Think the worst is over? What would Benjamin Graham do? (WSJ)

Sunday, May 31st, 2009

Jason Zweig, dis­cusses Mr. Mar­ket and opines about what Ben­jamin Graham's advice would be, given the idea that many are feel­ing as though the worst may be over in the econ­omy and markets.

It is some­times said that to be an intel­li­gent investor, you must be unemo­tional. That isn’t true; instead, you should be inversely emotional.

Even after recent tur­bu­lence, the Dow Jones Indus­trial Aver­age is up roughly 30% since its low in March. It is nat­ural for you to feel happy or relieved about that. But Ben­jamin Gra­ham believed, instead, that you should train your­self to feel wor­ried about such events.

At this moment, con­sult­ing Mr. Graham’s wis­dom is espe­cially fit­ting. Sixty years ago, on May 25, 1949, the founder of finan­cial analy­sis pub­lished his book, ‘The Intel­li­gent Investor’, in whose honor this col­umn is named. And today the mar­ket seems to be in just the kind of mood that would have wor­ried Mr. Gra­ham: a jit­tery opti­mism, an inse­cure and almost des­per­ate need to believe that the worst is over.

You can’t turn off your feel­ings, of course. But you can, and should, turn them inside out.

Stocks have sud­denly become more expen­sive to accu­mu­late. Since March, accord­ing to data from Robert Shiller of Yale, the price/earnings ratio of the S&P 500 index has jumped from 13.1 to 15.5. That’s the sharpest, fastest rise in almost a quarter-century. (As Gra­ham sug­gested, Prof. Shiller uses a 10-year aver­age P/E ratio, adjusted for inflation.)

Over the course of 10 weeks, stocks have moved from the edge of the bar­gain bin to the full-price rack. So, unless you are retired and liv­ing off your invest­ments, you shouldn’t be cel­e­brat­ing, you should be worrying.

Mr. Gra­ham worked dili­gently to resist being swept up in the mood swings of ‘Mr. Mar­ket’ — his metaphor for the col­lec­tive mind of investors, euphoric when stocks go up and mis­er­able when they go down.

In an auto­bi­o­graph­i­cal sketch, Mr. Gra­ham wrote that he ‘embraced sto­icism as a gospel sent to him from heaven’. Among the main com­po­nents of his ‘inter­nal equip­ment’, he also said, were a ‘cer­tain aloof­ness’ and ‘unruf­fled serenity’.

Mr. Graham’s immer­sion in lit­er­a­ture, math­e­mat­ics and phi­los­o­phy, he once remarked, helped him view the mar­kets ‘from the stand­point of eter­nity, rather than day-to-day’.

Per­haps as a result, he almost invari­ably read the enthu­si­asm of oth­ers as a yel­low cau­tion light, and he took their mis­ery as a sign of hope.

His knack for invert­ing emo­tions helped him see when mar­kets had run to extremes. In late 1945, as the mar­ket was ris­ing 36%, he warned investors to cut back on stocks; the next year, the mar­ket fell 8%. As stocks took off in 1958–59, Mr. Gra­ham was again pes­simistic; years of jagged returns fol­lowed. In late 1971, he coun­seled cau­tion, just before the worst bear mar­ket in decades hit.”

Source: Jason Zweig, The Wall Street Jour­nal, May 26, 2009.

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Bespoke: BRIC countries continue to surge

Sunday, May 31st, 2009

Bespoke Invest­ment Group, who do a bril­liant job chart­ing, have put together the year-to-date look at BRICs vs. S&P500 [below].

Are emerg­ing mar­kets equi­ties decou­pling once again from devel­oped mar­kets equities?

It may still be too soon to tell, how­ever, a recog­ni­tion of the under­indebt­ed­ness of BRIC-based com­pa­nies and con­sumers, healthy bank­ing sys­tems, sound fis­cal and mon­e­tary poli­cies, as well as a resur­gence in gov­ern­ment spend­ing and domes­tic con­sump­tion could be behind the recov­ery which has taken place in Emerg­ing Mar­kets since last November's lows, which began 4 months sooner than the equity mar­ket recov­ery in March in the G-7.

Oil's surg­ing recov­ery from the $30s to $66 [Fri­day], and the weak­en­ing Green­back [which has been good to com­modi­ties' prices] have pro­vided a fur­ther boost to Rus­sia and Brazil's com­mod­ity complex.

A land­slide gen­eral elec­tion vic­tory for India's incum­bent Con­gress [Lib­er­als] coali­tion gov­ern­ment has cleared the way polit­i­cally for India to move for­ward on much needed reforms for at least the next 5 years.

China's eco­nomic rebal­anc­ing, via its $600-billion stim­u­lus appears to be trick­ling very solidly into the cor­po­rate sec­tor and the econ­omy, much faster than anticipated.

Time will tell.

Russia’s RTS stock index was up another 3.2% today [Fri­day], while China was up 1.71% and India was up 2.3%. The BRIC (Brazil, Rus­sia, India, China) coun­tries con­tinue to surge higher in 2009, as they’ve far out­paced stock mar­kets of so-called ‘devel­oped’ coun­tries. Below we high­light their year to date per­for­mance com­pared to the S&P 500. As shown, Rus­sia is up a whop­ping 72.1% this year, fol­lowed by India at 51.6%, China at 44.6%, and Brazil at 39.7%. The S&P 500 is up 0.22%.

Source: Bespoke, May 29, 2009.

Tags: Banking Systems, Brazil, BRIC, Bric Countries, BRICs, Brilliant Job, Coalition Government, Commodities Prices, Corporate Sector, Domestic Consumption, Election Victory, Emerging Markets, Fiscal And Monetary Policies, government spending, Greenback, India, India China, Investment Group, Last November, P500, Rebalancing, Stock Index, Stock Markets
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Charlie Rose: Bear Stearns Last 72 Hours

Sunday, May 31st, 2009

“A con­ver­sa­tion about Bear Stearns and the eco­nomic cri­sis with Kate Kelly, author of Street Fight­ers: The Last 72 Hours of Bear Stearns, the Tough­est Firm on Wall Street and William Cohan, author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.”

Source: Char­lie Rose, May 28, 2009.

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Tags: Bear Stearns, Cape Town, Charlie Rose, Cohan, Economic Crisis, Hat Tip, House Of Cards, Hubris, Kate Kelly, Postcards, Street Fighters, Target, Wall Street, Wall Street Source, Wretched Excess
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Words from the (investment) wise for the week that was (May 25 – 31, 2009)

Sunday, May 31st, 2009

Gov­ern­ment bonds dom­i­nated action on finan­cial mar­kets dur­ing the past holiday-shortened week, as angst about infla­tion and mas­sive issuance pro­pelled yields to six-month highs in the US, Europe and Japan.

Bonds and other safe-haven assets such as the US dol­lar were out of favor as signs of a bot­tom­ing of global economies, albeit ten­ta­tive, embold­ened investors’ appetite for refla­tion trades like equi­ties and com­modi­ties, includ­ing oil and pre­cious metals.

Source: CXO Advi­sory Group

In addi­tion to the major stock mar­ket indices ris­ing for a third con­sec­u­tive month, some of the other mile­stones achieved dur­ing the past week were the following:

• The S&P 500 Index rose by 5.3% in May for a three-month per­for­mance of +25.0% — the biggest three-month gain since August 1938.

• The Dow Jones Indus­trial Index advanced by 4.1% and 20.4% for May and the three-month period respec­tively — its largest three-month return since Novem­ber 1998. (The last straight three-month gain was from August to Octo­ber 2007, when the Index reached its bull mar­ket peak).

• The US dol­lar declined to a five-month low against the euro, los­ing 6.6% dur­ing May. The buck’s declines was even more pro­nounced against high-yielding cur­ren­cies such as the Aus­tralian dol­lar (-9.4%) and the New Zealand dol­lar (-11.3%).

• The yield spread between two– and ten-year Trea­sury Notes reached a record 275 basis points on Wednes­day before nar­row­ing to 254 basis points by the close of the week.

• The Reuters-Jeffries CRB Index increased by 13.8% dur­ing May — its best monthly gain since 1974.

• The Baltic Dry Index — mea­sur­ing freight rates of iron ore and bulk com­modi­ties — climbed every day in May to post its biggest monthly advance (+95.6%) on record.

• The price of West Texas Inter­me­di­ate Crude recorded its largest monthly increase (+29.7%) since March 1999.

• Sil­ver surged by 26.8% for the month — its strongest per­for­mance for 22 years. (Gold bul­lion advanced by 10.2% dur­ing May, and plat­inum by 8.2%.)

Back to long-term bonds. Accord­ing to the Finan­cial Times, Mike Lenhoff, chief mar­ket strate­gist at Brewin Dol­phin Secu­ri­ties, said: “Bond mar­kets may be telling us to expect infla­tion but, more impor­tantly, I think they are telling us that pol­icy mak­ers the world over will suc­ceed with their efforts to reflate the global economy.

“The trend of yields on cor­po­rate debt has been down, and that on Trea­suries up, imply­ing dimin­ish­ing risk pre­mi­ums — which is just what you would expect if mar­kets are bank­ing on recovery.”

The week’s per­for­mance of the major asset classes is sum­ma­rized by the chart below.

Source: StockCharts.com

The MSCI World Index (+1.7%) and the MSCI Emerg­ing Mar­kets Index (+6.6%) last week added to the pre­vi­ous week’s gains to take the year-to-date returns to +5.4% and a mas­sive +36.3% respectively.

Although the major US indices expe­ri­enced declines on Mon­day and Wednes­day, the weekly score­board ended in pos­i­tive ter­ri­tory, as seen from the move­ments of the indices: S&P 500 Index (+3.6%, YTD +1.8%), Dow Jones Indus­trial Index (+2.7%, YTD –3.1%), Nas­daq Com­pos­ite Index (+4.9%, YTD +12.5%) and Rus­sell 2000 Index (+5.0%, YTD +0.4%).

The Dow remains the only major US index still in the red for the year to date — and, along with the FTSE 100, one of the few global indices in this unen­vi­able position.

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

Source: StockCharts.com

As far as non-US mar­kets are con­cerned, returns ranged from top per­form­ers Mace­do­nia (+10.8%), Croa­tia (+10.2%), Nige­ria (+9.9%), Namibia (+8.5%) and Peru (+7.8%), to the Czech Repub­lic (-6.6%), Den­mark (-5.7%), Saudi Ara­bia (-4.4%), Latvia (-4.2%) and Côte d’Ivoire (-3.5%), which expe­ri­enced head­winds. (Click here to access a com­plete list of global stock mar­ket move­ments, as sup­plied by Emergin­vest.)

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

Source: StockCharts.com

John Nyaradi (Wall Street Sec­tor Selec­tor) reports that as far as exchange-traded funds (ETFs) are con­cerned, the lead­ers for the week included Claymore/Delta Global Ship­ping (SEA) (+10.5%), iShares MSCI Hong Kong (EWH) (+10.4%) and HOLDRS Mer­rill Lynch Mar­ket Oil Ser­vice (OIH) (+10.4%). Poor per­form­ers were all things “short”, with notable lag­gards being ProShares Short MSCI Emerg­ing Mar­kets (EUM) (-4.5%), ProShares Short QQQ (PSQ) (-4.1%) and ProShares Short Rus­sell 2000 (RWM) (‑3.5%).

Fur­ther con­fir­ma­tion that the var­i­ous cen­tral bank liq­uid­ity facil­i­ties and cap­i­tal injec­tions are hav­ing the desired effect of unclog­ging credit mar­kets, comes from the Gold­man Sachs’s Finan­cial Stress Index (FSI). This index includes four fac­tors related to the degree of impair­ment of finan­cial mar­kets: coun­ter­party risk (US dol­lar 3-month LIBOR-OIS), liq­uid­ity risk (mortgage-backed secu­rity [MBS] to trea­sury repo dif­fer­en­tials), refund­ing risk (com­mer­cial paper out­stand­ing) and broader risk aver­sion (per­cent­age of monies held in money-market mutual funds in rela­tion to equity mar­ket capitalization).

As shown in the graph below, the FSI is now at its low­est level since the begin­ning of the credit cri­sis in August 2007.

Source: Gold­man Sachs — Strat­egy Mat­ters, May 15, 2009.

The decline of the US dol­lar and the rise in bond yields took on new momen­tum dur­ing the past few weeks. Deep­en­ing anti-dollar sen­ti­ment caused bets against the green­back on the Chicago Mer­can­tile Exchange to rise to their high­est level since the onset of the finan­cial cri­sis, reported the Finan­cial Times.

Source: StockCharts.com

Richard Rus­sell (Dow The­ory Let­ters) said: “The US Dol­lar Index is sit­ting on what I term ‘the edge of the cliff’. If the dol­lar falls apart, we’re deal­ing with a whole new story — it will affect almost all invest­ments, US and for­eign. The slid­ing dol­lar is already putting pres­sure on Trea­sury bonds, par­tic­u­larly the long-term matu­ri­ties. This is caus­ing our cred­i­tors (think China) to cut back.” The graph below shows that the sov­er­eign debt bub­ble may be in the midst of bursting.

Source: StockCharts.com

The higher Trea­sury yields had a neg­a­tive impact on mort­gage rates, with the 30-year fixed rate increas­ing by 29 basis points to 5.27% on the week and the 15-year fixed rate by 25 basis points to 4.87%, as indi­cated by Bankrate.com. Yields on mort­gage bonds for the first time exceeded the lev­els at which they were trad­ing before the Fed’s announce­ment of expand­ing Trea­sury pur­chases to reduce lend­ing rates. This raises the ques­tion of whether the Fed might soon increase its Trea­sury buy-backs.

The quote du jour comes from the “out-the-box” ana­lyst Marc Faber who argued that the US econ­omy would enter “hyper­in­fla­tion” approach­ing the lev­els in Zim­babwe. “I am 100% sure that the US will go into hyper­in­fla­tion,” Faber said in an inter­view with Bloomberg. “The prob­lem with gov­ern­ment debt grow­ing so much is that when the time comes and the Fed should increase inter­est rates, they will be very reluc­tant to do so and so infla­tion will start to accelerate.”

In other news, accord­ing to The Wash­ing­ton Post, senior admin­is­tra­tion offi­cials are con­sid­er­ing the cre­ation of a sin­gle agency to reg­u­late the bank­ing indus­try, replac­ing a mish­mash of bod­ies that failed to pre­vent banks from plung­ing into the worst finan­cial cri­sis since the Great Depression.

Next, a tag cloud of all the arti­cles I read dur­ing the past week. This is a way of visu­al­iz­ing word fre­quen­cies at a glance. Key words such as “finan­cial”, “gold”, “dol­lar”, “banks” and “credit” fea­tured promi­nently. Sur­pris­ingly, “bonds” did not make the cloud despite play­ing a key role in mar­ket move­ments over the past few days.

Zero­ing in on the US stock mar­kets, this week’s sur­vey of investor sen­ti­ment from the Amer­i­can Asso­ci­a­tion of Indi­vid­ual Investors (AAII) shows an increase in both bear­ish and bull­ish sen­ti­ment. Bespoke reports that in the last week bull­ish sen­ti­ment increased from 33.7% to 40.4%, whereas bear­ish sen­ti­ment climbed from 45.4% to 48.6%. Bears there­fore still out­num­ber bulls and are at their high­est level since March 12.

Source: Bespoke, May 28, 2009.

An analy­sis of the mov­ing aver­ages of the major US indices shows all the indices above their 50-day mov­ing aver­ages, with the Nas­daq Com­pos­ite after last week’s gains now also above the key 200-day line and the early Jan­u­ary high. The highs of May 8 (already breached by the Nas­daq) are the most imme­di­ate tar­gets to the upside, whereas the lev­els from where the rally com­menced on March 9 should hold in order for base for­ma­tions to remain in force.

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

Eoin Treacy (Fuller­money) said: “… the log­i­cal areas for indices to encounter resis­tance are near round num­bers. For the S&P, this would be 950 or 1,000. The FTSE 100 is cur­rently encoun­ter­ing sup­ply beneath 4,500. For India, 15,000 is the per­ti­nent num­ber. Brazil is cur­rently in the region of 53,000, and if it breaks upwards from here, the next log­i­cal area for peo­ple to look at is 60,000.”

Adam Hewi­son of INO.com has again pre­pared another of his pop­u­lar tech­ni­cal analy­ses — this time on the British pound, oil and gold bul­lion. Click here to access the short presentation.

Richard Rus­sell, who has taken the stand that we are expe­ri­enc­ing a bear mar­ket rally, said: “Lowry’s valu­able sta­tis­tics have been avail­able for over 70 years. Nor­mally, as a bear mar­ket nears its final low, Lowry’s Sell­ing Pres­sure Index sinks dra­mat­i­cally, thereby pro­vid­ing evi­dence that the sup­ply of stocks for sale is sink­ing. The Sell­ing Pres­sure Index con­tin­ues to decline after the bot­tom has passed. This is NOT what has hap­pened before or since the March 9 lows.

“On the low of March 9 Lowry’s Sell­ing Pres­sure Index stood at 884. At yesterday’s close the Sell­ing Pres­sure Index stood at 868, only 14 points lower than it was on March 9. Mean­while, on March 9 Lowry’s Buy­ing Power Index stood at 120. At yesterday’s close, Buy­ing Power was at 156, which was a gain of 36 points from the March 9 low.

“To move the stock mar­ket higher in a healthy way, Buy­ing Power must rise while Sell­ing Pres­sure must decline. As things stand, there’s still too much Sell­ing Pres­sure (sup­ply) built into this market.”

With the first-quarter earn­ings report­ing sea­son now wind­ing down, ana­lysts are shift­ing their focus to Q2. Albert Edwards, Société Générale’s strate­gist, observes (via Barron’s) that bottom-up com­pany ana­lysts fore­cast an unprece­dent­edly mild con­trac­tion in profit mar­gins in the midst of the worst reces­sion since the Great Depres­sion. “This just doesn’t make sense to us. Ana­lysts are ‘anchor­ing’ on recent unprece­dented highs in mar­gins as the new norm, instead of view­ing them as bub­ble non­sense never to be seen again.” Time will tell whether the con­sen­sus earn­ings expec­ta­tion for the S&P 500 of a 34.7% decline for Q2 2009 ver­sus Q2 2008 is too optimistic.

As Gen­eral Motors moved closer to a bank­ruptcy fil­ing, pos­si­bly on Mon­day, I couldn’t help recall­ing the state­ment by for­mer GM CEO “Engine Char­lie” Wat­son: “What’s good for the coun­try is good for Gen­eral Motors, and vice versa.” Oh well.

For more dis­cus­sion on the direc­tion of stock mar­kets, also see my recent posts “Video-o-rama: higher bond yields raise cau­tion“, “Why Jeremy Grantham changed his mind“, “Dollar’s slide hurt­ing for­eign investors“, “Gold­man: Past the worst?” and “Tech­ni­cal talk: S&P 500 test­ing resis­tance“. (Also, Don­ald Coxe’s web­cast has been updated for May 28 and makes for good lis­ten­ing. This can be accessed from the side­bar of the Invest­ment Post­cards site.)

Twit­ter
I reg­u­larly post short com­ments (max­i­mum 140 char­ac­ters) on top­i­cal eco­nomic and mar­ket issues, web links and graphs on Twit­ter. For those not doing so already, you can fol­low my “tweets” by click­ing here. The Twit­ter posts also appear on my Face­book page and in the side­bar of the Invest­ment Post­cards site.

Econ­omy
“Sen­ti­ment among global busi­nesses remains very poor, but it con­tin­ues to slowly improve. Con­fi­dence has moved mea­sur­ably higher since mid-March and is now close to where it was last Novem­ber. Busi­nesses are notably more upbeat about the out­look towards the end of this year …,” said the lat­est Sur­vey of Busi­ness Con­fi­dence of the World con­ducted by Moody’s Economy.com. The global econ­omy remains mired in reces­sion accord­ing to the Sur­vey results, but the reces­sion is becom­ing less intense.

Source: Moody’s Economy.com

“Taken sep­a­rately, one can find many rea­sons not to rely on sur­vey results, espe­cially those from con­sumers. But put them together, and global sur­vey results indi­cate that eco­nomic sta­bi­liza­tion is afoot,” said Rebecca Wilder (News N Eco­nom­ics).

As seen from the chart below, the con­sumer and busi­ness sur­vey results for the US, Japan and Ger­many have been improv­ing for sev­eral months now, with the US show­ing a size­able increase in May. The Euro­zone has just seen its first improve­ment in eco­nomic sen­ti­ment since May 2007.

Source: News N Economics

Con­sid­er­ing hard data, signs have also emerged that the global econ­omy is sta­bi­liz­ing. Exam­ples include a rebound in Japan­ese indus­trial pro­duc­tion, the first rise in Ger­man retail sales in four months, and a rise in UK house prices in May.

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

May 29
• Q1 real GDP pre­lim­i­nary esti­mate — minor revi­sions, mes­sage is unchanged

May 28
• New Home Sales flat in April, inven­to­ries are shrink­ing slowly
• Job­less Claims fall but con­tin­u­ing claims con­tinue to advance
• Durable Goods Orders were weak in April, Defense Orders lifted total bookings

May 27
• Sales of Exist­ing Homes moved up, but inven­to­ries remain elevated

May 26
• Chicago National Activ­ity Index sends an upbeat mes­sage
• Con­sumer Con­fi­dence Index posts sig­nif­i­cant jump in May
• Case-Shiller Home Price Index — note­wor­thy price move­ments, but more is required

Refer­ring specif­i­cally to US hous­ing, John Mauldin (Thoughts from the Front­line) said: “Hous­ing in many areas is start­ing to once again become afford­able (see chart below) to more and more Amer­i­cans and even first-time home buy­ers. The cure for the hous­ing cri­sis is actu­ally lower prices, as that brings more and more poten­tial home buy­ers into the mar­ket. While hous­ing sales are still quite depressed, what are sell­ing are homes in fore­clo­sure, as buy­ers per­ceive that there are bar­gains. And they are right.”

Source: Moody’s Economy.com

In his weekly Forbes col­umn, Nouriel Roubini (RGE Mon­i­tor) com­mented as fol­lows: “The cru­cial issue fac­ing us is not whether the global econ­omy will bot­tom out in the third or fourth quar­ter of this year, or in the first quar­ter of next year. It’s whether the global growth recov­ery, once the bot­tom is reached, will be robust or weak over the medium term — say 2010-11. … one can­not rule out a sharp snap­back of GDP for a cou­ple of quar­ters, as the inven­tory cycle and the mas­sive pol­icy boost lead to a short-term growth revival. My analy­sis, how­ever, sug­gests that there are many yel­low weeds that may lead to a weak global growth recov­ery over 2010-11.”

On a related note, Gillian Tett (Finan­cial Times) asked whether one should expect a “V”-shaped recov­ery, or a sce­nario more like a “U” or a “W”. “Many years ago, when I was a rookie reporter, I learnt the Pit­man sys­tem of short­hand. And it just hap­pens that the half-squashed, asym­met­ri­cal ‘W’ pat­tern that I am strug­gling to describe is almost iden­ti­cal to the short­hand sign for ‘bank’.

“So there you have it: as long as we avoid a gov­ern­ment bond cri­sis, my best prog­no­sis is for a ‘bank’ shaped recovery-cum-stagnation, at least as depicted by short­hand. It is a fit­ting twist for a cri­sis that started with the shadow banks; per­haps the Gods of finance (and jour­nal­ism) have a sense of humor after all,” said Tett.

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

Source: Yahoo Finance, May 29, 2009.

In addi­tion to Fed­eral Reserve Chair­man Ben Bernanke’s tes­ti­mony before the House Bud­get Com­mit­tee (Wednes­day, June 3), and inter­est rate announce­ments by the Bank of Eng­land and the Euro­pean Cen­tral Bank (Thurs­day, June 4), 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 finan­cial mar­kets per­formed dur­ing the past week.

Source: Wall Street Jour­nal Online, May 29, 2009.

British philoso­pher Bertrand Rus­sell said: “If a man is offered a fact which goes against his instincts, he will scru­ti­nize it closely, and unless the evi­dence is over­whelm­ing, he will refuse to believe it. If, on the other hand, he is offered some­thing which affords a rea­son for act­ing in accor­dance to his instincts, he will accept it even on the slight­est evidence.”

Hope­fully the “Words from the Wise” reviews offer mate­r­ial of the nec­es­sary sub­stance that will guard against Invest­ment Post­cards read­ers merely hav­ing to rely on their instincts when tak­ing invest­ment decisions.

That’s the way it looks from Cape Town as May draws to a close.

Source: Maple­leafweb

Char­lie Rose: A con­ver­sa­tion about Bear Sterns and the eco­nomic cri­sis with Kate Kelly and William Cohan
“A con­ver­sa­tion about Bear Sterns and the eco­nomic cri­sis with Kate Kelly, author of Street Fight­ers: The Last 72 Hours of Bear Stearns, the Tough­est Firm on Wall Street and William Cohan, author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.”

Source: Char­lie Rose, May 28, 2009.

The Wall Street Jour­nal: How to fix the finan­cial sys­tem
“The Com­mit­tee on Cap­i­tal Mar­kets Reg­u­la­tion, a diverse group of aca­d­e­mics, for­mer gov­ern­ment offi­cials, and busi­ness lead­ers, plans to present a com­pre­hen­sive list of rec­om­men­da­tions Tues­day call­ing for an over­haul of the rules super­vis­ing finan­cial mar­kets. The rec­om­men­da­tions will likely attract atten­tion from key gov­ern­ment offi­cials because of the people’s cre­den­tials who put together the report, called “The Global Finan­cial Cri­sis: A Plan For Reg­u­la­tory Reform.”

“Among oth­ers, the report was penned by R. Glenn Hub­bard, dean of the Colum­bia Busi­ness School, John L. Thorn­ton, Chair­man of the Brook­ings Insti­tu­tion, Hal S. Scott, Nomura Pro­fes­sor and Direc­tor of the Pro­gram on Inter­na­tional Finan­cial Sys­tems at Har­vard Law School, and Roel Cam­pos, a for­mer com­mis­sioner at the Secu­ri­ties and Exchange Com­mis­sion. The report is thor­ough — the exec­u­tive sum­mary alone has 57 recommendations.

“Some of the key recommendations:

“1) Keep two or three reg­u­la­tors for the finan­cial sys­tem — the Fed, a new US Finan­cial Ser­vices Author­ity, and an investor and con­sumer pro­tec­tion agency. The USFSA ‘would reg­u­late all aspects of the finan­cial sys­tem, includ­ing mar­ket struc­ture and activ­i­ties and safety and sound­ness for all finan­cial institutions.’

“2) Man­date cen­tral­ized clear­ing of credit default swaps. To the extent that some CDSs stay out­side a cen­tral­ized clear­ing process, the com­mit­tee calls for higher cap­i­tal require­ments to ‘com­pen­sate for increased sys­temic risk of these contracts’.

“3) Don’t make a hasty deci­sion to raise cap­i­tal require­ments across the finan­cial sec­tor until more analy­sis is done. But the com­mit­tee does rec­om­mend higher cap­i­tal require­ments for mega­banks, such as those with more than $250 bil­lion in assets. ‘Given the con­cen­tra­tion of risks to the gov­ern­ment and tax­payer, we rec­om­mend that large insti­tu­tions be held to a higher sol­vency stan­dard than other insti­tu­tions, which means they should hold more cap­i­tal per unit of risk.’

“4) Strengthen the ‘lever­age’ cap­i­tal ratio, and debate whether the lever­age ratio should be based on com­mon equity rather than total Tier 1 capital.

“5) Give the Fed tem­po­rary author­ity to eval­u­ate con­fi­den­tial infor­ma­tion sup­plied by hedge funds.

“6) Relax acqui­si­tion rules to make it eas­ier for pri­vate equity firms to pump money into the bank­ing sector.

“7) Cre­ate a com­pre­hen­sive pol­icy called the Finan­cial Com­pany Res­o­lu­tion Act, that would be allowed to put any finan­cial com­pany into receiver­ship, not just ’sys­tem­i­cally’ impor­tant ones.

“8) Ban or limit high-risk mort­gages from being securitized.”

Source: Damian Paletta, The Wall Street Jour­nal, May 26, 2009.

The Wash­ing­ton Post: US weighs sin­gle agency to reg­u­late bank­ing indus­try
“Senior admin­is­tra­tion offi­cials are con­sid­er­ing the cre­ation of a sin­gle agency to reg­u­late the bank­ing indus­try, replac­ing a patch­work of agen­cies that failed to pre­vent banks from falling into the worst finan­cial cri­sis since the Great Depres­sion, sources said.

“The agency would be a key ele­ment in the administration’s sweep­ing over­haul of finan­cial reg­u­la­tion, which offi­cials hope to unveil in com­ing weeks, includ­ing the cre­ation of a new author­ity to police risks to the finan­cial sys­tem as well as a new agency to pro­tect con­sumers, accord­ing to three peo­ple famil­iar with the mat­ter. Most of the pro­pos­als would require legislation.

“‘The pres­i­dent is com­mit­ted to sign­ing a reg­u­la­tory reform pack­age by the end of the year, and offi­cials at the White House and the Trea­sury Depart­ment are con­tin­u­ing work with Con­gress on the final phases of a pro­posal, but there is no final pro­posal in place and any announce­ment will not be for a cou­ple of weeks,’ said White House deputy spokesman Jen­nifer Psaki.

“Senior offi­cials have reached agree­ment on aspects of the plan, accord­ing to a per­son famil­iar with the discussions.

“They favor vest­ing the Fed­eral Reserve with new pow­ers as a sys­temic risk reg­u­la­tor, with broad respon­si­bil­ity for detect­ing threats to the finan­cial sys­tem. The pow­ers would include over­sight of pre­vi­ously unreg­u­lated mar­kets, such as the deriv­a­tives trade, and of mar­ket par­tic­i­pants such as hedge funds.

“Offi­cials also favor the cre­ation of a new agency to enforce laws pro­tect­ing con­sumers of finan­cial prod­ucts such as mort­gages and credit cards.

“And they want to merge the Secu­ri­ties and Exchange Com­mis­sion and the Com­mod­ity Futures Trad­ing Com­mis­sion, which share respon­si­bil­ity for pro­tect­ing investors from fraud.

“Other aspects of the plan remain under dis­cus­sion, sources said, speak­ing on con­di­tion of anonymity because they were not autho­rized to dis­close details.”

Source: Binyamin Appel­baum and Zachary Gold­farb, The Wash­ing­ton Post, May 28, 2009.

The Wall Street Jour­nal: Fed cools banks’ faith in future rev­enue
“Big banks were hop­ing bil­lions of dol­lars in future rev­enue would help them fill the cap­i­tal holes found in the government’s stress tests ear­lier this month. Now the Fed­eral Reserve is lim­it­ing how much of that per­for­mance can be counted, accord­ing to peo­ple famil­iar with the situation.

“The Fed’s deci­sion is forc­ing Bank of Amer­ica Corp. to come up with bil­lions of dol­lars in cap­i­tal from other sources, these peo­ple said. Other stress-tested banks also have revamped their capital-raising plans or might need to, includ­ing PNC Finan­cial Ser­vices Group Inc. and Wells Fargo & Co.

“The move by the Fed, which began noti­fy­ing banks last week, has deep­ened ten­sions over the stress tests, which are intended to help steady the bank­ing indus­try and shore up con­fi­dence in the finan­cial sys­tem. The results were announced May 7, and banks face a June 8 dead­line for gov­ern­ment approval of their capital-raising plans.

“Some banks had planned for finan­cial per­for­mance in 2009 and 2010 to cover 20% or more of their cap­i­tal shortfalls.

“Since announc­ing the stress-test results, though, Fed offi­cials have grown con­cerned that some banks are lean­ing too heav­ily on future rev­enue pro­jec­tions, accord­ing to peo­ple famil­iar with the mat­ter. Under the new require­ment, pro­jected rev­enue can be used for no more than 5% of the addi­tional equity being demanded from the 10 banks.”

Source: Dan Fitz­patrick, The Wall Street Jour­nal, May 28, 2009.

The New York Times: GM plan gets sup­port from key bond­hold­ers
“As Gen­eral Motors moved closer to a bank­ruptcy fil­ing, pos­si­bly early next week, atten­tion on Thurs­day turned again to the bond­hold­ers, the most impor­tant group that the com­pany has yet to win over for its efforts to start fresh.

“Early Thurs­day, GM pro­posed a deal in which bond­hold­ers would receive up to a 25% stake — a big­ger share than GM offered the autowork­ers union — if they do not oppose its bank­ruptcy reor­ga­ni­za­tion, and then said that a group rep­re­sent­ing many of the largest bond­hold­ers had accepted the offer.

“The pro­posal came as admin­is­tra­tion offi­cials and GM began to dis­cuss how the car­maker would look once it emerged from a court reor­ga­ni­za­tion. The com­pany is expected to seek bank­ruptcy pro­tec­tion by Mon­day, the dead­line set by the Obama admin­is­tra­tion to restruc­ture out­side bankruptcy.

“In a reg­u­la­tory fil­ing, GM set Sat­ur­day after­noon as the dead­line for other bond­hold­ers to sup­port the plan. In addi­tion to an ad hoc com­mit­tee that sup­ports the GM plan, which rep­re­sents about 20% of GM’s debt, peo­ple with knowl­edge of the dis­cus­sions said a sec­ond group, with about 30% of GM’s debt, was in talks with the Treasury.

“Admin­is­tra­tion offi­cials said they con­sid­ered the devel­op­ment pos­i­tive. While the offi­cials said there was no spe­cific thresh­old for approval by the bond­hold­ers, a per­son briefed on the mat­ter said that GM was seek­ing sup­port from investors hold­ing about 50% of GM’s $27 bil­lion in bond debt.

“GM and the Trea­sury will re-examine the results after 5 p.m. on Sat­ur­day to gauge sup­port before decid­ing how to proceed.”

Source: Michael de la Merced and Miche­line May­nard, The New York Times, May 28, 2009.

Nouriel Roubini (Forbes): Ten risks to global growth
“Last week, I dis­cussed why the US and global recov­ery will occur later than the opti­mistic con­sen­sus argues. This week, I will dis­cuss why the recov­ery will be sub-par and below trends for a few years once it does occur, and why there is even the risk of a double-dip W-shaped recession.

“The cru­cial issue fac­ing us is not whether the global econ­omy will bot­tom out in the third or fourth quar­ter of this year, or in the first quar­ter of next year. It’s whether the global growth recov­ery, once the bot­tom is reached, will be robust or weak over the medium term — say 2010-11. … one can­not rule out a sharp snap­back of GDP for a cou­ple of quar­ters, as the inven­tory cycle and the mas­sive pol­icy boost lead to a short-term growth revival. My analy­sis, how­ever, sug­gests that there are many yel­low weeds that may lead to a weak global growth recov­ery over 2010-11.

“The cur­rent con­sen­sus among ‘green shoot’ opti­mists sees US eco­nomic growth going back in 2010 to a rate that is close to the 2.75% poten­tial growth rate, and return­ing to poten­tial by 2011. Many opti­mists go even fur­ther, argu­ing that the snap­back of demand and pro­duc­tion after the depressed lev­els of the cur­rent reces­sion will lead growth to be well above trend (3.5% to 4%) for a cou­ple of years, as most pre­vi­ous US reces­sions have been fol­lowed by a period of above-trend growth once the recov­ery gets going. Yet a detailed analy­sis sug­gests that growth will remain well below poten­tial for at least two years — if not longer — as the severe vul­ner­a­bil­i­ties and excesses of the last decade will take years to resolve. Let us exam­ine 10 fac­tors that will cause below-potential eco­nomic growth over the medium term even after this reces­sion is over.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, May 28, 2009.

Bloomberg: US spends 14% of eco­nomic stim­u­lus money in first 100 days
“About 14% of Pres­i­dent Barack Obama’s $787 bil­lion eco­nomic stim­u­lus pack­age has been allo­cated, cre­at­ing 150,000 jobs in the 100 days since the mea­sure was signed into law, the admin­is­tra­tion said.

“A report released today said the $112 bil­lion in stim­u­lus funds com­mit­ted so far is going to projects across the coun­try, from mak­ing pub­lic hous­ing more ‘green’ in Wash­ing­ton to help­ing build a new library in Dar­ling­ton County, South Car­olina and buy­ing a snow plow in Munis­ing, Michigan.

“Obama said when he signed the bill Feb. 17 that it would cre­ate or save 3.5 mil­lion jobs by the end of Sep­tem­ber 2010. Today’s report didn’t mea­sure how many jobs the stim­u­lus has preserved.”

Source: Angela Greil­ing Keane, Bloomberg, May 27, 2009.

Bloomberg: Faber — US infla­tion to approach Zim­babwe level
“The US econ­omy will enter ‘hyper­in­fla­tion’ approach­ing the lev­els in Zim­babwe because the Fed­eral Reserve will be reluc­tant to raise inter­est rates, investor Marc Faber said. Prices may increase at rates ‘close to’ Zimbabwe’s gains, Faber said in an inter­view with Bloomberg Tele­vi­sion in Hong Kong.”

Click here for the article.

Source: Bloomberg, May 27, 2009.

Casey’s Charts: A 2,050% rise in price
“The costs of things as mea­sured by the con­sumer price index have risen twen­ty­fold since the Fed­eral Reserve Act of 1913. This act empow­ered the cen­tral bank to cre­ate and con­trol a new cur­rency for the United States, the Fed­eral Reserve Note. Over this same period, the fed­eral deficit soared from $2 bil­lion to over $11 tril­lion. Coin­ci­dence? We think not.

“After Pres­i­dent Nixon cut the dollar’s ties to gold, fund­ing the whims of gov­ern­ment was no longer bur­dened by the need for higher taxes. Now any gaps in the bud­get can be filled by sim­ply print­ing more dol­lars. And as you can see, the politi­cians didn’t hes­i­tate to meet the chal­lenge. Price lev­els and fed­eral debt have risen hand-in-hand ever since.”

Source: Casey’s Charts, May 28, 2009.

John Tay­lor (Finan­cial Times): Explod­ing debt threat­ens Amer­ica
“Stan­dard and Poor’s deci­sion to down­grade its out­look for British sov­er­eign debt from ’sta­ble’ to ‘neg­a­tive’ should be a wake-up call for the US Con­gress and admin­is­tra­tion. Let us hope they wake up.

“Under Pres­i­dent Barack Obama’s bud­get plan, the fed­eral debt is explod­ing. To be pre­cise, it is ris­ing — and will con­tinue to rise — much faster than gross domes­tic prod­uct, a mea­sure of America’s abil­ity to ser­vice it. The fed­eral debt was equiv­a­lent to 41% of GDP at the end of 2008; the Con­gres­sional Bud­get Office projects it will increase to 82% of GDP in 10 years. With no change in pol­icy, it could hit 100% of GDP in just another five years.

“‘A gov­ern­ment debt bur­den of that [100%] level, if sus­tained, would in Stan­dard & Poor’s view be incom­pat­i­ble with a triple A rat­ing,’ as the risk rat­ing agency stated last week.

“I believe the risk posed by this debt is sys­temic and could do more dam­age to the econ­omy than the recent finan­cial cri­sis. To under­stand the size of the risk, take a look at the num­bers that Stan­dard and Poor’s con­sid­ers. The deficit in 2019 is expected by the CBO to be $1,200 bil­lion. Income tax rev­enues are expected to be about $2,000 bil­lion that year, so a per­ma­nent 60% across-the-board tax increase would be required to bal­ance the bud­get. Clearly this will not and should not hap­pen. So how else can debt ser­vice pay­ments be brought down as a share of GDP?

“Infla­tion will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a dou­bling of prices. That 100% increase would make nom­i­nal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82%. A 100% increase in the price level means about 10% infla­tion for 10 years. But it would not be that smooth — prob­a­bly more like the great infla­tion of the late 1960s and 1970s with boom fol­lowed by bust and reces­sion every three or four years, and a suc­ces­sively higher infla­tion rate after each recession.

“The fact that the Fed­eral Reserve is now buy­ing longer-term Trea­suries in an effort to keep Trea­sury yields low adds cred­i­bil­ity to this scary story, because it sug­gests that the debt will be mon­e­tised. That the Fed may have a dif­fi­cult task reduc­ing its own bal­loon­ing bal­ance sheet to pre­vent infla­tion increases the risks con­sid­er­ably. And 100% infla­tion would, of course, mean a 100% depre­ci­a­tion of the dol­lar. Amer­i­cans would have to pay $2.80 for a euro; the Japan­ese could buy a dol­lar for Y50; and gold would be $2,000 per ounce. This is not a fore­cast, because pol­icy can change; rather it is an indi­ca­tion of how much sys­temic risk the gov­ern­ment is now creating.

“Why might Wash­ing­ton sleep through this wake-up call? You can already hear the excuses.”

Click here for the full article.

Source: John Tay­lor, Finan­cial Times, May 26, 2009.

USA Today: IRS tax rev­enue falls along with tax­pay­ers’ income
“Fed­eral tax rev­enue plunged $138 bil­lion, or 34%, in April ver­sus a year ago — the biggest April drop since 1981, a study released Tues­day by the Amer­i­can Insti­tute for Eco­nomic Research says.

“When the econ­omy slumps, so does tax rev­enue, and this reces­sion has been no dif­fer­ent, says Kerry Lynch, senior fel­low at the AIER and author of the study. ‘It illus­trates how severe the reces­sion has been.’

“For exam­ple, 6 mil­lion peo­ple lost jobs in the 12 months ended in April — and that means far fewer dol­lars from income taxes. Income tax rev­enue dropped 44% from a year ago.

“‘These are stag­ger­ing num­bers,’ Lynch says.

“Big rev­enue losses mean that the US bud­get deficit may be larger than pre­dicted this year and in future years.

“‘It’s one of the dri­vers of the ongo­ing expan­sion of the fed­eral bud­get deficit,’ says John Lon­ski, chief econ­o­mist for Moody’s Investors Ser­vice. The Con­gres­sional Bud­get Office projects a $1.7 tril­lion bud­get deficit for fis­cal year 2009.

“The other deficit dri­ver is gov­ern­ment spend­ing, which, the AIER’s report says, is the main cul­prit for the fed­eral bud­get deficit.”

Source: John Wag­goner, USA Today, May 26, 2009.

Asha Ban­ga­lore (North­ern Trust): Q1 real GDP pre­lim­i­nary esti­mate — minor revi­sions, mes­sage is unchanged
“Real gross domes­tic prod­uct of the US econ­omy declined at a 5.7% annual rate in the first quar­ter, mar­gin­ally smaller than the advance esti­mate of a 6.1% drop. Con­sumer spend­ing was weaker than the advance read­ing (+1.5% ver­sus +2.2% in the advance report). Liq­ui­da­tion of inven­to­ries ($91.4 bil­lion ver­sus $103.7 bil­lion) and the trade deficit ($302.6 bil­lion ver­sus $308.4 bil­lion) were both smaller than the first estimate.

“Going for­ward, real GDP is expected to post declines in both the sec­ond and third quar­ters. Auto plant shut­downs and resump­tions are most likely to exag­ger­ate the pro­jected decline and increase in head­line GDP in the third and fourth quar­ters of 2009.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, May 29, 2009.

Asha Ban­ga­lore (North­ern Trust): Chicago National Activ­ity Index sends an upbeat mes­sage
“The Chicago Fed National Activ­ity Index (CFNAI) in April moved up to –2.06 from –3.36 in March. Read­ings below zero denote an econ­omy that is grow­ing below trend. The index reg­is­tered a trough in Jan­u­ary 2009 (-3.99). The index is based on 85 indi­ca­tors of national activ­ity clas­si­fied under four broad cat­e­gories — pro­duc­tion and income, employ­ment, per­sonal con­sump­tion and hous­ing, and sales, orders, and inven­to­ries. In April, all of these four cat­e­gories improved.

“The Chicago Fed sug­gests that the month-to-month move­ments of the index are volatile and rec­om­mends the 3-month mov­ing aver­age of the index as a bet­ter indi­ca­tor of national eco­nomic growth. The 3-month mov­ing aver­age of the CFNAI was –2.65 in April ver­sus –3.29 in March. This index bot­tomed out in Jan­u­ary 2009 (-3.69).

“Set­backs from the auto indus­try restruc­tur­ing should not be sur­pris­ing. We will need to watch for a few months to con­firm that it is not a false signal.”

Source: Asha Ban­ga­lore, North­ern Trust, May 26, 2009.

Asha Ban­ga­lore (North­ern Trust): Job­less claims fall but con­tin­u­ing claims con­tinue to advance
“Ini­tial job­less claims fell 13,000 to 623,000 dur­ing the week ended May 23. Con­tin­u­ing claims, which lag ini­tial claims by one week, rose 110,000 to 6.788 mil­lion and the insured unem­ploy­ment rate hit the 5.1% mark. The num­ber of folks col­lect­ing unem­ploy­ment insur­ance is trou­bling but the down­ward trend of ini­tial job­less claims is the big pos­i­tive aspect of the report.”

Source: Asha Ban­ga­lore (North­ern Trust), May 28, 2009.

Stan­dard & Poor’s: S&P/Case-Shiller Home Price Indices — record­ing record declines
“Data through March 2009, released today [Tues­day] by Stan­dard & Poor’s for its S&P/Case-Shiller Home Price Indices, show that the US National Home Price Index con­tin­ues to set record declines, a trend that began in late 2007 and pre­vailed through­out 2008.

“The chart above depicts the annual returns of the US National, the 10-City Com­pos­ite and the 20-City Com­pos­ite Home Price Indices. The S&P/Case-Shiller US National Home Price Index — which cov­ers all nine US cen­sus divi­sions — recorded a 19.1% decline in the 1st quar­ter of 2009 ver­sus the 1st quar­ter of 2008, the largest decline in the series’ 21-year history.

“‘Declines in res­i­den­tial real estate con­tin­ued at a steady pace into March,’ says David M. Blitzer, Chair­man of the Index Com­mit­tee at Stan­dard & Poor’s.”

Source: Stan­dard & Poor’s, May 26, 2009.

Asha Ban­ga­lore (North­ern Trust): Sales of exist­ing homes moved up, but inven­to­ries remain ele­vated
“Sales of exist­ing homes increased 2.9% in April to an annual rate of 4.68 mil­lion. Pur­chases of both single-family (+2.5%) and multi-family homes (+6.4%) advanced in April. On a regional basis sales increased in the North­east (+11.6%), South (+1.8%) and West (+3.5%) but fell 2.00% in the Mid­west. The impact of auto indus­try restruc­tur­ing is reflected in the weak­ness of home sales in the Midwest.

“There was a small improve­ment in the sea­son­ally adjusted inven­to­ries of unsold single-family homes in April to a 9.18-month sup­ply mark, down from a 9.38-month read­ing in March. The median inventories-sales ratio of exist­ing home sales for the period June 1982 — April 2009 is a 7.11-month sup­ply, with the ratio hold­ing closer to a 5-month sup­ply in the decade end­ing 2005. The still ele­vated level of inven­to­ries augurs poorly for home prices in the months ahead.”

Source: Asha Ban­ga­lore, North­ern Trust, May 27, 2009.

Chart of the Day: Home / gold ratio in strong down­trend
“Today’s chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For exam­ple, it cur­rently takes 192 ounces of gold to by the median single-family home. This is con­sid­er­ably less that the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down 68% from its 2001 peak and remains within the con­fines of its four-year accel­er­ated downtrend.”

Source: Chart of the Day, May 29, 2009.

Asha Ban­ga­lore (North­ern Trust): Con­sumer Con­fi­dence Index posts sig­nif­i­cant jump in May
“The Con­fer­ence Board’s Con­sumer Con­fi­dence Index rose to 54.9 from a revised 40.8 read­ing in April. The Present Sit­u­a­tion Index advanced 3.4 points to 28.9 and the Expec­ta­tions Index rose 21.3 points to 72.3.

“The 28 point jump in the April-May period is the sec­ond largest two-month gain seen in the his­tory of the sur­vey which began in 1967. The sur­vey was held six times a year until the late-1970s. In 1974, the index increased 32.4 points over the span of the Feb­ru­ary and April surveys.”

Source: Asha Ban­ga­lore, North­ern Trust, May 26,2009.

Asha Ban­ga­lore (North­ern Trust): Durable goods boosted by defense orders
“Orders of durable goods increased 1.9% in April, after a 2.1% drop in the prior month. The 23.2% jump in orders of defense goods lifted the over­all total. Book­ings of non-defense cap­i­tal goods declined 2.0% and that of non-defense cap­i­tal goods exclud­ing air­craft also dropped 1.5%. On a year-to-year basis, orders of durables fell 26.6% in April com­pared with a 24.7% drop in March.”

Source: Asha Ban­ga­lore (North­ern Trust), May 28, 2009.

Bespoke: Rat­ing agen­cies — sound and fury sig­ni­fy­ing noth­ing
“After S&P cut its credit out­look on the UK last week, we noted that lis­ten­ing to the rat­ings agen­cies is like mak­ing invest­ment deci­sions based on last month’s news­pa­per. In this weekend’s Wall Street Jour­nal inter­view, Dal­las Fed Pres­i­dent Richard Fisher seemed to agree with that sentiment:

“‘I served on cor­po­rate boards. The way rat­ing agen­cies worked is that they were paid by the peo­ple they rated. I saw that from the inside.’ He says he also saw this ‘inher­ent con­flict of inter­est’ as a fund man­ager. ‘I never paid atten­tion to the rat­ing agen­cies. If you relied on them you got … you know,’ he says, spar­ing me the gory details. ‘You did your own analy­sis. What is clear is that rat­ing agen­cies always change some­thing after it is obvi­ous to every­one else. That’s why we never relied on them.’

“If the US ever loses its AAA credit rat­ing, does any­one really think the rat­ings agen­cies will be ahead of the curve?”

Source: Bespoke, May 26, 2009.

Finan­cial Times: JPMor­gan warns on credit card woes
“Jamie Dimon, JPMor­gan Chase chief exec­u­tive, warned on Wednes­day that loss rates on the credit card loans of Wash­ing­ton Mutual, the trou­bled bank acquired last year by JPMor­gan, could climb to 24% by the year end.

“In the past, credit card loss rates have tracked the unem­ploy­ment rate but that rela­tion­ship has been break­ing down for more trou­bled credit card port­fo­lios, such as the $25.9 bil­lion in WaMu credit card loans.

“At the end of the first quar­ter, 12.63% of the WaMu credit card loans were deemed uncol­lec­table by JPMor­gan. The bank esti­mates that fig­ure could reach 18 to 24% by the end of 2009, depend­ing on eco­nomic conditions.

“Describ­ing credit cards as JPMorgan’s most chal­lenged busi­ness, Mr Dimon said loss rates for the company’s larger $150 bil­lion port­fo­lio of Chase credit cards could reach 9% in the third quar­ter and as much as 10.5% by the end of the year, depend­ing on hous­ing and unem­ploy­ment trends. That com­pares with first-quarter charge-off rates of 6.86% on the Chase card portfolio.

“Mr Dimon said he believed that a new law restrict­ing higher inter­est rates on delin­quent credit card debt for the first 60 days could make credit cards more expen­sive in the future.

“Banks are repric­ing credit cards and cut­ting credit lines before the new rules take effect, push­ing bor­row­ers into dis­tress in some instances, accord­ing to indus­try executives.”

Source: Henry Sender and Saskia Scholtes, Finan­cial Times, May 28, 2009.

CNBC: Bond market’s volatil­ity
“Many con­cerns about the ris­ing Trea­sury yields con­tinue to under­mine the Obama administration’s eco­nomic res­cue plan, with James Gal­braith, Uni­ver­sity of Texas; Jonathan Tisch, Loews Hotels chairman/CEO and CNBC’s Steve Liesman.”

Source: CNBC, May 29, 2009.

John Authers (Finan­cial Times): Keep an eye on Trea­suries
“Did the tide turn for US assets last week? For months, US Trea­sury bond prices have fallen, tak­ing the dol­lar with them. The expla­na­tion was clear. Investors believed dis­as­ter had been averted. That meant tak­ing greater risks once more and sell­ing the secure US Trea­sury bonds bought dur­ing the panic.

“But the rise in bond yields and fall of the dol­lar took on new momen­tum last week, even as stock mar­kets fell back. The 10-year bond yield hit 3.45%, a six-month high, while the dol­lar hit a five-month low.

“Accord­ing to RBC, there were only 18 days in the past 20 years when the 10-year Trea­sury rose by 6 basis points or more, the dol­lar trade-weighted index fell 0.5 per cent or more and the S&P 500 fell more than 1.2%. None of them came from 2003 to 2008. But this hap­pened on Thurs­day last week.

“The cat­a­lysts for the bad day appeared to be the news that deal­ers tried to sell the Fed­eral Reserve far more bonds that day than the cen­tral bank was will­ing to buy, and the deci­sion by Stan­dard & Poor’s to put the UK on review for a poten­tial sov­er­eign down­grade — seen as a stalk­ing horse for mak­ing the same move for the US.

“A rat­ing agency move is not a good rea­son to sell US assets. The US Trea­sury has tax­ing author­ity. If it were ever to default, the result would be dis­as­ter for vir­tu­ally all other gov­ern­ments, many of which are in a more par­lous fis­cal state than the US in any case. So some of the fear sur­round­ing the dol­lar is a lit­tle irrational.

“But con­cern about the bond mar­ket is more mean­ing­ful. It is vital to keep US rates down, to revive both the hous­ing mar­ket and the health of the banks. That is why the Fed is buy­ing bonds. If even this dras­tic action is not enough to keep rates low, then these pol­icy aims are in jeop­ardy. Last week that con­cern clar­i­fied in traders’ minds and it gave good rea­son to sell the dol­lar and US stocks.”

Source: John Authers, Finan­cial Times, May 29, 2009.

Eoin Treacy (Fuller­money): Gov­ern­ment bonds in down­trend
“Gov­ern­ment bonds were the safe haven of choice for large num­bers of investors dur­ing the most pan­icky period of this cri­sis. Three-month yields hit neg­a­tive ter­ri­tory on a num­ber of occa­sions in Decem­ber as investors stam­peded out of ‘risk assets’ and into gov­ern­ment backed secu­ri­ties. Longer-dated issues surged to impor­tant highs in late Decem­ber, which coin­cided with a yield of 2.5% on the 30yr and 2% on the 10yr.

“Since then yields have almost dou­bled as the per­ceived need for a ’safe haven’ has decreased and investors grad­u­ally begin to demand a great return for shoul­der­ing the risk of lend­ing to gov­ern­ments in the process of mas­sively increas­ing the sup­ply of bonds.

“The spread between the 10yr and 2yr, com­monly used as an approx­i­ma­tion of the yield curve, hit a new high yes­ter­day. In the past, an inverted yield curve has been a reli­able lead indi­ca­tor of reces­sions. This was borne out again between 2006 and mid 2007. How­ever, peaks in the spread do not appear to reli­ably pre­dict the end of reces­sions. In fact there appears to be a lag. The move to new high ground for this rela­tion­ship is com­men­su­rate with the size and shape of this reces­sion and when a peak becomes evi­dent, it will likely lend con­fi­dence to investors.

“There is also now a marked dif­fer­ence with how investors are look­ing at infla­tion. In Decem­ber the spread of 10yr yields over 10yr TIPS bot­tomed just above 0%. The spread has since ral­lied to almost 2% as investors weigh the risks of quan­ti­ta­tive eas­ing. There was also surely an ele­ment of hedg­ing the poten­tial for infla­tion while prices were so low in Novem­ber and Decem­ber. Since then prices have recov­ered to the 5yr aver­age and are cur­rently pres­sur­ing the lower side of the 5-month range.

“In the mean­time, yields con­tinue to rally from deeply over­sold ter­ri­tory and are likely over­due a con­sol­i­da­tion of recent gains. A sus­tained move below 3% would sug­gest a length­ier reac­tion. How­ever, given the tech­ni­cal action, bond prices are likely to be shorts on sig­nif­i­cant ral­lies for the fore­see­able future.

“While the gov­ern­ment bond bub­ble may be in the process of burst­ing, cor­po­rate bond spreads are con­tract­ing rather swiftly. BBB Indus­trial spreads peaked in Novem­ber near 440 basis points and have since fallen to 340. A sus­tained move back above 400 basis points would be needed to ques­tion poten­tial for fur­ther contraction.”

Source: Eoin Treacy (Fuller­money), May 28, 2009.

Mar­ket­Watch: Mar­ket ends the month with more gains
“May marks the third straight month of gains for the stock mar­ket. But will June bring more rea­sons for opti­mism? Sam Sto­vall, chief invest­ment strate­gist for Stan­dard & Poor’s Equity Research, talks to Kelsey Hub­bard about what the future might bring.”

Source: Mar­ket­Watch, May 29, 2009.

Bloomberg: Bar­ton Biggs says rally may push S&P 500 to 1,050
“Bar­ton Biggs, the for­mer chief global strate­gist for Mor­gan Stan­ley who runs the New York-based hedge fund Traxis Part­ners LP, talks with Bloomberg’s Matt Miller about the out­look for stocks. The steep­est rally since the 1930s for the Stan­dard & Poor’s 500 Index may push the bench­mark to 1,050 and emerg­ing mar­kets will con­tinue to rise, Biggs said.”

Source: Bloomberg, May 29, 2009.

Bespoke: Sec­tor per­for­mance dur­ing pull­back
“The S&P 500 is down 3.89% since ral­ly­ing 37% from March 9 through May 8. Below is a scat­ter chart show­ing sec­tor per­for­mance dur­ing the 3/9–5/8 rally and dur­ing the cur­rent pull­back. As shown, as per­for­mance dur­ing the rally gets bet­ter, it gets worse dur­ing the cur­rent pull­back. So the sec­tors that ral­lied the most have gen­er­ally pulled back the most.

“Finan­cials are down the most of any sec­tor since May 8 at –11.2%, but they were also up a whop­ping 110% dur­ing the rally. The Indus­trial sec­tor has been the sec­ond worst since May 8 with a decline of 7.5%. Tech­nol­ogy and Con­sumer Sta­ples are the only two sec­tors that are up since May 8, so they’ve shown the best rel­a­tive strength recently.”

Source: Bespoke, May 28, 2009.

Finan­cial Times: Small caps out­per­form in sec­ond half of reces­sion
“For US equity investors, it has long paid to think small and cheap. Seem­ingly minor dif­fer­ences in returns for opaque and dowdy com­pa­nies com­pound impres­sively over the years. In the 80 years ended in 2008, invest­ing in a bas­ket of US small cap value stocks com­piled by Al Frank Invest­ments would have turned $1 into $46,603 with div­i­dends rein­vested against $1,097 for large growth stocks.

“The final stages of a boom, though, are an inaus­pi­cious time to own small com­pa­nies. As the econ­omy slows, they are often the first to feel the pinch: small busi­nesses tend to be biased towards cycli­cal indus­tries and mostly do not have the lux­ury of inter­na­tional diver­si­fi­ca­tion. Also, as bull mar­kets near their apex, inflows from naïve retail investors may be con­cen­trated in the largest, most liq­uid shares. True to form, small caps began to under­per­form the broader US mar­ket just as the hous­ing bub­ble peaked. From April 2006 to the end of 2008, they shed 32% of their value com­pared with just 24% for large stocks.

“Con­versely, much of small stocks’ his­tor­i­cal edge comes from out­per­form­ing early in any recov­ery. Pin­point­ing the end of today’s down­turn, which has now lasted twice as long as aver­age, is hardly nec­es­sary. And do not bother look­ing to offi­cial arbiters of these things — the last eight down­turns were only declared to be over, on aver­age, 15 months after­wards. The recent out­per­for­mance of small stocks may thus be a lead­ing indi­ca­tor of a recov­ery next year.

“Had an investor in pre­vi­ous reces­sions known ahead of time the day the reces­sion would end and bought small stocks imme­di­ately, it would have been too late, accord­ing to research by Rus­sell Invest­ments. The best time to max­imise returns would be six to nine months before. Sep­a­rately, ana­lysts at Mer­rill Lynch showed that small caps under­per­formed by four per­cent­age points in the first half of a reces­sion but out­per­formed by nine points in the sec­ond half. Ignore small caps only if you think the halfway point of this cri­sis is still not even in sight.”

Source: Finan­cial Times, May 25, 2009.

Barron’s: Prof­its squeezed at the mar­gin
“That things are get­ting worse more slowly is the essence of the bull­ish argu­ment for the US econ­omy and, by exten­sion, cor­po­rate prof­its. After the nose­dive of the past two quar­ters, the rate of decline will flat­ten out and give way to an even­tual ascent by later this year.

“But that take­off could be slower and later than assumed …

“Smithers & Co. of Lon­don pointed out that the cycli­cal improve­ment in prof­itabil­ity would accrue less to equity hold­ers than pre­vi­ous phases given the need to use those funds to bol­ster bal­ance sheets.

“Delever­ag­ing means pay­ing down debt instead of pay­ing out div­i­dends or buy­ing in stock. Indeed, as the pick-up in equity financ­ing indi­cates, it means issu­ing new shares. ‘The growth rate in of earn­ings per share thus is likely to be worse than that indi­cated by profit mar­gins alone,’ Smithers’ report concludes.

“Those mar­gins, far from being depressed, remain near his­tor­i­cal highs, a point which both Smithers and Albert Edwards, Soci­ete Generale’s strate­gist, emphasize.

“More­over, Edwards observes that the work of his col­league, quan­ti­ta­tive ana­lyst Andrew Lapthome, shows that bottom-up com­pany ana­lysts fore­cast an unprece­dent­edly mild con­trac­tion in profit mar­gins in the midst of the worst reces­sion since the Great Depression.

“‘This just doesn’t make sense to us,’ Edward writes in his Global Strat­egy Weekly. ‘Ana­lysts are ‘anchor­ing’ on recent unprece­dented high in mar­gins as the new norm, instead of view­ing them as bub­ble non­sense never to be seen again.’

“In the first-quarter report­ing sea­son now wind­ing down, results exceeded expec­ta­tions despite punk top-line growth. ‘Clearly com­pa­nies have been cut­ting costs aggres­sively. This helps explain why we have seen mas­sive job cuts in recent months,’ he adds. And with house­holds’ delever­ag­ing and pur­chas­ing power erod­ing, cor­po­rate rev­enue growth will be hit further.

“Those who didn’t get on board the rally that’s taken the US stock mar­ket up by a third from its early March lows face ‘career risk’ if, like most, they lost a boat­load of money last year. That sug­gests they’ll try to ride win­ners to the extent they can. After mid-year, we’ll see if they can keep flog­ging them successfully.”

Source: Ran­dall Forsyth, Barron’s, May 28, 2009.

Bespoke: Inter­na­tional rev­enues and recent stock per­for­mance
“When the US dol­lar expe­ri­enced its big decline in the years lead­ing up to the 2008 rally, stocks with high amounts of inter­na­tional rev­enues out­per­formed as busi­nesses in other coun­tries bought more goods from US com­pa­nies. As the dol­lar made its come­back last year and ear­lier this year, stocks that gen­er­ated most of their rev­enues domes­ti­cally out­per­formed. But now that the dol­lar has pulled back again, the inter­na­tional rev­enue trade has made a comeback.

“We broke up the S&P 500 into deciles (50 stocks in 10 groups) based on a stock’s per­cent­age of inter­na­tional rev­enues and cal­cu­lated the aver­age per­for­mance of stocks in each decile since the May 8 mar­ket top. Over this same time period, the US dol­lar has declined quite a bit as well. As shown below, the 50 stocks with the high­est per­cent­age of inter­na­tional rev­enues are down just 1.3%, while the 50 stocks with the low­est per­cent­age of inter­na­tional rev­enues are down 7.9%.

“Depend­ing on which way you think the dol­lar will go from here, you can play stocks with high amounts of inter­na­tional rev­enues or low amounts.”

Source: Bespoke, May 28, 2009.

Bespoke: BRIC coun­tries con­tinue to surge
“Russia’s RTS stock index was up another 3.2% today [Fri­day], while China was up 1.71% and India was up 2.3%. The BRIC (Brazil, Rus­sia, India, China) coun­tries con­tinue to surge higher in 2009, as they’ve far out­paced stock mar­kets of so-called ‘devel­oped’ coun­tries. Below we high­light their year to date per­for­mance com­pared to the S&P 500. As shown, Rus­sia is up a whop­ping 72.1% this year, fol­lowed by India at 51.6%, China at 44.6%, and Brazil at 39.7%. The S&P 500 is up 0.22%.”

Source: Bespoke, May 29, 2009.

Invest­ment­News: “Shake hands” with gov­ern­ment, the Pimco guru advises
“The credit crises and recent mar­ket col­lapse have resulted in ‘long-term changes that will estab­lish a ‘new nor­mal’,’ Bill Gross said yesterday.

“The man­ag­ing direc­tor and co-chief invest­ment offi­cer of Pacific Invest­ment Man­age­ment Co. made his com­ments dur­ing a keynote address at the Morn­ingstar Invest­ment Man­age­ment Con­fer­ence in Chicago, which was spon­sored by Morn­ingstar Inc. of Chicago.

“That means eco­nomic growth of between 1% to 2% over the next sev­eral years, rel­a­tively high unem­ploy­ment in the range of 7% to 8% and accel­er­at­ing infla­tion, Mr. Gross said.

“That will crimp asset-manager prof­its because they will have to con­tend with a low-return envi­ron­ment, he said.

“Among other things, Mr. Gross rec­om­mended that investors look over­seas, par­tic­u­larly in Brazil, India and China. ‘The growth will be in economies where con­sumers are a small por­tion of the econ­omy,’ he said.

“Domes­ti­cally, Mr. Gross sug­gested investors ’shake hands’ with gov­ern­ment. Investors should look for what gov­ern­ment is going to buy, and buy it first, he said.”

Source: David Hoff­man, Invest­ment­News, May 29, 2009.

CNBC: Mobius — emerg­ing mar­kets due for cor­rec­tion
“The emerg­ing mar­kets are due for a cor­rec­tion, though it will be short-lived, says, Mark Mobius, exec­u­tive chair­man at Tem­ple­ton Asset Man­age­ment. He shares his out­look, with CNBC’s Amanda Drury.”

Source: CNBC, May 29, 2009.

The Wall Street Jour­nal: If you think worst is over, take Ben­jamin Graham’s advice
“It is some­times said that to be an intel­li­gent investor, you must be unemo­tional. That isn’t true; instead, you should be inversely emotional.

“Even after recent tur­bu­lence, the Dow Jones Indus­trial Aver­age is up roughly 30% since its low in March. It is nat­ural for you to feel happy or relieved about that. But Ben­jamin Gra­ham believed, instead, that you should train your­self to feel wor­ried about such events.

“At this moment, con­sult­ing Mr. Graham’s wis­dom is espe­cially fit­ting. Sixty years ago, on May 25, 1949, the founder of finan­cial analy­sis pub­lished his book, ‘The Intel­li­gent Investor’, in whose honor this col­umn is named. And today the mar­ket seems to be in just the kind of mood that would have wor­ried Mr. Gra­ham: a jit­tery opti­mism, an inse­cure and almost des­per­ate need to believe that the worst is over.

“You can’t turn off your feel­ings, of course. But you can, and should, turn them inside out.

“Stocks have sud­denly become more expen­sive to accu­mu­late. Since March, accord­ing to data from Robert Shiller of Yale, the price/earnings ratio of the S&P 500 index has jumped from 13.1 to 15.5. That’s the sharpest, fastest rise in almost a quarter-century. (As Gra­ham sug­gested, Prof. Shiller uses a 10-year aver­age P/E ratio, adjusted for inflation.)

“Over the course of 10 weeks, stocks have moved from the edge of the bar­gain bin to the full-price rack. So, unless you are retired and liv­ing off your invest­ments, you shouldn’t be cel­e­brat­ing, you should be worrying.

“Mr. Gra­ham worked dili­gently to resist being swept up in the mood swings of ‘Mr. Mar­ket’ — his metaphor for the col­lec­tive mind of investors, euphoric when stocks go up and mis­er­able when they go down.

“In an auto­bi­o­graph­i­cal sketch, Mr. Gra­ham wrote that he ‘embraced sto­icism as a gospel sent to him from heaven’. Among the main com­po­nents of his ‘inter­nal equip­ment’, he also said, were a ‘cer­tain aloof­ness’ and ‘unruf­fled serenity’.

“Mr. Graham’s immer­sion in lit­er­a­ture, math­e­mat­ics and phi­los­o­phy, he once remarked, helped him view the mar­kets ‘from the stand­point of eter­nity, rather than day-to-day’.

“Per­haps as a result, he almost invari­ably read the enthu­si­asm of oth­ers as a yel­low cau­tion light, and he took their mis­ery as a sign of hope.

“His knack for invert­ing emo­tions helped him see when mar­kets had run to extremes. In late 1945, as the mar­ket was ris­ing 36%, he warned investors to cut back on stocks; the next year, the mar­ket fell 8%. As stocks took off in 1958–59, Mr. Gra­ham was again pes­simistic; years of jagged returns fol­lowed. In late 1971, he coun­seled cau­tion, just before the worst bear mar­ket in decades hit.”

Source: Jason Zweig, The Wall Street Jour­nal, May 26, 2009.

BCA Research: US — devalue or deflate
“While the US dol­lar is becom­ing over­sold and a short-term retrace­ment is pos­si­ble, we believe that the cycli­cal decline has fur­ther to run.

“In the after­math of the burst credit/asset bub­ble, US pol­i­cy­mak­ers face a choice: devalue or deflate. Indeed, gov­ern­ments around the world are fac­ing sim­i­lar con­di­tions and are also attempt­ing to reflate their economies. How­ever, US refla­tion­ary poli­cies are the most aggres­sive, which places the dol­lar at longer-term risk. The US fis­cal deficit will top 14% of GDP this year and the Fed has already announced debt pur­chases which amount to 12.5% of GDP.

“More­over, the FOMC min­utes warned that the Fed is will­ing to increase its debt mon­e­ti­za­tion oper­a­tions. There are two ways that these poli­cies are dol­lar neg­a­tive. First, cur­rency debasement/higher infla­tion means a lower nom­i­nal exchange rate in order to keep the real exchange rate sta­ble. Sec­ond, the Fed’s efforts to sup­press bond yields will impact cross-border cap­i­tal flows. As the US cur­rent account deficit is now entirely the result of the bud­get deficit, for­eign pur­chases of Trea­surys is the most impor­tant flow for the dollar.

“Bot­tom line: The con­tin­u­a­tion of cur­rent US poli­cies could even­tu­ally raise investor con­cerns of a dol­lar debase­ment. While some short-term tech­ni­cal indi­ca­tors are warn­ing that the US dol­lar is becom­ing over­sold, our For­eign Exchange Strat­egy ser­vice rec­om­mends investors hold core short dol­lar positions.”

Source: BCA Research, May 28, 2009.

Finan­cial Times: Bets against dol­lar high­est since start of eco­nomic cri­sis
“Spec­u­la­tive bets against the dol­lar have risen to their high­est level since the onset of the finan­cial crisis.

“Posi­tion­ing data from the Chicago Mer­can­tile Exchange, often used as a proxy for hedge fund activ­ity, showed that in the week end­ing May 19, bets against the dol­lar — short posi­tions — ver­sus the euro exceeded bets on dol­lar strength by 12,250 contracts.

“This net short posi­tion was the high­est level since the week of July 15, when the dol­lar hit a record low of $1.6038 against the euro.

“Mean­while, the net short posi­tion on the dol­lar ver­sus the yen rose to 6,000 con­tracts, the high­est since March.

“Ana­lysts said the fact that net long posi­tions in the Aus­tralian dol­lar also hit their high­est level since July reflected the extent of deep­en­ing anti-US dol­lar sen­ti­ment among the spec­u­la­tive community.

“Ashraf Laidi at CMC Mar­kets said con­sid­er­ing that long posi­tions in the euro and yen against the dol­lar were still about 11 times lower than their record highs, spec­u­la­tors had plenty of upside against the dol­lar in terms of quan­tity as well as price.”

Source: Peter Gar­nham, Finan­cial Times, May 26, 2009.

Ambrose Evans-Pritchard (Tele­graph): China warns Fed­eral Reserve over “print­ing money”
“Richard Fisher, pres­i­dent of the Dal­las Fed­eral Reserve Bank, said: ‘Senior offi­cials of the Chi­nese gov­ern­ment grilled me about whether or not we are going to mon­e­tise the actions of our legislature.’

“‘I must have been asked about that a hun­dred times in China. I was asked at every sin­gle meet­ing about our pur­chases of Trea­suries. That seemed to be the prin­ci­pal pre­oc­cu­pa­tion of those that were invested with their sur­pluses mostly in the United States,’ he told the Wall Street Journal.

“His recent trip to the Far East appears to have been a stark reminder that Asia’s ‘Con­fu­cian’ cul­ture of right action does not look kindly on the insou­ciant pol­icy of print­ing money by Anglo-Saxons.

“Mr Fisher, the Fed’s lead­ing hawk, was a fierce oppo­nent of the orig­i­nal deci­sion to buy Trea­sury debt, fear­ing that it would lead to a blur­ring of the line between fis­cal and mon­e­tary pol­icy — and could all too eas­ily degen­er­ate into Argentine-style financ­ing of uncon­trolled spending.

“How­ever, he agreed that the Fed was forced to take emer­gency action after the finan­cial sys­tem ‘lit­er­ally fell apart’.

“The Oxford-educated Mr Fisher, an out­spo­ken free-marketer and believer in the Schum­peter­ian process of ‘cre­ative destruc­tion’, has been run­ning a fer­vent cam­paign to alert Amer­i­cans to the ‘very big hole’ in unfunded pen­sion and health-care lia­bil­i­ties built up by a care­less polit­i­cal class over the years.

“‘We at the Dal­las Fed believe the total is over $99 tril­lion,’ he said in February.”

Source: Ambrose Evans-Pritchard, Tele­graph, May 26, 2009.

Bloomberg: Baltic Dry Index gains 5.9% to cap record monthly gain
“The Baltic Dry Index, a mea­sure of ship­ping costs for com­modi­ties, climbed every day in May to post its biggest monthly advance on record.

“The index track­ing trans­port costs on inter­na­tional trade routes added 196 points, or 5.9%, to 3,494 points, accord­ing to the London-based Baltic Exchange today. The gauge climbed 96% in the month.

“‘It’s amaz­ing; the atmos­phere is much more pos­i­tive than it was a few months back,” said Her­man Bil­lung, chief exec­u­tive offi­cer of Golden Ocean Man­age­ment A/S, which oper­ates Nor­we­gian bil­lion­aire John Fredriksen’s fleet of com­mod­ity carriers.

“‘It’s extremely dan­ger­ous to under­es­ti­mate Chi­nese demand, which we’ve all had a ten­dency to do for a few years now.’
“As well as three straight months of record iron ore imports, Chi­nese ship­pers are step­ping up pur­chases of coal and other com­modi­ties, Bil­lung said by phone from Oslo today. Ships’ asset val­ues are climb­ing because of the ris­ing mar­ket, he said.”

Source: Alaric Nightin­gale, Bloomberg, May 29, 2009.

Finan­cial Times: Opec bets on recov­ery to boost price
“The Organ­i­sa­tion of the Petro­leum Export­ing Coun­tries deliv­ered on Thurs­day its most opti­mistic mes­sage about the global econ­omy and the oil mar­ket since the start of the finan­cial cri­sis last sum­mer trig­gered a pre­cip­i­tous fall in prices from a record $150 a bar­rel to $30.

“‘We are begin­ning to see light at the end of the tun­nel,’ Abdalla El-Badri, Opec secretary-general, said after the car­tel agreed to leave its pro­duc­tion level unchanged, bet­ting that the global recov­ery would push oil prices to $75-$80 a barrel.

“‘We are see­ing [oil demand in] the US pick­ing up,’ Mr El-Badri added. ‘But, above all, which is the most impor­tant, we are see­ing demand in China and India and Asia as a whole.’

“Because oil demand was closely cor­re­lated with eco­nomic activ­ity, Opec’s cheer­ful view was a sig­nal the global econ­omy was slowly strength­en­ing, ana­lysts said.

“Ali Naimi, Saudi min­is­ter and one of the world’s most senior energy pol­i­cy­mak­ers, added to the upbeat sen­ti­ment, say­ing: ‘The price is good, the mar­ket is in good shape and the recov­ery is under way, so what else could we want?’

“David Kirsch, an oil mar­ket ana­lyst at PFC Energy, said in Vienna that Opec was leav­ing behind its wor­ries about the global econ­omy, last expressed at its March meet­ing. ‘Opec is wit­ness­ing early signs of eco­nomic recov­ery and finan­cial flows into com­modi­ties,’ Mr Kirsch said.

“Opec del­e­gates said that Saudi Ara­bia appeared con­fi­dent that the flow of money into com­modi­ties — as investors wor­ried about a pick-up in infla­tion or a fur­ther weak­en­ing of the US dol­lar — would help the car­tel to sup­port oil prices. Spec­u­la­tive flows, long an Opec foe, could turn into an ally, ana­lysts said.”

Source: Javier Blas, Finan­cial Times, May 28, 2009.

Ric­cardo Bar­bi­eri (Banc of Amer­ica Securities-Merrill Lynch): Higher oil won’t derail recov­ery
“The recent rise in the oil price should not pose a threat to the global recov­ery — for now, believes Ric­cardo Bar­bi­eri, head of inter­na­tional eco­nom­ics at Banc of Amer­ica Securities-Merrill Lynch.

“‘As long as prices rise only mod­er­ately from here, say revis­it­ing the $80 a bar­rel level by year-end, this would not pose severe risks for the advanced economies, while the emerg­ing ones would be able to tol­er­ate even higher lev­els, say $100, in due course.’

“He says the key issue is whether oil’s increase is part of the ‘refla­tion trade’ seen in the equity and credit mar­kets, or whether it reflects a sig­nif­i­cant rise in oil demand. ‘It seems that the oil mar­ket has mostly responded to improv­ing expec­ta­tions con­cern­ing the tim­ing of the recov­ery more than to an actual pickup in demand,’ he says. ‘The oil futures curve has flat­tened sig­nif­i­cantly in recent weeks, with late-2009 and 2010 con­tracts ris­ing a lot less than the front ones.’

“Mr Bar­bi­eri ref­er­ences work by the bank’s head of com­mod­ity research, Fran­cisco Blanch, sug­gest­ing global inven­to­ries remain high and Opec is sit­ting on ample spare capac­ity. Accord­ing to Mr Blanch, given the pre­car­i­ous state of the global econ­omy, Saudi Ara­bia would boost pro­duc­tion if prices moved up too quickly.

“‘In terms of price, our house view is that the line in the sand for Opec could be at $80. While this level may well be exceeded, it would not be sus­tain­able with­out a strong pickup in demand if Opec boosted its output.’”

Source: Ric­cardo Bar­bi­eri, Banc of Amer­ica Securities-Merrill Lynch (via Finan­cial Times), May 26, 2009.

Richard Rus­sell (Dow The­ory Let­ters): The three phases of a gold bull mar­ket
“Every major pri­mary bull mar­ket takes place in three sen­ti­ment phases. The first phase of the gold bull mar­ket occurred around 1999 to 2005. This was the ‘dirt cheap’ phase of gold when only the true believ­ers assumed posi­tions. Old timers prob­a­bly remem­ber back in 2000 when I wrote that the listed gold shares were so ridicu­lously cheap that they could be bought and ‘put away’ as per­pet­ual warrants.

“The sec­ond phase of the gold bull mar­ket started around 2005 and is still in force. This is the phase where the sea­soned pro­fes­sion­als and a few more sophis­ti­cated funds take their posi­tions. It is in the sec­ond phase where we see the most painful sec­ondary cor­rec­tions. And it is in the sec­ond phase where the pub­lic first notices the per­sis­tent rise in gold. In the cur­rent area, gold is just start­ing to attract the atten­tion of the public.

“Every major pri­mary bull mar­ket that I have stud­ied or lived through ends up with a wildly spec­u­la­tive third phase. This is the phase where the pub­lic and the crowd rushes head-long into the mar­ket. We saw this last in the years around 2000 when peo­ple bought any kind of tech stock. ‘I don’t care what it is, if it’s tech, just get me in!’

“My belief is that we’re now near­ing the begin­ning of the third spec­u­la­tive phase of the great gold bull mar­ket. The huge sec­ondary reac­tion that has held gold in its grip since early 2008 is com­ing to an end. Inter­est­ingly, this reac­tion has taken the form of a large head-and-shoulders bot­tom­ing pat­tern. Most recently, gold has been climb­ing (almost unno­ticed) up the formation’s right shoul­der. If June gold can close above 1003, I believe that will sig­nal the begin­ning of gold’s third spec­u­la­tive phase.”

Source: Richard Rus­sell, Dow The­ory Let­ters, May 26, 2009.

Ambrose Evans-Pritchard (Tele­graph): Gold bugs at last have their per­fect trin­ity
“The world’s top hedge fund man­ager John Paul­son has built a gold posi­tion of at least $5.5 bil­lion, the biggest such move since George Soros and Sir James Gold­smith bet on New­mont Min­ing in 1993.

“Britain has become the first of the Anglo-Saxon ‘AAA’ club to face a down­grade. As feared, the can­cer of bank lever­age is spread­ing to sov­er­eign cores.

“Gold prices tend to slide in late May and lan­guish through the sum­mer, because of the sea­sonal ups and downs of jew­ellery demand. The trader reflex would be to short gold at this stage after its $90 vault to $959 an ounce over the past month. They may think again this year.

“Paul­son & Co has bought $2.9 bil­lion in SPDR Gold Trust, the biggest of the gold exchange traded funds (ETFs), which now holds 1106 tonnes — three times the Brown-gutted reserves of the United Kingdom.

“Mr Paul­son has also built up a $2.3 bil­lion hold­ing of Anglo Ashanti, Gold­fields, Kin­ross Gold, and Mar­ket Vec­tors Gold Min­ers. The fact that he is launch­ing a ‘Paul­son Real Estate Recov­ery Fund’, revers­ing the bet against sub-prime secu­ri­ties that made him rich, tells us all we need to know about his think­ing. This is a liquidity-reflation play.

“You can argue — as do UBS, Mer­rill Lynch, ING, and Cap­i­tal Eco­nom­ics, to name a few — that mas­sive global stim­u­lus is merely strug­gling to off-set a mas­sive defla­tion­ary shock.

“So how will gold fare in a ‘Japan­ese’ stale­mate world where nei­ther infla­tion nor defla­tion gets the upper hand? The eight-year rally that has lifted gold from $254 to $959 may lose momen­tum for a while.

“‘The air is get­ting thin up here,’ said John Reade, pre­cious met­als guru at UBS. ‘Rich investors are no longer rush­ing out to buy­ing gold bars as they did after the Lehman col­lapse. Still, we think it is highly sig­nif­i­cant that both China and Rus­sia — two of the biggest hold­ers of for­eign reserves — are both buy­ing gold,’ he said.

Per­son­ally, I remain a gold bug out of fear that the most cor­ro­sive phase of this cri­sis lies ahead. … gold has out­per­formed Wall Street’s S&P 500 index by 500% so far this cen­tury, as if able sniff out trou­ble in advance. Such runs tend to fin­ish with a ‘par­a­bolic’ blow-off before they die. Mr Paul­son may yet make another for­tune, what­ever his reason.”

Source: Ambrose Evans-Pritchard, Tele­graph, May 23, 2009.

Credit Suisse: Gold — how far can the rally go?
“Gold prices ral­lied over the past months, dri­ven by investors, cen­tral banks or other hedgers look­ing for a safe haven. There is how­ever still sig­nif­i­cant upside poten­tial in the medium term, even if this safe haven effect has abated. Credit Suisse’s com­mod­ity ana­lyst Eliane Tan­ner explains why.

“Strong mon­e­tary demand cou­pled with a muted sup­ply out­look should keep gold prices well sup­ported over the next few months. How­ever, the decline in jew­elry demand should limit the medium-term upside poten­tial, since it is likely to dimin­ish quickly when prices increase too high or too fast. But in turn, jew­elry demand is set to pro­vide a floor to prices when invest­ment demand abates, as the lower prices should see non-monetary demand recov­er­ing. Credit Suisse there­fore fore­casts gold prices between 1,100 and 1,200 dol­lars per ounce by the end of the sec­ond quar­ter of 2010.”

Click here for the full article.

Source: Credit Suisse, May 25, 2009.

Ifo: Ifo Busi­ness Cli­mate Index for Ger­many look­ing up
“The Ifo Busi­ness Cli­mate Index for indus­try and trade in Ger­many rose once again in May. Although the firms have again assessed their cur­rent busi­ness sit­u­a­tion more unfavourably than in the pre­vi­ous month, they have given clearly fewer poor assess­ments of their six-month busi­ness out­look. This points to a grad­ual sta­bil­i­sa­tion of eco­nomic out­put at a low level.”

Source: Ifo, May 25, 2009.

Nationwide:UK house prices rise for sec­ond time in three months
“Com­ment­ing on the fig­ures Mar­tin Gah­bauer, Nationwide’s Chief Econ­o­mist, said:

“‘The price of a typ­i­cal house rose by 1.2% in May, pro­vid­ing fur­ther evi­dence of some improve­ment in hous­ing mar­ket con­di­tions over the last few months. At £154,016, the aver­age house price is still 11.3% lower than a year ago, although this marks a sig­nif­i­cant improve­ment from the annual decline of 15.0% recorded in April. The 3 month on 3 month rate of change — a smoother indi­ca­tor of short-term price trends — rose from –3.0% in April to –0.5% in May and now stands at its high­est level since Jan­u­ary 2008.

“‘Although the short-term trend in house prices has clearly improved from where it was at the begin­ning of the year, it is still too early to say that the mar­ket is turn­ing defin­i­tively. Dur­ing the down­turn of the early 1990s, there were many months dur­ing which prices rose, only to fall back down again in sub­se­quent periods.

“‘In the cur­rent down­turn, the com­bi­na­tion of rapidly ris­ing unem­ploy­ment and tight access to credit implies that the last of the price declines has prob­a­bly not been seen yet. Nonethe­less, the improve­ment in house price trends is con­sis­tent with signs of sta­bil­i­sa­tion in sev­eral other eco­nomic indi­ca­tors and sug­gests that any fur­ther price declines may occur at a less rapid pace than in 2008.”

Source: Nation­wide, May 29, 2009.

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Tags: Advisory Group, Australian Dollar, Baltic Dry Index, Basis Points, Bill Gross, Brazil, BRIC, BRICs, Crb Index, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Emerging Markets, ETF, Freight Rates, Global Economies, Gold, Gold Bullion, Government Bonds, India, Iron Ore, Jeffries, Market Peak, Metals Source, New Zealand Dollar, oil, precious metals, Rbc, Reuters, Stock Market Indices, West Texas Intermediate
Posted in Brazil, Emerging Markets, ETFs, Gold, India, Markets, Outlook, Silver | Comments Off

Global surveys – confidence is improving

Friday, May 29th, 2009

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

Taken sep­a­rately, one can find many rea­sons not to rely on sur­vey results, espe­cially those from con­sumers. But put them together, and global sur­vey results indi­cate that eco­nomic sta­bi­liza­tion is afoot.

The chart illus­trates con­sumer and busi­ness cli­mate sur­vey results through April 2009 for Japan and the Euro­zone and through May 2009 for Ger­many and the US. The indices are nor­mal­ized to 1995 for com­par­i­son. Except for the Euro­zone, which saw its first improve­ment in eco­nomic sen­ti­ment since May 2007, the indices have been improv­ing for sev­eral months now, with the US show­ing a siz­able increase in May. Here are some highlights:

From the US Con­fer­ence Board’s mea­sure of con­sumer con­fi­dence:

Con­tin­ued gains in the Present Sit­u­a­tion Index indi­cate that cur­rent con­di­tions have mod­er­ately improved, and growth in the sec­ond quar­ter is likely to be less neg­a­tive than in the first. Look­ing ahead, con­sumers are con­sid­er­ably less pes­simistic than they were ear­lier this year, and expec­ta­tions are that busi­ness con­di­tions, the labor mar­ket and incomes will improve in the com­ing months.

From the Euro­pean Commission’s Eco­nomic Sen­ti­ment results:

The rebound in the ESI resulted from a clear improve­ment in sen­ti­ment in indus­try and among con­sumers, which in both regions rose by the same amount (3 points), and a smaller increase in ser­vices (+1 point in both regions).

From the Ger­man Ifo Busi­ness Cli­mate

Although the firms have again assessed their cur­rent busi­ness sit­u­a­tion more unfavourably than in the pre­vi­ous month, they have given clearly fewer poor assess­ments of their six-month busi­ness out­look. This points to a grad­ual sta­bil­i­sa­tion of eco­nomic out­put at a low level.

Source: Rebecca Wilder, News N Eco­nom­ics, May 27, 2009.

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

Tags: Business Climate, Business Conditions, Business Outlook, Business Situation, Climate Survey, Consumer Confidence, Current Conditions, Doctorate, Economic Output, Economic Sentiment, Economic Stabilization, Esi, European Commission, Eurozone, German Ifo, Global Survey, Incomes, Situation Index, Sizable Increase, Survey Results
Posted in Markets, Outlook | Comments Off

Credit Crisis Watch: Update – Improvement in Financial Stress Index

Friday, May 29th, 2009

I have often reported on the progress that has been made on the credit front and con­cluded as fol­lows in my “Credit Cri­sis Review” of a few days ago: “Most indi­ca­tions are that the credit mar­ket tide has turned on the back of the mas­sive refla­tion efforts orches­trated by cen­tral banks world­wide and that the credit sys­tem has started thawing.

“How­ever, although the con­va­les­cence process seems to be well on track, it still has a way to go before con­fi­dence in the world’s finan­cial sys­tem returns to more ‘nor­mal’ lev­els, liq­uid­ity starts to flow freely again, and the eco­nomic recov­ery can commence.”

Fur­ther con­fir­ma­tion that the var­i­ous cen­tral bank liq­uid­ity facil­i­ties and cap­i­tal injec­tions are hav­ing the desired effect of unclog­ging credit mar­kets comes from Gold­man Sachs’s Finan­cial Stress Index (FSI). This index includes four fac­tors related to the degree of impair­ment of finan­cial mar­kets: coun­ter­party risk (US dol­lar 3-month LIBOR-OIS), liq­uid­ity risk (MBS to trea­sury repo dif­fer­en­tials), refund­ing risk (com­mer­cial paper out­stand­ing) and broader risk aver­sion (per­cent­age of monies held in money-market mutual funds in rela­tion to equity mar­ket capitalization).

As shown in the graph below, the FSI is now at the low­est level on a cycli­cally adjusted basis since the begin­ning of the credit cri­sis in August 2007.

“… the dis­tress pre­mium across assets has almost com­pletely eroded. While the recent improve­ment [in the FSI] is largely due to the increase in risk appetite, indi­cated by money-market mutual fund out­flows, there has also been improve­ment in other met­rics as well,” said the Gold­man team.

Source: Gold­man Sachs — Strat­egy Mat­ters, May 15, 2009.

Tags: 3 Month Libor, Adjusted Basis, Capital Injections, Central Banks, Convalescence, Credit Crisis, Credit Markets, Differentials, Economic Recovery, Financial Stress, Goldman Sachs, Liquidity Risk, Market Capitalization, Money Market Mutual Fund, Money Market Mutual Funds, Risk Appetite, Risk Aversion, Strategy Matters, Stress Index, Team Source
Posted in Gold, Markets | Comments Off

Between a Rock and Hard Place

Friday, May 29th, 2009

Money man­agers, invest­ment advi­sors and investors alike face a daunt­ing emo­tional and finan­cial chal­lenge in these mar­kets as a result of all the con­flict­ing sig­nals the mar­kets and the econ­omy are giv­ing. In addi­tion, when what you hear, see and feel do not match up, sea­sick­ness or motion sick­ness may set in.

Econ­o­mists are report­ing that the rate of eco­nomic wors­en­ing is slow­ing down, trea­sury yields are ris­ing again at the long end, and there are so-called green shoots. Gov­ern­ment is sig­nalling a turn in the eco­nomic outlook.

The stock mar­ket has enjoyed what some are call­ing (hop­ing) a new bull mar­ket and oth­ers, a mas­sive bear-market rally, and cor­po­rate earn­ings beat severely beat-down earn­ings fore­casts in the lat­est report­ing sea­son. Ques­tions remain as to what is sta­ble, and what is not?

In a recent post, Barry Ritholtz referred to Ran­dall Forstyh's "Green Shoots = Ganga" arti­cle in Barron's:

Ran­dall Forsyth elic­its chuck­les via his clever phrase-turning. He turns his poi­son pen on the ubiq­ui­tous non­sense known as “green shoots”  that has been so in vogue amongst the perma-wrong crowd:

“So, why the attrac­tion of green shoots? One can only spec­u­late that they must be in some ways intox­i­cat­ing. Per­haps not the shoots exactly, or the stems or seeds, but the leaves of a cer­tain plant. Those might be smoked or oth­er­wise ingested to bring about a euphoric effect. From what I’ve read, the cur­rent crop is far more potent than the com­mod­ity avail­able in years past. How else to explain the mind-bending notion that an econ­omy that is declin­ing less quickly is some­how improving?”

Like all great inven­tions, it obvi­ous in hindsight.

Once some­one else has invented it, every­one says (or at least thinks to them­selves) “How on earth did I not come up with that myself . . . ?”

Dan Dorf­man dis­cusses an inter­view with an asset man­ager who repeat­edly referred to him­self as an idiot, to make the point about "the unre­lent­ing pres­sures fac­ing Wall Street's performance-oriented big guns, many of them leery, and offers a cred­i­ble rea­son why the belea­guered stock mar­ket could get another sig­nif­i­cant shot in the arm pro­vided it doesn't cave in first."

When I told him of my inter­est in writ­ing a piece on his lat­est mar­ket think­ing, he chuck­led and shot back: "Why would you solicit the views of an idiot?"

Why such a dis­parag­ing ref­er­ence?, I asked. "Because my gut and the facts tell me the mar­ket is going lower, maybe a cou­ple of thou­sand Dow points lower, and that the econ­omy, con­trary to what a lot of econ­o­mists are say­ing, will not bounce back very much in the sec­ond half," he says. "Yet, I've been reduc­ing cash reserves and buy­ing some stocks fairly aggres­sively," he tells me. "Only an idiot would do that."

Then why buy? Because the per­for­mance pres­sures from clients are enor­mous, he explains. "My phone is ring­ing off the hook at all hours of the day and night. My clients all know the mar­ket is up about 30% from its March lows and all they want to hear is how much money I'm mak­ing for them after a lousy 2008. With the kind of explo­sive rally we've had," he says, "they can't imag­ine my not being an active par­tic­i­pant in it, and you really can't explain to peo­ple some­thing they don't want to hear — that it could be a buy­ing trap or a bear mar­ket rally.

In one of this week's posts pub­lished here, the leg­endary and incred­i­bly mod­est Jeremy Grantham, of GMO, as inter­viewed by Smart Money (May 21, 2009) dis­cusses why he changed his mind about the mar­ket after over a decade of being char­ac­ter­ized as a perma-bear:

SM: Why were you so cer­tain things were going to get so ugly?

G: There wasn’t a whole lot of doubt where I was com­ing from. I thought the fair value of the S&P was 925; the S&P went to 1500. And by 2006 the hous­ing bub­ble was at a 100-year peak. This was the 32nd asset bub­ble that we’ve tracked, and all but the U.K. hous­ing bub­ble have popped.

SM: … for the first time in years, you like US stocks.

JG: We think a fair price for the S&P 500 index is 900. By sheer divine inter­ven­tion we bought into the mar­ket on Mar. 6, the day it hit the recent low of 666. It’s likely, but far from cer­tain, that we’ll go back and make a new low. You aren’t going to get to buy at the absolute low unless you have a time machine.

SM: Any­thing else besides US stocks?

JG: US stocks were nicely cheap, and frankly, the rest of the world was even cheaper. In early March, when we bought, we invested only in stocks we thought would have a 10 to 14 per­cent aver­age annual return after infla­tion. That’s mag­nif­i­cent. We haven’t seen any­thing like that in 20 years. It was some­what dis­ap­point­ing that prices moved up so fast in just a cou­ple of weeks. The odds are a bit more than 50–50 that we will go back and test that low.

SM: So you’ve made a quick buck. Now what?

JG: You have a set of pos­si­bil­i­ties. First, if the mar­ket nose­dives, it’s easy: You buy. The sec­ond is con­fus­ing, when the mar­ket just goes side­ways, between 700 and 800. The mar­ket is irri­tat­ingly cheap then, but not super cheap. The longer that goes on, the less prob­a­bil­ity we will set a new low, so we’ll ulti­mately put money each month into the market.

SM: What if stocks keep rallying?

JG: If the mar­ket goes higher, above 950, and then starts mov­ing side­ways, between 950 and 1050, we prob­a­bly do very lit­tle. Then the mar­ket is mod­er­ately overpriced.

David Rosen­berg, Gluskin Sheff's Chief Econ­o­mist (ex-Merrill), has the fol­low­ing to say in yesterday's Break­fast with Dave:

Okay, the gloves are off. Just as was the case in the sum­mer of 2007, the bond bears are com­ing back out of hiber­na­tion, and we see and hear that they have a new set of pen­cils and rulers out and declar­ing, yet again, the end of the sec­u­lar bull mar­ket in Trea­suries. Not so fast.

About longer-term Trea­sury Bonds...

We think that this sharp cor­rec­tion in Trea­suries (4.5% loss so far this year) started off as a flight-out-of-safety when the Obama eco­nom­ics team put a floor under the finan­cials, then the sec­ond stage were the ‘green shoots’, fol­lowed by recur­ring asset mix rebal­anc­ing, and then by talk and tech­ni­cals — the exact stage when the blowoff occurs; and the blowoff is what pro­vides the opportunity.

Let’s not for­get what the upcom­ing round of data releases are going to look like after GM declares bank­ruptcy — job­less claims are likely going to test the old highs, ISM the old lows, and the boom in con­sumer con­fi­dence is going to seem like a dis­tant mem­ory by Labour Day.

About equi­ties

Well, we have a sneak­ing sus­pi­cion that the nearby peak was May 8 when the yield on the 10-year T-note was 3.29%. That was the tip­ping point for the stock mar­ket, which has only done back­ing and fill­ing ever since; and some wild swings (three triple-digit up Dow ses­sions; four triple-digit down days).

We would have to think that a 4.63% yield com­pares quite favourably with a 2.6% S&P 500 div­i­dend yield — the spread hasn’t been that wide in at least eight months. Not only that, but the stock mar­ket has become increas­ingly “less cheap” — over the last six months, 2009 con­sen­sus earn­ings esti­mates have been pared from +30% growth expec­ta­tions to a mere +9%. The S&P 500 is trad­ing at mul­ti­ples of around 17-18x, which is no bar­gain in our view.

Now for the rock and the hard place. Do you stay invested in equi­ties as though its a new bull, or do you take the pre­cau­tion­ary mea­sures in case the bears are right?

Its not always clear, but after read­ing through a fair bit of opin­ion it seems that the sim­ple, sen­si­ble thing to do next, may be to rebal­ance from equi­ties to bonds. Equi­ties and gov­ern­ment bond yields have had quite a run up on the 'green shoots' and Obama's 'floor-under-financials', and upcom­ing eco­nomic data may be, very mildly put, uninspiring.

Finally, some advice on seasickness:

There are three things which trig­ger sea sick­ness, and it is advis­able that you avoid them, if you are prone to it, or try to do as lit­tle as pos­si­ble: if you go below the deck for a long time (there the wag is big­ger), if you look through binoc­u­lars or other opti­cal device, and finally — if you read a book, look at a com­pass or do any work that requires gaz­ing at one point for a long time. Just try to keep your periph­eral vision on objects that your brain will inter­pret as sta­ble (because in fact they are not, and there will be clash in the sen­sory infor­ma­tion and it will end in sea sickness).

Tags: Asset Manager, Barron, Bear Market, Corporate Earnings, Dan Dorfman, David Rosenberg, Earnings Forecasts, Economic Outlook, Financial Challenge, Great Inventions, Hindsight, Investment Advisors, Market Rally, Money Managers, Motion Sickness, Place Money, Poison Pen, Reporting Season, S Green, Seasickness, Treasury Yields
Posted in Economy, Markets, Outlook | Comments Off

Higher bond yields raise caution

Friday, May 29th, 2009

While investors’ atten­tion was focused on global gov­ern­ment bond yields march­ing higher, the holiday-shortened week pro­duced a sur­pris­ingly small num­ber of video clips.

Some qual­ity footage was nev­er­the­less pro­duced, fea­tur­ing the likes of David Rosen­berg, now in his new role as chief econ­o­mist and strate­gist of Gluskin Sheff, Mohamed El-Erian, Barry Ritholtz, Puru Sax­ena and Mario Gabelli.

And then there is “out of the box” ana­lyst Marc Faber argu­ing that the US econ­omy will enter “hyper­in­fla­tion” approach­ing the lev­els in Zim­babwe. “I am 100% sure that the US will go into hyper­in­fla­tion,” Faber said in an inter­view with Bloomberg. “The prob­lem with gov­ern­ment debt grow­ing so much is that when the time comes and the Fed should increase inter­est rates, they will be very reluc­tant to do so and so infla­tion will start to accelerate.”

The selec­tion kicks off with a humor­ous take by Emmy Award win­ner Hoofy and Boo on “How not to save Detroit”, and con­cludes with a clip fea­tur­ing Twit­ter co-founders Biz Stone and Evan Williams explain­ing how they plan to attain their goal of gen­er­at­ing rev­enue by the end of the year. (By the way, you can fol­low me on Twit­ter by click­ing here.)

Hoofy & Boo (Minyanville): How not to save Detroit
“Chrysler is in dire straits and hop­ing that Fiat will save the com­pany. Join Hoofy and Boo as they watch two turkeys com­bine in an ill-conceived effort to make an eagle.”

Source: Hoofy & Boo, Minyanville, May 2009.

Finan­cial Times: GM’s future
“Spencer Jakab says once Gen­eral Motors emerges from almost cer­tain bank­ruptcy, it may be in sur­pris­ingly good shape.”

Source: Spencer Jakab, Finan­cial Times, May 26, 2009.

Fox Busi­ness: End of reces­sion? Not so fast
“David Rosen­berg, chief econ­o­mist at Gluskin Sheff & Asso­ciates, gives his take on the end of the mar­ket downturn.”

Source:Fox Busi­ness, May 26, 2009.

CNBC: Out­look from the Bond King — Mohamed El-Erian
“Cur­rent per­spec­tives on the future of the econ­omy, with Mohamed El-Erian, Pimco CEO/co-CIO.”

Source: CNBC, May 27, 2009.

Bloomberg: Wachovia’s Vit­ner says con­sumers see­ing bet­ter econ­omy
“Mark Vit­ner, man­ag­ing direc­tor at Wachovia Corp., talks with Bloomberg’s Erik Schatzker about data show­ing that con­fi­dence among US con­sumers jumped this month to the high­est level since Sep­tem­ber. The Con­fer­ence Board’s sen­ti­ment index surged to 54.9, higher than fore­cast and the biggest gain since April 2003, the New York-based research group said today.”

Source: Bloomberg, May 26, 2009.

CNBC: Blitzer on S&P/Case-Shiller home price declines
“The data shows home prices fell at the fastest rate ever in the first quar­ter. Insight with David Blitzer, Stan­dard & Poor’s man­ag­ing director/chairman.”

Source: CNBC, May 26, 2009.

CNBC: Ritholtz — how far from the hous­ing bot­tom?
“Search­ing for the hous­ing bot­tom, with Barry Ritholtz, FusionIQ CEO and the Fast Money traders.”

Source: CNBC, May 26, 2009.

John Authers (Finan­cial Times): House prices key to con­sumer con­fi­dence
“John Authers, FT’s invest­ment edi­tor, says that until US house prices recover we will not see con­sumer con­fi­dence return in earnest.”

Click here for the article.

Source: John Authers, Finan­cial Times, May 26, 2009.

The Wall Street Jour­nal: The rise of a finan­cial sta­bil­ity reg­u­la­tor
“Just as the Great Depres­sion led to the cre­ation of new insti­tu­tions and finan­cial prac­tices, the Obama admin­is­tra­tion is on track to impact finan­cial reg­u­la­tions. One of the new con­cepts involves a finan­cial sta­bil­ity reg­u­la­tor, David Wes­sel explains.”

Source: The Wall Street Jour­nal, May 27, 2009.

The Wash­ing­ton Post: Gei­th­ner dis­misses GOP social­ism charge as “ridicu­lous”
“Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner admits pri­vate investors are wor­ried about invest­ing in new government-backed com­mer­cial mort­gage secu­ri­ties and dis­misses as ‘ridicu­lous’ a recent Repub­li­can National Com­mit­tee res­o­lu­tion stat­ing that Demo­c­ra­tic poli­cies bor­dered on socialism.”

Source: The Wash­ing­ton Post, May 24, 2009.

The Wall Street Jour­nal: Mythol­ogy of bulls and bears
‘As the bulls gain force, investors must avoid get­ting tram­pled in a stam­pede. Barron’s Steven Sears comments.”

Source: David Ran­son, The Wall Street Jour­nal, May 21, 2009.

CNBC: Puru Sax­ena — expect a mild cor­rec­tion
“As mar­kets have run ahead of them­selves, expect a mild cor­rec­tion or con­sol­i­da­tion soon, pre­dicts Puru Sax­ena, money man­ager and CEO, Puru Sax­ena Wealth Man­age­ment. He tells CNBC’s Chloe Cho why this will be pos­i­tive for the US dollar.”

Source: CNBC, May 27, 2009.

Bloomberg: Gabelli says stock mar­ket find­ing “place of equi­lib­rium”
“Mario Gabelli, chair­man and chief exec­u­tive offi­cer of Gamco Investors Inc., talks with Bloomberg’s Betty Liu about the out­look for the US econ­omy and stocks.”

Source: Bloomberg, May 28, 2009.

CNBC: Faber — mar­ket cor­rec­tion will unfold
“Marc Faber, edi­tor and pub­lisher of The Gloom, Boom & Doom Report, says the over­bought mar­ket will cor­rect but he is uncer­tain about the mag­ni­tude of the cor­rec­tion. He speaks to Sean Cal­low of West­pac Bank, CNBC’s Mar­tin Soong & Sri Jegarajah.”

Source: CNBC, May 25, 2009.

CNBC: Dr Gloom — paper money will become worth­less
“Hold onto gold as paper money will become worth­less in the future, warns Marc Faber, edi­tor & pub­lisher of The Gloom, Boom and Doom Report. CNBC’s Mar­tin Soong & Sri Jegara­jah asked Faber how he was gain­ing expo­sure to the pre­cious metal.”

Source: CNBC, May 25, 2009.

The Street: Gold can hit $1 000
“Is a per­fect storm of a weak dol­lar, weak mar­kets, options expi­ra­tions and phys­i­cal demand going to push gold higher? Car­los Sanchez, Asso­ciate Direc­tor of Research for CPM Group offers his take at TheStreet.com.”

Source: The Street, May 28, 2009.

CNBC: OPEC sec­re­tary gen­eral — oil should be above $70
“OPEC is look­ing for a ‘rea­son­able’ oil price, which is not below $70 a bar­rel, OPEC sec­re­tary gen­eral Abdalla Salem El-Badri told CNBC after the orga­ni­za­tion left out­put unchanged Thursday.”

Source: CNBC, May 28, 2009.

Mar­ket­Watch: Twit­ter founders aim for rev­enue by year end
“Twit­ter co-founders Biz Stone and Evan Williams tell Mar­ket­Watch colum­nist Therese Poletti how they plan to attain their goal of gen­er­at­ing rev­enue by the end of the year.”

Source: Mar­ket­Watch, May 27, 2009.

Tags: Barry Ritholtz, Biz Stone, Bond Yields, Chief Economist, Cnbc, David Rosenberg, Financial Times, Global Government, Gluskin Sheff, Good Shape, Government Bond, Hyperinflation, King Mohamed, Marc Faber, Mario Gabelli, Market Downturn, Mohamed El Erian, Puru Saxena, Quality Footage, Shape Source
Posted in Canadian Market, Emerging Markets, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook | Comments Off

Why Jeremy Grantham Changed His Mind

Thursday, May 28th, 2009

The opin­ions of Jeremy Grantham, vet­eran investor and founder of Boston-based money-management firm GMO, have been fea­tured reg­u­larly in posts on the Invest­ment Post­cards blog. Against the back­ground of his gen­eral dis­re­gard for con­ven­tional wis­dom, his turn­around in early March from a perma-bearish stance to a more bull­ish demeanour was par­tic­u­larly closely followed.

“… be aware that the mar­ket does not turn when it sees light at the end of the tun­nel. It turns when all looks black, but just a sub­tle less black than the day before,” he said in March in a newslet­ter enti­tled “Rein­vest­ing when ter­ri­fied“. He also cau­tioned investors not to fall prey to “ter­mi­nal paral­y­sis” that often sets in after a finan­cial crisis.

A recent inter­view by Smart­Money with Grantham pro­vides insight on why he has changed his mind and his prog­no­sis for the future. A few excerpts from the inter­view are shared below.

Smart­Money: In 2007 you were wor­ried the global finan­cial mar­ket could fall apart, and you said a mar­ket down­turn was prob­a­bly com­ing. Okay, say it: “I told you so.”

Jeremy Grantham: That seems so long ago. I felt like say­ing that a few months ago, but now onward and upward, and wait for the next unex­pected twist.

SM: Why were you so cer­tain things were going to get so ugly?

G: There wasn’t a whole lot of doubt where I was com­ing from. I thought the fair value of the S&P was 925; the S&P went to 1500. And by 2006 the hous­ing bub­ble was at a 100-year peak. This was the 32nd asset bub­ble that we’ve tracked, and all but the U.K. hous­ing bub­ble have popped.

SM: … for the first time in years, you like US stocks.

JG: We think a fair price for the S&P 500 index is 900. By sheer divine inter­ven­tion we bought into the mar­ket on Mar. 6, the day it hit the recent low of 666. It’s likely, but far from cer­tain, that we’ll go back and make a new low. You aren’t going to get to buy at the absolute low unless you have a time machine.

SM: Any­thing else besides US stocks?

JG: US stocks were nicely cheap, and frankly, the rest of the world was even cheaper. In early March, when we bought, we invested only in stocks we thought would have a 10 to 14 per­cent aver­age annual return after infla­tion. That’s mag­nif­i­cent. We haven’t seen any­thing like that in 20 years. It was some­what dis­ap­point­ing that prices moved up so fast in just a cou­ple of weeks. The odds are a bit more than 50–50 that we will go back and test that low.

SM: So you’ve made a quick buck. Now what?

JG: You have a set of pos­si­bil­i­ties. First, if the mar­ket nose­dives, it’s easy: You buy. The sec­ond is con­fus­ing, when the mar­ket just goes side­ways, between 700 and 800. The mar­ket is irri­tat­ingly cheap then, but not super cheap. The longer that goes on, the less prob­a­bil­ity we will set a new low, so we’ll ulti­mately put money each month into the market.

SM: What if stocks keep rallying?

JG: If the mar­ket goes higher, above 950, and then starts mov­ing side­ways, between 950 and 1050, we prob­a­bly do very lit­tle. Then the mar­ket is mod­er­ately overpriced.

SM: Over the long haul, is there any par­tic­u­lar indus­try or sec­tor you like?

JG: The peo­ple who move quickly in this mar­ket can make money. The peo­ple who invest in energy alter­na­tives will make more. Alter­na­tive ener­gies and com­bat­ing cli­mate change are the sin­gle most impor­tant eco­nomic ini­tia­tives over the next 10 years-really over the next 50 years. It will be a very excit­ing next 50 years.

SM: Will we get out of this mess?

JG: The stim­u­lus is so great in the United States, China and the United King­dom, it will kick the econ­omy up. GDP will go back pos­i­tive for two to three quar­ters. They’ll assume every­thing is set­tled, that throw­ing money at it has worked. But the long-term imbal­ance between over­pro­duc­ers [like China] and over­spenders [like the US] will con­tinue. It’ll be a mul­ti­year drag on growth.

SM: We’re just throw­ing money at the problems?

JG: If the prob­lem is that we con­sume too much and bor­row too much, does it make sense to bor­row more and spend more? It doesn’t make sense to solve alco­holism by giv­ing an alco­holic a quart of whiskey, but every­one believes that we must stim­u­late. So that’s why we feel this is a tem­po­rary cure. This is like when you revive the drunk, he stag­gers down a few blocks, then falls down again.

SM: That does not sound promising.

JG: We’re not rich, and we’re under­saved and under­pen­sioned. Those will be a real brake on eco­nomic growth. This will be a pretty long recov­ery period, longer than we’re used to, but hope­fully not as long as Japan took. It will not be as long as the Depres­sion, but it will be sev­eral years, and not just two. Lord knows we have had sev­eral fat years.

Source: Rus­sell Pearl­man and Jonathan Dahl, Smart­Money, May 21, 2009.

Tags: Conventional Wisdom, Demeanour, Disregard, Divine Intervention, Excerpts, Financial Crisis, Global Financial Market, Gmo, Housing Bubble, Jeremy Grantham, Light At The End Of The Tunnel, Market Downturn, Money Management Firm, Paralysis, Prey, Prognosis, Smartmoney, Time Machine, Turnaround, Unexpected Twist, Whole Lot
Posted in Markets | Comments Off

Seth Klarman (Baupost Group) Interview (Q2/2009)

Wednesday, May 27th, 2009

Here is an inter­view Seth Klar­man (of Bau­post Group) did with TIFF for their Endow­ment Man­age­ment Sem­i­nar. This tran­script pro­vides even more words of wis­dom from Klar­man after we cov­ered some of his lat­est move­ments. Addi­tion­ally, be on the look­out next week when we cover him in our first quar­ter 2009 port­fo­lio track­ing series.

Here is the inter­view (RSS & Email read­ers will have to come to the blog to view it):

Seth Klar­man Inter­view —

Tags: Baupost Group, Blog, Endowment Management, ETF, First Quarter, Group Interview, Lookout, Management Seminar, Portfolio Tracking, Seth Klarman, Tiff, Words Of Wisdom
Posted in ETFs, Markets | Comments Off

Top 5 FREE Blackberry Applications

Wednesday, May 27th, 2009

As power Black­berry users, we have found there are some pretty amaz­ing free appli­ca­tions for your Black­berry that you can get that will improve your expe­ri­ence with your device. Here are our 5 faves, which you can down­load and install over-the-air (OTA) here:

1. BBFile­Scout (OTA) (More Info) — This is a very handy file man­ager appli­ca­tion that you can use to store and access files, such as Word and Excel Docs, and PDFs, for when you'd like to send them as an attach­ment when you're not in the office. It also allows you to cre­ate fold­ers, orga­nize files from doc­u­ments to music and other media.

2. Quick­Pull V.2 (OTA — Curve, Bold) (OTA — (Storm) (More Info) — The insanely pop­u­lar Quick­Pull is an appli­ca­tion for all track­ball or touch­screen Black­Berry devices and allows you to eas­ily per­form a battery-pull equiv­i­lent. This frees up mem­ory and can help resolve any issues you are hav­ing with your device at the time. Quick­Pull can also be schdeuled to run at a spec­i­fied time each day.

3. BOLT — Mobile Web browser — (OTA) — In our expe­ri­ence, this browser out­does Opera Mini as well as the Black­berry browser. It does not require always hav­ing to zoom up pages, and even sites like the New York Times are read­able once you arrive on the main land­ing page. It also has tabbed his­tory and favourites right on the front end.  Bolt is fast, Fast, FAST; in fact, it's the speed­i­est mobile browser I've ever used. And it employs sim­i­lar short­cuts to Opera Mini for scrolling, zoom­ing and other page nav­i­ga­tion, so it shouldn't take you long to get used to it. And Bit­stream, the com­pany that makes Bolt, also says the browser uses one-third of the bat­tery life of com­pa­ra­ble mobile browsers.

4. Google Mobile App — (OTA) By far the coolest fea­ture of this handy app from Google is the voice search...Google Mobile App helps you find the infor­ma­tion you need quickly and eas­ily with instant access to Google Search.

• Search with your voice so you don't have to type. ^New!
• Search with My Loca­tion makes find­ing busi­ness, weather, and movie info easy. ^New!
• Sug­ges­tions appear as you type to save you time.
• Launch Gmail, Google News, and more from one place.

MobiPocket Reader (OTA) — This app lets you eas­ily open and read and search PDF files right from the email mes­sage, as well as save the file. You're not at your desk and some­one sends you a PDF file for your review. You can open it right there and then when you need to. Also this app turns your black­berry into a uni­ver­sal file reader, and gives you access to amazon.com's reader book library.

Tags: Battery Life, Blackberry Applications, Bolt, Curve, Faves, Folders, Free Applications, Google, Google Search, Instant Access, Manager Application, Mobile Browser, Mobile Web, New York Times, Opera, Page Navigation, Search Google, Shortcuts, Touchscreen, Trackball, Web Browser
Posted in Markets | Comments Off

Goldman: Past the Worst?

Wednesday, May 27th, 2009

The debate rages on regard­ing whether the global busi­ness cycle has started to sta­bi­lize, with most of the “green shoots” argu­ments based on softer data such as Pur­chas­ing Man­agers Indices (PMIs) appear­ing “less bad”. Although this is not the same as “good”, one should be aware of the fact that a bot­tom­ing process of the eco­nomic cycle has com­menced. Impor­tantly, dif­fer­ent coun­tries will expe­ri­ence dis­sim­i­lar rates of recov­ery that, in turn, will impact asset allo­ca­tion decisions.

An inter­est­ing analy­sis by the Gold­man Sachs Global Eco­nom­ics team sug­gests that every major econ­omy has pos­si­bly already seen its worst rate of GDP decline, either in Q4 of last year or Q1 of this year (see graphs below). “Emerg­ing mar­kets are likely to see a return to trend growth about six months, on aver­age, before advanced economies. Sim­i­larly, emerg­ing mar­kets on aver­age will close their out­put gaps – the dif­fer­ence between actual growth and trend growth – about two years before advanced economies,” said the economists.

Although the Gold­man team are not under the elu­sion that they will be entirely cor­rect on the tim­ing of these events, they do feel more con­fi­dent about the rel­a­tive order in which countries/regions will reach the above mile­stones. The analy­sis leads them to the fol­low­ing mar­ket impli­ca­tions as sum­ma­rized in the report:

• Equity mar­kets have most likely bot­tomed and volatil­ity should start dimin­ish­ing.
• Coun­tries that get back to trend growth sooner will tighten mon­e­tary pol­icy sooner.
• Coun­tries that get back to trend growth sooner should see their cur­ren­cies strengthen.
• As the out­put gap will take many years to close, there should be lim­ited pres­sure on prices and wages. Defla­tion will still be a greater con­cern in the short term than infla­tion.
• Emerg­ing mar­kets, par­tic­u­larly Asia, should offer more oppor­tu­ni­ties for out­per­for­mance for equi­ties and forex, and could sup­port com­mod­ity prices, espe­cially indus­trial metals.

Source: Peter Berezin and Alex Kel­ston, Gold­man Sachs — Global Eco­nom­ics Weekly (via Fuller­money), May 20, 2009.

Tags: Asset Allocation Decisions, Business Cycle, Commodity Prices, Debate Rages, Economic Cycle, Economics Team, Elusion, Emerging Markets, Gap, Global Business, Global Economics, Goldman Sachs, Industrial Metals, Market Implications, Metals Source, Monetary Policy, Outperformance, Output Gap, Output Gaps, Prieur, Purchasing Managers, Q1, Q4, Volatility
Posted in Emerging Markets, Gold, Markets | Comments Off

Dollar’s slide hurting foreign investors

Wednesday, May 27th, 2009

With the US dol­lar trad­ing at a five-month low, spare a thought for non-US investors invested in US stocks and bonds.

The graph below com­pares the per­for­mance of the US 10-year Trea­sury Note in US dol­lar terms (green line) with the same bonds from the view­point of a Euro­pean investor (red line). (Although I am using the euro in this exam­ple, the same logic applies to most other non-US dol­lar cur­ren­cies.) Since the peak of the US dol­lar against the euro on March 5, US investors have lost 2.6% on their Trea­sury invest­ments, but euro investors are com­pletely under water to the tune of –11.9%. The year-to-date num­bers are down by 5.6% (US dol­lar) and 5.7% (euro) respectively.

Source: StockCharts.com

The next graph shows the S&P 500 Index in both US dol­lar terms (green line) and euro terms (red line). Whereas US investors have every rea­son to be pleased with a huge return of +27.7%, euro investors received a less ster­ling but nev­er­the­less palat­able +15.6%, given the mag­ni­tude of the rally. For the year to date the fig­ures are +0.8% (US dol­lar) and –0.7% (euro).

Source: StockCharts.com

In the words of Richard Rus­sell (Dow The­ory Let­ters): “The US Dol­lar Index is sit­ting on what I term ‘the edge of the cliff’. If the dol­lar falls apart, we’re deal­ing with a whole new story – it will affect almost all invest­ments, US and for­eign. The slid­ing dol­lar is already putting pres­sure on Trea­sury bonds, par­tic­u­larly the long-term 30-year matu­ri­ties. This is caus­ing our cred­i­tors (think China) to cut back.”

Will the green­back turn out to be the Achilles heel of the US economy?

Posted in Markets | Comments Off

David Swensen Interview (May 22, 2009)

Wednesday, May 27th, 2009

David Swensen, leg­endary CIO of the Yale Endow­ment appeared in a full length inter­view on Con­suelo Mack's Wealth­track on May 22. 2009. In it, he dis­cusses among other things, his updated rec­om­men­da­tions for indi­vid­ual investors. Swensen reminds us of Jeremy Grantham, a ded­i­cated prac­ti­tioner who could care less about the invest­ment spot­light, and would most likely pre­fer to be left alone to do what he loves best. Investing.

Click play to watch. For a tran­script of Part 1, click here.

This is an enlight­en­ing inter­view, as Swensen shares his can­did views on invest­ing, and what is required for invest­ment success.

Here are Swensen's rec­om­men­da­tions for indi­vid­ual investors. Cana­dian investors may want to sub­sti­tute for the Canada equity bias on the US stocks allo­ca­tion. Sub­sti­tute for Canada Bonds and Canada Real Return Bonds to reduce the cur­rency risk.

30% US stocks
15% trea­sury bonds
15% TIPS
now 15% REITs
15% for­eign devel­oped equi­ties
now 10% emerg­ing markets

Swensen has reduced the REITs allo­ca­tion by 5% and raised the Emerg­ing Mar­kets allo­ca­tion from 5% to 10%. By the way, Swensen made these long view asset allo­ca­tion adjust­ments at the begin­ning of the year, and not last week, so given that emerg­ing mar­kets are out­per­form­ing G7 coun­try equity mar­kets, his call early in the year, to indi­vid­ual investors, to over­weight them was reliable.

Swensen remarked that diver­si­fi­ca­tion fails dur­ing crises — it did in 1987, 1998 and last year. He also dis­cusses the idea that while he is reli­giously a bottom-up investor, crises force you to look at top-down considerations.

This is a must see inter­view and Swensen pro­vides much food for thought in this meaty interview.

Tags: Active Management, Asset Allocation, Asset Classes, Canada Bonds, Canada Equity, Canadian Investors, Canadian Market, Candid Views, capitalism, Consuelo Mack, Currency Risk, David Swensen, Diversification, Emerging Markets, Endowments, Etps, Financial Crisis, Food For Thought, Hedge Funds, Individual Investors, Investment Horizon, Investment Success, Jeremy Grantham, Length Interview, Long Periods Of Time, Real Return Bonds, Reits, Roger Nusbaum, Some Critical Remarks, Stocks Bonds, Treasuries, Treasury Bonds, Wealthtrack, Yale Endowment
Posted in Canadian Market, Emerging Markets, Markets | Comments Off

Technical talk: S&P 500 testing support

Tuesday, May 26th, 2009

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

The S&P 500 Index, after stalling below resis­tance for much of May, has now slipped below its lower chan­nel line and is test­ing price sup­port again at the 875 level. If the 875 level is vio­lated the mar­ket will become more defen­sive and expect sell­ing to mate­ri­al­ize quickly as traders will look to lock in remain­ing prof­its from this rally.

At this point we do believe any sell­ing that mate­ri­al­izes on a break­ing of the afore­men­tioned sup­port zone would be fairly short-lived and the price drop rel­a­tively shal­low (10 – 15%). We fur­ther believe if this sell­ing occurs it will be part of a mar­ket retest­ing phase and would set up another buy­ing oppor­tu­nity since there isn’t a lot of sup­ply left after the near eight months of con­tin­u­ous sell­ing from August 2008 into the March 2009 low.

Addi­tion­ally, momen­tum indi­ca­tors such as the 21-day Rate of Change (ROC) are see­ing the rate at which prices are accel­er­at­ing slow rapidly when com­pared with the aggres­sive pace of accel­er­a­tion seen in the begin­ning of the advance. This diver­gence between price and momen­tum can typ­i­cally be a warn­ing sign that a near-term trend change will take place.

Since we don’t believe this will be a large sell-off, investors can play this poten­tial cor­rec­tive wave sev­eral ways: firstly, tighten trail­ing stops on prof­itable posi­tions or off­set long expo­sure by short­ing an equal dol­lar amount to your long expo­sure of a mar­ket ETF or buy­ing an inverse mar­ket ETF; sec­ondly, sell all remain­ing long expo­sure and wait for a pull­back to repur­chase names at cheaper prices, or lastly, and for only the most aggres­sive investors, sell all long expo­sure on a sup­port level break and increase short expo­sure sig­nif­i­cantly by short­ing a mar­ket ETF or buy­ing an inverse mar­ket ETF (in this option keep stops and draw­down lim­its tight).

Source: Kevin Lane, Fusion IQ, May 14, 2009.

Tags: Acceleration, Aggressive Investors, Corrective Wave, Divergence, Eight Months, ETF, Iq, Momentum Indicators, Pace, Profits, Pullback, Rally, Resistance, Roc, Several Ways, Support Zone, Term Trend, Trailing Stops, Warning Sign
Posted in ETFs, Markets | Comments Off

Richard Russell (Dow Theory Letters): Characteristics of secondary reactions

Monday, May 25th, 2009

Richard Rus­sell, author of Dow The­ory Let­ters, offers wis­dom on price move­ments, explain­ing the nature of upside moves, par­tic­u­larly, bear mar­ket rallies.

“The most dif­fi­cult and puz­zling study of the stock mar­ket is that which deals with sec­ondary reac­tions against the pri­mary trend. Because we’re in a bear mar­ket, I’m going to limit the fol­low­ing dis­cus­sion to (upward) reac­tions in bear markets.

“Over the week­end I pulled out my vol­ume of Robert Rhea’s ‘The Dow The­ory’. I went over some of Rhea’s com­ments on sec­ondary reac­tion in bear market.

“‘For the pur­pose of this dis­cus­sion, a sec­ondary reac­tion is con­sid­ered to be an impor­tant advance in a bear mar­ket, usu­ally last­ing three weeks to as many months, dur­ing which inter­val the price move­ment gen­er­ally retraces from 33% to 66% of the pri­mary price change since the last pre­ced­ing sec­ondary reaction.

“‘Those who try to place exact lim­its on sec­ondary reac­tions are doomed to fail­ure, just as surely as would be the weather man who fore­casted a snow­fall of exactly three and one half inches within a spec­i­fied time.

“‘In a bear mar­ket steady liq­ui­da­tion of secu­ri­ties by those who pre­fer or need cash reduces quo­ta­tions day after day, with pro­fes­sion­als, real­iz­ing there is more room on the bot­tom than on the top, has­ten­ing the decline with short sales. Even­tu­ally, the mar­ket is forced to a lower level than is war­ranted by con­di­tions. The short inter­est is per­haps too extended, with wise traders sens­ing the fact the liq­ui­da­tion has, for the time, at least, run its course.

“‘Quiet, weak spots in bear mar­kets are gen­er­ally good ones to short, as they gen­er­ally develop into seri­ous declines.

“‘In a pri­mary bear mar­ket the ral­lies are apt to be vio­lent and erratic, and always occupy less time than the decline, which they par­tially recov­ery. Often the pri­mary move­ment of sev­eral weeks is retracted in a few days.

“‘Ral­lies in a bear mar­ket are sharp, but expe­ri­enced traders wisely put out their shorts again when the mar­ket becomes dull after a recovery.

“‘In bear mar­kets, pri­mary move­ment has an aver­age dura­tion of 95.6 days, whereas the sec­ondary move­ment aver­ages 66.5 days or 69.6% of the time con­sumed in the pre­ced­ing pri­mary movements.’

“All the above per­tains to the price action dur­ing ral­lies in bear mar­kets. But what about busi­ness con­di­tions dur­ing bear mar­ket ral­lies? My stud­ies show that bear mar­ket ral­lies are tech­ni­cal phe­nom­e­nons which do not nec­es­sar­ily reflect on busi­ness. I’m look­ing at a chart of the great 1929 to 1930 rally which occurred after the 1929 crash. The Fed­eral Reserve Index turned down in late-1929, and despite the great bear mar­ket rally, the Fed Index con­tin­ued lower into early 1932.”

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

Hat tip: Invest­ment Postcards

Tags: Bear Market, Bear Markets, Decline, Declines, Dow Theory Letters, Exact Limits, Failure, Few Days, Interval, Liquidation, Market Rallies, Nature, Quotations, Rallies, Richard Russell Dow Theory, Robert Rhea, Short Interest, Snowfall, Stock Market, Weather Man, wisdom
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BRICs, Canada Showing Relative Strength

Monday, May 25th, 2009

It appears that the coun­tries with either the health­i­est bank­ing and finan­cial sys­tems, or strongest eco­nomic growth fun­da­men­tals, or large com­mod­ity com­plexes, or or all of the above, are enjoy­ing a stronger recov­ery in equity mar­kets than those with sig­nif­i­cant expo­sure to the cur­rent finan­cial cri­sis that sank the G7 economies.

It looks as though global investors are focused on Canada as the stand­out from G7, with its strong finan­cial sys­tem and sig­nif­i­cant com­mod­ity com­plex, despite its trade expo­sure to a crip­pled US con­sumer, and the BRICs with their strong consumer/producer pair­ings. All of the BRICs have sound fis­cal posi­tions, sub­stan­tial forex reserves, many years of cur­rent accounts cov­er­age, lit­tle or no direct expo­sure to the West's finan­cial and credit cri­sis, and bil­lions of under­lev­ered con­sumers. There seems to also be a recog­ni­tion of the com­par­a­tive under­indebt­ed­ness of emerg­ing mar­kets' com­pa­nies and their resilient domes­tic con­sump­tion supports.

“With global equity mar­kets still in rally mode, below we high­light
the year to date per­for­mance of the major indices for 83 coun­tries
around the world. After nearly every coun­try was down ear­lier in the
year, 62 out of the 83 are now up in 2009.

“Peru is up the most at 72.92%, while Costa Rica is down the most at
–39.94%. And the BRIC (Brazil, Rus­sia, India, China) coun­tries are
sig­nif­i­cantly out­per­form­ing the devel­oped G-7 coun­tries. Rus­sia, India,
and China rank 2nd, 3rd, and 4th in terms of year to date per­for­mance,
and Brazil isn’t far behind in 10th place.

“Canada has been the best per­form­ing G-7 coun­try with a gain of
12.62% in 2009, but it ranks 35th out of 83. The rest of the G-7
coun­tries are bunched up in the 0%-5% range, which is closer to the
bot­tom of the list than the top. And the US is the worst of the seven
with gains of less than 1%. While the mar­kets here in the US have
ral­lied nicely off of their March lows, most other coun­tries have
bounced back even more 2009.”

Source: Bespoke, May 19, 2009.

Tags: Banking And Financial Systems, Bottom Of The List, Brazil, BRIC, Bric Brazil, BRICs, Canadian Market, Countries Around The World, Credit Crisis, Current Accounts, Domestic Consumption, Emerging Markets, Fiscal Positions, Forex Reserves, Global Equity Markets, Global Investors, India, India China, Lows, Major Indices, Place Canada, Rally Mode, Relative Strength, Standout, Year 62
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Words from the (investment wise) for the week that was (May 18 – 24, 2009)

Sunday, May 24th, 2009

“Words from the Wise” this week comes to you a bit later than usual and in a short­ened for­mat as my “day-job” demands keep me from doing my cus­tom­ary com­men­tary. How­ever, a full dose of excerpts from inter­est­ing news items and quotes from mar­ket com­men­ta­tors is provided.

Stock mar­kets kicked off the last week on a high note, but then the US parted ways with other mar­kets as the remain­ing four days went down­hill for Amer­i­can stocks. In con­trast, global mar­kets in gen­eral had only one down day on Thursday.

In addi­tion to non-US equi­ties, risky assets such as com­modi­ties, oil, gold, sil­ver and plat­inum, and high-yielding cur­ren­cies per­formed strongly amid fresh signs of “less bad” eco­nomic and finan­cial con­di­tions. How­ever, safe-haven trades like the US dol­lar and gov­ern­ment bonds got whacked, espe­cially fol­low­ing Stan­dard & Poor’s deci­sion on Thurs­day to mark down its medium-term out­look for the UK’s AAA credit rat­ing from “sta­ble” to “neg­a­tive”. This raised con­cerns that the US may face a sim­i­lar fate.

Source: New York Post, May 23, 2009.

As the impli­ca­tions of surg­ing gov­ern­ment debt lev­els move to cen­ter stage, the US Debt Clock makes for sober­ing read­ing. Click here or on the image below for the live version.

Source: US Debt Clock, May 23, 2009.

David Rosen­berg, Mer­rill Lynch’s for­mer chief North Amer­i­can econ­o­mist, who has just com­menced duty with buy-side firm Gluskin Sheff & Asso­ciates, com­mented as fol­lows: “While the UK gov­ern­ment debt-to-GDP ratio is around 40%, the rat­ing agen­cies are look­ing at 100% in com­ing years. The US gov­ern­ment debt/GDP ratio right now is near 65%, but clearly head­ing higher. It seems as though 100%+ is the trig­ger point for downgrades …

“So the view out there that the US is about to receive a credit down­grade despite the dra­matic expan­sion of the gov­ern­ment bal­ance sheet is a lit­tle pre­ma­ture. For now, it makes for nice cock­tail con­ver­sa­tion but as super-sized as the deficit is (13% of GDP), there is enough room in the debt ratio that the US would likely have to run three more years of this sort of fis­cal pol­icy to be seen as a can­di­date for a downgrade.”

The per­for­mance of the major asset classes is sum­ma­rized by the chart below.

Source: StockCharts.com

Fol­low­ing the pre­vi­ous week’s bruis­ing, the MSCI World Index last week gained 2.2% (YTD +2.3%) and the MSCI Emerg­ing Mar­kets Index 5.4% (YTD +31.6%).

Sim­i­larly, the major US indices reversed course, but in a much more sub­dued fash­ion, as seen from the fairly flat move­ments of the major indices: S&P 500 Index (+0.5%, YTD –1.8%), Dow Jones Indus­trial Index (+0.1%, YTD –5.7%), Nas­daq Com­pos­ite Index (+0.7%, YTD +7.3%) and Rus­sell 2000 Index (+0.4%, YTD –4.4%).

The Nas­daq remains the only major US index still in the black for the year to date, find­ing itself in the com­pany of the major­ity of emerg­ing and mature markets.

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

India’s BSE 30 Sen­sex Index (+14.1%) was the strongest mar­ket for the week, hav­ing ral­lied by 17.3% on Mon­day on unex­pected elec­tion results. This was the biggest one-day gain in the 30-year his­tory of the Index.

Else­where, returns ranged from top per­form­ers Sri Lanka (+12.5%), Cyprus (+12.3%), Lux­em­bourg (+9.4%), Mace­do­nia (+9.0%) and Nige­ria (+8.8%), to Ghana (-8.9%), Malta (-1.2%), Pales­tine (-1.2%), Côte d’Ivoire (-1.1%) and Uganda (-1.1%), which expe­ri­enced head­winds. Japan’s Nikkei 225 Aver­age (-0,4%) put in the worst per­for­mance among the major mar­kets. (Click here to access a com­plete list of global stock mar­ket move­ments, as sup­plied by Emergin­vest.)

John Nyaradi (Wall Street Sec­tor Selec­tor) reports that as far as exchange-traded funds (ETFs) are con­cerned, Indian ETFs such as Wis­domTree India Earn­ings (EPI) (+22.7%) and Pow­er­Shares India (PIN) (+21.6%) were going great guns. Other top-performing sec­tors were con­cen­trated among com­mod­ity funds, helped by investors becom­ing less risk averse. Strong per­form­ers included Mar­ketVec­tors TR Gold­Min­ers (GDX) (+10.6%), United States Oil (USO) (+4.1%), and iShares Sil­ver Trust (SLV) (+4.6%).

Con­versely, safe-haven-related ETFs — US dol­lar and gov­ern­ment bonds — and regional banks reacted neg­a­tively, with iShares Dow Jones US Regional Banks Index (IAT) declin­ing by –5.3%, iShares 20+ Year Trea­sury Bond (TLT) by –4.8%, and Pow­er­Shares DB US Dol­lar Index Bull­ish (UUP) by –2.9%.

On the credit front, I updated my reg­u­lar “Credit Cri­sis Watch” last week and con­cluded as follows:

“In sum­mary, the past few months have seen impres­sive progress on the credit front, with a num­ber of spreads hav­ing declined sub­stan­tially since their ‘panic peaks’. The TED spread (down to 0.48% from 4.65% on Octo­ber 10), LIBOR-OIS spread (down to 0.45%% from 3.64% on Octo­ber 10) and GSE mort­gage spreads have all nar­rowed con­sid­er­ably since the record highs.

“In addi­tion, cor­po­rate bonds have seen a strong improve­ment, although high-yield spreads remain at ele­vated lev­els. Credit deriv­a­tive indices for com­pa­nies in all the major geo­graph­i­cal regions have also shown a marked tight­en­ing since the Novem­ber highs.

“Most indi­ca­tions are that the credit mar­ket tide has turned on the back of the mas­sive refla­tion efforts orches­trated by cen­tral banks world­wide and that the credit sys­tem has started thaw­ing. How­ever, although the con­va­les­cence process seems to be well on track, it still has a way to go before con­fi­dence in the world’s finan­cial sys­tem returns to more ‘nor­mal’ lev­els and liq­uid­ity starts to move freely again.”

The quote du jour relates to the mon­e­ti­za­tion process and belongs to Bill King (The King Report): “The dol­lar col­lapsed and infla­tion accel­er­ated with Bernanke’s Trea­sury mon­e­ti­za­tion. More mon­e­ti­za­tion will yield higher infla­tion and a dol­lar débâ­cle. The Fed, Trea­sury, admin­is­tra­tion and solons are being checked by the dol­lar and com­men­su­rate infla­tion … You can ref­er­ence Jimmy Carter, G. William Miller, stagfla­tion, dol­lar flight, the Mis­ery Index and pub­lic revolt if you don’t believe us.”

In other news, Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner on Wednes­day tes­ti­fied before the Sen­ate Bank­ing Com­mit­tee, say­ing that “there are impor­tant indi­ca­tions that our finan­cial sys­tem is start­ing to heal”, and that the Trea­sury would soon be intro­duc­ing its plan to team up with pri­vate investors to buy toxic assets from the banks. Sep­a­rately, Pres­i­dent Barack Obama on Fri­day signed into law a bill to put new restric­tions on the credit-card indus­try, com­pelling card issuers to spell out their terms in fewer words — in plain Eng­lish — and treat cus­tomers more fairly.

Next, a quick tex­tual analy­sis of my week’s read­ing. No sur­prises here, with the word “banks” dom­i­nat­ing the media. Strik­ingly, “dol­lar” is increas­ingly promi­nent as the green­back hit a five-month low.

Back to the stock mar­ket. An analy­sis of the mov­ing aver­ages of the major US indices shows the spring rally hav­ing encoun­tered resis­tance at the impor­tant 200-day line and/or the early Jan­u­ary highs. The highs of May 8 are the most imme­di­ate tar­get to the upside, whereas the lev­els from where the rally com­menced on March 9 should hold in order for base for­ma­tions to remain in force.

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

For more about key lev­els and the most likely short-term direc­tion of the S&P 500, Adam Hewi­son of INO.com pre­pared another of his pop­u­lar tech­ni­cal analy­ses. Click here to access the short pre­sen­ta­tion. (The analy­sis was done on Wednes­day with the Index at 912, but is still as rel­e­vant as it was a few days ago.)

Jef­frey Saut (Ray­mond James) said: “… our sense is the equity mar­kets are form­ing at least a near– to intermediate-term TOP and we are cau­tious. As Sy Hard­ing writes, ‘Our Sea­sonal Tim­ing Strat­egy is now in its unfa­vor­able sea­son. Our non-seasonal Mar­ket Tim­ing Strat­egy is now on a new sell sig­nal. We remain on the recent buy sig­nal for gold and remain neu­tral on bonds.’

“Indeed, over the past few weeks tech­nol­ogy, retail, hous­ing, and cycli­cals have bro­ken their rel­a­tive strength uptrends that have been intact since the March lows. Whether this turns out to be just another shal­low cor­rec­tion, or some­thing more endur­ing, will likely be deter­mined by those groups whose rel­a­tive strength still remains intact. Such groups include finan­cials, agri­cul­ture, chem­i­cals, oil drillers, and emerg­ing markets.”

“Speak­ing of stocks, with the Aver­ages back­ing off from their thrust at the May highs, it’s clear (at least to me) that the mar­ket is hav­ing sec­ond thoughts about the pic­ture,” said Richard Rus­sell, ven­er­a­ble writer of the Dow The­ory Let­ters. “My guess is that those thoughts have to do with the slid­ing dol­lar, the sink­ing bonds with their higher yields — and last but not least — the surg­ing price of gold. Dol­lar down, bonds down, gold up, it all fits together — trouble.”

For more dis­cus­sion about the direc­tion of stock mar­kets, also see my recent posts “Gold bul­lion glit­ters brightly“, “Video-o-rama: Wall Street slumps on eco­nomic wor­ries” and “Credit Cri­sis Watch: Thaw­ing — note­wor­thy progress“. (Also, Don­ald Coxe’s web­cast has been updated for May 22 and makes for good lis­ten­ing. This can be accessed from the side­bar of the Invest­ment Post­cards site.)

Econ­omy
The Ifo World Eco­nomic Cli­mate Indi­ca­tor also rose in the sec­ond quar­ter of 2009 for the first time since autumn 2007. Accord­ing to the Sur­vey, “The rise in the indi­ca­tor was the result of more favor­able expec­ta­tions for the com­ing six months; the assess­ment of the cur­rent eco­nomic sit­u­a­tion, how­ever, wors­ened again, falling to a new record low.”

Eco­nomic expec­ta­tions have improved in all major regions, espe­cially in North Amer­ica and Asia. But the expec­ta­tions for the com­ing six months for West­ern Europe, Cen­tral and East­ern Europe, Rus­sia and Latin Amer­ica are also clearly upwards.

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

May 22
• Road map for the near-term per­for­mance of the economy

May 21
• Index of Lead­ing Indi­ca­tors sig­nals improv­ing eco­nomic con­di­tions
• Auto indus­try events will con­tinue to dis­tort job­less claims data

May 19
• Plunge in multi-family starts con­ceals small gain of single-family units

May 18
• Home­builders Sur­vey records improve­ment; will new home sales fol­low?
• Dis­count win­dow bor­row­ing con­tin­ues to trend down

The chart below shows the Con­fer­ence Board’s Lead­ing Eco­nomic Indi­ca­tor, which rose 1% month over month and is com­pa­ra­ble to the increases seen at the end of the last recession.

Source: US Global Investors — Weekly Investor Alert, May 22, 2009.

Accord­ing to Moody’s Economy.com, the min­utes from the Fed­eral Open Mar­ket Committee’s meet­ing late in April indi­cate that par­tic­i­pants were more opti­mistic about the econ­omy than they had been at their pre­vi­ous meet­ing in mid-March. While the econ­omy remained in reces­sion, there were numer­ous signs that the pace of con­trac­tion was slow­ing down.

“FOMC mem­bers agreed that the steps the com­mit­tee had pre­vi­ously taken appeared to be pro­vid­ing an eco­nomic stim­u­lus and that the Fed­eral Reserve should con­tinue with its pre­vi­ously announced pol­icy actions, in par­tic­u­lar ‘quan­ti­ta­tive eas­ing’, an expan­sion of the Fed’s bal­ance sheet through the pur­chase of longer-term Trea­suries, designed to bring down long-term inter­est rates,” said Moody’s Economy.com.

Gallup’s lat­est Con­sumer Mood poll, deal­ing with eco­nomic and mar­ket impli­ca­tions, shows that only 6% of Amer­i­cans have a “pos­i­tive” mood on the econ­omy, but that the per­cent­age of those that are ”neg­a­tive” has dropped sig­nif­i­cantly since early March when the stock mar­ket advance started. Also, Amer­i­cans whose mood is described as “mixed” have increased from the mid-teens to 36% as the neg­a­tiv­ity has subsided.

Source: Gallup Daily: Con­sumer Mood, May 22, 2009.

“This ‘mixed’ mood goes along with the ‘green shoots’ the­ory that some things are get­ting bet­ter and most things have stopped get­ting worse,” said Bespoke. “With Amer­i­cans mov­ing from ‘neg­a­tive’ to ‘mixed’ before turn­ing ‘pos­i­tive’, does this imply that we’ll have a U-shaped recov­ery instead of a V?”

The last quote comes from Nouriel Roubini, via a Face­book sta­tus update: “The Green Shoot­ers are start­ing to sweat and get­ting cold feet as evi­dence of pesti­lent yel­low weeds is mushrooming.”

Week’s eco­nomic reports

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

Source: Yahoo Finance, May 22, 2009.

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 finan­cial mar­kets per­formed dur­ing the past week.

Source: Wall Street Jour­nal Online, May 22, 2009.

Louis Pas­teur said: “Chance favors the pre­pared mind.” Hope­fully the “Words from the Wise” reviews will assist Invest­ment Post­cards read­ers with the ongo­ing prepa­ra­tion that is required to man­age your money wisely.

I hope you’re enjoy­ing a great Memo­r­ial Day hol­i­day weekend.

That’s the way it looks from Cape Town.

Source: Daryl Cagle, Slate.

CNBC: PIMCO’s El-Erian on this week’s sell­off “Mohamed El-Erian, CEO and co-CIO of PIMCO, dis­cusses this week’s mar­ket sell­off and the pos­si­bil­ity of the US los­ing its AAA credit rat­ing.”

Source: CNBC, May 22, 2009.

The New York Times: Banks raised bil­lions, Gei­th­ner says “The country’s biggest banks have made moves to bol­ster their bal­ance sheets by about $56 bil­lion since the gov­ern­ment dis­closed the results of its finan­cial ’stress tests’ two weeks ago, Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner said Wednesday.

“Tes­ti­fy­ing before the Sen­ate Bank­ing Com­mit­tee, Mr. Gei­th­ner said that the finan­cial sys­tem had begun to ‘heal’, and that the Trea­sury would soon be intro­duc­ing the next phase of its finan­cial res­cue effort — the plan to team up with pri­vate investors to buy bil­lions of dol­lars in toxic assets from banks.

“‘There are impor­tant indi­ca­tions that our finan­cial sys­tem is start­ing to heal,’ Mr. Gei­th­ner told law­mak­ers, though he cau­tioned that it was still too early to talk about an ‘exit strat­egy’ for the government.

“But law­mak­ers in both par­ties com­plained that the $700 bil­lion aid plan, known as the Trou­bled Asset Relief Pro­gram, or TARP, had yet to revive bank lend­ing in many parts of the country.

“‘The frus­tra­tion level is mount­ing on an hourly basis,’ said Sen­a­tor Christo­pher J. Dodd, Demo­c­rat of Con­necti­cut and chair­man of the bank­ing committee.

“Sen­a­tor Richard C. Shelby, Repub­li­can of Alabama who voted against the entire pro­gram last year, said the Trea­sury had ‘treated many sick banks’ but ‘cer­tainly has not cured them’.

“In describ­ing the bank­ing sys­tem, Mr. Gei­th­ner, said that the country’s largest finan­cial insti­tu­tions had raised bil­lions by issu­ing com­mon stock and new debt, includ­ing $8 bil­lion in bonds not guar­an­teed by the government.”

Source: Jack Healy and Edmund Andrews, The New York Times, May 20, 2009.

Finan­cial Times: Smaller US banks need addi­tional $24 bil­lion “Small and medium-sized US banks must raise some $24 bil­lion to meet the cap­i­tal stan­dards set by the gov­ern­ment in its stress tests of large insti­tu­tions, research for the Finan­cial Times shows.

“News of the poten­tial cap­i­tal short­fall could increase pres­sure on many of the 7,900 US banks that form the back­bone of the US finan­cial system.

“As many as 500 more banks could close, accord­ing to invest­ment bank San­dler O’Neill, which car­ried out the research.

“Since this month’s release of the tests for the 19 largest banks, reg­u­la­tors and investors have increased their focus on the next tier of lenders, amid con­cerns some of them might strug­gle to sur­vive if the econ­omy worsens.

“The government’s stress-case would result in cap­i­tal short­falls for 38% of the 200 banks below the 19 largest finan­cial insti­tu­tions, lead­ing to a deficit of around $16.2 bil­lion in com­mon equity, accord­ing to San­dler O’Neill.

“Apply­ing sim­i­lar cri­te­ria to the remain­ing 7,700 banks in the US would result in a fur­ther $7.8 bil­lion cap­i­tal deficit.

“The banks have to repay a com­bined $27 bil­lion in aid from the Trou­bled Asset Relief Pro­gramme (Tarp) but they could do that from inter­nal resources rather than rais­ing more funds.

“The US Trea­sury has said that it does not intend to extend the stress tests beyond the 19 top insti­tu­tions it exam­ined. But ana­lysts say that the pub­lic release of the government’s test method­ol­ogy and cap­i­tal ade­quacy phi­los­o­phy means that the tests’ stan­dards will become a model for the rest of the US bank­ing system.”

Source: Saskia Scholtes, Julie Mac­In­tosh and Francesco Guer­rera, Finan­cial Times, May 17, 2009.

Finan­cial Times: US banks scram­ble to repay bail-out cash “US banks are scram­bling to be in the first wave of lenders to repay Wash­ing­ton bail-out funds after the author­i­ties told Wall Street exec­u­tives they would allow five or six big finan­cial groups to return tax­pay­ers’ money before the rest of the industry.

“Bankers said they expected the Trea­sury and Fed­eral Reserve — which doled out bil­lions of dol­lars from the $700 bil­lion trou­bled assets relief pro­gramme to lenders last year — to name the first repay­ers in the next few weeks.

“The author­i­ties decided to allow a group of banks to return the funds, rather than approv­ing indi­vid­ual appli­ca­tions, to avoid a ‘rush for the exit’ by lenders vying for brag­ging rights of being the first to repay, said peo­ple close to the matter.

“The tim­ing of the repay­ment and the num­ber and iden­tity of the banks in the first wave is still under discussion.

“Gold­man Sachs, JPMor­gan Chase and Amer­i­can Express, which were found not to need addi­tional equity in the recent stress tests, are almost cer­tain to be in the first grouping.”

Source: Francesco Guer­rera and Krishna Guha, Finan­cial Times, May 18, 2009.

Bloomberg: Gei­th­ner says Trea­sury may move “quickly” to sell TARP war­rants “Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner said he’s inclined to ‘quickly’ sell war­rants the gov­ern­ment got when inject­ing cap­i­tal into banks, offer­ing prospects of a speedy exit to lenders seek­ing to retire gov­ern­ment stakes.

“‘In gen­eral, our objec­tive will be to sell these war­rants as quickly as we can,’ Gei­th­ner told the Sen­ate Bank­ing Com­mit­tee today. ‘What I’m reluc­tant to do is have the gov­ern­ment be in a posi­tion where we hold these invest­ments for a long period of time, longer than is desir­able, in the hopes that we’re going to max­i­mize value.’

“The Trea­sury received war­rants with nearly every cap­i­tal injec­tion it made with its $700 bil­lion bank-rescue fund, called the Trou­bled Asset Relief Pro­gram. As big banks begin to pay back the assis­tance years ear­lier than expected, the Trea­sury may use mar­ket bid­ding to break a log­jam over how to value a key com­po­nent of the government’s equity stakes.

“The total value of the government’s bank war­rants is roughly $5 bil­lion, accord­ing to Trea­sury calculations.

“If the Trea­sury can’t agree with banks about the value of the war­rants, the gov­ern­ment may try to sell them at auc­tions, a Trea­sury offi­cial said in an inter­view this week. That’s because investor offers may be the only way to put a clear value on war­rants that can vary widely depend­ing on the model used.”

Source: Rebecca Christie, Bloomberg, May 20, 2009.

Finan­cial Times: US poised for finance reg­u­la­tion shake-up “Con­gress will next month start the biggest reg­u­la­tory over­haul of the US finan­cial sys­tem in decades, bring­ing into the open a fran­tic lob­by­ing effort between banks, reg­u­la­tors and pol­i­cy­mak­ers on what it con­tains and who pays for it.

“The House finan­cial ser­vices com­mit­tee, chaired by Demo­c­rat Bar­ney Frank, will hold hear­ings early in June into reforms out­lined by Tim­o­thy Gei­th­ner, Trea­sury sec­re­tary, say peo­ple famil­iar with the timetable.

“But the com­plex­ity, cou­pled with a crowded leg­isla­tive agenda, means one key pil­lar — a res­o­lu­tion author­ity allow­ing a reg­u­la­tor to seize a fail­ing bank hold­ing com­pany — is not likely to be put in place until year-end.

“The cost of the res­o­lu­tion author­ity and a pro­posed sys­temic risk reg­u­la­tor could be borne by both large banks and small, accord­ing to peo­ple involved, in spite of the entreaties from the hun­dreds of small US insti­tu­tions that they should not pay a levy.

“Cam Fine, chief exec­u­tive of the Inde­pen­dent Com­mu­nity Bankers of Amer­ica, said the author­ity ’should be totally funded by those insti­tu­tions that are regarded as sys­tem­i­cally impor­tant or too big to fail’. He said he ‘felt pretty good about where we stand’ and was con­fi­dent of Mr Geithner’s support.

“Other smaller insti­tu­tions such as hedge funds are also express­ing con­cern that they will suf­fer from severe ‘hair­cuts on con­tracts’ entered into as coun­ter­par­ties with the seized insti­tu­tion, accord­ing to one lobbyist.

“Sheila Bair, the chair­man of the Fed­eral Deposit Insur­ance Cor­po­ra­tion, has been lob­by­ing for early intro­duc­tion of seizure pow­ers that could be used to take over a large sys­tem­i­cally impor­tant bank if it was severely weak­ened by another sud­den down­turn in the economy.

“Mr Gei­th­ner has said new pow­ers would allow for an orderly wind­ing up of a sys­tem­i­cally impor­tant insti­tu­tion, avoid­ing a repeat of the messy fall-out from Lehman Broth­ers’ col­lapse last year or the expen­sive bail-out of AIG, the insurer.”

Source: Tom Braith­waite, Sarah O’Connor and Krishna Guha, Finan­cial Times, May 17, 2009.

The New York Times: Sen­ate passes bill to restrict credit card prac­tices “The Sen­ate voted over­whelm­ingly on Tues­day to put new restric­tions on the credit card indus­try, pass­ing a bill whose back­ers say will make card-issuers spell out their terms in fewer words, using plain Eng­lish, and treat cus­tomers more fairly.

“The 90-to-5 vote, fol­low­ing a 357-to-70 vote in the House on April 30, made it likely that Pres­i­dent Obama will have a mea­sure on his desk before the Memo­r­ial Day recess. The dif­fer­ences between the House and Sen­ate ver­sions will have to be worked out, but given the polit­i­cal atmos­phere it seems likely that the House-Senate nego­ti­a­tions will move quickly.

“The indus­try has asserted that the leg­is­la­tion may back­fire, forc­ing banks to issue fewer credit cards at greater cost to the cur­rent card­hold­ers and mak­ing credit harder to get at a time when many Amer­i­cans need it.”

Source: David Stout, The New York Times, May 19, 2009.

Finan­cial Times: UK looks towards sale of bank stakes “Britain has begun tak­ing sound­ings with sov­er­eign wealth funds and other investors about sell­ing stakes in its part-nationalised banks as it seeks to tap into a revival of stock mar­ket con­fi­dence in the finan­cial sector.

“UK Finan­cial Invest­ments, which man­ages the government’s 43.5% stake in Lloyds Bank­ing Group and 70% stake in Royal Bank of Scot­land, could start the process of sell­ing tranches in both banks within a year, accord­ing to peo­ple briefed on the organisation’s plans.

“Lloyds on Mon­day launched an open offer to replace £4 bil­lion of pref­er­ence shares held by the gov­ern­ment with new ordi­nary shares. The move fol­lowed the week­end announce­ment of the planned depar­ture of Sir Vic­tor Blank as Lloyds chair­man amid investor unrest over his role in the bank’s much-criticised takeover of HBOS last year.

“UKFI has already had sub­stan­tial con­tact with poten­tial investors, includ­ing UK insti­tu­tions and for­eign organ­i­sa­tions such as sov­er­eign wealth funds, to gauge their interest.

“‘A lot of peo­ple around the world think once you get through the losses the earn­ings power of these banks will be for­mi­da­ble,’ said one per­son famil­iar with the situation.

“The organ­i­sa­tion is likely to exit its stakes in tranches over a period of time although ‘these might be quite large dribs and drabs’, accord­ing to peo­ple close to the matter.”

Source: Jane Croft and Patrick Jenk­ins, Finan­cial Times, May 18, 2009.

BCA Research: Euro area banks — stress­ful sit­u­a­tion “The euro area’s attempt to stress-test the bank­ing sys­tem is likely to prove fruitless.

“The Com­mit­tee of Euro­pean Bank­ing Super­vi­sors has designed a set of sce­nar­ios, which are cur­rently being used by national reg­u­la­tors and cen­tral banks to eval­u­ate the euro area bank­ing sys­tem. How­ever, the stress tests will not con­clude until Sep­tem­ber, the assump­tions used and the results will remain a secret, and the focus will not be on indi­vid­ual banks but rather the sys­tem as a whole.

“It is hard to argue that this process will help pro­vide clar­ity regard­ing bank bal­ance sheets or ease investor con­cerns over the poten­tial for enor­mous losses. Up to the end of last year, Euro­pean banks (exclud­ing the UK) had only accounted for $224 bil­lion in bad loans. The IMF esti­mates that another $875 bil­lion will need to be writ­ten down by the end of 2010, com­pared with another $550 bil­lion in the US bank­ing sys­tem. Losses for the next two years are enough to wipe out all of the Euro­pean bank­ing system’s tan­gi­ble cap­i­tal, before con­sid­er­ing earn­ings over the period.

“The IMF results are roughly con­sis­tent with our own cal­cu­la­tions for the top 20 banks. It would take just over 2% in write­downs of assets to elim­i­nate all tan­gi­ble equity (US banks have roughly 3%). It is pos­si­ble that banks’ access to pri­vate cap­i­tal will improve and, together with future oper­at­ing earn­ings, fur­ther asset write­downs will be eas­ily absorbed. Still, the stress tests as cur­rently envi­sioned will do lit­tle to bring clar­ity to the sit­u­a­tion or restore investor trust.

“One pos­i­tive devel­op­ment is that the Ger­man Cab­i­net has agreed to a ‘bad bank’ scheme to remove toxic assets from bank bal­ance sheets. The pro­posal still needs par­lia­men­tary approval but would be help­ful, at least for the Ger­man finan­cial sector.”

Source: BCA Research, May 19, 2009.

The New York Times: GM draws another $4 bil­lion from Trea­sury “Gen­eral Motors, fac­ing the almost cer­tain prospect of a bank­ruptcy fil­ing, said Fri­day that it had drawn another $4 bil­lion from the Trea­sury Depart­ment, rais­ing its total from the gov­ern­ment to $19.4 billion.

“GM orig­i­nally said that it would need an addi­tional $2.6 bil­lion from the gov­ern­ment to oper­ate through June 1, but added $1.4 bil­lion to that amount.

“The com­pany, in a reg­u­la­tory fil­ing, also increased — to $7.6 bil­lion — the amount it said it would need from the Trea­sury after June 1, the dead­line set by the Obama admin­is­tra­tion for a restruc­tur­ing plan.

“GM gave the Trea­sury a note for $266.8 mil­lion as secu­rity against the addi­tional money that it bor­rowed on Fri­day. The financ­ing does not appear to be the last that GM will draw, accord­ing to the fil­ing with the Secu­ri­ties and Exchange Commission.

“It says that by June 1, it expects to have bor­rowed a total of $21.4 bil­lion from the Trea­sury. In its orig­i­nal request to Con­gress last fall, GM asked for $18 bil­lion in loans to keep it afloat while it restruc­tured. With its lat­est injec­tion from Trea­sury, it has sur­passed that request.

“Lawyers for GM and the gov­ern­ment are prepar­ing doc­u­ments for a GM bank­ruptcy fil­ing, which is expected to come around June 1.

“Peo­ple briefed on GM’s finances said the automaker would require debtor-in-possession financ­ing dur­ing its reor­ga­ni­za­tion of $40 bil­lion to $70 billion.

“If GM drew the full $70 bil­lion while in bank­ruptcy, the gov­ern­ment would have pro­vided the com­pany with more than $90 bil­lion in total, includ­ing the money it has drawn to date.

“Also on Fri­day, the Cana­dian Auto Work­ers union said that it had reached a sec­ond cost-cutting agree­ment with Gen­eral Motors of Canada, even as bond­hold­ers for the par­ent com­pany stood firm in their deci­sion to reject an offer to con­vert their debt into GM stock.

“The automaker has offered its bond­hold­ers 225 shares for each $1,000 worth of debt, which over all would give them a 10% stake in the company.

“The com­pany has said that it needs 90% approval from its bond­hold­ers by Tues­day if it is to avoid a bank­ruptcy fil­ing. But the com­mit­tee of GM’s biggest bond­hold­ers, which rep­re­sent 20% of the over­all debt, said there was no sup­port for the cur­rent offer. Bond­hold­ers have said that com­pet­ing cred­i­tors, like the UAW, have received bet­ter treatment.”

Source: Bill Vla­sic and Ian Austen, The New York Times, May 22, 2009.

Clip­Syn­di­cate: In-depth look at GM bank­ruptcy loom­ing “Inter­view and dis­cus­sion with White House Eco­nomic Adviser, Aus­tan Gools­bee. He talks about Pres­i­dent Obama’s plans for GM’s restruc­tur­ing, the res­ig­na­tion of AIG CEO Edward Liddy and the impact of the credit-card bill that the Pres­i­dent will sign this after­noon [Fri­day].”

Source: Clip­Syn­di­cate, May 22, 2009.

Finan­cial Times: Declin­ing Libor “As a barom­e­ter of the finan­cial cri­sis, it’s been hard to beat Libor, the Lon­don inter­bank offered rate for bor­row­ing short-term funds in the bank­ing system.

“On Wednes­day, dol­lar Libor for the bench­mark three-month sec­tor set at 0.71625 per cent, extend­ing its run of declines for 36 straight days. A com­par­i­son of Libor with the Fed funds rate shows that the gap between these two rates is at its low­est level since Feb­ru­ary 2008. Traders fore­cast fur­ther improve­ment on Thurs­day. The mood is a world away from the stress­ful peaks of Bear Stearns’ res­cue last March and the fail­ure of Lehman Broth­ers in Sep­tem­ber when Libor took a rocket ship to the moon.

“Fur­ther evi­dence that the bank­ing sys­tem is sta­bil­is­ing is seen by activ­ity in finan­cial com­mer­cial paper. Lend­ing for three months is back above that of the one-month sec­tor for the first time since late Jan­u­ary when the Fed­eral Reserve’s sup­port tem­porar­ily boosted 90-day paper. Quan­ti­ta­tive eas­ing and the smooth com­ple­tion of the stress tests for banks has eased ten­sion. That has helped nur­ture the recov­ery in risky assets.

“For the bank­ing sys­tem, how­ever, there are still signs of dis­lo­ca­tion. Swap spreads, the dif­fer­ence between gov­ern­ment bond yields and money mar­ket rates and a mea­sure of bank credit qual­ity, remain some way from look­ing nor­mal. Liq­uid­ity also remains ques­tion­able as banks seek stronger bal­ance sheets and raise cap­i­tal to pay back gov­ern­ment support.

“The steady declines in three-month Libor have also reduced the Ted spread, which com­pares the bank lend­ing rate with that of three-month Trea­sury bills. After surg­ing to record lev­els, the much lower Ted spread is another good sign. But with bills only yield­ing 0.18 per cent, it’s clear there remains an aver­sion to lend­ing money at the much higher unse­cured rate of three-month Libor.”

Source: Michael Macken­zie, Finan­cial Times, May 20, 2009.

Ifo: Ifo World Eco­nomic Cli­mate bright­ens “The Ifo World Eco­nomic Cli­mate Indi­ca­tor rose in the sec­ond quar­ter of 2009 for the first time since autumn 2007. The rise in the indi­ca­tor was the result of more favourable expec­ta­tions for the com­ing six months; the assess­ment of the cur­rent eco­nomic sit­u­a­tion, how­ever, wors­ened again, falling to a new record low.

“The eco­nomic expec­ta­tions improved in all major regions, espe­cially in North Amer­ica and Asia. But also in West­ern Europe, Cen­tral and East­ern Europe, Rus­sia and Latin Amer­ica the expec­ta­tions for the com­ing six months have been clearly cor­rected upwards. In con­trast, the cur­rent eco­nomic sit­u­a­tion in all major regions is still assessed as markedly unfavourable, with the worst appraisals com­ing from North Amer­ica and West­ern Europe.”

Source: Ifo, May 19, 2009.

Nouriel Roubini (Forbes): Don’t believe the opti­mists “Recent data sug­gest that the rate of eco­nomic con­trac­tion in the global econ­omy is slow­ing down, and that we are closer than we were six months ago to the trough of the recent severe global recession.

“But while the rate of eco­nomic con­trac­tion is now lower than the free-fall and near-depression expe­ri­enced by many economies in the fourth quar­ter of 2008 and the first of 2009, the recent opti­mism that ‘green shoots’ of recov­ery will lead to the reces­sion to bot­tom out by the mid­dle of this year — and that recov­ery to poten­tial growth will rapidly occur in 2010 — appears grossly mis­placed, for three note­wor­thy reasons.

“First, the cur­rent deep and pro­tracted U-shaped reces­sion in the US and other advanced economies will con­tinue through all of 2009, rather than reach a trough in the mid­dle of this year as expected by the optimists.

“Sec­ond, rather than a rapid V-shaped recov­ery, growth will remain slug­gish and sub-par for at least two years into all of 2010 and 2011. A cou­ple of quar­ters of more rapid growth can­not be ruled out as we get out of this reces­sion toward the end of the year or early next year as firms rebuild inven­to­ries and the effects of the mon­e­tary and fis­cal stim­u­lus reach a delayed peak. But struc­tural weak­nesses of the US and the global econ­omy will cause both a below-trend growth and even the risk of a reduc­tion of poten­tial growth itself.

“Third, we can­not rule out a double-dip W-shaped reces­sion, with the wings of a ten­ta­tive recov­ery of growth in 2010 at risk of being clipped toward the end of that year or in 2011. This will result from a per­fect storm of ris­ing oil prices, ris­ing taxes and ris­ing nom­i­nal and real inter­est rates on the pub­lic debt of many advanced economies, as con­cerns rise about medium-term fis­cal sus­tain­abil­ity and the risk that mon­e­ti­za­tion of fis­cal deficits will lead to infla­tion­ary pres­sures after two years of defla­tion­ary pressures.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, May 21, 2009.

Casey’s Charts: Reces­sion hits the Trea­sury “The mag­ni­tude of the reces­sion was under­scored by the lat­est num­bers from the US Trea­sury: last month’s indi­vid­ual income tax receipts dropped 44% and cor­po­rate tax rev­enue plunged 65% com­pared to April 2008. Alarm­ing news, as April is his­tor­i­cally the biggest col­lec­tion month of the year and usu­ally results in a siz­able bud­get sur­plus for the month.

“As Casey Research Chief Econ­o­mist Bud Con­rad cor­rectly pre­dicted back in Jan­u­ary, the ini­tial $1.2 tril­lion deficit for 2009 was grossly under­es­ti­mated. The Con­gres­sional Bud­get Office esti­mate is not only rid­dled with low-ball expen­di­ture fig­ures and account­ing trick­ery, it also failed to antic­i­pate a pre­cip­i­tous col­lapse in tax revenues.”

Source: Casey’s Charts, May 19, 2009.

Asha Ban­ga­lore (North­ern Trust): Index of Lead­ing Indi­ca­tors sig­nals improv­ing eco­nomic con­di­tions “The Con­fer­ence Board’s Index of Lead­ing Eco­nomic Indi­ca­tors (LEI) moved up 1.0% after a string of monthly declines between Octo­ber 2008 and March 2009. The increase of the index in April reflects a wide­spread improve­ment as seen in the 70% dif­fu­sion index for April.

“On a year-to-year basis, the LEI fell 3.0% in April, after a 4.0% drop in the November-December months of 2008. The year-to-year change in LEI on a quar­terly basis dropped 3.6% in the sec­ond quar­ter (based on April data). It is the sec­ond con­sec­u­tive decline which is smaller than the 3.9% drop of the fourth quar­ter of 2008.

“The chart below illus­trates that the year-to-year change in LEI bot­toms out well ahead of the end of a reces­sion. The table lists the details related to this obser­va­tion. Based on the his­tory of the LEI, the 3.9% drop in the fourth quar­ter could be the bot­tom for the cur­rent cycle; we will need addi­tional monthly data to con­firm this assessment.

“At the present time, we can tem­porar­ily con­clude that the worst of the decline in eco­nomic activ­ity is part of his­tory. The num­ber of quar­ters, deduced from the his­tory of the LEI, before recov­ery com­mences after the year-to-year change of the LEI has recorded a bot­tom for the cycle varies between one and four quarters.”

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

Asha Ban­ga­lore (North­ern Trust): Auto indus­try events will con­tinue to dis­tort job­less claims data “Ini­tial job­less claims fell 12,000 to 631,000 dur­ing the week ended May 16. The prior week’s read­ing of ini­tial job­less claims was raised to 643,000 from the ear­lier esti­mate of 631,000.

“The large move­ments of ini­tial job­less claims in the past two weeks from 605,000 in the week ended May 2 is largely due to auto indus­try events. The four-week mov­ing aver­age of ini­tial job­less claims is 628,500 and it appears to have peaked in the first week of April at 658,750. The Chrysler and GM plant shut­downs and reopen­ing in the next few months are most likely to dis­tort job­less claims data.

“The ten­ta­tive con­clu­sion is that ini­tial job­less claims are trend­ing down, albeit hold­ing at a high level.

“The 1990–91 and 2001 reces­sions were both job­less recov­er­ies with job­less claims post­ing sig­nif­i­cant declines only well after the recov­ery was under­way. There is a strong like­li­hood the cur­rent reces­sion may also be fol­lowed by a job­less recov­ery. We will need to see sig­nif­i­cant and con­sec­u­tive weekly declines in job­less claims to declare that the worst is behind us.”

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

Asha Ban­ga­lore (North­ern Trust): Home­builders sur­vey records improve­ment, will new home sales fol­low? “The Hous­ing Mar­ket Index (HMI) of the National Asso­ci­a­tion of Home Builders rose to 16 in May from 14 in April. The HMI has advanced in three out of the four months ended May. Sales of new single-family homes rose 8.2% in Feb­ru­ary and edged down 0.6% in March. The sales tally for new single-family homes dur­ing April will be pub­lished on May 28. There is a strong pos­i­tive cor­re­la­tion with the HMI and actual sales of new homes.”

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

Asha Ban­ga­lore (North­ern Trust): Plunge in multi-family starts con­ceals small gain of single-family units “Hous­ing starts fell 12.8% to an annual rate of 458,000, a new record low. Total hous­ing starts have fallen 80% from the peak in Jan­u­ary 2006.

“In April, multi-family starts plunged 46.1% and single-family starts advanced 2.8%. Single-family starts held steady in Feb­ru­ary and rose 0.3% in March. Starts of new single-family homes have declined each month dur­ing July 2007-January 2009, with the excep­tion of a small increase in May 2008. The recent move­ments sug­gest that single-family starts appear to be estab­lish­ing a bottom.

“At the same time, the ele­vated level of unsold new single-family homes (10.7-month sup­ply in March, down from peak of 12.5-month sup­ply in Jan­u­ary) is a drag on new con­struc­tion. The good news is that inven­to­ries of new unsold single-family homes appear to have peaked in Jan­u­ary 2009.

“Pulling together the dif­fer­ent pieces of news from the hous­ing mar­ket, the hous­ing starts report for April leans on the side of opti­mism because the pace of decline could have accel­er­ated fur­ther. Instead, it appears that there is a mod­er­at­ing trend in place with sup­port from other reports. The key to a com­plete recov­ery is, of course, a turn­around in employ­ment conditions.”

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

Bespoke: Coun­try returns “With global equity mar­kets still in rally mode, below we high­light the year to date per­for­mance of the major indices for 83 coun­tries around the world. After nearly every coun­try was down ear­lier in the year, 62 out of the 83 are now up in 2009.

“Peru is up the most at 72.92%, while Costa Rica is down the most at –39.94%. And the BRIC (Brazil, Rus­sia, India, China) coun­tries are sig­nif­i­cantly out­per­form­ing the devel­oped G-7 coun­tries. Rus­sia, India, and China rank 2nd, 3rd, and 4th in terms of year to date per­for­mance, and Brazil isn’t far behind in 10th place.

“Canada has been the best per­form­ing G-7 coun­try with a gain of 12.62% in 2009, but it ranks 35th out of 83. The rest of the G-7 coun­tries are bunched up in the 0%-5% range, which is closer to the bot­tom of the list than the top. And the US is the worst of the seven with gains of less than 1%. While the mar­kets here in the US have ral­lied nicely off of their March lows, most other coun­tries have bounced back even more 2009.”

Source: Bespoke, May 19, 2009.

Bespoke: Recent per­for­mance of key ETFs “For those inter­ested in a quick snap­shot of how var­i­ous ETFs across all asset classes have per­formed recently, below we high­light their 1-day, 5-day, and 1-month per­for­mance. As far as equi­ties go, there was lots of red today [Thurs­day], but there’s still lots of green over the last month.”

Source: Bespoke, May 21, 2009.

Bespoke: Strate­gists keep 2009 S&P 500 price tar­get at 949 “The Wall Street strate­gists that Bloomberg polls each week haven’t changed their year-end S&P 500 price tar­gets since mid-March. But by doing noth­ing, they’re col­lec­tive price tar­get has got­ten much closer to the actual level of the index since the mar­ket has ral­lied so much.

“At the start of the year, strate­gists as a whole were look­ing for a year-end S&P 500 price of 1,049, which would have meant a gain of 16.2% for the year. When the mar­ket was down more than 20% in early March, this bull­ish price tar­get was pretty bad. As the mar­ket fell, strate­gists cut their year-end tar­get, which is now 100 points lower at 949. But as the mar­ket has risen, they haven’t increased their expec­ta­tions yet, so they are now just look­ing for another 4.19% gain through the end of the year.

“UBS and JP Mor­gan remain the most bull­ish of the bunch with a tar­get of 1,100. And four strate­gists have price tar­gets below the cur­rent level of the S&P 500, with Bar­clays the most bear­ish at 757. At the start of the year, Bar­clays was look­ing for 874.”

Source: Bespoke, May 19, 2009.

Jef­frey Saut (Ray­mond James): A stoop­ers’ mar­ket ” … our sense is the equity mar­kets are form­ing at least a near– to intermediate-term TOP and we are cau­tious. As Sy Hard­ing writes, ‘Our Sea­sonal Tim­ing Strat­egy is now in its unfa­vor­able sea­son. Our non-seasonal Mar­ket Tim­ing Strat­egy is now on a new sell sig­nal (as of the close on May 13). We remain on the recent buy sig­nal for gold; and, remain neu­tral on bonds.’

“Indeed, over the past few weeks tech­nol­ogy, retail, hous­ing, and cycli­cals have bro­ken their rel­a­tive strength uptrends that have been intact since the March lows. Whether this turns out to be just another shal­low cor­rec­tion, or some­thing more endur­ing, will likely be deter­mined by those groups whose rel­a­tive strength still remains intact. Such groups include finan­cials, agri­cul­ture, chem­i­cals, oil drillers, and emerg­ing markets.

“We con­tinue to favor emerging/frontier mar­kets and as ISI’s Fran­cois Tra­han notes, ‘If you are bull­ish on US equi­ties, global stock mar­kets have become more cor­re­lated over the past decade. And, gen­er­ally when the S&P 500 has risen it has under­per­formed the global equity com­plex.’ Obvi­ously, we agree …”

Source: Jef­frey Saut, Ray­mond James, May 21, 2008.

David Fuller (Fuller­money): Sub­stan­ti­at­ing bull­ish bias for equi­ties “I have described con­di­tions as being more bull­ish than bear­ish for a num­ber of months. How­ever such claims need to be sub­stan­ti­ated by tech­ni­cal (mar­ket) evi­dence, which is best mon­i­tored every day.

“I will review the process, dis­cussed at length in Fuller­money, in what can be a tem­plate for sub­scribers, not only for today’s envi­ron­ment but also the tran­si­tion from every other bear to bull mar­ket in future:

“Cli­mac­tic capit­u­la­tion — Bear mar­kets usu­ally end in cli­mac­tic fash­ion, which is the phase of great­est capit­u­la­tion and despon­dency. This is what hap­pened late last Octo­ber and also in November.

“Base build­ing — The most per­sis­tent capit­u­la­tion stage marks the begin­ning of the end for the bear mar­ket, which by def­i­n­i­tion, must also be the begin­ning of the new bull mar­ket, although all one may see for some months will be rang­ing, includ­ing some new lows by indices for less fun­da­men­tally attrac­tive mar­kets, but also ris­ing lows by indices for the next bull market’s leaders.

“Rever­sion to the mean — If the bear really is end­ing or over, you will see the evi­dence accu­mu­late in sev­eral ways, which are dif­fer­ent from the redis­tri­b­u­tion bear mar­ket ral­lies which occur on the way down. Mean rever­sion (we use the 200-day mov­ing aver­age to mea­sure this because it is a widely fol­lowed medium to some­what longer-term trend smooth­ing device) will become evi­dent due to a com­bi­na­tion of dif­fer­ent developments.

“Uptrends are estab­lished — Indices will be break­ing up out of their rang­ing bases, with the best per­form­ers estab­lish­ing step sequence uptrends, one above the other. These will even­tu­ally break above the 200-day MAs, which will even­tu­ally turn upwards some­time later. The ris­ing MA becomes a poten­tial sup­port level dur­ing minor mean rever­sions through­out the dura­tion of the new uptrend.

“Sum­mary — Per­spec­tive is gained by mon­i­tor­ing many indices, as there will inevitably be lead­ers and lag­gards. This is Fullermoney’s com­mon­al­ity approach. For instance, if stock mar­ket indices are mostly rang­ing but down­ward breaks are no longer being main­tained, in con­trast to some ral­lies which are being extended, one does not need to be a genius to deduce that demand (buy­ing pres­sure) is begin­ning to exceed sup­ply (sell­ing pressure).

“The per­for­mance of upside lead­ers when look­ing for evi­dence of mar­ket bot­toms and recov­ery poten­tial is much more impor­tant than focussing on lag­gards, because we are look­ing for a tran­si­tion from bear, which includes all stock mar­ket indices in its lat­ter stages, to bull in which case mar­kets will break away from the prior down­trend one by one over time.”

Source: David Fuller, Fuller­money, May 18, 2009.

Smart­Money: Why Jeremy Grantham changed his mind “If peo­ple had paid atten­tion to vet­eran investor Jeremy Grantham over the past two years, their invest­ment port­fo­lios would be look­ing much bet­ter than they likely are. While many investors were caught up in bull-market eupho­ria in 2007, Grantham, who over­sees $85 bil­lion for Boston-based insti­tu­tional money-management firm GMO, told any­one who would lis­ten there was a global bub­ble: ‘It’s every­where, in every­thing’. Then, in early March of this year, when the mar­ket looked its worst, he wrote that peo­ple needed to get over their fears and invest, because US stocks were cheap and for­eign stocks even cheaper.”

Click here for the full article.

Source: Rus­sell Pearl­man and Jonathan Dahl, Smart­Money, May 21, 2009.

John Huss­man (Huss­man Funds): Stock mar­ket advance — “lead­er­ship by losers” “As of last week, the mar­ket cli­mate for stocks remained char­ac­ter­ized by mixed val­u­a­tions — mod­estly over­val­ued on the basis of most fun­da­men­tal mea­sures except those that assume a sus­tained return to the record profit mar­gins of 2007, and slightly under­val­ued if one assumes that a return to those profit mar­gins is a given.

“Mar­ket action was also mixed — vol­ume con­tin­ues to show fairly tepid spon­sor­ship rel­a­tive to durable mar­ket advances. Mean­while, price action has been very favor­able on the basis of breadth, but with the strongest lead­er­ship from indus­try groups with the least favor­able bal­ance sheets and finan­cial sta­bil­ity. It is not typ­i­cal for the indus­tries that suf­fer worst in a bear mar­ket to be the ones that lead the sub­se­quent bull mar­ket. That sort of ‘lead­er­ship by losers’ how­ever, is very char­ac­ter­is­tic of bear mar­ket rallies.

“That’s not to say that we can imme­di­ately con­clude that stocks are in a bear mar­ket advance as opposed to a new bull mar­ket, but as usual, we don’t spend much of our energy mak­ing assump­tions about things that aren’t observ­able. At present, the observ­able evi­dence is that stocks are priced to deliver mod­estly sub-par long-term returns, but still in the range of about 8% annu­ally over the com­ing decade …”

Source: John Huss­man, Huss­man Funds, May 18, 2009.

Richard Rus­sell (Dow The­ory Let­ters): Char­ac­ter­is­tics of sec­ondary reac­tions “The most dif­fi­cult and puz­zling study of the stock mar­ket is that which deals with sec­ondary reac­tions against the pri­mary trend. Because we’re in a bear mar­ket, I’m going to limit the fol­low­ing dis­cus­sion to (upward) reac­tions in bear markets.

“Over the week­end I pulled out my vol­ume of Robert Rhea’s ‘The Dow The­ory’. I went over some of Rhea’s com­ments on sec­ondary reac­tion in bear market.

“‘For the pur­pose of this dis­cus­sion, a sec­ondary reac­tion is con­sid­ered to be an impor­tant advance in a bear mar­ket, usu­ally last­ing three weeks to as many months, dur­ing which inter­val the price move­ment gen­er­ally retraces from 33% to 66% of the pri­mary price change since the last pre­ced­ing sec­ondary reaction.

“‘Those who try to place exact lim­its on sec­ondary reac­tions are doomed to fail­ure, just as surely as would be the weather man who fore­casted a snow­fall of exactly three and one half inches within a spec­i­fied time.

“‘In a bear mar­ket steady liq­ui­da­tion of secu­ri­ties by those who pre­fer or need cash reduces quo­ta­tions day after day, with pro­fes­sion­als, real­iz­ing there is more room on the bot­tom than on the top, has­ten­ing the decline with short sales. Even­tu­ally, the mar­ket is forced to a lower level than is war­ranted by con­di­tions. The short inter­est is per­haps too extended, with wise traders sens­ing the fact the liq­ui­da­tion has, for the time, at least, run its course.

“‘Quiet, weak spots in bear mar­kets are gen­er­ally good ones to short, as they gen­er­ally develop into seri­ous declines.

“‘In a pri­mary bear mar­ket the ral­lies are apt to be vio­lent and erratic, and always occupy less time than the decline, which they par­tially recov­ery. Often the pri­mary move­ment of sev­eral weeks is retracted in a few days.

“‘Ral­lies in a bear mar­ket are sharp, but expe­ri­enced traders wisely put out their shorts again when the mar­ket becomes dull after a recovery.

“‘In bear mar­kets, pri­mary move­ment has an aver­age dura­tion of 95.6 days, whereas the sec­ondary move­ment aver­ages 66.5 days or 69.6% of the time con­sumed in the pre­ced­ing pri­mary movements.’

“All the above per­tains to the price action dur­ing ral­lies in bear mar­kets. But what about busi­ness con­di­tions dur­ing bear mar­ket ral­lies? My stud­ies show that bear mar­ket ral­lies are tech­ni­cal phe­nom­e­nons which do not nec­es­sar­ily reflect on busi­ness. I’m look­ing at a chart of the great 1929 to 1930 rally which occurred after the 1929 crash. The Fed­eral Reserve Index turned down in late-1929, and despite the great bear mar­ket rally, the Fed Index con­tin­ued lower into early 1932.”

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

Bloomberg: Birinyi says S&P 500 may reach 1,700 within three years “Las­zlo Birinyi, pres­i­dent of research and money-management firm Birinyi Asso­ciates Inc., talks with Bloomberg’s Matt Miller about the out­look for US stocks. Birinyi also dis­cusses his invest­ment strat­egy and the out­look for the US economy.”

Source: Bloomberg, May 20, 2009.

Barry Ritholtz (The Big Pic­ture): Nor­mal­iz­ing earn­ings dur­ing profit freefalls “I am becom­ing ter­ri­bly enam­ored of the charts Ron Griess high­lights each week form The Chart Store. Now that earn­ings sea­son is all but over, Ron looks at a few charts that are reveal­ing of the extent of the dam­age done to cor­po­rate prof­itabil­ity. It is, in a word, breathtaking.”

How cheap are stocks?

How much have prof­its fallen?

Source: Barry Ritholtz, The Big Pic­ture, May 18, 2009.

Ran­dall Forsyth (Barron’s): Gain from the greenback’s pain “The dol­lar con­tin­ues to be yin to the stock market’s yang.

“As the per­cep­tion that the worst of the eco­nomic and finan­cial cri­sis has passed bol­sters equi­ties, the green­back is giv­ing back its gains.

“The dollar’s declines are being blamed by the sado-monetarists (to steal once again a ter­rific turn of phrase from John Lis­cio, our late friend and col­league at Barron’s) on the aggres­sive expan­sion of liq­uid­ity by the Fed­eral Reserve.

“And, indeed, the US Dol­lar Index, which mea­sures the greenback’s value against a bas­ket of America’s major trad­ing part­ners, broke below its 200-day mov­ing a cou­ple of weeks ago. The fur­ther drop in the US Dol­lar Index to below 82 essen­tially puts it back to where it started the year.

“The dollar’s rever­sal actu­ally rep­re­sents a relief of sorts. In the global scram­ble for scarce dol­lar liq­uid­ity, the dollar’s price was bid up. Bor­row­ers of dol­lars — nearly the whole world in the global credit crunch — had to pay them back. That made for a clas­sic short-covering rally for the greenback.

“Make no mis­take: the fun­da­men­tals for the dol­lar are neg­a­tive, given the huge US current-account deficit (though it’s shrink­ing, cour­tesy of the reces­sion that’s curbed imports) and America’s debtor-nation sta­tus. But deflat­ing the econ­omy in a credit cri­sis to main­tain the exchange rate is worse. It was tried in the 1930s; it was one of the things that made the Great Depres­sion ‘great’.

“So we’ve picked our poi­son, and it is a cheaper cur­rency. For investors, the ques­tion is how best to react.

“ISI Group’s Port­fo­lio Strat­egy Group, led by Fran­cois Tra­han, sug­gests that if you like US equi­ties, you should be buy­ing the big, global com­pa­nies that may be domi­ciled out­side the US but com­pete in the same mar­kets as Amer­i­can com­pa­nies around the world.

“Even though this is sup­posed to be a global world, there remain many port­fo­lio man­agers who are restricted to buy­ing “US com­pa­nies,” an archaic notion.

“… if you’re bull­ish on US stocks that will ben­e­fit from an eco­nomic recov­ery and refla­tion, why not buy for­eign stocks, which should get the added ben­e­fit of cur­rency gains from the dollar’s decline?

“You can wring your hands and bewail the demise of the dol­lar. Or you can take advan­tage by invest­ing abroad. Never has it been so easy for Amer­i­cans to do so.”

Source: Ran­dall Forsyth, Barron’s, May 21, 2009.

Bespoke: India has biggest one-day change ever “India’s Sen­sex ral­lied 17.34% today on unex­pected elec­tion results for its biggest one-day gain ever in its 30 year his­tory. The next biggest one-day gain came in March 1992 when the index ral­lied 13.14%. From its peak in Jan­u­ary 2008 to its recent low, the Sen­sex dropped 60.91%. From its low, how­ever, the index has now ral­lied 75.04% in just over two months. Even after this 75% gain, India needs to rally another 46.13% to reach its old highs.”

Source: Bespoke, May 18, 2009.

Richard Rus­sell (Dow The­ory Let­ters): US dol­lar crack­ing down “On the edge — below, a weekly chart of the Dol­lar Index. The 10-week blue mov­ing aver­age is about to drop below the red 40-week mov­ing aver­age in what tech­ni­cians call ‘the death cross’. As I write the dol­lar is flirt­ing with a seri­ous break to new lows. The bear­ish tar­get is 80, below which the dol­lar could swoon. Is it any won­der that inter­na­tional hold­ers of dollar-denominated secu­ri­ties are white-knuckled?

“The sta­tus of the dol­lar is now so extremely impor­tant that I’ve decided to include a daily chart as well. What you see on the daily chart is an enor­mous head-and-shoulders top with the dol­lar right on the edge of sup­port. A break below sup­port (the blue line) would be omi­nous, and would prob­a­bly send the dol­lar down to test its Decem­ber low at 81.41.”

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

Barron’s: New dilemma for the UD dol­lar “China isn’t just talk­ing about sup­plant­ing the dol­lar as the cen­ter of the inter­na­tional mon­e­tary sys­tem. It is tak­ing con­crete steps away from the green­back for both finance and trade.

“The Finan­cial Times reports China and Brazil have dis­cussed using their own cur­ren­cies for trade, a marked shift away from the use of dol­lars, the norm for the con­duct of inter­na­tional trade.

“There have been pro­pos­als over the years to use cur­ren­cies other than the dol­lar for trade, most notably by the Orga­ni­za­tion of Petro­leum Export­ing Coun­tries. OPEC has made noises about pric­ing its oil in a bas­ket of cur­ren­cies or per­haps the euro to off­set the cartel’s cur­rency losses when the green­back would take one of its peri­odic headers.

“But noth­ing ever has come of those threats. And even with the intro­duc­tion of the euro as the first, real poten­tial rival, world trade con­tin­ues to be con­ducted over­whelm­ingly in dollars.

“The global use of dol­lars has been an enor­mous advan­tage to the US, afford­ing the nation the abil­ity to spend and bor­row nearly with­out limit. As long as the rest of the world wanted and needed dol­lars for trade in goods and finan­cial trans­ac­tions, Amer­ica could effec­tively just reel off green­backs to pay its bills.

“As noted here pre­vi­ously, the rest of the world quite sim­ply is get­ting its fill of dol­lars. The head of the People’s Bank of China, that nation’s cen­tral bank, has called for a ’super sov­er­eign’ inter­na­tional cur­rency that would take the place of the dol­lar. More recently, a Japan­ese offi­cial called on the US to issue Trea­sury bonds denom­i­nated in yen, which couldn’t sim­ply be repaid by the print­ing of dollars.

“Now, talks between China and Brazil on set­ting up bilat­eral trade in their own cur­ren­cies moves the pos­si­ble sup­plant­ing of the dol­lar out of the finan­cial realm.

“It is no coin­ci­dence that the US has been replaced by China as Brazil’s biggest trad­ing part­ner. As such those two nations see less of a need to use dol­lars for their bilat­eral trade. More­over, China and Argentina last year entered an agree­ment to trans­act trade in their respec­tive cur­ren­cies, cut­ting out the dol­lar as an intermediary.”

Source: Ran­dall Forsyth, Barron’s May 19, 2009.

Eoin Treacy (Fuller­money): Out­look for British pound “The pound was one of the world’s worst per­form­ing cur­ren­cies from late-2007 through to the end of the 2008. As a major Euro­pean econ­omy, out­side the Euro­zone, with a burst hous­ing bub­ble and a heavy reliance of the City’s finan­cial sec­tor, the UK is more exposed to the effects of the credit cri­sis than many others.

“The UK took no action to sup­port the cur­rency as it declined, since it helped to make UK exporters more com­pet­i­tive. As short-sellers focused on ster­ling as a vehi­cle for tak­ing advan­tage of the credit cri­sis, the pound’s fall out­paced that of its trad­ing part­ners and on a trade weighted basis, it fell over 30% between mid-2007 and late 2008.

“The Deutsche Bank British Pound Trade Weighted Index ranged from 2001 to the mid­dle of 2007. How­ever, it broke emphat­i­cally below 95 in Decem­ber 2007 and fell to 90 where it dis­trib­uted for four months. It broke down­wards again in August and began to accel­er­ate lower from Octo­ber. The Index found sup­port in Decem­ber and has posted a suc­ces­sion of higher lows since.

“This action is in con­trast to the bear­ish sen­ti­ment towards the UK econ­omy and the pound gen­er­ally. The fun­da­men­tal eco­nomic con­di­tion of the coun­try is still deeply trou­bling but we should not for­get that cur­rency trad­ing is a rel­a­tive value endeav­our. It could be argued that the pound became under­val­ued rel­a­tive to its main trad­ing part­ners too quickly and that rather than the pound being strong, other cur­ren­cies are now get­ting weaker.

“If we accept the propo­si­tion that the pound is bot­tom­ing, then for­eign investors look­ing at poten­tially mak­ing rel­a­tively long-term invest­ments in Europe could jus­ti­fi­ably start look­ing at the UK as a pre­ferred destination.”

Source: Eoin Treacy, Fuller­money, May 18, 2009.

Joe Weisen­thal (Clus­ter­stock): John Paulson’s big bet on infla­tion “Ear­lier this week we men­tioned that hedge fund man­ager John Paul­son, who made his for­tune bet­ting against the hous­ing mar­ket, is mov­ing for­ward with plans to pounce on cheap real estate.

“Prior to that Paul­son was bet­ting on gold, tak­ing siz­able stakes in some gold miners.

“The Prag­matic Cap­i­tal­ist smartly con­nects the dots: String­ing together the recent SEC fil­ings of John Paul­son, the bil­lion­aire hedge fund man­ager, makes one thing clear: he is bet­ting big on the refla­tion trade. Paulson’s lat­est 13-F fil­ing shows large posi­tions in Angl­o­gold, Kin­ross gold, Gold Fields, mar­ket vec­tors gold ETF and the S&P gold ETF.

“More inter­est­ing is a recent fil­ing by Paul­son to start rais­ing money for a hun­dred mil­lion dol­lar “real estate recov­ery” fund.

“At first, the news of large gold pur­chases early last month were seen as poten­tial Armaged­don plays based on Paulson’s big bets on the col­lapse of the econ­omy last year, but it’s now clear that Paul­son is bet­ting big on infla­tion in the com­ing years.”

Source: Joe Weisen­thal, Clus­ter­stock, May 21, 2009.

Busi­ness Intel­li­gence: Gold will ulti­mately hit US$1,300 on infla­tion hedg­ing, says JPMor­gan Chase “Jan Loeys, the global head of mar­ket strat­egy at JPMor­gan Chase & Co said com­modi­ties are going to move higher as investors start to get con­cerned about inflation.

“Speak­ing on Bloomberg Tele­vi­sion from Hong Kong, Loeys said: “The global reces­sion and the US reces­sion prob­a­bly is over this month, maybe next month. Com­modi­ties, mate­ri­als in par­tic­u­lar, are going to be ben­e­fit­ing right now as investors start to get a bit wor­ried about future inflation.”

“‘Over the next year or so, we think we are going to be cross­ing US$1,000, prob­a­bly go ulti­mately to US$1,200, US$1,300 just for infla­tion hedg­ing and lack of sup­ply,’ Loeys said.

“Clients ‘are very wor­ried about infla­tion in two, three years time,’ Loeys said in the inter­view. ‘The buy­ing we are see­ing now in com­modi­ties is really hedg­ing, hedg­ing off the poten­tial risk that we will see a spike in inflation.’

“Loeys said crude-oil prices may rise faster than gold in the next few months as energy demand picks up.”

Source: Busi­ness Intel­li­gence, May 17, 2009.

Bespoke: Gold breaks down­trend and dol­lar breaks down “Gold is up another $12.40 today to $939/ounce. Ever since the metal hit sup­port at its 200-day mov­ing aver­age in April, gold has been ral­ly­ing nicely. And based on tech­ni­cals, gold has quite a bit of room to run on the upside before it starts to hit resis­tance again. As shown below, when the metal broke its multi-month down­trend at the start of May, it turned the tech­ni­cals from neg­a­tive to positive.

“Gold’s gain has coin­cided with the dollar’s demise. The dol­lar tried to mount a come­back after tak­ing a big hit in March, but it didn’t get close to a retest of its 52-week highs. Once it tested and failed at sup­port lev­els a cou­ple of weeks ago, the trend turned from neu­tral to neg­a­tive. The next area of sup­port for the dol­lar doesn’t come into play until it gets down to its Decem­ber lows. For now, investors should play the stocks with high inter­na­tional rev­enues as a play on the decreas­ing dollar.”

Source: Bespoke, May 20, 2009.

Bespoke: Oil sea­son­al­ity “With gas prices steadily ris­ing in recent weeks, dri­vers are ner­vously watch­ing move­ments in crude oil and hop­ing that last week’s sell-off is the begin­ning of a trend rather than a just a quick pull­back. Unfor­tu­nately, if crude oil’s sea­sonal pat­tern over the last 25 years is any indi­ca­tion, we shouldn’t expect any relief until Sep­tem­ber. The chart below shows the aver­age YTD per­cent change in the price of crude oil over var­i­ous time peri­ods. For each period, we also show the date the high was reached. As shown, over the last twenty-five (9/30), ten (9/19), and five (9/22) years, the price of crude oil has typ­i­cally peaked in mid to late September.”

Source: Bespoke, May 18, 2009.

BCA Research: Oil breaks out — is it sus­tain­able? “The rally in oil from the low $30s is tech­ni­cally impres­sive against the weak global demand back­drop and ele­vated inventories.

“Oil prices reached $62/bbl this week, despite lofty US oil inven­to­ries (notwith­stand­ing this week’s inven­tory decline) and the fact that Amer­i­cans are dri­ving much less than last year. The higher price of oil reflects in part the upturn in Chi­nese oil imports and car sales at a time when oil pro­duc­tion is lag­ging. Rus­sia con­tin­ues to have dif­fi­culty boost­ing out­put and oil pro­duc­tion has been flat for most OPEC coun­tries. Saudi Ara­bia has cut pro­duc­tion sharply.

“As with other com­modi­ties, oil should ben­e­fit from both a weaker US dol­lar and a shift in investor port­fo­lio pref­er­ence toward real assets as a hedge against infla­tion. The upturn in our global lead­ing eco­nomic indi­ca­tors is another pos­i­tive sign for the com­mod­ity com­plex. Bot­tom line: Our strate­gists have upgraded com­modi­ties to over­weight recently, with energy at the top of the buy list. Investors should con­sider play­ing the oil bull mar­ket by buy­ing North Amer­i­can explo­ration and pro­duc­tion stocks, or by going long the Nor­we­gian krone and the Cana­dian dollar.”

Source: BCA Research, May 22, 2009.

Finan­cial Times: S&P warns UK over high debt level “Britain on Thurs­day became the first big econ­omy to be warned in the finan­cial cri­sis that it might lose its top-notch credit rat­ing, in a move that raised fears of pos­si­ble down­grades for other large indus­tri­alised nations.

“Stan­dard and Poor’s low­ered its medium-term out­look on the triple A rat­ing for the UK’s debt to ‘neg­a­tive’ from ’sta­ble’ for the first time since the credit rat­ings agency started analysing the country’s pub­lic finances in 1978.

“Though the agency low­ered its out­look, it affirmed Britain’s AAA long-term and A-1+ short-term sov­er­eign credit ratings.

“S&P based its warn­ing on a fore­cast that net gov­ern­ment debt risked approach­ing 100% of national income and stay­ing at that level. ‘A gov­ern­ment debt bur­den of that level, if sus­tained, would in Stan­dard & Poor’s view be incom­pat­i­ble with a AAA rat­ing,’ the agency said.

“A loss of the top credit rat­ing could raise the cost of financ­ing the national debt, putting fur­ther strain on pub­lic finances and adding to pres­sure on Gor­don Brown to bring down bor­row­ing faster than the Trea­sury has planned.

“The agency’s warn­ing sets a prece­dent for other big economies with triple A rat­ings whose debt bur­dens are also approach­ing 100% of national income. The UK debt bur­den is fore­cast over com­ing years to be sim­i­lar to that of the US, France and Ger­many, all of which may now be vul­ner­a­ble to an S&P downgrade.

“Investors wor­ried that the US — which is also run­ning record gov­ern­ment deficits — might be in line for a sim­i­lar warn­ing. Yields on long-term US gov­ern­ment debt rose sharply, the dol­lar fell to a new low for the year, while gold ral­lied 1.7% in New York towards $955 an ounce.”

Source: Chris Giles and Dave Shel­lock, Finan­cial Times, May 21, 2009.

Bespoke: S&P cuts UK’s credit out­look to neg­a­tive … we’re shak­ing in our boots “The fact that the major credit rat­ings agen­cies still make news is one of the more pecu­liar finan­cial top­ics of the 21st cen­tury. After being worth­less dur­ing the credit cri­sis and then being labeled worth­less after the fact by the media, some­how S&P’s cut of the UK’s credit out­look to neg­a­tive is rever­ber­at­ing through global mar­kets today. And now investors are won­der­ing if the US is next.

“With­out lay­ing out a thou­sand more rea­sons why no one in the world should pay atten­tion to this, below we high­light a chart of the credit default swap (CDS) price per year to insure $10,000 of UK sov­er­eign debt for 5 years. Since default risk peaked in late Feb­ru­ary, the cost to insure UK debt is down 50%! The S&P out­look cut today moved the CDS price from 72 bps to 82 bps. This move barely shows up on the chart and high­lights that the bond mar­ket surely doesn’t care about S&P’s call. And where the heck was S&P prior to and dur­ing the 900% (yes 900%!) rise in UK default risk in 2008 and early 2009?”

Source: Bespoke, May 21, 2009.

Gabriel Stein (Lom­bard Street Research): Russ­ian stim­u­lus is not work­ing “Russia’s cen­tral bank could once again face a choice between allow­ing the rou­ble to weaken and tak­ing steps to sup­port the econ­omy, says Gabriel Stein, chief econ­o­mist at Lom­bard Street Research.

“‘Accord­ing to esti­mates, Russ­ian GDP shrank by 9.5% in the first quar­ter from a year ear­lier,’ he says. ‘There are some ‘green shoots’ of recov­ery — but even Pres­i­dent Medvedev has acknowl­edged stim­u­lus mea­sures to boost the econ­omy have so far not worked.’

“Mr Stein says Rus­sia is pay­ing the price for its dou­ble expo­sure to the ‘most seri­ous haz­ards of the mod­ern world — energy and exports to con­ti­nen­tal Europe.’ The for­mer, he says, is the result of Moscow’s single-minded pur­suit of energy con­trol, regard­less of the dam­age to Russia’s busi­ness climate.

“The rou­ble has strength­ened this year, partly on opti­mism about emerg­ing mar­kets, partly due to — but also a cause of — Russ­ian stock mar­ket gains and partly on high inter­est rates.

“‘Rates were cut to 12% last week, but remain attrac­tive — and should pro­vide a bar­rier to the rou­ble col­lapse that the state of the econ­omy seems to call for.

“‘If main­tain­ing the value of the rou­ble remains the goal, it will be very dif­fi­cult to ease mon­e­tary pol­icy fur­ther. Bet­ter to act now to mod­er­ate a deval­u­a­tion which rep­re­sents the loss of income implied by the col­lapse of energy prices.’”

Source: Gabriel Stein, Lom­bard Street Research (via Finan­cial Times), May 18, 2009.

Peter Attard Mon­talto (Nomura): Fears over South African sov­er­eign risk “Investor fears of height­ened sov­er­eign risk in South Africa have been crys­tal­ized by the events of the week­end when a Pre­to­ria court threw out a case by the tele­coms reg­u­la­tor and unions object­ing to the list­ing of Voda­com, says Peter Attard Mon­talto, econ­o­mist at Nomura.

“‘Investors are par­tic­u­larly con­cerned at the increase in influ­ence of the unions in gov­ern­ment now they hold sev­eral key seats in the new cab­i­net,’ he says. ‘Reg­u­la­tory flip-flopping is embar­rass­ing and adds to investor uncer­tainty but we are cau­tiously con­struc­tive on the big­ger issue of sov­er­eign risk.’

“Mr Attard Mon­talto believes hav­ing Cosatu, the umbrella union organ­i­sa­tion, as well as the SACP (com­mu­nist party) in gov­ern­ment with the ANC will be a noisy affair for investors as each jock­eys to have its agenda heard.

“‘We put the events of the week­end down to such noise,’ he says. ‘Investors need to look beyond this to the fact the gov­ern­ment will find itself heav­ily con­strained in pol­icy terms by the need to main­tain investor sen­ti­ment in order to raise the funds needed to push for­ward its social agenda. This is espe­cially true given South Africa already runs a sub­stan­tial cur­rent account deficit.

“‘This is only the first hur­dle for Pres­i­dent Zuma. To keep investors onside, he must pub­licly stamp on any cab­i­net dis­agree­ment on the Voda­com issue and assert a con­tin­u­a­tion of investor-friendly pol­icy in both what he says and pru­dent pol­icy action.’”

Source: Peter Attard Mon­talto, Nomura (via Finan­cial Times), May 19, 2009.

Tags: Aaa Credit, American Economist, American Stocks, Bill Gross, Brazil, BRIC, BRICs, Canadian Market, David Rosenberg, Day Job, Debt Levels, Dramatic Expansion, Emerging Markets, ETF, Gdp Ratio, Gold, Gold Bullion, Gold Silver, Government Bonds, Government Debt, High Note, India, Interesting News, Market Commentators, Medium Term Outlook, Merrill Lynch, New York Post, oil, Risky Assets, Stock Markets, Us Debt Clock
Posted in Brazil, Canadian Market, Commodities, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, ETFs, Gold, India, Markets, Oil and Gas, Outlook, Silver | Comments Off

Rebecca Wilder’s economic updates (May 14–21): still bad, but flood of shocking reports ebbs

Sunday, May 24th, 2009

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

This week was a lit­tle light on global data. Given that the trade data is look­ing “bet­ter” in some areas (which really means not falling as quickly in some cases, see this post and this post), it is likely that Q1 will be the worse quar­ter for many Asian economies who rely heav­ily on exports for growth. It’s bad, though, with Japan, Tai­wan, and Sin­ga­pore all falling 9% or more over the year! Infla­tion is slow­ing sub­stan­tially in some areas, neg­a­tive in oth­ers. And finally, it looks like US cap­i­tal mar­kets got a small bump in March, as for­eign­ers returned to risk. Over­all, the global eco­nomic reports remain in the red, but the shock­ingly bad reports are fading.

GDP in Asia: wait­ing to exhale

The chart illus­trates annual GDP growth through Q1 2009 for Hong Kong, Japan, Tai­wan, Indone­sia, and Sin­ga­pore. Looks bad, but Indone­sia is show­ing some resilience, although GDP is now grow­ing at its slow­est pace since Jan­u­ary 2004.

More scary infla­tion charts: dis­in­fla­tion­ary pres­sures strong — defla­tion in some

The chart illus­trates annual infla­tion across key economies through April 2009. The UK is an inter­est­ing case: the British pound has been tak­ing a beat­ing and pres­sur­ing prices, and the con­sumer price index is hold­ing on (can’t say the same for the retail price index) bet­ter than in other economies (US infla­tion now neg­a­tive for two con­sec­u­tive months). Today, though, S&P down­graded the UK out­look to neg­a­tive, and the ster­ling took a hit; won­der what that will do to prices?

Amid a calm devel­op­ing in cap­i­tal mar­kets, for­eign investors return­ing to US-denominated risk

The chart illus­trates the 12-month rolling sum of net cap­i­tal inflows through March 2009, as reported by the Trea­sury Inter­na­tional Cap­i­tal data (TIC). Good thing for the Trea­sury, which is plan­ning on run­ning $tril­lion deficits in com­ing years, that for­eign­ers might buy their notes. In March, for­eign­ers showed a slight shift toward risk, with net long-term flows grow­ing for the first time over the year since the end of 2008 (sec­ond time over the month).

Source: Rebecca Wilder, News N Eco­nom­ics, May 21, 2009.

Tags: Asian Economies, Capital Inflows, Capital Markets, Consumer Price Index, Deflation, Economic Reports, Economic Updates, Foreign Investors, Foreigners, GDP, GDP Growth, Global Data, inflation, Japan Taiwan, Resilience, Retail Price Index, Shocking Reports, Treasury International Capital, Trillion Deficits, Waiting To Exhale
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Gold bullion glitters brightly

Sunday, May 24th, 2009

I argued the bull case for gold in my post of May 7 enti­tled “Gold bul­lion — regain­ing its shine?” With gold trad­ing at more than $950 an ounce this morn­ing, it would cer­tainly seem as if renewed inter­est in the yel­low metal is being stirred up.

As print­ing presses are run­ning at full speed to pro­duce ever-increasing quan­ti­ties of fiat money as gov­ern­ments engi­neer the great­est asset price refla­tion in human his­tory — and the US green­back is head­ing South — the longer-term fun­da­men­tal case for the yel­low metal is arguably positive.

As to be expected, there is a strong rela­tion­ship between the gold price (green line) and Trea­sury inflation-protected secu­ri­ties (red line).

Source: StockCharts.com

The shorter-term tech­ni­cal pic­ture is also start­ing to look inter­est­ing. This is explained by Adam Hewi­son of INO.com who pre­pared a short tech­ni­cal analy­sis of gold’s most likely direc­tion and key chart lev­els. (The analy­sis was done on Wednes­day with the gold price at $935, but is still as rel­e­vant as it was two days ago.)

Click here or on the image below to access the video presentation.

Tags: Asset Price, Bull Case, Engineer, fiat, Fiat Money, Full Speed, Gold, Gold Bullion, Gold Price, Governments, Greenback, Human History, Inflation Protected Securities, Line Source, Ounce, Printing Presses, Quantities, Red Line, Reflation, Treasury Inflation Protected Securities, Video Presentation
Posted in Bonds, Gold | Comments Off