World's Largest Companies: Top 25

Thursday, April 30th, 2009

This is a guest con­tri­bu­tion by Bespoke Invest­ment Group:

"For those inter­ested, below we high­light the 25 largest com­pa­nies in the world.  For each com­pany, we pro­vide its coun­try, sec­tor, price (local cur­rency), year to date change, and mar­ket cap in dol­lars.  As shown, Exxon Mobil (XOM) is the biggest com­pany in the world and the only one worth more than $300 bil­lion.  PetroChina ranks sec­ond and is the only other com­pany worth more than $200 bil­lion.  The Indus­trial and Com­mer­cial Bank of China is the world's third largest com­pany, giv­ing China two of the biggest three.  Wal-Mart and Microsoft round out the top five.  The United States still dom­i­nates the list with 12 of the 25 spots.  China ranks sec­ond with four spots.  Gen­eral Elec­tric used to be the biggest com­pany in the world, but it has slipped all the way down to the 18th spot.  Google (GOOG) is also on the list at num­ber 22."

Source: Bespoke Invest­ment Group, April 27, 2009

Tags: Bank Of China, Biggest Company In The World, Commercial Bank Of China, Currency, Exxon, Exxon Mobil, General Electric, Goog, Google, Industrial And Commercial Bank, Industrial And Commercial Bank Of China, Investment Group, Largest Companies In The World, Market Cap, Microsoft, Number 22, United States, Wal Mart, Xom, Year To Date
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Country ETFs Overbought

Thursday, April 30th, 2009

This is a guest post from Bespoke Invest­ment Group:

From our daily ETF Trends report at below we high­light var­i­ous coun­try ETFs and their cur­rent trad­ing lev­els.  An ETF becomes over­bought when it trades more than one stan­dard devi­a­tion above its 50-day mov­ing aver­age.  The % over­bought num­ber is how far the ETF is cur­rently above this ini­tial over­bought level.  This is the first time in quite awhile that all coun­try ETFs have been over­bought at the same time, and it's a sign that mar­kets around the world are extended from their nor­mal trad­ing ranges.  The Tai­wan ETF is the most over­bought at 13.32%, fol­lowed by Italy (8.34%), India (7.92%), Brazil (7.14%), Swe­den (7.08%), and South Korea (7.08%).  Japan is the least over­bought at 1.4%.

Tags: Brazil, Current Trading, Emerging Markets, ETF, India, Investment Group, Italy, Japan, Moving Average, South Korea, Standard Deviation, Sweden, Taiwan
Posted in Emerging Markets, ETFs, India, Markets | Comments Off

Roubini Global Economics: 2009 World Economic Outlook

Thursday, April 30th, 2009

By RGE Mon­i­tor

Today we present some of the main con­clu­sions of the recently released update to the RGE 2009 Global Eco­nomic Outlook.

The global econ­omy is in the mid­dle of a syn­chro­nized con­trac­tion that will push global growth into neg­a­tive ter­ri­tory in 2009 for the first time in decades. This will be the worst finan­cial cri­sis since the Great Depres­sion and the worst global eco­nomic down­turn in decades. Global trade vol­umes face their sharpest con­trac­tions of the post­war era — trade is expected to con­tract 12% in 2009 due to the severe and pro­longed global demand slump, excess capac­ity across sup­ply chains and the con­tin­ued crunch in trade finance.

Many ana­lysts and com­men­ta­tors are point­ing out that the sec­ond deriv­a­tive of eco­nomic activ­ity is turn­ing pos­i­tive (i.e. economies are still con­tract­ing but a slower rather than accel­er­ated rate) and that green shoots of an eco­nomic recov­ery are blos­som­ing. RGE Monitor’s analy­sis of the data sug­gests that the global eco­nomic con­trac­tion is still in full swing with a very severe, a deep and pro­tracted U-shaped reces­sion. Last year’s eco­nomic con­sen­sus fore­cast of a V-shaped short and shal­low reces­sion has vanished.

While the rate of eco­nomic con­trac­tion is slow­ing com­pared to the free fall rates of Q4 of 2008 and Q1 of 2009, we are still a long way away from the eco­nomic bot­tom and from a sus­tained recov­ery of growth. In par­tic­u­lar, in Europe and Japan there is lit­tle evi­dence of a pos­i­tive sec­ond deriv­a­tive of eco­nomic activity.

How­ever, by the end of Q1 2009, there were some signs that the pace of con­trac­tion had slowed in many economies espe­cially in the US and China, where pol­icy responses have been more sig­nif­i­cant and lead­ing indi­ca­tors in the man­u­fac­tur­ing sec­tor may have bot­tomed before they did in Europe and Japan. How­ever, major economies includ­ing all of the G7 will con­tinue to con­tract through­out 2009, albeit at a slower pace than at the begin­ning of the year.

More­over the global recov­ery might be slug­gish at best in 2010 given the over­hang of credit losses of finan­cial insti­tu­tions, lin­ger­ing credit crunch, need for retrench­ment by over­stretched and over-indebted house­holds in cur­rent account deficit coun­tries and a slow resump­tion of demand prompted by exten­sive gov­ern­ment stimulus.

Some key ele­ments of RGE Monitor’s out­look include:

• Global eco­nomic activ­ity is expected to con­tract by 1.9% in 2009. Advanced economies are expected to con­tract 4% in 2009. Japan and the euro­zone will suf­fer the sharpest down­turns. US GDP will con­tinue to con­tract, albeit at a slower pace through­out 2009, with neg­a­tive growth in every quarter.

• Emerg­ing mar­kets will slow down sharply from the stel­lar growth rates of the past few years, with the BRIC economies grow­ing at half their 2008 pace.

• Dete­ri­o­rated terms of trade, slower cap­i­tal flows and tighter credit will push Latin Amer­ica into reces­sion from the 4.1% growth of 2008. Argentina, Brazil, Chile, Colom­bia, Mex­ico, and Venezuela will all shift to neg­a­tive ter­ri­tory on a year-over-year basis while smaller coun­tries, like Peru, will expe­ri­ence a sig­nif­i­cant slowdown.

• Coun­tries in East­ern Europe and the CIS will expe­ri­ence some of the sharpest con­trac­tions given the with­drawal of for­eign credit and the risk of a severe finan­cial cri­sis. The reduc­tion in oil rev­enues and finan­cial stress will con­tribute to a 5% yoy con­trac­tion in Rus­sia and some coun­tries — espe­cially in the Baltics — are at risk of double-digit contractions.

• Export-dependent Asia’s growth will slow sig­nif­i­cantly to less than 3% in 2009. China will have a hard land­ing with GDP growth falling to 5.5% while India will slow sharply to 4.3%. All four Asian Tigers (Sin­ga­pore, Tai­wan, South Korea and Hong Kong) as well as Malaysia and Thai­land will expe­ri­ence recessions.

• The Mid­dle East and Africa will mark much slower growth, half of their 2008 pace, given the reduc­tion in cap­i­tal inflows, reduced demand from the US and EU and decline in com­mod­ity prices and out­put. Israel and South Africa will suf­fer slight contractions.

• The unprece­dented fis­cal and mon­e­tary stim­u­lus may help alle­vi­ate the sub­stan­tial con­trac­tion in pri­vate demand and reduce the risk of a global L-shaped near-depression. Debt financ­ing may be a chal­lenge for many coun­tries though, espe­cially emerg­ing mar­kets or the most vul­ner­a­ble West­ern Euro­pean economies.

• Job losses dur­ing the cur­rent global reces­sion might exceed those in recent reces­sion, con­tribut­ing to increases in defaults and pos­ing addi­tional risks to banks. The unem­ploy­ment rate in devel­oped coun­tries will reach double-digits by 2010 (as early as mid-2009 in the US) and push more peo­ple in devel­op­ing coun­tries into poverty. More­over, despite new fund­ing from mul­ti­lat­eral insti­tu­tions, severe con­trac­tions will raise the risk of social and polit­i­cal unrest.

• Com­modi­ties as a class are likely to come under renewed pres­sure in 2009 despite some sup­port from pro­duc­tion cuts. RGE expects the WTI oil price to aver­age about $40 a bar­rel in 2009 as demand destruc­tion con­tin­ues to out­weigh crude sup­ply destruction.

Source: RGE Mon­i­tor, April 21, 2009.

Tags: Brazil, BRIC, BRICs, Economic Activity, Economic Consensus, Economic Contraction, Economic Downturn, Emerging Markets, Excess Capacity, Full Swing, Global Demand, Global Economic Outlook, Global Economy, Global Growth, Great Depression, India, Leading Indicators, Manufacturing Sector, Negative Territory, oil, Policy Responses, Roubini Global Economics, Supply Chains, Trade Finance, Trade Volumes, World Economic Outlook
Posted in Commodities, Credit Markets, Emerging Markets, India, Markets, Outlook | Comments Off

Paul Kasriel: Preferred equity into common equity – accounting alchemy?

Thursday, April 30th, 2009

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

Con­gress cur­rently is in no mood to autho­rize more funds to help recap­i­tal­ize the finan­cial sys­tem. The Trea­sury says this will not be a prob­lem. If finan­cial insti­tu­tions need addi­tional cap­i­tal from the tax­pay­ers to remain sol­vent, the Trea­sury will sim­ply shift the pre­ferred shares it already owns in finan­cial insti­tu­tions to com­mon equity shares. Voila - cap­i­tal ade­quate finan­cial insti­tu­tions! Really?

Con­sider Bal­ance Sheet One of hypo­thet­i­cal Gotham City Bank. Assets equal lia­bil­i­ties plus com­mon equity. That is good for starters.

But sup­pose the Trea­sury believes that Gotham should have a ratio of com­mon equity to total assets of 10% rather than the 5% it cur­rently has. No prob­lem. Trea­sury will just con­vert $5 of the pre­ferred shares it owns in Gotham to $5 of com­mon equity. This is shown in Bal­ance Sheet Two.

Now Gotham is well cap­i­tal­ized, right? Wrong. The depos­i­tors and the bond hold­ers always were in line in front of the pre­ferred share­hold­ers in case Gotham had to be liq­ui­dated. So, mov­ing $5 from the pre­ferred equity cat­e­gory to the com­mon equity cat­e­gory does not make the depos­i­tors and bond hold­ers any bet­ter off.

Are tax­pay­ers any worse off? Not really. If Gotham’s orig­i­nal $5 of com­mon equity was not going to be enough of a cush­ion to pro­tect depos­i­tors and bond­hold­ers, then tax­pay­ers were not going to get all of their preferred-share hold­ings back anyway.

Now sup­pose that $30 of Gotham’s loans and invest­ments become uncol­lectible, as shown in Bal­ance Sheet Three. This means that all of Gotham’s com­mon equity has been wiped out. In fact, Gotham now has an equity “defi­ciency” of $20. No prob­lem, accord­ing to Trea­sury. It will sim­ply con­vert its remain­ing $10 of pre­ferred equity to com­mon equity. That won’t cut it in this case. As shown in Bal­ance Sheet Four, Gotham still has a com­mon equity defi­ciency of $10. In other words, if Gotham were to be liq­ui­dated, there are only $70 of assets to pay off $60 of deposits and $20 of bonds. Either the Trea­sury would have to come up with $10 of new funds or bond­hold­ers would have to take a 50% hair­cut. If the Trea­sury wanted to keep Gotham open and with a ratio of com­mon equity to total assets of 10%, Trea­sury would have to inject $17 of new funds, all of which would be com­mon equity. In other words, Trea­sury, mean­ing us tax­pay­ers, would own 100% of Gotham.

In sum, Treasury’s plan to enhance the cap­i­tal­iza­tion of some finan­cial insti­tu­tions by beat­ing pre­ferred equity shares into com­mon equity shares is account­ing alchemy.

Source: Paul Kas­riel, North­ern Trust — The Econ­trar­ian, April 27, 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: Accounting, Alchemy, Balance Sheet, Bank Assets, Bond Holders, Bondholders, Depositors, Financial Institutions, Investments, Liabilities, Northern Trust Company, Paul Kasriel, Preferred Equity, Preferred Share, Preferred Shareholders, Preferred Shares, Share Holdings, Starters, Taxpayers, Treasury
Posted in Bonds, Markets | Comments Off

Roubini Global Economics: Navigating towards Bretton Woods 3?

Thursday, April 30th, 2009

By RGE Mon­i­tor

A few years back, before this cri­sis erupted, sev­eral econ­o­mists were con­cerned about the sus­tain­abil­ity of the large global imbal­ances fueled by the so-called Bret­ton Woods 2 (BW2) sys­tem. These econ­o­mists rec­og­nized the ten­dency of emerg­ing (export-led) economies to man­age their exchange rate sys­tems — the ori­gin of large trade and cur­rent account sur­pluses that, via large for­eign reserve accu­mu­la­tion, were financ­ing the mir­ror of those sur­pluses, namely the large US trade and cur­rent account deficits.

These sur­pluses, pri­mar­ily in sev­eral exports-led Asian economies, and also in oil pro­duc­ing coun­tries, bal­looned to exten­sive pro­por­tions in 2007 and 2008. The pur­chases of US gov­ern­ment bonds by these investors helped keep long-term inter­est rates low and led many investors to seek out high-yielding invest­ments espe­cially in some emerg­ing markets.

Although we are not (yet) wit­ness­ing a US dol­lar cri­sis, the Bret­ton Woods 2 sys­tem is still at the cen­ter of the debates on the ori­gins of this cri­sis. Under­stand­ing the nature of this cri­sis is fun­da­men­tal in order to under­stand what reforms need to be under­taken for this not to hap­pen again, and to under­stand what the global econ­omy will look like after this cri­sis. Although other fac­tors played a part, it is hard to argue that the large global imbal­ances that arose a few years ago had no role what­so­ever in the cur­rent global syn­chro­nized reces­sion. How­ever, so far, global imbal­ances do not seem to be on even the long-term agenda of most of those try­ing to remake the global finan­cial system.

Global imbal­ances are now start­ing to nar­row though — and the cur­rent cri­sis is likely play­ing a role — as sav­ing rates rise in the US trade vol­umes fall on lower demand, expen­sive credit and weak com­mod­ity prices. The US cur­rent account deficit has fallen from 6.6% at the end of 2005 to 3.7% at the end of 2008 and the IMF esti­mates that it will fall fur­ther to 2.8% of GDP in 2009. Many of the emerg­ing economies that eas­ily financed wide deficits are now being forced into con­sum­ing less given the lack of credit and in some cases cur­rency deval­u­a­tion that boosts the costs of imports. Mean­while the fall in the price of oil and other com­modi­ties is shift­ing many oil exporters, some of the larger sur­plus nations, into deficit territory.

Is this the death of BW2? Can export-led growth coun­tries increase con­sump­tion? Or are we going to see large imbal­ances in the global econ­omy come back when the recov­ery will be in full swing? And would a per­ma­nent cor­rec­tion of global imbal­ances be con­trac­tionary? If sur­plus economies con­tinue along a busi­ness as usual path, try­ing to stoke export demand rather than increas­ing domes­tic spend­ing to boost con­sump­tion, it could increase defla­tion­ary pressures.

Fis­cal and cur­rent account sur­pluses and for­eign exchange reserves can be used to increase gov­ern­ment spend­ing on infra­struc­ture and pub­lic ser­vices and boost con­sump­tion and invest­ment, which might help unwind the global imbal­ances. In fact, fis­cal stim­u­lus spend­ing being under­taken dur­ing the cur­rent down­turn by sur­plus coun­tries like China and the Middle-East will help increase their own domes­tic demand and also boost the exports of deficit coun­tries. Gov­ern­ments with com­fort­able fiscal/external sur­pluses, com­mod­ity rev­enues or for­eign exchange reserves, such the Asia-Pacific, GCC and Latam economies, Canada, Nor­way, Ger­many and Rus­sia, have rightly increased stim­u­lus spend­ing in spite of eas­ing exports and com­mod­ity prices recently.

How­ever, there are crit­i­cisms that such spend­ing still fall short and are rather steered towards export firms than domes­tic demand which will only exac­er­bate global defla­tion­ary pres­sures. On the other hand, stim­u­lus spend­ing by deficit coun­tries such as the US and UK will only accen­tu­ate pres­sure on global fis­cal deficits and global imbalances.

Some are still con­cerned that the unwind­ing of imbal­ances might be dis­or­derly lead­ing to swift exchange rate moves. How­ever, it is also pos­si­ble that this might be a grad­ual process, aided by a beefed-up IMF and other mul­ti­lat­eral insti­tu­tions which will avert bal­ance of pay­ments crises if not sharp con­trac­tions in many emerg­ing economies espe­cially in East­ern Europe.

Some imbal­ances seem to be per­sis­tent though. China’s sur­plus does not seem to be shrink­ing very much, largely because the import con­trac­tion includ­ing goods for re-export and cheaper com­modi­ties is more severe than that of exports. And those of Ger­many and Japan are expected to con­tinue to be quite large also.

The con­sump­tion share of China’s GDP has fallen since the year 2000 although Chi­nese gov­ern­ment invest­ment could pro­vide a boost in 2009. The IMF sug­gests that China’s cur­rent account sur­plus will con­tinue to rise– albeit at a slower pace — in 2009, near­ing $500 bil­lion from almost $430 bil­lion in 2008. Such a large cur­rent account sur­plus implies still large rec­i­p­ro­cal deficits in some of China’s trad­ing part­ners, likely the US and sev­eral Euro­pean countries.

As we noted in our recently released out­look, there is a risk that China’s fis­cal stim­u­lus might exac­er­bate pro­duc­tion over­ca­pac­i­ties, cre­at­ing fur­ther defla­tion­ary pres­sures unless China is able to stim­u­late domes­tic demand, espe­cially pri­vate con­sump­tion. More­over, there is related risk that China’s exten­sion of invest­ment and credit expan­sion could defer China’s tran­si­tion to a global econ­omy in which the US con­sumer con­sumes less. As it cur­rently stands, China’s almost $600 bil­lion fis­cal stim­u­lus has less than 10% ded­i­cated to social wel­fare pro­grams. Expand­ing this expen­di­ture through increas­ing gov­ern­ment expen­di­ture on health care, increas­ing pen­sion pay­ments and unem­ploy­ment ben­e­fits, could have a sig­nif­i­cant effect on boost­ing con­sump­tion par­tic­u­larly as it could reduce some of the house­holds’ struc­tural pres­sures to save.

In the longer term, some tax pol­icy changes, includ­ing the require­ment of state owned enter­prises to pay div­i­dends and intro­duc­tion of a value added tax, might also be sup­port­ive of con­sump­tion based growth. Chi­nese lead­ers are cog­nizant of the need to rebal­ance growth, mean­ing China may be bet­ter placed to do so than some of the export and investment-led advanced economies or the Asian tigers whose growth mod­els are in ques­tion in the midst of the global export collapse.

So far, despite sev­eral months of hot money cap­i­tal out­flows, China seems to have increased its share of the safest US assets espe­cially trea­sury bills. Given the global export weak­ness, China may be forced to main­tain its quasi dol­lar peg, which will likely involve a resump­tion of US dol­lar asset pur­chases. Yet, Chi­nese con­cerns about the long-term value of its US assets have increased. China has been diver­si­fy­ing its assets on the mar­gins, increas­ing the share of gold (from a very low share of total assets) and loan­ing its for­eign exchange to resource exporters. The Chi­nese cen­tral bank gov­er­nor has sug­gested that over time the IMF’s SDR has a cer­tain attrac­tion as a reserve cur­rency given the insta­bil­i­ties that have stemmed from the US dollar’s reserve cur­rency role.

The severe impact of the global reces­sion and export con­trac­tion on Asia’s growth and man­u­fac­tur­ing out­put and employ­ment loss might pave way for Asia to re-think its export-led growth model and change its source of growth away from exports towards domes­tic con­sump­tion. How­ever, this might require a lot more polit­i­cal will since this growth model has nev­er­the­less helped Asia attain higher per capita income, stronger eco­nomic growth and sig­nif­i­cant poverty reduction.

More­over, the struc­tural changes required to change the growth model (move pro­duc­tion from low-end man­u­fac­tur­ing to high-end labor-intensive man­u­fac­tur­ing and ser­vices to boost employ­ment and incomes, improve social safety net, pen­sion and health care sys­tems, invest in skill train­ing and R&D, and enhance inter­me­di­a­tion of sav­ings and credit access for firms by devel­op­ing finan­cial mar­kets) all involve short-term costs with results only in the long-term, some­thing that polit­i­cal lead­ers might be unwill­ing to trade.

On the other hand, it might be argued that Asia might con­tinue to fol­low an export-led model even in the future to sus­tain growth and poverty reduc­tion and at the same time use the presently avail­able vast resources to boost safety net and cush­ion the econ­omy and work­ers from any future global export downturn.

While poli­cies to increase domes­tic demand might boost Asian imports and reduce cur­rent account sur­pluses, shrink­ing exports recently have in fact led imports to shrink at a faster pace than exports (given high import con­tent of exports) thus keep­ing up the trade and cur­rent account sur­pluses in many Asian coun­tries. Let­ting the exchange rate appre­ci­ate will also be chal­leng­ing for Asia and will largely depend on China’s cur­rency stance. In fact, many Asian coun­tries started favor­ing an under­val­ued cur­rency or at least stopped allow­ing appre­ci­a­tion recently as exports weak­ened and to main­tain com­pet­i­tive­ness vis-a-vis China.

Asia’ stance will also be gov­erned by the losses that the cen­tral banks will have to real­ize on their US trea­sury hold­ings by let­ting their cur­ren­cies appre­ci­ate. More­over, any change in Asia’s growth model will be gov­erned by the medium to long-term fac­tors such as the pace of rise in the US sav­ings rate and whether it’s struc­tural or cycli­cal in nature, and also the trends in global com­mod­ity, ship­ping and Asian labor costs going forward.

It is a dif­fer­ent story with com­mod­ity exporters who as a whole are set to shift from sur­plus to deficit ter­ri­tory in 2009 given robust spend­ing and much lower rev­enues. Unlike China, oil exporters were already con­tribut­ing more to rebal­anc­ing in the last few years, with much of the incre­men­tal increase in rev­enues being spent or rather absorbed at home by mas­sive projects and increased con­sump­tion. In fact, rather than gen­er­at­ing sur­pluses, the cur­rent risks are that the economies of many oil exporters in the CIS, Africa and even some in the GCC could con­tract in 2009 on given the weaker hydro­car­bon and non-hydrocarbon sec­tor outlook.

Facil­i­tated by past sav­ings, many of these coun­tries includ­ing Saudi Ara­bia, the UAE and Rus­sia are con­duct­ing expan­sion­ary fis­cal poli­cies this year and will run sig­nif­i­cant fis­cal deficits at an oil price below $50 a bar­rel. More­over coun­tries like the UAE, Saudi Ara­bia and oth­ers are expected to run cur­rent account deficits, financed by the sale of past sav­ings. Mean­while with many sov­er­eign wealth funds and other gov­ern­ment cap­i­tal been deployed at home, there may be fewer for­eign purchases.

The eurozone’s largely bal­anced exter­nal posi­tion cov­ers ample intra-EMU imbal­ances among euro­zone coun­tries. Cur­rent account dis­per­sion reached from +8.4% in the Nether­lands and 7% in Ger­many to –13.4% in Cyprus as of 2008. The Euro­pean Com­mis­sion notes that while large cur­rent account bal­ances by them­selves could merely be the expres­sion of ratio­nal pri­vate sec­tor choices, a com­par­i­son of real exchange rates with their bench­mark “equi­lib­rium” cur­rent accounts shows the exis­tence of siz­able real exchange rate misalignments.

Decom­po­si­tions of this kind gave rise to claims that Ger­many, in par­tic­u­lar in its role as EMU’s “cen­ter” econ­omy, is engag­ing in beggar-thy-neighbor behav­ior by set­ting in motion a real com­pet­i­tive deval­u­a­tion of its cur­rency through falling unit labor costs. This makes a rebal­anc­ing of high deficit coun­tries all the more chal­leng­ing. Since a nom­i­nal deval­u­a­tion is not an option within the EMU, high-deficit coun­tries have no option but to deflate in real terms either through rel­a­tively higher pro­duc­tiv­ity or con­sump­tion restraint against an already ambi­tious Ger­man benchmark.

Ger­many is not exposed to over-indebted house­holds and non-financial cor­po­rates to the same extent as Spain, Ire­land or even France. How­ever, as the cur­rent down­turn makes painfully clear, bal­anced finan­cial accounts pro­vide no shield against an over-reliance on exter­nal con­di­tions or undi­ver­si­fied spe­cial­iza­tion pat­terns. Bun­des­bank pres­i­dent Axel Weber recently made clear that Ger­many should try to break its depen­dence on exports as the main­stay of its eco­nomic growth, whereas Chan­cel­lor Angela Merkel argues that a strong indus­trial base and exter­nal com­pet­i­tive­ness are valu­able assets, espe­cially for an age­ing and shrink­ing pop­u­la­tion. In fact, “[export-reliance] is not some­thing we even want to change.”

Ulti­mately, the BW2 sys­tem of global imbal­ances has had far-reaching effects beyond the US and Asia. Like the US, emerg­ing mar­kets in East­ern Europe were able to fund large current-account deficits in the recent era of cheap financ­ing. In May 2007, Nouriel Roubini wrote: “The cur­rency and eco­nomic poli­cies of China and East Asia have con­tributed — among many other fac­tors — to unsus­tain­able global cur­rent account imbal­ances whose rebal­anc­ing now risks becom­ing dis­or­derly rather than orderly.” This is cer­tainly the case in Cen­tral and East­ern Europe (CEE), where cur­rent account deficits have been the norm and where the unwind­ing of such imbal­ances is rais­ing con­cern that it could con­tribute to a regional finan­cial cri­sis along the lines of 1997 in Asia.

The drying-up of cap­i­tal inflows, amid the global finan­cial tur­moil, is neces­si­tat­ing a sharp adjust­ment in East­ern Europe’s exter­nal imbal­ances. These imbal­ances rival, and in some cases exceed, those in pre-crisis Asia — i.e. cur­rent account deficits in South­east Asia from 1995–97 fell within the 3.0–8.5% of GDP range, while those in CEE were well over 10% of GDP in Roma­nia, Bul­garia and the Baltics in 2008. A cor­rec­tion in the region’s imbal­ances is already under­way via cur­rency depre­ci­a­tion (in coun­tries with flex­i­ble exchange rates) and via a sharp drop in domes­tic demand. Thus far, the IMF has stepped in with finan­cial assis­tance in three EU new­com­ers — Hun­gary, Latvia and Roma­nia — to smooth out the sharp drop-off in cap­i­tal inflows and to avert a dis­or­derly unwind­ing of exter­nal imbal­ances. These coun­tries are unlikely to be the last to knock on the IMF’s door.

Source: RGE Mon­i­tor, April 29, 2009.

Tags: Account Deficits, Asian Economies, Bretton Woods, Bw2, Canadian Market, Commodity Prices, Current Account Deficit, Dollar Crisis, Economists, Emerging Markets, Exchange Rate Systems, Global Economy, Global Financial System, Government Bonds, Oil Producing Countries, Recession, Roubini Global Economics, Surpluses, Term Agenda, Term Interest, Trade Volumes
Posted in Bonds, Commodities, Credit Markets, Emerging Markets, Gold, Infrastructure, Markets, Outlook | Comments Off

Sell in May and go away: fact or fallacy?

Wednesday, April 29th, 2009

Where is the stock mar­ket head­ing? Has the rally that started in early March been exhausted? These are the key ques­tions on all investors’ minds as finan­cial mar­kets remain caught between the fran­tic actions of cen­tral banks to get the cogs of the credit sys­tem and econ­omy turn­ing again on the one hand, and a still shaky eco­nomic and cor­po­rate out­look on the other.

It is there­fore no won­der that even so-called “pop analy­sis”, includ­ing some leg­endary axioms, is resorted to in a quest for direc­tion. And besides “buy low and sell high” few other axioms are more widely prop­a­gated than “sell in May and go away”. A Google search revealed an astound­ing 127,000 items fea­tur­ing this phrase.

As equi­ties have seen a par­tic­u­larly strong six-week rally, fol­lowed by what looks like the start of a consolidation/retracement of some of the recent gains, investors are jus­ti­fi­ably ques­tion­ing the market’s next move. And they ner­vously won­der whether this May will not only her­ald longer days in the North­ern Hemi­sphere, but also live up to its rep­u­ta­tion as the advent of a cor­rec­tive phase in the markets.

The impor­tant issue, how­ever, is whether this axiom actu­ally has any sci­en­tific basis at all. Ana­lyz­ing his­tor­i­cal returns, the fig­ures vary from mar­ket to mar­ket, but long-term sta­tis­tics seem to show that the best time to be invested in equi­ties is the six months from early Novem­ber through to the end of April of the next year (”good” peri­ods), while the “bad” peri­ods nor­mally occur over the six months from May to October.

A study of the MSCI World Index, a com­monly used bench­mark for global equity mar­kets, reveals that since 1969 “good” peri­ods returned +6.5% per annum while investors were actu­ally in the red by –1.0% per annum dur­ing the “bad” periods.

“Sell in May and go away” also holds true for the US stock mar­kets. An updated study by Plexus Asset Man­age­ment of the S&P 500 Index shows that the returns of the “good” six-month peri­ods from Jan­u­ary 1950 to March 2009 were 7.9% per annum whereas those of the “bad” peri­ods were 2.5% per annum.

A study of the pat­tern in monthly returns reveals that the “bad” peri­ods of the S&P 500 Index are quite dis­tinct, with five of the six months from May to Octo­ber hav­ing lower aver­age monthly returns than the six months of the good peri­ods. Inter­est­ingly, May — the first month of the bad patch — is the only exception.

But what exactly does this mean for the investor who con­tem­plates tim­ing the mar­ket by sell­ing in May and rein­vest­ing in Novem­ber? Fur­ther analy­sis shows that had one kept the invest­ment in the S&P 500 Index only dur­ing the “good” six-month peri­ods, and rein­vested the pro­ceeds in the money mar­ket dur­ing the “bad” six-month peri­ods, the total return would have been 10.5% per annum.

These cal­cu­la­tions do not take tax into account. And, of course, every time one switches out of and back into the stock mar­ket there are costs involved, which would also reduce the returns for the mar­ket timer.

How did the good and bad peri­ods stack up dur­ing the past two years? The results are as follows.

• May 2007 — Octo­ber 2007: +4.52%
• Novem­ber 2007 — April 2008: –9.62%
• May 2008 — Octo­ber 2008: –30.1%
• Novem­ber 2008 — April 2009: –5.1%

Some you win, some you don’t! It seems that the axiom “sell in May and go away” in itself is a rather doubt­ful basis for tim­ing equity invest­ments. How­ever, it may serve a use­ful pur­pose as input, together with other fac­tors, to oth­er­wise ratio­nal deci­sion making.

Tags: Annum, Axiom, Axioms, Central Banks, Cogs, Corporate Outlook, Corrective Phase, Early November, Fallacy, Financial Markets, Global Equity Markets, Google, Google Search, Historical Returns, Msci World Index, Northern Hemisphere, Retracement, Stock Market, Term Statistics, Us Stock Markets
Posted in Credit Markets, Markets, Outlook | Comments Off

Hendry: Markets Assuming Optimism

Wednesday, April 29th, 2009

Hugh Hendry, the out­spo­ken hedge fund man­ager and founder of Eclec­tica Asset Man­age­ment, known for his remark­ably accu­rate call on defla­tion, and long-duration gov­ern­ment bond bets, appeared on CNBC last night to share his con­tro­ver­sial out­look on mar­kets. In his usual and cut­ting way, Hendry dis­missed crit­ics of his stance on long bonds, by point­ing out that we are in the midst of "a rally of risk".

The recent rise in stocks and talk about green shoots in the mar­kets are opti­mistic assump­tions, as the world down­turn "still has a way to run," said Hugh Hendry, CIO at Eclectica.

Here are the accom­pa­ny­ing notes from CNBC.

The recent rise in stocks and talk about green shoots in the mar­kets are opti­mistic assump­tions, as the world down­turn "still has a way to run," Hugh Hendry, Chief Invest­ment Offi­cer at Eclec­tica, told CNBC Tuesday.

World gross domes­tic prod­uct looks over­es­ti­mated, because global con­sump­tion has been based on debt, and this can­not con­tinue, Hendry told "Squawk Box Europe."

"In the last five weeks we had a rally in risk. Big deal," he said.

"I am fear­ful of the sur­plus coun­tries, like China and Ger­many. I think GDP has been over­stated," Hendry added.

"My notion was, you had Bernie Mad­off doing US GDP account­ing." China "built capac­ity to serve a world that doesn't exist. We're drown­ing in capac­ity. The idea to pro­pose we build more… that ain't a rem­edy," he explained.

Although com­pa­nies' results beat fore­casts, this is mainly because they marked their expec­ta­tions too low, but their out­look is grim, accord­ing to Hendry.

"I believe the down­turn in the global econ­omy still has a way to run. We've only been given evi­dence of fur­ther dete­ri­o­ra­tion," he said.

The rise in bond yields shows that the yield curve is flat­ten­ing, point­ing to more eco­nomic weak­ness ahead.

"What it reveals is that it's ter­ri­fy­ing. This rise in bond yields shows… the pri­vate sec­tor is coun­ter­ing the Fed and is tight­en­ing pol­icy," Hendry said.

Dur­ing the Great Depres­sion, there had been ral­lies in the stock mar­ket, but stocks gen­er­ally fell, Hendry reminded, explain­ing his bear­ish stance on stocks. He added that nobody can pre­dict where the bot­tom was for the stock market.

"Mon­keys spend all their time pick­ing bot­toms. I refuse to pick bot­toms as I don't live in trees," he said.

Hendry also shared his thoughts on Tobacco stocks, com­modi­ties, bonds, and gold.

Tobacco stocks, espe­cially in the US, are among the few assets that Hugh Hendry, chief invest­ment offi­cer at hedge fund Eclec­tica, said he likes Tues­day, but he added investors should be pru­dent as world economies are still in the mid­dle of a delever­ag­ing trend.

Altria and Philip Mor­ris are inter­est­ing choices as they are "priced in dol­lars," Hendry said, adding "I like dollars."

"One of the things we know with cer­tainty is that peo­ple smoke, they're addicted to it," Hendry added.

He said he was get­ting a 9 per­cent yield on the stock, but, because of the frag­ile eco­nomic sit­u­a­tion, was think­ing of buy­ing senior debt, which would give the same yield but offers more secu­rity in case of bankruptcy.

"As a soci­ety, we have taken debt… to almost four times greater than the econ­omy. That's unprece­dented. And it's a turn­ing point," Hendry said. "Gov­ern­ments around the world want some infla­tion, and they are tar­get­ing infla­tion. It's one thing to tar­get it and another to achieve it. Who wants to take on debt today?"

Because of this, the econ­omy will con­tinue to con­tract and com­modi­ties such as oil are not a good bet either, accord­ing to Hendry.

Bonds are not a good buy for the sum­mer, as they are usu­ally an invest­ment for the sec­ond half of the year, and investors should be "patient and scared" and, at the end of debt defla­tion, may get "fan­tas­tic values".

Gold has behaved as a risk-free asset, but Hendry said he hopes for a cor­rec­tion in the price of gold to around $600 to $700 per ounce, from the cur­rent level of $898, to start buying.

"I'm not say­ing it will hap­pen, but stranger things have hap­pened," he said. "Gold investors have had it easy. I expect gold to get a bit more uncom­fort­able for the peo­ple who hold it in the short term."

"The intel­lec­tual case for gold is very strong. Gov­ern­ments are print­ing money, but only God prints gold and that takes bil­lions of years."

Tags: Accompanying Notes, Assumptions, Bernie Madoff, Bill Gross, Bond Yields, Chief Investment Officer, Cnbc, Deflation, Depressio, Deterioration, Duration Government, Economic Weakness, ETF, Global Consumption, Global Economy, Government Bond, Great Depression, Gross Domestic Product, Hedge Fund Manager, Hugh Hendry, Optimism, Rallies, Squawk Box, Stock Market, World Downturn, Yield Curve
Posted in Bonds, Commodities, Economy, Energy & Natural Resources, ETFs, Gold, Markets, Oil and Gas, Outlook | Comments Off

Bill Ackman, Joseph Stiglitz on Charlie Rose

Tuesday, April 28th, 2009

A fas­ci­nat­ing, enlight­en­ing con­ver­sa­tion and debate about the econ­omy with Bill Ack­man, major investor and hedge fund man­ager of Per­sh­ing Square Cap­i­tal Man­age­ment LP, Kate Kelly of The Wall Street Jour­nal, Andrew Ross Sorkin of The New York Times and Joseph Stiglitz, econ­o­mist and a mem­ber of Colum­bia Uni­ver­sity faculty.

Here is the com­plete transcript:

CHARLIE ROSE: The Obama admin­is­tra­tion today took the lat­est step in
its efforts to repair the nation’s bank­ing sys­tem. The Fed­eral Reserve
began releas­ing infor­ma­tion about its stress test on major banks. The Fed
reported that while reserves had sub­stan­tially reduced in some banks, most
had cap­i­tal well in excess of gov­ern­ment stan­dards. The 19 banks exam­ined
hold two-thirds of the assets and more than half the loans in the U.S.
bank­ing sys­tem. The gov­ern­ment pri­vately told bank exec­u­tives their test
results this after­noon. The Fed also released its method­ol­ogy ahead of an
announce­ment of the results in two weeks.

We want to talk about the finan­cial sec­tor, the stress test, all of
this, with a very inter­est­ing group of peo­ple. Bill Ack­man of Per­sh­ing
Square Cap­i­tal man­age­ment, a hedge fund here in New York. Joseph Stiglitz
of Colum­bia Uni­ver­sity, co-winner of the 2001 Nobel Prize in eco­nom­ics.
Andrew Ross Sorkin of “The New York Times,” a reporter and colum­nist. And
Kate Kelly of “The Wall Street Jour­nal.” I am pleased to have all of them
here at this table.

I will begin with you. Tell me where we are in terms of — what do we
know about the stress test? What do we know about the results? What are
they telling us and who cares?

KATE KELLY: Well, there are pre­cious few details that have been
released so far. We’re going to know more I think on May 4th. But what
hap­pened is, the banks under­went these stress tests. They had cer­tain
para­me­ters they were sup­posed to run their mod­els against, run their
port­fo­lios against — assump­tions about unem­ploy­ment and how severe it
would get this year, for exam­ple; assump­tions about losses on the value of
cer­tain hold­ings that were approx­i­mately close to what you saw last year
with the Lehman Broth­ers fail­ure. And the Fed met indi­vid­u­ally with the
bank man­age­ment today. I think it was CEO, CFO, other senior peo­ple, risk
offi­cers, to dis­cuss where they stood, how strong they were — I think they
had three buck­ets from strong to weak — and whether they would need to
raise capital.

So what’s inter­est­ing is, there has been much back and forth about how
much to dis­close, and I don’t think we fully know what they are going to
dis­close yet. But what they do will have a major impact on pub­lic
per­cep­tion. And even if they don’t give us all the details, based on who’s
rais­ing cap­i­tal, we’re going to be able to make some assumptions.

CHARLIE ROSE: Yes.

KATE KELLY: So the gov­ern­ment is in a bit of a box.

CHARLIE ROSE: All right, Andrew, add to that.

ANDREW ROSS SORKIN: Well, so the issue this after­noon — I talked to
a num­ber of the exec­u­tives who have been briefed on their sta­tus, if you
will — and the ques­tion right now is what assump­tion the gov­ern­ment used
for their rev­enue, right? They did all these other assump­tions which they
used for every­body across the aboard, but what they didn’t do — they
actu­ally for each bank indi­vid­u­ally said what is their rev­enue going to be
for the next two years. And that’s the most fun­gi­ble, if you will, of all
of these, because every bank thinks they’re going to have higher rev­enue
than the gov­ern­ment seems to think. And so what we’re going to be see­ing
over the next week is a debate pri­vately, that hope­fully will come out in
pub­lic at some level, over what those rev­enue judg­ments are, and — and
that’s– that’s what we’re going to find out. And that to me will tell us
in the end who’s strong and who’s not, and who we can actu­ally believe.

CHARLIE ROSE: OK, but it will tell us that, and then what will
happen?

WILLIAM ACKMAN: It depends.

(LAUGHTER)

WILLIAM ACKMAN: The answer is, the banks that need more cap­i­tal,
where does the money come from?

CHARLIE ROSE: Exactly.

WILLIAM ACKMAN: And the last six months, the money has come from the
tax­payer, and the ques­tion is if that is going to con­tinue. And there are
some alter­na­tives in the taxpayer.

And this past week­end, Larry Sum­mers was on “Meet the Press,” and he
talked about asset lia­bil­ity swaps as alter­na­tive means to raise cap­i­tal
for banks. I trans­late asset lia­bil­ity swap for debt-for-equity swap,
junior debt-for-equity swap, pre­ferred stock for equity swap.

Basi­cally, what’s inter­est­ing is that the banks in this coun­try have
all the cap­i­tal they need. The prob­lem is too much of that cap­i­tal is in
the form of debt, not enough is in the form of equity. The way we solve
that prob­lem typ­i­cally in Amer­ica is through a reor­ga­ni­za­tion process,
where a judge adju­di­cates a bank­ruptcy or some other form of
con­ser­va­tor­ship or reor­ga­ni­za­tion. They fig­ure out the value of the firm.
They fig­ure out how much equity needs to be raised, and they com­pro­mise
with the bond hold­ers until the bond hold­ers end up own­ing the firm.

What you can do instead is Bill the bond holder has to con­vert $50
bil­lion of his debt into equity, and that mag­i­cally raises $100 bil­lion of
cap­i­tal, because for each dol­lar of debt that becomes equity, you’re
can­cel­ing a dol­lar of debt, you’re cre­at­ing a dol­lar of equity. And the
sys­tem is really set up for this. This is a clas­sic restruc­tur­ing
approach.

CHARLIE ROSE: OK, why haven’t we tried this before? Is this — do
you think this idea has merit? This idea of Ack­man and Larry Sum­mers
talk­ing about it publicly?

JOSEPH STIGLITZ: It’s what I said they should have been doing all
along.

CHARLIE ROSE: Oh, this was your idea?

JOSEPH STIGLITZ: No, what I’m say­ing is, it is what we have done. We
did it in Con­ti­nen­tal Illi­nois, we’ve done it in — what they’ve con­fused
is the notion of too big to fail with the notion of too big to be
finan­cially reor­ga­nized. And this is just a sim­ple process of finan­cial
reor­ga­ni­za­tion. We do it all the time.

The bond hold­ers don’t like it, because they would pre­fer the
tax­pay­ers giv­ing them money. It’s per­fectly under­stand­able. And the bond
hold­ers have been — their voice has been heard very clearly, but it’s not
in our national inter­est. The banks would be stronger after they do this
kind of finan­cial reor­ga­ni­za­tion. They don’t have to pay out every month
all the inter­est pay­ments that they had to pay before. They now have all
the cap­i­tal that — you know, the lever­age right now is huge. So small
change in the value of the assets means that the cap­i­tal is all wiped out.
So now you have more cap­i­tal, less debt. They’re in a bet­ter posi­tion to
go for­ward. It’s basi­cally the notion that we call a fresh start.

CHARLIE ROSE: Right, so what does Mr. Gei­th­ner think of this?

JOSEPH STIGLITZ: Well, they’ve been resist­ing this.

CHARLIE ROSE: Because?

JOSEPH STIGLITZ: Well, the only rea­son I think is because the — a
lot of influ­ence from the bond hold­ers, finan­cial sec­tor bond hold­ers don’t
like it. You don’t have to be a genius to fig­ure out why they don’t like
it.

CHARLIE ROSE: Exactly right. Andrew.

ANDREW ROSS SORKIN: Well, no, I mean, it’s funny, you said Bill the
bond holder. I should say Bill Gross the bond holder from Pimco, and he is
some­one who has had a lot of influ­ence, as have other bond hold­ers, who
have sug­gested that the moment that you effec­tively force these bond
hold­ers to take a hair­cut or to swap out into equity, you are going to
under­mine the entire bond mar­ket and we’re going to see some kind of
cat­a­clysmic dis­as­ter.

Now, I’m not sure that’s the case, and as you’ve seen in other
bank­rupt­cies, we’ve got­ten through that. So at the end of the day, yes,
this would instill more con­fi­dence, but there is other peo­ple on the other
side say­ing that it would kill confidence.

WILLIAM ACKMAN: There is also a lot of mis­un­der­stand­ings. I mean, I
think that if the tax­payer really under­stood that their cap­i­tal was going
in — if you think about a bank that took in $25 bil­lion of TARP funds.
Let’s assume they have $400 bil­lion of debt — that’s a round num­ber for a
sys­tem­i­cally impor­tant bank — $25 bil­lion is enough to pay inter­est on
$400 bil­lion of debt for a year. So banks won’t lend money because they
need that cap­i­tal to pay inter­est on their debts.

I read a study by a guy by the name of Pro­fes­sor David Scharf­stein of
Har­vard Busi­ness School where he said of the $350 bil­lion that was infused
into bank actu­ally didn’t go into banks. Went into.

CHARLIE ROSE: This is the orig­i­nal TARP money?

WILLIAM ACKMAN: Right. It went into bank hold­ing com­pa­nies. Only
some­thing like $17 bil­lion went into the actual banks. And I know this is
a lit­tle tech­ni­cal per­haps for your audi­ence, but I think it’s important.

The com­pa­nies that trade on the stock exchange are called hold­ing
com­pa­nies, and they’re shells. They have debt. They have equity. And
they own the sys­tem­i­cally impor­tant insti­tu­tions. So the thing that we’re
wor­ried about, that we want to pro­tect, the deposit-taking insti­tu­tion, is
actu­ally the sub­sidiary of the hold­ing com­pany. And that’s why these –
that’s why sys­tem­i­cally impor­tant insti­tu­tions are struc­tured this way, so
that there’s the investor entity — I call it the hold­ing com­pany — can be
com­pro­mised. You know, the debt for equity then can be con­verted with­out
an impact at all on the sub­sidiaries. So the thing that guar­an­tees
deriv­a­tives, the entity that lends money, you don’t want — when Lehman
failed, what hap­pened was con­struc­tion stopped, deriv­a­tive coun­ter­par­ties
tore up con­tracts. If they had been a deposit-taking insti­tu­tion, there
would have been a risk.

The beauty here is you can sim­ply just walk your way through the
cap­i­tal struc­ture of the hold­ing com­pany and cre­ate enor­mous amounts of
cap­i­tal. Let me just fol­low it through for what it can do. Imag­ine if we
did this across the 19 — let’s not do it– you don’t con­vert all the debt
into equity. What you do is you set a stan­dard. You say, look, we need
these banks to be extremely well cap­i­tal­ized, which means they need to have
a cer­tain amount of cap­i­tal. We now have all the data we col­lected from
the stress tests. So each bank needs to have — call it 10 per­cent com­mon
equity to total assets, and we con­vert suf­fi­cient amount of debt — you
know, if JP Mor­gan has a bet­ter bal­ance sheet, you con­vert some. Less for
JP Mor­gan, then you pick another insti­tu­tion and (INAUDIBLE) bal­ance sheet.
It’s a very fair process.

Once you do that, if the banks are now over­cap­i­tal­ized and you
restrict div­i­dends and you restrict stock buy­backs, the only way the bank
can earn an ade­quate return on its cap­i­tal is by increas­ing assets. And
what does that mean? It means mak­ing loans.

Now you’ve got 19 banks com­pet­ing to make loans, and it has a huge
impact on the econ­omy, because the aver­age busi­ness­man says, I can’t spend
money today because I have a debt matu­rity and I can’t refi­nance. But if
he has three bankers knock­ing on the door, or 19 say­ing, “I’m going to lend
you money,” they can start spend­ing again, and the econ­omy can recover.

CHARLIE ROSE: Go ahead.

JOSEPH STIGLITZ: Exactly right. I mean, and in a way, it’s so
inter­est­ing, because we’ve been spend­ing our money deal­ing with what
they’re now euphemisti­cally call legacy assets. They used to first call
them toxic waste, toxic assets, then they called them trou­bled assets, and
now the offi­cial term is legacy assets. But that’s backward-looking. And
it hasn’t.

CHARLIE ROSE: Why is that backward-looking?

JOSEPH STIGLITZ: Because it’s look­ing at the loans that were made in
the past.

CHARLIE ROSE: As long as those loans are there, those assets are
there, those toxic assets are there, these banks have a very bad bal­ance
sheet.

JOSEPH STIGLITZ: Yes, but there’s another way of deal­ing with that
problem.

CHARLIE ROSE: Which you can’t — you don’t quite know how to
evaluate.

JOSEPH STIGLITZ: Which is to con­vert the debt — con­vert the debt
into equity. No one knows how to value those risky assets. And what
they’re doing is very sim­ple. They want to take all that trash and dump it
on the U.S. tax­payer. And it doesn’t make it disappear.

CHARLIE ROSE: The orig­i­nal idea, we buy all the toxic assets.

JOSEPH STIGLITZ: That’s right.

CHARLIE ROSE: Under the Paul­son plan, the first Paul­son plan.

JOSEPH STIGLITZ: Exactly. And then they went into buy­ing it in bulk,
and then they — the cur­rent pro­gram is to use the pri­vate sec­tor as the
garbage col­lec­tor and dump it on our backs, but it’s all basi­cally the same
idea.

CHARLIE ROSE: From the begin­ning, the toxic assets have been a huge
prob­lem. So what should we do about them now?

KATE KELLY: I just think there’s a fun­da­men­tal debate going on here
about val­u­a­tion, and I’m not sure what the answer is. But there is
cer­tainly a coun­ter­vail­ing view to what you were say­ing, that indeed these
toxic assets can be marked, and they should be marked lower than where the
banks think they should be, and that’s why the banks don’t want to sell
them.

CHARLIE ROSE: But that raises the ques­tion, if they do that, what
will that mean to the bal­ance sheets of the banks if they have to mark them
lower, and how many banks will we find are in fact at that eval­u­a­tion
insolvent?

KATE KELLY: Prob­a­bly quite a few, which is a scary prospect.

CHARLIE ROSE: And so what do you do then?

JOSEPH STIGLITZ: And that’s why you need to con­vert the debt into
equity. So that — it’s the only way you can do it. If it turns out then
that the banks are right and the toxic assets are worth a lot more, then
the equity of the banks will go up auto­mat­i­cally, and they get fully
com­pen­sated. So the issue here is who’s going to bear the risk of the
uncer­tain val­u­a­tion? And is it the peo­ple who gave the money to the bank
or is it the U.S. tax­payer? And it’s really sim­ple as that.

CHARLIE ROSE: Andrew.

ANDREW ROSS SORKIN: This all points, though, to the issue of
con­fi­dence and what the goal of the stress test was sup­posed to do, which
was sup­posed to be to instill con­fi­dence. We were sup­posed to have this
stress test. We were sup­posed to get the results and we were sup­posed to
say, ah, this is all going to work out.

CHARLIE ROSE: Mean­ing they had enough cap­i­tal to do what they need
(ph) to do.

ANDREW ROSS SORKIN: They had enough cap­i­tal or we knew which ones
were in trou­ble and which ones weren’t, and we were all sup­posed to feel
very good about it. Instead, what I worry about now is that we’re going to
look at the results of the stress test, and it’s almost a lose-lose.
Either you are going to be very real­is­tic, per­haps even too real­is­tic for
many peo­ple, and you’re going to sug­gest that some of these banks really
are either insol­vent or in so much trou­ble that they are going to need
either addi­tional tax dol­lars, beyond by the way tak­ing pre­ferred shares
and swap­ping them for com­mon, or you’re going to decide.

WILLIAM ACKMAN: How about bonds…

ANDREW ROSS SORKIN: Or bonds.

WILLIAM ACKMAN: … into equity.

ANDREW ROSS SORKIN: Or you’re going to decide that the entire process
is a white­wash and you’re going to have no con­fi­dence in the test to begin
with.

KATE KELLY: I think you’re right about that quandary, because
ini­tially, I think peo­ple were excited about get­ting real results. Then
the word leaked out that nobody was going to fail the stress test.
Every­body was more or less in good shape.

(LAUGHTER)

(CROSSTALK)

KATE KELLY: Right. And then the pub­lic reac­tion was, well, are these
stress tests worth the paper they’re writ­ten on?

CHARLIE ROSE: And what is their method­ol­ogy is another ques­tion about
it.

KATE KELLY: How can that be? How can — this is just going to hurt
confidence.

JOSEPH STIGLITZ: And you look at the num­bers when they come out, and
they cer­tainly are not the worst num­bers that one could imag­ine. I mean,
they’re sort of median. But stress is stress. It’s not where the aver­age
is. It’s what hap­pens if.

ANDREW ROSS SORKIN: I mean, they’re think­ing worst case is
unem­ploy­ment at 10.3 per­cent. Hous­ing prices are down.

CHARLIE ROSE: You mean.

ANDREW ROSS SORKIN: The government.

CHARLIE ROSE: The assumption.

ANDREW ROSS SORKIN: The assump­tions built into the stress test assume
three major things. One, that unem­ploy­ment is at 10.3 per­cent.
KATE KELLY: In the worst-case scenario.

ANDREW ROSS SORKIN: In the worst-case scenario.

(CROSSTALK)

KATE KELLY: 8.8 is (INAUDIBLE).

ANDREW ROSS SORKIN: So this is median already in some cases.
Unem­ploy­ment — unem­ploy­ment is at 10.3. We go to.

WILLIAM ACKMAN: House prices.

ANDREW ROSS SORKIN: . house prices at 22 per­cent. Thank you, I
apol­o­gize. And finally, the econ­omy con­tracts by 3.3 per­cent. All of
those are right down the mid­dle. Nobody would argue, I think, that that is
true stress, worst-case scenario.

CHARLIE ROSE: Right. What would true stress be?

ANDREW ROSS SORKIN: Prob­a­bly 11 or 12 per­cent unem­ploy­ment.
Absolutely.

WILLIAM ACKMAN: I think an anal­ogy that I think will help under­stand
this. Think of a bridge that a truck had dri­ven over. The bridge
col­lapses, the truck falls down, kills a thou­sand peo­ple who hap­pen to be
walk­ing under the bridge. When some­thing like that hap­pens, when they go
to rebuild the bridge, that bridge had a 10,000-pound capac­ity; the truck
weighed 9,800 pounds, but stress and oth­er­wise, the bridge collapsed.

What you need to do is — we don’t need well-capitalized banks under a
his­toric def­i­n­i­tion. What we need is extra­or­di­nar­ily well-capitalized
banks. And you have to ask your­self, what is the down­side if the U.S.
bank­ing sys­tem was the best cap­i­tal­ized bank­ing sys­tem in the world? So
imag­ine a world — and using this debt for equity — the beauty of
con­vert­ing debt for equity is it’s not a tak­ing from tax­payer and it’s not
a tak­ing from the bond holder. The bond holder is get­ting exactly what
they own. Right? A bond holder is an owner of a com­pany in the same way
an equity investor. The equity investor.

ANDREW ROSS SORKIN: Except that most bond hold­ers don’t want to do
this.

(CROSSTALK)

ANDREW ROSS SORKIN: Most share­hold­ers don’t want their stock to go
down.

Tags: 2001 Nobel Prize In Economics, Andrew Ross Sorkin, Bank Executives, Banking System, Bill Ackman, Bill Gross, Charlie Rose, Columbia University Faculty, Financial Sector, Government Standards, Hedge Fund Manager, Joseph Stiglitz, Kate Kelly, Nobel Prize In Economics, Pershing Square, Pershing Square Capital, Pershing Square Capital Management, Pershing Square Capital Management Lp, Stress Test, Stress Tests, Wall Street Journal
Posted in Bonds, Markets | Comments Off

Regression to Trend: New S&P 500 Update (dshort.com)

Tuesday, April 28th, 2009

Doug Short (dshort.com) pro­vides use­ful analy­sis to make the point sta­tis­tics how­ever reli­able or unre­li­able can cause us to change or mod­ify our per­spec­tive. For exam­ple, Has the US Gov­ern­ment been report­ing reli­able infla­tion data since the elim­i­na­tion of the Gold Stan­dard in 1971? Or are the infla­tion stats accord­ing to econ­o­mist John Williams of shadowstats.com more in keep­ing with reality.

After all, we're aware that our cost of liv­ing has risen faster than our incomes, right? So what hap­pens when we apply this stan­dard of thought to the long term trend regres­sion in the mar­ket? This is what Doug Short has done here. Take a look, you might be surprised:

About the only cer­tainty in the stock mar­ket is that, over the long haul, over­per­for­mance turns into under­per­for­mance and vice versa. Is there a pat­tern to this move­ment? Let's apply some sim­ple regres­sion analy­sis to the question.

Bear­ish View

Here's a chart of the S&P Com­pos­ite stretch­ing back to 1871. The chart shows real (inflation-adjusted) monthly aver­ages of daily closes. We're using a semi-log scale to equal­ize ver­ti­cal dis­tances for the same per­cent­age change regard­less of the index price range. The regres­sion trend­line drawn through the data clar­i­fies the sec­u­lar pat­tern of vari­ance from the trend — those multi-year peri­ods when the mar­ket trades above and below trend.

The Bear­ish View
The peak in 2000 marked an unprece­dented 154% over­shoot­ing of the trend – dou­ble the over­shoot in 1929. The index had been above trend for 17 years, but it has now fallen 9% below trend. The major troughs brought declines in excess of 50% below the trend. If the S&P 500 were sit­ting squarely on the regres­sion, it would be hov­er­ing around 830. If the index should decline over the next year or two to a level com­pa­ra­ble to pre­vi­ous major bot­toms, it would fall to the vicin­ity of 425–450.

The Bull­ish Alter­na­tive
A crit­i­cal fac­tor for the reli­a­bil­ity of a regres­sion analy­sis of stock prices over many decades is the accu­racy of the infla­tion adjust­ment. The Bureau of Labor Sta­tis­tics (BLS) has been actively track­ing infla­tion since 1919 and has esti­mated infla­tion rates back to 1913 using data on food prices. In 1982, how­ever, the BLS began incor­po­rat­ing changes to the Con­sumer Price Index (CPI), which is used to cal­cu­late infla­tion. These changes have resulted in much lower "offi­cial" infla­tion rates than would have been the case if the method of cal­cu­la­tion had remained consistent.

At his www.shadowstats.com web­site, Econ­o­mist John Williams pub­lishes an "Alter­nate CPI" employ­ing the ear­lier BLS method. Here is a chart that illus­trates the sig­nif­i­cant dif­fer­ence between these two cal­cu­la­tion methods.

Bull­ish View

Sta­tis­tics and hand­i­cap­ping are funny that way. They can warp our per­cep­tions in immea­sur­able ways. Which one do you agree with? Are you bull­ish or bearish?

We side with Doug Short, that the answer is some­where in between.

Tags: 17 Years, According To John, Bls, Bottoms, Bureau Of Labor, Bureau Of Labor Statistics, Consumer Price Index, Critical Factor, Deca, Declines, Economist John, Food prices, Gold Standard, Incomes, Index Cpi, Index Price, Inflation Adjustment, Inflation Data, Inflation Rates, John Williams, Long Haul, Overshoot, Percentage Change, Regression Analysis, Simple Regression, Stock Market, Stock Prices, Term Trend, Troughs, Variance, Vertical Distances
Posted in Gold, Markets | 2 Comments »

A Light at the End of the Tunnel?

Tuesday, April 28th, 2009

This week's Econ­o­mist cover story dis­cusses the idea that it may be too early to assume that the global econ­omy is in recov­ery. The illus­tra­tion really cap­tures this. Our vul­ner­a­bil­ity right now seems to be that we want the econ­omy (and mar­kets) to recover, so we are look­ing for the signs to val­i­date our hopes are not just hopes.

"The worst thing for the world econ­omy would be to assume the worst is over"

"THE rays are dif­fuse, but the specks of light are unmis­tak­able. Share prices are up sharply. Even after slip­ping early this week, two-thirds of the 42 stock­mar­kets that The Econ­o­mist tracks have risen in the past six weeks by more than 20%. Dif­fer­ent eco­nomic indi­ca­tors from dif­fer­ent parts of the world have bright­ened. China’s econ­omy is pick­ing up. The slump in global man­u­fac­tur­ing seems to be eas­ing. Prop­erty mar­kets in Amer­ica and Britain are show­ing signs of life, as mort­gage rates fall and homes become more afford­able. Con­fi­dence is grow­ing. A widely tracked index of investor sen­ti­ment in Ger­many has turned pos­i­tive for the first time in almost two years.

All this is welcome—not least because the slump has been made so much worse by panic and despair. When the finan­cial sys­tem was on the brink of col­lapse in Sep­tem­ber, investors shunned all but the safest assets, con­sumers stopped spend­ing and firms shut down. That plunge into the depths could be suc­ceeded by a vir­tu­ous cycle, where the wheels of finance turn again, cheerier con­sumers open their wal­lets and ambi­tious firms turn from hoard­ing cash to pur­su­ing profits.

But, wel­come as it is, opti­mism con­tains two traps, one obvi­ous, the other ..."

Read the com­plete story here.

Source: The Econ­o­mist, April 23, 2009, A Glim­mer of Hope?

Tags: Brink Of Collapse, Despair, Economic Indicators, Economist, Glimmer Of Hope, Global Economy, Investor Sentiment, Light At The End Of The Tunnel, Mortgage Rates, Optimism, Plunge, Property Markets, Share Prices, Signs Of Life, Six Weeks, Slump, Specks, Stockmarkets, Virtuous Cycle, Wallets, World Economy
Posted in Markets | Comments Off

Alex Tabarrok: An Optimistic Lesson from 1929

Monday, April 27th, 2009

Alex Tabar­rok, noted econ­o­mist, pro­fes­sor, and author of MarginalRevolution.com, one of the internet's most suc­cess­ful blogs, pro­vides many rea­sons to be opti­mistic, and deliv­ers a real sur­prise toward the end of the talk given the con­text of eco­nomic cri­sis, in which we now find ourselves.

About this talk from TED:

The "dis­mal sci­ence" truly shines in this opti­mistic talk, as econ­o­mist Alex Tabar­rok argues free trade and glob­al­iza­tion are shap­ing our once-divided world into a com­mu­nity of idea-sharing more healthy, happy and pros­per­ous than anyone's predictions.

Tags: Alex Tabarrok, Blogs, Dismal Science, Economic Crisis, Economist, ETF, globalization, Surprise, Ted
Posted in ETFs, Markets | Comments Off

China Fifth Largest Holder of Gold

Sunday, April 26th, 2009

“China has qui­etly almost dou­bled its gold reserves to become the world’s fifth-biggest holder of the pre­cious metal, it emerged on Fri­day, in a move that sig­nals the revival of bul­lion after years of fad­ing importance.

“Gold rose to a three-week high of more than $910 an ounce after Hu Xiao­lian, head of the secre­tive State Admin­is­tra­tion of For­eign Exchange, which man­ages the country’s $1,954 bil­lion in for­eign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.

“The news could spark inter­est in gold among other cen­tral banks. ‘When the largest holder of for­eign exchange reserves dis­closes an increase in gold hold­ings, other coun­tries may decide to think more care­fully about under­weight gold posi­tions,’ said John Reade, a pre­cious met­als strate­gist at UBS.

“The increase in China’s gold reserves has come pri­mar­ily from domes­tic pro­duc­tion and refin­ing. How­ever, the news raises ques­tions about the future of Beijing’s for­eign reserves policy.

“Ahead of the G20 sum­mit in Lon­don this month, China sug­gested global reliance on the US dol­lar as a reserve cur­rency should be reduced.

“China has been diver­si­fy­ing away from the dol­lar since 2005, when it broke the renminbi’s peg to the US cur­rency and offi­cially marked it to a bas­ket of cur­ren­cies, but it still holds more than two-thirds in US dollar-denominated assets by most estimates.

“As its trade sur­plus and forex reserves bal­looned in recent years, Bei­jing con­tin­ued to buy huge amounts of US Trea­sury bonds while rais­ing the pro­por­tion of pur­chases it allot­ted to other cur­ren­cies and to gold.

“‘China’s announce­ment sig­nals a broader shift in cen­tral banks’ atti­tude towards gold,’ said Philip Klap­wijk, chair­man of GFMS, the pre­cious metal consultancy.”

Source: Jamil Ander­lini and Javier Blas, Finan­cial Times, April 24, 2009.

Hat Tip:

Hat tip: Invest­ment Postcards

Tags: Blas, Bullion, Central Banks, Financial Times, Foreign Exchange Reserves, Forex Reserves, G20 Summit, Gfms, Gold, Gold Bullion, Gold Holdings, Gold Reserves, Hat Tip, Increase In China, Precious Metal, precious metals, Renminbi, Reserve Currency, Secretive State, State Administration Of Foreign Exchange, Tip Hat, Trade Surplus, Us Currency, Us Treasury Bonds
Posted in Bonds, Gold, Markets | Comments Off

Rebecca Wilder’s economic updates (April 16 – 23): Expected to slide through 2009

Sunday, April 26th, 2009

This post is a guest con­tri­bu­tion by Rebecca Wilder*, author of the of the News N Eco­nom­ics blog.

Today’s weekly reports are slightly more pos­i­tive than last week. How­ever, I avoided the trade reports all together, which undoubt­edly would have dragged down the sen­ti­ment. Although there are a grow­ing num­ber of pos­i­tive reports out there, global economies are still very much in the red zone, –1.3% in 2009 accord­ing to the IMF.

China’s retail sales rebound in March

China’s retail sales grew 14.7% in March 2009. Much of the draw on retail sales, mea­sured in cur­rent prices, has been dri­ven down by the slow­ing — now neg­a­tive — rate of infla­tion (see next chart); how­ever, weak demand surely played its part as well. The March rebound is one of the numer­ous point­ing to a bot­tom in the Chi­nese recession.

Infla­tion con­tin­ues to fall; some areas go negative

Infla­tion around the world is low and going neg­a­tive in some areas (China). This is pri­mar­ily an energy story, since core infla­tion, growth in all prices except food and energy, in Canada and the Euro­zone are still ris­ing at a 2% and 1.5%, respec­tively. How­ever, prices move at a lag, and even­tu­ally weak demand will drag down core infla­tion as well.

Accord­ing to some mea­sures, home value in the UK and US are stabilizing

In April, UK home val­ues grew for the third con­sec­u­tive month, slow­ing the annual rate of decline to –7.3%. In another report across the Atlantic, Feb­ru­ary US home val­ues grew for the sec­ond con­sec­u­tive month, slow­ing the annual decline to –6.5%. Amaz­ingly, this gain in US home prices was not widely reported in the media. I’ll take this as good news, but this is just two data points; and there are lots of rea­sons to think that home val­ues will fall fur­ther (like the inven­tory of exist­ing homes is still very elevated).

The FHFA index (this week’s report) shows price move­ments on homes tied to con­form­ing loans guar­an­teed by Fan­nie Mae and Fred­die Mac. There­fore, it is miss­ing much of the mar­ket tied to non-conforming loans; the S&P Case-Shiller index is thought to cap­ture bet­ter the hous­ing mar­ket as a whole since it includes homes tied to non-conforming loans. See this WSJ arti­cle for a broad descrip­tion of the two indices. I imag­ine the true price is some­where in between the two.

The Bank of Canada reaches its “effec­tive” lower bound

The Bank of Canada low­ered its pol­icy rate (the overnight rate) to just 0.25%, join­ing the near-zero lower bound club. The pol­icy announce­ment reported that “the reces­sion in Canada will be deeper than antic­i­pated, with the econ­omy pro­jected to con­tract by 3.0 per cent in 2009. The Bank now expects the recov­ery to be delayed until the fourth quar­ter and to be more grad­ual.” The Wall Street Jour­nal dis­cusses the Bank of Canada’s unprece­dented state­ment that “the tar­get overnight rate can be expected to remain at its cur­rent level until the end of the sec­ond quar­ter of 2010 in order to achieve the infla­tion target.”

Pol­icy, Pol­icy, Pol­icy. That is what this cycle is all about. From China to the U.S., and every­where in between, cen­tral banks are push­ing hard and gov­ern­ments are spend­ing. How­ever, in spite of the pos­i­tive pol­icy shifts, the IMF released this week its World Eco­nomic Out­look, where world growth, mea­sured using purchasing-power par­ity (PPP) weights, is expected to con­tract 1.3% in 2009. If I had to choose, I’d go with the World Bank’s fore­cast, which is –0.6% in 2009 on a PPP basis.

Source: Rebecca Wilder, News N Eco­nom­ics, April 23, 2009.

* Rebecca Wilder is an econ­o­mist in the finan­cial indus­try. She was pre­vi­ously an assis­tant pro­fes­sor and holds a doc­tor­ate in economics.

Tags: Canadian Market, Conforming Loans, Core Inflation, Economic Updates, Energy Story, Eurozone, Fannie Mae, Global Economies, Home Value, Home Values, Imf, Negative Inflation, Rate Of Inflation, Rebecca, Rebound, Recession, Red Zone, Retail Sales, Second Consecutive Month, Sentiment, Zone 1
Posted in Markets, Outlook | Comments Off

Jim Rogers isn’t buying a US stock recovery (Barron's)

Sunday, April 26th, 2009

“Leg­endary investor Jim Rogers is skep­ti­cal of the lat­est rally in equi­ties — as well the health of the global econ­omy. As such, he is scorn­ing stocks and bonds while embrac­ing com­modi­ties as his invest­ment vehi­cle of choice. Barron’s John Kimel­man got the chance to inter­view the CEO of Rogers Hold­ings, with the fol­low­ing excerpts appear­ing on the web­site yesterday:

Q: When you last did a lengthy inter­view with Barron’s mag­a­zine a year ago you were light­en­ing up on emerg­ing mar­kets invest­ments. Well, you called that one right. But now that many of those mar­kets have fallen from their highs of recent years, are you more optimistic?

A: No. I’ve sold all emerg­ing mar­kets stock except the ones in China. I bought more Chi­nese shares in Octo­ber and Novem­ber dur­ing the panic, but I have not bought China or any other stock mar­kets includ­ing the US since then. I’m not buy­ing any­thing in China right now because the Chi­nese mar­ket ran up maybe 50% since last Novem­ber. It’s been the strongest mar­ket in the world in the past six months and I don’t like jump­ing into some­thing that has been that run up. Still, I’m not think­ing of sell­ing these stocks either. I think if it goes down I’ll buy more. I think you will find that it’s the sin­gle strongest mar­ket in the world since last fall.

Q: That being said, you cur­rently think Chi­nese stocks are bid-up now, so you’re not buy­ing at these lev­els. So what have you been buy­ing lately?

A: I have been buy­ing com­modi­ties through the Rogers com­mod­ity indexes I devel­oped because my lawyer won’t let me buy indi­vid­ual com­modi­ties. I recently bought all four Rogers indexes — the Ele­ments Rogers Inter­na­tional Com­modi­ties Index (ticker:RJI) as well as the three spe­cialty indexes, the Inter­na­tional Met­als (RJZ), the Inter­na­tional Energy (RJN), and the Inter­na­tional Agri­cul­ture (RJA.) That’s how I invest in com­modi­ties and that’s what I bought last week. I have been buy­ing these shares since last fall and up to last week.

Q: Now despite the recent stock-market rally that started in March, many US stocks are trad­ing well off their 2007 highs. How come you see no value to this market?

A: I am not buy­ing US com­pa­nies mainly because I think we may have seen a bot­tom but I don’t think we have seen the bot­tom. I am skep­ti­cal about the rally, the world econ­omy for the next year or two or three. But if stocks go down, I can make money with com­modi­ties. In the 1970s, com­modi­ties went through the roof even though stocks were a dis­as­ter. In the 1930s, com­modi­ties ral­lied first and went up the most long before stocks pulled it together.

Q: Can you sum­ma­rize the rea­sons for your bull­ish­ness about commodities?

A: It depends on the sup­ply and demand. And we have had a dearth of sup­ply. Nobody has invested in pro­duc­tive capac­ity for 25 or 30 years now. The inven­to­ries of food are the low­est they have been in 50 years and you have a short­age of farm­ers even right now because most farm­ers are old men because it has been such a hor­ri­ble busi­ness for 30 years. And as for met­als, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it’s going to be 15 or 20 years before we see new mines come on. Nobody has been open­ing mines for 30 years and they are not going to. And in the mean­time reserves are declin­ing. As for oil, the Inter­na­tional Energy Agency came out recently with a study show­ing that oil reserves world­wide were declin­ing at the rate of 6% or 7% a year.

That does not mean that if sud­denly the US goes bank­rupt that every­thing won’t col­lapse in price. But I would rather be in com­modi­ties because it’s the only thing I know where the fun­da­men­tals are improv­ing. They are not improv­ing for Citibank or Gen­eral Motors but the sup­ply sit­u­a­tion in com­modi­ties is such that when demand comes back, then com­modi­ties are going to be the best place to be in my view.”

Click here for the full article.

Source: Barron’s, April 20, 2009.

Hat tip: Invest­ment Postcards

Tags: Array, Barron, Barron S Magazine, Chinese Market, Chinese Stocks, Commodity, Emerging Markets, Global Economy, International Agriculture, International Commodities Index, International Energy, International Metals, Investment Vehicle, Jim Rogers, Last November, Lengthy Interview, Rja, Rjn, Rogers International Commodities Index, Stock Markets, Stock Recovery, Stocks And Bonds, Stocks Bonds
Posted in Bonds, Commodities, Emerging Markets, Markets | Comments Off

Richard Russell: Are we in a bear market rally or a new bull market?

Sunday, April 26th, 2009

Richard Rus­sell of Dow The­ory Let­ters, pro­vides the fol­low­ing note April 20, 2009:

“(1) The mar­ket turned up in a V-shaped rever­sal off the March 9 low. How­ever, almost all bull mar­kets start with a period of accu­mu­la­tion. This entails a side­ways move, some­times tak­ing weeks or even months. Or it may require a non-confirmation of the Aver­ages as per Decem­ber 1974. At the March low, we saw nei­ther — no indi­ca­tion of accu­mu­la­tion. And that both­ers me.

“(2) At the March lows, we did not see the ‘great val­ues’ that usu­ally accom­pany major bear mar­ket bot­toms (i.e. P/E’s in the 5–8 area, aver­age div­i­dend yields of 5–6%).

“(3) The mar­ket was severely over­sold at the March lows, a con­di­tion that often sets off a ‘relief’ (‘let off the pres­sure’) rally. The advance was prob­a­bly trig­gered by the severely over­sold con­di­tion of the market.

“(4) The one thing a money-manager can­not afford to do is be on the side­lines dur­ing ‘what could be’ a major rally. Once the mar­ket started up from the March 9 low, many money man­agers leaped in. The big short posi­tions were imme­di­ately squeezed. The rise became a momen­tum advance. Retail buy­ers moved in, many try­ing to retrieve some of their bru­tal losses.

“(5) The rally moved up ‘too fast’ — action more typ­i­cal of a bear mar­ket rally than the slow, plod­ding rise that is char­ac­ter­is­tic of the advance in a new bull market.

“(6) Two groups that led the rally were Finan­cials and Con­sumer Cycli­cals. Inter­est­ingly, these two groups con­tained respec­tively 5 bil­lion and 2.7 bil­lion shares sold short. This sug­gests strongly that a sig­nif­i­cant part of the rally was fired up by short-covering in these two groups (thanks Alan Abel­son for this information).

“(7) Many investors and ana­lysts turned opti­mistic after the mar­ket had ral­lied for only a few weeks. At true bear mar­ket bot­toms, investors remain stub­bornly scep­ti­cal or bear­ish for months after the bot­tom. Remem­ber­ing 1974, peo­ple were actu­ally angry when I turned bull­ish at the bot­tom. I was receiv­ing hate let­ters and sub­scrip­tion cancellations.

“All of the above have kept me skep­ti­cal and cau­tious about this rally.”

Source: Richard Rus­sell, The Dow The­ory Let­ters, April 20, 2009.

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Hat tip: Invest­ment Postcards

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Words from the (investment) wise for the week that was (April 20 – 26, 2009)

Sunday, April 26th, 2009

“Words from the Wise” this week comes to you in a short­ened for­mat as my trav­el­ing in the US pre­cludes me from doing my cus­tom­ary com­men­tary. How­ever, a full dose of excerpts from inter­est­ing news items and quotes from mar­ket com­men­ta­tors is provided.

On Fri­day, Fed­eral Reserve reg­u­la­tors have released a white paper out­lin­ing the cri­te­ria they used to assess the finan­cial health of the nation’s 19 biggest banks. On the same day they also briefed the banks about how their com­pa­nies had fared in the exam­i­na­tion. The banks will have until Tues­day to dis­pute any of the results before they are made pub­lic on May 4.

Accord­ing to the Finan­cial Times, senior Fed offi­cials said US author­i­ties will ask some of the country’s biggest banks to raise more cap­i­tal fol­low­ing the com­ple­tion of bank stress tests. The offi­cials also indi­cated that a sec­ond, larger, group of banks will be asked to improve the qual­ity of their cap­i­tal by increas­ing their amount of com­mon equity.

Last week investors’ mood was also influ­enced by ten­ta­tive signs of eco­nomic sta­bi­liza­tion in a num­ber of coun­tries and a bar­rage of earn­ings report — gen­er­ally bet­ter than feared. As the equity rally ground to a halt on some bourses, the US dol­lar and gov­ern­ment bonds offered lit­tle safety appeal and edged weaker. Gold, on the other hand, advanced after China revealed it has almost dou­bled its gold reserves since 2003. Trea­sury Infla­tion Pro­tected Secu­ri­ties (TIPS) also improved on the week.

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

After ris­ing for six con­sec­u­tive weeks, global stock mar­kets expe­ri­enced a volatile week, includ­ing the worst losses since early March on Mon­day. In the end, the MSCI World Index gained 0.1% (YTD –4.1%) on the week and the MSCI Emerg­ing Mar­kets Index 0.7% (YTD +14.2%), but the S&P 500 Index shaved off –0.4% (YTD –4.1).

Click on the table below for a larger image.

As far as the earn­ings sea­son is con­cerned, Bespoke indi­cated that 156 S&P 500 com­pa­nies had reported earn­ings by Thurs­day, beat­ing esti­mates in 67% of the cases. Also, so far earn­ings are down 16.6% ver­sus the first quar­ter of 2008. While down, this is much bet­ter than the –37.3% expected at the start of the earn­ings sea­son. “The earn­ings sea­son still has a long way to go, but the cur­rent trend has investors opti­mistic,” said Bespoke.

“The growth rate of the ECRI Lead­ing Index has been steadily head­ing higher over the last month, point­ing to the reces­sion mod­er­at­ing or end­ing later in the year,” said Moody’s Economy.com. Inter­est­ingly, Chart of the Day com­pared the 26-week rate of change (ROC) of the ECRI Lead­ing Index with the S&P 500 and found that, with a few excep­tions (i.e. early 1974, early 2000s — which were ulti­mately not sig­nif­i­cant troughs) the stock mar­ket began to per­form well soon after the ROC of the Index “troughed” in a sig­nif­i­cant manner.

“What all of this is say­ing is not that the econ­omy is expected to improve, but rather that the dete­ri­o­ra­tion is expected to stop. This glim­mer of hope has in the past been enough to encour­age forward-looking investors to move back into the stock mar­ket,” con­cluded Chart of the Day.

In an attempt to cast light on the debate of whether we are deal­ing with a bull mar­ket or a bear mar­ket rally, William Hes­ter (Huss­man Funds) high­lighted the fol­low­ing: “Con­tract­ing vol­ume is not enough evi­dence to qual­ify that this is a bear-market rally with cer­tainty. There are other mea­sures that are show­ing more strength — such as var­i­ous indi­ca­tors of mar­ket breadth. But new bull mar­kets, whether at their incep­tion or soon after, have a his­tory of recruit­ing notice­able improve­ments in vol­ume. So far this rally lacks that impor­tant qual­ity. Over the next few weeks stock mar­ket vol­ume will be a met­ric to watch closely.”

The stock mar­ket will show its hand in due course, but it is cru­cial that the lows of March 9 hold in order for base for­ma­tion devel­op­ment to remain intact. Should these lev­els — 677 for the S&P 500 and 6,547 for the Dow Jones — be breached, fur­ther down­side move­ments may be in store.

For more dis­cus­sion on the direc­tion of stock mar­kets, see my recent posts “Video-o-rama: Econ­omy — Recov­ery or relapse?” and “Has stock mar­ket rally run its course?” (And do make a point of lis­ten­ing to Don­ald Coxe’s web­cast of April 24, which can be accessed from the side­bar of the Invest­ment Post­cards site.)

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

Econ­omy
“Global busi­ness sen­ti­ment remains very poor, but it has taken on a slightly bet­ter hue in recent weeks. Broad assess­ments of cur­rent and prospec­tive con­di­tions have also moved up mea­sur­ably since the begin­ning of the year,” said the lat­est Sur­vey of Busi­ness Con­fi­dence of the World con­ducted by Moody’s Economy.com. “It is pre­ma­ture to con­clude that busi­nesses are turn­ing mea­sur­ably more upbeat, but recent sur­vey results are some­what encouraging.”

For a fur­ther per­spec­tive on the out­look for the global econ­omy, also read my posts “Eco­nomic rate of decline slow­ing down?“, “Gold­man raises China’s growth fore­casts” and “Chi­nese econ­omy on the rebound“.

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.)

April 24
• New Home Sales appear to be sta­bi­liz­ing
• Durable Goods Orders report — weak, but pace of decline is moderating

April 23
• Sales of Exist­ing Homes appear to be sta­bi­liz­ing at a low level
• Ini­tial Job­less Claims erase part of the improve­ment seen in recent weeks

April 22
• House Price Index points to mod­er­a­tion in pace of decline

April 20, 2009
• Lead­ing Index — con­tin­ues to send mes­sage of weak eco­nomic con­di­tions
• Chicago Fed National Activ­ity Index shows a small but note­wor­thy improvement

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

Source: Yahoo Finance, April 24, 2009.

In addi­tion to inter­est rate announce­ments by the Fed­eral Open Mar­ket Com­mit­tee (FOMC) (Wednes­day, April 29) and the Bank of Japan (Thurs­day, April 30), 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, April 24, 2009.

“To find your­self, think for your­self,” said Socrates (hat tip: Charles Kirk.) And we know the stock mar­ket is a dan­ger­ous place if you don’t think ratio­nally and know your own invest­ment per­son­al­ity. Hope­fully the “Words from the Wise” reviews will assist Invest­ment Post­cards read­ers in crys­tal­iz­ing their thoughts to come up trumps with their invest­ment decisions.

That’s the way it looks from Cape Town (or, more accu­rately, from beau­ti­ful Dana Point, Cal­i­for­nia, for the next few days).

Source: Slate.com

Finan­cial Times: IMF puts finan­cial losses at $4,100 bil­lion
“The dete­ri­o­rat­ing global econ­omy means finan­cial insti­tu­tions now face total losses of $4,100 bil­lion on loans and other assets, the Inter­na­tional Mon­e­tary Fund said on Tues­day, urg­ing gov­ern­ments to take ‘bolder steps’ to shore up insti­tu­tions — includ­ing nation­al­is­ing them where necessary.

“The IMF said in its Global Finan­cial Sta­bil­ity Report that many loans sit­ting on insti­tu­tions’ bal­ance sheets were erod­ing in value, not just the toxic sub-prime secu­ri­ties which first trig­gered the crisis.

“The IMF esti­mated that total write­downs on US assets would reach $2,700 bil­lion, up from the $2,100 bil­lion esti­mate it made in Jan­u­ary and almost dou­ble what it fore­cast in Octo­ber last year. Includ­ing loans orig­i­nated in Japan and Europe, the write­downs would hit $4,100 bil­lion, it added.

“Banks would bear about two-thirds of the losses, it said, with insur­ance com­pa­nies, pen­sion funds, hedge funds and oth­ers tak­ing the rest.

“Efforts to cleanse these bad assets from bal­ance sheets and replen­ish viable insti­tu­tions with cap­i­tal had so far been ‘piece­meal and reac­tive’, the IMF said, call­ing for more deci­sive gov­ern­ment action.

“‘The cur­rent inabil­ity to attract pri­vate money sug­gests the cri­sis has deep­ened to the point where gov­ern­ments need to take bolder steps and not shrink from cap­i­tal injec­tions in the form of com­mon shares even if it means tak­ing major­ity, or even com­plete, con­trol of insti­tu­tions,’ it said.”

Source: Sarah O’Connor, Finan­cial Times, April 21, 2009.

The New York Times: Reg­u­la­tors dis­close cri­te­ria for bank “stress tests”
“Fed­eral reg­u­la­tors released the cri­te­ria they used to assess the finan­cial health of the nation’s 19 biggest banks on Fri­day, but pro­vided lit­tle new infor­ma­tion for investors to dis­tin­guish the industry’s weak play­ers from the strong.

“In a 21-page report, the Fed­eral Reserve reg­u­la­tors broadly laid out the tools they used to project bank losses if the econ­omy wors­ens, and offi­cials estab­lished an unspec­i­fied base­line to mea­sure how much addi­tional cap­i­tal the banks should add as a buffer against higher losses. But they pro­vided no con­crete met­rics to assess the depths of the trou­bles fac­ing the indus­try or spe­cific banks.

“Still, the Fed­eral Reserve report sug­gested that reg­u­la­tors are focus­ing on the amount of cap­i­tal that they want banks to hold in com­mon stock, which makes it eas­ier for them to absorb future losses as the reces­sion wears on. That could force at least a hand­ful of the 19 banks to raise sig­nif­i­cant amounts of new cap­i­tal and could lead to greater gov­ern­ment own­er­ship stakes in the banks.

“‘Losses asso­ci­ated with the deep­en­ing reces­sion and finan­cial mar­ket tur­moil have sub­stan­tially reduced the cap­i­tal of some banks,’ the Fed­eral Reserve report on the stress test said. ‘Lower over­all lev­els of cap­i­tal — espe­cially com­mon equity — along with the uncer­tain eco­nomic envi­ron­ment have eroded pub­lic con­fi­dence in the amount and qual­ity of cap­i­tal held by some firms, which is impair­ing the abil­ity of the bank­ing sys­tem to per­form its crit­i­cal role of credit intermediation.’

“The stress test cri­te­ria were released as fed­eral reg­u­la­tors started brief­ing top exec­u­tives from the 19 large banks about how their com­pa­nies fared on the exam­i­na­tion. In closed-door meet­ings at the regional Fed­eral Reserve Bank offices, the reg­u­la­tors plan to review their pre­lim­i­nary find­ings and inform bankers if they need addi­tional cap­i­tal. The banks will have until Tues­day to dis­pute any of the results before they are made pub­lic on May 4.”

Source: Eric Dash, The New York Times, April 24, 2009.

The New York Times: US may con­vert banks’ bailouts to equity share
“Pres­i­dent Obama’s top eco­nomic advis­ers have deter­mined that they can shore up the nation’s bank­ing sys­tem with­out hav­ing to ask Con­gress for more money any time soon, accord­ing to admin­is­tra­tion officials.

“In a sig­nif­i­cant shift, White House and Trea­sury Depart­ment offi­cials now say they can stretch what is left of the $700 bil­lion finan­cial bailout fund fur­ther than they had expected a few months ago, sim­ply by con­vert­ing the government’s exist­ing loans to the nation’s 19 biggest banks into com­mon stock.

“Con­vert­ing those loans to com­mon shares would turn the fed­eral aid into avail­able cap­i­tal for a bank — and give the gov­ern­ment a large own­er­ship stake in return.

“While the option appears to be a quick and easy way to avoid a con­fronta­tion with Con­gres­sional lead­ers wary of putting more money into the banks, some crit­ics would con­sider it a back door to nation­al­iza­tion, since the gov­ern­ment could become the largest share­holder in sev­eral banks.

“The Trea­sury has already nego­ti­ated this kind of con­ver­sion with Cit­i­group and has said it would con­sider doing the same with other banks, as needed. But now the admin­is­tra­tion seems con­vinced that this maneu­ver can be used to make up for any short­fall in cap­i­tal that the big banks con­front in the near term.

“Each con­ver­sion of this type would force the admin­is­tra­tion to decide how to han­dle its con­sid­er­able vot­ing rights on a bank’s board.

“Tax­pay­ers would also be tak­ing on more risk, because there is no way to know what the com­mon shares might be worth when it comes time for the gov­ern­ment to sell them.

“Trea­sury offi­cials esti­mate that they will have about $135 bil­lion left after they fol­low through on all the loans that have already been announced. But the nation’s banks are believed to need far more than that to main­tain enough cap­i­tal to absorb all their losses from soured mort­gages and other loan defaults.”

Source: Edmund Andrews, The New York Times, April 19, 2009.

Finan­cial Times: US to put con­di­tions on Tarp repay­ment
“Strong banks will be allowed to repay bailout funds they received from the US gov­ern­ment but only if such a move passes a test to deter­mine whether it is in the national eco­nomic inter­est, a senior admin­is­tra­tion offi­cial has told the Finan­cial Times.

“‘Our gen­eral objec­tive is going to be what is good for the sys­tem,’ the senior offi­cial said. ‘We want the sys­tem to have enough capital.’

“His com­ments come as Gold­man Sachs, JPMor­gan Chase and other rel­a­tively strong banks are press­ing to be allowed to repay their bailout funds. On Sun­day, Lawrence Sum­mers, Pres­i­dent Barack Obama’s top eco­nomic adviser, told NBC’s Meet the Press that repay­ments could even­tu­ally help the gov­ern­ment pro­vide fur­ther resources to help the sec­tor. Such a move could also allow health­ier insti­tu­tions to dif­fer­en­ti­ate them­selves from weaker banks and free them from con­straints on exec­u­tive pay, and other activ­i­ties, that come with bailout money.

“‘Not sur­pris­ingly dif­fer­ent banks are in dif­fer­ent sit­u­a­tions; they are going need dif­fer­ent lev­els of assis­tance of tax­pay­ers,’ Mr Obama told a press con­fer­ence at a sum­mit in Trinidad on Sun­day, while promis­ing: ‘I’m not going to sim­ply put tax­payer money into a black hole.’

“The offi­cial, mean­while, said banks that had plenty of cap­i­tal and had demon­strated an abil­ity to raise fresh cap­i­tal from the mar­ket should in prin­ci­ple be able to repay gov­ern­ment funds. But the judg­ment would be made in the con­text of the wider eco­nomic inter­est. He said the gov­ern­ment had three basic tests. It needed first to ‘make sure the sys­tem is sta­ble’. Sec­ond, to not cre­ate ‘incen­tives for more delever­ag­ing which would deepen the reces­sion’. Third, to make sure the sys­tem had enough cap­i­tal to ‘pro­vide credit to sup­port the recovery’.”

Source: Krishna Guha and Daniel Dombey, Finan­cial Times, April 19, 2009.

Fox Busi­ness: Will banks make the grade?
“Rochdale Secu­ri­ties ana­lyst Dick Bove on the 19 banks receiv­ing gov­ern­ment ’stress test’ results today [Fri­day]. Bove says the results could be dan­ger­ous to the over­all econ­omy and won­ders if the banks that fail could raise cap­i­tal either from the gov­ern­ment or the marketplace.”

Source: Fox Busi­ness, April 24, 2009.

PBS: Bill Moy­ers talks to Simon John­son and Michael Perino
“Bill Moy­ers talks about the econ­omy and Wall Street’s future with Simon John­son, for­mer chief econ­o­mist of the Inter­na­tional Mon­e­tary Fund (IMF) and a pro­fes­sor at MIT Sloan School of Man­age­ment, and Michael Perino, pro­fes­sor of law at St. John’s Uni­ver­sity and an advi­sor to the Secu­ri­ties and Exchange Commission.”

Source: Bill Moy­ers Jour­nal, PBS, April 24, 2009.

Bill King (The King Report): Ken Lewis’s tes­ti­mony
“NY AG Andrew Cuomo in a let­ter to Con­gres­sional Lead­ers about Ken Lewis’s shock­ing testimony:

‘Imme­di­ately after learn­ing on Decem­ber 14,2008 of what Lewis described as the “stag­ger­ing amount of dete­ri­o­ra­tion” at Mer­rill Lynch, Lewis con­ferred with coun­sel to deter­mine if Bank of Amer­ica had grounds to rescind the merger agree­ment by using a clause that allowed Bank of Amer­ica to exit the deal if a mate­r­ial adverse event (”MAC”) occurred. After a series of inter­nal con­sul­ta­tions and con­sul­ta­tions with coun­sel, on Decem­ber 17,2008, Lewis informed then-Treasury Sec­re­tary Henry Paul­son that Bank of Amer­ica was seri­ously con­sid­er­ing invok­ing the MAC clause. Paul­son asked Lewis to come to Wash­ing­ton that evening to dis­cuss the matter.

‘At a meet­ing that evening Sec­re­tary Paul­son, Fed­eral Reserve Chair­man Ben Bernanke, Lewis, Bank of America’s CFO, and other offi­cials dis­cussed the issues sur­round­ing invo­ca­tion of the MAC clause by Bank of Amer­ica. The Fed­eral offi­cials asked Bank of Amer­ica not to invoke the MAC until there was fur­ther con­sul­ta­tion. There were follow-up calls with var­i­ous Trea­sury and Fed­eral Reserve offi­cials, includ­ing with 2 Trea­sury Sec­re­tary Paul­son and Chair­man Bernanke. Dur­ing those meet­ings, the fed­eral gov­ern­ment offi­cials pres­sured Bank of Amer­ica not to seek to rescind the merger agree­ment. We do not yet have a com­plete pic­ture of the Fed­eral Reserve’s role in these mat­ters because the Fed­eral Reserve has invoked the bank exam­i­na­tion privilege…

‘On the issue of ter­mi­nat­ing man­age­ment and the Board, Sec­re­tary Paul­son indi­cated that he told Lewis that if Bank of Amer­ica were to back out of the Mer­rill Lynch deal, the gov­ern­ment either could or would remove the Board and man­age­ment. Sec­re­tary Paul­son told Lewis a series of con­cerns, includ­ing that Bank of America’s invo­ca­tion of the MAC would cre­ate sys­temic risk and that Bank of Amer­ica did not have a legal basis to invoke the MAC (though Sec­re­tary Paulson’s basis for the opin­ion was entirely based on what he was told by Fed­eral Reserve officials).

‘Sec­re­tary Paulson’s threat swayed Lewis. Accord­ing to Sec­re­tary Paul­son, after he stated that the man­age­ment and the Board could be removed, Lewis replied, “that makes it sim­ple. Let’s deesca­late.” Lewis admits that Sec­re­tary Paulson’s threat changed his mind about invok­ing that MAC clause and ter­mi­nat­ing the deal. Sec­re­tary Paul­son has informed us that he made the threat at the request of Chair­man Bernanke. After the threat, the con­ver­sa­tion between Sec­re­tary Paul­son and Lewis turned to receiv­ing addi­tional gov­ern­ment assis­tance in light of the stag­ger­ing Mer­rill Lynch losses.’”

Source: Cuomo’s let­ter, April 23, 2009 (hat tip: The King Report).

Cal­cu­lated Risk: BofA CEO — “Credit is bad, going to get worse”
“BAC CEO Ken Lewis on the con­fer­ence call:

“‘Let me make a cou­ple com­ments about our given envi­ron­ment. Credit is bad and we believe credit is going to get worse before it will even­tu­ally sta­bi­lize and improve. Whether that turn is later this year or in the first half of 2010, I’m not going to haz­ard a guess … For the rest of the year we look for charge-offs to con­tinue to trend upward …”

Source: Cal­cu­lated Risk, April 20, 2009.

CEP News: IMF revises down global growth estimates

“The Inter­na­tional Mon­e­tary Fund expects the global econ­omy to con­tract 1.3% in 2009, a down­ward revi­sion from the pre­vi­ous fore­cast call­ing for a con­trac­tion of between 0.5% and 1.0%, accord­ing to its semi-annual report released on Wednesday.

“The Fund also said that in 2010 the global econ­omy should grow 1.9% ver­sus a pre­vi­ous fore­cast for 3% growth.

“‘This is not the time for com­pla­cency, and the need for strong poli­cies, both on the macro and espe­cially on the finan­cial fronts, is as acute as ever,’ said IMF chief econ­o­mist Olivier Blan­chard. ‘But, with such poli­cies in place, there is light at the end of this long tun­nel. World growth can turn pos­i­tive by the end of this year, and unem­ploy­ment can start decreas­ing by the end of next year.’

“All G7 nations are expected to con­tract in 2009 with the US econ­omy shrink­ing 2.8% in 2009, with zero growth in 2010.

“The Japan­ese econ­omy is expected to con­tract 6.2% in 2009 and grow 0.5% in 2010, the euro zone econ­omy is fore­cast to shrink 4.2% in 2009 and 0.4% in 2010, the Cana­dian econ­omy is seen falling 2.5% in 2009 and grow­ing 1.2% the fol­low­ing year, and the UK econ­omy is expected to decline 4.1% in 2009 and 0.4% in 2010.

“‘These pro­jec­tions are based on an assess­ment that finan­cial mar­ket sta­bi­liza­tion will take longer than pre­vi­ously envis­aged, even with strong efforts by policy-makers,’ accord­ing to Blan­chard and José Viñals, head of the IMF’s Mon­e­tary and Cap­i­tal Mar­kets Depart­ment, in a joint statement.”

Source: CEP News, April 22, 2009.

BCA Research: From eco­nomic free-fall to slid­ing
“The flow of eco­nomic and earn­ings data has con­tin­ued to beat expec­ta­tions in recent weeks, help­ing to grad­u­ally heal investor sentiment.

“Our global lead­ing eco­nomic indi­ca­tor and boom/bust index have both ticked higher, albeit from his­tor­i­cally depressed read­ings. Sim­i­larly, pur­chas­ing man­agers’ sur­veys and busi­ness con­fi­dence mea­sures appear to have bot­tomed across the devel­oped world, after free-falling late last year. Even last week’s release of the Fed’s Beige Book high­lighted that the level of eco­nomic activ­ity remains extremely weak, although slightly less so than the pre­vi­ous report.

“Still, the econ­omy has merely shifted from falling off a cliff to slid­ing down a slope. The lat­ter is cer­tainly less ter­ri­fy­ing and jus­ti­fies the unwind­ing of Armaged­don trades but is hardly bull­ish. Risk assets may con­tinue to move higher from over­sold lev­els over the next few weeks but sus­tained upside will require evi­dence that the spate of pos­i­tive sec­ond deriv­a­tive of growth indi­ca­tors will turn into a mean­ing­ful recovery.

“Aggres­sive fis­cal stim­u­lus in most coun­tries, com­bined with the poten­tial for a pos­i­tive inven­tory adjust­ment, should sta­bi­lize GDP growth in Q3 and Q4. How­ever, an ongo­ing improve­ment in growth con­di­tions will be reliant on fix­ing the global bank­ing sys­tem and credit chan­nels, allow­ing liq­uid­ity to begin flow­ing to the real econ­omy. While our finan­cial sec­tor stress index has eased mod­estly, it remains extremely ele­vated. Sim­i­larly, bank lend­ing sur­veys have improved but stan­dards are not yet easing.

“Bot­tom line: Pol­i­cy­mak­ers will need to con­tinue act­ing aggres­sively for the recov­ery in risk assets to per­sist. We are posi­tioned mod­estly in favor of refla­tion but pre­fer tak­ing bets in fixed income spread prod­uct rather than equi­ties due to rel­a­tive value and a bet­ter yield pickup in case a sus­tain­able upleg takes time to develop.”

Source: BCA Research, April 24, 2009.

Nouriel Roubini (Red­iff News): End of eco­nomic gloom?
“Mild signs that the rate of eco­nomic con­trac­tion is slow­ing in the United States, China and other parts of the world have led many econ­o­mists to fore­cast that pos­i­tive growth will return to the US in the sec­ond half of the year, and that a sim­i­lar recov­ery will occur in other advanced economies.

“The emerg­ing con­sen­sus among econ­o­mists is that growth next year will be close to the trend rate of 2.5%.

“Investors are talk­ing of ‘green shoots’ of recov­ery and of pos­i­tive ‘sec­ond deriv­a­tives of eco­nomic activ­ity’ (con­tin­u­ing eco­nomic con­trac­tion is the first, neg­a­tive, deriv­a­tive, but the slower rate sug­gests that the bot­tom is near).

“As a result, stock mar­kets have started to rally in the US and around the world. Mar­kets seem to believe that there is light at the end of the tun­nel for the econ­omy and for the bat­tered prof­its of cor­po­ra­tions and finan­cial firms.

“This con­sen­sus opti­mism is, I believe, not sup­ported by the facts. Indeed, I expect that while the rate of US con­trac­tion will slow from –6% in the last two quar­ters, US growth will still be neg­a­tive (around –1.5 to –2%) in the sec­ond half of the year (com­pared to the bull­ish con­sen­sus of +2%).

“More­over, growth next year will be so weak (0.5 to 1%, as opposed to the con­sen­sus of 2% or more) and unem­ploy­ment so high (above 10%) that it will still feel like a recession.

“In the euro zone and Japan, the out­look for 2009 and 2010 is even worse, with growth close to zero even next year. China will have a more rapid recov­ery later this year, but growth will reach only 5% this year and 7% in 2010, well below the aver­age of 10% over the last decade.

“Given this weak out­look for the major economies, losses by banks and other finan­cial insti­tu­tions will con­tinue to grow. My lat­est esti­mates are $3.6 tril­lion in losses for loans and secu­ri­ties issued by US insti­tu­tions, and $1 tril­lion for the rest of the world.”

Click here for the full article.

Source: Nouriel Roubini, Red­iff News, April 15, 2009.

Alan Abel­son (Barron’s): Don’t bank on it
“David Rosen­berg of Bank of America/Merrill Lynch last week offered some worth­while obser­va­tions on the stock mar­ket and the eco­nomic land­scape that just hap­pen to but­tress our own reservations.

“He points out that the two groups that paced the sharp upswing were finan­cials and con­sumer cycli­cals, in which there are, respec­tively, net short posi­tions of 5 bil­lion and 2.7 bil­lion shares. Which strongly sug­gests that not an insignif­i­cant part of the rally has been pro­vided by shorts run­ning for cover.

“He also points out that the Rus­sell 2000 small-cap index is up 36% since the March low, and has out­per­formed the S&P by some 980 basis points. As David says, ‘the last time it pulled such a mas­sive rab­bit out of the hat’ was in the stretch from late Novem­ber to early Jan­u­ary, and the major aver­ages pro­ceeded to make new lows two months later.

“Another amber light he spots is investor con­fi­dence. Over the past five weeks, he reports, Ras­mussen, which takes a daily read­ing, has seen its investor-confidence index surge 32 points, an unprece­dented climb in so short a span. This could be, he sus­pects, a ‘fly in the oint­ment for a sus­tained equity-market rally’.

“David has four mark­ers that will sig­nal to him that the econ­omy is finally mak­ing the turn and start­ing an extended expan­sion. The first is home prices. The sec­ond is the personal-savings rate. Marker No. 3 is the debt-service ratio, and No. 4 is the ratio of the coincident-to-lagging indi­ca­tors of the Con­fer­ence Board.

“Aggre­gat­ing those four mark­ers, he cal­cu­lates that we are roughly 44% of the way through the adjust­ment process. That is a tick up from where we were last month. How­ever, the improve­ment, he laments, has been very mod­est and very slow.

“We should add that he also stresses that it’s crit­i­cal for both the econ­omy and the mar­ket that pay­rolls stop shrink­ing. All the talk about job­less claims “sta­bi­liz­ing” is so much pop­py­cock, he snorts. That num­ber of claims, he notes, is still con­sis­tent with monthly pay­roll losses of around 700,000. As with indus­trial pro­duc­tion, which is also in a vicious slump, employ­ment must stop falling before a reces­sion typ­i­cally ends.

“‘Call us when claims fall below 400,000,’ he says, which is his esti­mate of ‘the cut-off for pay­roll expansion/contraction’.

“Until then, he warns, ‘the reces­sion will remain a real­ity. Ral­lies will be brief, no mat­ter how vio­lent, and green shoots are a fore­cast with a very wide error term attached to it.’”

Source: Alan Abel­son, Barron’s, April 18, 2009.

Barry Ritholtz (The Big Pic­ture): The (false) glim­mer of hope
“Nice cover image from The Econ­o­mist on the brown shoots.

“Excerpt: ‘But, wel­come as it is, opti­mism con­tains two traps, one obvi­ous, the other more sub­tle. The obvi­ous trap is that con­fi­dence proves mis­placed — that the glim­mers of hope are mis­in­ter­preted as the begin­nings of a strong recov­ery when all they really show is that the rate of decline is slow­ing. The sub­tler trap, par­tic­u­larly for politi­cians, is that con­fi­dence and bet­ter news cre­ate ruinous com­pla­cency. Opti­mism is one thing, but hubris that the world econ­omy is return­ing to nor­mal could hin­der recov­ery and block poli­cies to pro­tect against a fur­ther plunge into the depths.’”

Source: Barry Ritholtz, The Big Pic­ture, April 23, 2009.

Horowitz & Com­pany: Reces­sions — past and present

Source: Horowitz & Com­pany, April 2009.

Asha Ban­ga­lore (North­ern Trust): Lead­ing Index — con­tin­ues to send mes­sage of weak eco­nomic con­di­tions
“The Con­fer­ence Board’s Index of Lead­ing Indi­ca­tors (LEI) dropped –0.3% in March 2009, after a revised 0.2% decline dur­ing Feb­ru­ary. The LEI posted the last increase in June 2008. On a year-to-year basis, the quar­terly aver­age of the LEI fell 3.8% after a 4.0% decline in the fourth quar­ter. The LEI appears to have estab­lished a bot­tom in the fourth quar­ter of 2008.

“The main mes­sage is that the LEI con­tinue to point to weak eco­nomic con­di­tions in the near term. More is required to declare that the econ­omy is out of the woods.”

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

Asha Ban­ga­lore (North­ern Trust): Chicago Fed National Activ­ity Index shows a note­wor­thy improve­ment
“The Chicago Fed National Activ­ity Index (CFNAI) was –2.96 in March ver­sus –2.82 in Feb­ru­ary. The 3-month mov­ing aver­age of the index pro­vides a more con­sis­tent pic­ture of national activ­ity. In March, the 3-month mov­ing aver­age increased to –3.27 from –3.57 in Feb­ru­ary. A bot­tom of the 3-month mov­ing aver­age of the CFNAI is asso­ci­ated with the likely end of a reces­sion, most of the time. We will be track­ing this infor­ma­tion to get a heads up about the economy.”

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

Asha Ban­ga­lore (North­ern Trust): House Price Index points to mod­er­a­tion in pace of decline
“The Fed­eral Hous­ing Finance Authority’s (pre­vi­ously OFHEO) House Price Index (HPI) for Feb­ru­ary moved up 0.7% in Feb­ru­ary after a 1.1% increase in Jan­u­ary. From a year ago the HPI dropped 6.43% com­pared with a 6.88% decline in Jan­u­ary. The sharpest decline was recorded in Novem­ber 2008 (-9.06%). The Case-Shiller Home Price Index for Feb­ru­ary will be pub­lished on April 28. In Jan­u­ary the Case-Shiller Home Price Index fell 19% from a year ago fol­low­ing an 18.6% drop in December.

“Two out of three house price indexes appear to have estab­lished a ten­ta­tive bot­tom. The New York Times (For Hous­ing Cri­sis, the End Prob­a­bly Isn’t Near) story sug­gests that addi­tional price declines, prob­a­bly of a large mag­ni­tude, are likely in the near term. The ele­vated level of inven­to­ries of unsold homes and the weak­ness in employ­ment con­di­tions sup­port the con­clu­sion of the arti­cle. How­ever, we should bear in mind that other sec­tors of the econ­omy are show­ing pre­lim­i­nary signs of sta­bi­liza­tion that could trans­late into a recov­ery given the his­tor­i­cal size of the mon­e­tary and fis­cal pol­icy stim­u­lus put in place.”

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

Asha Ban­ga­lore (North­ern Trust): Sales of exist­ing homes appear to be sta­bi­liz­ing at a low level
“Sales of all exist­ing homes dropped 3.0% at an annual rate of 4.57 mil­lion units in March. Sales of exist­ing single-family homes declined 2.8% to an annual rate of 4.10 mil­lion units in March. Sales of single-family exist­ing homes have moved in a nar­row range of 4.06 mil­lion — 4.25 mil­lion in last five months, sug­gest­ing that a bot­tom at a low level is being estab­lished. The Beige Book, pre­pared for the April 28–29 FOMC meet­ing, noted that there were ‘some signs that con­di­tions may be stabilizing’.

“The sea­son­ally adjusted inventory-sales ratio for exist­ing single-family homes rose slightly to a 9.6-month sup­ply mark in March from a 9.5-month sup­ply in the ear­lier month. This ratio appears to have peaked in Novem­ber 2008 (11.3 month sup­ply) and has since moved in a nar­row range between 9.96 months and 9.53 months.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, April 23, 2009.

Asha Ban­ga­lore (North­ern Trust): New home sales appear to be sta­bi­liz­ing
“Sales of new homes dropped 0.6% to an annual rate of 356,000 in March fol­low­ing an upwardly revised gain in sales dur­ing Feb­ru­ary (358,000 ver­sus ear­lier esti­mate of 337) and Jan­u­ary (331,000 ver­sus ear­lier esti­mate of 322,000). The level of new home sales sug­gests that sales are sta­bi­liz­ing. … year-to-year decline in sales in new homes in March was smaller than in prior months.

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, April 24, 2009.

Asha Ban­ga­lore (North­ern Trust): Ini­tial Job­less Claims erase part of the improve­ment seen in recent weeks
“Ini­tial job­less claims moved up 27,000 to 640,000 in the week ended April 18 and erased a part of the decline seen in the prior two weeks.

“Con­tin­u­ing claims, which lag ini­tial claims by one week, advanced 93,000 to 6.137 mil­lion, a new record. The insured unem­ploy­ment rate rose to 4.6% from 4.5% in the pre­vi­ous week. The insured unem­ploy­ment rate has risen one per­cent­age point in a short span of 10 weeks which has occurred only on two other occa­sions. The job­less claims report presents a seri­ous chal­lenge to policymakers.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, April 23, 2009.

Casey’s Charts: Pour­ing fuel on the fire
“In Novem­ber, the Fed announced its intent to pur­chase agency mortgage-backed secu­ri­ties directly from the mar­ket ‘to reduce the cost and increase the avail­abil­ity of credit for the pur­chase of houses’.

“After pump­ing $350 bil­lion worth of freshly printed dol­lars into the sys­tem, they’ve suc­ceeded in forc­ing mort­gage rates to near his­toric lows. Great news for home­own­ers able to refi­nance; yet new home sales remain stagnant.

“There’s no telling when the hous­ing mar­ket will sta­bi­lize. But the Fed is cer­tain to con­tinue fuel­ing the fire with cheap money until recov­ery signs appear.”

Source: Casey’s Charts, April 21, 2009.

Bloomberg: Zero per­cent on Trea­sury Bills as China, Fed con­verge
“The last time US Trea­sury bill rates headed toward zero per­cent investors were pan­ick­ing. Now it’s an indi­ca­tion Fed­eral Reserve Chair­man Ben Bernanke’s efforts to revive credit mar­kets are start­ing to work.

“Rates on three-month bills turned neg­a­tive in Decem­ber for the first time since the gov­ern­ment began sell­ing them in 1929 as investors sac­ri­ficed returns to pre­serve prin­ci­pal. After increas­ing at the start of the year, rates have dropped 0.20 per­cent­age point since the begin­ning of Feb­ru­ary to 0.13%.

“Demand for bills is ris­ing again because investors includ­ing for­eign cen­tral banks are snap­ping up the shortest-term US secu­ri­ties as the Fed­eral Reserve buys Trea­suries to drive down bor­row­ing costs in a pol­icy of so-called quan­ti­ta­tive eas­ing. China, the largest US cred­i­tor, with $744 bil­lion of debt, has ques­tioned the prac­tice and shifted pur­chases to bills from longer-maturity securities.

“‘There’s a group of investors out there who are look­ing at what the Fed is doing and the pol­icy action they’ve taken and the asset pur­chases, and say­ing ulti­mately this is infla­tion­ary,’ said Stu­art Spodek, co-head of US bonds in New York at Black­Rock. ‘You’re going to invest in very short-term bills because you absolutely need not just the qual­ity but also the absolute liquidity.’

“China bought $5.6 bil­lion in bills and sold $964 mil­lion in US notes and bonds in Feb­ru­ary, accord­ing to Trea­sury data released April 15. It was first time since Novem­ber that China pur­chased more bills than longer-maturity debt.”

“While Trea­sury depends on China to fund the deficit, exports account for about 40% of gross domes­tic prod­uct for the world’s most pop­u­lous nation. China’s exports to the US jumped 40% in March after slump­ing for five con­sec­u­tive months.

“‘China and the US have a sym­bi­otic rela­tion­ship,’ said Win Thin, a senior cur­rency strate­gist in New York at Brown Broth­ers Har­ri­man & Co. ‘We need each other.’”

Source: Daniel Kruger, Bloomberg, April 20, 2009.

Smart­Money: Could munic­i­pal bonds really default?
“When War­ren Buf­fett speaks, it’s usu­ally worth pay­ing atten­tion. This time, the Ora­cle of Omaha is voic­ing con­cerns about the abil­ity of some bat­tered local and state gov­ern­ments to pay off their debts. The idea of cities and states fac­ing insol­vency is alarm­ing for sure, and Buf­fett isn’t alone. Moody’s recently assigned a ‘neg­a­tive out­look’ to the cred­it­wor­thi­ness of all the nation’s local gov­ern­ments. The agency has rarely made such a sweep­ing gen­er­al­iza­tion but said the mag­ni­tude of this reces­sion war­ranted the move. The com­ments are the lat­est to have shaken the once-staid world of munic­i­pal bond investing.

“Tra­di­tion­ally, muni bonds offered lower yields — usu­ally about 20% less — than Trea­sury bonds, since their income isn’t taxed. But the group was crushed last year, send­ing prices down and yields up. Now bar­gain hunters have started to emerge, attracted by yields that are as much as 70 basis points, or 0.7%, more than sim­i­lar 10-year Trea­surys, for exam­ple. As a result, the S&P Muni Index has climbed 7% this year, com­pared with the nearly 6% decline in the broader stock market.

“These low prices reflect investor con­cerns about pos­si­ble down­grades, says Daniel Solen­der, direc­tor of munic­i­pal bond man­age­ment at Lord Abbett. The Fed­eral Reserve’s buy­ing spree in other areas of the bond mar­ket is also depress­ing yields of Trea­sury bonds and mak­ing munic­i­pal bonds all that more attrac­tive. And then there is the $100 bil­lion fis­cal stim­u­lus headed toward the states that should help off­set the short­fall in tax rev­enue, says TD Amer­i­trade Chief Invest­ment Strate­gist Stephanie Giroux, who adds that his­tor­i­cally there has only been a 1% default rate for muni bonds.”

Source: Reshma Kapa­dia, Smart­Money, April 23, 2009.

Bespoke: Muni Bond ETF makes a come­back
“Invest­ing in munic­i­pal bonds is a para­dox for investors right now. On one hand, they are attrac­tive because of their tax-free sta­tus since taxes are expected to rise. On the other hand, with the econ­omy as bad as it is, munic­i­pal­i­ties could come under duress and be at risk of default. Based on the per­for­mance of the National Muni Bond ETF (MUB) in recent months, it looks like investors are weigh­ing the tax advan­tage more heav­ily against default risk. As shown below, MUB is up 14.4% from its lows last year, and it is trad­ing near its all-time highs since the ETF was released in 2007.”

Source: Bespoke, April 24, 2009.

David Fuller (Fuller­money): Clues to stock mar­ket out­look
“Few of the West­ern stock mar­ket indices have ral­lied suf­fi­ciently to con­firm that the bear mar­ket is over. Irrefutable con­fir­ma­tion, in our view, will not occur until share indices break above their 200-day mov­ing aver­ages, which then also turn upwards. Obvi­ously mar­kets will be well off their lows when this evi­dence of at least medium-term uptrends is apparent.

“How­ever, there are many tech­ni­cal clues along the way. The first, spe­cific to West­ern stock mar­kets, is that tech-weighted indices such as Sweden’s OMX and the USA’s Nas­daq 100 did not break to new lows in Feb­ru­ary and March. Tech is often a lead indi­ca­tor. The sec­ond clue is the num­ber of down­side fail­ures which occurred with weaker indices. Third is the orderly and per­sis­tent six-week rally which tested the pre­vi­ous rally high in some although not all of these indices — Germany’s DAX, for instance and the S&P 500 got close to that 880 level which we have often men­tioned in the past.

“There were enough down­ward dynam­ics yes­ter­day [Mon­day] to sug­gest that reac­tions and con­sol­i­da­tions were com­menc­ing in response to the short-term over­bought con­di­tions pre­vi­ously men­tioned. If so, and if West­ern stock mar­ket indices hold at least half of their gains since the March lows dur­ing this pause, which could last for a num­ber of weeks, and then move to new recov­ery highs, the bear mar­ket pat­tern of lower rally highs fol­lowed by new lows will have been bro­ken. There is also a pos­si­bil­ity that indices only hover near cur­rent lev­els for a short while before extend­ing their ral­lies. If so, many would break their pre­vi­ous rally highs, pro­vid­ing a fourth clue by these indices that their bear mar­ket was over.

“I remain rea­son­ably opti­mistic because we have already seen a bull­ish lead from many favoured Fuller­money themes, led by China and Brazil among the big­ger cap­i­tal­i­sa­tion emerg­ing mar­kets, as men­tioned so often in recent months.

“Mean­while, all stock mar­ket indices show vary­ing degrees of the rang­ing, base build­ing rever­sion to the mean (the lat­ter is rep­re­sented by the 200-day MAs) which this ser­vice has been fore­cast­ing since the sell­ing cli­max in late Octo­ber and Novem­ber. Con­se­quently, down­side risk, even for the weak­est stock mar­kets, cur­rently looks to be no worse than base for­ma­tion exten­sion, con­sis­tent with the long con­va­les­cence also forecast.”

Source: David Fuller, Fuller­money, April 21, 2009.

Richard Rus­sell (Dow The­ory Let­ters): Are we in a bear mar­ket rally or a new bull mar­ket?
“(1) The mar­ket turned up in a V-shaped rever­sal off the March 9 low. How­ever, almost all bull mar­kets start with a period of accu­mu­la­tion. This entails a side­ways move, some­times tak­ing weeks or even months. Or it may require a non-confirmation of the Aver­ages as per Decem­ber 1974. At the March low, we saw nei­ther — no indi­ca­tion of accu­mu­la­tion. And that both­ers me.

“(2) At the March lows, we did not see the ‘great val­ues’ that usu­ally accom­pany major bear mar­ket bot­toms (i.e. P/E’s in the 5–8 area, aver­age div­i­dend yields of 5–6%).

“(3) The mar­ket was severely over­sold at the March lows, a con­di­tion that often sets off a ‘relief’ (‘let off the pres­sure’) rally. The advance was prob­a­bly trig­gered by the severely over­sold con­di­tion of the market.

“(4) The one thing a money-manager can­not afford to do is be on the side­lines dur­ing ‘what could be’ a major rally. Once the mar­ket started up from the March 9 low, many money man­agers leaped in. The big short posi­tions were imme­di­ately squeezed. The rise became a momen­tum advance. Retail buy­ers moved in, many try­ing to retrieve some of their bru­tal losses.

“(5) The rally moved up ‘too fast’ — action more typ­i­cal of a bear mar­ket rally than the slow, plod­ding rise that is char­ac­ter­is­tic of the advance in a new bull market.

“(6) Two groups that led the rally were Finan­cials and Con­sumer Cycli­cals. Inter­est­ingly, these two groups con­tained respec­tively 5 bil­lion and 2.7 bil­lion shares sold short. This sug­gests strongly that a sig­nif­i­cant part of the rally was fired up by short-covering in these two groups (thanks Alan Abel­son for this information).

“(7) Many investors and ana­lysts turned opti­mistic after the mar­ket had ral­lied for only a few weeks. At true bear mar­ket bot­toms, investors remain stub­bornly scep­ti­cal or bear­ish for months after the bot­tom. Remem­ber­ing 1974, peo­ple were actu­ally angry when I turned bull­ish at the bot­tom. I was receiv­ing hate let­ters and sub­scrip­tion cancellations.

“All of the above have kept me skep­ti­cal and cau­tious about this rally.”

Source: Richard Rus­sell, The Dow The­ory Let­ters, April 20, 2009.

Eoin Treacy (Fuller­money): Stock mar­kets are vul­ner­a­ble to a pull­back
“In the short-term, all stock mar­kets are vul­ner­a­ble to a pull­back for a num­ber of rea­sons. The six week rally is begin­ning to look overex­tended. Some of the lead­ing shares and com­modi­ties are begin­ning to lose their uptrend con­sis­tency. Taiwan’s key rever­sal on Fri­day is notable in this regard. Israel needs to rally from near cur­rent lev­els if it is to remain con­sis­tent. The same can be said for cop­per and plat­inum. How­ever all of these mar­kets have already posted impres­sive gains and have room to con­sol­i­date above their bases.

“Mar­kets such as the Dow Jones Indus­trial or the FTSE 100 ral­lied well over the last six weeks but only man­aged to push partly back into their pre­vi­ous ranges. Tak­ing the per­for­mance of lead­ing global stock indices into account, we can prob­a­bly deduce that they are in the bot­tom­ing process. How­ever, the case that they have hit their absolute lows is much less clear than for the lead­ing markets.

“‘Buy and hold’ is a suit­able strat­egy for when rel­a­tively con­sis­tent uptrends have been estab­lished. These are not present in the lag­ging mar­kets and it is too early to say with the lead­ing mar­kets. The con­di­tions will be more suit­able for such a strat­egy when the 200-day mov­ing aver­age has turned upwards and indices find sup­port near it on down­ward reac­tions within their uptrends. How­ever, let us not for­get that the con­di­tion­ing process of the bear mar­ket will influ­ence or abil­ity to stay with uptrends once they get going.

“… the Dow Jones World Stock Index has not reverted to its mean in the same way that some of the lead­ing mar­kets have. This sup­ports the lengthy con­va­les­cence hypoth­e­sis for lag­ging mar­kets. This index is cap­i­tal­iza­tion weighted and heav­ily influ­enced by US shares, par­tic­u­larly in the oil and bank­ing sec­tors. Nei­ther of these is cur­rently leading.

“As for the S&P 500, one could have argued that the rally from the Novem­ber low was a failed break. How­ever, the index was unable to sus­tain the ini­tial rally and the pro­gres­sion of lower highs remained in place. It broke down­wards again in Feb­ru­ary and made a new low. On this occa­sion, the rally has been larger and the Index is pres­sur­ing the pro­gres­sion of lower highs so an argu­ment can again be made for a failed down­side break. How­ever, we have quoted 880 as an impor­tant level for the S&P for a num­ber of months. It con­tin­ues to need a sus­tained push above this level to reaf­firm sup­port from the lows.”

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

Bloomberg: S&P 500 will rise to 1,100 this year, Leuthold says
“Steve Leuthold, whose Griz­zly Short Fund returned 74% last year bet­ting against US stocks, said the Stan­dard & Poor’s 500 Index will surge to 1,100 after val­u­a­tions got to the cheap­est lev­els of his career in March.

“Leuthold, 71, who helps man­age $3.2 bil­lion as founder of Minneapolis-based Leuthold Wee­den Cap­i­tal Man­age­ment, said most investors should have 65% of their assets in stocks.

“‘This mar­ket was about as cheap as I’ve seen in my 45 years in this busi­ness,’ Leuthold said in a Bloomberg Tele­vi­sion inter­view today. ‘We’re prob­a­bly going to see the econ­omy start turn­ing upward, not now but toward the end of the year. The mar­ket is a lead eco­nomic indi­ca­tor, so the time clock is about right for the mar­ket to turn up.’

“Leuthold also said that finan­cial shares won’t be the stock market’s lead­ers. He favors tech­nol­ogy and biotech­nol­ogy com­pa­nies and advised investors to avoid ‘defen­sive’ con­sumer shares and utilities.

“‘Investors should start buy­ing gold over the next year or so because of the threat of infla­tion,’ Leuthold said. He started buy­ing the pre­cious metal three weeks ago.”

Source: Rita Nazareth and Erik Schatzker, Bloomberg, April 14, 2009.

Bespoke: Q1 earn­ings growth bet­ter than expected so far
“A fifth of the com­pa­nies in the S&P 500 have reported earn­ings for the first quar­ter, and so far earn­ings are down 16.6% ver­sus the first quar­ter of 2008. While down, this is much bet­ter than the –37.3% expected at the start of earn­ings sea­son. When com­par­ing actual earn­ings ver­sus esti­mates, Con­sumer Dis­cre­tionary, Finan­cials, and Energy are lead­ing the way. Con­sumer Dis­cre­tionary was expected to see a year over year decline of 103.4% at the start of earn­ings sea­son, but the com­pa­nies that have reported in the sec­tor have only seen earn­ings decline 22.2% so far. And Finan­cials are actu­ally show­ing earn­ings growth with 26.3% of the reports in.

“On the down­side, the Indus­trial sec­tor is the only one where actual earn­ings have come in weaker than expected. Earn­ings sea­son still has a long way to go, but the fact that growth has come in bet­ter than expected thus far has been one fac­tor dri­ving the mar­ket higher.”

Source: Bespoke, April 22, 2009.

Bespoke: Earn­ings sea­son beat and miss rates
“A total of 430 US com­pa­nies and 156 S&P 500 names have reported their quar­terly num­bers since earn­ings sea­son began with Alcoa’s report on April 7. We’re always mon­i­tor­ing how com­pa­nies are report­ing ver­sus expec­ta­tions, and below we high­light the per­cent­age of com­pa­nies beat­ing and miss­ing esti­mates as earn­ings sea­son has progressed.

“At the start of earn­ings sea­son, more com­pa­nies were miss­ing esti­mates than beat­ing, how­ever, this trend has changed sig­nif­i­cantly as the bulk of reports have come in this week. At the end of last week, 50% of US com­pa­nies had beaten esti­mates, and this num­ber has increased every day this week to its cur­rent level of 57%. Last quar­ter only 55% of com­pa­nies beat esti­mates, so if we begin to see the ‘beat rate’ increase quar­ter over quar­ter instead of decrease, it will be a pos­i­tive sign for the market.

“And stocks within the S&P 500 are report­ing even bet­ter num­bers. Again, after a slow start, the cur­rent ‘beat rate’ for the 156 S&P 500 com­pa­nies stands at 67%. Earn­ings sea­son still has a long way to go, but the cur­rent trend has investors optimistic.”

Source: Bespoke, April 23, 2009.

Bespoke: Retail stocks show rel­a­tive strength
“At a time when the US con­sumer is sup­posed to be all but dead, retail stocks have been soar­ing. As shown below, the S&P 500 Retail group is up 51.29% since its low last Novem­ber. Inter­est­ingly, when the over­all mar­ket broke to new lows in early March, the Retail group failed to make a new low, which is indica­tive of its rel­a­tive strength.

Source: Bespoke, April 21, 2009.

Casey’s Charts: SPDR Gold Shares grow­ing rapidly
“SPDR Gold Shares (GLD), an exchange-traded fund, first hit the mar­ket in Novem­ber 2004 with 260,000 ounces of gold. Today, GLD is the world’s 6th largest holder of phys­i­cal gold with over 35 mil­lion troy ounces in the vault. In fact, since the gen­eral mar­ket melt­down last fall, the ETF has added over 16 mil­lion ounces and ended 2008 with a 5% gain — not many invest­ments can make that claim.

Source: Casey’s Charts, April 23, 2009.

Vitaliy Kat­senel­son (Con­trar­ian Edge): Who’s going to buy gold?
“After mut­ing CNBC for years, I turned it on by acci­dent yes­ter­day and learned some­thing very inter­est­ing. The gold ETF (GLD) is the sixth largest holder of gold in the world — the whole world, even ahead of China. When investors buy GLD they have to go out and buy gold dri­ving up the prices. This raises a lit­tle ques­tion — who will be buy­ing this gold from GLD when investors will decide to sell it?

“Gold is one of those weird assets where nobody knows what it is really worth. You can­not run dis­counted cash flow analy­sis to value it — it has no cash flows. It is an asset where per­cep­tion and real­ity are deeply intertwined.

“Investors buy­ing the gold ETF (GLD) are influ­enc­ing the price of gold which is fair for the most part as oth­er­wise they’d be buy­ing the real thing. Though of course the ease of buy­ing GLD cre­ates a slightly higher arti­fi­cial demand, but still it is fair game.

“The vio­lent sell off in GLD will drive the prices of gold down dra­mat­i­cally unless a real buyer steps in (like another gov­ern­ment sick of own­ing the US debt for instance) and the gold price could get cut in half overnight. Sud­denly per­cep­tion of not being a store of value will cre­ate a real­ity of gold not being a store of value. The gold game will be over.”

Source: Vitaliy Kat­senel­son, Con­trar­ian Edge, April 18, 2009.

Guardian: Zimbabwe’s cen­tral bank raided pri­vate accounts to prop up min­istries
“Zimbabwe’s cen­tral bank gov­er­nor admit­ted today that he took hard cur­rency from the bank accounts of pri­vate busi­nesses and for­eign aid groups with­out per­mis­sion, say­ing he was try­ing to keep his country’s cash-strapped min­istries running.

“In a state­ment that would be unthink­able com­ing from most cen­tral banks, the gov­er­nor of the Reserve Bank, Gideon Gono, appeared to be issu­ing a plea to keep his job in the face of grow­ing criticism.

“Gono said it was time ‘to let bygones be bygones’ now that Zim­babwe has a new coali­tion gov­ern­ment ded­i­cated to revers­ing its eco­nomic decline.

“The cen­tral banker said he gave the money he took from the hard cur­rency accounts as loans to var­i­ous min­istries, and the pri­vate accounts would be reim­bursed when the min­istries repaid the loans. He said the bank’s efforts ‘sus­tained the coun­try’ in its hour of need.

“Gono’s state­ment showed the prac­tice was wide­spread. It was first hinted at last year, when the inter­na­tional aid agency Global Fund threat­ened to cut off funds to Zim­babwe for fight­ing Aids, tuber­cu­lo­sis and malaria unless money taken from its account was returned. The cen­tral bank returned $7.3 mil­lion to Global Fund.

“The raid­ing of for­eign cur­rency accounts is just one of the highly ques­tion­able actions for which Gono has been sharply criticised.

“In the last two years, Gono has slashed 25 zeros from the local cur­rency, printed more local money with­out backup reserves or assets and dis­trib­uted agri­cul­tural equip­ment to many in Pres­i­dent Robert Mugabe’s party who were given farms seized from white people.”

Source: Guardian, April 20, 2009.

Barron’s: Jim Rogers isn’t buy­ing a US stock recov­ery
“Leg­endary investor Jim Rogers is skep­ti­cal of the lat­est rally in equi­ties — as well the health of the global econ­omy. As such, he is scorn­ing stocks and bonds while embrac­ing com­modi­ties as his invest­ment vehi­cle of choice. Barron’s John Kimel­man got the chance to inter­view the CEO of Rogers Hold­ings, with the fol­low­ing excerpts appear­ing on the web­site yesterday:

Q: When you last did a lengthy inter­view with Barron’s mag­a­zine a year ago you were light­en­ing up on emerg­ing mar­kets invest­ments. Well, you called that one right. But now that many of those mar­kets have fallen from their highs of recent years, are you more optimistic?

A: No. I’ve sold all emerg­ing mar­kets stock except the ones in China. I bought more Chi­nese shares in Octo­ber and Novem­ber dur­ing the panic, but I have not bought China or any other stock mar­kets includ­ing the US since then. I’m not buy­ing any­thing in China right now because the Chi­nese mar­ket ran up maybe 50% since last Novem­ber. It’s been the strongest mar­ket in the world in the past six months and I don’t like jump­ing into some­thing that has been that run up. Still, I’m not think­ing of sell­ing these stocks either. I think if it goes down I’ll buy more. I think you will find that it’s the sin­gle strongest mar­ket in the world since last fall.

Q: That being said, you cur­rently think Chi­nese stocks are bid-up now, so you’re not buy­ing at these lev­els. So what have you been buy­ing lately?

A: I have been buy­ing com­modi­ties through the Rogers com­mod­ity indexes I devel­oped because my lawyer won’t let me buy indi­vid­ual com­modi­ties. I recently bought all four Rogers indexes — the Ele­ments Rogers Inter­na­tional Com­modi­ties Index (ticker:RJI) as well as the three spe­cialty indexes, the Inter­na­tional Met­als (RJZ), the Inter­na­tional Energy (RJN), and the Inter­na­tional Agri­cul­ture (RJA.) That’s how I invest in com­modi­ties and that’s what I bought last week. I have been buy­ing these shares since last fall and up to last week.

Q: Now despite the recent stock-market rally that started in March, many US stocks are trad­ing well off their 2007 highs. How come you see no value to this market?

A: I am not buy­ing US com­pa­nies mainly because I think we may have seen a bot­tom but I don’t think we have seen the bot­tom. I am skep­ti­cal about the rally, the world econ­omy for the next year or two or three. But if stocks go down, I can make money with com­modi­ties. In the 1970s, com­modi­ties went through the roof even though stocks were a dis­as­ter. In the 1930s, com­modi­ties ral­lied first and went up the most long before stocks pulled it together.

Q: Can you sum­ma­rize the rea­sons for your bull­ish­ness about commodities?

A: It depends on the sup­ply and demand. And we have had a dearth of sup­ply. Nobody has invested in pro­duc­tive capac­ity for 25 or 30 years now. The inven­to­ries of food are the low­est they have been in 50 years and you have a short­age of farm­ers even right now because most farm­ers are old men because it has been such a hor­ri­ble busi­ness for 30 years. And as for met­als, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it’s going to be 15 or 20 years before we see new mines come on. Nobody has been open­ing mines for 30 years and they are not going to. And in the mean­time reserves are declin­ing. As for oil, the Inter­na­tional Energy Agency came out recently with a study show­ing that oil reserves world­wide were declin­ing at the rate of 6% or 7% a year.

That does not mean that if sud­denly the US goes bank­rupt that every­thing won’t col­lapse in price. But I would rather be in com­modi­ties because it’s the only thing I know where the fun­da­men­tals are improv­ing. They are not improv­ing for Citibank or Gen­eral Motors but the sup­ply sit­u­a­tion in com­modi­ties is such that when demand comes back, then com­modi­ties are going to be the best place to be in my view.”

Click here for the full article.

Source: Barron’s, April 20, 2009.

Bespoke: Baltic Dry Index on 9-day win­ning streak
“The Baltic Dry Index is used to track the glob­al­iza­tion trade, as it mea­sures the sup­ply and demand for the ship­ment of goods around the world based on trans­port costs. The Baltic Dry Index has had some big ups and downs this year, going on mul­ti­ple win­ning and los­ing streaks. This year alone, the index has had a 17-day win­ning streak, a 21-day los­ing streak, and it’s cur­rently on another 9-day win­ning streak. The trend in 2009 has been upward, how­ever, as the index is up 145%. And it’s still impor­tant to remem­ber that we’re work­ing off a very low base after the glob­al­iza­tion bub­ble burst last year. The index is still off 84% from its highs in May of 2008.”

Source: Bespoke, April 24, 2009.

Bespoke: Bespoke’s com­mod­ity snap­shot
“Below are our trad­ing range charts for some com­modi­ties. The green shad­ing rep­re­sents 2 stan­dard devi­a­tions above and below the commodity’s 50-day mov­ing aver­age. When the price moves above or below this green shad­ing, the com­mod­ity is in extreme over­bought or over­sold territory.

“As shown, after reach­ing over­bought ter­ri­tory a few weeks ago, oil has pulled back to just above the mid­dle of its trad­ing range. After trend­ing higher since last Octo­ber, gold and sil­ver have recently moved to the bot­tom of their trad­ing ranges, but they bounced nicely off of over­sold ter­ri­tory a cou­ple days ago. Plat­inum has held up bet­ter than gold and sil­ver and is closer to the top of its trad­ing range than the bottom.

“Not shown, cop­per con­tin­ues to trend higher, along with orange juice, while corn, wheat, and cof­fee are in a side­ways trad­ing pattern.”

Source: Bespoke, April 23, 2009.

Finan­cial Times: China reveals big rise in gold reserves
“China has qui­etly almost dou­bled its gold reserves to become the world’s fifth-biggest holder of the pre­cious metal, it emerged on Fri­day, in a move that sig­nals the revival of bul­lion after years of fad­ing importance.

“Gold rose to a three-week high of more than $910 an ounce after Hu Xiao­lian, head of the secre­tive State Admin­is­tra­tion of For­eign Exchange, which man­ages the country’s $1,954 bil­lion in for­eign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.

“The news could spark inter­est in gold among other cen­tral banks. ‘When the largest holder of for­eign exchange reserves dis­closes an increase in gold hold­ings, other coun­tries may decide to think more care­fully about under­weight gold posi­tions,’ said John Reade, a pre­cious met­als strate­gist at UBS.

“The increase in China’s gold reserves has come pri­mar­ily from domes­tic pro­duc­tion and refin­ing. How­ever, the news raises ques­tions about the future of Beijing’s for­eign reserves policy.

“Ahead of the G20 sum­mit in Lon­don this month, China sug­gested global reliance on the US dol­lar as a reserve cur­rency should be reduced.

“China has been diver­si­fy­ing away from the dol­lar since 2005, when it broke the renminbi’s peg to the US cur­rency and offi­cially marked it to a bas­ket of cur­ren­cies, but it still holds more than two-thirds in US dollar-denominated assets by most estimates.

“As its trade sur­plus and forex reserves bal­looned in recent years, Bei­jing con­tin­ued to buy huge amounts of US Trea­sury bonds while rais­ing the pro­por­tion of pur­chases it allot­ted to other cur­ren­cies and to gold.

“‘China’s announce­ment sig­nals a broader shift in cen­tral banks’ atti­tude towards gold,’ said Philip Klap­wijk, chair­man of GFMS, the pre­cious metal consultancy.”

Source: Jamil Ander­lini and Javier Blas, Finan­cial Times, April 24, 2009.

Eugen Wein­berg (Com­merzbank): Cop­per ral­lies too soon
“The rally in the cop­per mar­ket, where prices have risen by about 50% in the past eight weeks, looks to be pre­ma­ture, says Eugen Wein­berg, com­modi­ties ana­lyst at Commerzbank.

“He notes three main points put for­ward by mar­ket bulls.

“First, signs of a sta­bil­is­ing eco­nomic envi­ron­ment jus­tify a cycli­cal recov­ery in base metal prices; sec­ond, pur­chases by China’s State Reserve Bureau will pre­vent a strong decline in demand; third, Lon­don Metal Exchange cop­per inven­to­ries have declined sharply, and falling inven­tory lev­els nor­mally point to a mar­ket tightening.

“But Mr Wein­berg believes an improve­ment in the eco­nomic sit­u­a­tion is still uncer­tain. ‘And even if sen­ti­ment indi­ca­tors have sus­tain­ably turned round, pre­vi­ous eco­nomic cycles have not seen a recov­ery in base metal prices right after sen­ti­ment has bottomed.’

“He also believes that the pur­chases by the SRB in China can only sup­port prices in the short term. ‘Given that its strate­gic stock­pil­ing effort is at an advanced stage, the SRB will grad­u­ally with­draw from the mar­ket dur­ing the com­ing weeks. The shrink­ing LME inven­to­ries, espe­cially in ware­houses in Asia, reflect the strong Chi­nese import-driven pull.

“‘We there­fore expect a sig­nif­i­cant cor­rec­tion in the cop­per price dur­ing com­ing weeks — although this might be delayed by ris­ing inter­est from finan­cial investors.’”

Source: Eugen Wein­berg, Com­merzbank (via Finan­cial Times), April 23, 2009.

Reuters: Boone Pick­ens sees oil at $75/bbl at end-year
“Texas oil bil­lion­aire T. Boone Pick­ens on Mon­day reit­er­ated his pre­dic­tion that crude oil prices would hit $75 a bar­rel this year as pro­duc­ers scale back production.

“Pick­ens said about OPEC pro­duc­ers: ‘They told you they want $75 by the end of the year, I would count on that, I believe them.’

“OPEC has scaled back out­put to help sup­port crude prices, which have dropped from record highs over $147 a bar­rel in July to around $47 a bar­rel on Monday.

“‘I think you are going to clean up the stocks because the peo­ple who have the oil are cut­ting sup­ply,’ Pick­ens said at an alter­na­tive fuels and vehi­cles con­fer­ence, refer­ring to the nearly 19-year high on US inven­to­ries of crude oil reported last week by the fed­eral government.

“The United States would likely burn through its sup­ply over­hang in three months, he told reporters.”

Source: Reuters, April 20, 2009.

CEP News: Euro zone PMIs hit six-month highs, sug­gest­ing eco­nomic sta­bi­liza­tion may be in sight
“Euro zone out­put improved by a record mar­gin in April, sug­gest­ing that the econ­omy could begin to sta­bi­lize by the end of the year, Markit Eco­nom­ics reported on Thursday.

“Accord­ing to advance esti­mates, the euro zone man­u­fac­tur­ing pur­chas­ing man­agers index hit a six-month high of 36.7 in April, beat­ing expec­ta­tions of a 34.7 print.

“The ser­vices PMI also reached its high­est level in six months, ris­ing to 43.1 in April, up 1.7 points from the fore­casted fig­ure and up 2.2 points from March’s level.

“Tak­ing both the man­u­fac­tur­ing and ser­vices PMIs together, Markit noted that the com­pos­ite PMI jumped by a record 2.2 points to a six-month high of 40.5 in April, up from both the 38.9 print expected and the pre­vi­ous month’s 38.3 reading.

“The improve­ments were wide­spread in the month, Markit said, not­ing that declines in new busi­ness and back­logs of work had eased sharply. Fur­ther­more, the ratio of new orders to stocks rose to its high­est level since August, hint­ing at good news to come regard­ing future out­put, Markit said.

“How­ever, employ­ment lev­els con­tin­ued to con­tract, falling at record speeds as com­pa­nies adjusted to weak­en­ing demand, the report said.

“Despite the strong gain in the PMI fig­ures, Markit senior econ­o­mist Chris Williamson warned against being overly optimistic.

“‘The ongo­ing sever­ity of the sit­u­a­tion should not be under­es­ti­mated,’ he said ‘The lat­est num­bers are still con­sis­tent with a double-digit annual rate of decline of man­u­fac­tur­ing out­put and a quar­terly rate of con­trac­tion of GDP of at least 0.5%.’”

Source: CEP News, April 23, 2009.

CEP News: ZEW head­line fig­ure rises to 2-year high on strong Ger­man investor opti­mism
“Stronger-than-expected Ger­man investor opti­mism for the six-month out­look pushed the Cen­tre for Euro­pean Eco­nomic Research’s eco­nomic sen­ti­ment indi­ca­tor above zero for the first time since July 2007 and to its high­est level since June of the same year.

“Accord­ing to the ZEW, the Ger­man eco­nomic sen­ti­ment indi­ca­tor rose to +13.0, over­shad­ow­ing both the +2.0 read­ing expected and March’s –3.5 level. How­ever, the research firm was quick to add that the head­line fig­ure still remains sig­nif­i­cantly below its long-term aver­age of 26.1 points.

“In a report issued on Tues­day, the ZEW noted that sen­ti­ment likely ben­e­fited from recent gov­ern­ment stim­u­lus pack­ages, as well as eas­ing infla­tion­ary pres­sures and the improv­ing eco­nomic out­look in both the US and China

“‘Along with other indi­ca­tors, the ZEW sen­ti­ment indi­ca­tor reveals that there are well-founded expec­ta­tions that the down­ward dynam­ics of the busi­ness cycle are bot­tom­ing out,’ ZEW Pres­i­dent Dr. Wolf­gang Franz said. ‘It is even becom­ing more likely that the econ­omy will slowly recover in the sec­ond half of this year.’”

Source: CEP News, April 21, 2009.

Ifo: Rise in the Ifo Busi­ness Cli­mate Index
“The Ifo Busi­ness Cli­mate for indus­try and trade in Ger­many has improved some­what in April. The firms are no longer quite so dis­sat­is­fied with their cur­rent busi­ness sit­u­a­tion than in the pre­vi­ous month. With regard to the busi­ness out­look for the com­ing half year, the scep­ti­cal assess­ments have again been reduced some­what. It is thus likely that the decline in eco­nomic out­put will slow clearly.”

Click here for the full report.

Source: Ifo, April 24, 2009.

Finan­cial Times: Dar­ling “fly­ing on a wing and a prayer”
“Mar­tin Wolf, FT chief eco­nom­ics com­men­ta­tor, analy­ses the UK Bud­get 2009. He says noth­ing in today’s Bud­get will ensure chan­cel­lor Alis­tair Darling’s opti­mistic growth fore­casts will be achieved and that he is at the mercy of a global reces­sion. He says the gov­ern­ment appears to want to spend as if noth­ing has hap­pened at least until next year and the election.”

Source: Finan­cial Times, April 23, 2009.

CEP News: UK plans to bor­row £703 bil­lion over five years to fight reces­sion
“The UK gov­ern­ment plans to bor­row a record £703 bil­lion over the next five years — £269 bil­lion more than in the pre­vi­ous bud­get — to con­tinue sup­port­ing a suf­fer­ing econ­omy and coun­ter­act large job losses.

“Pre­sent­ing the fis­cal 2009 bud­get on Wednes­day, UK Chan­cel­lor of the Exche­quer Alis­tair Dar­ling said the UK econ­omy is expected to con­tract 3.5% in 2009 and grow 1.25% in 2010.

“To coun­ter­act large declines in employ­ment, the UK is propos­ing to spend an addi­tional £1.7 bil­lion to cre­ate jobs and pro­vide guar­an­tees for the unem­ployed over a period of 12 months. The ini­tia­tive applies to per­sons under the age of 25 and is expected to sup­port 250,000 jobs.

“On hous­ing, the UK plans to guar­an­tee asset-backed secu­ri­ties and extend mort­gage sup­port to peo­ple who lost their jobs, and extend the stamp tax duty hol­i­day on homes worth up to £175,000 until the end of the year. The bud­get also allots £500 mil­lion in aid to homebuilders.

“Also included is an auto­mo­bile scrap­ping agree­ment that will offer a £2,000 dis­count to those trad­ing in used cars for new ones. The ini­tia­tive will be in place until March 2010.

“The bud­get also allots £750 mil­lion to set up a strate­gic invest­ment fund.

“The UK’s Debt Man­age­ment Office will issue £220 bil­lion in gilts over the 2009–2010 fis­cal year to finance £175 bil­lion in pub­lic bor­row­ing. Total bor­row­ing is pro­jected to decline to £97 bil­lion by 2013–2014.

“Pub­lic bor­row­ing will total 11.9% of GDP in 2010, said Dar­ling, who wants to cut the cur­rent bud­get deficit in half over the next four years.”

Source: Erik Kevin Franco, CEP News, April 22, 2009.

CEP News: UK house prices post three-month win­ning streak
“UK house prices con­tin­ued mov­ing higher in April, mark­ing three-months of gains, accord­ing to a report from Rightmove.

“House prices climbed 1.8% in April to an aver­age price of £222,077. A month ear­lier, house prices had increased 0.9% to an aver­age price of £218,081.

“On an annual basis, house prices are down 7.3% in April, bet­ter than March’s 9.0% decline.

“Although the news bodes well for the Island Nation who’s hous­ing sec­tor was hard-hit by the finan­cial cri­sis, house prices in Lon­don plunged 3.2% month-over-month in April, revers­ing a 3.1% gain the month prior. This resulted in an annual decline of 4.1% ver­sus the 1.8% con­trac­tion seen in March.”

Source: CEP News, April 19, 2009.

Finan­cial Times: Japan to issue $110 bil­lion bonds for stim­u­lus
“Japan is to issue an extra Y10,800 bil­lion ($110 bil­lion) of gov­ern­ment bonds this fis­cal year to help it tackle its worst reces­sion since the sec­ond world war.

“The bonds will fund the bulk of the government’s $154 bil­lion stim­u­lus plan and will bring its expected total new issuance for the fis­cal year start­ing this month to a record Y44,100 bil­lion, a 33% rise on last year.

“This comes as gov­ern­ments around the globe are tak­ing on record debt lev­els to bail out loss-making banks and bol­ster economies as they attempt to spend their way out of the downturn.

“The US is expected to issue about $2,000 bil­lion in the fis­cal year start­ing last Octo­ber, more than dou­ble last year. The euro­zone gov­ern­ments are set to raise €800 bil­lion ($1,050 bil­lion) this cal­en­dar year, 23% up on 2008.

“The UK gov­ern­ment in Wednesday’s annual Bud­get state­ment is expected to announce plans to issue £180 bil­lion ($270 bil­lion) in the 2009/10 finan­cial year, a 25% rise on last year’s record levels.

Source: Lind­say Whipp, David Oak­ley and Michael Macken­zie, Finan­cial Times, April 21, 2009.

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Bonds: Reversion Cuts Both Ways

Friday, April 24th, 2009

Robert Arnott, Founder, Research Affil­i­ates, and inno­va­tor of FTSE-RAFI Fun­da­men­tal Indices, has pub­lished a detailed report test­ing the ques­tion of why investors should bother hold­ing bonds (at all?) and dis­plac­ing the long-standing notion that stocks for the long run hold a 5-percent risk pre­mium over bonds. This is a must-read-over-the-weekend report as it is lengthy, but far from boring.

Here is a preview:

"Rever­sion cuts both ways," accord­ing to Arnott.

For four decades, from time to time, we hear this ques­tion: Why bother with bonds at all? Bond skep­tics gen­er­ally point out that stocks have beaten bonds by 5 per­cent­age points a year for many decades, and that stock returns mean-revert, so that the true long-term investor enjoys that higher return with lit­tle addi­tional risks in 20-year and longer annu­al­ized returns.

Recent events pro­vide a pow­er­ful reminder that the risk pre­mium is unre­li­able and that mean rever­sion cuts both ways; indeed, those 5 per­cent excess returns, earned in the aus­pi­cious cir­cum­stances of ris­ing price-to-earnings ratios and ris­ing bond yields, are a fast-fading mem­ory, to which too many investors cling, in the face of starkly con­tra­dic­tory evi­dence. Most observers, whether bond skep­tics or advo­cates, would be shocked to learn that the 40-year excess return for stocks, rel­a­tive to hold­ing and rolling ordi­nary 20-year Trea­sury bonds, is not even zero.

The Death Of The Risk Premium?

It’s now well-known that stocks have pro­duced neg­a­tive returns for just over a decade. Real returns for capitalization-weighted U.S. indexes, like the S&P 500 Index, are now neg­a­tive over any span start­ing 1997 or later. Peo­ple fret about our “lost decade” for stocks, with good rea­son, but they under­es­ti­mate the car­nage. Even this sim­ple real return analy­sis ignores our oppor­tu­nity cost. Start­ing any time we choose from 1979 through 2008, the investor in 20-year Trea­suries (con­sis­tently rolling to the near­est 20-year bond and rein­vest­ing income) beats the S&P 500 investor. In fact, from the end of Feb­ru­ary 1969 through Feb­ru­ary 2009, despite the grim bond col­lapse of the 1970s, our 20-year bond investors win by a nose. We’re now look­ing at a lost 40 years!

Stocks have done bet­ter, but not in the last 40 years...

It’s hard to imag­ine that bonds could ever have out­paced stocks for 40 years, but there is prece­dent. Fig­ure 1 shows the wealth of a stock investor, rel­a­tive to a bond investor. From 1802 to Feb­ru­ary 2009, the line rises nearly 150-fold. This doesn’t mean that the stock investor prof­ited 150-fold over the past 200 years. Stocks actu­ally did far bet­ter than that, giv­ing us about 4 mil­lion times our money in 207 years. But bonds gave us 27,000 times our money over the same span. So, the investor hold­ing a broad U.S. stock mar­ket port­fo­lio was 150 times wealth­ier than an investor hold­ing U.S. bonds over this 207-year span. So far, so good.

That 150-fold rel­a­tive wealth works out to a 2.5-percentage-point-per-year advan­tage for the stock mar­ket investor, almost exactly match­ing the his­tor­i­cal aver­age ex ante expected risk pre­mium that Peter Bern­stein and I derived in 2002 in “What Risk Pre­mium Is ‘Nor­mal’?” Those who expect a 5 per­cent risk pre­mium from their stock mar­ket invest­ments, rel­a­tive to bonds, either haven’t stud­ied enough mar­ket history—a char­i­ta­ble interpretation—or have for­got­ten some basic arithmetic—a less char­i­ta­ble view.

A 2.5 per­cent­age point advan­tage over two cen­turies com­pounds might­ily over time. But it’s a thin enough dif­fer­en­tial that it gives us a heck of a ride.

• From 1803 to 1857, stocks floun­dered, giv­ing the equity investor one-third of the wealth of the bond holder; by 1871, that short­fall was finally recov­ered. Oh, by the way, there was a bit of a war—or three—in between. For­get rel­a­tive wealth if you owned Con­fed­er­ate States of Amer­ica stocks or bonds. Most observers would be shocked to learn that there was ever a 68-year span with no excess return for stocks over bonds.
• Stocks con­tin­ued their bumpy ride, deliv­er­ing impres­sive returns for investors, over and above the returns avail­able in bonds, from 1857 until 1929. This 72-year span was long enough to lull new gen­er­a­tions of investors into won­der­ing “why bother with bonds?” Which brings us to 1929.
• The crash of 1929–32 reminded us, once again, that stocks can hurt us, espe­cially if our start­ing point involves div­i­dend yields of less than 3 per­cent and P/E ratios north of 20x. It took 20 years for the stock mar­ket investor to loft past the bond investor again, and to achieve new relative-wealth peaks.
• Then again, between 1932 and 2000, we expe­ri­enced another 68-year span in which stocks beat bonds rea­son­ably relent­lessly, and we were again per­suaded that, for the long-term investor, stocks are the pre­ferred low-risk invest­ment. Indeed, stocks were seen as so very low risk that we tol­er­ated a 1 per­cent yield on stocks, at a time when bond yields were 6 per­cent and even TIPS yields were north of 4 percent.
• From the peak in 2000 to year-end 2008, the equity investor lost nearly three-fourths of his or her wealth, rel­a­tive to the investor in long Treasuries.

This is an in-depth analy­sis and wor­thy of a back to back read, from one of the industry's pre-eminent philoso­phers, as well as the inno­va­tor of FTSE-RAFI Fun­da­men­tal Indexes.

The full report can be read and printed here.

Tags: Bond Yields, Capitalization, Carnage, Contradictory Evidence, Excess Return, Excess Returns, Ftse Rafi, Good Reason, Innovator, Observers, Opportunity Cost, Percentage Points, Premium Bonds, Research Affiliates, Risk Premium, Robert Arnott, Skeptics, Stock Returns, Stocks Bonds, Term Investor, Treasuries, Treasury Bonds
Posted in Bonds, Credit Markets, Economy, Markets | 2 Comments »

10-Yr Treasury Yields: Higher or Lower?

Friday, April 24th, 2009

Econom­pic Data looks at the pos­si­ble direc­tion for 10-Year Trea­surys. On one hand you have the sup­ply issue; on the other hand you have defla­tion and fur­ther dete­ri­o­ra­tion, com­bined with the Fed's impe­tus to pur­chase lond-dated trea­surys which could drive yields down further:

Higher –> Sup­ply: Across the Curve

Trea­sury bonds are tak­ing a severe drub­bing and the yield on the bench­mark 10 year note is approx­i­mately at the level which pre­vailed on the day when the Fed­eral Reserve announced quan­ti­ta­tive ease (2.96 per­cent currently).

One par­tic­i­pant noted that the 200 day mov­ing aver­age on the Long Bond was 3.798 per­cent and the mar­ket pen­e­trated that level this morn­ing as a sharp knife would melt­ing butter.

The yield curve has steep­ened sharply and par­tic­i­pants are deem­ing the belly of the curve par­tic­u­larly odi­ous. The 2year/10 year is once again close to 200 basis points and the 2year/5year/30 year but­ter­fly has returned to 93 basis points after a foray into the low 100s.

Deal­ers report rate lock sell­ing and fear of very heavy Trea­sury sup­ply next week. As I have men­tioned too often the Trea­sury will announce around $ 100 bil­lion of new sup­ply tomor­row. It will con­sist of 2year,5 year and 7 year notes.

Lower –> Quan­ti­ta­tive Eas­ing / Con­tin­ued Eco­nomic Dete­ri­o­ra­tion: Zero Hedge

n light of next week's sched­uled meet­ing of the Fed, we thought we would look at the poten­tial for fur­ther announced quan­ti­ta­tive eas­ing. Last month, the Fed rocked most major mar­kets with the announce­ment of a major pur­chase of long rates to push down yields. Since then, many have dis­missed the pur­chases as a one-time event that are not likely to repeat. How­ever we have to ques­tion that think­ing as it is very much in line with the pre-crisis men­tal­ity that quan­ti­ta­tive eas­ing is the equiv­a­lent of a nuclear bomb in a cen­tral bank's arse­nal and the unpre­dictabil­ity of any result­ing infla­tion would destroy all cred­i­bil­ity that a cen­tral bank may have to price stability.

There has been a lot of crit­i­cism of Big Ben (us included) but one thing that has come out is he is not afraid to take rel­a­tively risky moves to com­bat what­ever he per­ceives as the biggest threat. As we have noted before, he has clearly revealed his play­book in the past and we see lit­tle indi­ca­tion that he will stray from it going for­ward. On the bal­ance between infla­tion and defla­tion, much has been made of the Chi­nese response if we try to print our way out of this sit­u­a­tion but the much larger prob­lem has always been defla­tion. Com­bin­ing what we know about the avail­able pol­icy options and the effec­tive­ness of the last round of QE, we have to believe that more pur­chases of long rates are on the table as a seri­ous consideration.

We are not say­ing that the Fed is deaf to the con­cerns of price sta­bil­ity; indeed, the spe­cific con­cern is addressed in last month's minutes.

Also, some par­tic­i­pants were con­cerned that Fed­eral Reserve pur­chases of longer-term Trea­sury secu­ri­ties might be seen as an indi­ca­tion that the Fed­eral Reserve was respond­ing to a fis­cal objec­tive rather than its statu­tory man­date, thus reduc­ing the Fed­eral Reserve’s cred­i­bil­ity regard­ing long-run price sta­bil­ity. Most par­tic­i­pants, how­ever, saw this risk as low so long as the Fed­eral Reserve was clear about the impor­tance of its long-term price sta­bil­ity objec­tive and demon­strated a com­mit­ment to take the nec­es­sary steps in the future to achieve its objectives.

How­ever, con­sumer spreads con­tinue to stay at high levels.

Addi­tion­ally, long rates have given back much of the gains made from the time of the pre­vi­ous announcement.

In light of the min­i­mal impact of the announced $300B bond pur­chase last month, we have to think that the Fed will give it at least one more go. The Fed can really only directly con­trol the bench­mark — if the Trea­sury fig­ures out a way to strong arm banks into flow­ing credit again, that may put a stop to fur­ther QE but that isn't a likely sce­nario in the short-term.

At this point the issue of defla­tion­ary pres­sure does seem to be the 800-pound gorilla in the room.

Source: Yahoo

Tags: 10 Yr Treasury, Basis Points, Credibility, Crisis Mentality, Drubbing, Economic Deterioration, Federal Reserve, Foray, Impetus, Lond, Moving Average, Nuclear Bomb, Price Stability, Sharp Knife, Time Event, Treasury Bonds, Treasury Yields, Treasurys, Unpredictability, Yield Curve
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Emerging Markets Versus G7

Thursday, April 23rd, 2009

BCA Research has pub­lished the fol­low­ing daily note about the rel­a­tive strength of Emerg­ing Mar­kets ver­sus G7 equity markets.

Our Emerg­ing Mar­kets Strat­egy ser­vice remains bull­ish on many emerg­ing stock mar­kets in Asia and Latin Amer­ica rel­a­tive to their G7 counterparts.

Emerg­ing mar­ket equi­ties bot­tomed late Octo­ber and did not break to new lows in March along with U.S. and Euro­pean indexes. Con­se­quently, emerg­ing mar­ket rel­a­tive per­for­mance has been spec­tac­u­lar. Head­ing for­ward, there is still risk that renewed weak­ness in the global equity bench­mark will weigh on emerg­ing mar­ket stocks. Still, in rel­a­tive terms, we expect out­per­for­mance to per­sist through­out this year. This is con­sis­tent with our bias that the cur­rent prob­lems in the devel­op­ing world are cycli­cal in nature, not struc­tural as is the case in the U.S. and U.K. Bot­tom line: A cor­rec­tion in global equi­ties would be a drag on emerg­ing mar­ket share prices in absolute terms. How­ever, the rel­a­tive out­look remains appeal­ing and investors should con­tinue to over­weight emerg­ing mar­kets in a global equity portfolio.

Tags: Absolute Terms, Bca Research, Benchmark, Counterparts, Developing World, Drag On, Emerging Market Stocks, Emerging Markets, Emerging Stock Markets, European Indexes, Global Equities, Global Equity, Latin America, Lows, Market Share, Relative Performance, Relative Strength, Relative Terms, Share Prices, Strategy Service
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Rebecca Wilder: Of course bank lending is stalling

Thursday, April 23rd, 2009

This post is a guest con­tri­bu­tion by Rebecca Wilder*, author of the of the News N Eco­nom­ics blog.

The Wall Street Jour­nal ran a story about reduced bank lend­ing orig­i­nat­ing from those banks that received TARP monies. Frankly, I don’t know what kind of response the WSJ was going for, but I know what mine was: of course bank lend­ing is stalling. Amid the pre­cip­i­tous eco­nomic decline, loan orig­i­na­tion would likely be much worse had the banks not received cap­i­tal injec­tions. And in look­ing at the data, I noticed that another shoe might drop on con­sumer spend­ing: home equity lines of credit are surging.

The credit crunch is now very evi­dent in the data.

The chart above illus­trates total com­mer­cial bank lend­ing growth since 1950. Lend­ing has stalled at a 2.2% annual growth rate in March 2009, falling 2.3% since its peak in Octo­ber 2008. The unem­ploy­ment rate is at 8.5% and expected to rise fur­ther, GDP is about to post its third con­sec­u­tive decline, and the health of the bank­ing sys­tem is still in ques­tion. It is very likely that annual lend­ing growth would be neg­a­tive by now and prob­a­bly well below growth rates seen in pre­vi­ous credit crunch (cir­cles in chart).

TARP monies and bank lend­ing accord­ing to the WSJ:

“Accord­ing to a Wall Street Jour­nal analy­sis of Trea­sury Depart­ment data, the biggest recip­i­ents of tax­payer aid made or refi­nanced 23% less in new loans in Feb­ru­ary, the lat­est avail­able data, than in Octo­ber, the month the Trea­sury kicked off the Trou­bled Asset Relief Program.

“The total dol­lar amount of new loans declined in three of the four months the gov­ern­ment has reported this data. All but three of the 19 largest TARP recip­i­ents with com­pa­ra­ble data orig­i­nated fewer loans in Feb­ru­ary than they did at the time they received fed­eral infusions.

“The Journal’s analy­sis paints a starker pic­ture of the lend­ing envi­ron­ment than the monthly snap­shots released by the gov­ern­ment and is a reminder of the sever­ity of the credit con­trac­tion. One rea­son for the dis­par­ity: The Trea­sury crunches the data in a way that some experts say under­states the lend­ing decline.”

The Trea­sury reports bank lend­ing here (the WSJ’s ref­er­ence above), say­ing this about res­i­den­tial real estate lend­ing in February:

“Lend­ing lev­els increased from Jan­u­ary pri­mar­ily in res­i­den­tial mort­gage lend­ing which was dri­ven by attrac­tive mort­gage rates.”

The Trea­sury data is out­dated. Since the shadow bank­ing sys­tem is all but dead right now, any loan orig­i­na­tion is likely going through the com­mer­cial bank­ing sys­tem, which is reported by the Fed here through March. The Fed’s data tells a sim­i­lar story as the Trea­sury report, that loan orig­i­na­tion is down.

How­ever, there is one excep­tion: as of March, real estate lend­ing is still ris­ing slightly, but only because house­holds are draw­ing on exist­ing home equity lines of credit. I see this as another shoe to drop on con­sumer spending.

Credit crunch: firm lend­ing is down.

The chart illus­trates monthly com­mer­cial and indus­trial lend­ing by the com­mer­cial banks. Loan orig­i­na­tion has decreased, and the annual growth rate slowed, substantially.

Credit crunch: con­sumer lend­ing — revolv­ing and non revolv­ing — is dropping.

The chart illus­trates monthly con­sumer lend­ing. Con­sumers are reduc­ing debt load by pay­ing off credit cards and new loan orig­i­na­tion (auto, stu­dent) is falling.

Next shoe to drop: house­holds are increas­ingly draw­ing on revolv­ing home equity lines of credit.

The chart illus­trates lend­ing on revolv­ing home equity lines of credit (HELOC). Lend­ing (blue line) is still ris­ing through March at a 20% annual rate. House­holds are using these lines of credit (pre­sum­ably) to finance con­sump­tion needs, and a 20% annual growth rate is likely unsustainable.

Even­tu­ally, the lines of credit will run dry; and house­holds will be forced to cut back on spend­ing, tak­ing another leg down. Not shown here is non-revolving real estate lend­ing, which is down 1.3% in March since its peak in Jan­u­ary 2008.

The credit crunch is in full swing, and the TARP monies no doubt kept lend­ing in pos­i­tive ter­ri­tory for a while. Amid surg­ing unem­ploy­ment, ongo­ing eco­nomic uncer­tainty, and a bank­ing cri­sis that has yet to be resolved, the growth in bank lend­ing is, in my opin­ion, rather remarkable.

Source: Rebecca Wilder, News N Eco­nom­ics, April 21, 2009

*Rebecca Wilder is an econ­o­mist in the finan­cial indus­try. She was pre­vi­ously an assis­tant pro­fes­sor and holds a doc­tor­ate in economics.

Tags: Banking System, Capital Injections, Comparable Data, Consumer Spending, Credit Crunch, Economic Decline, Four Months, GDP, Home Equity Lines, Home Equity Lines Of Credit, Loan Origination, Monies, Severity, Snapshots, Tarp, Treasury Department, Unemployment Rate, Wall Street, Wall Street Journal, Wsj
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