Is the rally ending, or does it have more to go?

Sunday, September 20th, 2009

This is a guest post by Barry Ritholtz, edi­tor of The Big Pic­ture Blog and author of the pop­u­lar book, Bailout Nation.

OK, it’s time for round 2, Shed­lock vs. Ritholtz.

You may recall that last time, Mish & I dis­agreed as to whether this was a reces­sion (Me) or a depres­sion (He). This time, the debate is over the cur­rent rally.

On Mon­day this week on Yahoo Tech Ticker, I dis­cussed that we did not see evi­dence that the rally was end­ing (see “Rally May Only Be in 6th or 7th Inning, Ritholtz Says“).

Shed­lock pens a response — “Rally in 6th Inning or Top of the 12th?” — and dis­cusses the rea­sons he thinks the mar­ket rally should be end­ing soon: “The flip side of the coin is this mar­ket has advanced so far, so fast that if down­side momen­tum does develop, there is noth­ing but air pock­ets below. Air pock­ets are thus a two-way street. If any­thing, there is far more air below than above.”

That may be. How­ever, none of the var­i­ous met­rics we track sug­gest the rally is about to run out of gas any­time soon. That doesn’t mean it can’t end to tomor­row, but we would rather play the high prob­a­bil­ity, rather than low prob­a­bil­ity outcomes.

Here are the four most impor­tant rea­sons why I think we can have more upside, plus a look at some grim eco­nomic realty.

1) Indi­vid­ual investors remain under-invested.

2) Mar­ket breadth and momen­tum are each pos­i­tive (i.e. sup­port­ive of fur­ther upside).

3) Sen­ti­ment has not yet reached extreme levels.

4) The broader invest­ment com­mu­nity believes — incor­rectly in my opin­ion — that a recov­ery is upon us, prof­its are get­ting better.

5) His­tory shows that sec­u­lar bear mar­kets have deep sell­offs and huge ral­lies; this cur­rent rally still has room to run based upon a com­pos­ite of prior cycles (see “Four Stages of Sec­u­lar Bear Mar­kets“).

Now, about that econ­omy. Here is my dirty lit­tle secret. FOR TWO THIRDS OF THE TIME, THE ECONOMY REALLY DOES NOT MATTER.

I know that sounds insane, but con­sider the fol­low­ing: In the mid­dle of sec­u­lar bull mar­kets, eco­nomic info seems to have the great­est cor­re­la­tion with mar­ket per­for­mance. Good data, more prof­its, bet­ter mar­ket action.

At mar­ket tops, the econ­omy looks great. Val­u­a­tions are rich, but record prof­its sup­port the multiple.

Then it all goes to hell.

At bot­toms, it looks awful. It looks like these com­pa­nies will never make another dime, that lay­offs won’t ever end, that we can never escape the tar pit.

And then we do.

This must be per­plex­ing, mad­den­ing, infu­ri­at­ing to pure econ­o­mists. But that is Mr.Market’s job — to frus­trate the max­i­mum num­ber of players.

Source: Barry Ritholtz, The Big Pic­ture, Sep­tem­ber 17, 2009.

Tags: Air Pockets, Bailout, Barry Ritholtz, Bear Markets, Big Picture, Dirty Little Secret, Downside, Extreme Levels, Flip Side, Individual Investors, Investment Community, Market Breadth, Market Rally, Metrics, Momentum, Nothing But Air, Probability, Rallies, Recession, Selloffs
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Words from the (Investment) Wise — September 20, 2009

Sunday, September 20th, 2009

Mark­ing the one-year anniver­sary of the Lehman Broth­ers demise, risky assets last week again marched higher to the tune of eco­nomic data sup­port­ing the argu­ment of a global eco­nomic recov­ery. A real­iza­tion among investors that the eco­nomic tran­si­tion from reces­sion to recov­ery was gain­ing momen­tum, resulted in many global stock mar­kets scal­ing fresh peaks for the year.

Ben Bernanke, Fed­eral Reserve chair­man, on Tues­day said the US reces­sion “is very likely over”. How­ever, he remained cau­tious about the shape of the recov­ery and said he expected a “mod­er­ate” recov­ery in 2010 with growth “not much faster than the under­ly­ing poten­tial growth rate of the econ­omy”, i.e. approx­i­mately 3%.

“At the moment we don’t see (the econ­omy) get­ting bet­ter or worse, but that’s bet­ter than you could say six months ago,” added War­ren Buf­fett. “The ter­ror of last year is gone and that’s thanks in part to the government.”

Source: Tom Toles, Slate.com

Not only did the US stock mar­ket indices record up-days on every day except Thurs­day, but all ten eco­nomic sec­tors that make up the S&P 500 also closed the week in the black. Most other stock mar­kets (mature and emerg­ing alike), com­modi­ties, oil, pre­cious met­als, high-yielding cur­ren­cies and cor­po­rate bonds also put in a stel­lar per­for­mance as a bull­ish mood prevailed.

The CBOE Volatil­ity Index (VIX), or “fear gauge”, traded at about the same level (23.9) as before the Lehman bank­ruptcy in Sep­tem­ber last year. Also, gov­ern­ment bonds and other safe-haven assets such as the US dol­lar and Japan­ese yen were out of favor as investors sought higher returns elsewhere.

As investors started assum­ing more risk since March, the US Dol­lar Index headed lower, hit­ting a one-year low last week and trad­ing in a con­firmed down­trend as far as pri­mary trend indi­ca­tors are con­cerned. The com­bi­na­tion of low inter­est rates and quan­ti­ta­tive eas­ing has made the US dol­lar an attrac­tive cur­rency for fund­ing carry-trade trans­ac­tions (i.e. sell­ing low-yielding cur­ren­cies to finance the pur­chase of higher-yielding cur­ren­cies). (Click here for a short tech­ni­cal analysis.)

The declin­ing dol­lar, cen­tral bank pur­chases, the de-hedging by gold pro­duc­ers and ris­ing infla­tion expec­ta­tions served as cat­a­lysts for gold bullion’s strength, caus­ing the yel­low metal to close above the $1,000 level for the sixth con­sec­u­tive day on Fri­day. While gold’s move grabbed the head­lines, plat­inum (+42.5%) and sil­ver (+50.5%) have actu­ally out­per­formed gold (+13.9%) sig­nif­i­cantly since the start of the year.

Source: StockCharts.com

The past week’s per­for­mance of the major asset classes is sum­ma­rized by the chart below — a set of num­bers that indi­cates an increase in risk appetite.

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 (+1.8%) and MSCI Emerg­ing Mar­kets Index (+2.8%) both made head­way last week to take the year-to-date gains to +23.8% and a stag­ger­ing +62.1% respec­tively. These indices are still more than 30% down from the 2007 highs, but mar­kets such as Mex­ico (-8.8%) and Chile (-5.8%) have almost wiped out all their finan­cial cri­sis losses.

The major US indices extended their gains to two con­sec­u­tive weeks, mark­ing eight up-weeks dur­ing the past ten weeks. The year-to-date gains are as fol­lows: Dow Jones Indus­trial Index +11.9%, S&P 500 Index +18.3%, Nas­daq Com­pos­ite Index +35.2% and Rus­sell 2000 Index +23.7%. Inter­est­ingly, since the Nas­daq Index was cre­ated in 1971, only 1991, 1995 and 2003 have seen big­ger year-to-date gains.

While the indices have gained con­sid­er­ably from their lows, they still have to rally by between 6.0% (Rus­sell 2000) and 17.2% (S&P 500) to reach the lev­els of the Fri­day (Sep­tem­ber 12, 2008) before Lehman’s collapse.

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

Top per­form­ers in the stock mar­kets this week were Hun­gary (+7.4%), Mace­do­nia (+7.3%), Ire­land (+6.1%), Argentina (+5.7%) and Sri Lanka (+5.3%). At the bot­tom end of the per­for­mance rank­ings, coun­tries included Kenya (-1.6%), Uganda (-1.5%), the Philip­pines (-1.3%), Sin­ga­pore (-1.2%) and Slo­va­kia (-1.2%).

Of the 98 stock mar­kets I keep on my radar screen, 81% recorded gains, 13% showed losses and 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 Mar­ket Vec­tors Solar (KWT) (+10.5%), United States Nat­ural Gas (UNG) (+9.9%), iShares Cohen & Steers Realty Majors (ICF) (+9.6%) and Claymore/MAC Global Solar Energy (TAN) (+9.0%).

On the los­ing side of the slate, ETFs included ProShares Short Finan­cials (SEF) (-4.5%), ProShares Short Rus­sell 2000 (RWM) (-4.2%), Broad­band HOLDRS (BDH) (-2.9%) and Cur­ren­cyShares British Pound Ster­ling Trust (FXB) (-2.6%).

The cost of buy­ing credit insur­ance for US and Euro­pean com­pa­nies eased sharply dur­ing the past two months, as shown by the tighter spreads for both the CDX (North Amer­i­can, investment-grade) Index (down from 118 to 103) and the Markit iTraxx Europe Index (down from 95 to 86).

Also, junk-bond yields con­tin­ued declin­ing, as shown by the Mer­rill Lynch US High Yield Index (and also by the good per­for­mance of the iShares iBoxx $ High Yield Cor­po­rate Bond ETF, HYG). The Index dropped by 63.4% to 798 from its record high of 2,182 on Decem­ber 15, mean­ing the spread between high-yield debt and com­pa­ra­ble US Trea­suries was 798 basis points on Fri­day. This her­alds the return of high-yield spreads to “pre-Lehman” lev­els (854 basis points on Sep­tem­ber 12, 2008).

Refer­ring to the Fed­eral Open Mar­ket Committee’s (FOMC) meet­ing next week, the quote du jour comes from straight-talking Bill King (The King Report). He said: “Traders and investors must con­tem­plate what course of action the Fed will announce and enact after next week’s FOMC if ‘the US reces­sion is very likely over’. If quan­ti­ta­tive eas­ing (QE), which is due to expire, is renewed, stocks should rally but com­modi­ties, gold and infla­tion plays should rally far more. The dol­lar should tank. China should go apoplec­tic. Ben­ito will look fool­ish for say­ing ‘the reces­sion is very likely over’. Bonds might rally ini­tially but then look out below.

“If QE is not renewed, stocks and com­modi­ties should tank; the dol­lar should soar and bonds, after ini­tially declin­ing, should rally. China will be appeased. Ben­ito will have val­i­dated his rhetoric with action.”

Other news is that the Fed­eral Reserve and the Trea­sury are con­sid­er­ing sweep­ing rules to reg­u­late pay at banks. Accord­ing to The New York Times “the rules depart from the hands-off approach that dom­i­nated bank reg­u­la­tion for the last three decades, but are not as strict as pro­pos­als from some Euro­pean leaders”.

Also, the US Secu­ri­ties and Exchange Com­mis­sion passed rules last week to firm up on the super­vi­sion of credit rat­ings agen­cies fol­low­ing a flood of crit­i­cism over their role in the finan­cial crisis.

Next, a tag cloud of all the arti­cles I read dur­ing the past week. This is a way of visu­al­iz­ing word fre­quen­cies at a glance. Key words such as “bank”, “mar­ket”, “econ­omy”, “gov­ern­ment”, “China” and “gold” fea­tured promi­nently. “Reces­sion” has become a footnote.

The major moving-average lev­els for the bench­mark US indices, the BRIC coun­tries and South Africa (from where I am writ­ing this post) are given in the table below. With the excep­tion of the Chi­nese Shang­hai Com­pos­ite Index, which 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. On the other hand, the next poten­tial upside tar­get for the S&P 500 is about 1,120.

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

As stock mar­kets con­tinue to reach new highs, long-term mutual fund investors have reversed their strat­egy this month, sell­ing shares for the first time since March, said Clus­ter­stock. The out­flows for the first two weeks of Sep­tem­ber were big­ger than the inflows seen in the last three months combined.

Source: Clus­ter­stock — Busi­ness Insider, Sep­tem­ber 17, 2009.

Bespoke high­lights that the S&P 500 has now closed more than 20% above its 200-day mov­ing aver­age for the first time since May 1983. “This comes just six months after the Index traded the fur­thest below its 200-day since the Great Depres­sion! Not even dur­ing the great bull run of the 90s did the Index get this far above its 200-DMA. This has hap­pened only a hand­ful of times in the his­tory of the S&P 500,” said the report.

Source: Bespoke, Sep­tem­ber 16, 2009.

Short-term move­ment aside, when con­sid­er­ing monthly data, three momentum-type oscil­la­tors (RSI, MACD and ROC) have reversed course over the past few months for the first time since the sell sig­nals of 2007, and now indi­cate a pos­i­tive pri­mary trend.

Source: StockCharts.com

Putting mat­ters in per­spec­tive from across the pond, David Fuller (Fuller­money) said: “Stock mar­ket action con­tin­ues to con­firm a bull mar­ket in every respect. Down­side risk is prob­a­bly lim­ited to peri­odic mean rever­sions towards the ris­ing 200-day mov­ing aver­ages. Such pull­backs gen­er­ally offer the best buy­ing opportunities.

“The main dan­ger signs to look for will be an even­tual tight­en­ing of mon­e­tary pol­icy and an inverted yield curve. [PduP: The chart below shows that the next inverted yield curve is prob­a­bly a long way off.] When this next hap­pens, and both tend to be lead indi­ca­tors, I will focus on intro­duc­ing trail­ing stops for all equity posi­tions, actual or men­tal, and ide­ally use strength to reduce equity exposure.

Source: Fullermoney.com

“Cur­rently, I main­tain that we are still in the sec­ond psy­cho­log­i­cal per­cep­tion stage of the cur­rent bull mar­ket, char­ac­ter­ized by the ‘wall of worry’. With any luck, we can look for­ward to the third and cli­mac­tic stage of a bull mar­ket cycle, in which investors become euphoric,” con­cluded Fuller.

For more dis­cus­sion on the direc­tion of finan­cial mar­kets, see my recent posts “Inter­view with Marc Faber“, “Is the rally end­ing, or does it have more to go?“, “Charts: Stocks face 15% cor­rec­tion in Octo­ber“, “Albert Edwards: ‘I remain in the bear­ish camp‘”, “Bul­lion — a viable alter­na­tive to fiat cur­ren­cies” and “More US dol­lar woes ahead“. (And do make a point of lis­ten­ing to Don­ald Coxe’s web­cast of Sep­tem­ber 18, which can be accessed from the side­bar of the Invest­ment Post­cards site.)

Econ­omy
The global eco­nomic reces­sion is over, accord­ing to the lat­est Sur­vey of Busi­ness Con­fi­dence of the World by Moody’s Economy.com. “Sur­vey results dur­ing the first week of Sep­tem­ber improved notably across the entire global econ­omy and most indus­tries. Assess­ments of cur­rent busi­ness con­di­tions and expec­ta­tions regard­ing the out­look in early 2010 rose sharply.”

Source: Moody’s Economy.com

The Survey’s results were con­firmed by the Orga­ni­za­tion for Eco­nomic Coöper­a­tion and Development’s index of lead­ing indi­ca­tors (cov­er­ing 29 coun­tries), which rose to 97.8 in July from 96.3 in June, reported The Wall Street Jour­nal. The OECD said the indi­ca­tors “point to broad eco­nomic recov­ery” and that “clear sig­nals of recov­ery are now vis­i­ble in all major seven economies, in par­tic­u­lar in France and Italy, as well as in China, India and Russia”.

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

Sep­tem­ber 18, 2009
• Loan delin­quency and charge-off rates

Sep­tem­ber 17, 2009
• Hous­ing starts — multi-family units led the charge in August
• Job­less claims — ini­tial claims decline, con­tin­u­ing claims advance

Sep­tem­ber 16, 2009
• The Energy Price Index lifts Con­sumer Price Index in August
• Cars and many other com­po­nents account for the strength in fac­tory activ­ity
• Cur­rent account nar­rows in Q2

Sep­tem­ber 15, 2009
• Autos and non-auto com­po­nents lift retail sales in August
• Whole­sale Price Index move­ment largely an energy price story

It is note­wor­thy that indus­trial pro­duc­tion increased 0.8% in August after an upwardly revised 1.0% gain in July. Asha Ban­ga­lore (North­ern Trust) said: “The Busi­ness Cycle Dat­ing Com­mit­tee of the National Bureau of Eco­nomic Research (NBER) uses four vari­ables — indus­trial pro­duc­tion, non­farm pay­roll employ­ment, real per­sonal income less trans­fer pay­ments, and real man­u­fac­tur­ing and trade sales — to deter­mine turn­ing points of a busi­ness cycle. The impor­tant aspect to note is that the trough of indus­trial pro­duc­tion was in June 2009. There­fore, it is quite likely that the NBER will date the end of the Great Reces­sion as June/July 2009 once addi­tional infor­ma­tion is available.”

Source: North­ern Trust — Daily Global Com­men­tary, Sep­tem­ber 16, 2009.

Econ­o­mists sur­veyed by the The Wall Street Jour­nal are increas­ingly con­fi­dent that the US econ­omy is grow­ing again. They pre­dicted that the US will grow at a 3% annual rate in the cur­rent quar­ter — well above the 0.6% fore­cast they made just three months ago — and will expand at a 2.5% pace in the fourth quarter.

Mean­while, William White, the highly respected for­mer chief econ­o­mist at the Bank for Inter­na­tional Set­tle­ments, warned (via the Finan­cial Times) that gov­ern­ment actions to help the econ­omy in the short run may be sow­ing the seeds for future crises. “Are we going into a W[-shaped reces­sion]? Almost cer­tainly. Are we going into an L? I would not be in the slight­est bit sur­prised,” he said, refer­ring to the risks of a so-called double-dip reces­sion or a pro­tracted stag­na­tion like Japan suf­fered in the 1990s. “The only thing that would really sur­prise me is a rapid and sus­tain­able recov­ery from the posi­tion we’re in.”

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

Date	Time (ET)	Sta­tis­tic	For	Actual	Brief­ing Forecast	Mar­ket Expects	Prior
Sep 15	8:30 AM	Core PPI	Aug	0.2%	0.0%	0.1%	–0.1%
Sep 15	8:30 AM	PPI	Aug	1.7%	1.0%	0.8%	–0.9%
Sep 15	8:30 AM	Retail Sales	Aug	2.7%	2.1%	1.9%	–0.2%
Sep 15	8:30 AM	Retail Sales ex-auto	Aug	1.1%	0.1%	0.4%	–0.5%
Sep 15	8:30 AM	Empire Man­u­fac­tur­ing	Sep	18.88	13.00	15.00	12.08
Sep 15	10:00 AM	Busi­ness Inventories	Jul	–1.0%	–1.2%	–0.9%	–1.4%
Sep 16	8:30 AM	Core CPI	Aug	0.1%	0.0%	0.1%	0.1%
Sep 16	8:30 AM	CPI	Aug	0.4%	0.2%	0.3%	0.0%
Sep 16	8:30 AM	Cur­rent Account	Q2	–98.8B	NA	–92.0B	–104.5B
Sep 16	9:00 AM	Net Long-term TIC Flows	Jul	15.3B	NA	60.0B	90.2B
Sep 16	9:15 AM	Capac­ity Utilization	Aug	69.6%	69.6%	69.0%	69.0%
Sep 16	9:15 AM	Indus­trial Production	Aug	0.8%	1.0%	0.6%	1.0%
Sep 16	10:30 AM	Crude Inven­to­ries	09/11	–4.73M	NA	NA	–5.91M
Sep 17	8:30 AM	Build­ing Permits	Aug	579K	575K	583K	564K
Sep 17	8:30 AM	Hous­ing Starts	Aug	598K	570K	598K	589K
Sep 17	8:30 AM	Ini­tial Claims	09/12	545K	565K	557K	557K
Sep 17	8:30 AM	Con­tin­u­ing Claims	09/05	6230K	6000K	6100K	6101K
Sep 17	10:00 AM	Philadel­phia Fed	Sep	14.1	10.0	8.0	4.2

Source: Yahoo Finance, Sep­tem­ber 18, 2009.

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

In addi­tion to the inter­est rate announce­ment by the FOMC on Wednes­day (Sep­tem­ber 23), US eco­nomic data reports for the week include the following:

Mon­day, Sep­tem­ber 21
• Lead­ing eco­nomic indicators

Tues­day, Sep­tem­ber 22
• FHFA US Hous­ing Price Index

Wednes­day, Sep­tem­ber 23
• FOMC rate decision

Thurs­day, Sep­tem­ber 24
• Ini­tial job­less claims
• Exist­ing home sales

Fri­day, Sep­tem­ber 25
• Durable goods orders
• Michi­gan Sen­ti­ment Index
• New home sales

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 18, 2009.

“Suc­cess is not final, fail­ure is not fatal: it is the courage to con­tinue that counts,” said Win­ston Churchill (hat tip: Charles Kirk — do make a point of vis­it­ing his excel­lent site). And isn’t this so true of the invest­ment world where mis­takes are the order of the day. 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 over­come the inevitable los­ing trades and focus on the next money-making opportunity.

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

That’s the way it looks from Cape Town (from where I am leav­ing on my first trip to Dal­las, Texas in just more than a week).

Hat tip: The Big Picture

The New York Times: Wall Street, one year later
“The Times’s Andrew Ross Sorkin, Gretchen Mor­gen­son and Joe Nocera recount the events of the week­end that Lehman Broth­ers failed and dis­cuss the lessons learned from the finan­cial crisis.”

Source: The New York Times, Sep­tem­ber 11, 2009.

Char­lie Rose: Obama’s Wall Street speech
“Pres­i­dent Obama’s speech on Wall Street mark­ing one year since the fall of Lehman Broth­ers and the global eco­nomic recov­ery plan with Jake Tap­per of ABC News, author Jim Stew­art and Andrew Ross Sorkin of The New York Times.

Source: Char­lie Rose, Sep­tem­ber 14, 2009.

Finan­cial Times: Bernanke says US reces­sion prob­a­bly over
“The US reces­sion ‘is very likely over’, Ben Bernanke, Fed­eral Reserve chair­man, said on Tues­day as Barack Obama, US Pres­i­dent, her­alded the end of the eco­nomic ‘freefall’.

“Their com­ments came after data showed retail sales rose 2.7% last month, their fastest rate in more than three years. The expected boost from the pop­u­lar ‘cash for clunk­ers’ car rebate pro­gramme was accom­pa­nied by a sur­prise pick-up in other spending.

“This raised hopes that US con­sumers might be re-emerging from the rub­ble of the hous­ing mar­ket col­lapse, the roller­coaster ride in equi­ties mar­kets and ris­ing unemployment.

“‘This is a con­sumer that is in a last­ing full recov­ery mode,’ said Chris Rup­key of the Bank of Tokyo/Mitsubishi UFJ. ‘The Fed is going to need to stop talk­ing about its exit strat­egy and start imple­ment­ing it if today’s data keeps up.’

“Oth­ers were more cau­tious, point­ing out that August was the back-to-school month. ‘I’d like to see if this is just a one-month bounce or an actual trend,’ said Adam York, at Wells Fargo.

“Many econ­o­mists believe that con­sumer spend­ing will be con­strained for months by house­holds’ lim­ited access to credit and their desire to reduce their debts.

“Mr Bernanke, who did not com­ment directly on the sales report, remained cau­tious about the shape of the recovery.

“He said he expected a ‘mod­er­ate’ recov­ery in 2010 with growth ‘not much faster than the under­ly­ing poten­tial growth rate of the econ­omy’ — which means around 3%.”

Source: Krishna Guha, Anna Fifield, Sarah O’Connor and Alan Rappe­port, Finan­cial Times, Sep­tem­ber 15, 2009.

The Wall Street Jour­nal: The reces­sion is over … sort of
“Barrons.com’s Bob O’Brien com­ments on Ben Bernanke’s speech ear­lier this week in which he believes the reces­sion is over, but not with­out qualifications.”

Source: The Wall Street Jour­nal, Sep­tem­ber 16, 2009.

The Wall Street Jour­nal: Eco­nomic con­fi­dence rebounds
“Econ­o­mists and con­sumers are feel­ing bet­ter about the econ­omy a year after the most fright­en­ing moments of the finan­cial cri­sis. Fore­cast­ers sur­veyed by The Wall Street Jour­nal, giv­ing the gov­ern­ment gen­er­ally good marks for its han­dling of the finan­cial cri­sis, now see employ­ers slowly adding jobs over the next 12 months.

“And the lat­est read­ing of con­sumer spir­its shows signs of opti­mism. But most econ­o­mists still expect the unem­ploy­ment rate will climb to 10.2%, from today’s 9.7%, before falling early next year.

“‘We are in a tech­ni­cal recov­ery, but risks remain abun­dant,’ said Diane Swonk of Mesirow Finan­cial. ‘It will still take some luck and skill to get Main Street to feel some of the relief Wall Street has felt.’

“Main Street is begin­ning to feel some relief, though, accord­ing to the Reuters/University of Michi­gan pre­lim­i­nary read­ing of con­sumer sen­ti­ment for Sep­tem­ber, released Friday.

“The index rose to 70.2 in Sep­tem­ber from to 65.7 in August, the first increase since June. Con­sumers felt bet­ter about cur­rent con­di­tions, and about the future.

“The 51 fore­cast­ers sur­veyed over the past week, not all of whom answered every ques­tion, are increas­ingly con­fi­dent that the US econ­omy is grow­ing again.

“They pre­dicted in the new Wall Street Jour­nal sur­vey that the US will grow at a 3% annual rate in the cur­rent quar­ter — well above the 0.6% fore­cast they made just three months ago — and will expand at a 2.5% pace in the fourth quarter.

“While they pre­dict the US will add jobs over the next 12 months, they see a net increase of only 200,000 jobs over that period, and pre­dict unem­ploy­ment to be a still-high 9.3% in Decem­ber 2010.

“Job-market weak­ness is expected to keep the Fed from boost­ing inter­est rates, now near zero, until August 2010, the econ­o­mists say.

“The Orga­ni­za­tion for Eco­nomic Coöper­a­tion and Development’s fore­cast­ing gauge bol­sters the opti­mists’ case. Its index of lead­ing indi­ca­tors, which cov­ers 29 of its mem­ber coun­tries, rose to 97.8 in July, from 96.3 in June.

“The Paris research orga­ni­za­tion said Fri­day the indi­ca­tors ‘point to broad eco­nomic recov­ery’. It said ‘clear sig­nals of recov­ery are now vis­i­ble in all major seven economies, in par­tic­u­lar in France and Italy, as well as in China, India and Russia’.

“As they look back on a year of extra­or­di­nary gov­ern­ment actions aimed at avoid­ing an even worse reces­sion, econ­o­mists in The Wall Street Jour­nal sur­vey give good grades to the response of the Bush and Obama admin­is­tra­tions and the Fed­eral Reserve — a median score of 80 out of 100.”

Source: Phil Izzo, Sara Mur­ray and Justin Lahart, The Wall Street Jour­nal, Sep­tem­ber 14, 2009.

Mon­eyNews: Buf­fett — econ­omy has not turned up
“The US econ­omy has not begun to climb out of the worst reces­sion since the Great Depres­sion, but the ‘ter­ror’ that fol­lowed last year’s near-collapse of the finan­cial sys­tem is gone, due in part to gov­ern­ment inter­ven­tion, War­ren Buf­fett told Reuters on Tuesday.

“Buf­fett main­tained a pos­i­tive out­look on the government’s much crit­i­cized Trou­bled Asset Relief Pro­gram (TARP) for banks, say­ing it may ulti­mately turn a profit for the government.

“‘At the moment we don’t see (the econ­omy) get­ting bet­ter or worse, but that’s bet­ter than you could say six months ago,’ said the bil­lion­aire known as The Sage of Omaha for his long his­tory of suc­cess­ful invest­ments. ‘The ter­ror of last year is gone and that’s thanks in part to the government.’

“US Pres­i­dent Barack Obama said on Tues­day that mea­sures under­taken by his admin­is­tra­tion to res­cue the econ­omy — includ­ing a $787 bil­lion stim­u­lus pack­age — were work­ing, but warned a com­plete recov­ery would take ’some time’.

“Fed­eral Reserve Chair­man Ben Bernanke also gave a fairly upbeat view, say­ing the longest and deep­est reces­sion since the 1930s was likely over, but added it would ‘feel like a very weak econ­omy for some time’.”

Source: Mon­eyNews, Sep­tem­ber 16, 2009.

Finan­cial Times: Econ­o­mist warns of double-dip reces­sion
“The world has not tack­led the prob­lems at the heart of the eco­nomic down­turn and is likely to slip back into reces­sion, accord­ing to one of the few main­stream econ­o­mists who pre­dicted the finan­cial crisis.

“Speak­ing at the Sibos con­fer­ence in Hong Kong on Mon­day, William White, the highly-respected for­mer chief econ­o­mist at the Bank for Inter­na­tional Set­tle­ments, also warned that gov­ern­ment actions to help the econ­omy in the short run may be sow­ing the seeds for future crises.

“‘Are we going into a W[-shaped reces­sion]? Almost cer­tainly. Are we going into an L? I would not be in the slight­est bit sur­prised,’ he said, refer­ring to the risks of a so-called double-dip reces­sion or a pro­tracted stag­na­tion like Japan suf­fered in the 1990s.

“‘The only thing that would really sur­prise me is a rapid and sus­tain­able recov­ery from the posi­tion we’re in.’

“The com­ments from Mr White, who ran the eco­nomic depart­ment at the cen­tral banks’ bank from 1995 to 2008, carry weight because he was one of the few senior fig­ures to pre­dict the finan­cial cri­sis in the years before it struck.

“Mr White repeat­edly warned of dan­ger­ous imbal­ances in the global finan­cial sys­tem as far back as 2003 and — break­ing a great taboo in cen­tral bank­ing cir­cles at the time — he dared to chal­lenge Alan Greenspan, then chair­man of the Fed­eral Reserve, over his pol­icy of per­sis­tent cheap money.

“On Mon­day Mr White ques­tioned how sus­tain­able the signs of life in the global econ­omy would prove to be once gov­ern­ments and cen­tral banks started to with­draw their unprece­dented stim­u­lus mea­sures. ‘The green shoots are cer­tainly out there — the ques­tion is what kind of fer­tiliser is being used on them,’ he said.

“World­wide, cen­tral banks have pumped thou­sands of bil­lions of dol­lars of new money into the finan­cial sys­tem over the past two years in an effort to pre­vent a depres­sion. Mean­while, gov­ern­ments have gone to sim­i­lar extremes, tak­ing on vast sums of debt to prop up indus­tries from bank­ing to car making.

“These mea­sures may already be inflat­ing a bub­ble in asset prices, from equi­ties to com­modi­ties, he said, and there was a small risk that infla­tion would get out of con­trol over the medium term if cen­tral banks miss-time their ‘exit strategies’.”

Source: Robert Cook­son and Sun­deep Tucker, Finan­cial Times, Sep­tem­ber 14, 2009.

Finan­cial Times: Lend­ing in Europe con­tin­ues to shrink
“The credit crunch in Europe wors­ened over the sum­mer as cor­po­rate bond finance issuance failed to plug the gap left by a sharp con­trac­tion of bank lending.

“Net lend­ing by banks went fur­ther into neg­a­tive ter­ri­tory in July as com­pa­nies paid back more loans than they took out new ones.

“Loans out­stand­ing con­tracted by a net €25 bil­lion ($36 bil­lion) in the month, the fifth suc­ces­sive month of an increas­ing shrink­age of supply.

“At the same time, there was a retreat in the recent record cor­po­rate bond issuance.

“Bond issuance in July declined for the first time since March, by €20 bil­lion month on month to €27 bil­lion, although bankers are con­vinced that it was only seasonal.

“Bankers said the July trends had con­tin­ued into August and would affect smaller com­pa­nies most severely.

“Mor­gan Stan­ley, which com­piled the credit crunch num­bers from cen­tral bank data and Dealogic, said the scant avail­abil­ity of bank lend­ing would penalise smaller com­pa­nies that have no access to bond markets.

“‘As Europe’s com­mer­cial banks de-lever, lend­ing is likely to be squeezed,’ said Huw van Stee­nis, banks analyst.

“Accord­ing to Mor­gan Stan­ley, there was €319 bil­lion of cor­po­rate bond issuance in the first seven months of the year and a decline of €33 bil­lion in Euro­pean bank-originated loans.

“That marked a rever­sal of the bal­ance of cor­po­rate fund­ing from the same time last year, when bank loans totalled €356 bil­lion com­pared with cor­po­rate bond issuance of only €119 billion.

“Banks across Europe have insisted in recent months any decline in lend­ing is due to a fall-off in demand, not supply.”

Source: Patrick Jenk­ins, Finan­cial Times, Sep­tem­ber 13, 2009.

Finan­cial Times: OECD warns 25 mil­lion jobs at risk from cri­sis
“Up to 25 mil­lion peo­ple in high-income coun­tries will have lost their jobs by the end of next year as the reces­sion pushes the unem­ploy­ment rate towards a record 10%, the Organ­i­sa­tion for Eco­nomic Co-operation and Devel­op­ment fore­cast on Wednesday.

“The Paris-based OECD said that, while recent signs of eco­nomic recov­ery might mean unem­ploy­ment peaked ear­lier and at a slightly lower level than its fore­cast, gov­ern­ments must inter­vene ‘quickly and deci­sively’ to pre­vent the sharp rise turn­ing into long-term joblessness.

“Its annual employ­ment out­look under­lines fears that a recov­ery with­out jobs might be in prospect, even if the return to eco­nomic growth seen in some coun­tries in the third quar­ter is sustained.

“‘Most OECD coun­tries are already fac­ing a jobs cri­sis. This is likely to get worse before it gets bet­ter,’ said Ste­fano Scar­petta, the report’s lead author and head of the organisation’s employ­ment division.

“The OECD said 15 mil­lion jobs were lost between the end of 2007 and July this year and 10 mil­lion more could go by the end of next year in the 30-nation area if the recov­ery failed to gain momen­tum. A total increase of that mag­ni­tude would be equiv­a­lent to the pop­u­la­tion of a coun­try larger than Australia.

“In 2007 the unem­ploy­ment rate in the OECD hit a 25-year low of 5.6%, but it rose to a post­war high of 8.5% this July.”

Source: Brian Groom, Finan­cial Times, Sep­tem­ber 16, 2009.

Finan­cial Times: China turns to WTO in trade dis­pute
“Barack Obama’s deci­sion last week to impose emer­gency tar­iffs on Chi­nese tyres has fuelled an increas­ingly famil­iar Sino-US war of words over trade.

“Bei­jing launched an inves­ti­ga­tion on Mon­day into whether US poul­try and car parts were being unfairly dumped in the Chi­nese mar­ket. It also requested for­mal con­sul­ta­tions at the World Trade Organ­i­sa­tion into the US tar­iffs — the first step in try­ing to have them declared illegal.

“Whether it will suc­ceed is unclear. The par­tic­u­lar ’safe­guard’ mea­sure that the US pres­i­dent invoked was, after all, writ­ten specif­i­cally to allow the US to block Chi­nese imports as part of the price for China join­ing the WTO in 2001.

“How­ever, trade experts and lawyers say the episode does show the increas­ingly sophis­ti­cated legal strate­gies used by Bei­jing in its many dis­putes with trad­ing part­ners, and the way it max­imises polit­i­cal effect while try­ing to limit the actual eco­nomic damage.

“Opin­ion is divided as to whether this dis­pute — while break­ing ground by using a par­tic­u­lar trade law for the first time — is likely by itself to set off a pro­tec­tion­ist spiral.

“Gao Yongfu, an expert in trade law at Shang­hai Insti­tute of For­eign Trade, said: “I think it unlikely that this dis­pute will be lim­ited to just one indus­try — it’s likely to spread to others.”

“Prof Gao said other trad­ing part­ners, includ­ing the Euro­pean Union, were likely to fol­low suit, broad­en­ing if not deep­en­ing the restric­tions on trade.

“Yet other trade lawyers and econ­o­mists noted that China had threat­ened to retal­i­ate in a way that had high polit­i­cal salience but mod­est eco­nomic impact.

“Bei­jing has built a rep­u­ta­tion for rapid but con­trolled retal­i­a­tion dur­ing trade dis­putes. One Wash­ing­ton trade lawyer said: ‘China always responds, so I don’t think this esca­lates. It just repeats each time the US does something.’”

Source: Alan Beat­tie and Geoff Dyer, Finan­cial Times, Sep­tem­ber 14, 2009.

Chart of the day (Clus­tr­stock): Con­sumer credit col­lapse
“Hop­ing for a consumer-led recov­ery? Don’t hold your breath. The lat­est data from the Fed­eral Reserve shows that the year-over-year decline in total con­sumer credit is col­laps­ing at an accel­er­at­ing rate. God for­bid con­sumers go back to liv­ing within their means.”

Source: Joe Weisen­thal and Kamelia Angelova, Clus­ter­stock — Busi­ness Insider, Sep­tem­ber 9, 2009.

Mon­eyNews: Gei­th­ner — tax hikes not likely
“Trea­sury Sec­re­tary Tim­o­thy Gei­th­ner acknowl­edged Tues­day the fed­eral gov­ern­ment had to take some ‘deeply offen­sive’ steps to help the coun­try get past the finan­cial cri­sis a year ago.

“But he also said in a nation­ally broad­cast inter­view that things are ‘dra­mat­i­cally dif­fer­ent’ now, although it’s too early to say the econ­omy is in recovery.

“‘A year ago we really were on the verge of a full-sale run’ on banks, along the lines of the 1930s Depres­sion, Gei­th­ner said in an inter­view broad­cast on ABC’s ‘Good Morn­ing Amer­ica’. He said ‘the biggest fear now, the biggest chal­lenge, is to make sure we change the rules of the game so it doesn’t hap­pen again’.

“Asked about pro­jec­tions of a $1.6 tril­lion deficit and a grow­ing US debt oblig­a­tion to other coun­tries, Gei­th­ner said the Obama admin­is­tra­tion still wants to avoid an increase in income taxes on the mid­dle class. The sec­re­tary noted Barack Obama’s pledge against such a hike dur­ing his pres­i­den­tial cam­paign and said Obama remains ‘very com­mit­ted’ to it.

“He also said it was too early to say just when the gov­ern­ment might let allow expi­ra­tion of an emer­gency lend­ing pro­gram for finan­cial insti­tu­tions (TARP) and said he also didn’t know how soon Wash­ing­ton could extri­cate itself from direct involve­ment in the auto indus­try, although he said it likely won’t be within a year.

“Gei­th­ner said the admin­is­tra­tion can­not sug­gest any guar­an­tee of finan­cial sta­bil­ity, but said ‘what we have an oblig­a­tion to do is to put that in place here and around the world. … That’s our obligation.’

“He acknowl­edged that to a large degree, Washington’s inter­ven­tion in the pri­vate mar­kets hasn’t gone over well with large ele­ments of the pub­lic and said ‘the gov­ern­ment had to do some deeply offen­sive things to undo the dam­age. … But we’re going to get out of this as soon as possible.’

“On the bud­get deficits, Gei­th­ner said, ‘I think Amer­i­cans under­stand we have an unsus­tain­able fis­cal posi­tion. We have to bring these deficits down over time.’ He said the coun­try must ‘get our fis­cal house in order’ and stressed that Obama is vehe­mently opposed to a gen­eral income tax increase for peo­ple who make under $250,000 a year.

“The sec­re­tary said that while things are bet­ter than they were a year ago, ‘I would say there’s no recov­ery yet. We define recov­ery … as peo­ple back to work, peo­ple able to get a job again, busi­nesses invest­ing again … and we’re not at that point.’

“‘We’re going to do what it takes to get this econ­omy going again,’ he said. ‘We’re going to look care­fully at any sen­si­ble program.’”

Source: Mon­eyNews, Sep­tem­ber 15, 2009.

BCA Research: US retail sales — too soon to open the cham­pagne
“A slew of pos­i­tive eco­nomic sur­prises have pro­pelled stocks to new rally highs. How­ever, the equity rally has entered a more risky phase, with breadth likely to nar­row going forward.

“The improve­ment in house­hold sen­ti­ment in recent months and the recent release of the retail sales report offer some hope for a recov­ery in final demand, but it is still far too soon to deter­mine that a sus­tain­able con­sumer revival is begin­ning. Impor­tantly, the uptick in con­sumer spend­ing out­side of autos and gas sta­tions occurred in the con­text of heavy dis­count­ing. This sig­nals that con­sumer thrift remains well entrenched and that retail­ers are being forced to slash prices in order to boost sales, to the detri­ment of margins.

“We remain cau­tiously opti­mistic on the equity mar­ket, but worry that breadth will nar­row as profit expec­ta­tions for domestically-geared sec­tors could be dis­ap­pointed. Investors should stay con­cen­trated in globally-focused companies.”

Source: BCA Research, Sep­tem­ber 16, 2009.

Asha Ban­ga­lore (North­ern Trust): Hous­ing starts — multi-family units led the charge in August
“Starts of new homes increased 1.5% to an annual rate of 598,000 in August, with a 25% increase in starts of multi-family units account­ing for all the gain. The level of hous­ing starts is the high­est since Novem­ber 2008.

“On a year-to-year basis, starts of new homes have dropped nearly 28%, which is a notice­able decel­er­a­tion in the pace of activ­ity from the 55% record decline seen in Jan­u­ary 2009.”

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

Mon­eyNews: Gross — hous­ing recov­ery no cure
“Hous­ing will not rebound to its for­mer exu­ber­ance once the econ­omy rebounds, says Bill Gross, man­ager of bond giant Pimco.

“Gross said investors will not trust their homes to give them good returns as they did in the past, and that hous­ing will not lead the econ­omy forward.

“‘Hous­ing can­not lead us out of this big R reces­sion no mat­ter what the recent Case-Shiller home price num­bers may sug­gest,’ Gross writes in his Sep­tem­ber outlook.

“Investors were buoyed by new home sales increas­ing by 9.6% in July, accord­ing to the Com­merce Depart­ment. Yet the num­ber of Amer­i­cans own­ing homes could fall to 65% from a peak of 69%, reported For­tune magazine.

“Amer­i­cans should not expect a robust bull mar­ket, Gross said. The new econ­omy will pay off its debt, increase its sav­ings, and see more ‘delev­er­ing, deglob­al­iza­tion, and reg­u­la­tion,’ he said.”

Source: Ellen Chang, Mon­eyNews, Sep­tem­ber 17, 2009.

Mon­eyNews: Mil­lions more fore­clo­sures loom
“As many as six mil­lion Amer­i­cans remain at risk of fore­clo­sure over the next three years, accord­ing to a recent press release about the government’s Home Afford­able Refi­nanc­ing Pro­gram (HAMP).

“‘We rec­og­nize that any mod­i­fi­ca­tion pro­gram seek­ing to avoid pre­ventable fore­clo­sures has lim­its, HAMP included,’ wrote Assis­tant Sec­re­tary for Finan­cial Insti­tu­tions Michael S. Barr.

“‘Even before the cur­rent cri­sis, when home prices were climb­ing, there were still many hun­dreds of thou­sands of fore­clo­sures. There­fore, even if HAMP is a total suc­cess, we should still expect mil­lions of foreclosures.’

“Some of these fore­clo­sures, Barr observes, will result from investor bor­row­ers who did not qual­ify for the pro­gram, or because bor­row­ers did not respond to gov­ern­ment outreach.

“‘Still oth­ers will be the prod­uct of bor­row­ers who bought homes well beyond what they could afford and so would be unable to make the monthly pay­ment even on a mod­i­fied loan,’ Barr says.

“The Home Afford­able Refi­nanc­ing Pro­gram was intended to help home­own­ers whose exist­ing mort­gages were up to 105% of their cur­rent house value, but has since been expanded to help those with mort­gages up to 125% of cur­rent value.

“‘Over­all, the GSEs (gov­ern­ment spon­sored enter­prises Fan­nie Mae, Fred­die Mac, and Gin­nie Mae) have refi­nanced more than 2.7 mil­lion loans since the announce­ment of the Administration’s com­pre­hen­sive hous­ing plan,’ Barr notes.”

Source: Julie Craw­shaw, Mon­eyNews, Sep­tem­ber 15, 2009.

Asha Ban­ga­lore (North­ern Trust): Cur­rent account nar­rows in Q2
“The current-account deficit of the US econ­omy nar­rowed to $98.8 bil­lion in the sec­ond quar­ter from $104.5 bil­lion in the first quar­ter. As a per­cent of nom­i­nal GDP, the cur­rent account deficit was 2.8% in the sec­ond quar­ter, down from a 2.9% mark in the first quar­ter of 2009 and record high of 6.5% in the fourth quar­ter of 2005. The trade deficit widened in July (-$31.9 bil­lion vs. -$27.5 bil­lion in June) which raises the prob­a­bil­ity of a wider cur­rent account deficit in the third quarter.

“In the sec­ond quar­ter, the sur­plus on income declined, mark­ing the fifth quar­terly drop in the last six quar­ters. Foreign-owned assets in the US rose $16.4 bil­lion in the sec­ond quar­ter after record­ing declines in the fourth quar­ter of 2008 (-$11.9 bil­lion) and the first quar­ter (-$67.8 billion).”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Sep­tem­ber 16, 2009.

Asha Ban­ga­lore (North­ern Trust): Cars and many other com­po­nents account for the strength in fac­tory activ­ity
“Indus­trial pro­duc­tion increased 0.8% in August after an upwardly revised 1.0% gain in July (pre­vi­ously esti­mated as a 0.5% increase). The Busi­ness Cycle Dat­ing Com­mit­tee of the National Bureau of Eco­nomic Research (NBER) uses four vari­ables — indus­trial pro­duc­tion, non­farm pay­roll employ­ment, real per­sonal income less trans­fer pay­ments, and real man­u­fac­tur­ing and trade sales — to deter­mine turn­ing points of a busi­ness cycle. The impor­tant aspect to note is that the trough of indus­trial pro­duc­tion was in June 2009. There­fore, it is qui­etly likely that the NBER will date the end of the Great Reces­sion as June 2009/July 2009 once addi­tional infor­ma­tion is available.

“Fac­tory pro­duc­tion increased 0.6% in August, after an upwardly revised 1.4% increase in July (pre­vi­ously esti­mated as a 1.0% gain). Pro­duc­tion of autos rose 5.5% in August, fol­low­ing a 20.1% jump in the prior month. Pri­mary met­als; machin­ery; and elec­tri­cal equip­ment, appli­ances, and com­po­nents all posted gains between 0.5% and 1% dur­ing August. The oper­at­ing rate of the fac­tory sec­tor rose to 66.6% in August, after estab­lish­ing a record low of 65.1% in June 2009.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Sep­tem­ber 16, 2009.

Asha Ban­ga­lore (North­ern Trust): Energy Price Index lifts Con­sumer Price Index in August
“The Con­sumer Price Index (CPI) moved up 0.4% in August after hold­ing steady in July. The 9.1% increase in gaso­line prices accounted for the sharp increase in the head­line num­ber. Exclud­ing energy, the CPI increased only 0.1% in August com­pared with no change in July. Food prices rose 0.1% in August fol­low­ing a 0.3% decline in the prior month. The Energy Price Index recorded a 4.6% gain in August vs. a 0.4% decline in July. The decline in energy prices in the early weeks of Sep­tem­ber sug­gests a drop of the Energy Price Index for the month. On a year-to-year basis, the CPI declined 1.5% in August vs. a 2.1% in the twelve months ended July.

“The core CPI, which excludes food and energy, rose 0.1% in August, putting the year-to-year gain at 1.4%. The decel­er­a­tion of the core CPI and declin­ing trend of the over­all CPI is indica­tive of infla­tion being a non-issue for sev­eral months.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Sep­tem­ber 16, 2009.

Asha Ban­ga­lore (North­ern Trust): Whole­sale Price Index move­ment largely an energy price story
“The Pro­ducer Price Index (PPI) of Fin­ished Goods moved up 1.7% in August fol­low­ing a 0.9% drop in the prior month. The wide swings of this index are largely due to sim­i­lar notice­able move­ments of the Energy Price Index. Accord­ing to the Labor Depart­ment, over 90% of the increase in the whole­sale fin­ished goods price index dur­ing August was the result of higher energy prices, which rose 8.0%. The 23% jump in gaso­line price was the biggest cul­prit. This is most likely to be reversed in Sep­tem­ber, given the drop in gaso­line prices dur­ing the first two weeks of the month.

“The food price index was up 0.4% after record­ing a 1.5% drop in July. A large part of the increase in food prices was due to the 5.9% jump in prices of fresh fruits and mel­ons. Exclud­ing food and energy, the core PPI rose 0.2% in August com­pared with a 0.1% drop in July. The 0.8% increase of the light motor vehi­cle index in August accounted for over fifty per­cent of the gain in the core PPI. The 0.7% increase of the Pas­sen­ger Car Price Index also played a role in lift­ing the core PPI.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Sep­tem­ber 15, 2009.

The New York Times: Fed con­sid­ers sweep­ing rules to reg­u­late pay at banks
“The Fed­eral Reserve and the Trea­sury are prepar­ing broad new rules that would force banks to rein in prac­tices that made mul­ti­mil­lion­aires out of many finan­cial exec­u­tives dur­ing the hous­ing bub­ble, offi­cials said.

“The rules depart from the hands-off approach that dom­i­nated bank reg­u­la­tion for the last three decades, but are not as strict as pro­pos­als from some Euro­pean lead­ers and sug­ges­tions from some mem­bers of Con­gress angered by the finan­cial trou­bles of the last year.

“Fed offi­cials would give banks wide lee­way in how they struc­ture their rewards. They would not pro­hibit million-dollar pay pack­ages or address issues of fair­ness. Rather, the rules are intended to restrict pay plans that encour­age reck­less behav­ior by reward­ing only short-term gains.

“And because the rules would be applied through the con­fi­den­tial bank exam­i­na­tion process, it would be hard for con­sumers and investors to judge how strictly the rules were being applied.

“The effort is also meant to be a cred­i­ble alter­na­tive to the call by some Euro­pean lead­ers for spe­cific lim­its on bonuses to finan­cial exec­u­tives, an idea opposed by the Obama admin­is­tra­tion. Offi­cials from Europe and the

“Trea­sury are nego­ti­at­ing over com­pen­sa­tion and other finan­cial indus­try reg­u­la­tions in advance of a sum­mit meet­ing next week in Pitts­burgh of lead­ers from the Group of 20 indus­tri­al­ized and large emerg­ing countries.

“The Obama admin­is­tra­tion opposes strict caps on pay, argu­ing that the size of the bonuses are not as impor­tant as the risk to the finan­cial health of the bank that bonuses linked to per­for­mance can create.

“The sim­ple propo­si­tion should be that you don’t want peo­ple being paid for tak­ing too much risk, and you want to make sure that their com­pen­sa­tion is tied to long-term per­for­mance,” said Tim­o­thy Gei­th­ner, the Trea­sury sec­re­tary, in an inter­view by telephone.”

Source: Edmund Andrews and Louise Story, The New York Times, Sep­tem­ber 19, 2009.

Finan­cial Times: SEC tight­ens grip on rat­ings agen­cies
“The US Secu­ri­ties and Exchange Com­mis­sion passed rules on Thurs­day to tighten super­vi­sion of credit rat­ings agen­cies fol­low­ing a tor­rent of crit­i­cism over their role in the finan­cial crisis.

“Credit rat­ings agen­cies, which are usu­ally paid by the issuers they rate, came under fire dur­ing the cri­sis because they gave top rat­ings to hun­dreds of bil­lions of dol­lars of bonds backed by risky mort­gages and other loans that are now in many cases worthless.

“The SEC said on Thurs­day that rat­ings agen­cies must reveal more infor­ma­tion on past rat­ings so that investors could com­pare rel­a­tive per­for­mance. Banks will have to share the under­ly­ing data used to deter­mine rat­ings, so that com­pet­ing agen­cies can offer unso­licited rat­ings for struc­tured finance products.

“The SEC said it would remove ref­er­ences to rat­ings in some of its rules as part of efforts to reduce over­all reliance on rat­ings by investors.

“It also decided to get pub­lic feed­back on whether rat­ings agen­cies should be sub­ject to poten­tial legal lia­bil­ity under secu­ri­ties law and what the pos­si­ble con­se­quences might be.

“Indeed, most law­suits against rat­ings agen­cies have failed because their rat­ings are an ‘opin­ion’ and there­fore sub­ject to free-speech pro­tec­tion. The issue has become a key fac­tor in the debate on the future of the industry.

“Fresh pro­pos­als were also put for­ward gov­ern­ing dis­clo­sure, includ­ing whether any “pre­lim­i­nary rat­ings” were obtained from other rat­ings agen­cies — in other words, whether there was ‘rat­ings shopping’.”

Source: Joanna Chung and Aline van Duyn, Finan­cial Times, Sep­tem­ber 17, 2009.

The Wall Street Jour­nal: Fed likely to keep buy­ing mort­gage instru­ments
“The Fed­eral Reserve, which con­venes its pol­icy meet­ing next week, is likely to stay the course to buy $1.45 tril­lion in mortgage-linked secu­ri­ties despite poten­tial resis­tance from a few regional Fed presidents.

“Central-bank offi­cials plan to dis­cuss wind­ing down those pur­chases over the com­ing months to limit dis­rup­tion to the mar­ket when the buy­ing comes to an end.

“Some regional Fed pol­icy mak­ers have sug­gested the Fed might halt the pro­gram before it fin­ishes its pur­chases of $1.25 tril­lion in mortgage-backed secu­ri­ties and $200 bil­lion in Fan­nie Mae and Fred­die Mac debt announced in the past year. But they are a small minor­ity across the Fed system.

“Top Fed offi­cials believe such a move would tighten over­all mon­e­tary pol­icy at a time when they still worry about the dura­bil­ity of the eco­nomic recov­ery. The Fed has com­pleted about two-thirds of its pur­chases, almost $1 tril­lion worth, and is likely to com­plete the rest unless prospects for the econ­omy improve rad­i­cally in the com­ing months.

“At the Fed­eral Open Mar­ket Committee’s Sep­tem­ber 22–23 meet­ing, the cen­tral bank’s pol­icy mak­ers — includ­ing the 12 regional Fed pres­i­dents — will assess the early signs of improve­ment now tak­ing shape across the econ­omy. Offi­cials are encour­aged by the rebound in financial-market con­di­tions and ini­tial indi­ca­tions that the hous­ing mar­ket is pulling out of its deep dive.

“But they are hes­i­tant to bank on a strong recov­ery. The siz­able growth expected in the third quar­ter is due in part to short-term effects such as com­pa­nies replen­ish­ing inven­to­ries and the government’s ‘cash for clunk­ers’ auto-rebate pro­gram. Higher sav­ing by house­holds is cast­ing doubt on con­sumer spend­ing. And even the mod­er­ate growth that Fed offi­cials expect next year wouldn’t be enough to bring down the unem­ploy­ment rate substantially.

“‘The econ­omy seems to be brush­ing itself off and begin­ning its climb out of the deep hole it’s been in,’ San Fran­cisco Fed Pres­i­dent Janet Yellen said in a speech Mon­day. ‘But I regret to say that I expect the recov­ery to be tepid. What’s more, the grad­ual expan­sion gath­er­ing steam will remain vul­ner­a­ble to shocks.’”

Source: Sudeep Reddy, The Wall Street Jour­nal, Sep­tem­ber 16, 2009.

Bloomberg: Pimco’s Gross boosts gov­ern­ment debt to 5-year high
“Bill Gross, who runs the world’s biggest bond fund at Pacific Invest­ment Man­age­ment Co., increased hold­ings of government-related debt last month to the most in five years and cut mort­gage securities.

“Gross boosted the $177.5 bil­lion Total Return Fund’s invest­ment in Trea­suries, so-called agency debt and other bonds linked to the gov­ern­ment to 44% of assets, the most since August 2004, from 25% in July, accord­ing to Pimco’s web­site. The fund cut mort­gage debt to 38%, the low­est level since Feb­ru­ary 2007, from 47%.

“‘We are head­ing into what we call the New Nor­mal, which is a period of time in which economies grow very slowly,’ Gross wrote at the start of the month in his Sep­tem­ber invest­ment out­look for the New­port Beach, Cal­i­for­nia, company.

“The Total Return Fund handed investors a 12.2% gain in the past year, beat­ing 92% of its peers, accord­ing to data com­piled by Bloomberg. The one-month return is 1.8%, out­pac­ing 69% of its competitors.”

Source: Wes Good­man and Susanne Walker, Bloomberg, Sep­tem­ber 16, 2009.

Bespoke: High-yield spreads fall below pre-Lehman lev­els
“For the first time since the recov­ery off the March lows, high yield credit spreads fell below their ‘pre-Lehman’ lev­els. Based on data from Mer­rill Lynch indices, high yield bonds are cur­rently yield­ing 835 basis points more than com­pa­ra­ble Trea­suries. This com­pares to a level of 854 bps on 9/12/08, which was the Fri­day before Lehman’s bankruptcy.

“While credit mar­ket bench­marks have mostly recov­ered to ‘pre-Lehman’ lev­els, equi­ties still have a ways to go. Even after the his­tor­i­cally strong rally off the March lows, all three major indices and all ten major S&P 500 sec­tors remain below their ‘pre-Lehman’ lev­els. While the S&P 500 has gained nearly 60% from its lows, the index would still have to rally an addi­tional 17.4% to reach its level from the Fri­day before Lehman’s bankruptcy.”

Source: Bespoke, Sep­tem­ber 16, 2009.

CNN Money: Insid­ers sell like there’s no tomor­row
“Can hun­dreds of stock-selling insid­ers be wrong?

“The stock mar­ket has mounted an his­toric rally since it hit a low in March. The S&P 500 is up 55%, as US job losses have slowed and credit mar­kets have stabilized.

“But against that improv­ing back­drop, one indi­ca­tor has turned dis­tinctly bear­ish: Cor­po­rate offi­cers and direc­tors have been sell­ing shares at a pace last seen just before the onset of the sub­prime malaise two years ago.

“While a wave of insider sell­ing doesn’t nec­es­sar­ily fore­tell a stock mar­ket down­turn, it sug­gests that those with the first read on busi­ness trends don’t believe cur­rent stock prices are jus­ti­fied by eco­nomic fundamentals.

“‘It’s not a very com­pli­cated story,’ said Charles Bider­man, who runs mar­ket research firm Trim Tabs. ‘Insid­ers know bet­ter than you and me. If prices are too high, they sell.’

“Bider­man, who says there were $31 worth of insider stock sales in August for every $1 of insider buys, isn’t the only one who has taken note. Ben Sil­ver­man, direc­tor of research at the InsiderScore.com web site that tracks trad­ing action, said insid­ers are sell­ing at their most aggres­sive clip since the sum­mer of 2007.

“Sil­ver­man said the ‘orgy of sell­ing’ is note­wor­thy because cor­po­rate insid­ers were aggres­sive buy­ers of the market’s spring dip. The S&P 500 dropped as low as 666 in early March before the recent rally took it back above 1,000.

“‘That was a great call,’ Sil­ver­man said. ‘They were buy­ing when prices were low, so it makes sense to look at what they’re doing now that prices are higher.’”

Source: Colin Barr, CNN Money, Sep­tem­ber 12, 2009.

Bespoke: S&P 500 new highs expand­ing … from a low base
“Back in late Feb­ru­ary and early March, we made sev­eral ref­er­ences that even though the S&P 500 was trad­ing down to new lows, the num­ber of stocks mak­ing new lows wasn’t expand­ing, which is very pos­i­tive for the mar­ket. As shown in the chart below, at the Octo­ber low, 84% of the stocks in the S&P 500 made a new low. Then in Novem­ber, 63% of stocks hit new lows. At the March low, how­ever, only 36% of the stocks in the S&P 500 made new lows.

“Just as the smaller num­ber of stocks mak­ing new lows shrunk towards the end of the bear mar­ket, as the mar­ket rises, investors should be look­ing for an expan­sion in the num­ber of stocks mak­ing new highs. As shown in the above chart, new highs are expand­ing, albeit from a low base. In today’s trad­ing, 23 stocks (high­lighted below) in the S&P 500 hit a new 52-week high. This is the best daily read­ing since May 2008. Going for­ward, if the mar­ket con­tin­ues to rally, investors should watch the new high list for con­fir­ma­tion of the rally. If the new high list fails to keep expand­ing, it could be an early sign that a cor­rec­tion is in the cards.”

Source: Bespoke, Sep­tem­ber 15, 2009.

Bespoke: Short inter­est at low­est level since Feb­ru­ary 2007
“It just keeps get­ting lone­lier on the short side. As of the end of August, the aver­age short inter­est as a per­cent­age of float for stocks in the S&P 1500 stood at 6.6%, rep­re­sent­ing the low­est level since Feb­ru­ary 2007. Over the last six months, the bal­ance of power has shifted from the sell­ers to buy­ers. With the short side now being the loneli­est trade, will the roles reverse again over the next six months?”

Source: Bespoke, Sep­tem­ber 14, 2009.

Bespoke: Finan­cials, Indus­tri­als and Mate­ri­als at most over­bought lev­els in at least a year
“While Sep­tem­ber was sup­posed to be a month where the mar­ket would at least take a breather, halfway through the month, stocks have done any­thing but rest. This month, the S&P 500 and most sec­tors have con­sis­tently been trad­ing to new highs for the year on a seem­ingly daily basis. As a result, the 10-day A/D line for the S&P 500 (not pic­tured) is near its most over­bought lev­els of the last year. Addi­tion­ally, Finan­cials, Indus­tri­als and Mate­ri­als are cur­rently at their most over­bought lev­els in at least a year. While these lev­els do not nec­es­sar­ily mean a decline is immi­nent, they do indi­cate that some con­sol­i­da­tion is to be expected.”

Source: Bespoke, Sep­tem­ber 17, 2009.

Doug Kass (TheStreet.com): Bear­ish argu­ments are roar­ing
“I would argue that the bulls are ignor­ing the emer­gence of a num­ber of sec­u­lar head­winds. Here are 10 of them:

1. Deep cost cuts have been main­stay of cor­po­ra­tions over the last few years. Cost cuts are a cor­po­rate life­line (like fis­cal stim­u­lus), but both have a defined and lim­ited life. Ulti­mately, top-line growth is needed.

2. Cost cuts (exac­er­bated by wage defla­tion) pose an endur­ing threat to the labor force. The con­sumer remains the most sig­nif­i­cant con­trib­u­tor to domes­tic growth. Unem­ploy­ment should remain high, exac­er­bated by many retir­ing later in life because their nest eggs have been reduced.

3. The con­sumer entered the cur­rent down­cy­cle exposed and lev­ered to the hilt, and net worth (and con­fi­dence) has been dam­aged and will need to be repaired through time and by higher sav­ings and lower con­sump­tion. (The con­sumer is hurt­ing. Last week I met with a mid­sized bank’s lend­ing team. The bank is see­ing a big mix change toward ris­ing use of their debit cards (where money is in the bank) at the expense of credit cards (where money is then owed).)

4. The credit after­shock will con­tinue to haunt the econ­omy. The unreg­u­lated shadow bank­ing indus­try is dead, as is the secu­ri­ti­za­tion mar­ket. All signs indi­cate that banks will likely remain reluc­tant to lend to indi­vid­u­als and small busi­nesses. Just try to get a jumbo mort­gage today.

5. The effect of the Fed’s mon­e­tarist exper­i­ment and its impact on invest­ing and spend­ing still remain uncertain.

6. While the hous­ing mar­ket has sta­bi­lized, its recov­ery will be prob­a­bly remain muted. More impor­tant, there are few growth dri­vers to replace the impor­tant role taken by the real estate mar­kets in the prior upturn.

7. Com­mer­cial real estate has only begun to enter a cycli­cal down­turn. It might not be as deep as many expect, but it won’t pro­vide much of a con­tri­bu­tion to growth.

8. While the public-works com­po­nent of pub­lic pol­icy is a stim­u­lant, the impact might be more muted than is gen­er­ally rec­og­nized. There may be less than meets the eye — most of the cur­rent fis­cal pol­icy ini­tia­tives rep­re­sent trans­fer pay­ments that have a neg­a­tive mul­ti­plier and cre­ate work disincentives.

9. Munic­i­pal­i­ties have his­tor­i­cally pro­vided eco­nomic sta­bil­ity dur­ing times of eco­nomic weak­ness — no more. They are broadly in dis­re­pair. State sales taxes are being raised all over the coun­try, and so are sin taxes (to shore up munic­i­pal finances) on cig­a­rettes, booze and maybe even sugar products.

10. The most impor­tant non­tra­di­tional head­wind is the inevitabil­ity of higher mar­ginal tax rates. How will higher indi­vid­ual tax rates affect an already deflated con­sumer? How will cor­po­ra­tions react to higher tax rates? Will ris­ing taxes be P/E mul­ti­ple benders?

“The liq­uid­ity that grew out of the mas­sive gov­ern­ment stim­u­la­tion and the growth in the mon­e­tary base is reach­ing the equity mar­ket and our econ­omy. It has been greeted by cheers and almost unno­tice­able, brief and shal­low pull­backs in stocks, pro­duc­ing a degree of price momen­tum that is almost rem­i­nis­cent of the ‘good old days’ in 1999/early 2000. Mar­ket par­tic­i­pants appear now to have embraced the notion that we are in an eco­nomic ’sweet spot’ and that a below-average but self-sustaining domes­tic recov­ery is being endorsed.

“With the per­spec­tive of the large mar­ket rise and dra­matic change in sen­ti­ment (from dire to pos­i­tive), there is now lit­tle room for disappointment.”

Source: Doug Kass, TheStreet.com, Sep­tem­ber 14, 2009.

Bill King (The King Report): Be care­ful about liq­uid­ity rally
“The liq­uid­ity rally con­cept is the ratio­nal­iza­tion that is induc­ing investors and traders to buy stocks. Noth­ing else mat­ters right now.”

Source: Bill King, The King Report, Sep­tem­ber 14, 2009.

Chart of the day (Clus­ter­stock): Fear dis­ap­pears from the market

“More evi­dence that investors have got­ten very com­pla­cent in this mar­ket. Not only does the mar­ket con­tinue to rally, but the VIX, some­times called the fear index, is at the lows of the year. There was a brief spike before Sep­tem­ber, but since then it’s collapsed.”

Source: Joe Weisen­thal and Kamelia Angelova, Clus­ter­stock — Busi­ness Insider, Sep­tem­ber 15, 2009.

Andrew Garth­waite (Credit Suisse): Too early to sell
“Sep­tem­ber may his­tor­i­cally be the worst month for equity returns, but it is still too early to go under­weight on stocks, says Andrew Garth­waite, global equity strate­gist at Credit Suisse.

“‘This is the best phase of the eco­nomic cycle,’ he says. ‘GDP growth con­tin­ues to be revised up, yet infla­tion remains muted. We have intro­duced a mid-2010 tar­get for the S&P 500 of 1,150.’

“Mr Garth­waite points to earn­ings upgrades and unde­mand­ing val­u­a­tions and also notes that many eco­nomic and mar­ket vari­ables are back to pre-Lehman levels.

“Fur­ther­more, there is still plenty of quan­ti­ta­tive eas­ing to come, with part of the addi­tional liq­uid­ity likely to end up in stocks.

“‘We do not exclude a period of near-term equity con­sol­i­da­tion, given that some of our tac­ti­cal indi­ca­tors are send­ing a sig­nal of caution.

“‘But other indi­ca­tors sug­gest it is too early to sell. Risk appetite peaks six weeks after it hits eupho­ria, equity sen­ti­ment is in line with its aver­age and insider buy­ing is low but this was the same in 2004. The time to go ‘under­weight’ strate­gi­cally will be when we get the sec­ond leg down of a W-shaped recovery.

“‘We see three pos­si­ble trig­gers for this: first, a rise in US inter­est rates, which is not likely to come until the sec­ond half of 2010; sec­ond, a fund­ing cri­sis — unlikely until bank loan growth rises strongly; or third, clear signs of China overheating.’”

Source: Andrew Garth­waite, Credit Suisse (via Finan­cial Times), Sep­tem­ber 8, 2009.

CNBC: Biggs — putting your port­fo­lio to work
“How to invest now, with Bar­ton Biggs, Traxis Part­ners and CNBC’s Maria Bartiromo.”

Source: CNBC, Sep­tem­ber 15, 2009.

Bloomberg: Dol­lar dimin­ish­ing makes US favorite for high-yield
“Bet­ting against the dol­lar is becom­ing the trade investors can’t afford to ignore.

“The US Dol­lar Index fell last week to the low­est level in a year as price swings in for­eign exchange declined, encour­ag­ing investors to bor­row green­backs at record low inter­est rates and buy assets in coun­tries offer­ing yields as much as 8.1 per­cent­age points higher than US deposit rates. Bor­row­ing costs in dol­lars as mea­sured by Lon­don inter­bank offered rates fell below those of yen and Swiss francs for an extended period for the first time since 1994 dur­ing the past three weeks.

“Those carry trades are the most prof­itable since before 2000, accord­ing to data com­piled by Bloomberg. Bor­row­ing dol­lars and then sell­ing them is adding pres­sure on a cur­rency that’s already weak­ened 14% since March as the bud­get deficit exceeded $1 tril­lion, the gov­ern­ment sells a record amount of debt and the Fed­eral Reserve floods the finan­cial sys­tem with $1.75 tril­lion to pull the econ­omy out of a recession.

“‘The dol­lar is the big fund­ing cur­rency,’ said Jonathan Clark, vice chair­man of New York-based FX Con­cepts Inc., the world’s largest cur­rency hedge fund, with $9 bil­lion in assets under man­age­ment. ‘The rea­son why peo­ple are bor­row­ing the US dol­lar for carry trade is A: It’s very cheap to fund, and B: The expec­ta­tion is it’s going to go down.’”

Source: Oliver Big­gadike and Ron Harui, Bloomberg, Sep­tem­ber 14, 2009.

CNBC: Jim Rogers — “I expect a cur­rency cri­sis or semi-crisis”
“Jim Rogers, CEO of Rogers Hold­ings, told CNBC Mon­day that when Lehman Broth­ers failed he thought ‘thank good­ness they’re finally let­ting some­body col­lapse’. He said that ‘when some­body fails, you let them fail’, and that for­mer US Trea­sury Sec­re­tary Hank Paul­son ’should have let ten peo­ple go bankrupt’.”

Click here for the article.

Source: CNBC, Sep­tem­ber 14, 2009.

Ian Stan­nard (BNP Paribas): Swiss National bank inter­ven­tion
“The Swiss National Bank’s meet­ing on Thurs­day could pro­vide the ideal oppor­tu­nity for a fur­ther bout of inter­ven­tion to weaken the franc, believes Ian Stan­nard, cur­rency strate­gist at BNP Paribas.

“‘The SNB is likely to con­tinue to warn about defla­tion risks, jus­ti­fy­ing the need to main­tain non-conventional mea­sures,’ he says.

“Mr Stan­nard notes that BNP Paribas’ Swiss franc trade-weighted index (TWI) is back at the highs of the past six months, which form the upper end of the trad­ing range that has been in place since March.

“‘This extreme level of the TWI coin­cides with the pre­vi­ous assumed rounds of inter­ven­tion by the SNB in June.

“‘Given that the SNB’s objec­tive has been to pre­vent a fur­ther appre­ci­a­tion of the franc, the strength of the TWI must be a concern.’

“He also sug­gests that while the focus of atten­tion has been on the level of the euro against the franc — given the impor­tance of the Swiss trad­ing rela­tion­ship with the euro­zone — this could start to change.

“‘Despite the franc TWI being at its highs, the euro is still above the lev­els at which the SNB intro­duced its inter­ven­tion policy.

“‘But the dol­lar has con­tin­ued to trend lower against the franc and is now test­ing the lows from Decem­ber 2008.

“‘This sug­gests that the SNB may also include dollar-franc to a greater degree in any fur­ther rounds of intervention.’”

Source: Ian Stan­nard, BNP Paribas (via Finan­cial Times), Sep­tem­ber 16, 2009.

Bloomberg: Cana­dian dol­lar climbs to 11-month high on growth opti­mism
“Canada’s dol­lar rose to the strongest level since Octo­ber ver­sus its US coun­ter­part as spec­u­la­tion the global reces­sion is over encour­aged appetite for higher-yielding assets.

“‘Risk is back in the mar­ket,’ said Andrew Chave­riat, a tech­ni­cal ana­lyst at BNP Paribas SA in New York. The Cana­dian dol­lar is ‘catch­ing up a bit’, he added.

“The gain in Canada’s dol­lar prompted spec­u­la­tion the nation’s cen­tral bank is inter­ven­ing to weaken it. A Bank of Canada spokes­woman, Stephanie Bento, said any inter­ven­tion would be announced on the cen­tral bank’s website.

“‘We did hear those rumors early this morn­ing,’ said Blake Jes­persen, direc­tor of for­eign exchange in Toronto at BMO Cap­i­tal Mar­kets, a unit of Canada’s fourth-largest bank. ‘We think it’s 100 per­cent untrue. I don’t think the bank has the ammu­ni­tion or the desire to inter­vene. This is a story about US dol­lar weak­ness across the board.’

“The nation’s cen­tral bank hasn’t done trans­ac­tions in foreign-exchange mar­kets to affect the currency’s value since 1998, even with the dol­lar set­ting record highs and lows against the green­back over the past decade.”

Source: Chris Fournier, Bloomberg, Sep­tem­ber 17, 2009.

Richard Rus­sell (Dow The­ory Let­ters): Anti-gold inter­ests fac­ing defeat
“Jason Ham­lin, founder of Gold­Stock­Bull, has put for­ward four major devel­op­ments which he thinks all gold-believers should be aware of:

(1) China (today every­thing seems to depend on China) is encour­ag­ing its cit­i­zens to buy (accu­mu­late) gold and repa­tri­ate any gold held in Lon­don. As recently as 2002, the pos­ses­sion of gold in pri­vate hands was pro­hib­ited in China — now we’re see­ing a dra­matic rever­sal of pol­icy. ‘It’s glo­ri­ous to buy and hold gold’ is the offi­cial stance in China.

(2) Bar­rick Gold Corp. has decided to begin clos­ing its huge gold hedge book. This will entail Bar­rick buy­ing mil­lions of ounces of gold which they have shorted. Bar­rick is prepar­ing for a higher gold price. The word I hear is that Bar­rick has bought 2 mil­lion ounces of gold and is expected to buy another 3 mil­lion ounces. This is sup­posed to cut its hedge book by half.

(3) COMEX Com­mer­cial traders [usu­ally gold min­ing com­pa­nies] have taken the largest net short posi­tion ever against gold and sil­ver. Nor­mally this huge addi­tion to sup­ply would knock the pre­cious met­als down. But this has not hap­pened, at least, so far. Evi­dently, buy­ing in gold and sil­ver has been pow­er­ful enough to pres­sure the com­mer­cial shorts. They will have to put out more shorts (a dan­ger­ous move) or be forced to cover.

(4) Gold and sil­ver have slipped into back­war­da­tion. This occurs when the price of a com­mod­ity for imme­di­ate (spot) deliv­ery is higher than its price for future deliv­ery. One inter­pre­ta­tion is that peo­ple who con­trol the sup­ply of the met­als can’t be per­suaded to part with their sup­ply, and this sug­gests that there is more demand for imme­di­ate phys­i­cal deliv­ery than there is an imme­di­ate sup­ply of metals.

“With the news that China and Rus­sia are scram­bling to build up their sup­ply of gold, this could mean that the demand for gold is intense.

“Adding to the above, the cen­tral banks have now turned into net buy­ers of gold rather than sellers.

“All in all, the pre­cious met­als sit­u­a­tion is now fas­ci­nat­ing, and the anti-gold inter­ests (those who cre­ate fiat cur­rency, i.e. the cen­tral banks and the infla­tion­ists) may, at last, be fac­ing an inglo­ri­ous defeat.”

Source: Richard Rus­sell, Dow The­ory Let­ters, Sep­tem­ber 17, 2009.

Reuters: Cen­tral banks seen becom­ing net gold buyers-expert
“Cen­tral banks are expected to buy 6 mil­lion to 10 mil­lion ounces of gold annu­ally due to cur­rency uncer­tain­ties after being net sell­ers in past decades, Jef­frey Chris­t­ian, man­ag­ing direc­tor of CPM Group, told the Den­ver Gold Forum on Monday.

“In a keynote speech kick­ing off North America’s biggest gold con­fer­ence, which runs through Wednes­day, Chris­t­ian gave what he said was a con­ser­v­a­tive fore­cast for gold to aver­age $914 an ounce over the next 10 years.

“‘What we are see­ing is that cen­tral banks are mak­ing the tran­si­tion from large net sell­ers to large net buy­ers,’ Chris­t­ian said.

“‘You will see a net buy­ing of 6 (mil­lion) to 10 mil­lion ounces per year by cen­tral banks, and that is an extremely con­ser­v­a­tive pro­jec­tion,’ he said.

“Chris­t­ian said that Euro­pean cen­tral banks appeared to be done with their gold sell­ing, and that cen­tral banks in emerg­ing coun­tries which have been build­ing up for­eign reserves were now diver­si­fy­ing into gold due to volatil­ity in the dol­lar and other major currencies.

“Recently, China and other emerg­ing economies have sig­naled grow­ing inter­est in gold rather than stock­pil­ing their cur­rency reserves in US dollar-denominated assets.”

Source: Reuters, Sep­tem­ber 14, 2009.

Mon­eyNews: Gold expert — sell, sell, sell
“One of London’s lead­ing gold experts has urged his clients to dump their gold and sil­ver holdings.

“John Reade, an ana­lyst at UBS, told investors to erase all their posi­tions until the lat­est upward price surge ends, Ambrose Evans-Pritchard writes in the Lon­don Telegraph.

“Gold has climbed amid the dollar’s drop to a one-year low.

“Reade says futures con­tracts on New York’s Comex exchange are flash­ing warn­ing sig­nals. The Comex expe­ri­enced a surge of 6.4 mil­lion ounces in net long con­tracts last week. Such jumps in the past have on aver­age pre­saged a 5% drop in gold prices over the next month.

“‘We rec­om­mend that nim­ble investors take prof­its on any long gold and sil­ver posi­tions, look­ing to re-enter after a cor­rec­tion,’ Reade says.

“He sees gold slip­ping to $950 over the next month and then resum­ing its rally next year.

“The last time Comex long con­tracts approached last week’s lev­els was in Feb­ru­ary 2008, when gold hit its record high and then crashed.”

Source: Dan Weil, Mon­eyNews, Sep­tem­ber 15, 2009.

Bespoke: Baltic Dry remains flat as mar­kets con­tinue to rally
“Even as China has recov­ered sig­nif­i­cantly from its cor­rec­tion and US mar­kets charge higher, the Baltic Dry Index remains in a down­trend. As shown in the first chart below, the Baltic Dry peaked at the start of June and has headed steadily lower since then. China’s Shang­hai Com­pos­ite peaked about a month later, but it has ral­lied nicely since the start of Sep­tem­ber. The Baltic Dry led the fall in China dur­ing the sum­mer, so is it now sug­gest­ing that China’s recent bounce is a pump fake, or is it just lag­ging this time around?”

Source: Bespoke, Sep­tem­ber 17, 2009.

Mar­tin Wolf (Finan­cial Times): Wheel of for­tune turns as China out­does west
“China has emerged as the most sig­nif­i­cant win­ner from the global finan­cial and eco­nomic cri­sis. At the end of 2008, many ques­tioned whether China would achieve its growth tar­get of 8% in 2009. Who now dares to do so?

“Cush­ioned by its more than $2,100 bil­lion (€1,440 bil­lion, £1,260 bil­lion) of for­eign cur­rency reserves, huge trade and cur­rent account sur­pluses and a robust fis­cal posi­tion, Bei­jing has been able to deploy all its levers over the finan­cial sys­tem and the economy.

“Mean­while, as one senior Chi­nese par­tic­i­pant at the World Eco­nomic Forum’s annual meet­ing of ‘the new cham­pi­ons’, in Dalian, noted, ‘the teach­ers have made big mis­takes’. Indeed, any vis­i­tor to Asia will recog­nise the west’s rep­u­ta­tion for finan­cial and eco­nomic com­pe­tence is in tat­ters, while that of China has soared. The wheel of for­tune is turning.

“Three imme­di­ate ques­tions arise. How has China responded to the cri­sis? Is its resur­gent growth sus­tain­able? How far will its recov­ery help the world economy?

“The answer to the first ques­tion is: aston­ish­ingly. Accord­ing to data reported at the end of last week, indus­trial out­put expanded 12.3% in the 12 months to August, up from a 10.8% increase in July. This is the fastest growth for a year.

“Behind this is growth of bank credit at close to 30%, year-on-year, since March 2009. It is no sur­prise, then, that fixed-asset invest­ment has also been grow­ing at over 30%, year-on-year, since March and by 33% in the year to August.

“Is this growth surge sus­tain­able? In a word, yes. Inevitably, the tor­rid growth of bank credit and money is spilling over into asset prices, par­tic­u­larly equi­ties. But there is lit­tle dan­ger of exces­sive infla­tion in an econ­omy with an appre­ci­at­ing cur­rency, fully embed­ded in a world econ­omy still threat­ened more by defla­tion than by infla­tion, at least in the near term.

“Finally, how­ever suc­cess­ful China is in pro­mot­ing domes­tic demand, it will not be the loco­mo­tive for the world econ­omy. True, China’s mer­chan­dise trade sur­plus has indeed been nar­row­ing: it was $35 bil­lion in the sec­ond quar­ter, 40% lower than a year ear­lier. China’s cur­rent account sur­plus is also shrink­ing: it may be down to 6% of gross domes­tic prod­uct this year, from 11% in 2007.

“Yet, since it still only gen­er­ates some 7% of world out­put, China is too small to act as the world’s loco­mo­tive. Even halv­ing its exter­nal sur­plus would add only 0.4% to aggre­gate demand in the rest of the world.”

Source: Mar­tin Wolf, Finan­cial Times, Sep­tem­ber 13, 2009.

Finan­cial Times: Brus­sels fears deficits will exceed fore­casts
“Euro­pean gov­ern­ments are at risk of record­ing even higher bud­get deficits this year than was thought likely four months ago, the Euro­pean Com­mis­sion warned on Monday.

“Pre­sent­ing its lat­est eco­nomic fore­casts for 2009, the Com­mis­sion said pre­lim­i­nary infor­ma­tion indi­cated that deficits in the 27-nation Euro­pean Union could be above the aver­age 6% of gross domes­tic prod­uct esti­mated in May.

“‘This appears to be mainly caused by stronger than expected rev­enue short­falls in a num­ber of coun­tries, as out­put growth and the size of dis­cre­tionary stim­u­lus mea­sures are broadly in line with the spring fore­cast,’ the Com­mis­sion said.

“The warn­ing served as a reminder that the most sav­age reces­sion in the EU’s 52-year his­tory will inflict last­ing dam­age on the bloc’s pub­lic finances and aver­age long-term eco­nomic growth.

“Pol­i­cy­mak­ers at the EU’s head­quar­ters believe the emer­gency mea­sures taken to save the finan­cial sys­tem and fight the reces­sion have destroyed all progress made in the first 10 years of Euro­pean mon­e­tary union towards con­sol­i­dat­ing the pub­lic finances.

“Accord­ing to the Commission’s May fore­casts, pub­lic debt in the 16-nation euro­zone will soar to 77.7% of GDP this year and 83.8% in 2010. Both fig­ures are far higher than the 60% thresh­old set under EU treaty law for coun­tries aspir­ing to adopt the euro.

“Pri­vate sec­tor econ­o­mists cal­cu­late the pic­ture will be dra­mat­i­cally worse if gov­ern­ments take no reme­dial action. Accord­ing to Lau­rence Boone, econ­o­mist at Bar­clays Cap­i­tal, euro­zone pub­lic debt would shoot up to 105% of GDP by 2015 if no action were taken and annual infla­tion would aver­age 2% between 2011 and 2015. Greece’s debt would be 149%, Ireland’s 144%, Spain’s 135% and that of France 106%.

“Some inde­pen­dent econ­o­mists say the eco­nomic dam­age will end up being worse in Europe than the US, which most Euro­pean gov­ern­ments hold respon­si­ble for hav­ing caused the cri­sis in the first place.”

Source: Tony Bar­ber, Finan­cial Times, Sep­tem­ber 14, 2009.

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