August 23rd, 2009 by Prieur du Plessis, Investment Postcards from Cape Town

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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.

Date	Time (ET)	Sta­tis­tic	For	Actual	Brief­ing Forecast	Mar­ket Expects	Prior
Aug 17	08:30 AM	Empire Man­u­fac­tur­ing	Aug	12.08	5.00	3.00	–0.55
Aug 17	09:00 AM	Net Long-Term TIC Flows	Jun	$90.7B	NA	$17.5B	-$19.4B
Aug 18	08:30 AM	Hous­ing Starts	Jul	581K	580K	599K	587K
Aug 18	08:30 AM	Build­ing Permits	Jul	560K	565K	577K	570K
Aug 18	08:30 AM	PPI	Jul	–0.9%	–0.2%	–0.3%	1.8%
Aug 18	08:30 AM	Core PPI	Jul	–0.1%	0.1%	0.1%	0.5%
Aug 19	10:30 AM	Crude Inven­to­ries	08/14	–8.40M	NA	NA	+2.52M
Aug 20	08:30 AM	Ini­tial Claims	08/15	576K	550K	550K	561K
Aug 20	10:00 AM	Lead­ing Indicators	Jul	0.6%	0.6%	0.7%	0.8%
Aug 20	10:00 AM	Philadel­phia Fed	Aug	4.2	1.0	–2.0	–7.5
Aug 21	10:00 AM	Exist­ing Home Sales	Jul	5.24M	5.10M	5.00M	4.89M

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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Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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