Seth Klarman: The Value of Not Being Sure

Wednesday, February 25th, 2009

Seth Klar­man, Founder, Bau­post Group, an investor with a remark­able long-term track record, has from time to time offered his valu­able insights on investing.

The fol­low­ing Feb­ru­ary 23, 2009 arti­cle pub­lished in Value Investor Insight (www.valueinvestorinsight.com) cov­ers some of Seth Klarman's pro­found and expe­ri­enced views, learned from his early expe­ri­ence work­ing with invest­ing leg­ends Max Heine and Michael Price at Mutual Shares, now part of Franklin Tem­ple­ton. Klarman's part­ner­ship, Bau­post Group, has con­sis­tently pro­duced annual returns in the 20% com­pounded range, since it was founded in 1983.

Tags: Array, Baupost Group, Franklin Templeton, Free Legal Forms, Insights, Investing, Investor Insight, Legends, Max Heine, Mutual Shares, Partnership, Seth Klarman, Value Investing, Value Investor
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Hans Rosling: Debunking third-world myths with the best stats you've ever seen

Wednesday, February 25th, 2009

Get ready to learn about the devel­op­ing world from a source of fas­ci­nat­ing per­spec­tive. "You've never seen data pre­sented like this. With the drama and urgency of a sports­caster, sta­tis­tics guru Hans Rosling debunks myths about the so-called "devel­op­ing world."

Even the most worldly and well-traveled among us will have their per­spec­tives shifted by Hans Rosling. A pro­fes­sor of global health at Sweden’s Karolin­ska Insti­tute, his cur­rent work focuses on dis­pelling com­mon myths about the so-called devel­op­ing world, which (he points out) is no longer worlds away from the west. In fact, most of the third world is on the same tra­jec­tory toward health and pros­per­ity, and many coun­tries are mov­ing twice as fast as the west did.

Tags: Debunking, Developing World, Dispelling Common Myths, ETF, Global Health, Guru, Hans Rosling, Karolinska Institute, Perspective, Perspectives, Prosperity, Sportscaster, Statistics, Sweden, Third World, Trajectory, Urgency, World Myths
Posted in ETFs, Markets | Comments Off

James Montier: The Psychology of Happiness

Tuesday, February 24th, 2009

James Mon­tier, Co-Chief, Cross Global Strat­egy, at Société Générale in Lon­don, not only has a long term track record of accu­rate mar­ket calls, he also hap­pens to be well renown on the sub­ject of behav­ioural psy­chol­ogy. Some years before join­ing Soc­Gen, he was, along with Albert Edwards, at Dres­d­ner Klein­wort Wasser­stein, writ­ing some of the best known papers on behav­ioural finance and in the case of this article, "The Psy­chol­ogy of Hap­pi­ness". Mon­tier is elo­quent in his writ­ing. Here is the syn­op­sis from the front page of the report, a classic:

If you are after spe­cific invest­ment advice, stop read­ing now. We seek to explore one of Adam Smith’s obses­sions: what it means to be happy. We also dis­cuss why that’s impor­tant to investors, and how we can seek to improve our own lev­els of hap­pi­ness. The list below shows our top ten sug­ges­tions for improv­ing happiness.

• Don’t equate hap­pi­ness with money. Peo­ple adapt to income shifts rel­a­tively quickly, the long last­ing ben­e­fits are essen­tially zero.
• Exer­cise reg­u­larly. Tak­ing reg­u­lar exer­cise gen­er­ates fur­ther energy, and stim­u­lates the mind and the body.
• Have sex (prefer­ably with some­one you love). Sex is con­sis­tently rated as amongst the high­est gen­er­a­tors of hap­pi­ness. So what are you  wait­ing for?
• Devote time and effort to close rela­tion­ships. Close rela­tion­ships require work and effort, but pay vast rewards in terms of happiness.
• Pause for reflec­tion, med­i­tate on the good things in life. Sim­ple reflec­tion on the good aspects of life helps pre­vent hedo­nic adaptation.
• Seek work that engages your skills, look to enjoy your job. It makes sense to do some­thing you enjoy. This in turn is likely to allow you to flour­ish at your job, cre­at­ing a pleas­ant feed­back loop.
• Give your body the sleep it needs.
• Don’t pur­sue hap­pi­ness for its own sake, enjoy the moment. Faulty per­cep­tions of what makes you happy, may lead to the wrong pur­suits. Addi­tion­ally, activ­i­ties may become a means to an end, rather than some­thing to be enjoyed, defeat­ing the pur­pose in the first place.
• Take con­trol of your life, set your­self achiev­able goals.
• Remem­ber to fol­low all the rules.

Down­load the com­plete paper here.

James Mon­tier has also writ­ten the quin­tes­sen­tial books on the sub­ject of Behav­ioural Finance, Behav­ioural Finance: A User’s Guide , then, Behav­ioural Invest­ing: A Prac­ti­tion­ers Guide to Apply­ing Behav­ioural Finance (The Wiley Finance Series).

Tags: Accurate Market, Achievable Goals, Adam Smith, Adaptation, Aspects Of Life, Defeating The Purpose, Dresdner Kleinwort Wasserstein, Exercise, Faulty Perceptions, Feedback Loop, Generators, Global Market, Global Strategy, Investment Advice, James Montier, Levels Of Happiness, Market Strategists, Means To An End, Obsessions, Psychology Of Happiness, Reflection, Relationships, Renown, Rewards, Sake, Sleep, Societe Generale
Posted in Markets | 2 Comments »

George Soros: Loading up Potash and Petrobras (13F Filings)

Monday, February 23rd, 2009

Thanks to the work of MarketFolly.com, we can get a glimpse into the deal­ings of some of the most promi­nent and suc­cess­ful hedge funds and insti­tu­tional investors. These are use­ful as they point to tac­ti­cal oppor­tu­ni­ties and some­times, when hedge funds take short posi­tions, they pro­vide lucid guid­ance, point­ing to areas or stocks in the mar­ket that should be sold or avoided, or for those with the stom­achs, to fol­low short.

This is the 4th Quar­ter 2008 edi­tion of our ongo­ing hedge fund port­fo­lio track­ing series. Before read­ing this update, make sure you check out the Hedge Fund 13F fil­ings pref­ace.

Next up is Soros Fund Man­age­ment run by George Soros. Soros is famous for his stel­lar returns with part­ner Jim Rogers when they ran the Quan­tum fund. Now, he has car­ried his invest­ment style over to his own firm, Soros Fund Man­age­ment. Whether it be equi­ties, bonds, cur­ren­cies, debt, or com­modi­ties, Soros is more of a global macro player, seek­ing invest­ments in what­ever mar­ket they can gain an edge. So, keep in mind that these equity posi­tions only rep­re­sent a por­tion of the fund's over­all hold­ings. They are not required to dis­close hold­ings out­side of equi­ties, notes, and stock options. 2008 was an inter­est­ing time to be invest­ing, to say the least. Recently, Soros detailed his thoughts about his port­fo­lio from 2008 and it makes for a good read.

Soros is good to track because of his excel­lent macro sense and for­mi­da­ble track record as an investor. His thoughts on the cur­rent finan­cial land­scape are detailed in his lat­est book, The New Par­a­digm for Finan­cial Mar­kets: The Credit Cri­sis of 2008 and What It Means. Soros sees a vast con­sol­i­da­tion in the hedge fund space in the near future, as we noted when we recently checked in on Quan­tum Fund ex-partners Jim Rogers & George Soros. If you want to get a bet­ter sense as to how Soros for­mu­lates his invest­ment the­ses, we highly rec­om­mend read­ing his first book, The Alchemy of Finance. This book is a sta­ple in our rec­om­mended read­ing list and after you read it, you'll under­stand why. We like to track Soros since he has a solid track record and a great macro sense. We'll see what he has in his port­fo­lio this time around.

The fol­low­ing were their long equity, note, and options hold­ings as of Decem­ber 31st, 2008 as filed with the SEC. We have not detailed the changes to every sin­gle posi­tion in this update, but we have cov­ered all the major moves. All hold­ings are com­mon stock unless oth­er­wise denoted.

Some New Posi­tions (Brand new posi­tions that they ini­ti­ated in the last quar­ter):
Mer­rill Lynch (MER)
Mylan (MYL)
Homex (HXM)
R.R. Don­nelly & Sons (RRD)
Har­monic (HLIT)
Kin­ross Gold (KGC)
Street­tracks Gold ETF (GLD)
Gen­worth Finan­cial (GNW)
EMC (EMC)
Sol­era (SLH)
CBL & Asso­ciates (CBL)
Dis­cov­ery Com­mu­ni­ca­tions (DISCK)
Dis­cov­ery Com­mu­ni­ca­tions (DISCA)
Yahoo (YHOO)
Amdocs (DOX)
Texas Instru­ments (TXN)
JB Hunt (JBHT)
Syman­tec (SYMC)
Cir­rus Logic (CRUS)
Covi­dien (COV)
...among others

Some Increased Posi­tions (A few posi­tions they already owned but added shares to; major moves listed)
Petroleo Brasileiro (PBR)
Potash (POT)
Best Buy (BBY)
Hess (HES)
Conoco Philips (COP)
Union Pacific (UNP)
Arch Coal (ACI)
Schlum­berger (SLB)
Loril­lard (LO)
Ter­a­data (TDC)
Google (GOOG)
Con­sol Energy (CNX)
Lat­tice Semi­con­duc­tor (LSCC)
...among others

Some Reduced Posi­tions (Some posi­tions they sold some shares of — note not all sales listed, just the major moves)
Wal­mart (WMT)
Wind River (WIND)
Jet­Blue (JBLU)
...among others

Removed Posi­tions (Posi­tions they sold out of com­pletely)
Research in Motion (RIMM), ishares Dow Real Estate (IYR), Pow­er­shares QQQ (QQQQ), Aux­il­ium Phar­ma­ceu­ti­cals (AUXL), Whit­ing Petro­leum (WLL), Sun­cor (SU), Chesa­peake Energy (CHK), Inter­na­tional Rec­ti­fier (IRF), Buf­falo Wild Wings (BWLD), Anheuser Busch (BUD), Front­line (FRO), Bank of Amer­ica (BAC), Col­lec­tive Brands (PSS), Com­pan­hia Siderug­ica (SID), Cen­ten­nial Com­mu­ni­ca­tions (CYCL), Entergy (ETR), Sun­trust Banks (STI), Nas­daq (NDAQ), Gen­eral Growth Prop­er­ties (GGP), Kimco Realty (KIM), Bank of New York Mel­lon (BK), CSG Sys­tems (CSGS), Tek­elec (TKLC), GATX (GMT), Car­max (KMX), Echostar (SATS), Extreme Net­works (EXTR), Ama­zon (AMZN), Radisys (RSYS), Medi­va­tion (MDVN), ITT Cor­po­ra­tion (ITT), Micron Tech­nol­ogy (MU), Alca­tel (ALU)

Top 20 Hold­ings (by % of portfolio)

1. Petroleo Brasileiro (PBR): 19.53% of portfolio
2. Potash (POT): 9.4% of portfolio
3. Mer­rill Lynch (MER): 5.84% of portfolio
4. Best Buy (BBY): 5.79% of portfolio
5. Hess (HES): 4.74% of portfolio
6. Conoco Phillips (COP): 3.84% of portfolio
7. Union Pacific (UNP): 1.77% of portfolio
8. Arch Coal (ACI): 1.7% of portfolio
9. Schlum­berger (SLB): 1.56% of portfolio
10. RR Don­nelly (RRD): 1.48% of portfolio
11. Homex (HXM): 1.37% of portfolio
12. Con­sol Energy (CNX): 0.75% of portfolio
13. Map Phar­ma­ceu­ti­cals (MAPP): 0.62% of portfolio
14. Wal­mart (WMT): 0.57% of portfolio
15. Hologic (HOLX): 0.57% of portfolio
16. Heinz (HNZ): 0.53% of portfolio
17. Jet­Blue Air­ways (JBLU): 0.52% of portfolio
18. Home Depot (HD): 0.52% of portfolio
19. Lowes (LOW): 0.51% of portfolio
20. Citi Trends (CTRN): 0.29% of portfolio

The major moves in Soros' port­fo­lio come from energy and agri­cul­ture. He added large to his PBR and POT posi­tions, among many other global growth type names. He def­i­nitely seems to think all these energy related names are attrac­tive. He sold out of a lot of his Wal­mart (WMT) and all of his Research in Motion (RIMM). He also added heav­ily to his posi­tion in Best Buy (BBY). He also started a new, large posi­tion in Mer­rill Lynch (MER). Assets from the col­lec­tive long US equity, options, and note hold­ings listed above were $4.6 bil­lion. If you want to hear some more insight­ful thoughts from George Soros him­self, head over to our post on Hedge Fund man­ager inter­views or check out his recent inter­view with Fareed Zakaria to dis­cuss the cur­rent cri­sis. This is just one of many funds in our hedge fund port­fo­lio track­ing series in which we're track­ing 35+ promi­nent funds. We've already cov­ered Paul­son & Co (John Paul­son), Carl Icahn, War­ren Buf­fett, and Stephen Mandel's Lone Pine Cap­i­tal. Look for our updates each day over the next few weeks.

This arti­cle was con­tributed by MarketFolly.com.

Tags: 13f Filings, 4th Quarter, Alchemy Of Finance, Better Sense, Credit Crisis, Equity Positions, ETF, Financial Landscape, Fund Portfolio, George Soros, Global Macro, Hedge Fund, Hedge Funds, Institutional Investors, Investment Style, Jim Rogers, Macro Sense, New Paradigm, Partner Jim, Potash, Quantum Fund, Soros Fund Management, Tactical Opportunities
Posted in Bonds, Commodities, Credit Markets, ETFs, Gold, Markets | Comments Off

Richard Russell (Dow Theory Letters): Potential buyers of gold?

Monday, February 23rd, 2009

The fol­low­ing is an excerpt from Richard Russell's Dow The­ory Let­ters, Feb­ru­ary 18, 2009.

“Here are some fig­ures, the first num­ber is the nation’s hold­ing of gold and the sec­ond fig­ure is the per­cent­age that gold is of their reserves. Nations with low per­cent­ages of gold in their reserves may be expected to be poten­tial buy­ers of gold.

US — owns 8,135 met­ric tons of gold … Gold makes up 64.4% of US reserves. The US will not sell any of its gold.
Ger­many — 3,412 … 64.4% of reserves
IMF — 3,217 …
France — 2,508 … 58.7%
Italy — 2,451 … 61.9%
Switzer­land — 1,040 … 23.8%
Japan — 765.2 … 1.9% (a poten­tial gold-buyer)
China — 600.0 … 0.9% (should be a big buyer)
Rus­sia — 495. 9 … 2.2% (is a buyer)
Tai­wan — 422.2 … 3.6% (should be a buyer)
India — 357.7% … 3.0% (should be a buyer)
UK — 310.3 … 14.5% (sold most of its gold at the low price)
Saudi Ara­bia — 143.0 … 11.4% (should buy gold)
South Africa — 124.4 … only 9.0%
Aus­tralia — 79.8 … 6.3%”

Source: Richard Rus­sell, Dow The­ory Let­ters, Feb­ru­ary 18, 2009.

Hat tip: Invest­ment Postcards

Tags: Buy Gold, Buyers Of Gold, Dow Theory Letters, Emerging Markets, Excerpt From, France 2, Gold Buyer, Gold Gold, Hat Tip, Imf 3, India, Italy, Metric Tons, Percentages, Postcards, Richard Russell Dow Theory, Russia, Saudi Arabia, Sell Gold, South Africa, Taiwan
Posted in Emerging Markets, Gold, India, Markets | Comments Off

David Fuller (Fullermoney): Invest in creditor nations

Monday, February 23rd, 2009

This is a guest con­tri­bu­tion from David Fuller, Fuller­money.

“The US has elected an inter­est­ing, intel­li­gent and charis­matic new pres­i­dent. This will help the coun­try in terms of inter­na­tional rela­tions. How­ever, debt-laden economies and the USA in par­tic­u­lar, given its size, remain at the epi­cen­tre of global eco­nomic risk. In a best-case sce­nario, the eco­nomic out­look might show some evi­dence of improve­ment dur­ing the sec­ond­half of 2009. I hope so but even in this event, global invest­ment remains an inter­na­tional beauty contest.

“The invest­ment ques­tion for all of us, I sug­gest, is would we rather back the debtor or cred­i­tor nations. Some may see this as a rhetor­i­cal ques­tion. Run it through a price chart fil­ter show­ing rel­a­tive strength since the cli­mac­tic sell­ing in Octo­ber, and the choice becomes even eas­ier for me. Not all cred­i­tor nations are doing well, but Fuller­money themes such as Brazil and espe­cially China (note also the strength of A-Share Banks) cer­tainly are.

“I do not doubt that if Wall Street expe­ri­ences a new down leg of con­se­quence, that its leash effect would pull other stock mar­kets lower as well. This is an ongo­ing risk. How­ever, it might not drag today’s bet­ter per­form­ers to new bear mar­ket lows. More impor­tantly, I have already seen enough to feel con­fi­dent that among larger coun­tries, China and Brazil will be upside lead­ers in the next sig­nif­i­cant stock mar­ket recov­ery. This will occur sooner rather than later if, and this is a big IF, Obama’s poli­cies can help the S&P 500 Index to remain within its cur­rent trad­ing range.”

Source: David Fuller, Fuller­money, Feb­ru­ary 16, 2009.

Hat Tip: InvestmentPostcards.com

Tags: Bear Market, Best Case Scenario, Brazil, Creditor Nations, Current Trading, David Fuller, Debtor, Economic Outlook, Economic Risk, Epicentre, Fullermoney, Global Investment, Hat Tip, International Beauty Contest, International Relations, Investment Question, Lows, New President, Relative Strength, Rhetorical Question, Stock Markets
Posted in Credit Markets, Markets, Outlook | Comments Off

Doug Kass: Recipe for Recovery

Sunday, February 22nd, 2009

Thanks to the work of MarketFolly.com, we can get a glimpse into the deal­ings of some of the most promi­nent and suc­cess­ful hedge funds and insti­tu­tional investors. These are use­ful as they point to tac­ti­cal oppor­tu­ni­ties and some­times, when hedge funds take short posi­tions, they pro­vide lucid guid­ance, point­ing to areas or stocks in the mar­ket that should be sold or avoided, or for those with the stom­achs, to fol­low short.

Doug Kass' recent piece, 'Fear and Loathing on Wall Street,' high­lights some excel­lent points. In it, he cre­ates a list of things the mar­kets need to see to begin their return to normality:

• Bank bal­ance sheets must be recap­i­tal­ized. We await a bank res­cue pack­age in the week ahead.
• Bank lend­ing must be restored. Bank lend­ing stan­dards remain tight. For now, we are in a liq­uid­ity trap.
• Finan­cial stocks' per­for­mance must improve. We are not yet there. Finan­cials' per­for­mance is still drek.
• Com­mod­ity prices must rise as con­fir­ma­tion of world­wide eco­nomic growth. There has been some recent evi­dence of higher com­modi­ties, but it's still inconclusive.
• Credit spreads and credit avail­abil­ity must improve. While credit spreads are improv­ing, the yield curve is ris­ing and inter­est rates have rebounded, the trans­mis­sion of credit remains poor. Time will tell whether mon­e­tary and fis­cal poli­cies will serve to unclog credit.
• We need evi­dence of a bot­tom in the econ­omy, hous­ing mar­kets and hous­ing prices. The economy's down­turn con­tin­ues apace. Months of inven­tory of unsold homes are declin­ing and so are mort­gage rates, but home prices have yet to sta­bi­lize despite an improve­ment in afford­abil­ity indices.
• We also need evi­dence of more favor­able reac­tions to dis­ap­point­ing earn­ings and weak guid­ance. We are not yet there, but this will tell us a lot about the state of the stock market's dis­count­ing process.
• Emerg­ing mar­kets must improve. China's econ­omy (PMI and retail sales) and the per­for­mance of its year-to-date stock mar­ket have turned decid­edly more constructive.
• Mar­ket volatil­ity must decline. The world's stock mar­kets remain more volatile than a Mex­i­can jump­ing bean.
• Hedge fund and mutual fund redemp­tions must ease. While I am com­fort­able in writ­ing that most of the forced redemp­tions have likely passed, we will find out more over the next few months. Regard­less, the dis­in­ter­me­di­a­tion and dis­ar­ray of hedge funds and fund of funds have a ways to go.
• A mar­ginal buyer must emerge. Pen­sion funds seem to be the likely mar­ginal buyer as they real­lo­cate out of fixed income into equi­ties, but we have not yet seen the emer­gence of this trend."

Read the entire piece.

This arti­cle was con­tributed by MarketFolly.com.

Tags: Affordability, Balance Sheets, Bank Balance, Commodity Prices, Credit Availability, Credit Spreads, Doug Kass, Downturn, ETF, Fear And Loathing, financial stocks, Fiscal Policies, Hedge Funds, Institutional Investors, Liquidity Trap, Mortgage Rates, Poor Time, Recovery Thanks, Stomachs, Tactical Opportunities, Yield Curve
Posted in Commodities, Credit Markets, Economy, Emerging Markets, ETFs, Markets | Comments Off

Words from the (investment) wise for the week that was (February 16 – 22, 2009)

Sunday, February 22nd, 2009

A per­fect storm of a deep­en­ing global reces­sion and bank­ing woes last week bat­tered equi­ties and sup­ported the safe havens of the US dol­lar, gov­ern­ment bonds and gold bullion.

A dis­mal cor­po­rate earn­ings out­look, fears about bank nation­al­iza­tions, espe­cially Bank of Amer­ica (BAC) and Cit­i­group ©, and a warn­ing by Moody’s Investors Ser­vice of pos­si­ble down­grades of Euro­pean banks exposed to the slump­ing economies of Cen­tral and East­ern Europe, stoked investors’ fears.

Few stock mar­kets escaped the sell­ing pres­sure as sum­ma­rized by the week’s move­ments of the MSCI Global Index (-7.7%, YTD –16.0%) and the MSCI Emerg­ing Mar­kets Index (-9.3%, YTD –11.4%). Venezuela (+6.7%), Pak­istan (+6.1%) and Morocco (+3.7%) were the top three per­form­ers, whereas poten­tial debt default­ers — Rus­sia (-17.1%), Ukraine (-12.5%) and Hun­gary (‑12.4%) — occu­pied the bot­tom end of the rank­ing (data cour­tesy of Emergin­vest).

The major US indices suf­fered their worst weekly losses this year (to record six los­ing weeks out of seven): Dow Jones Indus­trial Index –6.2% (YTD ‑16.1%), S&P 500 Index –6.9% (YTD –14.7%), Nas­daq Com­pos­ite Index ‑6.1% (YTD –8.6%) and Rus­sell 2000 Index –8.3% (YTD –17.7%).

Neg­a­tive sen­ti­ment dragged the S&P 500 to seven points below its Octo­ber 2002 low, whereas the Dow stopped only 80 points short of this key level. It is note­wor­thy that it took five years for the lat­ter to increase from 7,286 to 14,165, but only 16 months to wipe out the entire 2002–2007 advance.

Source: StockCharts.com

With the bears prowl­ing Wall Street, none of the main eco­nomic sec­tors reg­is­tered pos­i­tive returns on the week. Among exchange-traded funds (ETFs), the KBW Bank Index ETF (KBE) and the Finan­cial Select Sec­tor SPDR ETF (XLF) lost 16.6% and 15.9% respec­tively. How­ever, as high­lighted by John Nyaradi (Wall Street Sec­tor Selec­tor), inverse exchange-traded funds (ETFs) such as ProShares Short S&P 500 (SH) (+6.8%), ProShares Short Dow30 (DOG) (+5.8%) and Short QQQ ProShares (PSQ) (+5.1%) gained handsomely.

As was the case the pre­vi­ous week with the announce­ment of Trea­sury Sec­re­tary Tim­o­thy Geithner’s finan­cial sta­bil­ity plan, last week’s mort­gage relief plan, designed to stem the fore­clo­sure cri­sis, also made scant impres­sion on the stock mar­ket. Pres­i­dent Barack Obama ear­marked $275 bil­lion to help reduce mort­gage pay­ments for up to nine mil­lion strug­gling bor­row­ers and enable Fan­nie Mae and Fred­die Mac to keep mort­gage rates down.

Jeff Ran­dall (Tele­graph) wrote: “… we are in denial about the causes of reces­sion and there­fore can­not face up to the action required to lift us out of it. As Niall Fer­gu­son, pro­fes­sor of his­tory at Har­vard Uni­ver­sity, wrote: ‘The real­ity being repressed is that the West­ern world is suf­fer­ing a cri­sis of indebt­ed­ness.’ In which case, pump­ing out yet more debt will not be the answer. It is sim­ply a short-term fix that in the long run cre­ates an even big­ger dis­as­ter, like giv­ing a shiv­er­ing alco­holic a case of Spe­cial Brew.” (Also read RGE Monitor’s recent guest post on the US’s financ­ing needs.)

Barry Ritholtz (The Big Pic­ture) has an inter­est­ing post up that lists the names of those favor­ing and oppos­ing nation­al­iza­tion of the big­ger US banks. Yes, I know it is a polit­i­cally con­tro­ver­sial issue, but rather get it over and done with than pussy­foot­ing with “behind-the-curve” mea­sures as being exper­i­mented with by the pol­i­cy­mak­ers week after week. If nation­al­ized banks are still alive once the toxic junk has been marked to mar­ket, they can start act­ing like banks and stake their claim to be pri­va­tized once again in the next eco­nomic upswing.

Notwith­stand­ing sup­ply con­cerns, gov­ern­ment bond yields in the US, UK and Ger­many declined as investors con­tin­ued their flight to safety. Yields of 10-year Trea­suries, Bunds and Gilts were down by 14, 12 and 12 basis points respectively.

Increas­ing finan­cial tur­bu­lence also resulted in the gold hold­ings of the world’s largest bullion-backed ETF jump­ing to a record level. “The SPDR Gold Trust (GLD) hold­ings have risen by 228.6 met­ric tons so far this year, to a record 1,008.8 met­ric tons late on Tues­day, absorb­ing in the first seven weeks of the year about 10% of the world’s annual mine gold out­put,” reported the Finan­cial Times. Gold bul­lion breached the $1,000 level on Fri­day and closed the week at $1,002 (+6.4%) — within strik­ing dis­tance of its record of $1,031 reached in March last year.

With the yel­low metal behav­ing like “the last man stand­ing”, David Fuller reminded us of the quote by the Eng­lish poet Lord Byron: “O gold! I still pre­fer thee unto paper, which makes bank credit like a bark of vapour.”

Besides pre­cious met­als shin­ing brightly, the other com­modi­ties per­formed poorly, as shown in the graph below. The Reuters/Jeffries CRB Index recorded a six-and-a-half year low as global growth deteriorated.

Next, a tag cloud of my week’s read­ing. This is a way of visu­al­iz­ing word fre­quen­cies at a glance. Key words such as “banks”, “China”, “finan­cial” and “gold” fea­tured promi­nently.

As far as the out­look for stock mar­kets is con­cerned, the pri­mary bear mar­ket was recon­firmed on Thurs­day, at least in terms of Dow The­ory. Richard Rus­sell (Dow The­ory Let­ters) said: “The ver­dict, at long last, is in. Today the DJ Indus­trial Aver­age closed below its Novem­ber 20 bear mar­ket low. In so doing, the Dow con­firmed the prior break­down of the Trans­porta­tion Aver­age. The two Aver­ages jointly closed at new lows today, thereby sig­nal­ing that the great bear mar­ket remains in force.

“Accord­ing to Dow The­ory, nei­ther the dura­tion nor the extent of a bear mar­ket can be pre­dicted in advance. How­ever there are some use­ful hints. Most major bear mar­kets end with stocks at ‘great val­ues’. This has meant in the past that price/earnings (P/E) ratios for the Dow and the S&P have fallen to single-digit num­bers. It has also meant that div­i­dend yields have moved into the 5–6% zone.”

Stan­dard & Poor’s esti­mated GAAP (or “as reported”) earn­ings of 32.3 cents for the S&P 500 for 2009 implies a ten-month prospec­tive P/E ratio of 23.8. Hardly “great value”.

As men­tioned above, the Dow and S&P 500 are floun­der­ing around the Novem­ber 20, 2008 and Octo­ber 2002 lows, as shown in the columns on the right-hand side of the table below.

Stock mar­kets remain caught between the actions of cen­tral banks fran­ti­cally try­ing to fend off a total eco­nomic melt­down on the one hand, and a wors­en­ing eco­nomic and cor­po­rate pic­ture on the other. The next few days will tell whether the key chart lev­els will arrest the indices’ declines and the three-month trad­ing range will hold, or whether more cat­a­stro­phe lies ahead.

For more dis­cus­sion about the direc­tion of stock mar­kets, also see my recent posts “Video-o-rama: Stocks between a rock and a hard place” and “Ben­net Sedacca: Free Fallin’???“. (And do make a point of lis­ten­ing to Don­ald Coxe’s weekly web­cast, which can be accessed from the side­bar of the Invest­ment Post­cards site.)

Announce­ment
Back to Richard Rus­sell, 84-year old writer of the Dow The­ory Let­ters. Busi­ness part­ner John Mauldin (Thoughts from the Front­line) is orga­niz­ing a “Richard Rus­sell Trib­ute Din­ner” for April 4 in San Diego. This will be a night of mem­o­ries and good fun with fel­low writ­ers and long-time read­ers of Richard’s newslet­ter. I will be mak­ing the trip from Cape Town and would encour­age you, if at all pos­si­ble, also to attend this very spe­cial event. You can reg­is­ter here.

Econ­omy
A grim pic­ture regard­ing the global eco­nomic sit­u­a­tion emerges from the lat­est Ifo World Eco­nomic Sur­vey (WES), show­ing that the World Eco­nomic Cli­mate has declined to a record low in the first quar­ter of 2009. The dete­ri­o­ra­tion is affect­ing all major eco­nomic regions and the export and import expec­ta­tions indi­cate a clear decline in world trade in the first half of 2009.

Source: Ifo, Feb­ru­ary 18, 2009.

Fur­ther evi­dence of the eco­nomic malaise is pro­vided by the GDP-weighted graphs of the global man­u­fac­tur­ing Pur­chas­ing Man­agers’ Index and global ser­vices PMI.

Source: Plexus Asset Management

Source: Plexus Asset Management

A snap­shot of the week’s US eco­nomic data is pro­vided below. (Click on the dates to see North­ern Trust’s assess­ment of the var­i­ous data releases.)

Feb­ru­ary 20
• CPI report — under­ly­ing trend of defla­tion will fade only later

Feb­ru­ary 19
• Index of Lead­ing Indi­ca­tors improved, but wait before tak­ing a leap
• Whole­sale prices moved up, but infla­tion is a non-issue, for now
• Job­less Claims — dis­mal labor mar­ket con­di­tions persist

Feb­ru­ary 18
• Indus­trial Pro­duc­tion plunges, fac­tory oper­at­ing rate at record low
• Con­struc­tion of new homes at new low
• Import prices — sixth con­sec­u­tive monthly decline

Feb­ru­ary 17
• Hous­ing Mar­ket Index — show­ing signs of sta­bil­ity?
• For­eign appetite for Trea­sury secu­ri­ties remains in place for moment

Given the nature of eco­nom­ics reports of recent months, the min­utes of the Fed­eral Open Mar­ket Com­mit­tee (FOMC) meet­ing of Jan­u­ary 27–28 come as no sur­prise. Asha Ban­ga­lore (North­ern Trust) said: “The FOMC is more bear­ish about the econ­omy com­pared with the fore­cast pub­lished in Octo­ber 2008. The US econ­omy is pre­dicted to con­tract in 2009 (-1.3% to –0.5%) on a Q4-to-Q4 basis.

“The con­sen­sus fore­cast among the Blue Chip Sur­vey par­tic­i­pants is a 1.9% drop in real GDP on an annual aver­age basis in 2009. We are pre­dict­ing a 2.7% decline in real GDP … So, there is a gen­eral expec­ta­tion of a sig­nif­i­cant weak­en­ing of busi­ness con­di­tions dur­ing 2009.”

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

Source: Yahoo Finance, Feb­ru­ary 20, 2009.

In addi­tion to Fed Chair­man Bernanke’s semi-annual tes­ti­mony on mon­e­tary pol­icy before the US Sen­ate Bank­ing Com­mit­tee (Tues­day, Feb­ru­ary 24), the US eco­nomic high­lights for the week include the following:

Source: North­ern Trust

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, Feb­ru­ary 20, 2009.

“Ana­lysts can tell you every­thing about the ship, the crew, the price — but they don’t let you know whether it’s in shal­low water or is about to be hit by a tidal wave,” said Scott Cle­land (hat tip: Charles Kirk). Hope­fully the “Words from the Wise” reviews play a part in steer­ing the port­fo­lios of Invest­ment Post­cards‘ read­ers through the murky waters.

That’s the way it looks from Cape Town.

Bloomberg: Obama unveils $275 bil­lion plan to shore up hous­ing
“US Pres­i­dent Barack Obama pledged $275 bil­lion to cut mort­gage pay­ments for as many as 9 mil­lion strug­gling home­own­ers and enable Fan­nie Mae and Fred­die Mac to keep loan rates down.

“The plan includes $75 bil­lion to reduce monthly pay­ments for bor­row­ers, helps home­own­ers with loans owned or backed by Fan­nie Mae and Fred­die Mac to refi­nance at lower rates and promises incen­tives to indus­try. Obama will dou­ble by $200 bil­lion fund­ing avail­able for Fan­nie and Fred­die to buy loans.

“‘It will give mil­lions of fam­i­lies resigned to finan­cial ruin a chance to rebuild,’ Obama said today in Mesa, Ari­zona. ‘By bring­ing down the fore­clo­sure rate, it will help to shore up hous­ing prices for everyone.’

“The pro­gram sig­nals the Obama admin­is­tra­tion, which will release more details in two weeks, plans a more active stance to halt fore­clo­sures than the Bush admin­is­tra­tion, which backed vol­un­tary indus­try efforts. Record fore­clo­sures in the past year are swelling the glut of prop­er­ties on the mar­ket, forc­ing down home val­ues and under­min­ing home­builders’ efforts to revive demand and lighten inven­tory by cut­ting prices.

“‘We tried vol­un­tary, it didn’t work,’ Fed­eral Deposit Insur­ance Corp. Chair­man Sheila Bair said today at a brief­ing in Mesa before Obama spoke. Bair has pressed the bank­ing indus­try to accel­er­ate loan mod­i­fi­ca­tions to keep peo­ple in their homes.

“JPMor­gan Chase & Co. Chief Exec­u­tive Offi­cer Jamie Dimon said the Obama plan will help the bank expand its mod­i­fi­ca­tion of mort­gages. ‘The plan is good and strong, com­pre­hen­sive and thought­ful,’ Dimon said in an inter­view today. ‘I think it will be suc­cess­ful in mod­i­fy­ing mort­gages in a way that’s good for homeowners.’”

Source: Ali­son Vek­shin and Roger Run­nin­gen, Bloomberg, Feb­ru­ary 18, 2009.

CNBC: Santelli’s “rant of the year”
“CNBC’s Rick San­telli and the traders on the floor of the CME Group express out­rage over the notion they may have to pay their neighbor’s mort­gage, par­tic­u­larly if they bought far more house than they could actu­ally afford, with Jason Roney, Shar­mac Capital.”

Source: CNBC, Feb­ru­ary 19, 2009.

CNN: FDIC’s Bair speaks out on housing

Source: CNN, Feb­ru­ary 20, 2009.

Bill King (The King Report): Why have banks not been nation­al­ized?
“There is a major rea­son why banks have not been nation­al­ized. Too many solons and insid­ers will lose their equity and stock options. There will be no struc­tural revival until crony cap­i­tal­ism ends.

“Here is a major rea­son why a bank bailout plan can­not be orches­trated: Banks do not, because they can­not, reveal the amount and mag­ni­tude of their toxic paper. We said this in Octo­ber before TARP and we will reit­er­ate again. The mar­ket can­not with­stand full dis­clo­sure of crappy paper.”

Source: Bill King, The King Report, Feb­ru­ary 17, 2008.

Bloomberg: Shiller says US needs long-term plan to exit cri­sis
“Robert Shiller, chief econ­o­mist at Macro­Mar­kets LLC and an eco­nom­ics pro­fes­sor at Yale Uni­ver­sity, talks with Bloomberg’s Kath­leen Hays about the need for a long-term US strat­egy to emerge from the finan­cial cri­sis. Shiller also dis­cusses the US’s efforts to stem the cri­sis and the out­look for the hous­ing market.”

Source: Bloomberg, Feb­ru­ary 20, 2009.

Finan­cial Times: US car­mak­ers to seek $21.6 bil­lion in funds
“Gen­eral Motors and Chrysler pre­sented long-awaited plans to return to via­bil­ity on Tues­day, but said they would need up to $21.6 bil­lion more in fed­eral funds between them to carry them out.

“The two Detroit car­mak­ers made the plea as part of tougher new plans to restruc­ture and down­size their busi­nesses in sub­mis­sions to the gov­ern­ment required as a con­di­tion of the $17.4 bil­lion of emer­gency bridge loans they received in December.

“Their request for more funds reflects more pes­simistic assump­tions about global demand for cars and credit mar­ket con­di­tions than Chrysler and GM pre­sented to Con­gress on Decem­ber 2.

“It raises the ante for Pres­i­dent Barack Obama’s admin­is­tra­tion as it jug­gles demands for fed­eral aid from banks and other con­stituen­cies and pre­pares to imple­ment its $787 bil­lion stim­u­lus bill.”

Source: John Reed, Bernard Simon and Andrew Ward, Finan­cial Times, Feb­ru­ary 18, 2009.

Ifo: Indi­ca­tor for the World Eco­nomic Cli­mate falls fur­ther
“The Ifo World Eco­nomic Cli­mate has wors­ened fur­ther in the first quar­ter of 2009. The indi­ca­tor has fallen to a new his­toric low. The decline is solely the result of more unfavourable assess­ments of the cur­rent eco­nomic sit­u­a­tion; the expec­ta­tions for the com­ing six months have improved somewhat.

“The dete­ri­o­ra­tion of the Ifo World Eco­nomic Cli­mate has affected all major eco­nomic regions. The export and import expec­ta­tions of the WES experts indi­cate a clear decline in world trade in the first half of 2009.

“Aver­age infla­tion expec­ta­tions for 2009 are clearly lower than the infla­tion rates of the pre­vi­ous year (3.3% ver­sus 5.4%). More­over, price increases will con­tinue to weaken in the course of the next six months in the opin­ion of the WES experts. The decline in infla­tion will be par­tic­u­larly strong in West­ern Europe and North America.

“In light of the reces­sion­ary ten­den­cies and the clear slow­ing of price increases, a fur­ther decline in cen­tral bank inter­est rates is expected nearly every­where. Also long-term inter­est rates are expected to fall in the com­ing six months, accord­ing to the WES experts, albeit less than short-term inter­est rates.

“After the strong increase in value of the Japan­ese yen, for the first time since 2002 it is no longer regarded as under­val­ued but now as slightly over­val­ued. On the other hand, after the clear weak­en­ing in past months the British pound is now viewed as under­val­ued. The US dol­lar is largely seen as prop­erly val­ued, and cor­re­spond­ingly, WES experts antic­i­pate a sta­ble dol­lar in the com­ing six months.”

Source: Ifo, Feb­ru­ary 18, 2009.

BCA Research: Finan­cial crises and pub­lic finances — where is the great­est risk?
“Our fixed income team has just pub­lished a Spe­cial Report com­par­ing 22 devel­oped gov­ern­ment debt in the face of the cur­rent finan­cial crisis.

“The Spe­cial Report reviewed the vul­ner­a­bil­ity of these mar­kets to rat­ing down­grades as well as focused on the risks and poten­tial costs asso­ci­ated with sta­bi­liz­ing their bank­ing sys­tems (after ana­lyz­ing 150 banks around the world). A fur­ther loss of as lit­tle as 3% on total bank assets would wipe out most, if not all, of the remain­ing tan­gi­ble bank cap­i­tal in the coun­tries we analyzed.

“UK, Ire­land, Den­mark and Switzer­land have the great­est risk of wide­spread nation­al­iza­tion (out­side of Ice­land). When the other main fac­tors that deter­mine over­all sov­er­eign credit risk are included (e.g. eco­nomic struc­ture and prospects, mon­e­tary flex­i­bil­ity, fis­cal flex­i­bil­ity, and exter­nal liq­uid­ity depen­dence) Ice­land, Por­tu­gal, Ire­land, Spain, Italy and the UK are at the top in terms of the risk of downgrades.

“The cost of clean­ing up the US bank­ing sys­tem will also be painful, although the risk of a sov­er­eign down­grade is less than in most of the other devel­oped countries.”

Source: BCA Research, Feb­ru­ary 18, 2009.

Word Net Daily: Fed­eral oblig­a­tions exceed world GDP
“As the Obama admin­is­tra­tion pushes through Con­gress its $800 bil­lion deficit-spending eco­nomic stim­u­lus plan, the Amer­i­can pub­lic is largely unaware that the true deficit of the fed­eral gov­ern­ment already is mea­sured in tril­lions of dol­lars, and in fact its $65.5 tril­lion in total oblig­a­tions exceeds the gross domes­tic prod­uct of the world.

“The total US oblig­a­tions, includ­ing Social Secu­rity and Medicare ben­e­fits to be paid in the future, effec­tively have placed the US gov­ern­ment in bank­ruptcy, even before new con­tin­u­ing social wel­fare oblig­a­tion embed­ded in the mas­sive spend­ing plan are taken into account.

“The real 2008 fed­eral bud­get deficit was $5.1 tril­lion, not the $455 bil­lion pre­vi­ously reported by the Con­gres­sional Bud­get Office, accord­ing to the ‘2008 Finan­cial Report of the United States Gov­ern­ment’ as released by the US Depart­ment of Treasury.

“The dif­fer­ence between the $455 bil­lion ‘offi­cial’ bud­get deficit num­bers and the $5.1 tril­lion bud­get deficit cited by ‘2008 Finan­cial Report of the United States Gov­ern­ment’ is that the offi­cial bud­get deficit is cal­cu­lated on a cash basis, where all tax receipts, includ­ing Social Secu­rity tax receipts, are used to pay gov­ern­ment lia­bil­i­ties as they occur.

“But the num­bers in the 2008 report are cal­cu­lated on a GAAP basis (‘Gen­er­ally Accepted Account­ing Prac­tices’) that include year-for-year changes in the net present value of unfunded lia­bil­i­ties in social insur­ance pro­grams such as Social Secu­rity and Medicare.

“Under cash account­ing, the gov­ern­ment makes no pro­vi­sion for future Social Secu­rity and Medicare ben­e­fits in the year in which those ben­e­fits accrue.”

Source: Jerome Corsi, World Net Daily, Feb­ru­ary 13, 2009.

Bloomberg: Roubini says Europe’s bank­ing sys­tem faces grow­ing risks
“Nouriel Roubini, the New York Uni­ver­sity econ­o­mist who pre­dicted the global finan­cial cri­sis, talks with Bloomberg’s Erik Schatzker and Julie Hyman about the grow­ing risks fac­ing Europe’s bank­ing sys­tem. Roubini also dis­cusses the out­look for a ‘mas­sive’ increase in the US deficit, the need to nation­al­ize insol­vent banks and the impor­tance of global coöper­a­tion in finan­cial regulation.”

Source: Bloomberg, Feb­ru­ary 20, 2009.

Asha Ban­ga­lore (North­ern Trust): Min­utes of Jan­u­ary FOMC meet­ing
“The FOMC is more bear­ish about the econ­omy com­pared with the fore­cast pub­lished in Octo­ber 2008. The US econ­omy is pre­dicted to con­tract in 2009 (-1.3% to –0.5%) on a Q4-to-Q4 basis. The unem­ploy­ment rate is pre­dicted to advance higher than pre­vi­ously pre­dicted and the infla­tion is expected to hold below the level seen in the Octo­ber forecast.

“The direc­tion of revi­sions to the Fed’s pro­jec­tions is not a sur­prise given the nature of the eco­nomic reports of recent months. The con­sen­sus fore­cast among the Blue Chip Sur­vey par­tic­i­pants is a 1.9% drop in real GDP on an annual aver­age basis in 2009. We are pre­dict­ing a 2.7% decline in real GDP on an annual aver­age basis dur­ing 2009. So, there is a gen­eral expec­ta­tion of a sig­nif­i­cant weak­en­ing of busi­ness con­di­tions dur­ing 2009.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Feb­ru­ary 18, 2009.

Asha Ban­ga­lore (North­ern Trust): Index of Lead­ing Indi­ca­tors advances in Jan­u­ary, but wait before tak­ing a leap
“The Index of Lead­ing Eco­nomic Indi­ca­tors (LEI) increased 0.4% in Jan­u­ary after a revised 0.2% gain in Decem­ber, pre­vi­ously reported as a 0.3% increase. The index of LEI has moved up for two straight months. His­tor­i­cally, the LEI has been a reli­able indi­ca­tor warn­ing about turn­ing points of the econ­omy ahead of other eco­nomic indicators.

“The two con­sec­u­tive monthly gains of the index have to be inter­preted with cau­tion. Infla­tion adjusted money sup­ply has made hefty pos­i­tive con­tri­bu­tions for five straight months and the inter­est rate spread is another com­po­nent that has been an advanc­ing com­po­nent for sev­eral months. Both of these com­po­nents have risen for rea­sons that do not reflect bull­ish eco­nomic con­di­tions. Infla­tion adjusted money sup­ply is advanc­ing because cur­rency, demand and sav­ing deposits have risen sharply. At the same time, bank lend­ing has con­tracted. The two sig­nals are incon­sis­tent and they do not denote the under­ly­ing con­di­tions that sug­gest a revival of eco­nomic activity.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Feb­ru­ary 19, 2009.

Asha Ban­ga­lore (North­ern Trust): Indus­trial pro­duc­tion plunges
“Indus­trial pro­duc­tion fell 1.8% in Jan­u­ary, fol­low­ing a down­wardly revised 2.4% drop in the prior month. If util­i­ties pro­duc­tion had not advanced at a rapid clip of 2.7%, the head­line would have been weaker. The 23.4% decline in auto pro­duc­tion from extended shut­downs of auto plants sub­tracted more than one percentage-point from the change in indus­trial pro­duc­tion. Man­u­fac­tur­ing out­put fell 2.5% in Jan­u­ary; exclud­ing autos, fac­tory pro­duc­tion dropped 1.4%, which is indica­tive of wide­spread weak­ness in the fac­tory sector.

“On a year-to-year basis, fac­tory pro­duc­tion fell 12.9% and exclud­ing autos it declined 10.8% in January.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Feb­ru­ary 18, 2009.

Asha Ban­ga­lore (North­ern Trust): Con­struc­tion of new homes at new record low
“Con­struc­tion of new homes fell to a record low of 466,000 in Jan­u­ary, which is down 79.5% from the peak in Jan­u­ary 2006. The 16.8% drop in hous­ing starts dur­ing Jan­u­ary reflects a 12.2% decline in starts of new single-family homes and a 27.9% decline in starts of multi-family homes.

“The grim news has a pos­i­tive aspect because in an envi­ron­ment of a ris­ing inven­tory of unsold new homes (12.9-month sup­ply, record high in Decem­ber 2008) a reduc­tion in the con­struc­tion of new homes is nec­es­sary to reduce the sup­ply of new homes and bring about sta­bil­ity in the hous­ing market.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Feb­ru­ary 18, 2009.

Asha Ban­ga­lore (North­ern Trust): Hous­ing Mar­ket Index show­ing signs of sta­bil­ity?
“The Hous­ing Mar­ket Index (HMI) of the National Asso­ci­a­tion of Home Builders inched up to 9.0 in Feb­ru­ary from 8.0 in Jan­u­ary. It is a small but note­wor­thy improve­ment because a decline of the same mag­ni­tude would be seen in a dif­fer­ent light. Also, it is nec­es­sary to note that this is a sin­gle monthly read­ing. Addi­tional gains of the index in the months ahead will be nec­es­sary to con­firm that the hous­ing mar­ket has turned the corner.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Feb­ru­ary 17, 2009.

Asha Ban­ga­lore (North­ern Trust): Whole­sale prices moved up in Jan­u­ary, but not prob­lem­atic
“The Pro­ducer Price Index (PPI) for Fin­ished Goods rose 0.8% in Jan­u­ary, fol­low­ing a string of five monthly declines. The major cul­prit was a 3.7% jump of the energy price index which had declined for six con­sec­u­tive months and a 0.4% increase of the core PPI, which excludes food and energy. The food price index fell 0.4% in Jan­u­ary after a 1.4% drop in the prior month. Higher energy prices in Feb­ru­ary point to another monthly gain of the energy price index.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Feb­ru­ary 19, 2009.

Asha Ban­ga­lore (North­ern Trust): Jan­u­ary CPI report — under­ly­ing trend of defla­tion will fade only later
“The Con­sumer Price Index (CPI) rose 0.3% in Jan­u­ary, the first increase since July 2008. The CPI is unchanged from a year ago, the low­est read­ing since August 1955. The core CPI, which excludes food and energy, moved up 0.2% after a steady read­ing in Decem­ber. On a year-to-year basis, the core CPI advanced 1.7% in Jan­u­ary, the low­est since August 2004. Although these head­lines take the edge off con­cerns about defla­tion tem­porar­ily, the under­ly­ing trend of defla­tion will fade only much later in 2009.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Feb­ru­ary 20, 2009.

Bespoke: Up days — the scarcest com­mod­ity of all
“While the world sud­denly finds itself with a glut of oil and other related com­modites, one thing that is cer­tainly in short sup­ply so far this year is an up day in the mar­ket. So far this year, the Dow has fin­ished the day higher on 36.7% of the 32 trad­ing days (through Wednes­day). We all know that it has been a bad year, but this is down right depressing!

“In the table below, we high­light the 15 prior years where the Dow started off the year with 40% or less of the first 32 trad­ing days fin­ish­ing higher. You have to go all the way back to 1984 to find a year that started off with an even greater fre­quency of down days. As shown below, the rest of the year is hardly any­thing to get excited about. While the last three occur­rences have been pos­i­tive, the over­all aver­age return for the rest of the year is a decline of 2.1%.”

Source: Bespoke, Feb­ru­ary 19, 2009.

Bespoke: Fourth quar­ter earn­ings sea­son — one we’d all like to for­get
“The unof­fi­cial fourth quar­ter earn­ings sea­son came to an end yes­ter­day, and the num­bers show that it’s one we’d all like to for­get. From Bloomberg, diluted year-over-year earn­ings for the S&P 500 are down 36% with 80% of the reports in. As shown in the chart below, ana­lysts were expect­ing an increase of 30% from Q4 ‘07 to Q4 ‘08 back in October.

“And on a sec­tor basis, three sec­tors saw earn­ings decline more than the index as a whole, while seven came in bet­ter than the index. In the chart below we have excluded Finan­cials because its declines were off the charts (-272%). Mate­ri­als saw the sec­ond biggest decline in earn­ings at –78%, fol­lowed by Con­sumer Dis­cre­tionary, Energy, and Tech­nol­ogy. Three sec­tors did see year-over-year increases in earn­ings, how­ever. Util­i­ties were up 6.1%, Con­sumer Sta­ples were up 9.6%, and Health Care was up 9.9%.”

Source: Bespoke, Feb­ru­ary 18, 2009.

Carl Swen­lin (Deci­sion Point): Earn­ings are crash­ing
“The real P/E for the S&P 500 is based on ‘as reported’ or GAAP earn­ings (cal­cu­lated using Gen­er­ally Accepted Account­ing Prin­ci­pals), and it is the stan­dard for his­tor­i­cal earn­ings com­par­isons. The nor­mal range for the GAAP P/E ratio is between 10 (under­val­ued) to 20 (over­val­ued). Mar­ket cheer­lead­ers invari­ably use ‘pro forma’ or ‘oper­at­ing earn­ings’, which exclude some expenses and are decep­tively opti­mistic. They are use­less and should be ignored.

“The fol­low­ing are the most recently reported and pro­jected twelve-month trail­ing (TMT) earn­ings and price/earnings ratios (P/Es) accord­ing to Stan­dard and Poors. I have high­lighted GAAP earn­ings. Note that pro­jected earn­ings for 2009 Q2 are $15.90. Keep in mind that the last earn­ings peak of $84.92 was for 2007 Q3. That’s a drop of over 80%!

“Based upon pro­jected GAAP earn­ings the fol­low­ing would be the approx­i­mate S&P 500 val­ues at the car­di­nal points of the nor­mal his­tor­i­cal value range. They are cal­cu­lated sim­ply by mul­ti­ply­ing the GAAP EPS by 10, 15, and 20. I have high­lighted the over­val­ued val­ues. Note that the S&P would have to drop to 554 just to be over­val­ued based on 2008 Q4 earn­ings pro­jec­tions. The out­look by 2009 Q2 is much worse.

“Of course, the mar­ket doesn’t always fol­low these pro­jec­tions, but they are rea­son­able tar­gets based upon the best fun­da­men­tal esti­mates we have available.”

Source: Carl Swen­lin, Deci­sion Point, Feb­ru­ary 13, 2009.

David Fuller (Fuller­money): Invest in cred­i­tor nations
“The US has elected an inter­est­ing, intel­li­gent and charis­matic new pres­i­dent. This will help the coun­try in terms of inter­na­tional rela­tions. How­ever, debt-laden economies and the USA in par­tic­u­lar, given its size, remain at the epi­cen­tre of global eco­nomic risk. In a best-case sce­nario, the eco­nomic out­look might show some evi­dence of improve­ment dur­ing the sec­ond­half of 2009. I hope so but even in this event, global invest­ment remains an inter­na­tional beauty contest.

“The invest­ment ques­tion for all of us, I sug­gest, is would we rather back the debtor or cred­i­tor nations. Some may see this as a rhetor­i­cal ques­tion. Run it through a price chart fil­ter show­ing rel­a­tive strength since the cli­mac­tic sell­ing in Octo­ber, and the choice becomes even eas­ier for me. Not all cred­i­tor nations are doing well, but Fuller­money themes such as Brazil and espe­cially China (note also the strength of A-Share Banks) cer­tainly are.

“I do not doubt that if Wall Street expe­ri­ences a new down leg of con­se­quence, that its leash effect would pull other stock mar­kets lower as well. This is an ongo­ing risk. How­ever, it might not drag today’s bet­ter per­form­ers to new bear mar­ket lows. More impor­tantly, I have already seen enough to feel con­fi­dent that among larger coun­tries, China and Brazil will be upside lead­ers in the next sig­nif­i­cant stock mar­ket recov­ery. This will occur sooner rather than later if, and this is a big IF, Obama’s poli­cies can help the S&P 500 Index to remain within its cur­rent trad­ing range.”

Source: David Fuller, Fuller­money, Feb­ru­ary 16, 2009.

Bespoke: Default risk ticks higher, but still below prior highs
“Below is a price chart of a North Amer­i­can invest­ment grade credit default swap index that mea­sures default risk for 125 com­pa­nies. As shown, default risk peaked in early Decem­ber 2008 and has declined some­what since then, but it just broke above a short-term trad­ing range today. This isn’t sur­pris­ing given the recent trou­bles in equity mar­kets, and from a tech­ni­cal per­spec­tive, this break­out doesn’t bode well for the mar­ket going forward.”

Source: Bespoke, Feb­ru­ary 18, 2009.

CEP News: Fed’s Bullard says buy­ing Trea­suries still not off the table
“Fed­eral Reserve Bank of St. Louis Pres­i­dent James Bullard said the pos­si­bil­ity of the Fed­eral Reserve mak­ing out­right pur­chases of Trea­suries is not off the table, but this may not take place until the spring.

“Speak­ing in New York, Bullard said there is effec­tively no large dif­fer­ence between buy­ing agency debt — which the Fed is already doing — and long-term Treasuries.

“Bullard said it is fair to say the world is enter­ing a period of excep­tion­ally low inter­est rates.

“He said the global reces­sion will carry through until at least the first half of 2009. As for the US, he expects the first half of 2009 to see employ­ment and out­put con­tinue to deteriorate.

“On infla­tion, Bullard said the risks of dis­in­fla­tion and even defla­tion are real, with core infla­tion close to zero. He advo­cated an unof­fi­cial infla­tion tar­get rate of 2%. The most recent reports showed head­line infla­tion at –0.7%.

“Bullard noted that the Fed’s recent efforts to expand its bal­ance sheet have done noth­ing to pre­vent deflation.

“Bullard also said the Fed­eral Reserve needs to find a way to keep mon­e­tary base growth rates high. He said there is no way to pre­dict the pace of growth of the mon­e­tary base.”

Source: CEP News, Feb­ru­ary 17, 2009.

Asha Ban­ga­lore (North­ern Trust): For­eign appetite for Trea­sury secu­ri­ties remains in place, for now
“The tremen­dous sup­ply of US Trea­sury secu­ri­ties in the pipeline is cited as a fac­tor that may deter for­eign appetite for US Trea­sury secu­ri­ties. In Decem­ber, net pri­vate sec­tor pur­chases of US Trea­sury secu­ri­ties were $11.1 bil­lion putting quar­terly net pur­chases at $45.5 bil­lion. Net pur­chases of Trea­sury secu­ri­ties were higher in the sec­ond ($86.7 bil­lion) and third ($67.7 bil­lion) quar­ters of 2008. Net offi­cial pur­chases of Trea­sury secu­ri­ties increased $3.9 bil­lion in Decem­ber, after two monthly declines. In the fourth quar­ter, offi­cial pur­chases of Trea­sury secu­ri­ties declined.

“In 2008, pri­vate sec­tor net pur­chases of Trea­sury secu­ri­ties stood at $239.4 bil­lion ver­sus $195 bil­lion dur­ing 2007, while offi­cial pur­chases were $76.6 bil­lion in 2008 ver­sus $3.0 bil­lion in 2007.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Feb­ru­ary 17, 2009.

CNN Money: Who will buy all those Trea­suries?
“Chi­nese doubts about the value of US Trea­sury bonds high­light a cru­cial ques­tion: Who will buy the esti­mated $2.7–4.2 tril­lion of debt expected to be issued over the next two years?

“With annual for­eign pur­chases account­ing for less than a tenth of the low end of that range, and domes­tic investors unable to bridge the gap, the Chi­nese are right to worry.

“Yu Yongding, for­mer adviser to the People’s Bank of China, recently demanded guar­an­tees for the value of China’s $682 bil­lion of Trea­sury secu­ri­ties. Then Luo Ping, direc­tor of the China Bank­ing Reg­u­la­tory Com­mis­sion, said that China had mis­giv­ings about the US econ­omy, but despite this it would con­tinue to buy Treasuries.

“The two state­ments appear designed to raise the issue non-confrontationally before new chief US diplo­mat Hillary Clinton’s visit to Bei­jing on Feb­ru­ary 20.

“China wor­ries about the dollar’s value against other cur­ren­cies, par­tic­u­larly the yuan. With US inter­est rates so low, the dollar’s value may slide. How­ever, Pres­i­dent Barack Obama has repeat­edly said he wants a strong dol­lar, and indeed its trade-weighted value rose 13.9% between April and Decem­ber 2008.

“The other area of con­cern for China is the value of its Trea­suries. Given the US bor­row­ing require­ment and its lax mon­e­tary pol­icy, T-bond yields could well rise sharply, caus­ing a cor­re­spond­ing price decline.”

Source: Mar­tin Hutchin­son, CNN, Feb­ru­ary 13, 2009.

Bespoke: The curi­ous case of the US dol­lar
“As equity mar­kets test their Novem­ber lows, the US Dol­lar index is test­ing its Novem­ber highs. The US Dol­lar has been a pecu­liar ‘risk-flight’ trade through­out the credit cri­sis, as global investors have flocked to the cur­rency with the belief that other sov­er­eign nations are even worse off than the US. This comes at a time when gold is also ral­ly­ing to new highs, and the US money sup­ply is increas­ing at an astound­ing rate.”

Source: Bespoke, Feb­ru­ary 17, 2009.

Michael Met­calfe (State Street Global Mar­kets): The yen is head­ing for a fall
“The yen is over­val­ued and its sta­tus as a ‘safe haven’ cur­rency is likely to come under scrutiny, says Michael Met­calfe, head of global macro strat­egy at State Street Global Markets.

“He argues that ana­lysts typ­i­cally fall back on either cur­rent account posi­tions or, bet­ter still, net for­eign asset posi­tions as a guide to which cur­ren­cies should per­form in times of height­ened risk aversion.

“‘The ratio­nale is that investors respond to reduced risk appetite by cut­ting their expo­sure to inter­na­tional invest­ments,’ Mr Met­calfe says.

“This the­ory appears to be sup­ported by the fact that Japan has one of the largest sur­pluses on its net for­eign asset posi­tion — and there­fore the biggest poten­tial for repa­tri­a­tion flows — and the yen has appre­ci­ated strongly.

“But Mr Met­calfe points out the Japan­ese are not repa­tri­at­ing. ‘Indeed, quite the reverse. Money is flow­ing out of Japan into for­eign bonds and, more unusu­ally, for­eign equity mar­kets too. This implies it has been the per­cep­tion of — or poten­tial for — repa­tri­a­tion that has drawn investors into bets that the yen will rise.’

“He says both spec­u­la­tive and insti­tu­tional investors now hold sig­nif­i­cant long posi­tions in the yen.

“‘The ques­tion is whether investors will hang on to these bets, as the real­ity is that the yen is over­bought and over­val­ued and Japan’s econ­omy is sink­ing fast. It has the poten­tial to be a safe haven, but the real­ity may prove dif­fer­ent if Japan­ese investors keep buy­ing for­eign assets.’”

Source: Michael Met­calfe, State Street Global Mar­kets (via Finan­cial Times), Feb­ru­ary 17, 2009.

Busi­ness Intel­li­gence: Jim Rogers advises Gulf states to get rid of dol­lar peg
“The Gulf coun­tries’ cur­rency peg to the dol­lar is a ‘ter­ri­ble mis­take’ and will cause prob­lems for the region as the US cur­rency is expected to decline, Jim Rogers said.

“The six Gulf Coöper­a­tion Coun­cil states should form a joint cur­rency as soon as pos­si­ble, the chair­man of Singapore-based Rogers Hold­ings said at a con­fer­ence in Dubai Monday.

“The new cur­rency shouldn’t be linked to any other as the region has enough for­eign reserves and oil to back it up.

“‘You’ve got good for­eign exchange reserves and a lot of oil’ to back a com­mon cur­rency, Rogers said dur­ing a bank­ing con­fer­ence in Dubai.

“Saudi Ara­bia, Kuwait, Bahrain, Qatar, the United Arab Emi­rates and Oman agreed in 2001 to form a Euro­pean Union-style mon­e­tary union by 2010 to boost regional trade. Oman later pulled out.

“Kuwait is the only Gulf Arab state to have dropped its cur­rency peg to the dol­lar, giv­ing it some con­trol over mon­e­tary policy.

“Gulf Arab lead­ers in Decem­ber approved an agree­ment to cre­ate a cen­tral bank and sin­gle cur­rency for the region to boost trade and strengthen mon­e­tary policy.

“A sin­gle cur­rency would allow the Gulf states to stop peg­ging their cur­ren­cies to the dol­lar and imple­ment inde­pen­dent mon­e­tary policy.

“Rogers said the dol­lar will suf­fer because the US government’s bailout plans and the eco­nomic stim­u­lus will increase the US debt, weak­en­ing the US currency.”

Source: Busi­ness Intel­li­gence, Feb­ru­ary 17, 2009.

Bloomberg: StockCharts’ John Mur­phy — gold to outshine

Source: Bloomberg (via YouTube), Feb­ru­ary 14, 2009.

David Fuller (Fuller­money): Gold bul­lion in solid uptrend
“The USD’s firm­ness had masked some of gold’s strength, until recently. How­ever many other charts of bul­lion have been show­ing sig­nif­i­cant break­outs and resump­tions of the long-term bull mar­ket for some time. You can see this in terms of bullion’s per­for­mance against most cur­ren­cies, includ­ing: EUR, CHF, GBP, RUB, AUD, SGD and ZAR.

“How high will gold move on this par­tic­u­lar run?

“I have no idea, par­tic­u­larly in this envi­ron­ment, and nei­ther does any­one else. Tar­gets are always pure guess­work, not least because the out­come depends on so many variables.

“How­ever, we know what gold has done on its ear­lier advances dur­ing this decade. Once it began to appre­ci­ate against all cur­ren­cies, it sub­se­quently also moved to new all-time highs against all of them. These moves occurred in medium-term trends per­sist­ing for at least six months from the last reac­tion low in the prior trad­ing range. If that con­sis­tency was repeated in the cur­rent cycle, gold should rally well into March. The best clue of a pend­ing peak, which you can see on the charts and which vet­eran sub­scribers will cer­tainly remem­ber, has been clear evi­dence of trend acceleration.”

Source: David Fuller, Fuller­money, Feb­ru­ary 17, 2009.

Richard Rus­sell (Dow The­ory Let­ters): Poten­tial buy­ers of gold?
“Here are some fig­ures, the first num­ber is the nation’s hold­ing of gold and the sec­ond fig­ure is the per­cent­age that gold is of their reserves. Nations with low per­cent­ages of gold in their reserves may be expected to be poten­tial buy­ers of gold.

US — owns 8,135 met­ric tons of gold … Gold makes up 64.4% of US reserves. The US will not sell any of its gold.
Ger­many — 3,412 … 64.4% of reserves
IMF — 3,217 …
France — 2,508 … 58.7%
Italy — 2,451 … 61.9%
Switzer­land — 1,040 … 23.8%
Japan — 765.2 … 1.9% (a poten­tial gold-buyer)
China — 600.0 … 0.9% (should be a big buyer)
Rus­sia — 495. 9 … 2.2% (is a buyer)
Tai­wan — 422.2 … 3.6% (should be a buyer)
India — 357.7% … 3.0% (should be a buyer)
UK — 310.3 … 14.5% (sold most of its gold at the low price)
Saudi Ara­bia — 143.0 … 11.4% (should buy gold)
South Africa — 124.4 … only 9.0%
Aus­tralia — 79.8 … 6.3%”

Source: Richard Rus­sell, Dow The­ory Let­ters, Feb­ru­ary 18, 2009.

Finan­cial Times: Fund amasses bul­lion hold­ing
“Gold hold­ings at the world’s largest bullion-backed exchange-traded fund jumped above 1,000 met­ric tons for the first time, the lat­est indi­ca­tion of investor demand for bul­lion amid increas­ing finan­cial tur­bu­lence and eco­nomic slump.

“The SPDR Gold Trust hold­ings have risen 228.6 met­ric tons so far this year, to a record 1,008.8 met­ric tons late on Tues­day, absorb­ing in the first seven weeks of the year about 10% of the world’s annual mine gold output.

“The industry-backed World Gold Coun­cil said that gold con­sump­tion last year rose 4% to 3,658.6 met­ric tons as a 64% surge in invest­ment demand was coun­ter­bal­anced by a 11% drop in jew­ellery demand and a 7% fall in indus­trial consumption.

“Sup­ply fell 1% last year com­pared with 2007 … a 42% drop in offi­cial sales from cen­tral banks and a 3% drop in mine out­put. Gold scrap sup­ply jumped 17%.

“The WGC said that the extreme uncer­tainty that cur­rently sur­rounds the global econ­omy was unlikely to abate and should con­tinue to under­pin net invest­ment demand, par­tic­u­larly for bars and coins. ‘How­ever, we expect this to be partly off­set by ongo­ing weak­ness in both indus­trial and jew­ellery demand,’ it added.”

Source: Javier Blas, Finan­cial Times, Feb­ru­ary 18, 2009.

James Turk (Gold­Money): ETFs no alter­na­tive to own­ing phys­i­cal gold
“There is one chart I would like to share with you. Bill Mur­phy pre­sented it on Fri­day in his com­men­tary. It’s another one of the infor­ma­tive charts pre­pared by Nick Laird of www.sharelynx.com. This chart plots both the gold price and the weight of gold recorded in GLD, the gold exchange traded fund (ETF).

“When I look at the above chart, one key ques­tion arises imme­di­ately. How can a 150-tonne increase in demand for metal in recent weeks trans­late into such a rel­a­tively small increase in the price of gold? This dis­par­ity raises more ques­tions as to whether the ETF really owns the metal sup­posed to be back­ing the shares it issues.

“I’m no fan of the pre­cious metal ETFs, and haven’t been since they were first launched.

“In short, the ETF is at best a trad­ing vehi­cle, and not an alter­na­tive to own­ing phys­i­cal gold. In this sense, the ETF is like a futures con­tract, which of course is not an alter­na­tive to own­ing phys­i­cal gold either. With these trad­ing vehi­cles you have expo­sure to move­ments in the price of gold, but they also come with coun­ter­party risk, which should of course be avoided because of the ongo­ing eco­nomic and finan­cial prob­lems around the globe. The lessons in this regard were learned in Sep­tem­ber when Lehman col­lapsed and AIG was on the ropes, which caused numer­ous com­mod­ity ETFs in Lon­don to sus­pend trading.

“So if you want to trade the price of gold, trade futures or ETFs. But do not view futures or the ETFs as an alter­na­tive to own­ing phys­i­cal gold and silver.

“If you are still not con­vinced, or even if you are, I rec­om­mend read­ing an arti­cle by Jim Sin­clair which ques­tions the integrity of GLD and the other gold ETFs. His Feb­ru­ary 12th report is enti­tled ‘Where Do All The Gold ETFs Get Their Bul­lion From?‘.”

Source: James Turk, Gold­Money, Feb­ru­ary 15, 2009.

Finan­cial Times: Are plat­inum, pal­la­dium and sil­ver prices sus­tain­able?
“Investors search­ing for a safe haven have pushed gold prices to $950 a troy ounce. In their rush to safety, they have also boosted the price of sil­ver, plat­inum and palladium.

“In fact, the well-reported 7.5% rise in gold prices this year pales against the 20.5% gain in sil­ver, 14.5% rise in plat­inum and 15.6% increase in palladium.

“Are the gains in these three pre­cious met­als sus­tain­able? Part of the surge is a cor­rec­tion from last year’s crash, which saw plat­inum plung­ing from more than $2,000 an ounce to less than $800 in three months.

“Gold spikes tra­di­tion­ally boost other pre­cious met­als and this time is no excep­tion, with a surge in exchange-traded funds’ hold­ings of sil­ver, plat­inum and pal­la­dium. But investors should note that, even if usu­ally grouped under the pre­cious met­als umbrella, these three resem­ble indus­trial met­als more closely, albeit expen­sive ones.

“Plat­inum and pal­la­dium are used for cat­alytic con­vert­ers in the auto­mo­tive indus­try, account­ing for 60% of their con­sump­tion. And for sil­ver, elec­tron­ics is a large consumer.

“For these three met­als, demand for jew­ellery is less impor­tant than for gold. The sup­ply side, which last year boosted prices — par­tic­u­larly for plat­inum — now looks less sup­port­ive, too. As HSBC says: ‘After many years of deficit, we antic­i­pate that the plat­inum mar­ket will swing into a sur­plus  …  in 2009.’ Sil­ver and pal­la­dium face a sim­i­larly loose market.

“Against that back­drop, investors will need to cor­ner the mar­ket and sharply increase their hold­ings if sil­ver, plat­inum and pal­la­dium prices are to sus­tain their upward tra­jec­tory. Fur­ther price gains are pos­si­ble as long as the met­als ben­e­fit from safe-haven buy­ing. But with­out the sup­port of indus­trial demand, any upside is prob­a­bly limited.”

Source: Javier Blas, Finan­cial Times, Feb­ru­ary 16, 2009.

Bloomberg: Ship­ping Index surge sig­nals com­mod­ity cur­rency gains
“Ship­ping costs have more than dou­bled this year, so it may be time to buy kro­ner, Aussies and loonies.

“The 147% jump in ocean-transport prices is evi­dence that China’s $580 bil­lion stim­u­lus plan will lift raw mate­ri­als, said Ihab Salib, who over­sees $3 bil­lion at Fed­er­ated Invest­ments Inc. in Pitts­burgh. That would ben­e­fit coun­tries export­ing them, so Salib is ‘actively trad­ing’ Norway’s krone and Aus­tralian and Cana­dian dol­lars, nick­named Aussies and loonies.

“Salib and other cur­rency traders have started using the Baltic Dry Index’s global gauge of raw-material ship­ping costs to help make such deci­sions. The index and the value of a bas­ket of those three resource-rich coun­tries’ cur­ren­cies are increas­ingly mov­ing in tan­dem — 96% of the time in the past year, up from 84% in the past decade, data com­piled by Bloomberg show.

“‘His­tor­i­cally, the Baltic Dry Index is a good lead­ing indi­ca­tor for com­mod­ity prices,’ said Salib, who declined to detail his invest­ments. ‘Com­modi­ties are very depressed right now, and they offer good long-term value. Once they come back, these cur­ren­cies should do well.’

“The ship­ping gauge is a sign that China’s stim­u­lus spend­ing on hous­ing, high­ways, air­ports and power grids will have impact beyond its bor­ders. By Feb. 28, it will have spent 25% of its stim­u­lus bud­get, Deutsche Bank AG said, pre­dict­ing the country’s econ­omy will grow at a 12% annual rate between the fourth and first quar­ter, after shrink­ing 2.3% between the third and fourth.”

Source: Ye Xie and Can­dice Zachari­ahs, Bloomberg, Feb­ru­ary 17, 2009.

Finan­cial Times: China/Russia oil deal
“China has what Rus­sia wants: masses of US dol­lars. Rus­sia has what China wants: energy, and lots of it. Hence Tuesday’s oil-for-loans agree­ment between Moscow and Bei­jing. Russia’s state-owned oil com­pa­nies get 20-year loans to help them refi­nance while pre­serv­ing cap­i­tal spend­ing; China gets cheap fuel for the duration.

“Bilat­eral deals hap­pen all the time between coun­tries. The dif­fer­ence here is that no one has tried to dress this up as a polit­i­cal or diplo­matic event. This is an artifice-free exchange of one com­mod­ity for another.

“For their part, Russia’s national cham­pi­ons avert a nasty cash crunch. The world’s second-largest oil pro­ducer has been floun­der­ing amid depressed crude prices and declin­ing pro­duc­tion: aggre­gate vol­umes shrank by almost 1 per cent last year.

“China does very nicely too. 300,000 bar­rels a day amounts to about 4% of its total demand, or 8% of its total oil imports. Rus­sia is pay­ing 6% on the loans, imply­ing that China is secur­ing sup­plies at about $20 a bar­rel, accord­ing to UOB-Kay Hian, a Shang­hai bro­ker­age. As China buys most of its oil in the spot mar­ket, this is a sig­nif­i­cant saving.

“There are fringe ben­e­fits. Rus­sia diver­si­fies its cus­tomer base away from Europe, while China reduces its depen­dence on the Mid­dle East. It also increases its chances of get­ting a stake in the long-term devel­op­ment of Russia’s fabled Siber­ian oil reserves — per­haps at the expense of Japan. But at bot­tom, this is barter. How very post-crunch.”

Source: Finan­cial Times, Feb­ru­ary 18, 2009.

Finan­cial Times: Brazil to sup­ply oil to China for loans
“Brazil and China signed a land­mark agree­ment on Thurs­day that will ensure long-term sup­plies of oil to China while deliv­er­ing much-needed financ­ing to help Brazil develop enor­mous reserves of oil and gas recently dis­cov­ered in its coastal waters.”

Source: Jonathan Wheat­ley, Finan­cial Times, Feb­ru­ary 19, 2009.

Finan­cial Times: Japan growth plunges to a 35-year low
“Japan’s gov­ern­ment faced pres­sure for another stim­u­lus pack­age on Mon­day after plung­ing exports pushed the coun­try, the world’s sec­ond largest econ­omy, into its worst slump in 35 years.

“Econ­o­mists see lit­tle prospect for a quick rebound after a quarter-on-quarter fall of 3.3% in gross domes­tic prod­uct in the last three months of 2008.

“The decline was worse than econ­o­mists had fore­cast and equiv­a­lent to an annu­alised fall of 12.7% — the steep­est drop since 1974 when import-dependent Japan suf­fered because of soar­ing oil prices.

“This time, col­laps­ing demand for exports and weak domes­tic con­sump­tion are to blame.

“‘This is the biggest eco­nomic cri­sis since the war,’ said Kaoru Yosano, min­is­ter for eco­nomic and fis­cal policy.

“Gov­ern­ment lead­ers have resisted announc­ing new action as a stim­u­lus pack­age drawn up last year, which includes a Y2,000 bil­lion ($22 bil­lion) cash hand­out, and the main bud­get for the year from April, move slowly through a par­lia­ment in which the oppo­si­tion con­trols the upper house.

“The decline in GDP is fuelling calls for more aggres­sive mea­sures from the gov­ern­ment and the Bank of Japan.”

Source: Mure Dickie, Finan­cial Times, Feb­ru­ary 16, 2009.

Finan­cial Times: G7 soft­ens tone on China
“The US and other Group of Seven indus­tri­alised coun­tries have stepped back from crit­i­cism of China in a push for greater coöper­a­tion with Bei­jing and a more uni­fied response to the global finan­cial crisis.

“In a com­mu­niqué issued fol­low­ing their meet­ing in Rome at the week­end, G7 finance min­is­ters adopted milder lan­guage than recently regard­ing China’s han­dling of its cur­rency. Tim Gei­th­ner, US Trea­sury sec­re­tary, also used a more con­cil­ia­tory tone towards Bei­jing than he did last month, when he accused China of manip­u­lat­ing its cur­rency to ben­e­fit exporters.

“Hillary Clin­ton, US sec­re­tary of state, will this week become the first senior mem­ber of the new admin­is­tra­tion to visit China as ana­lysts look for clues as to how Wash­ing­ton will han­dle one of its most impor­tant eco­nomic relationships.

“In a speech before she left, she labelled a ‘pos­i­tive, co-operative rela­tion­ship’ between Bei­jing and Wash­ing­ton as ‘vital to peace and pros­per­ity, not only in the Asia-Pacific region but world­wide’ and also announced the resump­tion of mil­i­tary con­tacts between the two nations.

“How­ever, in a sign of poten­tial for ten­sion, China on Sun­day hit out at a ‘Buy Amer­i­can’ pro­vi­sion in the $787 bil­lion eco­nomic stim­u­lus pack­age approved by the US Con­gress last week. ‘His­tory and eco­nomic the­ory show that in fac­ing a finan­cial cri­sis, trade pro­tec­tion­ism is not a way out, but rather could become just the poi­son that wors­ens global eco­nomic hard­ships,’ the offi­cial Xin­hua news agency said in a commentary.

“‘The G7 has realised that China needs to be brought into the fold of the global finan­cial sys­tem rather than be treated as a pariah just because of cur­rency inflex­i­bil­ity,’ UBS said in a note on Sun­day on the meet­ing. ‘This is also a real­i­sa­tion that as the world’s largest for­eign exchange reserve holder and the US’s largest cred­i­tor nation, China not only holds the purse strings but its con­tin­ued growth is cru­cial to help­ing the world recover from the eco­nomic crisis.’”

Source: Guy Din­more, Daniel Dombey and Kathrin Hille, Finan­cial Times, Feb­ru­ary 15, 2009.

Jing Ulrich (JPMor­gan): China urges spend­ing
“While the first phase of China’s stim­u­lus plans involved mas­sive infra­struc­ture projects and tax relief mea­sures for man­u­fac­tur­ers, the country’s lead­ers have now begun speak­ing with greater urgency on the need to encour­age con­sump­tion, says Jing Ulrich, chair­man, China equi­ties at JPMorgan.

“Recently, Pre­mier Wen Jiabao said bluntly that the trick to spurring con­sumer spend­ing was not to engage in slo­gans, but to put money in people’s pockets.

“‘This prin­ci­ple has been applied lit­er­ally in the issuance of con­sump­tion coupons by some local gov­ern­ments to low-income res­i­dents,’ Ms Ulrich says. ‘This prac­tice is likely to become more com­mon as an alter­na­tive to income tax cuts — which might only encour­age greater savings.’

“She adds that the gov­ern­ment is also turn­ing to rural res­i­dents to help stim­u­late growth.

“‘Hav­ing launched a rural sub­sidy pro­gramme for house­hold appli­ances and elec­tron­ics, author­i­ties are plan­ning to intro­duce a sim­i­lar scheme for light­weight vehicles.’

“But she acknowl­edges that while con­sumer stim­u­lus plans will help sup­port growth, China will remain heav­ily depen­dent on trade and fixed invest­ments until head­way is made in address­ing a lack of con­fi­dence in the country’s social safety net.

“‘Towards this end, the State Coun­cil recently approved plans to spend $123 bil­lion by 2011 to imple­ment a basic uni­ver­sal health­care system.’”

Source: Jing Ulrich, JP Mor­gan (via Finan­cial Times), Feb­ru­ary 19, 2009.

BCA Research: Chi­nese exports — not as weak as they appeared
“The Chi­nese New Year effect is mainly to blame for China’s extremely weak trade num­bers in January.

“Yesterday’s data release showed that Chi­nese exports tum­bled by 17% in Jan­u­ary and imports col­lapsed by 43% from a year ago. How­ever, it is impor­tant to note that China’s macro data in the first two months of the year tend to be dis­torted by the Chi­nese New Year hol­i­days. There is no ques­tion that January’s shock­ing trade data sug­gests that the eco­nomic envi­ron­ment remains highly chal­leng­ing. Nonethe­less, they are greatly exag­ger­ated by fewer work­ing days last month than Jan­u­ary 2008.

“Adjust­ing for this fac­tor, it is esti­mated that exports actu­ally increased by 6% from a year ago, while imports dropped by 26%. The lat­ter is also impacted by the tum­ble in com­mod­ity prices. The export sec­tor per­for­mance is con­sis­tent with the most recent pur­chas­ing man­agers’ sur­veys, which show a slight improve­ment in both export orders and indus­trial production.”

Source: BCA Research, Feb­ru­ary 17, 2009.

Peter Attard Mon­talto (Nomura): The threat from emerg­ing Europe
“One of the biggest threats to finan­cial sta­bil­ity in the euro­zone comes from the region’s expo­sure to cen­tral and east­ern Euro­pean banks, says Peter Attard Mon­talto, emerg­ing Europe econ­o­mist at Nomura.

“Dur­ing the boom years, he says, high inter­est rates in emerg­ing Europe led to a huge increase in for­eign cur­rency bor­row­ing by house­holds and com­pa­nies — most notably in euros and Swiss francs. ‘Bor­row­ers took the view that the for­eign cur­rency risk was low and off­set any­way by the credit cost saving.’

“But not only did euro­zone banks lend to these coun­tries, they also took very large stakes in local insti­tu­tions. ‘Indeed, more than 80% of emerg­ing Europe bank assets are owned by west­ern Euro­pean banks,’ Mr Attard Mon­talto says.

‘”This was fine dur­ing times of easy credit when the region’s economies were grow­ing strongly. How­ever, widen­ing spreads and a painful slow­down in growth now point to a seri­ous risk to these expo­sures as non-performing loans may reach above 25%.

“‘This will have grave con­se­quences for the cen­tral east­ern Euro­pean and Baltic economies as well as for the Euro­pean banks that hold the ulti­mate risk.

“‘Mar­ket sen­ti­ment is cur­rently very frag­ile but there is no clear agree­ment from the EU or other bod­ies about how to tackle this prob­lem. Swift action is needed as CEE cur­ren­cies con­tinue to weaken. This issue is not going to go away on its own.’”

Source: Peter Attard Mon­talto, Nomura (via Finan­cial Times), Feb­ru­ary 16, 2009.

Finan­cial Times: No escape from the east­ern pain
“Can west­ern banks extri­cate them­selves from the pain of an east­ern Euro­pean collapse?

“These east­ern neigh­bours owe west­ern banks — mainly in Aus­tria, Italy, France, Bel­gium, Ger­many and Swe­den — about $1,635 billion.

“Such a fig­ure is almost equiv­a­lent to the entire bal­ance sheet of a major bank in any one of these coun­tries, so the ques­tion is not trivial.

“How­ever, a bet­ter ques­tion might be: should west­ern banks extri­cate them­selves from east­ern Europe?

“For this group of coun­tries, where expo­sures are largest, is like the canary in the coalmine of Euro­pean trade. But as Poland, the Czech Repub­lic, Hun­gary, Roma­nia and Croa­tia sicken, west­ern Europe can­not hope to sur­vive with a dash back to the clean air.

“East­ern Europe is at the sharp end of the new finan­cial pro­tec­tion­ism, a nat­ural con­se­quence of gov­ern­ment involve­ment in banking.

“But it is also a big con­trib­u­tor to west­ern Europe’s economies, account­ing for almost one-quarter of Ger­man exports for instance.

“There has been a cer­tain amount of ven­dor finance at work here. High local inter­est rates as gov­ern­ments tried to cool growth and move in line with the euro­zone encour­aged con­sumers to import first west­ern debt in euros and Swiss francs, then more west­ern goods. Sadly, they have also imported the credit crunch through the same channels.

“The quandary is not going unrecog­nised — Hun­gary has already had Euro­pean Union sup­port. But nei­ther is it fully appre­ci­ated. Some believe the euro is doomed to trail after its poorer neigh­bours. The more the Pol­ish zloty or Hun­gar­ian florint sicken, the worse the euro will feel. There is a credit trade choice to be made, too: should you buy pro­tec­tion on, say, Aus­tria or Ger­many? As the canary chokes, the answer looks like the latter.”

Source: Paul Davies, Finan­cial Times, Feb­ru­ary 17, 2009.

Tags: Bill Gross, Brazil, BRIC, BRICs, Canadian Market, Central And Eastern Europe, Citigroup C, Corporate Earnings, Dollar Government, Dow Jones Industrial, Dow Jones Industrial Index, Economic Sectors, Emerging Markets, ETF, European Banks, Global Recession, Gold, Gold Bullion, Government Bonds, India, Investors Service, Kbw Bank Index, Msci Emerging Markets Index, Nasdaq Composite Index, Negative Sentiment, oil, Russell 2000 Index, Safe Havens, Sector Spdr, Xlf
Posted in Bonds, Canadian Market, Commodities, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, ETFs, Gold, India, Infrastructure, Markets, Oil and Gas, Outlook, Silver, US Stocks | Comments Off

Roubini Global Economics: Meeting the US financing needs

Sunday, February 22nd, 2009

By RGE Mon­i­tor

Bank res­cue via TARP funds, the bailout of the GSEs and two fis­cal stim­u­lus pack­ages have put severe pres­sure on the US fis­cal deficit since 2008. Despite hav­ing lit­tle bang for the buck in the short-term, the recently passed $787 bn fis­cal stim­u­lus pack­age will have a bill of $185 bn in FY2009 and $399 bn in FY2010 (based on Con­gres­sional Bud­get Office esti­mates), adding to the US gov­ern­ments financ­ing needs.

Given fur­ther down­side risks to growth and bank losses, another stim­u­lus pack­age and more funds for bank recap­i­tal­iza­tion will be required dur­ing 2009-10.

After a deficit of $455 bn in FY2008, these expen­di­tures will push the US fis­cal deficit to $1.6–1.8 tril­lion in FY2009 (already $569 bn in Oct 2008-Jan 2009) and over a tril­lion in FY2010. This along with plung­ing indi­vid­ual, cor­po­rate and invest­ment related tax rev­enues imply the country’s tar­get to bal­ance the bud­get by 2012 might not be achieved. The Con­gress has already raised the ceil­ing for national debt to $12 tril­lion while the govt debt/GDP ratio is expected to exceed 85% in FY 2009.

The financ­ing needs of the US gov­ern­ment will thus be very high in 2009 and 2010, lead­ing many to ques­tion how these needs will be met, par­tic­u­larly as the reduc­tion in com­mod­ity prices and cap­i­tal inflows to emerg­ing mar­kets has slowed cen­tral bank reserve accu­mu­la­tion. Trea­sury yields have already been ris­ing from their Novem­ber 2008 lows on con­cerns of increased sup­ply. Sus­pi­cions that the inter­ven­tions will raise Trea­sury debt issuance could exac­er­bate the sell-off in longer-dated Trea­suries — the bench­mark 10-year note broke above 3% on Feb­ru­ary 9 for the first time since Novem­ber 2008.

There are sev­eral stum­bling blocks ahead for trea­suries. Despite some recent climbs, yields are still near record lows, leav­ing lit­tle scope for fur­ther cap­i­tal gains from price appre­ci­a­tion. The low or neg­a­tive carry of US trea­suries over sov­er­eign debt else­where plus the long-term down­trend in the dol­lar erodes the rel­a­tive appeal and total return of trea­suries to their for­eign holders.

Mean­while US retail investor pur­chases of sav­ings bonds have been declin­ing for the past 20 years.

For­eign cen­tral bank pur­chases of US debt to build up FX reserves may wane as export receipts fall on a con­trac­tion of global trade. For­eign trea­suries are turn­ing their spend­ing inwards to stim­u­late their own slump­ing economies which may reduce their pur­chases of US assets. Mid­dle East­ern oil exporters, for exam­ple, are absorb­ing most if not all of their now much lower oil rev­enues at home. Saudi Arabia’s for­eign assets fell in Decem­ber in what could be the start of a trend.

Crowd­ing in the world mar­ket for gov­ern­ment debt could inten­sify the com­pe­ti­tion for buy­ers. While Trea­sury issuance will reach unprece­dented lev­els this year, other gov­ern­ments around the world are in sim­i­lar predica­ments and will pay higher yields to absorb their debt sup­ply increases.

Although the scale of increase in trea­sury issuance is quite exten­sive, there is rea­son to believe that demand will hold up. Risk aver­sion, debt mon­e­ti­za­tion, defla­tion, delever­ag­ing, and USD fund­ing short­ages abroad as cor­po­rates seek to refi­nance their debt may cap the rise in trea­sury yields. Uncer­tainty over the effec­tive­ness of the government’s inter­ven­tions may keep risk appetite frag­ile and the pref­er­ence for liq­uid assets high as cor­po­ra­tions, espe­cially in the emerg­ing world, seek to refi­nance their debt and gov­ern­ments pro­vide cap­i­tal to the banks.

The lack of a quick fix to the finan­cial cri­sis adds sup­port to trea­suries as investors may con­tinue to shift from risky assets to fixed income espe­cially Trea­suries even if the flight to the shortest-term assets may wane.

Like the Trea­sury, the Fed­eral Reserve is con­sid­er­ing using old tools to solve cur­rent prob­lems. At the last FOMC meet­ing on Jan­u­ary 28, the Fed announced it was pre­pared to buy longer-term trea­suries to keep long-term mar­ket inter­est rates low. Debt mon­e­ti­za­tion may fail to keep trea­sury yields low though, if mar­kets believe quan­ti­ta­tive eas­ing will fail.

Strong defla­tion­ary head­winds (such as ane­mic credit growth) could pare the pre­ma­ture climb in infla­tion expec­ta­tions seen so far this year.

Finally, as the US sav­ings rate increases back to its decade ago aver­age of 6%, Amer­i­cans may start plow­ing any money left over from debt repay­ment into sav­ings bonds.

Risky assets had ral­lied recently but the con­tin­ued dete­ri­o­ra­tion in eco­nomic fun­da­men­tals around the world sug­gests the dol­lar will once again enjoy its safe haven sta­tus once investors flee back to Trea­suries. Delever­ag­ing of cross-border USD-denominated lia­bil­i­ties is still pro­vid­ing juice for the dol­lar against G10 cur­ren­cies (except the yen and swiss franc), though with less vigor than in Q4 2008. Against the euro, the US dol­lar will likely strengthen a lit­tle fur­ther in the near-term on expected ECB rate cuts, inten­si­fy­ing East­ern Euro­pean finan­cial tur­moil and euro­zone sov­er­eign credit down­grades. Later on though, rate dif­fer­en­tials may tip the over­val­ued dol­lar into a cor­rec­tion if ECB eas­ing looks likely to trough at a higher level than the Fed.

Against the yen, the US dol­lar will likely gain briefly in the near-term as mar­kets focus on Japan’s dete­ri­o­rat­ing eco­nomic fun­da­men­tals before spec­u­la­tion over end-March yen repa­tri­a­tion and wax­ing risk aver­sion reclaim the dollar.

In gen­eral, the dol­lar will ben­e­fit in the short-term from US gov­ern­ment inter­ven­tions if they appear to put the US ahead of the curve in fight­ing the reces­sion com­pared to Europe and Japan.

In the near term, the need for liq­uid assets, the lack of global alter­na­tives (the Euro­pean bond mar­ket is frag­mented and under stress from macro­eco­nomic diver­gences) and the depth of liq­uid assets in the US may keep attract­ing cap­i­tal from both for­eign and US investors.

GCC coun­tries, which aside from Saudi Ara­bia were once the most risk tol­er­ant of sov­er­eign investors, are now seek­ing out more liq­uid assets to meet spend­ing and financ­ing needs.

Fur­ther­more, with the global eco­nomic out­look being weak and trade con­tract­ing, coun­tries like China may keep inter­ven­ing to keep their cur­ren­cies weaker in the hope of export com­pet­i­tive­ness, keep­ing them buy­ing US assets. The recent uptick in risk appetite in China and some­what opti­mistic eco­nomic indi­ca­tors may increase inflows into China even if hopes of an eco­nomic turn­around seem as yet, pre­ma­ture. China and Japan, the largest hold­ers of US debt, are wary of a col­lapse in dol­lar assets which would reduce their past hold­ings — avoid­ing such an out­come might keep pur­chases on stream, if at a more sub­dued pace.

Fur­ther­more other assets, includ­ing per­haps cor­po­rate bonds could also ben­e­fit from inflows as they did in Decem­ber 2008, In short, it seems the US dol­lar still has some tricks left up its sleeve before it capit­u­lates to a long-term downtrend.

Trea­suries and the US dol­lar are not the only instru­ments ben­e­fit­ing from risk aver­sion. Gold could be con­sid­ered an even safer ’safe haven’ if it weren’t for its sus­cep­ti­bil­ity to spec­u­la­tive excess. But that didn’t stop strong demand for a safe haven and a store of value from push­ing gold up to the $950/oz level on Comex as of Feb­ru­ary 12, 2009 — 25% above its fair value assayed by phys­i­cal sup­ply and demand. Uncer­tainty over the global eco­nomic out­look con­tin­ues to send investors run­ning for cover in cash-like instruments.

But as sov­er­eign credit risk rises around the world due to sharp increases of pub­lic debt, some investors are scur­ry­ing towards apo­lit­i­cal cash-like instru­ments. Gold fits the bill as it is not tied to any par­tic­u­lar country’s asset qual­ity. In addi­tion, ris­ing infla­tion expec­ta­tions (in the longer-term) have spurred demand for gold as investors worry mas­sive gov­ern­ment spend­ing and pos­si­bly debt mon­e­ti­za­tion will be infla­tion­ary, which would have dele­te­ri­ous effects on cur­ren­cies as a store of value.

Despite likely pull­backs in the gold price this week as incom­ing data sig­nals defla­tion, ana­lysts believe gold will reach $1000/oz within 3 months due to ongo­ing uncer­tainty over the out­look for the global econ­omy, infla­tion, sov­er­eign debt and cur­ren­cies. Yet if there is a reduc­tion of risk relat­ing to sov­er­eign defaults, gold could soften in the mid-term espe­cially if cen­tral banks keep infla­tion­ary pres­sures under con­trol once the eco­nomic recov­ery begins and the veloc­ity of money picks up.

Source: RGE Mon­i­tor, Feb­ru­ary 17, 2009.

Tags: Bailout, Capital Inflows, Commodity Prices, Congressional Budget Office, Debt Issuance, Downside Risks, Fiscal Deficit, Fiscal Stimulus, Gdp Ratio, Govt Debt, Gses, Monitor Bank, Price Appreciation, Record Lows, RGE Monitor, Roubini Global Economics, Sovereign Debt, Stimulus Package, Target, Treasury Yields
Posted in Bonds, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook | Comments Off

Stocks Between a Rock and a Hard Place

Sunday, February 22nd, 2009

Stock mar­kets remain caught between the actions of cen­tral banks fran­ti­cally try­ing to fend off a total eco­nomic melt­down on the one hand, and a wors­en­ing eco­nomic and cor­po­rate pic­ture on the other.

Mean­while, the Dow Jones Indus­trial Index has fallen to its low­est level since Octo­ber 2002. It is note­wor­thy that it took five years for the Index to increase from 7,500 to 14,000, but only 16 months to wipe out the entire 2002–2007 advance.

I have just returned from a busi­ness visit to a rather mor­bid Europe, with the sight of thou­sands of peo­ple queu­ing for unem­ploy­ment ben­e­fits in Ire­land still fore­most in my mind. The fact that a num­ber of this week’s video clips refer to the dire sit­u­a­tion in Europe, and specif­i­cally the cri­sis in a few East­ern Euro­pean coun­tries, there­fore comes as no surprise.

But although gloom pre­vails, money-making oppor­tu­ni­ties do exist as high­lighted by John Mur­phy (StockCharts.com) and Den­nis Gart­man (The Gart­man Let­ter) who expect gold bul­lion to keep shining.

CNBC: McCul­ley & Leuthold — invest­ment strate­gies for a volatile mar­ket
“Paul McCul­ley, man­ag­ing direc­tor at PIMCO, and Steven Leuthold, chair­man of Leuthold Wee­den Cap­i­tal Man­age­ment, share their best strate­gies for this mar­ket environment.”

Source: CNBC, Feb­ru­ary 18, 2009.

Bloomberg: Obama pledges $275 bil­lion to stem mort­gage foreclosures

Click here for the article.

Source: Bloomberg, Feb­ru­ary 18, 2009.

CNBC: Dimon — hous­ing plan “well designed”
“Pres­i­dent Obama’s hous­ing plan is very ele­gant and well-designed, accord­ing to JPMor­gan Chase CEO Jamie Dimon.”

Source: CNBC, Feb­ru­ary 18, 2009.

Yahoo Tech Ticker: Whalen — “nation­al­iza­tion” of Citi and BofA inevitable
“In the past few months, an increas­ing num­ber of econ­o­mists have become con­vinced that the best ‘fix’ for the bank­ing sys­tem is a gov­ern­ment takeover and restruc­tur­ing of com­pa­nies like Cit­i­group. And some voices in the gov­ern­ment are finally sup­port­ing this idea. Over the week­end, Sen­a­tor Lind­sey Gra­ham said he thought ‘nation­al­iza­tion’ has to be con­sid­ered, because he doesn’t want to throw good money after bad.

“What would this mean, exactly? The gov­ern­ment run­ning our banks for the next decade? No, says our guest Chris Whalen of Insti­tu­tional Risk Ana­lyt­ics. ‘Nation­al­iza­tion’ is a poor word to describe the process. ‘Receiver­ship and restruc­tur­ing’, along the lines of what the FDIC did with WaMu, is the right way to think about it.”

Source: Yahoo Tech Ticker, Feb­ru­ary 18, 2009.

TheStreet.com: Peter Schiff slams TARP 2
“Peter Schiff, pres­i­dent of Euro Pacific Cap­i­tal, takes on Trea­sury Sec­re­tary Tim Geithner’s bank­ing relief plan in a spe­cial ‘light­ning round’ session.”

Source: TheStreet.com, Feb­ru­ary 15, 2009.

CNN: Stim­u­lus plan irks Ron Paul
“For­mer pres­i­den­tial can­di­date Ron Paul is angered at being left in the dark about the details of the stim­u­lus plan.”

Source: CNN, Feb­ru­ary 16, 2009.

CNBC: Greenspan on the finan­cial cri­sis
“For­mer Fed­eral Reserve Chair­man Alan Greenspan deliv­ers a speech on the finan­cial cri­sis at The Eco­nomic Club of New York.”

Source: CNBC, Feb­ru­ary 18, 2009.

CNBC: Whit­ney on the bank­ing sec­tor
“Bank­ing stocks are all lower today as the out­look for the indus­try fails to brighten. Mered­ith Whit­ney, CEO of the Mered­ith Whit­ney Advi­sory Group, has been on point with her out­look for finan­cials and tells CNBC what’s next for the sector.”

Source: CNBC, Feb­ru­ary 19, 2009.

Bloomberg: Ross says investors will wait for bank writedowns

Click here for the article.

Source: Jason Kelly and Carol Mas­sar, Bloomberg, Feb­ru­ary 12, 2009.

Char­lie Rose: A con­ver­sa­tion with IMF’s Dominique Strauss-Kahn

Source: Char­lie Rose, Feb­ru­ary 13, 2009.

Char­lie Rose: Mishkin, Roubini, Zandi & Eas­ton — dis­cus­sion about the economy

Source: Char­lie Rose, Feb­ru­ary 18, 2009.

Finan­cial Times: Mar­tin Wolf — the slow path to recov­ery
“Mar­tin Wolf on how coun­tries will extri­cate them­selves from the global finan­cials crisis.”

Source: , Finan­cial Times, Feb­ru­ary 17, 2009.

Bloomberg: Bernanke speaks on the econ­omy
Fed Chair­man Ben Bernanke reveals the Fed’s long-term eco­nomic fore­cast to the National Press Club in Washington.

Click here for Part 2 of Bernanke’s speech.

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

Bloomberg: In-depth look — the hous­ing crunch
“Analy­sis and dis­cus­sion with Nico­las Retsi­nas of Har­vard University.”

Click here for Part 2 of the discussion.

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

Bloomberg: Biggs bull­ish on US stocks
“US stocks are poised to rise because eco­nomic indi­ca­tors are start­ing to improve, said Bar­ton Biggs, man­ag­ing part­ner at Traxis Part­ners LLC in New York. ‘There’s too much bear­ish­ness and the mar­ket is poised for a big, big rally,’ said Biggs.”

Click here for the article.

Source: Bloomberg, February 18, 2009.

Bloomberg: StockCharts’ John Murphy - gold to outshine

Source: Bloomberg (via YouTube), February 14, 2009.

Bloomberg: Gartman sees gold as world’s “second reserve currency”
“Dennis Gartman, economist and editor of the Gartman Letter, talks with Bloomberg’s Erik Schatzker and Deirdre Bolton about the outlook for gold prices. Gartman also discusses the state of the Japanese economy and why he favors selling the yen.”

Source: Bloomberg, Feb­ru­ary 17, 2009.

The Wall Street Jour­nal: China’s billion-dollar hunger for resources
“WSJ’s Rebecca Blu­men­stein and Andrew Browne dis­cuss China’s recent invest­ment in nat­ural resources, includ­ing a $25 bil­lion deal with Rus­sia for oil.”

Source: The Wall Street Jour­nal, Feb­ru­ary 18, 2009.

Finan­cial Times: Austria’s cen­tral banker on the EU eco­nomic cri­sis
“Austria’s cen­tral bank gov­er­nor Ewald Nowotny talks to eco­nom­ics edi­tor Chris Giles about pos­si­ble ‘uncon­ven­tional mea­sures’ by the Euro­pean Cen­tral Bank, how EU states are more united on pol­icy, and the need to help east­ern Euro­pean coun­tries out­side the EU.”

Source: Finan­cial Times, Feb­ru­ary 17, 2009.

The Wall Street Jour­nal: A grim fore­cast for East­ern Europe
“Is East­ern Europe on the brink of eco­nomic col­lapse? WSJ’s Nik Deo­gun and Joanna Slater dis­cuss the rea­sons for worry amid the slump in East­ern Euro­pean currencies.”

Source: The Wall Street Jour­nal, Feb­ru­ary 18, 2009.

Bloomberg: Faber says Ger­many, France may have to bail out nations
“Marc Faber, pub­lisher of the ‘Gloom, Boom & Doom Report’, talks with Bloomberg’s Deirdre Bolton about the pos­si­bil­ity that France and Ger­many may have to bail out entire nations as Euro­pean gov­ern­ment bud­gets buckle under the weight of reces­sion. Faber also dis­cusses the out­look for the US stock market.”

Source: Bloomberg, Feb­ru­ary 18, 2009.

Tags: Bofa, Central Banks, Cnbc, Commodities, Dennis Gartman, Dow Jones Industrial, Dow Jones Industrial Index, Eastern European Countries, Economic Meltdown, energy, Gartman Letter, Gold, Gold Bullion, Government Takeover, Jamie Dimon, Jpmorgan Chase, Management Share, Mortgage Foreclosures, Natural Resources, Oil Sands, Paul McCulley, Place Stock, Steven Leuthold, Stockcharts, Unemployment Benefits
Posted in Economy, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook, US Stocks | Comments Off

Vitaliy Katsenelson: The pain of mean reversion

Friday, February 20th, 2009

This post is a guest con­tri­bu­tion by Vitaliy N. Kat­senel­son*, author of Active Value Invest­ing: Mak­ing Money in Range-Bound Mar­kets and direc­tor of research at Invest­ment Man­age­ment Asso­ciates.

The stock mar­ket has dropped. Cor­po­rate prof­its have col­lapsed. And profit mar­gins have reverted toward the mean. What is next?

Before I dive into the dis­cus­sion, let me explain the chart below, which I named appro­pri­ately, “The pain of mean reversion.”

I looked at reported earn­ings for S&P 500 and com­pared them to the “aver­age case” earn­ings sce­nario. In the “aver­age case” sce­nario I took reported earn­ings of S&P 500 in the early 1990s and grew them at 6% — an aver­age growth rate of GDP over the last cen­tury which hap­pens to be the same as earn­ings growth for stocks dur­ing the same century.

If the econ­omy had no cycli­cal­ity and profit mar­gins remained con­stant, you would see nice, steady growth earn­ings for S&P 500 stocks like the one in the chart.

Of course, profit mar­gins do not stay con­stant — they fluc­tu­ate, thus actual earn­ings swing above and below the steady 6% trend line.

Click here for larger chart.

How far will earn­ings drop?
You’ll never go wrong quot­ing Mark Twain when he said “His­tory doesn’t repeat itself, but it does rhyme.” Our chal­lenge as investors is to look at the past and fig­ure out how his­tory will rhyme with the future.

If you were to look at the recent his­tory of the 2001 reces­sion, earn­ings dropped 54% from their highs to their lows. If S&P 500 reported earn­ings were to drop by the same amount this time around they’d be at about $39. We are already below that level, 2008 esti­mates for S&P 500 were revised down again, now to $28. How­ever, this is where Twain’s rhyming think­ing becomes impor­tant — note that in 2001 earn­ings went only 18% above the “aver­age case” line; in 2007 they were 31% above that line. If we were to fol­low the higher they climb the harder (deeper) they fall logic, this would lead us to believe that earn­ings will drop fur­ther this time, esti­mates for early 2009 earn­ings indi­cate that.

When will we see aver­age earn­ings?
The good news is S&P “aver­age case” earn­ings are about high $70s to low $80s a share (see big red squares in yel­low shaded area) — which would make the mar­ket cheap (with a PE of about 10). But here is the bad news (don’t shoot the mes­sen­ger please) — we just won’t see those “aver­age case” num­bers for a while.

The 2001 reces­sion was dri­ven by the over­ca­pac­ity in the cor­po­rate sec­tor. Cor­po­ra­tions ratio­nal­ized their inven­to­ries and fac­to­ries, higher unem­ploy­ment fol­lowed — we were in a reces­sion. Excesses were worked out, cor­po­ra­tions started to hire, and voila — we were out of the reces­sion. Of course the recov­ery process was also aided by a “friendly” Fed, it took inter­est rates to (at the time) an unprece­dented low lev­els and kept them there until cor­po­ra­tions and con­sumers got seri­ously drunk on cheap money and spent them­selves into seri­ous debt for which we are pay­ing now.

In the 2001 reces­sion it took two and a half years for earn­ings to rise from their bot­tom to their average.

Unfor­tu­nately we’ll not be that lucky this time — we are in a con­sumer reces­sion. Con­sumers are two thirds of the econ­omy and they are delever­ag­ing. As a side note: This delever­ag­ing goes beyond big ticket dis­cre­tionary items like large screen TVs and SUVs. Now it is show­ing up in lower con­sump­tion of sta­ples like iced tea by Snap­ple which com­petes with cheap­est com­mod­ity of all — tap water. Now, more expen­sive branded prod­ucts like dia­pers and tis­sue made by Kim­berly Clark are forced to com­pete with generic store brands. The mean­ing of the word sta­ple is being rede­fined by this economy.

The Fed, being even “friend­lier” than the last time, has low­ered inter­est rates to almost zero, buy­ing long-term bonds etc. But this time around the Fed’s booze will not do the trick — con­sumers are still suf­fer­ing a hang­over from the last Fed’s “help” — they don’t want to bor­row and banks, after incur­ring huge losses, are behav­ing like real banks — only giv­ing loans to peo­ple who’ll pay them back.

In addi­tion to con­sumer delever­ag­ing, gov­ern­ment debt is sky­rock­et­ing with every bailout, thus taxes and inter­est rates are likely to be sig­nif­i­cantly higher once the econ­omy normalizes.

The Earn­ings recov­ery will likely take longer than many expect, there­fore, there is a very high pos­si­bil­ity that the “aver­age case” earn­ings growth going for­ward will be below the his­tor­i­cal aver­age of 6%

Are we about to embark on a sec­u­lar bull mar­ket?
The mar­ket is a dis­count­ing mech­a­nism — stocks will rise in the antic­i­pa­tion of a future earn­ings rebound, before the rebound. Sim­i­lar to the stock mar­ket fore­cast­ing ten out of the last three reces­sions, it will dis­count a few recov­er­ies before the real one takes hold.

What does this mean? We’ll likely have a few “fake” head starts and dis­ap­point­ments before the actual earn­ings recov­ery takes place.

As I argued in my book Active Value Invest­ing: Mak­ing Money in Range-Bound Mar­kets, we are very likely in the midst of a sec­u­lar range-bound (trend­less, volatile but going nowhere) mar­ket that started in early 2000. His­tor­i­cally, range-bound mar­kets started at the end of the sec­u­lar bull mar­ket when P/Es were above aver­age. They ended when P/Es stopped declin­ing (mean revert­ing), after a visit to below aver­age ter­ri­tory (around 10–11 or less). The cur­rent range-bound mar­ket started at much above aver­age val­u­a­tion and will likely rhyme with the past fin­ish at below aver­age val­u­a­tion as well.

Based on the Pain of mean rever­sion chart we are trad­ing some­where between 30 and 10 times earn­ings. How­ever, nei­ther num­ber is very mean­ing­ful. Let me explain:

2008 esti­mates of $28, the “E” in P/E of 30, are dis­torted by mas­sive charge offs.

The “aver­age case,” the “E” ($80) that went into P/E of 10, lies in a far away land that … well, let me put it this way, you and I will get to grow sick of pres­i­den­tial cam­paign adver­tise­ments at least once or maybe even twice before that “E” is in sight.

Even based on 2010 “E” esti­mates ($40) stocks in the S&P 500 are trad­ing at 21 times earnings.

Despite the decline, the mar­ket is still not cheap. Sorry, we are not likely to embark onto the new sec­u­lar bull mar­ket any­time soon. His­tory and data sug­gest that the choppy mar­kets that we have seen since 2000 will likely con­tinue. Own­ing a broad mar­ket index will not pave a road to pros­per­ity. It comes down to not just own­ing stocks but own­ing the right stocks.

P.S. As a side note I believe sig­nif­i­cant earn­ings write-offs will con­tinue well into next year as finan­cial stocks will pass their write-off torch to com­pa­nies in energy, mate­ri­als and indus­trial sec­tors — stuff stocks — that will be writ­ing off the invest­ments they’ve made over the last five years.

By the time, I fin­ished putting these thoughts together, which on and off took about two weeks, 2008, 2009 and 2010 esti­mates were taken down by about 20–25%.

If you missed it, Vitaliy did three 5 minute seg­ment inter­views on Yahoo TechTicker on Tues­day with Aaron Task and Henry Blodget.

1. Only Time Can Cure What Ails Us: Stocks Slump on Bailout, Stim­u­lus News

2. Range-Bound at Best: The Long View on Stocks Isn’t Much Bet­ter, says Vitaliy Kat­senel­son

3. Active Value Invest­ing: The Bull Case for EBAY, Philip Mor­ris and Supervalu

* Vitaliy Kat­senel­son is author of Active Value Invest­ing: Mak­ing Money in Range-Bound Mar­kets and direc­tor of research at Invest­ment Man­age­ment Asso­ciates. He is also an adjunct fac­ulty mem­ber at the Uni­ver­sity of Col­orado at Den­ver, Grad­u­ate School of Busi­ness where he teaches Prac­ti­cal Equity Analy­sis and Port­fo­lio Man­age­ment. Vitaliy, a CFA char­ter holder, received both his degrees — bach­e­lor of sci­ence and mas­ter of sci­ence in finance — from the Uni­ver­sity of Col­orado at Den­ver, where he grad­u­ated cum laude.

Tags: Case Line, Case Scenario, Corporate Profits, Director Of Research, Early 1990s, Earnings Growth, Estimates, GDP, Growth Stocks, Investment Management, Lows, Management Associates, Mark Twain, Market Profits, Mean Reversion, Profit Margins, Recent History, Recession, Stock Market, Stocks, Trend Line
Posted in Bonds, Economy, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Bill Gates' Portfolio Holdings and Recent Buy

Thursday, February 19th, 2009

Bill Gates has recently declared that Cas­cade Invest­ment, the com­pany that is his invest­ment arm, has acquired a 5.2% stake in East­man Kodak. Kodak is still in the midst of a rapid and chal­leng­ing tran­si­tion from film to dig­i­tal media and their sales rev­enues were down 24% in Q4. The tech saavy founder of Microsoft, however, likes low-tech trans­ports (rail­ways), util­i­ties, tele­vi­sion (Grupo Tele­visa, con­sumer non-durables (FEMSA, Coca Cola FEMSA), Berkshire Hath­away, and Inflation-protected ETFs, for his portfolio.  Here from Barron's, Tech Trader Daily, is a sum­mary of the SEC fil­ings discoveries.

Nonethe­less, it turns out this morn­ing that East­man Kodak has attracted no less a fan than Bill Gates. In a fil­ing with the SEC, the Microsoft co-founder dis­closed a 5.2% stake in the company’s shares, with posi­tions held by both Cas­cade Invest­ment, his invest­ment arm, and the Bill and Melinda Gates Foun­da­tion.

In another fil­ing this morn­ing, Cas­cade pro­vided a list of its largest hold­ings; here are all the stock in which it holds at least $10 mil­lion worth of securities:

• Cana­dian National Rail­way (CNI), $1.279 Billion
• Repub­lic Ser­vices (RSG), a trash hauler, $879 million.
• Fomento Eco­nom­ico Mex­i­cano, (FMX) a Mex­i­can bot­tler known as FEMSA, $678 million.
• Berk­shire Hath­away (BRK), run by Bill’s pal War­ren Buf­fett, $391 million.
• Grupo Tele­visa (TV), Mex­i­can media play, $301 million.
• Auto­Na­tion (AN), oper­a­tor of auto dealiers, $112 million.
• Otter Tail (OTTR), an elec­tric power com­pany, $79 million.
• PNM Resources (PNM), another elec­tric power com­pany, $71 million.
• Kodak (EK), $52.3 million.
• West­ern Asset/Claymore Inflation-Linked Secu­ri­ties & Income Fund (WIA), a closed end fund, $49 million.
• West­ern Asset/Claymore Infla­tion– Linked Oppor­tu­ni­ties & Income Fund (WIW), another closed end fund, $46 million.
• Coca-Cola Femsa (KOF), $37.3 million.
• Patriot Coal (PCX), $15.1 million.

Source: Barron's Tech Trader Daily
http://blogs.barrons.com/techtraderdaily/2009/02/17/bill-gates-takes-52-ek-stake-a-look-at-his-holdings/

Tags: Berkshire Hathaway, Bill And Melinda Gates, Bill And Melinda Gates Foundation, Bill Gates, Bottler, Canadian Market, Canadian National Railway, Closed End Fund, Coca Cola Femsa, Eastman Kodak, ETF, Founder Of Microsoft, Grupo Televisa, Investment Arm, Melinda Gates Foundation, Otter Tail, Pnm Resources, Portfolio Holdings, Republic Services, Trash Hauler, Warren Buffett, Western Asset
Posted in ETFs, Markets | Comments Off

How the (financial) world nearly ended at 2:00 p.m., September 18, 2008

Wednesday, February 18th, 2009

At 2 min­utes, 20 sec­onds into this C-Span video clip, Rep. Paul Kan­jorski of Penn­syl­va­nia explains how the Fed­eral Reserve told Con­gress mem­bers about a "tremen­dous draw-down of money mar­ket accounts in the United States, to the tune of $550 bil­lion dol­lars." Accord­ing to Kan­jorski, this elec­tronic trans­fer occurred over the period of an hour or two. Its enough to put a knot in your stomach.

Kan­jorski dis­cusses the fol­low­ing dis­clo­sure by Bernanke and Paulson:

On Thurs­day (Sept 18), at 11am the Fed­eral Reserve noticed a tremen­dous draw-down of money mar­ket accounts in the U.S., to the tune of $550 bil­lion was being drawn out in the mat­ter of an hour or two. The Trea­sury opened up its win­dow to help and pumped a $105 bil­lion in the sys­tem and quickly real­ized that they could not stem the tide. We were hav­ing an elec­tronic run on the banks. They decided to close the oper­a­tion, close down the money accounts and announce a guar­an­tee of $250,000 per account so there wouldn't be fur­ther panic out there.

If they had not done that, their esti­ma­tion is that by 2pm that after­noon, $5.5 tril­lion would have been drawn out of the money mar­ket sys­tem of the U.S., would have col­lapsed the entire econ­omy of the U.S., and within 24 hours the world econ­omy would have col­lapsed. It would have been the end of our eco­nomic sys­tem and our polit­i­cal sys­tem as we know it.

We are no bet­ter off today than we were 3 months ago because we have a decrease in the equity posi­tions of banks because other assets are going sour by the moment.

This is fur­ther con­firmed on Sep­tem­ber 24, 2008, in a House Sub Com­mit­tee Meet­ing at which both Bernanke and Hank Paul­son are present, and Rep. Kan­jorski con­firms the facts with Paulson.

http://financialserv.edgeboss.net/wmedia/financialserv/hearing092408.wvx

Go to 1hr 50 mins 48 secs. into the video. Paul­son answers Kanjorski's ques­tions about the $550-billion run, but waf­fles a fair bit. You be the judge.

Hat tip: Live Leak, Zero Hedge

Tags: 2pm, Bernanke, Billion Dollars, C Span, Committee Meeting, Congress Members, Economic System, Electronic Transfer, Equity Positions, Federal Reserve, Hank Paulson, Hat Tip, Money Accounts, Money Market Accounts, Money Market System, Paul Kanjorski, September 18, Trillion, Waffles, Wmedia, World Economy
Posted in Economy, Markets | Comments Off

Warren Buffett: Portfolio Update (From 13F Filings)

Wednesday, February 18th, 2009

Thanks to the work of MarketFolly.com, we can get a glimpse into the deal­ings of some of the most promi­nent and suc­cess­ful hedge funds and insti­tu­tional investors. These are use­ful as they point to tac­ti­cal oppor­tu­ni­ties and some­times, when hedge funds take short posi­tions, they pro­vide lucid guid­ance, point­ing to areas or stocks in the mar­ket that should be sold or avoided, or for those with the stom­achs, to fol­low short.

War­ren Buf­fett, the leg­endary investor and ora­cle from Omaha, has filed Berk­shire Hathaway's 13F and we get a glimpse as to what he's been up to in these tumul­tuous mar­kets. The man needs no intro­duc­tion, but if you want to learn more about him: read his biog­ra­phy, its very insight­ful. The man is known for his buy and hold strat­egy and he has amassed some large stakes in great brands and great com­pa­nies. This cri­sis has pre­sented numer­ous oppor­tu­ni­ties in his eyes, as he has started buy­ing Amer­i­can. He most recently bought bonds in Tiffany's and Harley David­son. Ear­lier on, he got involved with Gold­man Sachs and Gen­eral Elec­tric with large multi-billion dol­lar pre­ferred pur­chases. Do you notice a theme yet? He sees oppor­tu­nity in Amer­ica. He sees oppor­tu­nity in Amer­i­can brands and Amer­i­can com­pa­nies. Heck, he had even men­tioned pos­si­bly buy­ing back Berk­shire stock, which is the War­ren Buf­fett brand in and of itself. But, enough about all his recent pur­chases that every­one already knows about. Let's get to the info revealed in the 13F.

To be hon­est, the changes to his port­fo­lio were kind of lack­lus­ter. After all the Buf­fett activ­ity we've seen lately, there's noth­ing mas­sive to report. But, there have been some changes indeed. A while ago, we had men­tioned that Buf­fett was sell­ing puts on Burling­ton North­ern. He was clearly draw­ing a line in the sand as to where he wanted to add to his already large posi­tion in BNI. And, that strat­egy worked out as he was assigned more BNI shares to add to his large pile.

The sec­ond (and arguably biggest) change to his port­fo­lio would be the large posi­tion he picked up in Nalco (NLC). This is a brand new posi­tion for him and he has over 8.7 mil­lion shares. Nalco does a lot of water treat­ment among other things, so its inter­est­ing to see him step into this arena. We've been read­ing a lot recently about the impend­ing clean water prob­lems world­wide, and its safe to say that Buf­fett has as well.

The third most notice­able change would be in regards to his John­son & John­son (JNJ) posi­tion. He sold over half his posi­tion in this name from over 60 mil­lion shares down to around 28 mil­lion shares. If we were to wager a guess, we'd say that Buf­fett did so in a "sell­ing when its the hard­est to" kind of move. The right plays are usu­ally the hard­est to make. And, if you think about it, sell­ing a con­sumer sta­ples name in the heart of the reces­sion is prob­a­bly a tough play. But, it could very well be the right play, as more names could be attrac­tive once we emerge from these dif­fi­cult times. Who knows though, as that's just pure spec­u­la­tion on our part. For all we know, Buf­fett could sim­ply be trad­ing his 'safe' port­fo­lio plays for a solid income stream of 10–15% inter­est, which he has gar­nered in some of his most recent deals. And, who wouldn't take that? Those were some sweet terms, so that would also make per­fect sense. Addi­tion­ally, he sold some of his Proc­ter & Gam­ble (PG), another well known con­sumer sta­ples name.

Buf­fett is the third name we've cov­ered in our fourth quar­ter 2008 hedge fund port­fo­lio track­ing series. We're track­ing a ton of promi­nent names and we invite you to check out what John Paul­son and Carl Icahn were up to recently, as we've already cov­ered their move­ments. Look for 35+ more hedge funds in our daily cov­er­age.

Bot­tom line in all things Buf­fett: He started a new posi­tion in Nalco (NLC), and he picked up some more Burling­ton North­ern (BNI), & NRG Energy (NRG) among oth­ers. He sold some John­son & John­son (JNJ), Proc­ter & Gam­ble (PG), US Ban­corp (USB), & Wells Fargo (WFC), among others.

This arti­cle was con­tributed by MarketFolly.com.

Tags: 13f Filings, American Brands, Berkshire Hathaway, Bni, Burlington Northern, ETF, General Electric, Glimpse, Goldman Sachs, Harley Davidson, Hedge Funds, Insightful, Institutional Investors, Line In The Sand, Recent Purchases, Secon, Selling Puts, Stomachs, Tactical Opportunities, Warren Buffett, Warren Buffett Portfolio
Posted in Bonds, ETFs, Gold, Markets | Comments Off

Jeremy Grantham: Obama and the Teflon Men, and Other Short Stories (Part 2)

Wednesday, February 18th, 2009

I pub­lished the first part of Jeremy Grantham’s quar­terly newslet­ter, “Obama and the Teflon Men, and Other Short Sto­ries (Part 1)" on this site a few weeks ago. The sec­ond part of the newslet­ter by the chair­man of Boston-based GMO has also now been published.

Whereas Part 1 included thoughts on the recent loss of per­ceived wealth and Pres­i­dent Obama’s appoint­ments in the finan­cial arena, Part 2 deals with value traps, tran­si­tion­ing from bub­bles to busts, ethics in the finan­cial indus­try, and the value of GMO’s asset allo­ca­tion exper­tise in an envi­ron­ment of “near certainties”.

Click the links for the two parts of the newslet­ter: Part 1 and Part 2.

Source: Source: Jeremy Grantham, GMO, Jan­u­ary 2009.

Tags: Appointments, Asset Allocation, Boston, Bubbles, Busts, Ethics, Financial Arena, Jeremy Grantham Gmo, Obama, Quarterly Newsletter, Short Stories, Teflon, Traps
Posted in Markets | Comments Off

Bennet Sedacca: Free Fallin???

Wednesday, February 18th, 2009

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

Over the past year or so, I have used imagery such as hur­ri­canes, tsunamis, and avalanches to tie in my thoughts about the econ­omy and the mar­kets. The imagery helps me sort out just how strongly I feel about a par­tic­u­lar sub­ject, and if the thought of a Cat­e­gory 5 hur­ri­cane hit­ting your shores, a 50 foot tall tsunami or an avalanche com­ing your way gets your atten­tion, the thought of a free fall most cer­tainly should.

I can tell you that as the econ­omy and finan­cial markets/system fall off a cliff in a vicious cycle, it makes me feel as if I would rather deal with the Cat­e­gory 5 storm. I have long feared that in the case of the hur­ri­cane, the eye of the storm would pass only to usher in the strongest part of the storm. The ques­tion of whether a Finan­cial Tsunami would hit has now been answered, and it is reach­ing not only our shores but the shores of most of the world. The avalanche most cer­tainly is in motion, head­ing straight for us, poten­tially forc­ing both mar­kets and the global econ­omy off the cliff. As usual, sober­ing stuff to be sure, but the next move for mar­kets and the econ­omy could be fright­en­ingly swift and have us feel­ing as though we are about to fall off a cliff.

I recall back from my child­hood the look on Wile E. Coyote’s face while The Road­run­ner looked on just as he was about to crash from the cliff. There was a look of fear on Wile E’s face as he knew there was no way he wasn’t going to fall — he flaps his feet and waves his arms in attempt to stay air­borne — but to no avail. The Road­run­ner watches in amuse­ment as Wile E. Coy­ote lit­er­ally falls off the cliff on his way to a date with des­tiny at the bot­tom of the canyon. While the image below gives me a laugh as I recall watch­ing Road­run­ner car­toons as a kid, as an adult deal­ing with an econ­omy and finan­cial sys­tem that seem to be falling off the cliff, it is no laugh­ing matter.

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, Avail, Avalanche, Avalanches, Category 5 Hurricane, Category 5 Storm, Coyote, Date With Destiny, Eye Of The Storm, Financial Markets, Free Fallin, Global Economy, Hurricanes, Laughing Matter, Roadrunner, Roadrunner Cartoons, Tsunamis, Usher, Vicious Cycle, Wile E Coyote
Posted in Economy, Markets | Comments Off

FRONTLINE: Inside the Meltdown (PBS)

Tuesday, February 17th, 2009

On Thurs­day, Sept. 18, 2008, the aston­ished lead­er­ship of the U.S. Con­gress was told in a pri­vate ses­sion by the chair­man of the Fed­eral Reserve that the Amer­i­can econ­omy was in grave dan­ger of a com­plete melt­down within a mat­ter of days. "There was lit­er­ally a pause in that room where the oxy­gen left," says Sen. Christo­pher Dodd (D-Conn.).

In case you missed PBS' "Inside the Melt­down," aired tonight, Feb­ru­ary 17, 2009 at 9:00am, it is an in-depth 1-hour pro­gram detail­ing the break­down of the finan­cial sys­tem over the last year. Its very well done, and pro­vides some valu­able insight into the credit and finan­cial mar­kets melt­down we have expe­ri­enced dur­ing the course of the last year. Click play to view:

Hover over the dots next to the clock for the story chapters.

Tags: American Economy, Chairman Of The Federal Reserve, Christopher Dodd, Clock, Complete Meltdown, Congress, Conn, Dots, February 17, Federal Reserve, Financial Markets, Frontline Pbs, Grave Danger, Insight, Leadership, Oxygen, Pbs, Pbs Org, Private Session, Story Chapters
Posted in Credit Markets, Economy, Markets | 2 Comments »