Routinely “Under Water”

Monday, November 30th, 2009

Investors, fondly recall­ing the Octo­ber 2007 high in the U.S. stock mar­ket, are undoubt­edly anx­ious to see a full recov­ery of their cap­i­tal. This is under­stand­able. The promise of equi­ties is clear — they offer the poten­tial for growth as cor­po­rate prof­its increase over time in response to grow­ing rev­enues and improved pro­duc­tiv­ity. As illus­trated below, $1.00 invested in U.S. large cap stocks on Jan­u­ary 1, 1926 was worth $2,394 at the end of Octo­ber 2009, after fac­tor­ing in the rein­vest­ment of dividends.

It is this ascend­ing graph, fea­tured in end­less sales pre­sen­ta­tions dur­ing the last bull mar­ket, which enticed so many investors. "Stocks for the long-run" is the com­mon mantra.

Unfor­tu­nately, this graph obscures a harsher real­ity. Over this almost 84-year his­tory, U.S. large cap stocks expe­ri­enced 105 peri­ods where a draw­down occurred (i.e. where the value fell below its prior peak as mea­sured at month-end) – about once every 10 months. And although the aver­age decline from peak to trough was just –6.9%, there were eight peri­ods where the decline was greater than –20% (see Table I at the end of the Com­men­tary). The mother of all declines was the 83% plunge in the Great Depres­sion fol­lowed by the recent 51% draw­down just endured from Octo­ber 2007 through Feb­ru­ary 2009.

The aver­age time from peak to trough was just three months, although this ranged from as lit­tle as a month to the 34 month decline at the out­set of the Great Depres­sion. Recov­er­ies took longer – four months on aver­age. The deeper the decline, how­ever, the longer the recov­ery. Where the decline was in excess of –20%, it took an aver­age of three and half years to recover.

As a result, investors spend the vast major­ity of the time with the value of their stock hold­ings below their prior high. In fact, as illus­trated in the fol­low­ing chart, since 1926 investors in U.S. large cap stocks spent 33% of the time watch­ing the val­ues of their stock port­fo­lio fall, 38% of the time watch­ing them recover and only 29% of the time watch­ing them hit new highs.

Source: Tacita Cap­i­tal. Based on month-end val­ues with div­i­dend reinvestment.

What about adding bonds? Surely, a bal­anced approach will yield more inspir­ing results. Unfor­tu­nately, this is true only to a degree. In fact, a bal­anced investor with a port­fo­lio com­prised of 35% intermediate-term U.S. gov­ern­ment bonds and 65% large-cap U.S. stocks endured 120 peri­ods of draw­down, nearly 15% more than the stock only investor. The aver­age decline period was the same – three months.

Where a bal­anced investor wins out is that their aver­age decline was less: –4.4% ver­sus –6.9% for the "stock only" investor. The fero­cious bear mar­kets were all buffered to a degree by the bond allo­ca­tion (see Table II at the end of the Com­men­tary). Also, the aver­age recov­ery period was faster by a month.

How­ever, on the mea­sure of month-end port­fo­lio expe­ri­ence, there was not much of a dif­fer­ence. As illus­trated below, bal­anced investors spent 34% of the time watch­ing their port­fo­lios fall in value, 31% watch­ing them recover and only 35% enjoy­ing new highs.

Source: Tacita Cap­i­tal. Based on month-end val­ues with div­i­dend and inter­est reinvestment.

Investors need to be aware that when mea­sured against the pre­vi­ous high, their port­fo­lio will be spend­ing the major­ity of the time "under water." Also, the greater the decline, the longer the period of sub­mer­gence. Under­stand­ing the inevitabil­ity of this dis­heart­en­ing expe­ri­ence may make it a lit­tle eas­ier to bear. A wiser approach is to take a longer-term view and com­pare today's value against prior lows as well as prior highs. Mar­kets are cycli­cal; per­for­mance com­par­isons need to rec­og­nize this reality.

Table I – Worst "Stock Only" Draw­downs

*Recov­ery dura­tion includes the first month exceed­ing the prior high.

Table II – Worst Bal­anced Port­fo­lio Draw­downs

*Recov­ery dura­tion includes the first month exceed­ing the prior high.

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

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

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

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

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

Tags: Average Decline, Cap Stocks, Corporate Profits, Declines, Dividends, Drawdown, Four Months, Graph, Great Depression, Half Years, January 1, Mantra, Outset, Plunge, Sales Presentations, Stock Holdings, Stock Portfolio, Trough, U S Stock Market
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Jim Rogers on Gold's Allure

Monday, November 30th, 2009

Maria Bar­tiromo writes about Jim Rogers thoughts in BusinessWeek:

I was on assign­ment in Sin­ga­pore on Nov. 24 when gold hit an all-time high of $1,174 an ounce. That was for­tu­itous because Sin­ga­pore is the home base of com­modi­ties guru Jim Rogers, cre­ator of the Rogers Inter­na­tional Com­modi­ties Index. Mean­time, back in the U.S., reports were sur­fac­ing about grow­ing dis­con­tent in the halls of Con­gress over the per­for­mance of Trea­sury Sec­re­tary Tim Gei­th­ner and the pos­si­bil­ity he might be replaced by JPMor­gan Chase (JPM) CEO Jamie Dimon. When I rang up Rogers, he was his usual low-key self, with quiet opin­ions about the future of gold prices, com­modi­ties to watch, and why Obama should dump Geithner.

Jim Rogers on Why Gold Is Glit­ter­ing So Brightly, Busi­ness­Week, Novem­ber 25, 2009

Tags: Advertisement, Allure, Businessweek, Ceo, Commodities, Congress, Discontent, Gold, Gold Commodities, Gold Prices, Gold Watch, Guru, International Commodities Index, Jamie Dimon, Jim Rogers, Jpm, Jpmorgan Chase, Maria Bartiromo, Ounce, Rogers International Commodities Index, Singapore, Tim Geithner, Treasury Secretary
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The World According to Americans

Monday, November 30th, 2009

A humor­ous look at the world from an Amer­i­can perspective.

Tags: American Perspective, Look At The World
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Why American Consumers Will Spend Lavishly Again

Monday, November 30th, 2009

Via Har­vard Busi­ness –An excerpt:

Let me intro­duce you to Susan House­holder.* Here she is, stand­ing in the entrance of her garage in a mid­dle class sub­urb of Ridge­field, New York. She is sur­vey­ing a moun­tain of stuff: bicy­cles, tobog­gans, a work bench, exer­cise equip­ment, canned goods, Christ­mas dec­o­ra­tions, a pic­nic ham­per, board games, lots of wrap­ping paper, sev­eral boxes of stem ware, and lots and lots of con­tain­ers, con­tents unknown. There’s so much stuff here, this ceased to be a garage a long time ago. It’s now a stor­age locker, Susan’s very own U-Store-It. (Cars are con­signed to the drive way.) If we wanted a mon­u­ment to all the spend­ing Susan did in the 00s, this is it.What cre­ated this moun­tain of stuff? Was it irra­tional exu­ber­ance and cheap money? It was not. This crowded garage springs from cul­tural motives. These things were not pur­chased to express van­ity or pur­sue sta­tus. They were pur­chased to help Susan build a life.

Source: Har­vard Business

Tags: American Consumers, Bicycles, Board Games, Business Advertisement, Canned Goods, Cheap Money, Christmas Decorations, Christmas Hamper, Class Suburb, Excerpt, Exercise Equipment, Harvard Business, Householder, Irrational Exuberance, Life Source, Middle Class, Motives, Mountain Bicycles, Picnic Games, Picnic Hamper, Storage Locker, Vanity, Work Bench, Wrapping Paper
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Dubai – floating on an island of debt

Monday, November 30th, 2009

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

Stock mar­kets around the world cracked on Fri­day with the Dow Jones indus­trial aver­age down more than 150 points (Fig. 1), and com­modi­ties plung­ing as Dubai debt woes unnerved investors, and sent tremors of uncer­tainty through­out all markets.

The cri­sis flared after Dubai, a part of the United Arab Emi­rates (UAE) fed­er­a­tion, asked to delay inter­est pay­ment for six months on $60 bil­lion of debt issued by the state-run con­glom­er­ate Dubai World and its main prop­erty unit Nakheel.

Con­cerns that a government-backed invest­ment com­pany risked default ripped through world mar­kets. Investors read it as a sign of yet another sov­er­eign implo­sion after Ice­land and Ire­land, and recoiled from risk and piled into dollars.

Las Vegas on Steroids

Dubai World has served as Dubai’s main dri­ver of growth, oper­at­ing ports, trans­porta­tion groups, spear­head­ing real-estate & infra­struc­ture projects both at home and abroad. Its real-estate sub­sidiary Nakheel built Dubai’s iconic palm-tree-shaped island, packed with lux­ury vil­las and hotels, many still under con­struc­tion. Real estate and con­struc­tion accounts for about 23% of Dubai’s GDP.

With lit­tle oil, Dubai financed much of this rapid real estate devel­op­ment with debt. After incur­ring its esti­mated $80-$90 bil­lion of debt in a four-year con­struc­tion boom to trans­form its econ­omy into a regional finan­cial and tourism hub, Dubai suf­fered the world’s steep­est prop­erty slump in the first global reces­sion since World War II.

Deutsche Bank esti­mates that Dubai’s prop­erty prices, both com­mer­cial and res­i­den­tial, have halved since August last year, and could fall a fur­ther 15–20% this year.

U.S. Banks Less Exposed

Most ana­lysts believe U.S. banks are prob­a­bly less exposed than Euro­pean rivals to a poten­tial debt default by Dubai World, but a lack of trans­parency and the inter­con­nec­tion of the mod­ern finan­cial sys­tem make it dif­fi­cult to know which insti­tu­tions are ulti­mately exposed.

Dubai World’s largest cred­i­tors are report­edly domes­tic banks in Dubai and Abu Dhabi. Mar­ket­Watch noted data from the Bank for Inter­na­tional Set­tle­ments which put cross-border bank­ing expo­sure for the UAE as a whole at $123 bil­lion at the end of June. Of that total, Euro­pean banks hold 72%, with the United States and Japan only hold­ing 9% and 7% of the expo­sure, respec­tively. The United King­dom is by far the biggest cred­i­tor with a share of 41%.

Reminder of Other Risks

On a global scale, Dubai World’s debt prob­lem seems rel­a­tively minor, but it illus­trates the impact from one tiny coun­try in an increas­ingly inter­con­nected world. The Dubai news also cast doubt over the strength of the U.S. eco­nomic recov­ery, and the prospects for a bot­tom­ing of prop­erty prices.

Com­mer­cial Real Estate

As pointed out in my pre­vi­ous arti­cle that the com­mer­cial real estate sec­tor posed a much greater threat than the over-hyped “mother of all carry trades.”  The Dubai debt cri­sis fur­ther rein­forces this viewpoint.

The poten­tial for con­ta­gion from Dubai’s debt woes could fur­ther unhinge an already frag­ile U.S. com­mer­cial real estate sec­tor, whose val­ues have already fallen 42.9% from their 2007 peak, close to the low­est since 2002, accord­ing to Moody’s. (Fig. 2) The lat­est Moody’s pro­jec­tion is for prices to bot­tom at 45–55% below their peak, but could drop as mush as 65% from their peak in a “stress case”.

As com­mer­cial prop­erty val­ues fall, debt defaults rise. The $3.4 tril­lion out­stand­ing in debt backed by com­mer­cial real estate poses a real threat to the recov­ery. Trepp LLC reported that last month, delin­quen­cies on U.S. com­mer­cial real estate loans that were pack­aged into com­mer­cial mortgage-backed secu­ri­ties reached 4.8%, more than six times the year ear­lier level. Hotel loans, at 8.7% dis­tressed, have begun falling into delin­quency faster than any other kind of com­mer­cial real estate debt.

Write-downs and losses at banks around the world have risen to more than $1.7 tril­lion since 2007 as the credit cri­sis under­mined the value of assets owned by finan­cial insti­tu­tions, accord­ing to data com­piled by Bloomberg. Any fur­ther delever­ag­ing and the result­ing credit tight­en­ing from com­mer­cial real estate would impede the finan­cial sec­tor and prob­a­bly derail the U.S. econ­omy send­ing it into another recession.

Hous­ing Mar­ket Mort­gage Crisis

So far, the appear­ance of recov­ery in the hous­ing sec­tor is being dri­ven pri­mar­ily by reduced prices com­bined with fed­eral pro­grams to lower mort­gage rates with the goal of bring­ing more buy­ers into the market.

Based on a study released by Zillow.com, the fore­clo­sure cri­sis has moved beyond sub­prime mort­gages and into the prime mort­gage mar­ket. (Fig. 3) While sub­prime bor­row­ers are still a fac­tor in the cur­rent fore­clo­sure epi­demic, it’s becom­ing increas­ingly appar­ent that the weak labor mar­ket is the dri­ving force behind the mort­gage cri­sis we face today.

Accord­ing to the Mort­gage Bankers Asso­ci­a­tion, one in seven U.S. home loans was past due or in fore­clo­sure as of Sept. 30, putting that quar­terly delin­quency mea­sure at its high­est level since the report’s incep­tion, 1972, and up from one in ten at the begin­ning of the year.

The con­tin­ued surge in delin­quen­cies sug­gests that a recov­ery in the hous­ing mar­ket could be hin­dered by the weak job mar­ket as well as by fur­ther fall­out from the easy money and loose lend­ing prac­tices of the past. The fore­clo­sures and delin­quen­cies are expected to keep ris­ing well into 2010, not lev­el­ing off until the unem­ploy­ment rate starts to moderate.

In a study by First Amer­i­can Core­L­ogic found that one in four of all U.S. mortgage-borrowers owe more than the value of their prop­er­ties in the 3rd quar­ter. And many experts didn’t expect U.S. home prices to hit bot­tom until early 2011, per­haps falling another 5–10%, as more fore­clo­sures get pushed onto the market.

Neg­a­tive equity is another out­stand­ing risk hang­ing over the mort­gage market.

Dubai Is No Lehman

The cir­cum­stances behind Dubai’s moves are murky, mak­ing it hard to gauge the exact risk to the per­tain­ing bonds and Dubai’s own gen­eral cred­it­wor­thi­ness. UBS cau­tioned that Dubai’s over­all debt “might be higher than the gen­er­ally assumed $80 bil­lion to $90 bil­lion, due to poten­tial off-balance sheet lia­bil­i­ties. These could include unlim­ited and unquan­tifi­able amount of credit default swaps (CDS) and other deriv­a­tives against the under­ly­ing assets, and once unrav­eled, could poten­tially erupt into a subprime-like crisis.

The cur­rent expectation; however, is that there’s a good chance that Dubai’s prob­lems will prob­a­bly prove a local issue. Most likely, Dubai, or its neigh­bor­ing emi­rate, Abu Dhabi, won’t risk tar­nish­ing their images and rep­u­ta­tion fur­ther, and will come up with a rea­son­able resolution.

Even if Dubai goes into sov­er­eign default, the amount is prob­a­bly not enough on its own to threaten the finan­cial sys­tem since any actual losses would be a frac­tion of the total. So, the prob­lems in Dubai are unlikely to be as seri­ous as last year’s Lehman Broth­ers col­lapse, nor is it a reflec­tion on the abil­ity of emerg­ing mar­kets to lead a global eco­nomic recovery.

Ratio­nal Expectations?

But Dubai could well spur a broader cri­sis of investor con­fi­dence in overly lever­aged economies as mar­ket con­fi­dence world-wide is still frag­ile from the sever­ity of the finan­cial cri­sis.  The debts of many emerg­ing mar­kets have risen even fur­ther as the coun­tries gov­ern­ments have fought the rav­ages of the global reces­sion by issu­ing more stim­u­lus debt to fill the gap voided by pri­vate investment.

The spread of credit-default swaps on developing-nation’s bonds jumped 14 basis points after the Dubai news broke, the most in a month, to 3.24 per­cent­age points, accord­ing to JPMor­gan Chase & Co.’s EMBI+ Index. There is also a clear sign of poten­tial con­ta­gion effects of global risk aver­sion on basi­cally all risky assets, with the dol­lar and yen being the prime beneficiaries.

Ratio­nal expec­ta­tions or not, for now, the Dubai cri­sis is sim­ply a reminder that the severe global reces­sion has rel­e­gated much debt to near junk sta­tus, and there still remains a high degree of uncer­tainty as to the per­cent­age recov­er­able on all out­stand­ing debt which is going to be com­ing due over the next 5 years.

Despite some sem­i­nal signs of green shoots in the news head­lines dur­ing this 9 month liq­uid­ity dri­ven rally in many asset classes around the globe, we should be reminded that all that glit­ters is not gold, and that the global eco­nomic recov­ery is still on shaky ground.

*Dian Chu, Mar­ket ana­lyst, trader and finan­cial writer for Seek­ing Alpha, Zero Hedge, Daily Mark­sts, iStock­An­a­lyst & Straight­Stocks. My arti­cles also appear in Reuters, USA Today and Busi­ness­Week, etc. Pro­fes­sional cre­den­tials include M.B.A., C.P.M. and Char­tered Econ­o­mist with exten­sive pro­fes­sional expe­ri­ence in mar­ket seg­ment fore­cast­ing and strate­gies. Pre­vi­ous employ­ers include Enron, Time Warner & Clear Chan­nel. I’m cur­rently work­ing in the U.S. for the energy sector.

Source: Dian Chu, Eco­nomic Fore­casts & Opin­ions, Novem­ber 28, 2009.

Tags: Commodities, Construction Boom, Debt Default, Debt Woes, Dian, Dow Jones, Dow Jones Industrial Average, Economic Forecasts, Emerging Markets, European Rivals, Global Recession, Gold, Implosion, Infrastructure Projects, Interconn, Interest Payment, Luxury Villas, Market Analyst, oil, Palm Tree Shaped Island, Tourism Hub, Transportation Groups, United Arab Emirates, World War Ii, Year Construction
Posted in Energy & Natural Resources, Infrastructure, Markets, US Stocks | Comments Off

Words from the (Investment) Wise (November 29, 2009)

Sunday, November 29th, 2009

As shop­pers were emp­ty­ing their purses on Black Fri­day bar­gains, Dubai’s attempt to resched­ule its debt roiled finan­cial mar­kets, plung­ing risky assets into the red. The gov­ern­ment of Dubai requested a six-month pay­ment freeze on the $59 bil­lion debt issued by Dubai World — a state-owned con­glom­er­ate that has become known for its extrav­a­gant real estate projects.

Wor­ries about Dubai’s debt woes rat­tled investors’ con­fi­dence, pre­cip­i­tat­ing a sell-off in equi­ties, high-yielding cor­po­rate bonds, com­modi­ties and the Baltic Dry Index, while mature-market gov­ern­ment debt, the US dol­lar and the Japan­ese yen attracted safe-haven buy­ers. On Thurs­day and Fri­day, many emerging-market and high-yielding cur­ren­cies declined sharply.

A fact not widely known is that Dubai has the worst debt per capita in the world. Ah well …

Source: Peter Brookes, Times Online

The credit-rating agen­cies promptly down­graded Dubai’s government-related debt and the cost of insur­ing against default jumped across the United Arab Emi­rates (UAE) region. As shown in the Bloomberg screen­shot below, cour­tesy of Bespoke, the price of Dubai’s sov­er­eign debt credit default swap (CDS) last week spiked up to 541 basis points. “Now that global mar­kets have sta­bi­lized and exited cri­sis mode, an iso­lated event in Dubai where default risk doesn’t even spike to its 2009 highs [of almost 1,000 basis points] has caused a global mar­ket sell­off,” remarked Bespoke.

Source: Bespoke, Novem­ber 27, 2009.

Geof­frey Yu, strate­gist at UBS, said (via the Finan­cial Times): “Although the major­ity of mar­ket observers believe the prob­lems in Dubai are not insur­mount­able, the wider fall­out has sim­ply revealed how frag­ile mar­kets are — and risk appetite may not be as strong as pre­vi­ously assumed, regard­less of how prof­li­gate cen­tral banks glob­ally have been in pro­vid­ing liquidity.”

Also as reported by the Finan­cial Times, Julian Jes­sop of Cap­i­tal Eco­nom­ics argued that Dubai’s move was unlikely to affect the pos­i­tive out­look for emerg­ing mar­kets in the longer term: “We do not believe the events in Dubai mark a new phase in the global cri­sis. But if they are the cat­a­lyst for a more selec­tive approach to invest­ment, that might be no bad thing.”

In terms of banks’ expo­sure to Dubai, JPMor­gan Chase com­ments (via The Big Pic­ture) that the Royal Bank of Scot­land under­wrote more Dubai World loans than any other insti­tu­tion. In terms of cap­i­tal at risk, HSBC has the largest expo­sure to the UAE.

The past week’s per­for­mance of the major asset classes is sum­ma­rized by the chart below. Gold bul­lion (not shown on the graph) touched a record high of $1,194.90 on Thurs­day before tum­bling to $1,136.80, but sub­se­quently recov­ered to close 2.4% up for the week at $1,177.63. Sim­i­lar volatil­ity was seen in the oil price, with West Texas Inter­me­di­ate Crude declin­ing by more than $5 at one point on Fri­day, but later regain­ing some ground to end the week 1.8% down at $76.05.

Source: StockCharts.com

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

The MSCI World Index (-0.1%) last week marked time, whereas the MSCI Emerg­ing Mar­kets Index (-2.5%) expe­ri­enced more sell­ing from risk-averse investors. How­ever, the aggre­gate indices mask greatly vary­ing per­for­mances. For exam­ple, among mature mar­kets the Japan­ese Nikkei 225 Index (-4.4%) recorded a fifth con­sec­u­tive down-week, suf­fer­ing from the strong Japan­ese yen that recorded a 14-year low ver­sus the US green­back. On the other hand, the Brazil­lian Bovespa Index (+1.1%) and the Russ­ian Trad­ing Sys­tem Index (+1.8%) bucked the broader down­trend among emerg­ing markets.

As far as the US indices are con­cerned, Friday’s losses wiped out the gains from ear­lier in the week, revers­ing a new recov­ery high of 10,464 made by the Dow Jones Indus­trial Index on Wednes­day. By the close of the Thanksgiving-shortened week on Fri­day, the S&P 500 Index remained unchanged on the week, whereas the other major indices expe­ri­enced a sec­ond down-week. Five of the ten eco­nomic sec­tors (as mea­sured by the SPDR exchange-traded funds) closed higher for the week, with Tele­coms (+1.8%), Health Care (+1.3%) and Util­i­ties (+0.9%) out­per­form­ing, and Finan­cials (-2.2%) in the red.

The year-to-date gains in the US remain firmly in pos­i­tive ter­ri­tory and are as fol­lows: Dow Jones Indus­trial Index 17.5%, S&P 500 Index 20.8%, Nas­daq Com­pos­ite Index 35.6% and Rus­sell 2000 Index 15.6%.

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

Top per­form­ers among stock mar­kets this week were Bangladesh (+5.7%), Ecuador (+4.3%), Kuwait (+3.4%), Kenya (+2.1%) and Esto­nia (+1.9%). At the bot­tom end of the per­for­mance rank­ings, coun­tries included Cyprus (‑15.6%), Viet­nam (-11.7%), Ser­bia (-8.8%), China (-6.4%) and Greece (‑6.2%). The declines in the Shang­hai Com­pos­ite Index came in the wake of a warn­ing by China’s bank­ing reg­u­la­tor that it would refuse approvals for expan­sion and limit bank­ing oper­a­tions if lenders did not meet new cap­i­tal ade­quacy requirements.

Of the 98 stock mar­kets I keep on my radar screen, 30% recorded gains (last week 39%), 65% (58%) showed losses and 5% (3%) 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 United States Nat­ural Gas Fund (UNG) (+10.0%), Rydex S&P Equal Weight Util­i­ties (RYU) (+3.0%), Cur­rency Shares Japan­ese Yen (FXY) (+2.6%), Pow­er­Shares DB Gold (DGL) (+2.5%) and Van­guard Extended Dura­tion Trea­sury (EDV) (+2.5%).

At the bot­tom end of the per­for­mance rank­ings, ETFs included iShares MSCI Turkey Investible Mar­ket (TUR) (-5.6%), SPDR S&P Emerg­ing Europe (GUR) (-5.4%) and Mar­ket Vec­tors Rus­sia (RSX) (-4.9%).

Refer­ring to the bull mar­ket in gold, the quote du jour this week comes from Richard Rus­sell, 85-year-old author of the Dow The­ory Let­ters. He said: “There’s still loads of scep­ti­cism about the ris­ing price of gold and the bull mar­ket in gold. It’s been so long since the US pub­lic (since 1971) real­ized gold was real Con­sti­tu­tional money that they don’t know what to make of the gold action. They think gold near $1,200 an ounce is expen­sive and they’d rather have dol­lar bills.

“I’ve coined the phrase, ‘dollar-bugs’ for these igno­rant Amer­i­cans. I guess they’ll have to get edu­cated the hard way, which means hold­ing on to their fad­ing Fed­eral Reserve Notes, no mat­ter what. As far as I’m con­cerned, it’s an amaz­ing exam­ple of mass brain­wash­ing. ‘Hey, I’d rather have junk paper turned out by the Fed than the real thing — gold.’ Pathetic. And the happy thought is that you can (legally) still swap your junk fiat paper for gold.”

Still on the topic of gold, Ian McAv­ity (Ian McAvity’s Delib­er­a­tions) said: “Gold bub­ble? I regard such talk as non­sense … Gold is about 52% higher than the peak weekly aver­age price of Jan­u­ary 1980. The US CPI is 177% higher, US M-2 Money Sup­ply is 464% higher, and the S&P is 892% higher. I don’t think it unto­ward to sug­gest gold is badly lag­ging a num­ber of impor­tant yard­sticks and at these lev­els has some catch­ing up to do.”

In other news, Mar­ket­Watch reported that the num­ber of dis­tressed banks in the US rose to the high­est level in 16 years in the third quar­ter. The Fed­eral Deposit Insur­ance Corporation’s (FDIC) Deposit Insur­ance Fund, which is used to pro­tect depos­i­tors, swung to an $8.2 bil­lion loss in the third quar­ter, the largest drop since the savings-and-loan cri­sis of the 1990s.

Sep­a­rately, accord­ing to Mar­ket­Watch, rates on 30-year fixed-rate mort­gages aver­aged 4.78% last week, match­ing April’s all-time low of in Fred­die Mac’s weekly sur­vey of con­form­ing mort­gage rates. The mort­gage rate aver­aged 5.97% a year ago.

Next, a quick tex­tual analy­sis of my week’s read­ing. This is a way of visu­al­iz­ing word fre­quen­cies at a glance. There is noth­ing spe­cific to report here, other than that “gold” and “banks” are still promi­nent and “Dubai” is mak­ing an appearance.

Back to the stock mar­kets: The major moving-average lev­els for the bench­mark US indices, the BRIC coun­tries and South Africa (where I am based in Cape Town) are given in the table below. With the excep­tion of the Rus­sell 2000 Index and the Bom­bay Sen­sex Index, the indices in the table are all trad­ing above their 50-day mov­ing aver­ages, with all the indices also above their respec­tive 200-day mov­ing averages.

How­ever, many stock mar­kets have already fallen to below their 50-day lines (not shown on this table, but indi­cated on the per­for­mance table higher up), point­ing to pos­si­ble fur­ther weak­ness. Also, the Japan­ese Nikkei 225 Index last week became the first major mar­ket to breach its key 200-day mov­ing aver­age, point­ing to a very weak tech­ni­cal picture.

The Octo­ber lows are also given in the table. A break below these lev­els would indi­cate a rever­sal of the uptrend since March, i.e. revers­ing the pro­gres­sion of higher-reaction lows.

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

In addi­tion to hav­ing retraced 50% of their bear mar­ket declines, the Dow Indus­trial and S&P 500 are up against sig­nif­i­cant medium-term down­ward trend lines. Also, neg­a­tive diver­gences have been show­ing up in a num­ber of breadth indi­ca­tors, finan­cial stocks and small caps, sug­gest­ing a more cau­tious tone.

Accord­ing to Bespoke, last week’s sen­ti­ment sur­vey from Investors Intel­li­gence showed bull­ish sen­ti­ment among newslet­ter writ­ers was near its high­est lev­els since the March lows (50.6%), while bear­ish sen­ti­ment is at a five-year low (17.6%). This puts the spread between bulls and bears at 33, which is the high­est level since Decem­ber 2007. “High lev­els of bull­ish sen­ti­ment are typ­i­cally con­sid­ered con­trar­ian, but we would note that sen­ti­ment can remain bull­ish for extended peri­ods of time with lit­tle impact on the mar­ket. While it is true that mar­kets typ­i­cally peak when bull­ish sen­ti­ment is high, how­ever, high lev­els of bull­ish sen­ti­ment don’t nec­es­sar­ily mean an immi­nent decline,” said Bespoke.

Source: Bespoke, Novem­ber 25, 2009.

Cast­ing his eye on 2010, Eoin Treacy (Fuller­money) said: “Most mar­kets ral­lied from deeply over­sold lev­els this year and have posted impres­sive advances since March. It is unrea­son­able to expect the same type of per­for­mance to be repeated next year. Nev­er­the­less, mon­e­tary con­di­tions are unlikely to pose a head­wind and the envi­ron­ment is likely to remain largely bull­ish despite the poten­tial for swift mean rever­sion in mar­kets some­what overex­tended rel­a­tive to their 200-day mov­ing averages.”

In my opin­ion, stock mar­kets have run too far too fast — dri­ven by an avalanche of liq­uid­ity — and they have moved out of align­ment with eco­nomic and earn­ings growth that may not live up to the expec­ta­tions being priced into equity val­u­a­tions. I will bide my time while the fun­da­men­tals play catch-up.

For more dis­cus­sion on the econ­omy and finan­cial mar­kets, see my recent posts “Dubai’s lat­est mega-project — a mas­sive default?“, “Japan­ese Nikkei 225 nose­dives“, “Gold ETF makes it 9 up-days in a row“, “Gold bul­lion — over­due for a pull­back?“, “Ritholtz: “Buy and hold” is a dis­as­ter“, “Char­lie Rose in con­ver­sa­tion with Bar­ton Biggs“, “Pic­ture du Jour: Will emerging-market out­per­for­mance last?” and “Wealth­Track: Robert Klein­schmidt — rev­el­ing in con­trar­ian invest­ment phi­los­o­phy“.

Twit­ter and Face­book
I reg­u­larly post short com­ments (max­i­mum 140 char­ac­ters) on top­i­cal eco­nomic and mar­ket issues, web links and graphs on Twit­ter. For those read­ers not doing so already, you can fol­low my “tweets” by click­ing here. You may also con­sider join­ing me as a friend on Face­book.

Econ­omy
“There has been no mean­ing­ful change in global busi­ness sen­ti­ment dur­ing the past three months. Since mid-August, busi­ness con­fi­dence has been con­sis­tent with a ten­ta­tive global eco­nomic recov­ery,” accord­ing to the results of the lat­est Sur­vey of Busi­ness Con­fi­dence of the World by Moody’s Economy.com. “Busi­nesses have remained con­sis­tently more upbeat about the out­look than their assess­ment of cur­rent con­di­tions. Sales and hir­ing are soft, as are pric­ing and inven­to­ries. South Amer­i­can busi­nesses and pro­fes­sional ser­vice firms are the most pos­i­tive and North Amer­i­cans and those work­ing in gov­ern­ment gen­er­ally the most negative.”

Source: Moody’s Economy.com

Pur­chas­ing man­agers indices for the 16-country Euro­zone region showed pri­vate sec­tor activ­ity expand­ing this month at the fastest pace in two years, led by France and Ger­many, reported the Finan­cial Times. The com­pos­ite index, cov­er­ing Euro­zone ser­vices and man­u­fac­tur­ing, reached 53.7 in Novem­ber, up from 53.0 in Octo­ber, mak­ing it the fourth con­sec­u­tive month of expansion.

As far as hard data are con­cerned, Germany’s econ­omy expanded again in the third quar­ter of 2009. GDP rose by 0.7% on a sea­son­ally adjusted basis from the pre­vi­ous quar­ter, when it expanded by a revised 0.4%. Eco­nomic activ­ity was boosted by inven­tory restock­ing and spend­ing on machin­ery and equipment.

Con­cerns remain about the pace of the global eco­nomic recov­ery, and there­fore how quickly gov­ern­ments and cen­tral banks should with­draw emer­gency sup­port mea­sures. Accord­ing to the Finan­cial Times, Mr Strauss-Kahn, man­ag­ing direc­tor of the Inter­na­tional Mon­e­tary Fund, said the global econ­omy stood at the cusp of recov­ery but remained vul­ner­a­ble to shocks and pol­icy mis­steps. Fis­cal and mon­e­tary stim­u­lus pro­grams should not be stopped too soon, he said.

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.)

Tues­day, Novem­ber 24
• Min­utes of Novem­ber 3–4 FOMC Meet­ing — spots of opti­mism are vis­i­ble, con­cerns about dol­lar, com­mer­cial real estate loans, and low inter­est rates are notice­able
• Wide­spread revi­sions of Q3 GDP
• Home prices — signs of sta­bil­ity remain in place
• Con­sumer Con­fi­dence Index moves up slightly

Mon­day, Novem­ber 23
• Low mort­gage rates and tax credit lift sales of exist­ing homes

A very handy graph to assess the cur­rent state of the US econ­omy comes cour­tesy of Rus­sell Invest­ments. Click here to link to the inter­ac­tive version.

Source: Rus­sell Invest­ments, Novem­ber 22, 2009.

The min­utes of the Fed­eral Open Mar­ket Committee’s (FOMC) Novem­ber 3–4 meet­ing point to con­tin­ued aggres­sive mon­e­tary pol­icy in the near term. Although par­tic­i­pants agreed that the reces­sion was over, they expected the unem­ploy­ment rate to remain ele­vated and the infla­tion rate to remain below the cen­tral bank’s opti­mal level. Par­tic­i­pants expected eco­nomic growth to slow a bit in 2010 and then pick up again after that.

On the topic of the mag­ni­tude of the US eco­nomic recov­ery, David Rosen­berg, chief econ­o­mist and strate­gist of Gluskin Sheff & Asso­ciates, pro­vided the fol­low­ing inter­est­ing snippet:

“The reces­sion in the US may be over, but what sort of recov­ery lies ahead remains in ques­tion. All we can say is that when look­ing at what is nor­mal in the con­text of a post-recession rebound dur­ing the post-WWII era, the first quar­ter of growth is closer to 7.3% at an annual rate, not 2.8% as we just saw in the lat­est real GDP esti­mate — the median was 6.3%. The fact that with the mas­sive amount of stim­u­lus — with­out it, growth would have flirted with 0% — this first quar­ter of pos­i­tive growth was basi­cally one-third of what is typ­i­cal, really says something.”

Food for thought indeed.

Source: Gluskin, Sheff & Asso­ciates — Break­fast with Dave, Novem­ber 26, 2009.

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

Source: Yahoo Finance, Novem­ber 27, 2009.

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

Mon­day, Novem­ber 30
• Chicago PMI

Tues­day, Decem­ber 1
• Con­struc­tion spend­ing
• ISM Index
• Pend­ing home sales
• Auto and truck sales

Wednes­day, Decem­ber 2
• ADP employ­ment report
• Fed Beige Book

Thurs­day, Decem­ber 3
• Job­less claims
• Pro­duc­tiv­ity
• ISM Services

Fri­day, Decem­ber 4
• Non­farm pay­rolls
• Fac­tory orders

Mar­kets
The per­for­mance chart from the Wall Street Jour­nal Online shows how dif­fer­ent global finan­cial mar­kets per­formed dur­ing the past week.

Source: Wall Street Jour­nal Online, Novem­ber 27, 2009.

“Regard­less of the dol­lar price involved, one ounce of gold would pur­chase a good-quality men’s suit at the con­clu­sion of the Rev­o­lu­tion­ary War, the Civil War, the pres­i­dency of Franklin Roo­sevelt, and today,” said Peter Bur­shre (hat tip: Chart of the Day). Let’s hope the news items and quotes from mar­ket com­men­ta­tors included in the “Words from the Wise” review will assist the read­ers of Invest­ment Post­cards to not only don decent suits, but also build con­sid­er­able wealth with their invest­ment portfolios.

That’s the way it looks from Cape Town (where I will be spend­ing my time over the next few weeks, because my visit to New York had to be can­celled to attend to local busi­ness responsibilities).

Source: Wayne Stayskal, Novem­ber 11, 2009.

Finan­cial Times: Bets rise on rich coun­try bond defaults
“The mount­ing level of debt in the indus­tri­alised world is prompt­ing a grow­ing num­ber of investors to use the deriv­a­tives mar­ket to bet on the chance of rich gov­ern­ments default­ing on bonds.

“The vol­ume of activ­ity in sov­er­eign credit default swaps — which mea­sure the cost to insure against bond defaults — linked to the US, UK and Japan have dou­bled in the past year because of con­cerns about their pub­lic finances.

“CDS vol­umes for Italy, which has one of the high­est debt bur­dens of the devel­oped economies, are now the high­est for an indi­vid­ual coun­try, accord­ing to the Depos­i­tory Trust & Clear­ing Corporation.

“In con­trast, the out­stand­ing vol­ume of CDS linked to emerg­ing nations such as Rus­sia, Brazil, Ukraine and Indone­sia have been flat or fallen in the past 12 months as investors have become less inter­ested in trad­ing the risks of those countries.

“In the past, the CDS mar­ket for devel­oped coun­tries was slug­gish, because few investors saw the need to buy or sell pro­tec­tion against a risk of default that seemed exceed­ingly remote.

“How­ever, ris­ing debt lev­els and grow­ing polit­i­cal and eco­nomic uncer­tainty have cre­ated a more active mar­ket, with more investors now seek­ing insur­ance. Mean­while, many banks are pre­pared to offer pro­tec­tion in exchange for a fee.

“This fee has recently jumped, since the cost to insure the debt of devel­oped coun­tries has increased since the sum­mer of last year, while the cost of insur­ing emerg­ing mar­ket debt has fallen.

“Gary Jenk­ins, head of fixed income research at Evo­lu­tion, said: ‘The biggest sin­gle risk hang­ing over the bond mar­kets is the rapid rise in pub­lic debt in the indus­tri­alised world.

“‘If we get to a point where the mar­ket thinks the lev­els of debt are unsus­tain­able, then we will see an almighty sell-off in the gov­ern­ment bond mar­kets, with yields soar­ing. Gov­ern­ments need to take action to cut deficits and debt.’

“Nigel Ren­dell, senior emerg­ing mar­kets strate­gist at RBC Cap­i­tal Mar­kets, said: ‘It is not sur­pris­ing that investors are increas­ingly wor­ried about debt in the indus­tri­alised world. Debt to GDP of more than 100 per cent is dif­fi­cult to sustain.’”

Source: David Oak­ley, Finan­cial Times, Novem­ber 22, 2009.

Finan­cial Times: Dubai World
“Dubai has shocked investors by ask­ing for a debt stand­still at Dubai World, the government’s flag­ship hold­ing com­pany that has devel­oped some of the world’s most extrav­a­gant real estate projects. The move raised the spec­tre of default in the Mid­dle East’s trad­ing hub just as early signs of eco­nomic recov­ery have emerged. John Paul Rath­bone analy­ses recent devel­op­ments in Dubai.”

Source: John Paul Rath­bone, Finan­cial Times, Novem­ber 24, 2009.

Finan­cial Times: Dubai shock after debt stand­still call
“Dubai has shocked investors by ask­ing for a debt stand­still at Dubai World, the government’s flag­ship hold­ing com­pany that has devel­oped some of the world’s most extrav­a­gant real estate projects.

“The move raised the spec­tre of default in the Mid­dle East’s trad­ing hub just as early signs of eco­nomic recov­ery have emerged. Dur­ing the boom, Dubai rode the wave of easy credit gen­er­at­ing phe­nom­e­nal eco­nomic growth but was badly hit by the global credit crisis.

“Dubai’s sur­prise move angered some investors who had been reas­sured by local offi­cials for months that the city would meet all oblig­a­tions on its $80bn of gross debt in spite of reces­sion and a real estate crash.

“‘Investors view this as shock­ingly bad news,’ said Rob Whichello of BNP Paribas. Two hours after announc­ing it had raised $5bn from two Abu Dhabi banks, the depart­ment of finance asked for a stand­still until May 30 on all financ­ing to the heav­ily indebted Dubai World and its trou­bled prop­erty unit Nakheel, which is due to pay back $4bn on an Islamic bond on Decem­ber 14.

“Dubai also launched a restruc­tur­ing of the gov­ern­ment hold­ing com­pany, which over­sees ports oper­a­tor DP World, the UK-based P&O Fer­ries and trou­bled invest­ment com­pany Istith­mar. Nakheel, the devel­oper behind the city’s Palm Islands that boast celebrity own­ers such as David Beck­ham, has had to shed thou­sands of staff and left con­trac­tors out of pocket as local prop­erty prices halved and credit dried up.

“A sym­bol of Dubai’s pre-crunch excess, the gov­ern­ment com­pany has had to can­cel plans for the world’s tallest tower and a con­stel­la­tion of reclaimed islands, as col­laps­ing cash flow left the devel­oper on the brink.

“‘This will destroy con­fi­dence in Dubai, the whole process has been so opaque and unfair to investors,’ said Eckart Woertz, econ­o­mist with Dubai’s Gulf Research Centre.

“The gap­ing size of Dubai World’s $22bn debt prob­lem has been appar­ent for a year. But the government’s level of sup­port has been clouded by pol­i­tics and a lack of clar­ity on how much it could raise from inter­na­tional mar­kets and the oil-rich cap­i­tal of the United Arab Emi­rates, Abu Dhabi.

“Bond mar­kets reacted sharply to the news with investors demand­ing higher pre­mi­ums to hold debt from the region. In Lon­don trade it cost about $460,000 annu­ally over five years to insure $10m worth of Dubai gov­ern­ment debt against default, com­pared with $360,000 on Tues­day. Prices rose for its neigh­bours with Abu Dhabi pro­tec­tion $100,000 more than on Tuesday.

“Stan­dard & Poor’s and Moody’s Investors Ser­vice imme­di­ately down­graded the rat­ings of all six government-related issuers in Dubai fol­low­ing news of the repay­ment delay and left them on review for pos­si­ble fur­ther downgrade.

“Moody’s cut rat­ings on some government-related enti­ties to junk sta­tus, while S&P cut rat­ings on some enti­ties to one level above junk.

“S&P said the restruc­tur­ing ‘may be con­sid­ered a default under our default cri­te­ria, and rep­re­sents the fail­ure of the Dubai gov­ern­ment (not rated) to pro­vide timely finan­cial sup­port to a core government-related entity’.”

Source: Simeon Kerr and Jen­nifer Hughes, Finan­cial Times, Novem­ber 25, 2009.

Eoin Treacy (Fuller­money): Dubai could trig­ger cor­rec­tive phase
“Mid­dle East­ern stock mar­kets have been lag­gards over the last year despite the advance in oil prices. Lag­gards usu­ally lag for a rea­son and these are now becom­ing appar­ent with yesterday’s announce­ment. This news has had lit­tle effect on the region’s stock mar­kets which sug­gests either some expec­ta­tions of credit prob­lems are already in the price or the focus of these prob­lems lies with the Dubai gov­ern­ment and for­eign creditors.

“Dubai took full advan­tage of loose credit con­di­tions ear­lier this decade to build on a mas­sive scale. A huge per­cent­age of the world’s cranes were domi­ciled in the coun­try and the ‘before and after’ pic­tures of the city were com­monly used to illus­trate the extent of the devel­op­ment. The aim of build­ing a finan­cial and tourist hub and becom­ing a gate­way between Europe and Asia as a solu­tion to the Emirate’s lack of oil and gas reserves is laud­able, but as with any mania, the good idea was taken to excess. The con­trac­tion of global liq­uid­ity has put pres­sure on Dubai’s abil­ity to attract invest­ment and has con­tributed to the cur­rent problems.

“Coun­tries that expe­ri­enced the biggest build­ing booms on credit alone are expe­ri­enc­ing some of the deep­est reces­sions. The US, UK, Ire­land, Spain and a num­ber of East­ern Euro­pean and Mid­dle East­ern coun­tries share this char­ac­ter­is­tic. How­ever, the stock mar­ket action of the last year demon­strates that not all coun­tries have been affected the same way and those which avoided build­ing to excess have largely avoided reces­sions and posted the best stock mar­ket performances.

“The extent to which British banks are exposed to Dubai World has begun to rekin­dle wor­ries about con­ta­gion but I won­der how jus­ti­fied this is? Dubai’s big brother, Abu Dhabi, is on a sounder finan­cial foot­ing and remains likely to pro­vide assis­tance. Cred­i­tors may have to endure a delay in get­ting their cap­i­tal returned but mas­sive write­downs akin to those expe­ri­enced fol­low­ing Lehman Broth­ers’ bank­ruptcy are prob­a­bly unlikely. How­ever, the per­cep­tion of these prob­lems is more impor­tant in the short-term. Stock and com­mod­ity mar­kets have had an excep­tional run since March. The Dubai default could be a cat­a­lyst for a deeper cor­rec­tive phase unfold­ing generally.”

Source: Eoin Treacy, Fuller­money, Novem­ber 26, 2009.

Nouriel Roubini (Forbes): Will the world go shop­ping?
“Roughly one year ago, around the Thanks­giv­ing fes­tiv­i­ties, the National Bureau of Eco­nomic Research announced that the US reces­sion started in Decem­ber 2007. One year later, though the US econ­omy is in recov­ery mode, retail­ers are approach­ing the hol­i­day sea­son — which accounts for slightly less than one-fifth of yearly US retail sales — with some concern.

“A sharp col­lapse in US con­sumer spend­ing since mid-2008 led to a par­tic­u­larly dis­mal 2008 hol­i­day retail sea­son. As per US Cen­sus Bureau esti­mates, core retail sales (which exclude autos, gaso­line and build­ing sup­plies) fell by 1.1% year on year dur­ing Novem­ber and Decem­ber 2008, com­pared to an aver­age 4.6% year-on-year increase in hol­i­day sea­son sales over the past decade. Total retail sales suf­fered a larger col­lapse, falling 9.5% year on year.

“After col­laps­ing in 2008, retail sales showed signs of sta­bi­liz­ing over the sum­mer of 2009. While auto sales have fluc­tu­ated sharply dur­ing recent months due to the government’s ‘cash for clunk­ers’ ini­tia­tive, core retail sales have risen for three con­sec­u­tive months as of Octo­ber 2009, creep­ing up at a pace of about 0.5% month on month. Enter­ing the 2009 hol­i­day sea­son, the recent uptick in core sales offers hope for bet­ter than antic­i­pated hol­i­day retail sales.

“Eco­nomic indi­ca­tors, how­ever, sug­gest a note of cau­tion. The renewal in US con­sumer con­fi­dence over the first half of 2009 faded. Suc­ces­sive grim reports on the employ­ment sit­u­a­tion revealed no quick end to labor mar­ket woes, low­er­ing con­sumers’ income expec­ta­tions. Accord­ing to the Octo­ber Reuters/University of Michi­gan Sur­vey of Con­sumer Sen­ti­ment, in Octo­ber 2009, con­sumers reported wors­en­ing per­sonal finances for the 13^th con­sec­u­tive month, the ‘longest and deep­est decline in the 60-year his­tory of the surveys’.

“The poor state of per­sonal finances has dri­ven con­sumers to reduce debt at an accel­er­ated pace. In Sep­tem­ber, con­sumer credit fell for the eighth con­sec­u­tive month at an annu­al­ized pace of 7.2%. The poor health of per­sonal finances, labor mar­ket uncer­tainty and the ongo­ing house­hold bal­ance– sheet repair will con­tinue to pro­mote fru­gal behav­ior by US con­sumers. The Con­fer­ence Board con­sumer con­fi­dence sur­veys tell a reveal­ing story: Con­sumers’ plans to pur­chase big-ticket appli­ances have declined in the run-up to the 2009 hol­i­day sea­son. This is a bit unusual as plans to buy big-ticket appli­ances usu­ally dis­play a sinu­soidal pat­tern, with a trough in the month of Octo­ber and a peak some­time the fol­low­ing spring.

“A mea­sure of weekly retail sales released by the Inter­na­tional Coun­cil of Shop­ping Cen­ters and Gold­man Sachs indi­cates that same-store sales flat­tened over the first three weeks of Novem­ber, though com­pared to 2008, sales are up by a promis­ing aver­age pace of 2.9%. The National Retail Fed­er­a­tion projects retail sales will fall 1% dur­ing this hol­i­day sea­son, com­pared to an aver­age 3.4% annual gain in hol­i­day sales over the past decade. After the sharp slide in 2008, a decline of ‘only’ 1% or even a small pos­i­tive gain in 2009 hol­i­day sales may seem like a wel­come num­ber; how­ever, account­ing for the base effects of a dis­mal 2008 sea­son, the under­ly­ing real­ity for retail­ers remains grim for this hol­i­day season.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, Novem­ber 26, 2009.

Finan­cial Times: Divi­sions emerge on stim­u­lus strat­egy
“Stark divi­sions are emerg­ing among eco­nomic pol­i­cy­mak­ers about how quickly gov­ern­ments and cen­tral banks should with­draw emer­gency sup­port mea­sures, with Dominique Strauss-Kahn, the man­ag­ing direc­tor of the Inter­na­tional Mon­e­tary Fund, warn­ing on Mon­day about the risks of early exit.

to shocks and pol­icy mis-steps. Fis­cal and mon­e­tary stim­u­lus pro­grammes should not be stopped too soon, he said.

“He added: ‘It is too early for a gen­eral exit. We rec­om­mend erring on the side of cau­tion, as exit­ing too early is cost­lier than exit­ing too late.’

“His words may be of some use to the Obama admin­is­tra­tion, which is boxed in by increas­ingly shrill calls to reduce the bud­get deficit and by appeals from some lib­eral Democ­rats and econ­o­mists to spur job cre­ation with more pub­lic money.

“On the mon­e­tary pol­icy side, Ben Bernanke, US Fed­eral Reserve chair­man, last week said ‘infla­tion seems likely to remain sub­dued for some time’ and reit­er­ated that inter­est rates were likely to remain excep­tion­ally low for ‘an extended period’, although he also said he was ‘atten­tive’ to the value of the dollar.

“Mr Strauss-Kahn’s stance con­trasted with warn­ings by the Euro­pean Cen­tral Bank that delays in unwind­ing excep­tional mea­sures taken to com­bat the eco­nomic cri­sis could back­fire. Last Fri­day, Lorenzo Bini Smaghi, an ECB exec­u­tive board mem­ber, said his­tory showed that the late imple­men­ta­tion of ‘exit strate­gies’ could cause future crises.

“Speak­ing in Madrid on Mon­day, Jean-Claude Trichet, ECB pres­i­dent, said the threats to pub­lic finances posed by gov­ern­ment stim­u­lus pack­ages meant ‘there is an increas­ingly press­ing need for ambi­tious and real­is­tic fis­cal exit strate­gies and for fis­cal con­sol­i­da­tion’. He said it was ’still pre­ma­ture to declare the finan­cial cri­sis over. But when the appro­pri­ate time comes, there should be no con­cern about the ECB’s deter­mi­na­tion and abil­ity to exit.’

“Mr Strauss-Kahn said the worst of the finan­cial storm had passed but the global econ­omy remained in a hold­ing pat­tern — ’sta­ble, and get­ting bet­ter, but still highly vulnerable’.”

Source: Brian Groom, Ralph Atkins and Tom Braith­waite, Finan­cial Times, Novem­ber 23, 2009.

Finan­cial Times: Fed sees risks in low rates pol­icy
“Fed­eral Reserve offi­cials have expressed con­cerns that near-zero inter­est rates could fuel ‘exces­sive risk-taking in finan­cial mar­kets’ but believe the pos­si­bil­ity of such an out­come is ‘rel­a­tively low’ min­utes from its Novem­ber meet­ing show.

“Both China and Ger­many warned this month that the weak dol­lar and the Fed’s pol­icy to keep US inter­est rates ‘excep­tion­ally low’ for an ‘extended period’ could be lay­ing the ground­work for a new spec­u­la­tive bubble.

“The cen­tral bank’s Fed­eral Open Mar­ket Com­mit­tee already had dis­cussed this risk, accord­ing to the min­utes released on Tues­day. In their meet­ing on Novem­ber 3–4, the offi­cials ‘noted the pos­si­bil­ity that some neg­a­tive side-effects might result from the main­te­nance of very low short-term inter­est rates for an extended period’.

“The min­utes said: ‘While mem­bers cur­rently saw the like­li­hood of such effects as rel­a­tively low, they would remain alert to these risks.’

“The com­mit­tee mem­bers took a fairly san­guine view of the dollar’s recent decline, which they described as ‘orderly’ and linked to improved risk appetite. How­ever, the min­utes note that ‘any ten­dency for dol­lar depre­ci­a­tion to inten­sify or to put sig­nif­i­cant upward pres­sure on infla­tion would bear close watching’.

“In the meet­ing, the com­mit­tee decided to stick to its interest-rate pol­icy, say­ing the US econ­omy was con­tin­u­ing to improve but that infla­tion risks were low. The com­mit­tee mem­bers upgraded their fore­casts for US growth in 2009 and 2010, but reduced their fore­cast slightly for 2011. They also low­ered their unem­ploy­ment expeca­tions, fore­cast­ing a rate between 9.3 and 9.7 per cent next year, down from a pre­vi­ous fore­cast of between 9.5 and 9.8 per cent.

“The min­utes were released after the com­merce depart­ment said gross domes­tic prod­uct grew at an annual rate of 2.8 per cent in the third quar­ter, below its first esti­mate of 3.5 per cent.”

Source:  Sarah O’Connor, Finan­cial Times, Novem­ber 24, 2009.

CNBC: FOMC min­utes — reac­tion
“Dis­sect­ing the FOMC min­utes with James Bianco of Bianco Research, Zane Brown of Lorb Abbett and CNBC’s Steve Liesman.”

Source: CNBC, Novem­ber 24, 2009.

Mon­eyNews: Inter­est alone on Fed­eral debt — $4.8 tril­lion
“When you think about the government’s explod­ing debt bur­den, you prob­a­bly don’t focus on inter­est payments.

“But those pay­ments will likely total $4.8 tril­lion over the next 10 years, amount­ing to more than half the government’s $9 tril­lion in debt.

“Inter­est rates are near zero now, thanks to the Fed­eral Reserve’s mas­sive mon­e­tary stim­u­lus. But at some point the Fed will have to reverse that easing.

“‘When inter­est rates rise, even a small amount, the inter­est pay­ments go up a lot because of the size of the debt,’ Charles Konigs­berg, chief bud­get coun­sel of the Con­cord Coali­tion, told CNNMoney.com.

“The $4.8 tril­lion interest-payment esti­mate made by the Con­gres­sional Bud­get Office assumes some inter­est rate appre­ci­a­tion. But if rates rise higher than its esti­mates, the dol­lar total will be higher.

“The Obama admin­is­tra­tion has pledged to cut the bud­get deficit to 3 per­cent of GDP, down from 10 per­cent last year. But that goal may be more fan­tasy than reality.

“‘Even under the president’s (2010) bud­get as eval­u­ated by the CBO, we do not get any­where close to that,’ William Gale, a senior fel­low at the Brook­ings Insti­tu­tion, told CNNMoney.com.”

Source: Dan Weil, Mon­eyNews, Novem­ber 23, 2009.

Asha Ban­ga­lore (North­ern Trust): Wide­spread revi­sions of Q3 GDP
“Real GDP grew at an annual rate of 2.8% in the third quar­ter, pre­vi­ously esti­mated as a 3.5% increase. Lower esti­mates of con­sumer spend­ing (+2.9% vs. +3.4% in the advance report), out­lays on struc­tures ((-15.1% vs. –9.0% in the advance report), res­i­den­tial invest­ment expen­di­tures and (+19.5% vs. +23.4% in advance report), includ­ing a smaller con­tri­bu­tion from inven­to­ries and a wider trade gap more than off­set the upward revi­sions of gov­ern­ment spend­ing and equip­ment and soft­ware spending.

“Going for­ward, real GDP is pro­jected to show a slightly slower pace of growth in the fourth quar­ter of 2009 and first quar­ter of 2010, partly because car sales of the future have been bor­rowed to take advan­tage of the ‘clash for clunk­ers’ program.

“Cor­po­rate prof­its from cur­rent pro­duc­tion rose 10.6% in the third quar­ter, fol­low­ing a revised 3.7% gain in the sec­ond quar­ter. From a year ago, cor­po­rate prof­its fell 6.7%, the first single-digit decline after three straight quar­ters of sig­nif­i­cantly weaker prof­its. Cor­po­rate prof­its of the finan­cial sec­tor advanced 36.4% in the third quar­ter and made up the larger share of cor­po­rate prof­its. Cor­po­rate prof­its of the non-financial sec­tor increased only 2.0%. The finan­cial sector’s per­for­mance is arti­fi­cially boosted by the sup­port pro­grams in place.”

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

Clus­ter­stock: The blood­bath in Amer­i­can man­u­fac­tur­ing is over
“Man­u­fac­tur­ing has been one of the hard­est hit sec­tors around, but the pain is going away.

“Today’s chart shows the num­ber of mass lay­off events (at least 50 peo­ple whacked in one blow) per month in man­u­fac­tur­ing, and as you can see, it’s way down from its peak, and now below the peak of the 2001–2002 recession.

“Still, we’ve got to see a lot of improve­ment before we’re at pre-crisis levels.”

Source: Joe Weisen­thal and Kamelia Angelova, Clus­ter­stock — The Busi­ness Insider, Novem­ber 20, 2009.

Stan­dard and Poors: S&P/Case-Shiller — Home prices show sus­tained improve­ment
“Data through Sep­tem­ber 2009, released today [Tues­day] by Stan­dard & Poor’s for its S&P/Case-Shiller Home Price Indices, show that the US National Home Price Index improved in the third quar­ter of 2009, post­ing its sec­ond con­sec­u­tive quar­terly increase and fur­ther improve­ment in its annual rate of return.

“The chart above depicts the annual returns of the US National, the 10-City Com­pos­ite and the 20-City Com­pos­ite Home Price Indices. The S&P/Case-Shiller US National Home Price Index, which cov­ers all nine US cen­sus divi­sions, recorded an 8.9% decline in the third quar­ter of 2009 ver­sus the third quar­ter of 2008. This is a marked improve­ment over the 14.7% decline in the annual rate of return reported in the sec­ond quar­ter of 2009, and the 19.0% drop in the first quar­ter. The 10-City and 20-City Com­pos­ites recorded annual declines of 8.5% and 9.4%, respec­tively. These two indices, which are reported at a monthly fre­quency, have gen­er­ally seen improve­ments in their annual rates of return every month since the begin­ning of the year.

“‘We have seen broad improve­ment in home prices for most of the past six months,’ says David Blitzer, Chair­man of the Index Com­mit­tee at Stan­dard & Poor’s. ‘How­ever, the gains in the most recent month are more mod­est than dur­ing the sea­son­ally strong sum­mer months.’”

Source: Stan­dard and Poors, Novem­ber 24, 2009.

Asha Ban­ga­lore (North­ern Trust): Low mort­gage rates and tax credit lift sales of exist­ing homes
“Sales of all exist­ing homes rose 10.1% to an annual rate of 6.1 mil­lion units in Octo­ber. Attrac­tive mort­gage rates and the first-time home buyer tax credit of $8,000 helped to boost sales of exist­ing homes. The tax credit pro­gram has been expanded and extended to April 30, 2010.

“Sales of single-family exist­ing homes advanced 9.7% to an annual rate of 5.33 mil­lion units in Octo­ber. Sales of single-family exist­ing homes have moved up nearly 32% from the cycle low of 4.05 mil­lion homes in Jan­u­ary 2009. The peak of single-family exist­ing home sales was in Sep­tem­ber 2005 (6.34 mil­lion units).

“The median price of an exist­ing single-family home declined 1.6% to $173,100 in Octo­ber from the prior month and it is down 6.8% from a year ago. The year-to-year decline of the median price shows a sig­nif­i­cant mod­er­a­tion, with the Octo­ber read­ing the small­est since June 2008.

“As a result of the low mort­gage rates and the first-time home buyer tax credit of $8,000, the sup­ply of unsold single-family exist­ing homes in Octo­ber dropped to nearly 7-month sup­ply, which is slightly below the his­tor­i­cal median of 7.2-month supply.

“The impor­tant impli­ca­tion is that the declin­ing trend of the num­ber of unsold exist­ing homes should estab­lish price sta­bil­ity. Addi­tional home sales will be pos­si­ble as the econ­omy recov­ers and hir­ing recovers.”

Source: Asha Ban­ga­lore, North­ern Trust — Daily Global Com­men­tary, Novem­ber 23, 2009.

Clus­ter­stock: The “dis­tress­ing” gap between new and exist­ing home sales
“This morning’s exist­ing home sales num­ber showed that sales surged in Octo­ber by a sur­pris­ing 10.1%. But new home sales con­tinue to remain quite weak.

“Today’s chart, show­ing the ‘dis­tress­ing’ gap between the two mea­sures, comes cour­tesy of Cal­cu­lated Risk, which explains:

“‘The ini­tial gap was caused by the flood of dis­tressed sales. This kept exist­ing home sales ele­vated, and depressed new home sales since builders couldn’t com­pete with the low prices of all the fore­closed properties.

“‘The recent spike in exist­ing home sales was due pri­mar­ily to the first time home­buyer tax credit.

“‘But what mat­ters for the econ­omy — and jobs is new home sales, and new home sales are still very low because of the huge over­hang of exist­ing home inven­tory and rental properties.’”

Source: Joe Weisen­thal and Kamelia Angelova, Clus­ter­stock — The Busi­ness Insider, Novem­ber 23, 2009.

Mon­eyNews: Nearly 11 mil­lion US homes under­wa­ter
“Some experts say the hous­ing mar­ket has bot­tomed, but one sta­tis­tic indi­cates otherwise.

“The por­tion of US home­own­ers who are ‘under­wa­ter’ on their loans — that is, they owe more on the mort­gage than the home is worth — surged to 23 per­cent in the third quar­ter, or almost 10.7 mil­lion house­holds, accord­ing to First Amer­i­can Core­L­ogic, a real estate research firm.

“Many of the under­wa­ter homes will end up in fore­clo­sure or on the already bulging mar­ket of homes for sale.

“Of the 10.7 mil­lion homes under­wa­ter, nearly half have a mort­gage that is at least 20% per­cent higher than the home’s value, accord­ing to First American.

“More than 520,000 of these home­own­ers are in default on their mortgages.

“This ‘is an out­stand­ing risk hang­ing over the mort­gage mar­ket’, Mark Flem­ing, chief econ­o­mist of First Amer­i­can, told The Wall Street Journal.

“‘It low­ers home­own­ers’ mobil­ity because they can’t sell, even if they want to move to get a new job.’

“Some home­own­ers who are under­wa­ter are fully capa­ble of pay­ing their mort­gages, but are ditch­ing their homes any­way — to the tune of 588,000.”

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

Clus­ter­stock: We’re still gen­er­at­ing too many neg­a­tive equity mort­gages
“In Wash­ing­ton, DC, the pre­vail­ing view these days is that unem­ploy­ment is now the lead­ing dri­ver of mort­gage defaults. This is one rea­son you can expect to see the next stage of the government’s attempt to res­cue the hous­ing mar­ket focus on sav­ing jobs.

“But a new study out of Amherst Secu­ri­ties indi­cates that neg­a­tive equity is by far the best default pre­dic­tor of defaults. If that view is cor­rect, the fact that we are still pro­duc­ing mort­gages that quickly slip into neg­a­tive equity should be ter­ri­fy­ing. And, in fact, much of the recov­ery in the hous­ing mar­ket appears to be built on thinly cap­i­tal­ized mort­gages sub­si­dized by low loan-to-value FHA guar­an­teed mort­gages and the home-buyer tax credit.

“As the chart below shows, even home buy­ers who took out mort­gages as late as this year are find­ing them­selves with neg­a­tive equity at his­tor­i­cally high rates. We’ve come down from the worst lev­els of the hous­ing boom but we are still well above healthy levels.

“In short, we may be wit­ness­ing a pol­icy mis­take of stun­ning pro­por­tions as law­mak­ers and reg­u­la­tors focus on job cre­ation while ignor­ing the still prob­lem­atic loan-to-value ratios in the hous­ing market.”

Source: John Car­ney and Kamelia Angelova, Clus­ter­stock — The Busi­ness Insider, Novem­ber 24, 2009.

Yahoo Finance — Tech Ticker: Hous­ing bot­tom? “Not even close,” Barry Ritholtz says
“A fifth-straight monthly gain for the Case-Shiller Index Tues­day and Monday’s stronger-than-expected exist­ing home sales report is giv­ing renewed hope to the hous­ing bulls.

“‘Dis­re­gard them,’ says Barry Ritholtz, CEO of Fusion IQ, who notes the exist­ing home sales num­ber was juiced by sales of cheap con­dos and var­i­ous gov­ern­ment pro­grams. Mean­while, the Case-Shiller results were below expectations.

“We are ‘not even close’ to a bot­tom in hous­ing, says Ritholtz, who esti­mates national house prices remain 15–20% over­val­ued, based on the tra­di­tional met­rics of: median income-to-median sales price, the cost of own­ing vs. rent­ing, and hous­ing stock as a per­cent of GDP.

“‘Until we start see­ing a healthy hous­ing mar­ket that can stand on its own, with­out gov­ern­ment props, with­out dis­tressed prop­er­ties sell­ing 60% off peak lev­els — that’s how you know the bot­tom is in,’ says the blog­ger and Bailout Nation author.

“The likely best-case-scenario for hous­ing is sev­eral years of side­ways action for prices, wherein pop­u­la­tion growth and a firmer econ­omy com­bine to sop up the still huge inven­tory of homes on the market.

“‘And that’s if we’re lucky,’ Ritholtz says, cit­ing the lack­lus­ter envi­ron­ment for jobs and wages, as well as CoreLogic’s analy­sis that 23% of all US mort­gage hold­ers are under water. With so many Amer­i­cans owing more money than their homes are worth, the recent rise in fore­clo­sures and so-called jin­gle mail is ‘not nearly done’, he warns.

“In sum, expect more homes for sale at dis­tressed prices and more down­ward pres­sure on prices over­all — unless the ‘real’ econ­omy shows dra­matic improve­ment, which Ritholtz doesn’t see any­time soon.”

Source: Aaron Task, Yahoo Finance — Tech Ticker, Novem­ber 24, 2009.

Clus­ter­stock: US weekly job­less claims the low­est since Sep­tem­ber 2008
“The Depart­ment of Labor reported today [Wednes­day] that ini­tial job­less claims for the week end­ing Novem­ber 21 fell 35,000 on a seasonally-adjusted basis from the pre­vi­ous week.

“They rose 68,080 on a not-seasonally-adjusted basis, but this basi­cally means that job­less claims rose less than nor­mal for this time of year. Sea­sonal adjust­ments are widely used to spot over­all unem­ploy­ment trends since the employ­ment mar­ket is indeed seasonal.

“As shown below, at 466,000, this most recent seasonally-adjusted claims num­ber rep­re­sents the best data point we’ve had since the week of Sep­tem­ber 13, 2008.

“Regard­less of the poten­tial for sta­tic in the weekly num­bers, or errors due to sea­sonal adjust­ments, it’s now pretty clear that the over­all rate of new job­less claims has indeed slowed substantially.”

Source: Vin­cent Fer­nando and Kamelia Angelova, Clus­ter­stock — The Busi­ness Insider, Novem­ber 25, 2009.

Angry Bear: Unem­ploy­ment claims — 1975, 1982–83 and 2009
“The weekly ini­tial unem­ploy­ment claims are widely reported and var­i­ous charts show how they have been falling since the peak. But it is hard to com­pare the drop in claims this cycle com­pared to after other severe reces­sions in the stan­dard charts show­ing claims over time.

“So to make such com­par­isons eas­ier I though read­ers might find a chart show­ing claims after the 1974 and 1982 reces­sions and this reces­sion on the same scale.”

Source: Spencer, Angry Bear, Novem­ber 25, 2009.

Asha Ban­ga­lore (North­ern Trust): Con­sumer Con­fi­dence Index moves up slightly
“The Con­fer­ence Board’s Index moved up to 49.5 dur­ing Novem­ber from 48.7 in the pre­vi­ous month. The Present Sit­u­a­tion Index (21.0 vs. 21.1 in Octo­ber) fell, while the Expec­ta­tions Index rose to 68.5 in Novem­ber from 67.0 in the prior month. The num­ber of respon­dents indi­cat­ing that ‘jobs are hard to get’ rose to 49.8 from 49.4 in the prior month, while those not­ing that ‘jobs are plenty’ fell to 3.2 from 3.5 in Sep­tem­ber. The main mes­sage is that hir­ing remains weak.”

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

Mon­eyNews: Dre­man — brace for 10 per­cent infla­tion
“David Dre­man says investors should be pre­pared for high infla­tion rates — as high as 10 per­cent — to start within the next three years, and that the Obama admin­is­tra­tion is pow­er­less to stop it.

“Dre­man, the well-known con­trar­ian investor and CEO of Dre­man Value Man­age­ment, told Fox Busi­ness that the stock mar­ket will see a cor­rec­tion, although ‘it’s anybody’s guess’ when that cor­rec­tion will occur.

“He said infla­tion could rise to be as high as 8 per­cent to 10 per­cent within the next three years.

“Dre­man advises investors to hold onto their cur­rent stocks and ‘ride through’ the cor­rec­tion. He also advises investors to stay out of long-term bonds because they will take a hit.

“Instead, investors should go for very short-term bonds, equi­ties, and real estate, he said.

“Dre­man pre­dicts that inter­est rates will remain low since ‘no admin­is­tra­tion’ will attempt to raise them with high unem­ploy­ment rates. He said the cur­rent admin­is­tra­tion is both trapped and powerless.

“Dre­man also said that gold is cur­rently under­val­ued, despite break­ing records daily.”

Source: Mon­eyNews, Novem­ber 25, 2009.

Bloomberg: Late card pay­ments rose in Octo­ber, Moody’s reports
“US credit-card delin­quen­cies climbed last month to the high­est level since Feb­ru­ary as five of the six biggest card lenders posted increases, Moody’s Investors Ser­vice said.

“Loans at least 30 days over­due, a sig­nal of future defaults, rose to 6.12 per­cent in Octo­ber from 5.97 per­cent in Sep­tem­ber, Moody’s said in a report dated Nov. 20 and dis­trib­uted today. So-called early-stage delin­quen­cies, pay­ments 30 to 59 days late, were unchanged at 1.66 percent.

“Banks typ­i­cally write off card loans after 180 days, and defaults fell last month to 10.04 per­cent from 10.72 per­cent in Sep­tem­ber, reflect­ing lower delin­quency rates ear­lier in the year. Credit-card defaults and delin­quen­cies tend to track US unem­ploy­ment, which climbed to 10.2 per­cent in Octo­ber, the high­est since 1983.

“‘Weak job cre­ation, ele­vated bank­rupt­cies and ris­ing unem­ploy­ment con­tinue to weigh on results,’ John McDon­ald, an ana­lyst with San­ford C. Bern­stein & Co., said in a Novem­ber 17 research note. ‘It still feels too early to declare victory.’

“Write-offs may peak at 12 per­cent to 13 per­cent in 2010, Moody’s ana­lysts Will Black and Jef­frey Hibbs said in the report.”

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

Bloomberg: Strauss-Kahn says half of bank losses are undis­closed
“Dominique Strauss-Kahn, man­ag­ing direc­tor of the Inter­na­tional Mon­e­tary Fund, talks about bank losses and the out­look for a global eco­nomic recov­ery. Strauss-Kahn answers ques­tions from del­e­gates at the Con­fed­er­a­tion of British Industry’s annual con­fer­ence in London.”

Click here for the article.

Source: Bloomberg, Novem­ber 23, 2009.

Finan­cial Times: S&P raises fears over health of some banks
“A study by Stan­dard & Poor’s has raised ques­tions over the finan­cial strength of some of the biggest banks ahead of new rules that could require them to raise more funds.

“The analy­sis by S&P showed that HSBC is the best cap­i­talised bank in the world, while Switzerland’s UBS, Cit­i­group of the US and sev­eral of Japan’s biggest banks are among the weakest.

“The rank­ing of 45 of the world’s lead­ing banks will unnerve investors, high­light­ing once again the cap­i­tal short­fall that insti­tu­tions still need to make up over the com­ing years.

“Although some banks will be able to top-up cap­i­tal through retained prof­its, ana­lysts expect a string of rights issues from weaker bank­ing groups as they try to raise tens of bil­lions of dollars.

“S&P’s risk-adjusted cap­i­tal (RAC) ratios — a mea­sure of bal­ance sheet strength — fore­shadow the new cap­i­tal ratio régime expected to be set by the Basel com­mit­tee on bank­ing super­vi­sion early next year.

“Its report, pub­lished on Mon­day, gave HSBC a 9.2 per cent ratio, com­pared with barely 2 per cent for the likes of UBS, Cit­i­group and Mizuho.”

Source: Patrick Jenk­ins, Finan­cial Times, Novem­ber 23, 2009.

The Wall Street Jour­nal: Banks scram­ble as debt comes due
“Banks have spent the past year deal­ing with a moun­tain of bad assets. Now atten­tion is turn­ing to tril­lions of dol­lars of debt they have matur­ing over the next few years.

“Banks unable to maneu­ver around the chal­lenge could be forced to refi­nance their debt at sharply higher costs.

“The sit­u­a­tion was caused by banks engag­ing in cheap bor­row­ing dur­ing the credit-market boom that began in the mid­dle of the decade and lasted through 2007. As finan­cial mar­kets hit cri­sis mode, banks were propped up by gov­ern­ment guar­an­tees that enabled them to keep sell­ing debt — but with much shorter maturities.

“About $10 tril­lion of debt comes due by the end of 2015, includ­ing $7 tril­lion by 2012, accord­ing to Moody’s Investors Ser­vice, which high­lighted grow­ing con­cerns about the banks’ loom­ing lia­bil­i­ties in a report this month.

“The life span of bank debt has shrunk to his­tor­i­cally low lev­els, forc­ing banks to deal with the prob­lem sooner rather than later. Glob­ally, the aver­age matu­rity of new debt rated by Moody’s fell from 7.2 years to 4.7 years in the past five years.

“‘We thought that we should send a sig­nal’ of warn­ing, said Jean-Francois Trem­blay, a Moody’s ana­lyst and one of the report’s authors.

“The prob­lem is espe­cially acute for US and UK banks, which have been among the hard­est hit by the finan­cial cri­sis. In the US, banks have seen matu­ri­ties drop to 3.2 years from 7.8 years in the past five years. In the UK, the aver­age matu­rity for new debt fell to 4.3 years from 8.2 years, Moody’s said.”

Source: Car­rick Mol­lenkamp and Ser­ena NG, The Wall Street Jour­nal, Novem­ber 25, 2009.

Finan­cial Times: Bet­ter cli­mate for hedge funds
“The hedge fund sec­tor looks to be going through the early stages of recov­ery, with indus­try flows turn­ing pos­i­tive and redemp­tions largely nor­mal­is­ing to his­tor­i­cal lev­els, says Huw van Stee­nis, head of banks and finan­cials research at Mor­gan Stanley.

“‘Next year is likely to be a piv­otal year for hedge funds, with the sec­tor set to ben­e­fit from the rise in demand for bet­ter risk adjusted returns, the migra­tion of tal­ent from invest­ment banks and trad­ing off the back of a suc­cess­ful 2009,’ he says.

“Mr van Stee­nis believes sov­er­eign wealth funds, foun­da­tions and pen­sion funds have over­taken endow­ments and high net worth hedge fund of funds as the largest source of inflows — and thinks the mar­ket is under­es­ti­mat­ing the poten­tial upsurge in demand for absolute return funds from pri­vate clients and smaller institutions.

“‘In the UK, in the third quar­ter alone, there were $2.1bn of inflows into absolute return funds — three times that in the first quar­ter. Our base case esti­mates that global assets under man­age­ment in the sec­tor will reach $1,750bn by the end of 2010 — where we were in the first half of 2007 — although we see risks posed by per­for­mance, reg­u­la­tion and rep­u­ta­tional issues.

“‘The out­come of US/EU reg­u­la­tory changes remains uncer­tain, but grow­ing prag­ma­tism should be the order of the day; we esti­mate that hedge funds funded 30–40 per cent of cap­i­tal raised by US and Euro­pean banks this year.’”

Source: Huw van Stee­nis, Finan­cial Times, Novem­ber 24, 2009.

Bespoke: Sov­er­eign default risk
“Below we high­light cur­rent credit default swap prices and the year-to-date change for the sov­er­eign debt of 39 coun­tries. As shown, default risk has declined for every coun­try except Japan in 2009, includ­ing Dubai.”

Source: Bespoke, Novem­ber 27, 2009.

Yahoo Finance — Tech Ticker: A bad econ­omy could spell good news on Wall Street for years to come
“The eco­nomic recov­ery isn’t as strong as first thought. Revised GDP fig­ures released this morn­ing [Tues­day] show the econ­omy grew at a 2.8% annu­al­ized pace in the third quar­ter, less than the 3.5% ini­tially reported. The revi­sion was in line with expec­ta­tions but shows the econ­omy didn’t have as much momen­tum head­ing into the fourth quar­ter as pre­vi­ously believed.

“Unlike Wall Street traders, con­sumers seem to know the recov­ery is ‘ane­mic’, as Barry Ritholtz, CEO of Fusion IQ, describes it. The Con­fer­ence Board’s lat­est con­fi­dence sur­vey shows Amer­i­cans feel worse about the cur­rent eco­nomic sit­u­a­tion than they did in March, when the stock mar­ket was mak­ing new lows.

“What’s dri­ving the dis­con­nect between Wall Street and Main Street?

“Ritholtz says it’s a clas­sic exam­ple of bad news being good news on Wall Street. ‘We’re in a cycle that’s not based on prof­itabil­ity, not based on expand­ing econ­omy but based on all sorts of gov­ern­ment sup­ports,’ he says. ‘Bad news is going to be good news for the next cou­ple of quar­ters probably.’

“That’s because low inter­est rates and liq­uid­ity pro­vided by the Fed­eral Reserve, cou­pled with gov­ern­ment stim­u­lus are entic­ing traders to buy into the mar­ket. ‘Cash is trash,’ says Rithotlz, who remains bull­ish on stocks.

“Ritholtz is con­fi­dent that even­tu­ally fun­da­men­tals will pre­vail and thinks the mar­ket will take a hit once the econ­omy shows signs of improve­ment, mean­ing the ‘extra­or­di­nary’ stim­uli can be removed.

“But pre­dict­ing the tim­ing is anyone’s guess. ‘You could have this dis­con­nect that goes on for not days, weeks or months but years and years,’ he says.

“So, in the mean­time, Ritholtz — who cor­rectly pre­dicted the 2008 crash and told Tech Ticker’s audi­ence ‘the mother of all bear mar­ket ral­lies’, was upon us in March — is still long stocks and likes com­modi­ties (thanks to a weak dol­lar) and emerg­ing markets.”

Source: Peter Goren­stein, Yahoo Finance — Tech Ticker, Novem­ber 24, 2009.

Finan­cial Times: Get­ting tech­ni­cal
“There is one group of investors that has few doubts about the direc­tion of the US stock mar­ket. Tech­ni­cal ana­lysts — who scour price moves in charts for pat­terns of behav­iour that they think will be repeated and drive future action — see plenty of sig­nals that jus­tify a con­tin­ued move higher in the S&P 500 index of US stocks.

“Although there are many rea­sons to doubt the rel­e­vance of tech­ni­cal analy­sis, there are many investors who do trade on these signs. Indeed, much of the computer-driven, high-speed trad­ing that has become a fea­ture of stock trad­ing uses such analy­sis to pro­gramme trades. At the very least, it is impor­tant to be aware of the key price lev­els that tech­ni­cal ana­lysts are targeting.

“At its sim­plest in terms of tech­ni­cal sig­nals, a ris­ing sup­port line con­nects the dips seen in the S&P 500 since it started its rally in March. This backs the idea that such a sup­port will con­tinue to prop up prices after any dips.

“In terms of spe­cific lev­els, the most widely watched ones are those that clus­ter round key ratios iden­ti­fied by the math­e­mati­cian Fibonacci in the 13th cen­tury. Under these ratios, tech­ni­cal ana­lysts believe that once mar­kets have ral­lied 50 per cent from a low, they tend to progress to a level mark­ing a 61.8 per cent retracement.

“Tak­ing the 2007 S&P 500 high of 1,576 as the top and the March 2009 low of 667 as a bot­tom, the eyes of these ana­lysts are on the S&P reach­ing 1,121 — a level that would mark a 50 per cent retrace­ment of the decline from the peak. The sub­se­quent 61.8 per cent retrace­ment level would be 1,229.

“Tech­ni­cal ana­lysts sim­i­larly argue that charts sig­nal con­tin­ued dol­lar declines and rises in gold, sil­ver and oil prices. With fun­da­men­tal fac­tors send­ing mixed pic­tures, more traders may grasp for the cryp­tic clues on short-term mar­ket moves pro­vided by tech­ni­cal analysis.”

Source: Aline van Duyn, Finan­cial Times, Novem­ber 24, 2009.

Bespoke: Where are the Finan­cials?
“Prob­a­bly the main rea­son why the S&P 500 has strug­gled to take out old highs in recent weeks is the per­for­mance of the Finan­cial sec­tor. It’s actu­ally sur­pris­ing that the mar­ket is where it is given how poorly the Finan­cials have done. As shown in the first chart below, the S&P 500 Finan­cial sec­tor can’t even get above its 50-day mov­ing aver­age, much less test its bull mar­ket highs from a month or so ago.

“The Finan­cials led us into and out of the bear, and it’s hard to imag­ine the over­all mar­ket con­tin­u­ing its bull­ish pace over the next few months with­out a resur­gence in the Finan­cials. The ques­tion right now is whether to treat the stag­na­tion as a bull­ish sig­nal to gain expo­sure to the sec­tor or a bear­ish sig­nal to sell the broad market.”

Source: Bespoke, Novem­ber 23, 2009.

Bespoke: Gold­man can’t get out of its own way
“While there prob­a­bly aren’t a lot of peo­ple shed­ding tears over it, the stock of Gold­man Sachs (GS) can’t seem to get out of its own way. We’ve high­lighted the rel­a­tive weak­ness in this stock sev­eral times over the last few weeks, so this shouldn’t come as any sur­prise, but GS is now on pace to close at its low­est lev­els since early November.

“Politi­cians in Wash­ing­ton and con­spir­acy the­o­rists may be rejoic­ing in Goldman’s mis­ery, but if there’s one thing Gold­man employ­ees can be thank­ful for it is that with the stock lag­ging the over­all mar­ket, the inten­sity of pub­lic back­lash directed towards the com­pany seems to have abated. Next thing you know, the con­spir­acy the­o­rists will claim that ‘evil’ Gold­man is pur­posely mak­ing their stock weak just so they can buy back the stock at lower prices.”

Source: Bespoke, Novem­ber 25, 2009.

Finan­cial Times: Asian asset bub­ble fears overblown
“Fears that asset bub­bles are being cre­ated in Asia by for­eign cap­i­tal inflows look over­done at this point, says Michael Spencer, Deutsche Bank chief Asia economist.

“He says that while a few nar­row real estate mar­kets may be start­ing to look pricey, equity mar­kets for the most part appear to be at or near fair value.

“‘The big­ger prob­lem fac­ing a num­ber of key Asian economies is the extent to which their cur­ren­cies are pegged to the dol­lar, and the Fed­eral Reserve’s very stim­u­la­tive pol­icy stance.

“‘The mon­e­tary stim­u­lus and cap­i­tal flows these pegs are engen­der­ing are forc­ing [Asian] author­i­ties to adopt more restric­tive pru­den­tial reg­u­la­tions in an effort to avoid the inevitable infla­tion pres­sures and asset bub­bles this arrange­ment will bring.’

“Mr Spencer says the pos­si­bil­ity that this extends to cap­i­tal con­trols can­not be ruled out — but argues that they would be used only as a last resort if mon­e­tary con­trol could not be estab­lished through cur­rency appre­ci­a­tion, rate hikes and sterilisation.

“‘We would any­way dis­pute the argu­ment that cap­i­tal flows or asset prices are at extremes. Asian equity prices may have risen sharply since the begin­ning of the year, but the regional index is only about 5 per cent higher than it was last sum­mer. In a sim­i­lar vein, while prop­erty prices in gen­eral are going up, it is only the lux­ury end that is ‘frothy’.'”

Source: Michael Spencer, Finan­cial Times, Novem­ber 25, 2009.

Reuters: Templeton’s Mobius eyes Libyan mar­ket
“Tem­ple­ton Asset Man­age­ment fund man­ager Mark Mobius said he was eye­ing pri­vate equity and other invest­ments in Libya and said the stock mar­ket had enor­mous poten­tial for growth.

“Mobius, a promi­nent emerg­ing mar­ket investor, told Reuters at the launch of a new Egypt­ian bro­ker­age office in Tripoli he saw poten­tial for tourism, infra­struc­ture and tele­coms investments.

“Libya, holder of Africa’s largest oil reserves, has attracted a wave of inter­est from Arab and inter­na­tional com­pa­nies, oper­at­ing mainly in energy and con­struc­tion, since most inter­na­tional sanc­tions were lifted in 2004.

“‘This mar­ket is very excit­ing now because the gov­ern­ment is embark­ing on a pri­vati­sa­tion pro­gramme to list many of the state enter­prises. Although the mar­ket is small now, the poten­tial for growth is enor­mous,’ Mobius said, speak­ing late on Sunday.

“Libya has said it plans to sell shares in four state firms via ini­tial pub­lic offer­ings (IPOs) in 2010 and will enact a law next year offer­ing tax breaks to com­pa­nies list­ing on the stock exchange in an attempt to get more Libyans to invest.

“The Libyan exchange now has 10 listed firms, mostly banks and insur­ance com­pa­nies. Shares worth about 2.1 mil­lion dinars ($1.75 mil­lion) traded in Octo­ber, a stock mar­ket report said.

“For­eign firms have been lin­ing up for oil deals and infra­struc­ture con­tracts in a coun­try which boasts a long Mediter­ranean coast­line but few top class hotels.

“‘The poten­tial here for hos­pi­tal­ity and tourism is tremen­dous. That’s one area. The other area is infra­struc­ture, roads, bridges, what­ever, if that’s pri­va­tised,’ Mobius said.”

Source: Shaimaa Fayed, Reuters, Novem­ber 23, 2009.

Mon­eyNews: Fore­cast­ers see dol­lar decline next year
“The top per­form­ing fore­cast­ers in Bloomberg’s sur­vey of 46 firms pre­dict the dol­lar will con­tinue falling next year.

“The slug­gish eco­nomic recov­ery and explod­ing gov­ern­ment debt bur­den will weigh on the cur­rency, they say.

“Stan­dard Char­tered bank, which placed first in esti­mat­ing the dollar-euro rate over the 18 months ended June 30, sees the euro ris­ing 5.5 per­cent against the dol­lar next year, to $1.58.

“‘His­tory tells us the dol­lar shouldn’t start ris­ing on a sus­tained basis until 12 months after the Fed starts to lift rates,’ Cal­lum Hen­der­son, the bank’s head of for­eign exchange strat­egy told Bloomberg.

“‘It’ll take time to drain the over­sup­ply of dol­lars from the mar­ket. The dol­lar will remain weak until the Fed’s rates rise above the competitors.’

“All three of the top per­form­ers in Bloomberg’s sur­vey see the dol­lar falling against the euro next year.

“That includes Aletti Gestielle (an Ital­ian money man­age­ment firm) and HSBC in addi­tion to Stan­dard Chartered.

“The dol­lar bears are con­trar­i­ans, as 24 of the 37 pre­dic­tions on dollar-euro have the green­back ris­ing next year.

“But some of the most renowned cur­rency experts antic­i­pate the dol­lar will depre­ci­ate further.

“‘I think the dol­lar is an over-owned cur­rency,’ Pimco man­ag­ing direc­tor Bill Gross told CNBC. ‘The Chi­nese, the Asians have basi­cally owned too many dol­lars for too long.’”

Source: Dan Weil, Mon­eyNews, Novem­ber 23, 2009.

Richard Rus­sell (Dow The­ory Let­ters): Why gold?
“Let’s say you’re a mul­ti­mil­lion­aire. You’re seri­ously wor­ried about what to do with your mil­lions in sav­ings. You don’t want to keep your money under your mat­tress or in your Frigidaire, so where should you keep it? US T-bills are now in a state of zero or even neg­a­tive inter­est — you pay the gov­ern­ment to hold your money, but you’re SAFE. T-bills have behind them the full faith and credit of the United States. Great, but, now you’re think­ing the unthink­able — How good is the full faith and credit of the US? There are rumors that the credit rat­ing of the US could actu­ally be low­ered. And with the mas­sive unfunded debt of the US, that could hap­pen, and worse — the dol­lar could cave in. What to do?

“And you ask your­self, ‘What’s safer than T-bills or even top-grade for­eign short-term debt?’ The answer is that there is one item that’s safer — gold. Gold rep­re­sents intrin­sic value in and of itself and by itself. Gold needs no nation to back or guar­an­tee its value. Gold is no sin­gle nation’s lia­bil­ity. Fur­ther­more, gold has no matu­rity date and gold is so safe that it doesn’t need to pay inter­est to those who hold it. You decide to put your sav­ings into gold rather than T-bills. And unlike T-bills today, gold doesn’t depend on anyone’s ‘full faith and credit’.

“The fact is that the so-called ‘oppor­tu­nity cost’ of buy­ing or hold­ing gold is zero today. T-bills pay you noth­ing. The fact is that it’s cheaper, safer, and it makes more sense to hold gold at this time than at almost any time in my mem­ory. And a lot of knowl­edge­able, big money investors are doing just that — buy­ing and hold­ing gold for safety and as a store of value.”

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

TheStreet.com: $8,000 gold
“James Turk, author and founder of Gold­Money, argues that gold will hit $8K in 6 years’ time.”

Source: TheStreet.com, Novem­ber 25, 2009.

Inter­na­tional Mon­e­tary Fund: IMF announces sale of 10 met­ric tons of gold to the Cen­tral Bank of Sri Lanka
“The Inter­na­tional Mon­e­tary Fund (IMF) announced today the sale of 10 met­ric tons of gold to the Cen­tral Bank of Sri Lanka. The sale was con­ducted on the basis of mar­ket prices pre­vail­ing on Novem­ber 23, 2009 with pro­ceeds equiv­a­lent to US$375 mil­lion. This trans­ac­tion is part of the total sales of 403.3 met­ric tons approved by the Exec­u­tive Board in Sep­tem­ber 2009, and it adds to the total of 202 met­ric tons already sold to the Reserve Bank of India and the Bank of Mauritius.”

Source: Inter­na­tional Mon­e­tary Fund, Novem­ber 25, 2009.

Finan­cial Times: Gold rush forces US to clip Eagle sales
“The rush by retail investors into gold has forced the US gov­ern­ment to sus­pend sales of the world’s most pop­u­lar bul­lion coin, the Amer­i­can Eagle, after run­ning out of inventories.

“The short­age, the sec­ond since the start of the finan­cial cri­sis in August 2008, is the lat­est sign of investors seek­ing a safe haven into bul­lion amid the US dol­lar woes. Safe-haven buy­ing spurred by con­cerns about the health of Wall Street and a spike in infla­tion due to a lax mon­e­tary pol­icy have also ben­e­fited gold sales.

“‘The US Mint has depleted its cur­rent inven­tory of 2009 Amer­i­can Eagles one-ounce bul­lion coins due to the con­tin­ued strong demand,’ the mint said in a state­ment late on Wednes­day. It added that sell­ing will resume ‘once suf­fi­cient inven­to­ries … can be acquired to meet mar­ket demand’.

“The US Mint has sold about 1.19m ounces of Amer­i­can Eagles so far this year, up almost 75 per cent from the same period last year and on track to be the high­est annual vol­ume in ten years, accord­ing to offi­cial data. Sales of Amer­i­can Eagle’s sil­ver coins have hit 26m ounces, the high­est level in at least 23 years.”

Source: Javier Blas, Finan­cial Times, Novem­ber 26, 2009.

Mon­eyNews: Banks say too much gold to store
“Gold prices have been soar­ing this year thanks to a weak dol­lar, and every­one wants in on the investment.

“For some banks, though, it is becom­ing clear that only the big insti­tu­tional investors are wel­come to store the pre­cious metal in their vaults.

“So they’re telling smaller investors to get their gold out and store it elsewhere.

“HSBC has told retail clients to remove their small gold hold­ings from its vault in New York City, The Wall Street Jour­nal reported.

“Small retail investors don’t turn enough prof­its for the bank like the big insti­tu­tional investors do, the news­pa­per reported.”

Source: For­rest Jones, Mon­eyNews, Novem­ber 24, 2009.

David Fuller (Fuller­money): Gold’s advance is not a bub­ble
“Intrin­sic or not, I think value is in the eye of the beholder. The Fuller­money view for the last nine years is that gold is being grad­u­ally remon­e­tised in the eyes of investors. That process has accel­er­ated over the last year because we have wit­nessed noth­ing less than the great­est mon­e­tary refla­tion in history.

“What might we expect from gold over the short to medium term?

“Tech­ni­cally, gold looks tem­porar­ily over­stretched and $1,200 is a minor psy­cho­log­i­cal level. Con­se­quently, we could eas­ily see a short-term reac­tion and con­sol­i­da­tion of per­haps $30 to $50 before this sec­u­lar bull mar­ket pow­ers on into 1Q 2010. If the con­sis­tency of the two ear­lier cycles com­menc­ing in Sep­tem­ber 2005 and Sep­tem­ber 2007 is main­tained, gold should reach at least $1,300 between March and May of next year.

“I do not think that gold’s cur­rent advance is a bub­ble, although it is likely to become one even­tu­ally. A gen­uine bub­ble, as opposed to a mar­ket that hap­pens to be ris­ing at a time when most peo­ple are under­in­vested and there­fore envi­ous observers, will include gold fever of the sort we have not seen since 1979–1970.

“To put recent events in per­spec­tive, bul­lion con­sol­i­dated for eigh­teen months prior to the last three month’s gains. It has ral­lied about $200 since the Sep­tem­ber break­out, which is approx­i­mately $100 less than the two ear­lier advances referred to above. Com­par­ing those three moves, gold’s recent per­cent­age move is clearly less to date than we saw on the two ear­lier advances. Lastly, the Amex Gold Bugs Index has yet to clear its 2008 high. This does not sug­gest a bub­ble to me.”

Source: David Fuller, Fuller­money, Novem­ber 26, 2009.

Finan­cial Times: Oil prices are too high
“An oil price at $80 a bar­rel is incon­sis­tent with sup­ply and demand dynam­ics, inven­tory lev­els and the cur­rent macro­eco­nomic envi­ron­ment, says Alexan­der Red­man, strate­gist at Credit Suisse.

“‘US gaso­line demand is at lower lev­els than this time a year ago, while dis­til­late demand remains well below the five-year range and jet plane stor­age con­tin­ues to climb. Over­all, US oil demand is still down by 3 per cent year-on-year.’

“At the same time, he says, US petro­leum inven­to­ries are among the high­est lev­els of this decade and a fur­ther 100m bar­rels of oil is being held glob­ally off­shore in tankers.

“Mr Red­man says an exam­i­na­tion of the longer-term asso­ci­a­tion between the real oil price and global spare oil capac­ity indi­cates two impor­tant factors.

“‘First, the oil price only tends to spike up once spare capac­ity falls below the crit­i­cal 2–3 per cent level — the Inter­na­tional Energy Agency does not project this occur­ring again until 2014. Sec­ond, using the IEA’s esti­mate of 2010 spare capac­ity of about 8 per cent, the oil price would typ­i­cally be closer to $40 a barrel.

“‘For now, the mar­ket appears to be pric­ing in the return to a tighter sup­ply envi­ron­ment well into the next decade and dis­re­gard­ing the cur­rent glut in supply.

“‘Going for­ward, the Credit Suisse oil team is tar­get­ing $70 a bar­rel for WTI — and $68 a bar­rel for Brent Crude.’”

Source: Alexan­der Red­man, Finan­cial Times, Novem­ber 26, 2009.

Finan­cial Times: Euro­zone PMI growth reaches two-year high
“The euro­zone recov­ery is gath­er­ing pace in the final months of 2009, but warn­ing signs of weaker growth next year have appeared.

“Pur­chas­ing man­agers’ indices for the 16-country region on Mon­day showed pri­vate sec­tor activ­ity expand­ing this month at the fastest rate in two years, with France and Ger­many pow­er­ing the revival. How­ever, the sur­vey also pointed to a loss of momen­tum in com­ing months.

“The results add to evi­dence that the euro­zone has returned to expan­sion, but that it risks see­ing growth fade once gov­ern­ment and cen­tral bank sup­port mea­sures are ended. The results are likely to add to pol­i­cy­mak­ers’ wari­ness about the out­look for 2010.

“In a speech in Madrid, Jean-Claude Trichet, Euro­pean Cen­tral Bank pres­i­dent, said: ‘We can spot a num­ber of signs of sta­bil­i­sa­tion. But the cri­sis has debil­i­tated the real econ­omy … [and has] proved so deep because it has deprived our cit­i­zens of confidence.’”

“The euro­zone reces­sion ended in the third quar­ter, when gross domes­tic prod­uct rose by 0.4 per cent.

“November’s pur­chas­ing man­agers’ indices sug­gest the fourth quar­ter will see growth of a sim­i­lar pace or faster. The com­pos­ite index, cov­er­ing euro­zone ser­vices and man­u­fac­tur­ing, reached 53.7 in Novem­ber, up from 53.0 in Octo­ber, mak­ing it the fourth con­sec­u­tive month of expansion.

“How­ever, Chris Williamson, chief econ­o­mist at Markit, which pro­duces the sur­vey, said Novem­ber ‘also saw the first signs of growth peak­ing’. New orders grew at a slower rate than in Octo­ber, espe­cially in the ser­vice sec­tor. Job losses remained high and ‘high­lighted the fragility of the recov­ery’, he added.”

Source: Ralph Atkins, Finan­cial Times, Novem­ber 23, 2009.

Finan­cial Times: Japan says econ­omy back in defla­tion
“The Bank of Japan moved towards a neu­tral stance on the risk of infla­tion on Fri­day even as the gov­ern­ment for­mally declared that the world’s second-largest econ­omy has entered defla­tion for the first time since 2006.

“The government’s dec­la­ra­tion sets the scene for height­ened ten­sion with the bank, which has been resist­ing pub­lic calls by politi­cians for greater aggres­sion in the fight against deflation.

“‘We want the BoJ to extend sup­port on the mon­e­tary pol­icy front in over­com­ing defla­tion,’ said Naoto Kan, deputy prime min­is­ter. Hiro­hisa Fujii, finance min­is­ter, and Shizuka Kamei, finan­cial ser­vices min­is­ter, have also called on the cen­tral bank to do more.

“The bank’s pol­icy board kept inter­est rates on hold at 0.1 per cent on Fri­day, but said ‘there is a pos­si­bil­ity that infla­tion will rise more than expected’ due to higher com­mod­ity prices, off­set by a risk it could fall due to lower pub­lic expec­ta­tions for medium– to long-term infla­tion. In pre­vi­ous state­ments it only men­tioned the risk of infla­tion declines.

“Con­sumer prices were down by 2.2 per cent on the pre­vi­ous year in Sep­tem­ber, or by 1.0 per cent exclud­ing fresh food and energy. Although year-on-year infla­tion first turned neg­a­tive in Feb­ru­ary, the gov­ern­ment only now declared that ‘the Japan­ese econ­omy is in a mild defla­tion­ary phase’.”

Source: Robin Hard­ing, Finan­cial Times, Novem­ber 20, 2009.

Finan­cial Times: Japan­ese export growth eases reces­sion fears
“Strong demand from China and other Asian economies lifted Japan­ese exports, which last month fell at their slow­est rate for a year, boost­ing hopes that the econ­omy will con­tinue to report healthy growth.

“In Octo­ber, exports fell 23.2 per cent from a year ear­lier, com­pared with a 30.6 per cent decline in Sep­tem­ber, accord­ing to data released by the Min­istry of Finance on Wednes­day. The fig­ure rep­re­sented the small­est drop since Octo­ber 2008, when exports fell 7.9 per cent.

“On a sea­son­ally adjusted basis, the value of ship­ments rose for the third straight month by 2.5 per cent from September.

“Junko Nish­ioka, econ­o­mist at RBS in Tokyo, said the fall in exports last month was smaller than expected and marked a ‘clear improvement’.

“‘It shows how rapidly the growth rate is improv­ing. Over­all, we can safely say that the worst is over and down­side risk is lim­ited,’ said Ms Nishioka.

“Japan’s econ­omy grew at an annu­alised rate of 4.8 per cent in the third quar­ter, fuelled by a mix of stimulus-induced domes­tic demand, a bounce­back in exports and rebuild­ing of inventories.”

Source: Jus­tine Lau, Finan­cial Times, Novem­ber 25, 2009.

Finan­cial Times: China banks pre­pare to raise cap­i­tal
“China’s banks are prepar­ing to raise tens of bil­lions of dol­lars in addi­tional cap­i­tal to meet reg­u­la­tory require­ments fol­low­ing an unprece­dented expan­sion of new loans this year, accord­ing to peo­ple famil­iar with the matter.

“China’s 11 largest listed banks will have to raise at least Rmb300bn ($43bn) to meet more strin­gent cap­i­tal ade­quacy require­ments and main­tain loan growth and busi­ness expan­sion, accord­ing to esti­mates from BNP Paribas.

“China’s bank­ing reg­u­la­tor has warned it would refuse approvals for expan­sion and limit bank­ing oper­a­tions if lenders did not meet new cap­i­tal ade­quacy require­ments, a move that has prompted the country’s largest state-owned banks to pre­pare capital-raising plans for next year and beyond.

“Expec­ta­tions of giant cash calls from the listed Chi­nese banks spooked investors on Tues­day, help­ing to send the bench­mark Shang­hai Com­pos­ite Index down 3.45 per cent on a day of record turnover on the Shang­hai and Shen­zhen markets.

“China’s bank­ing reg­u­la­tor ‘is def­i­nitely aware of poten­tial asset qual­ity issues and is push­ing for higher cap­i­tal ade­quacy require­ments to off­set dete­ri­o­ra­tion in asset qual­ity’, accord­ing to Dor­ris Chen, an ana­lyst with BNP Paribas.

“Fol­low­ing gov­ern­ment orders to prop up the domes­tic econ­omy in the face of the global cri­sis, Chi­nese banks extended a record Rmb8,920bn in loans in the first 10 months of the year, up by Rmb5,260bn from the same period a year earlier.

“This unprece­dented loan expan­sion resulted in a record fall in their core cap­i­tal ade­quacy rates from just over 10 per cent at the end of last year to 8.89 per cent by the end of Sep­tem­ber, a drop that wor­ries regulators.”

Source: Jamil Ander­lini, Finan­cial Times, Novem­ber 24, 2009.

Infec­tious Greed: China leaps to sec­ond spot in global sci­ence
“The lat­est Thom­son ISI sci­ence data shows that China has leaped to second-spot world­wide in aca­d­e­mic sci­ence, as mea­sured by papers pro­duced. The US still leads the way, at 340,000 pub­li­ca­tions per year (not shown), but China could sur­pass US pro­duc­tion within five years at cur­rent rates of rel­a­tive growth.

“Of course, paper pro­duc­tion is only one mea­sure. Cita­tions mat­ter at least as much, and that isn’t cap­tured here. Nev­er­the­less, it is strik­ing stuff.”

Source: Paul Kedrosky, Infec­tious Greed, Novem­ber 21, 2009.

Mon­eyNews: Roach — buy China after col­lapse
“Buy China, advises Mor­gan Stan­ley Asia chair­man Stephen Roach — but only after it tanks fol­low­ing a mar­ket cor­rec­tion Roach says is long overdue.

“‘I think right now the mar­kets have run too fast too far, liquidity-driven and they have moved out of align­ment with what I think is a very slug­gish under­ly­ing recov­ery in the global econ­omy,’ Roach told CNBC.

“Roach says the Chi­nese have focused too much on its invest­ment growths and depended too much on export sales.

“‘The cri­sis is a wake-up call that the exter­nal demand from the West won’t be there for a long time,’ Roach says, push­ing China to find new sources of demand.

“‘Korea has shifted its major exter­nal mar­ket from Amer­ica to China, as has Japan … so there’s a lot rid­ing on the abil­ity of the Chi­nese to stim­u­late this new source of inter­nal demand that could ben­e­fit not just the Chi­nese, but the Kore­ans and the Sin­ga­pore too,’ Roach notes.

“Over­all, how­ever, Roach remains bull­ish on China, see­ing an upside in its ser­vices sec­tor over the next 5 to 7 years.”

Source: Julie Craw­shaw, Mon­eyNews, Novem­ber 23, 2009.

Tags: Baltic Dry Index, Bill Gross, Black Friday Bargains, Brazil, BRIC, BRICs, Central Banks, China, Commodities, Corporate Bonds, Credit Default Swap, Credit Rating Agencies, Crisis Mode, David Rosenberg, Debt Woes, Default Risk, Dollar And The Japanese Yen, Emerging Markets, Estate Projects, ETF, ETFs, Gold, Gold Bullion, India, Jessop, Market Observers, Mature Market, Natural Gas, oil, Oil Sands, Peter Brookes, Rbc, Risk Appetite, Risky Assets, Russia, Sovereign Debt, Swap Cds, United Arab Emirates
Posted in Brazil, Canadian Market, China, Emerging Markets, Energy & Natural Resources, ETFs, Gold, India, Infrastructure, Markets, Outlook, Silver | Comments Off

David Rosenberg: 2010 Global Outlook

Saturday, November 28th, 2009

In case you missed David Rosen­berg on CNBC last Tues­day, shar­ing his global out­look with Mor­gan Stanley's Thomas Lee Chief Global Strategist.

Press play to watch:

(hat tip: Barry Ritholtz, The Big Pic­ture)

Tags: Advertisement, Barry Ritholtz The Big Picture, Cnbc, David Rosenberg, Global Outlook, Global Strategist, Hat Tip, Last Tuesday, Morgan Stanley, Press Play, Thomas Lee
Posted in Markets, Outlook | Comments Off

Dubai’s latest mega-project – a massive default?

Saturday, November 28th, 2009

This post is a guest con­tri­bu­tion by James Pressler* of The North­ern Trust Com­pany.

Over the past few years, Dubai has built a rep­u­ta­tion not just locally but world­wide. As the fastest grow­ing of the seven emi­rates mak­ing up the United Arab Emi­rates, it has become known for its aston­ish­ing cre­ations — the largest man­made islands (three at lat­est count), one of the world’s largest ports, and the Burj Dubai — the tallest man­made struc­ture in the world. Unfor­tu­nately, its lat­est cre­ation is not receiv­ing the same kind of oohs and ahhs. The announce­ment on Wednes­day request­ing a six-month pay­ment freeze on the $59 bil­lion in debt issued by Dubai World, a state-run con­glom­er­ate behind all this grand devel­op­ment, made mar­kets shud­der at another prospect — the largest sov­er­eign default since Argentina in 2001.

While tech­ni­cally this week’s announce­ment does not yet con­sti­tute a for­mal default, inter­na­tional mar­kets are treat­ing it like one. Credit default spreads have broad­ened to what one ana­lyst called “Ice­landic” lev­els, investors have cut back posi­tions and headed for the safety of the US$(?), and every­one is recon­sid­er­ing just how safe some safe bets are. If a shamelessly-wealthy Gulf coun­try could poten­tially default, what about coun­tries with ris­ing debts, huge deficits and shaky recoveries?

The com­plex­i­ties of the UAE’s gov­ern­men­tal struc­ture make the sit­u­a­tion dif­fi­cult to grasp at first glance, but the prob­lem can be cap­tured by a few basic points. First, Dubai is the second-largest emi­rate in the UAE next to Abu Dhabi, but Abu Dhabi is also the power of the national gov­ern­ment and has been chal­lenged by Dubai’s mete­oric rise. Next, the UAE has a sov­er­eign wealth fund esti­mated at one half-trillion dol­lars in case of emer­gency, so money is clearly avail­able at the national level to bail out Dubai if that route is cho­sen. Lastly, the national gov­ern­ment wants to emerge from this sit­u­a­tion with inter­na­tional mar­kets assured that a state-run entity has the back­ing of the gov­ern­ment and will be sub­se­quently sub­ject to reform and account­abil­ity. Taken together, these points plus an appre­ci­a­tion of the politi­cial under­cur­rents sug­gest a sce­nario that avoids out­right default.

In our base case, Abu Dhabi offers sup­port from a national level so Dubai World can meet its finan­cial oblig­a­tions and imple­ment some debt restruc­tur­ing, all in exchange for own­er­ship of sig­nif­i­cant Dubai-owned assets — Emi­rates air­lines has been sug­gested in recent reports. In addi­tion, Abu Dhabi forces Dubai World to restruc­ture its busi­ness model from the dys­func­tional “build it and they will come” ideal. These con­di­tions would sat­isfy Abu Dhabi’s emirate-level inter­est in retain­ing dom­i­nance while also secur­ing the national inter­est of retain­ing some inter­na­tional mar­ket con­fi­dence, all while avoid­ing a for­mal default. We will be mon­i­tor­ing events for key mark­ers sug­gest­ing this sce­nario is play­ing out — replace­ment of Dubai World board mem­bers by more tech­no­cratic peo­ple favored by Abu Dhabi, the trans­fer of Dubai’s assets, and a gen­eral hum­bling of the indebted emi­rate in a way that places Abu Dhabi firmly in charge.

How­ever, it would be irre­spon­si­ble to not also men­tion what wor­ries us look­ing for­ward. Aside from the off-chance that Dubai and Abu Dhabi are unable to con­verge on a cohe­sive recov­ery, what are the chances that Dubai World is just the first of more pos­si­ble defaults to come? Since the UAE does not release pub­lic debt fig­ures and esti­mates are sketchy at best, there is a chance that another pub­lic com­pany could announce an exces­sive finan­cial bur­den and a need for bail­ing out. This applies not just for the UAE but for any of the fast-developing Gulf coun­tries expe­ri­enc­ing an asset bub­ble col­lapse. With widen­ing credit default spreads through­out the region and even into emerg­ing Asia, any entity depen­dent on the recent flood of cheap money to roll over its debts could eas­ily find itself out of options. Few would be as sin­gu­larly vul­ner­a­ble as Dubai World, but a sig­nif­i­cant default could set forth a vicious cycle of con­trac­tion and col­lapse that could take a num­ber of victims.

The first sign of things to come could be as early as the first week in Decem­ber, when Gulf mar­kets re-open from the Eid al-Adha hol­i­day (Dubai World announc­ing its debt post­pone­ment plans just before Eid cel­e­bra­tions was in all like­li­hood not a coin­ci­dence). This will mark the first chance for offi­cials to state posi­tions and make confidence-building claims, with the fur­ther inter­est of calm­ing inter­na­tional mar­kets. Between that time and the Decem­ber 14 due date for Dubai World’s next debt pay­ment, we expect to see a con­crete plan laid out for bail­ing out the con­glom­er­ate and some pres­sure taken off the credit mar­kets. How­ever, if no set­tle­ment can be reached, it would not sur­prise us if another major entity started talk­ing about restruc­tur­ing or a debt freeze before year-end – and not nec­es­sar­ily a com­pany in the UAE.

* James Pressler is an asso­ciate inter­na­tional econ­o­mist at The North­ern Trust Com­pany, Chicago.

Source: North­ern Trust — Daily Global Com­men­tary, Novem­ber 27, 2009.

Tags: Abu Dhabi, Bets, Burj Dubai, Complexities, Conglomerate, Credit Default, Debts, Emirate, First Glance, Governmental Structure, International Markets, James Pressler, Manmade Islands, Meteoric Rise, National Government, Northern Trust Company, Tallest Manmade Structure, Trillion, Uae, United Arab Emirates
Posted in Emerging Markets, Markets | Comments Off

Advisor Alert — November 27, 2009

Friday, November 27th, 2009

Tags: asset class, Bill Gross, Brazil, BRIC, BRICs, Canadian Market, Census Bureau, Chief Investment Officer, China, Commodities, Congressional Budget Office, Economic Trend, Emerging Markets, energy, Federal Budget Deficit, Federal Budget Outlays, Federal Deficits, Frank Holmes, Global Investors, Gold, Gold Bullion, Gold Equities, India, Market Groups, Medicare Medicaid, National Debt Clock, Natural Gas, Natural Resources, oil, Reputable Sources, Russia, Social Security Benefits, Treasury Department, Trend Data, Unfunded Liabilities, War Efforts
Posted in Bonds, Brazil, Canadian Market, China, Emerging Markets, Energy & Natural Resources, Gold, India, Markets, Outlook, Silver, US Stocks | Comments Off

Alternative Treatments for Common Ailments | The Origin of Famous Brands | Garlic is the Best Investment in China | Men Married to Smart Women Live Longer | "Goodnight Keith Moon"

Friday, November 27th, 2009

Here is our selec­tion of read­ing diver­sions for this weekend:

Alter­na­tive Treat­ments for Com­mon Ail­ments
November-24–09, 11:04 AM

From gar­lic to honey, to lemon­ade and chicken soup, there are time-honored treat­ments from grandma's rem­edy chest to heal your­self and speed your recov­ery from com­mon ail­ments. Just head to the kitchen next time you are feel­ing ill, and whip up a rem­edy for what ails you. Below are some of the most com­mon and eas­ily pre­pared reme­dies for every­thing from stom­achache to cold and con­ges­tion to house­hold burns.

What's in a Name? The Ori­gins of Famous Brands
November-25–09, 9:50 AM

Our lives are full of brand names and trade­marked prod­ucts that we use every day, from the Apple com­puter I turn on every morn­ing to the bowl of Quaker oat­meal I eat for break­fast. At the birth of every com­pany that makes a prod­uct we can't live with­out, some­body try­ing to come up with a mem­o­rable and suc­cess­ful name was present. Many of us know that a real Ben and Jerry, Wendy, and Ford exist, but the funny-hatted man on my oat­meal box is a fig­ment of the founders' imag­i­na­tion, thought to evoke images of hon­esty and value. Although many brand names are sim­ple acronyms or ver­sions of their founders' names, some of the com­pa­nies we trust every day actu­ally have fascinating-and surprising-back stories.

Hold your nose: gar­lic is best invest­ment in China
November-27–09, 11:04 AM

The price of gar­lic in China has nearly quadru­pled since March, pro­pelled by its very pun­gency to rank ahead of gold and stocks as the country's best-performing asset this year.

Men mar­ried to smart women live longer
November-27–09, 9:28 AM

There is a lin­ger­ing sus­pi­cion among girls (as the unpop­u­lar­ity of sci­ence sub­jects demon­strates) that boys don't value clev­er­ness as an essen­tial qual­ity in a life part­ner. Given a choice between gor­geous or brainy, there is no guar­an­tee they'll do the right thing, because men think they're clever enough for two. Well, it turns out they're wrong. Swedish sci­en­tists have dis­cov­ered that long life and good health have noth­ing to do with a man's edu­ca­tion and every­thing to do with his wife's. Men mar­ried to smart women live longer — simple.

"Good­night Keith Moon": A Creepier Ver­sion Of The Clas­sic Kid's Book (VIDEO)
November-27–09, 9:59 AM

"Good­night Moon": Everyone's favorite children's book about a noto­ri­ous drum­mer who died of a drug over­dose. Wait, that's not what it was about? Well, authors Bruce Wor­den and Clare Cross have updated the clas­sic story to revolve around the death of The Who's Keith Moon with hilar­i­ous results.

Tags: Ails, Alternative Treatments, Apple Computer, Back Stories, Brand Names, Chicken Soup, China, China Men, Cleverness, Common Ailments, Diversions, Emerging Markets, Figment, Gold, Goodnight, Keith Moon, Life Partner, Pungency, Quaker Oatmeal, Science Subjects, Smart Women, Stomachache, Trademarked Products
Posted in Canadian Market, China, Gold, Markets | Comments Off

David Rosenberg: Government Bonds are on Fire

Friday, November 27th, 2009

In today's Break­fast with Dave, Gluskin Sheff's Rosie says:

Gov­ern­ment bonds are on fire. Yes­ter­day we saw a 10bps slide in the Ger­man Bund and U.K. Gilt yields — they are con­sol­i­dat­ing today — and U.S. 10-year yields are now down about half that amount, to 3.22% — 2bps from tak­ing out the Octo­ber lows, so keep an eye here for a pos­si­ble tech­ni­cal break­down in yields. The Cana­dian bond mar­ket already did that yes­ter­day with the yield on the 10-year GoC slip­ping below the Octo­ber lows — we have news for you: this was a major tech­ni­cal move. We can under­stand that gov­ern­ment bonds are the "enemy" to the bulls (not once were Trea­suries even men­tioned as an asset class dur­ing my two-hour stint on CNBC the other day). But there is no deny­ing that some­body is buy­ing these bonds because the 7-year Trea­sury note auc­tion ahead of Thanks­giv­ing had $88 bil­lion of bids for the $22 bil­lion offer­ing. Go fig­ure, some folks clearly still have defla­tion on their mind (as they should).

We went into this lat­est round of tur­bu­lence with tremen­dous com­pla­cency in the mar­ket­place (I really sensed it dur­ing the two-hour stint on CNBC's squawk box on Tues­day) — ral­lies were still light-volume in nature (only two ses­sions in the past three weeks with NYSE vol­ume north of a bil­lion shares), the VIX index had just receded to its low for the year, at 20.5 (down 60% since March!), the bull share and bear share of the sen­ti­ment sur­veys hit late-2007 lev­els, and with the trail­ing P/E ratio at 27x and the for­ward P/E on $65 of earn­ings of 17x. There is no mar­gin for error in an over­val­ued equity mar­ket — one that is priced for nearly 5% GDP growth. Remem­ber, it was in the fourth quar­ter of 1987, a quar­ter that saw 7% GDP growth and a 55% earn­ings trend, that the S&P 500 cratered 30%. So, it's not just about the eco­nomic back­drop, it's what is being priced in — that is the les­son. For a highly over­val­ued mar­ket, it does not take much — like an off-the-cuff remark from the Trea­sury Sec­re­tary on the Meet the Press — to entice a mas­sive round of profit-taking.

Don't look now but the Baltic Dry Index has just slipped for the fifth ses­sion in a row, and down 12% from the Novem­ber 19 interim high. Not a con­struc­tive near-term sign­post for the com­mod­ity com­plex. How­ever, as we said above, we look for­ward to a cor­rec­tion that allows us another oppor­tu­nity to build long-term posi­tions in this seg­ment of the mar­ket where there are sec­u­lar pos­i­tive dynam­ics at play. But as we high­lighted last week, any­thing con­nected to the U.S. dollar-carry-trade — a very over­crowded trade — is due for a correction.

To reit­er­ate, the Swiss, the Rus­sians, the Brazil­ians and the Viet­namese have all taken actions to weaken their cur­ren­cies in recent weeks (see Rus­sia Launches Cam­paign to Weaken Ruble on page C2 of the WSJ).

If you would like to read more of this, sub­scribe to David Rosenberg's newslet­ter by click­ing on the link below:

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Tags: asset class, Bear Share, Bond Market, Brazil, Canadian Bond, Canadian Market, Cnbc, Commodities, Complacency, David Rosenberg, Economic Backdrop, GDP Growth, German Bund, Gilt Yields, Gluskin Sheff, Government Bonds, Half That Amount, Light Volume, Lows, Nyse Volume, Russia, Squawk Box, Treasuries, Vix Index, Year Treasury Note
Posted in Brazil, Markets, US Stocks | Comments Off

Stephen Jen: Sovereign Buyers Could Tip Gold into Stratosphere

Friday, November 27th, 2009

Stephen Jen (Blue Gold Cap­i­tal), who was for­merly Mor­gan Stanley's expert on sov­er­eign wealth funds believes that China, India and Russia's con­tin­u­ing pur­chases of gold bul­lion could be the cat­a­lyst for gold to rise in price into the stratos­phere. He says that as their for­eign exchange reserves as a per­cent­age of their GDP is near­ing 100%, the pres­sure to diver­sify away from fiat cur­rency could reach a crit­i­cal tip­ping point, should they decide to sim­ply dou­ble their expo­sure to gold. As of this week, it turns out that India may emerge as the buyer of the remain­ing half of the IMF's 400-ton sale of gold.

Here is an excerpt from Ambrose Evans-Pritchard's Tele­graph article:

China, India, and Rus­sia have all been buy­ing gold on a large scale over recent months.

Why should that stop when the AAA club of sov­er­eign debtors is push­ing towards the dan­ger thresh­old of 100pc of GDP?

These new play­ers account for almost all the accu­mu­la­tion of for­eign cur­rency reserves world­wide over the last five years, so what they do mat­ters enormously.

Adver­tise­ment

After crunch­ing the num­bers, Mr Jen found that the share of gold in their reserves is just 2.2pc com­pared to 38pc for the Old World (per­haps we should just call them the dead­beats from now on). They would have to buy $115bn of gold at cur­rent prices to raise their bul­lion to just 5pc of total reserves, and $700bn to reach just half west­ern levels.

The killer-term here is at cur­rent prices since any such move in the tiny global mar­ket for gold would send prices into the stratosphere.

The real­ity is that sov­er­eign debtors to the US may not be able stop sup­port­ing their sym­bi­otic mon­e­tary rela­tion­ship with the dol­lar, by buy­ing US trea­suries, but they can increase their pro­por­tion­ate  inter­est in gold denom­i­nated reserves.

Read the arti­cle here.

Tags: 2pc, Aaa Club, Accumulation, Ambrose, Blue Gold, China, Currency Reserves, Deadbeats, Debtors, Emerging Markets, Evans Pritchard, Fiat Currency, Foreign Currency, Foreign Exchange Reserves, Gold, Gold Bullion, Gold Capital, Imf, India, Morgan Stanley, Proportionate Interest, Russia, S 400, Stratosphere, Telegraph Article, Tipping Point, Treasuries
Posted in Canadian Market, China, Emerging Markets, Gold, India, Markets | Comments Off

While pundits play “gotcha”, the unemployment situation improves

Friday, November 27th, 2009

This post is a guest con­tri­bu­tion by Paul Kas­riel* of The North­ern Trust Com­pany.

The best mea­sure of the cur­rent con­di­tion of the labor mar­ket is the state unem­ploy­ment insur­ance data. These data are not sam­ples or sur­veys with guessti­mates of how many new jobs were cre­ated by new busi­nesses, but the head count of actual peo­ple stand­ing in actual unem­ploy­ment insur­ance lines. Too be sure, because a gov­ern­ment entity is doing the count­ing, the first count is not always the most accu­rate count. But after four weeks of count­ing and recount­ing, the num­ber that emerges is the one that remains for all times. The monthly labor reports from the Estab­lish­ment and House­hold sur­veys get revised over and over, lit­er­ally, for years.

Weekly data, which the state unem­ploy­ment insur­ance data are, are inher­ently “noisy.” So, in order to more accu­rately mea­sure the sig­nal rather than the noise, it is pru­dent to aver­age the state unem­ploy­ment insur­ance data over rolling four-week peri­ods. So, what are the state unem­ploy­ment data sig­nal­ing? They are indi­cat­ing that the rate of fir­ing has slowed sig­nif­i­cantly and that hir­ing could com­mence soon, if it already has not. As Chart 1 shows, the num­ber of first-time claimants for state unem­ploy­ment insur­ance on a four-week mov­ing aver­age basis has come down from a cycle peak of 659,000 in the four weeks ended April 4 to 497,000 in the four weeks ended Novem­ber 21. Now, 497,000 new fir­ings per week is noth­ing to brag about, but we can be thank­ful that it is com­ing down after the worst reces­sion in the post-war era, a reces­sion that started well before the stim­u­lus pro­gram was instituted.

Although fewer peo­ple are now being fired, are any of those that have pre­vi­ously been fired being re-employed? Prob­a­bly not yet, accord­ing to the con­tin­u­ing unem­ploy­ment claims data, but the out­look for re-employment is improv­ing. Because the past reces­sion, which com­menced in Jan­u­ary 2008, well before the cur­rent stim­u­lus pro­gram was ini­ti­ated, was the longest reces­sion in the post-war era, many of the peo­ple who have lost their jobs have been out of work so long that their reg­u­lar unem­ploy­ment insur­ance ben­e­fits expired. The cur­rent Con­gress and admin­is­tra­tion have imple­mented pro­grams to extend unem­ploy­ment insur­ance ben­e­fits to those who have exhausted their reg­u­lar ben­e­fits. If we add these extended ben­e­fit claimants, which are not sea­son­ally adjusted and need not be because there is unlikely to be any reg­u­lar sea­sonal pat­tern to them, to seasonally-adjusted ben­e­fit claimants under the reg­u­lar pro­gram, we see in Chart 1 that the four-week aver­age of com­bined con­tin­u­ing unem­ploy­ment claims appears to have peaked at about 9.9 mil­lion peo­ple and in the four weeks ended Novem­ber 7 had moved ever so slightly lower to 9.8 mil­lion. Again, noth­ing to brag about but some­thing to be thank­ful for. The com­bi­na­tion of a decline in the num­ber of fir­ings per week and a slight drop in the total num­ber of unem­ploy­ment insur­ance ben­e­fi­cia­ries sug­gests either that hir­ing has com­menced in a small way or that it is about to.

How much of the improv­ing labor mar­ket con­di­tions can be directly attrib­uted to the cur­rent stim­u­lus pro­gram is impos­si­ble to say. For the cur­rent admin­is­tra­tion to make any claims along these lines opens it up to legit­i­mate crit­i­cism. But what is pos­si­ble to say is that about three months after the stim­u­lus pro­gram was ini­ti­ated, the over­all econ­omy began to emerge from the deep­est and longest reces­sion in the post-war era and now, about nine months after the ini­ti­a­tion of the stim­u­lus pro­gram, the labor mar­ket is show­ing incon­tro­vert­ible signs of improv­ing. Two of the biggest crit­ics of the stim­u­lus pro­gram with regard to job cre­ation are two for­mer chairs of the president’s Coun­cil of Eco­nomic Advis­ers (CEA), Michael Boskin from the Bush Sr. admin­is­tra­tion and Eddie Lazear from the Bush Jr. admin­is­tra­tion. Both of these pres­i­den­tial advis­ers appear to have gained pol­icy wis­dom after leav­ing their pres­i­den­tial advi­sory posts. For you see, dur­ing both Bush pres­i­den­tial terms, Senior and Junior, and under the tute­lage of Messrs. Boskin and Lazear, the U.S. expe­ri­enced the slow­est job growth in the post-war era. If these guys are so smart with regard to job cre­ation, why was job cre­ation so weak when they were advis­ing presidents?

*Paul Kas­riel is Senior Vice Pres­i­dent and Direc­tor of Eco­nomic Research at The North­ern Trust Com­pany. The accu­racy of the Eco­nomic Research Department’s fore­casts has con­sis­tently been highly-ranked in the Blue Chip sur­vey of about 50 fore­cast­ers over the years. To that point, Paul received the pres­ti­gious 2006 Lawrence R. Klein Award for hav­ing the most accu­rate eco­nomic fore­cast among the Blue Chip sur­vey par­tic­i­pants for the years 2002 through 2005. The accu­racy of Paul’s 2008 eco­nomic fore­cast was ranked in the top five of The Wall Street Jour­nal sur­vey panel of econ­o­mists. In Jan­u­ary 2009, The Wall Street Jour­nal and Forbes cited Paul as one of the few who iden­ti­fied early on the for­ma­tion of the hous­ing bub­ble and fore­saw the eco­nomic and finan­cial mar­ket havoc that would ensue after the bub­ble inevitably burst.

Source: North­ern Trust — Daily Global Com­men­tary, Novem­ber 25, 2009.

Tags: Accurate Count, April 4, Claimants, Current Condition, Cycle Peak, Government Entity, Household Surveys, Insurance Data, Insurance Lines, New Businesses, New Jobs, Northern Trust Company, Paul Kasriel, Post War, Pundits, Recession, State Unemployment Insurance, Stimulus, Unemployment Claims, Unemployment Data
Posted in Markets, Outlook | Comments Off

Recession is Over — But has the Recovery Begun?

Friday, November 27th, 2009

On the topic of the mag­ni­tude of the eco­nomic recov­ery, David Rosen­berg, Chief Econ­o­mist and Strate­gist of Gluskin Sheff & Asso­ciates, pro­vided the fol­low­ing inter­est­ing snippet:

“The reces­sion in the US may be over, but what sort of recov­ery lies ahead remains in ques­tion. All we can say is that when look­ing at what is nor­mal in the con­text of a post-recession rebound dur­ing the post-WWII era, the first quar­ter of growth is closer to 7.3% at an annual rate, not 2.8% as we just saw in the lat­est real GDP esti­mate — the median was 6.3%. To think that with the mas­sive amount of stim­u­lus — with­out it, growth would have flirted with 0% — this first quar­ter of pos­i­tive growth was basi­cally one-third of what is typ­i­cal really says something.”

Food for thought indeed.

Source: David Rosen­berg, Gluskin, Sheff & Asso­ciates — Break­fast with Dave, Novem­ber 26, 2009.

Tags: Advertisement, Ahead, Chief Economist, David Rosenberg, Economic Recovery, Era, First Quarter, Food For Thought, GDP, Gluskin Sheff, Magnitude, Median, Real Gdp, Rebound, Recession, Snippet, Stimulus, Strategist, Wwii
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Richard Karn: Nobody's Right When Everybody's Wrong (Chapter 2)

Thursday, November 26th, 2009

On Tues­day of this week we fea­tured chap­ter 1 of Richard Karn's fas­ci­nat­ing e-book, Credit and Cred­i­bil­ity, about the future of  mar­kets, the global econ­omy, global credit mar­kets, and the 5 most press­ing issues in the midst at this ‘hinge of his­tory’ we have arrived at.

Karn has been described as one of the finest ana­lysts and writ­ers in the finan­cial indus­try. Karn hap­pens to be the fea­tured guest speaker in an upcom­ing webi­nar (1 CE credit), on Decem­ber 2, on the sub­ject of cur­rency debase­ment, spon­sored by BMG Inc.

Chap­ter Sum­mary: Credit and Cred­i­bil­ity

Chap­ter 1: Pay no atten­tion to the man behind the cur­tain! dis­cusses fiat cur­rency, the finan­cial excesses and abuse it engen­ders, inter­ven­tion­ist pol­icy response to per­pet­u­ate it, and the role of the US dol­lar going forward;

Chap­ter 2: Nobody’s right when everybody’s wrong devel­ops our con­tention that all fiat cur­ren­cies today have become deriv­a­tives of the US dollar;

Chap­ter 3: May you live in inter­est­ing times explores the extent to which emerg­ing mar­kets can decou­ple from “con­sumer” economies and the role of China as the lit­mus test for the thesis;

Chap­ter 4: The report of my death was an exag­ger­a­tion details our con­tention the world has had its fill of “finan­cial inno­va­tion”, and the only way the US econ­omy will recover will be through its tra­di­tional strengths in agri­cul­ture, man­u­fac­tur­ing, inven­tion, and hard work; and

Chap­ter 5: Pass­ing laws, just because offers our assess­ment of the anthro­pogenic global warm­ing debate and pend­ing legislation.

Below we are very pleased to fea­ture once again, for its rel­e­vance, the full Sec­ond chap­ter. Karn offers us a hype-less, lucid, insight­ful, look at the “macro” pic­ture and begins to answer lead­ing ques­tions, prof­fered from his pro­found research. Yes­ter­day, we fea­tured some of Richard Karn’s lat­est thoughts. Very inter­est­ing read­ing. Enjoy!

Credit and Credibility

Chap­ter 2: Nobody’s right when everybody’s wrong

Arguably more effec­tive than the mil­i­tary adven­tur­ism that dom­i­nates the head­lines, what amounts to Amer­i­can cul­tural impe­ri­al­ism has sub­tly seduced large swathes of the world, and it has not been lim­ited sim­ply to a taste for fast food, film, and fash­ion.  The far more addic­tive aspect has been the suc­cess­ful over­seas mar­ket­ing of the "debt cul­ture" via the finan­cial inno­va­tion asso­ci­ated with the secu­ri­ti­za­tion (deriv­a­tive) mar­kets, which at $27 tril­lion has con­sti­tuted the US' largest export of the 21^st cen­tury.[1] This is the realm of the money cen­ter banks.

Enticed by var­i­ous forms of off-balance sheet 'account­ing' skull­dug­gery, very few large banks glob­ally man­aged to resist the siren song of easy prof­its and big bonuses offered by these finan­cial inno­va­tions sim­ply because it appears the only restric­tion on 'prof­its' was how far a bank dared to push its expo­sure.  That these vehi­cles were pur­pose­fully unreg­u­lated only increased their allure: calls for reg­u­la­tion as far back as 1998,[2] and again in the after­math of the Enron scan­dal when these vehi­cles' decep­tive capa­bil­i­ties were fully exposed, were shouted down at every turn by none other than Alan Greenspan, Larry Sum­mers and Robert Rubin and their cohorts in the SEC,[3] osten­si­bly not to sti­fle inno­va­tion or to drive mar­kets off­shore. But the behav­ior at Enron, far from being viewed as a cau­tion­ary tale prompt­ing stricter agency enforce­ment, was adopted as the exem­plar by money cen­ter banks-the very same banks, inci­den­tally, that had made the ongo­ing fraud at Enron pos­si­ble through a host of deriv­a­tives and spe­cial invest­ment vehi­cles[4] the likes of JPMor­gan, Citibank et al[5] actively mar­keted to Enron; instead, deriv­a­tives were the mech­a­nism use to trans­mit the can­cer globally.

This tacit gov­ern­ment sanc­tion sug­gests to us then that in effect the whole finan­cial cri­sis only came to light because of what amounts to a falling out amongst thieves. No inves­tiga­tive reporter or over­sight com­mit­tee or reg­u­la­tory watch­dog safe­guard­ing the inter­ests of the pub­lic dis­cov­ered and exposed any wrong-doing: major inter­na­tional banks' books just became so over­loaded with god-awful paper they knew may well be worth­less that they grew ter­ri­fied of loan­ing money to each other even over night for fear of not being repaid.[6] Once inter-bank lend­ing stopped, credit cre­ation froze, and the Ponzi-scheme par­al­lel in the fiat cur­rency mech­a­nism began to breakdown.

The secu­ri­ti­za­tion and deriv­a­tives mar­kets were so thor­oughly cor­rupted by 'inno­va­tion' that if a bank shuf­fled paper, adjusted notional val­ues and tweaked their infal­li­ble com­puter mod­els furi­ously enough, they could arrive at the happy posi­tion of not requir­ing any cap­i­tal reserves what­so­ever to make loans. In other words, major banks world­wide indulged in what amounts to ram­pant uncol­lat­er­al­ized lending-literally cre­at­ing and dis­trib­ut­ing unfath­omable amounts of money in the form of debt issuance from noth­ing, secured by noth­ing.  And quite pos­si­bly worth noth­ing.  It is widely assumed the still undis­closed expen­di­ture of $2 tril­lion of tax­payer money referred to in the pre­vi­ous chap­ter was used to pur­chase boat­loads of this stuff in order to stave off the recog­ni­tion by the pub­lic that this behav­ior had ren­dered many of these 'too big to fail' money cen­ter banks lit­er­ally insol­vent; sim­i­lar bailouts have been under­taken by gov­ern­ments worldwide.

Con­cur­rent with the run­away lend­ing, cen­tral banks through­out the world were chan­nel­ing trade sur­pluses with the US as well as with each other into US Trea­sury bonds while simul­ta­ne­ously cre­at­ing equal amounts of domes­tic cur­rency to weaken it in order to main­tain export com­pet­i­tive­ness. This got so out of hand that today two-thirds of the world's assets are denom­i­nated in US dol­lars.[7] The most con­tro­ver­sial of these arrange­ments has been the de facto ven­dor financ­ing agree­ment China has extended to the US: China sup­pressed the yuan, exports exploded, and it accu­mu­lated sur­pluses; the US let the dol­lar fall, con­sump­tion exploded, and it accu­mu­lated debts.[8] Both actions were irre­spon­si­ble and highly infla­tion­ary.  Com­bined with sim­i­lar behav­ior from much of the world, it pro­duced a flood of liq­uid­ity that was if not mis­in­ter­preted as emerg­ing mar­ket pros­per­ity, cer­tainly over­stated it.  At the time it was noted pri­mar­ily for con­tribut­ing to the low inter­est rate envi­ron­ment enjoyed in the US that enabled the Amer­i­can con­sump­tion binge accom­pa­ny­ing the hous­ing bub­ble.  Few real­ized hous­ing bub­bles were pan­demic.[9]

Our analy­sis con­cludes it was never a case of a "global sav­ings glut" as pro­claimed by Mr. Bernanke and the Fed in 2005[10] and reit­er­ated by ex-Treasury Sec­re­tary Paul­son[11]ear­lier this year  to deflect blame for the global finan­cial cri­sis but a global fiat cur­rency glut-a case of ram­pant global mon­e­tary infla­tion. Too much money could be lever­aged too many times and trans­ferred between too many inter­na­tional mar­kets too quickly.  In addi­tion to mask­ing the extent of fiat cur­rency cre­ation, it pro­duced, by his­toric stan­dards, rapid-fire sequen­tial bub­bles in a range of real assets and com­modi­ties sup­ported by cred­i­ble expla­na­tions like 'the emerg­ing mar­ket infra­struc­ture build-out,' or 'they're not mak­ing any more real estate' or 'emerg­ing mid­dle classes will want to improve their diets' or 'Peak Oil,' and was rein­forced by price action.  These bub­bles, as they must be, were largely based on the sound rea­son­ing, analy­sis and extrap­o­la­tions of eco­nomic data, as was the price action that sup­ported it on charts; how­ever, pos­i­tive tech­ni­cal chart pat­terns can­not read­ily dis­tin­guish between break­outs dri­ven by a glut of fiat cur­rency look­ing for a spec­u­la­tive return and the sup­ply and demand imbal­ances in this instance attrib­uted to emerg­ing mar­ket growth. Momen­tum pro­duced the self-reinforcing hype of being right-something the ETR fell vic­tim to itself-and as mar­kets have dis­cov­ered, it works in both directions. 

Down­load a PDF of the com­plete chap­ter here.

[2] O'Brien, Tim­o­thy L.: "A Fed­eral Turf War Over Deriv­a­tive Con­trol"; The New York Times: 08.05.1998. http://query.nytimes.com/gst/fullpage.html?res=9B0DEFD81231F93BA35756C0A96E958260&n=Top%2FReference%2FTimes%20Topics%2FOrganizations%2FT%2FTreasury%20Department%20&scp=1&sq=Brooksley%20Born%20warns%20about%20derivatives&st=cse

[3] Whalen, Christo­pher:  "State­ment to the Sen­ate Com­mit­tee on Bank­ing, Hous­ing and Urban Affairs, Sub­com­mit­tee on Secu­ri­ties, Insur­ance, and Invest­ment": June 22, 2009, http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=1f354557-7b1f-4ffd-9014-e80435bc55b8

[4] McLean, B., Elkind, P. & Gib­ney, A.: Enron: The Smartest Guys in the Room; Mag­no­lia Pic­tures: 2005.

[5] Thorn­ton, Emily & France, Mike: "For Enron's Bankers, a 'Get out of Jail Free' card"; Busi­ness­Week: 11.08.2008. http://www.businessweek.com/magazine/content/03_32/b3845036.htm

[6] Car­ney, Brian M.: "Bernanke is Fight­ing the Last War"; Wall Street Jour­nal: 18.10.2008. http://online.wsj.com/article/SB122428279231046053.html

[7] Tett, Gillian: "In uncer­tain times, all that glit­ters is the gold stan­dard"; The Finan­cial Times: 09.04.2009.

http://www.ft.com/cms/s/0/d29f2728-249e-11de-9a01-00144feabdc0.html

[8] Grant, James: "For a bet­ter fuse box"; Grant's Inter­est Rate Observer: Vol. 27, No. 6, 20.03.2009. http://www.grantspub.com

[9] Tom­lin­son, Richard & Doyle, Dara: "Ire­land Loses Ice­land Stigma as Euro Ensures No Return to Past"; Bloomberg: 04.06.2009.  http://www.bloomberg.com/apps/news?pid=20601109&sid=aBWMuYMHhfXw

[10] Cas­sidy, John: "Anatomy Of A Melt­down"; the New Yorker: 01.12.2008. http://www.newyorker.com/reporting/2008/12/01/081201fa_fact_cassidy?currentPage=all

[11] Yan­ping, Li: "China Cen­tral Bank Attacks Paulson's 'Gang­ster Logic'"; Bloomberg: 16.01.2009. http://www.bloomberg.com/apps/news?pid=20601087&sid=an1lSsWKeDs0&refer=home

Tags: Anthropogenic Global Warming, BMG Inc., Chapter Summary, China, Commodities, Credit Markets, Debasement, E Book, Emerging Markets, Exaggeration, Excesses, Fiat Currencies, Fiat Currency, Financial Innovation, Global Credit, Global Economy, Gold, Litmus Test, Man Behind The Curtain, May You Live In Interesting Times, oil, Policy Response, Richard Karn, Thesis Chapter, Traditional Strengths
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Gold bullion – Overdue for a Pullback? (Richard Russell)

Thursday, November 26th, 2009

Gold closed up $1.10 yes­ter­day to scale a fresh high of $1,165.80. Amaz­ingly, this was the 14th higher close of the last 15 sessions..

It doesn’t take much analy­sis to con­clude that gold is over­bought, at least in the short term, but here is Richard Russel’s (Dow The­ory Let­ters) answer to the ques­tion “Should I buy more gold here?”.

“To those of us who bought gold a year or five ago, gold looks expen­sive now. But is it really expen­sive? Does the US have too much debt? Can the dol­lar avoid a col­lapse? Those are ques­tions I can­not answer. As I write tonight [Fri­day], gold futures are up over $17. By any stan­dard, gold appears to be over­bought. But wait — I’m won­der­ing whether gold is on the edge of its third, spec­u­la­tive phase and whether it is start­ing to go par­a­bolic. If gold is going par­a­bolic, then there’s no such thing as ‘over­bought’. Gold will con­tinue to rise until it’s exhausted. And ulti­mately it will rise higher than almost any­one is expecting.

“I’ve writ­ten before that my expe­ri­ence in big pri­mary bull mar­kets tells me the item in ques­tion will advance fur­ther than any­one thinks rea­son­able or even pos­si­ble. If gold is enter­ing its third phase, I have no idea where it’s head­ing and nei­ther does any­one else.

“Fur­ther­more, if gold is close to going par­a­bolic, all you can do is close your eyes and place your buy order. Wait­ing for a big gold cor­rec­tion is going to be a frus­trat­ing wait. You just have to pull the trig­ger and buy it. When the pri­mary trend is up, the bull mar­ket will usu­ally bail you out of most of your mis­takes (and, of course, you will make mistakes).”

Mr Rus­sell may very well be right, but I would still be reluc­tant to buy now, espe­cially when con­sid­er­ing gold’s “high pole” on the point and fig­ure chart below, indi­cat­ing the metal is over­due for a pullback.

Source: StockCharts.com

I have always been a pro­po­nent of buy­ing a noto­ri­ously volatile asset like gold on down­ward reac­tions, which are bound to hap­pen from time to time — even in a well-defined bull mar­ket. That’s the way I will play it.

Tags: Bull Markets, Buy Gold, Collapse, Dollar, Dow Theory Letters, Gold, Gold Bullion, Gold Futures, Heading, Mr Russell, Parabolic, Proponent, Pullback, Richard Russell, Russell Gold, Sessions
Posted in Gold, Markets | 1 Comment »

Rob Arnott: Deficits, Debt, and Demographics Will Impede Real Returns For Next 25 Years

Thursday, November 26th, 2009

In his lat­est newslet­ter (Novem­ber 2009), The "3-D" Hur­ri­cane Force Head­wind, Robert Arnott (founder, Research Affil­i­ates) exam­ines how Deficit, National Debt, and Demo­graph­ics, the 3 Ds, mean that we should lower our expec­ta­tions for real return from mar­kets over the next 25 years. Arnott, a fun­da­men­tal index­ing aca­d­e­mic and inno­va­tor, has been warn­ing, via his papers, that investors be mod­est. For exam­ple, it is inter­est­ing, given that Research Affil­i­ates, the cre­ators of fun­da­men­tal equity indices, that its founder, Arnott, has spent most of the last year dis­cussing bonds, and rever­sion to mean.

Here are a few excerpts from the lat­est newsletter.

In this issue we exam­ine three crit­i­cal long-horizon issues — the deficit, the national debt, and demographics—and find a dis­turb­ing struc­tural head­wind that will impede the real returns we can expect from finan­cial assets in the years ahead. The com­ing quar­ter cen­tury will be very, very dif­fer­ent from the past quar­ter cen­tury; the lessons we’ve learned in the past gen­er­a­tion may lead us astray in the com­ing  generation.

On the (D)eficit:

The lat­est year shows a deficit of 10% of GDP, but even this isn’t a prob­lem as long as it’s a one­off deficit incurred to help avert a major finan­cial and eco­nomic cri­sis. Right? Right… if the past aver­age really was 2.4% and the cur­rent deficit really is temporary.

But ...

The aver­age increase in our national debt, includ­ing unfunded oblig­a­tions and GSEs, soars to 9.8% of GDP for the past 25 years. The lat­est 12 months saw our pub­lic debt and unfunded oblig­a­tions grow by 18% of GDP! No won­der the debt seems to have grown crush­ingly large.

Arnott's case is com­pelling, and sounds quite sim­i­lar to what his New­port Beach bond mar­ket peer, Bill Gross, calls the "New Nor­mal," though Gross has not elab­o­rated on it as specif­i­cally, as Arnott does here and in past let­ters. Whether you agree with this or not, its a must-read.

For more on Debt and Demo­graph­ics, and to read Rob Arnott's com­plete newslet­ter, click here.

Tags: Bill Gross, Bond Market, Coming Generation, Demographics, Economic Crisis, Financial Assets, Fundamental Indexing, GDP, Headwind, Horizon Issues, Hurricane Force, Innovator, National Debt, Newport Beach, Public Debt, Quarter Century, Research Affiliates, Reversion, Rob Arnott, Robert Arnott, Soars
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Barry Ritholtz: "Buy and Hold" is a Disaster

Thursday, November 26th, 2009

Barry Ritholtz, writer of The Big Pic­ture blog and author of Bailout Nation: How Greed and Easy Money Cor­rupted Wall Street and Shook the World Econ­omy, last week addressed del­e­gates at a City­Wire event in Berlin.

Accord­ing to City­Wire, he argued that we were in a sec­u­lar bear mar­ket that began in 2000 and has some years to run. “In sec­u­lar bear mar­kets, the buy-and-hold approach to invest­ing is a ‘dis­as­ter’, he says, cit­ing the expe­ri­ence of 1966–82 in which the Dow Jones Indus­trial Aver­age went through five strong ral­lies and ended up back where it started. It’s not all bad news — the cur­rent cycli­cal rally has a few months yet to go with up to 20% upside, based on his­tor­i­cal pat­terns — but will be tough going, Ritholtz warns,” reported the website.

In part two of the inter­view Ritholtz dis­cusses the state of the US econ­omy, why the US gov­ern­ment should have let the banks col­lapse, and why infla­tion­ary fears are misplaced.

Source: Richard Lan­der, City­Wire, Novem­ber 24, 2009.

Tags: Bad News, Bailout, Barry Ritholtz, Bear Markets, Big Picture, Citywire, Collapse, Delegates, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Easy Money, Event In Berlin, Greed, Rallies, Richard Lander, Secular Bear Market, Us Government, Wall Street, Website Advertisement, World Economy
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Barton Biggs in Conversation with Charlie Rose

Thursday, November 26th, 2009

Char­lie Rose sits down with Bar­ton Biggs, leg­endary investor, to dis­cuss the chal­lenges the Pres­i­dent faces regard­ing the econ­omy, as well as other related issues.

A link to the tran­script of the inter­view fol­lows at the end of the post.

Click here or on the image below to view the video. (As there is no direct link to the clip, you need to click on “Archive” on the Char­lie Rose site, and then scroll down to the Roach video of Novem­ber 23.)

Click here for a tran­script of the interview.

Source: Char­lie Rose, Novem­ber 23, 2009.

Tags: Barton Biggs, Challenges, Charlie Rose, Economy, Interview Source, Investor, Roach
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Richard Karn: Past, Present, and Future of the Dollar

Wednesday, November 25th, 2009

Richard Karn, of Emerg­ing Trends Report, was kind enough to pro­vide us with this exclu­sive overview of he and his group's most recent thoughts on the past, present, and future of the vaunted/maligned US dol­lar and the elab­o­rate con­text within which it man­ages to remain the world's reserve cur­rency, as well as the world's fiat mon­e­tary system.

As usual, Richard's exhaus­tive research yields a per­spec­tive that is insight­ful and pro­found, free of rhetoric, and hype-less.

Here are a range of thoughts regard­ing the fiat dol­lar, the major­ity of which I will be incor­po­rat­ing into the pre­sen­ta­tion as time allows:

Inter­na­tion­ally:

• the world had the chance to end dol­lar hege­mony when it dis­cov­ered that the US was not hon­or­ing the Bret­ton Woods Agree­ment, but for polit­i­cal, secu­rity or eco­nomic rea­sons, chose not to;
• Gresham's Law (bad money dri­ves out good money) insures no coun­try today could oper­ate a sound cur­rency based on the gold stan­dard or some vari­a­tion thereof;
• whether sub­verted or sub­orned, all coun­tries today admin­is­ter fiat cur­rency regimes, ren­der­ing those cur­ren­cies but deriv­a­tives of the US dol­lar and their politi­cians and cen­tral bankers guilty of defraud­ing their cit­i­zens for power and profit;
• the cost of a fiat cur­rency fran­chise is the pur­chase of US Trea­sury instru­ments, which amounts to essen­tially an impe­r­ial tax or trib­ute, and whichr has reached unprece­dented lev­els today;
• reserve cur­rency sta­tus has lit­tle to do with com­par­a­tive value and every­thing to do with how read­ily it is traded glob­ally, and that is deter­mined as well as main­tained by mil­i­tary dominance;
• as was amply demon­strated in 2008–9, dur­ing an eco­nomic cri­sis, fiat cur­rency regimes weaken from the periph­ery (or his­tor­i­cally the fron­tier) toward the cen­ter, and the role of the reserve cur­rency is sim­ply to ensure con­ti­nu­ity of the global finan­cial system;
• behind the empty rhetoric today, calls for a new cur­rency amount to but  pos­tur­ing and a cheap power grab dur­ing a time of per­ceived dol­lar weak­ness because no one is offer­ing a 'backed' cur­rency which might be eas­ily mon­i­tored, only a new fiat cur­rency over which the pro­po­nents will have a greater say;
• rec­og­niz­ing that there is no legit­i­mate chal­lenge to the fiat dol­lar on the hori­zon pro­vides observers with a fil­ter with which they can tune out the 'white noise' in order to focus on what is being done, not said;
• mar­ket com­men­ta­tors today are so eager to write off the dol­lar and to pro­mote com­mu­nist China as the future of cap­i­tal­ism that they are over­look­ing the sim­ple fact that in the after­math of the global finan­cial cri­sis all cur­ren­cies are being inflated today, not just the dol­lar, which will some­day result in a tremen­dous loss of pur­chas­ing power by their citizens–'confiscation by infla­tion' on a global basis;
• long term this is sup­port­ive of com­mod­ity prices, but as events have demon­strated, short term any­thing is possible;
• the world will buy more, not less, Trea­sury debt: the cost of a fiat dol­lar fail­ure would be a uni­ver­sal loathing of fiat cur­ren­cies, with all of the unpleas­ant con­se­quences for politi­cians and cen­tral bankers;
• in con­junc­tion with the dol­lar replac­ing the yen as the cur­rency of choice in the carry trades, the increased veloc­ity and vol­ume of 'hot money' chas­ing spec­u­la­tive return in a largely neg­a­tive real inter­est rate envi­ron­ment glob­ally means there will be both increased volatil­ity as well as increased like­li­hood of a dis­lo­cat­ing event;
• the increas­ingly des­per­ate mea­sures, the myr­iad decep­tions, the the back-room deals and out­right frauds that are being exposed on a near-daily basis, with the guilty par­ties going unpun­ished, vir­tu­ally guar­an­tees the global finan­cial cri­sis is not over, merely await­ing the right spark.

Adver­tise­ment

Domes­ti­cally:

• the key enabling attrib­utes for the suc­cess­ful admin­is­tra­tion of a fiat cur­rency régime are co-operation between the finan­cial sec­tor and the gov­ern­ment, end­less pro­mo­tion of their man­age­ment prowess and reg­u­lar deflec­tion, tak­ing advan­tage of vary­ing per­spec­tives regard­ing time and value, and credibility;
• so-called "end-of-the-world" finan­cial crises and resul­tant taxpayer-funded bailouts are far more com­mon than most peo­ple real­ize, with each being larger and more lucra­tive for the finan­cial sec­tor than the pre­vi­ous (think of Wall Street receiv­ing record bonuses less than a year after pre­cip­i­tat­ing the crisis);
• over the last 30 years and numer­ous bub­ble cycles, cumu­la­tive credit debt has bal­looned while cap­i­tal has been so badly mis­al­lo­cated that we are at, or fast approach­ing, a point at which there is not suf­fi­cient real income gen­er­ated any longer to ser­vice the out­stand­ing debt;
• in 1965, each dol­lar bor­rowed pro­duced 93 cents of GDP growth; in 2008 a bor­rowed dol­lar pro­duced but 18 cents of GDP growth, and pre­dic­tions regard­ing the ser­vic­ing of debt are so hor­ren­dous that it is thought that by 2015 bor­row­ing money will have no net effect on the economy;
• should Amer­i­can con­sumers increase their sav­ings rate and reduce house­hold debt to 1980 lev­els, it would con­sti­tute as much as a 2.5% reduc­tion in global GDP;
• the US gov­ern­ment is using the finan­cial cri­sis to fur­ther expand its power and bureau­cratic reach into Amer­i­cans' lives;
• too much gov­ern­ment is one of the prob­lems: civil­ian work­ers out­num­ber gov­ern­ment work­ers about 5 to 1, but it requires the tax receipts from roughly 14 aver­age wage earn­ers to pay the salary of an aver­age gov­ern­ment employee;
• the more finan­cial resources that are con­sumed by gov­ern­ment, which pro­duces very lit­tle of value to the real econ­omy, the less there is avail­able to the real economy–out where real things are man­u­fac­tured and real, sus­tain­able income is generated;
• in con­trast to what is gen­er­ally accepted, finan­cial sec­tor credit growth pre­cedes the expan­sion of the mon­e­tary base, and banks are not lend­ing, they are hoarding;
• with­out money reach­ing those most in need of it, small busi­nesses and indi­vid­u­als, recov­ery is impossible;
• gov­ern­ment stim­u­lus pro­grams have his­tor­i­cally proven to be of at best mar­ginal ben­e­fit to an econ­omy, but tax cuts, incen­tives and pay­roll sub­si­dies to busi­nesses have been shown to have a 'mul­ti­plier effect' of nearly three times the funds committed;
• inter­ven­tion­ist poli­cies imple­mented in the admin­is­tra­tion of the the fiat dol­lar régime amount to more of the same poli­cies that landed us in this fix, only harder
• how­ever, the inter­ven­tion­ists are run­ning out of options: we can count but six avail­able to the admin­is­tra­tion over the near to inter­me­di­ate term, which is the sub­ject of the next webi­nar, with the most ter­ri­fy­ing not being a full-blown depres­sion but the whole­sale March Toward Marx­ism under the largely fab­ri­cated aegis of the need to con­trol the emis­sions of car­bon dioxide–by every­one and everything.

Tomor­row, we will fea­ture Chap­ter 2 from Richard Karn's book, Credit and Cred­i­bil­ity.

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