Corporate Bonds or Equities? Deflation or Inflation?

Monday, March 30th, 2009

The debate rages on, and it is between whether to invest in cor­po­rate bonds or equi­ties, or if eco­nomic con­di­tions are defla­tion­ary or infla­tion­ary? FT Alphav­ille, Fortune.com and Cap­i­tal Spec­ta­tor have cov­ered this quite well. Here are all the pieces:

Of Bonds and Stocks and the Weimar Repub­lic
(FT.com/Alphaville, March 30, 2009)
by Tracy Alloway

You’d have to be liv­ing under a bailout-sized rock not to be aware of the cur­rent debate sur­round­ing equi­ties vs cor­po­rate bonds.

HSBC has now thrown its hat in the ring, in a 24-page research note enti­tled “The tri­umph of the pes­simists”, which looks at the behav­iour of cor­po­rate bonds and equi­ties over the past 140 years or so. Here’s the summary.

Lots of stud­ies have looked at gov­ern­ment bond and equity val­u­a­tions, few at the rela­tion­ship between cor­po­rate debt and equi­ties. We’ve filled the gap, going back to the mid­dle of the 19th century.

The results don’t look pretty for equi­ties, which are likely to suf­fer a multi-year down­grad­ing com­pared with cor­po­rate debt… His­tor­i­cally, there have been three multi-decade peri­ods. Rel­a­tive prices in the first two were very dif­fer­ent to those in the third. Before the begin­ning of the last cen­tury, yields on cor­po­rate equity were some­times lower than those on cor­po­rate debt and some­times higher.

Over the fol­low­ing 50 years — from about 1907 until 1951 — they were almost always higher, some­times a great deal higher. But for the 50 years start­ing in the early 1950s, div­i­dend yields on equi­ties fell sharply rel­a­tive to yields on cor­po­rate bonds. By 2000, the peak of the cult of the equity, the rel­a­tive yield of equi­ties com­pared with gov­ern­ment and cor­po­rate bonds had reached its low­est level ever.

In fact, the only sig­nif­i­cant period in which div­i­dend yields weren’t higher than cor­po­rate bond yields was in the early 1930s (chart, using rail­way bond yields as a proxy for cor­po­rates, below), when div­i­dend yields col­lapsed and cor­po­rate bond yields surged because of the cas­cade of Depression-related defaults, accord­ing to HSBC. Investors’ enthu­si­asm for equi­ties was dulled, and, in a par­al­lel with our cur­rent finan­cial cri­sis, their appetite for cor­po­rate debt sharp­ened. Even as the econ­omy improved and prof­its rose, investors attached an increas­ingly low val­u­a­tion to div­i­dend pay­ments, result­ing in increased div­i­dend yields.

Fear­ing another depres­sion, then, investors demanded more of their returns upfront. That’s why div­i­dend yields went up and cor­po­rate spreads went down. Although stocks went up and down, the shift con­tin­ued until 1950, by which time the trail­ing PE for the S&P had fallen to 6x, its div­i­dend yield had reached 7.5%, yields on Baa bonds had fallen to 3.2% and spreads to less than 80bps. In the early 1930s, Baa yields reached 11% and spreads touched 725bps.

That was the cheap­est that equi­ties have ever been against cor­po­rate bonds. Over the next 50 years, not all at once and with big, some­times huge set­backs, val­u­a­tions of stocks com­pared with cor­po­rate bonds moved from their cheap­est ever to their most expen­sive. Which … is the sit­u­a­tion in which we find our­selves now.

Which leads us to today, when, accord­ing to HSBC, we’re fac­ing two sce­nar­ios for cor­po­rate bonds and equities.

Over the past 18 months, the implo­sion of the global finan­cial sys­tem has led to huge risk aver­sion and acute defla­tion­ary con­cerns, both of which have dri­ven gov­ern­ment bond yields lower still. Now, it could be that quan­ti­ta­tive eas­ing by cen­tral banks will lead to a pick up in infla­tion­ary con­cerns and wor­ries about how gov­ern­ments will repay the huge num­bers of bonds that they have issued and will con­tinue to issue. That’s cer­tainly not an argu­ment that one should dis­miss out of hand. That wouldn’t augur well for gov­ern­ment bonds in the long term.

Alter­na­tively, the sit­u­a­tion we’re in now might echo the 1930s, when risk appetite was shot to pieces and, regard­less of whether infla­tion fell through the floor or picked up some­what, government-bond yields fell and then fell fur­ther. For their part, hav­ing spiked up hugely, cor­po­rate spreads declined for the rest of the decade. But as we saw ear­lier, if investors lapped up bonds, par­tic­u­larly cor­po­rate bonds, they shunned equi­ties; earn­ings yields and div­i­dend yields rose dra­mat­i­cally. In that envi­ron­ment, investors, in other words, were express­ing a strong pref­er­ence for safety and income over risk and cap­i­tal gains.

Although we strongly sus­pect that the present world looks more like the sec­ond of these sce­nar­ios than the first, we really don’t know for sure. Per­haps it doesn’t much mat­ter, as long as gov­ern­ments don’t unleash another huge infla­tion. For what is cer­tainly true is that cen­tral bankers have now told us explic­itly that they will not allow gov­ern­ment bond yields to rise for the fore­see­able future. Their aim is sim­ple: to make risk-free assets so unat­trac­tive that investors wade into riskier mar­kets, thus restor­ing con­fi­dence to the finan­cial sys­tem and the econ­omy as a whole. For now, it’s clear, equity mar­kets have taken the hint, but cor­po­rate credit mar­kets haven’t. That sit­u­a­tion will, we think, be reversed.

This is a sen­ti­ment echoed in The Aleph Blog and Cross­ing Wall Street. The spread between cor­po­rate bonds and equi­ties is get­ting big — cor­po­rates were sit­ting out of the recent rally. They are, as per HSBC’s research title, the pessimists.

How­ever, as HSBC also notes, this is essen­tially a defla­tion­ary vs infla­tion­ary debate. In a defla­tion­ary envi­ron­ment, as in the Great Depres­sion, cor­po­rate bonds, with their sta­ble returns, make sense. In an infla­tion­ary envi­ron­ment those fixed returns are eroded. Equi­ties, with their abil­ity to raise prices in tan­dem with infla­tion (or as close as they can get) could be more attractive.

A slightly ran­dom exam­ple here — but the Ger­man stock mar­ket of the 1920s increased by a stag­ger­ing amount as infla­tion shot through the roof. We’re far from hyper-inflation, but throw­backs to that era, like the below 1921 clip­ping from the New York Times, should give us pause for thought.

Related links:
Sun­day links: Stocks vs bonds — Abnor­mal Returns
Is it back to the Fifties? — FT
Equity lives! - FT Alphav­ille
The death of equity — FT Alphaville

This entry was posted by Tracy Alloway on Mon­day, March 30th, 2009 at 16:32.

WHAT ARE MONEY MANAGERS THINKING? (Cap­i­tal Spectator)

What are pro­fes­sional money man­agers think­ing these days? A new poll by Rus­sell Invest­ments offers an answer. Among the highlights:

• 67% of man­agers are now bull­ish on cor­po­rate bonds
• 61% are bull­ish on high-yield bonds

In both cases, the per­cent­ages are a bit higher com­pared with the pre­vi­ous poll from last Decem­ber. "In this envi­ron­ment of cau­tion and real­ism, man­agers are find­ing oppor­tu­nity in spreads between high-quality cor­po­rate bonds and Trea­suries that are at his­toric lev­els," Erik Ris­tuben, Russell's chief invest­ment offi­cer, says in the accom­pa­ny­ing press release. Expec­ta­tions for junk bonds are also higher from late last year.

U.S. equi­ties, on the other hand, have fallen in the eyes of man­agers. Value and small-cap equi­ties suf­fer the most in terms of the cur­rent out­look, accord­ing to the Rus­sell sur­vey. Here's an overview of how the changes in expec­ta­tions for the var­i­ous asset classes stack up:

Source: Cap­i­tal Spectator

High-yield bonds: Appetite for risk

If you've got the stom­ach for it, indus­try watch­ers say now is the time to hit the bar­gain buffet.

By Beth Kowitt, reporter

Last Updated: March 30, 2009: 12:02 PM ET

NEW YORK (For­tune) — Like most invest­ments with higher credit risk, the high-yield bond mar­ket took a huge hit in 2008 as investors fled to qual­ity. But with the sec­tor recently see­ing its deep­est dis­count ever — and even ral­ly­ing a bit — some say it's time to test the waters again.

"The val­ues are just extra­or­di­nary," says Mar­tin Frid­son, CEO of Frid­son Invest­ment Advi­sors and a high-yield bond spe­cial­ist. "I think it's an oppor­tu­nity you're not going to see very often in your lifetime."

Frid­son says the spread between high-yield bonds and trea­suries over the last few months has been far beyond any­thing seen before. The option adjusted spread, which mea­sures the dif­fer­ence, is about 17.6 points, accord­ing to Mer­rill Lynch data. A year ago, the spread was 8.2 points.

Lower val­u­a­tions mean more upside, Frid­son says, but they're also the rea­son for investors' hes­i­ta­tions. Default rates will likely run higher than dur­ing past reces­sions, he notes, partly because the qual­ity of the sec­tor has dete­ri­o­rated since the last low cycle.

Lawrence Jones, asso­ciate direc­tor of fund analy­sis at Morn­ingstar, said some experts he's spo­ken with expect default rates, which have run between 2% and 3% the last few years, to reach between 10% and 15%.

"I see the oppor­tu­nity," Jones says, "but almost every­one who's being straight with you will say there's a lot of risk."

You may know them as "junk"

High-yield bonds, or "junk" bonds, are defined by the indus­try as a bond with below a Stan­dard and Poor's BBB– rat­ing. They have a higher risk of default (fail­ure to make a sched­uled inter­est or prin­ci­pal pay­ment), and are sub­ject to greater price swings than more highly rated bonds. But on the upside they also have a higher rate of interest.

Jones sug­gests mak­ing high-yield bonds a small part of your port­fo­lio through bond funds run by expe­ri­enced man­agers and research teams invest­ing in better-quality high-yield secu­ri­ties. A fund pro­vides the advan­tage of a manager's exper­tise and also the diver­si­fi­ca­tion that's needed to limit the risk of default in any sin­gle invest­ment. And high-yield bonds can be highly illiq­uid, i.e., hard to unload if they're thinly traded, but a fund gives you the secu­rity of get­ting in and out when you want.

Read the entire piece here.

Source: Fortune.com

Tags: 1930s, 1950s, Alphaville, Bailout, Capital Spectator, Cascade, Corporate Bond Yields, Corporate Bonds, Corporate Debt, Corporate Equity, Corporates, Debate Rages, Deflation, Dividend Yields, Economic Conditions, ETF, Ft Alphaville, Gap, Government Bond, Government Bonds, Pessimists, Relative Prices, Valuations, Weimar Republic
Posted in Bonds, Canadian Market, Credit Markets, ETFs, Markets, Outlook, US Stocks | Comments Off

Institutional Investors Call the Shots

Monday, March 30th, 2009

This post is a guest con­tri­bu­tion by Marty Chenard, of StockTiming.com.

Marty Chenard, of StockTiming.com has pro­duced an inter­est­ing chart and his thoughts below about the weight that insti­tu­tional investors wield in the mar­ket. He strongly cau­tions against buy­ing stocks, in gen­eral, when trad­ing by insti­tu­tional investors is still in dis­tri­b­u­tion, and uses a chart based on Investors Busi­ness Daily's Accumulation/Distribution rat­ings. Here are his thoughts on this:

You will lose money if you go against the action of what Insti­tu­tional Investors are doing.

Many of you sub­scribe to Investors Busi­ness Daily and pay par­tic­u­lar atten­tion to the "Accumulation/Distribution rat­ings" they show on listed stocks.

Their read­ers have learned that a stock in "Dis­tri­b­u­tion" is being sold off or dumped, and that it is not a safe buy until "Accu­mu­la­tion" starts.

It is all the more impor­tant to apply this con­cept to the stock mar­ket as a whole, because if the stock mar­ket is in Dis­tri­b­u­tion, then the major­ity of indi­vid­ual stocks will also be in Dis­tri­b­u­tion and mov­ing lower.

That is why we report on the stock mar­ket Accumulation/Distribution every day.

We do this by fol­low­ing the action of what Insti­tu­tional Investors are doing. Since Insti­tu­tional Investors are respon­si­ble for OVER half of the daily trad­ing vol­ume, they turn out to be the decid­ing force and direc­tion of the over­all market.

So, this morn­ing, we will share our Insti­tu­tional Accumulation/Distribution chart. To get that net result, we take all the Insti­tu­tional buy­ing on a given day, and sub­tract the Insti­tu­tional sell­ing. That gives us the net dif­fer­ence which is by def­i­n­i­tion, accu­mu­la­tion or distribution.

Below is the Net Accumulation/Distribution chart going back to Octo­ber of 2007. It is easy to read ... if the green bars are above zero, then Insti­tu­tions were in Accu­mu­la­tion. If the green bars are below zero, then Insti­tu­tional Investors were in Distribution.

With that under­stand­ing, take a minute to look at the Accumulation/Distribution chart, and com­pare it to the move­ment on the NYA (New York Stock Exchange Index) chart below it. After observ­ing the chart, it should be pretty clear that the mar­ket does NOT go in a dif­fer­ent direc­tion of the Insti­tu­tional Accu­mu­la­tion or Distribution.

So, the mes­sage is clear ... invest in the SAME direc­tion as the Insti­tu­tions, and never go against them.

If you are buy­ing when they are sell­ing, you will lose because they are the top dog and top force in the stock market.

Source: Marty Chenard, StockTiming.com

Tags: Accumulation Distribution, Array, Buying Stocks, Index Chart, Institutional Buying, Institutional Investors, Institutions, Invest, Investors Business Daily, Investors Daily, Marty Chenard, Money, Moving, New York Stock, New York Stock Exchange, Nya, Same Direction, Stock Chart, Stock Exchange Index, Stock Index, Stock Market, Stocks, Stocktiming, York Stock Exchange
Posted in Markets | Comments Off

Why Bother with Bonds?

Monday, March 30th, 2009

*The fol­low­ing arti­cle is a guest post from John Mauldin.

Investors, we are told, demand a risk pre­mium for invest­ing in stocks rather than bonds. With­out that extra return, why invest in risky stocks if you can get guar­an­teed returns in bonds? This week we look at a bril­liantly done paper exam­in­ing whether or not investors have got­ten bet­ter returns from stocks over the really long run and not just the last ten years, when stocks have wan­dered in the wilder­ness. This will not sit well with the buy and hope crowd, but the data is what the data is. Then we look at how bulls are spin­ning bad news into good and, if we have time, look at how you should ana­lyze GDP num­bers. Are we really down 6%? (Short answer: no.) It should make for a very inter­est­ing letter.

And for the last time, let me remind you of the Richard Rus­sell Trib­ute Din­ner this Sat­ur­day, April 4 in San Diego. We have had over 400 of Richard's fans (I guess you could say we are all groupies) sign up. A sig­nif­i­cant num­ber of my fel­low writ­ers and pub­lish­ers have com­mit­ted to attend. It is going to be an investment-writer, Richard-reader, star-studded event. You are going to be able to rub shoul­ders with some very famous ana­lysts and writ­ers. If you are a fel­low writer, you should make plans to attend or send me a note that I can put in the trib­ute book we are prepar­ing for Richard. And feel free to men­tion this event in your let­ter as well. We want to make this night a spe­cial event for Richard and his fam­ily of read­ers and friends. So, if you haven't, go ahead and log on to https://www.johnmauldin.com/russell-tribute.html and sign up today. The room will be full, so don't pro­cras­ti­nate. I wouldn't want any of you to miss out on this trib­ute. I look for­ward to shar­ing the evening with all of you. I am really look­ing for­ward to that evening.

Why Bother With Bonds?

If stocks out­per­form bonds by as much as 5% over the long run then, for our truly long-term money, why should we bother with bonds? Why not just ignore the volatil­ity and col­lect the increased risk pre­mium from stocks? That is the mes­sage of those who believe in "Stocks for the Long Run" and also from those who want you to invest in their long-only mutual fund or man­aged account pro­gram. Indeed, it is always a good day to buy their fund.

One of my favorite ana­lysts is my really good friend Rob Arnott. Rob is Chair­man of Research Affil­i­ates, out of New­port Beach, Cal­i­for­nia, a research house which is respon­si­ble for the Fun­da­men­tal Indexes which are break­ing out every­where (and which I have writ­ten about in past let­ters), as well as the only out­side man­ager that PIMCO uses, for his asset allo­ca­tion abil­i­ties. He has won so many indus­try awards and hon­ors that I won't take the time to men­tion them. In short, Rob is brilliant.

He recently sent me a research paper that will be pub­lished next month in the Jour­nal of Indexes, enti­tled "Bonds: Why Bother?" The pub­lisher of the jour­nal, Jim Wiandt, has gra­ciously allowed me to review it for you prior to it actu­ally being sent out. The entire arti­cle will be avail­able when the Jour­nal of Indexes goes to print in late April, at www.journalofindexes.com. Qual­i­fied finan­cial pro­fes­sion­als can also get a free sub­scrip­tion there to pick up the print copy. There is some very inter­est­ing research at the web­site. But let's look at a small por­tion of the essay. I am reduc­ing 17 pages down to a few, so there is a lot more meat than I can cover here, but I will try and hit a few things that really struck me.

It is writ­ten into our invest­ment tru­isms that investors expect their stock invest­ments to out­pace their bond invest­ments over really long peri­ods of time. Rob notes, and I con­firm, that there are many places where investors are told that stocks have about a 5% risk pre­mium over bonds.

By "risk pre­mium," we mean the forward-looking expected returns of stocks over bonds. As noted above, if you do not think stocks will out­per­form bonds by some rea­son­able mar­gin, then you should invest in bonds. That "rea­son­able mar­gin" is called the risk pre­mium, about which there is some con­sid­er­able and heated debate.

Most peo­ple would con­sider 40 years to be the "long run." So, it is rather dis­con­cert­ing, or shock­ing as Rob puts it, to find that not only have stocks not out­per­formed bonds for the last 40 plus years, but there has actu­ally been a small neg­a­tive risk premium.

In a foot­note, Rob gets off a great shot, point­ing out that the 5% risk pre­mium seen in a lot of sales pitches is at best unre­li­able and is prob­a­bly lit­tle more than an urban leg­end of the finance community.

How bad is it? Start­ing at any time from 1980 up to 2008, an investor in 20-year trea­suries, rolling them over every year, beats the S&P 500 through Jan­u­ary 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a mar­ginal amount. And that is with a very bad bond mar­ket in the '70s.

Let's go back to the really long run. Start­ing in 1802, we find that stocks have beat bonds by about 2.5%, which, com­pound­ing over two cen­turies, is a huge dif­fer­en­tial. But there were some peri­ods just like the recent past where stocks did in fact not beat bonds.

Look at the fol­low­ing chart. It shows the cumu­la­tive rel­a­tive per­for­mance of stocks over bonds for the last 207 years. What it shows is that early in the 19^th cen­tury there was a period of 68 years where bonds out­per­formed stocks, another sim­i­lar 20-year period cor­re­spond­ing with the Great Depres­sion, and then the recent episode of 1968–2009.

In fact, note that stocks only mar­gin­ally beat bonds for over 90 years in the 19^th cen­tury. (Remem­ber, this is not a graph of stock returns, but of how well stocks did or did not do against bonds. A chart of actual stock returns looks much, much better.

Bill Bern­stein notes that in the last cen­tury, from 1901–2000, stocks rose 9.89% before infla­tion and 6.45% after. Bonds paid an aver­age of 4.85% but only 1.57% after infla­tion, giv­ing a real yield dif­fer­ence of almost 5%. In the 19^th cen­tury the real (inflation-adjusted) dif­fer­ence between stocks and bonds was only about 1.5%.

In the late '90s, stock bulls would point out that there was no 30-year period where stocks did not beat bonds in the 20^th cen­tury. The 19^th cen­tury for them was mean­ing­less, as the stock mar­ket then was small, and we were now in a mod­ern world.

But what we had was a stock mar­ket bub­ble, just like in 1929, which con­vinced peo­ple of the supe­ri­or­ity of stocks. And then we had the crash. Also, from 1932 to 2000 stocks beat bonds rather hand­ily, again con­vinc­ing investors that stocks were almost risk­less com­pared to bonds. But in the after­math of the bub­ble, yields on stocks dropped to 1%, com­pared to 6% in bonds. If you assumed that investors wanted a 5% risk pre­mium, then that means they were expect­ing to get a com­pound 10% going for­ward from stocks. Instead, they have seen their long-term stock port­fo­lios col­lapse any­where from 40–70%, depend­ing on which index you use.

So what is the actual risk pre­mium? Rob Arnott and Peter Bern­stein wrote a paper in 2002 about that very point. Their con­clu­sion was that the risk pre­mium seems to be 2.5%. Arnott writes:

"My point in explor­ing this extended stock mar­ket his­tory is to demon­strate that the widely accepted notion of a reli­able 5% equity risk pre­mium is a myth. Over this full

207-year span, the aver­age stock mar­ket yield and the aver­age bond yield have been nearly iden­ti­cal. The 2.5 per­cent­age point dif­fer­ence in returns had two sources: infla­tion aver­ag­ing 1.5 per­cent trimmed the real returns avail­able on bonds, while real earn­ings and div­i­dend growth aver­ag­ing 1.0 per­cent boosted the real returns on stocks. Today, the yields are again nearly iden­ti­cal. Does that mean that we should expect history's 2.5 per­cent­age point excess return or the five per­cent pre­mium that most investors expect?

"As Peter Bern­stein and I sug­gested in 2002, it's hard to con­struct a sce­nario which deliv­ers a five per­cent risk pre­mium for stocks, rel­a­tive to Trea­sury bonds, except from the troughs of a deep depres­sion, unless we make some rather aggres­sive assump­tions. This remains true to this day."

One other quick point from this paper. Just as capitalization-weighted indexes will tend to empha­size the larger stocks, many bond indexes have the same prob­lem, in that they will over­weight large bond issuers. At one point in 2001, Argentina was 20% of the Emerg­ing Mar­ket Bond Index, sim­ply because they issued too many bonds. If you bought the index, you had large losses. The same with the recent high-yield index which had 12% devoted to GM and Ford. In gen­eral, I do not like bond index funds, and this is just one more rea­son to eschew them.

Let me be clear here. I am not say­ing you should put your port­fo­lio in 20-year bonds, or that I even expect 20-year bonds to out­per­form stocks over the next 20 years. Far from it! The les­son here is to be very care­ful of geeks bear­ing charts and graphs (it will be a chal­lenge for my Chi­nese trans­la­tor to trans­late that pun!). Very often, they are designed with biases within them that may not even be appar­ent to the per­son who cre­ated them.

Pro­fes­sor and Nobel Lau­re­ate Paul Samuel­son in late 1998 was quoted as say­ing, a bit sadly, "I have stu­dents of mine — PhDs — going around the coun­try telling peo­ple it's a sure thing to be 100% invested in equi­ties, if only you will sit out the tem­po­rary declines. It makes me cringe."

When some­one tells you that stocks always beat bonds, or that stocks go up in the long run, they have not done their home­work. At best, they are par­rot­ing bad research that makes their case, or they are sim­ply try­ing to sell you something.

As I point out over and over, the long-run, 20-year returns you will get on your stock port­fo­lios are VERY highly cor­re­lated with the val­u­a­tions of the stock mar­ket at the time you invest. That is one rea­son why I con­tend that you can roughly time the stock market.

Val­u­a­tions mat­ter, as I wrote for many chap­ters in Bull's Eye Invest­ing, where I sug­gested in 2003 that we were in a long-term sec­u­lar bear mar­ket and that stocks would be a dif­fi­cult place to be in the com­ing decade, based on val­u­a­tions. I looked fool­ish in 2006 and most of 2007. Pun­dits on TV talked about a new bull mar­ket. But val­u­a­tions were at nose­bleed lev­els. And now?

I have been doing a lot of inter­views with the press, with them want­ing to know if I think this is the start of a new bull mar­ket. There are a lot of pun­dits on TV and in the press who think so. I also notice that many of them run mutual funds or long-only invest­ment pro­grams. What are they going to do, go on TV and say, "Sell my fund"? And get to keep their jobs?

Am I accus­ing them of being insin­cere? Maybe a few of them, but most have a built-in bias that points them to the pos­i­tive news that would make their fund (finally!) per­form. And believe me, I can empathize. It is part of the human con­di­tion. But you just need to keep that in mind when you are think­ing about invest­ing in a new fund, or rethink­ing your own portfolio.

P/E Ratios at 200? Really?

Just for fun, when I was inter­view­ing with the New York Times today, I went to the S&P web site and looked at the earn­ings for the S&P 500. It's ugly. The as-reported loss for the S&P 500 for the 4^th quar­ter was $23.16 a share. This is the first reported quar­terly loss in his­tory. That almost wipes out the expected earn­ings for the next three quar­ters. For the trail­ing 12 months the P/E ratio, as of the end of the sec­ond quar­ter, is 199.97. Close enough to 200 for gov­ern­ment work.

But it gets worse. The expected P/E ratio for the end of the third quar­ter is (drum roll, please) 258! How­ever, tak­ing the loss of the fourth quar­ter off the trail­ing returns allows us to get back to an esti­mated P/E of 23 by the end of 2009. The prob­lem is that you have to believe the esti­mates, which I have shown are repeat­edly being low­ered each quar­ter, and which I expect to be low­ered by at least another 25% in the com­ing months.

Now, much of that loss is com­ing from the finan­cials, which showed stag­ger­ing write-offs of $101 bil­lion, $28 bil­lion com­ing from (no sur­prise) AIG alone. Sales across the board are down almost 9%, with 290 com­pa­nies report­ing lower sales.

This quar­ter the esti­mated con­sen­sus GDP is some­where between down 5% to down 7%. Last quar­ter we were down an annu­al­ized 6.3%. That would be two ugly quar­ters back to back. It is hard to believe earn­ings for non­fi­nan­cial com­pa­nies are going to be all that much better.

Side note: The econ­omy did not con­tract at 6.3% in the 4^th quar­ter. That is an annu­al­ized num­ber. The quar­ter actu­ally con­tracted at about 1.6%. If we go a whole year with a 6% con­trac­tion, that would be truly hor­ren­dous. We would blow right on through 10% unem­ploy­ment. While it is pos­si­ble, we should start to see some­what bet­ter num­bers in the sec­ond half of the year, although I still think they will be negative.

Mark-to-Market Slip Slides Away

But it is quite pos­si­ble that the finan­cial stocks see an improve­ment in earn­ings this quar­ter. The US Finan­cial Account­ing Stan­dards Board (FASB) changed the mark-to-market rules last week, which many (includ­ing your hum­ble ana­lyst) thought was needed. First, they sus­pended the mark-to-market rules for assets in dis­tressed mar­kets. Sec­ond, they widened the def­i­n­i­tion of "tem­po­rary" impair­ments of trou­bled assets, which will "allow banks to write up the value of some trou­bled assets if these have been hit by falling mar­kets with­out (yet) suf­fer­ing any sig­nif­i­cant credit losses." (www.gavekal.com)

Here's the impor­tant part. The board decided to make the new changes effec­tive imme­di­ately, prior to full board approval on April 2.

As my friend Charles Gave noted, this will allow banks to write up their paper, and it hap­pens before Trea­sury Sec­re­tary Tim Gei­th­ner starts putting tax­payer money at risk. Expect to see a pop in val­u­a­tions. It will be inter­est­ing to see if Citi and B of A post prof­its this quarter.

(I should note that the Inter­na­tional Account­ing Stan­dards Board sent out a scathing press release. I guess from that we should assume that Euro­pean banks will not be so for­tu­nate as their US counterparts.)

In the­ory, as I under­stand it, the infor­ma­tion will still be there, but the way it will be recorded will not be reflected in the profit and loss state­ment. I under­stand that this is a very con­tro­ver­sial pro­posal, and I expect many read­ers will dis­agree. The key is whether or not the infor­ma­tion is avail­able to investors and how the pro­pos­als are put into actual prac­tice. If there is abuse, and reg­u­la­tors should be all over this, then the old rules must quickly go back into place.

This could put some strength back into finan­cials, at least until the com­mer­cial mort­gage and credit card prob­lems start hav­ing to be writ­ten off. At the least, it could make for another solid rise in the stock mar­ket until we start to get what I expect to be very bad 1^st and 2^nd quar­ter earnings.

Hous­ing Sales Improve? Not Hardly

I opened the Wall Street Jour­nal and read that new home sales were up in Feb­ru­ary. Bloomberg reported that sales were "unex­pect­edly" up by 4.7%. I was intrigued, so I went to the data. As it turns out, sales were down 41% year over year, but up slightly from January.

But if you look at the data series, there was noth­ing unex­pected about it. For years on end, Feb­ru­ary sales are up over Jan­u­ary. It seems we like to buy homes in the spring and sum­mer and then sales fall off in the fall and win­ter. It is a very sea­sonal thing. If you use the sea­son­ally adjusted num­bers, you find sales were down 2.9% instead of up 4.7%. But the media reports the pos­i­tive num­ber. Inter­est­ingly, they report the sea­son­ally adjusted num­bers for ini­tial claims, which have been a lot bet­ter than the actual num­bers. Not that they are look­ing to just report pos­i­tive news, you understand.

Plus, as my friend Barry Ritholtz points out, the 4.7% rise was "plus or minus 18.3%". That means sales could have risen as much as 23% or dropped 13%. We won't know for awhile until we get real num­bers and not esti­mates. Hang­ing your out­look for the econ­omy or the hous­ing mar­ket on one-month esti­mates is an exer­cise in futil­ity, and could come back to embar­rass you.

But that brings up my final point tonight, and that is how data gets revised by the var­i­ous gov­ern­ment agen­cies. Typ­i­cally with these gov­ern­ment sta­tis­tics, you get a pre­lim­i­nary num­ber, which is a guess based on past trends, and then as time goes along that data is revised. In reces­sions like we are in now the revi­sions are almost always negative.

There is no con­spir­acy here. The peo­ple who work in the gov­ern­ment offices have to cre­ate a model to make esti­mates. Each data series, whether new home sales, employ­ment, or durable goods sales, etc., has its own unique sets of char­ac­ter­is­tics. The esti­mates are based on past his­tor­i­cal per­for­mance. There is really no other way to do it.

So, past per­for­mance in a reces­sion sug­gests higher esti­mates than what really hap­pens. Then, the num­bers in the fol­low­ing months are revised down­ward as actual num­bers are obtained. But the esti­mates in the cur­rent months are still too high. That makes the com­par­isons gen­er­ally favor­able, at least for one month. And the media and the bulls leap all over the "data," and some silly econ­o­mist goes on TV or in the press and says some­thing like, "This is a sign that things are sta­bi­liz­ing." It dri­ves me nuts.

Ignore month-to-month esti­mated data. The key thing to look for is the direc­tion of the revi­sions. If they are down, as they have been for over a year, then that is a bad sign. Fur­ther, one month's esti­mates are just noise. Look at the year-over-year num­bers. When the direc­tion of the revi­sions is pos­i­tive and the year-over-year num­bers are start­ing to sta­bi­lize, then we will know things are start­ing to turn around.

La Jolla, Copen­hagen, Lon­don, etc.

April is a travel month. Next week I am going to a pre­sen­ta­tion in Irvine on the state of stem cell research, which I must admit fas­ci­nates me. Then I'm in La Jolla for my Strate­gic Invest­ment con­fer­ence, co-hosted with my part­ners Alte­gris Invest­ments. Then home for a week. Easter week­end, all seven kids will be home. Then the next week I go to Copen­hagen for a board meet­ing; and I will be in Lon­don, Thurs­day April 16 to meet with my Euro­pean part­ners, Absolute Return Part­ners, and clients. The next week­end I go back to Cal­i­for­nia for a con­fer­ence, and then the next week I'll be a day or so in Orlando, where I'll speak at the CFA con­fer­ence on the state of the alter­na­tive invest­ment industry.

While I'm in Lon­don, I need to drop by and buy a pint for David Steven­son, a colum­nist for the Finan­cial Times. Seems that he was ask­ing his read­ers for nom­i­na­tions for best finan­cial web­sites. For what­ever rea­son, he decided I deserved a spe­cial award: "Best online com­men­ta­tor goes to US ana­lyst John Mauldin, whose weekly let­ters at www.frontlinethoughts.com are required read­ing for all the big City-based bears I encounter." It's nice to be appreciated.

At the end of May (29–31), I will be in Naples, where I will be doing a sem­i­nar with Jyske Global Asset Man­age­ment and Gary Scott. I will try to line up a web site where you can see whether you would like to attend.

It's after mid­night and time to hit the send but­ton. The day sim­ply van­ished on me, although I did get to the gym, at least. I am work­ing hard, but some­body turned the dial down on my metabolism.

Have a great week­end. It is spring in the north­ern hemi­sphere, and the aza­leas in Texas are awe­some this year. Make sure you stop and enjoy nature a lit­tle this spring (or fall, for you blokes Down Under).

Your get­ting more skep­ti­cal of data as I get older analyst,

John Mauldin

John Mauldin is pres­i­dent of Mil­len­nium Wave Advi­sors, LLC, a reg­is­tered invest­ment advisor.

Tags: April 4, Bad News, Fellow Writer, Fellow Writers, GDP, Ig, Invest Stocks, Investing In Stocks, Investment Writer, John Mauldin, Last Ten Years, Richard Russell, Risk Premium, Risky Stocks, Short Answer, Stocks Bonds, Term Money, Tribute Book, Tribute Dinner, Wilderness, Writer Richard
Posted in Bonds, Emerging Markets, Markets, Outlook | Comments Off

The Quiet Coup: How Wall Street Captured Government

Monday, March 30th, 2009

Read the com­plete arti­cle here.

Tags: Chief Economist, Dance Card, Emerging Market, Finance Industry, Imf, Imon, International Monetary Fund, Kwak, Last Ditch, Oligarchy, Painful Changes, Private Capital, Regional Trading, Running Out Of Time, School Of Management, Simon Johnson, Sloan School Of Management, State Of Affairs, True Depression, Unpleasant Truths
Posted in Emerging Markets, Markets | Comments Off

Words from the (investment) wise for the week that was (March 23 – 29, 2009)

Sunday, March 29th, 2009

Fol­low­ing Fed Chair­man Ben Bernanke’s “money print­ing” announce­ment of last week, the action stayed on Capi­tol Hill with Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner detail­ing his Pub­lic Pri­vate Invest­ment Pro­gram (PPIP) as well the ini­tial salvo on “new rules of the game” for the US’s bro­ken sys­tem of finan­cial regulation.

The US Trea­sury on Mon­day morn­ing announced its highly-anticipated Pri­vate Pub­lic Invest­ment Pro­gram (PPIP), rekin­dling investors’ hopes that the worst might be over for the belea­guered bank­ing sec­tor and the global econ­omy is close to a bottom.

Up to $1.0 tril­lion will be spent in an attempt to sup­port the bal­ance sheets of finan­cial insti­tu­tions by remov­ing toxic assets — mostly mortgage-backed secu­ri­ties. The Trea­sury plans to invest between $75 bil­lion to $100 bil­lion from its exist­ing Trou­bled Asset Relief Pro­gram (TARP), and also to estab­lish a sep­a­rate ini­tia­tive that will use the Fed’s Term Asset-backed Secu­ri­ties Lend­ing Facil­ity (TALF) and Fed­eral Deposit Insur­ance Cor­po­ra­tion (FDIC) fund­ing to finance the PPIP.

Source: About.com

In reac­tion to the Obama administration’s plan, global stock mar­kets extended their gains and the US dol­lar reclaimed a stronger foot­ing, but gov­ern­ment bonds suf­fered from indi­ges­tion on issuance wor­ries and the haven appeal of com­modi­ties waned. The per­for­mance of the major asset classes is sum­ma­rized by the chart below, cour­tesy of StockCharts.com.

Stock mar­kets, led by finan­cials, surged on the unveil­ing of the Treasury’s plan to deal with trou­bled assets, adding to the gains of the rally that com­menced on March 10 (see table below). The Dow Jones Indus­trial Index moved up 497 points (+6.8%) on Mon­day, its fifth largest one-day point gain and 23^rd biggest one-day per­cent­age gain on record.

Although stocks suc­cumbed to profit-taking towards Friday’s close, indices nev­er­the­less man­aged to reg­is­ter a third straight week of gains — only the third time since the bear mar­ket began 78 weeks ago. With two trad­ing days to go, March has the poten­tial of pro­duc­ing the third best monthly return for the broad mar­ket since 1950.

Else­where in the world stocks also per­formed strongly, with the MSCI World Index gain­ing 4.4% (YTD –10.4%) and the MSCI Emerg­ing Mar­kets Index ahead by 6.9% (YTD +4.3%). These indices have risen by 19.8% and 21.8% respec­tively since the low of March 9. Returns ranged from top-performers Peru (+17.4%), India (+12.6%) and Hong Kong (+10.0%) to Uganda (-5.7%), Côte d’Ivoire (-4.7%) and Bangladesh (-4.4%), which are still lan­guish­ing in the red.

The Shang­hai Com­pos­ite Index (+3.9%) had another good week and remains at the top of the field for the year to date with a 30.1% gain in US dol­lar terms. (Click here to access a com­plete list of global stock mar­ket move­ments, in local cur­rency terms, as sup­plied by Emegin­vest.)

Emerg­ing mar­kets are show­ing mature mar­kets a clean pair of heels, as can be seen from the ris­ing trend line of the MSCI Emerg­ing Mar­kets Index rel­a­tive to the Dow Jones World Index since late Octo­ber. The fact that devel­op­ing coun­tries are now out­per­form­ing the devel­oped ones is a sign that global investors are begin­ning to take more risk — a nec­es­sary ingre­di­ent for stock mar­kets in gen­eral to improve further.

Source: StockCharts.com

As far as US exchange-traded funds (ETFs) are con­cerned, John Nyaradi (Wall Street Sec­tor Selec­tor) reports that the strongest funds this week were Claymore/MAC Global Solar Energy (TAN) (+32.1%), Mar­ket Vec­tors Solar Energy (KWT) (+25.8%) and iShares Dow Jones US Home Con­struc­tion (ITB) (+20.8%). On the other end of the per­for­mance scale United States Nat­ural Gas (UNG) (-12.6%), Pow­er­Shares DB Agri­cul­ture Fund (DBA) (‑4.6%) and iShares Sil­ver Trust (SLV) (-3.4%) per­formed poorly.

Among the ten US eco­nomic groups, the Finan­cial Select Sec­tor SPDR (XLF) (+12.3%) led the way, with defen­sive funds such as Health Care Select Sec­tor SPDR (XLV) (+3.0) and Util­i­ties Select Sec­tor SPDR (XLU) (+1.8%) falling behind, as one would expect in a ris­ing market.

In the com­ing week, as reported by the New York Times, the US admin­is­tra­tion is likely to extend more short-term aid to Gen­eral Motors and Chrysler, but impose a strict dead­line for bond­hold­ers and union work­ers to make con­ces­sions that would help the ail­ing automak­ers become viable busi­nesses and avert bankruptcy.

Also on the agenda next week, is the sum­mit of the Group of 20 in Lon­don — a “make or break event”, accord­ing to George Soros (via Reuters). In addi­tion to the one-time increase of the IMF’s resources, there ought to be sub­stan­tial annual spe­cial draw­ing rights (SDR) issues, say $250 bil­lion, as long as the global reces­sion lasts, he said. SDRs are an inter­na­tional reserve asset cre­ated by the IMF in 1969 that has the poten­tial to act as a super-sovereign reserve currency.

Next, a quick tex­tual analy­sis of my week’s read­ing. No sur­prises here with key words such as “banks”, “mar­ket”, “assets” and “plan” fea­tur­ing prominently.

The nag­ging ques­tion remains: is the stock mar­ket rally for real, or is it just an upward cor­rec­tion in a big­ger bear mar­ket? The wor­ry­ing aspect is the rapid­ity with which the price increases have occurred. To gauge just how “vio­lent” it has been, Mark Hul­bert (Mar­ket­Watch) com­pared the rally since the March 9 lows to a com­pos­ite of the stock market’s behav­ior over the first two weeks of all bull mar­kets since 1900. The graph below indi­cates that the mar­ket is per­haps in need of catch­ing its breath.

Regard­ing spe­cific “tar­gets”, Adam Hewi­son of INO.com pre­pared a short tech­ni­cal analy­sis pre­sen­ta­tion deal­ing with key lev­els. Click here to view the clip. As shown in the table below, the 50-day mov­ing aver­ages have been cleared for all the major US indices and the early Jan­u­ary highs (not shown) are the next tar­gets. On the down­side, the lev­els from where the nascent rally com­menced on March 9 should hold in order for the upward trend to endure.

Kevin Lane, tech­ni­cal ana­lyst of Fusion IQ, said: “We think the S&P 500 can still rally up to the 850–860 in the near term on the heels of the unwind­ing of the deeply over­sold con­di­tions, the large piles of side­line liq­uid­ity, and addi­tional money man­agers are allo­cat­ing to stocks so as not fall too far behind their bench­marks. At the afore­men­tioned S&P 500 level some more aggres­sive profit-taking is likely to ensue and it may be a good time to take some chips off the table (i.e. lock in some prof­its). We would then look to real­lo­cate on the next aggres­sive pullback.”

The graph below shows the per­cent­age of S&P 500 stocks trad­ing above their 50-day mov­ing aver­ages. Alto­gether 66% of the stocks are cur­rently trad­ing above their 50-day lines. This is get­ting close to the 80% (over­bought) level seen at prior peaks dur­ing this bear market.

Source: StockCharts.com

Short-term move­ments aside, more bulls are com­ing to the fore by the day. Accord­ing to Bloomberg, Mark Mobius, exec­u­tive chair­man of Tem­ple­ton Asset Man­age­ment, said the next bull mar­ket rally has begun. Also, Bar­ton Biggs, the for­mer chief global strate­gist for Mor­gan Stan­ley who now runs New York-based hedge fund Traxis Part­ners, last week pre­dicted the S&P 500 may jump by 30%-50%. Sim­i­larly, Jeff Saut, strate­gist at Ray­mond James, argued that the “odds are pretty good stocks have seen their lows”.

From across the pond, London-based David Fuller (Fuller­money) said: “I feel that it is a defin­ing rally …. increas­ing evi­dence that the bear mar­ket mostly ended last Novem­ber. How­ever, while Wall Street is the big ele­phant in the room, cast­ing a large shadow in terms of influ­ence, it is cer­tainly not the leader. Fuller­money themes, led by Asian emerg­ing mar­kets and South Amer­i­can resources mar­kets, def­i­nitely bot­tomed out in Octo­ber and Novem­ber. Many have also gone on to com­plete base formations.

“In the short-term, stock mar­kets are tech­ni­cally over­bought so we can expect a pause and con­sol­i­da­tion. How­ever, if the S&P 500 Index can hold onto approx­i­mately half of its gains from this month’s lows, this would pro­vide fur­ther evi­dence of recov­ery poten­tial for the medium to longer term.”

On the other hand, Richard Rus­sell (Dow The­ory Let­ters), who has been study­ing mar­kets since the 1950s, remains bear­ish: “The most help­ful insights I’ve received dur­ing the course of this bear mar­ket are the Lowry’s sta­tis­tics and com­ments. From the lat­est Lowry’s sta­tis­tics I can see that although the Buy­ing Power Index (demand) has risen sharply, the Sell­ing Pres­sure Index (sup­ply) has given ground rather grudg­ingly. Nor­mally, if we were at the start of a new bull mar­ket, Sell­ing Pres­sure should be col­laps­ing. It is not.

“The con­clu­sion is that there remains a sur­pris­ing amount of Sell­ing Pres­sure (sup­ply) for this bear mar­ket advance to wade through. This is typ­i­cal bear mar­ket rally action. Nor­mally, prior to the start of a new bull mar­ket there will be an extended period in which the Sell­ing Pres­sure Index slumps, indi­cat­ing that sell­ers have exhausted their desire to sell. The infer­ence is that we are expe­ri­enc­ing a purely tech­ni­cal situation …”

One of the great con­cerns for the stock mar­ket rally is that the credit mar­kets, the tar­get of the res­cue oper­a­tions, are still far from “nor­mal”. This was again seen dur­ing the past week when the US 30-day Trea­sury Bills dipped below zero on Thursday.

I believe stock mar­kets are in a bot­tom­ing phase, but that this may take a while to play out. This is not a junc­ture at which one should go all-out bull­ish or bear­ish. Tak­ing one step at a time, the next hur­dle is the release of poten­tially ugly earn­ings and guid­ance announce­ments in April. By then a clearer pic­ture should also start emerg­ing on the results of the Fed’s med­i­cine and whether credit mar­kets are thaw­ing and con­fi­dence is begin­ning to improve.

For more dis­cus­sion about the direc­tion of stock mar­kets, also see my recent posts “Video-o-rama: Risk appetite rekin­dled on hope of bet­ter days“, “Stock mar­kets: Keep an eye on con­fi­dence mea­sures” and “Tech­ni­cal Talk: Stocks near­ing short-term resis­tance“. (And do make a point of lis­ten­ing to Don­ald Coxe’s web­cast of March 20, which can be accessed from the side­bar of the Invest­ment Post­cards site.)

Econ­omy
“Global busi­nesses remain remark­ably pes­simistic. Busi­nesses say that sales fell sharply last week to a new record low and pric­ing power con­tin­ues to evap­o­rate as close to one third of busi­nesses say they are cut­ting prices for their goods and ser­vices,” said the lat­est Sur­vey of Busi­ness Con­fi­dence of the World con­ducted by Moody’s Economy.com.

Accord­ing to RGE Mon­i­tor, the World Trade Orga­ni­za­tion said the col­lapse in global demand would drive trade vol­umes down by 9% in 2009 — the biggest con­trac­tion since World War II. Trade in devel­oped coun­tries would fall by 10% while in devel­op­ing coun­tries it would shrink by 2–3%. The fall in global trade in 2009 will be the first neg­a­tive annual decline since 1982 led by the con­trac­tion in global growth, slump in man­u­fac­tur­ing activ­ity and capex, and crunch in trade finance. This might be exac­er­bated by grow­ing pro­tec­tion­ist mea­sures around the world.

Euro­pean busi­ness con­fi­dence has never been as dark and is near record lows, as indi­cated by the March Ifo Busi­ness Sur­vey for Germany.

On a light-hearted note, the Finan­cial Times reported last week that lin­gerie sales in Britain were look­ing bet­ter than the retail sec­tor as a whole. One CEO in the indus­try told the FT that cou­ples were stay­ing home more and women were invest­ing in “adven­tur­ous apparel” to cheer them­selves up dur­ing the eco­nomic down­turn. (Hat tip: US Global Investors — Weekly Investor Alert.)

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.)

March 27, 2009
• Con­sumer spend­ing in Q1 most likely to show an increase

March 26, 2009
• Minor Q4 GDP revi­sions, cor­po­rate prof­its plunge
• Job­less claims — per­sis­tent upward trend remains in place

March 25, 2009
• New home sales — notable pickup in sales, but more is nec­es­sary
• Durable goods orders — glim­mer of strength emerges but it is tentative

March 24, 2009
• Home prices — mean­ing­ful turnaround?

March 23, 2009
• Treasury’s Public-Private Invest­ment Pro­gram — aims to unclog credit mar­kets and pro­mote credit exten­sions
• Exist­ing home sales advance — note­wor­thy for sev­eral reasons

The past week wit­nessed a trend of better-than-feared eco­nomic reports. Of the twelve reports released, only three were weaker than the con­sen­sus fore­cast. Bespoke said: “While none of these reports can be clas­si­fied as ‘good’, the fact that they are beat­ing expec­ta­tions is a pos­i­tive sign. The next test will come this week when we get the first look at reports for the month of March. Will the rel­a­tive strength fol­low through, or was the recent string of reports just an aberration?”

“We’ve passed the period where every indi­ca­tor is plum­met­ing, and that’s good news,” said Nari­man Behravesh, chief econ­o­mist at IHS Global Insight (via The Wall Street Jour­nal). “We may not be exactly at the turn­ing point, but we’re get­ting pretty close to it.”

Source: The Wall Street Jour­nal, March 28, 2009.

What are the pol­icy actions required in the US and abroad to lead to a recov­ery of the global econ­omy and pre­vent an L-shaped global near-depression? Nouriel Roubini (RGE Mon­i­tor) sum­ma­rized the fol­low­ing steps:

• Much more mas­sive unortho­dox mon­e­tary pol­icy eas­ing;
• Much more fis­cal stim­u­lus;
• Res­o­lu­tion of the bank­ing cri­sis via a takeover of insol­vent insti­tu­tions and recap­i­tal­iza­tion and removal of toxic assets from the sol­vent but illiq­uid and under­cap­i­tal­ized ones;
• Actions to reduce the credit crunch and restore credit growth to cred­it­wor­thy firms and house­holds;
• Direct reduc­tion — rather than restretch­ing — of the debt bur­den of insol­vent house­holds;
• Tripling of IMF resources and finan­cial help to emerging-market economies that are at risk of a liq­uid­ity cri­sis or a broader finan­cial cri­sis; and
• Other mea­sures of reg­u­la­tory for­bear­ance to reduce the pro­cycli­cal­ity of the credit cycle (appro­pri­ate changes to mark-to-market, reduc­tion in cap­i­tal ade­quacy ratios, reduc­tion of the coun­ter­cycli­cal role of down­grades by rat­ing agencies).

“Avoid­ing the L is pos­si­ble, but it will require much more coher­ent and aggres­sive pol­icy actions in the US, China and all over the world,” con­cluded Roubini.

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

Source: Yahoo Finance, March 27, 2009.

In addi­tion to an inter­est rate announce­ment by the Euro­pean Cen­tral Bank (Tues­day, April 2), 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, March 27, 2009.

Lau-Tzu said: “Those who have knowl­edge, don’t pre­dict. Those who pre­dict, don’t have knowl­edge.” Wise words indeed, but hope­fully the “Words from the Wise” reviews will assist Invest­ment Post­cards read­ers with their research to cast some light on the lie of the invest­ment land.

That’s the way it looks from Cape Town (where I am about to embark on a long-haul flight to New York and San Diego).

Source: Walt Han­dels­man

CNBC: Gei­th­ner & toxic assets
“Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner dis­cusses his plan to deal with finan­cial insti­tu­tions’ toxic assets, with CNBC’s Erin Burnett.”

Part 1

Part 2

Source: CNBC, March 23, 2009.

CEP News: US Trea­sury unveils PIPP
“The US Trea­sury announced Mon­day morn­ing it will spend up to $1.0 tril­lion in a bid to pro­vide sup­port to the bal­ance sheets of finan­cial insti­tu­tions and sup­port the ‘toxic debt’ mar­ket, which includes mostly mortgage-backed securities.

“The US Trea­sury will invest between $75 bil­lion to $100 bil­lion from its exist­ing Trou­bled Asset Relief Pro­gram, and it plans to set up a sep­a­rate ini­tia­tive which will use the Fed­eral Reserve’s Term Assets Backed Secu­ri­ties Lend­ing Facil­ity and FDIC fund­ing to finance the highly antic­i­pated Pri­vate Pub­lic Invest­ment Pro­gram (PPIP).

“Five dif­fer­ent pri­vate pub­lic funds will bid on toxic assets and sell them to the broader pub­lic. Mean­while, the Fed­eral Deposit Insur­ance Cor­po­ra­tion will guar­an­tee private-sector loans for these pur­chases, while the US Gov­ern­ment will invest side by side with pri­vate equity using tax­payer capital.

“In a press con­fer­ence fol­low­ing the offi­cial announce­ment, Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner said he expects sig­nif­i­cant inter­est from the pri­vate sec­tor, a sen­ti­ment which was con­firmed by PIMCO’s Bill Gross fol­low­ing the announcement.

“Gei­th­ner said that while there is no doubt that the US gov­ern­ment is tak­ing risk with the PPIP, the tax­payer stands to make sub­stan­tial returns on the invest­ments. He also said that the Trea­sury should be able to imple­ment the PPIP quickly.”

Source: CEP News, March 23, 2009.

BCA Research: Some hope for the US bank sec­tor
“The Public-Private Invest­ment Pro­gram (PPIP) is a sig­nif­i­cant pos­i­tive step for­ward in restruc­tur­ing the trou­bled US bank­ing sector.

“The Trea­sury con­firmed ear­lier this week its inten­tion to remove toxic ‘legacy’ assets from bank bal­ance sheets in order to improve the health of finan­cial insti­tu­tions and restore the flow of credit through­out the economy.

“Per­haps the most nag­ging issue fac­ing pol­i­cy­mak­ers in their efforts to solve the credit cri­sis has been what price to pay banks for their toxic assets. Too low a price would prompt fur­ther sig­nif­i­cant write­downs and could lead to addi­tional bank fail­ures. Too high a price would cheat tax­pay­ers and rein­force pre­vi­ous bad invest­ment deci­sions. The Treasury’s plan attempts to solve the issue by cre­at­ing a public-private part­ner­ship, which deter­mines asset prices using an auc­tion process, while at the same time ensur­ing ade­quate financ­ing (backed by the FDIC) and allow­ing the tax­payer to share in some of the upside.

“The plan does not directly sup­port home prices, but it may stem the slide in real estate assets held by the banks. Even if the pur­chase of legacy assets leads to fur­ther write­downs, the gov­ern­ment stands ready to con­tribute addi­tional equity cap­i­tal through its Cap­i­tal Assis­tance Pro­gram (CAP) to main­tain the bank as a going con­cern. Thus, creep­ing nation­al­iza­tion remains a pos­si­bil­ity for those banks with a high pro­por­tion of legacy assets. Bank bonds, how­ever, would seem to be well sup­ported under this plan.”

Source: BCA Research, March 25, 2009.

The Wall Street Jour­nal: Will the removal of assets make them any less toxic?
“Bar­rons Bob O’Brien talks about how the gov­ern­ment will try to help the ail­ing econ­omy by help­ing banks with toxic assets. This raises many ques­tions includ­ing whether gov­ern­ment help will chill public-private initiative.”

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

Nouriel Roubini (RGE Mon­i­tor): Obama’s toxic-asset plan shows promise
“So to clar­ify my view point: I see the Gei­th­ner plan as being rel­e­vant to banks that are sol­vent. For those that are found — after stress tests — to be insol­vent I see as the proper solu­tion to nation­al­ize them and clean them up to pre­pare them for reprivatization.

“The stress test should do a triage between banks that are illiq­uid and under­cap­i­tal­ized but sol­vent given the pro­vi­sion of cap­i­tal and liq­uid­ity and those that, under a rea­son­able stress sce­nario are effec­tively insolvent.

“Those that are insol­vent should be nationalized.

“Those that are sol­vent will still have many toxic assets that need to be dis­posed of; and the Gei­th­ner plan pro­vides a way to prop­erly dis­pose of the toxic assets of sol­vent banks.

“So my par­tial sup­port of the Gei­th­ner plan — with all the appro­pri­ate caveats — is con­sis­tent with the com­ple­men­tary idea of nation­al­iz­ing the insol­vent finan­cial insti­tu­tions. The bad assets of insol­vent banks that are nation­al­ized could be sep­a­rated from the good assets and then worked out by the gov­ern­ment; or they could be sold to pri­vate investors through an auc­tion mech­a­nism along the lines of the Gei­th­ner plan; or they could be sold — together with the good assets — to the investors pur­chas­ing a pri­va­tized bank that was tem­porar­ily pri­va­tized (along the lines of the Indy Mac deal where the investors pur­chas­ing the bank received a gov­ern­ment guar­an­tee on the bad assets after a first loss).”

Source: Nouriel Roubini, RGE Mon­i­tor, March 24, 2009.

Tech Ticker (Yahoo Finance): James Gal­braith — Gei­th­ner plan “extremely dan­ger­ous”, banks “mas­sively cor­rupted”
“Pro­fes­sor James Gal­braith didn’t pull any punches on TechTicker this. He hates the Gei­th­ner plan, call­ing it ‘extremely dan­ger­ous’. He says the banks may game the plan to bid up the prices for their own crap assets and that get­ting bad assets off their books won’t get them lend­ing again. Like Paul Krug­man, Gal­braith thinks the FDIC should just put the banks into receiver­ship and have the banks’ sub­or­di­nated bond­hold­ers pick up some of the cost of restruc­tur­ing them.”

Part 1: Get­ting crap assets off bank books won’t save economy

“Aaron Task, TechTicker: Like it or not, many peo­ple seem to be resigned to the idea there’s no alter­na­tive to the public-private invest­ment fund scheme Trea­sury Sec­re­tary Gei­th­ner detailed this morning.

“That’s hog­wash, says Uni­ver­sity of Texas pro­fes­sor James Gal­braith, author of The Preda­tory State. Of course there’s an alter­na­tive: FDIC receiver­ship of insol­vent banks.

“So why isn’t the Obama admin­is­tra­tion push­ing for FDIC receiver­ship? ‘Polit­i­cal influ­ence of big banks,’ the econ­o­mist says.”

Part 2: Mas­sive corruption

Source: Tech Ticker, Yahoo Finance, March 23, 2009.

Bloomberg: Nobel Prize win­ners clash on prospects of Geithner’s plan
“Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner has a good chance of suc­ceed­ing with his plan to cleanse banks of toxic assets, says Michael Spence, co-winner of the 2001 Nobel Prize in eco­nom­ics. Paul Krug­man, the newest lau­re­ate, is so sure Gei­th­ner will fail that he’s full of ‘despair’.

“Even win­ners of the high­est awards in eco­nom­ics can’t always be right. Which pre­dic­tion proves cor­rect depends in part on whether pri­vate investors can be enticed to bid on as much as $1 tril­lion of illiq­uid loans and secu­ri­ties that banks are now stuck with.

“‘This pro­gram is cru­cially depen­dent on the pri­vate sec­tor as par­tic­i­pants and price set­ters,” said Spence, who shared the Nobel Prize with George Akerlof and Joseph Stiglitz for a the­ory that found some gov­ern­ment inter­ven­tion can make mar­kets more effi­cient. ‘It could work,’ Spence said in a tele­phone inter­view yesterday.

“That’s not an opin­ion shared by 2008 Nobel lau­re­ate Krug­man. ‘The real prob­lem with this plan is that it won’t work,’ Krug­man, said in his New York Times opin­ion col­umn yesterday.

“Gei­th­ner appears to be going back to the ‘cash for trash’ approach of his pre­de­ces­sor as Trea­sury Sec­re­tary, Henry Paul­son, Krug­man said. ‘This is more than dis­ap­point­ing. In fact, it fills me with a sense of despair.’

“Instead of financ­ing the pur­chase of illiq­uid assets, the gov­ern­ment should guar­an­tee many bank debts, take con­trol of ‘insol­vent’ firms and clean up their books, sim­i­lar to what Swe­den did in the 1990s, Krug­man said.

“While Spence, a Stan­ford Uni­ver­sity pro­fes­sor and for­mer business-school dean, has more con­fi­dence in Gei­th­ner, even he isn’t pos­i­tive the Trea­sury sec­re­tary can pull it off.

“The Trea­sury plan ‘is a lit­tle com­plex to imple­ment,’ Spence said. ‘I assume the Trea­sury has done its home­work, and has peo­ple lined up’ to com­mit pri­vate cap­i­tal to Geithner’s public-private part­ner­ships, he said.

“Stiglitz, speak­ing at a con­fer­ence in Hong Kong today, said the plan ‘risks a major increase in our national debt.’

“‘You can take the bad assets off the banks, but where are they going to go?’ said Stiglitz, who served as chair­man of for­mer Pres­i­dent Bill Clinton’s Coun­cil of Eco­nomic Advis­ers. ‘The one place for them to go is to the taxpayers.’”

Source: Scott Lan­man and Vivien Lou Chen, Bloomberg, March 24, 2009.

Bill King (The King Report): TAPS — cre­at­ing a deriv­a­tive on deriv­a­tives
“Geithner’s plan effec­tively cre­ates ‘calls’ on banks’ toxic assets. The US tax­payer will under­write losses in this pro­gram. The call pre­mium will be the pri­vate equity risk; the buyer gets the upside appre­ci­a­tion. The tax­payer pro­vides the funding/leverage.

“Bill Gross sees pri­vate investor risk of 4% to 5%. This is the call pre­mium for the toxic assets.

“Let’s think through this plan and the prob­a­ble consequences.

“Every­one knows that solons are try­ing to engi­neer mas­sive asset infla­tion. So if we are run­ning a bank why would we sell any asset that has a chance to reflate?

“We would only sell assets that we deem hope­less. Are there enough pri­vate equity pat­sies to buy calls on assets that we deem have a low prob­a­bil­ity of increas­ing sub­stan­tively in value?

“Most call buy­ers do not intend or wish to own the under­ly­ing assets. They are inter­ested in a lev­ered gain. So even if the toxic assets are inflated enough in value to pro­duce a gain for the ‘call’ buy­ers, what pat­sies will appear as a dump­ing ground for the call buyers?

“Geithner’s toxic asset scheme is a repo with a call option. And unless end-user pat­sies appear at some point, the toxic assets will return to sender and the US taxpayer.

“We are in this mess due to excess deriv­a­tives and lever­age. Iron­i­cally or absurdly, Geither’s toxic asset plan & solu­tion (TAPS) cre­ates a deriv­a­tive on deriv­a­tives (toxic paper) and increases the lever­age on lev­ered toxic assets! You can’t make up stuff like this.

“Unfor­tu­nately for solons their expe­di­ency just delays the inevitable neg­a­tives. Solons have cre­ated extremely pos­i­tive expec­ta­tion for the TAPS. If the scheme does not go excep­tion­ally well, the con­se­quences will not be pretty … BTW, $1 tril­lion is not nearly enough.

“The first TAPS auc­tion will prob­a­bly go well because solons will exert intense pres­sure on the com­mu­nity to play nice. Enti­ties that are already adjuncts of the Fed or Trea­sury, like PIMCO and Black Rock, will be sub­jected to enor­mous pres­sure to stand and deliver.”

Source: Bill King, The King Report, March 24, 2009.

CEP News: FDIC’s Bair says some US banks could be beyond help
“Fed­eral Deposit and Insur­ance Cor­po­ra­tion (FDIC) head Sheila Bair said Mon­day that some US finan­cial insti­tu­tions may be beyond help from US gov­ern­ment agen­cies, and some banks will close.

“In a con­fer­ence call with reporters, Bair touted the US Treasury’s plan intro­duced this morn­ing to remove toxic assets from banks’ bal­ance sheets.

“The public/private part­ner­ship to buy these assets and resell them to the pub­lic won’t nec­es­sar­ily be a 50/50 split, she said.

“Bair said the high­est pri­or­ity will be given to high-risk real estate loans, because the prob­lems are with these assets.

“She said the most dif­fi­cult part of the pro­gram will be to price the assets prop­erly, but that gov­ern­ment agen­cies will find the best pos­si­ble struc­ture to do so, adding that she expects the pro­gram will be profitable.”

Source: CEP News, March 24, 2009.

The New York Times: Bat­tles over reform plan lie ahead
“Out­lin­ing a far-reaching pro­posal on Thurs­day to rebuild the nation’s bro­ken sys­tem of finan­cial reg­u­la­tion, the Trea­sury sec­re­tary, Tim­o­thy F. Gei­th­ner, fired the open­ing salvo in what is likely to be a marathon battle.

“‘Our sys­tem failed in fun­da­men­tal ways,’ Mr. Gei­th­ner told the House Finan­cial Ser­vices Com­mit­tee. ‘To address this will require com­pre­hen­sive reform. Not mod­est repairs at the mar­gin, but new rules of the game.’

“On the sur­face, both the law­mak­ers who lis­tened to the Trea­sury sec­re­tary and the finan­cial industry’s lob­by­ing groups made it sound as if they com­pletely agreed with Mr. Geithner’s call for what he described as ‘bet­ter, smarter tougher regulation.’

“But in fact indus­try groups are already mobi­liz­ing to block restric­tions they oppose and win new pro­tec­tions they have wanted for years. Even though Mr. Gei­th­ner care­fully avoided spe­cific details, lay­ing out mostly broad prin­ci­ples for over­haul­ing the sys­tem, finan­cial indus­try groups are iden­ti­fy­ing issues they plan to pur­sue and lin­ing up well-connected lob­by­ists and pub­li­cists to help make their cases.

“If his­tory is any guide, Mr. Geithner’s pro­pos­als will start an equally intense bat­tle among the reg­u­la­tory agen­cies them­selves — includ­ing the alpha­bet soup of bank­ing reg­u­la­tors, the Secu­ri­ties and Exchange Com­mis­sion and the Fed­eral Reserve — to stay in busi­ness and enhance their authority.

“Hedge funds and pri­vate equity funds, which have been almost entirely unreg­u­lated, would have to reg­is­ter with the SEC and tell it about their risk-management prac­tices. Many finan­cial deriv­a­tive instru­ments, like credit-default swaps, would come under super­vi­sion for the first time.

“Mr. Geithner’s most spe­cific pro­posal, which Demo­c­ra­tic law­mak­ers hope to pass in the next few weeks, would allow the fed­eral gov­ern­ment to seize con­trol of trou­bled insti­tu­tions whose col­lapse or bank­ruptcy might jeop­ar­dize the broader finan­cial system.”

Source: Edmund Andrews, The New York Times, March 26, 2009.

CNBC: JPMorgan’s Dimon on meet­ing with Obama
“Jamie Dimon, CEO of JPMor­gan, sits down for an exclu­sive inter­view with CNBC’s Erin Bur­nett. Dimon dis­cusses the meet­ing he and other bank CEOs had with Pres­i­dent Obama.”

Source: CNBC, March 27, 2009.

News N Eco­nom­ics: Real money sup­ply: surg­ing in some coun­tries, not so much in oth­ers
“The Fed’s recent and extreme poli­cies have made peo­ple ner­vous about infla­tion. They should be, but just not right now. Key cen­tral banks recently added hydro­gen to their engines in the form of quan­ti­ta­tive eas­ing, caus­ing high-powered money to surge. How­ever, the mul­ti­plier is col­laps­ing, and there­fore, the new base is sim­ply a mea­sure to keep the money sup­ply afloat. Some economies, though, are show­ing wor­ri­some trends in their money growth rates.

“The chart below illus­trates the 6-month annu­al­ized growth rate of the broad mea­sure of real money in the US, the UK, Japan, and the Euro­zone. In spite of the mas­sive surge in the US mon­e­tary base, 231% over the last 6 months, the real US money sup­ply grew just 22.6% over that same period. Can you imag­ine what would have hap­pened had the Fed not eased so sub­stan­tially? Trou­ble­some defla­tion. The money mul­ti­plier is col­laps­ing as banks hoard cash and con­sumers and firms pull back.

“Fur­ther­more, like the Fed, the Bank of Eng­land (BoE) is engaged in quan­ti­ta­tive eas­ing, result­ing in a sim­i­lar 6-month money growth rate, 22.8%. The ECB and the Bank of Japan (BoJ) are still increas­ing their broader mea­sures of real money on a 6-month basis, but at a much slower rate. Admit­tedly, the BoJ is engag­ing in alter­na­tive pol­icy mea­sures, but the ECB and the BoJ are not pulling out all of the ‘eas­ing stops’ as are the Fed and the BoE.”

Source: Rebecca Wilder, News N Eco­nom­ics, March 24, 2009.

Reuters: Soros — G20 a “make or break” event for mar­kets
“The Group of 20 nations meet­ing next week is a ‘make or break event’ for the global mar­kets, investor George Soros said on Wednesday.

“‘Unless it comes up with prac­ti­cal mea­sures to sup­port the coun­tries at the periph­ery of the global finan­cial sys­tem, mar­kets are going to suf­fer another sink­ing spell just as they did on Feb­ru­ary 10, 2009, when the author­i­ties failed to pro­duce prac­ti­cal mea­sures to recap­i­tal­ize the United States bank­ing sys­tem,’ Soros said in tes­ti­mony to the Sen­ate For­eign Rela­tions Committee.

“Soros said Pres­i­dent Barack Obama could help make the G20 meet­ing a suc­cess by rais­ing a pos­si­ble solu­tion that would involve increas­ing the amount that devel­op­ing coun­tries — from East­ern Europe to Africa — can effec­tively bor­row from the Inter­na­tional Mon­e­tary Fund.

“The urgent task of re-inflating the global econ­omy has to be car­ried out mainly by the IMF, ‘imper­fect and belea­guered as it is, because it is the only insti­tu­tion avail­able,’ Soros said.

“While the IMF’s resources were likely to be dou­bled at the G20 meet­ing of big devel­oped and devel­op­ing coun­tries, that would not pro­vide a sys­temic solu­tion for the devel­op­ing world, Soros said.

“But a sys­temic solu­tion was read­ily avail­able in the form of spe­cial draw­ing rights (SDRs), an inter­na­tional reserve asset cre­ated by the IMF in 1969 that has the poten­tial to act as a super-sovereign reserve currency.

“In addi­tion to the one-time increase of the IMF’s resources, there ought to be sub­stan­tial annual SDR issues, say $250 bil­lion, as long as the global reces­sion lasts, he said.”

Source: Reuters, March 25, 2009.

Asha Ban­ga­lore (North­ern Trust): Minor Q4 GDP revi­sions, cor­po­rate prof­its plunge
“Real GDP is esti­mated to have dropped at an annual rate of 6.3% in the fourth quar­ter of 2008. This is vir­tu­ally unchanged from the ear­lier esti­mate of a 6.2% drop of real GDP. In 2008, real GDP increased 1.1% after a 2.03% increase in 2007.

“On a Q4-to-Q4 basis, the 0.85% drop in real GDP in the fourth quar­ter is the first decline in real GDP since the 1990–91 reces­sion. The econ­omy is expected to post another sharp quar­terly reduc­tion in real GDP in the first quar­ter of 2009 (-6.1%), with these two quar­terly declines chalk­ing up to be the weak­est quar­ters of the cur­rent recession.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, March 26, 2009.

Asha Ban­ga­lore (North­ern Trust): Con­sumer spend­ing in Q1 most likely to show increase
“Con­trary to our ear­lier expec­ta­tions, con­sumer spend­ing in the first quar­ter is most likely to show an increase. The sharp upward revi­sion of infla­tion adjusted con­sumer spend­ing in Jan­u­ary (+0.7% ver­sus +0.4% in the orig­i­nal report) is the main rea­son for this revi­sion. Nom­i­nal con­sumer spend­ing moved up 0.2% in Feb­ru­ary after a 1.0% increase in Jan­u­ary. How­ever, after adjust­ing for infla­tion, con­sumer spend­ing fell 0.2% in Feb­ru­ary. A con­ser­v­a­tive assump­tion for March results in an over­all increase of con­sumer spend­ing in the first quar­ter of 2009 of roughly 0.6%-0.8%. This in turn will result in a mod­i­fi­ca­tion of the head­line GDP fore­cast, which we are work­ing on as of this writing.

“The near term trend of con­sumer spend­ing is most likely to be weak owing to the severe declines in pay­roll employment.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, March 27, 2009.

Asha Ban­ga­lore (North­ern Trust): Durable goods orders — glim­mer of strength emerges
“Orders of durable goods increased 3.4% in Feb­ru­ary after a down­wardly revised drop in Jan­u­ary of 7.3% (orig­i­nally esti­mated as a 4.5% decline). The 35.3% increase in orders of defense items and the 6.6% jump in book­ings of non-defense cap­i­tal goods exclud­ing air­craft stand out in the report. Orders of air­craft (-28.9%) and autos (-0.6%) dropped but that of machin­ery (+13.5%), com­put­ers (+5.6%), and appli­ances rose (+1.6%) dur­ing Feb­ru­ary. The main mes­sage is that the pickup in orders of durables is sig­nif­i­cant but con­sis­tent monthly gains will be nec­es­sary to declare that the fac­tory sec­tor has pulled out of the cur­rent doldrums.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, March 25, 2009.

Asha Ban­ga­lore (North­ern Trust): New home sales — notable pickup but more is nec­es­sary
“Sales of new homes rose 4.7% to an annual rate of 337,000, fol­low­ing an upward revi­sion of sales in Jan­u­ary and Decem­ber. On a regional basis, sales of new homes increased in the South (+9.7%) and West (+6.6%) but fell in the North­east (-3.3%) and Mid­west (-9.1%). The fact that sales advanced in Feb­ru­ary is note­wor­thy but addi­tional monthly gains will be nec­es­sary to reduce the inven­tory of unsold new homes and bring about sta­bil­ity in this sector.

“Sales of new single-family homes are down 43.8% in Feb­ru­ary from a year ago, after a 47.7% plunge in Jan­u­ary. Sales of new homes have dropped 75.7% from the peak in July 2005. The trough for new home sales appears to be Jan­u­ary 2009, for now.

“The median price of a new single-family home declined 18.1% from a year ago in Feb­ru­ary, the largest year-to-year drop on record. The median price of a new single-family home has fallen 23.5% from the peak in March 2007, also the largest peak-to-trough decline on record.

“Addi­tional declines in prices of new homes are nearly cer­tain given the large inven­tory of unsold new homes. The good news is that the inven­tory unsold homes fell slightly to a 12.2-month mark from the record high of 12.9 months in January.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, March 25, 2009.

CEP News: Fed’s Rosen­gren says pro­grams will lower con­sumer, busi­ness loan costs
“Recent actions by the Fed­eral Reserve should help lower the cost of credit to con­sumers and busi­nesses, accord­ing to Boston Fed Pres­i­dent Eric Rosen­gren speak­ing before the House Finan­cial Ser­vices Com­mit­tee on Monday.

“While credit avail­abil­ity con­tin­ues to be a sig­nif­i­cant source of con­cern for the Fed­eral Reserve, the Fed has ‘acted proac­tively and cre­atively to address these con­cerns,’ said the cen­tral banker.”

Source: Erik Kevin Franco, CEP News, March 23, 2009.

Zil­low: Fed­eral Reserve announce­ment dri­ves mort­gage rate drop
“Dri­ven by the news that the Fed­eral Reserve plans to spend an addi­tional $750 bil­lion to buy mortgage-backed secu­ri­ties, the weekly aver­age rate bor­row­ers were quoted on Zil­low Mort­gage Mar­ket­place for thirty-year mort­gages fell to 5.06%, down from 5.21% the week prior, accord­ing to the Zil­low Mort­gage Rate Monitor.”

Source: Zil­low, March 24, 2009.

Finan­cial Times: Ron Paul — believer in small gov­ern­ment pre­dicts 15-year depres­sion
“Pen­sion trustees and insur­ance com­pany port­fo­lio man­agers look away now. Your increased com­mit­ment to gov­ern­ment bond hold­ings in recent times is about to blow up spectacularly.

“At least, that is the view of Ron Paul, the US con­gress­man who ran against John McCain in last year’s Repub­li­can Party pres­i­den­tial nomination.

“His is a minor­ity view. Yields on gov­ern­ment bonds world­wide have been falling fast over the past few months and in the UK, the com­mence­ment of ‘quan­ti­ta­tive eas­ing’ this month sent bond prices soaring.

“But the cred­i­bil­ity of both west­ern gov­ern­ments and their cur­ren­cies is wan­ing, and has been ever since the gold stan­dard was aban­doned in 1971, says Mr Paul. And that means even ‘safe’ invest­ments are far from safe, he claims.

“‘Peo­ple will start to aban­don the dol­lar as cur­rent and past eco­nomic poli­cies cre­ate a steep rise in inter­est rates,’ Mr Paul says.

“‘If you are in Trea­suries, you will need to be watch­ful and nim­ble to time your escape.’

“Unfor­tu­nately, cash­ing out will not pro­tect the value of invest­ments, he insists, because ‘fiat’ cur­ren­cies will all decline over the com­ing years as mea­sures to try to haul the world econ­omy out of reces­sion fail. ‘The cur­rent stim­u­lus mea­sures are mak­ing things a lot worse,’ says Mr Paul.

“‘The US gov­ern­ment just won’t allow the cor­rec­tion the econ­omy needs.’ He cites the mini-depression of 1921, which lasted just a year largely because insol­vent com­pa­nies were allowed to fail. ‘No one remem­bers that one. They’ll remem­ber this one, because it will last 15 years.’”

“And don’t even men­tion shares to Mr Paul: ‘The last place you want to be is in the stock mar­ket,’ he says. ‘It may not bot­tom out for 10 years — just look at Japan.’”

Click here for the full article.

Source: Phil Davis, Finan­cial Times, March 22, 2009.

Finan­cial Times: Credit mar­ket con­cerns
“While equi­ties responded strongly to the Treasury’s plan to get bad loans off banks’ bal­ance sheets, the rally in credit mar­kets was more muted, says FT’s Aline van Duyn.”

Source: Aline van Duyn, Finan­cial Times, March 24, 2009.

Bespoke: S&P 500 sec­tor breadth mea­sures
“The S&P 500 is cur­rently trad­ing 3.73% above its 50-day mov­ing aver­age, while the aver­age stock in the index is 5.34% above its 50-day. This is a pos­i­tive breadth mea­sure. Below we pro­vide the same analy­sis for the ten S&P 500 sectors.

“As shown, the Energy sec­tor has the most pos­i­tive breadth with a dif­fer­ence of +4.58% between the aver­age stock’s dis­tance from its 50-day ver­sus the sector’s dis­tance from its 50-day. Con­sumer Dis­cre­tionary ranks 2nd, fol­lowed by Tech­nol­ogy and Telecom.

“On the neg­a­tive side, the Finan­cial sec­tor as a whole is trad­ing 10.12% above its 50-day, while the aver­age stock in the sec­tor is 5.06% abvoe its 50-day. Only two sec­tors remain below their 50-days after this sig­nif­i­cant mar­ket rally and they are both defen­sive in nature — Health Care and Utilities.”

Source: Bespoke, March 26, 2009.

Bespoke: Sec­tor trad­ing ranges — near­ing over­bought lev­els
“In the chart below, we high­light the cur­rent lev­els of each S&P 500 sec­tor with respect to their nor­mal trad­ing ranges. Red shad­ing indi­cates that the sec­tor is over­bought (with dark red indi­cat­ing extreme over­bought lev­els), while green shad­ing is indica­tive of an over­sold reading.

“Over the last week, the S&P 500 and each of its sec­tors have moved closer to over­bought lev­els. There are cur­rently four over­bought sec­tors, no over­sold sec­tors, and six sec­tors in neu­tral ter­ri­tory. Given the Nasdaq’s brief push into pos­i­tive YTD ter­ri­tory yes­ter­day, it’s no sur­prise that the Tech­nol­ogy sec­tor is the most over­bought one in the mar­ket. Health Care, on the other hand, is the fur­thest from over­bought lev­els. It is cur­rently attempt­ing to recover from the sell off that took place in late Feb­ru­ary after the release of the Obama bud­get plan.

“Over the com­ing weeks, it would not be sur­pris­ing to see investors rotate out of the tech sec­tor, which is near­ing extreme over­bought ter­ri­tory, and into the less extended Health Care sector.”

Source: Bespoke, March 27, 2009.

Bloomberg: Mobius says stocks at begin­ning of a bull mar­ket rally
“The next bull mar­ket rally has begun and there are bar­gains in every emerg­ing mar­ket fol­low­ing a record slump in stocks, Tem­ple­ton Asset Management’s Mark Mobius said.”

Click here for the article.

Source: Bloomberg, March 23, 2009.

Bloomberg: Roubini — stocks will drop as banks go “belly up”
“US stocks will fall and the gov­ern­ment will nation­al­ize more banks as the econ­omy con­tracts through the end of 2009, said Nouriel Roubini, the New York Uni­ver­sity pro­fes­sor who pre­dicted last year’s eco­nomic crisis.

“‘The stock mar­ket is a bit ahead of the real macro­eco­nomic and finan­cial news,’ Roubini, a pro­fes­sor at NYU’s Stern School of Busi­ness and the chair­man of con­sult­ing firm Roubini Global Eco­nom­ics, said in an inter­view with Bloomberg Tele­vi­sion in Lon­don today. ‘We’ll have some major banks going belly up that will need to be taken over.’

“The global equity rebound in March that sent the Stan­dard & Poor’s 500 Index to its best monthly advance in 17 years is a ‘bear-market rally’ and US Trea­sury yields will ‘remain rel­a­tively low’ as investors flock to the safest assets, Roubini said. Trea­sury Sec­re­tary Tim­o­thy Geithner’s new plan to remove toxic debt from finan­cial com­pa­nies won’t be enough for insol­vent banks, he said.

“Roubini’s out­look con­trasts with pre­dic­tions this week from Tem­ple­ton Asset Management’s Mark Mobius and Traxis Part­ners’ Bar­ton Biggs, who said that equi­ties are poised to rally as gov­ern­ment efforts to revive the econ­omy and bank­ing sys­tem begin to work. Investors are ‘way too opti­mistic’ about the prospects for a recov­ery in the econ­omy and earn­ings, Roubini said.”

Source: Michael Pat­ter­son and Maithreyi Seethara­man, Bloomberg, March 26, 2009.

Mar­ket­Watch: Keep­ing hope alive — bear mar­ket rally or new bull mar­ket?
“Is it pos­si­ble to have too much of a good thing? Mae West didn’t think so, though I have it on reli­able author­ity that she wasn’t talk­ing about the stock market.

“And when it comes to ral­lies off of mar­ket lows, it is indeed pos­si­ble for stocks to overdo it. That at least is the argu­ment being made by at some of the invest­ment newslet­ter edi­tors I monitor.

“Accord­ing to them, bear mar­ket ral­lies are almost by their very nature pow­er­ful and impres­sive. If we were to endow the bear mar­ket with intent, we would say that the very pur­pose of a rally is to draw as many gullible investors back into the mar­ket before the next leg down commences.

“… what­ever else you say about the rally that began two weeks ago, it has indeed been ‘vio­lent’ and has occurred with ‘amaz­ing rapidity’.

“To gauge just how vio­lent and rapid it has been, I com­pared the rally since March 9 to a com­pos­ite of the stock market’s behav­ior over the first two weeks of all bull mar­kets since 1900.

“To come up with a list of those bull mar­kets, I fol­lowed the lead of Ned Davis Research, the insti­tu­tional research firm. For them, a bull mar­ket requires one of three con­di­tions to hold: (1) at least a 30% rise in the Dow Jones Indus­trial Aver­age in 50 cal­en­dar days, (2) at least a 13% rise in the Dow in 155 cal­en­dar days, or (3) at least a 30% rever­sal in the Value Line Geo­met­ric Index.

“Since the begin­ning of 1900, accord­ing to the research firm, there have been by this set of cri­te­ria no fewer than 34 bull markets.

“It turns out that the recent rally has been markedly more pow­er­ful than the aver­age begin­ning of prior bull mar­kets. Over the last two weeks, for exam­ple, the Dow has gained 18.8%. The Dow’s aver­age gain over the first two weeks of past bull mar­kets, in con­trast, has been 8.4%, or less than half as much.

“In fact, of the 34 bull mar­kets iden­ti­fied by Ned Davis Research, only one of them pro­duced a greater gain in its first two weeks than in the recent rally. That was the one that began on Novem­ber 13, 1929, and is hardly one that the bulls would want to brag about. That bull mar­ket lasted just five months and led to an increase of just 48% in the Dow — mak­ing it one of the most mod­est of bull mar­kets in the sam­ple, despite have one of the most impres­sive returns in its first two weeks.

“These his­tor­i­cal com­par­isons don’t auto­mat­i­cally mean that the market’s strength over the last two weeks is just a bear mar­ket rally, of course. But those com­par­isons do high­light the pos­si­bil­ity that the recent rally, impres­sive as it oth­er­wise is, will in the end prove to be just a bear mar­ket rally.”

Source: Mark Hul­bert, Mar­ket­Watch, March 24, 2009.

Jef­frey Saut (Ray­mond James): Bear mar­ket rally or some­thing more?
“In recent weeks, cop­per, steel, and energy prices have crept higher. Addi­tion­ally, build­ing per­mits and hous­ing starts have come in bet­ter than expected. Mean­while, tax refunds are up 13.3% when com­pared to this time last year, which is prob­a­bly why retail sales have sta­bi­lized despite ris­ing unemployment.

“Only time will tell, but it feels like the eco­nomic dete­ri­o­ra­tion is no longer accel­er­at­ing? Could it be that the huge increase in money sup­ply, neg­a­tive real inter­est rates (infla­tion adjusted rates) and the rein­ter­me­di­a­tion we have been speak­ing about are begin­ning to have a pos­i­tive impact on the economy?

“The stock mar­ket might just be sens­ing that, hav­ing leaped off of a gen­er­a­tional over­sold con­di­tion into a 20%, ten-session, upside stam­pede that pro­duced four 90% upside days (March 10th, 12th, 17th, and 18th) within a two week period. Such enthu­si­as­tic buy­ing has tended to be asso­ci­ated with the start of new bull mar­kets. Yet as the Lowry’s ser­vice notes, ‘Our 2002 study of 90% days showed that the start of new bull mar­kets are typ­i­cally iden­ti­fied by a sin­gle 90% upside day, rep­re­sent­ing a rush of enthu­si­as­tic buy­ers which typ­i­cally calms down after the first dra­matic day. On rare occa­sions, two 90% upside days have been recorded in the first 30 days of a new bull market.’

“While we are cau­tious, we remain hope­ful and con­tinue to favor the upside until proven wrong, which is why we are still ‘long’ var­i­ous indexes and have selec­tively been accu­mu­lat­ing stocks.”

Source: Jef­frey Saut, Ray­mond James, March 23, 2008.

Richard Rus­sell (Dow The­ory Let­ters): Get used to bear mar­ket ral­lies
“Mov­ing on to the stock mar­ket, sub­scribers will have to get used to bear mar­ket action. In bear mar­kets, counter-intuitively much of the time is spent with stocks ris­ing, due to the fre­quent upward cor­rec­tion. For instance, dur­ing the hor­ren­dous 1929–32 bear mar­kets there were no less than nine 15% ral­lies, the aver­age last­ing 15 days.

“Dur­ing the 1937 to 1942 bear mar­ket, there were nine ral­lies of 15% or more with the aver­age cor­rec­tion last­ing 82 days

“Dur­ing the 1946 to 1949 bear mar­ket there were two 15 % or more ral­lies aver­ag­ing 57 days each.

“Dur­ing the recent 2000 to 2002 bear mar­ket there were three 15% or more ral­lies aver­ag­ing 5 days each.

“From Novem­ber 2009 to Jan­u­ary 2009 there were two ral­lies, one short and one longer one that stopped just short of 15%.

“So we have to get used to ral­lies in the bear mar­ket. One dif­fi­culty in deal­ing with bear ral­lies is that they can end as sud­denly as they started. This is because bear mar­ket ral­lies don’t end with a period of dis­tri­b­u­tion. The buy­ing just stops, and down they go. This is oppo­site to bull mar­ket advances that usu­ally ter­mi­nate after a period of delib­er­ate distribution.”

Source: Richard Rus­sell, Dow The­ory Let­ters, March 24, 2009.

David Fuller (Fuller­money): Don’t look to Wall Street for the lead
“The US stock mar­ket is the big ele­phant in the room, cast­ing a long shadow, but it sel­dom leads mar­ket moves. New bull mar­kets are led by emerg­ing economies, sub­ject to gov­er­nance, with their bet­ter val­u­a­tions near the lows, com­pet­i­tive cur­ren­cies, supe­rior GDP growth prospects and com­par­a­tively thin mar­kets. … grow­ing list of mar­ket indices which bot­tomed in Octo­ber and Novem­ber, and have now bro­ken up out of their trad­ing ranges dur­ing the cur­rent rally. This is very bull­ish action and the way new uptrends commence.

“Many other stock mar­ket indices tested their lows estab­lished last year and found good sup­port near those lev­els, evi­denced by their per­sis­tent ral­lies towards the upper-middle of their ranges. This is con­sis­tent with base for­ma­tion devel­op­ment. Lastly, most of the stock mar­kets that clearly broke beneath last year’s lows ear­lier this month have not main­tained those down­ward breaks. Fur­ther ral­lies by these indices would also con­firm base development.

“Long-dated gov­ern­ment bond mar­kets are no longer per­form­ing. Every­one knows that their yields are not attrac­tive for any eco­nomic envi­ron­ment other than a defla­tion­ary depres­sion. Some of the money cur­rently in bonds came from stock mar­kets and will return to equi­ties as con­fi­dence improves. Cor­po­rate bonds are per­form­ing and they are a lead indi­ca­tor for equities.

“Cop­per is lead­ing indus­trial com­modi­ties higher, as it did in 2003.

“Lastly, the US dol­lar and yen in par­tic­u­lar are weak­en­ing against yield / resources cur­ren­cies such as the Aus­tralian and New Zealand dol­lars. This indi­cates that carry trade delever­ag­ing has not only ended but is also reversing.

“Return­ing to global stock mar­kets, I main­tain that the bear mar­ket mostly ended in Octo­ber and Novem­ber. The Jan­u­ary to early-March sell-off looks like a suc­cess­ful test of sup­port from last year’s lows for most non-Western stock markets.

“I do have some remain­ing con­cern over Wall Street and its leash effect. How­ever, tech­nol­ogy is a lead­ing indi­ca­tor and the tech-heavy Nas­daq 100 Index did not break down­wards. The S&P 500 Index did not main­tain its break beneath the Novem­ber low and is push­ing above psy­cho­log­i­cal resis­tance at 800. A move above 880 would, in my view, con­firm a sig­nif­i­cant down­side fail­ure and resump­tion of the yearend base for­ma­tion development.

“Inter­est­ingly, stock mar­kets have been extend­ing this month’s rally against a back­ground of short-term over­bought indi­ca­tors. This indi­cates that bears are being squeezed and that bulls are embold­ened. I have pre­vi­ously men­tioned that a sig­nif­i­cant rally would be indi­cated by its per­sis­tence. We now have some dis­tance between cur­rent lev­els and the early-March lows, which should pro­vide a cush­ion of sup­port dur­ing the next consolidation.

“In con­clu­sion, if the bear mar­ket is not con­tin­u­ing, the new bull mar­ket is already under­way, although most peo­ple do not yet realise it. How­ever this will not be fully con­firmed, as I have said before, until the major­ity of stock mar­kets are trad­ing above ris­ing 200-day mov­ing aver­ages. More­over, even though the bal­ance of tech­ni­cal evi­dence increas­ingly sug­gests that a new bull mar­ket is grad­u­ally com­menc­ing, this does not mean that all of the devel­op­ing bases can sup­port uptrends at this time. The lead­ing Asian emerg­ing mar­kets and South Amer­i­can resources mar­kets may actu­ally be com­menc­ing uptrends, but many oth­ers are likely to extend their bases in com­ing months.”

Source: David Fuller, Fuller­money, March 26, 2009.

BCA Research: Demys­ti­fy­ing Chi­nese hold­ings of US assets
“In an unusual dis­clo­sure, Chi­nese Pre­mier Wen Jiabao pub­licly expressed his con­cerns about the safety of China’s hold­ings of US assets, putting the country’s mas­sive yet largely furtive for­eign exchange assets into the spotlight.

“Our research finds that China cur­rently has about 64% of its for­eign reserves in US assets, a level that has declined grad­u­ally from as high as 84% in 2003. The major­ity of Chi­nese hold­ings of US assets are risk free and long-term in nature, but there has been a clear trend in China’s reserve hold­ings that shows a per­sis­tent increase in expo­sure to risky assets and non-US assets over the past five years.

“Although, China’s net pur­chases of risky US assets have dropped sharply since mid-last year, while its net pur­chases of Trea­surys have jumped. This under­scores the author­i­ties’ reduced risk appetite amid the ongo­ing global storm. Their reserve diver­si­fi­ca­tion process could accel­er­ate again when global finan­cial mar­kets sta­bi­lize. Impor­tantly, China’s net pur­chases of short-term US Trea­surys have jumped dra­mat­i­cally over the past year, account­ing for the major­ity of the country’s total net pur­chases of US gov­ern­ment paper. This is an unprece­dented devel­op­ment and a sit­u­a­tion that war­rants close atten­tion going forward.”

Source: BCA Research, March 23, 2009.

The Wall Street Jour­nal: China takes aim at dol­lar
“China called for the cre­ation of a new cur­rency to even­tu­ally replace the dol­lar as the world’s stan­dard, propos­ing a sweep­ing over­haul of global finance that reflects devel­op­ing nations’ grow­ing unhap­pi­ness with the US role in the world economy.

“The unusual pro­posal, made by cen­tral bank gov­er­nor Zhou Xiaochuan in an essay released Mon­day in Bei­jing, is part of China’s increas­ingly assertive approach to shap­ing the global response to the finan­cial crisis.

“Mr. Zhou’s pro­posal comes amid prepa­ra­tions for a sum­mit of the world’s indus­trial and devel­op­ing nations, the Group of 20, in Lon­don next week. At past such meet­ings, devel­oped nations have crit­i­cized China’s eco­nomic and cur­rency policies.

“This time, China is on the offen­sive, backed by other emerg­ing economies such as Rus­sia in mak­ing clear they want a global eco­nomic order less dom­i­nated by the US and other wealthy nations.

“How­ever, the tech­ni­cal and polit­i­cal hur­dles to imple­ment­ing China’s rec­om­men­da­tion are enor­mous, so even if backed by other nations, the pro­posal is unlikely to change the dollar’s role in the short term. Cen­tral banks around the world hold more US dol­lars and dol­lar secu­ri­ties than they do assets denom­i­nated in any other indi­vid­ual for­eign cur­rency. Such reserves can be used to sta­bi­lize the value of the cen­tral banks’ domes­tic currencies.

“Monday’s pro­posal fol­lows a sim­i­lar one Rus­sia made this month dur­ing prepa­ra­tions for the G20 meet­ing. Like China, Rus­sia rec­om­mended that the Inter­na­tional Mon­e­tary Fund might issue the cur­rency, and empha­sized the need to update ‘the obso­les­cent unipo­lar world eco­nomic order’.”

Source: Andrew Bat­son, The Wall Street Jour­nal, March 24, 2009.

Bespoke: Gold test­ing down­side sup­port
“Just one week after the Fed­eral Reserve deval­ued the dol­lar by announc­ing that they would start buy­ing US Trea­suries, one would think gold would be in rally mode and in over­bought ter­ri­tory. How­ever, while gold had an ini­tial spike fol­low­ing the Fed’s announce­ment, since then the yel­low metal has come back down to earth. Gold is cur­rently close to test­ing its 50-day mov­ing aver­age, which is a level that has pro­vided rea­son­able sup­port over the last few months. If that level fails to hold, the next level of sup­port is around its 200-day mov­ing aver­age at 859.”

Source: Bespoke, March 25, 2009.

Platts: Chi­nese buy­ing spree sparks fears of base metal short­age in Asia
“Robust Chi­nese demand could result in a sup­ply short­age of base met­als in Asia even as the rest of the world grap­ples with low demand, mar­ket sources said this week.

“Japan­ese cop­per smelters pro­duc­ing a total 120,000 mt/month of cop­per cath­ode have sold out of April-May ship­ments. Two smelters pro­duc­ing 20,000–40,000 mt/month each said they may be able to offer spot car­goes in June.

“Asia’s cop­per mar­ket has tight­ened as a result, sources said. Pre­mi­ums for Japan­ese cop­per for prompt ship­ment within 60 days have risen to $150/mt plus Lon­don Metal Exchange cash CIF Shang­hai this month, from $80–100 mt/plus LME CIF Shang­hai in February.

“There is no short­age yet, and no cop­per con­sumer in Asia has yet been forced to cur­tail pro­duc­tion of coils or cables due to a short­age of cop­per feed­stock, sources said.

“But if demand in recession-hit Japan does start to pick up unex­pect­edly, Asia may suf­fer short­ages, impact­ing smaller con­sumers in par­tic­u­lar that have no pro­tec­tion from long term contracts.”

Source: Mayumi Watan­abe, Platts, March 27, 2009.

David Fuller (Fuller­money): Where do oil prices go from here?
“The con­sen­sus view is usu­ally a con­trary indi­ca­tor. Near the July 2008 peak at just under $150, many ana­lysts were fore­cast­ing $200 and higher. This trend extrap­o­la­tion was often influ­enced by their firms’ and clients’ own spec­u­la­tive posi­tions, not least in tracker funds. Around $40, the con­sen­sus was for $25, sug­gest­ing siz­able short positions.

“Price charts gave a very good sig­nal that crude oil’s bull run was over in mid-July 2008 and since Decem­ber we have inter­preted the rang­ing price action as base for­ma­tion devel­op­ment cen­tred on $40. I do not assume that the lows will be retested and the base might even have been com­pleted. If so, the next reac­tion and con­sol­i­da­tion, rep­re­sent­ing the first step above the base, would most likely encounter sup­port at $47 or higher.

“His­tor­i­cally, demand for crude oil has only expe­ri­enced a small decline dur­ing deep reces­sions. Global con­sump­tion of crude con­tin­ued to rise dur­ing the 2001–2002 reces­sion, albeit at a slower rate. We are cur­rently see­ing a dip in demand but as Matthew Sim­mons points out, it is only slight and mostly in terms of con­sump­tion in the US.

“Mean­while, OPEC has reduced sup­plies, while world­wide explo­ration and devel­op­ment of oil reserves has been cur­tailed by low prices and financ­ing dif­fi­cul­ties in the global reces­sion. The search for viable alter­na­tives has become a pri­or­ity for oil-importing coun­tries but it is a slow process.

“Energy is a Fuller­money sec­u­lar theme and our view is that it has become a bull play once again, in all its var­i­ous forms. The short to medium-term risk is prob­a­bly lim­ited to addi­tional base for­ma­tion devel­op­ment before sig­nif­i­cant uptrends occur. That will mark the return of com­mod­ity price inflation.”

Source: David Fuller, Fuller­money, March 24, 2009.

Ifo: Fur­ther decline in the Ifo Busi­ness Cli­mate Index
“The Ifo Busi­ness Cli­mate for indus­try and trade in Ger­many has cooled again some­what in March. The firms have reported a fur­ther wors­en­ing of their cur­rent busi­ness sit­u­a­tion. With regard to the busi­ness out­look for the com­ing six months, they are again slightly less pes­simistic. An eco­nomic turn­ing point has not yet been reached, in the opin­ion of the sur­vey participants.”

Source: Ifo, March 25, 2009.

CEP News: Fall in Ger­man PMIs starts mod­er­at­ing
“Ger­man man­u­fac­tur­ing and ser­vices out­put con­tin­ued to con­tract at severe rates in March. How­ever, the pace of con­trac­tion unex­pect­edly eased over the month, Markit Eco­nom­ics noted.

“On Tues­day, Markit Eco­nom­ics reported that the Ger­man man­u­fac­tur­ing pur­chas­ing man­agers rose to 32.4 in March, up mod­estly from February’s 32.1 level. Econ­o­mists had expected the PMI to fall back to its record low 32.0 level.

“Out­put in the ser­vices sec­tor also showed unex­pected strength, as reflected in the ser­vices PMI ris­ing to 41.7 from February’s 41.3 level. Expec­ta­tions had been for a fall to an all-time low of 41.0.

“Tak­ing the two PMIs together, the com­pos­ite index came to a two-month high of 37.7, up 1.4 points from February’s figure.

“‘The rise in the head­line com­pos­ite index pro­vides some ten­ta­tive hope that the down­turn has passed its nadir,’ Markit econ­o­mist Mark Smith said.”

Source: CEP News, March 24, 2009.

CEP News: ECB may turn to “uncon­ven­tional pol­icy” if rates reach limit
“The Euro­pean Cen­tral Bank may take uncon­ven­tional mea­sures if its key pol­icy rate hits its lower bound­ary, ECB Gov­ern­ing Coun­cil mem­ber Nout Wellink said on Thursday.

“‘The ECB could use uncon­ven­tional mon­e­tary pol­icy, on top of the unusual expan­sion already imple­mented, if the inter­est rate instru­ment can’t be used fur­ther because of [almost] reach­ing the zero-rate limit,’ Wellink said in the Ned­er­land­sche Bank’s annual report.

“The pol­icy maker also said that months of neg­a­tive price growth could not be ruled out in the euro zone. ‘[Neg­a­tive infla­tion] isn’t a prob­lem in itself as long as con­sumers don’t con­tin­u­ously post­pone spend­ing in the hope on fur­ther price declines,’ Wellink said.

“Wellink also said that the global eco­nomic envi­ron­ment is unprece­dent­edly uncer­tain.’ He added, ‘The finan­cial sys­tem has been under unprece­dented pres­sure since August 2007.”

“How­ever, the cen­tral banker said that it was ‘not unre­al­is­tic to expect that the world econ­omy will get going’ by next year.”

Source: CEP News, March 26, 2009.

Finan­cial Times: Take-up of City offices at new low
“Take-up of new offices in the City of Lon­don has fallen to its low­est for more than 20 years as the slow­down in the econ­omy has reined in finan­cial ser­vices busi­nesses from expand­ing and mov­ing to new buildings.

“There has been just 220,000 sq ft of new occu­pied space in the Square Mile since the begin­ning of the year, half the pre­vi­ous low­est office take-up dur­ing the last reces­sion, when 500,000 sq ft was let in the third quar­ter of 1991.

“The eco­nomic down­turn has hit the City office mar­ket hard, with many busi­nesses look­ing to cut staff and reduce office occu­pa­tion. Some are also look­ing to sub-let their own space.

“Accord­ing to data com­piled by Atis­real prop­erty con­sul­tancy since 1987, the vacancy rate in the City is 12.4%, or 10m sq ft, still sig­nif­i­cantly less than the last reces­sion, when a fifth of offices were empty.

“Even so, there are a num­ber of new build­ings set for com­ple­tion in the next two years that will add to those figures.

“City rents have also fallen sharply. Dan Bay­ley, head of national sales and let­tings at Atis­real, said that prime rents were now about £45 per sq ft, down about a third from the peak of the mar­ket in 2007 when offices were being let at about £67.50 per sq ft.

“Mr Bay­ley said: ‘With rents con­tin­u­ing to fall, land­lords are expe­ri­enc­ing fur­ther pain. How­ever, the pos­i­tive fac­tor is that a num­ber of occu­piers really are see­ing value for money and, like the West End, may start see­ing more activ­ity in the com­ing quarters.’”

Source: Daniel Thomas, Finan­cial Times, March 22, 2009.

CEP News: BOJ min­utes reveal steps to buy assets
“The Bank of Japan’s min­utes from the Feb­ru­ary 18–19 meet­ing revealed the bank felt that buy­ing cor­po­rate bonds was nec­es­sary to sta­bi­lize finan­cial markets.

“At the meet­ing, the cen­tral bank held the tar­get rate unchanged at 0.1% as expected, but also announced fur­ther mea­sure to boost cor­po­rate financing.

“The bank said it would begin pur­chases of cor­po­rate bonds and extend the period of time they will buy com­mer­cial paper. The bank has met since then and expanded their pur­chases of Japan­ese gov­ern­ment bonds.”

Source: Megan Ain­scow, CEP News, March 23, 2009.

Tags: Asset Backed Securities, Ben Bernanke, Bill Gross, Commodities, Deposit Insurance Corporation, Dow Jones Industrial, Dow Jones Industrial Index, Emerging Markets, energy, ETF, Federal Deposit Insurance, Federal Deposit Insurance Corporation, Federal Deposit Insurance Corporation Fdic, Global Stock Markets, Government Bonds, India, Investment Program, Money Printing, Mortgage Backed Securities, Natural Resources, oil, Percentage Gain, Point Gain, Ppip, Timothy Geithner, Treasury Secretary, Troubled Assets, Us Treasury
Posted in Bonds, Commodities, Emerging Markets, ETFs, Gold, India, Markets, Outlook, Silver | Comments Off

Fed monetization – not what it buys, but how much of anything it buys

Saturday, March 28th, 2009

This post is a guest con­tri­bu­tion by Paul Kas­riel* of North­ern Trust Com­pany.

Last week the Fed announced that it would pur­chase $300 bil­lion of longer-maturity Trea­sury secu­ri­ties. The main­stream media got all excited, talk­ing about the Fed “print­ing money”. But the Fed fig­u­ra­tively “prints money” or cre­ates credit when­ever it acquires assets — loans or investments.

For exam­ple, when the Fed pur­chases a mortgage-backed secu­rity, it pays for the secu­rity sim­ply by cred­it­ing the deposit (reserve) account of the secu­rity seller’s bank. The seller’s bank, in turn, cred­its the seller’s deposit account. If the seller hap­pens to be a bank, then just the bank’s reserve account gets credited.

Either way, the Fed is fig­u­ra­tively cre­at­ing credit and, in the case when the seller of the secu­rity is a non­bank, money “out of thin air”. To cre­ate credit out of thin air, it does not mat­ter whether the Fed pur­chases a mortgage-backed secu­rity or a Trea­sury secu­rity. More­over, when the Fed lends to banks through its dis­count win­dow, it also is cre­at­ing credit out of thin air. In fact, when the Fed pays its employ­ees, it is cre­at­ing credit and money out of thin air.

Sup­pose the Trea­sury issues an addi­tional $100 bil­lion of secu­ri­ties and the Fed pur­chases an addi­tional amount of mortgage-backed secu­ri­ties. Is the Fed “mon­e­tiz­ing” the Trea­sury debt? Directly, no. Indi­rectly, yes. Funds are fun­gi­ble. All else the same, the Treasury’s increase in the sup­ply of secu­ri­ties is off­set by a decrease in the amount of mortgage-backed secu­ri­ties as a result of the Fed’s pur­chase. So, the amount of secu­ri­ties to be held by the non-Fed pub­lic is unchanged. Indi­rectly, then, the Fed has mon­e­tized the increased debt issuance by the Treasury.

Get­ting back to the Fed’s announce­ment last week, not only did it say that it would pur­chase $300 bil­lion of longer-maturity Trea­sury secu­ri­ties, but it also would pur­chase an addi­tional $750 bil­lion of mortgage-backed secu­ri­ties and an addi­tional $100 bil­lion of direct debt of government-sponsored agen­cies (e.g. Fan­nie and Fred­die debt). So, the Fed announced “mon­e­ti­za­tion” in an amount of $1.15 tril­lion, all else the same.

But wait, there’s more. The Fed also has begun another mon­e­ti­za­tion pro­gram via the Term Asset-backed secu­ri­ties Loan Facil­ity (TALF). TALF cur­rently is per­mit­ted to pro­vide up to $1 tril­lion of new credit to the finan­cial sys­tem — thus, another $1 tril­lion of monetization.

From Decem­ber 2007 to Decem­ber 2008, Fed­eral Reserve Bank credit more than dou­bled, increas­ing from about $877 bil­lion to $2.2 tril­lion. Mama mia, that’s a lot of mon­e­ti­za­tion! But a size­able por­tion of the increase in Fed credit just ended up as idle excess reserves on the books of banks and other depos­i­tory insti­tu­tions. Fed­eral Reserve Bank credit minus excess reserves went from $875 bil­lion in Decem­ber 2007 to almost $1.5 tril­lion in Decem­ber 2008 (see chart below).

Just as the non-bank public’s demand for money to hold has increased in the past year, banks’ demand for “money” or reserves to hold also has increased. Had the Fed not sat­is­fied both the banks’ and the non-bank public’s increased demand for money by cre­at­ing more of it, eco­nomic activ­ity would have been even weaker than it was.

In the com­ing months, the fed­eral gov­ern­ment is going to be increas­ing its debt issuance to finance its increased spend­ing as a result of the recently-passed fis­cal stim­u­lus pro­gram. The Con­gres­sional Bud­get Office is fore­cast­ing a fed­eral bud­get deficit for fis­cal year 2009 of about $1.8 tril­lion. As men­tioned above, the Fed is on course to cre­ate about $2.15 tril­lion of new credit in the months ahead.

All else the same, the Fed’s mon­e­ti­za­tion of debt through the pur­chase of mortgage-backed secu­ri­ties, Trea­sury secu­ri­ties or through the TALF pro­gram in con­junc­tion with the fed­eral government’s increased spend­ing will gen­er­ate stronger eco­nomic activ­ity. If the increased fed­eral spend­ing were being funded with increased taxes, then those pay­ing higher taxes would cut back on their spend­ing as the fed­eral gov­ern­ment increased its spend­ing. Net, net, there would not be much increase in total spending.

The same would hold true if the fed­eral government’s increased spend­ing were being funded with increased Trea­sury debt pur­chased by the non-bank pub­lic and not off­set by Fed pur­chases of some kind of debt.

But if the Fed pur­chases some kind of debt in amounts equal to the fed­eral government’s increased debt issuance, then the fed­eral gov­ern­ment can increase its spend­ing with­out any one else hav­ing to cut back on his or her spend­ing. In the short run, this will boost real eco­nomic activ­ity. Of course, far­ther down the road, this will increase the rate at which prices rise — prices of goods, ser­vices and assets. Ben Bernanke’s “money-dropping” heli­copter has been replaced by a C-5 Galaxy transport!

Source: Paul Kas­riel, North­ern Trust — The Econ­tra­t­ian, March 23, 2009.

*Paul Kas­riel is Senior Vice Pres­i­dent and Direc­tor of Eco­nomic Research at The North­ern Trust Com­pany. The accu­racy of the Eco­nomic Research Department’s fore­casts has con­sis­tently been highly-ranked in the Blue Chip sur­vey of about 50 fore­cast­ers over the years. To that point, Paul received the pres­ti­gious 2006 Lawrence R. Klein Award for hav­ing the most accu­rate eco­nomic fore­cast among the Blue Chip sur­vey par­tic­i­pants for the years 2002 through 2005. The accu­racy of Paul’s 2008 eco­nomic fore­cast was ranked in the top five of The Wall Street Jour­nal sur­vey panel of econ­o­mists. In Jan­u­ary 2009, The Wall Street Jour­nal and Forbes cited Paul as one of the few who iden­ti­fied early on the for­ma­tion of the hous­ing bub­ble and fore­saw the eco­nomic and finan­cial mar­ket havoc that would ensue after the bub­ble inevitably burst.

Tags: Assets, Banks, Credit Loans, Debt Issuance, Investments, Mainstream Media, Maturity Treasury, Mortgage Backed Securities, Mortgage Backed Security, Northern Trust Company, Paul Kasriel, Printing Money, Prints, Thin Air, Treasury Issues, Treasury Securities, Treasury Security
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FRONTLINE: Ten Trillion and Counting

Friday, March 27th, 2009

In case you missed it, you can view last week's PBS FRONTLINE, Ten Tril­lion and Count­ing, here:

Sum­mary cour­tesy of PBS.org:

All of the fed­eral government's efforts to stem the tide of the finan­cial melt­down have added hun­dreds of bil­lions of dol­lars to an already stag­ger­ing national debt, a sum that is expected to dou­ble over the next 10 years to more than $23 tril­lion. In Ten Tril­lion and Count­ing, FRONTLINE traces the pol­i­tics behind this mount­ing debt and inves­ti­gates what some say is a loom­ing cri­sis that makes the cur­rent finan­cial sit­u­a­tion pale in comparison.

The jour­ney begins as FRONTLINE cor­re­spon­dent For­rest Sawyer takes view­ers to a secret loca­tion: the Treasury's debt auc­tion room, where the U.S. gov­ern­ment sells secu­ri­ties backed by the "full faith and credit of the United States." On this day, the gov­ern­ment is auc­tion­ing $67 bil­lion of Trea­sury secu­ri­ties. The money bor­rowed will be used to fund ser­vices and pro­grams that the gov­ern­ment can­not pay for through tax rev­enues alone.

Observers warn that the United States' reliance on bor­row­ing to fund essen­tial pro­grams is a dan­ger­ous gam­ble. For the first time, investors are begin­ning to ques­tion the abil­ity of fed­eral gov­ern­ment to meet its grow­ing finan­cial oblig­a­tions, and fad­ing con­fi­dence can have dire con­se­quences. "You might have a sit­u­a­tion where there is one day when the gov­ern­ment says we need to sell sev­eral bil­lion dol­lars of bonds, and nobody shows," Econ­o­mist reporter Greg Ip tells FRONTLINE. "No money to pay the Social Secu­rity checks, no money to give to the states for their Med­ic­aid pro­grams. Cut, cut, cut, cut, cut."

Yet more bor­row­ing is exactly what the Obama admin­is­tra­tion plans to do: hun­dreds of bil­lions to bail out the banks and other finan­cial insti­tu­tions; tens of bil­lions more for the auto indus­try; $275 bil­lion for home­own­ers and mort­gage lenders; and a giant $787 bil­lion stim­u­lus pack­age to jump-start an econ­omy spi­ral­ing down­ward. Just like the Bush admin­is­tra­tion before it, Obama and his team are going to bor­row big. "That's the para­dox of the sit­u­a­tion that we're in now," observes Matt Miller, author of The Tyranny of Dead Ideas. "Gov­ern­ment has got to run big deficits to stim­u­late the econ­omy, deficits that would have been unthink­able ... because government's the only entity with the where­withal to prop up a demand in the econ­omy when busi­nesses and con­sumers are all pulling back."

Tags: Auction Room, Auto Industry, Billion Dollars, Dangerous Gamble, Financial Institutions, Financial Meltdown, Financial Obligations, Financial Situation, Forrest Sawyer, Full Faith And Credit, Medicaid Programs, Mortgage Lenders, National Debt, Pbs Frontline, Secret Location, Social Security Checks, Stimulus Package, Tax Revenues, Time Investors, Treasury Securities
Posted in Bonds, Credit Markets, Economy, Markets | Comments Off

Wall Street's 'Coup d'État'

Friday, March 27th, 2009

This past week's Rolling Stone mag­a­zine presents a hard-hitting in-depth inves­tiga­tive arti­cle, a Wall Street expose, The Big Takeover, by Matt Taibbi. This lengthy 'can't stop read­ing this' arti­cle presents some widely held and not-so-widely held alle­ga­tions about Wall Street's inner sanctum.

Here are some excerpts:

The global eco­nomic cri­sis isn't about money — it's about power. How Wall Street insid­ers are using the bailout to stage a revolution.

"It's over — we're offi­cially, roy­ally f—-d. No empire can sur­vive being ren­dered a per­ma­nent laugh­ing­stock, which is what hap­pened as of a few weeks ago, when the buf­foons who have been run­ning things in this coun­try finally went one step too far. It hap­pened when Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner was forced to admit that he was once again going to have to stuff bil­lions of tax­payer dol­lars into a dying insur­ance giant called AIG, itself a pro­found sym­bol of our national decline — a cor­po­ra­tion that got rich insur­ing the con­crete and steel of Amer­i­can indus­try in the country's hey­day, only to destroy itself chas­ing phan­tom for­tunes at the Wall Street card tables, like a dis­solute noble­man gam­bling away the fam­ily estate in the wan­ing days of the British Empire."

"The lat­est bailout came as AIG admit­ted to hav­ing just posted the largest quar­terly loss in Amer­i­can cor­po­rate his­tory — some $61.7 bil­lion. In the final three months of last year, the com­pany lost more than $27 mil­lion every hour. That's $465,000 a minute, a yearly income for a median Amer­i­can house­hold every six sec­onds, roughly $7,750 a sec­ond. And all this hap­pened at the end of eight straight years that Amer­ica devoted to fran­ti­cally chas­ing the shadow of a ter­ror­ist threat to no avail, eight years spent stop­ping every cit­i­zen at every air­port to search every purse, bag, crotch and brief­case for juice boxes and explo­sive tubes of tooth­paste. Yet in the end, our gov­ern­ment had no mech­a­nism for search­ing the bal­ance sheets of com­pa­nies that held life-or-death power over our soci­ety and was unable to spot holes in the national econ­omy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses)."

. . ."Peo­ple are pissed off about this finan­cial cri­sis, and about this bailout, but they're not pissed off enough. The real­ity is that the world­wide eco­nomic melt­down and the bailout that fol­lowed were together a kind of rev­o­lu­tion, a coup d'état. They cemented and for­mal­ized a polit­i­cal trend that has been snow­balling for decades: the grad­ual takeover of the gov­ern­ment by a small class of con­nected insid­ers, who used money to con­trol elec­tions, buy influ­ence and sys­tem­at­i­cally weaken finan­cial regulations."

"The cri­sis was the coup de grâce: Given vir­tu­ally free rein over the econ­omy, these same insid­ers first wrecked the finan­cial world, then cun­ningly granted them­selves nearly unlim­ited emer­gency pow­ers to clean up their own mess. And so the gambling-addict lead­ers of com­pa­nies like AIG end up not pen­ni­less and in jail, but with an Alien–style death grip on the Trea­sury and the Fed­eral Reserve — "our part­ners in the gov­ern­ment," as Liddy put it with a shock­ingly casual matter-of-factness after the most recent bailout."

. . ."The best way to under­stand the finan­cial cri­sis is to under­stand the melt­down at AIG. AIG is what hap­pens when short, bald man­agers of oth­er­wise bor­ing finan­cial bureau­cra­cies start see­ing Brad Pitt in the mir­ror. This is a com­pany that built a giant for­tune across more than a cen­tury by bet­ting on safety-conscious pol­i­cy­hold­ers — peo­ple who wear seat belts and build houses on high ground — and then blew it all in a year or two by turn­ing their entire bal­ance sheet over to a guy who acted like mak­ing huge bets with other people's money would make his dick bigger.

I. Patient Zero

That guy — the Patient Zero of the global eco­nomic melt­down — was one Joseph Cas­sano, the head of a tiny, 400-person unit within the com­pany called AIG Finan­cial Prod­ucts, or AIGFP."

. . ."In a span of only seven years, Cas­sano sold some $500 bil­lion worth of CDS pro­tec­tion, with at least $64 bil­lion of that tied to the sub­prime mort­gage market."

. . . "The CDS was pop­u­lar­ized by J.P. Mor­gan, in par­tic­u­lar by a group of young, cre­ative bankers who would later become known as the "Mor­gan Mafia," as many of them would go on to assume influ­en­tial posi­tions in the finance world."

. . ."Cassano's out­ra­geous gam­ble wouldn't have been pos­si­ble had he not had the good for­tune to take over AIGFP just as Sen. Phil Gramm — a grin­ning, laissez-faire ide­o­logue from Texas — had fin­ished engi­neer­ing the most dra­matic dereg­u­la­tion of the finan­cial indus­try since Emperor Hien Tsung invented paper money in 806 A.D."

. . ."When Mor­gan pre­sented their plans for credit swaps to reg­u­la­tors in the late Nineties, they argued that if they bought CDS pro­tec­tion for enough of the invest­ments in their port­fo­lio, they had effec­tively moved the risk off their books. There­fore, they argued, they should be allowed to lend more, with­out keep­ing more cash in reserve. A whole host of reg­u­la­tors — from the Fed­eral Reserve to the Office of the Comp­trol­ler of the Cur­rency — accepted the argu­ment, and Mor­gan was allowed to put more money on the street."

Read this whole, must-read, arti­cle here.

Source: The Big Takeover, Matt Taibbi, Rolling Stone, March 19, 2009

Matt Taibbi is a jounal­ist and polit­i­cal writer, and colum­nist for Rolling Stone magazine.

Tags: American Household, Big Takeover, British Empire, Buffoons, Chasing The Shadow, Concrete And Steel, Coup D, Coup D Etat, Death Power, Final Three Months, Global Economic Crisis, Inner Sanctum, Insurance Giant, Investigative Article, Juice Boxes, Laughingstock, Matt Taibbi, National Decline, National Economy, Profound Symbol, Rolling Stone Magazine, Street Insiders, Timothy Geithner, Treasury Secretary
Posted in Markets | Comments Off

Risk appetite rekindled on hope of better days

Friday, March 27th, 2009

Fol­low­ing Fed Chair­man Ben Bernanke’s “nuclear option” announce­ment of last week, the action stayed on Capi­tol Hill with Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner out­lin­ing his Public-Private Invest­ment Pro­gram as well as “new rules of the game” for the finan­cial ser­vices industry.

Whereas Nouriel Roubini’s reac­tion to the administration’s new plan to buy toxic assets was sur­pris­ingly pos­i­tive, James Gal­braith and Paul Krug­man were not impressed. These gen­tle­men are included in this week’s har­vest of video clips, shar­ing the plat­form with the likes of Bill Gross, Paul McCul­ley, John Bogle, Wilbur Ross and Jeremy Siegel.

As stock mar­kets look set for a straight third week of gains, the debate as to the longevity of the nascent rally rages on. The fea­tured video mate­r­ial sees Mark Mobius say­ing “the next bull mar­ket has begun”, Jeff Saut argu­ing the “odds are pretty good stocks have seen their lows”, but Laslo Birinyi tak­ing a bear­ish stance and advis­ing to sell stocks that gained in the rally.

The selec­tion starts with a great dis­cus­sion across the pond on the “future of cap­i­tal­ism” and ends with an edu­ca­tional clip about the ins and outs of quan­ti­ta­tive easing.

Finan­cial Times: Future of cap­i­tal­ism — Lon­don panel
“Does the finan­cial cri­sis sig­nal the end of the Reagan-Thatcher model of free mar­kets and glob­al­i­sa­tion? FT edi­tor Lionel Bar­ber leads a dis­cus­sion with Howard Davies, direc­tor of the Lon­don Schoof of Eco­nom­ics, Don­ald Bry­don, incom­ing chair­man of the Royal Mail, and John Studzin­ski, of US pri­vate equity firm Black­stone.”

Source: Finan­cial Times, March 26, 2009.

CNBC: Gei­th­ner & toxic assets
“Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner dis­cusses his plan to deal with finan­cial insti­tu­tions’ toxic assets, with CNBC’s Erin Burnett.”

Part 1

Part 2

Source: CNBC, March 23, 2009.

Finan­cial Times: Geithner’s toxic asset plan
“The gov­ern­ment has given the finan­cial sec­tor what it has wanted for a long time; it will pay investors to take the toxic assets off banks’ bal­ance sheets. But the super­charged polit­i­cal envi­ron­ment could endager the pro­gram, says FT’s Francesco Guer­rera.”

Click here for the article.

Source: Francesco Guer­rera, Finan­cial Times, March 23, 2009.

CNBC: Bill Gross buys in
“Pimco is intrigued by the poten­tial double-digit growth from the toxic asset plan, says William Gross, co-chief invest­ment officer/founder.”

Source: CNBC, March 23, 2009.

CNBC: Mar­ket mas­ters wigh in on the Trea­sury’ plan
“The economy’s per­for­mance uti­mately dri­ves stock prices, with Abby Joseph Cohen, Gold­man Sachs, Paul McCul­ley, PIMCO, John Bogle, The Van­guard Group, and Bob Doll, BlackRock.”

Source: CNBC, March 24, 2009.

PBS News: Toxic asset plan may woo investors, but long-term impact is unclear
“While mar­kets rose Mon­day on details of the toxic asset plan, crit­ics voiced con­cern over tax­payer risk and the need for a long-term fix to finan­cial sec­tor trou­bles. New York Times colum­nist Paul Krug­man and Don­ald Mar­ron of Lightyear Cap­i­tal debate the details.”

Click here for the article.

Source: PBS News, March 23, 2009.

Bloomberg: Roubini says Gei­th­ner plan won’t stop nation­al­iza­tions
“Nouriel Roubini, econ­o­mist and pro­fes­sor at New York University’s Stern School of Busi­ness, talks with Bloomberg’s Maithreyi Seethara­man about US Trea­sury Sec­re­tary Tim­o­thy Geithner’s plan to remove toxic assets from the books of the nation’s banks. Roubini, speak­ing in Lon­don, also dis­cusses the out­look for the meet­ing between the Group of 20 lead­ers in Lon­don.”

Source: Bloomberg, March 26, 2009.

Tech Ticker (Yahoo Finance): James Gal­braith — Gei­th­ner plan “extremely dan­ger­ous”, banks “mas­sively cor­rupted”
“Pro­fes­sor James Gal­braith didn’t pull any punches on TechTicker this morn­ing. He hates the Gei­th­ner plan, call­ing it ‘extremely dan­ger­ous’. He says the banks may game the plan to bid up the prices for their own crap assets and that get­ting bad assets off their books won’t get them lend­ing again. Like Paul Krug­man, Gal­braith thinks the FDIC should just put the banks into receiver­ship and have the banks’ sub­or­di­nated bond­hold­ers pick up some of the cost of restruc­tur­ing them.

Part 1: Get­ting crap assets off bank books won’t save economy

Part 2: Mas­sive corruption

Source: Tech Ticker, Yahoo Finance, March 23, 2009.

CNBC: EU politi­cian slams US eco­nomic recov­ery plan
“A top EU offi­cial slams the US eco­nomic recov­ery plan, call­ing it a way to hell, reports CNBC’s Car­olina Cimenti.”

Source: CNBC, March 25, 2009.

CNBC: Ross: Due dili­gence inte­gral to suc­cess of US plan
“The key issue would be how much due dili­gence the US gov­ern­ment allows pri­vate investors to con­duct in its toxic asset plan, says Wilbur Ross, chair­man & CEO of WL Ross & Co. He speaks with CNBC’s Mar­tin Soong & Sri Jegarajah.”

Source: CNBC, March 23, 2009.

Finan­cial Times: “New rules of the game”
“Trea­sury sec­re­tary Tim Geithner’s reg­u­la­tory over­haul is ambi­tious, but the ques­tion is whether he can fol­low through, says FT’s Helen Thomas.”

Source: Finan­cial Times, March 26, 2009.

CNBC: Restor­ing investors’ trust
“The stress test on banks is an essen­tial step in restor­ing trust for investors, says Jeremy Siegel, Whar­ton School at The Uni­ver­sity of Penn­syl­va­nia pro­fes­sor of finance.”

Source: CNBC, March 26, 2009.

CNBC: AIG hear­ing — Tim­o­thy Geithner’s state­ment
“Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner says AIG’s fail­ure would have caused cat­a­strophic damage.”

Source: CNBC, March 24, 2009.

CNBC: AIG Hear­ing — Ben Bernanke’s state­ment
“Fed Chair­man Ben Bernanke dis­cusses the impor­tance of bail­ing out AIG.”

Source: CNBC, March 24, 2009.

Bloomberg: FDIC’s Bair says gold­man should return US aid if able
“Fed­eral Deposit Insur­ance Corp. Chair­man Sheila Bair talks with Bloomberg’s Kath­leen Hays about the pos­si­ble return of gov­ern­ment bailout funds by Gold­man Sachs Group. Gold­man Sachs is talk­ing with US reg­u­la­tors about repay­ing the $10 bil­lion it received from the gov­ern­ment by mid-April, a per­son famil­iar with the mat­ter said. Bair also dis­cusses Trea­sury Sec­re­tary Tim­o­thy Geithner’s plan to remove toxic assets from the books of US banks.”

Source: Bloomberg, March 24, 2009.

Char­lie Rose: An update on the econ­omy with Krug­man et al
“An update on the econ­omy with Paul Krug­man, Joe Nocera and Andrew Ross Sorkin.”

Source: Char­lie Rose, March 23, 2009.

John Authers (Finan­cial Times): Credit mar­ket gloom
“Per­haps the great­est cause for con­cern amid the equity rally is that credit mar­kets, the tar­get of all the res­cue oper­a­tions, are still work­ing on the assump­tion of absolute dis­as­ter, says John Authers.”

Click here for the article.

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

60 Min­utes: Pres­i­dent Barack Obama
“From the AIG bonuses, to the eco­nomic melt­down, to the war in Afghanistan, it has been an event­ful two months in office for Pres­i­dent Obama. Steve Kroft has the behind-the-scenes interview.”

Part 1

Part 2

Source: 60 Min­utes, March 22, 2009.

Bloomberg: Mobius says stocks at begin­ning of a bull mar­ket
“The next bull mar­ket has begun and there are bar­gains in every emerg­ing mar­ket fol­low­ing a record slump in stocks, Tem­ple­ton Asset Management’s Mark Mobius said.”

Click here for the article.

Source: Bloomberg, March 23, 2009.

Bloomberg: Saut says odds “pretty good” stocks have seen their lows
“Jef­frey Saut, chief invest­ment strate­gist at Ray­mond James & Asso­ciates, talks with Bloomberg’s Julie Hyman about the out­look for US stocks. Saut, speak­ing from St. Peters­burg, Florida, also dis­cusses the Treasury’s Public-Private Invest­ment Pro­gram and finan­cial stocks.”

Source: Bloomberg, March 23, 2009.

Bloomberg: Las­zlo Birinyi — sell stocks that gained in rally
“Las­zlo Birinyi, pres­i­dent of Birinyi Asso­ciates, talks with Bloomberg’s Betty Liu about his equity invest­ment strat­egy. Birinyi, speak­ing from West­port, Con­necti­cut, says investors who own stocks that rose as the Stan­dard & Poor’s 500 Index ral­lied 20% since March 9 should con­sider sell­ing them.”

Source: Bloomberg, March 26, 2009.

John Authers (Finan­cial Times): Read­ing cop­per leaves
“Recov­er­ing com­mod­ity prices may sig­nal that we have reached the bot­tom of this bear mar­ket.”

Click here for the article.

Source: John Authers, Finan­cial Times, March 24, 2009.

Finan­cial Times: Benita Ferrero-Waldner on east­ern Europe
“Benita Ferrero-Waldner, the EU’s exter­nal affairs com­mis­sioner, says east­ern Europe is impor­tant to the Euro­pean Union. Ms Ferrero-Waldne also says the EU must re-engage in a broad dia­logue with Rus­sia to avoid another energy cri­sis.”

Source: Finan­cial Times, March 23, 2009.

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

Source: Mar­ket­place (via Vimeo), Decem­ber 2008.

Tags: Ben Bernanke, Bill Gross, Birinyi, Cnbc, Galbraith And Paul, Howard Davies, Incoming Chairman, James Galbraith, Jeremy Siegel, John Bogle, John Studzinski, Lionel Barber, Nouriel Roubini, Paul Krugman, Paul McCulley, Private Equity Firm, Risk Appetite, Royal Mail, Timothy Geithner, Treasury Secretary, Wilbur Ross
Posted in Bonds, Emerging Markets, Gold, Markets, Outlook | Comments Off

Howard Marks: Will it Work?

Thursday, March 26th, 2009

Howard Marks' let­ters to Oak­tree Cap­i­tal investors have become as highly renown and antic­i­pated by the invest­ment com­mu­nity as those of War­ren Buf­fett, par­tic­u­larly to denizens of the debt mar­ket. Oak­tree runs about $50-billion in assets includ­ing high yield debt, con­vert­ible bonds, dis­tressed debt, pri­vate equity, real estate, and about 1.2-billion in equities.

Marks' March let­ter is now avail­able; in it Marks dis­cusses the Fed and the government's plans to get the econ­omy and the credit mar­ket func­tion­ing nor­mally again, and what the like­li­hoods are in his highly-esteemed view.

Here are some excerpts:

The other day, my son Andrew — col­lege senior and credit-analyst-to-be — asked whether I think Trea­sury Sec­re­tary Gei­th­ner is doing the right things. As has hap­pened before, his ques­tion elicited a fatherly response that grew into this memo.

Solu­tions in eco­nom­ics aren't nearly as depend­able as engi­neers' cal­cu­la­tions, and there may not be a tool that's just right for fix­ing an econ­omy. Of course, the tool­box offers lots of pos­si­bil­i­ties, includ­ing inter­est rate reduc­tions; quan­ti­ta­tive eas­ing; tax cuts, rebates and cred­its; stim­u­lus checks; infra­struc­ture spend­ing; cap­i­tal injec­tions; loans, res­cues and takeovers; reg­u­la­tory fore­bear­ances and on and on. But no one should think there's a "golden tool," such that solv­ing the prob­lem is just a mat­ter of fig­ur­ing out which one it is and apply­ing it. Any­one who holds the prob­lem solvers to that stan­dard is being unfair and unre­al­is­tic. There are a num­ber of rea­sons why, includ­ing these:

· Every sit­u­a­tion is dif­fer­ent, and none is exactly like any that has come before. That means fixed recipes can't work. Cer­tainly this one has never been seen before.
· Most pol­icy actions aren't all good or all bad. They merely rep­re­sent imper­fect com­pro­mises as to ide­ol­ogy, goals, prob­lem solv­ing and resource allo­ca­tion.
· Eco­nomic prob­lems are multi-faceted, mean­ing the solu­tion for one aspect might not work on — and in fact might exac­er­bate — another aspect.
· Economies are dynamic, and the prob­lems are mov­ing tar­gets. The envi­ron­ment changes con­stantly, rather than sit­ting still and wait­ing for a solu­tion to work.
· The main ingre­di­ent in eco­nom­ics is psy­chol­ogy, and the work­ings of psy­chol­ogy clearly can't be fully known, con­trolled or fixed.

. . .The Bot­tom Line

There are so many mov­ing parts to the cur­rent sit­u­a­tion — and to its causes and what we hope will be its solu­tion — that I've tried to boil things down to the essen­tials. In order to right the sys­tem and get the econ­omy mov­ing for­ward again, I think three main things have to be accomplished:

· Our econ­omy and its com­po­nent parts have to be delev­ered;
· The vast destruc­tion of cap­i­tal has to be dealt with; and
· Con­fi­dence has to be restored.

. . .Debt has to be reduced, and it's hap­pen­ing (other than at the fed­eral level, of course). But the way it hap­pens is usu­ally unpleas­ant: bank­rupt­cies, fore­clo­sures and debt restruc­tur­ings. "Debt reduc­tion" sounds like a good thing, but it's likely to be accom­pa­nied by the painful loss of the assets that had been bought with bor­rowed money.

Many assets are worth far less than they used to be — that's one of the main rea­sons why the debt load has become unbear­able and has to be reduced. Investors, con­sumers, home­own­ers and finan­cial insti­tu­tions will have to rebuild their cap­i­tal as they — and the econ­omy — attempt to again move ahead.

And con­fi­dence has to be rebuilt, too. The will­ing­ness to bor­row, spend and invest will rebound only when peo­ple believe incomes and asset val­ues will resume their growth.

To read the com­plete let­ter, click here.

Source: Howard Marks, Oak­tree Capital

About Oak­tree:
Oak­tree was founded in April 1995 by Howard Marks, Bruce Karsh, Steve Kaplan, Larry Keele, Richard Mas­son and Shel­don Stone. These Oak­tree prin­ci­pals joined together begin­ning in the mid-1980s to man­age high yield bonds, con­vert­ible secu­ri­ties, dis­tressed debt and prin­ci­pal investments.

Today, Oak­tree is com­prised of nine prin­ci­pals and over 530 staff mem­bers in Los Ange­les (head­quar­ters), New York, Stam­ford (Con­necti­cut), Ams­ter­dam*, Frank­furt, Lon­don, Lux­em­bourg*, Paris, Bei­jing, Hong Kong, Seoul, Shang­hai, Sin­ga­pore and Tokyo.

About Howard Marks
From the rise of junk bonds to the dot-com col­lapse to today's eco­nomic cri­sis, Howard Marks has rid­den the ups and downs of the finan­cial markets.

From the day he began his pro­fes­sional career in 1969, Marks has been deeply immersed in sophis­ti­cated finan­cial instru­ments. As the high-yield bond man­ager for Citibank start­ing in the late 1970s, he was one of Michael Milken's first cus­tomers. In 1985, he became chief invest­ment offi­cer of invest­ment titan TCW Group Inc., based in down­town Los Ange­les. And with sev­eral decades of expe­ri­ence under his belt, Marks set out on his own in 1995 and founded Oak­tree Cap­i­tal Man­age­ment LLC with a hand­ful of TCW executives.

The firm, which now boasts a $55 bil­lion invest­ment port­fo­lio, has become one of the élite invest­ment firms in the West­ern United States. In build­ing Oak­tree into an invest­ment pow­er­house, Marks has amassed his own for­tune. On the Busi­ness Journal's annual list of the wealth­i­est Ange­lenos, Marks ranked No. 29 with an esti­mated net worth of $1.5 bil­lion, though he acknowl­edges he's taken a major hit as a result of the finan­cial crisis.

These days, the 62-year-old Marks is more inter­ested in dis­pens­ing his wis­dom on the mar­kets than in actively man­ag­ing port­fo­lios. He over­sees the direc­tion of the firm, but spends a good deal of his time pen­ning closely watched memos on the state of the finan­cial indus­try. Marks recently met with the Busi­ness Jour­nal in the firm's down­town offices to dis­cuss his life, career and the chaos in the markets.

Read more: "Inter­view with Oak­tree Co-Founder Howard Marks — Stephen's Pos­ter­ous" — http://stephenlaughlin.posterous.com/interview-with-oaktree-co-foun#ixzz0AvAbB9aP

Tags: Andrew College, Array, Capital Injections, Capital Investors, Compromises, Convertible Bonds, Credit Analyst, Debt Market, Denizens, Distressed Debt, Economic Problems, Geithner, Interest Rate Reductions, Investment Community, Main Ingredient, Moving Targets, Policy Actions, Private Equity, Problem Solvers, Renown, Resource Allocation, Son Andrew, Takeovers, Treasury Secretary, Warren Buffett
Posted in Bonds, Credit Markets, Economy, Gold, Infrastructure, Markets, Outlook | Comments Off

Cool Tool: Interactive Economic Dashboard

Thursday, March 26th, 2009

Rus­sell Invest­ments has a great inter­ac­tive tool on their site, which gives an at-a-glance view of the econ­omy rel­a­tive to typ­i­cal ranges of mea­sure. It is dynam­i­cally updated, on a monthly basis, and comes with all of the sup­ple­men­tary back­ground charts for each mea­sure in the dash­board. Check it out.

In the snap­shot below which is dated as at Feb­ru­ary 28, 2009 the chart shows that:

• Credit risk as mea­sured by the TED spread is trend­ing towards and within the typ­i­cal his­tor­i­cal range at 1.01.
• Cor­po­rate debt as mea­sured by OAS, Option-adjusted spread on invest­ment grade cor­po­rate debt, is well above the his­tor­i­cal range at 5.05 and trend­ing back towards typical.
• Volatil­ity as mea­sured by the VIX index is still high at 46.35 and trend­ing back towards typ­i­cal, which is between 11.10 and 26.84.
• Mort­gage del­i­quen­cies, whoa! They have sky­rock­eted to 6.92% and are con­tin­u­ing to trend away from typ­i­cal, which is between 1.51 and 3.35.
• Employ­ment growth is trend­ing lower, but spend­ing is trend­ing higher.
• and so on...

Click the pic­ture of the chart to get to the tool, or click here:

Happy Eco­nom­ick­ing!

Source: Rus­sell Invest­ments
http://www.russell.com/Helping-Advisors/Markets/EconomicRecoveryDashboard.asp

Tags: Corporate Debt, Credit Risk, Economic Dashboard, Economy, Employment Growth, Glance View, Interactive Tool, Investments, Measures, Mortgage, Oas, Option Adjusted Spread, Snapshot, Ted, Tool Source, Typical Ranges, Vix Index, Volatility
Posted in Credit Markets, Economy, Markets, Outlook | Comments Off

Roadmap to Inflation and Sources of Cheap Insurance

Thursday, March 26th, 2009

*This arti­cle is a guest con­tri­bu­tion cour­tesy of John Mauldin, "Out­side the Box."

What hap­pens when infla­tion once again returns. As this week's Out­side the Box writer, James Mon­tier, writes, we may want to start think­ing now about infla­tion insur­ance and he men­tions a few ways to do so. But this let­ter is a must read for his bring­ing to light a speech by Fed chair­man Ben Bernanke in 2000 given to the Japan­ese, where he sug­gest infla­tion targeting:

I think you will find this week's OTB to be excep­tion­ally thought pro­vok­ing. Mon­tier is one of my favorite eco­nomic thinkers (and a good friend). He works for Soci­ete Gen­erale in Lon­don in their Cross Asset Research group.

John Mauldin, Edi­tor
Out­side the Box

**********************************************

As Albert [Edwards] and I reg­u­larly point out dur­ing meet­ings, we have never been more unsure on the inflation/deflation out­look. I have pre­vi­ously said I was torn between the defla­tion­ary impact of the burst­ing credit bub­ble, and the infla­tion­ary pres­sures of the pol­icy response. When we read some­thing by the defla­tion­ists we sit there nod­ding our heads in agree­ment, then we pick up some­thing by the pro­po­nents of a return of infla­tion and we find our­selves agree­ing with that as well. The respec­tive sides seem deeply entrenched in their positions.

In con­trast, we are try­ing to keep an open mind on the sub­ject. Albert is biased towards a Japan­ese style out­come, and I am biased towards an infla­tion­ary out­come, but nei­ther of us has any strong conviction.

Fisher and the debt-deflation the­ory of depressions

In the face of this uncer­tainty I decided to return to his­tory and see what it has to say about the way out of a depres­sion. My first point of call was Irv­ing Fisher's "The debt-deflation the­ory of Great Depres­sions" pub­lished in 1933¹. Fisher is prob­a­bly most infa­mous to those in finance for his pro­nounce­ments of a new era of per­ma­nently high stock prices in 1929. But in the wake of his dis­as­trous calls he turned to try­ing to under­stand the expe­ri­ence of the depres­sion. Inci­den­tally, he also invented the Rolodex.

In his debt-deflation the­ory, he posits "two dom­i­nant fac­tors" in dri­ving depres­sions "Namely over-indebtedness to start with and defla­tion fol­low­ing soon after... In short, the big bad actors are debt dis­tur­bances and price-level dis­tur­bances". He con­tin­ues "Defla­tion caused by the debt reacts on the debt. Each dol­lar of debt still unpaid becomes a big­ger dol­lar, and if the over-indebtedness with which we started was great enough, the liq­ui­da­tion of debt can­not keep up with the fall of prices which it causes. In that case, the liq­ui­da­tion defeats itself. While it dimin­ishes the num­ber of dol­lars owed, it may not do so as fast as it increases the value of each dol­lar owed." That is to say, debt-deflation spi­rals can eas­ily become self-reinforcing.

The good news is that Fisher is also very clear on how to end a debt-deflation spi­ral: "It is always eco­nom­i­cally pos­si­ble to stop or pre­vent such a depres­sion sim­ply by reflat­ing the price level up to the aver­age level at which out­stand­ing debts were con­tracted by exist­ing debtors and assumed by exist­ing cred­i­tors... I would empha­size... that great depres­sions are cur­able and pre­ventable through refla­tion and sta­bi­liza­tion". The irony of Fisher's route out of defla­tion is that, prob­a­bly only the Fed — after help­ing lead us into this mess² — can now get us out of it.

Romer's lessons from the Great Depression

After read­ing Fisher's analy­sis of the 1930s, I came across a recent speech given by Christina Romer, who is now the head of the Coun­cil of Eco­nomic Advis­ers, and who made her name in aca­d­e­mic cir­cles study­ing the events which ended the Great Depres­sion. In the speech, Romer offers six lessons from the Great depres­sion for the cur­rent juncture.

Les­son 1 – Small fis­cal expan­sion has only small effects

Romer wrote a paper in 1992³ argu­ing that fis­cal pol­icy was not the key dri­ver in the recov­ery from the Great Depres­sion. Not because fis­cal expan­sion is inef­fec­tual per se, but rather because the fis­cal stim­u­lus that was con­ducted wasn't large. As Romer notes "When Roo­sevelt took office in 1933, real GDP was more than 30% below its nor­mal trend level... The deficit rose by about one and a half per­cent of GDP in 1934".

Les­son 2 – Mon­e­tary expan­sion can help heal an econ­omy even when inter­est rates are near zero

Romer notes that actu­ally it was the Trea­sury rather than the Fed­eral Reserve that drove the mon­e­tary expan­sion (a pecu­liar­ity of the sys­tem under the Gold Stan­dard). In April 1933, Roo­sevelt sus­pended con­vert­ibil­ity to gold on a tem­po­rary basis, and the dol­lar depre­ci­ated. When the US returned to gold at the new higher price, gold flowed into the US, allow­ing the Trea­sury to issue gold cer­tifi­cates which were inter­change­able with Fed­eral Reserve notes. As Romer notes "The result was that the money sup­ply, defined nar­rowly as cur­rency and reserves, grew by nearly 17% per year between 1933 and 1936". Romer argues that this "Deval­u­a­tion fol­lowed by rapid mon­e­tary expan­sion broke the defla­tion­ary spi­ral" — empir­i­cal evi­dence to sup­port Fisher's hypoth­e­sis out­lined above.

Les­son 3 – Beware of cut­ting back on stim­u­lus too soon

The mon­e­tary expan­sion seems to have pro­duced remark­able results in terms of real growth: the US econ­omy grew by 11% in 1934, 9% in 1935 and 13% in 1936 in real terms. This lulled the author­i­ties into think­ing that all was well with the sys­tem again. Hence, in 1937, the deficit was reduced by approx­i­mately two and half per­cent of GDP. Mon­e­tary pol­icy was also tight­ened, as Romer notes "The Fed­eral Reserve dou­bled the reserve require­ment in three steps in 1936 and 1937". She con­cludes "tak­ing the wrong turn in 1937 effec­tively added two years to the Depression".

Les­son 4 – Finan­cial recov­ery and real recov­ery go hand in hand

Romer points out the insep­a­ra­ble nature of the real and finan­cial recov­er­ies. This meshes with our analy­sis that the banks aren't really the prob­lem in a debt-deflation envi­ron­ment, rather they are a symp­tom of the prob­lem. The cur­rent pol­icy in the US seems to be aimed at "fix­ing the finan­cial sys­tem", wit­ness Bernanke's recent com­ments "Recov­ery is not going to hap­pen until the finan­cial mar­kets and the banks are sta­bi­lized". This appears to be a mis­per­cep­tion, as, Romer notes "Strength­en­ing the real econ­omy improved the health of the finan­cial sys­tem. Bank prof­its moved from large and neg­a­tive in 1933 to large and pos­i­tive in 1935, and remained high through the end of the Depression".

Investors seem to be rather excited about banks post­ing prof­its at the moment. Frankly, if a bank didn't post a profit in this envi­ron­ment it should be shot out of kind­ness. The envi­ron­ment for prof­itabil­ity from banks has rarely been bet­ter, but that doesn't make them sol­vent. If you were start­ing a busi­ness today, then set­ting up a bank would be a very attrac­tive option. How­ever, his­tory — as rep­re­sented by the bal­ance sheet — can­not sim­ply be ignored when it is incon­ve­nient. As John Huss­man noted "The excite­ment of investors last week about Cit­i­group post­ing an oper­at­ing profit in the first two months of the year sim­ply indi­cates that investors may not fully under­stand the term "oper­at­ing profit." Cit­i­group could burst into flames while Vikram Pan­dit sells lemon­ade in the park­ing lot, and Citi would still post an oper­at­ing profit. Oper­at­ing prof­its exclude what hap­pens on the bal­ance sheet."

Les­son 5 – World­wide expan­sion­ary pol­icy shares the burdens

Given the world­wide nature of the cur­rent slump, Romer makes an inter­est­ing point on the effec­tive­ness of com­pet­i­tive deval­u­a­tions, "Going off the gold stan­dard and increas­ing the domes­tic money sup­ply was a key fac­tor in gen­er­at­ing recov­ery... across a wide range of coun­tries in the 1930s... These actions worked to lower world [real] inter­est rates... rather than just to shift expan­sion from one coun­try to another".

This is some­thing that Albert and I have been dis­cussing of late. We have been pon­der­ing the pos­si­bil­ity of com­pet­i­tive deval­u­a­tion (obvi­ously ulti­mately a zero sum game in terms of exchange rates) hav­ing enough of an impact on local mon­e­tary cre­ation to increase infla­tion­ary expec­ta­tions, thus help­ing coun­tries reflate. It appears as if Romer has sym­pa­thy with this view.

Les­son 6 – The Great Depres­sion did even­tu­ally end

The final les­son that Romer offers may be of use to investors at the cur­rent junc­ture. She makes the point that the Great Depres­sion did finally end. As Romer puts it "Despite the dev­as­tat­ing loss of wealth, chaos in our finan­cial mar­kets, and a loss of con­fi­dence so great that it nearly destroyed American's fun­da­men­tal faith in cap­i­tal­ism, the econ­omy came back. Indeed, the growth between 1933 and 1937 was the high­est we have ever expe­ri­enced out­side of wartime. Had the U.S. not had the ter­ri­ble policy-induced set­back in 1937, we, like most other coun­tries... would prob­a­bly have been fully recov­ered before the out­break of World War II" This is a reminder that the cur­rent obses­sion with no sce­nario being too pes­simistic is prob­a­bly ill advised.

Bernanke and the pol­icy options

The final source for sign­posts to watch comes from a speech given by Bernanke in 2000 to Japan­ese pol­icy mak­ers. As I wrote in Mind Mat­ters 6 Jan­u­ary 2009, in this speech Bernanke clearly acknowl­edged the greater threat that defla­tion poses in a highly lever­aged econ­omy, "Zero infla­tion or mild defla­tion is poten­tially more dan­ger­ous in the mod­ern envi­ron­ment than it was, say, in the clas­si­cal gold stan­dard era. The mod­ern econ­omy makes much heav­ier use of credit, espe­cially longer-term credit, than the economies of the nine­teenth century."

Bernanke clearly believes that mon­e­tary pol­icy is far from impo­tent at the zero inter­est rate bound. In essence his argu­ment is an arbi­trage based⁴ one as fol­lows "Money, unlike other forms of gov­ern­ment debt, pays zero inter­est and has infi­nite matu­rity. The mon­e­tary author­i­ties can issue as much money as they like. Hence, if the price level were truly inde­pen­dent of money issuance, then the mon­e­tary author­i­ties could use the money they cre­ate to acquire indef­i­nite quan­ti­ties of goods and assets. This is man­i­festly impos­si­ble in equi­lib­rium. There­fore money issuance must ulti­mately raise the price level, even if nom­i­nal inter­est rates are bounded at zero."

In the speech, he laid out a menu of pol­icy options that are avail­able to the mon­e­tary author­i­ties at the zero bound. First, aggres­sive cur­rency depre­ci­a­tion, as per Romer's analy­sis of the end of the Great Depres­sion. Sec­ond on Bernanke's list is the intro­duc­tion of an infla­tion tar­get to help mould the public's expec­ta­tions about the cen­tral bank's desire for infla­tion. He men­tions the range of 3–4%!

Third on the list was money financed trans­fers. Essen­tially tax cuts financed by print­ing money. Obvi­ously this requires co-ordination between the mon­e­tary and fis­cal author­i­ties, but this should be less of an issue in the US than it was in Japan. Finally, Bernanke argues that non-standard mon­e­tary pol­icy should be deployed. Effec­tively, quan­ti­ta­tive and qual­i­ta­tive eas­ing. Bernanke has repeat­edly men­tioned the pos­si­bil­ity of out­right pur­chases of gov­ern­ment bonds — as the UK is now doing.

This menu should pro­vide us with a roadmap of pol­icy options to watch for. If (and when) the defla­tion­ary pres­sure builds, we should expect to see more and more of these options wheeled out. Note that we aren't talk­ing about try­ing to 'fix the sys­tem', to reflate the bub­ble (which would be the equiv­a­lent of giv­ing crack cocaine to a heroin addict try­ing to deal with with­drawal). Rather, the sug­ges­tion from Fisher is that infla­tion erodes the real value of debt; it is the most pain­less way out of our cur­rent mess. Whether the author­i­ties can cre­ate just a lit­tle infla­tion remains to be seen, as does their abil­ity to actu­ally cre­ate infla­tion in any way. Such impon­der­ables are beyond my ken.

Invest­ment impli­ca­tions – Cheap insurance

Howard Marks recently sug­gested that today's invest­ment deci­sions must focus on "value, sur­viv­abil­ity and stay­ing power". These fac­tors lie at the heart of the three-pronged approach that I have been sug­gest­ing since the end of Octo­ber last year.

The first prong is cash. This is a legacy from the lack of oppor­tu­ni­ties that char­ac­terised mar­kets in the last few years. But it is also a hedge against out­right defla­tion. The sec­ond prong is deep value oppor­tu­ni­ties in both debt and equity mar­kets (as detailed for the equity mar­kets most recently in Mind Mat­ters, 4 March 2009). The third ele­ment is sources of cheap insur­ance. The idea behind this ele­ment of the port­fo­lio is to pre­pare for a wide vari­ety of out­comes by buy­ing cheap insur­ance (which ide­ally, although not always, pays off in mul­ti­ple states of the world). Of course, it should be noted that the pur­chase of cheap equi­ties also con­tains an infla­tion hedge element.

Inflation/deflation insur­ance I – TIPS

The first and most obvi­ous source of inflation/deflation pro­tec­tion when I first started think­ing about this sub­ject was US TIPS. These bonds have a defla­tion floor on the prin­ci­pal, so in the event of defla­tion I receive my cash back — rep­re­sent­ing a real rate of return equiv­a­lent to what­ever the defla­tion rate is. In the event of infla­tion, I get what­ever the yield is on the TIPS when I pur­chase them plus the infla­tion, of course (buy­ing the new issue TIPS avoids the prob­lem of accrued inflation).

When I started look­ing at TIPS, the yield was over 3.5%. This has dropped since then, result­ing in the 10 year TIPS deliv­er­ing a 9% return since the end of Octo­ber. The 10 year TIP is cur­rently yield­ing 2.1%, against the 10 year nom­i­nal bond yield of 3%. This implies that the mar­ket expects US infla­tion to be a mere 1% p.a. over the next decade — this strikes me as an excep­tion­ally low rate.

Inflation/deflation insur­ance II – Gold

The sec­ond inflation/deflation hedge I sug­gested in late Octo­ber was gold. Now, gold con­cerns me for a vari­ety of rea­sons, not least of which is that it has no intrin­sic worth: I can't really value gold — beyond extrac­tion cost.

How­ever, it has some attrac­tive fea­tures from an insur­ance point of view. Most obvi­ously, in a world of com­pet­i­tive deval­u­a­tions, gold is the one cur­rency that can't be debased. Thus it pro­vides a use­ful hedge against the return of this sort of beggar-thy-neighbour pol­icy. In the event of sig­nif­i­cant pro­longed defla­tion, what is left of our finan­cial sys­tem is likely to col­lapse, thus hold­ing a money sub­sti­tute isn't such a bad idea against this cat­a­clysmic outcome.

Of course, recently every­one has been talk­ing about gold (not hugely sur­pris­ing given that it is up some 30% since late Octo­ber) — some­thing that makes me ner­vous. How­ever, gold is insti­tu­tion­ally mas­sively under-owned, so whilst it may have been mov­ing up the list of attrac­tive assets of indi­vid­ual investors (if the EFTs are any­thing to go by) and sen­si­ble hedge funds (such as the likes of Green­light, Paul­son, Third Point, Eton Park and Hay­man), the main­stream insti­tu­tional appetite for it has remained depressed.

Infla­tion insur­ance I – Div­i­dend swaps

As we noted in Mind Mat­ters, 2 Feb­ru­ary 2009 the Euro­pean and UK div­i­dend swap mar­kets are pric­ing in an out­come that implies greater div­i­dend declines than wit­nessed in the US dur­ing the Great Depres­sion. The pric­ing then implies that essen­tially the div­i­dends won't recover, pretty much for­ever. This strikes me as exces­sively pessimistic.

In addi­tion, div­i­dends have a rel­a­tively close rela­tion­ship with infla­tion (as detailed in the afore­men­tioned Mind Mat­ters). Thus div­i­dend swaps look like a deeply dis­tressed asset fire sale, with the added advan­tage of offer­ing infla­tion insur­ance if I buy the longer dated swaps (up around 7% from my orig­i­nal note in Feb­ru­ary). The most com­mon rebut­tal to my fond­ness for div­i­dend swaps is coun­ter­party risk. How­ever, the Euro­pean div­i­dend swaps have an exchange listed future, which obvi­ously doesn't have any coun­ter­party issues.

Infla­tion insur­ance II – Infla­tion swaps

The sec­ond of the pure infla­tion hedges comes via the infla­tion swap mar­ket. The charts below show the zero-coupon fixed rate nec­es­sary to build a swap against zero-coupon CPI appre­ci­a­tion over 10 years. When I first looked at the US ver­sion in Jan­u­ary (see Mind Mat­ters, 6 Jan­u­ary 2009) the rate was a mere 1.5%. Today it has risen, although not dra­mat­i­cally, to 2.3%.

How­ever, the cheap­est infla­tion swaps in the world seem to be Japan­ese swaps. They are avail­able for –2.5%! Both the US and Japan­ese infla­tion swaps strike me as cheap ways of buy­ing infla­tion insur­ance at the moment. Although coun­ter­party risk is obvi­ously a sig­nif­i­cant fac­tor in these long dura­tion swap transactions.

Euro­zone break-up insur­ance: Span­ish and Por­tuguese CDS

The final ele­ment of the insur­ance pol­icy con­cerns the risk of a euro break-up. In a world of com­pet­i­tive deval­u­a­tion, it isn't clear that the Euro­zone will be able to stand the pres­sure. The one area of the world which has any­thing like the gold stan­dard in place is the Euro­zone. As Albert opines dur­ing our meet­ings with clients, this is less a func­tion of eco­nomic real­i­ties and more a func­tion of polit­i­cal expe­di­ency (I'll leave a detailed expo­si­tion of this logic to Albert in a future note).

To pro­tect against this risk (or even ris­ing per­cep­tions of this risk) the nat­ural insur­ance is pro­vided by the CDS mar­ket. If even one coun­try was to pub­licly con­tem­plate leav­ing the Euro­zone then these CDS spreads would explode. I find it hard to believe that Por­tuguese and Span­ish CDS are below those of the UK — where we have the abil­ity (and have used it) to print our own money.

Foot­notes:

¹ Avail­able from http://www.fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf This is one of few arti­cles pub­lished in Econo­met­rica that I have ever read!

² See Bill Flecksenstein's excel­lent book, Greenspan's Bub­bles or John Taylor's insight­ful paper The Finan­cial Cri­sis and the Pol­icy Responses: An empir­i­cal analy­sis of what went wrong, avail­able from http://www.stanford.edu?~johntayl/FCPR.pdf, or any of Albert Edwards' myr­iad of rants on Greenspan.

³ Romer (1992) What ended the Great Depres­sion?, The Jour­nal of Eco­nomic His­tory, Vol 52

⁴ As Stephen Ross once said, to turn a par­rot into a learned finan­cial econ­o­mist it needs learn just one word: arbi­trage. To my mind econ­o­mists are far too happy to rely on arbi­trage assump­tions to rule out solu­tions. Indeed the sec­ond chap­ter of my first book, Behav­ioural Finance is spent detail­ing fail­ures of arbi­trage (both causes and con­se­quences thereof, includ­ing the ketchup markets!).

Source: John Mauldin, Out­side the Box

Tags: Bad Actors, Ben Bernanke, Cheap Insurance, Credit Bubble, Currency Depreciation, Depression, Dominant Factors, Economic Thinkers, End Of The Great Depression, Fed Chairman, Finance, Great Depression, Great Depressions, Indebtedness, Inflation Deflation, Inflation Target, Inflationary Pressures, Irving Fisher, James Montier, Japanese Style, John Mauldin Outside The Box, Liquidation, Monetary Authorities, New Era, Policy Options, Policy Response, Pronouncements, Proponents, Rolodex, Societe Generale, Stock Prices, Strong Conviction, Uncertainty
Posted in Bonds, Credit Markets, Economy, Gold, Markets, Outlook | Comments Off

Stock markets – keep an eye on confidence measures

Thursday, March 26th, 2009

It is impor­tant that con­fi­dence be restored for the recent stock mar­ket gains to be more endur­ing. A few com­ments regard­ing this issue are high­lighted in this post.

As shown in Sunday’s “Words from the Wise” review, there is a strong his­tor­i­cal rela­tion­ship between the US Con­sumer Con­fi­dence Index and the 12-month change in the S&P 500 Index. One needs to take a view on the direc­tion of con­sumer con­fi­dence, but should it for argument’s sake pick up from 30 to 40 by the end of June, the rela­tion­ship indi­cates a S&P 500 decline of 30–35% in year-ago terms. Using end-of-quarter prices, this means an Index at between 832 and 896 by mid-year.

Source: Plexus Asset Man­age­ment (based on data from I-Net Bridge)

Inter­est­ingly, a report from Franklin Tem­ple­ton Invest­ments has just arrived, also show­ing that when con­fi­dence was low in the past, it had been time to buy. For exam­ple, on aver­age, stocks returned 12.5% a year fol­low­ing con­sumer con­fi­dence of 66 or lower. The con­sumer con­fi­dence read­ing at the end of Feb­ru­ary was 25.

Another con­fi­dence indi­ca­tor worth mon­i­tor­ing, is the Barron’s Con­fi­dence Index. This Index is cal­cu­lated by divid­ing the aver­age yield on high-grade bonds by the aver­age yield on intermediate-grade bonds. The dis­crep­ancy between the yields is indica­tive of investor con­fi­dence. There has been an improve­ment in the ratio since its all-time low in Decem­ber, show­ing that bond investors are grow­ing some­what more con­fi­dent and have started opt­ing for more spec­u­la­tive bonds over high-grade bonds.

Source: I-Net Bridge

Not sur­pris­ingly, a strong his­tor­i­cal rela­tion­ship also exists between the Barron’s Con­fi­dence Index and the S&P 500’s 12-month rate of change. But unlike con­sumer con­fi­dence that has not yet bot­tomed, the Barron’s indi­ca­tor has already been work­ing its way higher over the three months.

Source: Plexus Asset Man­age­ment (based on data from I-Net Bridge)

As men­tioned before, tak­ing one step at a time, the next hur­dle is the release of poten­tially ugly earn­ings and guid­ance announce­ments in April. By then a clearer pic­ture should also start emerg­ing on the results of the Fed’s med­i­cine and whether credit mar­kets are thaw­ing and con­fi­dence is begin­ning to improve.

Tags: Asset Management, Barron, Bond Investors, Bonds, Bridge, Buy Stocks, Confidence Indicator, Confidence Measures, Consumer Confidence Index, Decline, Discrepancy, Franklin Templeton Investments, Investor Confidence, Relationship, Sake, Stock Market Gains, Stock Markets, Stocks, Three Months, Us Consumer Confidence
Posted in Bonds, Credit Markets, Emerging Markets, Markets | Comments Off

Agriculture: Fundamentals Strong at the Core

Wednesday, March 25th, 2009

This week's Econ­o­mist mag­a­zine pro­vides a strong out­look for agri­cul­tural invest­ment and com­modi­ties. The arti­cle, Green Shoots, dated March 19, 2009 dis­cusses the fun­da­men­tal strength of the global trend in increased con­sump­tion of grain, meat and milk. "There is rea­son to believe that this strength is more than just another of the many bub­bles that have recently inflated, only to pop."

Here is an excerpt:

China’s role has been pro­found, reflect­ing its enor­mous eco­nomic progress and huge pop­u­la­tion. In the past decade, says Carlo Caiani of Caiani & Com­pany, an investment-advisory firm based in Mel­bourne, the con­sump­tion of milk has grown seven-fold, and that of olive oil six-fold. China is con­sum­ing twice as much veg­etable oil (instead of less healthy pork fat), 60% more poul­try, 30% more beef and 25% more wheat, and these are merely the obvi­ous foods. Scores of niches have expanded dra­mat­i­cally: peo­ple are drink­ing four times as much wine, for example.

And yet even with all this growth, peo­ple in China still, on aver­age, con­sume only one-third as much milk and meat as peo­ple in wealthy coun­tries such as Aus­tralia, Amer­ica and Britain. The gap is even larger with India, which is also grow­ing fast. Over­all, pro­tein intake in Europe and Amer­ica is unlikely to expand much, but a com­bi­na­tion of ris­ing incomes and pop­u­la­tion in devel­op­ing coun­tries could increase demand by more than 5% annu­ally for years to come. “Once peo­ple are accus­tomed to eat­ing more pro­tein, they won’t take it out of their diet,” says Mr Caiani.

Expand­ing sup­ply at the same rate will be dif­fi­cult, because the amount of arable land under cul­ti­va­tion is grow­ing by only a frac­tion of a per­cent­age point each year. In China and India many of the most fer­tile areas are the ones being devel­oped for roads and fac­to­ries. That means exist­ing land is becom­ing more valu­able, and must become more productive.

Read the whole story here.

Source: Green Shoots, The Econ­o­mist, March 19, 2009

http://www.economist.com/business/displaystory.cfm?story_id=13331189&fsrc=rss

Tags: Advisory Firm, Agricultural Investment, Arable Land, Caiani, Economic Progress, Economist Magazine, Emerging Markets, Europe And America, Fertile Areas, Fundamental Strength, Gap, Global Trend, Incomes, India, March 19, Niches, Olive Oil, Percentage Point, Protein Intake, Vegetable Oil, Wealthy Countries
Posted in Commodities, Emerging Markets, Energy & Natural Resources, India, Markets, Oil and Gas, Outlook | Comments Off

Nouriel Roubini: Public-Private Partnership Investment Program — Will it Work?

Wednesday, March 25th, 2009

Given how crit­i­cal Nouriel Roubini (RGE Mon­i­tor) has been in the past regard­ing var­i­ous gov­ern­ment plans to fix the US econ­omy, his take on the administration’s new plan to buy toxic assets is sur­pris­ingly pos­i­tive. The fol­low­ing para­graphs have been repub­lished from his lat­est newsletter.

The main com­po­nents of Trea­sury Sec­re­tary Geithner’s new PPIP to price and remove toxic assets from banks’ bal­ance sheets are as follows:

Basic Prin­ci­ples: Trea­sury will use $75bn — $100bn in TARP money to co-invest along­side pri­vate sec­tor par­tic­i­pants and the FDIC as well as the Fed­eral Reserve, to buy $500bn to $1 tril­lion of toxic mort­gage assets (both res­i­den­tial and com­mer­cial) off banks’ books (‘legacy assets’)

There are two sep­a­rate approaches for legacy loans and for legacy secu­ri­ties. At first, Trea­sury will share its $75-100bn equity stake equally between the two pro­grams with the option to shift the bulk of financ­ing towards the option with the greater promise of suc­cess with mar­ket participants.

1) Public-Private Pro­gram for Legacy Loans: The FDIC estab­lishes sev­eral public-private invest­ment funds whose sole pur­pose will be to pur­chase and hold spe­cific loan pools put up for sale by banks (large and small). The trans­ac­tion price will be estab­lished by the high­est bid at an auc­tion run by the FDIC, in which a wide array of insti­tu­tional investors and even indi­vid­u­als with a long-term ori­en­ta­tion are encour­aged to participate.

The lia­bil­i­ties of the invest­ment fund con­sist of an equity stake (50% of which pro­vided by auc­tion win­ner, 50% from Trea­sury TARP), and col­lat­er­al­ized debt issued by the invest­ment fund and guar­an­teed by the FDIC to finance the remain­der of the pur­chase price (FDIC gets guar­an­tee fee).

Before the auc­tion, the FDIC spec­i­fies the pool-specific debt-to-equity ratio it is will­ing to guar­an­tee sub­ject to a max­i­mum 6-to-1 lever­age ratio. The pri­vate investor would then man­age the ser­vic­ing of the asset pool — using asset man­agers approved and super­vised by the FDIC — until dis­posal or maturity.

Exam­ple: Assum­ing a 6-to-1 debt-to-equity ratio, the high­est bid for a loan pool with $100 face value might turn out to be $84. Of this amount, the FDIC would pro­vide $72 in debt guar­an­tees whereas the equity stake of $12 would be shared equally between the auc­tion win­ner ($6) and the Trea­sury ($6).

2) Legacy Secu­ri­ties Pro­gram: The legacy secu­ri­ties pro­gram is to be incor­po­rated into the Term Asset-Backed Secu­ri­ties Facil­ity (TALF) whose orig­i­nal goal was to pro­vide col­lat­er­al­ized financ­ing (non-recourse loans) to buy­ers of newly cre­ated con­sumer loan/small busi­ness loan ABS. Under the Legacy Secu­ri­ties Pro­gram, the eli­gi­ble col­lat­eral for TALF is extended to include non-agency RMBS that were orig­i­nally rated AAA and out­stand­ing CMBS and ABS that are rated AAA.

Exam­ple: Under the Legacy Secu­ri­ties Pro­gram, up to five Treasury-approved fund man­agers will have a period of time to raise pri­vate cap­i­tal to tar­get the pur­chase of des­ig­nated secu­ri­ties. Assum­ing the fund man­ager is able to raise $100 of pri­vate cap­i­tal for the fund, Trea­sury will pro­vide $100 equity co-investment along­side pri­vate investors. Trea­sury will then pro­vide a $100 loan to the public-private invest­ment fund. More­over, Trea­sury may also choose to pro­vide an addi­tional loan of up to $100 to the fund. The invest­ment fund then has $300-$400 at its dis­posal to buy legacy secu­ri­ties at its dis­cre­tion. As a pur­chaser of TALF-eligible secu­ri­ties, the PPIF would also have access to the expanded TALF pro­gram of col­lat­er­al­ized Fed loans when it is launched.

Assess­ment

The main stick­ing points in pre­vi­ous market-based approaches to clear toxic assets from banks’ books were threefold:

a) How to value illiq­uid assets?
b) Once a trans­ac­tion price is estab­lished, will banks be will­ing to sell and take a hair cut?
c) How to induce pri­vate investors to pur­chase legacy assets with­out unduly wast­ing tax­payer money?

a) Val­u­a­tion of Illiq­uid Assets
The the­o­ret­i­cal foun­da­tions of Geithner’s plan are pro­vided by Lucian Bebchuk from Har­vard Uni­ver­sity among oth­ers. He explains that “if the under­ly­ing mar­ket fail­ure is at least partly one of liq­uid­ity, an effec­tive plan for a public-private part­ner­ship in buy­ing trou­bled assets can be designed. The key is to have com­pe­ti­tion at two levels.

First, at the level of buy­ing trou­bled assets, the government’s pro­gram should focus on estab­lish­ing many com­pet­ing funds that are pri­vately man­aged and partly funded with pri­vate cap­i­tal — and not cre­at­ing one, large “aggre­ga­tor bank” — funded with pub­lic and pri­vate cap­i­tal and engag­ing in pur­chas­ing trou­bled assets.

Sec­ond, sev­eral poten­tial fund man­agers should com­pete for gov­ern­ment cap­i­tal under a mar­ket mech­a­nism result­ing in max­i­mum par­tic­i­pa­tion of pri­vate cap­i­tal and min­i­mum costs to taxpayers.”

Geithner’s plan seems to fol­low these guide­lines to a large degree. In par­tic­u­lar, on the one hand the gov­ern­ment sub­sidy allows pri­vate investors to bid a higher price than oth­er­wise war­ranted (i.e. the gov­ern­ment gives investors the equiv­a­lent of a call option.) On the other hand, the fact that the pri­vate investor is bound to lose its entire equity stake if the asset value dete­ri­o­rates from arti­fi­cially high val­u­a­tions pro­vides an incen­tive to bid con­ser­v­a­tively. Both effects together may con­tribute to a rea­son­able level of price dis­cov­ery. In case of the secu­ri­ties pro­gram, the prospect of refi­nanc­ing pur­chased legacy secu­ri­ties with TALF via a non-recourse loan (which is the equiv­a­lent of a put option) should incen­tivize pri­vate investors to bid higher than oth­er­wise warranted.

b) Will banks par­tic­i­pate?
A sim­i­lar purely pri­vate solu­tion to get toxic assets off banks’ bal­ance sheets was tried with Paulson’s aborted Super-SIV when legacy assets were still marked sub­stan­tially higher than at present. It became clear then that the pri­vate sec­tor will require a pos­si­bly sub­stan­tial tax­payer sub­sidy in order to over­come the col­lec­tive action paral­y­sis. Indeed, in the case of the legacy loan exam­ple out­lined in the Gei­th­ner plan with a 6/1 lever­age, pri­vate investors that invest 7.1% (=1/7 * 0.5) of the equity will get 50% of any upside in return. While Trea­sury will also share in any upside by half, any down­side beyond the pri­vate investors’ equity stake is clearly borne by the taxpayers.

While this sub­sidy to investors pro­vides a pow­er­ful incen­tive to bid prices up in a com­pet­i­tive auc­tion, banks stuck with par­tic­u­larly toxic assets or thin cap­i­tal buffers may still find a poten­tial write­down at market-clearing prices pro­hib­i­tive and some might need to be recap­i­tal­ized after tak­ing the hair cut. FDIC Chair­man Sheila Bair has already warned that while this plan will help many sol­vent banks get rid of their toxic assets thus clear­ing the way for new loans and fresh cap­i­tal some banks are beyond the stage of res­cue. Those bor­der­line insol­vent banks will likely require an addi­tional incen­tive to sell or manda­tory par­tic­i­pa­tion oth­er­wise they will pre­fer to hold on to their assets, espe­cially in view of the FASB’s prospec­tive eas­ing of mark-to-market account­ing rules.

For the sake com­plete­ness, some com­men­ta­tors would also like to see bet­ter safe­guards estab­lished in order to pre­vent banks and asset man­agers from poten­tially col­lud­ing in their com­mon inter­est to the detri­ment of the taxpayer.

c) And tax­pay­ers?
At the end of the day the per­for­mance of the toxic legacy assets is dri­ven by the cash flow per­for­mance of the under­ly­ing loans. Keep in mind that among sub­prime bor­row­ers, seri­ous delin­quen­cies and fore­clo­sures have affected about 20% of out­stand­ing loans as of Decem­ber 2008 thus impair­ing the cash flow directed to junior RMBS investors and/or ABS CDOs con­sist­ing of these junior tranches. While ABX prices responded pos­i­tively to the prospect of increased buyer inter­est, the ulti­mate loan value will depend on whether house­holds and com­mer­cial real estate bor­row­ers will con­tinue mak­ing pay­ments in the future. More on that below.

As a prac­ti­cal exam­ple of the per­for­mance of a toxic port­fo­lio, take the Fed’s Maiden Lane port­fo­lio with Bear Stearns assets. Cum­ber­land Advi­sors reported that so far the results aren’t promis­ing, and they see no prospect for a profit on the assets. In fact, the port­fo­lio has lost over 10% of its value, and losses are mount­ing. At present, losses on that port­fo­lio exceed $4.5 bil­lion and the tax­pay­ers’ share is now $3.5 bil­lion. Oth­ers point to the low recov­ery value of IndyMac’s mort­gage port­fo­lio as a benchmark.

Bot­tom line: Will it get credit flow­ing again?

The imme­di­ate mar­ket reac­tion (equi­ties and invest­ment grade CDS staged a sub­stan­tial rally, less so high yield CDS) was clearly one of relief that nation­al­iza­tion seems to be off the table for now and that the admin­is­tra­tion is com­mit­ted to market-based solu­tions. While the extent of the guar­an­tees almost makes one won­der why the involve­ment of the pri­vate sec­tor is needed in the first place, it is the involve­ment of the pri­vate sec­tor that cre­ates a con­text in which price set­ting and dis­cov­ery hap­pen based on a mar­ket mechanism.

An impor­tant ques­tion at this point is: What should we look at while assess­ing the plan in the months ahead?

Clearly the unfreeze of credit mar­kets would be the first sign of suc­cess but we might not see this hap­pen­ing before some time. Some of the banks that choose to sell assets and take a write­down might be in need of addi­tional cap­i­tal before they can resume lend­ing. Also, for those insti­tu­tions that are beyond the stage of res­cue and effec­tively insol­vent, the plan will likely not be as effec­tive in stim­u­lat­ing lend­ing or par­tic­i­pa­tion in the first place.

The increase in the sup­ply of credit that will come from insti­tu­tions that are sol­vent will be impor­tant, but will demand be there to do its part? If the real side of the econ­omy con­tin­ues to dete­ri­o­rate, it is likely that credit demand might be sub­dued. More­over, a fur­ther con­tin­ued dete­ri­o­ra­tion on the real side of the econ­omy would imply new defaults on credit cards, con­sumer loans, auto loans and mort­gages that would result in new toxic assets on the bal­ance sheets of finan­cial insti­tu­tions recre­at­ing an envi­ron­ment where banks would main­tain strin­gent lend­ing stan­dards. There­fore, the suc­cess of the plan is a nec­es­sary but not suf­fi­cient con­di­tion to get the econ­omy back on a recov­ery path. The suc­cess of the fis­cal stim­u­lus pack­age in sus­tain­ing aggre­gate demand and min­i­miz­ing job losses and the suc­cess in restart­ing demand in the hous­ing sec­tor will be instru­men­tal to put a stop to the neg­a­tive feed­back loop between the real and the finan­cial side of the economy.

More­over, if the neg­a­tive feed­back loop per­sists, need for fur­ther fund­ing will arise. While it will be very chal­leng­ing to obtain Con­gress approval for addi­tional TARP money, we should point out that the gov­ern­ment has set aside an addi­tional $750bn in the FY2010 bud­get in aid for the finan­cial sector.

Hence, tak­ing care of legacy loans and secu­ri­ties is a wel­come step for­ward, espe­cially for sol­vent insti­tu­tions whose asset val­ues are sub­ject to a sub­stan­tial liq­uid­ity dis­count. How­ever, insol­vent insti­tu­tions might not find as much relief from this plan, and the impact of the plan on the real econ­omy might not be enough to pull the econ­omy out of a con­trac­tion for good part of this year and slug­gish growth there­after. But by con­duct­ing auc­tions and deter­min­ing the mar­ket value of the toxic assets, the Trea­sury will be implic­itly using the pri­vate sec­tor to ‘stress test’ the finan­cial sys­tem to deter­mine which banks are insol­vent and there­fore will need fur­ther gov­ern­ment intervention.

Source: Nouriel Roubini, RGE Mon­i­tor, March 24, 2009.

Tags: Auction Winner, Debt To Equity Ratio, Equity Stake, Geithner, Guarantee Fee, Investment Fund, Investment Program, Legacy Assets, Leverage Ratio, Loan Pools, Market Participants, Mortgage Assets, Partnership Investment, Private Investment Funds, Private Investor, Private Program, Private Sector Participants, Public Private Partnership, Transaction Price, Treasury Secretary
Posted in Credit Markets, Economy, Markets | Comments Off

Byron Wien: March 2009 Commentary

Tuesday, March 24th, 2009

This arti­cle is a guest con­tri­bu­tion from MarketFolly.com.

Here's Pequot Cap­i­tal Management's March com­men­tary from Byron Wien. We've cov­ered Pequot's Q3 hold­ings ear­lier, and are soon going to be cov­er­ing their lat­est Q4 hold­ings so keep an eye out. In terms of recent move­ments, we've detailed those here. (RSS & Email read­ers may need to come to the blog to read).

Here is an excerpt:

"I won­der if we are too impa­tient with our new Pres­i­dent. After less than two months in office the stock mar­ket is still declin­ing, house prices con­tinue to drop, the futures of the bank­ing and auto­mo­bile indus­tries remain uncer­tain, cor­po­rate prof­its are shrink­ing, indus­trial pro­duc­tion is falling and unem­ploy­ment is ris­ing. Did we really think he would come out with a flaw­less plan to reverse these con­di­tions within the first 60 days? The pro­grams announced so far are not bereft of pos­i­tive aspects. You can crit­i­cize the stim­u­lus pack­age for hav­ing been writ­ten by var­i­ous con­gres­sional com­mit­tees who put their pet projects in the bill but the leg­is­la­tion con­tains pro­grams for alter­na­tive energy, the envi­ron­ment, edu­ca­tion and health­care which were all promised by the Pres­i­dent dur­ing the cam­paign. What’s more, sup­port for the infra­struc­ture projects at the state and local level cre­ates jobs or keeps pub­lic employ­ees from being laid off and attends to deferred main­te­nance projects that may have been on the books for years. More than $1 tril­lion dol­lars has already been com­mit­ted and it may be sev­eral times that before we are done in a $15 tril­lion econ­omy. That’s prob­a­bly going to be a boost to the
gross domes­tic prod­uct (GDP) of five to seven per­cent start­ing this year and con­tin­u­ing into next in an econ­omy that is shrink­ing at about five percent."

"Even the pes­simists think GDP will turn pos­i­tive late this year or early in 2010. Nobody knows when the stock mar­ket will bot­tom, hous­ing will sta­bi­lize, the banks will feel solid enough finan­cially to start lend­ing again, unem­ploy­ment will turn down and fear among con­sumers and busi­ness peo­ple will dis­si­pate. To assume that there are not a num­ber of con­struc­tive aspects to the pro­grams announced (and passed) to date is too harsh a judg­ment in my opin­ion. It took decades to cre­ate the prob­lems we are fac­ing and it will take years to solve them. The long-term impli­ca­tions of the debt we are tak­ing on to accom­plish our goals are another atter, but the econ­omy was in free fall and a series of dra­matic steps had to be taken."

"So I remain one of the few opti­mists who believe the mar­ket will begin to antic­i­pate a recov­ery in the econ­omy some­time in the sec­ond half of this year. I am pre­pared for the fun­da­men­tal back­drop for equi­ties to get worse before it gets bet­ter. I expect earn­ings will be dis­ap­point­ing and com­pany guid­ance will be revised down­ward and more lay­offs and bank­rupt­cies will take place. How­ever, once the pos­i­tive effects of this enor­mous stim­u­lus pro­gram begin to be seen, I believe the stock mar­ket will have already antic­i­pated the good news. Even if the fun­da­men­tals only show improve­ment in 2010 we could see a bet­ter stock mar­ket later this year."

You can read the whole doc­u­ment here, by click­ing the full screen but­ton at the top right of the view­ing pane.

You may also down­load the doc­u­ment here.

Tags: Alternative Energy, Array, Automobile Industries, Bill Gross, Blog, Byron Wien, Congressional Committees, Corporate Profits, Creative Writing, Environment Education, ETF, Excerpt, GDP, Gross Domestic Product, House Prices, Infrastructure Projects, Maintenance Projects, New President, Pequot Capital Management, Pessimists, Pet Projects, Q3, Scribd, Short Stories, Stimulus Package, Stock Market, Trillion, Writing Music
Posted in Economy, ETFs, Infrastructure, Markets | Comments Off

Technical talk: Stocks nearing short-term resistance

Tuesday, March 24th, 2009

The com­ments below were pro­vided by Kevin Lane of Fusion IQ.

As we have said before, it is not the points gained or lost that mat­ter, but rather the con­vic­tion behind the move. Monday’s inter­nals did not dis­ap­point, with the NASDAQ and NYSE both scor­ing up to down vol­ume ratios and advancer to decliner ratios that were super­bull­ish. This rally con­firms the com­ments we made on March 10 and then again on March 18.

Excerpt from FusionIQ com­ments on March 10: “Mar­ket inter­nals (i.e. the num­ber of advancers to declin­ers and up vol­ume to down vol­ume) on today’s advance were the most bull­ish inter­nal read­ings seen since the move off the 2002 lows … ” We also added: … “That said, we believe today’s rally is the start of a good move higher (again it may not be the ulti­mate low – only hind­sight will tell us that); how­ever, the surge of momen­tum sug­gests this rally will be worth par­tic­i­pat­ing in.”

On March 18 we stated: “So that said, we con­tinue to view this cur­rent rally as hav­ing legs with maybe another 10–15% up from present lev­els. (So buy­ing on dips with appro­pri­ate stop losses would make sense for the time being.) We also con­tinue to view this as an oppor­tu­nity to make money on the long side for a nar­row win­dow of time (1 to 3 months).”

We think the S&P 500 can still rally up to the 850 – 860 in the near term on the heels of the unwind­ing of the deeply over­sold con­di­tions, the large piles of side­line liq­uid­ity and addi­tional money man­agers are allo­cat­ing to stocks so as not fall too far behind their bench­marks. At the afore­men­tioned S&P 500 level some more aggres­sive profit-taking is likely to ensue and it may be a good time to take some chips off the table (i.e. lock in some profits)

We would then look to real­lo­cate on the next aggres­sive pull­back. Techs con­tinue to act bet­ter than the broader mar­ket and should dom­i­nate your port­fo­lio more than any other sec­tor at this point.

Source: Kevin Lane, Fusion IQ, March 24, 2009.

Tags: Advancer, Benchmarks, Decliners, Dips, E Lock, Hindsight, liquidity, Lows, Market Internals, Money Managers, Nasdaq, Nyse, Piles, Point Source, Profit Taking, Pullback, Sideline, Volume Ratios, Window Of Time, Would Make Sense
Posted in Markets, US Stocks | 1 Comment »

Mark Mobius: Riding the Chinese Ox

Tuesday, March 24th, 2009

Fur­ther to my recent arti­cles on China (”China — bet­ter days ahead” and “China — ris­ing to the occa­sion“), a few com­ments from Mark Mobius, exec­u­tive chair­man of Tem­ple­ton Asset Man­age­ment, have just arrived.

“On Feb­ru­ary 4, China and Chi­nese all over the world cel­e­brated the entry into the Year of the Ox. We would pre­fer to call it the Year of the Bull because we believe that 2009 will be the year that the emerg­ing stock mar­kets should wit­ness a sub­stan­tial recov­ery and China should lead the way to that recovery.

“The invest­ment prospects and long-term out­look for China are excel­lent for a num­ber of rea­sons: (1) the Chi­nese lead­er­ship is intel­li­gent, resource­ful and enlight­ened, with an inter­est in main­tain­ing growth with a bet­ter stan­dard of liv­ing for all Chi­nese, (2) that lead­er­ship has the orga­ni­za­tional skills and poli­cies capa­ble of ensur­ing that China con­tin­ues to achieve the high­est GDP growth of any major coun­try in the world, (3) China has the finan­cial resources to under­take this gar­gan­tuan task with the world’s largest store of for­eign reserves and (4) China has one of the health­i­est bank­ing sys­tems in the world and most indi­vid­u­als have lit­tle borrowings.

“Undoubt­edly, China will not be able to achieve the double-digit growth of 2008 but it can cer­tainly achieve high single-digit growth. In order to main­tain growth, the gov­ern­ment is under­tak­ing a num­ber of mas­sive stim­u­la­tion pro­grams tar­geted at the domes­tic mar­ket, which is designed to replace export-led growth by the domes­tic market-led growth. The key dri­ver there­fore will be domes­tic con­sump­tion. The gov­ern­ment is also tak­ing mea­sures to boost con­sumer spend­ing by tax cuts and con­sump­tion coupons. There­fore, any sec­tor related to domes­tic con­sump­tion will be favor­able. China’s eco­nomic growth is expected to be dri­ven pre­dom­i­nantly by fis­cal stim­u­lus and mon­e­tary easing.

“Since Sep­tem­ber 15, 2008, the People’s Bank of China has cut lend­ing inter­est rates by 216 basis points (2.16%) with addi­tional cuts expected. In order to stim­u­late bank lend­ing, the reserve require­ment ratio for banks was low­ered four times and loan quo­tas, which were designed in 2008 to restrain banks from lend­ing, will prob­a­bly be unof­fi­cially abandoned.

“Infla­tion eased to its low­est level in more than two years, with con­sumer prices increas­ing 1.0% y-o-y in Jan­u­ary. With strong declines in infla­tion, pol­icy mak­ers in China have become more con­fi­dent and have been cut­ting inter­est rates aggres­sively. One of the con­straints to infla­tion has been the crunch in trade financ­ing, which became a global prob­lem, but as a result of new sup­port from Bei­jing this prob­lem seems to have eased.

“The Chi­nese cur­rency, the ren­minbi, is cur­rently under­val­ued on a price par­ity basis. There is thus pres­sure for it to strengthen against the US$. How­ever, the Chi­nese are con­cerned about fur­ther ero­sion of export busi­nesses and thus are pro­ceed­ing cau­tiously regard­ing any fur­ther appre­ci­a­tion. Struc­turally, this would be a good oppor­tu­nity for China to intro­duce fur­ther reforms on the open­ing of its cap­i­tal account and cur­rency con­vert­ibil­ity. With the ren­minbi tak­ing a big­ger role in the inter­na­tional mar­ket, it could become another reserve cur­rency after the US$ and euro.

“In Novem­ber 2008, the gov­ern­ment announced a stim­u­lus pack­age and should be able to spend up to RMB4 tril­lion (or US$586 bil­lion) in new invest­ment pro­grams. The pack­age is sched­uled to be spent before the end of 2010 in ten key areas, includ­ing trans­port infra­struc­ture, rural elec­tric­ity and gas facil­i­ties, low-rent hous­ing, agri­cul­tural sub­si­dies and min­i­mum income support.

“There are also other sup­ple­men­tary pro­grams geared towards pro­mot­ing incomes and con­sump­tion. Fund­ing is cer­tainly not a prob­lem for the Chi­nese gov­ern­ment as the gov­ern­ment is in fis­cal sur­plus and has the largest fis­cal reserves, cur­rently at US$1.95 tril­lion, in the world. More­over, given the high sav­ings rate and low loan-to-deposit ratio with the bank­ing sys­tem, there is ample room for the gov­ern­ment to raise debt.

[PduP: The Chi­nese FTSE Xin­hua Bank Index has cer­tainly been the best-performing bank­ing sec­tor of any coun­try over the past few months as seen from its per­for­mance ver­sus the S&P 500 Finan­cial Index, although US finan­cials have started mak­ing amends over the past two weeks.]

Source: Fuller­money

“There are now signs of recov­ery in the China econ­omy with the government’s infra­struc­ture projects begin­ning to have an impact and as the Pur­chas­ing Man­agers new orders index rebounds. The Decem­ber PMI rebounded to 41.2, 2.4 per­cent­age points higher than the pre­vi­ous month, which rep­re­sents the first mean­ing­ful rebound since March 2008.

“The cur­rent 2009 GDP growth fore­cast for China is 7.4%. The fis­cal stim­u­lus and inter­est rate cuts are expected to have a con­tin­u­ous pos­i­tive impact. Of par­tic­u­lar inter­est is the rise in orders for infrastructure-related mate­r­ial and machin­ery orders. This reflects the effects of the government’s fis­cal stim­u­lus mea­sures. There are indi­ca­tions that the slow­down in China’s indus­trial pro­duc­tion growth is show­ing signs of recov­ery with new orders, input prices and even new export orders recov­er­ing from their lows. More­over, stocks of major inputs and fin­ished goods are stabilizing.

“There are, of course, risks in Chi­nese invest­ing. Cur­rently unem­ploy­ment is on the rise and labor activism is increas­ing. There­fore there are risks of dis­rup­tions, which could impact stock prices. While the offi­cial unem­ploy­ment rate was just 4%, it is believed the actual num­ber could be as high as 10%, with most unem­ployed being migrant work­ers in the coastal areas and new col­lege grad­u­ates. Com­pared to the last down-cycle, the gov­ern­ment now has greater fis­cal strength to han­dle the sit­u­a­tion. Farm own­er­ship reform and wider social secu­rity cov­er­age will help ease the impact on social stability.

[PduP: The risks are plen­ti­ful as pointed out in this report by George Fried­man of Strat­for. How­ever, the author­i­ties are mind­ful of the declin­ing world trade and are using their enor­mous fire­power to counter the reduced exports.]

“The ben­e­fits, how­ever, far out­weigh the risks of invest­ing in China and as the fastest grow­ing major coun­try in the world with the largest pop­u­la­tion, clearly China must be an invest­ment des­ti­na­tion for any intel­li­gent investor.”

[PduP: In con­clu­sion, an updated chart of the Chi­nese Shang­hai Com­pos­ite Index that seems to be map­ping out a rather bull­ish pat­tern notwith­stand­ing con­cerns about the com­mand economy’s abil­ity to suc­cess­fully com­pen­sate for reduced global trade with domes­tic demand. Some may argue that the stock mar­ket is being manip­u­lated, but such action, if true, can at most be a tem­po­rary phe­nom­e­non. Charts sel­dom lie over the longer term and with the Index above the 40-week (200-day) mov­ing aver­age and the rate of change (ROC) indi­ca­tor (black line in the bot­tom sec­tion) on the weekly chart above zero, depict­ing a pos­i­tive trend, the Chi­nese Ox (or should I say bull) appears to be in control.]

Source: Stockcharts.com

Source: Mark Mobius, Tem­ple­ton Asset Man­age­ment, Feb­ru­ary 2009.

Tags: Articles On China, Bank Of China, Banking Systems, China China, Chinese Leadership, Domestic Consumption, Double Digit Growth, Emerging Stock Markets, Executive Chairman, Fiscal Stimulus, Gargantuan Task, GDP Growth, Investment Prospects, Mark Mobius, Rising To The Occasion, S Largest Store, Substantial Recovery, Templeton Asset Management, Year Of The Bull, Year Of The Ox
Posted in Economy, Emerging Markets, Infrastructure, Markets, Outlook | Comments Off

Quantitative Easing: A Guide and Outlook to the 'Nuclear Option'

Sunday, March 22nd, 2009

Last week, Ben Bernanke announced the Fed's deci­sion to employ 'Quan­ti­ta­tive Eas­ing' (QE), the 'nuclear option,' to save the credit mar­ket and the econ­omy. On the news that the Fed will buy back up to $300-billion worth of long dated US trea­sury bonds, and acquire an addi­tional $750-billion of mort­gage backed secu­ri­ties, the US dol­lar plunged, the euro surged, Trea­sury yields nose-dived, gold bul­lion exploded, and stocks, oil and com­modi­ties gained handsomely.

We know what the imme­di­ate reac­tion has been to this, but what does it all mean in the longer term?

The main design of QE is to sup­ply the money, by print­ing it, that is required to ful­fill cur­rent demand for money aris­ing from the delever­ag­ing of bal­ance sheets. Buy­ers need to be able to access credit and cash in order to pur­chase assets from dis­tressed ven­dors. If pur­chasers can­not be facil­i­tated via the mar­ket, the bids for the assets will keep falling until they can. QE means to pro­vide the stop-gap mea­sure. The other pur­pose of QE, is to make it pos­si­ble for the Fed to enlarge its own bal­ance sheet by assum­ing or acquir­ing 'toxic' assets in return for retir­ing debt from banker debtors, so that they can be freer to resume lending.

Until now, the delever­ag­ing of mar­ket assets in favour of debt reduc­tion has resulted in strong demand for cash, such that it has given the dol­lar a dis­pro­por­tion­ate boost — hence the strangely strong dollar.

Prior to the Fed's move last week, this quote describes the cur­rent nature of the strong US dol­lar, from FT.com:

Hans Redeker at BNP Paribas said under nor­mal cir­cum­stances, a ris­ing deficit works against the domes­tic cur­rency. “How­ever, in this envi­ron­ment, delever­ag­ing by insti­tu­tions in order to clean up bal­ance sheets will pro­vide the dol­lar with a nat­ural bid,” he said.

This delever­ag­ing helped cre­ate a dol­lar short­age that drove the US cur­rency sharply higher against the euro after the col­lapse of Lehman Broth­ers last Sep­tem­ber. Ana­lysts said a sim­i­lar sit­u­a­tion seemed to be devel­op­ing as equity mar­kets plunged below their lows from last autumn.

The fol­low­ing is an excel­lent tuto­r­ial from Marketplace.com on Lever­ag­ing and Deleveraging:

Lever­ag­ing and delever­ag­ing from Mar­ket­place on Vimeo.
Quan­ti­ta­tive eas­ing sup­plies the cash via the print­ing press to those insti­tu­tions in need of cash in return from the sale of lev­ered assets, in the form of credit for buy­ers of liq­ui­dated assets. With credit for the pur­pose of re-purchasing dis­tressed assets unavail­able to would-be buy­ers, the mar­ket for those assets has suf­fered immensely; stocks, bonds, real estate, etc. As for the CDOs, only a dar­ing breed of investors have shown inter­est, but they too may find it hard to get the credit to make it worth­while, or the con­ces­sions and covenants.

The fol­low­ing is a tuto­r­ial from Marketplace.com on Quan­ti­ta­tive Easing:

Quan­ti­ta­tive eas­ing from Mar­ket­place on Vimeo.

Effec­tively, when you sell (or short) assets, the end result is that you end up long the cash. For those seek­ing to reduce debt, the cash dis­ap­pears into the money pit, return­ing to the lender's bal­ance sheet. For those sell­ing assets because they are risk averse, the money ends up for the time being in now zero-interest trea­suries and short term cash equiv­a­lents. There­fore you end up with a strong dol­lar. When the mar­ket was over-using credit, it was short the dol­lar and the dol­lar was weaker. Now that the mar­ket is in a debt-reduction or delever­ag­ing mode, it is long the dol­lar, there­fore the dol­lar gains strength.

The Feds deci­sion to employ the 'nuclear option' of QE sends a sig­nal that there may be a great deal more delever­ag­ing in store for the econ­omy and there is sub­stan­tial need to sup­ply the money.

The imme­di­ate reac­tion is the weak­en­ing of the dol­lar, but that just pro­vides tem­po­rary breath­ing space until the sub­se­quent rounds of delever­ag­ing sop up the slack cre­ated by QE, and what fol­lows is a revi­tal­ized dol­lar, strength­ened yet again by the deleveraging.

Grad­u­ated QE will peri­od­i­cally and grad­u­ally weaken the dol­lar, as it is dilu­tive, but the take up cre­ated by grad­u­ated delever­ag­ing will grad­u­ally renew dol­lar strength. Ide­ally, if all the cen­tral banks in the G6 resort to this, there will be bal­ance, but the tim­ing may at times prove to be skewed by the inde­pen­dent agen­das of the UK and the ECB.

The bot­tom line is that this first round of QE is just that. The first round. Bill Gross, Man­ag­ing Direc­tor, PIMCO, points out that while it is a good move, it may not be enough, and that the Fed may have to expand its bal­ance sheet to $5 or $6-trillion, as it takes $4 of debt to gen­er­ate $1 of GDP growth.

Bill Gross: No, I agree with all of that. Its just a ques­tion, Kath­leen, of ‘how big of a kick?’ There are a num­ber of ways of look­ing at this. Gold­man Sachs has approached it from the stand­point of the Tay­lor Rule, the defi­cien­cies of out­put rel­a­tive to their own par­tic­u­lar index.

We look at it a lit­tle bit dif­fer­ently at PIMCO, we look at it from the stand­point of the amount of debt that’s required to pro­duce a dollar’s worth of GDP growth. And up until 12–18 months ago in terms of our exist­ing econ­omy, that was about $4 of debt for $1 of GDP growth.

This $1-trillion dol­lars to our way pro­duces $250-billion of GDP; that’s just under two per­cent real growth. That`s good, that pro­duces in our opin­ion about 1-million jobs, but we need more than that.

KH: Is it enough to avoid the mini-depression you were talk­ing about last month when I joined you for an inter­view out there at New­port Beach?

BG: We think so, you know yesterday’s move by the Fed were in recog­ni­tion of this reces­sion­ary econ­omy that could have resem­bled a small depres­sion unless credit mar­kets and risk tak­ing were revived. And in fact the Fed labelled their poli­cies ‘credit eas­ing’ and you men­tioned the obvi­ous intent to lower mort­gage rates to home­own­ers and lower credit card rates, auto loans, com­mer­cial rates as well so, you know, its very much of a pos­i­tive push. We have sense that the $1.8-trillion bal­ance sheet that the Fed has, that’s now grow­ing to $3-trillion, prob­a­bly will have to grow to $5-trillion and $6-trillion in order to keep us on a trend line that pro­duces pos­i­tive as opposed to neg­a­tive growth.

Because QE mea­sures may not yet be suf­fi­cient to com­pletely over­come the prob­lems fac­ing the bank­ing sys­tem in terms debt reduc­tion the out­look con­tin­ues to be tilt­ing towards defla­tion.  As long as the need to delever­age bal­ance sheets exceeds the avail­abil­ity of credit, assets could con­tinue to deflate. There­fore, our sense is that the Feds first QE move is pre­lim­i­nary, and primes the pump for more QE in the next 6–12 months.

So, is the Fed's move a sig­nal that we are at an infla­tion­ary or defla­tion­ary inflec­tion point for the moment? Watch the debate unfold between Hugh Hendry, and Liam Hal­li­gan. Then you decide...

We like to err on the side of rea­son and validity.

At the moment the polit­i­cal will to carry out this process fully, and fur­ther, faces sig­nif­i­cant oppo­si­tion, espe­cially to the idea of bail­ing out Wall Street and the US bank­ing sys­tem, and is hob­bled by the pub­lic out­cry against the AIG bonuses débâ­cle, and gov­ern­ment has done as much as it can to suit­ably con­vince con­stituents of what it needs to do, for now. Today, the US Trea­sury announces a $1-trillion 'public-private invest­ment pro­gramme' to absorb the toxic assets into what amounts to a 'bad bank.' One of the big issues is the com­pe­tence of those in the pri­vate sec­tor (which is meant to be a checks and bal­ances com­po­nent) to price these assets. Another issue remains whether or not this will get banks to release their choke­hold on credit and resume busi­ness as usual in the lend­ing busi­ness. The White House is expected to fol­low up this week with its com­pre­hen­sive finan­cial plan. This administration's pub­lic rela­tions pro­gramme has reached a crescendo; 60 Min­utes, Jay Leno. Will they be able to finally stop talk­ing and actu­ally get down to work on it?

Does Gei­th­ner have the polit­i­cal ammu­ni­tion to take fur­ther mea­sures? Gei­th­ner must con­vince the mar­ket and con­stituents that this move will com­ple­ment the Fed's quan­ti­ta­tive easing.

From today's Globe and Mail: Nobel Prize-winning econ­o­mist and Prince­ton Uni­ver­sity pro­fes­sor Paul Krug­man blasted the strat­egy as a rehash of for­mer trea­sury sec­re­tary Henry Paulson's dis­cred­ited solu­tion to the bank­ing cri­sis, first pro­posed six months ago. "It's not new; it's just another ver­sion of an idea that keeps com­ing up and keeps being refuted," Prof. Krug­man wrote over the week­end on his New York Times blog.

"It's just hor­ri­fy­ing that [U.S. Pres­i­dent Barack] Obama — and yes, the buck stops there — has decided to base his finan­cial plan on the fan­tasy that a bit of finan­cial hocus-pocus will turn the clock back to 2006."

The only way out of the bank­ing cri­sis is for the gov­ern­ment to offer a sweep­ing guar­an­tee of prob­lem debts and to seize con­trol of banks with too few assets to cover their debts, Prof. Krug­man argued.

The cur­rent cri­sis, he argued, isn't just a panic, but a fun­da­men­tal realign­ment of a finan­cial sys­tem that fool­ishly bet big that house prices and con­sumer debt would con­tinue ris­ing forever.

For these rea­sons, QE and other mea­sures will be a grad­ual process and could work, but only if tax­pay­ers are will­ing to be sad­dled with the burden.

Tags: Balance Sheet, Balance Sheets, Ben Bernanke, Bill Gross, Bnp Paribas, Cdos, Collapse, Covenants, Debt Reduction, Debtors, Distressed Assets, Domestic Currency, End Result, Feds, Gap, Gold, Gold Bullion, Hugh Hendry, Last Autumn, Last September, Lehman Brothers, Lows, Market Assets, Mortgage Backed Securities, Nuclear Option, Printing Money, Printing Press, Qe, Redeker, Stocks Bonds, Stop Gap, Strong Dollar, Treasury Yields, Us Treasury Bonds, Vimeo
Posted in Bonds, Commodities, Credit Markets, Economy, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook | Comments Off

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

Sunday, March 22nd, 2009

Phew — what a week! What an announcement!

The Fed­eral Open Mar­ket Com­mit­tee (FOMC) on Wednes­day left the Fed funds range unchanged at zero to 0.25%, but stunned the finan­cial mar­kets with an announce­ment that it would pur­chase up to $300 bil­lion in longer-term Trea­suries over the next six months.

Act­ing boldly in an attempt to get the econ­omy breath­ing again, the pol­icy board also com­mit­ted to pur­chas­ing up to an addi­tional $750 bil­lion of agency mortgage-backed secu­ri­ties, bring­ing its total pur­chases of these secu­ri­ties to up to $1.25 tril­lion this year, as well as a fur­ther $100 bil­lion in agency debt.

The objec­tive of pur­chas­ing Trea­suries is to orches­trate a reduc­tion in long-term rates in the expec­ta­tion that these lower rates would fil­ter through to mort­gage rates and other pri­vate sec­tor loans. The aver­age 30-year fixed-rate mort­gage fell to 4.98% on Thurs­day, down from 5.47% in early Decem­ber and a high of 6.46% in mid-October (see Fred­die Mac’s weekly survey).

“They’re call­ing it ‘The Rambo Fed‘,” said Richard Rus­sell (Dow The­ory Let­ters). “Bernanke is not fool­ing around any longer. He’s play­ing all his cards. He’s going to put a floor under hous­ing and boost asset prices in an all-out attack on the bear mar­ket. Bernanke will in no way accept defla­tion. The Fed will go all out in print­ing Fed­eral Reserve Notes in its mas­sive assault on defla­tion. Bernanke will accept a col­laps­ing dol­lar rather than a repeat of the Great Depression.”

“These actions are high-quality bond-friendly and dollar-unfriendly,” com­mented Bill Gross of Pimco (via Reuters). “To the extent that they are suc­cess­ful and Trea­sury efforts match these efforts, cer­tain risk assets may ben­e­fit as well, although their ulti­mate prices will reflect the abil­ity of gov­ern­ment to suc­cess­fully reflate.”

On the announce­ment, the yield on the US ten-year Trea­sury Note recorded its sharpest fall since the Wall Street crash of 1987, the US dol­lar suf­fered its biggest weekly loss for almost 25 years, gold bul­lion surged by more than $80 at one stage, and oil and base met­als gained handsomely.

The per­for­mance of the major asset classes is sum­ma­rized by the chart below, cour­tesy of StockCharts.com.

Stock mar­kets ini­tially rose strongly on the Fed’s move to revive the econ­omy, adding to the gains of the rally that com­menced on March 10. Although stocks suc­cumbed to profit-taking towards the close, indices nev­er­the­less man­aged to reg­is­ter a sec­ond straight week of gains — the first such stretch since May 2008 in the case of the US bourses.

Else­where in the world stocks also per­formed strongly, with the MSCI World Index gain­ing 4.4% (YTD –14.2%) and the MSCI Emerg­ing Mar­kets Index ahead by 4.7% (YTD –2.5%). Returns ranged from +17.7% in the case of Roma­nia to –5.6% for Bermuda. The Shang­hai Com­pos­ite Index (+7.2%) had another solid week and remains at the top of the field for the year to date with a 25.0% gain in US dol­lar terms. (Click here to access a com­plete list of global stock mar­ket move­ments, in local cur­rency terms, as sup­plied by Emegin­vest.)

As far as US exchange-traded funds (ETFs) are con­cerned, John Nyaradi (Wall Street Sec­tor Selec­tor) reports that the strongest sec­tors this week were energy, com­modi­ties and emerg­ing mar­kets. Lead­ers included SPDR S&P Oil and Gas Explo­ration (XOP) (+7.6%), Pow­er­Shares Com­mod­ity Track­ing Index (DBC) (+9.4%) and iShares MSCI South Korea Index (EWY) +7.5%. On the other end of the per­for­mance spec­trum Real Estate Invest­ment Trust (REIT) stocks had a tor­rid time, with SPDR DJ Wilshire REIT (RWR) los­ing 12.3% and Van­guard REIT (VNQ) down by 10.3%.

Notwith­stand­ing sup­ply con­cerns and a US bud­get deficit expected to hit $1.8 tril­lion this year, gov­ern­ment bond yields around the globe declined as the US cen­tral bank joined the Bank of Eng­land, the Bank of Japan and the Swiss National Bank in a pol­icy of quan­ti­ta­tive eas­ing. Yields of 10-year Trea­suries and Bunds were down by 22 and 5 basis points respec­tively on the week. How­ever, the yield on the 10-year Gilt rose by 7 basis points even as the Bank of Eng­land con­tin­ued to buy long-dated bonds.

“… I think the US gov­ern­ment bond mar­ket is a dis­as­ter wait­ing to hap­pen for the sim­ple rea­son that the require­ments of the gov­ern­ment to cover its fis­cal deficit will be very, very high,” said Marc Faber in a CNBC inter­view. “There will be a time when the Fed­eral Reserve will have to increase inter­est rates to fight infla­tion, and it will be reluc­tant to do so because the cost of ser­vic­ing gov­ern­ment debt will rise substantially.”

Not sur­pris­ingly, the US dol­lar got whacked. Accord­ing to Bespoke, the US Dol­lar Index had its third biggest one-day decline (-2.69%) on Wednes­day since daily pric­ing started back in 1970. The green­back broke below its 50-day mov­ing aver­age and short-term uptrend, but is still trad­ing above its 200-day mov­ing aver­age and longer-term uptrend. Given the Fed’s “nuclear” strat­egy, fur­ther dam­age appears likely.

Source: StockCharts.com

In the expec­ta­tion that the Fed’s print­ing of mas­sive amounts of money will stoke infla­tion­ary pres­sures, Trea­sury Inflation-protected Secu­ri­ties (TIPS) surged to a level last seen in Octo­ber 2009, as shown by the per­for­mance of iShares TIPS Bond ETF (TIP).

Source: StockCharts.com

Bernanke’s “inflate or die” approach also caused gold bul­lion to shine. After hav­ing traded below $884 prior to the Fed’s announce­ment, the yel­low metal rose sharply to $967 before eas­ing back to close the week at $952.

Com­modi­ties ben­e­fited as the Fed’s announce­ment saw the US dol­lar nose-diving, with West Texas Inter­me­di­ate Crude (+10.7%) ris­ing above $50 for the first time since Novem­ber. Sim­i­larly, cop­per touched a four-month high as the price breached $4,000 a met­ric ton.

Next, a tag cloud of al the arti­cles I read dur­ing the past week. This is a way of visu­al­iz­ing word fre­quen­cies at a glance. Key words such as “bank”, “mar­ket”, “econ­omy”, “Fed” and “gov­ern­ment” fea­tured promi­nently, whereas “China” is also attract­ing more atten­tion by the week.

Turn­ing to the stock mar­ket again, the 800 level on the S&P 500 Index needs to be exceeded for stocks to make fur­ther head­way. It not only rep­re­sents a 50% retrace­ment of the January/March decline, but is also the resis­tance level of the two-month down­trend and the 50-day mov­ing average.

Source: StockCharts.com

The key chart lev­els for the major US indices are pro­vided in the table below.

Kevin Lane, tech­ni­cal ana­lyst of Fusion IQ, said: “… we con­tinue to view this cur­rent rally as hav­ing legs with maybe another 10–15% up from present lev­els. How­ever, ulti­mately we think this rally will fade and we will get a retest of the recent lows (check the his­tory books, we almost always get a retest). How the mar­ket han­dles that retest will tell us a lot with regard to the longer-term picture.”

“While our sense is that the rally has more to go on the upside in the weeks to come, we feel it is still too early to say the final bot­tom has been put in place,” added Jef­frey Saut of Ray­mond James.

Back to the ven­er­a­ble Richard Rus­sell, who said: “The rally is run­ning into some hes­i­ta­tion. Trans­ports have been down four out of the last six ses­sions. When the Aver­ages dis­agree, it’s often a sign of dis­tri­b­u­tion. Let the mar­ket have its fun. As far as I’m con­cerned, the pri­mary trend of the stock mar­ket remains bear­ish although the sec­ondary trend has turned up. When a mar­ket becomes too over­sold, the sec­ondary cor­rec­tion acts like the ‘release valve’ in an over-heated boiler. Some of the steam escapes, and they call that an upward correction.

“Often, these explo­sive cor­rec­tions look bet­ter than the real thing, Fur­ther­more, they can prove costly to both bulls and bears. Cor­rec­tions in a bear mar­ket are always tricky and decep­tive, and I’ve learned not to fool with them.”

In the extreme bear­ish camp, Nouriel Roubini shared the fol­low­ing caveat emp­tor (via Tech Ticker, Yahoo Finance): “Dear investors, do enjoy this dead cat bounce and bear mar­ket sucker’s rally … don’t wait too long until you jump ship while the finan­cial Titanic hits the next finan­cial ice­berg: you may get squeezed and crashed in the rush to the lifeboats.”

The Achilles heel of the stock mar­ket is the uncer­tainty regard­ing cor­po­rate earn­ings. The graph below, cour­tesy of Chart of the Day, illus­trates that 12-month, as-reported S&P 500 real earn­ings have declined over 80% over the past 18 months, mak­ing this by far the largest decline on record (the data go back to 1936). “Dur­ing Q4 2008, the S&P 500 came in with its first neg­a­tive earn­ings quar­ter ever and the amount lost dur­ing the quar­ter was more than the index has ever earned dur­ing a sin­gle quar­ter,” said Chart of the Day.

Also, it is impor­tant that con­fi­dence be restored for the recent gains to be more endur­ing. The chart below shows the strong his­tor­i­cal rela­tion­ship between the US Con­sumer Con­fi­dence Index and the 12-month change in the S&P 500 Index. One needs to take a view on the direc­tion of con­fi­dence, but should it for argument’s sake pick up from 30 to 40 by the end of June, the rela­tion­ship indi­cates a S&P 500 decline of 30–35% in year-ago terms. Using end-of-quarter prices, this means an Index at between 832 and 896.

Source: Plexus Asset Man­age­ment (based on data from I-Net Bridge)

Tak­ing one step at a time, the next hur­dle is the release of poten­tially ugly earn­ings and guid­ance announce­ments in April. By then a clearer pic­ture should also start emerg­ing on the results of the Fed’s med­i­cine and whether credit mar­kets are thaw­ing and con­fi­dence is begin­ning to improve. Very selec­tive stock pick­ing is in order, but tread care­fully otherwise.

For more dis­cus­sion about the direc­tion of stock mar­kets, also see my recent posts “Video-o-rama: Fed employs nuclear option” and “Tech­ni­cal Talk: Rally con­tin­ues …“. (And do make a point of lis­ten­ing to Don­ald Coxe’s web­cast of March 20, which can be accessed from the side­bar of the Invest­ment Post­cards site.)

Invi­ta­tion
I will again be embark­ing on a long-haul flight from Cape Town to the US in a week’s time. My final des­ti­na­tion is San Diego where, amongst oth­ers, I will be attend­ing a Richard Rus­sell Trib­ute Din­ner. How­ever, in order to catch up with busi­ness asso­ciates and “feel” the East Coast eco­nomic tem­per­a­ture, I have arranged to con­nect via JFK and will be spend­ing Tues­day, March 31 in New York City.

I am keen to meet as many of the Invest­ment Post­cards read­ers as pos­si­ble on the one day I will be in the Big Apple and have sched­uled an infor­mal get-together in mid­town Man­hat­tan from 17:30 to 19:00 that after­noon. If you are inter­ested in join­ing me for a drink, and “putting a face to the name”, please get in touch through the “com­ments” or “con­tact” sec­tions of the site so that that I can send the details to you.

Econ­omy
“Busi­nesses remain darkly pes­simistic across the globe. Sen­ti­ment hit a new record low in Asia last week and is close to record lows every­where else,” said the lat­est Sur­vey of Busi­ness Con­fi­dence of the World con­ducted by Moody’s Economy.com. “Hir­ing inten­tions have taken a decided turn for the worse in recent weeks and sug­gest that there has been no let-up in the mas­sive global lay­offs and ris­ing unem­ploy­ment in March.”

Con­fi­dence is very poor across all indus­tries, par­tic­u­larly in man­u­fac­tur­ing, where it has never been as bleak. For exam­ple, Euro­zone man­u­fac­tur­ing activ­ity con­tin­ued to plum­met in Jan­u­ary, falling by 3.5% from the pre­vi­ous month, when it dropped by a revised 2.7%. In year-ago terms it fell by 17.3% — the steep­est fall on record.

Source: Moody’s Economy.com

As shown by Rebecca Wilder (News N Eco­nom­ics), retail sales are like­wise ane­mic around the world.

The World Bank has reduced its 2009 growth fore­cast for China from 7.5% to 6.5%, but indi­cated that the country’s econ­omy was show­ing “early signs” of sta­bi­liza­tion as government-sponsored invest­ment mit­i­gated the neg­a­tive impact of con­tract­ing exports. “In an era when exports may con­tinue to shrink due to an exter­nal demand col­lapse and con­sump­tion may prove dif­fi­cult to stim­u­late as defla­tion has arrived, fixed asset invest­ment cham­pi­oned by the gov­ern­ment would be vital for China’s eco­nomic growth this year,” said US Global Investors.

“Although cor­po­rate sav­ings played a more impor­tant role in financ­ing invest­ment than bank loans in the recent cycle, credit expan­sion, which has accel­er­ated rapidly since Decem­ber, remains a key dri­ver for pub­lic sec­tor invest­ment which is likely to dom­i­nate this year.”

It hardly comes as a sur­prise that the Inter­na­tional Mon­e­tary Fund has cut its fore­cast for global growth this year from +0.5%/-0.5% to –0.5%/-1.0%. Accord­ing to CEP News, the report said Japan’s econ­omy will con­tract by 5.8% in 2009, that of the US by 2.6% and the Eurozone’s by 3.2%. In 2010, the US and Euro­zone are expected to see ane­mic growth, and the Japan­ese econ­omy is fore­cast to see a mild annual con­trac­tion in GDP.

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.)

March 20
• None

March 19
• Index of Lead­ing Indi­ca­tors — con­tin­ued con­trac­tion of eco­nomic activ­ity
• Job­less claims — new high for con­tin­u­ing claims and insured unem­ploy­ment rate

March 18
• Fed adopts more aggres­sive mea­sures to fix the credit machine and facil­i­tate work­ing of the econ­omy
• Higher gas prices mostly respon­si­ble for sharp increase in Con­sumer Price Index
• Cur­rent account deficit shrinks as imports fall

March 17
• Multi-family starts lift total hous­ing starts; recov­ery in home build­ing not there yet
• Core whole­sale prices show mod­er­at­ing trend

March 16
• Fac­tory pro­duc­tion remains weak, but pace of decline shows mod­er­a­tion
• Home Builders Sur­vey shows flick­er­ing signs of stability

“In sum, although the econ­omy remains mired in a severe reces­sion, we have seen noth­ing of late to dis­suade us from our fore­cast of recov­ery get­ting under way in the fourth quar­ter of this year. In fact, what we have seen of late increases our con­fi­dence in the fore­cast,” con­cluded Paul Kas­riel (North­ern Trust).

Not dis­put­ing the down­ward momen­tum in eco­nomic data, Binit Panel, econ­o­mist at Gold­man Sachs, asked in a recent research report (via the Finan­cial Times ) “what could go ‘right’ for the world econ­omy”. He listed a num­ber of devel­op­ments that might be poten­tial bright spots.

“First, a sta­bi­liza­tion in con­sumer demand in the US — and an improve­ment in the UK and Germany.

“Sec­ond, an early end to the US hous­ing down­turn and a sta­bi­liza­tion in the UK hous­ing market.

“Third, the suc­cess­ful oper­a­tion of the Fed­eral Reserve’s term asset-backed secu­ri­ties loan facil­ity, or Talf.

“Fourth, greater inter­na­tional co-operation — for exam­ple at the forth­com­ing G20 meeting.

“Fifth, bet­ter signs from the Bric (Brazil, Rus­sia, India and China) emerg­ing mar­ket economies — in par­tic­u­lar China.”

Inter­est­ingly, after months of bleak eco­nomic news, an increas­ing pro­por­tion of Amer­i­cans now say they are hear­ing a mix of good and bad eco­nomic news, while fewer say they are hear­ing mostly bad news. “As has been the case for the last few months, very few say they are hear­ing mostly good news about the econ­omy,” reported The Pew Research Cen­ter for the Peo­ple & the Press.

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

Source: Yahoo Finance, March 20, 2009.

In addi­tion to Fed Chair­man Ben Bernanke’s tes­ti­mony to the House Finan­cial Ser­vices Com­mit­tee (Tues­day, 24 March), 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, March 20, 2009.

“You are too con­cerned about what was and what will be. There is a say­ing: yes­ter­day is his­tory, tomor­row is a mys­tery, but today is a gift. That is why it is called the present,” said Oog­way (Kung Fu Panda — hat tip: Charles Kirk). These words ring espe­cially true as I mourn the sad loss of Ben­net Sedacca. He was not only a bril­liant strate­gist and reg­u­lar con­trib­u­tor to the Invest­ment Post­cards site, but also a dear per­sonal friend. Rest in peace, Bennet.

That’s the way it looks from Cape Town.

The Wall Street Jour­nal: Obama on The Tonight Show with Jay Leno
“Pres­i­dent Obama took to Jay Leno’s stage and com­pared life in Wash­ing­ton to ‘Amer­i­can Idol’, where ‘everybody’s got an opin­ion’. The appear­ance on ‘The Tonight Show with Jay Leno’ was itself a sign of just how much the cul­ture has changed in Amer­ica, where com­edy and pol­i­tics often mix.”

Source: The Wall Street Jour­nal, March 19, 2009.

CEP News: IMF slashes global growth fore­cast for 2009
“The Inter­na­tional Mon­e­tary Fund cut its fore­cast for global growth in 2009. Accord­ing to the report released on Thurs­day, global growth will con­tract between 0.5% and 1.0% this year and expand between 1.5% and 2.5% in 2010.

“The report said Japan’s econ­omy will con­tract 5.8% in 2009, the US econ­omy by 2.6%, and the euro zone econ­omy by 3.2%. In 2010, the US and euro zone are expected to see ane­mic growth, and the Japan­ese econ­omy is fore­cast to see a mild annual con­trac­tion in GDP.

“Going for­ward, the IMF said essen­tial action includes addi­tional eas­ing in mon­e­tary pol­icy, and more con­certed action to steady mar­kets — namely deal­ing with toxic bank assets.

“For its part, the US res­cue plan was crit­i­cized by the IMF for lack­ing detail.

“Fur­ther­more, there is a seri­ous risk of defla­tion in some advanced economies, the report said. As for emerg­ing economies, there is a ‘seri­ous risk’ they will not have fund­ing, the report added.

“At the G20 meet­ing on April 2 in Lon­don, world nations are expected to con­sider up to $500 bil­lion in addi­tional fund­ing for the IMF in order to aid emerg­ing economies.”

Source: Megan Ain­scow, CEP News, March 19, 2009.

CEP News: FOMC keeps rates unchanged, announces pur­chase of $300 bil­lion in Trea­suries
“The Fed­eral Reserve’s mon­e­tary pol­icy board left the key inter­est rate unchanged, as expected, within a tar­get range of zero to 0.25% on Wednes­day, but announced it will pur­chase up to $300 bil­lion in longer-term Trea­suries over the next six months.

“The Fed­eral Open Mar­ket Com­mit­tee also com­mit­ted to pur­chas­ing an addi­tional $100 bil­lion in agency debt, and up to an addi­tional $750 bil­lion of agency mortgage-backed secu­ri­ties, bring­ing its total pur­chases of these secu­ri­ties to up to $1.25 tril­lion this year.

“‘Although the near-term eco­nomic out­look is weak, the Com­mit­tee antic­i­pates that pol­icy actions to sta­bi­lize finan­cial mar­kets and insti­tu­tions, together with fis­cal and mon­e­tary stim­u­lus, will con­tribute to a grad­ual resump­tion of sus­tain­able eco­nomic growth,’ the state­ment reads.

“The FOMC said it con­tin­ues to ‘employ all avail­able tools to pro­mote eco­nomic recov­ery and to pre­serve price sta­bil­ity’, a com­ment iden­ti­cal to the Jan­u­ary state­ment. The state­ment also men­tioned that ‘eco­nomic con­di­tions are likely to war­rant excep­tion­ally low lev­els of the fed­eral funds rate for an extended period’, also unchanged from last month.

“Absent from this month’s state­ment is the assess­ment that ‘con­di­tions in finan­cial mar­kets have improved’.

“The com­mit­tee said it expects infla­tion will remain sub­dued in light of increas­ing eco­nomic slack in the US and abroad. ‘More­over, the Com­mit­tee sees some risk that infla­tion could per­sist for a time below rates that best fos­ter eco­nomic growth and price sta­bil­ity in the longer term,’ the state­ment said.

“The com­mit­tee also said it will con­tinue to ‘care­fully mon­i­tor the size and com­po­si­tion of the Fed­eral Reserve’s bal­ance sheet’ in light of evolv­ing finan­cial and eco­nomic developments.”

Source: Stephen Huebl, CEP News, March 18, 2009.

Reuters: Pimco’s Gross — unclear why Fed moved Wednes­day
“Pimco’s Bill Gross said it is unclear what was behind the Fed­eral Reserve’s sur­prise deci­sion on Wednes­day to buy up to $300 bil­lion in Treasuries.

“The move came as the gov­ern­ment pre­pares its lat­est efforts to resus­ci­tate credit mar­kets with a pro­gram aimed at con­sumer and small busi­ness lending.

“But that pro­gram faces an uphill bat­tle given the back­drop of pub­lic out­rage over the fact that tax­payer money will be used to pay $165 mil­lion in bonuses for exec­u­tives at bailed-out insurer Amer­i­can Inter­na­tional Group.

“As a result, the shock move by the Fed raises the ques­tion of whether the imme­di­ate effect of buy­ing Trea­suries was deemed nec­es­sary in the event these pro­grams fail to pro­duce credit mar­ket improve­ment as quickly as hoped.

“‘It’s unclear whether today’s pol­icy changes by the Fed are coör­di­nated with the Trea­sury,’ Gross, co-chief invest­ment offi­cer at Pacific Invest­ment Man­age­ment Co, told Reuters in an inter­view on Wednesday.

“The uproar over AIG’s reten­tion bonuses are seen by many hedge funds, pri­vate equity and big money man­agers as sig­nif­i­cantly rais­ing the risks asso­ci­ated with part­ner­ing with the gov­ern­ment on its Term Asset-Backed Secu­ri­ties Loan Facil­ity, or TALF, as well as the Treasury’s public-private plan to buy toxic assets from ail­ing banks.

“An irate US Con­gress, fum­ing over AIG’s bonus pay­ments to exec­u­tives after the insurer was bailed out three times using tax­payer dol­lars, are more likely than ever to change the rules of engage­ment — pos­si­bly retroac­tively — and that is unnerv­ing money man­agers at hedge funds, pri­vate equity firms and banks on the eve of the long-delayed launch of the government’s newest res­cue efforts.

“On Thurs­day, appli­ca­tions from investors are due to par­tic­i­pate in the Trea­sury and Fed’s $1 tril­lion TALF program.

“Gross, who helps over­see more than $800 bil­lion at Pimco, said the econ­omy and, by exten­sion, the finan­cial mar­kets ‘needed a sub­stan­tial shot of adrenaline’.

“‘The Fed’s bal­ance sheet may approach $3.5 tril­lion — nearly a 100% addi­tion — which will help sub­sti­tute for the pri­vate sector’s delever­ag­ing over the past 12 to 18 months,’ Gross said.

“‘These actions are high-quality bond-friendly and dol­lar unfriendly,’ Gross said.

“‘To the extent that they are suc­cess­ful and Trea­sury efforts match these efforts, cer­tain risk assets may ben­e­fit as well, although their ulti­mate prices will reflect the abil­ity of gov­ern­ment to suc­cess­fully reflate.’”

Source: Jen­nifer Ablan, Reuters, March 18, 2009.

Bill King (The King Report): Why has Ben opted for nuclear option?
“Just a cou­ple days ago, Ben Bernanke said the econ­omy would bot­tom this year. Citi and GM don’t need any more tax­payer funds. Banks have earn­ings year to date; and stocks are ral­ly­ing. So why has Ben opted to employ the nuclear option and com­mence a Weimar Watch? In a word: China

“We thought the main FOMC issue would be its mon­e­ti­za­tion dis­po­si­tion. But we did not think that Ben would play his final option now. Either some­thing sys­temic is ter­ri­fy­ing Ben and the solons or China, as the US’s Cred­i­tor in Chief, told Hillary the cold hard facts of debtor life.

“And when the US didn’t respond fast enough, China pub­licly expressed their con­cern about US debt.

“The US can­not jump through the prover­bial hoop and buy bonds from China. But it can mon­e­tize bonds in the mar­ket, which helps China indi­rectly, and directly if China hits the Fed’s syn­di­cate bid.

“How­ever, China can­not be happy that the dol­lar tanked. This not only nul­li­fies much of the bond mar­ket rally in yuan terms, it also strength­ens the yuan, which will fur­ther crimp China’s exports.”

Source: Bill King, The King Report, March 18, 2009.

BCA Research: The Fed gets more aggres­sive
“The FOMC’s increas­ingly aggres­sive actions high­light a deep con­cern about the eco­nomic out­look. The Fed will run the print­ing presses until it gets results.

“The FOMC remains very con­cerned about the eco­nomic and finan­cial out­look. The Fed’s bal­ance sheet recently has shrunk mod­estly, but that does not reflect any delib­er­ate actions. The Fed’s sup­port of com­mer­cial paper has unwound as activ­ity in that mar­ket has declined. The Fed’s bal­ance sheet should start to grow again as the TALF pro­gram ramps up.

“More­over, the deci­sion to boost pur­chases of agency debt and mort­gages, and to start directly buy­ing Trea­surys, sug­gests that the Fed’s bal­ance sheet will mush­room in the months ahead. The key point is that mon­e­tary pol­icy will remain highly accom­moda­tive and proac­tive until there are signs that finan­cial inter­me­di­a­tion is work­ing more effec­tively. The Fed’s actions should be pos­i­tive for both stocks and bonds.”

Source: BCA Research, March 19, 2009.

Asha Ban­ga­lore (North­ern Trust): The Fed’s announce­ment — indi­ca­tors to track
“The Fed’s inten­tion to pur­chases mort­gage backed secu­ri­ties, agency debt, and long dated Trea­suries amount­ing to the sum of $1.15 tril­lion is an aggres­sive move. This fol­lows the plethora of pro­grams in place and the $1 tril­lion TALF pro­gram, the first dis­burse­ment of funds under TALF will take place next week.

“How would we track the impact of this announce­ment and other pro­grams in place? The imme­di­ate impact should be vis­i­ble in credit mar­kets as we have seen since the cur­rent cri­sis com­menced in August 2007.

“The chart below illus­trates the recent behav­ior of the fed­eral funds rate, 10-year Trea­sury note yield and the Moody’s Aaa cor­po­rate bond yield. The 10-year Trea­sury note yield closed at 2.51% on March 18 after the FOMC pol­icy state­ment was pub­lished from 3.00% ear­lier in the day. A state­ment on the New York Fed’s web­site indi­cates that the Fed’s pur­chase will focus on the 2– to 10-year sec­tor of the nom­i­nal Trea­sury curve. The pur­chases will be con­ducted through the Fed’s pri­mary deal­ers 2–3 times per week. Fur­ther details will be avail­able early next week and the plan is to hold the first pur­chase oper­a­tion late next week. The objec­tive of the Fed’s explicit pur­chase of long-dated Trea­suries is to bring down bor­row­ing costs which in turn should be reflected in lower yields of other pri­vate sec­tor secu­ri­ties in the weeks ahead.

“The increase in the pur­chase of mortgage-backed secu­ri­ties is focused on dri­ving down mort­gage rates. The Fed has been suc­cess­ful in this regard since the pro­gram was oper­a­tional from early-January 2009. As of the week ended March 19, the 30-year fixed rate on mort­gages was 4.98%, down from 5.47% in early-December and a high of 6.46% in mid-October.

“The TALF pro­gram is aimed at unlock­ing the frozen con­sumer and small busi­ness loan sec­tor. The accom­plish­ments of this pro­gram will be vis­i­ble in the inter­est spreads with regard to asset-backed secu­ri­ties such as those of credit cards and autos. These spreads have nar­rowed since their peaks in late-2008. Addi­tional improve­ments in these spreads would indi­cate that the Fed’s pro­gram is work­ing in the desired direc­tion. These actions com­bined with the fis­cal pol­icy stim­u­lus pack­age are expected to get the econ­omy back on track.”

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

CEP News: Fed expands col­lat­eral for TALF
“The Fed expanded the secu­ri­ties it will accept for its short-term lend­ing pro­gram just hours before the revamped plan was set to begin.

“The pro­gram is designed to free up cap­i­tal for lend­ing by pur­chas­ing secu­ri­ties backed by high-quality assets from finan­cial insti­tu­tions. The Fed plans to spend about $1 tril­lion through the program.

“In a release on Thurs­day, the Fed said it will accept secu­ri­ties backed by mort­gage ser­vic­ing advances, secu­ri­ties backed by loans or leases relat­ing to busi­ness equip­ment, and secu­ri­ties backed by floor­plan loans.

“‘The addi­tional new asset-backed secu­ri­ties cat­e­gories com­ple­ment the con­sumer and small busi­ness loan cat­e­gories that were already eli­gi­ble,’ the Fed said in a press release.”

Source: Adam But­ton, CEP News, March 19, 2009.

Bloomberg: Ross says TALF will help end reces­sion “more quickly”
“Bil­lion­aire investor Wilbur Ross talks with Bloomberg’s Matt Miller in New York about auto sup­plier aid and the Term Asset-Backed Secu­ri­ties Loan Facil­ity. Auto sup­pli­ers will get as much at $5 bil­lion in US Trea­sury aid to avoid a col­lapse that would crip­ple the domes­tic indus­try, includ­ing fed­er­ally funded Gen­eral Motors Corp and Chrysler.”

Source: Bloomberg, March 19, 2009.

BBC News: US deficit “to hit $1.8 tril­lion”
“The US bud­get deficit will hit $1.8 tril­lion this year, a record amount, accord­ing to US Con­gress estimates.

“The White House said the pre­dic­tion by the Con­gres­sional Bud­get Office (CBO) would not alter Pres­i­dent Barack Obama’s pol­icy agenda. Nor would it affect its goal to cut the deficit in half by 2013, it added.

“The mas­sive deficit fore­casts come after Pres­i­dent Obama’s $3.55 tril­lion bud­get plan for the 2010 finan­cial year, which includes big spend­ing pro­grams to address health­care, edu­ca­tion and curb green­house gas emissions.

“The CBO also issued gloomy fore­casts for the US econ­omy, pro­ject­ing that it will con­tract 3% in 2009 before grow­ing 2.9% next year and expand­ing 4% in 2011.”

Source: BBC News, March 20, 2009.

CNBC: Mered­ith Whit­ney — credit crunch & finan­cials
“Weigh­ing in on con­sumer credit and why mark-to-market will not really help banks, with Mered­ith Whit­ney, Mered­ith Whit­ney Advi­sory Group CEO.”

Source: CNBC, March 17, 2009.

Nouriel Roubini (Forbes): United States of Ponzi — behold the Mad­off in the mir­ror
“A reporter con­tacted me recently with the fol­low­ing question:

“‘I am a reporter, and I am doing a story on Bernard Madoff’s life after plead­ing guilty. As part of this, I was won­der­ing if you could com­ment on what sig­nif­i­cance he will have in the his­tory of this period. Will he rep­re­sent more than a scam­ster who stole a lot of money from a lot of peo­ple? As Bernie Ebbers and Ken Lay came to embody cor­po­rate greed and deceit, what will Mad­off symbolize?’

“Here is my answer fleshed out in full:

“Amer­i­cans lived in a ‘Made-off’ and Ponzi bub­ble econ­omy for a decade or even longer. Mad­off is the mir­ror of the Amer­i­can econ­omy and of its over-leveraged agents: a house of cards of lever­age over lever­age by house­holds, finan­cial firms and cor­po­ra­tions that has now col­lapsed in a heap.

“When you put zero down on your home, and you thus have no equity in your home, your lever­age is lit­er­ally infi­nite and you are play­ing a Ponzi game.

“And the bank that lent you, with zero down, a NINJA (no income, no jobs and assets) liar loan that was interest-only for a while, with neg­a­tive amor­ti­za­tion and an ini­tial teaser rate, was also play­ing a Ponzi game.

“And pri­vate equity firms that did over a $1 tril­lion of lever­aged buy­outs (LBOs) in the last few years with a debt-to-earnings ratio of 10 or above were also Ponzi firms play­ing a Ponzi game.

“A gov­ern­ment that will issue tril­lions of dol­lars of new debt to pay for this severe reces­sion and social­ize pri­vate losses may risk becom­ing a Ponzi gov­ern­ment if — in the medium term — it does not return to fis­cal dis­ci­pline and debt sustainability.

“A coun­try that has — for over 25 years — spent more than income and thus run an end­less string of cur­rent account deficit — and has thus become the largest net for­eign debtor in the world (with net for­eign lia­bil­i­ties that are likely to be over $3 tril­lion by the end of this year) — is also a Ponzi coun­try that may even­tu­ally default on its for­eign debt if it does not, over time, tighten its belt and start run­ning smaller cur­rent account deficits and actual trade surpluses.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, March 19, 2009.

Bespoke: Gei­th­ner gone chat­ter
“Many sto­ries have popped up over the last cou­ple of days about Trea­sury Sec­re­tary Tim Geithner’s job secu­rity. Of course, leave it up to Intrade to release a con­tract on the mat­ter that peo­ple can trade. Intrade cur­rently has two con­tracts allow­ing peo­ple to bet on Geithner’s depar­ture. One is whether he will depart by the end of June, and the other is whether he will depart by the end of 2009. While the con­tracts have been tick­ing up in price lately, traders on Intrade aren’t bet­ting big yet that his depar­ture is immi­nent. The con­tract for Geithner’s depar­ture by the end of June is cur­rently putting the odds at 15%, while the end of the year depar­ture odds are higher at 26%.”

Source: Bespoke, March 18, 2009.

Asha Ban­ga­lore (North­ern Trust): Index of Lead­ing Indi­ca­tors — con­tin­ued con­trac­tion of eco­nomic activ­ity
“The Con­fer­ence Board’s Index of Lead­ing Eco­nomic Indi­ca­tors (LEI) fell 0.4% in Feb­ru­ary, after a revised 0.1% increase in Jan­u­ary (pre­vi­ously reported as a 0.4% increase). On a quar­terly basis, the year-to-year change in the LEI advanced one quar­ter has a strong pos­i­tive cor­re­la­tion with the year-to-year change in real GDP. The January-February aver­age, the proxy for the first quar­ter, declined 3.5% from a year ago, a slightly smaller reduc­tion than the 4.0% drop recorded in the fourth quar­ter of 2008. We are fol­low­ing this indi­ca­tor closely to iden­tify a turn­around in eco­nomic conditions.”

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

Asha Ban­ga­lore (North­ern Trust): Multi-family starts lift total hous­ing starts
“Hous­ing starts increased 22.2% to an annual rate of 583,000 dur­ing Feb­ru­ary, after post­ing dou­ble digit declines for three con­sec­u­tive months. How­ever, the bulk of the increase was from multi-family starts which rose 82.3%, while starts of single-family homes moved up only 1.1% to an annual rate of 357,000.

“Starts of single-family homes are still down 80.5% from the peak in Jan­u­ary 2006.

“The sur­prise strength in hous­ing starts in Feb­ru­ary, which was largely in the volatile multi-family sec­tor, reduces expec­ta­tions of a con­tin­ued recov­ery of home build­ing because single-family starts are the larger and more sta­ble com­po­nent of total hous­ing starts. More­over, the ele­vated inven­tory of unsold homes sug­gests that a robust recov­ery in home build­ing will be pos­si­ble only after there is a sub­stan­tial reduc­tion in the inven­tory of unsold new single-family homes.”

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

Bill King (The King Report): Don’t trust hous­ing starts
“The com­mon excuse for Tuesday’s rally is the surge in condo con­struc­tion that boosted hous­ing starts. PUHLEASE! The wicked win­ter delayed con­struc­tion. More impor­tantly, from where will the jobs, income and financ­ing to buy all the con­dos and homes be derived?

“Also, the spring sell­ing sea­son is com­menc­ing and we don’t know what sea­son­ally adjusted magic was used to craft the numbers.”

Source: Bill King, The King Report, March 18 , 2009.

Asha Ban­ga­lore (North­ern Trust): Cur­rent account deficit shrinks as imports fall
“The cur­rent account deficit of the US econ­omy was $132.8 bil­lion in the fourth quar­ter, down from $181.3 bil­lion in the third quar­ter. Dur­ing 2008, the cur­rent account deficit nar­rowed to $673.3 bil­lion from $731.2 bil­lion in 2007. This is the small­est cur­rent account deficit since 2004.

“The cur­rent account deficit as a per­cent of GDP was 3.7% in the fourth quar­ter of 2008, the low­est since the fourth quar­ter of 2001. On an annual basis, the cur­rent account deficit was 4.7% of GDP, the low­est since 2002. In sum, the cur­rent account deficit has nar­rowed to a sig­nif­i­cant extent.”

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

Asha Ban­ga­lore (North­ern Trust): Higher gas prices mostly respon­si­ble for sharp increase in CPI
“The Con­sumer Price Index (CPI) moved up 0.4% in Feb­ru­ary, fol­low­ing a 0.3% increase in Jan­u­ary. Gains of the energy price index in Jan­u­ary (+1.7%) and Feb­ru­ary (+3.3%) helped to raise the head­line read­ings dur­ing these months. The Labor Depart­ment has indi­cated that about two-thirds of the all items increase was from higher prices for gaso­line. The gaso­line price index increased 8.3% in Feb­ru­ary after a 6.0% jump in Jan­u­ary. The food price mea­sure rose 0.1% in Jan­u­ary and was fol­lowed by a 0.1% drop in Feb­ru­ary. Exclud­ing food and energy, the core CPI has recorded gains of 0.2% in Jan­u­ary and Feb­ru­ary. On a year-to-year basis, the CPI rose 0.2% in Feb­ru­ary after reg­is­ter­ing read­ings close to zero in each of the two prior months. The core CPI increased 1.79% in Feb­ru­ary ver­sus a 1.68% increase in January.”

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

Asha Ban­ga­lore (North­ern Trust): Core whole­sale prices show a mod­er­at­ing trend
“The Pro­ducer Price Index (PPI) for Fin­ished Goods rose only 0.1% in Feb­ru­ary after a 0.8% gain in Jan­u­ary, as the 1.6% drop in food prices off­set the 1.3% jump in energy prices. The core PPI, which excludes food and energy, rose 0.2% in Feb­ru­ary com­pared with the 0.4% increase in the prior month.

“On a year-to-year basis, the fin­ished goods whole­sale price index fell 1.3% and the core PPI rose 4.0%. The core PPI posted a cycle high of 4.7% in Octo­ber 2008.”

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

Bespoke: The com­mod­ity rebate
“In the chart below we have cal­cu­lated the cumu­la­tive daily price change of the major food and energy com­modi­ties in the CRB index (Corn, Soy, Wheat, Cat­tle, Hogs, Oil and Nat­ural Gas) since the begin­ning of 2008. We then mul­ti­plied the changes by the annual per capita con­sump­tion of each item. While this method may over­sim­plify the actual costs, it pro­vides a good idea of how changes in com­mod­ity prices have impacted con­sumers’ wal­lets over the last 15 months.

“In July, when the price of oil and other key com­modi­ties were trad­ing at record highs, the impact of ris­ing prices was trans­lat­ing into an extra $4.77 per Amer­i­can per day ver­sus the start of 2008.

“Ever since then, how­ever, com­modi­ties have crashed back down to earth, result­ing in an effec­tive rebate for con­sumers. As a result, even after the recent rebound in oil prices, the aver­age Amer­i­can is sav­ing $4.10 per day due to lower com­mod­ity prices. While this may not sound like much, mul­ti­plied out over a year, it works out to just under $1,500 per year per indi­vid­ual, and nearly $6,000 per year for a fam­ily of four.”

Source: Bespoke, March 18, 2009.

The Wall Street Jour­nal: Pen­sion bills to surge nation­wide
“Many state and city gov­ern­ments reel­ing from finan­cial woes are about to get whacked again, this time by an unfore­seen increase in their pen­sion bill thanks to mar­ket declines.

“In an effort to stave off tax increases, New Jer­sey law­mak­ers on Mon­day will con­sider a bill that would allow munic­i­pal­i­ties to defer pay­ment of half their annual pen­sion bill, due April 1, for one year. Those towns, coun­ties and schools that opt to defer would face a higher pen­sion bill for years to come.

“Other states and munic­i­pal­i­ties are fac­ing sim­i­larly dif­fi­cult choices. In Penn­syl­va­nia, the state employ­ees and pub­lic teach­ers pen­sion funds both have warned that employer con­tri­bu­tion rates could surge seven-fold from about 4% of pay­roll to 28%, start­ing in 2012. The Detroit police and fire pen­sion plan might have to dou­ble employer con­tri­bu­tion rates to 50% of pay­roll by 2011, accord­ing to the fund’s out­side actuary.

“‘It’s going to be huge show­down’ between tax­pay­ers and pub­lic employ­ees, said Susan Mang­iero, pres­i­dent of Pen­sion Gov­er­nance, a con­sult­ing and research firm in Trum­bull, Conn. ‘The anger is more acute today when peo­ple are feel­ing eco­nomic hardship.’”

Source: Craig Karmin, The Wall Street Jour­nal, March 16, 2009.

CEP News: US House passes bill to take back AIG bonuses
“The US House of Rep­re­sen­ta­tives passed a bill on Thurs­day that will recoup the major­ity of bonuses paid to AIG executives.

“AIG paid out $165 mil­lion in bonuses to exec­u­tives after the com­pany received up to $180 bil­lion, in gov­ern­ment aid, many exec­u­tives whom politi­cians say were respon­si­ble for bring­ing the com­pany to near-collapse.

“The US gov­ern­ment kept the insur­ance giant on a life­line by dump­ing sev­eral multi-billion dol­lar bailouts into it. The US gov­ern­ment now owns 80% of the company.

“The bill passed by the House Thurs­day will impose a 90% tax on any bonuses paid out to exec­u­tives earn­ing $250,000 a year or more work­ing at com­pa­nies given more than $5 bil­lion in gov­ern­ment bailout cash.”

Source: Megan Ain­scow, CEP News, March 19, 2009.

DK Matai (Sil­i­con Val­ley Watcher): The size of deriv­a­tives bub­ble = $190K per per­son on planet
“Accord­ing to var­i­ous dis­tin­guished sources includ­ing the Bank for Inter­na­tional Set­tle­ments (BIS) in Basel, Switzer­land — the cen­tral bankers’ bank — the amount of out­stand­ing deriv­a­tives world­wide as of Decem­ber 2007 crossed USD 1.144 Quadrillion, i.e., USD 1,144 Tril­lion. The main cat­e­gories of the USD 1.144 Quadrillion deriv­a­tives mar­ket were the following:

1. Listed credit deriv­a­tives stood at USD 548 trillion;

2. The Over-The-Counter (OTC) deriv­a­tives stood in notional or face value at USD 596 tril­lion and included:

a. Inter­est Rate Deriv­a­tives at about USD 393+ trillion;

b. Credit Default Swaps at about USD 58+ trillion;

c. For­eign Exchange Deriv­a­tives at about USD 56+ trillion;

d. Com­mod­ity Deriv­a­tives at about USD 9 trillion;

e. Equity Linked Deriv­a­tives at about USD 8.5 tril­lion; and

f. Unal­lo­cated Deriv­a­tives at about USD 71+ trillion.”

Source: DK Matai (via Sil­i­con Val­ley Watcher), Octo­ber 16, 2008.

Fabius Max­imus: A look at the new world — after the down­turn
1. Far less risk-taking in Amer­ica.
2. Our finan­cial sys­tem swings from dis­in­ter­me­di­a­tion to re-intermediation.
3. The gov­ern­ment becomes obvi­ously insol­vent.
4. Gov­ern­ment con­trols not just the risk-free rate of inter­est, but also risk pre­mia.
5. The end of the US dol­lar as the reserve cur­rency.
6. The end of the US empire.
7. The US dol­lar declines in value so that our trade deficit goes away, and we can pay our for­eign debts.

Source: Fabius Max­imus (via RGE Mon­i­tor), March 19, 2009.

CNBC: Trea­surys are “dis­as­ter wait­ing to hap­pen”
“The Fed­eral Reserve has no option but to start buy­ing Trea­surys as the government’s needs for financ­ing are huge, but the gov­ern­ment bond mar­ket is a dis­as­ter in the mak­ing, Marc Faber, edi­tor and pub­lisher of The Gloom, Boom & Doom Report, told CNBC.”

“Fed­eral Reserve pol­i­cy­mak­ers start a two-day meet­ing on Tues­day, weigh­ing options on how to spur lend­ing to help cash-strapped con­sumers kick­start the economy.

“Econ­o­mists expect them to leave rates at zero and look to other ways of boost­ing liq­uid­ity, such as buy­ing gov­ern­ment bonds — a mea­sure which has already been taken by the Bank of England.

“‘Well I think other cen­tral banks have done it already around the world but basi­cally what it amounts to is money print­ing and in fact I don’t think that it will help the bond mar­ket at all in the long run,’ Faber told CNBC’s Mar­tin Soong.

“‘… I think the US gov­ern­ment bond mar­ket is a dis­as­ter wait­ing to hap­pen for the sim­ple rea­son that the require­ments of the gov­ern­ment to cover its fis­cal deficit will be very, very high,’ Faber said.

“‘The Fed­eral Reserve will have to buy Trea­surys, oth­er­wise yields will go up sub­stan­tially,’ he said, adding that as their reserves were dwin­dling, for­eign investors were likely to scale down their purchases.

“But there will be a time when the Fed­eral Reserve will have to increase inter­est rates to fight infla­tion, and it will be reluc­tant to do so because the cost of ser­vic­ing gov­ern­ment debt will rise substantially.

“‘So we’ll go into high infla­tion rates one day,’ Faber said.

“The stock mar­ket is likely to con­tinue its bounce at least for a while, but the out­look is bleak, he added.

“‘I think we may still have a rally (in the S&P) until about the end of April and prob­a­bly then a total col­lapse in the sec­ond half of the year some­times, when it becomes clear that the econ­omy is a total dis­as­ter,’ Faber said.”

Source: CNBC, March 17, 2009.

John Authers (Finan­cial Times): Fed’s shock and awe
“John Authers on mar­ket reac­tion to the Fed­eral Reserve’s deci­sion to buy $300 bil­lion in long-dated Trea­sury bonds.”

Click here for the article.

Source: John Authers, Finan­cial Times, March 18, 2009.

Bespoke: S&P 500 finan­cial sec­tor approaches Novem­ber lows
“It’s hard to believe, but even after the finan­cial sector’s 50%+ rally since March 6th, it is still mar­gin­ally below its clos­ing low of 2008 on Novem­ber 20th. As shown below, the sec­tor is cur­rently at lev­els that have the poten­tial to pro­vide short-term resistance.”

Source: Bespoke, March 19, 2009.

Bespoke: S&P 500 stops dead in its tracks at 50-day mov­ing aver­age
“As shown in the can­dle­stick chart of the S&P 500 below, the index tested and then failed at its 50-day mov­ing aver­age resis­tance this morn­ing. After a gain of nearly 20% off of its lows, the index is expe­ri­enc­ing a bit of a pull­back today. The 50-day is right at the 800 level for the S&P, and if the index can even­tu­ally break through it, it will then act as sup­port instead of an upside barrier.”

Source: Bespoke, March 19, 2009.

Richard Rus­sel (Dow The­ory Let­ters): What are the signs of a final bot­tom?
“Will the evi­dence come from the D-J Aver­ages? I think it might. At the final bear mar­ket bot­tom, we should see:

(1) a dra­matic non-confirmation by either the Indus­tri­als or the Trans­ports (this is what occurred in 1974).

(2) or we might see an extended ‘line’ in the Aver­ages, in which the Aver­ages fluc­tu­ate within a 5% zone for many weeks on low vol­ume. At some point both aver­ages will surge higher on increas­ing volume.

(3) Val­ues — We will see blue chip stocks sell­ing ‘below known val­ues’ with P/E ratios at sin­gle dig­its and the yield on the Dow near 6%.

“In the area of the final bear mar­ket lows, pub­lic atti­tude towards stocks and the stock mar­ket will be black-pessimistic and even angry. Wall Street will be despised and denounced as a scam. Actu­ally, we are begin­ning to see just a bit of that via the highly-publicized debate between Jim Cramer and John Stew­art, in which Stew­art lit­er­ally calls both Cramer and Wall Street a fraud.

“Already the pub­lic is turn­ing against Wall Street, and, of course, the Bernie Mad­off scheme only adds to the pub­lic anger against the ‘crooks of Wall Street’. Already, the ‘buy and hold’ creed (reli­gion?) is being denounced along with the image of stocks as wealth-building vehi­cles. War­ren Buf­fett is being tarred and feath­ered — Berk­shire Hath­away lost bil­lions of dol­lars over the last year, despite Buffett’s cheer-leading role a few months ago when he announced that he was buy­ing stocks.

“Tak­ing it to the present, the big ques­tion is whether we have already seen the bot­tom of the bear mar­ket and whether the recent strength in the mar­ket is the begin­ning of a new bull mar­ket. My opin­ion is that the lat­est rally is part of a bear mar­ket cor­rec­tion — not the begin­ning of a new bull mar­ket. The pri­mary trend was recently re-confirmed as bear­ish when both the Indus­tri­als and the Trans­ports broke to simul­ta­ne­ous new lows.

“One hint as to where we are is that prior to a major low, Lowry’s Sell­ing Pres­sure Index (sup­ply) turns down while their Buy­ing Power Index (demand) leads on the upside. This did not occur at or near the recent lows.”

Source: Richard Rus­sell, Dow The­ory Let­ters, March 16, 2009.

Forbes: Barry Ritholtz on whether the stock mar­ket is near the bottom

Source: Forbes, March 16, 2009.

Richard Bern­stein (Banc of Amer­ica Securities-Merrill Lynch): The best risk-reward poten­tial
“Small-cap stocks have his­tor­i­cally offered the best risk-reward poten­tial to investors, while gold has offered the worst, says Richard Bern­stein, chief invest­ment strate­gist at Banc of Amer­ica Securities-Merrill Lynch.

“He says: ‘Investors often lose sight of longer-term his­tor­i­cal invest­ment results, espe­cially dur­ing short-term peri­ods of extreme volatil­ity and trend­ing markets.

“‘We have inves­ti­gated the true long-term risk/return char­ac­ter­is­tics of stan­dard asset classes.’

“Instead of defin­ing risk as the stan­dard devi­a­tion of returns, Mr Bern­stein defined it as the per­cent­age of the his­tor­i­cal returns that were neg­a­tive. If an asset pro­vided a neg­a­tive return dur­ing five of 25 peri­ods stud­ied, the risk mea­sure would be 20%.

“Mr Bern­stein says longer time hori­zons tend to reduce the prob­a­bil­ity of los­ing money in an invest­ment — although gold appeared to be an exception.

“He said: ‘Gold was the only asset class that gen­er­ated a sig­nif­i­cant pro­por­tion of neg­a­tive returns over 10-year periods.

“‘Small stocks offered the best risk/reward poten­tial, regard­less of time horizon.

“‘With the excep­tion of gold, investors had lit­tle chance of los­ing money in our selected asset classes over 10-year time periods.

“‘Only in the cur­rent bear mar­ket did many equity bench­marks gen­er­ate their first trail­ing 10-year losses for the peri­ods we analysed.’”

Source: Richard Bern­stein, Banc of Amer­ica Securities-Merrill Lynch (via Finan­cial Times, March 18, 2009.

Reuters: China and Rus­sia ques­tion dollar’s reserve sta­tus
“China and other emerg­ing nations back Russia’s call for a dis­cus­sion on how to replace the dol­lar as the world’s pri­mary reserve cur­rency, a senior Russ­ian gov­ern­ment source said on Thurs­day. Rus­sia has pro­posed the cre­ation of a new reserve cur­rency, to be issued by inter­na­tional finan­cial insti­tu­tions, among other mea­sures in the text of its pro­pos­als to the April G20 sum­mit pub­lished last Monday.

“Calls for a rethink of the dollar’s sta­tus as world’s sole bench­mark cur­rency come amid con­cerns about its long-term value as the US Fed­eral Reserve moved to pump more than a tril­lion dol­lars of new cash into the ail­ing econ­omy late Wednesday.

“Rus­sia met rep­re­sen­ta­tives of China, India and Brazil ahead of the G20 finance min­is­ters meet­ing last week, as the big emerg­ing pow­ers seek to up their influ­ence on decision-making glob­ally. Their first ever joint com­mu­niqué did not men­tion a new cur­rency but the source said the issue was discussed.

“‘They (China) did not for­mally put for­ward their posi­tion for the G20 sum­mit but unof­fi­cially they had dis­trib­uted their paper regard­ing the same ideas (the need for the new cur­rency),’ the source told Reuters, speak­ing on con­di­tion of anonymity.

“The source said the Chi­nese paper envis­aged the Inter­na­tional Mon­e­tary Fund’s Spe­cial Draw­ing Rights (SDRs) being first assigned a role of a clear­ing cur­rency on some trans­ac­tions and then grad­u­ally becom­ing the main global reserve cur­rency. ‘They said that the role of reserve cur­rency should be given to SDR,’ the source said.”

Source: Gleb Bryan­ski, Reuters, March 19, 2009.

Glob­al­ists: Skip Amero, bring on Acmetal
“Nobel Lau­re­ate Robert Mundell, the man behind the euro, is back­ing a pro­posal by Kazakh Pres­i­dent Nur­sul­tan Nazarbayev to cre­ate a one world currency.

“That’s quite an endorse­ment for Nazarbayev, who is indis­putably one of the world’s most cor­rupt dic­ta­tors (he’s been run­ning Kaza­khstan since the Soviet era).

“Sup­port­ers of the cur­rency, to be called the acmetal (or akmetal), say the pro­posal ‘holds great promise’.

“But I won­der, as Alan Watt did in his March 12 radio show, ‘Holds great promise for whom?’

“Nazarbayev, speak­ing at an eco­nomic forum in the glitzy new cap­i­tal he has built on the Kazakh steppe, defended his pro­posal for the ‘acmetal’ world cur­rency say­ing it might ‘look kind of funny’ but was not.”

Source: Mark Baard, Glob­al­ists, March 14, 2009.

CNBC: Dr Gloom — choose gold over AIG insur­ance
“Marc Faber, edi­tor & pub­lisher of The Gloom, Boom & Doom Report, a.k.a. Dr Gloom, would rather own gold as an insur­ance pol­icy, than an insur­ance pol­icy from AIG. He tells CNBC’s Amanda Drury how else he is invest­ing his money.”

Source: CNBC, March 17, 2009.

Richard Rus­sell (Dow The­ory Let­ters): Why I am bull­ish on gold
“I started build­ing my gold posi­tion in 1999. At the time gold was flat on its fanny well below 300 — what few gold min­ing shares were still alive were sell­ing under $5. I wrote at the time that many gold shares were so cheap that you could buy them as if they were per­pet­ual war­rants. My gold posi­tion now is com­pa­ra­ble to my mar­ket posi­tion back in 1958. My gold posi­tion rep­re­sents maybe 30% of my total worth. Why have I done this again?

“For the fol­low­ing reasons:

(1) I believe gold is in a major or pri­mary bull mar­ket. I believe the gold bull mar­ket is cur­rently in its sec­ond phase. This is the phase where sophis­ti­cated and sea­soned investors and the funds enter the mar­ket. I don’t believe the pub­lic is in the gold mar­ket to any extent. They are inter­ested and watch­ing the action, but they do not have the nerve to buy gold. In fact, the pub­lic doesn’t know how to buy gold, although ads are now appear­ing telling them of the ‘won­ders’ of gold and how they can buy the coins (at huge pre­mi­ums over spot gold).

(2) If there is only one bull mar­ket in progress, it will attract broad new cov­er­age and atten­tion — just as Thursday’s $70 rise in gold did.

(3) I believe the bear mar­ket in stocks will con­tinue errat­i­cally and the defla­tion­ary trends will per­sist. This will drive Fed Chair­man Bernanke up the wall, and I think he will stop at noth­ing (includ­ing mas­sive print­ing of dol­lars) in his effort to halt deflation.”

Source: Richard Rus­sell, Dow The­ory Let­ters, March 20, 2009.

David Fuller (Fuller­money): IMF gold sales not great con­cern
“While I remain a long-term bull of gold and other pre­cious met­als, I have often men­tioned in the last two years that we should expect some IMF gold sales to increase their lend­ing capacity.

“Yes­ter­day, I dis­cussed this with a sub­scriber who used to work for the IMF. In addi­tion to con­firm­ing that an addi­tional $500 bil­lion has been agreed for the IMF, he men­tioned that each con­tribut­ing coun­try could pay 75% of their allo­ca­tion in their own cur­ren­cies, and the remain­ing 25% in either another viable cur­rency or gold.

“Clearly, an extra $500 bil­lion will not be suf­fi­cient in what is arguably the worst global reces­sion since the ’30s. Addi­tional con­tri­bu­tions will be required. It is not unrea­son­able to assume that US, UK and most likely some other coun­tries will print the 75% in their own cur­ren­cies. Pre­sum­ably indi­vid­ual Euroland coun­tries can­not print euros but the ECB can and almost cer­tainly will. This rein­forces the long-term bull­ish out­look for gold.

“How­ever, the prospect of IMF sales is a head­wind for bul­lion. There are likely to be more cen­tral bank sales of gold under the Wash­ing­ton Agree­ment, than pur­chases by cred­i­tor nations dur­ing the eco­nomic slump. I also men­tioned that gold had become a crowded trade on the brief look at $1000 in late Feb­ru­ary, adding that since fear was the most recent motive to buy gold, the yel­low metal would be sus­cep­ti­ble to a cor­rec­tion once stock mar­kets firmed.

“I think any IMF gold sales would be han­dled dis­cretely and it could also be a case of: ‘Sell the rumour, buy the news.’”

Source: David Fuller, Fuller­money, March 18, 2009.

Bespoke: Bespoke’s com­mod­ity snap­shot
“Below we pro­vide a table and chart of the recent per­for­mance of ten major com­modi­ties. As shown, cop­per is up the most year to date at 23.66%. Cop­per is fol­lowed by sil­ver, plat­inum, and oil on the upside. At the start of the year, we pointed out that gold had been sig­nif­i­cantly out­per­form­ing sil­ver, and that a long silver/short gold strat­egy may be a good play. That trade has worked out well so far this year. A sim­i­lar trend has been hap­pen­ing with oil and nat­ural gas lately, where oil has been ral­ly­ing and nat­ural gas has con­tin­ued its decline. From their peaks last year, gold is still the com­mod­ity that has held up the best.”

Source: Bespoke, March 17, 2009.

Money News: Gart­man — oil headed higher, sooner
“Econ­o­mist Den­nis Gart­man, edi­tor of the Gart­man Let­ter, says oil is headed higher, pos­si­bly to $50 or $55 per bar­rel within the next three months.

“‘A huge sum of oil has been put in stor­age,’ Gart­man told Bloomberg TV. ‘Over many months, when the con­tango was extra­or­di­nar­ily wide, you could make almost 30% or more.’

“Con­tango refers to the sit­u­a­tion when distant-month futures con­tracts trade at a higher price than front-month con­tracts. In a wide con­tango, prices would be much higher in far out months than nearby ones.

“You make money off that ‘by buy­ing front month crude, tak­ing deliv­ery if you had the stor­age facil­i­ties, and then sell­ing deferred futures,’ Gart­man says.

“‘If you were bor­row­ing money at 5% and lend­ing money via the crude future con­tango at 35%, you would have locked in profit.’

“But now, Gart­man says, ‘we are see­ing the inor­di­nately wide con­tango com­ing in dra­mat­i­cally. When con­tango nar­rows, it is really say­ing to crude itself, we need you. There’s demand; please come out of storage.’

“Bot­tom line: ‘That’s bull­ish for crude,’ he says. “We can trade to $50 maybe $55 over the next two to three months,’ Gart­man says.”

Source: Money News, March 13, 2009.

CEP News: Euro Zone indus­trial out­put falls at sharpest pace on record
“Euro zone indus­trial pro­duc­tion fell at its sharpest pace on record to kick off the year, Euro­stat reported on Friday.

“In the 12 months to Jan­u­ary, euro zone indus­trial pro­duc­tion fell 17.3%, down from both the 15.5% tum­ble expected and December’s 11.8% contraction.

“On a monthly basis, indus­trial out­put fell 3.5% in Jan­u­ary, adding to the pre­vi­ous month’s 2.7% slide, which was revised down from –2.6%. Econ­o­mists had expected a more pro­nounced decline of 4.0% for the month.”

Source: CEP News, March 20, 2009.

CEP News: Ger­man investor sen­ti­ment rises for fifth con­sec­u­tive month
“Ger­man investor opti­mism towards the eco­nomic out­look con­tin­ued to gain strength in 2009, accord­ing to the Cen­tre for Euro­pean Eco­nomic Research (ZEW).

“In a press release issued on Tues­day, the ZEW reported that investor sen­ti­ment rose to a read­ing of –3.5 in March, despite expec­ta­tions of a fall back to –8.0 from –5.8 in February.

“While the improve­ment from Feb­ru­ary to March has slowed com­pared to pre­vi­ous months, the impres­sion remains that investors are becom­ing more hope­ful regard­ing the Ger­man eco­nomic out­look in six-months time, the ZEW said.

“‘Accord­ing to the finan­cial mar­ket experts, the eco­nomic slow­down is grad­u­ally phas­ing out,’ ZEW Pres­i­dent Dr. Wolf­gang Franz said. ‘The bot­tom of the reces­sion is likely to be reached this summer.’

“Mean­while, euro zone investor con­fi­dence also unex­pect­edly improved in March, ris­ing to a read­ing of –6.5 from –8.7 pre­vi­ously. Econ­o­mists had fore­cast a fall back to –12.0 for the month.”

Source: CEP News, March 17, 2009.

CEP News: EU lead­ers agree to stim­u­lus spend­ing, to increase aid to non-EMU mem­bers
“Euro­pean Union lead­ers have agreed in prin­ci­pal to dou­ble the amount of aid allowed to non-euro zone mem­ber states and have reached a com­pro­mise on infra­struc­ture project spending.

“Speak­ing to reporters fol­low­ing the first day of an EU sum­mit held in Brus­sels on Thurs­day, Czech Prime Min­is­ter Mirek Topolanek said that the EU heads of state were close to agree­ing on a €5 bil­lion stim­u­lus spend­ing plan.

“Ger­many had raised con­cerns, but later com­pro­mised when it was agreed that the funds, to be used for infra­struc­ture projects, would be spent by the end of next year.

“‘Sub­stan­tial parts’ of the projects would need to be in progress by then, ‘oth­er­wise it won’t con­tribute to deal­ing with the cri­sis, which will be over after a cer­tain period of time,’ Ger­man Chan­cel­lor Angela Merkel said.

“Also speak­ing to the press on Thurs­day, Euro­pean Com­mis­sion Pres­i­dent Jose Manuel Bar­roso said that the max­i­mum amount of aid avail­able to EU states out­side the mon­e­tary union could rise to €50 bil­lion from its cur­rent €25 bil­lion level.

“The EU also pledged to increase fund­ing to the Inter­na­tional Mon­e­tary Union. The amount ‘should be quite a large fig­ure’, Czech Finance Min­is­ter Miroslav Kalousek said to reporters late Thurs­day evening, adding that the range would likely be between €75 bil­lion and €100 billion.”

Source: CEP News, March 20, 2009.

CEP News: UK house prices higher for sec­ond con­sec­u­tive month
“UK house prices climbed 0.9% month-over-month to an aver­age ask­ing price of £218,081 in March fol­low­ing a 1.2% gain in Feb­ru­ary, accord­ing to prop­erty web­site Rightmove.

“The two con­sec­u­tive months of gains come after three straight months of losses that saw the aver­age price fall from £229,691 in October.

“On an annu­al­ized basis, house prices declined 9.0% in March, slightly less than the 9.1% annual decline in February.”

Source: Adam But­ton, CEP News, March 15, 2009.

Finan­cial Times: Swiss warn lift­ing secrecy “will take time”
“Switzer­land has warned coun­tries against expect­ing swift results from its deci­sion last week to water down bank secrecy laws, say­ing it could take years for the nec­es­sary leg­is­la­tion to come into action.

“Hans-Rudolf Merz, Switzerland’s finance min­is­ter, said rene­go­ti­at­ing the country’s more than 70 dou­ble tax­a­tion treaties ‘won’t be so fast’ as each would have to be approved indi­vid­u­ally by the country’s parliament.

“New treaties could be sub­ject to ref­er­en­dums, he told the Finan­cial Times in an inter­view, while putting in place the rules pre­scribed by of the Organ­i­sa­tion for Eco­nomic Co-Operation and Devel­op­ment would also require nego­ti­a­tions and ‘will take time’.

“The com­ments from Mr Merz, who is head of state under Switzerland’s rotat­ing pres­i­dency, came as some of the coun­tries that have pressed hard for greater inter­na­tional tax trans­parency greeted last week’s move with caution.”

Source: Haig Simon­ian, Finan­cial Times, March 16, 2009.

RGE Mon­i­tor: China now expected to grow by 6.5% in 2009
“In a series of down­ward revi­sions, the World Bank is the lat­est to reduce its fore­cast of 2009 eco­nomic growth in China. As with many export-led economies, China has been hit hard by the pre­cip­i­tous decline in export demand, falling 25.7% in Feb­ru­ary 2009. For this rea­son, the World Bank reduced its 2009 growth fore­cast for China 1% to 6.5%. You can watch the World Bank’s quar­terly update on video here.

“The new World Bank fore­cast is in line with that of the IMF; the IMF down­graded their fore­cast of 2009 Chi­nese eco­nomic growth to 6.7% at the end of January.

“The Chi­nese gov­ern­ment rec­og­nizes that export-led growth is not suf­fi­cient in the cur­rent eco­nomic envi­ron­ment. In addi­tion to sup­port­ing its export sec­tor — the gov­ern­ment plans to reduce export taxes to zero — the Chi­nese gov­ern­ment is focus­ing on the domes­tic econ­omy with fis­cal stim­u­lus mea­sures and pro­mot­ing domes­tic con­sump­tion. The fis­cal stim­u­lus already in place (4 tril­lion yuan announced in Novem­ber) is prob­a­bly pass­ing through to the econ­omy, as China’s PMI increased for the third con­sec­u­tive month in February.

Chi­nese growth is expected to improve in 2010, where the World Bank fore­cast is 8.0%.”

Source: Rebecca Wilder, RGE Mon­i­tor, March 18, 2009.

China Daily: Slide in reserves reported
“China’s for­eign exchange reserves slid the most in at least nine years in Jan­u­ary, Reuters reported yes­ter­day, cit­ing an uniden­ti­fied per­son ‘famil­iar with the situation’.

“The Reuters report did not dis­close the exact amount of declin­ing reserves, but said the decline was partly due to the US dollar’s appre­ci­a­tion and with­drawal of cap­i­tal by for­eign com­pa­nies and investors hurt by the finan­cial crisis.”

Source: China Daily, March 18, 2009.

CEP News: Chi­nese entre­pre­neur sen­ti­ment improv­ing, says PBOC
“Chi­nese entre­pre­neur sen­ti­ment is recov­er­ing, while firms appear less wor­ried about the econ­omy, the People’s Bank of China said on Wednesday.

“Accord­ing to the cen­tral bank’s first quar­ter entre­pre­neur sur­vey results, sen­ti­ment regard­ing busi­ness oper­a­tions is recov­er­ing. Mean­while, bank lend­ing lev­els have improved, as reflected in the sharp gain in the bank lend­ing index, the PBOC added.

“Nev­er­the­less, firms’ domes­tic and for­eign orders indexes are still dete­ri­o­rat­ing, point­ing to ongo­ing weak­ness in over­all demand lev­els, the cen­tral bank said.”

Source: Todd Wailoo, CEP News, March 11, 2009.

Her­ald Tri­bune: Medvedev announces plan to rearm Rus­sia
“Pres­i­dent Dmitri A. Medvedev said Tues­day that Rus­sia would begin a ‘large-scale rearm­ing’ in 2011 in response to what he described as threats to the country’s security.

“In a speech before gen­er­als in Moscow, Mr. Medvedev cited encroach­ment by NATO as a pri­mary rea­son for bol­ster­ing the mil­i­tary, includ­ing nuclear forces.

“Mr. Medvedev did not offer specifics on how much the bud­get would grow for the mil­i­tary, whose capa­bil­i­ties dete­ri­o­rated sig­nif­i­cantly after the fall of Soviet Union.

“Rus­sia has increased mil­i­tary spend­ing sharply in recent years, but with the finan­cial cri­sis and the drop in the price of oil, the country’s finances are under pres­sure, sug­gest­ing that it would be hard to lift these expen­di­tures further.

“Even so, Mr. Medvedev’s tim­ing was notable. He is expected to hold his first meet­ing with Pres­i­dent Barack Obama in early April in Lon­don on the side­lines of the sum­mit meet­ing of the Group of 20 indus­tri­al­ized and devel­op­ing countries.”

Source: Clif­ford J. Levy, Her­ald Tri­bune, March 17, 2009.

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