Lau-Tzu said: “Those who have knowl­edge, don’t pre­dict. Those who pre­dict, don’t have knowl­edge.” Wise words indeed, but hope­fully thor­ough research and a dose of com­mon sense will cast some light on the lie of the invest­ment land.

On Tues­day a new Pres­i­dent will be inau­gu­rated in the US, but the old con­cerns about finan­cial mar­kets will unfor­tu­nately still be around. In the mean­time, have a great long week­end in the US!

That’s the way it looks from Cape Town.

Source: Daryl Cagle

Clus­ter­stock: Roubini — you’re all fools for buy­ing into a sucker’s rally
“Yes­ter­day Nouriel Roubini weighed in on the recent rally and said any­one that thought the worst was behind us is ‘delu­sional’ and as a mat­ter of fact the worst is yet to come, cit­ing the grue­some macro data that’s been released as of late, and the fact that that trend won’t reverse until at least the fourth quar­ter of 2009.

“RGE: For a few weeks since late Novem­ber equity mar­kets ignored the onslaught of much worse than expected macro news (and all the news were really worse than awful) and had a nice 25% bear mar­ket sucker’s rally. But the drum­beat of ter­ri­ble — and worse-than-expected — macro news and earn­ings news and finan­cial news has finally taken a toll on the delu­sional mar­ket belief that the worst was over for finan­cial mar­kets and for equity mar­kets and that the US and global econ­omy would recover in the sec­ond half of 2009. So equity prices have already reversed more than half of their most recent bear mar­ket rally as the lousy macro news have finally shocked in the last week the wish­ful thinkers.

“Indeed, the retail sales fig­ures pub­lished today con­firmed a shopped-out, saving-less and debt-burdened US con­sumer is now fal­ter­ing as job losses, income losses, fall in home wealth, fall in equity wealth, high and ris­ing debt and debt ser­vic­ing ratios and a severe credit crunch take a severe toll on the abil­ity of con­sumers to spend. And reduc­tion in spend­ing and delever­ag­ing of the US con­sumer will take years to rebuild the sav­ings rate of a house­hold sec­tor now hit by a severe shock to its net worth (as equity and home val­ues fall while debts have been ris­ing) and shocked in its abil­ity to gen­er­ate income as job losses mount and the unem­ploy­ment rate surges.

“Our research at RGE Mon­i­tor sug­gests that the US and global reces­sion will con­tinue at least all the way until Q4 of 2009 (a nasty 24 months U-shaped reces­sion) and that the recov­ery in 2010-11 will be very weak with growth in the 1% range that is well below a poten­tial of 2.75%. And we can­not rule out that a more severe L-shaped stag-deflation (as in Japan in the 1990s) will take hold.”

Click here for CNBC video.

Source: Jay Yarow, Clus­ter­stock, Jan­u­ary 15, 2009.

CNBC: Pimco’s El Erian on the mar­kets
“Dis­cussing the global eco­nomic sit­u­a­tion, with Mohamed El-Erian, Pimco co-CEO and Michael Spence, Philip H. Knight eco­nom­ics professor/Nobel Laureate.

Source: CNBC, Jan­u­ary 15, 2009.

Barron’s: Round­table — hang on tight
“Our go-to group of invest­ment experts sees tough times for the econ­omy — but good for­tune for stockpickers.”

Click here for full article.

Source: Barron’s (via Fuller­money), Jan­u­ary 13, 2009.

Grace Cheng (Daily Mar­kets): Exclu­sive inter­view with Jim Rogers
Do you think the period of forced liq­ui­da­tion has ended or does it still have a ways to go?

Rogers: I’m sure it has not ended. It cer­tainly has not ended for many asset classes and it prob­a­bly has not ended for most. It may be over for a few things but it still has a long way to go.

As you’ve said many times, the US gov­ern­ment is print­ing a lot of money right now, when do you think infla­tion will come around and bite us?

Rogers: Well there is infla­tion now in many things. There’s tem­po­rary defla­tion in raw mate­r­ial prices and in some prop­erty. But through­out his­tory, when­ever you’ve had gigan­tic print­ing of money and spend­ing of bor­rowed money, it has always led to higher prices. Unless some­thing is dra­matic, it’s going to hap­pen again. When I don’t know. It’s already hap­pen­ing in some things. I don’t know if you’ve bought any sugar recently or some other things, prices are up and that will con­tinue and it will get worse.

You’ve been bull­ish on com­modi­ties for a long time, recently you said you’re buy­ing the Rogers Metal Index. Do you think that the Obama stim­u­lus plan will cre­ate more demand for commodities?

Rogers: Well of course, any­thing that causes a revival of eco­nomic activ­ity causes a revival of demand for every­thing includ­ing com­modi­ties. I mean if you’re gonna build bridges you’ve got to build them out of some­thing you can­not build vir­tual bridges you have to build real bridges, etc.

You’ve said that over the long term, the US dol­lar is doomed. What are your thoughts on the British Pound?

Rogers: More doomed. It will dis­ap­pear sooner. If it weren’t for the North Sea, the British Pound would have already dis­ap­peared. It’s more doomed. The UK has been export­ing oil for 26 years; within the decade, the UK will be a net importer of oil again, and they have noth­ing else to sell to the world once the oil dries up.

Do you think China will scale back on buy­ing US bonds? And if that hap­pens, how will it affect the US econ­omy and the US dollar?

Rogers: Well if I were China, I would scale back. If I were every­body, I would scale back. The US bonds yield vir­tu­ally noth­ing, the dol­lar is a flawed cur­rency, infla­tion is com­ing, higher inter­est rates are com­ing. I would think every­body would be scal­ing back includ­ing China. We’re going to have higher inter­est rates down the road because somebody’s gonna scale back. If not China, Japan or Korea, or who knows, somebody.

Source: Grace Cheng, Daily Mar­kets, Jan­u­ary 15, 2009 (hat tip: Investorazzi).

Bloomberg: Bernanke urges “strong mea­sures” to sta­bi­lize banks
“Fed­eral Reserve Chair­man Ben Bernanke speaks about the pos­si­ble need for more cap­i­tal injec­tions and guar­an­tees to fur­ther sta­bi­lize and strengthen the finan­cial sys­tem. Bernanke, speak­ing at the Lon­don School of Eco­nom­ics, warns that a fis­cal stim­u­lus won’t be enough to spur an eco­nomic recov­ery and that the gov­ern­ment may need to buy or guar­an­tee banks’ tainted assets to revive growth. Bernanke also dis­cusses the Fed’s bal­ance sheet, infla­tion expec­ta­tions and US unemployment.”

Click here for Finan­cial Times article.

Source: Bloomberg, Jan­u­ary 13, 2009.

Asha Ban­ga­lore (North­ern Trust): Bernanke explains Fed’s options
“In the con­text of finan­cial mar­ket sta­bil­ity, Bernanke calls on his­tory to stress that a ‘mod­ern econ­omy can­not grow if its finan­cial sys­tem is not oper­at­ing effec­tively’. Bernanke noted that in order to sup­port and mend the frag­ile finan­cial sys­tem ‘more cap­i­tal injec­tions and guar­an­tees may become nec­es­sary to ensure sta­bil­ity and nor­mal­iza­tion of credit markets’.

“He sug­gested that pur­chases of trou­bled assets, a pro­vi­sion of asset guar­an­tees, and/or pur­chase of assets from finan­cial insti­tu­tions in exchange for cash and equity in bad banks are other avenues through which fis­cal pol­icy could sup­port the finan­cial sys­tem. Also, reduc­ing pre­ventable fore­clo­sures would be use­ful in reduc­ing mort­gage losses and pro­mot­ing finan­cial stability.

“In sum, the con­clu­sion we draw here is that addi­tional fis­cal pol­icy stim­u­lus is nec­es­sary to ensure the work­ing of the finan­cial sys­tem and revival of eco­nomic activity.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Jan­u­ary 13, 2009.

Finan­cial Times: Democ­rats unveil $825 bil­lion stim­u­lus pack­age
“Demo­c­ra­tic law­mak­ers on Thurs­day unveiled a much-awaited $825 bil­lion stim­u­lus pack­age to halt America’s ver­tig­i­nous eco­nomic slide which Nancy Pelosi, the speaker of the House, said was only the ‘first step’ in a process that could take weeks to pass into law.

“The bill, which Barack Obama, the incom­ing pres­i­dent, wants enacted before mid-February when Con­gress goes into a short recess, comes in at $50 bil­lion higher than the ini­tial ceil­ing set by his tran­si­tion team. But econ­o­mists said they expected it to climb towards the impor­tant psy­cho­log­i­cal thresh­old of $1,000 bil­lion by the time it becomes law.

“The pack­age was divided between $275 bil­lion in tax cuts, mostly going towards a $1,000 tax credit for middle-class fam­i­lies and $500 for indi­vid­u­als, and $550 bil­lion in pub­lic spend­ing, which includes money for ‘shovel-ready’ infra­struc­ture projects, aid to state gov­ern­ments and invest­ments in infor­ma­tion tech­nol­ogy upgrades for health­care and a drive to make fed­eral build­ings energy-efficient.

“Thursday’s bill coin­cided with Mr Obama’s announce­ment that he would hold a ‘fis­cal respon­si­bil­ity’ sum­mit next month that would address enti­tle­ment reform — an issue that has long been avoided by lead­ers from both sides of the aisle. ‘We’ve kicked this can down the road and now we are at the end of the road,’ he told an edi­to­r­ial board meet­ing of the Wash­ing­ton Post. ‘We need to send a sig­nal that we are serious.’

“He said he did not know how long it would take for the pro­posed fis­cal stim­u­lus to take effect. ‘We are in uncharted waters here. I don’t have a crys­tal ball,’ he said.”

Source: Edward Luce, Finan­cial Times, Jan­u­ary 15, 2009.

Economix (The New York Times): Stim­u­lus pie chart

Source: Cather­ine Ram­pell, The New York Times — Economix, Jan­u­ary 15, 2009.

The New York Times: Sen­ate releases sec­ond por­tion of bailout fund
“President-elect Barack Obama’s eco­nomic agenda advanced rapidly in Con­gress on Thurs­day as the Sen­ate voted to release the sec­ond half of the finan­cial indus­try bailout fund and House Democ­rats unveiled an $825 bil­lion fis­cal recov­ery plan aimed at putting mil­lions of unem­ployed Amer­i­cans back to work.

“The Sen­ate action, by a vote of 52 to 42, spares Mr. Obama a messy leg­isla­tive fight just as he takes office and gives him a $350 bil­lion war chest to fur­ther sta­bi­lize the finan­cial sec­tor. The vote came amid renewed dis­tress in the bank­ing indus­try, includ­ing fur­ther dete­ri­o­ra­tion of Cit­i­group and a pitch for more gov­ern­ment aid by the Bank of America.

“Mr. Obama had per­son­ally lob­bied reluc­tant sen­a­tors to release the money. His top eco­nomic adviser, Lawrence H. Sum­mers, made three vis­its to the Capi­tol and sent two let­ters to reas­sure law­mak­ers that the pro­gram would be bet­ter managed.

“In a state­ment, the president-elect applauded the outcome.

“‘I know this wasn’t an easy vote because of the frus­tra­tion so many of us share about how the first half of this plan was imple­mented,’ Mr. Obama said. ‘Now my pledge is to change the way this plan is imple­mented and keep faith with the Amer­i­can taxpayer.’”

Source: David M. Her­szen­horn, Finan­cial Times, Jan­u­ary, 2009.

Bloomberg: Seat­tle FHLB short of cap­i­tal on mort­gage ebt
“The Fed­eral Home Loan Bank of Seat­tle said it will sus­pend div­i­dends and ‘excess’ stock repur­chases, becom­ing the sec­ond of the government-chartered lend­ing coop­er­a­tives to say its cap­i­tal may be run­ning low.

“The likely cap­i­tal short­fall as of Decem­ber 31 was caused by ‘unre­al­ized mar­ket value losses’ on res­i­den­tial mort­gage bonds with­out gov­ern­ment back­ing, the bank said in a US Secu­ri­ties and Exchange Com­mis­sion fil­ing today. Wash­ing­ton Mutual and Mer­rill Lynch had been the biggest stake­hold­ers and bor­row­ers in the Seat­tle Fed­eral Home Loan Bank, or FHLB.

“Seat­tle joins the San Fran­cisco FHLB in tak­ing steps to guard its reserves after the US hous­ing mar­ket col­lapse sent mortgage-backed bonds tum­bling. The declines may leave as many as eight of the 12 FHLBs below cap­i­tal require­ments, Moody’s Investors Ser­vice has said, erod­ing a below-market rate source of about $1 tril­lion in financ­ing for Cit­i­group, JPMor­gan Chase and other com­pa­nies that par­tic­i­pate in the cooperatives.”

Source: Jody Shenn, Bloomberg, Jan­u­ary 13, 2009.

BCA Research: It’s called credit eas­ing, not quan­ti­ta­tive eas­ing
“Fed Chair­man Bernanke argued in a key speech recently that the Fed’s cur­rent pol­icy will not lead to an infla­tion problem.

“Bernanke explained how the Fed’s cur­rent pol­icy, which he dubbed ‘Credit Eas­ing’, dif­fers from ‘Quan­ti­ta­tive Eas­ing’ (QE), as pur­sued by the Bank of Japan (BoJ) ear­lier this decade. Under QE, the BoJ set tar­gets for excess bank reserves in the hope that the banks would increase lend­ing. In con­trast, the Fed is tar­get­ing an improve­ment in the func­tion­ing of the credit mar­kets, an increase in the flow of credit, and lower pri­vate sec­tor bor­row­ing costs. There is no tar­get for the size of the Fed’s bal­ance sheet or the mon­e­tary base; both will fluc­tu­ate with the liq­uid­ity needs of bor­row­ers who are using the Fed’s facilities.

“To the extent that banks keep excess liq­uid­ity on deposit at the Fed, Bernanke argued that there is lit­tle infla­tion risk in the near term. In terms of the exit strat­egy from the cur­rent pol­icy, the Chair­man explained that excess reserves and the mon­e­tary base will nat­u­rally decline when credit mar­ket con­di­tions improve and recourse to the Fed’s liq­uid­ity facil­i­ties wanes.

“The Fed also plans to even­tu­ally sell the pri­vate sec­tor assets it is pur­chas­ing, which will also soak up excess liquidity.

“Bot­tom line: The Fed’s ‘Credit Eas­ing’ pol­icy will not nec­es­sar­ily be infla­tion­ary, as long as the excess reserves are re-absorbed in a timely man­ner once the econ­omy resumes growing.”

Source: BCA Research, Jan­u­ary 14, 2009.

Paul Kedrosky (Infec­tious Greed): Dra­matic changes in credit qual­ity
“A fairly remark­able sea-change in Fitch Rat­ings’ view of rated companies/countries/sectors over the last two years. The stresses in Europe, in par­tic­u­lar, caught my eye.”

Source: Paul Kedrosky, Infec­tious Greed, Jan­u­ary 16, 2009.

BBC News: US bank­ing giants in tie-up deal
“Strug­gling US bank­ing giant Cit­i­group and its rival Mor­gan Stan­ley have agreed a deal which sees the tie-up of their bro­ker­age oper­a­tions. Mor­gan Stan­ley is pay­ing Cit­i­group $2.7 bil­lion for a 51% stake in the joint ven­ture while Cit­i­group will have a 49% stake.

“Observers say the deal showed how much Cit­i­group wanted to slim down its oper­a­tions and build up cash reserves. It received the largest gov­ern­ment bail-out of any US bank last year.

“Citigroup’s retail bro­ker­age, Smith Bar­ney, was for­merly a key part of its wealth man­age­ment business.

“The new unit — to be called Mor­gan Stan­ley Smith Bar­ney — will have more than 20,000 advi­sors, $1.7 tril­lion in client assets, and serve 6.8 mil­lion house­holds around the world, the firms said.

“The Finan­cial Times reports Cit­i­group will sep­a­rate its higher risk US con­sumer finance and secu­ri­ties busi­nesses from its global com­mer­cial bank­ing operations.

“Ana­lysts sug­gest that the gov­ern­ment will end up buy­ing some strug­gling parts of the busi­ness with the next tranche of its finan­cial res­cue pro­gramme. ‘I think within 12 months, Cit­i­group no longer exists. The new CEO of this com­pany is the gov­ern­ment,’ said William Smith of Smith Asset Management.”

Source: BBC News, Jan­u­ary 13, 2009.

Barry Ritholtz (The Big Pic­ture): The 45 bil­lion dol­lar club
“The United States of Wall Street just added another major hold­ing to its port­fo­lio of finan­cial garbage: Bank of America.

“Like Citi, B of A has now received MORE IN BAILOUT MONEY than its actu­ally worth (BAC = $53B; C = $21B). How this can ever be a prof­itable invest­ment, as some math­e­mat­i­cally chal­lenged Congress-critters have sug­gested, is all but impos­si­ble to imagine.

“Blam­ing ‘pre­vi­ously undis­closed losses from its Mer­rill Lynch’, B of A threat­ened to kill their pur­chase of Mother Mer­rill. Trea­sury made an emer­gency cap­i­tal injec­tion of $20 bil­lion, on top of the $15B and $10B already received by B of A and MER respec­tively. The tax­pay­ers will also back­stop $118 bil­lion of assets, set­ting up what is likely to be a jumbo money los­ing trade.

“What should have hap­pened in both instances was an orderly liq­ui­da­tion, sell­ing off the pieces to com­pe­tent man­agers who under­stand risk, and can man­age smaller por­tions of the firm. Instead, the same idiots who helped destroy all of com­pa­nies involved are still run­ning the show.

“The amaz­ingly bad Bank of Amer­ica plan mir­rors an even worse bad deal made by the Feds with Cit­i­group in Novem­ber. There, the tax­pay­ers explic­itly insured the bank against losses on 90% of $306 bil­lion of toxic assets — Citigroup’s real-estate loans and securities.

“Like Citi, the B of A monies are a ter­ri­ble deal for the tax­payer — not a lot of bang for the buck, and leav­ing the same peo­ple who cre­ated the mess in charge.

“Organ trans­plant med­i­cine under­stands cer­tain truths: You do not give a healthy liver to a rag­ing alco­holic, as they will only destroy the organ via their disease/bad judgment/lifestyle.

“Why do we give bil­lions of tax­payer dol­lars to incom­pe­tent man­agers who failed to pro­tect their assets, who destroyed share­holder value? These peo­ple have demon­strated a marked INABILITY to run these firms. Why reward them with 10s of bil­lions of dollars?

“Its noth­ing short of madness …”

Source: Barry Ritholtz, The Big Pic­ture, Jan­u­ary 16, 2009.

CNBC: Bair — banks in cri­sis
“Dis­cussing big prob­lems for big banks includ­ing Citi and Bank of Amer­ica, with Sheila Bair, FDIC chairman.”

Source: CNBC, Jan­u­ary 16, 2009.

Bloomberg: Shilling says banks may need “a lot more” gov­ern­ment help
“Gary Shilling, pres­i­dent of A. Gary Shilling & Co., talks with Bloomberg’s Betty Liu about the poten­tial for addi­tional gov­ern­ment aid for US banks. Shilling also dis­cusses the future of Cit­i­group Inc. and Bank of Amer­ica Corp., the state of the US econ­omy, and the out­look for stocks.”

Source: Bloomberg, Jan­u­ary 16, 2009.

CEP News: Trichet — cen­tral bankers see global eco­nomic recov­ery in 2010
“Cen­tral bankers expect the global econ­omy to recover in 2010 accord­ing to Euro­pean Cen­tral Bank Pres­i­dent Jean-Claude Trichet speak­ing as head of the Bank for Inter­na­tional Set­tle­ments on Mon­day morning.

“While the cen­tral banker declined to com­ment on the Euro­pean Cen­tral Bank’s mon­e­tary pol­icy ahead of the rate deci­sion this Thurs­day, Trichet said that the global eco­nomic slow­down was due to a lack of con­fi­dence and pledged that the group would ‘do what­ever is appro­pri­ate to rein­force [it].’

“He also said that attend­ing mem­bers had not dis­cussed exchange rates at the meet­ing, but agreed that emerg­ing mar­ket growth con­tin­ues to play an impor­tant role for the global economy.

“Ear­lier on Mon­day, in an inter­view with Bloomberg, IMF Man­ag­ing Direc­tor Dominique Strauss-Kahn said that Europe is ‘behind the curve’ regard­ing stim­u­lus pack­ages, and that gov­ern­ments are under­es­ti­mat­ing how such mea­sures are needed to help economies recover.”

Source: CEP News, Jan­u­ary 12, 2009.

Finan­cial Times: Larry Fink on what could derail recov­ery
“Larry Fink chief exec­u­tive and chair­man of Black­Rock, talks to Henny Sender, FT’s inter­na­tional finan­cial cor­re­spon­dent, about mon­e­tary pol­icy, secu­ri­ties and risk man­age­ment. He also dis­cusses cor­po­rate gov­er­nance, over­sight and sta­bi­liz­ing trou­bled assets.”

Source: Finan­cial Times, Jan­u­ary 8, 2009.

Finan­cial Times: JPMor­gan chief says 2009 will be bleak
“The US finan­cial and eco­nomic cri­sis will worsen this year as hard-hit con­sumers default on credit cards and other loans, Jamie Dimon, chief exec­u­tive of JPMor­gan Chase, has pre­dicted in an inter­view with the Finan­cial Times.

“Mr Dimon, whose bank will report fourth-quarter results on Thurs­day, gave his bleak assess­ment as shares on both sides of the Atlantic tum­bled on ris­ing fears that banks would need more cap­i­tal and a larger-than-expected fall in US retail sales.

“‘The worst of the eco­nomic sit­u­a­tion is not yet behind us. It looks as if it will con­tinue to dete­ri­o­rate for most of 2009,’ said Mr Dimon. ‘In terms of our sec­tor, we expect con­sumer loans and credit cards to con­tinue to get worse.’

“Mr Dimon told the FT that JPMor­gan was pre­pared for an expected dete­ri­o­ra­tion in consumer-oriented busi­nesses but added that if things were to get worse than expected it would have to cut costs again.

“Mr Dimon said the burst­ing of the credit bub­ble would force the bank­ing indus­try to refo­cus on its tra­di­tional busi­nesses of advis­ing on deals and lend­ing to com­pa­nies and individuals.

“‘When we look back at indus­try excesses in areas such as highly lever­aged lend­ing and secu­ri­ti­sa­tion, it is clear that some of these mar­kets will never come back,’ he said. ‘In the next few years, the indus­try will go back to basics: serv­ing indi­vid­ual and cor­po­rate cus­tomers as best as we can.’”

Source: Francesco Guer­rera, Finan­cial Times, Jan­u­ary 14, 2009.

Char­lie Rose: A con­ver­sa­tion with Lee Scott, CEO of Wal-Mart

Source: Char­lie Rose, Jan­u­ary 14, 2009.

CNBC: Nobel debate on the econ­omy
“Weigh­ing in on the econ­omy with Edmund Phelps, 2006 Nobel Prize win­ner from Colum­bia Uni­ver­sity, and Michael Spence, 2001 Nobel Lau­re­ate from Stan­ford University.”

Source: CNBC, Jan­u­ary 15, 2009.

Times Online: Lead­ing econ­o­mist fears decade of weak­ness in US
“One of the world’s lead­ing econ­o­mists has given warn­ing that the United States is fac­ing a decade of finan­cial mis­ery, with the num­ber of unem­ployed Amer­i­cans set to con­tinue to rise for years.

“Robert Shiller, Pro­fes­sor of Eco­nom­ics at Yale Uni­ver­sity, who pre­dicted the end of the inter­net bub­ble seven years ago, said: ‘We could have many years of a very weak econ­omy. Big reces­sions are fol­lowed by years of weak­ness and typ­i­cally unem­ploy­ment keeps rising.

“‘To say that this will last years is not a dra­matic state­ment. What is hap­pen­ing now is much worse than 1990. We could be fac­ing a decade of real weak­ness. This is no ordi­nary reces­sion. There are signs that peo­ple see this as a dif­fer­ent story. Peo­ple are talk­ing about a depres­sion, some­thing that we haven’t seen previously.’

“Some econ­o­mists, such as Ken­neth Rogoff, the for­mer chief econ­o­mist at the Inter­na­tional Mon­e­tary Fund and now a Pro­fes­sor of Eco­nom­ics at Har­vard Uni­ver­sity, believe that Amer­ica will be lucky if unem­ploy­ment peaks at 9% of the work­force and that there is a high chance that it will reach at least 10%.

“Pro­fes­sor Shiller, who said that he has talked to the incom­ing Obama Admin­is­tra­tion about pos­si­ble solu­tions to the hous­ing cri­sis in the US, took a swipe at the Fed­eral Reserve.

“He said: ‘This reces­sion is by no means mechan­i­cal. Peo­ple have lost a sense of con­fi­dence, a sense of trust in insti­tu­tions and in each other. It is very hard for a cen­tral bank to address that by just cut­ting inter­est rates.’”

Source: Suzy Jag­ger, Times Online, Jan­u­ary 12, 2009.

PRNewswire: Fore­clo­sure activ­ity increases 81% in 2008
“Real­ty­Trac today [Wednes­day] released its 2008 US Fore­clo­sure Mar­ket Report, which shows a total of 3,157,806 fore­clo­sure fil­ings — default notices, auc­tion sale notices and bank repos­ses­sions — were reported on 2,330,483 US prop­er­ties dur­ing the year, an 81% increase in total prop­er­ties from 2007 and a 225% increase in total prop­er­ties from 2006. The report also shows that 1.84% of all US hous­ing units (one in 54) received at least one fore­clo­sure fil­ing dur­ing the year, up from 1.03% in 2007.

“Fore­clo­sure fil­ings were reported on 303,410 US prop­er­ties in Decem­ber, up 17% from the pre­vi­ous month and up nearly 41% from Decem­ber 2007. Despite the spike in Decem­ber, fore­clo­sure activ­ity for the fourth quar­ter was down nearly 4% from the pre­vi­ous quar­ter but still up nearly 40% from the fourth quar­ter of 2007.

“‘State leg­is­la­tion that slowed down the onset of new fore­clo­sure activ­ity clearly had an effect on fourth quar­ter num­bers over­all, but that effect appears to have worn off by Decem­ber,’ said James J. Sac­ca­cio, chief exec­u­tive offi­cer of Real­ty­Trac. ‘The big jump in Decem­ber fore­clo­sure activ­ity was some­what sur­pris­ing given the mora­to­ria enacted by both Fred­die Mac and Fan­nie Mae, along with pro­grams from some of the major lenders and loan ser­vicers aimed at delay­ing fore­clo­sure actions against dis­tressed homeowners.

“‘Clearly the fore­clo­sure pre­ven­tion pro­grams imple­mented to-date have not had any real suc­cess in slow­ing down this fore­clo­sure tsunami. And the recent Cal­i­for­nia law, much like its pre­de­ces­sors in Mass­a­chu­setts and Mary­land, appears to have done lit­tle more than delay the inevitable fore­clo­sure pro­ceed­ings for thou­sands of homeowners.’”

Source: PRNewswire, Jan­u­ary 14, 2009.

Richard Rus­sell (Dow The­ory Let­ters): Camp­bell — hous­ing to trough in 2012
“I read a great deal about real estate, and I fol­low real estate trends closely. By far the best real estate guid­ance that I’ve come across is Robert Campbell’s ‘The Camp­bell Real Estate Let­ter’. Noth­ing I’ve read com­pares with Campbell’s great record.

“Robert uses an unusual and unique com­bi­na­tion of fun­da­men­tal and his­tor­i­cal mate­r­ial along with his own spe­cialty of tech­ni­cal analy­sis in real estate tim­ing. Bob Camp­bell called the exact top of the real estate cycle in his report of August, 2005.

“What does Bob Camp­bell say now? He notes that his­tor­i­cally, hous­ing prices fall by an aver­age of 35% after a finan­cial cri­sis. He fur­ther states that he believes hous­ing across the land will fall by another 8% from here to the final low of the hous­ing cycle. And when will the low come? Camp­bell states that using five years as the aver­age length of a hous­ing down­turn, ‘we can expect the US hous­ing mar­ket to trough in the year 2012. Robert expects hous­ing to fall to the prices that existed back in 2001.

“Writes Camp­bell, ‘And as I’ve stated in pre­vi­ous let­ters, this is where the prob­lem arose: bor­row­ers took on far more mort­gage debt than they could ever pay back, and that’s why the real estate prices are crash­ing, and we are wit­ness­ing the destruc­tion of the biggest credit bub­ble in his­tory. And in the absence of dra­matic increases in house­hold incomes that are needed to ser­vice this mas­sive amount of mort­gage debt — all the bailouts in the world are unlikely to stop hous­ing prices from even­tu­ally revert­ing back to the 2001 pre-bubble years — or close to it.’”

Source: Richard Rus­sell, Dow The­ory Let­ters, Jan­u­ary 15, 2009.

Bespoke: Expected change in home prices
“The CME hous­ing futures that track the S&P/Case-Shiller median home price indices of 10 major cities offer a clue into how much more investors think home prices have to fall.

“In the chart below, we high­light the per­cent­age dif­fer­ence between the Octo­ber ‘08 actual Case-Shiller num­bers (the most recent set of num­bers) and the cur­rent price of the Novem­ber ‘09 futures con­tracts. The com­pos­ite 10-city Novem­ber ‘09 con­tract is cur­rently trad­ing 12% below its Octo­ber ‘08 level. San Fran­cisco is expected to fall the most in 2009 at –18%, fol­lowed by Los Ange­les (-16.6%), and Las Vegas (-13%). The rest of the cities are expected to fall less than the com­pos­ite, with Boston home prices expected to fall the least at –6%. Miami, Den­ver, DC, and San Diego are all expected to see home prices fall by less than 10% from 10/08 to 11/09.”

Source: Bespoke, Jan­u­ary 12, 2009.

Mar­ket­Watch: 30-year mort­gage under 5%
“The bench­mark 30-year mort­gage fell below 5% for the first time ever in Fred­die Mac’s weekly rate sur­vey as eco­nomic weak­ness con­tin­ued to push inter­est rates lower, the mort­gage agency said Thursday.

“The national aver­age rate on the 30-year loan fell to 4.96% in the week end­ing Jan­u­ary 15, down from 5.01% a week ago. That is the low­est on record. Fred­die Mac began its rate sur­vey in 1971. A year ago the loan aver­aged 5.69%.

“The 15-year fixed-rate mort­gage, a pop­u­lar refi­nanc­ing choice, edged up to 4.65% from 4.62% a week ago. Last year at this time the loan aver­aged 5.21%. Refi­nanc­ing activ­ity has been strong as mort­gage rates have plumbed his­toric lows.

“The two fixed-rate loans required the pay­ment of an aver­age 0.7 point to achieve the inter­est rate. A point is one per­cent of the loan amount, charged as pre­paid interest.”

Source: Steve Kerch & Amy Hoak, Mar­ket­Watch, Jan­u­ary 15, 2009.

Asha Ban­ga­lore (North­ern Trust): Dread­ful retail sales in Decem­ber
“Retail sales in Decem­ber were abysmal on every front. Total retail sales dur­ing Decem­ber plunged 2.7% from 2.1% in Novem­ber. Nearly all sub-components posted sig­nif­i­cant declines in sales.

“Retail sales have dropped at an annual rate of 24.6% in the fourth quar­ter ver­sus a 5.1% drop in the pre­vi­ous quar­ter, a large part of it is due to the drop in gaso­line prices. The weak­ness in retail sales sup­ports expec­ta­tions of a weak head­line GDP num­ber for the fourth quar­ter and also arith­meti­cally con­sumer spend­ing and GDP of the first quar­ter of 2009 are at a disadvantage.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Jan­u­ary 14, 2009.

Asha Ban­ga­lore (North­ern Trust): Lower prices and weak non-oil imports trans­late to smaller trade gap
“The trade bal­ance of the US econ­omy nar­rowed to $40.4 bil­lion in Novem­ber from $56.7 bil­lion in Octo­ber. A 12.0% drop in nom­i­nal imports of goods and ser­vices partly due to lower imported oil prices was the main rea­son for the reduc­tion in the trade gap. Weak eco­nomic con­di­tions in the US have resulted in lower imports, while a sim­i­lar sta­tus abroad has led to a 5.8% drop in nom­i­nal exports of goods and services.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Jan­u­ary 13, 2009.

Asha Ban­ga­lore (North­ern Trust): Energy and food prices bring down head­line whole­sale price index
“The Pro­ducer Price Index (PPI) of Fin­ished Goods fell 1.9% in Decem­ber after a 2.2% drop in the prior month, reflect­ing lower prices for energy (-9.3%) and food (-1.5%). In 2008, the PPI fell 0.9% ver­sus a 6.2% jump in 2007. The 20.3% drop of the energy price index was the main rea­son for a sharp rever­sal of the whole­sale price index in 2008. The food price index climbed 3.7% in 2008 ver­sus a 7.6% gain in 2007.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Jan­u­ary 15, 2009.

Asha Ban­ga­lore (North­ern Trust): Infla­tion — issue of lit­tle impor­tance, for now
“The Con­sumer Price Index (CPI) dropped 0.7% in Decem­ber, the third con­sec­u­tive monthly decline and the fourth drop in the last five months. Dur­ing the twelve months ended Decem­ber the CPI moved up only 0.1% (CPI rose 4.1% in all of 2007), which is the small­est gain on record in the post-war period with the excep­tion of a 0.7% drop in the twelve months ended Decem­ber 1954. The rever­sal of the energy price index (-21.3% ver­sus +17.4% in 2007) is largely respon­si­ble for the sig­nif­i­cant decel­er­a­tion of the CPI. The food price index fell 0.1% in Decem­ber and advanced only at an annual rate of 1.4% dur­ing the three months ended Decem­ber ver­sus a 4.0% annu­al­ized increase in the prior three-month period.

“… going for­ward, given the pro­jec­tions of weak eco­nomic con­di­tions, infla­tion could move below lev­els that are con­sis­tent with price sta­bil­ity for a short period. At the same time, we should bear in mind that the large fis­cal and mon­e­tary stim­u­lus in place, and more in the pipeline, infla­tion could once again be prob­lem­atic but much far­ther down the road.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Jan­u­ary 16, 2009.

Jim Sin­clair (Mine­Set): The unavoid­able face of hyper­in­fla­tion
“It is hor­ri­fy­ing what the Fed and Trea­sury injected in per­cent­age terms. A true mea­sure of com­par­i­son can be seen in the three months of 2008 when the Fed accom­plished more than in the seven years from 1929 to 1937.

“This is beyond all rea­son, hav­ing its own new and ter­ri­ble con­se­quences well in excess of the con­se­quences of the 1929 and 1932 breaks.

“Mar­kets have been run now for years by algo­rithms, manip­u­la­tors and seeded inter­ests that are like sum­mer thun­der­storms. They are loud and scary, but quite short term and in the end quite mean­ing­less and non-productive.

“The dol­lar can­not and will not remain strong, nor can a plan­e­tary Weimar expe­ri­ence now be avoided.”

Click here or on the image below for a larger chart.

Source: Jim Sin­clair, Mine­Set, Jan­u­ary 14, 2009.

Bloomberg: Hedge fund assets fell record 36% in 2008
“Hedge fund assets fell a record 36% to $1.84 tril­lion in 2008 as tum­bling global mar­kets prompted investor with­drawals and fund liq­ui­da­tions, accord­ing to indus­try researcher HedgeFund.net.

“Hedge funds lost $512 bil­lion through with­drawals and fund clo­sures, while per­for­mance losses totaled $535 bil­lion, the New York-based unit of Chan­nel Cap­i­tal Group said in an e-mailed state­ment. The decline is the biggest since Hedgefund.net began track­ing the data in 2003.

“Funds suf­fered losses and client with­drawals last year, with some sell­ing assets at fire-sale prices as the global credit cri­sis forced banks to with­draw loans to the indus­try. While defec­tions and clo­sures reached a record in Decem­ber, a bench­mark of per­for­mance rose for the month after declin­ing in pre­vi­ous months, Hedgefund.net said.

“‘Investor asset flows lag per­for­mance, and the sharp rise of out­flows in the fourth quar­ter are the result of year­long aggre­gate losses,’ Hedgefund.net said in the state­ment. ‘Pos­i­tive per­for­mance in Decem­ber may be an indi­ca­tion that the biggest wave of investor out­flows has passed.’”

Source: Tomoko Yamazaki, Bloomberg, Jan­u­ary 15, 2009.

Bespoke: S&P sec­tor returns year to date
“Below we high­light S&P 500 sec­tor per­for­mance year to date through about noon today. As shown, just three sec­tors are under­per­form­ing the mar­ket so far this year, and the Finan­cial sec­tor is weigh­ing heav­ily on the over­all index’s declines. Energy, Health Care, Tech­nol­ogy, Mate­ri­als, and Util­i­ties have actu­ally held up pretty well.”

Source: Bespoke, Jan­u­ary 16, 2009.

CNBC: Doll’s out­look for 2009
“A look ahead of the pos­si­ble double-digit equi­ties growth in 2009, with Bob Doll, Black­Rock vice chairman/global CIO.”

Source: CNBC, Jan­u­ary 12, 2009.

CNBC: Hendry — bonds still best bet
“Gov­ern­ment bonds are still the safest bet for investors in these uncer­tain times, and the euro will face an uphill bat­tle as weak economies will need more flex­i­bil­ity, Hugh Hendry from Eclec­tica told CNBC.”

Source: CNBC, Jan­u­ary 12, 2009.

BCA Research: US employ­ment will cap Trea­sury back-up
“The US Decem­ber employ­ment report was grim and included fur­ther down­ward revi­sions to prior months. Our fore­cast for the next six months is equally bear­ish, which implies that Trea­sury yields will be capped for a long time.

“The con­trac­tion in pay­rolls were roughly in line with expec­ta­tions, with a broad-based decline in all indus­tries. Our Model fore­casts sig­nif­i­cant weak­ness in the first half of the year, with no bot­tom in sight. Labor and income inse­cu­rity will con­tinue to keep con­sumers from spend­ing, and the already defla­tion­ary retail­ing envi­ron­ment will con­tinue to worsen.

“His­tor­i­cally, Trea­sury yields sus­tain­ably rebound only once the annual growth in pay­rolls turns up sig­nif­i­cantly. Thus, any back-up in gov­ern­ment bond yields over the next few months will prove short lived. Defla­tion and a con­tract­ing econ­omy will be the pri­mary dri­vers of trends in the Trea­sury mar­ket, under­scor­ing that fears of higher yields dri­ven by mush­room­ing bud­get deficits are premature.”

Source: BCA Research, Jan­u­ary 12, 2009.

Ambrose Evans-Pritchard (Tele­graph): The bond bub­ble is an acci­dent wait­ing to hap­pen
“The bond vig­i­lantes slum­ber. As the great­est sov­er­eign bond bub­ble of all time rolls into 2009, investors are cling­ing to an implau­si­ble assump­tion that China and Japan will pro­vide enough cap­i­tal to keep the happy game going for ever.

“They are bet­ting too that debt defla­tion will over­whelm the effects of near-zero inter­est rates across the G10 and nul­lify a £2,000 bil­lion fis­cal blast in the US, China, Japan, Britain, and Europe.

“Above all, they are bet­ting that the Fed­eral Reserve chief Ben Bernanke will fail to print enough ban­knotes to inflate the US money sup­ply, despite his avowed intent to do so.

“Yields on 10-year US Trea­suries have fallen to 2.4% — a level that was unseen even in the Great Depres­sion. This is ‘return-free risk’, said bond guru Jim Grant.

“It is much the same story across the world. Yields are 1.3% in Japan, 3.02% in Ger­many, 3.13% in Britain, 3.26% in Chile, 3.47% in France, and 5.56% in Brazil.

“‘Get out of Trea­suries. They are very, very expen­sive,’ said Mohamed El-Erian, the invest­ment chief at the Pimco, the world’s top bond fund, in a Barron’s arti­cle last week.

“It is lazy to think that China, Japan, the petro-powers and the sur­plus states of emerg­ing Asia will con­tinue to amass for­eign reserves, recy­cling their trea­sure into the US and Euro­pean bond markets.

“These coun­tries are them­selves bleed­ing as exports col­lapse. Most face cap­i­tal flight. The whole process that fed the bond boom from 2003 to 2008 is now going into reverse. Woe betide any investor who mis­judges the con­se­quences of this strate­gic shift.”

Click here for the full article.

Source: Ambrose Evans-Pritchard, Tele­graph, Jan­u­ary 12, 2009.

David Fuller (Fuller­money): Gov­ern­ment bond bub­ble will burst
“Objec­tively, there is no doubt that gov­ern­ment debt yields in the UK, USA and a num­ber of other coun­tries have moved well out­side their his­toric, nor­mal price ranges and val­ues. This indi­cates a bub­ble, which some have described as a ‘return-free risk’.

“We need no remind­ing today that dire eco­nomic cir­cum­stances have con­tributed to these ultra-low yields. Indeed, gov­ern­ments have encour­aged the move, with rate cuts and talk of quan­ti­ta­tive eas­ing, as part of their refla­tion­ary efforts. We also know that gov­ern­ments need to issue con­sid­er­ably more debt to finance their pro­grammes, and they want to do this as cheaply as possible.

“My con­clu­sion is that those who are lend­ing to gov­ern­ments at record or at least near-record low yields, are walk­ing into a trap. The gov­ern­ment bond bub­ble has yet to burst, judg­ing from the charts, but it will burst. With bub­bles, it sel­dom pays to delay one’s exit until the down­trend is evi­dent to all.”

Source: David Fuller, Fuller­money, Jan­u­ary 14, 2009.

CNBC: Credit — still a good bet if yield curve steep­ens?
“Investment-grade credit looks very attrac­tive to Richard Urwin, MD & head of asset allo­ca­tion & eco­nom­ics research team at Black­Rock. But what hap­pens if the yield curve steep­ens by year-end? He gives his take CNBC’s Amanda Drury & Mar­tin Soong.”

Source: CNBC, Jan­u­ary 16, 2009.

Eoin Treacy (Fuller­money): 10-year Trea­suries show neg­a­tive real yield
“It is inter­est­ing that this is the first time since 1980 that the US 10yr has shown a neg­a­tive real yield. The fact is that it has not had any­thing close to the size of the move, rel­a­tive to CPI, as seen in 1974 or 1980 is also wor­thy of notice. Of course back then, high infla­tion expec­ta­tions were much more of a fac­tor in the move­ment of the spread, but that is cer­tainly not the case today.”

Source: Eoin Treacy, Fuller­money, Jan­u­ary 13, 2009.

Finan­cial Times: Bond issuance by emerg­ing nations surges
“Emerg­ing mar­ket sov­er­eign bond issuance has surged this week as gov­ern­ments take advan­tage of the dra­matic drop in yields because of the sharply improv­ing sen­ti­ment since the start of the year.

“The Philip­pines, Turkey, Brazil and Colom­bia have all issued debt in the past few days, rais­ing a total of $4.5 bil­lion. This com­pares with just one deal worth $2 bil­lion from Mex­ico issued in the entire fourth quar­ter of 2008.

“Nigel Ren­dell, senior emerg­ing mar­kets strate­gist at RBC Cap­i­tal Mar­kets, said: ‘Sen­ti­ment has improved a great deal since Jan­u­ary 1 in the emerg­ing mar­ket space, so these coun­tries see this as a win­dow of oppor­tu­nity to issue debt.’

“Since Jan­u­ary 1, emerg­ing mar­ket bond yields have fallen about 40 basis points com­pared with US Trea­suries, the inter­na­tional bench­mark for debt, close to eight-week lows, accord­ing to JP Morgan’s Embi+ Index. Emerg­ing mar­ket bonds are now trad­ing about 650 basis points above US Trea­suries. Emerg­ing mar­ket gov­ern­ments are also rush­ing to issue debt as they fear they could be ‘crowded out’ of the pri­mary bond mar­kets because of the record vol­umes of sov­er­eign debt due from the indus­tri­alised nations.

“These emerg­ing mar­ket coun­tries need the cash, like their indus­tri­al­ized coun­ter­parts, to stim­u­late their economies.”

Source: David Oak­ley, Roel Landin­gin and John Aglionby, Finan­cial Times, Jan­u­ary 9, 2009.

Bespoke: US dol­lar test­ing resis­tance
“The US Dol­lar index has made a nice come­back after its free-fall from late Novem­ber to mid Decem­ber. The dol­lar is up 6.76% from its low on Decem­ber 17, but as shown in the chart below, it is bump­ing up against key resis­tance at its 50-day mov­ing aver­age. If the dol­lar is able to break above its 50-day, a resump­tion of its multi-month uptrend will be solid­i­fied. If it fails to break through, how­ever, the cur­rent level will be one peak of a newly formed downtrend.”

Source: Bespoke, Jan­u­ary 14, 2009.

Edmund Con­way (Tele­graph): Ship­ping rates hit zero as trade sinks
“Freight rates for con­tain­ers shipped from Asia to Europe have fallen to zero for the first time since records began, under­scor­ing the dra­matic col­lapse in trade since the world econ­omy buck­led in October.

“‘They have already hit zero,’ said Charles de Trenck, a bro­ker at Trans­port Track­ers in Hong Kong. ‘We have seen trade activ­ity fall off a cliff. Asia-Europe is an unmit­i­gated disaster.’

“Ship­ping jour­nal Lloyd’s List said bro­kers in Sin­ga­pore are now waiv­ing fees for con­tain­ers trav­el­ling from South China, charg­ing only for the min­i­mal ‘bunker’ costs. Con­tainer fees from North Asia have dropped $200, tak­ing them below oper­at­ing cost.

“Indus­try sources said they have never seen rates fall so low. ‘This is a whole new ball game,’ said one trader.

“The Baltic Dry Index (BDI) which mea­sures freight rates for bulk com­modi­ties such as iron ore and grains crashed sev­eral months ago, falling 96%. The BDI — though a use­ful early-warning index — is highly volatile and exag­ger­ates appar­ent ups and downs in trade. How­ever, the lat­est phase of the ship­ping cri­sis is dif­fer­ent. It has spread to core trade of fin­ished indus­trial goods, the lifeblood of the world economy.”

Source: Ambrose Evans-Pritchard, Tele­graph, Jan­u­ary 12, 2009.

Bloomberg: Front­line says ships stor­ing the most oil in 20 years
“Front­line Ltd, the world’s biggest owner of super­tankers, said about 80 mil­lion bar­rels of crude oil are being stored in tankers, the most in 20 years, as traders seek to take advan­tage of higher prices later in the year.

“Traders are seek­ing to profit from a mar­ket sit­u­a­tion called con­tango where futures prices are higher than the cost of imme­di­ate sup­plies. A pur­chaser could buy oil now, keep it for months at sea and fetch bet­ter prices by sell­ing oil futures that are higher than the spot price.

“‘In this cur­rent finan­cial sit­u­a­tion I guess it’s one of the more safe bets to do,’ Jens Mar­tin Jensen, Singapore-based interim chief exec­u­tive offi­cer of the company’s man­age­ment unit, said by phone today. Thirty to 35 very large crude car­ri­ers, each designed to haul 2 mil­lion bar­rels of crude, are stor­ing oil, with the rest on ships half the size called suez­maxes, he said.

“The con­tango pric­ing struc­ture has been caused by excess near-term oil sup­ply as demand slows and spec­u­la­tion that out­put cuts by the Orga­ni­za­tion of Petro­leum Export­ing Coun­tries will reduce the glut later this year.”

Source: Alaric Nightin­gale, Bloomberg, Jan­u­ary 14 2009.

Vic­to­ria Marklew (North­ern Trust): Euro­zone — inter­est rates, infla­tion, the econ­omy — all fall down
“As widely expected, the Euro­pean Cen­tral Bank (ECB) lopped another 50 bps off its refi rate this morn­ing [Thurs­day], tak­ing it to 2.0%. Rates have now come down by 225 bps in four suc­ces­sive steps, includ­ing a 75 bps cut in Decem­ber, as the Euro­zone econ­omy hits the skids and infla­tion drops sharply.

“In his sub­se­quent press con­fer­ence, Pres­i­dent Trichet acknowl­edged that eco­nomic data and sur­veys over the past month point to ‘a fur­ther weak­en­ing of eco­nomic activ­ity around the turn of the year’ and warned that Euro­zone demand is likely to be ‘damp­ened for a pro­tracted period’ with growth risks to the down­side. He also acknowl­edged that the slow­ing econ­omy has reduced infla­tion risks, and that the rate of infla­tion is likely to ‘fall sig­nif­i­cantly’ in mid-year, in part because of base effects.”

Source: Vic­to­ria Marklew, North­ern Trust — Daily Global Com­men­tary, Jan­u­ary 15, 2009.

Finan­cial Times: Ger­man GDP con­tracts sharply
“Germany’s econ­omy could have con­tracted by as much as 2% in the final quar­ter of 2008, the country’s sta­tis­ti­cal office warned on Wednes­day, deep­en­ing a reces­sion that looks likely to be the worst since the sec­ond world war.

“The sharp con­trac­tion in Europe’s largest econ­omy would sound alarm bells across Europe because of Germany’s role as Europe’s eco­nomic powerhouse.

“Ger­man exports had ben­e­fited from strong global growth in recent years ‘but now that process has gone dra­mat­i­cally into reverse’, said Andreas Rees at Uni­credit in Munich.

“The lat­est data came just hours after Berlin unveiled a two-year $66 bil­lion pack­age of growth-boosting mea­sures. Michael Glos, eco­nom­ics min­is­ter, argued on Wednes­day that the plan would have a ‘notice­able effect’ by later this year.

“Gross domes­tic prod­uct increased by 1 per cent in 2008 as a whole, after a 2.6% rise in the pre­vi­ous year, the fed­eral sta­tis­tics office reported. But in the final three months of the year, pre­lim­i­nary esti­mates sug­gested that GDP fell between about 1.5% and 2%, it said.”

Source: Ralph Atkins, Finan­cial Times, Jan­u­ary 14, 2009.

CEP News: Germany’s coali­tion par­ties agree on €50 bil­lion stim­u­lus pack­age
“Germany’s coali­tion par­ties have agreed on a sec­ond eco­nomic stim­u­lus pack­age totalling approx­i­mately €50 bil­lion, to be put into place over the course of the next two years in an effort to pull the econ­omy out of its worst reces­sion since the end of the Sec­ond World War.

“The pack­age of mea­sures will include approx­i­mately €36 bil­lion in infra­struc­ture invest­ment and tax cuts. The announce­ment was made fol­low­ing six hours of talks between the Chris­t­ian Demo­c­ra­tic Union, the Chris­t­ian Social Union and the Social Demo­c­ra­tic Party in Berlin late on Monday.

“The sec­ond stim­u­lus pack­age fol­lows a €31 bil­lion plan already in existence.”

Source: CEP News, Jan­u­ary 13, 2008.

Finan­cial Times: Spain hit by pub­lic finance warn­ing
“The grow­ing dan­gers for Europe’s sharply slow­ing economies were high­lighted yes­ter­day as Spain became the third euro­zone coun­try to be warned over its dete­ri­o­rat­ing pub­lic finances in the space of three days.

“Stan­dard & Poor’s, the rat­ing agency, said Spain’s top-notch triple A credit rat­ings could be down­graded because of pres­sure on its pub­lic finances after it entered what is likely to be a deep reces­sion in the fourth quar­ter. On Fri­day, Greece and Ire­land were also warned by the agency that their rat­ings could be down­graded as eco­nomic con­di­tions worsen. The warn­ing is likely to help drive up bor­row­ing costs for those countries.

“The euro weak­ened against the dol­lar and the yen after the announce­ment, which under­lined the chal­lenges fac­ing Euro­pean coun­tries seek­ing to stim­u­late their bat­tered economies and pay for bank bail-outs. Ana­lysts say other Euro­pean coun­tries could face warn­ings in the com­ing days or weeks as gov­ern­ments take on record debt lev­els, which could jeop­ar­dise the sus­tain­abil­ity of their pub­lic finances.”

Source: David Oak­ley and Vic­tor Mal­let, Finan­cial Times, Jan­u­ary 12, 2009.

Finan­cial Times: China sees “suc­cess” in off­set­ting cri­sis
“Wen Jiabao declared China’s efforts to off­set the effect of the global eco­nomic slow­down an ‘ini­tial suc­cess’ on Sun­day as the econ­omy per­formed ‘bet­ter than expected’ last month.

“The premier’s hints that the country’s econ­omy might not be locked in a down­ward spi­ral will be seen as good news in the rest of the world, where Chi­nese growth is viewed as a poten­tial pal­lia­tive for the global recession.

“Speak­ing dur­ing a three-day visit to indus­trial regions in east­ern China, Mr Wen said sales at some com­pa­nies had begun to rebound, stock­piles were falling and elec­tric­ity con­sump­tion was rising.

“‘We have achieved ini­tial suc­cess from the poli­cies we adopted to counter the finan­cial cri­sis,’ the pre­mier said, accord­ing to China National Radio.

“Bei­jing announced an eco­nomic stim­u­lus pack­age of Rmb4,000 bil­lion ($585 bil­lion) in Novem­ber, heav­ily weighted towards con­struc­tion and heavy indus­try. It was not expected to improve eco­nomic growth until the mid­dle of this year but some indus­tries, such as steel, have already shown more con­fi­dence since the stim­u­lus pack­age was announced. Scores of Chi­nese steel­mak­ers have resumed pro­duc­tion in the hope that it will lead to a sus­tained recov­ery in steel prices.

“Mr Wen vowed that the cen­tral gov­ern­ment would take other mea­sures, includ­ing large invest­ments, to com­bat the cri­sis before the legislature’s annual meet­ing in early March, accord­ing to a speech pub­lished separately.”

Source: Patti Wald­meir, Finan­cial Times, Jan­u­ary 11, 2009.

US Global Investors: Rebound in Chi­nese bank lend­ing
“A sig­nif­i­cant rebound in money sup­ply growth and bank lend­ing in China dur­ing Decem­ber sug­gests that the government’s stim­u­lat­ing poli­cies may have achieved some suc­cess. How­ever, chal­lenges for the econ­omy are likely to be sus­tained in the fore­see­able future.”

Source: US Global Investors — Weekly Investor Alert, Jan­u­ary 16, 2009.

Bloomberg: China passes Ger­many to become third-biggest econ­omy
“China’s econ­omy over­took Germany’s in 2007 to become the world’s third largest, under­scor­ing the nation’s increas­ing eco­nomic and polit­i­cal clout.

“Gross domes­tic prod­uct expanded 13% from a year ear­lier, more than a pre­vi­ous esti­mate of 11.9%, to 25.731 tril­lion yuan ($3.38 tril­lion), the sta­tis­tics bureau said on its web­site today. That topped Germany’s 2.424 tril­lion euros ($3.32 tril­lion), using aver­age exchange rates for 2007.

“China’s econ­omy is 70 times big­ger than when leader Deng Xiaop­ing ditched hard-line Com­mu­nist poli­cies in favor of free-market reforms in 1978. After over­tak­ing the UK and France in 2005, China became the third nation to com­plete a space­walk, hosted the Olympic Games and sur­passed Japan as the biggest buyer of US Treasuries.

“The fig­ure was released as China faces the weak­est eco­nomic expan­sion since 1990 after exports col­lapsed because of the global recession.”

Source: Nipa Piboon­tana­sawat and Kevin Ham­lin, Bloomberg, Jan­u­ary 14 2009.

Finan­cial Times: Jim O’Neill on the Bric economies
“Jim O’Neill, Chief Econ­o­mist at Gold­man Sachs, tells David Oak­ley about the rea­sons to be pos­i­tive on China, find­ing value in Bric economies, and the prob­lems fac­ing Russia.”

Source: Finan­cial Times, Jan­u­ary 9, 2009.

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Hendry: What to Buy if You're Bearish on Oil?

Friday, January 16th, 2009

Hugh Hendry, CIO, Eclec­tica Asset Man­age­ment, dis­cusses oil with Geoff Cut­more of CNBC. We are big fans of Hendry's out­spo­ken views, and this is a must-view. Click the image below to watch the segment:

Here is what he said:

It is phe­nom­e­nally dif­fi­cult to be bull­ish on oil owing to the fact the oil curve is in con­tango. What I mean is that while oil is trad­ing today at $40, if you go out two years, its expected, indeed it trades at $70, and that’s why you have all the sur­plus oil being hoarded on these ves­sels at sea.

Now, every day that the oil price doesn’t move closer to $70, is a day of neg­a­tive carry, its a day where you’re los­ing money being long oil, which is why I prof­fer my caution.

I’m a believer in Peak Oil, I’m a believer in this cap­i­tal destruc­tion we’re not going to be invest­ing or look­ing for oil in all the hideous places like Rus­sia etc. over the next ten years, and we need to. The world of ten years time the time of our grand­chil­dren needs us to be look­ing for the blasted stuff now.

We ain’t going to do it, we’ve sus­pended all that activ­ity. I agree [that there is an oppor­tu­nity there], but as in all walks of life, it is going to be a mat­ter of tim­ing, and I believe the [Carl Wein­berg, see video] tim­ing is way way off.

It's an enor­mously dif­fi­cult task to be bull­ish on oil today.

Lord John Brown was the most bear­ish per­son in the world about oil, and for twenty years the price of oil lost 80% of it value, and the most bear­ish guy in the world ended up at the top, when the price of oil reached its low­est levels.

BP stock in absolute price terms went down dur­ing the ten years the price of oil was going from $10 to $150 per bar­rel, so if you’re bear­ish on oil you should own BP; you should own Shell, because they’re contra-cyclical, they’re unlever­aged, you get a very high carry. In a mar­ket like this one, you want to own assets like this that are unlever­aged, and you get a 5% yield.

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