TrimTabs' Charles Biderman on massive insider selling

Monday, August 31st, 2009

As a fol­low up to last week's com­ment on TrimTabs' report last week re: insider sell­ing vs. buy­ing, here is the Bloomberg TV clip of Charles Biderman's appearance.

"Insider sell­ing is 30x insider buy­ing, while cor­po­rate stock buy­backs are non-existent. Com­pa­nies are say­ing they don't want to touch their own stocks," said Bider­man. "I don't know where the money is com­ing from to keep the mar­kets from not plunging."

How about the fund man­agers described in Mer­rill Lynch's Fund Man­agers' Sur­vey?

(h/t: Zero­Hedge)

Tags: Appearance, Bloomberg Tv, Buying Stock, Charles Biderman, Corporate Stock, Insider, Insider Buying, Money, Stock Buybacks, Stocks, Trimtabs, Tv Clip
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David Rosenberg: Equities on a roll, but still overvalued

Monday, August 31st, 2009

David Rosen­berg, for­merly the Chief North Amer­i­can Econ­o­mist at Mer­rill Lynch in New York, returned to his native Canada to set­tle at Toronto-based Gluskin Sheff, fol­low­ing the Bank of Amer­ica acqui­si­tion. He is highly respected and one of the most can­did and lucid macro-economists and his grasp of the mar­ket related eco­nom­ics is refresh­ing. Rosen­berg says there is no point in mak­ing eco­nomic fore­casts that are not backed up by action­able invest­ment calls. His Break­fast, Lunch, Cof­fee and Tea With Dave newslet­ters are worth reading.

Last week, Rosen­berg shared his thoughts on the ques­tion, "Is the finan­cial cri­sis over?" (08/25)

Not if you're not too big to fail. We are now up to 77 failed U.S. banks so far in 2009. This already matches, in just eight months, the num­ber of lenders who failed in the pre­vi­ous 16 years combined.

About bear mar­kets and valuation:

One should always keep an open mind. Prac­ti­cally all bear mar­kets have a 50% retrace­ment and this cycle has been no dif­fer­ent. How­ever, what we have wit­nessed is unprece­dented because at no time in the past has the stock mar­ket ral­lied more than 50% ahead of the sup­posed end of a reces­sion. Nor­mally, the
move off the lows to the offi­cial end of the eco­nomic down­turn is 20%. And, the trail­ing P/E mul­ti­ple on oper­at­ing earn­ings is now north of 25, a record eight point expan­sion in a short time frame (the P/E on reported earn­ings is nearly 130x!).

Go back to the March lows, and the mar­ket was down around 60% from the peak,but then again, earn­ings plunged the same amount. At the lows, val­u­a­tion lev­els
sug­gested that equi­ties were pric­ing in $50 of oper­at­ing earn­ings and –2.5% real GDP growth for 2009. And guess what? That's exactly what we are likely to get.

What's priced in five months and 50% later? Call it $70 on oper­at­ing EPS for the com­ing year and +4.0% real eco­nomic growth. In other words — the stock mar­ket is fully priced and then some. But for the time being, the tech­ni­cals and sen­ti­ment — the high level of enthu­si­asm — and the risk of a "buy­ing panic" by lag­ging port­fo­lio man­agers are very likely going to make folks, like Wal­ter Mur­phy, look prescient.

About last week's so called good news (08/26):

1. Bernanke reappointed

We really fail to see how it could pos­si­bly be that the same cen­tral bank offi­cial, who, over a span of a decade, presided over two mas­sive bub­bles and their busts, can be viewed as being a pos­i­tive force for the mar­kets. Per­haps there is some solace in know­ing that the same per­son who cre­ated this awe­some and com­plex $2 tril­lion Fed bal­ance sheet will be around to dis­man­tle the largesse since he's prob­a­bly the only one that knows how.

2. The first monthly increase in the Case-Shiller home price index

As for the sec­ond point, there is a dif­fer­ence between a trend­line and the noise around that trend­line. Home prices are down a mas­sive 31% from their peak and have been in a vertical-down pat­tern for nearly three years. Per­haps a respite is in order, but with the true under­ly­ing unsold inven­tory near 12 months' sup­ply, which is dou­ble what would typ­ify a bal­anced hous­ing mar­ket, it would seem like wish­ful think­ing that we have sud­denly achieved a fun­da­men­tal low in res­i­den­tial real estate val­ues (espe­cially at the high end).

3. The seven-point jump in con­sumer con­fi­dence in August

With regard to point num­ber three, we wel­come any rise in con­sumer con­fi­dence but an hon­est appraisal of the data would show that 54.1 is still a very depressed level. In fact, the aver­age index level dur­ing reces­sions is 73.0 — August's read­ing was nearly 20 points below that. So, if the reces­sion is indeed over and done, some­body for­got to tell this 70% chunk of GDP oth­er­wise known as the con­sumer.
Now, what about Mr. Mar­ket, who is still in a most joy­ful mood. Well, the nor­mal level of con­sumer con­fi­dence in the month in which the S&P 500 is up 55% from an over­sold bear mar­ket low is 100. So, the stock mar­ket is behav­ing as if con­sumer con­fi­dence is twice the level it really is.

What is the enemy of this bear mar­ket rally?

The real enemy for the equity mar­ket is Mr. Bond — that pesky Trea­sury mar­ket that just won't sell off and val­i­date the great refla­tion trade. Indeed, if we were see­ing a real asset allo­ca­tion move on the part of investors, as opposed to mas­sive and ongo­ing short cov­er­ing, then the 10-year Trea­sury note yield would be trad­ing close to 5.0% — espe­cially with these freshly minted Obama debt fore­casts. But instead, the 10-year note is now get­ting per­ilously close to the July 10 low of 3.32%. Keep in mind that July 10 was the day when Mered­ith Whit­ney gave the green light to Gold­man, and Roubini declared the reces­sion to be end­ing, and what a spark that pro­vided to this last leg of the bear mar­ket rally. Now what if Doug Kass' dec­la­ra­tion yes­ter­day that the major aver­ages have hit their highs for the year proves as pre­scient in the other direc­tion? Come on, not only is the mar­ket trad­ing at a nutty 130x mul­ti­ple, but September-October is right around the cor­ner (as is H1N1).

Equi­ties are on a roll... but still over­val­ued (08/28):

We con­tinue to hear how under­val­ued the stock mar­ket got to this cycle, but it was really the cor­po­rate mar­ket that was priced for Armaged­don. The equity mar­ket, at the lows, was dis­count­ing –2.5% real GDP, but if it was pric­ing in the same out­look as cor­po­rates, Baa spreads pierced the 600 basis point thresh­old, then the S&P 500 would have bot­tomed near 315, not 666. (Hey, that still would have been a triple-bagger from the 1982 lows!)

Be that as it may, what we have on our hands is a liquidity-induced and technically-strong equity mar­ket, and as Bob Far­rell has been known to say, these types of ral­lies quite often “go fur­ther than you think” but they do not gen­er­ally cor­rect by “going side­ways”. Even if the reces­sion is over, the mar­ket usu­ally is up 20% from the time of the bot­tom to the end of the down­turn. By the time we are up over 50% on the S&P 500, what is “nor­mal” is that we are head­ing into the sec­ond year of recov­ery (reces­sion being over isn’t even a debate), the econ­omy has shown an abil­ity to expand with­out the need for gov­ern­ment assis­tance and GDP would have risen nearly 5.0% by now and helped cre­ate about 1 mil­lion jobs. In other words, after the mar­ket has jumped over 50% from the low, we have moved beyond hope and into reality.

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Tags: Acquisition, American Economist, Bank America, Bank Of America, Bear Markets, Breakfast Lunch, Canadian Market, Candid, Coffee And Tea, Core Beliefs, David Rosenberg, Economic Downturn, Economic Forecasts, Economics, Economists, Eight Months, Five Months, GDP Growth, Gluskin Sheff, Gold, Grasp, Lows, Merrill Lynch, Native Canada, Real Gdp, Recession, Retracement, Stock Market, Technicals, Valuation Levels
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Shanghai Cracks

Monday, August 31st, 2009

As men­tioned in yesterday’s edi­tion of “Words from the Wise“, the Chi­nese Shang­hai Com­pos­ite Index has now recorded four con­sec­u­tive down-weeks. The Index wit­nessed another mas­sive sell-off this morn­ing, declin­ing by a fur­ther 6.7% to take its total loss since the peak of August 4 to 23.2%.

The losses hap­pened on con­cerns of large Chi­nese share issuance and slow­ing bank lend­ing. The bank­ing reg­u­la­tor has already instructed lenders to raise reserves to 150% of their non-performing loans by the end of this year — up from 134.8% at the end of June, and the cen­tral bank has increased money-market rates to drain liquidity.

I have writ­ten a fair bit over the past two weeks about the over­bought level of most global stock mar­kets and also how China — a lead­ing mar­ket on the way up — could be the cat­a­lyst for trig­ger­ing a rever­sal of for­tune in global stock markets.

Of the global stock mar­kets I mon­i­tor, the Shang­hai Com­pos­ite (2,667) is the only one to have breached its 50-day mov­ing aver­age (3,125) and now has the key 200-day line (2,476) firmly in its sight.

Source: StockCharts.com

Inter­est­ingly, emerg­ing mar­kets have now seen two back-to-back weeks of declines and have been under­per­form­ing devel­oped mar­kets for four weeks run­ning, as shown by the declin­ing trend of the MSCI Emerg­ing Mar­kets Index rel­a­tive to the Dow Jones World Index. Could this be a sign of a broad retrench­ment in risk appetite?

Source: StockCharts.com

A global stock mar­ket cor­rec­tion could take the form of either a pull­back or a con­sol­i­da­tion (i.e. rang­ing). I sus­pect we may see at least some degree of rever­sion to the 200-day mov­ing aver­ages in a num­ber of instances, but will be watch­ing closely to ascer­tain whether we are deal­ing with a nor­mal short-term cor­rec­tion or a more sig­nif­i­cant move threat­en­ing the pri­mary trend. In the mean­time, sit tight and be cau­tious as mar­kets hope­fully realign with the real­ity on the ground.

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Tags: August 4, Dow Jones, Emerging Markets, Global Stock Market, Global Stock Markets, Leading Market, liquidity, Money Market Rates, Moving Average, Moving Averages, Msci Emerging Markets, Msci Emerging Markets Index, Pullback, Retrenchment, Reversal Of Fortune, Reversion, Risk Appetite, Shanghai Composite Index, Stock Market Correction, Target, World Index
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Words from the (Investment) Wise (August 30, 2009)

Sunday, August 30th, 2009

Stock mar­kets, in gen­eral, again logged gains last week as pun­dits per­ceived eco­nomic data to be bet­ter than expected. But the recov­ery path is not home and dry yet, as shown by declines in crude oil, a num­ber of emerg­ing stock mar­ket indices, small cap indices and high-yield cor­po­rate bonds. All said, risky assets dis­played some fatigue despite pos­i­tive eco­nomic reports.

Cau­tion remained over the robust­ness of any eco­nomic upswing, as reflected by the solid per­for­mance of gov­ern­ment bonds, with safe-haven cur­ren­cies such as the US green­back and the Japan­ese yen also edg­ing up.

As expected, Fed­eral Reserve Chair­man Ben Bernanke was appointed by Pres­i­dent Barack Obama on Tues­day to serve a sec­ond term. “Mr Obama is said to credit Mr Bernanke with a lead­ing role in help­ing to avert eco­nomic cat­a­stro­phe. By reap­point­ing Mr Bernanke — who worked in the Bush White House — Mr Obama can also empha­size his bipar­ti­san cre­den­tials at a time when he is embroiled in a fiercely par­ti­san bat­tle over health­care reform,” com­mented the Finan­cial Times.

Source: LOLFed.com

How­ever, crit­ics of Obama’s deci­sion were plen­ti­ful and Mor­gan Stanley’s Stephen Roach, blam­ing Bernanke for his pre-crisis actions, said (via the Finan­cial Times): “It is as if a doc­tor guilty of mal­prac­tice is being given credit for invent­ing a mir­a­cle cure. Maybe the patient needs a new doc­tor.” Bill King (The King Report) ascribed the stock mar­ket ris­ing sub­se­quent to Obama’s announce­ment to a “thank God it’s not Larry Sum­mers” rally.

The past week’s per­for­mance of the major asset classes is sum­ma­rized by the chart below — a set of num­bers show­ing both the S&P 500 Index and gov­ern­ment bonds ris­ing, indi­cat­ing an expec­ta­tion of a sub­dued eco­nomic recov­ery and that the Fed’s mon­e­tary pol­icy will stay easy for an extended period of time.

Source: StockCharts.com

A sum­mary of the move­ments of major global stock mar­kets for the past week, as well as var­i­ous other mea­sure­ment peri­ods, is given in the table below.

The MSCI World Index (+1.3%) and MSCI Emerg­ing Mar­kets Index (-0.2%) again fol­lowed sep­a­rate paths last week as China, Hong Kong and Brazil under­per­formed. Mature stock mar­kets have recorded gains for a straight seven weeks, whereas emerg­ing mar­kets have seen two back-to-back weeks of declines. The end result is that emerg­ing mar­kets have now under­per­formed devel­oped mar­kets for four weeks run­ning. Could this be a sign of a retrench­ment in risk appetite?

The major US indices extended their gains to two con­sec­u­tive weeks, includ­ing eight straight up-days in the case of the Dow Jones Indus­trial Index, before get­ting snapped by a decline on Fri­day. The year-to-date gains are as fol­lows: the Dow Jones Indus­trial Index +8.7%, the S&P 500 Index +13.9% and the Nas­daq Com­pos­ite Index +28.6%. With declines on three days, the Rus­sell 2000 Index was the odd index out last week, but still boasts a respectable +16.1% gain since the begin­ning of 2009.

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

Top per­form­ers in the stock mar­kets this week were Lithua­nia (+28.2%), Esto­nia (+17.3%), Latvia (+12.6%), Egypt (+9.6%) and Ice­land (+9.1%). The top three posi­tions were all occu­pied by east­ern Euro­pean coun­tries where wor­ries over the risk of some economies col­laps­ing have receded. At the bot­tom end of the per­for­mance rank­ings, coun­tries included Nepal (-4.0%), China (-3.4%), Kenya (-2.7%), Uganda (-2.6%) and Bangladesh (-1.8%).

The Chi­nese Shang­hai Com­pos­ite Index recorded its fourth con­sec­u­tive down-week as investors remained con­cerned about how long China’s excep­tion­ally loose mon­e­tary pol­icy will con­tinue. The bank­ing reg­u­la­tor has already instructed lenders to raise reserves to 150% of their non-performing loans by the end of this year — up from 134.8% at the end of June, and the cen­tral bank has increased money-market rates to drain liquidity.

How­ever, US Global Investors opines that his­tor­i­cally sus­tain­able mar­ket ral­lies out of a cycli­cal trough usu­ally start with an expan­sion in val­u­a­tion mul­ti­ples fol­lowed by a recov­ery in earn­ings. “China may be poised to enter this sec­ond stage against a favor­able macro back­drop. With surg­ing money sup­ply and sig­nif­i­cantly lower com­mod­ity prices from a year ear­lier, cor­po­rate earn­ings in China could pro­duce upside sur­prises going for­ward,” said the report.

Source: US Global Investors — Weekly Investor Alert, August 28, 2009.

Of the 96 stock mar­kets I keep on my radar screen, 77% (last week 47%) recorded gains, 18% (47%) showed losses and 5% (4%) remained unchanged. (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, the win­ners for the week included Cur­ren­cyShares Russ­ian Ruble (XRU) (+5.0%), First Trust Amex Biotech­nol­ogy (FBT) (+4.8%), iShares MSCI Aus­tralia (EWA) (+4.5%) and iShares Sil­ver Trust (SLV) (+4.2%).

On the los­ing side of the slate, ETFs included Claymore/AlphaShares China Real Estate (TAO) (-4.2%), Mar­ket Vec­tors Coal (KOL) (-3.1%), SPDR KBW Regional Bank­ing (KRE) (-3.1%) and iShares MSCI Brazil (EWZ) (-3.0%).

As far as credit mar­kets are con­cerned, Bloomberg reported that banks were increas­ing lend­ing to buy­ers of high-yield com­pany loans and mort­gage bonds at what might be the fastest pace since the credit-market débâ­cle began in 2007. “Fed­eral Reserve data show the 18 pri­mary deal­ers required to bid at Trea­sury auc­tions held $27.6 bil­lion of secu­ri­ties as col­lat­eral for financ­ings last­ing more than one day as of August 12, up 75% from May 6. The increase over that 14-week stretch is the biggest since the period that ended April 2007, three months before two Bear Stearns Cos. hedge funds failed because of lever­aged invest­ments.” This is a sign of credit mar­kets mov­ing towards normalization.

Refer­ring to the mind-boggling US bud­get deficit, the quote du jour this week comes from 85-year old Richard Rus­sell, author of the Dow The­ory Let­ters. He said: “Comes the dawn — and the penalty. There’s a price to be paid for Bernanke’s all-out bat­tle to thwart the bear mar­ket. And now it’s being told. Yes­ter­day the White House itself admit­ted that the bud­get deficit over the next 10 years would be $2 tril­lion above their orig­i­nal out­ra­geous esti­mate of $7 tril­lion dollars.

“As I said all along, it would have been bet­ter to have allowed the bear mar­ket to run its course to con­clu­sion. That would have been extremely painful, but the US would have recov­ered. How­ever, deficits in the tril­lions could ulti­mately ‘break’ this nation. I can’t imag­ine how Bernanke-Obama plan to han­dle the com­ing mind-blowing deficits, plus the inter­est on those deficits.

“The pres­sure will be on the reserve sta­tus of the dol­lar, the level of the dol­lar com­pared to other inter­na­tional cur­ren­cies, inter­est rates, and the stan­dard of liv­ing of all of us liv­ing in the new ‘banana repub­lic’, the United States of ‘bank­rupt’ America.

“When you take all this in, you can begin to see how this bear mar­ket could end with stocks sell­ing below known val­ues and peo­ple despis­ing the stock mar­ket and capitalism.”

Other news is that the Fed must for the first time iden­tify the com­pa­nies in its emer­gency lend­ing pro­grams — cre­ated to address the finan­cial cri­sis — after los­ing a Free­dom of Infor­ma­tion Act law­suit against Bloomberg. The Fed is likely to appeal against the order on the grounds that such dis­clo­sure would threaten the com­pa­nies and the economy.

Also, the Fed­eral Deposit Insur­ance Cor­po­ra­tion (FDIC) on Thurs­day said (via the Finan­cial Times) the num­ber of “prob­lem banks” had grown from 305 to 416 dur­ing the sec­ond quar­ter, rep­re­sent­ing total assets of $299.8 bil­lion. In the mean­time, the FDIC’s deposit insur­ance fund, which insures up to $250,000 per depos­i­tor in each bank, had fallen to just $10.4 bil­lion — the low­est level since March 1993 — as a result of all the bank fail­ures, tal­ly­ing 84 so far in 2009.

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 “mar­ket”, “Fed”, “bank”, “prices”, “rates” and “econ­omy” fea­tured promi­nently. Inter­est­ingly, “recov­ery” is still mov­ing up the ranks as the global econ­omy seems to have turned the corner.

The key moving-average lev­els for the major US indices, the BRIC coun­tries and South Africa (from where I am writ­ing this post) are given in the table below. With the excep­tion of the Chi­nese Shang­hai Com­pos­ite Index, which fell below its 50-day mov­ing aver­age about two weeks ago, all the indices are trad­ing above their respec­tive 50– and 200-day mov­ing aver­ages. The 50-day lines are also in all instances above the 200-day lines and there­fore not threat­en­ing the bull­ish “golden crosses” estab­lished when the 50-day aver­ages broke upwards through the 200-day averages.

The August 17 lows that rep­re­sent short-term sup­port lev­els for the major US mar­kets and are as fol­lows: Dow Jones Indus­trial Index (9,135), S&P 500 Index (980) and Nas­daq Com­pos­ite Index (1,931).

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

For more on key lev­els and some ideas regard­ing the short-term direc­tion of the S&P 500 Index, Adam Hewison’s (INO.com) short tech­ni­cal analy­sis pro­vides valu­able insight. Click here to access the presentation.

The chart below, cour­tesy of Bespoke, shows that the aver­age short inter­est as a per­cent­age of float for stocks in the S&P 1500 is cur­rently at 6.9% — the low­est level since Feb­ru­ary 2007 when the aver­age was 6.6%. “In 2008, it was the bulls who argued that high lev­els of short inter­est were a rea­son the mar­ket should rally. With the recent data, how­ever, it is now the bears who will argue that low lev­els of short inter­est sug­gest that investors are now too bull­ish,” remarked Bespoke.

Source: Bespoke, August 26, 2009.

Doug Kass (The Street.com) said: “The author­i­ties have cre­ated a sugar high for spec­u­la­tion, with a Fed­eral Reserve that has main­tained inter­est rates so low that there is no return on sav­ings and with an Admin­is­tra­tion that promises to pro­vide stim­u­lus until it man­u­fac­tures eco­nomic growth. My view is that investors will shortly see through the cur­rent sugar high and the better-than-expected earn­ings cycle and will begin to look over the val­ley at the chronic and sec­u­lar issues that have emerged from the past cycle and from pol­icy deci­sions aimed at return­ing the domes­tic econ­omy toward self-sustaining growth.”

The last words on equi­ties go to Jeff Saut, invest­ment strate­gist of Ray­mond James, who said “‘Break­out or fake out?’ is the ques­tion du jour. Yet as mar­ket maven Arthur Zeikel wrote decades ago, ‘Despite what the­o­reti­cians tell us, invest­ing — par­tic­u­larly at the mar­gin — is not the prod­uct of ratio­nal and objec­tive analy­sis, but an emo­tional rel­a­tive analy­sis — anx­i­ety about the future.” My col­league Bob Fer­rell put it this way: ‘Emo­tions are sim­ply stronger than rea­son; peo­ple do not change and peo­ple make mar­kets!’ Indeed, fear, hope and greed are only loosely con­nected to the busi­ness cycle. And, at ses­sion 30 in the ‘buy­ing stam­pede’, we are clearly in the ‘greed phase’. We con­tinue to invest, and trade accordingly.”

For more dis­cus­sion on the direc­tion of finan­cial mar­kets, see my recent posts “Stages of a sec­u­lar bear mar­ket“, “The lie of the invest­ment land, accord­ing to Hugh Hendry“, “Pic­ture du Jour: Stock mar­ket rally long in the tooth” and “RGE: Impact of China on finan­cial mar­kets“.

Econ­omy
“Global busi­ness con­fi­dence remained pos­i­tive last week for the third straight week. The last time con­fi­dence was con­sis­tently pos­i­tive was nearly a year ago,” said the lat­est Sur­vey of Busi­ness Con­fi­dence of the World by Moody’s Economy.com. “Busi­nesses are respond­ing most pos­i­tively to broad assess­ments of the cur­rent eco­nomic envi­ron­ment and the out­look into early 2010; they are as strong as they have been since the finan­cial cri­sis first hit in the sum­mer of 2007.” The Sur­vey results sug­gest that the global reces­sion is com­ing to an end, but isn’t quite over yet.

Source: Moody’s Economy.com

The Ger­man econ­omy expanded in the sec­ond quar­ter of 2009 with real GDP ris­ing by 0.3% on a sea­son­ally adjusted basis from the pre­vi­ous quar­ter. Also, the Ifo Busi­ness Sur­vey reported that Ger­man busi­ness con­fi­dence improved to an 11-month high in August, indi­cat­ing a fur­ther improve­ment in GDP in the sec­ond half of 2009.

Source: Ifo, August 27, 2009.

Head­ing home from Jack­son Hole a week ago, the world’s cen­tral bankers seemed in no hurry to start increas­ing inter­est rates — intent on not repeat­ing the mon­e­tary pol­icy tight­en­ing mis­takes of the Great Depres­sion. As reported by the Finan­cial Times, Mar­tin Feld­stein, a Har­vard pro­fes­sor, thought it would be pos­si­ble to have “two years or more of very low inter­est rates” with­out risk of excess infla­tion, given the labor and fac­tory capac­ity in the economy.

Mean­while, after keep­ing the inter­est rate at a record low of 0.5% from April to July 2009, the Bank of Israel (BoI) became the first cen­tral bank to raise inter­est rates in this cycle, increas­ing the bench­mark rate to 0.75%. Ana­lysts believe Aus­tralia and Nor­way will tighten first among the G-10 cen­tral banks in 2010, as reported by RGE Mon­i­tor.

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

Fri­day, August 28
• “Cash for clunk­ers” lifts con­sumer spend­ing in July

Thurs­day, August 27
• Job­less claims decline, but con­tin­u­ing claims includ­ing spe­cial pro­grams advance
• Q2 real GDP unchanged at –1.0%

Wednes­day, August 26
• Sales of new homes advanced, inven­to­ries are shrink­ing
• Defense and air­craft orders lift durable goods in July

Tues­day, August 25
• Case-Shiller Home Price Index and FHFA House Price Index — note­wor­thy recov­ery
• Gain in con­sumer con­fi­dence dur­ing August nearly erases losses of prior two months

Mon­day, August 24
• Chicago Fed National Activ­ity Index — con­firms pos­i­tive sig­nals of other reports

The S&P/Case-Shiller Home Price Index for June showed its sec­ond straight monthly increase. Accord­ing to Bespoke, the last time home prices increased two months in a row was back in the sum­mer of 2006 at the end of the last hous­ing boom. “June’s 1.4% monthly gain was also the largest monthly increase since June 2005. There’s no deny­ing that these num­bers are show­ing con­sid­er­able improvement.”

Source: Bespoke, August 25, 2009.

The White House con­firmed on Tues­day that the US deficit would be wider than they had pre­vi­ously esti­mated. The graph below, cour­tesy of Clus­ter­stock — Busi­ness Insider, shows that although the bud­get deficit as a per­cent­age of GDP has been revised down for 2009 — due to less bailout spend­ing — it has been increased for every year through 2019.

Source: Clus­ter­stock — Busi­ness Insider, August 25, 2009.

“The longest and deep­est reces­sion of the post­war era has ended,” said IHS Global Insight chief econ­o­mist Nari­man Behravesh (via Mar­ket­Watch). How­ever, he expressed con­cern that the recov­ery could lose steam in a few quar­ters, warn­ing: “A sus­tained, robust global recov­ery depends on renewed growth in con­sumer spend­ing and cap­i­tal invest­ment. The com­ing expan­sion will be restrained by cau­tious con­sumers in the United States and Europe, who are sav­ing to rebuild depleted assets and reduce debt burdens.”

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

Source: Yahoo Finance, August 28, 2009.

Click here for a sum­mary of Wells Fargo Secu­ri­ties’ weekly eco­nomic and finan­cial commentary.

The Euro­pean Cen­tral Bank (ECB) will make an inter­est rate announce­ment on Thurs­day (Sep­tem­ber 3). US eco­nomic data reports for the week include the following:

Mon­day, August 31
• Chicago PMI

Tues­day, Sep­tem­ber 1
• Con­struc­tion spend­ing
• ISM Index
• Auto sales

Wednes­day, Sep­tem­ber 2
• ADP employ­ment
• Pro­duc­tiv­ity
• Fac­tory orders
• FOMC minutes

Thurs­day, Sep­tem­ber 3
• Ini­tial job­less claims
• ISM services

Fri­day, Sep­tem­ber 4
• Non­farm pay­rolls
• Unem­ploy­ment rate

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, August 28, 2009.

“Great minds talk about ideas. Aver­age minds talk about events. Small minds talk about peo­ple,” said Eleanor Roo­sevelt. Let’s hope the news items and quotes from mar­ket com­men­ta­tors included in the “Words from the Wise” review will assist Invest­ment Post­cards read­ers to gen­er­ate money-making ideas that look past the noise investors so often wave to wade through.

For short com­ments — max­i­mum 140 char­ac­ters — on top­i­cal eco­nomic and mar­ket issues, web links and graphs, you can also fol­low me on Twit­ter by click­ing here.

That’s the way it looks from Cape Town (from where I am leav­ing on a busi­ness trip to Slove­nia in five days’ time — let me know if you are in Ljubl­jana at the time and would like to meet).

Source: Nate Beeler, August 28, 2009.

Clus­ter­stock: The great bank­ing recov­ery or next bub­ble?
“Should we be happy that the value of invest­ments owned by com­mer­cial banks has begun to rapidly climb? Or should we be wor­ried that the value is climb­ing at such a rapid clip that it looks a bit like an unsus­tain­able bub­ble? Or is it just evi­dence of banks hoard­ing money and refus­ing to lend it out, hold­ing Trea­suries and secu­ri­ties instead?”

Source: John Car­ney and Rory Maher, Clus­ter­stock — Busi­ness Insider, August 26, 2009.

Bloomberg: World econ­omy emerg­ing from worst reces­sion since World War II
“The global econ­omy may be com­ing out of the worst reces­sion since World War II as record-low inter­est rates and tril­lions of dol­lars in fis­cal stim­u­lus spur demand.

“Sales of exist­ing US homes jumped in July to the high­est level since August 2007, and Ger­man ser­vice indus­tries expanded this month for the first time in almost a year, reports yes­ter­day showed. The Japan­ese econ­omy grew for the first time in five quar­ters, accord­ing to a report ear­lier this week.

“‘There is no ques­tion the global econ­omy is heal­ing and emerg­ing from reces­sion,’ Ken­neth Rogoff, a Har­vard Uni­ver­sity pro­fes­sor and for­mer chief econ­o­mist for the Inter­na­tional Mon­e­tary Fund, said in a Bloomberg Tele­vi­sion inter­view yesterday.

“Fed­eral Reserve Chair­man Ben Bernanke and other global pol­icy mak­ers cau­tioned that the recov­ery is likely to be muted, indi­cat­ing they would not soon remove all the stim­u­lus injected into the finan­cial system.

“‘Strains per­sist in many finan­cial mar­kets across the globe,’ Bernanke said in a speech yes­ter­day at the Kansas City Fed’s annual sym­po­sium in Jack­son Hole, Wyoming. ‘The eco­nomic recov­ery is likely to be rel­a­tively slow at first, with unem­ploy­ment declin­ing only grad­u­ally from high levels.’

“The US hous­ing mar­ket, which led the way into the reces­sion, is show­ing signs of right­ing itself after almost four years of declines. The 7.2% rise in sales of exist­ing homes last month was the biggest since the National Asso­ci­a­tion of Real­tors began keep­ing records in 1999.

“In Ger­many, Europe’s largest econ­omy, ‘busi­ness sen­ti­ment among ser­vice providers strength­ened in August and was the most pos­i­tive since Jan­u­ary 2006,’ Markit Eco­nom­ics said yes­ter­day, point­ing to its pur­chas­ing man­agers’ survey.

“‘The reces­sion is over,’ said Klaus Baader, chief Euro­pean econ­o­mist at Soci­ete Gen­erale SA in Lon­don, who called the Markit data an ‘incred­i­ble reading’.

“Japan’s econ­omy is also being boosted by gov­ern­ment mea­sures ahead of an elec­tion. Prime Min­is­ter Taro Aso, whose party is trail­ing in opin­ion polls before the August 30 par­lia­men­tary elec­tions, has put for­ward a 25 tril­lion yen ($265 bil­lion) stim­u­lus plan.

“The 3.7% rise in Japan­ese gross domes­tic prod­uct in the sec­ond quar­ter fol­lowed an 11.7% con­trac­tion in the first three months of the year. Exports led the revival of the world’s second-largest econ­omy last quar­ter, jump­ing by 6.3%.”

Source: Rich Miller and Ali­son Sider, Bloomberg, August 22, 2009.

Nouriel Roubini (RGE Mon­i­tor): The exit strat­egy from the mon­e­tary and fis­cal eas­ing — damned if you do, damned if you don’t
“In the last few months the world econ­omy has been saved from a near depres­sion. That feat has been achieved by a range of extra­or­di­nary gov­ern­ment stim­u­lus mea­sures: In the US and in China, and to a lesser extent in Europe, Japan and other coun­tries, gov­ern­ments have pumped liq­uid­ity, slashed pol­icy rates, cut taxes, primed demand and ring-fenced and back-stopped the finan­cial sys­tem. All of this has worked, but it has worked at a cost. Gov­ern­ments have been spend­ing and bor­row­ing like never before. The ques­tion now is: how do they stop?

“This is not a sim­ple prob­lem. Restore nor­mal­ity too soon and the risk is that a weak recov­ery will dou­ble dip into a sec­ond and deeper reces­sion. Restore it too late and infla­tion will already be ingrained.

“The sec­ond quar­ter GDP esti­mates for the US show just how sig­nif­i­cant this aggres­sive front-loaded pol­icy stim­u­lus has been. While total GDP growth was sharply neg­a­tive in the first quar­ter — around –5.6% — the rate of decline in the sec­ond quar­ter had mod­er­ated to around –1.5%. Credit this rel­a­tive improve­ment to gov­ern­men­tal mon­e­tary, fis­cal and finan­cial stim­u­lus. The pri­vate com­po­nents of GDP, pri­vate demand and capex, were actu­ally still very weak. But gov­ern­ment spend­ing rose by 5.6%, break­ing what oth­er­wise would have been another quar­ter of head­long GDP contraction.

“Nec­es­sary as the stim­u­lus has been, it can­not go on indef­i­nitely. Gov­ern­ments can­not run deficits of 10% or more of GDP, and they can­not go on dou­bling the mon­e­tary base, with­out even­tu­ally stok­ing infla­tion expec­ta­tions, push­ing up long term inter­est rates and even­tu­ally erod­ing their very via­bil­ity as sov­er­eign bor­row­ers. Not even the US can do that.”

Click here for the full article.

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

Finan­cial Times: Cen­tral bankers con­tent to keep rates low
“The world’s cen­tral bankers were in no hurry to start rais­ing inter­est rates as they headed home on Sun­day from the US Fed­eral Reserve’s annual retreat in Jack­son Hole, Wyoming.

“In pri­vate and in pub­lic, most offi­cials indi­cated they believed that rates could be main­tained at ultra-low lev­els for a con­sid­er­able time with­out gen­er­at­ing excess infla­tion, in spite of bet­ter eco­nomic data and a return of ‘ani­mal spir­its’ in finan­cial markets.

“Some used the plat­form of the con­fer­ence to push back against calls for early imple­men­ta­tion of ‘exit strate­gies’ that would reverse the cur­rent extra­or­di­nary degree of mon­e­tary stimulus.

“‘There is no rea­son to re-assess our mon­e­tary pol­icy stance,’ Erkki Liika­nen, Finland’s cen­tral bank gov­er­nor, told Bloomberg news agency. Ewald Nowotny, Austria’s cen­tral bank chief, said he did not favour adding a sur­charge to the Euro­pean Cen­tral Bank’s next offer of one-year loans to banks — a view shared by some other Euro­pean offi­cials in Jack­son Hole.

“If the ECB sim­ply offers the money at its cur­rent pol­icy rate, the mar­ket is likely to inter­pret this as a sig­nal that it does not expect to raise inter­est rates for 12 months.

“Fed­eral Reserve offi­cials have edged up their assess­ment of eco­nomic con­di­tions but have not sig­nif­i­cantly revised 2010 fore­casts. They are encour­aged by the shares rally, and see scope for this to sup­port eco­nomic activ­ity by restor­ing lost wealth and improv­ing con­fi­dence, but are not bet­ting too much on this.

“Don Kohn, vice-chairman of the Fed, said he saw no con­tra­dic­tion between its com­mit­ment to keep rates low for an ‘extended period’ and the desire to keep infla­tion at mod­er­ate lev­els — though he empha­sised that this was a con­di­tional com­mit­ment that could change if the eco­nomic out­look changed.

“Mar­tin Feld­stein, a Har­vard pro­fes­sor, thought it would be pos­si­ble to have ‘two years or more of very low inter­est rates’ with­out risk of excess infla­tion, given the spare capac­ity in the economy.

“Rick Mishkin, a for­mer Fed gov­er­nor, told the Finan­cial Times the Fed would be eas­ing pol­icy fur­ther if it were not for the costs asso­ci­ated with mon­etis­ing gov­ern­ment debt.

“‘Opti­mal pol­icy sug­gests more Trea­sury pur­chases would make sense. But that ignores the fis­cal sit­u­a­tion,’ he said. ‘The Fed is absolutely right to get off that pro­gramme — it can­not be seen to be accom­mo­dat­ing the gov­ern­ment deficit.’

“Jean-Claude Trichet, pres­i­dent of the Euro­pean Cen­tral Bank, mean­while spoke against a return to com­pla­cency and a fail­ure to fol­low through on finan­cial reforms, even though ‘we are a lit­tle bit out of the cur­rent episode’.”

Source: Krishna Guha, Finan­cial Times, August 23, 2009.

The Wall Street Jour­nal: Pol­icy mak­ers seek to learn from 1937’s stalled come­back
“A few months ago, Obama admin­is­tra­tion offi­cials were sound­ing the alarm about another 1929. These days, it’s 1937 that has them in a sweat.

“The Great Depres­sion was W-shaped. The stock-market col­lapse led to a steep eco­nomic decline. But by 1933, the econ­omy had rebounded. Then a series of mon­e­tary and fis­cal blun­ders drove the coun­try back into a deep reces­sion at the end of 1937.

“That episode is at the heart of the debate over how quickly the gov­ern­ment and the US Fed­eral Reserve should unwind the emer­gency mea­sures they have taken to fend off a Depression-like contraction.

“For the admin­is­tra­tion, the answer is clear: Err on the side of con­tin­ued expan­sion­ary poli­cies. ‘What you learned from that episode in 1937 is that it’s not enough to be recov­er­ing,’ says Christina Romer, chair­man of the president’s Coun­cil of Eco­nomic Advis­ers and an expert on the Great Depres­sion. ‘You don’t want to do any­thing when you start recov­er­ing that nips it off too soon.’

“For fis­cal con­ser­v­a­tives, the answer is equally clear: Start cut­ting the fed­eral deficit and slow­ing the growth in the money sup­ply now, before the binge gen­er­ates a burst of inflation.

“Ms. Romer is ’send­ing the absolutely wrong mes­sage — that we can’t do any­thing to worry about infla­tion until the recov­ery is locked in because of con­cern for unem­ploy­ment,’ says Allan Meltzer, a polit­i­cal econ­o­mist at Carnegie Mel­lon Uni­ver­sity. ‘The rea­son econ­o­mists and cen­tral bankers have two eyes is so they can do two things at once.’

“The econ­omy was recov­er­ing briskly dur­ing Franklin D. Roosevelt’s first term in the White House. The job­less rate, which had peaked at 25% in 1933, fell to 14% in 1937 — not exactly cause for cel­e­bra­tion but a relief nonetheless.

“The come­back stalled in 1937. Banks, ner­vous about the frag­ile recov­ery, were hold­ing huge amounts of cash in reserve at the Fed. Fear­ing an infla­tion­ary surge should the banks decide to lend that money out to busi­nesses and indi­vid­u­als, the Fed — which had made the mis­take of tight­en­ing mon­e­tary pol­icy soon after the 1929 stock-market crash — mis­cal­cu­lated again. The Fed ratch­eted up banks’ reserve require­ments three times, start­ing in 1936. The banks reacted by cut­ting lend­ing even further.

“‘There’s no doubt that [Fed Chair­man Ben] Bernanke is heav­ily influ­enced by these two mis­takes of the Fed dur­ing the Depres­sion and is absolutely intent on not repeat­ing them,’ says Alex J. Pol­lock of the Amer­i­can Enter­prise Insti­tute, a free-market think tank in Washington.”

Source: Michael Phillips, The Wall Street Jour­nal, August 24, 2009.

Finan­cial Times: Obama to offer Bernanke sec­ond term
“Ben Bernanke is to be reap­pointed by Pres­i­dent Barack Obama for a sec­ond four-year term as chair­man of the Fed­eral Reserve, accord­ing to a White House official.

“Mr Obama will make the announce­ment on Tues­day in Martha’s Vine­yard, where he is on hol­i­day with his fam­ily. The deci­sion is the ulti­mate seal of approval for the Fed chair­man, who was orig­i­nally appointed by George W Bush, the Repub­li­can for­mer pres­i­dent, and whose reap­point­ment was seen as far from guaranteed.

“It fol­lows Mr Bernanke’s extra­or­di­nar­ily aggres­sive efforts to fight the eco­nomic cri­sis, includ­ing rad­i­cal inter­est rate cuts, loans to non-bank finan­cial insti­tu­tions, Fed-led bailouts of Bear Stearns and AIG and gigan­tic asset pur­chases — exploit­ing the Fed’s pow­ers to their legal lim­its in a bid to pre­vent a sec­ond Great Depression.

Econ­o­mists, investors and fel­low cen­tral bankers over­whelm­ingly favour Mr Bernanke’s reap­point­ment. How­ever, dis­quiet in Con­gress over the exer­cise of extra­or­di­nary Fed pow­ers has raised a cloud over his future.

“The Fed chairman’s reap­point­ment still has to be approved by the Sen­ate, but his prospects look good. Chris Dodd, chair­man of the Sen­ate bank­ing com­mit­tee, on Mon­day said that ‘reap­point­ing Chair­man Bernanke is prob­a­bly the right choice’, though he promised a ‘thor­ough and com­pre­hen­sive con­fir­ma­tion hearing’.

“Mr Obama is said to credit Mr Bernanke with a lead­ing role in help­ing to avert eco­nomic cat­a­stro­phe. By reap­point­ing Mr Bernanke — who worked in the Bush White House — Mr Obama can also empha­sise his bipar­ti­san cre­den­tials at a time when he is embroiled in a fiercely par­ti­san bat­tle over health­care reform.”

Source: Krishna Guha, Finan­cial Times, August 25, 2009.

The Wall Street Jour­nal: Bernanke reap­point­ment polit­i­cally shrewd
“As Pres­i­dent Obama trum­pets the turn­around in the econ­omy, WSJ’s Exec­u­tive Wash­ing­ton Edi­tor Ger­ald Seib says the reap­point­ment of Fed­eral Reserve chair­man Ben Bernanke, there­fore, is a polit­i­cally shrewd move.”

Source: The Wall Street Jour­nal, August 25, 2009.

Stephen Roach (Finan­cial Times): The case against Bernanke
“Barack Obama has ren­dered one of his most impor­tant post-crisis ver­dicts: Ben Bernanke will be nom­i­nated for a sec­ond term as chair­man of the Fed­eral Reserve. This is a very short­sighted deci­sion. While America’s head cen­tral banker deserves credit for being cre­ative and coura­geous in orches­trat­ing an unusu­ally aggres­sive mon­e­tary eas­ing pro­gramme, it is impor­tant to remem­ber that his pre-crisis actions played an equally crit­i­cal role in set­ting the stage for the most wrench­ing reces­sion since the 1930s. It is as if a doc­tor guilty of mal­prac­tice is being given credit for invent­ing a mir­a­cle cure. Maybe the patient needs a new doctor.

“Mr Bernanke made three crit­i­cal mis­takes in his pre-Lehman incarnation:

“First, and fore­most, he was deeply wed­ded to the philo­soph­i­cal con­vic­tion that cen­tral banks should be agnos­tic when it comes to asset bubbles.

“Sec­ond, Mr Bernanke was the intel­lec­tual cham­pion of the ‘global sav­ing glut’ defence that exon­er­ated the US from its bubble-prone ten­den­cies and pinned the blame on sur­plus savers in Asia.

“Third, Mr Bernanke is cut from the same mar­ket lib­er­tar­ian cloth that got the Fed into this mess.

“Notwith­stand­ing these mis­takes, Mr Obama may be pre­ma­ture in giv­ing Mr Bernanke credit for the great cure. No one knows for cer­tain as to whether the Fed’s strat­egy will ulti­mately be suc­cess­ful. The worst of the US reces­sion appears to have been arrested for now — a fairly typ­i­cal, but tem­po­rary, out­growth of the time-honoured inven­tory cycle. But the sus­tain­abil­ity of any post-bubble recov­ery is always dubi­ous. Just ask Japan 20 years after the burst­ing of its bubbles.

“While finan­cial mar­kets are giddy with hopes of eco­nomic revival — in part inspired by Mr Bernanke’s cheer­lead­ing at the Fed’s annual Jack­son Hole gath­er­ing — there is still good rea­son to believe that the US recov­ery will be anaemic and frag­ile. US con­sumers are in the early stages of a multi-year retrench­ment as they cut debt and rebuild retire­ment sav­ing. The unusual breadth and syn­chronic­ity of the global reces­sion will restrain US export demand from becom­ing a new growth engine.

“It would be the height of folly to reward Mr Bernanke for the recov­ery that never stuck. Yet Mr Bernanke’s appar­ent reward is, unfor­tu­nately, typ­i­cal of the snap judg­ments that guide Wash­ing­ton decision-making. In this same vein, it is hard to for­get Mr Greenspan’s mission-accomplished speech in 2004 that claimed ‘our strat­egy of address­ing the bubble’s con­se­quences rather than the bub­ble itself has been suc­cess­ful’. Eager to declare the cri­sis over, the Obama ver­dict may be equally premature.”

Source: Stephen Roach, Finan­cial Times, August 25, 2009.

The Wall Street Jour­nal: Into the abyss — bud­get deficit deep­ens
“The White House has released its bud­get deficit esti­mates and the news is grim, WSJ’s Deb­o­rah Solomon reports. With eco­nomic out­put tipped to fall by almost 3% this year, the US econ­omy is fac­ing more tough times.”

Source: The Wall Street Jour­nal, August 25, 2009.

Bill King (The King Report): With­hold­ing taxes down
“For all the hope and hype of recov­ery, with­hold­ing taxes keep mak­ing new lows (via Matt Trivisonno’s blog).”

Source: Bill King, The King Report, August 28, 2009.

Asha Ban­ga­lore (North­ern Trust): Q2 real GDP decline unchanged
“The real gross domes­tic prod­uct (GDP) of the econ­omy declined at an annual of 1.0% accord­ing to the pre­lim­i­nary esti­mate, unchanged from the advance report. The revi­sions off­set each other to leave the head­line unchanged.

“The upward revi­sions of con­sumer spend­ing (-1.0% vs. –1.2% in advance esti­mate), res­i­den­tial invest­ment expen­di­tures (-22.8% vs. –29.3% in the advance report), equip­ment and soft­ware spend­ing (-8.4% vs. –9.0% in advance esti­mate) led to an upward revi­sion of real final sales (+0.4% vs. –0.2% in advance report), which is the first gain after two quar­terly declines.

“Exports were also revised up which led to a smaller trade gap than pre­vi­ously esti­mated. The decline in inven­to­ries (-$159.2 bil­lion vs. -$141.1 bil­lion) is larger than the ear­lier esti­mate, imply­ing a big addi­tion to inven­to­ries in the second-half of the year. The US econ­omy is pro­jected to show a mild recov­ery in the second-half of the year.

“The over­all GDP price index was revised down to a flat read­ing but the core per­sonal con­sump­tion expen­di­ture price index was left unchanged at a 2.0% increase.”

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

Mon­eyNews: Fed offi­cial — real unem­ploy­ment at 16%
“The real US unem­ploy­ment rate is 16% if per­sons who have dropped out of the labor pool and those work­ing less than they would like are counted, a Fed­eral Reserve offi­cial said Wednesday.

“‘If one con­sid­ers the peo­ple who would like a job but have stopped look­ing — so-called dis­cour­aged work­ers — and those who are work­ing fewer hours than they want, the unem­ploy­ment rate would move from the offi­cial 9.4% to 16%, said Atlanta Fed chief Den­nis Lockhart.

“He under­scored that he was express­ing his own views, which ‘do not nec­es­sar­ily reflect those of my col­leagues on the Fed­eral Open Mar­ket Com­mit­tee,’ the policy-setting body of the cen­tral bank.”

Source: Mon­eyNews, August 27, 2009.

Vik­tor­Cap­i­tal­ist: US — 34% of work­ers have one week or less of sav­ings
“An online sur­vey reveals the thin sav­ings cush­ion of American:

“(Mish’s Global Eco­nomic Trend Analy­sis) … Over a one week period begin­ning July 6 and run­ning through July 13, more than 16,000 vis­i­tors to Monster.com par­tic­i­pated in the Mon­ster Meter Poll ques­tion ‘If you were laid off with­out sev­er­ance, how long would your sav­ings cover your liv­ing expenses?’

* One Week or Less: 34%
* 2–4 Weeks: 16%
* 1–2 Months: 16%
* 3–5 Months: 14%
* 6 Months or Longer: 20%

“Cre­at­ing three broad groups, 50% have less than a month of sav­ings, while only 20% have 6 months or more.”

Source: Vik­tor­Cap­i­tal­ist, August 26, 2009.

Asha Ban­ga­lore (North­ern Trust): “Cash for clunk­ers” lifts con­sumer spend­ing in July
“Nom­i­nal con­sumer spend­ing increased 0.2% in July, after a 0.6% gain in June. In July, the ‘cash for clunk­ers’ pro­gram accounted for the 1.3% increase in pur­chases of durables (mostly cars). After adjust­ing for infla­tion, con­sumer spend­ing moved up 0.2% in July vs. a 0.1% increase in June. Out­lays on non-durables dropped 0.3% in July and pur­chases of ser­vices rose 0.1%. Real con­sumer spend­ing has now reg­is­tered three con­sec­u­tive monthly increases. The “cash for clunk­ers” pro­gram should raise con­sumer spend­ing in August, albeit a large increase com­pared with July. The main impli­ca­tion is that con­sumer spend­ing in the third quar­ter is most likely to grow around a 2.0% annu­al­ized rate after a 1.0% drop in the sec­ond quar­ter. This sup­ports fore­casts of an increase in real GDP in the third quarter.

“Per­sonal income held steady in July, fol­low­ing a 1.1% drop in June and a 1.4% increase in May. Per­sonal income data reflect the impact of the Amer­i­can Recov­ery and Rein­vest­ment Act of 2009 in the past few months, with large trans­fer pay­ments lead­ing to the wide swings in per­sonal income. Focus­ing on wages and salaries gives a bet­ter pic­ture of earn­ings. Wages and salaries rose 0.1% in July, this is note­wor­thy because it is the first monthly increase recorded since Octo­ber 2008.

“Per­sonal sav­ing as a per­cent of dis­pos­able income was 4.2% in July, down from 4.5% in June. It appears that the sav­ing tra­jec­tory is close to 4.0% after exclud­ing the dis­tor­tions from trans­fer pay­ments related to the Amer­i­can Recov­ery and Rein­vest­ment Act. The per­sonal sav­ing rate was 1.7% and 2.6% in 2007 and 2008, respectively.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, August 28, 2009.

Stan­dard & Poor’s: S&P/Case-Shiller Home Price Indices — home prices on an upswing in the sec­ond quar­ter
“Data through June 2009, released today by Stan­dard & Poor’s for its S&P/Case-Shiller Home Price Indices, the lead­ing mea­sure of US home prices, show that the US National Home Price Index improved in the sec­ond quar­ter of 2009.

“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 14.9% decline in the 2nd quar­ter of 2009 ver­sus the 2nd quar­ter of 2008. While still a sub­stan­tial neg­a­tive annual rate of return, this is an improve­ment over the record decline of 19.1% reported in the 1st quar­ter of the year. The 10-City and 20-City Com­pos­ites recorded annual declines of 15.1% and 15.4%, respec­tively. These are also improve­ments from their recent respec­tive record losses of –19.4% and –19.1%.

“‘For the sec­ond month in a row, we’re see­ing some pos­i­tive signs,’ says David Blitzer, Chair­man of the Index Com­mit­tee at Stan­dard & Poor’s. ‘The US National Com­pos­ite rose in the 2nd quar­ter com­pared to the 1st quar­ter of 2009. This is the first time we have seen a pos­i­tive quarter-over-quarter print in three years. Both the 10-City and 20-City Com­pos­ites posted monthly increases, as did most of the cities. As seen in both sea­son­ally adjusted and unad­justed data, as well as the charts, there are hints of an upward turn from a bot­tom. How­ever, some of the hard­est hit cities, espe­cially in the Sun Belt, show con­tin­ued weakness.’”

Source: Stan­dard & Poor’s, August 25, 2009.

Asha Ban­ga­lore (North­ern Trust): Sales of new homes advanced, inven­to­ries are shrink­ing
“Sales of new single-family homes rose 9.6% in July, after upward revi­sions for May and June. Pur­chases of new homes have risen in five of the first seven months of the year. Sales of new single-family homes are now up roughly 32% from a record low read­ing of 329,000 units reg­is­tered in Jan­u­ary 2009. On a regional basis, sales of new homes rose in the North­east (+32.4%) and South (+16.2%), fell in Mid­west (-7.6%) and was nearly steady in the West (+1.0%). The $8,000 credit for home buy­ers appears to have raised sales of new and exist­ing single-family homes. Break­downs of new home sales based on price ranges show a small increase in pur­chases of homes prices upwards of $400,000 and below $750,000.

“From a year ago, sales of new single-family homes are down only 9.3%; it is a sig­nif­i­cant improve­ment com­pared with dou­ble digit declines seen in recent months. The largest drop in the median price of a new single-family home for the cycle was in Jan­u­ary 2009 (-45.5%).

“The inventories-sales ratio is encour­ag­ing because it declined to a 7.5-month mark, down from a cycle high of 12.4-months in Jan­u­ary 2009. The median of this ratio dur­ing 1963–2000 is 6-month supply.”

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

Clus­ter­stock: New fore­clo­sures dwarf new home sales
“New home sales are tick­ing up again, bring­ing some much-needed relief to the beleagured home­builders. But watch out. Mark Han­son pro­duced this chart, show­ing fore­clo­sure starts against new home sales. As you can see, the new fore­clo­sure starts jumped even more in July than new home sales, mean­ing trou­ble down the road for home­builders — espe­cially once that $8,000 first-time home­builder tax credit runs out.”

Source: Joe Weisen­thal and Rory Maher, Clus­ter­stock — Busi­ness Insider, August 27, 2009.

Asha Ban­ga­lore (North­ern Trust): Defense and air­craft orders lift durable goods
“Orders of civil­ian air­craft (+107%) and defense items (+14.8%) led to the 4.9% jump of book­ings of durable goods dur­ing July. Exclud­ing air­craft and defense, orders of durable cap­i­tal goods fell 0.3% in July after a 3.6% increase in June and a 4.3% gain in May.

“The main mes­sage from the ISM man­u­fac­tur­ing sur­vey, indus­trial pro­duc­tion report, and orders of durable goods is that the fac­tory sec­tor is mov­ing toward a com­plete recovery.”

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

Finan­cial Times: US “prob­lem” bank list hits 15-year high
“The num­ber of US banks at risk of fail­ure is at a 15-year-high while the fund pro­tect­ing depos­i­tors is at its low­est level since 1993, accord­ing to fig­ures that high­light the spread of the cri­sis to the lower reaches of the finan­cial system.

“The Fed­eral Deposit Insur­ance Cor­po­ra­tion, a bank­ing reg­u­la­tor, on Thurs­day said the num­ber of ‘prob­lem banks’ had risen from 305 to 416 dur­ing the sec­ond quar­ter. The FDIC does not name the lenders on the ‘prob­lem list’ but said that total assets of that group had increased from $220 bil­lion to $299.8 bil­lion in the three months through June.

“That rel­a­tively low fig­ure sug­gests that after hit­ting large insti­tu­tions which traded com­plex secu­ri­ties, the finan­cial cri­sis and the reces­sion are tak­ing a toll on smaller banks that lend to busi­nesses and consumers.

“Sheila Bair, the FDIC chair­man, said on Thurs­day that while ear­lier losses in the indus­try were related to trou­bled res­i­den­tial loans and com­plex mortgage-related assets, there were now prob­lems with more con­ven­tional types of retail and com­mer­cial loans that have been hit hard by the reces­sion. ‘These credit prob­lems will out­last the reces­sion by at least a cou­ple of quar­ters,’ she said.

“Thursday’s news of a sharp fall in the FDIC’s deposit insur­ance fund, which insures up to $250,000 per depos­i­tor in each bank, under­scored the prob­lems faced by reg­u­la­tors when con­tem­plat­ing the res­cue or wind-down of insti­tu­tions with tril­lions of dol­lars on their bal­ance sheets.

“The agency said its fund had fallen to just $10.4 bil­lion from $13 bil­lion in the quar­ter, the low­est level since March 1993 when the US was in the mid­dle of the sav­ings and loans cri­sis. The fund has been depleted by bank fail­ures: reg­u­la­tors have shut 81 banks this year.

“‘In many impor­tant respects, finan­cial mar­kets are return­ing to nor­mal,’ said Ms Bair. ‘Com­bined with the pos­i­tive eco­nomic news in recent weeks, we’re hope­ful that this will lead to a mod­er­a­tion in credit prob­lems in com­ing quar­ters. But, as our report shows, clean­ing up bal­ance sheets is a painful process that takes time.’”

Source: Joanna Chung and Francesco Guer­rera, Finan­cial Times, August 27, 2009.

Asha Ban­ga­lore (North­ern Trust): Some mar­ket spreads are widen­ing again
“At the short end, finan­cial mar­ket spreads con­tinue to nar­row. How­ever at the long end, the sit­u­a­tion is dif­fer­ent. Two rep­re­sen­ta­tive long end mar­ket spreads — Moody’s Baa less 10-year Trea­sury note yield and junk bond yield less 10-year Trea­sury note yield — have both widened dur­ing August 11–20. The rea­sons are not clear as eco­nomic reports strongly sug­gest that under­ly­ing fun­da­men­tals are improv­ing. Con­cern about the nature of eco­nomic recov­ery and pro­jected sta­tus of bal­ance sheets of banks could be fac­tors influ­enc­ing these spreads.”

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

Bloomberg: Lever­age ris­ing on Wall Street at fastest pace since ‘07 freeze
“Banks are increas­ing lend­ing to buy­ers of high-yield com­pany loans and mort­gage bonds at what may be the fastest pace since the credit-market débâ­cle began in 2007.

“Credit Suisse Group AG and Sco­tia Cap­i­tal, a unit of Canada’s third-largest bank, said they’re offer­ing credit to investors who want to pur­chase loans. Sun­Trust Banks Inc., which left the busi­ness last year, is ‘reach­ing out to clients’ to pro­vide financ­ing, said Michael McCoy, a spokesman for the Atlanta-based bank. JPMor­gan Chase & Co. and Cit­i­group Inc. are doing the same for loans and mortgage-backed secu­ri­ties, said peo­ple famil­iar with the situation.

“‘I am sur­prised by how quickly the mar­ket has become recep­tive to lever­age again,’ said Bob Franz, the co-head of syn­di­cated loans in New York at Credit Suisse. The Swiss bank has seen increas­ing investor demand for financ­ing to buy loans in the past two months, he said.

“Fed­eral Reserve data show the 18 pri­mary deal­ers required to bid at Trea­sury auc­tions held $27.6 bil­lion of secu­ri­ties as col­lat­eral for financ­ings last­ing more than one day as of August 12, up 75% from May 6.

“The increase sug­gests money is being used for riskier home-loan, cor­po­rate and asset-backed secu­ri­ties because it excludes Trea­suries, agency debt and mort­gage bonds guar­an­teed by Washington-based Fan­nie Mae and Fred­die Mac of McLean, Vir­ginia or Gin­nie Mae in Wash­ing­ton. Broader data on loans for invest­ments isn’t available.”

Source: Kris­ten Haunss and Jody Shenn, Bloomberg, August 28, 2009.

Bill King (The King Report): For­eign assets in the US

“The above chart illus­trates why the dol­lar is under severe pres­sure and the US finan­cial and eco­nomic sys­tem is on life-support from the Fed as well as why Bernanke and his ilk will not divulge its records, ways and means to the public.

“It also shows that the Fed is between a rock and a hard place because as the Fed increases its life sup­port (bal­ance sheet/debt mon­e­ti­za­tion) it will increase the desire of for­eign­ers to jet­ti­son dollar-denominated assets. This is why there is no exit strat­egy for the fore­see­able future.”

Source: Bill King, The King Report, August 27, 2009.

Eoin Treacy (Fuller­money): Stock mar­kets — give upside ben­e­fit of doubt
“There has been con­sid­er­able debate about how the excess liq­uid­ity per­me­at­ing ral­lies across asset classes and bor­ders will be with­drawn. What seems clear is that changes will be made cau­tiously and eco­nomic recov­ery will be given prece­dence over wor­ries about future inflation.

“The S&P 500 accel­er­ated lower from Sep­tem­ber, lost con­sis­tency at the penul­ti­mate low and finally bot­tomed in March. It encoun­tered brief resis­tance in the region of 1,000 and is now pulling away from that area. For months we have felt that the S&P’s bull mar­ket hypoth­e­sis was more faith based than ana­lyt­i­cal because it had not yet com­pleted its base like so many of the lead­ing mar­kets. This is no longer the case. Cur­rent action is con­sis­tent with bull mar­ket type activity..

“In the short-term, a sus­tained move back below 1,000 would be needed to check momen­tum. A fall back below 975 would break the pro­gres­sion of higher lows and pull into the pre­vi­ous May-June range. A sus­tained move below 900 would indi­cate an increased like­li­hood of base for­ma­tion exten­sion. In the absence of any of these fac­tors, the upside can con­tinue to be given the ben­e­fit of the doubt. As stock mar­kets advance, 10,000 points on the Dow Jones Indus­tri­als is the next poten­tial area of resistance.

“The Nas­daq has been trend­ing con­sis­tently higher from the March lows and appears to be in the process of com­plet­ing another small range. A sus­tained move below 1,560 would be needed to ques­tion the con­sis­tency of the advance.

“Favourable stock mar­ket con­di­tions are evi­dent all over the world with an impres­sive num­ber of mar­kets mov­ing to new recov­ery highs this week. The FTSE-100 con­sol­i­dated above the 4,500 for much of the month and broke upwards last week. A sus­tained move back into the base, with a fall below 4,500 would be required to hin­der upside poten­tial. Germany’s DAX has a sim­i­lar pat­tern with 5,000 being the oper­a­tive level.”

Source: Eoin Treacy, Fuller­money, August 25, 2009.

Richard Rus­sell (Dow The­ory Let­ters): Are we in a new pri­mary bull mar­ket?
“The stock mar­ket is at all times sub­ject to three trends (1) the pri­mary or great tidal sweep of the mar­ket which can be likened to the tide of the ocean. (2) The sec­ondary trend of the mar­ket, which can be com­pared with the waves in the ocean. And (3) The daily action, which can be likened to the rip­ples on the waves.

“Right now we are at a most unusual and rare junc­ture. I say this because at this time there are ques­tions and argu­ments regard­ing both the pri­mary trend of the mar­ket and the sec­ondary trend.

“Are we in a new pri­mary bull mar­ket now? Per­son­ally, I doubt it.

“As for the sec­ondary trend, I’m hav­ing some sec­ond thoughts about the sec­ondary trend. On July 23, 2009, the Trans­ports finally con­firmed the Dow in clos­ing above its June 11 high. This was a sig­nal that the sec­ondary trend of the mar­ket had turned bull­ish. From July 23 onward, the mar­ket gath­ered strength as the sec­ondary trend con­tin­ues to extend.

“At this point, it’s obvi­ous that the sec­ondary trend of the mar­ket remains strongly bull­ish. How far this counter-trend rally will carry is unknow­able. I’ve been reluc­tant to rec­om­mend invest­ing heav­ily in what I believe is a bear mar­ket rally or a cor­rec­tion against the pre­vail­ing pri­mary trend. The great val­ues haven’t been there, and play­ing bear mar­ket ral­lies can be dan­ger­ous and stressful.”

Source: Richard Rus­sell, (Dow The­ory Let­ters), August 25, 2009.

Brian Bel­ski (Oppen­heimer Asset Man­age­ment): Rea­sons to be cheer­ful
“His­tory shows that Sep­tem­ber is cus­tom­ar­ily the weak­est month of the year for US equi­ties — but this does not nec­es­sar­ily hold true fol­low­ing pos­i­tive stock mar­ket per­for­mances dur­ing the sum­mer, says Brian Bel­ski, chief invest­ment strate­gist at Oppen­heimer Asset Management.

“He says that since the sec­ond world war, the S&P 500 has suf­fered an aver­age Sep­tem­ber fall of 0.5%. But there has been a decided shift in sea­son­al­ity pat­terns in the past 15 years.

“‘Given the dra­matic change in the finan­cial sys­tem dur­ing this period, we believe the new pat­tern pro­vides a more rel­e­vant com­par­i­son,’ he says.

“‘Sea­sonal pat­terns actu­ally favour the mar­ket in the cur­rent envi­ron­ment. We have found that Sep­tem­bers that fol­low pos­i­tive sum­mer months, such as the one we have seen this year, exhibit pos­i­tive S&P 500 per­for­mance, on average.

“‘In addi­tion, the fourth quar­ter is typ­i­cally a period of strength for the mar­ket regard­less of sum­mer performance.’

“Mr Bel­ski notes that many investors are now antic­i­pat­ing a size­able cor­rec­tion in the stock mar­ket fol­low­ing its strong ascent since March.

“‘While we do not com­pletely dis­count the pos­si­bil­ity of some sort of mar­ket pull­back given recent gains, we remain opti­mistic regard­ing mar­ket per­for­mance in the months ahead and expect the S&P 500 to fin­ish the year above cur­rent levels.”

Source: Brian Bel­ski, Oppen­heimer Asset Man­age­ment (via Finan­cial Times), August 24, 2009.

Bespoke: Miss­ing in action — short sell­ers
“Last night [Wednes­day] after the close, the major exchanges released their mid-month short inter­est data, or as some would say, their lack of short inter­est data. As shown in the chart below, the aver­age short inter­est as a per­cent­age of float for stocks in the S&P 1500 is cur­rently at 6.9%. This is the low­est level since Feb­ru­ary 2007, when the aver­age was 6.6%. In 2008, it was the bulls who argued that high lev­els of short inter­est were a rea­son the mar­ket should rally. With the recent data, how­ever, it is now the bears who will argue that low lev­els of short inter­est sug­gest that investors are now too bullish.”

Source: Bespoke, August 26, 2009.

Bespoke: Investors Intel­li­gence hits most bull­ish level since Jan­u­ary 2008
“… short inter­est as a per­cent­age of float is cur­rently at its low­est level since 2007. Another group of investors who have turned decid­edly less bear­ish are newslet­ter writ­ers. Accord­ing to the weekly data from Investors Intel­li­gence, bull­ish sen­ti­ment among newslet­ter writ­ers is at its high­est lev­els since Jan­u­ary 2008. At the other end of the spec­trum, bears are prac­ti­cally in com­plete hiber­na­tion. At a level of 19.8%, bear­ish sen­ti­ment is at its low­est level since late 2007. While it is still far from stand­ing room only, the bull­ish camp is start­ing to attract a crowd.”

Source: Bespoke, August 26, 2009.

Bespoke: Indi­vid­ual investors not as bull­ish as the pros
“In the last few days, we have noted how short inter­est is at multi-year lows and newslet­ter writ­ers are more bull­ish than at any other time since the start of 2008. While the so-called pros are bull­ish, indi­vid­ual investors appar­ently need more con­vinc­ing. Accord­ing to this week’s sur­vey of the Amer­i­can Asso­ci­a­tion of the Indi­vid­ual Investors (AAII), only 1/3 of investors sur­veyed are cur­rently bull­ish, while nearly half (49%) are bear­ish. Based on these sur­veys at least, not every­one is bullish.”

Source: Bespoke, August 27, 2009.

Mon­eyNews: Roubini missed the stock rally
“While peren­nial pes­simist Nouriel Roubini has been pre­scient in pre­dict­ing recent eco­nomic woes, investors stick­ing to his fore­casts have suf­fered dearly since March.

“That’s because he’s been warn­ing about con­tin­ued prob­lems in the econ­omy while stock prices have soared.

“The New York Uni­ver­sity pro­fes­sor has been argu­ing for weeks that the econ­omy is in dan­ger of suf­fer­ing a double-dip reces­sion. And he hasn’t yet rec­om­mended that investors plunge into stocks, Bloomberg notes.

“Yet the Stan­dard & Poor’s 500 Index has soared 53% from its March low.

“When the rally began, Roubini called it a ‘dead-cat bounce’, and in May he said the ascent may ‘fiz­zle’, Bloomberg reports.

“On March 9, Roubini said the S&P 500 was headed down to 600. Instead it has jumped 71% to 1,027 as of Wednes­day morning.

“‘We’re look­ing at a bull cycle in phase one,’ invest­ment guru Las­zlo Birinyi told Bloomberg.

“‘No one wants to come out and say, ‘This is a bull mar­ket.’ Everyone’s just danc­ing around the term.’

“Birinyi says Roubini may have missed the upward move because he con­cen­trates on the econ­omy rather than stocks.

“Roubini cer­tainly isn’t the only bear.

“Mar­ket sage Robert Prechter told Yahoo! News that recent stock gains rep­re­sent a bear mar­ket rally and that the next wave will be down.

“‘I think we’ll def­i­nitely break the March 2009 lows, and I think the bear mar­ket will extend well into the next decade,’ he says.”

Source: Dan Weil, Mon­eyNews, August 26, 2009.

Clus­ter­stock: The trashiest stocks are on fire
“Since the mar­ket hit its lows in early March, the trashiest, most beaten-down stocks have been the big win­ners. Some are argu­ing that the trash stocks have to slow down soon. But in the mean­time, it looks like investors are reach­ing for the trashiest of the trash. Check out the crazy runs in Fan­nie Mae (FNM), Fred­die Mac (FRE), AIG (AIG) and even the soon-to-be-liquidated GM over the last few weeks. This is the kind of behav­ior that might fore­tell the end of the junk rally.”

Source: Joe Weisen­thal and Rory Maher, Clus­ter­stock — Busi­ness Insider, August 24, 2009.

Eoin Treacy (Fuller­money): Carry trades being reopened
“The unwind­ing of the yen carry trade, from Sep­tem­ber, forced large posi­tions in spec­u­la­tive assets all over the world to be sold, con­tribut­ing to the syn­chro­nous decline in the price of most finan­cial assets and the cor­re­spond­ing advance of the yen and the dol­lar. This tumul­tuous event is now part of our his­tory and con­di­tions, par­tic­u­larly since March, have been con­ducive to carry trades being reopened.

“Investors in spec­u­la­tive higher yield­ing assets have sel­dom been pro­vided with such a wide menu of poten­tial carry trade cur­ren­cies. Inter­est rates in the Euro­zone, UK, USA and Japan are all at his­tor­i­cally low lev­els. While we tend to con­cen­trate on the main cur­rency cross rates it is evi­dent from a perusal of the major cur­ren­cies that some clas­sic des­ti­na­tions for carry trades such as New Zealand (USD, GBP, EUR, JPY) or Brazil (USD, GBP, EUR, JPY) have cur­ren­cies that are appre­ci­at­ing in all four poten­tial carry currencies.

“In the past, a US, UK or Euro­pean investor would have had to bor­row Japan­ese yen and invest them in a third coun­try. This exposed them to cur­rency fluc­tu­a­tions in two crosses. The cur­rent envi­ron­ment is sim­pler, expos­ing a domes­tic investor in one of these coun­tries to a sin­gle cross rate.

“We have long said that in the com­pet­i­tive world of glob­al­i­sa­tion, no coun­try wants a strong cur­rency but some are more moti­vated to have a weak cur­rency than oth­ers. The strength of carry trade des­ti­na­tion cur­ren­cies will increas­ingly become a polit­i­cal issue. New Zealand’s gov­ern­ment has already com­mented on the strength of Kiwi. The Kiwi has appre­ci­ated sig­nif­i­cantly in all of the crosses men­tioned above but has only broke to new highs against the pound. This would sug­gest that the eas­i­est part of the advance has already occurred and fur­ther improve­ment will have a greater near-term asso­ci­ated risk of reversion.

“Israel is the first coun­try to raise rates fol­low­ing the credit cri­sis. Most of the poten­tial carry trade fund­ing economies are unlikely to raise inter­est rates before next year and when they do, rises are likely to be small and the pace slow. Des­ti­na­tions for carry trades are likely to be rais­ing rates at the same time, and poten­tially faster, so the tight­en­ing of inter­est rate dif­fer­en­tials is unlikely to be a major imped­i­ment to carry trades.

“Stocks, com­modi­ties and cred­its have all appre­ci­ated con­sid­er­ably over the last 6 months. While this move is not over, we are prob­a­bly closer to the next larger reac­tion than we are to the next large advance. When some of the con­sis­tent trends that are cur­rently evi­dent roll over, profit tak­ing may put upward pres­sure on carry trade cur­ren­cies. Look­ing beyond a rever­sion to the mean, as long as inter­est rate dif­fer­en­tials remain amenable and fund­ing cur­ren­cies rel­a­tively weak com­pared to their higher yield­ing coun­ter­parts, carry trades are likely to remain viable sources of funding.”

Source: Eoin Treacy, Fuller­money, August 27, 2009.

Finan­cial Times: High prices nec­es­sary for pro­duc­ing Chi­nese com­modi­ties
“For min­ing com­pa­nies, the drop in com­modi­ties prices ear­lier this year has been, iron­i­cally, good long-term news. True, in the short term earn­ings have suf­fered and share prices have tanked. The FTSE 350 Min­ing Index was down 45% between August 2008 and Jan­u­ary this year.

“But amid all the neg­a­tive news there was, nonethe­less, an encour­ag­ing clue about the lim­its of China’s domes­tic com­modi­ties out­put that paints a brighter out­look for the nat­ural resources sector.

“China’s geo­log­i­cal endow­ment is crit­i­cal for com­modi­ties com­pa­nies as Bei­jing attempts to cap imports — and prices — sup­port­ing its domes­tic out­put. China is rich in iron ore, baux­ite, zinc, nickel, coal and crude oil deposits.

“Although the size of the country’s geo­log­i­cal endow­ment mat­ters, what really makes a dif­fer­ence is the price at which Chi­nese com­pa­nies can dig out the raw mate­ri­als. Until this year, the country’s capa­bil­i­ties were mostly untested as most of the recent increase in out­put came on the back of ris­ing global prices since 2002.

“The drop in global prices ear­lier this year has now revealed that China can only sus­tain high domes­tic pro­duc­tion when global prices are near record highs.

“As raw mate­ri­als prices declined in late 2008 and early 2009, out­put from Chi­nese mines plunged because their mines were uncom­pet­i­tive. This forced the coun­try to rely heav­ily on imports, mop­ping up global sur­pluses and boost­ing prices.

“The poor resilience of China’s local pro­duc­tion to price crashes has been sus­pected for a long time. But the cor­rob­o­ra­tion is great news for min­ers with high vol­ume and low pro­duc­tion cost assets, such as BHP Bil­li­ton and Rio Tinto.”

Source: Javier Blas, Finan­cial Times, August 24, 2009.

Bespoke: Oil to national gas ratio high­est ever
“With oil ral­ly­ing and nat­ural gas con­tin­u­ing to plum­met on a daily basis, the ratio of oil to nat­ural gas is at its high­est level since at least 1990 at 26.35. When the line is increas­ing in the chart below, oil is out­per­form­ing nat­ural gas, and as shown, it has been doing that now since the end of 2008. The ratio is cur­rently in uncharted ter­ri­tory, so who knows when we’ll see some rever­sion to the mean.”

Source: Bespoke, August 24, 2009.

Gold­Seek: GATA presses Fed to give up its golden secrets
“Yes­ter­day GATA’s [Gold Anti-Trust Action] Washington-area law firm, William J. Olson P.C. of Vienna, Vir­ginia filed with the Fed­eral Reserve Board an admin­is­tra­tive appeal of the Fed’s most recent refusal to grant us access to the agency’s records involv­ing the US gold reserve.

“Really, why should any Fed­eral Reserve record involv­ing the national gold reserves be con­fi­den­tial, except per­haps records involv­ing the most ordi­nary secu­rity of the reserve’s vault­ing? Plainly the Fed has knowl­edge of some­thing that has been done with the gold reserve that the US gov­ern­ment does not want the Amer­i­can peo­ple and the finan­cial mar­kets to know.

“Fur­ther, GATA’s admin­is­tra­tive appeal notes, the Fed’s search of its records in response to our request was neg­li­gent, inso­far as it did not cite at least one doc­u­ment involv­ing gold swaps that is posted and pub­licly acces­si­ble at the Fed’s own Inter­net site. That is, it seems that GATA’s lawyers looked harder for the rel­e­vant doc­u­ments than the Fed itself did.

“It strikes GATA as remark­able that the finan­cial mar­ket com­men­ta­tors who most often dis­par­age sug­ges­tions that cen­tral banks are inter­ven­ing sur­rep­ti­tiously as well as openly in the gold mar­ket never have tried to put a crit­i­cal ques­tion about gold to any cen­tral bank. Even big finan­cial news orga­ni­za­tions have failed to do this when report­ing on the gold mar­ket. But if they ever did start ask­ing crit­i­cal ques­tions, they would have to report that the Fed has some big secrets about gold. It is more jus­ti­fi­ca­tion for US Rep. Ron Paul’s leg­is­la­tion to audit the Fed.”

Source: Chris Pow­ell, Gold­Seek, August 23, 2009.

TheStreet.com: Chris­t­ian — gold will hit $1,000
“Jef­frey Chris­t­ian, man­ag­ing direc­tor of CPM Group, argues that once invest­ment demand surges, gold will sky­rocket to $1,000.”

Source: The Street.com, August 28, 2009.

Finan­cial Times: The weather chan­nel
“In the agri­cul­tural com­modi­ties mar­ket, noth­ing explains bet­ter the influ­ence of weather than the dif­fer­ence between the price of trop­i­cal pro­duce such as sugar and cocoa and crops such as wheat and corn.

“While sugar and cocoa hover at multi-decade highs, the price of wheat and corn is falling to its low­est since 2007.

“A poor mon­soon in India and unsea­sonal rain in Brazil have hit sugar out­put in the world’s two largest pro­duc­ers. Cocoa prices have suf­fered because of poor weather in Ivory Coast, which pro­duces 40% of the world’s cocoa.

“Mean­while, the grains’ grow­ing sea­son in the US and Europe has been almost per­fect — timely rains in the spring, and sun­shine and warm tem­per­a­tures dur­ing the sum­mer — after a delayed start. Yields for wheat are, accord­ing to the Inter­na­tional Grains Coun­cil, ‘unex­pect­edly good’.

“The corn har­vest will not start until the autumn, but the scouters that check fields in the US mid­west are report­ing a large, if not record, crop.

“The fact that weather causes the price dif­fer­ences also helps to explain why hedge funds and invest­ment banks have hired dozens of mete­o­rol­o­gists in the past few years, seat­ing them close to their traders.

“For agri com­modi­ties, weather research is now as impor­tant as research on con­sump­tion trends. Stay tuned to the weather channel.”

Source: Javier Blas, Finan­cial Times, August 27, 2009.

Finan­cial Times: China tight­en­ing
“Not for the first time, there is a gap between what China says and what China does. Pre­mier Wen Jiabao warned this week that the ‘foun­da­tions of recov­ery are not sta­ble  . . .  we can­not afford the slight­est relax­ation or waver­ing’. The sub­text seemed obvi­ous: that China’s excep­tion­ally loose mon­e­tary pol­icy will con­tinue for the fore­see­able future.

“But a sub­tle shift is already under way. Mon­e­tary pol­icy in China is not qual­i­ta­tive but quan­ti­ta­tive. The People’s Bank has a tar­get inter­est rate but its focus is on eco­nomic growth and the assumed quan­tity of money needed to fund it. By that token, China has been tight­en­ing by stealth for a while.

“The bank­ing reg­u­la­tor last month told lenders to raise reserves to 150% of their non-performing loans by the end of this year, up from 134.8% at the end of June. A com­mu­niqué last Fri­day can­vassed views on deduct­ing hold­ings of other lenders’ sub­or­di­nated or hybrid debt from sup­ple­men­tary (non-core) capital.

“Then there are softer mea­sures, such as remind­ing banks to ensure that loans for invest­ment in fixed assets actu­ally end up there. The cen­tral bank also has raised money-market rates to drain liq­uid­ity. The effects of all this can be seen in the M2 mea­sure of money sup­ply, which was up 28% at the end of July, year on year, but which fell 3 basis points from the end of June.

“This is how China tight­ens: imper­cep­ti­bly, by degrees. As Gold­man Sachs points out, China’s last tight­en­ing cycle began not when it raised rates in Novem­ber 2004 but 18 months ear­lier when the cen­tral bank began to issue short-term bills to mop up excess cash. Lis­ten to the rhetoric now, and you can almost hear the flut­ter­ing of doves. But look at the evi­dence, and it is obvi­ous that hawks are gathering.”

Source: Ben McLan­na­han, Finan­cial Times, August 25, 2009.

Finan­cial Times: Trou­bling signs in Japan ahead of vote
“Japan’s con­sumer prices fell at a faster-than-expected pace in July and unem­ploy­ment rose sharply, accord­ing to data released on Fri­day, as the coun­try pre­pared to vote in a new gov­ern­ment on Sun­day to lead the economy’s recovery.

“The job­less rate jumped to 5.7% in July from 5.4% in June — the high­est level since records began in 1960 — as busi­nesses con­tin­ued to cut their work­force and new grad­u­ates joined the labour market.

“Ris­ing job inse­cu­rity con­tin­ued to weigh on pri­vate spend­ing. Japan­ese house­hold spend­ing fell 1.3% com­pared with June on a sea­son­ally adjusted basis while wors­en­ing defla­tion could fur­ther dampen demand. Last month, core con­sumer prices, exclud­ing fresh food, fell 2.2% from a year ago, com­pared with a drop of 1.7% in June. The decline was the worst since records began in the early 1970s.

“‘Much of the cur­rent bout of defla­tion is the result of huge falls in year-ago oil prices. How­ever, these will dis­si­pate, as oil prices have since risen. In fact, in six months time oil will likely be a strong pos­i­tive con­trib­u­tor to head­line infla­tion,’ said Daniel Melser, econ­o­mist at Moody’s Economy.com.

“The eco­nomic data were worse than expected but unlikely to change the fact that most econ­o­mists believe the econ­omy has hit bottom.

“Japan, which emerged from reces­sion in the sec­ond quar­ter, is expected to see another quar­ter of growth in the July to Sep­tem­ber period after vol­ume of exports rose a seasonally-adjusted 2.3% in July from June.

“The long-ruling Lib­eral Demo­c­ra­tic party is expected to face a land­slide defeat in Sunday’s gen­eral elec­tion as Japan­ese vot­ers demand for changes in the way the coun­try is run.”

Source: Jus­tine Lau, Finan­cial Times, August 28, 2009.

Paul Biszko (RBC Cap­i­tal Mar­kets): Time up for Rus­sia bears
“There is a grow­ing sense that the worst is now over for Rus­sia — but prob­lems still lie ahead, says Paul Biszko, senior emerg­ing mar­kets strate­gist at RBC Cap­i­tal Markets.

“‘In late 2008/early 2009 Rus­sia looked vul­ner­a­ble to a full blown cri­sis,’ he says. ‘Its exter­nally over-leveraged pri­vate sec­tor was hit by both a sharp credit squeeze and a com­mod­ity price collapse.’

“He says three fac­tors have been crit­i­cal to the country’s turnround.

“First, the risk asset rally and improved investor sen­ti­ment in the sec­ond quar­ter of this year helped halt cap­i­tal flight and eased refinancing problems.

“Sec­ond, the par­tial oil price recov­ery and com­mod­ity bounce has improved both gov­ern­ment and cor­po­rate cash flow.

“Third, the gov­ern­ment acted rel­a­tively effec­tively in con­fronting a deep domes­tic liq­uid­ity short­age and stem­ming ram­pant panic, largely as it had a strong bal­ance sheet com­ing into the crisis.

“‘Although Russia’s cash reserve cush­ion has been cut by a third, it is still rel­a­tively large at $400 bil­lion — this remains its key near-term anchor, which should allow it to cope with any second-round cri­sis after­shocks,’ Mr Biszko says.

“‘We are not turn­ing out­right bull­ish on Rus­sia, rather less bear­ish, at least on a three– to six-month horizon.

“‘Our biggest con­cern is that Rus­sia remains highly sen­si­tive to recur­ring com­mod­ity price shocks, and its willingness/ability to reduce this vul­ner­a­bil­ity is questionable.’”

Source: Paul Biszko, RBC Cap­i­tal Mar­kets (via Finan­cial Times), August 27, 2009.

Nation­wide: UK house price bounce extends into August
“Com­ment­ing on the fig­ures Mar­tin Gah­bauer, Nationwide’s Chief Econ­o­mist, said:

“‘The price of a typ­i­cal house rose for the fourth con­sec­u­tive month in August, increas­ing by 1.6% on a sea­son­ally adjusted basis. The 3 month on 3 month rate of change — gen­er­ally a smoother indi­ca­tor of the near term trend — rose from 2.7% in July to 3.3% in August, the high­est level since Feb­ru­ary 2007. At

£160,224, the aver­age price of a typ­i­cal UK prop­erty is still slightly lower than 12 months ago. How­ever, the annual rate of change rose fur­ther in August, from –6.2% to –2.7%. Over the first eight months of 2009, the sea­son­ally adjusted index of house prices has risen by 3.2%, though rel­a­tive to the Octo­ber 2007 peak it is down by 14.4%.

“‘The excep­tion­ally low level of inter­est rates offers some expla­na­tion for why house prices have not repeated the very sharp falls of 2008. There are two main chan­nels through which the low level of inter­est rates has impacted the hous­ing mar­ket. First, mort­gage pay­ments for exist­ing home­own­ers — espe­cially those with tracker or stan­dard vari­able rate loans — have been reduced sub­stan­tially. Before the MPC began cut­ting rates, the aver­age inter­est and prin­ci­pal pay­ment per mort­gage holder rep­re­sented about 38% of the aver­age post-tax labour income. Fol­low­ing the steep cuts in base rate, this has fallen to just 28% of post-tax income, despite his­tor­i­cally high lev­els of out­stand­ing mort­gage debt.

“‘The fall in debt ser­vic­ing costs has meant that fewer home­own­ers are under imme­di­ate finan­cial pres­sure to sell than might have been expected in a reces­sion­ary eco­nomic back­ground with ris­ing unem­ploy­ment. Partly as a result, fewer second-hand prop­er­ties have come onto the mar­ket than is nor­mally the case in reces­sions, which has con­tributed to mov­ing the bal­ance of sup­ply and demand more in favour of sell­ers over the course of 2009.

“‘In addi­tion to lim­it­ing the sup­ply of second-hand homes, lower inter­est rates have also had an impact on the demand side. Even though house prices remain high rel­a­tive to earn­ings, the fall in inter­est rates has improved the afford­abil­ity of mort­gages for those look­ing to buy a home. This helps to explain the strong rise in new buyer enquiries reported by estate agents for most of 2009. Although not all of these enquiries are turn­ing into sales, house pur­chase trans­ac­tions have con­tin­ued to slowly increase from the record lows reached in late 2008.

“‘At the moment, a rise in inter­est rates is prob­a­bly still some way off. How­ever, the even­tual exit from excep­tion­ally loose mon­e­tary pol­icy could make the recov­ery in the hous­ing mar­ket bumpier than some might expect after the last few months of price increases.’”

Source: Nation­wide, August 27, 2009.

James Lord (Cap­i­tal Eco­nom­ics): Israel’s mon­e­tary pol­icy
“The Bank of Israel’s sur­prise inter­est rate rise on Mon­day is unlikely to send other cen­tral banks rush­ing to tighten — but the move is nev­er­the­less of great inter­est, says James Lord at Cap­i­tal Economics.

“‘Although Israel is a rel­a­tively small econ­omy, the BoI’s response to the global cri­sis has been sophis­ti­cated,’ he says.

“‘It cut rates aggres­sively and imple­mented quan­ti­ta­tive eas­ing, lead­ing to a large expan­sion of the mon­e­tary base.’

“Mr Lord also notes that Stan­ley Fis­cher, the BoI gov­er­nor, is a for­mer IMF deputy man­ag­ing direc­tor and was US Fed chair­man Ben Bernanke’s PhD super­vi­sor. ‘Mr Bernanke is likely to watch closely given that his for­mer tutor is imple­ment­ing poli­cies that may be rel­e­vant for the Fed’s own exit from quan­ti­ta­tive easing.’

“Indeed, the BoI started to unwind quan­ti­ta­tive eas­ing last month, while the rate of inter­est payable on com­mer­cial bank reserves will now rise — which is Mr Bernanke’s pre­ferred method for revers­ing any infla­tion­ary impact from the Fed’s uncon­ven­tional eas­ing, Mr Lord says.

“‘But we doubt the BoI’s move has impli­ca­tions for other cen­tral banks. The BoI made clear rates went up to help anchor local infla­tion expec­ta­tions. In most major economies, infla­tion is expected to stay low this year and next.

“‘Also, cen­tral bankers at Jack­son Hole made it clear that ultra-accommodative pol­icy is likely to remain in place in the major economies for some time.’”

Source: James Lord, Cap­i­tal Eco­nom­ics (via Finan­cial Times), August 25, 2009.

Bloomberg: Zuma may be African Lula as anti-inflation move lures investors
“South African Pres­i­dent Jacob Zuma was pro­pelled into office this year by union sup­port. So far, it is investors who are reap­ing the benefit.

“Zuma, who cam­paigned on promises to cre­ate jobs and slash poverty, began by remov­ing two union foes: Finance Min­is­ter Trevor Manuel and cen­tral bank gov­er­nor Tito Mboweni. He then named replace­ments who once worked for Manuel and Mboweni and who have favored their pre­de­ces­sors’ eco­nomic poli­cies, which labor offi­cials say sti­fle growth and employment.

“That has some ana­lysts com­par­ing Zuma to Brazil­ian Pres­i­dent Luiz Ina­cio Lula da Silva, who pan­icked investors with his anti-capitalist rhetoric when he came to power in 2003, only to imple­ment market-pleasing mea­sures later. Since Lula took office on Jan­u­ary 1, 2003, Brazil’s gross domes­tic prod­uct has tripled to become the world’s eighth-biggest economy.

“‘Zuma is pulling a Lula,’ said Lars Chris­tensen, head of emerging-market strat­egy at Danske Bank in Copen­hagen. ‘Zuma is a prag­ma­tist. I can’t see any big dif­fer­ences between Zuma’s poli­cies and those of his pre­de­ces­sors. No one expected that.’

“The pres­i­dent has main­tained the inflation-fighting poli­cies of his pre­de­ces­sor, Thabo Mbeki, has met investors to reas­sure them, has said that pub­lic spend­ing may need to be curbed and has com­mis­sioned a study on using tax rev­enue more effec­tively. Yes­ter­day, Gwede Man­tashe, sec­re­tary gen­eral of Zuma’s African National Con­gress, said labor unions have no undue influ­ence over the president.

“South Africa’s rand is the sec­ond best-performing emerg­ing mar­ket cur­rency of the 26 mon­i­tored by Bloomberg this year. The first is the Brazil­ian real. Ex-union leader Lula kept spend­ing in check and named as cen­tral bank pres­i­dent a Fleet­Boston Finan­cial Corp. exec­u­tive who resisted pres­sure from some mem­bers of Lula’s Work­ers’ Party to imme­di­ately cut rates.

“Almost four months into his term, Zuma is adher­ing to the free-market approach that angered his union back­ers when imple­mented by Mbeki. Investors who were irked by Zuma’s ties to labor now say Zuma’s South Africa is look­ing like a good bet.

“Since the April 22 elec­tion, the rand has gained 13% against the dol­lar, the bench­mark South African stock index has advanced 26% and credit default swaps, the cost of pro­tect­ing against a default, have dropped by more than a third.

“‘Zuma appears to be mak­ing very solid deci­sions,’ said Joseph Rohm, fund man­ager of the $300 mil­lion Africa & Mid­dle East Fund at T Rowe Price Inter­na­tional Plc in Lon­don. ‘We are encour­aged that what was a business-friendly envi­ron­ment has been main­tained.’ He said he has been buy­ing South African assets, though he declined to be more specific.”

Source: Nas­reen Seria, Bloomberg, August 28, 2009.

Finan­cial Times: Ted Kennedy
“Edward Kennedy died on Tues­day night from the con­se­quences of a brain tumour at the age of 77. He did not ful­fil the ambi­tions of his dynas­tic fam­ily by becom­ing pres­i­dent of the United States, as one brother did and as another might have, both vic­tims of the assassin’s bul­lets, but he became a lion of the US sen­ate, liked and admired by friend and foe alike.”

Click here for the full article.

Source: Finan­cial Times, August 26, 2009.

Tags: Barack Obama, Bill Gross, Brazil, BRIC, BRICs, Canadian Market, Commodities, Crisis Actions, Doctor Bill, Economic Catastrophe, Economic Upswing, Emerging Markets, Emerging Stock Market, energy, ETF, ETFs, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Global Stock Markets, Gold, Government Bonds, High Yield Corporate Bonds, Hugh Hendry, India, Japanese Yen, Larry Summers, Miracle Cure, Morgan Stanley, Natural Gas, Natural Resources, oil, Partisan Battle, Rbc, Recovery Path, Risky Assets, Stephen Roach, Stock Market Indices
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Insider Selling Pace Highest Since 2004

Saturday, August 29th, 2009

TrimTabs Invest­ment Research reports that the pace of insider sell­ing is now 30.6X that of insider buy­ing the high­est lev­els since they began report­ing this data in 2004, to $6.1-billion, the high­est amount since May 2008.

"The best-informed mar­ket par­tic­i­pants are send­ing a clear sig­nal that the party on Wall Street is going to end soon," said Charles Bider­man, CEO of TrimTabs.

TrimTabs' data on insider trans­ac­tions is based on daily fil­ings of Form 4, which cor­po­rate offi­cers, direc­tors, and major hold­ers are required to file with the Secu­ri­ties and Exchange Commission.

In a research note, TrimTabs explained that insider activ­ity is not the only sign the rally is about to end. The TrimTabs Demand Index, which tracks 18 fund flow and sen­ti­ment indi­ca­tors, has turned very bear­ish for the first time since March.

For exam­ple, short inter­est on NYSE stocks plum­meted by 10.3% in the sec­ond half of July and mar­gin debt on all US listed stocks spiked 5.9% in July, while 51.6% of advi­sors sur­veyed by Investors Intel­li­gence are bull­ish, the high­est level since Decem­ber 2007.

"When cor­po­rate insid­ers are bail­ing, the shorts are cov­er­ing and investors are bor­row­ing to buy, it gen­er­ally pays to be a seller rather than a buyer of stock," said Biderman.

TrimTabs also reports that the actions of U.S. pub­lic com­pa­nies have been bear­ish. In the past four months, com­pa­nies have been net sell­ers of a record $105.2 bil­lion in shares

In the last week, we pub­lished the counter-opinons of Las­zlo Birinyi, and Barry Ritholtz (Mer­rill Lynch Fund Man­agers' Sur­vey, in Rally May Last Longer Than You Believe.

Birinyi says the recov­ery in the econ­omy and earn­ings could far exceed expec­ta­tions, and the mar­ket is pric­ing in the upside surprise.

“The mar­kets are sug­gest­ing that the econ­omy has turned the cor­ner and is going to do a lot bet­ter than most peo­ple antic­i­pate,” Birinyi, the founder of West­port, Con­necti­cut– based research and money-management firm Birinyi Asso­ciates Inc., said today in an inter­view broad­cast on Bloomberg Radio and Tele­vi­sion. “I’m still very optimistic.”

Ritholtz pointed out that accord­ing to the Mer­rill Lynch Fund Man­agers' Sur­vey, pro­fes­sion­als and fund man­agers have been buy­ing this rally in a big way, and that may mean the mar­ket has a far­ther dis­tance to run right now.

Investor opti­mism about the global econ­omy has soared to its high­est level in nearly six years, with port­fo­lio man­agers putting their cash back into equity mar­kets, accord­ing to the Mer­rill Lynch Sur­vey of Fund Man­agers for August.

A net 75% of sur­vey respon­dents believe the world econ­omy will strengthen in the com­ing 12 months, the high­est read­ing since Novem­ber 2003 and up from 63% in July.

Con­fi­dence about cor­po­rate health is at its high­est since Jan­u­ary 2004. A net 70% of the panel respon­dents expect global cor­po­rate prof­its to rise in the com­ing year, up from 51% last month.

August’s sur­vey shows that investors are match­ing their sen­ti­ment with action, by putting cash to work. Aver­age cash bal­ances have fallen to 3.5% from 4.7% in July, their low­est level since July 2007.

Bespoke pointed out that Short Inter­est has dropped to multi-year lows, and that pros are more opti­mistic than indi­vid­ual investors, in Pro Investors More Bull­ish than Indi­vid­u­als.

Accord­ing to this week’s sur­vey of the Amer­i­can Asso­ci­a­tion of the Indi­vid­ual Investors (AAII), only 1/3 of investors sur­veyed are cur­rently bull­ish, while nearly half (49%) are bearish.

Bot­tom Line: Insid­ers are bear­ish or tak­ing advan­tage of bet­ter prices in the mar­ket to sell their stakes, Pros are bullish.

Indi­vid­u­als are some­where in between, not as bear­ish as insid­ers and not as bull­ish as pros.

Tags: Barry Ritholtz, Birinyi Associates, Corporate Insiders, Daily Filings, Demand Index, Insider Activity, Insider Transactions, Investment Research Reports, Investors Intelligence, Laszlo Birinyi, Margin Debt, Market Participants, Merrill Lynch, Money Management Firm, Nyse Stocks, Opinons, Securities And Exchange Commission, Sentiment Indicators, Trimtabs, Upside Surprise, Westport Connecticut
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10 Reasons Why Doug Kass Called a Market Top

Friday, August 28th, 2009

Doug Kass, founder of Seabreeze Part­ners, a reg­u­lar guest on CNBC, who is dubbed the anti-Cramer, as well as the “Peer­less Prog­nos­ti­ca­tor of Palm Beach,” has called the top for the mar­kets for 2009. Doug Kass' most recent, pre­scient call was this 5 month rally in the mar­ket, just 2 days before it began in March, Print­ing An Impor­tant Mar­ket Bot­tom.

Here are his ten rea­sons why he thinks so:

My view remains that it is dif­fer­ent this time. Again (now for empha­sis), the typ­i­cal self-sustaining eco­nomic recov­ery of the past will not be repeated in the imme­di­ate future for 10 impor­tant rea­sons that will weigh on the econ­omy and mar­kets like the gov­er­nor that con­trolled the speed of the Good Humor truck I drove when I was in my teens dur­ing the summer:

1. Cost cuts are a cor­po­rate life­line and so is fis­cal stim­u­lus, but both have a defined and lim­ited life.
2. Cost cuts (exac­er­bated by wage defla­tion) pose an endur­ing threat to the con­sumer, which is still the most sig­nif­i­cant con­trib­u­tor to domes­tic growth.
3. The con­sumer entered the cur­rent down­cy­cle exposed and lev­ered to the hilt, and net worths have been dam­aged and will need to be repaired through higher sav­ings and lower consumption.
4. The credit after­shock will con­tinue to haunt the economy.
5. The effect of the Fed’s mon­e­tarist exper­i­ment and its impact on invest­ing and spend­ing still remain uncertain.
6. While the hous­ing mar­ket has sta­bi­lized, its recov­ery will be muted, and there are few growth dri­vers to replace the impor­tant role taken by the real estate mar­kets in the prior upturn.
7. Com­mer­cial real estate has only begun to enter a cycli­cal downturn.
8. While the pub­lic works com­po­nent of pub­lic pol­icy is a stim­u­lant, the impact might be more muted than is gen­er­ally rec­og­nized. There may be less than meets the eye as most of the cur­rent fis­cal pol­icy ini­tia­tives rep­re­sent trans­fer pay­ments that have a neg­a­tive mul­ti­plier and cre­ate work disincentives.
9. Munic­i­pal­i­ties have his­tor­i­cally pro­vided eco­nomic sta­bil­ity — no more.
10. Fed­eral, state and local taxes will be ris­ing as the deficit must even­tu­ally be funded, and high-tax health and energy bills also loom.

(h/t: The Reformed Bro­ker)

Tags: Aftershock, Cnbc, Current Fiscal Policy, Different This Time, Doug Kass, Economic Recovery, Fiscal Stimulus, Good Humor, Growth Drivers, Hilt, Humor Truck, Immediate Future, Market Bottom, Monetarist, Negative Multiplier, Peerless Prognosticator, Policy Initiatives, Seabreeze Partners, Transfer Payments, Worths
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Pro investors more bullish than individuals

Friday, August 28th, 2009

Short inter­est has dropped to multi-year lows accord­ing to AAII, says Bespoke Invest­ment Group:

In the last few days, we have noted how short inter­est is at multi-year lows and newslet­ter writ­ers are more bull­ish than at any other time since the start of 2008.  While the so-called pros are bull­ish, indi­vid­ual investors appar­ently need more con­vinc­ing.  Accord­ing to this week's sur­vey of the Amer­i­can Asso­ci­a­tion of the Indi­vid­ual Investors (AAII), only 1/3 of investors sur­veyed are cur­rently bull­ish, while nearly half (49%) are bear­ish.  Based on these sur­veys at least, not every­one is bullish.

Source: Bespoke Invest­ment Group, August 27, 2009

Tags: Few Days, Individual Investors, Investment Group, Lows, Newsletter Writers, Short Interest, Surveys
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The Secular Bear Market in 4 Stages

Friday, August 28th, 2009

The debate rages on as to whether global stocks mar­kets have turned the cor­ner and are in the early stages of a new sec­u­lar bull mar­ket, or whether we are expe­ri­enc­ing a sec­ondary bear mar­ket rally (or cycli­cal bull phase) within a pri­mary bear market.

Although I am not a big pro­po­nent of aver­ag­ing data across multi-year cycles, an analy­sis of the var­i­ous stages of a typ­i­cal sec­u­lar bear mar­ket by Teun Draaisma and the strat­egy team of Mor­gan Stan­ley Europe nev­er­the­less pro­vides food for thought. The chart below shows what a typ­i­cal sec­u­lar bear mar­ket looks like based on the aver­age of the past 19 major bear mar­kets around the globe.

Con­sid­er­ing the aggre­gate data, the team sum­ma­rized their find­ings as follows:

“Each involved a peak-to-trough decline of at least 40% last­ing at least a year. The median of these bear mar­kets showed a 57% decline over 30 months.

“The usual rebound rally is 71% over 17 months … Struc­tural bear mar­kets are always fol­lowed by a strong rebound, typ­i­cally from the moment author­i­ties take deci­sive action.

“A turn in the rate cycle is often the trig­ger for the next cor­rec­tion. Often the peak in the rebound rally has been around, or prior to, a change in the inter­est rate cycle.”

“Broad multi-year trad­ing ranges fol­lowed the ini­tial rebound in 10 of 19 bear mar­kets. In most cases, struc­tural prob­lems in the real econ­omy acted as a head­wind to a new bull mar­ket, such as finan­cial bub­bles, high debt lev­els, fis­cal deficits, cur­rent account deficits, defla­tion and high inflation.”

Look­ing at the present sit­u­a­tion with the MSCI World Index up by 57.7% and the S&P 500 Index up by 52.4% since the lows of March 9, the Mor­gan Stan­ley team con­cludes: “If the after­math of these 19 sec­u­lar bear mar­kets is any­thing to go by, the cur­rent rally could go on a bit longer; is likely to stall a few months before the first Fed rate hike, which we expect in Q3 of 2010 … and is likely to be fol­lowed by some sort of trad­ing range for years to come because of the struc­tural prob­lems of finan­cial sec­tor and house­hold delever­ag­ing as well as the poor state of gov­ern­ment finances.”

For those inter­ested in the data of the var­i­ous sec­u­lar bear mar­kets and sub­se­quent move­ments, the table below makes for inter­est­ing reading.

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

Source: Teun Draaisma, Ronan Carr, Gra­ham Secker, Edmund Ng and Matthew Gar­man, Mor­gan Stan­ley Euro­pean Strat­egy, August 10, 2009 (hat tips: The Big Pic­ture and proshare),  August 27, 2009.

Tags: Account Deficits, Aftermath, Amalgam, Barry Ritholtz The Big Picture, Bear Markets, Bears, Bull Phase, Cfa, Chart Below Shows, Composite Pattern, Current Market, Debate Rages, Debt Levels, Edmund Ng, Fed Rate Hike, Financial Bubbles, First Fed, Fiscal Deficits, Garman, Global Stocks, Headwind, Interest Rate Cycle, Market Rally, Morgan Stanley, Morgan Stanley Europe, Msci World Index, Rally, Rebound, Ronan, Secker, Secular Bear Market, Secular Bull Market, Snapback, Spx, Strategy Team
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Hugh Hendry: Investment Outlook August 2009

Thursday, August 27th, 2009

Hugh Hendry, CIO, Eclec­tica Asset Man­age­ment, has recently pub­lished his invest­ment out­look for August 2009. Since the Sum­mer of 2008, Hendry has been a strong pro­po­nent of defla­tion, and con­tin­ues so, even though his the­sis has been get­ting a thrash­ing lately. Hendry has dis­cussed invest­ing in long bonds fer­vently in the past, but had no choice in Late March to recon­sider his posi­tions and sell them off, as yields on long term gov­ern­ment paper started to climb sharply and the recov­ery rally of the last 5 months began to take shape. Hendry's flag­ship fund was up 40% for the cal­en­dar year in 2008, and most of that came from his bets in long term gov­ern­ment bonds.

We would note that Hendry is the first to pull the plug when he is wrong in the short term, as he did in March-April. He is no buy and hold investor, nor does he wish for the econ­omy to enter a depres­sion, but he does feel that it is inevitable given the debt defla­tion that he believes is ahead. One of Hendry's main asser­tions is that it will take many years for the devel­oped world to cor­rect its over-indebtedness.

Hav­ing said that, here are the first 4 para­graphs from his letter:

Good peo­ple are becom­ing des­per­ate. I know a man who is plan­ning to capit­u­late and buy stocks. He can­not com­pre­hend what is hap­pen­ing today. He is, to employ Churchill, a fanatic; he won't change his mind and he can't change the sub­ject. But, fear­ing the loss of his fran­chise, he will change his port­fo­lio. He laments that it is as though last year's events never hap­pened. Rhetor­i­cally, he asks whether we have all been sent through time to invest in equi­ties at the end of the 1970s when stocks were cheap and soci­ety had thor­oughly delever­aged (the oppo­site of today). "Why do other investors not con­tem­plate the prospect of fur­ther house­hold delever­ag­ing when build­ing their profit fore­casts?" he fumes. "Can they not see that the pri­vate sector's delever­ag­ing is more than off­set­ting the pub­lic sector's expan­sion?" Despite such rant­ing my Min­skian friend remains a most enter­tain­ing and charm­ing individual.

Now I know I have not cov­ered myself in glory these last few months. Stock mar­kets have gained 50% from their lows and the Fund has lit­tle to show for it except a mod­est rever­sal and no wild swings in our monthly NAV. Nev­er­the­less, I would con­tend that this game of play­ing "chicken" with the mar­ket is not for us. Our ambi­tion has been mod­est. To sur­vive the onslaught of a pos­i­tive change in social mood with­out being forced to capit­u­late in the face of a frenzy of opti­mism; so far so good, I think?

In this regard we have been helped immensely by a quote from Robert Prechter in early April. Hav­ing cor­rectly called for a counter-trend rally in stock prices in late Feb­ru­ary, he then described the most likely nature of the advance, "...regard­less of its extent, it should gen­er­ate sub­stan­tial feel­ings of opti­mism. At its peak, the President's pop­u­lar­ity will be higher, the gov­ern­ment will be tak­ing credit for suc­cess­fully bail­ing out the econ­omy, the Fed will appear to have saved the bank­ing sys­tem, and investors will be con­vinced that the bear mar­ket is behind us."

So far his prophecy reads well. It is rem­i­nis­cent of Warburg's line that the busi­ness cycle is "a sub­ject for psy­chol­o­gists" rather than econ­o­mists. Bernanke is already being com­pared favourably with Vol­cker. Con­ti­nen­tal Europe has appar­ently "escaped" from reces­sion. Pos­i­tive eco­nomic growth across the world for the remain­der of the year seems cer­tain. And yet Prechter went on, "Be pre­pared for this envi­ron­ment: it will be hard for most investors to resist. But beware... [the next move] will be the most intense col­lapse in stock prices"

Read more, down­load here.

Tags: 1970s, 5 Months, Assertions, Bets, Calendar Year, Churchill, Deflation, Eclectica Asset Management, Flagship, Franchise, Government Bonds, Government Paper, Hugh Hendry, Indebtedness, Investment Outlook, Paragraphs, Private Sector, Profit Forecasts, Proponent, Public Sector, Rally
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Rally may last longer than you believe

Thursday, August 27th, 2009

With the mar­ket up over 50% since March lows, many are call­ing for a 10%+ pull­back and advis­ing cau­tion. It may be a good time indeed to take some money off the table.

Oth­ers, though, like Las­zlo Birinyi, founder, Birinyi Asso­ciates, and Barry Ritholtz, CEO, FusionIQ, and pro­lific author of The Big Pic­ture blog, believe that the mar­ket has the capac­ity to surprise.

Birinyi says the recov­ery in the econ­omy and earn­ings could far exceed expec­ta­tions, and the mar­ket is pric­ing in the upside surprise.

Birinyi Says Stocks Rally Sig­nals Eco­nomic Rebound, August 24, 2009, Bloomberg.com

Birinyi said on May 20 that the S&P 500 would climb to a record 1,700 in the next two or three years, a 66 per­cent gain from its cur­rent level. The index has ral­lied 14 per­cent since his fore­cast. The bench­mark for U.S. stocks may rise 6 per­cent to 1,087 within the next three months “if it con­tin­ues to progress at the rate it’s been pro­gress­ing,” he said

Wait­ing for Econ­omy Roubini Can Believe In Means Miss­ing Rally, August 26, 2009, Bloomberg.com

“We’re look­ing at a bull cycle in phase one,” Las­zlo Birinyi said in a tele­phone inter­view yes­ter­day. Birinyi was the top-ranked Dow Jones Indus­trial Aver­age fore­caster for most of the 1990s on PBS’s “Wall Street Week with Louis Rukeyser.” “No one wants to come out and say, ‘This is a bull mar­ket.’ Everyone’s just danc­ing around the term,” he said.

Barry Ritholtz says the mar­ket has the strength and capac­ity to sur­prise us higher, now that fund man­agers are buy­ing this rally, accord­ing to the Mer­rill Lynch Sur­vey of Fund Managers:

“Pro­fes­sional money man­agers are buy­ing into the rally in a big way, accord­ing to a Mer­rill Lynch Sur­vey of Fund Managers:

• 75% believe the world econ­omy will improve in the next 12 months. That’s the high­est level in nearly six years and up from 63% in July.
• Aver­age cash bal­ances have fallen to 3.5%, the low­est since July 2007.
• 34% of man­agers sur­veyed are now over­weight stocks, the high­est since Oct. 2007.
• Risk appetite is also increas­ing, to the high­est lev­els in two years.

Reuters: August 19, 2009 — Mer­rill Lynch Fund Man­ager Sur­vey Finds Eco­nomic Opti­mism High­est Since 2003 as Investors...

Investor opti­mism about the global econ­omy has soared to its high­est level in nearly six years, with port­fo­lio man­agers putting their cash back into equity mar­kets, accord­ing to the Mer­rill Lynch Sur­vey of Fund Man­agers for August.

A net 75% of sur­vey respon­dents believe the world econ­omy will strengthen in the com­ing 12 months, the high­est read­ing since Novem­ber 2003 and up from 63% in July.

Con­fi­dence about cor­po­rate health is at its high­est since Jan­u­ary 2004. A net 70% of the panel respon­dents expect global cor­po­rate prof­its to rise in the com­ing year, up from 51% last month.

August’s sur­vey shows that investors are match­ing their sen­ti­ment with action, by putting cash to work. Aver­age cash bal­ances have fallen to 3.5% from 4.7% in July, their low­est level since July 2007.

Equity allo­ca­tions have risen sharply month-over-month with a net 34% of respon­dents over­weight the asset class, up from a net 7% in July. Mer­rill Lynch’s Risk and Liq­uid­ity Indi­ca­tor, a mea­sure of risk appetite, has risen to 41, the high­est in two years.

“Strong opti­mism in August rep­re­sents a big turn­around from the apoc­a­lyp­tic bear­ish­ness of March. And yet with four out of five investors pre­dict­ing below trend growth for the year ahead, a nag­ging lack of con­vic­tion about the dura­bil­ity of the recov­ery remains,” said Michael Hart­nett, chief global equi­ties strate­gist at Banc of Amer­ica Securities-Merrill Lynch Research. “The equity rally has been nar­rowly led by China and tech stocks. We have yet to see investors fully embrace cycli­cal regions such as Japan or Europe, or West­ern bank stocks.”

Tags: Barry Ritholtz, Birinyi Associates, Cash Balances, Dow Jones, Economic Rebound, ETF, Forecaster, Fund Managers, Laszlo Birinyi, Lows, Merrill Lynch, Phase One, Professional Money Managers, Prolific Author, Pullback, Roubini, Telephone Interview, Upside Surprise, Wall Street Week, Wall Street Week With Louis Rukeyser, World Economy
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The Misunderstanding of "Debt-Fueled Consumption"

Thursday, August 27th, 2009

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

Today I plan to rant just a bit about con­sump­tion because I was read­ing Yves Smith’s arti­cle today, and she referred to “debt-fueled con­sump­tion” — the now pejo­ra­tive phrase that just rolls off the tongue. She says:

“no where does the arti­cle [ref­er­enced WSJ arti­cle in her post on the con­sump­tion share] acknowl­edge that the con­sump­tion level was unsus­tain­able and debt fueled.”

And this is where I get just slightly irked, because it seems to me that the phrase “debt-fueled con­sump­tion” strikes the fol­low­ing chord: every Amer­i­can house­hold was load­ing up on home equity debt just to buy big ticket items like Hum­mers and large sofa sets with cup-holders galore from Jordan’s Fur­ni­ture (a dis­count fur­ni­ture shop in the Boston area — gener­i­cally, every city has one).

I am sure that Yves Smith knows this, but the debt-fueled con­sump­tion was more likely pay­ing surg­ing health care bills than buy­ing cute kitchenettes.

Myth 1: The years of debt-fueled con­sump­tion went into goods spend­ing, jump­ing the con­sump­tion share of GDP to an excess of 70%.

Real­ity: The goods share of total con­sump­tion has been falling quite dra­mat­i­cally, while the ser­vice com­po­nent surged. There­fore, it is more likely that the debt fueled con­sump­tion was going pre­dom­i­nantly into the ser­vice com­po­nent (pay­ing ser­vice bills).

In Q2 2009, 25% of ser­vice spend­ing went to health care — out­pa­tient ser­vices (physi­cian, drugs, den­tist) or hos­pi­tal and nurs­ing home ser­vices — and 29% of ser­vice spend­ing went to hous­ing and util­i­ties — rent, water, elec­tric­ity, and trash. As such, over 50% of ser­vice con­sump­tion is more likely to remain sta­ble, even rise faster, with the Boomers out there.

And as for the spec­u­la­tion that work­ers are post­pon­ing retire­ment due the drop-off in wealth, and con­sump­tion will be mea­ger into the medium term, I sim­ply don’t buy it. If any­thing, the aging pop­u­la­tion is going to fuel recov­ery — no mat­ter when they choose to retire. Ser­vice sec­tor con­sump­tion growth — much of it based on health care con­sump­tion — will sim­ply become a larger share of GDP growth (cut­ting out autos, per­haps), and pick up some of the slack.

And here’s another thing. Myth 2: durables con­sump­tion — i.e., autos and fur­ni­ture — are impor­tant con­trib­u­tors to the ini­tial stages of the recov­ery. It helps, but ser­vice con­sump­tion is the biggie.

The chart lists the aver­age con­tri­bu­tion each GDP com­po­nent dur­ing the ini­tial year of recov­ery span­ning the 1950–2007 (nine recov­er­ies in total).

Real­ity: The aver­age growth accu­mu­lated dur­ing the ini­tial stages of recov­ery (1-yr fol­low­ing the recession’s end) fol­low­ing the last nine reces­sions is a remark­able 6.43% (con­sen­sus fore­cast for growth in 2010 is cur­rently 2.3%). Only 0.47% of that came from durable goods. A huge 1.67% of that stemmed from the ser­vice com­po­nent of con­sump­tion (again, health care and housing).

And as long as ser­vice spend­ing rebounds, so too will the econ­omy — even with­out a big pickup in autos. Inven­to­ries are almost a fore­gone con­clu­sion, the res­i­den­tial con­struc­tion sec­tor is bound to pick up — 500-600k units is sim­ply unsus­tain­able for a US pop­u­la­tion that is grow­ing at roughly 1% a year, and growth rates on such a small base can be large.

And here’s another link to jobs that has not been incor­po­rated to many fore­casts — growth in jobs means new health care insur­ance, means added spend­ing on health care.

I could go on, but I won’t.

Source: Rebecca Wilder, News N Eco­nom­ics, August 19, 2009.

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

Tags: American Household, Big Ticket Items, Boomers, Boston Area, Consumption Level, Dentist, Discount Furniture, Furniture Boston, Furniture Shop, GDP, Health Care Bills, Medium Term, Misunderstanding, Nursing Home Services, Outpatient Services, Service Bills, Service Component, Sofa Sets, Speculation, Wsj Article, Yves
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RGE: China's Impact on Financial Markets

Wednesday, August 26th, 2009

Nouriel Roubini’s RGE Mon­i­tor has just pub­lished a report exam­in­ing China’s direct and indi­rect influ­ences on global asset mar­kets, and par­tic­u­larly equity, com­mod­ity and forex mar­kets. Although the full report is only avail­able to RGE’s sub­scribers, the abridged ver­sion nev­er­the­less pro­vides use­ful insight as reported in the para­graphs below.

Chi­nese equi­ties
The Shang­hai com­pos­ite index has fallen almost 20% from its August 4 peak, putting it within the tra­di­tional def­i­n­i­tion of a bear mar­ket. Thus far this year, how­ever, the index has risen over 50%, and it has surged even more since its low in late 2008. Yet Chi­nese equi­ties remain vul­ner­a­ble given the liq­uid­ity out­look and the chal­lenges of using rel­a­tively blunt tools to guide asset markets.

Cor­re­la­tions between Chi­nese and global equi­ties (espe­cially emerg­ing mar­ket equi­ties) have increased since 2007. Economies most reliant on Chi­nese invest­ment, or on the com­modi­ties con­sumed by China, tend to show the most sig­nif­i­cant cor­re­la­tions. Yet even the mar­kets of Cen­tral and East­ern Europe have shown greater co-movements. While Main­land mar­kets are dom­i­nated by domes­tic investors and for­eign invest­ment is heav­ily restricted, they have vaguely led global mar­kets, being among the first to begin to fall from over­heated heights in early 2008 and the first to climb in late 2008 fol­low­ing China’s stim­u­lus announcement.

China’s link­ages with global mar­kets, to the extent that they exist, seem more macro than finan­cial. The same gov­ern­ment poli­cies designed to avoid bub­bles and limit fur­ther mis­al­lo­ca­tion of cap­i­tal – includ­ing the slow­ing of credit exten­sion cur­rently under­way – could not only restrain frothy Chi­nese equi­ties, some investors worry, but also sug­gest that the Chi­nese and global recov­ery will be weaker.

Thus steps taken to “fine-tune” Chi­nese mon­e­tary pol­icy and cool over­heat­ing in some sec­tors of the econ­omy, could con­tribute to more global mar­ket volatil­ity. A burst Chi­nese bub­ble could reduce Chi­nese demand and pre­fig­ure poor per­for­mance in other mar­kets as liq­uid­ity is with­drawn. While mar­kets in the US and Europe seem more likely to take their cues from local trends–particularly the cor­po­rate earn­ings and eco­nomic growth out­looks than Chi­nese mar­kets, a slow­down in Chi­nese demand, could give pause. An increase in exports to China is among fac­tors sup­port­ing Euro­pean exports in Q2.

Chi­nese equi­ties were look­ing very bub­bly in July and early August, and in our most recent eco­nomic out­look, we high­lighted devel­op­ing asset bub­bles in China’s prop­erty and equity mar­kets as one of sev­eral poten­tial risks of China’s stim­u­lus. Chi­nese liq­uid­ity has begun to be less loose, even if it is not yet tight and inflows to Chi­nese equity mar­kets have slowed from July onwards. Sev­eral trends which sup­ported equity mar­kets in H1 2009—record bank lend­ing with few restric­tions, the improve­ment in con­sumer con­fi­dence, the defer­ral of IPOs—are no longer sup­port­ive. Inflows to the Chi­nese equity mar­ket slowed in July 2009 as bank lend­ing slowed and gov­ern­ment reg­u­la­tors sug­gested a closer look would be taken at the allo­ca­tion of funds. Mean­while price/earnings ratios are no longer as cheap, hav­ing almost dou­bled from their late 2008 lows. Cor­po­rate earn­ings may stay weak given the dif­fi­culty in pass­ing on higher pro­duc­tion costs. All of these fac­tors sug­gest that Chi­nese equi­ties might have far­ther to fall.

On the plus side, fur­ther cor­rec­tion might have only a lim­ited effect on the Chi­nese econ­omy, given lower wealth effects than in devel­oped mar­kets. Mar­ket cap­i­tal­iza­tion is a much smaller share of GDP and equity invest­ment is a much smaller share of sav­ings. Sen­ti­ment is affected. New accounts opened by Chi­nese retail investors have fallen since their late July peak. The reluc­tance of retail investors to incur losses could con­tribute to a boom and bust cycle, neg­a­tively affect­ing Chi­nese and global asset markets.

Chi­nese com­mod­ity demand
Record com­mod­ity imports, par­tic­u­larly of met­als, con­tributed to the com­mod­ity price climb in H1 2009 (pumped up by the ample liq­uid­ity from zero inter­est rate poli­cies and quan­ti­ta­tive eas­ing). A sus­tained reduc­tion in Chi­nese imports of com­modi­ties is per­haps the biggest risk to global com­mod­ity mar­kets, par­tic­u­larly met­als. In fact there is some pre­lim­i­nary evi­dence that the exten­sive stock­pil­ing that con­tributed to the record vol­umes of com­mod­ity imports early in 2009 may be slow­ing as prices rise. The vol­ume of imports of key met­als like cop­per, tin and alu­minum has slowed in either June or July 2009. While this reduc­tion may reflect sea­sonal trends, with stock­piles filled and costs high, a fur­ther slow­down should not be ruled out.

Chi­nese imports of com­modi­ties, espe­cially base met­als, grew sharply in the first half of 2009 as China sought to restock depleted reserves and build up new stock­piles. Even the infrastructure-heavy stim­u­lus likely absorbed only some of the imports, sug­gest­ing that China might be on the verge of a com­mod­ity glut Fur­ther pur­chases, par­tic­u­larly later in Q2, may have extended beyond the offi­cial stock­pil­ing to include investors who took phys­i­cal deliv­ery as a hedge.

Yet, not all of the increased demand is due to stock­pil­ing. Metal pro­cess­ing has been a key part of China’s fis­cal stim­u­lus – with any excess pro­duc­tion pur­chased by the gov­ern­ment. There have been reports that some of the state metal and grain reserves became net sell­ers domes­ti­cally, sug­gest­ing the pace of imports might slow. The Baltic Dry Index, a mea­sure of ship­ping costs that reflects demand for bulk com­modi­ties, has fallen from its 2009 highs. Import vol­umes of sev­eral key met­als fell in June and July 2009. Should they fall fur­ther, and should global stock piles grow, com­mod­ity prices could cor­rect from their cur­rent levels.

Chi­nese com­mod­ity pur­chasers are in part price-sensitive. In 2008, Chi­nese pro­duc­ers made due with cheaper alter­na­tives to expen­sive ores. Pur­chases of scrap cop­per and alu­minum rose in July 2009 even as the imports of higher-grade ore and mate­ri­als fell. While the con­tin­ued demand for scrap metal does sug­gest some under­ly­ing metal demand from Chi­nese con­sumers, they have their price.

Despite China’s role as the largest con­sumer of many com­modi­ties, it has had lim­ited suc­cess as a price set­ter despite its influ­ence as one of the largest deman­ders of most com­modi­ties. Unwill­ing to accept the 33% nego­ti­ated by Japan­ese com­pa­nies and their ore sup­pli­ers for bulk ship­ments, China held out for 40–50% reduc­tions – a con­ces­sion sup­pli­ers were reluc­tant to give. Only one – Fortes­cue, a rel­a­tively small pro­ducer, agreed to a 35% price cut.

Unlike metal ore imports, whose vol­umes have dou­bled and in some cases tripled from 2008 lev­els, oil imports have only recently topped 2008 lev­els. Chi­nese oil imports did report a sharp increase to 19 mil­lion tons in July, well above recent lev­els, per­haps due to demand from new refiner­ies. Yet end user demand in China and glob­ally has not climbed much even as sup­ply has inched up again – OPEC mem­bers have been increas­ing pro­duc­tion. Worse than expected macro news, mean­while, would likely con­tribute to a cor­rec­tion, to the $50 range more in line with supply/demand fundamentals.

Yet, liq­uid finan­cial con­di­tions and the improv­ing “less bad” macro cli­mate may keep com­mod­ity prices in their cur­rent US$ 70 range, despite weak demand and an increase in stor­age Should oil prices keep climb­ing, they could put a damper on the eco­nomic recov­ery and on the revival of energy demand. Yet over the next few years, sup­ply con­straints sup­ply, lim­ited invest­ment and high pro­duc­tion costs for the new sup­plies that are enter­ing the mar­ket could keep prices ele­vated and a damper on global growth, espe­cially among the oil importers like China, India and the US
Source: RGE Mon­i­tor, August 26, 2009.

Tags: Asset Markets, Bear Market, Central And Eastern Europe, Chinese Investment, Commodities, Correlations, Domestic Investors, Emerging Market, Emerging Markets, Fine Tune, Foreign Investment, Forex Markets, Global Equities, Global Markets, Global Recovery, Government Policies, India, Indirect Influences, Market Volatility, Misallocation, oil, RGE Monitor, Sectors Of The Economy, Shanghai Composite Index
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The Discomfort of Diversification

Wednesday, August 26th, 2009

When Harry Markowitz, an aspir­ing grad­u­ate stu­dent, had his arti­cle enti­tled Port­fo­lio Selec­tion pub­lished in the Jour­nal of Finance in 1952, he could not have fore­seen that his insight into diver­si­fi­ca­tion would earn him the Nobel Prize. His idea was sim­ple but pro­found – "it is not enough to invest in many securities...it is nec­es­sary to avoid invest­ing in secu­ri­ties with high covari­ances among them­selves." Putting eggs in lots of dif­fer­ent bas­kets isn't enough; one has to select bas­kets which do not move in tandem.

Proper diver­si­fi­ca­tion blends asset classes and invest­ment strate­gies that have low covari­ances mean­ing as some fall in value oth­ers will tend to rise. 2008 was a case in point. Although equi­ties plum­meted and cor­po­rate bonds fal­tered world­wide, a num­ber of assets and invest­ment strate­gies expe­ri­enced pos­i­tive per­for­mance as depicted in the fol­low­ing chart.

Gov­ern­ment bonds, par­tic­u­larly longer matu­ri­ties, man­aged futures and ded­i­cated short hedge funds and gold all rose in response to falling inter­est rates, plung­ing stock prices, and the flight to the safe-haven of the U.S. dol­lar and pre­cious met­als. What these assets and strate­gies have in com­mon are his­tor­i­cally low or even neg­a­tive cor­re­la­tions to equi­ties; in this light, their strong diver­si­fi­ca­tion effect in a year of epic stock losses should be no sur­prise. Investors with allo­ca­tions suit­able to their risk pro­files were undoubt­edly thankful.

Six months later, the invest­ment land­scape has changed. Stock mar­kets have soared and, as evi­denced in the fol­low­ing chart, with the excep­tion of gold, last year's diver­si­fiers are post­ing neg­li­gi­ble or neg­a­tive returns.

Yesterday's heroes have become today's losers. This expe­ri­ence typ­i­fies the veiled corol­lary of Markowitz's insight. Proper diver­si­fi­ca­tion is dis­com­fort­ing — it entails con­struct­ing a port­fo­lio with com­bi­na­tions of asset classes and strate­gies that will tend to fall in value when oth­ers tend to rise and vice-versa. In other words, hav­ing some por­tion of a port­fo­lio invested in today's losers is an essen­tial ele­ment of sound invest­ment management.

Unfor­tu­nately, investors are ill-equipped to deal with this dis­ap­point­ing truth. Behav­ioural finance experts have found that invest­ment decision-making is char­ac­ter­is­ti­cally marred by cog­ni­tive errors includ­ing myopia – the ten­dency to be short-sighted; loss aver­sion – the pre­dis­po­si­tion to find losses much more painful than gains; and men­tal account­ing – the ten­dency to cat­e­go­rize and eval­u­ate eco­nomic out­comes in iso­lated group­ings rather than as part of the whole. The result is that many investors react emo­tion­ally to any dis­ap­point­ing per­for­mance and impa­tiently sell losers and chase win­ners, often at the most inop­por­tune times. They for­get that the essence of diver­si­fi­ca­tion demands a con­tin­ual expo­sure to the los­ing asset classes of the day.

At times, diver­si­fi­ca­tion is not just dis­com­fort­ing; it is down­right painful. When growth stocks soared in the late 1990's, many investors found the lag­ging returns of value stocks and REIT's intol­er­a­ble. Yet, as illus­trated in the fol­low­ing graph which com­pares the annu­al­ized rolling six-month returns of growth stocks (in red) to value stocks (in green) and REIT's (in blue), those lag­gards rapidly became win­ners as the tech crash pum­melled growth stocks while value stocks and REIT's expe­ri­enced, for the most part, pos­i­tive returns.

Investors should know that although diver­si­fi­ca­tion works, it is dis­com­fort­ing because it inevitably entails hav­ing a port­fo­lio allo­ca­tion to los­ing asset classes and strate­gies. Win­ston Churchill once clev­erly opined, "Democ­racy is the worst form of gov­ern­ment, except for all those other forms that have been tried from time to time." To bor­row his shrewd wit­ti­cism, we can say that diver­si­fi­ca­tion is the worst form of invest­ing, except for all those other forms that have been tried from time to time.

Tacita Cap­i­tal Inc. ("Tacita") is a pri­vate, inde­pen­dent fam­ily office and invest­ment coun­selling firm that spe­cial­izes in pro­vid­ing inte­grated wealth advi­sory and port­fo­lio man­age­ment ser­vices to fam­i­lies of afflu­ence. We under­stand the chal­lenges of afflu­ence and apply the lead­ing research and best prac­tices of top finan­cial aca­d­e­mics and indus­try prac­ti­tion­ers in assist­ing our clients reach their goals.

Tacita research has been pre­pared with­out regard to the indi­vid­ual finan­cial cir­cum­stances and objec­tives of per­sons who receive it and is not intended to replace indi­vid­u­ally tai­lored invest­ment advice. The asset classes/securities/instruments/strategies dis­cussed may not be suit­able for all investors and cer­tain investors may not be eli­gi­ble to pur­chase or par­tic­i­pate in some or all of them. The appro­pri­ate­ness of a par­tic­u­lar invest­ment or strat­egy will depend on an investor's indi­vid­ual cir­cum­stances and objec­tives. Tacita rec­om­mends that investors inde­pen­dently eval­u­ate par­tic­u­lar invest­ments and strate­gies, and encour­ages investors to seek the advice of a finan­cial advi­sor.

Tacita research is pre­pared for infor­ma­tional pur­poses. Nei­ther the infor­ma­tion nor any opin­ion expressed con­sti­tutes a solic­i­ta­tion by Tacita for the pur­chase or sale of any secu­ri­ties or finan­cial prod­ucts. This research is not intended to pro­vide tax, legal, or account­ing advice and read­ers are advised to seek out qual­i­fied pro­fes­sion­als that pro­vide advice on these issues for their indi­vid­ual cir­cum­stances.

Tacita research is based on pub­lic infor­ma­tion. Tacita makes every effort to use reli­able, com­pre­hen­sive infor­ma­tion, but we make no rep­re­sen­ta­tion that it is accu­rate or com­plete. We have no oblig­a­tion to inform any par­ties when opin­ions, esti­mates or infor­ma­tion in Tacita research changes.

All invest­ments involve risk includ­ing loss of prin­ci­pal. The value of and income from invest­ments may vary because of changes in inter­est rates or for­eign exchange rates, secu­ri­ties prices or mar­ket indexes, oper­a­tional or finan­cial con­di­tions of com­pa­nies or other fac­tors. There may be time lim­i­ta­tions on the exer­cise of options or other rights in secu­ri­ties trans­ac­tions. Past per­for­mance is not nec­es­sar­ily a guide to future per­for­mance. Esti­mates of future per­for­mance are based on assump­tions that may not be real­ized. Man­age­ment fees and expenses are asso­ci­ated with investing.

Tags: Asset Classes, Corollary, Corporate Bonds, Gold, Government Bonds, Hedge Funds, Investment Landscape, Investment Strategies, Journal Of Finance, Maturities, Negative Correlations, Nobel Prize, Portfolio Selection, precious metals, Proper Diversification, Risk Profiles, Safe Haven, Short Hedge, Stock Losses, Stock Markets, Stock Prices
Posted in Gold, Markets | Comments Off

George Soros: Reduces Potash and PetroBras, Increases Convertibles

Wednesday, August 26th, 2009

MarketFolly.com reports that accord­ing to 13F fil­ings, George Soros' Soros Fund Man­age­ment made some notable changes to its port­fo­lio. Among them, Soros com­pletely exited from its posi­tions in Conoco Phillips, Macy's, reduced each of its hold­ings in Petro­bras and Potash by about two-thirds and increased posi­tions in con­vert­ible bonds. Despite the large reduc­tion in Petro­bras, it still remains the fund's largest hold­ing, and Potash remains a 4.4% holding.

Bloomberg reported -  Soros Fund Man­age­ment LLC, sold 22 mil­lion U.S.-listed com­mon shares of Petro­bras, as the Brazil­ian oil com­pany is known, accord­ing to a fil­ing today with the U.S. Secu­ri­ties and Exchange Com­mis­sion. Soros bought 5.8 mil­lion of the company’s U.S.-traded pre­ferred shares.

Soros is tak­ing advan­tage of the spread between the two types of U.S.-listed Petro­bras shares, said Luis Maizel, pres­i­dent of LM Cap­i­tal Group LLC, which man­ages about $4 bil­lion. The com­mon shares were 21 per­cent more expen­sive than pre­ferred today, accord­ing to data com­piled by Bloomberg.

“He knows he held a vot­ing right in the com­mon shares that would never trans­late to actual power,” Maizel said in an inter­view from San Fran­cisco. “He’s just play­ing the spread.”

Petro­bras pre­ferred shares have also a 10 per­cent addi­tional div­i­dend, said William Lan­ders, a senior port­fo­lio man­ager for Latin Amer­ica at Black­rock Inc.

Re: Potash — Bloomberg reported

Soros cut his stake in Potash Corp. of Saskatchewan Inc., sell­ing 4 mil­lion shares of the fer­til­izer pro­ducer while invest­ing in Mon­santo Co., the world’s largest seed producer.

Hedge Fund man­agers like Soros are worth watch­ing because their direc­tional votes (posi­tions) often con­sti­tute strin­gently researched deci­sions, that are beyond the grasp and will­ing­ness of most investors.

(MarketFolly.com) Some Reduced Posi­tions (Some posi­tions they sold some shares of)
Petroleo Brasileiro (PBR): Reduced by 68.9%
Potash (POT): Reduced by 65.2%
Macro­vi­sion (MVSN) Bonds: Reduced by 48.8%
Wal­green (WAG): Reduced by 22.7%

Removed Posi­tions (Posi­tions they sold out of com­pletely)
Conoco Phillips (COP), Macys (M), Union Pacific (UNP), Amer­i­can Elec­tric Power (AEP), Don­nel­ley (RRD), Smucker (SJM), Kohls (KSS), Occi­den­tal Petro­leum (OXY) Puts, iShares Mex­ico (EWW) Puts, and Arch Coal (ACI).

The rest of their sales were posi­tions that were less than 0.25% of their port­fo­lio each, includ­ing: Wey­er­hauser (WY), Coach (COH), Nabors (NBR), Pub­lic Ser­vice Enter­prise (PEG), Crown Hold­ings (CCK), DPL (DPL), Emulex (ELX), PPL (PPL), Blue­fly (BFLY), Fron­tier (FTO), Vishay (VSH), North­east Util­i­ties (NU), ICICI bank (IBN) Puts, Com­mer­cial Met­als (CMC), Air­gas (ARG), Form­fac­tor (FORM), Vignette (VIGN), and Ter­a­dyne (TER).

It appears that while they reduced the posi­tion in Petro­bras (PBR) they ini­ti­ated a large posi­tion in Petrobras-A (PBR-A), and also added sig­nif­i­cantly to posi­tions both new and exist­ing in con­vert­ible bonds.

Bloomberg reported that Soros boosted his stake in oil com­pany Hess Corp. to 5.1 mil­lion shares as of June 30 from 3.7 mil­lion at the end of the first quar­ter, accord­ing to the fil­ing. Hess was Soros’s sec­ond– largest hold­ing. He also added to stakes in Houston-based Plains Explo­ration & Pro­duc­tion Co. and bought shares in Calgary-based Sun­cor Energy Inc. and InterOil Corp. in Sydney.

(MarketFolly.com) Some New Posi­tions (Brand new posi­tions that they ini­ti­ated in the last quar­ter):
The major addi­tions: Petroleo Brasileiro (PBR-A), Auto­zone (AZO), Gold­man Sachs (GS) Puts, Interoil (IOC), Mon­santo (MON), Vale (VALE) Puts, BPZ Resources (BPZ), and Sun­cor (SU).

The rest of their new posi­tions were less than 0.5% of their port­fo­lio each: Ver­i­zon (VZ), Diodes (DIOD) Bonds, SPSS (SPSS) Bond, San­dridge Energy (SD), Exar (EXAR), Apache (APA) Calls, Pio­neer Nat­ural Resources (PXD), Law­son Soft­ware (LWSN) Bond, Black­board (BBBB) Bond, Novagold (NG), CSX (CSX), Brigham Explo­ration (BEXP), Com­cast (CMCSA), CA (CA), Con­stel­la­tion Energy (CEG), Focus Media (FMCN), Wabtec (WAB), Cov­anta (CVA) Calls, Ultra­short Finan­cials (SKF), Berry Petro­leum (BRY), Exco Resources (XCO), and Ter­a­data (TDC) Calls.

Sim­i­lar to Soros' Q1 2009 port­fo­lio, their sec­ond quar­ter port­fo­lio is heav­ily laden with con­vert­ible bonds. Seven out of their top 15 posi­tions are in bonds, with LSI and Lin­ear Tech­nol­ogy their top picks in that regard. They boosed their Flex­tron­ics Bond posi­tion by 141%, their Tech Data Bond posi­tion by 77% and their LSI Bond posi­tion by around 20%. So, they were still lik­ing those names over the course of the past quarter.

Some Increased Posi­tions (A few posi­tions they already owned but added shares to)
Allied Nevada Gold (ANV): Increased by 4,242% (was pre­vi­ously 0.01% of their port­fo­lio and is now boosted up to only 0.45% of their port­fo­lio)
Cov­anta (CVA): Increased by 1,185.5% (was pre­vi­ously a 0.11% posi­tion for them and is now 1.89% of their port­fo­lio)
AT&T (T): Increased by 691% (boosted from 0.05% of their port­fo­lio up to 0.47% of their port­fo­lio now)
Allegheny Energy (AYE): Increased by 259% (from 0.13% of their port­fo­lio up to 0.55% of their port­fo­lio)
Flex­tron­ics (FLEX) Bond: Increased by 141%
Plains Explo­ration (PXP): Increased by 81.8%
Tech Data (TECD) Bond: Increased by 77%
Hess (HES): Increased by 40%
RF Micro (RFMD) Bonds: Increased by 37.9%
LSI (LSI) Bonds: Increased by 19.4%

Here is the lat­est list of Soros Fund Man­age­ment Holdings:

Top 15 Hold­ings by per­cent­age of long port­fo­lio *(see note below regard­ing calculations)

1. Petroleo Brasileiro (PBR): 9.58% of portfolio
2. Hess (HES): 6.56% of portfolio
3. LSI Corp (LSI) Bond: 5.85% of portfolio
4. Lin­ear Tech­nol­ogy (LLTC) Bond: 5.2% of portfolio
5. Petroleo Brasileiro (PBR-A): 4.68% of portfolio
6. RF Micro Devices (RFMD) Bond: 4.42% of portfolio
7. Potash (POT): 4.4% of portfolio
8. Plains Explo­ration (PXP): 4.25% of portfolio
9. Tech Data (TECD) Bond: 3.96% of portfolio
10. RF Micro (RFMD) Bond 2nd set: 3.7% of portfolio
11. Flex­tron­ics (FLEX) 1%10 Bond: 3.2% of portfolio
12. Cov­anta (CVA): 1.9% of portfolio
13. Auto­zone (AZO): 1.9% of portfolio
14. Audiocodes (AUDC) 2% 24 Bond: 1.6% of portfolio
15. Entergy (ETR): 1.6% of portfolio

Tags: Blackrock Inc, Brazil, Capital Group Llc, Commodities, Common Shares, Conoco Phillips, Convertible Bonds, energy, ETF, Fertilizer Producer, George Soros, Gold, Hedge Fund Managers, Monsanto Co, Natural Gas, Natural Resources, oil, Petrobras, Potash Corp Of Saskatchewan, Potash Corp Of Saskatchewan Inc, Potash Pot, Preferred Shares, Securities And Exchange Commission, Seed Producer, Soros Fund Management, Soros Fund Management Llc, Voting Right, William Landers
Posted in Brazil, ETFs, Gold, Markets | Comments Off

Boom and Burst: Don't be fooled by false signs of economic recovery. It's just the lull before the storm

Monday, August 24th, 2009

Andy Xie is a former Mor­gan Stan­ley econ­o­mist now liv­ing in China; The fol­low­ing is from the South China Morn­ing Post:

The A-share mar­ket is col­laps­ing again, like many times before. It takes numer­ous gov­ern­ment poli­cies and “expert” opin­ions to entice igno­rant retail investors into the mar­ket but just a few days to send them pack­ing. As greed has the upper hand in Chi­nese soci­ety, the same story repeats itself time and again.

A stock mar­ket bub­ble is a negative-sum game. It leads to dis­tor­tion in resource allo­ca­tion and, hence, net losses. The redis­tri­b­u­tion of the remain­der, more­over, isn’t entirely ran­dom. The gov­ern­ment, of course, always wins. It pock­ets stamp duty rev­enue and the pro­ceeds of ini­tial pub­lic offer­ings of state-owned enter­prises in cash. And, the listed com­pa­nies sel­dom pay dividends.

The truly ran­dom part for the redis­tri­b­u­tion among spec­u­la­tors is prob­a­bly 50 cents on the dol­lar. The odds are quite sim­i­lar to that from play­ing the lot­tery. Every stock mar­ket cycle makes Chi­nese peo­ple poorer. The sys­tem takes advan­tage of their oppor­tunism and credulity to col­lect money for the gov­ern­ment and to enrich the few.

I am not sure this bub­ble that began six months ago is truly over. The trig­ger for the cur­rent sell­ing was the tight­en­ing of lend­ing pol­icy. Bank lend­ing grew mar­gin­ally in July. On the ground, loan sharks are again thriv­ing, indi­cat­ing that the banks are indeed tight­en­ing. Like before, gov­ern­ment offi­cials will speak to boost mar­ket sen­ti­ment. They might influ­ence government-related funds to buy. “Experts” will offer opin­ions to fool the peo­ple again. Their actions might revive the mar­ket tem­porar­ily next month, but the rebound won’t reclaim the high of August 4.

This bub­ble will truly burst in the fourth quar­ter when the econ­omy shows signs of slow­ing again. Land prices will start to decline, which is of more con­cern than the col­lapse of the stock mar­ket, as local gov­ern­ments depend on land sales for rev­enue. The present eco­nomic “recov­ery” began in Feb­ru­ary as inven­to­ries were restocked and was pushed up by the spillover from the asset mar­ket revival. These two fac­tors can­not be sus­tained beyond the third quar­ter. When the mar­ket sees the sec­ond dip loom­ing, panic will be more intense and thorough.

The US will enter this sec­ond dip in the first quar­ter of next year. Its eco­nomic recov­ery in the sec­ond half of this year is being dri­ven by inven­tory restock­ing and fis­cal stimulus.

How­ever, US house­holds have lost their love for borrow-and-spend for good. Amer­i­can house­hold demand won’t pick up when the tem­po­rary growth fac­tors run out of steam. By the mid­dle of the sec­ond quar­ter next year, most of the world will have entered the sec­ond dip. But, by then, finan­cial mar­kets will have collapsed.

China’s A-share mar­ket leads all the other mar­kets in this cycle. Even though cen­tral banks around the world have kept inter­est rates low, the finan­cial cri­sis has kept most banks from lend­ing. Only Chi­nese banks have lent mas­sively. That liq­uid­ity inflated the main­land stock mar­ket first, then com­mod­ity mar­kets and prop­erty mar­ket last. Stock mar­kets around the world are now fol­low­ing the A-share mar­ket down.

By next spring, another stim­u­lus story, involv­ing even big­ger sums, will sur­face. “Experts” will offer opin­ions again on its potency. After a month or two, peo­ple will be at it again. Such mar­ket move­ments are bear-market bounces. Every bounce will peak lower than the pre­vi­ous one. The rea­son that such bear-market bounces repeat is the US Fed­eral Reserve’s low inter­est rate.

The final crash will come when the Fed raises the inter­est rate to 5 per cent or more. Most think that when the Fed does this, the global econ­omy will be strong and, hence, exports would do well and bring in money to keep up asset mar­kets. Unfor­tu­nately, this is not how our story will end this time. The growth model of the past two decades — Amer­i­cans bor­row and spend; Chi­nese lend and export — is bro­ken for good. Pol­i­cy­mak­ers have been busy stim­u­lat­ing, rather than reform­ing, in des­per­ate attempts to bring growth back. The mas­sive increase in money sup­plies around the world will spur infla­tion through commodity-market spec­u­la­tion and infla­tion expec­ta­tions in wage set­ting. We are not in the midst of a new boom. We are at the last stage of the Greenspan bub­ble. It ends with stagflation.

Hong Kong’s asset mar­kets are most sen­si­tive to the Fed’s pol­icy due to the cur­rency peg to the US dol­lar. But, in every cycle, sto­ries abound about mys­te­ri­ous main­lan­ders arriv­ing with bags of cash. Today, Hong Kong’s prop­erty agents are known to spirit mainland-looking men, with small leather bags tucked under their arms, to West Kowloon to view flats. Such sto­ries in the past of main­lan­ders pay­ing ridicu­lous prices for Hong Kong flats usu­ally involved buy­ers from the north­east. In this round, Hunan peo­ple have sur­faced as the high­est bid­ders. The rea­son is, I think, that Hunan peo­ple sound even more mys­te­ri­ous. But, despite all this talk, the dri­ving force for Hong Kong’s prop­erty mar­ket is the Fed’s inter­est rate policy.

Pun­ters in Hong Kong view the short-term inter­est rate as the cost of cap­i­tal. It is cur­rently close to zero. When the cost of cap­i­tal is zero, asset prices are infi­nite in the­ory. At least in this envi­ron­ment, asset prices are about story-telling. This is why, even though Hong Kong’s econ­omy has con­tracted sub­stan­tially, its prop­erty prices have surged. Of course, the short-term inter­est rate isn’t the cost of cap­i­tal; the long-term inter­est rate is. Its absence turns Hong Kong into a futile ground for spec­u­la­tion, where asset prices increase more on the way up and decrease more on the way down.

When the Fed raises the inter­est rate, prob­a­bly next year, Hong Kong’s prop­erty mar­ket will col­lapse. When the Fed’s pol­icy rate reaches 5 per cent, prob­a­bly in 2011, Hong Kong’s prop­erty prices will be 50 per cent lower.

Andy Xie is an inde­pen­dent economist.

Boom and burst
Don’t be fooled by false signs of eco­nomic recov­ery. It’s just the lull before the storm
Andy Xie
South China Morn­ing Post Aug 24, 2009

(h/t: Barry Ritholtz, The Big Pic­ture)

Tags: Andy Xie, China Morning Post, Chinese Society, Commodities, Credulity, False Signs, Government Policies, Initial Public Offerings, Living In China, Loan Sharks, Local Governments, Lull Before The Storm, Market Sentiment, Morgan Stanley, Opportunism, Ormer, Resource Allocation, Retail Investors, South China Morning, South China Morning Post, Speculators, State Owned Enterprises, Stock Market Bubble, Stock Market Cycle
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WealthTrack's Great Investors: A Conversation with Andrew Lo

Monday, August 24th, 2009

This week in WealthTrack’s series on Great Investors, Con­suelo Mack delves into the world of hedge funds with MIT Pro­fes­sor and hedge fund investor Andrew Lo. A stu­dent of investor behav­ior, Lo explains how human psy­chol­ogy plays a key role in finan­cial crises, includ­ing the most recent one.

Lo is one of the up-and-coming stars of the invest­ment world both as a finan­cial thought leader and investor. The late, great finan­cial his­to­rian Peter Bern­stein, among oth­ers, highly rec­om­mended him as one of the best minds in the world of finance.

Note: The tran­script of this inter­view is not avail­able yet, but will be posted here as soon as it arrives.

Source: Wealth­Track, August 21, 2009.

Tags: August 21, Finance, Financial Crises, Fund Investor, Hedge Fund, Hedge Funds, Historian, Human Psychology, Investment World, Investor Behavior, Investors, Key Role, Mack, Mit, Peter Bernstein, Plays, Thought Leader, Wealthtrack
Posted in Markets | Comments Off

Sprott: Beyond the Stimulus

Monday, August 24th, 2009

In the lat­est issue of his monthly newslet­ter, Eric Sprott, head of Sprott Asset Man­age­ment, says that while the mas­sive $2.8-trillion in cheques already writ­ten, which are part of a grand total of $11-trillion in total stim­u­lus com­mit­ments, has been great for the stock mar­ket, it remains to be seen if indeed the pos­i­tive effects will make it to "Main" Street.

Sprott dis­cusses data that sug­gest this is as good as it gets — that the effects of the stim­u­lus are already wear­ing off.

The major­ity of the Act (ARRA — Amer­i­can Recov­ery and Rein­vest­ment Act of 2009)  con­sists of tax cuts and trans­fer pay­ments to cit­i­zens, the impact of which was felt within the first two quar­ters of being received. By the end of Sep­tem­ber 2009 this stim­u­lus will have worn off, and along with it will van­ish the great­est mar­ginal impact of the entire stim­u­lus pack­age itself. Accord­ing to eco­nomic fore­cast­ers like Moody's, by 2010 the net impact of the stim­u­lus pack­age to real GDP will be barely over 1%.

China's $4-trillion yuan eco­nomic stim­u­lus too has been unprece­dented. It effec­tively rep­re­sents 64% of China's GDP, and it makes China the great­est stim­u­la­tor of all. Beneath it all how­ever, Sprott points out that it has resulted in 7.9% GDP growth increase for 2009, a mere $1-trillion return on a $9.37-trillion investment.

So if the money hasn’t gen­er­ated GDP growth, where did it go? It’s  gone every­where. Their government-induced liq­uid­ity flood has “soaked” vir­tu­ally every spec­u­la­tive asset class in China. Cop­per, nickel, steel, Chi­nese equi­ties, Chi­nese real estate — they’ve all appre­ci­ated in spite of the obvi­ous and acknowl­edged weak­ness in the global economy.

What hap­pened?

In our assess­ment of recent eco­nomic data, there are only two pos­si­ble expla­na­tions for the recent mar­ket rally. Either  investors are dis­count­ing an incred­i­ble eco­nomic recov­ery that is just around the cor­ner (hard to believe), or the extra  liq­uid­ity injected into the econ­omy has found its way into the stock mar­ket. We’re lean­ing towards the lat­ter alternative.

What's next? Sprott says that a dou­ble dip reces­sion is more likely now and investors should pre­pare for what is wait­ing beyond the stim­u­lus, as there will noth­ing to replace all the arti­fi­cially induced demand.

Read the whole let­ter here (pdf), or below:

Click on the top right hand cor­ner of the read­ing pane to full screen the document.

Sprott Com­ment August 2009

Tags: Arra, asset class, China Copper, China Gdp, Copper Nickel, Economic Data, Economic Forecasters, Economic Recovery, Economic Stimulus, Eric Sprott, GDP Growth, Global Economy, Grand Total, Marginal Impact, Market Rally, Massive 2, Nickel Steel, Real Gdp, Reinvestment Act, Stimulus Package, Transfer Payments
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The Melt-Up Continues: Pros are buying the rally

Sunday, August 23rd, 2009

Barry Ritholtz, CEO of FusionIQ, reminds us that in 1973–74, the mar­ket fell 44%, then ral­lied 78%. He says he is not call­ing the fore­cast this time that tightly, but says that before this is all over, the mar­ket which is up over 50% cur­rently, may see 60, 70, or 80% before top­ping out.

The melt-up in the mar­ket has caused pro­fes­sional investors a great deal of per­for­mance angst over whether or not to re-enter the mar­ket more will­fully, given the under­ly­ing con­cerns about the economy's recov­ery and sus­tain­abil­ity of earn­ings fore­casts. Ritholtz says that fund man­agers are buy­ing the rally, and this is rea­son to believe the mar­ket melt-up can extend higher.

“After start­ing the week with a big knock, the stock mar­ket has resumed its ral­ly­ing ways, with the Dow clos­ing above 9300 on Thurs­day while the S&P again sur­passed the 1000 level.

“Pro­fes­sional money man­agers are buy­ing into the rally in a big way, accord­ing to a Mer­rill Lynch Sur­vey of Fund Managers:

• 75% believe the world econ­omy will improve in the next 12 months. That’s the high­est level in nearly six years and up from 63% in July.
• Aver­age cash bal­ances have fallen to 3.5%, the low­est since July 2007.
• 34% of man­agers sur­veyed are now over­weight stocks, the high­est since Oct. 2007.
• Risk appetite is also increas­ing, to the high­est lev­els in two years.

“The con­trar­ian in you prob­a­bly thinks that sig­nals a mar­ket top. But Barry Ritholtz, CEO of FusionIQ and author of Bailout Nation, isn’t ready to call an end to the move. ‘We’ve worked off lots of that over­sold con­di­tion,’ he admits, but that doesn’t mean the rally can’t con­tinue for some time.

“Ritholtz, who told Tech Ticker in early March we were in for a mon­ster rally, has 1,050–1,080 as an upside tar­get for the S&P 500, with a slight chance it can go as high as 1,200. If the rally does extend to those outer lim­its, Ritholtz sees the Dow top­ping out ’some­where around 12,000′.

“Regard­less of your posi­tion, long or short, Ritholtz’s key mes­sage is to remain cau­tious. ‘This is a trad­ing rally not a multi-year rally,’ he says. Even­tu­ally something’s got to give: ‘We’ve never had six-month period before where we’ve lost two mil­lion jobs and the market’s gained 50%,’ he says. ‘That’s sim­ply unprecedented.’”

Source: Yahoo Finance, Tech Ticker, August 21, 2009.

(h/t: Invest­ment Post­cards From Cape Town)

Tags: 12 Months, Anxiety, August 21, Bailout, Barry Ritholtz, Cash Balances, Dow, Earnings Forecasts, Fund Managers, Market Rally, Merrill Lynch, Monster Rally, Outer Limits, Performance Anxiety, Professional Investors, Professional Money Managers, Risk Appetite, Signals, Six Years, Stock Market, Sustainability, Target, Two Million, Vector, World Economy, Yahoo Finance
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Words from the (Investment) Wise (August 23, 2009)

Sunday, August 23rd, 2009

After start­ing the week with a broad-based sell-off, stock mar­kets resumed their five-month uptrend as investors’ con­fi­dence in the recov­ery prospects of the global econ­omy gained trac­tion. With risky assets back in favor, a num­ber of bourses and crude oil closed at fresh highs for the year, show­ing resilience in the face of a sharp cor­rec­tion in China on Mon­day (-5.8%) and Wednes­day (-4.3%). Safe-haven assets such as gov­ern­ment bonds and the US dol­lar received a cold shoulder.

Source: Walt Han­dels­man, August 20, 2009.

Refer­ring to the nascent eco­nomic recov­ery, Paul Kas­riel and Asha Ban­ga­lore (North­ern Trust) said: “There is con­cern being voiced that after the fis­cal stim­u­lus wears off, the econ­omy will lapse back into a reces­sion. Any­thing is pos­si­ble, but that does not nec­es­sar­ily make it highly prob­a­ble. In the post-WII era, once the US econ­omy has gained for­ward motion, it has main­tained that for­ward motion until the Fed­eral Reserve has inter­vened to halt it.

“We believe that the ear­li­est the Fed will begin to take action to brake the pace of nom­i­nal eco­nomic activ­ity will be late-June of 2010. And if it begins to take action then, it will do so only ten­ta­tively. If, in fact, eco­nomic activ­ity is flag­ging from a lack of addi­tional fis­cal stim­u­lus, then the Fed is unlikely to com­mence tight­en­ing or would reverse course. We believe that the next reces­sion, when­ever it occurs, will be pre­cip­i­tated by the lagged effects of Fed tight­en­ing, not by the econ­omy ‘run­ning out of gas’ on its own.”

The past week’s per­for­mance of the major asset classes is sum­ma­rized by the chart below — a set of num­bers that indi­cates renewed investor appetite for risky assets.

Source: StockCharts.com

A sum­mary of the move­ments of major global stock mar­kets for the past week, as well as var­i­ous other mea­sure­ment peri­ods, is given in the table below.

The MSCI World Index (+1.6%) and MSCI Emerg­ing Mar­kets Index (-0.8%) fol­lowed sep­a­rate paths last week as China and a num­ber of emerg­ing mar­kets came under pres­sure dur­ing the first few trad­ing days. Emerg­ing mar­kets have now under­per­formed devel­oped mar­kets for three weeks running.

Accord­ing to fund track­ers EPFR Global (via the Finan­cial Times), equity funds invest­ing in China had their worst week since Q1 2008, while out­flows from equity funds tar­get­ing global emerg­ing mar­kets and Asia ex-Japan recorded 24-week and year-to-date highs respectively.

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

Top per­form­ers in the stock mar­kets this week were Cyprus (+7.0%), Turkey (+6.5%), Greece (+5.9%), Poland (+5.9%) and Swe­den (+4.2%). The top posi­tions were all occu­pied by Euro­pean coun­tries where the region could emerge from reces­sion sooner than pre­vi­ously expected. At the bot­tom end of the per­for­mance rank­ings, coun­tries included Nige­ria (-9.3%), Tai­wan (-5.1%), Kyr­gyzs­tan (-4.2%), Qatar (-4.0%) and Aus­tralia (-3.8%).

After surg­ing by 90.7% since the begin­ning of the year to its peak on August 4, the Chi­nese Shang­hai Com­pos­ite Index plunged by 19.8% over the course of the fol­low­ing 11 trad­ing days, but clawed back 6.3% dur­ing the last two days of the week as pun­dits real­ized that the tight­en­ing of mon­e­tary pol­icy in China was not immi­nent. The Japan­ese Nikkei 225 Aver­age (-3.4%) fell in tan­dem with the Chi­nese and other Asian markets.

The S&P 500 Index, back above the psy­cho­log­i­cal 1,000 level, has surged by 51.7% since the March 9 low. ”One argu­ment the bears use is that we saw a num­ber of sim­i­lar bear mar­ket ral­lies that were this extreme dur­ing the over­all 86% decline that the mar­ket saw from Sep­tem­ber 1929 to June 1932,” said Bespoke. ”How­ever, as shown below, the cur­rent rally is now big­ger and longer than any of the ral­lies seen dur­ing the 1929 to 1932 crash. The biggest rally dur­ing the ‘29 to ‘32 period was 46.8% over 148 days.”

Source: Bespoke, August 21, 2009.

Of the 94 stock mar­kets I keep on my radar screen, 47% (last week 63%) recorded gains, 47% (33%) showed losses and 4% (4%) remained unchanged. (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, the win­ners for the week included SPDR S&P Inter­na­tional Finan­cial Sec­tor (IPF) (+7.4%), iShares MSCI Turkey (TUR) (+7.2%), Mar­ket Vec­tors Envi­ron­men­tal Ser­vices (EVX) (+6.7%), United States Oil (USO) (+6.1%) and iShares US Oil Equip­ment and Ser­vices (+6.0%) .

At the bot­tom end of the per­for­mance rank­ings, ETFs included United States Nat­ural Gas (UNG) (-9.1%) (nat­ural gas prices dropped to a seven-year low on wor­ries about a sup­ply glut), Pow­er­Shares Pre­ferred Finan­cial (PGF) (-7.8%), Mar­ket Vec­tors Solar (KWT) (-5.9%) and Claymore/MAC Global Solar Energy (TAN) (-5.5%).

On the credit front, the chart below comes from the annual report of the Bank for Inter­na­tional Set­tle­ments (via Casey’s Daily Dis­patch) and shows that the cri­sis has devel­oped in five dis­tinct stages. Stage five, begin­ning in March 2009, shows the rally in the MSCI World Index (red line), as well as the sig­nif­i­cant improve­ment in the LIBOR-OIS (overnight index swap) spread (blue) and the CDS spread of 18 inter­na­tional banks (green) — head­ing towards the pre-crisis levels.

Source: Casey’s Daily Dis­patch, August 22, 2009.

Other news is that the US government’s pop­u­lar “cash-for-clunkers” car sales incen­tive pro­gram has burnt through most of its $3 bil­lion fund­ing in just one month and will come to an end on Mon­day, August 24. Mean­while, the Fed­eral Deposit Insur­ance Corp (FDIC) seized the Guar­anty Bank of Austin on Fri­day, bring­ing the tally of US bank fail­ures in 2009 to 81.

Next, a quick tex­tual analy­sis of my week’s read­ing. The usual sus­pects such as “mar­ket”, “econ­omy”, “loans” and “China” fea­tured promi­nently. Inter­est­ingly, “recov­ery” has for the first time since the start of the credit crunch entered the tag cloud.

Refer­ring to the stock mar­ket rally that is exceed­ing most expec­ta­tions, the quote du jour this week comes from Brian Wes­bury and Robert Stein of First Trust Advi­sors who wrote as fol­lows in Forbes: “The way we see it, those who were pes­simistic about stocks and the econ­omy early this year are going through the clas­sic five stages of grief. First, they denied a recov­ery was going to hap­pen any­time soon. Then they lashed out with anger at those who spot­ted signs of the recov­ery. Now, they are bar­gain­ing, admit­ting the exis­tence of the recov­ery that they did not see com­ing, but belit­tling it. Next, as things keep mov­ing up, we can expect them to get depressed. We don’t expect accep­tance to fully set in until late next year.”

Not every­body is in agree­ment with Wes­bury and Stein, as gath­ered from David Rosenberg’s lat­est research report (Gluskin Sheff & Asso­ciates), say­ing: “Econo­met­ric mod­els we ran show that the S&P 500 has 4.0% real GDP growth priced in … Now at the stock mar­ket bot­tom in March, the S&P 500 was priced for –2.5% real GDP, which is exactly what we are going to get this year, so the notion that the S&P 500 was egre­giously under­val­ued back at 666 does not bear up to scrutiny. At the time, that level was com­pletely real­is­tic in light of the macro outlook.”

The key moving-average lev­els for the major US indices, the BRIC coun­tries and South Africa (where I am based) are given in the table below. With the excep­tion of the Chi­nese Shang­hai Com­pos­ite Index, which fell below its 50-day mov­ing aver­age just more than a week ago, all the indices are trad­ing above their respec­tive 50– and 200-day mov­ing aver­ages. The 50-day lines are also in all instances above the 200-day lines and there­fore not threat­en­ing the bull­ish “golden crosses” estab­lished when the 50-day aver­ages broke upwards through the 200-day averages.

The short-term sup­port lev­els for the major US mar­kets are as fol­lows: Dow Jones Indus­trial Index (9,135), S&P 500 Index (980) and Nas­daq Com­pos­ite Index (1,931).

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

“The end game for this bull­ish phase [on stock mar­kets] needs to be con­sid­ered well before the event. While the tim­ing is largely guess­work at this stage, the usual causes are not. Bull mar­kets are usu­ally assas­si­nated by tighter mon­e­tary pol­icy,” said David Fuller (Fuller­money) from across the pond.

“A good, although not pre­cise, indi­ca­tor of bear mar­ket risk will be pro­vided by the yield curve, cur­rently show­ing the pre­mium of US 10-year over 2-year gov­ern­ment yields. Years often go by before this chart shows any­thing impor­tant but it should not be for­got­ten by any of us. When this next approaches 0.0, we should have at least trail­ing stops, men­tal or actual, for all of our equity long posi­tions. When it inverts to neg­a­tive, indi­cat­ing that 2-year rates are higher than 10-year rates, and the longer it stays neg­a­tive, the more we should assume that a bear mar­ket is approaching.

Source: Fullermoney.com

“The good news today, is that the next inverted yield curve is prob­a­bly years away. Con­se­quently, it would most likely take a true ‘black swan’ to derail the cur­rent bull mar­ket any­time soon. These are unpre­dictable by def­i­n­i­tion so I would not worry about them with­out evi­dence of a game-changing event. Mean­while, set­backs in response to nor­mal ‘wall of worry’ mar­ket volatil­ity can be regarded as buy­ing oppor­tu­ni­ties in favored assets,” con­cluded Fuller.

I have dis­cussed val­u­a­tion lev­els and tech­ni­cal indi­ca­tors in my recent posts (see below), but another fac­tor that will come into play is sea­son­al­ity turn­ing neg­a­tive. Focus­ing on the S&P 500, I have done a short analy­sis of the his­tor­i­cal pat­tern of monthly returns for this index from 1957 to mid-2009. The results are sum­ma­rized in the graph below.

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

If one looks at the aver­age return per month and in which months the most mar­ket declines have occurred, it seems as if the months of June, August and Sep­tem­ber are tra­di­tion­ally bad for stock mar­kets. Although June this year played accord­ing to script, with the S&P 500 show­ing a zero return, July excelled with a 7.4% gain. August (+3.9%) is com­fort­ably ahead of the norm but, given the over­bought level of mar­kets, it is con­ceiv­able that the “bad” month of Sep­tem­ber — over time the month with the low­est aver­age monthly return — might con­form to the his­tor­i­cal pattern.

For more dis­cus­sion on the direc­tion of finan­cial mar­kets, see my recent posts “Exit strat­egy of cen­tral banks vs stock mar­ket strat­egy“, “Rosen­berg: The reces­sion is dead, long live the reces­sion!“, “Stock mar­kets ripe for cor­rec­tion, but …“, “Charles Kirk: 10 pow­er­ful trad­ing rules” and “Global stock mar­kets — pop ‘n drop“. (And do make a point of lis­ten­ing to Don­ald Coxe’s web­cast of August 21, which can be accessed from the side­bar of the Invest­ment Post­cards site.)

Econ­omy
The Reces­sion Sta­tus Map below, cour­tesy of Dis­mal Sci­en­tist Economy.com, aggre­gates growth sta­tis­tics from around the world and allows one to see at a glance which economies are in reces­sion, at risk or begin­ning to recover. Click on the map to link to the inter­ac­tive version.

Source: Dis­mal Scientist

“Global busi­ness con­fi­dence remained pos­i­tive last week for the sec­ond straight week. The last time con­fi­dence was con­sis­tently pos­i­tive was nearly a year ago,” said the lat­est Sur­vey of Busi­ness Con­fi­dence of the World by Moody’s Economy.com. (The chart below uses a four-week mov­ing aver­age and is there­fore not yet reflect­ing the break above the zero line.) Busi­nesses are respond­ing most pos­i­tively to broad assess­ments of the cur­rent eco­nomic envi­ron­ment and the out­look into early 2010; they are as strong as they have been since the finan­cial cri­sis first hit in the sum­mer of 2007. The Sur­vey results sug­gest that the global reces­sion is com­ing to an end, but isn’t quite over yet.

Source: Moody’s Economy.com

Accord­ing to Mar­ket­Watch, Olivier Blan­chard, the top econ­o­mist for the Inter­na­tional Mon­e­tary Fund, said on Tues­day the global reces­sion was over and a recov­ery had begun. “The turn­around will not be sim­ple. The cri­sis has left deep scars, which will affect both sup­ply and demand for many years to come,” Blan­card wrote in an arti­cle released by the IMF. He said growth was still highly depen­dent on gov­ern­ment stim­u­lus from fis­cal and mon­e­tary poli­cies and sus­tain­able growth “will require del­i­cate rebal­anc­ing acts, both within and across countries.”

Japan last week emerged from reces­sion (not yet reflected on the map above), with its econ­omy grow­ing by 0.9% in the three months to June, mark­ing the first expan­sion in five quar­ters on the back of pri­vate con­sump­tion, net exports and gov­ern­ment stim­u­lus spend­ing. After the worst quar­ter on record, Hong Kong also returned to growth in Q2 2009, expand­ing 3.3% quar­ter on quarter.

The euro­zone com­pos­ite Pur­chas­ing Man­agers Index rose to a 15-month high of 50 in August from 47 in July — the biggest monthly increase on record. The 50 level sep­a­rates expan­sion from con­trac­tion and the strong improve­ment seems to indi­cate that the euro­zone could emerge from reces­sion in the third quarter.

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

Fri­day, August 21
• Sales of exist­ing homes advance, inven­to­ries flat, and prices falling less rapidly

Thurs­day, August 20
• Ini­tial job­less claims edge up for sec­ond con­sec­u­tive week — it’s not unusual

Wednes­day, August 19
• None

Tues­day, August 18
• Home con­struc­tion is recov­er­ing, albeit at a slow pace
• Whole­sale prices of food, energy and core items fall in July

Mon­day, August 17
• Senior Loan Offi­cer Opin­ion Sur­vey — small pos­i­tive sig­nals but sev­eral aspects remain both­er­some
• Hous­ing Mar­ket Index shows note­wor­thy improve­ment
• Japan — the end of the lat­est recession?

The global econ­omy is now begin­ning to emerge from its worst cri­sis in gen­er­a­tions, but the down­turn might have been much worse if cen­tral banks hadn’t acted so force­fully last fall, Fed­eral Reserve Chair­man Ben Bernanke said on Fri­day in a speech at the Kansas City Fed’s annual retreat in Jack­son Hole, as reported by Mar­ket­Watch.

The chart below, cour­tesy of US Global Investors, shows the results of the Fed’s Senior Loan Offi­cer Opin­ion Sur­vey. An inverted scale is used, i.e. when the per­cent­age of banks tight­en­ing their lend­ing stan­dards increases, the line trends down and vice versa. As indi­cated, the trend in lend­ing stan­dards has his­tor­i­cally been closely cor­re­lated with the year-on-year change in pri­vate non-residential fixed invest­ment, or capex, lagged by three quarters.

The lend­ing stan­dards data for July were released last week and show that a net 31.5% of large banks were tight­en­ing their lend­ing cri­te­ria ver­sus a net 83.6% last Octo­ber, result­ing in the line trend­ing up. Based on the his­tor­i­cal rela­tion­ship, one would expect capex to start ris­ing soon. Although not shown, the research also indi­cates a sim­i­lar cor­re­la­tion between lend­ing stan­dards and both indus­trial pro­duc­tion and total non-farm employ­ees, imply­ing these should also soon start trend­ing up.

Source: US Global Investors — Weekly Investor Alert, August 21, 2009.

Damp­en­ing some of the enthu­si­asm, Nouriel Roubini (RGE Mon­i­tor) said (via Forbes): “I now antic­i­pate that pol­icy mea­sures and other fac­tors will boost real GDP growth, albeit in a tem­po­rary man­ner, in the sec­ond half of 2009. Yet the shape of the recov­ery (will it be V, U or W?) and other chal­lenges will influ­ence the US eco­nomic out­look going for­ward. Growth will remain well below poten­tial in 2010, while the shape of the recov­ery will be closer to a U.”

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

Source: Yahoo Finance, August 21, 2009.

Click here for a sum­mary of Wells Fargo Secu­ri­ties’ weekly eco­nomic and finan­cial commentary.

The US eco­nomic data reports for the week include the following:

Mon­day, August 24
• None

Tues­day, August 25
• Con­sumer con­fi­dence
• S&P/Case-Shiller Home Price Index

Wednes­day, August 26
• Durable goods orders
• New home sales

Thurs­day, August 27
• Ini­tial job­less claims
• Q2 GDP

Fri­day, August 28
• Per­sonal income and spend­ing
• Core PCE
• Michi­gan Sen­ti­ment Index

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, August 21, 2009.

“Some peo­ple are addicted to see­ing cat­a­stro­phe in the future,” said the late Peter Bern­stein, author of Against the Gods, The Remark­able Story of Risk. Let’s hope the news items and quotes from mar­ket com­men­ta­tors included in the “Words from the Wise” review will assist Invest­ment Post­cards read­ers to go about invest­ment deci­sion in a level-headed man­ner and steer away from exces­sive pes­simism (or extreme optimism).

For short com­ments — max­i­mum 140 char­ac­ters — on top­i­cal eco­nomic and mar­ket issues, web links and graphs, you can also fol­low me on Twit­ter by click­ing here.)

That’s the way it looks from Cape Town (where I’m mak­ing final arrange­ments to take a group of local busi­ness peo­ple to Slove­nia in ten days’ time — let me know if you would like to meet with us in Ljubljana).

Source: Jerry Hol­bert

Nouriel Roubini (Forbes): Stop ask­ing when the reces­sion will end
“A num­ber of eco­nomic and finan­cial vari­ables have exhib­ited signs of improve­ment recently even if macro indi­ca­tors are still mixed. The pace of eco­nomic dete­ri­o­ra­tion has slowed sig­nif­i­cantly and, after four quar­ters of severe con­trac­tion in eco­nomic activ­ity, I now fore­cast that the US will dis­play pos­i­tive real GDP growth in the sec­ond half of 2009. How­ever, that does not mean that the reces­sion in the US is already over, as many ana­lysts have argued.

“Indeed, all the vari­ables used by the National Bureau of Eco­nomic Research (NBER) to date reces­sion­ary peri­ods will con­tinue to con­tract or dis­play sub­par growth. How­ever, I now antic­i­pate that pol­icy mea­sures and other fac­tors will boost real GDP growth, albeit in a tem­po­rary man­ner, in the sec­ond half of 2009. Yet the shape of the recov­ery (will it be V, U or W?) and other chal­lenges will influ­ence the US eco­nomic out­look going for­ward. Growth will remain well below poten­tial in 2010, while the shape of the recov­ery will be closer to a U.

“Some of the so-called ‘green shoots’ observed in the econ­omy in recent months can be defined as green shoots only if com­pared with the eco­nomic pic­ture painted at the begin­ning of the year. The con­trac­tion in some indi­ca­tors, such as indus­trial pro­duc­tion, is still com­pa­ra­ble to the reces­sions in the 1970s and 1980s. The July 2009 employ­ment report dis­played ‘only’ 247,000 non­farm pay­roll losses — hardly qual­i­fy­ing as a green shoot in any other post­war reces­sion. How­ever, given how close the US was to enter­ing a depres­sion, even 250,000 pay­roll losses seem capa­ble of cheer­ing up investors.

“In the sec­ond half of 2009, as the econ­omy bot­toms out from a record con­trac­tion (the worst in the last 60 years), adjust­ments, such as slower inven­tory destock­ing, will occur, while pol­icy mea­sures such as ‘cash for clunk­ers’ will boost auto pro­duc­tion and induce con­tin­ued spend­ing brought on by the stim­u­lus. These fac­tors will likely bring US real GDP growth back to pos­i­tive ter­ri­tory in the third quar­ter of 2009. How­ever, the NBER is not likely to call the end of the reces­sion until at least late 2009 or early 2010. In addi­tion to GDP growth, the NBER looks at four vari­ables in mak­ing reces­sion calls: real per­sonal income less trans­fer pay­ments; real man­u­fac­tur­ing and wholesale-retail trade sales; indus­trial pro­duc­tion; and pay­roll employment.

“While all of these indi­ca­tors might per­form bet­ter in the sec­ond half of 2009 than in the first, they are likely to remain in con­trac­tion or reg­is­ter sub­par growth. With the labor mar­ket now a lead­ing indi­ca­tor for the recov­ery in pri­vate con­sump­tion and the wider econ­omy, trends in pay­rolls will def­i­nitely influ­ence the NBER’s call.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, August 20, 2009.

IFO: Clear Improve­ment in the Ifo World Eco­nomic Cli­mate
“The Ifo World Eco­nomic Cli­mate Indi­ca­tor rose in the third quar­ter of 2009 for the sec­ond time in suc­ces­sion. The rise in the indi­ca­tor was pri­mar­ily the result of the clearly more favourable expec­ta­tions for the com­ing six months. But also the appraisals of the cur­rent eco­nomic sit­u­a­tion have improved slightly for the first time since the third quar­ter of 2007.

“The eco­nomic expec­ta­tions in North Amer­ica and Asia are par­tic­u­larly opti­mistic. But also in West­ern Europe, Rus­sia and Latin Amer­ica, the expec­ta­tions for the com­ing six months have again been revised upwards. In con­trast, the eco­nomic expec­ta­tions in most of the coun­tries of Cen­tral and East­ern Europe remain neg­a­tive albeit some­what improved over the pre­vi­ous quarter.

“In con­trast, the cur­rent eco­nomic sit­u­a­tion is assessed as def­i­nitely unfavourable in all major regions. In the euro area, Cen­tral and East­ern Europe and Rus­sia, the cur­rent eco­nomic sit­u­a­tion has been even assessed as some­what worse.

“The infla­tion expec­ta­tions for 2009 are clearly lower, on a world aver­age, than the infla­tion expec­ta­tions for the pre­vi­ous year (2.5% vs. 5.4%). Accord­ing to the expec­ta­tions of the World Eco­nomic Sur­vey (WES) par­tic­i­pants, price increases in the course of the com­ing six months will sta­bilise around the cur­rently low level. On aver­age for the world, nei­ther a boost in infla­tion nor a slide into defla­tion is foreseen.

“Short-term cen­tral bank rates will remain at cur­rent low lev­els over the next six months, in the opin­ion of the WES experts. In accord with the more favourable eco­nomic prospects, the WES experts antic­i­pate that the long-term inter­est rates are likely to rise in most coun­tries over the com­ing six months.

“The euro is regarded as slightly over­val­ued by the WES experts, on a world aver­age. The other major world cur­ren­cies, the US dol­lar, the Japan­ese yen and the British pound, in con­trast are viewed as nearly prop­erly valued.”

Source: IFO, August 19, 2009.

The New York Times: Hints of a rebound in global trade
“World trade, which vir­tu­ally col­lapsed last fall, appears to be start­ing to recover. But the rebound so far is small, pro­vid­ing lit­tle evi­dence that the world econ­omy is about to start grow­ing at a good pace.

“The United States reported this week that its exports in June were up 2.2% from the pre­vi­ous month. It was the first time in a year that exports had risen for two con­sec­u­tive months.

“As the accom­pa­ny­ing chart shows, most coun­tries are now see­ing an increase in trade, but vol­umes remain far below those of a year ago. To off­set cur­rency swings, all fig­ures are based on the dol­lar vol­ume of exports, not adjusted for inflation.

“In the credit cri­sis that grew severe last fall, both indus­trial pro­duc­tion and world trade fell off much faster than final sales to con­sumers. That has set the stage for a recov­ery in trade even if there is none in con­sumer demand, as ship­ments are adjusted to final demand.

“There is a good chance that exports, par­tic­u­larly those directed to the United States, will pick up sig­nif­i­cantly over the next few months, as many indus­tries restock inven­to­ries. That will espe­cially be true for the auto­mo­bile indus­try, which was sur­prised by the suc­cess of the ‘cash for clunk­ers’ program.

“China, which is among the first coun­tries to report its trade fig­ures each month, dis­closed its July fig­ures this week, show­ing a 3.7% gain on a sea­son­ally adjusted basis. The Amer­i­can share of Chi­nese exports rose to its high­est level since before the reces­sion began, pro­vid­ing a sign that Amer­i­can fig­ures for July will start to show larger gains in imports.”

Source: Floyd Nor­ris, The New York Times, August 14, 2009.

Finan­cial Times: Cen­tral bankers hold to a sober view
“Cen­tral bankers from around the world gath­ered for the US Fed­eral Reserve’s annual retreat in Jack­son Hole, Wyoming, on Thurs­day amid a tug-of-war in the mar­kets as to the prospects for global eco­nomic recovery.

“Over the past month, stocks and other risky assets world­wide have soared in value fol­low­ing stronger second-quarter growth than expected in many economies and some sur­vey mea­sures that raised hopes of a rel­a­tively vig­or­ous, V-shaped rebound.

“The recov­ery of lost stock mar­ket wealth and broader eas­ing of finan­cial con­di­tions promises to rein­force the growth out­look through a vir­tu­ous cir­cle of finan­cial and eco­nomic improvement.

“How­ever, in recent days a pull­back in Chi­nese bank lend­ing and weak US con­sumer con­fi­dence and retail sales fig­ures revived con­cerns about the mar­ket run­ning ahead of itself.

“For the most part, cen­tral bankers appear to be tak­ing a sober view and stick­ing to their fore­casts of a long and slow climb out of the deep trough in eco­nomic activity.

“At issue is whether the near-term ‘upside sur­prise’ — a sharp rebound in Asia, better-than-expected growth in France and Ger­many, recov­er­ing trade flows, a swing in inven­tory accu­mu­la­tion and a spike in car pro­duc­tion — changes much beyond what is now likely to be a strong third-quarter this year.

“Cen­tral bankers appear scep­ti­cal. Axel Weber, pres­i­dent of the Bun­des­bank, told Die Zeit this week: ‘I am not con­vinced that the recov­ery is sus­tain­able yet and that the econ­omy is capa­ble of car­ry­ing itself.’

“Cen­tral bankers see the improve­ment in mar­kets as sig­nif­i­cant, but note that the finan­cial sys­tem still relies on gov­ern­ment sup­port and that banks remain under pres­sure, and are still cau­tious about lending.

“Final demand from con­sumers and busi­nesses in the main indus­tri­alised economies remains very weak — par­tic­u­larly exclud­ing the one-off effects of car-buying incentives.

“Many offi­cials see some risk of infla­tion falling too low, with eco­nomic activ­ity and capac­ity util­i­sa­tion, includ­ing employ­ment, still at very low levels.”

“How­ever, there is clearly some risk that the recov­ery does indeed turn out to be more vig­or­ous and sus­tained — and spare capac­ity less abun­dant — than the world’s cen­tral banks anticipate.

“This cre­ates a dilemma for pol­i­cy­mak­ers, who may wish to sig­nal that they still do not expect to raise inter­est rates for quite some time, to pre­vent mar­ket inter­est rates from ris­ing pre­ma­turely, but also want to retain flex­i­bil­ity to respond to data about the recovery.

“Par­tic­u­larly in the emerg­ing world, there is also a con­cern that today’s stim­u­lus could end up inflat­ing asset price bub­bles and lay­ing the seeds of future finan­cial instability.”

Source: Krishna Guha, Finan­cial Times, August 20, 2009.

Mar­ket­Watch: We saved the world from dis­as­ter, Fed’s Bernanke says
“The global econ­omy is now begin­ning to emerge from its worst cri­sis in gen­er­a­tions, but the down­turn might have been much worse if cen­tral banks hadn’t acted so force­fully last fall, Fed­eral Reserve Chair­man Ben Bernanke said Friday.

“In a speech at the Kansas City Fed’s annual retreat in Jack­son Hole, Wyo., Bernanke sum­ma­rized a hell­ish year and explained mod­estly how he and his cen­tral bank col­leagues saved the world from a big­ger dis­as­ter. Read his full remarks.

“‘The world has been through the most severe finan­cial cri­sis since the Great Depres­sion,’ he said. ‘As severe as the eco­nomic impact has been, how­ever, the out­come could have been decid­edly worse.’

“If the Fed, other cen­tral banks and other gov­ern­ment lead­ers hadn’t acted in a coör­di­nated and aggres­sive way in Sep­tem­ber and Octo­ber of 2008, ‘the result­ing global down­turn could have been extra­or­di­nar­ily deep and pro­tracted,’ Bernanke said.

“Bernanke spoke to a selected group of top pol­icy mak­ers and econ­o­mists. His speech, how­ever, was aimed at a much wider audi­ence: The pres­i­dent, the Con­gress and a pub­lic that’s angry and confused.

“Bernanke’s term as chair­man of the Fed runs out in Jan­u­ary, and the finan­cial world is watch­ing to see if Pres­i­dent Barack Obama reap­points Bernanke or hands to job to some­one else.

“Past finan­cial pan­ics have exacted an ‘enor­mous toll in both human and eco­nomic terms,’ Bernanke said. ‘In this episode, by con­trast, pol­i­cy­mak­ers in the United States and around the globe responded with speed and force to arrest a rapidly dete­ri­o­rat­ing and dan­ger­ous situation.’

“The pol­icy response ‘averted the immi­nent col­lapse of the global finan­cial sys­tem, an out­come that seemed all too pos­si­ble to the finance min­is­ters and cen­tral bankers’.”

Source: Rex Nut­ting, Mar­ket­Watch, August 21, 2009.

Mon­eyNews: Buf­fett — con­gress must cut spend­ing
“Bil­lion­aire investor War­ren Buf­fett said the US econ­omy has avoided a melt­down and appears on a slow path to recov­ery, but Con­gress must now deal with enor­mous amounts of debt that threaten to erode US pur­chas­ing power.

“In an opin­ion col­umn pub­lished on Wednes­day by the New York Times, Buf­fett wrote that he ‘resound­ingly applauds’ actions by the Fed­eral Reserve and the Bush and Obama admin­is­tra­tions to pump tril­lions of dol­lars into the finan­cial system.

“But the ‘gusher of fed­eral money’ has run up a high level of debt that could fuel infla­tion, he said.

“‘The United States econ­omy is now out of the emer­gency room and appears to be on a slow path to recov­ery,’ Buf­fett wrote.

“‘But enor­mous dosages of mon­e­tary med­i­cine con­tinue to be admin­is­tered and, before long, we will need to deal with their side effects. For now, most of those effects are invis­i­ble and could indeed remain latent for a long time. Still, their threat may be as omi­nous as that posed by the finan­cial cri­sis itself.’

“Buf­fett, who runs insur­ance and invest­ment com­pany Berk­shire Hath­away Inc, likened the eco­nomic threat of ‘green­back emis­sions’ to the envi­ron­men­tal threat of green­house gas emis­sions, leav­ing the United States with a deficit of $1.8 tril­lion or 13% of gross domes­tic prod­uct this year.

“In July, the gov­ern­ment posted a $180.68 bil­lion monthly bud­get deficit, a record for July, mark­ing only the third time in the past 30 years that the gov­ern­ment ran a deficit for 11 months in a row.

“Buf­fett said a revived econ­omy will not be able to gen­er­ate enough rev­enues to bridge the gap between out­lays and receipts, so changes in taxes and spend­ing will be required.

“Politi­cians will not likely have the will to raise taxes or slow spend­ing, so they may opt to qui­etly let infla­tion increase, a move that will ‘con­fis­cate’ wealth and allow the United States to evolve into a ‘banana repub­lic econ­omy’, he said.

“‘Our imme­di­ate prob­lem is to get our coun­try back on its feet and flour­ish­ing — a ‘what­ever it takes’ still makes sense,’ Buf­fet said in the paper.

“But once recov­ery is gained, Con­gress must end the rise in the debt-to-GDP ratio and keep its growth in oblig­a­tions in line with its growth in resources, he wrote.

“‘Unchecked car­bon emis­sions will likely cause ice­bergs to melt. Unchecked green­back emis­sions will cer­tainly cause the pur­chas­ing power of cur­rency to melt. The dollar’s des­tiny lies with Con­gress,’ he said.”

Source: Mon­eyNews, August 19, 2009.

Bloomberg: Fed says banks tight­ened lend­ing in sec­ond quar­ter
“US banks tight­ened stan­dards on all types of loans in the sec­ond quar­ter and said they expect to main­tain strict cri­te­ria on lend­ing until at least the sec­ond half of 2010, a Fed­eral Reserve report showed today.

“Most banks cited reduced risk tol­er­ance and ‘a more uncer­tain eco­nomic out­look’ as the main rea­sons for restrict­ing credit to busi­nesses, with 35.2% say­ing they ‘tight­ened some­what’, the Fed said in its quar­terly Senior Loan Offi­cer survey.

“The report sug­gests that lenders and bor­row­ers were wary of tak­ing on more risk until the US econ­omy showed clearer signs of recov­er­ing. Since the sur­vey, econ­o­mists have raised their out­look for growth as data sug­gested home sales and man­u­fac­tur­ing were sta­bi­liz­ing, and the Fed said last week that the econ­omy is ‘lev­el­ing out’.

“‘The report tells us that credit is not becom­ing more read­ily avail­able, but also that the credit freeze is at least mov­ing in the direc­tion of a thaw,’ said Carl Ric­cadonna, senior econ­o­mist at Deutsche Bank Securities.

“The sur­vey of 55 US banks and 23 US branches of for­eign banks found that demand for loans con­tin­ued to weaken ‘across all major cat­e­gories’ except prime res­i­den­tial mort­gages, the cen­tral bank said.”

Source: Craig Tor­res, Bloomberg, August 17, 2009.

Asha Ban­ga­lore (North­ern Trust): Hous­ing Mar­ket Index shows note­wor­thy improve­ment
“The Hous­ing Mar­ket Index (HMI) of the National Asso­ci­a­tion of Home Builders rose to 18 in August from 17 in the prior month. The level of the HMI is the high­est since June of 2008. The cycle low for the index (8.0) was recorded in Jan­u­ary 2009.

“The index mea­sur­ing cur­rent sales of new single-family homes held steady at 16. But, the index mea­sur­ing sales of home six months ahead rose to 30 in August from 26 in the prior month. The cycle low for this index was 15 in Feb­ru­ary 2009. The index track­ing traf­fic of prospec­tive buy­ers of new homes moved up to 16 in August from 13 in the prior month. The cycle low for this index was 7 in Decem­ber 2008. The main con­clu­sion from this report is that the mar­ket for new homes is recovering.”

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

Asha Ban­ga­lore (North­ern Trust): Home con­struc­tion is recov­er­ing, albeit at a slow pace
“Starts of new single-family homes increased 1.7% in July to an annual rate of 490,000, the fifth con­sec­u­tive monthly gain. The cycle low was 357,000, the low­est on record for the data series which goes back to Jan­u­ary 1959. Region­ally, starts were strong in the Mid­west (+12.9%) but fell in the North­east (-16.3%), South (-1.4%) and West (-1.6%). Multi-family starts dropped 13.3% in July.

“On a year-to-year basis, starts of new single-family homes fell 20.4% in July, the small­est drop since April 2007.

“The level of hous­ing starts and the year-to-year trend indi­cate that the con­struc­tion of new homes has posted a bot­tom. A robust recov­ery is sev­eral months ahead.”

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

Asha Ban­ga­lore (North­ern Trust): Sales of exist­ing homes advance, inven­to­ries flat, and prices falling less rapidly
“Sales of all exist­ing homes rose 7.2% to an annual rate of 5.24 mil­lion units dur­ing July, mark­ing the fourth con­sec­u­tive monthly gain. Pur­chases of exist­ing single-family homes increased 6.5% to an annual rate of 4.61 mil­lion units. Sales of exist­ing single-family homes have now risen 13.8% from the record low of 4.05 mil­lion units in Jan­u­ary 2009. The $8,000 tax credit is believed to have con­tributed to the increase sales of exist­ing homes.

“The median price of an exist­ing single-family home dropped 2.0% in July from the prior month to $178,300. The median sales price of an exist­ing single-family home is down 14.7% from a year ago. This rep­re­sents an improve­ment from the record 16.9% drop recorded in April of 2009.

“Sea­son­ally adjusted inven­to­ries of exist­ing single-family homes were vir­tu­ally flat (8.24 months sup­ply) com­pared with the sit­u­a­tion in June (8.26 months sup­ply). The peak of the inventories-sales ratio occurred in Jan­u­ary 2009 (13.3 months). The median inventories-sales ratio is 7.2-month sup­ply, which implies that the inven­to­ries sales ratio needs to make a sig­nif­i­cant break­through to match the his­tor­i­cal median. In sum, the hous­ing sec­tor con­tin­ues to present a frag­ile recov­ery, at the least.”

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

Finan­cial Times: Mount­ing job­less­ness fuels US hous­ing cri­sis
“More than one in every eight home­own­ers with a mort­gage was behind on home loan pay­ments or in some stage of fore­clo­sure at the end of the sec­ond quar­ter, as mount­ing unem­ploy­ment aggra­vated the hous­ing cri­sis, the Mort­gage Bankers Asso­ci­a­tion said on Thursday.

“The per­cent­age of loans that were in fore­clo­sure or at least one pay­ment past due rose to 13.16%, the high­est increase since the MBA began keep­ing records in 1972 and a jump of more than a per­cent­age point since the first quarter.

“Jay Brinkmann, chief econ­o­mist at the MBA, said signs were grow­ing that mort­gage per­for­mance is being affected more by unem­ploy­ment than by the struc­ture of risky home loans, indi­cat­ing a new stage in the fore­clo­sure cri­sis that may not be eas­ily addressed by gov­ern­ment loan mod­i­fi­ca­tion programmes.

“While the pro­por­tion of fore­clo­sures started on bor­row­ers with sub­prime adjustable-rate mort­gages fell dra­mat­i­cally in the sec­ond quar­ter, fore­clo­sure starts on tra­di­tional prime fixed-rate loans saw a dra­matic increase. Prime fixed-rate loans accounted for one in three fore­clo­sure starts at the end of the sec­ond quar­ter. A year ago they accounted for one in five.

“‘There has been a shift in the prob­lem from one dri­ven by the types of loans to one dri­ven by macro prob­lems in the econ­omy and drops in house prices,’ said Mr Brinkmann.

“Mr Brinkmann said “it is unlikely we will see mean­ing­ful reduc­tions in the fore­clo­sure and delin­quency rates until the employ­ment sit­u­a­tion improves”. Mr Brinkmann expects the peak in fore­clo­sures to lag the peak in unem­ploy­ment by around 6 months.”

Source: Saskia Scholtes, Finan­cial Times, August 20, 2009.

The Wall Street Jour­nal: Sour­ing prime loans com­pound mort­gage woes

Source: Nick Timi­raos, The Wall Street Jour­nal, August 21, 2009.

CNBC: Shiller — there could be another hous­ing bubble

Source: CNBC, August 19, 2009.

Bloomberg: Com­mer­cial prop­erty val­ues fall as rent drop fore­cast
“Com­mer­cial real estate val­ues in the US fell 27% in the year through June and rents for offices, shops and ware­house space may con­tinue to drop through 2010 as the reces­sion saps jobs and con­sumer spending.

“The Moody’s/REAL Com­mer­cial Prop­erty Price Indices fell 1% in June and are down 36% from their Octo­ber 2007 peak, Moody’s Investors Ser­vice said in a report today. A rebound isn’t likely until the sec­ond half of next year, the National Asso­ci­a­tion of Real­tors fore­cast in a sep­a­rate report.

“Unem­ploy­ment of 9.4%, falling indus­trial pro­duc­tion and a drop in con­sumer spend­ing curbed prop­erty demand, NAR said. Falling rental income and scarce credit are hurt­ing both land­lords and investors in secu­ri­ties backed by com­mer­cial prop­erty loans.

“‘It’s too soon to call the bot­tom,’ said Con­nie Petruzziello, a Moody’s ana­lyst and co-author of the com­mer­cial prop­erty price report.

“The 1% drop in Moody’s index is the small­est monthly decline since Feb­ru­ary, when it fell by 0.6%. The mea­sure fell more than 7% in both April and May.”

Source: David Levitt and John Git­tel­sohn, Bloomberg, August 19, 2009.

The Wall Street Jour­nal: Reluc­tant shop­pers hold back recov­ery
“Major retail­ers reported that Amer­i­can con­sumers are con­tin­u­ing to hun­ker down, cast­ing a cloud over the dura­bil­ity of the US recov­ery and under­scor­ing the impor­tance of over­seas demand in restor­ing the world econ­omy to health.

“Amer­i­can con­sumers appear so shaken by the worst reces­sion since the Great Depres­sion — and so pinched by unem­ploy­ment, stag­nant wages and stingier lenders — that they are rein­ing in spend­ing on all but basics. Econ­o­mists also see an upturn in US house­hold sav­ing as the begin­ning of a pro­longed period of thrift.

“The retail­ers’ reports serve as a reminder that it will be con­sumers, fore­most, who will fuel a sus­tained US recov­ery. Con­sumer spend­ing accounts for about 70% of all demand in the US economy.

“Most econ­o­mists expect growth to resume in the sec­ond half of this year at a mod­est pace, as US busi­nesses rebuild depleted inven­to­ries and the hous­ing mar­ket sta­bi­lizes. Econ­o­mists who see a second-half rebound point to a global-manufacturing revival and recent reports that the economies of France, Ger­many and Japan man­aged to expand in the sec­ond quarter.

“But US con­sumers could be the coun­ter­weight. In a sur­vey of econ­o­mists this month, The Wall Street Jour­nal asked if a sub­stan­tial increase in con­sumer spend­ing was needed for sus­tained growth. Of the 43 econ­o­mists who responded, 60% said yes.”

Source: Ann Zim­mer­man and Sara Mur­ray, The Wall Street Jour­nal, August 19, 2009.

Yahoo Finance: Top “Cash for Clunk­ers” trade-ins and new cars
“The Top Ten ‘Cash for Clunk­ers’ Trade-Ins:

1. 1998 Ford Explorer
2. 1997 Ford Explorer
3. 1996 Ford Explorer
4. 1999 Ford Explorer
5. Jeep Grand Chero­kee
6. Jeep Chero­kee
7. 1995 Ford Explorer
8. 1994 Ford Explorer
9. 1997 Ford Wind­star
10. 1999 Dodge Caravan

“The Top Ten ‘Cash for Clunk­ers’ New Cars:

1. Ford Focus
2. Honda Civic
3. Toy­ota Corolla
4. Toy­ota Prius
5. Ford Escape
6. Toy­ota Camry
7. Dodge Cal­iber
8. Hyundai Elantra
9. Honda Fit
10. Chevy Cobalt”

Source: Sean Tucker, Yahoo Finance, August 19, 2009.

BCA Research: US core infla­tion finally break­ing down
“Dis­in­fla­tion and pos­i­tive real GDP growth in the sec­ond half of the year should pro­vide a pos­i­tive macro back­drop for the equity market.

“The resilience of core CPI infla­tion to reces­sion­ary con­di­tions appears to be grad­u­ally break­ing down (core infla­tion fell to 1.5% in July). It has been some­what dis­con­cert­ing that core infla­tion has been sticky, although this has been partly due to spe­cial fac­tors such as tobacco tax hikes. Nonethe­less, the chart shows that in past cycles most of the decline in infla­tion occurs after the reces­sion ends, as eco­nomic slack affects infla­tion with a sig­nif­i­cant lag. Thus, the cycli­cal dis­in­fla­tion­ary phase is likely just get­ting started.

“Mod­er­at­ing labor cost growth and falling import prices high­light that “cost-push” infla­tion pres­sure is low and still eas­ing. Com­mod­ity prices have increased, but there is lit­tle chance of this being passed on into con­sumer prices given the yawn­ing out­put gap.

“Lower core infla­tion will help to con­tain long-term infla­tion expec­ta­tions and make it eas­ier for the Fed to keep the long end of the Trea­sury curve from ris­ing pre­ma­turely (i.e. before the econ­omy can han­dle higher rates). Thus the macro back­drop should be pos­i­tive for riskier asset classes such as equi­ties in the com­ing quarters.”

Source: BCA Research, August 18, 2009.

Eoin Treacy (Fuller­money): Avoid­ing infla­tion­ary out­comes
“All of the debt that has been built up over the last decade will even­tu­ally be paid down in one shape or form. Increas­ing the government’s por­tion of the total is help­ing to trans­fer some of the bur­den from the pri­vate sec­tor. At the same time, quan­ti­ta­tive eas­ing is effec­tively dilut­ing the value of the cur­rency that debt is denom­i­nated in.

“House­hold­ers are rely­ing on the suc­cess of these poli­cies to reignite eco­nomic growth and in so doing, help them pay down their debt. Higher sav­ings, lower expen­di­ture, more taxes, smaller gov­ern­ment and an absence of for­eign wars would all help ease the bur­den of debt but are unlikely to pro­vide the kind of stim­u­lus that would see GDP back up in the pre-crisis 3% range.

“Faced with the unpalat­able options of rais­ing taxes and cut­ting expen­di­ture or inflat­ing the prob­lem away, politi­cians have always favoured incor­po­rat­ing the lat­ter in their solu­tions. Mon­e­tary author­i­ties will con­tinue to attempt to adjust the amount of liq­uid­ity to com­pli­ment the Veloc­ity of Money regard­less of other solutions.

“M2 surged in the last cou­ple of years as the Veloc­ity of Money plunged, ensur­ing the mar­ket remained liq­uid. How­ever, Veloc­ity of M2 edged upwards in June for the first time in a year. Con­se­quently M2 expan­sion paused, ensur­ing that the mul­ti­ple retains its tra­jec­tory. The advance in the Veloc­ity of M2 is not yet enough to sug­gest recov­ery, fur­ther improve­ment is nec­es­sary to sug­gest such an out­come. (One should bear in mind that this is a lag­ging indi­ca­tor by def­i­n­i­tion.) How­ever, as long as these mea­sures con­tinue to be man­aged so that the mul­ti­ple does not accel­er­ate, infla­tion­ary fears are likely to be under con­trol. How­ever, a num­ber of fac­tors could upset this bal­anc­ing act.

“Poten­tial issues will arise when the econ­omy begins to recover because by def­i­n­i­tion, Veloc­ity of Money will begin to advance. Money Sup­ply would have to tighten in this sce­nario if infla­tion is be kept under con­trol but the debt bur­den will still be high and con­se­quently con­sumer con­fi­dence will be frag­ile. Argu­ments for retain­ing the stim­u­lus in this envi­ron­ment will be for­mi­da­ble but would serve to stoke infla­tion­ary pres­sures over the medium term.

“Surg­ing com­mod­ity prices, as we saw last year, are another poten­tial obsta­cle. A sec­u­lar bull mar­ket in com­mod­ity prices, dri­ven by a ris­ing cost of pro­duc­tion and increas­ing global per capita con­sump­tion is likely to pro­duce peri­ods when infla­tion­ary pres­sures become more prob­lem­atic. The nor­mal mon­e­tary response would be to raise rates and reduce Money Sup­ply. How­ever, this may be highly con­tro­ver­sial if eco­nomic growth remains weak, as is likely to be the case in the medium term.

“Another poten­tial imped­i­ment would be if the US dol­lar were to come under sus­tained sell­ing pres­sure. This could be in response to domes­tic fac­tors but is just as likely to reflect the rel­a­tive per­for­mance of the US econ­omy with that of its largest trad­ing part­ners. Right now, most of the world’s major economies are strug­gling to return to growth but those with less of a prob­lem with excess lever­age and debt are at a com­pet­i­tive advan­tage. Just how big this is will become evi­dent over the com­ing years and the dol­lar could be a medium-term vic­tim. Of course, in such a sce­nario, a sharply weaker cur­rency would even­tu­ally help to sup­port man­u­fac­tur­ing and restore the USA’s lost competitiveness.

“In the short-term, infla­tion in the broad sense is not a prob­lem. Defla­tion­ary pres­sures pre­dom­i­nate in wages, hous­ing and retail. Infla­tion­ary pres­sures remain in pub­lic ser­vices and poten­tially in com­mod­ity prices. The oppor­tu­nity remains to put poli­cies in place that help to avoid an infla­tion­ary out­come to the credit cri­sis but one can be jus­ti­fied in ques­tion­ing if the polit­i­cal will exists to imple­ment what will surely by unpop­u­lar decisions.”

Source: Eoin Treacy, Fuller­money, August 19, 2009.

Bespoke: Record low PPI
“In a reminder that the cur­rent eco­nomic sit­u­a­tion is far from nor­mal, today’s [Tues­day] year/year change in the PPI (pro­ducer price index) came in at a record low of neg­a­tive 6.8%. This is the low­est read­ing for the PPI going back to 1949, eas­ily eclips­ing the prior record low of –5.2% in August 1949.”

Source: Bespoke, August 18, 2009.

Bloomberg: Scholes, Mer­ton says banks should value assets bet­ter
“Myron Scholes and Robert Mer­ton shared the 1997 Nobel price for eco­nom­ics, and they are now united in call­ing for banks to give more accu­rate val­u­a­tions on their illiq­uid assets.

“Finan­cial insti­tu­tions should use mark-to-market account­ing or list the hard-to-value secu­ri­ties on pub­lic exchanges when­ever pos­si­ble, Scholes said in a Bloomberg Radio inter­view yes­ter­day. Scholes, win­ner of the Nobel with Mer­ton for help­ing invent a model for pric­ing options, said investors need bet­ter data on prices to accu­rately value the debt and equity secu­ri­ties of banks.

“‘I’d like to see us encour­age many more secu­ri­ties held on the books of the banks be migrated to exchanges if pos­si­ble,’ he said. Doing so would ‘allow for mar­ket dis­cov­ery and mar­ket pric­ing as much as pos­si­ble,’ Scholes added.

“Banks that oppose new account­ing stan­dards on asset val­ues want to con­ceal depressed prices, Mer­ton wrote in the Finan­cial Times yes­ter­day. He com­posed the col­umn with Robert Kaplan, a pro­fes­sor at the Har­vard Busi­ness School along with Mer­ton, and Scott Richard, a pro­fes­sor at the Uni­ver­sity of Pennsylvania’s Whar­ton School.

“‘This is not the way for­ward,’ they wrote. ‘While reg­u­la­tors and leg­is­la­tors are keen to find sim­ple solu­tions to com­plex prob­lems, allow­ing finan­cial insti­tu­tions to ignore mar­ket trans­ac­tions is a bad idea.’”

Source: Jeff Kearns, Bloomberg, August 19, 2009.

Clus­ter­stock: Credit may crunch again before get­ting back to nor­mal
“It would be very unusual if we emerged from a credit cri­sis with a sim­ple V-shaped recov­ery. (Or A-shaped if we think in terms of credit spreads)

“Going back to the Great Depres­sion, we expe­ri­enced a few sucker’s ral­lies before credit mar­kets ulti­mately nor­mal­ized. As this chart from Econom­pic Data shows, while credit spreads have recov­ered from their recent spike, they may still get worse before get­ting better.”

Source: Vin­cent Fer­nando, Clus­ter­stock — Busi­ness Insider, August 19, 2009.

Finan­cial Times: Bond issuance bursts through $1,000 bil­lion
“Global cor­po­rate bond issuance has risen above the $1,000 bil­lion mark — the first time it has bro­ken through this thresh­old in a sin­gle year — with four months remain­ing of 2009.

“The boom is because of the dif­fi­culty com­pa­nies face in obtain­ing bank loans and strong demand from investors, who can gain a big yield pick-up on cor­po­rate paper com­pared with gov­ern­ment bonds.

“Investors have switched more of their cash into cor­po­rate bonds because they offer bet­ter returns than the low inter­est rates on bank deposits and sav­ings accounts.

“Cor­po­rate bond issuance has risen to $1,103 bil­lion so far this year, beat­ing the annual record of $898 bil­lion in 2007, accord­ing to Dealogic, the data provider.

“The jump in issuance has been seen in dol­lar, euro, yen and sterling-denominated deals.

“Vol­umes in dol­lar, euro and ster­ling have risen to record annual highs, only eight months into the year, while vol­umes in yen are close to record levels.

“Of the $1,103 bil­lion raised this year, $989 bil­lion, or 90%, has been in investment-grade bonds, with 30% issued by com­pa­nies in the util­i­ties and oil and gas sectors.”

Source: David Oak­ley and Ed Ham­mond, Finan­cial Times, August 18, 2009.

Finan­cial Times: Cor­po­rate bond defaults hit record
“The num­ber of com­pa­nies default­ing on their debts has risen to record lev­els this year, accord­ing to Stan­dard & Poor’s, while invest­ment returns for risky cor­po­rate debt have sky­rock­eted since January.

“S&P said 201 bor­row­ers with $453.1 bil­lion in debt have defaulted this year, exceed­ing the 126 defaults for all of 2008, which com­prised debt worth $433 billion.

“It also sur­passed the num­ber of defaults from the com­pa­ra­ble period in 2001, the pre­vi­ous worst year on record.

“‘Reces­sion­ary eco­nomic con­di­tions and ongo­ing uncer­tainty in the finan­cial mar­kets are push­ing the num­ber of cor­po­rate casu­al­ties higher,’ said S&P.

“The defaults have not stopped spec­u­la­tive debt from being this year’s best per­form­ing sec­tor for investors as they look instead to a vir­tu­ous cycle that enables more finan­cially strapped com­pa­nies to refi­nance as the mar­ket ral­lies, a sce­nario that por­tends lower future defaults.

“‘The num­ber of defaults is impres­sive but, on an absolute month-to-month basis, it has been com­ing down steadily,’ said Mar­tin Frid­son, chief exec­u­tive of Frid­son Invest­ment Advi­sors. ‘It makes sense that the mar­ket has been ral­ly­ing since then.’ He added: ‘The vir­tu­ous cycle is a func­tion of the high-yield new issue mar­ket reopen­ing in response to the increased con­fi­dence in credit that pro­vides the bridge for com­pa­nies to get over any near-term matu­ri­ties that could threaten their solvency.’

“US high-yield debt has gen­er­ated a return of nearly 40% so far this year, out­strip­ping the 10% rise in equi­ties, while pan-European high yield is up 63%, accord­ing to data from Bar­clays Capital.”

Source: Michael Macken­zie and Nicole Bul­lock, Finan­cial Times, August 19, 2009.

Mon­eyNews: Huss­man — investors guz­zling Kool Aid
“John Huss­man says if you look care­fully at the eco­nomic data that shows improve­ment, and adjust it to reflect the impact of gov­ern­ment out­lays, it’s hard to see any­thing other than con­tin­ued dete­ri­o­ra­tion in pri­vate demand and investment.

“‘What we do see is a gov­ern­ment that has run what is now a tril­lion dol­lar deficit year-to-date, rep­re­sent­ing some 7% of GDP,’ Huss­man writes in a note to investors.

“‘That sort of tab will undoubt­edly buy some amount of Kool-Aid, but it has been some­thing of a dis­ap­point­ment to watch how eagerly investors have guz­zled it down.’

“It is not at all clear that short-term, deficit-financed improve­ment spells eco­nomic growth, Huss­man notes. ‘This is like some­body bor­row­ing money from their Uncle and then cel­e­brat­ing that their income has gone up,’ he says.

“And while imag­in­ing a return to 2007 S&P 500 returns is pleas­ant, Huss­man points out that investors should remem­ber that those highs were based on profit mar­gins about 50% above his­tor­i­cal norms, com­bined with an ele­vated P/E mul­ti­ple of about 19 against those earnings.

“‘Even if the econ­omy is poised for a sus­tained recov­ery here, the belief that those joint out­liers will be quickly re-established goes against his­tor­i­cal prece­dent,’ Huss­man says.

“Recent data dulled hopes for a consumer-led US recov­ery, a trend some fore­cast­ers see as part of the ‘new nor­mal’ economy.

“Mar­kets need to get used to ‘a world with­out the US con­sumer as last resort’, Alan Ruskin, chief inter­na­tional strate­gist at RBS Secu­ri­ties told Reuters.”

Source: Julie Craw­shaw, Mon­eyNews, August 17, 2009.

Bespoke: China falls down the coun­try per­for­mance list
“Just a cou­ple of weeks ago, China was rid­ing high as the top dog in terms of global stock mar­ket per­for­mance in 2009. After a 20% decline in a mat­ter of days, China is now just the third best per­form­ing BRIC (Brazil, Rus­sia, India, China) coun­try year to date. Rus­sia is up 57.24% year to date, India is up 53.51%, and China is up 52.99%. But it could be worse for China. At least they’re not down 50% year to date like Ghana.

“You can tell how much China has sold off ver­sus the rest of the world by look­ing at its per­cent­age from its 50-day mov­ing aver­age. China is one of just five coun­tries that are up year to date and cur­rently trad­ing below their 50-day mov­ing aver­ages, and it is the sec­ond fur­thest below its 50-day (-10.34%) out of all coun­tries behind only Nige­ria (-11.97%).”

Source: Bespoke, August 19, 2009.

Jing Ulrich (JPMor­gan): Cor­rec­tion for Shang­hai
“The 17% slide in the Shang­hai Com­pos­ite index since August 4 is mainly a ‘phase of cor­rec­tion’ soon to run its course, says Jing Ulrich, chair­man of China equi­ties and com­modi­ties at JPMorgan.

“‘The recent sell­ing has been fuelled by con­cern about immi­nent pol­icy tight­en­ing and stretched val­u­a­tions,’ she says. ‘Eco­nomic data for July were rea­son­ably strong, but a sharp fall in bank lend­ing has stoked fears that liq­uid­ity could dry up in the sec­ond half.’

“Ms Ulrich believes bank lend­ing will mod­er­ate this year but says this reflects the sea­sonal ten­dency of banks to front-load new loans. ‘Liq­uid­ity con­di­tions will remain favourable, as author­i­ties may accel­er­ate mutual fund approvals and insur­ance and pen­sion funds could step up their equity purchases.’

“Offi­cial pledges to stick to a proac­tive fis­cal pol­icy and mod­er­ately loose mon­e­tary pol­icy are believ­able, given the chal­leng­ing out­look for exports and con­tin­ued defla­tion, she says. ‘We believe the A share mar­ket will resume its upward tra­jec­tory after this period of correction.

“‘Since April, the share of demand deposits as a pro­por­tion of total house­hold deposits has risen, sug­gest­ing investors are favour­ing liq­uid sav­ings prod­ucts in antic­i­pa­tion of pos­si­ble invest­ments. Last month the num­ber of new indi­vid­ual stock trad­ing accounts reached the high­est since late 2007.’”

Source: Jing Ulrich, (JPMor­gan via Finan­cial Times), August 17, 2009.

Yahoo Finance, Tech Ticker: Pro­fes­sion­als are buy­ing the stock mar­ket rally
“After start­ing the week with a big knock, the stock mar­ket has resumed its ral­ly­ing ways, with the Dow clos­ing above 9300 on Thurs­day while the S&P again sur­passed the 1000 level.

“Pro­fes­sional money man­agers are buy­ing into the rally in a big way, accord­ing to a Mer­rill Lynch Sur­vey of Fund Managers:

• 75% believe the world econ­omy will improve in the next 12 months. That’s the high­est level in nearly six years and up from 63% in July.
• Aver­age cash bal­ances have fallen to 3.5%, the low­est since July 2007.
• 34% of man­agers sur­veyed are now over­weight stocks, the high­est since Oct. 2007.
• Risk appetite is also increas­ing, to the high­est lev­els in two years.

“The con­trar­ian in you prob­a­bly thinks that sig­nals a mar­ket top. But Barry Ritholtz, CEO of FusionIQ and author of Bailout Nation, isn’t ready to call an end to the move. ‘We’ve worked off lots of that over­sold con­di­tion,’ he admits, but that doesn’t mean the rally can’t con­tinue for some time.

“Ritholtz, who told Tech Ticker in early March we were in for a mon­ster rally, has 1,050–1,080 as an upside tar­get for the S&P 500, with a slight chance it can go as high as 1,200. If the rally does extend to those outer lim­its, Ritholtz sees the Dow top­ping out ’some­where around 12,000′.

“Regard­less of your posi­tion, long or short, Ritholtz’s key mes­sage is to remain cau­tious. ‘This is a trad­ing rally not a multi-year rally,’ he says. Even­tu­ally something’s got to give: ‘We’ve never had six-month period before where we’ve lost two mil­lion jobs and the market’s gained 50%,’ he says. ‘That’s sim­ply unprecedented.’”

Source: Yahoo Finance, Tech Ticker, August 21, 2009.

Barron’s: Is the mar­ket fore­cast­ing a Sep­tem­ber storm?
“Cer­tain indi­ca­tors are warn­ing that the stock mar­ket is in for a tur­bu­lent Sep­tem­ber. But are too many investors already bet­ting that way? Barron’s Mike San­toli reports.”

Source: Barron’s, August 17, 2009.

Eoin Treacy (Fuller­money): Cur­rent stock mar­ket advance is matur­ing
“From the point of view of an insti­tu­tional asset man­ager, one would have to be con­vinced of the out­right fail­ure of every stim­u­lus mea­sure not to have begun to shift cash back into the mar­ket since March. With stock mar­ket indices mov­ing higher, the risk of sig­nif­i­cantly under­per­form­ing one’s bench­mark is a real pos­si­bil­ity with only four-months left in the year. Man­agers could, to a cer­tain extent, have claimed ‘force majeure’ when one con­sid­ers the speed and extent of the decline expe­ri­enced last autumn, but choos­ing to remain un-invested as stock mar­kets rally over a sus­tained period is dif­fi­cult to excuse.

“At the begin­ning of any new bull mar­ket, dis­be­lief is the pre­dom­i­nant emo­tion because bear­ish argu­ments can be eas­ily jus­ti­fied and we are often scarred by our most recent expe­ri­ence. As per­for­mance improves, bear­ish argu­ments become less con­vinc­ing against the back­ground of strong per­for­mance. This is char­ac­terised as the ‘wall of worry’ stage.

“Cash is a less than attrac­tive asset right now, but anec­do­tal evi­dence sug­gests that many investors are wait­ing for an oppor­tune moment to buy. The process by which investors move out of cash and into rel­a­tively risky assets is what fuels a bull mar­ket. When we have reached the next occa­sion when investors are fully invested the per­cep­tion of risk will be lower but we will be closer to the next impor­tant peak.

“In the short-term, most mar­kets have ral­lied impres­sively from the July lows and lost momen­tum in late July. China has had the largest decline but is now see­ing more two-way action. Most other mar­kets have been more san­guine, with a small num­ber con­tin­u­ing to post new highs.

“In con­clu­sion, the last three days has seen some con­sid­er­able firm­ing in a wide num­ber of stock mar­kets, with a num­ber of impor­tant indices mov­ing to new high ground. Pull­backs in a large num­ber of oth­ers have so far been lim­ited to small reac­tions. How­ever, the cur­rent advance is matur­ing and trad­ing has become chop­pier of late. Nev­er­the­less, failed upside breaks or larger reac­tions, where applic­a­ble, are now needed to indi­cate that the expected larger reac­tion is unfolding.”

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

Mon­eyNews: El-Erian — stock rally has hit a wall
“Mohamed El-Erian, the chief exec­u­tive of top bond fund man­ager PIMCO, on Tues­day said the rally in US stocks had topped out because val­u­a­tions have shot up too quickly.

“Asked if US stocks have hit a wall, El-Erian told Reuters Tele­vi­sion: ‘I think we have, and I think what you are see­ing is a mas­sive tug of war going on.’

“‘On the one hand, push­ing stocks higher are pow­er­ful tech­ni­cals, the fact that very low yields on the front end have pushed cash out of the money mar­ket seg­ment and into the risk assets,’ El-Erian said. ‘But on the other hand, the fun­da­men­tals are such that val­u­a­tions are ahead of fun­da­men­tals. What you have seen over the last cou­ple of days is a recog­ni­tion that fun­da­men­tals matter.’

“El-Erian, who over­sees $850 bil­lion in assets for Pacific Invest­ment Man­age­ment Co, includ­ing equi­ties, said US stock mar­kets have been on a ’sugar high’ as recent cor­po­rate earn­ings have sur­passed expec­ta­tions. But for the most part prof­itabil­ity has been dri­ven by cut­backs in lay­offs and cap­i­tal spend­ing, he said.

“More­over, the nascent eco­nomic recov­ery in the United States faces mas­sive head­winds, includ­ing high unem­ploy­ment, which trans­lates into a vul­ner­a­ble con­sumer, and weak pri­vate demand.

“Pimco has reduced risk in its port­fo­lio as the rally has ‘gone too far’, El-Erian said, adding the firm has been a net seller of mort­gage debt over the past few weeks.”

Source: Mon­eyNews, August 18, 2009.

Forbes: This recov­ery is no sugar high
“Just two months ago, the con­sen­sus among econ­o­mists was that we would not see any sig­nif­i­cant eco­nomic growth until the end of this year, and that what­ever growth we did see would be tepid, at least through the end of 2010.

“Now, with a plethora of eco­nomic reports show­ing a recov­ery has prob­a­bly already begun — falling unem­ploy­ment claims, ris­ing hous­ing starts, grow­ing exports and Monday’s Empire State man­u­fac­tur­ing index — the con­ven­tional wis­dom appears to have piv­oted. Fore­casts for sec­ond half growth have been increased. But, for the most part, this is a tem­pered opti­mism. Con­ven­tional wis­dom is say­ing, ‘All right Wes­bury and Stein, it looks like you were right about the V-shaped recov­ery, but it can’t last, it will even­tu­ally look like a square-root — a V fol­lowed by a plateau.’

“One the­ory sup­port­ing this view is that the inven­tory cycle will add to growth in the near term, but delever­ag­ing and a weak job mar­ket will not allow this to build into a sus­tained recovery.

“Obvi­ously, we dis­agree. Easy mon­e­tary pol­icy must show up some­where. While we do not always know where it will show up, in the next year or two a shrink­ing trade deficit, a turn­around in home build­ing and a revival in busi­ness invest­ment and con­sump­tion will all help eco­nomic growth continue.

“A sec­ond the­ory sug­gests that any recov­ery in growth we are see­ing right now is due to gov­ern­ment stim­u­lus spend­ing. This stim­u­lus is expected to level out and there­fore, the the­ory goes, it will no longer boost eco­nomic activity.

“But fed­eral stim­u­lus has lit­tle or noth­ing to do with the recov­ery. In fact, we count it as a head­wind — the more gov­ern­ment spends, the more it crowds out pri­vate invest­ment and eco­nomic activ­ity. Mean­while, the threat of a major expan­sion in gov­ern­ment power, into health care and car­bon emis­sions, has also hurt prospects for growth.

“The real forces behind the recov­ery have been easy money, an end to the post-Lehman Broth­ers panic and the FASB’s cor­rec­tion of mark-to-market account­ing rules.

“While easy money can be thought of as a tem­po­rary pos­i­tive — a sugar high, the end of panic and changes in mark-to-market account­ing are more fun­da­men­tal. What they do is take Armaged­don off the table. As a result, the econ­omy and the stock mar­ket can reflect the con­tin­ued impact of tech­nol­ogy and pro­duc­tiv­ity. Our stock mar­ket model sug­gests fair value is sub­stan­tially above cur­rent lev­els, even if inter­est rates rise as we are fore­cast­ing over the next few years.

“The way we see it, those who were pes­simistic about stocks and the econ­omy early this year are going through the clas­sic five stages of grief. First, they denied a recov­ery was going to hap­pen any­time soon. Then they lashed out with anger at those who spot­ted signs of the recov­ery. Now, they are bar­gain­ing, admit­ting the exis­tence of the recov­ery that they did not see com­ing, but belit­tling it. Next, as things keep mov­ing up, we can expect them to get depressed. We don’t expect accep­tance to fully set in until late next year.”

Source: Brian Wes­bury and Robert Stein, Forbes, August 18, 2009.

Tele­graph: RBS über-bear issues fresh alert on global stock mar­kets
“Britain’s Über-bear is growl­ing again. After pre­dict­ing a tor­rid ‘relief rally’ over the early sum­mer, Bob Jan­juah at Royal Bank of Scot­land is advis­ing clients to take prof­its in global equity and com­mod­ity mar­kets and pre­pare for another storm as win­ter nears.

“‘We are now in the mid­dle of a par­a­bolic spike up,’ he said in his lat­est con­fi­den­tial note to clients.

“‘I expect this risk rally to con­tinue into — and maybe through — a large part of August. What hap­pens after that? The next ugly leg of the bear mar­ket begins as we get into the July through Sep­tem­ber ‘tip­ping zone’, dri­ven by the fail­ure of the data to val­i­date the V (shaped recov­ery) that is now fully priced into markets.’

“The key indi­ca­tors to watch are busi­ness spend­ing on equip­ment (Capex), incomes, jobs, and prof­its. Only a ’surge higher’ in these gauges can jus­tify cur­rent asset prices. Results that are merely ‘less bad’ will not suffice.

“He expects global stock mar­kets to test their March lows, and prob­a­bly worse. The slide could last three months. ‘A move to new lows is highly likely,’ he said.

“Mr Jan­juah, RBS’s chief credit strate­gist, has a loyal fol­low­ing in the City. He was one of the very few ana­lysts to speak out early about the dan­ger­ous excesses of the credit bub­ble. He then made waves in the sum­mer of 2008 by issu­ing a global crash alert, giv­ing warn­ing that a ‘very nasty period is soon to be upon us’ as — indeed it was. Lehman Broth­ers and AIG imploded weeks later.

“This time he expects the S&P 500 index of US equi­ties to reach the ‘mid 500s’, almost halv­ing from cur­rent lev­els near 1,000. Such a fall would take London’s FTSE 100 to around 2,500. The iTraxx Crossover index mea­sur­ing spreads on low-grade Euro­pean debt will dou­ble to 1,250.”

Click here for the full article.

Source: Ambrose Evans-Pritchard, Tele­graph, August 12, 2009.

Bill King (The King Report): Econ­omy and stocks are dis­con­nected
“The fol­low­ing chart from Finan­cial Sense shows how dis­con­nected the econ­omy and stocks are.”

Source: Bill King, The King Report, August 19, 2009.

Bespoke: AAII bulls drop at fastest rate since Jan­u­ary
“If there is one take­away from this week’s sen­ti­ment sur­vey by the Amer­i­can Asso­ci­a­tion of Indi­vid­ual Investors, it’s that the peo­ple who respond to the sur­vey are prone to mood swings. After one big down day on Mon­day and a gap lower on Wednes­day, this week’s sur­vey showed that the per­cent­age of bull­ish respon­dents declined from 51.0% down to 34.1% for its largest one-week decline since January.

“While many would con­sider such a large decline in bull­ish sen­ti­ment to be a con­trary indi­ca­tor, the equity market’s short-term per­for­mance (over the next week) has his­tor­i­cally been mixed. Look­ing at the 26 prior weeks where bull­ish sen­ti­ment dropped by more than 15 per­cent­age points since 2000, the S&P 500 aver­aged a move of 0.00% over the next week with pos­i­tive returns exactly half the time. You’d be just as well off flip­ping a coin.”

Source: Bespoke, August 20, 2009.

Bespoke: Mov­ing on to Q3 earn­ings
“Now that the sec­ond quar­ter earn­ings sea­son is behind us, we look ahead to the third quar­ter to see where expec­ta­tions stand. Below we high­light the con­sen­sus esti­mate for Q3 year-over-year earn­ings growth for the S&P 500 and its ten sectors.

“As shown, the Finan­cial sec­tor is expected to see earn­ings grow by a whop­ping 617.8% from Q3 ‘08 to Q3 ‘09! For those that remem­ber Q3 ‘08, it wasn’t a pretty sight for the Finan­cials, so the start­ing point shouldn’t be too tough of a num­ber to grow on. But 617.8% is still noth­ing to laugh it, and it is indica­tive of the sig­nif­i­cant turn­around the Finan­cials have seen in less than a year.

“The S&P 500 as a whole is expected to see earn­ings decline by 21.8% in the third quar­ter. Con­sumer Dis­cre­tionary is the only other sec­tor expected to see year-over-year growth in the third quar­ter. Mate­ri­als and Energy have the worst esti­mates at –69.2% and –66.7%, respectively.”

Source: Bespoke, August 18, 2009.

Bloomberg: Pimco says dol­lar to weaken as reserve sta­tus erodes
“Pacific Invest­ment Man­age­ment Co., the world’s biggest man­ager of bond funds, said the dol­lar will weaken as the US pumps ‘mas­sive’ amounts of money into the economy.

“The dol­lar will drop the most against emerging-market coun­ter­parts, Cur­tis A. Mew­bourne, a Pimco port­fo­lio man­ager, wrote in a report on the company’s web­site. The green­back is los­ing its sta­tus as the world’s reserve cur­rency, he said.

“‘Investors should con­sider whether it makes sense to take advan­tage of any peri­ods of US dol­lar strength to diver­sify their cur­rency expo­sure,’ Mew­bourne wrote in his August Emerg­ing Mar­kets Watch report. ‘The mas­sive amounts of US dol­lar liq­uid­ity pro­duced in response to the cri­sis’ have helped reduce demand for the cur­rency, he wrote.

“The Dol­lar Index, which tracks the green­back against a bas­ket of cur­ren­cies, has fallen 12% from this year’s high in March as US author­i­ties pledged $12.8 tril­lion to com­bat the reces­sion. China, the world’s largest holder of foreign-currency reserves, and Rus­sia have both called for a new global cur­rency to replace the dol­lar as the dom­i­nant place to store reserves.

“‘While we have not yet reached the point where a new global reserve cur­rency will arise, we are clearly see­ing a loss of sta­tus for the US dol­lar as a store of value even in the absence of a sin­gle viable alter­na­tive,’ Mew­bourne wrote.”

Source: Garfield Reynolds and Wes Good­man, Bloomberg, August 19, 2009.

Mon­ey­web: Jef­frey Nichols — key gold-price dri­vers
HILTON TARRANT: It’s a warm wel­come to Jeff Nichols, MD of Amer­i­can Pre­cious Met­als Advi­sors. Jeff, we’ve seen your lat­est opin­ion about the price of gold bul­lion. You are still extremely, extremely opti­mistic about the out­look for gold, call­ing a $2,000, $3,000 range. Why are you so bullish?

JEFFREY NICHOLS: Well, first let me say that this is a long-term fore­cast, and we expect gold to be mov­ing up irreg­u­larly over the next few years. But the main rea­son for the bull­ish fore­cast is a num­ber of points. No 1, we expect infla­tion in the United States and indeed in the major economies at some point to tick up, reflect­ing the very expan­sion­ary mon­e­tary pol­icy that we cur­rently have in place. I think if you look at the recent jump in gold this morn­ing and overnight, it owes a lot to the state­ment by the Fed over the last cou­ple of days that it was going to main­tain its easy mon­e­tary stance with low inter­est rates and its pol­icy of quan­ti­ta­tive eas­ing remain­ing in place for some time. And of course this means easy money and ulti­mately easy money means higher infla­tion. That’s No 1.

But what makes it espe­cially inter­est­ing is the fact that we now have these new ETFs, exchange-traded funds, which have brought hun­dreds of thou­sands of new investors into the gold mar­ket in a way that we’ve never seen before … gold invest­ments in a very impor­tant way and ETFs now already account for approx­i­mately 53 mil­lion ounces of gold hav­ing been taken off the mar­ket. And that’s quite sig­nif­i­cant and we expect that to con­tinue over the next few years.

HILTON TARRANT: Jeff, how impor­tant is the impact of jew­ellery, espe­cially look­ing at the Indian mar­ket? We know that mar­ket is very price-sensitive, but still significant.

JEFFREY NICHOLS: Yes, and jew­ellery is one of the rea­sons why gold is not now already stronger in price. First, in the US and West­ern Europe and major indus­tri­alised nations jew­ellery demand has been hit hard by the world­wide reces­sion, and the dif­fi­cult finan­cial straits that so many house­holds now find them­selves in. Not only is the man down, but we are see­ing, which is really very new, a lot of sec­ondary sup­ply, old scrap com­ing back to the mar­ket from indi­vid­u­als and house­holds that have old gold jew­ellery and are pressed for cash, and are try­ing to con­vert some of their jew­ellery into liq­uid cash. So there’s been an infra­struc­ture that has risen rather quickly. If you go into down­town Lon­don and New York you’ll see many shops with signs in the win­dow that say: ‘We buy old gold’.

HILTON TARRANT: Well, Jeff, we have seen gold quite range-bound between almost the $890 level and the $990 level for most of this year — a very nar­row band com­pared to other met­als. Do you fore­see a break­out, and what would cause a breakout?

JEFFREY NICHOLS: Well, I think we’ll see a break­out before year end. Impor­tantly the fourth quar­ter is typ­i­cally a sea­son of a pos­i­tive time for gold — a think partly because the jew­ellery sec­tor is gear­ing up for Christ­mas and jew­ellery demand tends to begin ris­ing at that point. Also the sea­son­al­ity of Indian demand is pos­i­tive begin­ning in the autumn, and those two fac­tors will make a big dif­fer­ence. But I think also the mar­ket has adjusted to the newer price level and the price points at which new sup­ply comes into the mar­ket from sec­ondary scrap or short-term investor sell­ing is mov­ing up and we’ll see gold pop in the fourth quar­ter, prob­a­bly over $1000/oz. Maybe it won’t quite hold, but when it comes back down it will set­tle at a still higher low point than we’ve seen in the last cou­ple of ups and downs.

HILTON TARRANT: Jeff Nichols is MD of Amer­i­can Pre­cious Met­als Advisors.

Source: Mon­ey­web, August 14, 2009.

Bespoke: Will oil break out or fail at resis­tance?
“At $72 and change, oil is cur­rently trad­ing at a key inflec­tion point. As shown below, oil recently bounced nicely off of the bot­tom of its uptrend chan­nel, and it is now butting up against resis­tance that formed when the com­mod­ity made its highs in June and July. If oil is able to break out above these short-term highs, there isn’t much in the way of resis­tance until the $90 mark. With oil track­ing so closely with the stock mar­ket recently, it’s highly likely that the break­out will occur if the rally in equi­ties continues.”

Source: Bespoke, August 20, 2009.

Finan­cial Times: Chi­nese com­mod­ity imports expected to slow
“Chi­nese com­mod­ity imports are expected to slow in the sec­ond half of the year from record lev­els as the impact of the country’s stim­u­lus pack­age, arbi­trag­ing oppor­tu­ni­ties and stock-piling fade, accord­ing to a Royal Bank of Scot­land report being pub­lished Monday.

“The mar­ket has been expect­ing a slow­down in Chi­nese imports for the past three months, but when data for July iron ore and crude oil imports were pub­lished last week, it showed another sharp increase to record highs.

“China’s imports of com­modi­ties includ­ing cop­per, alu­minium, coal, iron ore and crude oil surged in the first half of the year in spite of the eco­nomic slow­down, help­ing to push up world prices, which had col­lapsed in the after­math of the global crisis.

“‘China’s com­mod­ity imports reached record highs in 1H09, buoy­ing global com­mod­ity prices and con­fi­dence in China’s eco­nomic recov­ery,’ Ben Simpfendor­fer, chief China econ­o­mist for Royal Bank of Scot­land, wrote. ‘How­ever, it is less clear what share of imports was intended for final domes­tic demand.’

“One of the rea­sons behind the import rises has been a slump in domes­tic pro­duc­tion as low prices made high-cost mines uneco­nomic, par­tic­u­larly in the iron ore sec­tor. BHP Bil­li­ton, the world’s largest miner, said last week that up to 50% of China iron ore pro­duc­tion was shut down in the first half of the year.

“As com­mod­ity prices rebound, min­ers and bankers fore­cast a reverse in that trend.

“Restock­ing by China’s state com­mod­ity reserve bureau played a large part in the record import vol­umes, as did easy credit from state banks, which encour­aged some firms to buy com­modi­ties spec­u­la­tively, accord­ing to the report.”

Source: Jamil Ander­lini, Finan­cial Times, August 17, 2009.

James Pressler (North­ern Trust): Japan — the end of the lat­est reces­sion?
“In line with most of the major indus­tri­al­ized economies (with the glar­ing excep­tion of the US), the Japan­ese econ­omy posted mod­est pos­i­tive growth in Q2. The 0.9% gain breaks a four-quarter streak of eco­nomic con­trac­tion and allows politi­cians to declare the worst of the reces­sion is over. But before any­one breaks out the sake, we should take a sober­ing look at what the rest of the year holds for both the econ­omy and pol­i­cy­mak­ers alike.

“It is hard to deter­mine where pol­icy will go in the com­ing months because the Japan­ese gov­ern­ment could very well change hands. With national elec­tions on August 30, the oppo­si­tion DPJ looks set to kick the rul­ing LDP out of office and push through its own agenda. Today’s GDP indi­ca­tors are the last eco­nomic fig­ures that LDP politi­cians can trum­pet as ‘proof’ of recov­ery, and will likely not be enough to per­suade the vot­ing public.

“This being said, the DPJ is promis­ing far more pop­ulist mea­sures heavy on the pub­lic spend­ing and gen­er­ous on the tax breaks — pub­lic debt be damned — that all sound great in the short-term. If the new gov­ern­ment pushes these through quickly, it could offer a quick burst of eco­nomic stim­u­lus and sus­tain growth for another quar­ter or two. How­ever, at some point those debts will have to be paid, and the DPJ could find itself cre­at­ing yet another reces­sion in the wake of its own recovery.”

Source: James Pressler, North­ern Trust — Daily Global Com­men­tary, August 17, 2009.

Finan­cial Times: Ger­many offers hope of global recov­ery
“Europe’s biggest econ­omy offered renewed hopes for a global recov­ery on Tues­day as the Inter­na­tional Mon­e­tary Fund iden­ti­fied a ‘nascent’ but frag­ile upturn.

“Sep­a­rately, the ZEW insti­tute in Mannheim said that its closely watched sur­vey of Ger­man investor con­fi­dence had jumped by 16.6 points to 56.1 points in August, the high­est in three years.

“Also, Germany’s IAB labour mar­ket insti­tute said that the coun­try was likely to emerge from this year’s bru­tal down­turn with­out suf­fer­ing a large-scale increase in unem­ploy­ment thanks to the government’s pol­icy of sub­si­dis­ing wages.

“Olivier Blan­chard, IMF chief econ­o­mist, wrote in a paper due to be pub­lished on Wednes­day that a global recov­ery is under way but warned that US pol­i­cy­mak­ers are walk­ing a tightrope in tim­ing the end of their fis­cal stimulus.

“Mr Blan­chard said that the US con­sumer was unlikely to step in to help growth when the fis­cal stim­u­lus was removed. He indi­cated that increased US exports to sur­plus coun­tries in Asia were needed.

“But he said ‘it is clear’ that the rebal­anc­ing may not take place, ‘at least not on the scale needed’.”

Source: Tom Braith­waite, Bertrand Benoit and Ralph Atkins, Finan­cial Times, August 18, 2009.

Paul Kedrosky (Infec­tious Greed): Bei­jing car sales tick to 1,200/day
“It is stag­ger­ing the pace at which new autos are hit­ting the roads of Bei­jing, with the rate now touch­ing 1,200 a day. After pass­ing the US in terms of new car sales ear­lier this year, the cit­i­zens of China seem eager to make up for lost time in get­ting to devel­oped world lev­els of auto penetration.

“Bei­jing reported the reg­is­tra­tion of 261,000 new cars in the first seven months, or about 1,240 daily, up 9% from the same period last year.

“China’s vehi­cle sales posted a 63% year-on-year growth in July, which is usu­ally the worst period of the year for auto sales, accord­ing to fig­ures released by China Asso­ci­a­tion of Auto­mo­bile Manufacturers.”

Source: Paul Kedrosky, Infec­tious Greed, August 16, 2009.

Fox Busi­ness: IRS Com­mis­sioner on UBS set­tle­ment
“IRS Com­mis­sioner Doug Shul­man on the agree­ment from UBS to turn over the names of 4,500 Amer­i­cans hold­ing Swiss bank accounts to avoid taxes.”

Click here for the full article.

Source: Fox Busi­ness, August 19, 2009.

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Rosenberg: The recession is dead, long live the recession!

Friday, August 21st, 2009

Since join­ing Gluskin Sheff & Asso­ciates from Mer­rill Lynch a few months ago, the daily research reports from chief econ­o­mist and strate­gist David Rosen­berg have been a breath of fresh air in the world of the “dis­mal sci­ence”. His notes yes­ter­day on the typ­i­cal macro-economic envi­ron­ment preva­lent once the stock mar­ket has ral­lied by 49%, and how the cur­rent land­scape stacks up against the his­tor­i­cal aver­age, are proof of the use­ful input that has reg­u­larly been forth­com­ing from Rosen­berg. The para­graphs below are excerpts from his report.

We can under­stand that there is a grow­ing list of econ­o­mists call­ing for the end to the reces­sion, and that may or may not be the case actu­ally, judg­ing by the per­for­mance of all four ingre­di­ents that go into the NBER decision-making wheel. But let’s be char­i­ta­ble and assume that the herd is cor­rect this time around — a 49% rally from the lows and the degree of mul­ti­ple expan­sion sug­gests that the S&P 500 has gone beyond just dis­count­ing the end of the down­turn but is now embed­ding a 4.0% real GDP growth rate for the com­ing year. That is not our view, and even if it is attain­able, guess what? It’s priced in. Cor­po­rate bonds (and Trea­suries too) are dis­count­ing around a 2.0% GDP trend, which looks more realistic.

The mar­ket has turned in a per­for­mance that is dou­ble what is ‘nor­mal’ between the lows and the end of the reces­sion, and after such a rally, which is unprece­dented actu­ally, the end of the reces­sion isn’t even a debate … at this time, what is ‘nor­mal’ is that we are a full year into the next eco­nomic expan­sion. Did the econ­omy really bot­tom in August 2008? From our lens, there is always a cat­a­lyst or a spark for the next eco­nomic expan­sion and bull mar­ket. In 2003, it was lever­age and a hous­ing boom. What is it today? Cash for clunk­ers? Dig­i­tized med­ical tech­nol­ogy? Chi­nese con­sump­tion? Gov­ern­ment incur­sion into the econ­omy and cap­i­tal mar­ket? Per­haps we should also rec­og­nize that head­ing into the post-recession envi­ron­ment of 1991, there was a tail­wind from sub $20/bbl oil; and head­ing into the 2003 rebound, we had sub $30/bbl oil; so it may pay to ask the ques­tion as to how $70+ oil is going to play in the recov­ery, unless we are talk­ing about recov­er­ies in Saudi Ara­bia, Qatar and the UAE?

CHART 1: SHARPEST EQUITY MARKET RALLY EVER IN THE CONTEXT OF PRICING OUT THE RECESSION

United States: S&P 500 Com­pos­ite (% change from mar­ket trough dur­ing reces­sion to the offi­cial end of the downturn)

It could well be that all the effort the gov­ern­ment is mak­ing to stave off the decline in the record debt load the U.S. is car­ry­ing will just delay the inevitable for another day. The fact that the Fed is extend­ing TALF to buy up dis­tressed com­mer­cial real estate debt, not to men­tion financ­ing RVs and mobile homes. More­over, the Administration’s move to take over two auto com­pa­nies and then imme­di­ately offer rebates (now that the gov­ern­ment is an owner, it can do all it can in its pow­ers to rev up sales) is a sign­post that every effort is going to be made to per­pet­u­ate dis­cre­tionary spend­ing even though the boomers are not finan­cially pre­pared for retire­ment, and that every effort will be made to resist the need for the house­hold sec­tor to pare their record level of lia­bil­i­ties on their bal­ance sheets. You can­not pos­si­bly make this stuff up, but now appli­ance man­u­fac­tur­ers have suc­cess­fully lob­bied for a “cash for clunker” pro­gram of its own! See Pro­gram to Offer Appli­ance Rebates on page A3 of the WSJ — a $300 mil­lion fed­eral pro­gram to incen­tivize home­own­ers to replace old refrig­er­a­tors, air con­di­tion­ers, washer-dryers and dish­wash­ers with new “high-efficiency” units!

How­ever, the catch-22 is that not until the cul­ture of credit and con­spic­u­ous con­sump­tion has been replaced by a renewed focus on retire­ment plan­ning and finan­cial pru­dence will it be safe to call for the fun­da­men­tal lows in the mar­ket. A 49% flashy bear mar­ket rally notwith­stand­ing, we are not at some nat­ural equi­lib­rium point in the econ­omy as the Fed­eral Reserve and the gov­ern­ment have moved to can­ni­bal­ize their own bal­ance sheets as an off­set to the nec­es­sary delever­ag­ing in the pri­vate sector.

Source: David Rosen­berg, Gluskin Sheff & Asso­ciates, August 20, 2009.

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