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.

Date	Time (ET)	Sta­tis­tic	For	Actual	Brief­ing Forecast	Mar­ket Expects	Prior
May 26	9:00 AM	S&P/Case-Shiller Home Price Index	Mar	–18.70%	NA	–18.4%	–18.67%
May 26	10:00 AM	Con­sumer Confidence	May	54.9	43.0	42.6	40.8
May 27	10:00 AM	Exist­ing Home Sales	Apr	4.68M	4.65M	4.66M	4.55M
May 28	8:30 AM	Durable Goods Orders	Apr	1.9%	0.0%	0.5%	–2.1%
May 28	8:30 AM	Durables, Ex-Transport	Apr	0.8%	–0.5%	–0.3%	–2.7%
May 28	8:30 AM	Ini­tial Claims	05/23	623K	620K	628K	636K
May 28	10:00 AM	New Home Sales	Apr	352K	365K	360K	351K
May 28	11:00 AM	Crude Inven­to­ries	5/22	–5.41M	NA	NA	–2.10M
May 29	8:30 AM	GDP (pre­lim­i­nary)	Q1	–5.7%	–5.5%	–5.5%	–6.1%
May 29	8:30 AM	GDP Deflator	Q1	2.8%	2.9%	2.9%	2.9%
May 29	9:45 AM	Chicago PMI	May	34.9	41.0	42.0	40.1
May 29	9:55 AM	Mich Sen­ti­ment (revised)	May	68.7	68.0	68.0	67.9

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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