Zebras vs. institutional portfolio managers

Tuesday, September 29th, 2009

The fol­low­ing anal­ogy comes from Ralph Wanger, founder of the Acorn Fund (via Bill King):

“Zebras have the same prob­lem as insti­tu­tional port­fo­lio managers.

“Firstly, both seek prof­its. For port­fo­lio man­agers above-average per­for­mance; for zebras, fresh grass.

“Sec­ondly, both dis­like risk. Port­fo­lio man­agers can get fired; zebras can get eaten by lions.

“Thirdly, both move in herds. They look alike, think alike and stick close together. If you are a zebra, and live in a herd, the key deci­sion you have to make is where to stand in rela­tion to the rest of the herd. When you think that con­di­tions are safe, the out­side of the herd is the best, for there the grass is fresh, while the mid­dle sees only grass that is half-eaten or tram­pled down. The aggres­sive zebras, on the out­side of the herd, eat much bet­ter. On the other hand — or other hoof — there comes a time when lions approach. The out­side zebras end up as lion lunch, and the skinny zebras in the mid­dle of the pack may eat less well but they are still alive.”

So much for herd men­tal­ity! But that does not nec­es­sar­ily call for going against the stream at all times. Don’t be a con­trar­ian purely for the sake of being dif­fer­ent. Do so only once you have done the nec­es­sary home­work — proper research — to sup­port your invest­ment decisions.

Source: Bill King, The King Report, Sep­tem­ber 29, 2009.

Tags: Acorn Fund, Analogy, Bill King, Dislike, Grass, Herd Mentality, Herds, Institutional Portfolio, Institutional Portfolio Managers, Investment Decisions, Lion, Lions, Necessary Homework, Profits, Ralph Wanger, Risk Portfolio, Sake, September 29, Zebra, Zebras
Posted in Markets | Comments Off

Bill Gross Investing in Long-Dated Treasuries

Tuesday, September 29th, 2009

Bloomberg reports that PIMCO's Bill Gross is exchang­ing his cor­po­rate bonds for longer-dated gov­ern­ment secu­ri­ties out of con­cern for defla­tion. This is a theme that we have writ­ten exten­sively about dur­ing the course of the year.

Bill Gross, who runs the world’s biggest bond fund at Pacific Invest­ment Man­age­ment Co., said he’s been buy­ing longer matu­rity Trea­suries in recent weeks amid a re-emergence of defla­tion concern.

“We’ve exchanged our mort­gages for the government’s check” as the Fed­eral Reserve winds down pur­chases of agency debt, Gross said in an inter­view from New­port Beach, Cal­i­for­nia, with Bloomberg Radio.

Gross boosted the $177.5 bil­lion Total Return Fund’s invest­ment in government-related bonds to 44 per­cent of assets, the most since August 2004, from 25 per­cent in July, accord­ing data released ear­lier this month on Pimco’s Web site. The fund cut mort­gage debt to 38 per­cent from 47 percent.

This is very inter­est­ing if you've been fol­low­ing Bill Gross' calls dur­ing the course of the year. Late last year and early this year, Gross was a huge investor in cor­po­rate debt, par­tic­u­lar the debt of finan­cials that received sup­port from the gov­ern­ment in the form of guar­an­tees. Gross' main the­sis was and con­tin­ues to be "Shake hands with the Gov­ern­ment." By the way, cor­po­rate debt has out­per­formed its equity peers dur­ing the course of the year, and was con­sid­ered by many large investors as the supe­rior bet given the option to invest in equi­ties. The strat­egy of buy­ing cor­po­rate debt (which was regarded as a lower risk than equi­ties ear­lier this year) is one that eluded most retail investors because the credit mar­ket is gen­er­ally per­ceived as out of reach or sophisticated.

Much of the "easy" money has already been made in cor­po­rate debt, and its likely now that investors, who are still for the most part sit­ting in record lev­els of cash, may stay there, or be lured into the equity mar­ket by the pow­er­ful rally seen the last two quarters.

If, on the other hand if you're in the same camp as Gross, that defla­tion is still some­thing to worry about, then longer dated gov­ern­ments may be the way to go. In Gross' "New Nor­mal" de-leveraging, de-globalization, and re-regulation are three dom­i­nant themes that flat­ten out the yield curve, which remains steep, and a flat­ten­ing yield curve means short term rates rise while long term rates fall. The short term rates will be a lit­tle while in ris­ing as it may be a lit­tle pre­ma­ture for the Fed to touch them, but the long term rates will come down as the mar­ket con­tin­ues down the delever­ag­ing path Gross and a few oth­ers are count­ing on, as assets get sub­sti­tuted for cash on insti­tu­tional bal­ance sheets. For the large insti­tu­tions who con­tinue to tar­get their bal­ance sheets, this 'recov­ered' equity mar­ket is a per­fect oppor­tu­nity to sell some reflated assets, and that means that a large amount of cash will be used to retire debt  and/or refi­nance Option ARM mort­gages for that matter.

Long term rates are likely to fall on this development.

Read the whole arti­cle here.

Tags: Bill Gross, Bloomberg Radio, Bond Fund, Corporate Bonds, Corporate Debt, Deflation, Easy Money, Emergence, ETF, Federal Reserve, Government Bonds, government securities, Guarantees, Investment Bonds, Investment Management, Maturity, Mortgage Debt, Newport Beach California, Pacific Investment Management Co, Peers, Retail Investors, Treasuries
Posted in ETFs, Markets, Outlook | 1 Comment »

Financial Services: Prospects for Your Future

Tuesday, September 29th, 2009

In a lively dis­cus­sion with Simon John­son (MIT Prof, for­mer Chief Econ­o­mist, IMF), Lawrence Fish (for­mer Chair­man and CEO, Cit­i­zens Finan­cial) decon­structs the near col­lapse of the bank­ing sys­tem and points out the mul­ti­ple fac­tors that have con­tributed to the finan­cial crisis.

Top­ics in the dis­cus­sion include the banks that did not fail, how Cana­dian and other coun­tries’ bank­ing sys­tems also did not fail, the polit­i­cal land­scape of bank­ing reg­u­la­tion, ethics, bonuses in the bank­ing indus­try and the ethics oath signed by 50% of the stu­dents at the Har­vard Busi­ness School.

This is a must-view video clip, but be warned that it runs for 53 minutes.

Source: MIT World, Sep­tem­ber 24, 2009 (hat tip: Infec­tious Greed).

Tags: Banking Industry, Banking Regulation, Banking System, Banking Systems, Canadian Market, Ceo, Chief Economist, Citizens, Collapse, Ethics, Financial Crisis, Financial Services, Harvard Business School, Hat Tip, Imf, Infectious Greed, Lawrence Fish, Political Landscape, Prospects, Simon Johnson, Video Clip
Posted in Markets | 1 Comment »

Fifty common mistakes traders make

Tuesday, September 29th, 2009

An inter­est­ing sur­vey has just found its way into my inbox, cour­tesy of Ratio Trad­ing. The sur­vey of more than 500 expe­ri­enced futures bro­kers asked what, in their expe­ri­ence, caused most traders to lose money. There are some rep­e­ti­tions in the list, but it is nev­er­the­less a worth­while exer­cise to give it a quick read to again remind our­selves of the many invest­ment pit­falls out there.

1. Many futures traders trade with­out a plan. They do not define spe­cific risk and profit objec­tives before trad­ing. Even if they estab­lish a plan, they “sec­ond guess” it and don’t stick to it, par­tic­u­larly if the trade is a loss. Con­se­quently, they over­trade and use their equity to the limit (are under­cap­i­tal­ized), which puts them in a squeeze and forces them to liq­ui­date positions.

Usu­ally, they liq­ui­date the good trades and keep the bad ones.

2. Many traders don’t real­ize the news they hear and read has already been dis­counted by the market.

3. After sev­eral prof­itable trades, many spec­u­la­tors become wild and aggres­sive. They base their trades on hunches and long shots, rather than sound fun­da­men­tal and tech­ni­cal rea­son­ing, or put their money into one deal that “can’t fail.”

4. Traders often try to carry too big a posi­tion with too lit­tle cap­i­tal, and trade too fre­quently for the size of the account.

5. Some traders try to “beat the mar­ket” by day trad­ing, ner­vous scalp­ing, and get­ting greedy.

6. They fail to pre-define risk, add to a los­ing posi­tion, and fail to use stops.

7 .They fre­quently have a direc­tional bias; for exam­ple, always want­ing to be long.

8. Lack of expe­ri­ence in the mar­ket causes many traders to become emo­tion­ally and/or finan­cially com­mit­ted to one trade, and unwill­ing or unable to take a loss. They may be unable to admit they have made a mis­take, or they look at the mar­ket on too short a time frame.

9. They overtrade.

10. Many traders can’t (or don’t) take the small losses. They often stick with a loser until it really hurts, then take the loss. This is an undis­ci­plined approach…a trader needs to develop and stick with a system.

11. Many traders get a fun­da­men­tal case and hang onto it, even after the mar­ket tech­ni­cally turns. Only believe fun­da­men­tals as long as the tech­ni­cal sig­nals fol­low. Both must agree.

12. Many traders break a car­di­nal rule: “Cut losses short. Let prof­its run.”

13. Many peo­ple trade with their hearts instead of their heads. For some traders, adver­sity (or suc­cess) dis­torts judg­ment. That’s why they should have a plan first, and stick to it.

14. Often traders have bad tim­ing, and not enough cap­i­tal to sur­vive the shake out.

15. Too many traders per­ceive futures mar­kets as an intu­itive arena. The inabil­ity to dis­tin­guish between price fluc­tu­a­tions which reflect a fun­da­men­tal change and those which rep­re­sent an interim change often causes losses.

16. Not fol­low­ing a dis­ci­plined trad­ing pro­gram leads to accept­ing large losses and small prof­its. Many traders do not define offen­sive and defen­sive plans when an ini­tial posi­tion is taken.

17. Emo­tion makes many traders hold a loser too long. Many traders don’t dis­ci­pline them­selves to take small losses and big gains.

18. Too many traders are under financed, and get washed out at the extremes.

19. Greed causes some traders to allow prof­its to dwin­dle into losses while hop­ing for larger prof­its.
This is really a lack of dis­ci­pline. Also, hav­ing too many trades on at one time and over­trad­ing for the amount of cap­i­tal involved can stem from greed.

20. Try­ing to trade inac­tive mar­kets is dangerous.

Click here for the full list.

Source: Ratio Trad­ing, Sep­tem­ber 4, 2009.

Tags: Committed To One, Day Trading, Directional Bias, Futures Brokers, Futures Traders, Hunches, Long Shots, Loser, Losses, Market 3, Mistake, Pitfalls, Profit Objectives, Profitable Trades, Repetitions, risk, Speculators, Squeeze, Time Frame, Worthwhile Exercise
Posted in Markets | Comments Off

Michael Moore Visits CNBC

Monday, September 28th, 2009

Michael Moore pays CNBC a visit to dis­cuss his views on the "legal­iza­tion of greed", and his new doc­u­men­tary, Cap­i­tal­ism: A Love Story. A provoca­tive inter­view in the US, but here in Canada, Moore's ideas are com­mon­place. Its a good coun­try, Canada. Let's face it, despite all of the things we com­plain about, we sure are lucky aren't we?

Accord­ing to Moore, there's a fore­clo­sure fil­ing every 7 1/2 sec­onds now in the U.S., every 1 of 8 homes is in fore­clo­sure — "There's some­thing wrong with a sys­tem that tells you to go out and make as much money as you can, any way you can, with­out ask­ing how your activ­i­ties are affect­ing your soci­ety, your country."

Click play to watch:

Tags: Canadian Market, capitalism, Cnbc, Country Canada, Face, Foreclosure, Greed, Love Story, Michael Moore, Much Money, New Love
Posted in Canadian Market, Markets | Comments Off

Mortgage Resets: Have We Been in The Eye of the Hurricane?

Monday, September 28th, 2009

We orig­i­nally pub­lished the main body of this story in mid-June this year, and are repris­ing it now as the chart below from Credit Suisse's chart is mak­ing the rounds again, given there is talk that the mon­e­tary author­i­ties are con­sid­er­ing halt­ing quan­ti­ta­tive eas­ing oper­a­tions (i.e. print­ing money). We may have got­ten through the last 6 months, thanks largely to the Fed's QE induced liq­uid­ity, which fuelled a very strong rally off the March lows. The ques­tion is, "Has it worked?"

The equity mar­ket seems to indi­cate "yes," and now it remains to be seen in the next two quar­ters if it has indeed worked.

The pass­ing of a hur­ri­cane is quite an event, and a strong one can wreak havoc. In the eye of a hur­ri­cane, there is an eerie calm, and quiet, and the sun often shines brightly. The big­ger the hur­ri­cane, the big­ger the eye. This is then usu­ally fol­lowed by a sec­ondary lash­ing as the back end of the hur­ri­cane passes. Is this what's in store for the mort­gage and credit mar­ket over the next 2 years as the bank­ing sys­tem faces its next round of resets?

Have the banks hoarded cash for this rea­son? Is it enough?

Accord­ing to sta­tis­tics pro­vided by Credit Suisse, we are in the midst of a mortgage-paper-resets lull (the space between the two humps), as seen by the chart below. Doug Short (dshort.com) has kindly added the S&P500 chart to the one pro­duced by CS. In a nut­shell, banks (and the credit mar­ket) have got­ten a much needed break from the enor­mous pres­sure of hav­ing to ensure that the liq­uid assets are avail­able for the re-financings that are in the works.

Given the size of the Option-ARM (Adjustable Rate Mort­gages) por­tion of the sched­uled resets, there is much cause for con­cern, espe­cially for the bank­ing sec­tor, and the credit mar­ket in gen­eral. This pic­ture of the mort­gage reset his­togram is rem­i­nis­cent of the pass­ing of a hur­ri­cane. The tail end of the hur­ri­cane this time includes not only the Option ARMs but also the Alt-A (bet­ter than sub­prime) mortgages.

The S&P 500 is up nearly 36% from its bear mar­ket low on March 9th. Sen­ti­ment is some­what less neg­a­tive on sev­eral fronts. Credit cri­sis indi­ca­tors, the ADP employ­ment report, bank stress test leaks, and the mar­ket rally itself have all encour­aged opti­mism that the worst is over.

Accord­ing to Wall Street, the mar­ket is for­ward look­ing. But has the mar­ket really dis­counted the future impact of con­tin­u­ing mort­gage resets? Here's a widely cir­cu­lated Credit Suisse his­togram of resets to which I've added a thumb­nail of the S&P 500 match­ing the time­line from Octo­ber 2007 to the present. There are a lot more resets ahead — option-adjustable, prime and alt-A — over the next 2 1/2 years.

Click image to enlarge:

Tags: Adjustable Rate Mortgages, Banking Sector, Banking System, Bear Market, Credit Crisis, Credit Suisse, Employment Report, Eye Of A Hurricane, Eye Of The Hurricane, Financings, Histogram, Lashing, Liquid Assets, liquidity, Lows, Market Rally, Monetary Authorities, Mortgage Paper, Mortgage Resets, Option Arms, P500, Printing Money, Qe, Stress Test, Strong One, Subprime Mortgages
Posted in Markets | Comments Off

WealthTrack: Is “Mr Market” ahead of himself, or just catching up?

Monday, September 28th, 2009

This week on Con­suelo Mack Wealth­Track three invest­ment pros dis­cuss their win­ning strate­gies. David Win­ters is the founder and port­fo­lio man­ager of the Win­ter­green Fund that invests eclec­ti­cally and glob­ally; Whit­ney Tilson is a value investor who runs both mutual and hedge funds; Michael Hart­nett is the chief global equity strate­gist for Bank of Amer­ica Mer­rill Lynch. As always with Wealth­Track this is good view­ing material.

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

Source: Wealth­track, Sep­tem­ber 25, 2009.

Tags: Ahead, Bank America, Bank Of America, Consuelo Mack, David Winters, Global Equity, Hedge Funds, Investment Pros, Merrill Lynch, Michael Hartnett, Portfolio Manager, Strategist, Value Investor, Whitney Tilson, Wintergreen Fund
Posted in Markets | Comments Off

Chart of the Day: Dow Jones vs. Monetary Base

Sunday, September 27th, 2009

The chart below comes cour­tesy of Andy Kessler and shows the strong rela­tion­ship between the move­ment in the Dow Jones Indus­trial Index and the mon­e­tary base. The mon­e­tary base data is defined as the “sum of cur­rency in cir­cu­la­tion, reserve bal­ances with Fed­eral Reserve Banks, and service-related adjust­ments to com­pen­sate for float”.

The extra­or­di­nar­ily loose mon­e­tary con­di­tions will not last indef­i­nitely and the main head wind for stock mar­kets to look for will be a tight­en­ing mon­e­tary pol­icy, even­tu­ally fol­lowed by an inverted yield curve.

Source: Andy Kessler, Sep­tem­ber 25, 2009.

Tags: Andy Kessler, Circulation, Currency, Dow Index, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Federal Reserve, Federal Reserve Banks, Head Wind, Inverted Yield Curve, Monetary Base, Monetary Conditions, Monetary Policy, Relationship, Reserve Balances, Stock Markets
Posted in Markets | Comments Off

Bonds & equities: Expect a major shift

Sunday, September 27th, 2009

This post is a guest con­tri­bu­tion by Dian Chu*, mar­ket ana­lyst, trader and author of the Eco­nomic Fore­casts and Opin­ions blog.

The S&P has sky­rock­eted 58% since its bot­tom in early March, while the Dow is up 50% and the Nas­daq has surged 68% dur­ing that time. Mean­while, bond prices led a rally as rates on the bench­mark 10-year note have declined some 40 basis points since early August. This is good news for busi­ness: higher bond prices make it eas­ier to refi­nance debt and stay in business.

Mean­while, across the coun­try, Main Street investors are weigh­ing whether they should jump back into the mar­ket. How­ever, the price cor­re­la­tion between equi­ties and bonds of late has some argue that typ­i­cally, if equi­ties are trend­ing higher, then bonds would head lower, and yield would be higher, due to con­cerns of higher infla­tion. This essen­tially describes “the Fed Model“, which is a the­ory of equity val­u­a­tion pop­u­lar among secu­rity analysts.

Now, the fact that bonds and equi­ties in gen­eral are both firm seems to beg the ques­tion — which rally would end first — equi­ties or bonds? This is an intrigu­ing ques­tion which I will attempt to exam­ine here.

A Split Per­son­al­ity Spells Uncertainty

Based on the Fed Model, bond yields should have an inverse rela­tion­ship with the stock mar­ket in gen­eral. We can start by com­par­ing the S&P 500 index (SPX) and the 10-year Trea­sury notes yield. As dis­played in Fig. 1 by the two dot­ted trend lines, the cor­re­la­tion between stocks and bond yields is time-varying and, on aver­age, neg­a­tive over the last decade. Nev­er­the­less, it appears, within the last two years, the neg­a­tive cor­re­la­tion is more pro­nounced dur­ing the bear phase of the stock mar­ket from approx­i­mately May 2008 to March 2009 (Fig. 2 green cir­cle).

This sim­ple obser­va­tion is actu­ally sup­ported by eco­nomic research sug­gest­ing that the lower expected infla­tion and the real inter­est rate is likely to increase the neg­a­tive cor­re­la­tion between stock prices and bond yields; and that the sharp inverse between stock prices and bond yields in the 1990s bull mar­ket can be par­tially attrib­uted to the lower infla­tion risk dur­ing this period.

The fol­low­ing are some plau­si­ble dri­vers of the cur­rent price co-movement between bonds and the equi­ties market:

1. Fast money from Insti­tu­tional and hedge funds is being allo­cated to both equi­ties and bonds.

2. Flight from money mar­kets to Trea­suries due to the ultra-low inter­est rates in money mar­kets and mas­sive amounts of cash in the sys­tem as a result of the most syn­chro­nized global quan­ti­ta­tive eas­ing in his­tory.

3. Depre­ci­at­ing US dol­lar is push­ing up every­thing across the board from com­modi­ties, equi­ties as well as bonds.

4. Market’s low expec­ta­tion of future infla­tion sig­naled by the TIP spread of only about 1.75%. That is bond market’s 10-year expec­ta­tion of infla­tion is now around 1.75%, lower than the infla­tion­ary expec­ta­tions from 2003–2007 of around 2.5%. Low infla­tion expec­ta­tion tends to push down bond yields and drive up the equi­ties market.

5. Investors over-react to the “pos­i­tive asser­tions” such as Fed­eral Reserve Chair­man Ben Bernanke state­ment that the reces­sion is “likely over.”

Infla­tion & Inter­est Rate Expectations

There is often a multi-year lag between the cause (money-supply growth) and the effect (ris­ing prices). So, even though we will prob­a­bly be in the defla­tion­ary phase for the next 12 months or so, once eco­nomic growth starts kick­ing in, we’re bound to expe­ri­ence inflation.

What’s more, the cur­rent low infla­tion expec­ta­tion of 1.75% is sig­nal­ing the stock mar­ket is most likely mis­priced and over­val­ued right now. Wider recog­ni­tion of the infla­tion prob­lem will even­tu­ally emerge. Infla­tion plus a recov­ery means sooner or later the Fed is going to have to start rais­ing rates.

Higher inter­est rates and infla­tion expec­ta­tions, cou­pled with the over­val­u­a­tion in the equity mar­kets could lead to a bear phase and the dreaded W-shape dou­ble dip eco­nomic sce­nario. This would mean a major decline in both the stock mar­ket and Trea­sury bond prices (a major rise in bond yields) and bor­row­ing costs for com­pa­nies will increase expo­nen­tially, thus fur­ther hin­der­ing future growth prospects in the economy.

Expect A Major Correction

The stock mar­ket is over­val­ued and due for a sub­stan­tial pull­back based on any mea­sure of future earn­ings. Ulti­mately, bond yields are unsus­tain­able long term, and must rise sig­nif­i­cantly to pay hold­ers of US Debt for the risk of hold­ing Trea­suries against the back­drop of inflated gov­ern­ment bal­ance sheets, larger bud­get deficits, and asso­ci­ated inter­est expenses on the national debt.

It’s ironic that the take­away from all this is that both the equi­ties & bond mar­ket are mis­priced and headed in the oppo­site direc­tion over the next 24 months. Equi­ties are way over­priced and headed for a major cor­rec­tion (Dow 8,000 level) is a more ratio­nal val­u­a­tion even tak­ing into account improved earn­ings in 2011.

Expect the 10-year Trea­sury yield to rise above the 5.25 level in 2011. Increased bor­row­ing costs, a job­less recov­ery, the col­lapse of com­mer­cial real estate will pro­vide quite a head­wind for any­one think­ing of mak­ing a killing in equi­ties over the next 2 years from the long side.

Bot­tom Line — Port­fo­lio Repositioning

Start invest­ing in alter­na­tive invest­ments like res­i­den­tial real estate, which is where most of the smart money will seek out­sized returns, as slowly but surely the favor­able long-term demo­graph­ics start to kick in, as the pop­u­la­tion increases, excess hous­ing inven­tory evap­o­rates com­pletely pro­vid­ing for a hous­ing squeeze in 2011. Real estate is actu­ally the best infla­tion hedge of all, as they call it “Real” for a rea­son, unlike the US currency.

Source: Dian Chu, Eco­nomic Fore­casts & Opin­ions, Sep­tem­ber 24, 2009.

* Dian Chu is a mar­ket ana­lyst, trader and finan­cial writer for Zero Hedge, Seek­ing Alpha and Daily Mar­kets. Her arti­cles are also syn­di­cated to Reuters, USA Today and Busi­ness­Week. Pro­fes­sional cre­den­tials include M.B.A., C.P.M. and Char­tered Econ­o­mist with exten­sive pro­fes­sional expe­ri­ence in mar­ket seg­ment fore­cast­ing and strate­gies. She is cur­rently work­ing in the US in the energy sector.

Tags: 10 Year Treasury Notes, Basis Points, Bond Prices, Bond Yields, Commodities, Dian, Early August, Economic Forecasts, Equity Valuation, Fed Model, Intriguing Question, Inverse Relationship, Last Decade, Market Analyst, Negative Correlation, Real Interest Rate, Security Analysts, Split Personality, Stock Prices, Street Investors, Trend Lines
Posted in Markets | Comments Off

Words from the (Investment) Wise (Sept. 27, 2009)

Sunday, September 27th, 2009

After hit­ting its best lev­els of the year on Wednes­day ahead of the Fed­eral Open Mar­ket Committee’s (FOMC) com­mu­niqué, the S&P 500 Index ran into heavy weather on the real­iza­tion that the Fed could start scal­ing back on emer­gency sup­port of the econ­omy. US equi­ties dropped fur­ther later in the week on renewed con­cerns about the state of the trou­bled hous­ing mar­ket and weaker-than-expected durable goods orders.

In addi­tion to global stock mar­kets declin­ing, risky assets such as com­modi­ties, oil, gold and other pre­cious met­als all sold off as pun­dits wor­ried about the wind­ing down of quan­ti­ta­tive eas­ing punc­tur­ing the “liq­uid­ity rally”. Gov­ern­ment and cor­po­rate bonds, as well as the Japan­ese yen, emerged as winners.

Hat tip: The Big Pic­ture, Sep­tem­ber 23, 2009.

The FOMC main­tained its loose mon­e­tary pol­icy fol­low­ing its meet­ing on Wednes­day. The state­ment said the com­mit­tee expected to keep the Fed funds rate tar­get in the 0% to 0.25% range “for an extended period”.

“The com­mit­tee extended the time period over which it plans to pur­chase Fan­nie Mae and Fred­die Mac debt and mortgage-backed secu­ri­ties. The remarks on cur­rent eco­nomic con­di­tions were more opti­mistic than in August, and the FOMC now believes the reces­sion is over. The Fed will keep mon­e­tary pol­icy loose in the near term to sup­port the recov­ery but is lay­ing the ground­work for an even­tual tight­en­ing,” said Moody’s Economy.com.

Although the US Dol­lar Index (+0.4%) closed a lit­tle higher on the week, the green­back hit a one-year low against the euro on Wednes­day, with the Fed’s indi­ca­tion of keep­ing US inter­est rates at cur­rent lev­els for a while longer under­scor­ing the dollar’s sta­tus as a carry-trade fund­ing cur­rency. (Click here for a short tech­ni­cal analy­sis of the out­look for the dol­lar by INO.com’s Adam Hewison.)

The past week’s per­for­mance of the major asset classes is sum­ma­rized by the chart below — a set of num­bers that shows risk aver­sion creep­ing back into finan­cial markets.

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 (-1.4%) and MSCI Emerg­ing Mar­kets Index (-1.2%) both closed the week in the red, with the Shang­hai Com­pos­ite Index (-4.2%) one of the biggest losers among the major stock mar­kets. After buck­ing the global weak­ness that pre­vailed dur­ing the week, Chile is now only 5.1% down from its July 2007 highs and could be one of the first mar­kets to wipe out all the finan­cial cri­sis losses.

The major US indices declined for three con­sec­u­tive days (from Wednes­day to Fri­day) and reg­is­tered their first weekly drop since the last week of August. The year-to-date gains remain in pos­i­tive ter­ri­tory and are as fol­lows: Dow Jones Indus­trial Index +10.1%, S&P 500 Index +15.6%, Nas­daq Com­pos­ite Index +32.6% and Rus­sell 2000 Index +19.9%.

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

Top per­form­ers in the stock mar­kets this week were Latvia (+8.0%), Cyprus (+6.8%), Israel (+5.0%), Ukraine (+4.9%) and Saudi Ara­bia (+4.1%). At the bot­tom end of the per­for­mance rank­ings, coun­tries included Lux­em­bourg (‑8.7%), Ire­land (-4.2%), China (-4.2%), Mex­ico (-4.0%) and South Africa (‑3.3%).

Of the 98 stock mar­kets I keep on my radar screen, 44% recorded gains (last week 81%), 51% (15%) 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 Global X/InterBolsa FTSE Colom­bia 20 (GXG) (+6.0%), Mar­ket Vec­tors High-Yield Munic­i­pal (HYD) (+2.9%), iPath S&P 500 VIX Mid-Term Futures (VXZ) (+2.9%) and United States Nat­ural Gas (UNG) (+2.8%).

At the bot­tom end of the per­for­mance rank­ings, ETFs included United States Gaso­line (UGA) (-10.8%), United States Oil (USO) (-8.4%), United States 12 Month Oil (USL) (-8.3%) and iShares Dow Jones Home Con­struc­tion (ITB) (‑8.3%).

Against the back­ground of the Inter­na­tional Mon­e­tary Fund’s approval of the sale of 403.3 met­ric tons of its gold and beggar-thy-neighbor cur­rency deval­u­a­tions, Richard Rus­sell reminded us of the fol­low­ing quote from the Repub­li­can National Plat­form in 1932: “The Repub­li­can Party estab­lished and will con­tinue to uphold the gold stan­dard and will oppose any mea­sure which will under­mine the government’s credit or impair the integrity of our national cur­rency. Relief by cur­rency infla­tion is unsound in prin­ci­ple and dis­hon­est in results.” Rus­sell added: “My, how times have changed, and not always for the better.”

Other news is that the sum­mit of G20 coun­tries have agreed, inter alia, to plot a roadmap for the bank­ing indus­try, align eco­nomic pol­icy, ensure that tax havens com­ply with global stan­dards and phase out sub­si­dies for fos­sil fuels in the “medium term”.

Also, the Fed­eral Deposit Insur­ance Cor­po­ra­tion (FDIC) closed another bank on Fri­day, bring­ing the tally of US bank fail­ures in 2009 to 95 (120 since the begin­ning of the reces­sion). Mean­while, accord­ing to The New York Times, reg­u­la­tors are con­sid­er­ing a plan to have the nation’s healthy banks lend bil­lions of dol­lars to res­cue the FDIC. This would enable the fund, which is run­ning low on resources as a result of the myr­iad of bank fail­ures, to con­tinue to res­cue the sick­est banks … “You can’t make up stuff like this!,” com­mented Bill King (The King Report).

Next, a quick tex­tual analy­sis of my week’s read­ing. Although “banks” still fea­tures promi­nently, the key words have started tak­ing on a more nor­mal pat­tern com­pared with the crisis-related words that have dom­i­nated the tag cloud for many months.

The major moving-average lev­els for the bench­mark US indices, the BRIC coun­tries and South Africa (where I am based) are given in the table below. With the excep­tion of the Shang­hai Com­pos­ite Index, which is trad­ing below its 50-day mov­ing aver­age, all the indices are above their respec­tive 50– and 200-day mov­ing aver­ages. The 50-day lines are also in all instances above the 200-day lines.

The August highs and Sep­tem­ber lows are also given in the table as these lev­els define a sup­port area for a num­ber of the indices.

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

Kevin Lane, tech­ni­cal ana­lyst of Fusion IQ said: “Yesterday’s [Wednes­day] intra­day sell-the-Fed-news price rever­sal of the S&P 500 stalled at the area (1,079 to 1,106) where the index really accel­er­ated its 2008 sell-off. While we believe liq­uid­ity and buy­ing power remain strong and thus pull­backs should be rel­a­tively shal­low in nature, it doesn’t mean we can’t get a cor­rec­tive wave of some mag­ni­tude before this side­line liq­uid­ity is rede­ployed. Addi­tion­ally, quarter-end win­dow dress­ing may keep stocks ele­vated or from slip­ping too much.

“How­ever, we do believe putting new money to work in front of this more sig­nif­i­cant resis­tance level poses risks. Ini­tial sup­port below the cur­rent S&P lev­els comes into play near the 1,040 level (cur­rent 1,044). Sec­ondary sup­ports if 1,040 were to give way would come into play near 980/975 then 950.”

David Fuller (Fuller­money), mak­ing a suc­cess­ful recov­ery from heart surgery, said: “… it does look as if Wall Street and other stock mar­kets under its influ­ence have tem­porar­ily run out of upside momen­tum fol­low­ing a good run recently. Sup­ply in the form of sec­ondary offer­ings has increased. This coin­cides with under­stand­able Octo­ber jit­ters as investors recall last year’s meltdown.

“At this stage of the bull mar­ket cycle, a con­sol­i­da­tion would have the ben­e­fit of pre­vent­ing over­heat­ing. When a larger reac­tion even­tu­ally unfolds it is likely to be a prov­i­den­tial buy­ing oppor­tu­nity rather that a repeat of last year’s har­row­ing decline — pro­vided mon­e­tary con­di­tions remain favorable.”

The S&P is at a level that should be reached in the third year of recov­ery from a reces­sion, David Rosen­berg, chief econ­o­mist of Gluskin Sheff & Asso­ciates, told Bloomberg (via Mon­eyNews). “The fair mul­ti­ple for earn­ings should be 12 or 13,” he said. “We’ve blown right through that.” (The S&P 500 is trad­ing at a level equal to almost 20 times reported earn­ings from con­tin­u­ing oper­a­tions, accord­ing to weekly data com­piled by Bloomberg.)

The Bull­ish Per­cent Index shows the per­cent­age of stocks that are cur­rently in bull­ish mode as a result of point-and-figure buy sig­nals. With the fig­ure at 86.4%, this indi­ca­tor con­veys the mes­sage that the vast major­ity of stocks are in uptrends, but the line looks as if it might start turn­ing down from a high level, which could spell at least a short-term top.

Source: StockCharts.com

As stated often before, share prices have moved too far ahead of eco­nomic real­ity. This calls for a cau­tious approach in antic­i­pa­tion of the mar­ket work­ing off its over­bought con­di­tion and fun­da­men­tals reassert­ing them­selves. I will bide my time while the fun­da­men­tals play catch-up, espe­cially as we could be see­ing one of those occa­sional all-change sig­nals in the short-term trends of a num­ber of markets.

For more dis­cus­sion on the econ­omy and asset classes, see my recent posts “Bonds & equi­ties: Expect a major shift“, “Chart of the Day: Dow Jones vs Mon­e­tary Base“, “Marc Faber video bonanza” and “David Rosen­berg: Equity mar­ket est très expen­sif“. (And do make a point of lis­ten­ing to Don­ald Coxe’s web­cast of Sep­tem­ber 25, which can be accessed from the side­bar of the Invest­ment Post­cards site.)

Econ­omy
A ten­ta­tive global eco­nomic recov­ery has begun, accord­ing to the results of the lat­est Sur­vey of Busi­ness Con­fi­dence of the World by Moody’s Economy.com. “Busi­ness expec­ta­tions are strong that con­di­tions will improve fur­ther later this year and early next. Sen­ti­ment is strongest in Asia and South Amer­ica and among busi­ness ser­vice firms. Euro­pean busi­nesses and those that work in gov­ern­ment are least upbeat. Pric­ing power is con­sis­tent with very low rates of inflation.”

Source: Moody’s Economy.com

The Busi­ness Con­fi­dence Survey’s results were con­firmed by the Duke/CFO Mag­a­zine Global Busi­ness Out­look Sur­vey of CFOs of 650 com­pa­nies in the US and nearly 900 in Europe and Asia. Accord­ing to the Sur­vey, the eco­nomic out­look has improved since the last quar­ter; it appears that the Great Reces­sion is end­ing and economies around the world are sta­bi­liz­ing. How­ever, the analy­sis indi­cates that the recov­ery will be lethar­gic, with employ­ment growth lag­ging behind the rest of the economy.

Source: Duke/CFO Mag­a­zine Global Busi­ness Out­look Sur­vey, Sep­tem­ber 17, 2009.

As far as hard data are con­cerned, an index com­piled by the Bureau for Eco­nomic Pol­icy Analy­sis, a Dutch research insti­tute, showed the vol­ume of world trade ris­ing by 3.5% in July after a revised increase of 1.6% in June — its fastest rise in more than five years, as reported by the Finan­cial Times.

Also, accord­ing to China’s National Bureau of Sta­tis­tics (via US Global Investors), as of the end of June 97% of the 151 mil­lion migrant work­ers in the coun­try have landed a job, a sig­nif­i­cant improve­ment from early this year when more than 20 mil­lion migrant work­ers were reported as being unemployed.

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, Sep­tem­ber 25
• New homes sales — many encour­ag­ing details to report
• Air­craft orders bring down orders of durables in August

Thurs­day, Sep­tem­ber 24
• Sales of exist­ing homes are sta­bi­liz­ing, although head­line read­ing fell in August
• Ini­tial job­less claims decline, but tally of unem­ploy­ment insur­ance recip­i­ents advances
• Sur­veys point to sub­dued Euro­zone recovery

Wednes­day, Sep­tem­ber 23
• FOMC pol­icy state­ment — nature of incom­ing data allows Fed to wait and watch

Mon­day, Sep­tem­ber 21
• Index of Lead­ing Eco­nomic Indi­ca­tors — con­firms eco­nomic recov­ery is under way

The Fed men­tioned in its quar­terly flow-of-funds report that Amer­i­can house­holds were $2 tril­lion richer on June 30 than they had been three months ear­lier — the first time in two years that house­hold net worth had increased. “House­hold wealth rose in the sec­ond quar­ter at a 17% annual rate, or $2 tril­lion, to $53.1 tril­lion after falling at a 13% rate in the first quar­ter, the Fed said. It was the first time since the sec­ond quar­ter of 2007 that wealth had increased. Net worth is down $12.2 tril­lion from the peak in 2007, an indi­ca­tion of how much the col­lapse in stock prices and home prices has hurt,” said Mar­ket­Watch.

Source: Mar­ket Minds (via Bianco Research), Sep­tem­ber 24, 2009.

On the topic of wealth destruc­tion, the chart below, cour­tesy of Chart of the Day, not only illus­trates that house prices are cur­rently 30% off their 2005 peak, but also that a home buyer who bought a median-priced single-family home at the 1979 peak has seen that home appre­ci­ate by a mere 4% over the ensu­ing three decades.

Source: Chart of the Day, Sep­tem­ber 25, 2009.

The US has lent, spent or guar­an­teed $11.6 tril­lion to bol­ster banks and fight the longest reces­sion in 70 years, accord­ing to data com­piled by Bloomberg.

“There’s not a lot of new job cre­ation going on on Main Street, and the liq­uid­ity to the con­sumer and to small busi­ness is still con­tract­ing,” bank ana­lyst Mered­ith Whit­ney said on CNBC (via Mon­eyNews). “It’s very dif­fi­cult to get the engine mov­ing with­out a lot of gov­ern­ment sup­port within that. So when you slowly wean gov­ern­ment sup­port, that’s going to be the test that I think everyone’s going to be watch­ing start­ing in October.”

Richard Koo, author of Bal­ance Sheet Reces­sion and chief econ­o­mist at Nomura Research Insti­tute, said in an inter­view with Kate Welling at Welling@Weeden (via Dow The­ory Let­ters): “In this type of reces­sion, the econ­omy will not enter self-sustaining growth until pri­vate sec­tor bal­ance sheets are repaired. Until the pri­vate sec­tor is fin­ished repair­ing its bal­ance sheets, if the gov­ern­ment tries to cut its spend­ing, we’re going to fall into the same trap that Franklin Roo­sevelt fell into in 1937 (a crush­ing bear mar­ket) and Prime Min­is­ter Hashimoto fell into in 1997, exactly 70 years later.

“The econ­omy will col­lapse again and the sec­ond col­lapse is usu­ally far worse than the first col­lapse. And the rea­son is that, after the first col­lapse, peo­ple tend to blame them­selves. They say, ‘I shouldn’t have played the bub­ble. I shouldn’t have bor­rowed money to invest — to spec­u­late on these things.’ But a sec­ond col­lapse affects every­one, not just the bub­ble spec­u­la­tors, and it also sug­gests to the pub­lic that all the efforts to fight the down­turn up to that point — all the mon­e­tary eas­ing, the low inter­est rates, quan­ti­ta­tive eas­ing — they all failed and even fis­cal pol­icy failed. Once that kind of mind­set sets in, it becomes ten times more dif­fi­cult to get the econ­omy going again.

“So the fact that Larry Sum­mers was talk­ing about ‘tem­po­rary’ fis­cal stim­u­lus had me very, very wor­ried. That whole Larry Sum­mers idea that one big injec­tion of fis­cal stim­u­lus will get the US out of the reces­sion, and every­thing will be fine there­after, prob­a­bly led to Pres­i­dent Obama’s say­ing he’s going to cut his bud­get deficit in half in four years.”

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

Source: Yahoo Finance, Sep­tem­ber 25, 2009.

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

US eco­nomic data reports for the week include the following:

Tues­day, Sep­tem­ber 29
• Case-Shiller Hous­ing Price Index
• Con­sumer confidence

Wednes­day, Sep­tem­ber 30
• ADP employ­ment
• GDP — final
• Chicago PMI

Thurs­day, Octo­ber 1
• Ini­tial job­less claims
• Per­sonal income and spend­ing
• Con­struc­tion spend­ing
• ISM Index
• Pend­ing home sales

Fri­day, Octo­ber 2
• Employ­ment data
• Fac­tory orders

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, Sep­tem­ber 25, 2009.

“Genius may have its lim­i­ta­tions, but stu­pid­ity is not thus hand­i­capped,” said Elbert Hub­bard, Amer­i­can writer and philoso­pher (hat tip: Charles Kirk — do make a point of vis­it­ing his excel­lent site). Let’s hope the news items and quotes from mar­ket com­men­ta­tors included in the “Words from the Wise” review will assist read­ers of Invest­ment Post­cards to make sen­si­ble invest­ment deci­sions to ensure sold wealth build­ing over time.

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 my bags are almost packed for my first visit to Dal­las to attend friend John Mauldin’s 60^th birth­day celebrations).

Source: Despair (hat tip: The Big Pic­ture)

Bloomberg: G-20 unites again to curb bank pay, align eco­nomic pol­icy
“Group of 20 lead­ers built on the com­mon front they forged in fight­ing the finan­cial cri­sis to chart a shared-path toward a more sta­ble bank­ing sys­tem and a stronger global economy.

“Pres­i­dent Barack Obama and his coun­ter­parts ended their Pitts­burgh meet­ing yes­ter­day promis­ing to ‘raise stan­dards together’ to ensure banks restrain pay and build up cap­i­tal buffers. They also estab­lished a peer-review process to mon­i­tor indi­vid­ual efforts to rebal­ance their economies and to hand emerg­ing economies a greater say in man­ag­ing world growth.

“‘There is much more work to be done, but we leave here today more con­fi­dent and more united in the com­mon effort of advanc­ing secu­rity and pros­per­ity for all of our peo­ple,’ Obama told reporters yes­ter­day after host­ing his first summit.

“A lot is at stake. While the inter­na­tional econ­omy is show­ing signs of recov­er­ing from its worst reces­sion since World War II, pock­ets of weak­ness remain, espe­cially in the US and other indus­trial coun­tries. Demand for US durable goods unex­pect­edly fell in August and loans to house­holds and com­pa­nies in Europe grew at the slow­est pace on record, data showed yesterday.

“‘It’s going to be slow going,’ said for­mer US Trea­sury Sec­re­tary Paul O’Neill, who once ran Alcoa Inc., the largest US pro­ducer of alu­minum, from Pitts­burgh and still lives in the city. ‘We’re get­ting a recov­ery but it won’t be fast.’

“The third sum­mit of G-20 lead­ers in the past year plot­ted a roadmap for revamp­ing the bank­ing indus­try after the two pre­vi­ous meet­ings, in Wash­ing­ton and Lon­don, focused on fight­ing mar­ket tur­moil and reverse the spi­ral into recession.

“‘Given this is the third meet­ing of these peo­ple in 10 months, the fact that they’ve got­ten as much sub­stan­tively done as they have is quite impres­sive,’ said Edwin Tru­man, a for­mer adviser to Obama’s Trea­sury and a senior fel­low at the Peter­son Insti­tute for Inter­na­tional Eco­nom­ics in Washington.

“After record­ing $1.6 tril­lion in losses and write­downs, banks were told to avoid ‘multi-year guar­an­teed bonuses’ and a ’sig­nif­i­cant por­tion of vari­able com­pen­sa­tion’ must be deferred, paid in stock, tied to per­for­mance and sub­jected to claw­backs if earn­ings flop. The G-20 stopped short of endors­ing a French pro­posal to intro­duce spe­cific caps on pay.

“Awards must also be curbed if they are “incon­sis­tent with the main­te­nance of a sound cap­i­tal base.” Reg­u­la­tors should be allowed to mod­ify the com­pen­sa­tion prac­tices of key firms. Banks will also have to increase the qual­ity and quan­tity of cap­i­tal they hold by the end of 2012.

“The grow­ing influ­ence of emerg­ing economies such as China and Brazil was marked by the agree­ment that the G-20 would sup­plant the G-8 as the guardian of the world economy.”

“The lead­ers agreed to phase out sub­si­dies for fos­sil fuels in the ‘medium term,’ with­out set­ting a dead­line. They also plan to inten­sify their mon­i­tor­ing of tax havens from next month to ensure economies fol­low through on promises to com­ply with global standards.”

Source: Simon Kennedy and Rich Miller, Bloomberg, Sep­tem­ber 26, 2009.

Mon­eyNews: Putin — US should scrap trade bar­ri­ers
“Russ­ian Prime Min­is­ter Vladimir Putin on Fri­day praised Pres­i­dent Barack Obama’s deci­sion to scrap plans for a mis­sile defense sys­tem in Europe and urged the US to also can­cel Cold War-era restric­tions on trade with Russia.

“NATO Secretary-General Anders Fogh Ras­mussen said the West­ern alliance and Rus­sia should con­sider link­ing their defen­sive mis­sile systems.

“He said NATO and Rus­sia have a shared inter­est in com­bat­ting the pro­lif­er­a­tion of inter­con­ti­nen­tal bal­lis­tic mis­sile tech­nol­ogy in East Asia and the Mid­dle East.

“‘If North Korea stays nuclear and if Iran becomes nuclear, some of their neigh­bors might feel com­pelled to fol­low their exam­ple,’ Fogh Ras­mussen said.

“Obama’s pre­de­ces­sor, George W. Bush, had pushed to base ele­ments of a mis­sile defense sys­tem in Poland and the Czech Repub­lic, say­ing it would help defend against a mis­sile attack from Iran. But the Krem­lin stren­u­ously objected, fear­ing that the sys­tem would com­pro­mise Rus­sia strate­gic nuclear capa­bil­i­ties or be used to eaves­drop on Russ­ian mil­i­tary forces.

“Russ­ian lead­ers in the past threat­ened to deploy short-range mis­siles to the Baltic exclave of Kalin­ingrad near Poland if the US moved ahead with the mis­sile defense plan.

“On Fri­day, the Inter­fax news quoted an unnamed Russ­ian military-diplomatic source as say­ing that such retal­ia­tory mea­sures would now be frozen and, pos­si­bly, fully can­celed in response to Obama’s deci­sion to scrap the mis­sile defense shield.

“Russ­ian pres­i­dent Dmitry Medvedev on Thurs­day praised the US deci­sion to dump the mis­sile defense plan as a ‘respon­si­ble move’.

Source: Mon­eyNews, Sep­tem­ber 18, 2009.

Ifo: Busi­ness Cli­mate Sur­vey — brighter out­look for Ger­many
“Appraisals of the busi­ness sit­u­a­tion and out­look have improved. How­ever, by far the greater num­ber of firms still assesses the busi­ness sit­u­a­tion as poor. Only with regard to the six-month busi­ness out­look is there now nearly a bal­ance between pes­simists and opti­mists. In light of the cat­a­strophic devel­op­ments over the past twelve months, this is good news.”

Source: Ifo, Sep­tem­ber 24, 2009.

Nigel Ren­dell (RBC Cap­i­tal Mar­kets): Softly ahead on CEE
“Cen­tral and east­ern Euro­pean mar­kets have ral­lied strongly in the past six months but investors should still pro­ceed with cau­tion, says Nigel Ren­dell, senior emerg­ing mar­kets strate­gist at RBC Cap­i­tal Markets.

“‘As cap­i­tal has grad­u­ally returned to the region — through a com­bi­na­tion of IMF res­cue pack­ages and port­fo­lio flows — economies have started to show signs of bot­tom­ing out,’ he says.

“‘With the back­stop of IMF funds for coun­tries in severe finan­cial dif­fi­cul­ties, and the promise of pre­cau­tion­ary credit lines to oth­ers, investors have returned to CEE.’

“But are the mar­kets being too bull­ish and ignor­ing poten­tial pit­falls? Mr Ren­dell out­lines three main risks for the region.

“First, sus­tained recov­ery is highly depen­dent on a pick-up in west­ern Europe. ‘Most CEE coun­tries are small, open economies that rely on exter­nal demand to cre­ate eco­nomic growth.’

“Sec­ond, fis­cal accounts in many CEE coun­tries are in poor shape, with spi­ralling deficits that will require polit­i­cally dif­fi­cult tax rises and spend­ing cuts to meet Maas­tricht bud­get criteria.

“Third, the Baltic states and Ukraine are still wild cards, where eco­nomic uncer­tainty and mar­ket volatil­ity could feed through to the rest of CEE.

“‘Rather than break long estab­lished cur­rency pegs, all three Baltic states have decided to go down the ‘internal devaluation’ route.

“‘We remain very doubt­ful whether this adjust­ment can work over the medium term.’”

Source: Nigel Ren­dell, RBC Cap­i­tal Mar­kets (via Finan­cial Times), Sep­tem­ber 21, 2009.

The Wall Street Jour­nal: FOMC — home buy­ers get a reprieve
“The Fed­eral Reserve, in a move aimed at keep­ing inter­est rates low for home buy­ers through early next year, decided to extend and grad­u­ally phase out its pur­chase of mortgage-backed securities.

“The Fed’s action sig­nals its belief that the econ­omy, while in recov­ery, remains frag­ile and that hous­ing, which has seen some improve­ment in recent months, has only started to pull out of its slump.

“‘We def­i­nitely need help from the gov­ern­ment,’ says Lee Bar­rett, pres­i­dent of Cen­tury 21 Bar­rett, a real-estate bro­ker­age firm in Las Vegas. ‘I don’t think the mar­ket can make it on its own.’ He also hopes Con­gress will extend tax cred­its for home buy­ers due to expire at the end of November.

“The cen­tral bank left its interest-rate tar­get unchanged at zero to 0.25% and main­tained its expec­ta­tion that the federal-funds rate, or the rate banks charge each other for overnight loans, would remain low ‘for an extended period.’

“‘Eco­nomic activ­ity has picked up fol­low­ing its severe down­turn,’ the Fed­eral Open Mar­ket Com­mit­tee said Wednes­day in a state­ment after a two-day meet­ing. Though con­di­tions in finan­cial mar­kets and the hous­ing sec­tor have improved, house­hold spend­ing ‘remains con­strained by ongo­ing job losses, slug­gish income growth, lower hous­ing wealth and tight credit’, the Fed said.

“The Fed is about two-thirds of the way through its mortgage-purchase pro­gram, which was launched late last year to sup­port mort­gage lend­ing, hous­ing activ­ity and broader credit mar­kets. The cen­tral bank’s deci­sion to com­plete the full $1.25 tril­lion in pur­chases of mortgage-backed secu­ri­ties — rather than ‘up to’ that amount, as it said in August — ended spec­u­la­tion that it might stop short, as a hand­ful of pol­i­cy­mak­ers have sug­gested. The Fed still plans to buy up to $200 bil­lion in debt issued by Fan­nie Mae and Fred­die Mac.”

Source: Sudeep Reddy and James Hagerty, The Wall Street Jour­nal, Sep­tem­ber 24, 2009.

Bloomberg: Fed’s strat­egy reduces US bailout to $11.6 tril­lion
“The Fed­eral Reserve decided to keep pump­ing $1.25 tril­lion of new money into the mort­gage mar­ket to focus on res­cu­ing the US econ­omy as the finan­cial sys­tem revives and banks ask for less help.

“The Fed is allow­ing some of the 10 sup­port pro­grams it cre­ated or expanded after the credit cri­sis began in August 2007 to expire or shrink. That caused the first decline in the amount of money the US has com­mit­ted on behalf of tax­pay­ers to end the reces­sion, accord­ing to data com­piled by Bloomberg.

“The cen­tral bank has pur­chased $694 bil­lion of mort­gage– backed secu­ri­ties since Jan­u­ary and plans to spend $556 bil­lion more by April 2010 to keep inter­est rates down. The debt-buying is the biggest pro­gram in the Fed’s arsenal.

“‘The first thing the Fed had to do was stop the bleed­ing in the bank­ing sys­tem,’ said Richard Yamarone, direc­tor of eco­nomic research at Argus Research Corp. in New York. ‘Now that that seems to have been accom­plished, they’re focus­ing on the econ­omy by buy­ing mortgage-backed securities.’

“The pur­chases were sched­uled to stop at the end of Decem­ber. The Fed­eral Open Mar­ket Com­mit­tee decided on Sep­tem­ber 23 to con­tinue the pro­gram through the first quar­ter of next year and slow the pace of buy­ing to ‘pro­mote a smooth tran­si­tion in mar­kets’, the com­mit­tee said in a state­ment. It also said the econ­omy has ‘picked up’.

“The US has lent, spent or guar­an­teed $11.6 tril­lion to bol­ster banks and fight the longest reces­sion in 70 years, accord­ing to data com­piled by Bloomberg. That’s a 9.4% decline since March 31, when Bloomberg last cal­cu­lated the total at $12.8 trillion.”

===========================================================
                                  --- Amounts (Billions)---
                                    Limit         Current
===========================================================
Total                            $11,563.65     $3,025.27
-----------------------------------------------------------
 Federal Reserve Total            $5,870.65     $1,590.11
  Primary Credit Discount           $110.74        $28.51
  Secondary Credit                    $1.00         $0.58
  Primary dealer and others         $147.00         $0.00
  ABCP Liquidity                    $145.89         $0.08
  AIG Credit                         $60.00        $38.81
  Commercial Paper program        $1,200.00        $42.44
  Maiden Lane (Bear Stearns assets)  $29.50        $26.19
  Maiden Lane II  (AIG assets)       $22.50        $14.66
  Maiden Lane III (AIG assets)       $30.00        $20.55
  Term Securities Lending            $75.00         $0.00
  Term Auction Facility             $375.00       $196.02
  Securities lending overnight       $10.42         $9.25
  Term Asset-Backed Loans (TALF)  $1,000.00        $41.88
  Currency Swaps/Other Assets       $606.00        $59.12
  GSE Debt Purchases                $200.00       $129.21
  GSE Mortgage-Backed Securities  $1,250.00       $693.60
  Citigroup Bailout Fed Portion     $220.40         $0.00
  Bank of America Bailout            $87.20         $0.00
  Commitment to Buy Treasuries      $300.00       $289.22
-----------------------------------------------------------
Treasury Total                    $2,909.50     $1,075.91
  TARP                              $700.00       $372.43
  Tax Break for Banks                $29.00        $29.00
  Stimulus Package (Bush)           $168.00       $168.00
  Stimulus II (Obama)               $787.00       $303.60
  Treasury Exchange Stabilization    $50.00         $0.00
  Student Loan Purchases             $60.00         $0.00
  Citigroup Bailout Treasury          $5.00         $0.00
  Bank of America Bailout Treasury    $7.50         $0.00
  Support for Fannie/Freddie        $400.00       $200.00
  Line of Credit for FDIC           $500.00         $0.00
  Treasury Commitment to TALF       $100.00         $0.00
  Treasury Commitment to PPIP       $100.00         $0.00
  Cash for Clunkers                   $3.00         $2.88
-----------------------------------------------------------
FDIC Total                        $2,477.50       $356.00
  Public-Private Investment (PPIP)$1,000.00          0.00
  Temporary Liquidity Guarantees* $1,400.00       $301.00
  Guaranteeing GE Debt               $65.00        $55.00
  Citigroup Bailout, FDIC Share      $10.00         $0.00
  Bank of America Bailout, FDIC Share $2.50         $0.00
-----------------------------------------------------------
HUD Total                           $306.00         $3.25
  Hope for Homeowners (FHA)         $300.00         $3.20
  Neighborhood Stabilization (FHA)    $6.00         $0.05
-----------------------------------------------------------
* The program has generated $9.3 billion in income,
according to the agency.

Glos­sary: ABCP — Asset-backed com­mer­cial paper AIG — Amer­i­can Inter­na­tional Group Inc. FDIC — Fed­eral Deposit Insur­ance Corp. FHA — Fed­eral Hous­ing Admin­is­tra­tion, a divi­sion of HUD GE — Gen­eral Elec­tric Co. GSE — Government-sponsored enter­prises (Fan­nie Mae, Fred­die Mac and Gin­nie Mae) HUD — U.S. Depart­ment of Hous­ing and Urban Devel­op­ment TARP — Trou­bled Asset Relief Program

Breakout of TARP funds:
===========================================================
                                  --- Amounts (Billions)---
                                     Outlay      Returned
===========================================================
Total                              $447.76        $75.33
-----------------------------------------------------------
Capital Purchase Program           $204.55        $70.56
General Motors, Chrysler            $79.97         $2.14
American International Group        $69.84         $0.00
Making Home Affordable Program      $23.40         $1.13
Targeted Investment Bank of America $20.00         $0.00
Targeted Investment Citigroup       $20.00         $0.00
Term Asset-Backed Loan (TALF)       $20.00         $0.00
Citigroup Bailout                    $5.00         $0.00
Auto Suppliers                       $5.00         $1.50

Source: Mark Pittman and Bob Ivry, Bloomberg, Sep­tem­ber 25, 2009.

Mon­eyNews: Richard Rahn — the grow­ing debt bomb
“Assume you had put much of your sav­ings into US gov­ern­ment bonds and then you learned the fol­low­ing. In just the last eight months, the Con­gres­sional Bud­get Office esti­mates of the amount of addi­tional fed­eral debt to be held by the pub­lic grew by an astound­ing $4 tril­lion for the 2010–19 period; and that the amount of fed­eral debt held by the pub­lic grew from $5.9 tril­lion to $7.5 tril­lion in just the last 12 months.

“In addi­tion, you learned that the fed­eral gov­ern­ment (i.e. tax­pay­ers) now owns (pri­mar­ily through Fan­nie Mae and Fred­die Mac) or insures (through the Fed­eral Hous­ing Admin­is­tra­tion and other gov­ern­ment pro­grams) about 80% of the $14.6 tril­lion of home mort­gages out­stand­ing in the United States. Last week, Con­gress passed a bill requir­ing all stu­dent loans be made by the fed­eral gov­ern­ment rather than banks, which means the tax­pay­ers will be 100% liable for any stu­dent loan defaults.

“You also learned that the Fed­eral Deposit Insur­ance Corp. is con­sid­er­ing tap­ping its Trea­sury credit line for up to $500 bil­lion. It needs to do this because of the high num­ber of bank fail­ures and because each bank account is insured by the gov­ern­ment (i.e. tax­pay­ers) up to $250,000. The pres­i­dent and many in Con­gress are call­ing for a roughly $1 tril­lion health care bill — paid for by addi­tional debt and/or more taxes, which will fur­ther slow eco­nomic growth, even­tu­ally lead­ing to even more debt.

“Finally, you also became aware of the fol­low­ing facts: Fed­eral gov­ern­ment expen­di­tures are grow­ing far faster than the econ­omy, and thus the gov­ern­ment is becom­ing a larger and larger share of gross domes­tic prod­uct. Obvi­ously, this can­not con­tinue for­ever because even­tu­ally the gov­ern­ment would totally drive out the pri­vate sector.

“The enti­tle­ment pro­grams (i.e. Social Secu­rity, Medicare, Med­ic­aid, etc.) all con­tinue to grow faster than the econ­omy, and they will take more than 100% of all fed­eral tax rev­enue this year, requir­ing that vir­tu­ally all of the other gov­ern­ment spend­ing pro­grams, includ­ing defense and inter­est pay­ments on the debt, be funded by more borrowing.

“You are also aware that the gov­ern­ment can­not tax its way out of the deficit sit­u­a­tion, because increas­ing income tax rates on the upper income peo­ple will both slow the econ­omy and cause them to find legal or ille­gal ways to avoid the tax increase, and the politi­cians have pledged to not increase taxes on those mak­ing less than $250,000, which includes all but a very few Americans.”

Click here for the full article.

Source: Richard Rahn, Mon­eyNews, Sep­tem­ber 22, 2009. (Richard Rahn is a senior fel­low at the Cato Insti­tute and chair­man of the Insti­tute for Global Eco­nomic Growth.)

Bloomberg: Fed said to start talks with deal­ers on using reverse repos
“The Fed­eral Reserve has started talks with bond deal­ers about with­draw­ing the unprece­dented amount of cash injected into the finan­cial sys­tem the last two years, accord­ing to peo­ple with knowl­edge of the discussions.

“Cen­tral bank offi­cials are dis­cussing plans to use so-called reverse repur­chase agree­ments to drain some of the $1 tril­lion they pumped into the econ­omy, said the peo­ple, who declined to be iden­ti­fied because the talks are pri­vate. That’s where the Fed sells secu­ri­ties to its 18 pri­mary deal­ers for a spe­cific period, tem­porar­ily decreas­ing the amount of money avail­able in the bank­ing system.

“There’s no sense that pol­icy mak­ers intend to with­draw funds any­time soon, said the peo­ple. The cen­tral bank’s chal­lenge is to decrease the cash with­out stunt­ing the economy’s recov­ery and before it sparks infla­tion. Fed Chair­man Ben Bernanke said in a July Wall Street Jour­nal opin­ion arti­cle that reverse repos are one tool to accom­plish that goal with­out rais­ing inter­est rates.

“‘One thing the Fed has to fig­ure out is if they can launch pilot pro­grams with­out spook­ing the mar­ket and cre­at­ing the per­cep­tion that they are about to tighten,’ said Louis Cran­dall, chief econ­o­mist at Wright­son ICAP, a Jer­sey City, New Jersey-based research firm that spe­cial­izes in gov­ern­ment finance. ‘They are dis­cussing things like account­ing issues, and updat­ing the gov­ern­ing doc­u­ments to the vol­ume of reverse repos the dealer com­mu­nity could absorb.’

“Deb­o­rah Kil­roe, a spokes­woman for the Fed­eral Reserve Bank of New York, declined to com­ment about meet­ings with deal­ers. Total assets on the Fed’s bal­ance sheet stand at $2.14 tril­lion, up more than a $1 tril­lion since the col­lapse of the sub­prime mort­gage mar­ket in August 2007 trig­gered the worst global finan­cial cri­sis since the Great Depression.”

Source: Liz Capo McCormick, Bloomberg, Sep­tem­ber 22, 2009.

Mon­eyNews: Whit­ney — end of gov­ern­ment aid a big test
“Bank ana­lyst Mered­ith Whit­ney remains bear­ish on the econ­omy, par­tic­u­larly when it comes to jobs.

“‘There’s not a lot of new job cre­ation going on on Main Street, and the liq­uid­ity to the con­sumer and to small busi­ness is still con­tract­ing,’ she said on CNBC.

“‘It’s very dif­fi­cult to get the engine mov­ing with­out a lot of gov­ern­ment sup­port within that. So when you slowly wean gov­ern­ment sup­port, that’s going to be the test that I think everyone’s going to be watch­ing start­ing in October.’

“She ques­tioned where new jobs will come from.

“‘Once com­pa­nies become more pro­duc­tive do they go back and say I want to become less pro­duc­tive? … You have to have a rev­o­lu­tion­ary appli­ca­tion to hire peo­ple,’ Whit­ney says.

“‘Surely if this coun­try becomes mas­sively pro­tec­tion­ist we’ll build up man­u­fac­tur­ing capa­bil­i­ties. Is that nec­es­sar­ily a good thing? No.’

“Half of the work force toils in small busi­nesses, she notes. But, ‘there’s not a lot of free cap­i­tal for small busi­ness inno­va­tion, small busi­ness period’.

“As for the banks, ‘they’re now doing every­thing they can to keep loans on the books and not write them down,’ she notes. ‘They’re extend­ing and pre­tend­ing with loans.’”

Source: Dan Weil, Mon­eyNews, Sep­tem­ber 21, 2009.

Mon­eyNews: Tay­lor — rates may rise early in 2010
“The Fed­eral Reserve may hike up inter­est rates to com­bat infla­tion as early as the begin­ning of next year, says Stan­ford Uni­ver­sity Pro­fes­sor John Taylor.

“Inter­est rates have hov­ered at a very low tar­get range of zero to 0.25% since Decem­ber, as mon­e­tary pol­i­cy­mak­ers have worked to get the coun­try out of the recession.

“Lower lend­ing rates can even­tu­ally lead to ris­ing con­sumer prices.

“The gov­ern­ment, mean­while, has ear­marked $787 bil­lion in stim­u­lus spend­ing pro­grams that should inflate the country’s bud­get deficit, which can also fuel infla­tion, Tay­lor told Bloomberg News.

“The Con­gres­sional Bud­get Office pre­dicts the bud­get deficit will widen to $1.6 tril­lion this year.

“On top of low inter­est rates, the Fed­eral Reserve bal­ance sheet has bal­looned by $1.2 tril­lion since the mon­e­tary author­ity bailed out orga­ni­za­tions such as insur­ance giant AIG and took on other assets.

“‘The Fed’s bal­ance sheet has just exploded. They’ve got to find a way to bring it down,’ Tay­lor said.

“Now, Obama admin­is­tra­tion offi­cials say, the finan­cial sys­tem is on the mend and it’s time for the gov­ern­ment to start step­ping aside.

“‘The finan­cial sys­tem is show­ing very impor­tant signs of repair,’ Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner said.

“Mar­kets on the mend do not mean that the over­all econ­omy is very close to fully heal­ing, he also cautioned.

“‘I would not want any­one to be left with the impres­sion that we’re not still fac­ing really sub­stan­tial enor­mous chal­lenges through­out the US finan­cial system.’

“Gei­th­ner told Con­gress this week the gov­ern­ment will soon roll back sup­port for Wall Street res­cue pro­grams, a move that Tay­lor applauds.”

Source: For­rest Jones, Mon­eyNews, Sep­tem­ber 17, 2009.

Asha Ban­ga­lore (North­ern Trust): Index of Lead­ing Eco­nomic Indi­ca­tors — con­firms eco­nomic recov­ery is under­way
“Chair­man Bernanke noted last week that a recov­ery is most likely under­way. Our fore­cast is for a 2.5% increase in real GDP dur­ing the third quar­ter, which is slightly lower than the mar­ket con­sen­sus. The advance esti­mate of real GDP for the third quar­ter will be pub­lished on Octo­ber 29.

“The Index of Lead­ing Eco­nomic Indi­ca­tors rose 0.6% in August, the fifth con­sec­u­tive monthly increase of the index. On a year-to-year basis, the index moved up 1.89%, the largest gain since May 2006. The July-August aver­age trans­lates to a 1.32% from the third quar­ter of 2008, the first increase since the first quar­ter of 2007. His­tor­i­cally, the year-to-year change in the LEI advanced one quar­ter has a strong pos­i­tive cor­re­la­tion with the year-to-year change in real GDP.

“This evi­dence and other eco­nomic reports — ISM man­u­fac­tur­ing sur­vey, indus­trial pro­duc­tions index — sup­port expec­ta­tions that an eco­nomic recov­ery com­menced in the third quar­ter of 2009.

“In August, the work­week held steady, job­less claims, orders of non-defense cap­i­tal goods and real money sup­ply declined. The remain­ing seven com­po­nents — orders of durable con­sumer goods, sup­plier deliv­er­ies, build­ing per­mits, inter­est rate spreads, index of con­sumer expec­ta­tions and stock prices moved up. Effec­tively, there is a wide­spread improve­ment in eco­nomic con­di­tions, which had been brought about by pol­icy changes. The impact from mon­e­tary pol­icy accom­mo­da­tion is evi­dent. The pos­si­ble impact from the $787 bil­lion fis­cal stim­u­lus pack­age will be avail­able in 2010. By the end of fis­cal year 2009, roughly 24% of the fis­cal pack­age will have been spent.”

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

Asha Ban­ga­lore (North­ern Trust): Air­craft orders bring down orders of durables
“The 42.2% drop in orders of new civil­ian air­craft in August after a robust 92.2% increase in the prior month led to the 2.4% drop in orders of durable goods in August vs. a 2.8% jump in July. Pri­mary met­als, machin­ery, and autos recorded gains in orders dur­ing August. Book­ings of non-defense cap­i­tal goods exclud­ing air­craft fell 0.4% in August after a 1.3% decline in July.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Sep­tem­ber 25, 2009.

Asha Ban­ga­lore (North­ern Trust): Sales of exist­ing homes are sta­bi­liz­ing
“Sales of all exist­ing homes fell 2.7% to an annual rate of 5.1 mil­lion units dur­ing August, fol­low­ing a string of four monthly gains. Sales of new single-family homes fell 2.8% to an annual rate of 4.48 mil­lion units. The sales level of single-family exist­ing homes is now up 10% from the record low of 4.050 mil­lion units in Jan­u­ary. In the course of the eco­nomic recov­ery, all eco­nomic indi­ca­tors inclu­sive of hous­ing mea­sures are likely to show small set­backs than post a straight upward trend.

“It is note­wor­thy that on a year-to-year basis, sales of all exist­ing homes and single-family homes have risen for three straight months. The Fed’s pol­icy state­ment on Sep­tem­ber 23 also pointed to improv­ing con­di­tions in the hous­ing sec­tor. The $8,000 first-time home buyer credit appears to have played a role in bring­ing about sta­bil­ity in the hous­ing mar­ket. The new home sales report for August will be pub­lished on Sep­tem­ber 25.

“The median price of a single-family exist­ing home fell 12.1% from a year ago to $177,500. The largest his­tor­i­cal year-to-year drop of the median price of an exist­ing single-family home was recorded in Jan­u­ary 2009 (-17.5%)

“The sea­son­ally adjusted inventory-sales ratio of exist­ing single-family homes was an 8.1-month sup­ply in August vs. 8.24-month sup­ply in July. The cycle high read­ing occurred in Novem­ber 2008.”

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

Asha Ban­ga­lore (North­ern Trust): New homes sales — many encour­ag­ing details
“Sales of new single-family homes increased slightly in August to an annual rate of 429,000 from 426,000 in July. Sales of new single-family homes have risen 30.4% from the record low of 329,000 units in Jan­u­ary 2009.

“The most note­wor­thy aspect of the report is that sales of new homes held steady in August com­pared with the sales tally a year ago.

“The median price of a new single-family home stood at $195,700 in August, down 11.7% from a year ago. The largest drop in the median price occurred in Feb­ru­ary 2009 (-14.5%).

“The inven­tory of unsold new homes fell to 7.3-month sup­ply in August vs. 7.6-month sup­ply in July. The median inven­tory of unsold homes dur­ing 1963–2001 is 6-month sup­ply. The $8,000 first-time home buyer tax credit and low mort­gage rates have helped to sta­bi­lize sales of homes.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Sep­tem­ber 25, 2009.

Eoin Treacy (Fuller­money): US Home­build­ing Index leads Case/Shiller
“The over­lay of the S&P500 Home­build­ing Index with the Case/Shiller Composite-10 Index shows the sec­tor top­ping out almost a year ahead of house prices. The sec­tor lost down­ward momen­tum from Jan­u­ary 2008 and has arguably been in a period of base for­ma­tion since. It hit an impor­tant low in Novem­ber, posted a con­sis­tent suc­ces­sion of higher reac­tion lows since and pushed above the 200-day mov­ing aver­age which has now also turned upwards.

“Given the sector’s lead over the Case/Shiller Index, it is plau­si­ble to assume that house prices have begun to bot­tom out. How­ever, this is also likely to a lengthy process.”

Source: Eoin Treacy, Fuller­money, Sep­tem­ber 23, 2009.

Bloomberg: Hous­ing crash to resume on 7 mil­lion fore­clo­sures
“The crash in US home prices will prob­a­bly resume because about 7 mil­lion prop­er­ties that are likely to be seized by lenders have yet to hit the mar­ket, Amherst Secu­ri­ties Group ana­lysts said.

“The ‘huge shadow inven­tory’, reflect­ing mort­gages already being fore­closed upon or now delin­quent and likely to be, com­pares with 1.27 mil­lion in 2005, the ana­lysts led by Lau­rie Good­man wrote today in a report. Assum­ing no other homes are on the mar­ket, it would take 1.35 years to sell the prop­er­ties based on the cur­rent pace of existing-home sales, they said.

“Help­ing to stoke spec­u­la­tion the hous­ing slump has ended, an S&P/Case-Shiller Index for 20 US met­ro­pol­i­tan areas showed the first month-over-month increases in val­ues since 2006 in May and June, reduc­ing the drop from the peak to 31%. Echo­ing other mortgage-bond ana­lysts includ­ing those at Bar­clays Cap­i­tal, Amherst cau­tioned that a change in the mix of fore­clo­sure and tra­di­tional sales over dif­fer­ent parts of the year lifted prices in the period, as the dis­tressed share shrank.

“‘The favor­able sea­son­als will dis­ap­pear over the com­ing months, and the real­ity of a 7 million-unit hous­ing over­hang is likely to set in,’ they said.

“The amount of pend­ing foreclosed-home sup­ply has been boosted by more bor­row­ers going into default, fewer being able to catch up once they do, and longer time peri­ods to seize prop­er­ties because of issues such as loan-modification efforts and changes to state laws, the New York-based ana­lysts wrote.”

Source: Jody Shenn, Bloomberg, Sep­tem­ber 23, 2009.

Chart of the Day (Clus­ter­stock): The Option ARM Armaged­don
“The Option Arm Armaged­don was sup­posed to strike in the spring of 2009. Across the coun­try, option adjustable-rate mort­gages (ARMs) were set to det­o­nate and start a new wave of foreclosures.

“But it never hap­pened. We made it well past when this chart from Credit Suisse showed the option ARMs were sup­posed to begin to hit. And the cri­sis didn’t come.

“Why not? Well, when inter­est rates dropped to his­tor­i­cally low lev­els as the Fed fought the finan­cial cri­sis, the wave of resets was held off. Unfor­tu­nately, low inter­est rates won’t last for­ever — they’ll now likely strike next year and con­tinue well into 2011. Many bor­row­ers who now have the option of mak­ing pay­ments so low that they don’t even cover the inter­est are see­ing their orig­i­nal loan bal­ance grow, even as their home val­ues con­tinue to fall or remain flat.

“The chart below shows that the option ARM reset prob­lem is com­pa­ra­ble to the sub­prime prob­lem, and will likely last for quite some time. Armaged­don may have been fore­stalled but it hasn’t been overcome.”

Source: John Car­ney and Kamelia Angelova, Clus­ter­stock — Busi­ness Insider, Sep­tem­ber 21, 2009.

The Huff­in­g­ton Post: Land­mark deci­sion promises mas­sive relief for home­own­ers and trou­ble for banks
“A land­mark rul­ing in a recent Kansas Supreme Court case may have given mil­lions of dis­tressed home­own­ers the legal wedge they need to avoid fore­clo­sure. In Land­mark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nom­i­nee com­pany called MERS has no right or stand­ing to bring an action for fore­clo­sure. MERS is an acronym for Mort­gage Elec­tronic Reg­is­tra­tion Sys­tems, a pri­vate com­pany that reg­is­ters mort­gages elec­tron­i­cally and tracks changes in ownership.

“The sig­nif­i­cance of the hold­ing is that if MERS has no stand­ing to fore­close, then nobody has stand­ing to fore­close — on 60 mil­lion mort­gages. That is the num­ber of Amer­i­can mort­gages cur­rently reported to be held by MERS. Over half of all new US res­i­den­tial mort­gage loans are reg­is­tered with MERS and recorded in its name. Hold­ings of the Kansas Supreme Court are not bind­ing on the rest of the coun­try, but they are dicta of which other courts take note; and the rea­son­ing behind the deci­sion is sound.

“The devel­op­ment of ‘elec­tronic’ mort­gages man­aged by MERS went hand in hand with the ’secu­ri­ti­za­tion’ of mort­gage loans — chop­ping them into pieces and sell­ing them off to investors. In the hey­day of mort­gage secu­ri­ti­za­tions, before investors got wise to their risks, lenders would slice up loans, bun­dle them into ‘finan­cial prod­ucts’ called ‘col­lat­er­al­ized debt oblig­a­tions’ (CDOs), osten­si­bly insure them against default by wrap­ping them in deriv­a­tives called ‘credit default swaps’, and sell them to pen­sion funds, munic­i­pal funds, for­eign invest­ment funds, and so forth.

“There were many secured par­ties, and the pieces kept chang­ing hands; but MERS sup­pos­edly kept track of all these changes elec­tron­i­cally. MERS would reg­is­ter and record mort­gage loans in its name, and it would bring fore­clo­sure actions in its name. MERS not only facil­i­tated the rapid turnover of mort­gages and mortgage-backed secu­ri­ties, but it has served as a sort of ‘cor­po­rate shield’ that pro­tects investors from claims by bor­row­ers con­cern­ing preda­tory lend­ing practices.”

Click here for the full article.

Source: The Huff­in­g­ton Post, Sep­tem­ber 25, 2009.

Bloomberg: Card defaults surge in August
“US credit-card defaults rose to a record in August and more losses may lie ahead as delin­quen­cies climbed for the first time since March, accord­ing to Moody’s Investors Service.

“Write-offs rose to 11.49% from 10.52% in July, Moody’s said today in a report. Loans at least 30 days delin­quent rose to 5.8% from 5.73%. ‘Early– stage’ delin­quen­cies, or loans over­due 30 to 59 days, surged to 1.65%, from 1.41%, sig­nal­ing higher losses in com­ing months. Banks typ­i­cally write off loans after 180 days.

“Card issuers have strug­gled with ris­ing defaults as the reces­sion drove up unem­ploy­ment to 9.7% and the impact of income tax refunds waned. Credit-card defaults typ­i­cally track the US job­less rate since con­sumers tend to fall behind on pay­ments when their income dries up.

“‘We con­tinue to call for a recov­ery of the credit-card sec­tor to begin once indus­try aver­age charge-offs peak in mid-2010 between 12% and 13%,” said the Moody’s report, which pre­dicted unem­ploy­ment may reach 10.5%.”

Source: Peter Eichen­baum, Bloomberg, Sep­tem­ber 23, 2009.

Mon­eyNews: Wave of com­mer­cial prop­erty defaults ahead
“Once flour­ish­ing com­mer­cial prop­erty sales are expected to hit their low­est point in almost two decades this year, and ana­lysts say the grow­ing loan default rate may sig­nif­i­cantly lower gains in real estate invest­ment shares.

“‘There’s no real way to sug­ar­coat it,’ Real Cap­i­tal Ana­lyt­ics man­ag­ing direc­tor Dan Fasulo told Bloomberg.

“‘A slow­down of this mag­ni­tude cer­tainly hasn’t occurred since I’ve been in the business.’

“‘Some of the older folks in the indus­try I talk to said it has a sim­i­lar feel to the early ’90s, when trans­ac­tion activ­ity went to basi­cally zero.’

“The vol­ume of office sales in the sec­ond quar­ter was 97% less than the market’s peak in the first three months of 2007, accord­ing to Real Cap­i­tal, whose data indi­cates that only about $16 bil­lion of sales for office build­ings will com­plete by year’s end.

“More­over, fewer trans­ac­tions make it more dif­fi­cult for buy­ers and sell­ers to agree on prices, which in turn makes lenders less able to find the com­pa­ra­ble trans­ac­tions they need in order to eval­u­ate loan worthiness.

“Returns on office invest­ments this year have been run­ning almost 1% higher than for moderate-risk long-term cor­po­rate bonds.

“Most com­mer­cial prop­erty mort­gages made within the last few years are headed for default, says real estate financier Ethan Penner.

“‘For any­thing orig­i­nated after 2005, the chances of those loans going into default are very high,’ Pen­ner told The Dal­las Morn­ing News.

“‘A large major­ity of the loans orig­i­nated in this period will ulti­mately go into default.’”

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

Finan­cial Times: Euro­pean prop­erty groups face debt time-bomb
“Euro­pean com­mer­cial prop­erty own­ers face a wave of com­plex debt refi­nanc­ings and restruc­tur­ings that pose a threat to the sec­tor, accord­ing to bankers and indus­try groups.

“Senior bankers and indus­try rep­re­sen­ta­tives in the UK used a meet­ing with the Bank of Eng­land in the sum­mer to high­light the prob­lems caused by bil­lions of pounds worth of debt that needs to be refi­nanced or has breached bank­ing agreements.

“They are par­tic­u­larly con­cerned about the amount of Euro­pean debt pack­aged in com­plex bonds, known as com­mer­cial mortgage-backed secu­ri­ties (CMBS), where restruc­tur­ing has proved espe­cially dif­fi­cult and high­lighted this issue to the Bank for the first time.

“The group, which includes senior bankers and rep­re­sen­ta­tives from the British Prop­erty Fed­er­a­tion, the Royal Insti­tu­tion of Char­tered Sur­vey­ors and the Invest­ment Prop­erty Forum, believes the CMBS mar­ket remains impor­tant to the prop­erty sector.

“It dis­cussed with the Bank whether a cen­tral bank guar­an­tee could be used to under­pin the debt issued, or whether the real estate invest­ment trust mar­ket could be used by banks to offload their loans.

“There is mount­ing con­cern among indus­try pro­fes­sion­als about how to restruc­ture or refi­nance the $2,100 bil­lion of Euro­pean com­mer­cial prop­erty loans, in par­tic­u­lar the $200 bil­lion in CMBS.

“A report from the UK indus­try group that met with the Bank high­lighted that the UK com­mer­cial prop­erty sec­tor could be in neg­a­tive equity until 2017 and under­cap­i­talised by up to £120 bil­lion ($195 bil­lion) based on cur­rent con­ser­v­a­tive bank­ing refi­nanc­ing terms.

“Close to £43 bil­lion of loans to the com­mer­cial prop­erty sec­tor are due for repay­ment this year alone, accord­ing to De Mont­fort Uni­ver­sity research.

“Half of the out­stand­ing Euro­pean CMBS mar­ket needs to be repaid in 2011 and 2012, and CMBS in default have already proved dif­fi­cult to restructure.

“‘The amount of out­stand­ing CMBS that need to be refi­nanced poses an absolutely huge prob­lem, which is wait­ing to hit the mar­ket,’ said Edmund O’Kelly, head of real estate restruc­tur­ing at KPMG. ‘A lot of the tech­nol­ogy for cre­at­ing the struc­tures was imported from the US, but they have never been tested in Europe. Restruc­tur­ing CMBS is unchar­tered territory.’”

Source: Anousha Sak­oui and Daniel Thomas, Finan­cial Times, Sep­tem­ber 20, 2009.

Finan­cial Times: Finan­cial groups hit by surge in loan losses
“The US finan­cial sector’s losses on large loans exploded over the past year, exceed­ing the com­bined losses since 2001, with hedge funds and other mem­bers of the ’shadow bank­ing sys­tem’ hit the hard­est, offi­cial fig­ures revealed on Thursday.

“Reg­u­la­tors’ annual review of ’shared national cred­its’ — loans larger than $20 mil­lion shared by three or more fed­er­ally reg­u­lated insti­tu­tions — high­lighted the toll taken by the cri­sis on finan­cial groups out­side the tra­di­tional bank­ing sector.

“More than one in three dol­lars lent by non-bank insti­tu­tions such as hedge funds, secu­ri­ti­sa­tion vehi­cles and pen­sion funds, went sour, accord­ing to the fig­ures, com­pared with 11.5% for US banks.

“The results will increase fears that, in spite of a recov­ery in the shares and bal­ance sheets of many banks, the epi­cen­tre of the cri­sis has moved to the hedge funds and investors that gorged on cheap credit in the run-up to the turmoil.

“The impor­tance of these non-bank insti­tu­tions was under­lined by the review’s find­ing that they held 47% of prob­lem loans, in spite of account­ing for only 21.2% of the total loan pool.

“Over­all, the US finan­cial sector’s losses on loans in early 2009 reached a record of $53 bil­lion, almost triple the pre­vi­ous high in 2002.

“The num­ber of loans edg­ing into the dan­ger zone has also surged.

“Some 15% of the $2,900 bil­lion SNC port­fo­lio was clas­si­fied as ’sub­stan­dard’ — the sec­ond of the four cat­e­gories used by reg­u­la­tors — and worse, up from 5.8% in 2008.

“The pace at which loans got into seri­ous trou­ble accel­er­ated sig­nif­i­cantly. The dol­lar vol­ume classed as ‘doubt­ful’ or loss-making increased 14-fold over the past year to $110 bil­lion. ‘Doubt­ful’ loans are so weak that col­lec­tion or liq­ui­da­tion is highly improbable.”

Source: Sarah O’Connor and Francesco Guer­rera, Finan­cial Times, Sep­tem­ber 25, 2009.

Finan­cial Times: Liq­ui­da­tion of CDOs aids banks
“Bil­lions of dol­lars’ worth of the com­plex secu­ri­ties at the heart of the finan­cial cri­sis are being liq­ui­dated, enabling banks, insur­ance com­pa­nies and other investors to clear toxic assets from their books.

“Mar­ket par­tic­i­pants say the unwind­ing is occur­ring in the mar­ket for col­lat­er­alised debt oblig­a­tions (CDOs), com­plex secu­ri­ties backed by the pay­ments on mort­gages, cor­po­rate loans and other debt.

“Hun­dreds of bil­lions of dol­lars of CDOs have defaulted, but the struc­tures can only be liq­ui­dated if the under­ly­ing col­lat­eral can be sold. In recent weeks, more investors have been buy­ing the under­ly­ing assets at deep dis­counts, lead­ing to increased trade and boost­ing prices for some exist­ing CDOs.

“‘There has been a sig­nif­i­cant increase in the amount of CDO liq­ui­da­tions,’ said Vish­wanath Tiru­pat­tur, ana­lyst at Mor­gan Stan­ley. ‘The rally across asset classes has given investors an incen­tive to liquidate.’

“CDOs were one of the main vehi­cles through which risky US mort­gages were repack­aged and sold to investors around the world. Much of their value was wiped out amid a wave of defaults on sub­prime mort­gages. The inabil­ity to sell or unwind com­plex secu­ri­ties such as CDOs was one of the prime prob­lems of the finan­cial cri­sis. Now, the option to sell these so-called toxic assets is re-emerging. ‘For a long time it may have made sense for investors to liq­ui­date CDOs, but this was not pos­si­ble when there was no mar­ket for the under­ly­ing col­lat­eral,’ said Ed O’Connell, part­ner at Jones Day.

“The recent rally has been par­tic­u­larly marked for CDOs backed by cor­po­rate bonds and loans. Of the more than $500 bil­lion of CDOs backed by asset-backed secu­ri­ties sold in the boom years, $350 bil­lion have already expe­ri­enced an ‘event of default’.

“Once that hap­pens, the hold­ers of the top tranches, those once rated triple A, can opt to liq­ui­date the CDO. This involves sell­ing off the col­lat­eral. CDOs backed by cor­po­rate loans are now trad­ing at lev­els last seen nearly a year ago, shortly after the bank­ruptcy of Lehman Broth­ers. Mor­gan Stan­ley esti­mates about $123 bil­lion of these defaulted CDOs have been liquidated.”

Source: Aline van Duyn, Finan­cial Times, Sep­tem­ber 21, 2009.

Finan­cial Times: BofA to pay $425 mil­lion over toxic assets
“Bank of Amer­ica agreed late on Mon­day to pay $425 mil­lion to fed­eral reg­u­la­tors to extri­cate itself from an agree­ment struck last Decem­ber to pro­tect the bank against $118 bil­lion worth of toxic assets, most of which came from Mer­rill Lynch.

“The deci­sion to pay the money to the US Trea­sury, the Fed­eral Reserve and the Fed­eral Deposit Insur­ance Cor­po­ra­tion brings an end to one of BofA’s finan­cial entan­gle­ments with its over­seers at a time when the bank is also try­ing to pay back $45 bil­lion in funds to the trou­bled asset relief programme.

“The loss-protection agree­ment was part of a deal struck in Decem­ber after Ken Lewis, BofA chief exec­u­tive, told Hank Paul­son, the then Trea­sury sec­re­tary, that he wanted to invoke a ‘mate­r­ial adverse change’ clause to abort his planned acqui­si­tion of Mer­rill Lynch.

“Mr Paul­son, along with Ben Bernanke, the Fed­eral Reserve chair­man, encour­aged Mr Lewis to pro­ceed with the deal, and pro­vided $20 bil­lion in funds, on top of the $25 bil­lion already ear­marked for BofA and Mer­rill, to make sure the trans­ac­tion was con­sum­mated. On top of the money, the reg­u­la­tors gave BofA a guar­an­tee on $118 bil­lion worth of trou­bled assets.

“BofA did not for­mally sign a con­tract for the ringfence pro­tec­tion and in May decided against enter­ing into the insur­ance pro­gramme. For the past three months, the bank has been in nego­ti­a­tions with fed­eral offi­cials to deter­mine the fair value of the per­ceived insur­ance pro­vided by the guarantee.

“Mean­while, the US Secu­ri­ties and Exchange Com­mis­sion said it would con­sider adding charges to its law­suit against BofA for allegedly fail­ing to give investors details on exec­u­tive bonuses.”

Source: Greg Far­rell, Finan­cial Times, Sep­tem­ber 22, 2009.

Mon­eyNews: For­eign­ers snap­ping up Trea­suries, still
“While for­eign investors such as China have threat­ened for months to dump Trea­suries they are instead grab­bing every last one they can get their hands on.

“For­eign­ers have pur­chased 43.1% of the $1.41 tril­lion of Trea­sury notes and bonds issued so far this year, com­pared with 27.1% of the $527 bil­lion issued at this point in 2008, gov­ern­ment fig­ures show, Bloomberg reports.

“The Mer­rill Lynch Trea­sury Mas­ter Index of US secu­ri­ties returned 1.18% in the third quar­ter after the worst first half on record. Demand at Trea­sury auc­tions from the investor group, which includes cen­tral banks, surged to record heights.

“China is the biggest for­eign owner of Trea­suries, mak­ing net pur­chases of $24.1 bil­lion in July and rais­ing the country’s Trea­sury hold­ings 3.1% to $800.5 bil­lion, the lat­est offi­cial data show.

“China’s Trea­suries kitty has gained 10% this year, after a 52% jump last year.

“‘The inter­est rate on long-term Trea­sury bonds is at a very low level by his­tor­i­cal stan­dards,’ David Dol­lar, the Trea­sury Department’s eco­nomic and finan­cial emis­sary to China said at a recent con­fer­ence. ‘That says that the mar­ket has con­fi­dence the U.S. will get the fis­cal prob­lem under control.’”

Source: Dan Weil, Mon­eyNews, Sep­tem­ber 24, 2009.

Bespoke: Inter­na­tional equity mar­ket snap­shot
“Below we pro­vide our unique trad­ing range charts for major coun­try indices. For each index, the light blue shad­ing rep­re­sents between one stan­dard devi­a­tion above and below the 50-day mov­ing aver­age. When the price is within this trad­ing range, it is con­sid­ered to be in ‘neu­tral’ ter­ri­tory. The red zone rep­re­sents between one and two stan­dard devi­a­tions above the index’s 50-day mov­ing aver­age. Moves into or above the red zone are con­sid­ered ‘over­bought’. Moves into the green zone (more than one stan­dard devi­a­tion below the 50-DMA) are con­sid­ered ‘oversold’.

“With the excep­tion of a few Asian coun­tries, most indices are trad­ing into over­bought ter­ri­tory. China’s Shang­hai Com­pos­ite is the only index trad­ing below its 50-day mov­ing aver­age. Aus­tralia, Brazil, South Korea, Tai­wan, the UK, and the US look to be the most over­bought of the bunch. After trad­ing in per­pet­ual down­trends for nearly all of 2008 and the first few months of 2009, most coun­tries have now been trad­ing in solid uptrends for five months now, with only a brief pull­back here and there. Brazil, China, Hong Kong, India, Malaysia, Mex­ico, Sin­ga­pore, Swe­den, Spain, South Korea, and Tai­wan have all taken out their 52-week highs in recent months, while the rest still have a bit fur­ther to go.”

Source: Bespoke, Sep­tem­ber 21, 2009.

Bespoke: Investors get back $18.31 tril­ion
“Below we high­light the total mar­ket cap­i­tal­iza­tion of stocks both glob­ally and in the US. At its peak in 2007, total world mar­ket cap was $62.57 tril­lion. By the lows this March, world mar­ket cap had dropped to $25.6 tril­lion! That’s a loss of $36.97 tril­lion in stocks glob­ally. Since the March lows, how­ever, world mar­ket cap has risen $18.31 tril­lion back up to $43.9 trillion.

“In the US, mar­ket cap has risen $4.88 tril­lion from its low of $8.09 tril­lion in March. The peak in total US stock mar­ket value was $19.14 tril­lion in 2007, and the cur­rent value of all US stocks is $12.97 tril­lion. The US accounts for 29.5% of total stock mar­ket value in the world.”

Source: Bespoke, Sep­tem­ber 21, 2009.

David Fuller (Fuller­money): Rid­ing the stock mar­ket bull
“I main­tain that we are still in the com­par­a­tively early stages of the sec­ond psy­cho­log­i­cal per­cep­tion stage of a bull mar­ket, char­ac­ter­ized by the ‘wall of worry’. This stage is often longer than its pre­de­ces­sor — dis­be­lief dur­ing the base build­ing phase, or the final eupho­ria dur­ing an accel­er­ated peak. Today, many investors are still ner­vous, not least as we have yet to pass the anniver­sary of last October’s low, when most of today’s lead­ers bottomed.

“Today, I am not more bull­ish than ear­lier in the year when China and other favorites were so clearly lead­ing the base for­ma­tion devel­op­ment and com­ple­tion stage. After all, the low hang­ing fruit in terms of val­u­a­tion bar­gains has already been har­vested. Nev­er­the­less, momen­tum bull phases should not be under­es­ti­mated, espe­cially when inter­est rates remain low and mon­e­tary pol­icy is still accom­moda­tive. Also, the earn­ings growth phase of this bull cycle lies ahead of us and this will be more robust in Asia than most other regions of the globe.

“As investors we need to remem­ber that due to the human ele­ment, mar­kets are much more volatile than changes in under­ly­ing fun­da­men­tals. Over the last year we have seen aston­ish­ing fun­da­men­tal changes and even more dra­matic price moves. We are mov­ing into a period when fun­da­men­tal sur­prises should be mainly to the upside, not least due to year-on-year com­par­isons for 4Q 2009 and 1Q 2010. Once again, this should favour Asia, export and some con­sumer stocks excepted.

“Mean­while, investors will recall that even bull­ish momen­tum moves are some­times punc­tu­ated by sud­den reac­tions and con­sol­i­da­tions. These may be trig­gered by a tem­po­rary news item or they may be ran­dom. It is dif­fi­cult to time set­backs in an over­all bull­ish envi­ron­ment although they are usu­ally pro­ceeded by overex­ten­sions rel­a­tive to a mean such as the 200-day mov­ing aver­age. Mean rever­sions within an over­all upward trend … are usu­ally buy­ing opportunities.

“The next sig­nif­i­cant dan­ger period for investors is unlikely to arrive until a few months after lead­ing cen­tral banks have clearly sig­naled their intent to tighten mon­e­tary pol­icy. Today, we hear plenty of dis­cus­sion as to when this might occur but poli­cies remain accommodative.”

Source: David Fuller, Fuller­money, Sep­tem­ber 22, 2009.

Eoin Treacy (Fuller­money): Mon­e­tary con­di­tions remain accom­moda­tive
“Inter­est rates have fallen about as low as they can go in the US and Japan and are only slightly higher in the UK and Europe. Most coun­tries are now sig­nalling that their next move will be upwards. How­ever, this is not an imme­di­ate threat and cen­tral banks are only begin­ning to exam­ine how stim­u­lus can respon­si­bly be removed. The process by which cen­tral banks are bail­ing out their respec­tive finan­cial sec­tors via the yield curve has been a tail­wind for most stock and com­mod­ity markets.

“If we exam­ine spreads between 10yr and 2yr yields across a range of coun­tries a very sim­i­lar pat­tern emerges. Spreads in the US, Euro­zone, Canada and Switzer­land are all close to his­toric highs. The cor­re­spond­ing spread for the UK is at new 17-year highs and con­tin­ues to advance.

“These spreads clearly illus­trate the loose mon­e­tary con­di­tions per­me­at­ing the global econ­omy. These extra­or­di­nar­ily loose con­di­tions will not last inter­minably and the cur­rent strong tail­wind pro­vided to risk assets will decrease over time. How­ever, it will not turn into a sig­nif­i­cant head­wind until the next time these spreads invert, with moves below 0%. When this occurs, it will be a warn­ing that we are in the lat­ter stages of what remains likely to be a multi-year stock mar­ket advance.

“No sig­nif­i­cant uptrend unfolds in a straight line. We can expect occa­sional cor­rec­tions along the way. How­ever, as long as mon­e­tary con­di­tions remain accom­moda­tive, these are likely to be good medium-term buy­ing opportunities.”

Source: Eoin Treacy, Fuller­money, Sep­tem­ber 24, 2009.

Mon­eyNews: Rosen­berg — stocks vastly over­val­ued
“Econ­o­mist David Rosen­berg says the stock mar­ket has way over­done it on the upside.

“The Stan­dard & Poor’s 500 Index has soared 60% from its March low.

“The S&P is at a level that should be reached in the third year of recov­ery from a reces­sion, Rosen­berg, chief econ­o­mist at Gluskin Sheff & Asso­ciates Inc. in Toronto, told Bloomberg.

“‘The mar­ket is being really fueled here by tech­ni­cals and momen­tum,’ the for­mer chief North Amer­i­can econ­o­mist for Mer­rill Lynch said.

“‘It has over­shot the fun­da­men­tals. I’m a lit­tle ner­vous, at least over the near-term.’

“Earn­ings for com­pa­nies in the S&P 500 Index have fallen for a record eight straight quar­ters and will prob­a­bly plunge 22% in the cur­rent period before grow­ing 62% in the final three months of 2009, accord­ing to the aver­age esti­mate of ana­lysts sur­veyed by Bloomberg.

“Stock prices have surged to lev­els equal to almost 20 times reported earn­ings from con­tin­u­ing oper­a­tions, the high­est level in five years, accord­ing to weekly data com­piled by Bloomberg.

“‘The fair mul­ti­ple for earn­ings should be 12 or 13,’ Rosen­berg said. ‘We’ve blown right through that.’

“Rosen­berg isn’t the only bear.

“‘We think the mar­ket … is due for a pull­back or set­back only because it’s gone so far and eco­nomic growth can­not go so far,’ says Bill Gross, chief invest­ment offi­cer at bond giant Pimco, told CNBC.”

Source: Dan Weil, Mon­eyNews, Sep­tem­ber 22, 2009.

Mon­eyNews: Odey — stock mar­ket bub­ble form­ing
“Stock mar­kets are now ‘enter­ing a bub­ble phase’ which could last until the end of the year, says high-profile hedge fund man­ager Crispin Odey.

“Odey, found­ing part­ner at Odey Asset Man­age­ment and one of the first investors to call a pos­si­ble bull mar­ket early this year, said quan­ti­ta­tive eas­ing had fuelled the bub­ble but said real assets still appeared cheap com­pared with cash and gov­ern­ment bonds, prompt­ing investors to rush in.

“‘At some point the quan­ti­ta­tive eas­ing will have to come to an end but until it does this bull mar­ket is spon­sored by HMG (Her Majesty’s Gov­ern­ment) and every­one should enjoy it,’ the London-based man­ager said in a note to clients.”

Source: Mon­eyNews, Sep­tem­ber 22, 2009.

Mon­eyNews: Faber — choose stocks over bonds, cash
“Invest­ment guru Marc Faber sees stocks out­per­form­ing cash and bonds as the Fed­eral Reserve’s mas­sive mon­e­tary stim­u­lus props up the US economy.

“‘I think that he (Ben Bernanke) will print (money) like never before in his­tory.’ As a result, the Stan­dard & Poor’s 500 Index can rise as high as 1,250 in a year, up 17% from mid­day Wednes­day, Faber told Bloomberg.

“‘Where there is infla­tion in the sys­tem as defined by money sup­ply growth and credit growth, you have cur­rency weak­ness. Stocks can eas­ily go higher. If you print the money, they can go anywhere.’

“But the grow­ing US debt bur­den isn’t pretty, he points out. ‘You just post­pone the prob­lem until the ulti­mate cri­sis hap­pens. And that will hap­pen one day. I don’t know whether it will be tomor­row or in three years, five years, 10 years. But the next cri­sis will bring down the entire cap­i­tal­ist system.’”

Source: Dan Weil, Mon­eyNews, Sep­tem­ber 24, 2009.

CNBC: Bill gross bear­ish on stocks
“Bill Gross, of Pimco; Robert Doll, of Black­Rock; and Daniel Tish­man, of Tish­man Con­struc­tion, share their mar­ket insight.”

Source: CNBC, Sep­tem­ber 21, 2009.

Richard Rus­sell (Dow The­ory Let­ters): Stock mar­ket rally is tired
“I’m study­ing the daily chart of the Dow below. RSI appears to have hit the over­bought area (70) and has turned down from there. MACD has three declin­ing tops with the blue his­tograms about to turn neg­a­tive. The thin red line above vol­ume has been steadily declin­ing, indi­cat­ing a con­tract­ing of vol­ume as the Dow climbed. All this gives me food for thought. The rally is tired. But far more impor­tant, is the rally top­ping out? We should know over the com­ing two or three weeks.”

Source: Richard Rus­sell, Dow The­ory Let­ters, Sep­tem­ber 24, 2009.

Chart of the Day (Clus­ter­stock): Investor sen­ti­ment rebound could be a bear­ish sign
“42% of indi­vid­ual investors are bull­ish right now, accord­ing to most recent sen­ti­ment data from the Amer­i­can Asso­ci­a­tion of Indi­vid­ual Investors (AAII). While investor sen­ti­ment has changed dra­mat­i­cally since March, we’re still only mod­er­ately above the long-term aver­age of 39%.

“The prob­lem is that pro­fes­sional investors are likely to be more opti­mistic than AAII’s investor sen­ti­ment, since they became opti­mistic ear­lier in the game this year. Over­all bull­ish sen­ti­ment could thus be higher once you com­bine indi­vid­ual investors with these pros.

“The mar­ket could be approach­ing a tricky stage whereby one has to gauge the poten­tial for new bulls to be dis­ap­pointed ver­sus that for fur­ther bears or fence-sitters to capit­u­late. Given the uncer­tain times, even mod­er­ately above-average bull­ish­ness, shown below, could sig­nal a short-term sen­ti­ment peak.”

Source: Vin­cent Fer­nando and Joe Weisen­thal, Clus­ter­stock — Busi­ness Insider, Sep­tem­ber 22, 2009.

Bespoke: S&P 500 net new highs
“The S&P 500 closed at another high for 2009 today, but it still remains well below its 52-week high of 1,255 (Sep­tem­ber 22, 2008). As the mar­ket has ral­lied, we have been watch­ing the num­ber of stocks in the index mak­ing new 52-week highs for con­fir­ma­tion of the rally. Even though the num­ber has been rel­a­tively low, with each new high in the S&P 500, the num­ber of stocks mak­ing new highs has increased. Today [Tues­day], how­ever, was an excep­tion. Even though the S&P 500 closed at a new high for the year, only 5% of the stocks in the index hit a 52-week high. This is down from last week’s peak of 7.6% when the S&P 500 was at sim­i­lar lev­els. Given that it has only been one day, we wouldn’t read too much into this indi­ca­tor yet, but it cer­tainly war­rants watching.”

Source: Bespoke, Sep­tem­ber 22, 2009.

Bespoke: Polar oppo­sites — equi­ties vs US dol­lar
“While the inverse rela­tion­ship between the dol­lar and stocks is well doc­u­mented, the recent intra­day move­ments of the two assets takes it to another level. The chart below shows the intra­day chart of the S&P 500 over the last two days com­pared to the US Dol­lar Index on an inverse scale. In other words, a ris­ing red line indi­cates dol­lar weak­ness while a falling red line indi­cates dol­lar strength. As shown in the chart, since the Fed’s rate announce­ment yes­ter­day, the dollar’s strength has been in exact lock­step with the weak­ness in equi­ties. Over the last two trad­ing days, the S&P 500’s cor­re­la­tion to the US dol­lar index has been –0.97. You can’t get much more neg­a­tively cor­re­lated than that!”

Source: Bespoke, Sep­tem­ber 24, 2009.

John Nor­mand (JPMor­gan): This is not a cur­rency cri­sis
“The lat­est sell-off in the dol­lar has prompted renewed talk of reserve diver­si­fi­ca­tion — but this is not the stuff a cur­rency cri­sis is made of, says John Nor­mand, global head of FX strat­egy at JPMorgan.

“‘Quan­ti­fy­ing reserve diver­si­fi­ca­tion is finan­cial alchemy — often attempted and never suc­cess­ful,’ he says. ‘But there is decent cir­cum­stan­tial evi­dence that this process has accel­er­ated since June.’

“Mr Nor­mand notes that global for­eign exchange reserves are grow­ing at $100 bil­lion a month, while offi­cial pur­chases of US assets are run­ning near $50 bil­lion. ‘This sort of diver­gence is unusual in an envi­ron­ment where rate spreads between the US and the rest of the world are sta­ble,’ he says.

“Mr Nor­mand points out that offi­cial investors are still size­able net buy­ers of US assets, even if the dol­lar share of total reserve recy­cling appears to be declining.

“‘We could pan­der to the dollar-crisis camp and claim that this diver­gence marks the begin­ning of the end for the dol­lar and US asset mar­kets where for­eign own­er­ship dom­i­nates, but that course would be too easy,’ he says. ‘It would also be wrong.

“‘The dol­lar cri­sis sce­nario still looks low-probability for the next three to six months since the US man­ages to attract a high absolute level of offi­cial financ­ing, even though the US’s rel­a­tive share of global reserves may be declining.’”

Source: John Nor­mand, JPMor­gan (via Finan­cial Times), Sep­tem­ber 22, 2009.

Ambrose Evans-Pritchard (Tele­graph): HSBC bids farewell to dol­lar supremacy
“‘The dol­lar looks awfully like ster­ling after the First World War,’ said David Bloom, the bank’s cur­rency chief.

“‘The whole pic­ture of risk-reward for emerg­ing mar­ket cur­ren­cies has changed. It is not so much that they have risen to our stan­dards, it is that we have fallen to theirs. It used to be that sov­er­eign risk was mainly an emerg­ing mar­ket issue but the events of the last year have shown that this is no longer the case. Look at the UK — debt is rac­ing up to 100% of GDP,’ he said

“Cru­cially, China and ris­ing Asia have reached the point where they can no longer keep hold­ing down their cur­ren­cies to boost exports because this is caus­ing may­hem to their own economies, stok­ing asset bub­bles. Asia’s ‘mer­can­tilist mind­set’ of recent decades is about to be bro­ken by the spec­tre of an infla­tion spiral.

“The pol­icy headache was already becom­ing clear in the final phase of the global credit boom but the finan­cial cri­sis tem­porar­ily masked the effect. The pres­sures will return with a vengeance as these coun­tries roar back to life, leav­ing the US and other lag­gards of the old world far behind.

“A mon­e­tary pol­icy of near zero rates — fur­ther juiced by quan­ti­ta­tive eas­ing — is com­pletely incom­pat­i­ble with cir­cum­stances in most of Asia, the Mid­dle East, Latin Amer­ica, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

“What is occur­ring is an epochal loss in the rel­a­tive wealth and eco­nomic power of the old G10 bloc of rich coun­tries com­pared to ris­ing regions of the world. The euro, yen, ster­ling, Swiss franc and other mature cur­ren­cies will be rel­e­gated along with the dol­lar in this great process of rebal­anc­ing, but the Green­back will bear the brunt.

“The Fed’s super-loose pol­icy is turn­ing the dol­lar into the key fund­ing cur­rency for the next phase of the global ‘carry trade’, tak­ing over the role of Japan dur­ing its period of emer­gency stimulus.

“Mr Bloom said regional cur­ren­cies would emerge as the anchor for their smaller trad­ing part­ners, with China, Brazil, or South Africa sub­sti­tut­ing the role of the US. Aus­tralia is already link­ing its for­tunes to China through com­mod­ity ties.”

Source: Ambrose Evans-Pritchard, Tele­graph, Sep­tem­ber 20, 2009.

Yahoo Finance: IMF approves sale of some of its gold
“The Inter­na­tional Mon­e­tary Fund approved on Fri­day the sale of a lim­ited amount of its gold to help pro­vide loans to poor coun­tries and shore up its finances.

“The fund’s exec­u­tive board said it decided to sell ‘a vol­ume strictly lim­ited to 403.3 met­ric tons’ — one-eighth of its hold­ings — in a way that does not dis­rupt the sale of gold in com­mod­ity mar­kets, which already were expect­ing the sale and dis­counted the IMF decision.

“The IMF, a 186-nation Washington-based lend­ing orga­ni­za­tion, is the third-largest offi­cial holder of gold in the world, with 3,217 met­ric tons, after the United States and Germany.

“The board said the IMF could sell its gold directly to its mem­bers’ cen­tral banks if any were inter­ested or it could put the gold on the open mar­ket in phases.

“China, India and Rus­sia have indi­cated inter­est in such pur­chases as a way of reduc­ing their posi­tion in dollar-denominated secu­ri­ties and increas­ing their role in IMF oper­a­tions. These coun­tries and other devel­op­ing nations have com­plained the IMF is dom­i­nated by the United States, its largest share­holder, and Euro­pean nations.

“If the gold is sold on the open mar­ket, the IMF said it would inform these mar­kets before any sale begins and report reg­u­larly to the pub­lic on the progress of gold sales.

“The IMF said it also would coör­di­nate its sales with major cen­tral banks, who agreed last month on ceil­ings of gold sales amount­ing to 400 tons annu­ally and 2,000 tons in total over five years.

“‘Hence, on-market sales by the fund will not add to the announced vol­ume of offi­cial sales,’ the IMF said.

“The head of the IMF, Dominique Strauss-Kahn, expressed sat­is­fac­tion with the board’s decision.

“‘I am delighted the exec­u­tive board has given its over­whelm­ing back­ing to a strictly lim­ited sale of fund gold to put the finances of the IMF on sound, long-term foot­ing and enable us to step up much-needed con­ces­sional lend­ing to the poor­est coun­tries,’ he said.”

Source: Harry Dun­phy, Yahoo Finance, Sep­tem­ber 18, 2009.

James Lord (Cap­i­tal Eco­nom­ics): Baltic fall reflects China demand
“The recent sharp fall in the Baltic Dry Index is in part due to an increase in ship­ping capac­ity, but pri­mar­ily reflects wan­ing demand for com­modi­ties — espe­cially in China, says James Lord at Cap­i­tal Economics.

“‘The BDI, which has almost halved since the start of June, reflects the cost of hir­ing a bulk cargo ship and as such is often seen as an indi­ca­tor of the health of the global economy.

“‘But we think the BDI’s drop is due to con­di­tions spe­cific to the ship­ping indus­try and to China’s reduced com­mod­ity stock­pil­ing,’ Mr Lord says.

“He notes that orders for new ships rose sharply dur­ing the boom years for the global econ­omy — and as it takes up to two years to build these craft, many have only recently become avail­able for lease.

“‘How­ever, the sup­ply of new ships began to rise in Jan­u­ary — well before the recent cor­rec­tion in ship­ping costs,’ he says. ‘We there­fore believe the main dri­ver of the recent BDI decline has been falling Chi­nese stock­pil­ing of commodities.’

“Mr Lord says the global upswing may con­tinue to under­pin com­mod­ity prices for a while even though Chi­nese demand has tapered off. ‘How­ever, com­mod­ity mar­kets have already priced in a strong recov­ery. We expect global growth to slow in the sec­ond half of 2010 — and as such we see com­mod­ity prices falling next year.

“‘Indeed, the recent fall in the BDI may be an early warn­ing sign.’”

Source: James Lord, Cap­i­tal Eco­nom­ics (via Finan­cial Times), Sep­tem­ber 24, 2009.

Bespoke: DOE US crude oil inven­to­ries
“In this morning’s [Wednes­day] weekly energy inven­tory report from the Depart­ment of Energy, crude oil stock­piles are expected to show a decrease of 1,400 bar­rels of oil. In the chart below, we com­pare the cur­rent inven­tory lev­els with the over­all aver­age since 1984. Even though oil is up more than 60% this year, inven­tory lev­els remain well above their long-term aver­age. Just to get back to aver­age, we would need to see a decline of nearly 15 mil­lion barrels.”

Source: Bespoke, Sep­tem­ber 23, 2009.

Finan­cial Times: New Zealand climbs out of reces­sion
“The New Zealand econ­omy grew in the sec­ond quar­ter for the first time since the end of 2007 mark­ing the end of a pro­longed recession.

“Gross domes­tic prod­uct rose by 0.1% in the June quar­ter — after five con­sec­u­tive quar­ters of contraction.

“The quar­terly rise sur­prised the mar­ket which was expect­ing a 0.1% con­trac­tion. News that the nation was emerg­ing from a reces­sion pushed the New Zealand cur­rency to a 2009 high of 72.85 US cents.

“Accord­ing to Helen Kevans, econ­o­mist with JPMor­gan, sec­ond quar­ter GDP growth would have been much stronger had inven­to­ries not dropped so sharply. The NZ$1.1 bil­lion (US$792 mil­lion) plunge in inven­to­ries in June was the largest on record and took 2.3 per­cent­age points away from GDP growth.

“Demand for exports was met with exist­ing stock, accord­ing to Sta­tis­tics New Zealand, but lower imports and a fall in man­u­fac­tur­ing were also respon­si­ble for the dra­matic fall. But Ms Kevans says the run down of inven­to­ries is pos­i­tive for GDP growth in com­ing quar­ters as busi­nesses will need to replen­ish stock as global demand picks up

“Export vol­umes rose 4.7% thanks to a surge in ship­ments of dairy prod­ucts, forestry and log­ging. Import vol­umes dropped 3.8%.

“Although inven­to­ries were a drag on eco­nomic growth in the June quar­ter there were some encour­ag­ing signs. House­hold spend­ing was up 0.4% on the back of record low inter­est rates, heavy dis­count­ing among the nations retail­ers, strong migra­tion flows, and signs of recov­ery in the domes­tic hous­ing market.

“Gross fixed cap­i­tal for­ma­tion rose 0.1% buoyed by invest­ment in ‘other’ fixed assets, while invest­ment in res­i­den­tial build­ing remained weak as expected. Busi­ness invest­ment was sur­pris­ingly firm, ris­ing 1.3% despite credit con­straints and tighter lend­ing standards.”

Source: Eliz­a­beth Fry, Finan­cial Times, Sep­tem­ber 23, 2009.

Tags: Bill Gross, Brazil, BRIC, BRICs, Canadian Market, Carry Trade, Commodities, Corporate Bonds, David Rosenberg, Durable Goods Orders, Emergency Support, Emerging Markets, energy, ETF, ETFs, Fannie Mae, Fannie Mae And Freddie Mac, Fed Funds Rate, Federal Open Market Committee, Fomc, Global Stock Markets, Gold, Heavy Weather, India, Japanese Yen, Mortgage Backed Securities, Natural Gas, Natural Resources, oil, Open Market Committee, precious metals, Rate Target, Rbc, Risk Aversion, Risky Assets, Set Of Numbers, Us Dollar Index
Posted in Brazil, Canadian Market, Emerging Markets, ETFs, Gold, India, Markets, Outlook | Comments Off

Bored?

Saturday, September 26th, 2009

Look­ing for some­thing excit­ing to do on the week­end? Click play to view:

Fly­ing men with fly­ing suit from Xavier on Vimeo.

Tags: Bored, Flying Suit, Men Suit, Vimeo, Xavier
Posted in Markets | Comments Off

The Secret of Obama's Success

Saturday, September 26th, 2009

Obama's con­sis­tency is for­ever cap­tured in pho­tos in this amaz­ing video montage:

Click play to view:

Barack Obama's amaz­ingly con­sis­tent smile from Eric Spiegel­man on Vimeo.

Hat tip: Steve Rubel

Tags: Barack Obama, Consistency, Eric, Hat Tip, Photos, Smile, Spiegelman, Steve Rubel, Success, Vimeo
Posted in Markets | Comments Off

Canada on the Cusp of Something Big — Forget about inflation for now

Friday, September 25th, 2009

Canada is on the cusp of some­thing big. A boom in com­modi­ties means Canada will out­per­form the US over the next decade. Our recov­ery and upward tra­jec­tory is tied to global demand com­ing from China and India, and the rest of the devel­op­ing world. And with attrac­tive risk/reward fun­da­men­tals, sound fis­cal posi­tion, and strong bank­ing sec­tor, Canada  is des­tined to become a dar­ling of global investors. At this time, Canada resides in a sweet spot of long term invest­ing oppor­tu­nity, but not for the one rea­son — infla­tion — that gets cited most often. Not yet anyway.

Mark Car­ney says Canada's eco­nomic recov­ery is merely a 'con­se­quence' of  uncon­ven­tional mea­sures. And, his report cites that prices are still falling in Canada.

This flies in the face of all the hoopla sur­round­ing the inflation-motivated theme of invest­ing in com­modi­ties and/or com­modi­ties pro­duc­ers. Invest­ing in com­modi­ties pro­duc­ers is by no means a bad idea; its the ratio­nale for doing so, by way of infla­tion, that may be flawed. Invest­ing in com­modi­ties falls under the aegis of infla­tion pro­tec­tion, because if indeed we find our­selves in infla­tion­ary times again, we will be happy to own real things, such as com­modi­ties and real estate.

In the U.S. how­ever, is it really a big sur­prise that the G20 meet­ing is yield­ing a "strong dol­lar" con­sen­sus? China, and other dol­lar reservists, Brazil, Rus­sia and India, have been squawk­ing about the fal­ter­ing green­back, threat­en­ing to take mea­sures to reduce its appetite/dependency on the US dol­lar since before the cri­sis began. If you lis­ten to the Michael Pet­tis inter­view regard­ing China, you'll get the idea very clearly that China is in no posi­tion to undo its mar­riage to the US. At least not any­time soon. Un-pegging from the green­back would have desta­bi­liz­ing con­se­quences for China, not too men­tion the global econ­omy, if not because of its effect on China, then due to its effect on the US econ­omy. The US/China rela­tion­ship is a  sym­bi­otic one. In the mean­time, we will watch the U.S./China eco­nomic bal­let continue.

There­fore, as the G20 has reached a strong dol­lar con­sen­sus, the Cana­dian, Aussie and NZ dol­lars have all pulled back. It pre­serves bal­ance for the dol­lar, yen and euro economies, and more impor­tantly it keeps every­one happy polit­i­cally. As for the Cana­dian dol­lar ris­ing in value, it's not a good devel­op­ment for the Cana­dian econ­omy, but rather a by-product of the demand for what we pro­duce. Its ter­ri­ble for our non-commodity exports. So, bal­ance works for us too, in the long run.

Kathy Lien: The Cana­dian Dol­lar tum­bled against the green­back as investors took prof­its ahead of G20 meet­ing. Oil prices also fell more than 4 per­cent while gold prices closed below $1000, pro­vid­ing no sup­port for the com­mod­ity cur­ren­cies. The Cana­dian gov­ern­ment returned to eas­ier mon­e­tary pol­icy after Cana­dian Finance Min­is­ter Jim Fla­herty pro­posed an expan­sion of mort­gage buy-backs to C$125 Bil­lion or $116.4 Bil­lion. The pro­posal comes on the midst of yesterday's com­ments by Gov­er­nor Mark Car­ney who claims the recov­ery is not "self-sustainable" and is a mere con­se­quence of uncon­ven­tional mea­sures. If they pro­ceed fur­ther with this, we could see a turn­around in the Cana­dian dollar.

In What is Gold to China?, we dis­cussed the idea that gold is a safer long term bet as a result of the "Bei­jing put," the notion that when­ever gold falls to lower lev­els, the Chi­nese come in as strong buy­ers, bid­ding gold back up, as they are con­tin­u­ally out to diver­sify their reserves into other cur­ren­cies. Its all part of a sym­phony of inter­ven­tion that is chore­o­graphed between the US, Europe, the IMF, Japan, and China to keep the dol­lar in a fun­da­men­tally sta­ble range. Hav­ing said that, this too, ben­e­fits Canada as one of the world's biggest gold pro­duc­ers, despite the fact the price of gold is sub­ject to the manip­u­la­tion of cen­tral bankers.

In that vein, Canada, as impor­tant as it is in today's world, is along for the ride. Our recov­ery will depend upon a sta­ble global recov­ery deter­mined by steady inter­est rate pol­icy and coör­di­nated cur­rency balancing.

Herein lies the oppor­tu­nity; we just need to rec­og­nize it, and get our (long-term) peas lined up.

Canada really is the best thing going in the G7. We've writ­ten about this in the last two weeks in Canada: There's no place like home, and Canada's Uni­ver­sal Appeal and Advan­tage.

The long-term ratio­nale for invest­ing in Canada

Canada has what the world needs (resources), a sound fis­cal posi­tion, and a strong bank­ing sys­tem — So why haven't the dol­lar reservists cho­sen to invest in Canada bonds, as an ultra-safe alter­na­tive to US Trea­suries? Simple.

Canada has so much of what the reservists (BRICs and other emerg­ing economies) need and want in order to build out their own economies, that invest­ing in our debt would raise the price of the very things they want to buy from us, such as wheat, oil and gas, met­als, and min­er­als. They are not just inter­ested in import­ing com­modi­ties from us; more impor­tant, they have their eyes on buy­ing the com­pa­nies that pro­duce the com­modi­ties, as well. Despite this, Canada's bond mar­ket may per­form well in the near term, as a by-product of today's con­tin­ued price weak­nesses. And, the time will come, though not in the near future, when for­eign investors will alter­na­tively opt to buy Canada bonds.

Among the great inef­fi­cien­cies that have plagued Canada is our con­ser­vatism (or rather the reluc­tance among Cana­di­ans to invest risk cap­i­tal in the most strate­gic areas of our econ­omy), and our com­pla­cency. Cana­dian com­pa­nies have his­tor­i­cally faced short­ages of domes­tic investor cap­i­tal, and that issue has forced them to look first to the US, and now glob­ally for sub­stan­tial sources of cap­i­tal. This has meant that Cana­di­ans have fore­gone the own­er­ship of our home­grown com­pa­nies to for­eign inter­ests. Its this inef­fi­ciency that makes the oppor­tu­nity to invest in our own com­modi­ties pro­duc­ers, and other com­pa­nies so attractive.

By the way, every time some­thing cre­ative comes along to make it easy to raise money in Canada, for exam­ple, income trusts, some­one in gov­ern­ment comes along and shuts it down. There's no doubt that there was some abuse and stretch­ing of the rules which led to the leg­is­la­tion shut­ting them down, but then again, it was also one of the most suc­cess­ful equity financ­ing peri­ods in Canada's cap­i­tal mar­kets his­tory. At times it feels as though the Cana­dian gov­ern­ment would rather help for­eign investors take over our indus­tries, rather than police the tax incen­tives that make rais­ing cap­i­tal eas­ier, more fairly. Then again, this too, is part of our con­ser­vatism as a soci­ety, isn't it?

For­eign investors are more inter­ested in our com­pa­nies than we are. As a coun­try and as investors we need to real­ize that our assets are worth far more to for­eign­ers right now than they are to us. We take our great­est assets, our nat­ural resources, water, oil and gas for granted, because we have always lived in a state of sur­plus and exported most of what we pro­duce, mainly to the US.

Now that the bal­ance of demand is com­ing increas­ingly from the large emerg­ing economies who face mas­sive future short­falls of mate­ri­als, water, food, and energy we need to pre­pare for the geo­met­ric growth of demand com­ing in the next sev­eral decades. We sin­cerely owe it to our­selves to exer­cise our right to own and nur­ture these pre­cious assets, before they pass into the hands of for­eign cor­po­rate interests.

David Rosen­berg states in his lat­est report, out today, that Canada is in the sweet­est of spots because we are in the midst of a sec­u­lar com­modi­ties boom. He cites Chin­dia as the key dri­ver of demand over the next decade, but ini­tially 2009 and 2010, where it is shown that China and India will lead the world in GDP growth, and cur­rently com­mand 21.4% share of Global GDP. This is no big sur­prise to any­one fol­low­ing com­modi­ties, but rather, more confirmation.

We believe that com­modi­ties are in a sec­u­lar bull mar­ket, and this is where Cana­dian out­per­for­mance rel­a­tive to the United States comes into play — nearly 45% of the TSX com­pos­ite index is in resources; almost triple the share in the U.S. Almost 60% of Canada's exports are linked to the com­mod­ity sec­tor, roughly dou­ble the U.S. expo­sure. This explains how it is that the Cana­dian equity mar­ket has man­aged to out­per­form the S&P 500 this year by a cool 2,000 basis points (in this sense, Canada is basi­cally a low-beta way to play the emerg­ing mar­kets via com­mod­ity exposure).

This by no means indi­cates that the US and the West­ern con­sumer will cease to be the world's top con­sumer, but rather that we will have to line up with the new con­sumers from the devel­op­ing world, to buy the same stuff. That is ulti­mately infla­tion­ary, but not for some time.

Rosen­berg points out very nicely that com­modi­ties prices bot­tomed last year at the high­est reces­sion lev­els ever.

And, that prices bot­tomed at lev­els above his­tor­i­cal peak prices.

This last chart is remark­able, because it illus­trates how strong demand has got­ten dur­ing the last ten years with the rise of China and India. Even after last year's blow-off, prices are fun­da­men­tally higher because of the surge com­ing from the devel­op­ing world' grow­ing appetite for food, shel­ter and commerce.

For­get about infla­tion, at least for now, as a rea­son to buy com­modi­ties. There are two over­rid­ing themes, that should be front and centre:

1) demand for com­modi­ties — For­eign inter­ests wish to lock up sup­ply which means the com­modi­ties them­selves will be bid up.

2) demand for pro­duc­ing com­pa­nies - For­eign inter­ests, par­tic­u­larly China and its rapidly devel­op­ing and mutu­ally rich peers have their eyes squarely focused on our busi­nesses and our nat­ural resources. Merg­ers acqui­si­tions and hos­tile takeovers will bid up the prices of Canada's most desir­able com­modi­ties pro­duc­ers, and it won't be only China which comes knock­ing, though they will likely turn out to be the most aggres­sive. The onslaught of foreign-sourced cap­i­tal mar­kets activ­ity is likely to come well in advance of peak prices for the com­modi­ties themselves.

What do pol­i­cy­mak­ers think of, in the now wealth­ier, fastest grow­ing coun­tries of the world, whose nations are fac­ing short­ages of mate­ri­als, oil, water, and food that would be dev­as­tat­ing to their eco­nomic progress? "What will we need, and what do we have to do to get it?"

Let's come back to the notion of com­pla­cency. Cana­dian com­pla­cency. We have taken our most valu­able assets for granted, because they are abun­dantly avail­able in our back­yard. Also, the last year's tur­moil has also made it more dif­fi­cult for investors to com­mit long term cap­i­tal out of fear.

In the period ahead, it is not so much infla­tion, but rather pure and sim­ple demand for the future sup­ply of com­modi­ties that will take cen­tre stage. Infla­tion, when it re-appears will be the icing. Cana­dian investors should view any mar­ket cor­rec­tions as oppor­tu­ni­ties to accu­mu­late mean­ing­ful over­weight posi­tions in their port­fo­lios in the com­modi­ties com­plex in some com­bi­na­tion of com­modi­ties and com­modi­ties producers.

This period rep­re­sents Canada's big chance to get out in front of for­eign inter­ests in our own back­yard. We have the right to par­tic­i­pate in the growth that will come Canada's way as a result of the mas­sive global eco­nomic trans­for­ma­tion that is under­way or we can choose to be bystanders.

We will con­tinue to write and drill deeper into this sub­ject in the com­ing weeks and months.

Sources: Kathy Lien | Bloomberg | Gluskin Sheff

Adver­tise­ment

Tags: Aegis, All The Hoopla, Aussie, Bad Idea, Balance Works, Banking Sector, Brazil, BRIC, BRICs, Canadian Dollar, Canadian Economy, Canadian Finance Minister Jim Flaherty, Canadian Government, Canadian Market, Commodities, Commodity, Commodity Exports, Consequence, Currencies, Cusp, David Rosenberg, Dollar Yen, Economic Recovery, Effec, Emerging Markets, energy, Finance Minister Jim Flaherty, Fiscal Position, Forces At Work, G20 Meeting, Global Demand, Global Economy, Global Investors, Gold, Gold Prices, Greenback, India, Inflation Protection, Investing In Commodities, Investors, Mark Carney, Measures, Michael Pettis, Midst, Monetary Policy, Mortgage, Natural Gas, Natural Resources, Nz Dollars, oil, Oil Prices, Profits, Proposal, Relatio, Risk Reward, Strong Dollar, Sweet Spot, Term Investing, Time Canada, Turnaround, Upward Trajectory, Usd Cad
Posted in Brazil, Canadian Market, Economy, Emerging Markets, Gold, India | Comments Off

FOMC Policy Statement – nature of incoming data allow Fed to wait and watch

Friday, September 25th, 2009

This post is a guest con­tri­bu­tion by Asha Ban­ga­lore* of The North­ern Trust Com­pany.

The tone of the pol­icy state­ment and details are largely close to expec­ta­tions. The fed­eral funds rate was left unchanged at 0%-0.25%. The state­ment reit­er­ates Chair­man Bernanke’s opin­ion that an eco­nomic recov­ery is under­way, rep­re­sent­ing a sig­nif­i­cant depar­ture from the August pol­icy state­ment which noted that “eco­nomic activ­ity is lev­el­ing out.” The out­look for infla­tion remains favor­able in the Fed’s opin­ion due to “sub­stan­tial slack” in the econ­omy. In addi­tion, the sta­bil­ity of longer-term infla­tion expec­ta­tions was cited to rule out the case of an infla­tion­ary threat.

The last para­graph of the Fed pol­icy state­ment is devoted to the out­look of mon­e­tary pol­icy. The Fed left the stance unchanged to read as fol­lows: “The Com­mit­tee will main­tain the tar­get range for the fed­eral funds rate at 0 to 1/4 per­cent and con­tin­ues to antic­i­pate that eco­nomic con­di­tions are likely to war­rant excep­tion­ally low lev­els of the fed­eral funds rate for an extended period.” The trans­la­tion here is that Fed is on hold for sev­eral months.

The plan to buy mortgage-backed secu­ri­ties of $1.25 tril­lion is extended to the first quar­ter of 2010 from the end of 2009. The tar­get amount has not been changed; to date, the Fed has bought two-thirds of the planned amount. The Fed’s pur­chases of $300 bil­lion of Trea­sury secu­ri­ties will be com­pleted by the end of Octo­ber 2009. To date, the Fed has pur­chased 94% of the target.

In the effort to make Fed com­mu­ni­ca­tion trans­par­ent and acces­si­ble, I humbly request that this long-winded sen­tence, which has appeared in the April, June, August, and Sep­tem­ber state­ments, be more suc­cinct next time around:

“Although eco­nomic activ­ity is likely to remain weak for a time, the Com­mit­tee con­tin­ues to antic­i­pate that pol­icy actions to sta­bi­lize finan­cial mar­kets and insti­tu­tions, fis­cal and mon­e­tary stim­u­lus, and mar­ket forces will con­tribute to a grad­ual resump­tion of sus­tain­able eco­nomic growth in a con­text of price stability.”

Source: Asha Ban­ga­lore, North­ern Trust Daily, Sep­tem­ber 23, 2009.

* Asha Ban­ga­lore is vice pres­i­dent and econ­o­mist at The North­ern Trust Com­pany, Chicago. Prior to join­ing the bank in 1994, she was con­sul­tant to sav­ings and loan insti­tu­tions and com­mer­cial banks at Finan­cial & Eco­nomic Strate­gies Cor­po­ra­tion, Chicago.

Tags: August And September, Bangalore, Bernanke, Economic Activity, Economic Conditions, Economic Recovery, Fed Policy, Federal Funds Rate, Financial Markets And Institutions, Incoming Data, Inflation Expectations, Monetary Policy, Mortgage Backed Securities, Northern Trust Company, Policy Actions, Slack, Target Range, Term Inflation, Treasury Securities, Trillion
Posted in Markets, Outlook | Comments Off

Doug Casey on Gold

Friday, September 25th, 2009

Doug Casey is an Amer­i­can free-market mar­ket econ­o­mist, finan­cial author and entre­pre­neur. He has been writ­ing a monthly invest­ment newslet­ter, the Inter­na­tional Spec­u­la­tor since 1979 and I always find his ideas quite refresh­ing. He is also some­what of a perma gold bull, but nev­er­the­less argues his case con­vinc­ingly, as gleaned from the inter­view below with Louis James, edi­tor of the Inter­na­tional Speculator.

But before get­ting stuck in the dis­cus­sion, Adam Hewison’s (INO.com) has just pro­duced a short tech­ni­cal analy­sis of the short-term direc­tion of gold. Click here to access the presentation.

Here is the first sec­tion of Casey’s interview:

L: Doug, we’ve talked about cars, cows, and cash, but the invest­ment world thinks of you as a gold bug, so let’s give that a go; why gold?

Doug: Sure. First of all, it’s because gold is actu­ally money. It’s an unfor­tu­nate his­tor­i­cal anom­aly that peo­ple think about the paper in their wal­lets as money. The dol­lar is, tech­ni­cally, a cur­rency. A cur­rency is a gov­ern­ment sub­sti­tute for money. Gold is money.

Now, why do I say that?

His­tor­i­cally, many things have been used as money. Cat­tle have been used as money in many soci­eties, includ­ing Roman soci­ety. That’s where we get the word “pecu­niary” from: the Latin word for a sin­gle head of cat­tle is pecus. Salt has been used as money, also includ­ing in ancient Rome, and that’s where the word “salary” comes from; the Latin for salt was sal (or salis). The North Amer­i­can Indi­ans used seashells. Cig­a­rettes were used dur­ing WWII. So, money is sim­ply a medium of exchange and a store of value.

By that def­i­n­i­tion, almost any­thing could be used as money, but obvi­ously, some things work bet­ter than oth­ers; it’s hard to exchange things peo­ple don’t want, and some things don’t store value well. Over thou­sands of years, the pre­cious met­als have emerged as the best form of money. Gold and sil­ver both, though pri­mar­ily gold.

There are very good rea­sons for this, and they are not new rea­sons. Aris­to­tle defined five rea­sons why gold is money in the fourth cen­tury BC (which may only have been the first time it was put down on paper). Those five rea­sons are as valid today as they were then. A good form of money must be: durable, divis­i­ble, con­sis­tent, con­ve­nient, and have value in and of itself.

L: Can you elab­o­rate on that?

Doug: Yes, and from them, we can draw infer­ences that will help us antic­i­pate the fate of the dollar.

First, let’s take durable. That’s pretty obvi­ous — you can’t have your money dis­in­te­grat­ing in your pock­ets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.

Divis­i­ble. Again, obvi­ous. It’s why we don’t use dia­monds for money, nor art­work. You can’t split them into pieces with­out destroy­ing the value of the whole.

L: If I paid for a new Ford GT with the Mona Lisa, what would be my change — a small can­vas by Picasso?

Doug: [Laugh­ing.] That’s right. Maybe you’d get mil­lions of those paint­ings of Elvis or Jesus on velvet.

Con­sis­tent. The lack of con­sis­tency is why we don’t use real estate as money. One piece is always dif­fer­ent from another piece.

Con­ve­nient. That’s why we don’t use, for instance, other met­als like lead, or even cop­per. The coins would have to be too huge to han­dle eas­ily to be of suf­fi­cient value.

Value of itself. The lack here is why you shouldn’t use paper as money.

Actu­ally, there’s a sixth rea­son Aris­to­tle should have men­tioned, but it wasn’t rel­e­vant in his age, because nobody would have thought of it…

L: It can’t be cre­ated out of thin air.

Doug: Right. Not even the kings and emper­ors who clipped and diluted coins would have dared imag­ine that they could get away with try­ing to use some­thing essen­tially worth­less as money.

L: I think we can for­give Aris­to­tle for the oversight.

Doug: I think so. At any rate, these are the rea­sons why gold is the best money. It’s not a gold bug reli­gion, nor a bar­baric super­sti­tion. It’s sim­ply com­mon sense. Gold is par­tic­u­larly good for use as money, just as alu­minum is par­tic­u­larly good for mak­ing air­craft, steel is good for the struc­tures of build­ings, ura­nium is good for fuel­ing nuclear power plants, and paper is good for mak­ing books. Not money. If you try to make air­planes out of lead, or money out of paper, you’re in for a crash.

That gold is money is sim­ply the result of the mar­ket process, seek­ing opti­mum means of stor­ing value and mak­ing exchanges.

But it’s not some­thing that suits gov­ern­ments, because paper money is an excel­lent means for gov­ern­ments to tax peo­ple indi­rectly, sur­rep­ti­tiously, through infla­tion. That’s one rea­son cen­tral bankers love paper money, but also, phony eco­nomic the­o­ries, like those of John May­nard Keynes, hold that the gov­ern­ment not only can but should med­dle with the econ­omy, and the abil­ity to print paper money gives them a means to do that.

In today’s world, not only do peo­ple around the world take it for granted that paper is money, but that it should be so.

But it’s all non­sense. It’s one rea­son for tak­ing a gloomy view of human­ity — peo­ple will believe almost any kind of clap­trap, if the story is retailed by those in authority.

After the cur­rent sys­tem col­lapses, as every paper money sys­tem in the past has col­lapsed, some form of money will have to replace it, and it’s almost cer­tainly going to be gold.

Click here for the full interview.

Source: Con­ver­sa­tions with Casey, Sep­tem­ber 23, 2009.

Tags: Ancient Rome, Anomaly, Cows, Doug Casey, Emerging Markets, Financial Author, Gold, Gold And Silver, Gold Bug, India, International Speculator, Investment Newsletter, Investment World, Latin Word, Market Economist, Medium Of Exchange, Money Gold, North American Indians, Pecuniary, precious metals, Roman Society, Term Direction, Wallets
Posted in Emerging Markets, Gold, India, Markets, Silver | Comments Off

Technical Talk: Is S&P 500’s price reversal significant?

Friday, September 25th, 2009

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

Yesterday’s intra­day sell-the-Fed-news price rever­sal on the S&P 500 stalled at the area (S&P — 1,079 to 1,106 area) where the index really accel­er­ated its 2008 sell-off (red dot­ted lines). This area is likely to be more dif­fi­cult to over­come and may take sev­eral attempts, and thus may cap the rally a bit while the index marks time and pulls back slightly or enters a higher level trad­ing range.

While we believe liq­uid­ity and buy­ing power remain strong and thus pull­backs should be rel­a­tively shal­low in nature, that doesn’t mean we can’t get a cor­rec­tive wave of some mag­ni­tude before this side­line liq­uid­ity is rede­ployed. Addi­tion­ally, quarter-end win­dow dress­ing may keep stocks ele­vated or from slip­ping too much. How­ever, we do believe that putting new money to work in front of this more sig­nif­i­cant resis­tance level poses risks. Ini­tial sup­port below the cur­rent S&P lev­els comes into play near 1,040 level (green line).

Sec­ondary sup­ports if 1,040 were to give way would come into play near 980/975 then 950.

Kevin Lane, Fusion IQ, Sep­tem­ber 24, 2009.

Adver­tise­ment

Tags: Advertisement, Attempts, Corrective Wave, Current, Dotted Lines, Fusion, Index Marks, Initial Support, Intraday, Iq, Kevin Lane, liquidity, Magnitude, New Money, Pullbacks, Rally, Resistance Level, Sideline, Stocks, Window Dressing
Posted in Markets | Comments Off

Medal of Honor: Top analyst Josh Rosner nailed the crisis

Thursday, September 24th, 2009

This is a guest con­tri­bu­tion by Damien Hoff­man, editor-in-chief of the very pop­u­lar Wall St Cheat Sheet blog. Make sure to put this site on your must-read list.

Josh Ros­ner is the inau­gural recip­i­ent of our first annual Medal of Honor for Excel­lent Ser­vice Award. Like a Navy Seal who does the most élite work yet receives the least pub­lic spot­light, Ros­ner has for years con­sis­tently been one of the best ana­lysts on Wall Street. Most impor­tantly, while other false prophets had unde­servedly taken credit for nail­ing the cri­sis (for the wrong rea­sons), Ros­ner and a small hand­ful of other hard work­ing ana­lysts saw and called every­thing for the right rea­sons in real-time.

For this rea­son, Ros­ner deserves to be treated like a Rock Star. If you had invested money based on Rosner’s calls, you’d surely feel like one. So, while the cir­cus freaks and high-powered pub­lic rela­tions peo­ple gar­ner all the atten­tion, Wall St. Cheat Sheet is going to bring you the gen­tle­men who invaded enemy ter­ri­tory in the dark of night and emerged with the Truth.

I had the great honor of sit­ting down with Josh to dis­cuss his career, the bias of tra­di­tional Wall Street ana­lysts, the cur­rent state of the finan­cial sys­tem, Gold­man Sachs et al, the lost spirit of cap­i­tal­ism, and the good guys on Wall Street …

Damien Hoff­man: Josh, tell me how your career on Wall Street started.

Josh: Totally cir­cum­stance. To make a long story very short, I started on Wall Street in the depths of the ‘89-’90 reces­sion. I couldn’t find a job except on Wall Street. I came from a legal fam­ily. Wall Street was the last indus­try I ever intended or thought I’d work in. I thought I was going to go into for­eign ser­vice. I expected to work for or hoped to work in the gov­ern­ment — ide­ally, in for­eign ser­vice or inter­na­tional affairs.

Damien: So you thought you’d travel the world and now you’re stuck on a 9-mile long island?

Josh: I didn’t want to travel the world as much as I wanted to be a pro­duc­tive part of pol­icy formation.

Damien: How did you stum­ble upon your first job Wall Street job?

Josh: A friend made a sug­ges­tion to talk with her brother who then was at Lehman Broth­ers. I inter­viewed there and they hired me as an asso­ciate. That was it!

Damien: Since then you’ve worked your way towards becom­ing an inde­pen­dent ana­lyst. Can you tell us about that journey?

Josh: I was at Lehman for about 3 years. Then I left and went to Oppen­heimer — which was bought by CIBC. I was there for almost a decade. The sec­ond half of it was focused almost entirely on finan­cial ser­vice indus­try research. I got tired of the qual­ity of research I was watch­ing come out of the sell-side and the increase in con­flicts of inter­est that were becom­ing more appar­ent in the dot-com period.

I think all of us are born either growth or value guys. I was born a value guy. So, the dot-com thing never made much sense to me. Some like-minded col­leagues, both buy-side and sell-side, and I left to start an inde­pen­dent research firm. We did that until shortly after 9/11 when cir­cum­stance changed.

At that point, we offered KBW our research prod­uct until they got back on their feet after 9/11. Keefe’s response was, “We really appre­ci­ate it, but we can’t source from some­where else. Why don’t you folks all you come over?” They wanted me to fol­low New York or New Eng­land thrifts and GSEs. I wasn’t very com­fort­able going back to the tra­di­tional sales side. My part­ners and I had dif­fer­ing views. We still remain very good friends. I sim­ply wanted to keep going down the path of an inde­pen­dent finan­cial research bou­tique. They did too, but they thought there was an oppor­tu­nity to do that within Keefe. So, we went dif­fer­ent ways.

It became very dif­fi­cult for me to do it by myself and I was hired away to a firm called Med­ley Global Advi­sors. They asked me to run their finan­cial ser­vices prac­tice and focus on advis­ing insti­tu­tional investors on reg­u­la­tory, leg­isla­tive, and pol­icy issues.

I was there from the begin­ning of 2003 through the mid­dle of 2006. Man­age­ment started head­ing down a dif­fer­ent path than I. So, I con­tin­ued to do my thing at Graham-Fisher. That brings us to today.

Damien: What exactly has you diverg­ing toward the inde­pen­dent ana­lyst route?

Josh: One is the most obvi­ous poten­tial con­flicts of inter­est between invest­ment bank­ing clients and research — right where per­haps ana­lysts puts a more favor­able spin on the secu­ri­ties of com­pa­nies they’ve got a bank­ing rela­tion­ship with. Fur­ther­more, the will­ing­ness to be pres­sured by large insti­tu­tional clients who want you to con­sider stocks or secu­ri­ties that they’ve got heavy expo­sure to.

It seems to me that the inde­pen­dence of your view is really para­mount. In the largest and most com­plex finan­cial insti­tu­tions, the insti­tu­tions them­selves do not offer lev­els of dis­clo­sure and trans­parency that make them truly analyzable.

Damien: Is it hard to get access because you don’t play the game?

Josh: I have to rely solely on the cold hard facts of their fil­ings and pub­lic dis­clo­sures cou­pled with my macro-economic analy­sis. Wall Street is so siloed it becomes hard for an ana­lyst at a tra­di­tional Wall Street firm to actu­ally have an eco­nomic out­look. The guy who’s cov­er­ing the mort­gage bankers is not cov­er­ing the mort­gage insur­ers. The guy who’s cov­er­ing the mort­gage insur­ers is not cov­er­ing the GSEs. The guy who’s cov­er­ing the GSEs is not cov­er­ing the thrifts. How­ever, changes within a sec­tor occur where all of these sub-sectors meet. So, the tra­di­tional sell-side ana­lyst is stuck rely­ing much more heav­ily on man­age­ment to give them macro guid­ance and high­light struc­tural changes in the indus­try. Con­se­quently, their inde­pen­dence ends up jeopardized.

Damien: Speak­ing of macro views, we all know one of the prongs for a sus­tained recov­ery is fix­ing the bank­ing sys­tem. Can you update us on which inning we’re in and what you think the banks have done well so well so far?

Josh: In terms of fix­ing the bank­ing sys­tem, there’s a cou­ple ways of answer­ing the ques­tion. That ques­tion also needs to be asked as the bank­ing sys­tem dis­tinct from the real econ­omy, and the bank­ing sys­tem dis­tinct from the credit mar­kets. There are really three dif­fer­ent things related to each other with inter­play, but they’re separate.

Damien: I was think­ing specif­i­cally about the banks because they went through the process of giv­ing out loans to peo­ple who couldn’t pay them back and it’s been the heart of the prob­lem. But when you delin­eate it that way, the credit mar­kets have also been in dis­ar­ray and need to be healed as well.

Josh: Our large banks have taken some level of gov­ern­ment sup­port. They’ve raised some level of cap­i­tal. I think it has bought them time. I don’t think they fun­da­men­tally dealt with a lot of the trou­bled assets they con­tinue to hold. That’ll have to be dealt with. We still have a sig­nif­i­cant num­ber of smaller banks that are going to fail. Depend­ing on how you define ‘fail’, we prob­a­bly have north of 600 and poten­tially as high as 1100 failed banks. More real­is­ti­cally, I think 600–800 banks are going to fail. But let’s not look at the issue in terms of banks. We should look at it in terms of assets.

Part of the prob­lem is the banks are still by and large under­cap­i­tal­ized to per­form the finan­cial inter­me­di­a­tion that bankers are expected to per­form. In 1989, banks and sav­ings insti­tu­tions were respon­si­ble for pro­vid­ing 65% of con­sumer revolv­ing credit. Since 2000, they’ve only been respon­si­ble for 30–40% of that con­sumer revolv­ing credit. How­ever, secu­ri­tized pools as a per­cent­age of total revolv­ing con­sumer credit were 6% in 1989. Since 2000, they’ve been some­where close to 50% — declin­ing only since the begin­ning of the crisis.

Click here for the full interview.

Source: Damien Hoff­man, Wall St. Cheat Sheet, Sep­tem­ber 22, 2009.

Tags: Cheat Sheet, CIBC, Circus Freaks, Current State, Enemy Territory, Excellent Service Award, False Prophets, Foreign Service, Gold, Goldman Sachs, Good Guys, International Affairs, Lost Spirit, Medal Of Honor, Navy Seal, Public Spotlight, Recession, Rock Star, Rosner, Spirit Of Capitalism, Travel The World, Wall Street Analysts
Posted in Gold, Markets, Outlook | Comments Off

Marc Faber Video Bonanza

Thursday, September 24th, 2009

Marc Faber, edi­tor of The Gloom, Boom & Doom Report, recently did a wide-ranging inter­view with Aaron Task and Henry Blod­get of Yahoo Finance — Tech Ticker. The video clips are must-see footage for any seri­ous investor.

Part 1:
Bull­ish today, Marc Faber is “highly con­fi­dent” the future will be very bleak.

Part 2:
Buy stocks because US dol­lars will be “worth­less,” says Faber.

Part 3:
Faber: Emerg­ing mar­ket economies will chal­lenge and sur­pass the west.

Part 4:
Faber: Ken Fisher is wrong! Amer­ica already has way too much debt.

Source: Aaron Task and Henry Blod­get, Yahoo Finance — Tech Ticker (here, here, here and here), Sep­tem­ber 22, 2009.

Tags: Bonanza, Boom, Buy Stocks, Doom, Emerging Market Economies, Emerging Markets, Gloom, Henry Blodget, Investor, Ken Fisher, Marc Faber, Ticker, Video Clips, Video Editor, Yahoo, Yahoo Finance
Posted in Markets | Comments Off

Lower Than You Think

Tuesday, September 22nd, 2009

Although many ana­lysts fear the infla­tion­ary con­se­quences of the mas­sive money sup­ply cre­ated by the U.S. Fed­eral Reserve, defla­tion remains a more imme­di­ate threat. With the unem­ploy­ment rate expected to exceed 10% next year, the slack in the labour mar­ket will reach lev­els not seen since the Great Depres­sion and the reces­sion of 1981–82. The sever­ity of the recent employ­ment loss is evi­denced in the fol­low­ing chart illus­trat­ing the U.S. unem­ploy­ment rate from 1926 through August 2009.

Job growth will likely be muted once it begins. With com­pa­nies focused on pro­duc­tiv­ity and bot­tom line per­for­mance, a replay of the so-called "job­less recov­er­ies" that occurred after the mild reces­sions of the early 1990's and 2000's is almost cer­tain. The unem­ploy­ment rate is expected to decline very slowly. Hence, a wage increase spi­ral, one of the causes of infla­tion in the 1970's, is not in the cards.

The other poten­tial cause of infla­tion — too much money chas­ing too few goods – is also not a risk in the near term. In fact, the oppo­site is true; today there is too much pro­duc­tion capac­ity fac­ing too lit­tle demand. As shown in the fol­low­ing chart, the man­u­fac­tur­ing uti­liza­tion rate in the U.S. plum­meted to 65% in May 2009. This is the low­est level since monthly rates began being recorded in 1948.

In fact, at present there is sim­ply "too much" avail­able — whether it is air­lines, news­pa­pers, auto­mo­tive plants, houses, apart­ments, TV sta­tions, offices, restau­rants or retail out­lets. Job open­ings and easy credit are the rarities.

Unfor­tu­nately, a full recov­ery from a credit bub­ble col­lapse takes years not months. In a typ­i­cal busi­ness cycle, mon­e­tary eas­ing even­tu­ally trig­gers a pow­er­ful recov­ery that is first pow­ered by inven­tory rebuild­ing. Quickly-rising employ­ment and income then dri­ves consumption-led growth. In the after­math of a finan­cial melt­down, too much debt, weak job cre­ation and lim­ited busi­ness invest­ment under­cut demand growth in the face of exces­sive sup­ply. The rate of price increases is there­fore more likely to fall than rise. We could even face out­right price declines as occurred in Japan over the past two decades and world­wide in the 1930's.

Recov­er­ies from a credit bub­ble col­lapse are frag­ile and eas­ily derailed. For exam­ple, Japan's recov­ery from the bust of the early 1990's was choked off in part by the Asian crises of 1997–98. Also, cen­tral bankers and gov­ern­ments must adroitly remove their mon­e­tary and fis­cal stim­uli at some point so as to avoid an even­tual infla­tion­ary surge and repair gov­ern­ment bal­ance sheets. In 1937, con­cerned about renewed infla­tion and swelling gov­ern­ment deficits, the Fed­eral Reserve and the Roo­sevelt admin­is­tra­tion increased bank reserve require­ments and moved to cut spend­ing. These actions inad­ver­tently caused a deep reces­sion in 1937–1938.

Bond yields can there­fore be pushed lower for a longer period than is ever fore­seen at the out­set of a bub­ble col­lapse. Either pro­longed weak eco­nomic con­di­tions or a mis­cal­cu­la­tion by cen­tral bankers or gov­ern­ments could be the trig­ger. In the 1930's, for exam­ple, yields on gov­ern­ment and cor­po­rate bonds drifted grad­u­ally lower after the ini­tial eco­nomic recov­ery in 1933 as con­sumer prices dipped in the mid-1930's and dropped sharply in 1938. As illus­trated in the fol­low­ing chart, by the end of the decade, yields on intermediate-term and long-term Trea­suries (in red and green) were 1.0% and 2.3% respec­tively while Baa cor­po­rate bonds (in blue) yielded 4.9%.

Investors who are sourly apprais­ing today's low inter­est rates, par­tic­u­larly on gov­ern­ment bonds, need to be aware that there is a sce­nario where they may go even lower as we work through the over­hang from the credit bub­ble col­lapse. While we will likely see infla­tion­ary increases and higher inter­est rates at some point, these may be sev­eral years in the offing.

Sep­tem­ber 22, 2009

Tags: Bottom Line Performance, Bubble Collapse, Business Cycle, Business Investment, Cause Of Inflation, Causes Of Inflation, Credit Bubble, Deflation, Employment Loss, Excessive Supply, Financial Meltdown, Great Depression, Job Creation, Labour Market, Money Supply, Rarities, Recessions, Retail Outlets, Typical Business, Unemployment Rate, Utilization Rate
Posted in Markets | Comments Off

Pettis on China

Tuesday, September 22nd, 2009

Michael Pet­tis, pro­fes­sor of finance at Peking University’s Guanghua School of Man­age­ment and author of the China Finan­cial Mar­kets blog, has just been inter­viewed by the Geoff Dyer, FT’s Bei­jing Bureau Chief on a num­ber of China-related issues. The three-part inter­view is not only top­i­cal, but also excel­lent view­ing material.

Part 1:

Pet­tis dis­cusses where China may diver­sify its for­eign exchange reserves and whether the ren­minbi will become the global reserve currency.

Click here or on the image below to view the video.

Part 2:

Pet­tis dis­cusses the lessons other coun­tries can learn from China’s growth model and its han­dling of the finan­cial crisis.

Click here or on the image below to view the video.

Part 3:

Pet­tis dis­cusses the pros and cons of the “Asian devel­op­ment model” and the future of US-China trade relations.

Click here or on the image below to view the video.

Source: Geoff Dyer, Finan­cial Times, Sep­tem­ber 21, 2009.

Tags: Asian Development, Beijing, Bureau Chief, China Trade Relations, Development Model, Finance, Financial Crisis, Financial Markets, Financial Times, Foreign Exchange Reserves, Geoff Dyer, Growth Model, Guanghua, Michael Pettis, Peking University, Pros And Cons, Renminbi, Reserve Currency, School Of Management, Video Source
Posted in Markets | Comments Off