China's Appetite for Gold

Wednesday, March 31st, 2010

Email this arti­cle | Print this article

By Frank Holmes, U.S. Global Investors

March 30, 2010

What would hap­pen to the price of gold if China’s annual con­sump­tion went up tenfold?

That’s the high-end demand case laid out by the World Gold Coun­cil (WGC) in its new report “Gold in the Year of the Tiger,” which focuses on China.

The WGC says China’s gold con­sump­tion of 423 tonnes in 2009 works out to about one-quarter of a gram per per­son, which is lower than other Asian coun­tries with cul­tural affin­ity for gold (chart). The Saudis con­sume more than three grams per per­son, and in Hong Kong, it’s more than two grams.

“If gold were con­sumed in China at the same rate per capita as in India, Hong Kong or Saudi Ara­bia, annual Chi­nese demand could increase by at least 100 tonnes to as much as 4,000 tonnes in the jew­elry sec­tor alone,” the WGC writes.

OK, 4,000 tonnes (128.6 mil­lion troy ounces) looks pretty extreme, even for the most enthu­si­as­tic gold devo­tees. The WGC offers a more rea­son­able but nonethe­less bull­ish out­look: China’s gold demand has nearly dou­bled over the past five years (13 per­cent growth per year), so it would not be a huge stretch for a dou­bling to roughly 850 tonnes per year in the next decade.

Gold demand is ris­ing as China’s mid­dle class expands, and while the nation is the world’s largest pro­ducer, domes­tic sup­ply falls short of demand by some 100 tonnes per year and that gap will almost cer­tainly widen with ris­ing demand.

As more for­eign gold is diverted to the Chi­nese mar­ket, the impact on world prices could be significant.

Tags: Asian Countries, Bullish Outlook, Capita, China, Chinese Demand, Chinese Market, Devotees, Frank Holmes, Gap, Gold Chart, Gold Consumption, Gold Demand, India, Price Of Gold, Saudi Arabia, Saudis, Tonnes, Troy Ounces, U S Global Investors, Wgc, World Gold Council, Year Of The Tiger
Posted in India, Markets, Outlook | Comments Off

The Price of Emotion

Tuesday, March 30th, 2010

Suc­cess­ful invest­ing is built on twin pil­lars – diver­si­fi­ca­tion and self-control. Craft­ing a thought­fully diver­si­fied strat­egy but not stick­ing to it is like hav­ing a fit­ness pro­gram with­out dis­ci­pline – long on promise and short on results. Behav­ioural finance experts have iden­ti­fied a litany of cog­ni­tive biases that can dis­tort investor decision-making and dis­rupt adher­ence to a sound strat­egy. Some of the prin­ci­pal ones include:

• Over­con­fi­dence – the ten­dency to over­es­ti­mate one's abil­i­ties, knowl­edge and the reli­a­bil­ity of the infor­ma­tion used in decision-making.
  

• Con­fir­ma­tion bias — the pre­dis­po­si­tion to look for and inter­pret infor­ma­tion in a man­ner that con­firms one's pre­con­cep­tions.
  

• Myopic Fram­ing – the incli­na­tion to view facts in a nar­row con­text.
  

• Out­come bias – the ten­dency of peo­ple to expect to get what they want.
  

• Herd­ing – the ten­dency of indi­vid­u­als to fol­low the crowd.
  

As the mar­ket moves through bull and bear cycles, investor sen­ti­ment swings from opti­mism and hope to anx­i­ety and fear. Emo­tions inevitably inter­play with cog­ni­tive biases lead­ing to adverse out­comes in which investors end up "buy­ing high" and "sell­ing low". War­ren Buf­fett summed it up best with his obser­va­tion that, "Suc­cess in invest­ing doesn't cor­re­late with I.Q. once you're above the level of 25. Once you have ordi­nary intel­li­gence, what you need is the tem­pera­ment to con­trol the urges that get other peo­ple into trou­ble in invest­ing."

A num­ber of aca­d­e­mic stud­ies have attempted to mea­sure the returns earned by a typ­i­cal investor and com­pare them to mar­ket returns in order to esti­mate the cost of emotionally-driven buy­ing and sell­ing. Although not a per­fect proxy, the dollar-weighted returns of mutual funds, a cal­cu­la­tion that accounts for the tim­ing and size of cash flows in and out of funds, has been used as an esti­mate of the aver­age investor's returns. These dollar-weighted returns are then com­pared against the returns of the funds them­selves, a time-weighted cal­cu­la­tion that ignores the effects of cash flow tim­ing.

One of the first stud­ies com­pared the dol­lar and time-weighted returns of U.S. mutual funds from Decem­ber 31, 1983 to August 31, 1994. The author found that in every fund cat­e­gory – equi­ties, bond, bal­anced and pre­cious met­als, investors suf­fered a chronic short­fall in return because of ill-timed move­ments in and out and between mutual funds. Over­all, this inop­por­tune tim­ing of cash flows reduced returns to investors by 1.08% a year.

In another study, John Bogle, the founder of Van­guard, com­pared the dol­lar and time-weighted returns of U.S. equity funds from 1980 to 2005. He found that poorly timed moves in, out and between funds by investors resulted in a short­fall of 2.7% a year. Unques­tion­ably, the herd men­tal­ity asso­ci­ated with the tech bub­ble and its sub­se­quent col­lapse added to the under­per­for­mance of investors dur­ing this period. Many investors went from pil­ing into the hottest growth fund to hid­ing out in money mar­ket funds.

Asset bub­bles such as the tech boom induce greater emotionally-driven buy­ing and sell­ing, and hence, more dam­age to investors' port­fo­lio results. In con­fir­ma­tion, one study found that whereas U.S. fund investors lagged fund returns by 1.2% a year from 1984–1990, this per­for­mance gap climbed to 2.67% a year for the period 1991 to 2003.

At its recent asset allo­ca­tion con­fer­ence, Morn­ingstar dis­closed its find­ings from com­par­ing the dol­lar and time-weighted returns of U.S. mutual funds from 2000 to 2009. Over­all, the short­fall expe­ri­enced by investors was 1.5% per annum. The tim­ing of bond fund pur­chases and sales was no bet­ter than equity funds; in fact, investors in munic­i­pal bond funds had the high­est short­fall at 1.61% annu­ally.

Inter­est­ingly, investors in exchange-traded funds (ETFs) seem to suf­fer from greater tim­ing short­falls than their mutual fund brethren. Bogle ana­lyzed 79 ETFs in a vari­ety of asset classes over a five-year period and found that investors in 68 ETFs under­per­formed. On aver­age, investors' returns lagged the funds them­selves by a whop­ping 4.5% annu­ally. The annual under­per­for­mance ranged from 0.4% for large-cap value funds to 17.9% for finan­cial sec­tor funds. The hair-trigger trad­ing capa­bil­ity of ETFs may con­tribute to more emotionally-driven buy­ing and sell­ing.

Most investors appear blithely unaware of how much dam­age emotionally-driven buy­ing and sell­ing can wreak on their port­fo­lios over time. Instead their per­spec­tive is dom­i­nated by short-term emo­tional grat­i­fi­ca­tion. Unfor­tu­nately, the scale of emotionally-induced diminu­tion is that much greater when short­falls are deducted from real returns (i.e. returns net of infla­tion) and com­pounded over time.

In illus­tra­tion, the fol­low­ing graph com­pares the cumu­la­tive real growth of $1.00 invested in both a "buy and hold" (in red) and an "emotionally-driven" port­fo­lio
(in green) from 1970 through 2009. Each port­fo­lio is com­prised of 40% inter­me­di­ate term gov­ern­ment bonds and 60% large com­pany stocks but it is assumed the return of "emotionally-driven" port­fo­lio lags the "buy and hold" port­fo­lio by 1.5% annu­ally.

Emotionally-driven deci­sions extract a huge price on a port­fo­lio over time. In this illus­tra­tion, the cumu­la­tive real value of the port­fo­lio is almost cut in half.

The anti­dote is a three­fold exer­cise. First, an investor's abil­ity to tol­er­ate risk in finan­cial and psy­cho­log­i­cal terms must be clar­i­fied; this risk pro­file then serves as the pri­mary input into port­fo­lio design. Sec­ond, the asset class per­for­mance of the rec­om­mended port­fo­lio should be back-tested. The 1973/74 and 2008/09 down­turns pro­vide his­toric stress tests that should be reviewed in-depth and in dol­lar terms. There is a world of dif­fer­ence between say­ing you can tol­er­ate a 20 per­cent port­fo­lio decline and say­ing you can watch your $5 mil­lion port­fo­lio shrink by $1 mil­lion.

Finally, the invest­ment strat­egy must be doc­u­mented in writ­ing. As Charles Ellis wrote in his invest­ment clas­sic "Invest­ment Pol­icy: How to Win the Loser's Game", "The pri­mary rea­son for artic­u­lat­ing long-term pol­icy explic­itly and in writ­ing is to enable the client and the port­fo­lio man­ager to pro­tect the port­fo­lio from ad hoc revi­sions of sound long-term pol­icy, and to help them hold to long-term pol­icy when short-term exi­gen­cies are most dis­tress­ing and the pol­icy is most in doubt."

March 30, 2010

www.tacitacapital.com

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 to 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: Academic Studies, Adherence, Bull And Bear, Cognitive Biases, Confirmation Bias, Diversification, ETF, ETFs, Fitness Program, Inclination, Interplay, Investor Sentiment, Litany, Market Moves, Narrow Context, Preconceptions, Predisposition, Self Control, Sound Strategy, Twin Pillars, Typical Investor, Warren Buffet, Warren Buffett
Posted in ETFs, Markets, US Stocks | Comments Off

Why Gold will Not Make New Highs or Lows This Year

Tuesday, March 30th, 2010

Email this arti­cle | Print this article

This arti­cle is a guest con­tri­bu­tion by Adam Hewi­son, CEO of Mar­ket­Club.

Title: Why gold will not make new highs or lows this year

Gold has had some dra­matic moves in the last eigh­teen months and we expect it will have some equally dra­matic moves in the future, but not right now.

Click on the image to view:

While I rec­og­nize that gold is one of the few com­mod­ity mar­kets that peo­ple are really pas­sion­ate about; the pur­pose of this arti­cle is not to take sides either with the gold bugs or those who reject the argu­ment that gold is for­ever.  Rather, I want to dis­cuss my inter­pre­ta­tion of the mar­kets cycle.

After spot gold made an all-time high against the dol­lar on Decem­ber 2 at $1,226.37, gold has been in retreat mode. For the for the past sev­eral months gold has been in a broad trad­ing range, seem­ingly unable to move one way or another. This process has cre­ated frus­tra­tion from bulls and bears alike.

Here is the dirty lit­tle secret about the gold mar­ket. It can be a hor­ri­ble invest­ment and here's why:

Gold first started trad­ing in the 80s while I was on the floor of the Chicago Mer­can­tile Exchange in Chicago as a mem­ber of the Inter­na­tional Mon­e­tary Mar­ket, (IMM) which was at that time a divi­sion of the CME now the CME Group.  When gold opened up the pub­lic clam­ored to buy into the gold futures mar­ket and guess who sold it to them? That's right it was the pros– the guys who made their liv­ing trad­ing. As a result, gold hit an all-time high of around $850 an ounce back then and it took almost 25 years for gold to move over that level, at least in dol­lar terms. I don't know what your time­line is, but 25 to 30 years is an awful long time to get even again.

So what is really hap­pen­ing in this market?

Every­one is aware of the prob­lems in Europe with Greece, Por­tu­gal and a host of yet to be named coun­tries. We all know that the huge amount of money being printed, cou­pled with the bank fail­ures abroad con­tribute to the dol­lars declin­ing value. These events, in con­junc­tion with the Amer­i­can gov­ern­ments actions, also con­tribute to the deval­u­a­tion of the dol­lar. The gov­ern­ment claims that this is ben­e­fi­cial to exports, but the bot­tom line is that the pur­chas­ing power of the Amer­i­can dol­lar con­tin­ues to erode in world markets.

Based on the declin­ing value of world cur­rency against gold you might ask — why isn't gold trad­ing at $2,000 or even $3,000 an ounce? What is wrong with this mar­ket? This is because a great deal of what goes into the gold mar­ket is psy­cho­log­i­cal and reacts to cyclic trends dri­ven by both psy­cho­log­i­cal and eco­nomic factors.

So what does all this have to do with the price of gold now? It has every­thing to do with gold and noth­ing to do with gold.

Here is what I've been able to observe in the last sev­eral years in gold and seems to be hold­ing true.  It is some­thing that you should pay atten­tion to if you're inter­ested in the next big move in the gold market.

Before gold can move higher it needs to cre­ate what I call an "energy field".  The most recent energy fields in gold were between May 12, 2006 and Sep­tem­ber 20, 2007. This 17 month energy field saw gold prices oscil­late between a broad trad­ing range bound by $730.08 (upside) and $541.80 (down­side).  That energy field pro­duced enough power to pro­pel gold to the new high of $1,012.40 on March 17, 2008. This marked the first time gold exceeded, in dol­lar terms, the highs set in the early 80s men­tioned earlier.

The energy fields I have observed for gold are tak­ing some­where between 17 and 18 months to com­plete. If the energy field holds, then the Decem­ber 3rd 2009 high of $1,226.37 should remain in place for quite some time. If the same cycle remains true then the recent lows that we wit­nessed, at $1,050, should also remain intact as they rep­re­sent the 15 to 16 month cycle low.

To sum­ma­rize: I expect gold to be locked in a broad trad­ing range for the next 12 months bounded by the Decem­ber 09 highs of 1,226.37 and the lows of $1,050.00. If the gold cycle holds true, we expect that gold tops the $1,226.37 marker by April or May of 2011.

On the on the upside we will also be look­ing for gold to make a nature cyclic high in Octo­ber or Novem­ber of 2011. It's impos­si­ble to pre­dict the future with any degree of accu­racy; how­ever when we look at the cycles in gold this reads as a pretty good bet.

No mat­ter what hap­pens we expect gold will offer some great trad­ing oppor­tu­ni­ties that investors and traders should be able to take advan­tage of.

As I always dis­cuss– in trad­ing one should approach gold or any other mar­ket with a game plan and proper money man­age­ment stops. The key to suc­cess in this decade will be an investors will­ing­ness to move in and out of asset classes such as gold and be well diver­si­fied into more than one asset class. That way you wont be left hold­ing the bag for the next 25 years. Our World Com­mod­ity Port­fo­lio is a good exam­ple of this approach and one I believe will serve investors well in the com­ing years.

Tags: 80s, Amount Of Money, Bank Failures, Bulls, Bulls And Bears, Chicago Mercantile Exchange, CME, Commodity Markets, Dirty Little Secret, Dollar Terms, Frustration, Gold, Gold Bugs, Gold Commodity, Gold Futures Market, Gold Market, International Monetary Market, Lows, Move One, New Highs, Ounce, Spot Gold, Timeline
Posted in Markets | 1 Comment »

Three reasons analysts have rose-coloured glasses on Chinese bubble

Tuesday, March 30th, 2010

This arti­cle is a guest post by Ed Har­ri­son of Credit Write­downs.
Email this arti­cle | Print this arti­cle
China is in the midst of an asset bub­ble. The evi­dence is clear that China’s aggres­sive fis­cal and mon­e­tary pol­icy is caus­ing the Chi­nese econ­omy to over­heat, with some pre­dict­ing 12% growth for the Q1 2010. Accord­ing to Mar­shall Auer­back, researchers at Lom­bard Street think GDP growth hit an annu­al­ized 25% in the sec­ond half of 2009 (20% real and 5% infla­tion) but that the year-on-year data obscured this. Chi­nese pol­icy mak­ers are look­ing to rein all of this in for fear of a hard landing.

Ana­lysts like Edward Chan­cel­lor of Grantham, Mayo, Van Otter­loo & Co. LLC have writ­ten well-constructed argu­ments why we should be cau­tious, point­ing to the age-old signs of a finan­cial bub­ble. Nev­er­the­less, oth­ers are mak­ing excuses.

Cait Mur­phy explains quite well that these excuses tend to fall into three spe­cific camps. I will quote her below and add some extra commentary.

1. China’s asset price rises are not under­pinned by debt.

About half of apart­ments are paid for in cash, and for those who get mort­gages, the down-payment is typ­i­cally  50%. Mort­gage debts, which make up about 10% of Chi­nese GDP (com­pared to more than 100% in the U.S.), are not secu­ri­tized and are kept on the books of the banks that issued them…

But just because China is not lever­aged the way the U.S. was does not mean it is not lever­aged at all. Devel­op­ers, for exam­ple, take on debt to start projects and these are largely based on a cal­cu­la­tion of future prop­erty val­ues, which of course are assumed to always be rising….

Mur­phy goes on to point out that all bub­bles are equal, but some bub­bles are more equal than oth­ers. And this is the crux of the argu­ment here – bub­bles under­pinned by debt are assumed to be dam­ag­ing and ones not under­pinned by debt are not. This does not sit well. Unlike for­mer Fed mem­ber Fred­eric Mishkin, I believe poten­tial asset-prices bub­bles are always dan­ger­ous because of the mis­al­lo­ca­tion of eco­nomic resources they induce.

How­ever, here debt is indeed the prob­lem. Just because prop­erty price excesses are not financed by high debt lev­els in the house­hold sec­tor doesn’t mean there isn’t a debt prob­lem. If you recall, in Japan, it was the busi­ness sector’s property-related debt which cre­ated Japan’s bal­ance sheet malaise. In China, the same is true again.

2. China has a huge cache of reserves

China has $2.4 tril­lion in reserves. As Thomas Fried­man put it, with ghastly rogu­ish­ness, “First, a sim­ple rule of invest­ing that has always served me well: Never short a coun­try with $2 tril­lion in for­eign cur­rency reserves.” Hav­ing a lot of reserves does not mean there can­not be a bub­ble. Just two quick exam­ples:Amer­ica in the 1920s and Japan in the 1980s had reserves about the equiv­a­lent, in global GDP terms, as China does now. We know how that worked out.  But if there is more sup­ply than demand, and if prices keep going up faster than income and if there is some­thing like hys­te­ria about get­ting into the game — all char­ac­ter­is­tics of a bub­ble, all too true in China right now — the mar­ket is going to cor­rect. Period.

Reserves pro­tect the value of a cur­rency and are good for a country’s credit; they are a force for finan­cial sta­bil­ity. But they can­not pre­vent the for­ma­tion of a bub­ble. If any­thing, huge reserves can be a symp­tom of under­ly­ing eco­nomic imbal­ances, notes Michael Pet­tis, a spe­cial­ist in finan­cial mar­kets at Beijing’s Guanghua School of Man­age­ment, in the form of “a too-quick expan­sion of domes­tic money and credit.”

The reserves are irrel­e­vant. What I dis­cussed in the links this morn­ing regard­ing Argentina is highly rel­e­vant here. Argentina’s Pres­i­dent Cristina Fer­nan­dez de Kirch­ner has demanded the cen­tral bank to use for­eign cur­rency reserves to pay pub­lic debt matu­ri­ties. This is what peo­ple are say­ing the Chi­nese could do. But it is not as sim­ple as that because the cen­tral bank has a bal­ance sheet just like any other com­pany. The reserve assets are under­pinned by cur­rency lia­bil­i­ties. Pet­tis says:

…the PBoC has a bal­ance sheet con­sist­ing on one side of dol­lar assets (and here “dol­lar” is short-hand for all for­eign assets).   Against this and on the other side it has a roughly equiv­a­lent amount of RMB liabilities…

…China’s reserves are often thought of as if they were a trea­sure trove avail­able for spend­ing.  They are not.  They are sim­ply the asset side of the mis­matched bal­ance sheet.  If the PBoC wanted to “spend” $100, say for exam­ple to recap­i­tal­ize a bank, it could do so, but this would auto­mat­i­cally cre­ate a $100 dol­lar hole in its bal­ance sheet. – it would still owe the RMB that it bor­rowed orig­i­nally to pur­chase the $100…

Can PBoC reserves pro­tect China?

So the PBoC can­not give away the reserves with­out caus­ing an increase in its net indebt­ed­ness.  …Bei­jing can­not just recap­i­tal­ize the banks with reserves.  A sub­stan­tial amount of NPLs will one way or another increase gov­ern­ment debt.  The only way Bei­jing can recap­i­tal­ize the banks is by bor­row­ing, or by rais­ing direct (or hid­den) taxes.  Hav­ing the PBoC recap­i­tal­ize the banks is just another way for the gov­ern­ment to bor­row, and since almost every­one would agree that losses in the bank­ing sys­tem should be paid directly out of fis­cal rev­enues, and not indi­rectly by the cen­tral bank, it would be a very inef­fi­cient way of doing so.

So what are reserves good for?  As long as China main­tains its own cur­rency and denom­i­nates all domes­tic trans­ac­tions in RMB, the PBoC reserves can­not be used in China.  They can­not go to pay doc­tors’ salaries, to build bridges, to lower taxes or to sub­si­dize con­sump­tion.  They can only be used to pur­chase or pay for things from out­side China.  This means that reserves ensure that China can import for­eign com­modi­ties and other goods as long as it can pay for them domes­ti­cally.  It also means that the PBoC can ensure the avail­abil­ity of dol­lars to repay for­eign debt and for­eign investment.

So the point is that the reserves are mean­ing­less in the con­text of asset bub­bles.

The gov­ern­ment won’t let it hap­pen. It’s true that the Chi­nese gov­ern­ment, unen­cum­bered by trivia like free­dom, can do big, dif­fi­cult stuff more read­ily. For exam­ple, China’s stim­u­lus pro­gram was triple, in rel­a­tive terms, that of the U.S., and because their plan­ners did not have to deal with things like pub­lic opin­ion to any sig­nif­i­cant degree, lots got spent quickly. More­over, the gov­ern­ment owns the banks, so it should be able to exert con­trol over them. And yes, it’s true (as noted above) that the gov­ern­ment is aware of the prob­lem. In fact, Bei­jing has done a cou­ple of things to try to cool down the mar­ket, such as requir­ing banks to raise their reserves; mak­ing the pur­chase of sec­ond (or third or fourth…) homes more dif­fi­cult; and reduc­ing the mort­gage inter­est discount.

So what? Ani­mal spir­its are well estab­lished already. I would argue that, once the ani­mal spir­its of an asset bub­ble have taken over, the cen­tral bank must go well beyond pol­icy nor­mal­iza­tion and insti­tute a very restric­tive mon­e­tary pol­icy to rein in excesses. This risks a hard land­ing. In fact, this is the very same ‘conun­drum‘ Alan Greenspan faced with his baby step 25 basis point increases in the Fed Funds rate.

And I am not con­fi­dent in the least that Chi­nese offi­cials are any bet­ter at rein­ing in asset bub­bles. Willem Buiter and and Shen Ming­gao have it right.

“This time is unlikely to be dif­fer­ent unless the author­i­ties in China act dif­fer­ently from the author­i­ties in China and else­where in the past,” Buiter and Shen said.

Pol­icy mak­ers prob­a­bly won’t tem­per investors’ exu­ber­ance because they don’t want to lose polit­i­cal sup­port or hurt the invest­ment growth they view as nec­es­sary to ensur­ing the econ­omy main­tains an 8 per­cent growth rate and spurs employ­ment, Cit­i­group said.

“Few politi­cians have been suc­cess­ful run­ning against asset booms and bub­bles,” the report said.

When the asset bub­ble does break, the impact will be painful for China and its trad­ing part­ners, Buiter and Shen said. It may still not derail China’s eco­nomic expan­sion so long as the nation’s lead­ers seek to make the econ­omy more reliant on domes­tic demand…

Sources

Yes, Vir­ginia, China Does Have a Bub­ble – Cait Murphy

Citigroup’s Buiter Warns China Fac­ing ‘Boom, Bub­ble and Bust’ – Busi­ness Week

Source: CreditWritedowns.com

Edward Har­ri­son is a finance spe­cial­ist at Global Macro Advi­sors. He was a strat­egy and finance exec­u­tive at Deutsche Bank, Bain, and Yahoo. Edward started his career as a diplo­mat and speaks Ger­man, Dutch, Swedish, Span­ish and French. He holds an MBA from Colum­bia Uni­ver­sity and a BA in eco­nom­ics from Dart­mouth Col­lege. Edward also write the blog Credit Write­downs. Fol­low him on Twit­ter at twitter.com/edwardnh to receive all updates on finance news from around the web.

Tags: Asset Price, Asset Prices, Bubbles, Cait Murphy, China, Chinese Economy, Chinese Policy, Coloured Glasses, Commodities, Crux, Ed Harrison, Edward Chancellor, Financial Bubble, Fiscal And Monetary Policy, GDP, GDP Growth, Grantham Mayo Van Otterloo, Lombard Street, Marshall Auerback, Midst, Mortgage Debts, Property Values, Q1
Posted in Commodities, Markets | Comments Off

I’m still confused about this whole Eurozone thing…

Tuesday, March 30th, 2010

This is a post about my con­fu­sion, rather than my report­ing, of the Euro­zone saga. Here are some pieces worth read­ing if you want to catch up:

The NY Times (the basics); Ed Har­ri­son (via Naked Cap­i­tal­ism); From the billy blog; The Finan­cial Times (Mar­tin Wolf, a must read); The Econ­o­mist (will ref­er­ence below).

Okay, a con­di­tional guar­an­tee for pos­si­ble lend­ing, maybe, with con­sul­ta­tion from the IMF has been agreed upon by the Euro­zone coun­tries (Ger­many and France, really). But what I don’t under­stand is pretty well stated in the Econ­o­mist arti­cle:

The Greek gov­ern­ment has some­how to keep its econ­omy on an even keel while push­ing through a huge fis­cal tight­en­ing. Coun­tries that seek IMF help gen­er­ally have to endure bru­tal cuts in pub­lic spend­ing, which deepen reces­sions. To counter that effect, the IMF typ­i­cally coun­sels a weaker cur­rency. Sadly, this is not an option for Greece. Stuck in the euro, its exchange rate with its main trad­ing part­ners is fixed. Greece can­not devalue, so it needs more time to adjust than the three years it has agreed with its EU partners—and a big­ger safety net while it does.

Sadly? This is not an option? The Econ­o­mist com­pletely skips over the VERY LARGE issue of a sin­gu­lar cur­rency and on to the com­pet­i­tive­ness story, one that must be derived through inter­nal deval­u­a­tion, i.e., drop­ping wages and other nom­i­nal variables.

Finan­cial crises, espe­cially those in small-open economies (Swe­den, for exam­ple), gen­er­ally end with a mas­sive cur­rency deval­u­a­tion that dri­ves export growth (pro­vided there is exter­nal demand to suf­fice). I hon­estly don’t see how a suf­fi­cient export-generated rebound is even a pos­si­bil­ity, given that the rest of the Euro­zone is essen­tially try­ing the “inter­nal deval­u­a­tion” bit simul­ta­ne­ously (chart above).

And who’s going to pick up the slack? In 2008, 64% of Greece’s export income was derived by the EU 27 coun­tries, 70% for Spain, and 74% for Por­tu­gal. If the Euro­zone as a whole is using this same inter­nal defla­tion mech­a­nism to spur export growth, only the “zone” as a whole really ben­e­fits, not any one country.

WIHTOUT a mas­sive surge in export-driven GDP growth no "zone" coun­try can drop its finan­cial deficit with­out incur­ring behe­moth debt bur­den growth (in the case of the Euro­zone, the term “bur­den” actu­ally applies since Greece, nor any one econ­omy, can print its own money).

Look at the government’s period bud­get con­straint (left), where the lower-case let­ters "d" and "p" stand for the debt and pri­mary deficit as a share of GDP, respec­tively. r is the nom­i­nal inter­est rate, and (1+g) is the rate of NOMINAL GDP growth (includ­ing price appre­ci­a­tion). (Email me if you want the algebra.)

When Greece starts drop­ping p (the pri­mary deficit), the fun­da­men­tals of the econ­omy (i.e., nom­i­nal gdp growth (1+g)) must be robust enough to pre­vent a surg­ing debt bur­den. And here's the cycle: to drop the pri­mary deficit, it does so by reduc­ing G and rais­ing T, which drags Y (as of Y = C + I + G + Ex — Im) and growth of Y, (1+g), since export growth is unlikely to be there to off­set the decline in pri­vate spend­ing; these effects then flow back to the pri­mary deficit to raise p.

And like­wise, only under the cir­cum­stances of heroic export growth can the gov­ern­ment reduce its fis­cal deficit to 3% WITHOUT the pri­vate sec­tor lev­er­ing up their bal­ance sheets and con­tribut­ing to a larger default risk (of the depres­sion­ary type). I’m confused.

All I’m say­ing is that this plan, in its cur­rent form, is really not much of a plan at all. The inter­nal deval­u­a­tion model has a lot of holes.

Rebecca Wilder

Tags: Competitiveness, Conditional Guarantee, Currency Devaluation, Ed Harrison, Eurozone Countries, Even Keel, Export Income, Financial Crises, Financial Times, Greek Government, Imf, Martin Wolf, Nominal Variables, Ny Times, Open Economies, Public Spending, Recessions, Safety Net, Trading Partners, Worth Reading
Posted in Markets, Outlook | Comments Off

Latin America: Leadership in Chile and Brazil (Mark Mobius)

Monday, March 29th, 2010

This arti­cle is a guest con­tri­bu­tion by Mark Mobius, Exec­u­tive Chair­man, Franklin Tem­ple­ton Investments.

Latin Amer­ica is set to wit­ness eight elec­tions this year, includ­ing four pres­i­den­tial elec­tions in Chile, Costa Rica, Colom­bia, and Brazil. We recently trav­eled to the region to research invest­ment oppor­tu­ni­ties there and to get a sense of the ‘mood on the ground’. We came away with a gen­eral impres­sion of opti­mism, par­tic­u­larly in Brazil, and we think this will spread to other coun­tries in Latin America.

Chile
We had vis­ited San­ti­ago, Chile, and so I was shocked and sad­dened to hear of the impact of the pow­er­ful earth­quake that hit cen­tral Chile shortly after I left. I have an apart­ment in Chile and although the build­ing was not destroyed and is struc­turally sound, cracks formed in var­i­ous parts of the unit. Since cop­per and other min­er­als are Chile’s major exports, it was impor­tant to learn that the min­ing indus­try in the north of the coun­try was not impacted by the earthquake.

The swift response by the Chilean gov­ern­ment as well as inter­na­tional aid agen­cies to pro­vide assis­tance is reas­sur­ing, but there is much that still needs to be done. We must accept that earth­quakes, vol­canic erup­tions and other nat­ural phe­nom­ena have been with us in the past and will con­tinue in the future. Chile, too, has expe­ri­enced such events and has been able to recover and pros­per. We believe this will be the case this time as well.

Chile is a leader among Latin Amer­i­can coun­tries in terms of its man­age­ment of the econ­omy, its encour­age­ment of invest­ment both local and for­eign, and its sta­ble poli­cies. In mid-January, Chile elected Har­vard University-educated econ­o­mist Sebas­t­ian Pin­era as head of state – the first con­ser­v­a­tive, elected pres­i­dent of Chile in over 50 years. The new gov­ern­ment stepped into office on March 11. As noted, we believe Chile’s pre­vi­ous gov­ern­ment man­aged their econ­omy very well and we would look for­ward to a con­tin­u­a­tion of the cur­rent eco­nomic poli­cies. We would also encour­age the new gov­ern­ment to fur­ther sup­port small and entre­pre­neur­ial busi­nesses, which could likely help the econ­omy as well as cap­i­tal mar­kets. On a broad basis, we think that the new gov­ern­ment may even aug­ment new invest­ment oppor­tu­ni­ties in Chile.

Brazil
When we arrived in Brazil, the sum­mer air was thick with humid­ity, and the traf­fic from the air­port under­scored the coun­tries rapid eco­nomic expan­sion and opti­mism. I had always enjoyed the annual Car­ni­val in Rio de Janeiro, which reflects the cul­ture of a peo­ple who seem to embrace every­thing with great pas­sion. Brazil’s pres­i­den­tial elec­tions are sched­uled for Octo­ber of this year. From our con­ver­sa­tions with indi­vid­u­als and com­pa­nies, expec­ta­tions are that the new government’s poli­cies should be ‘more of the same’. Most peo­ple believe that the new pres­i­dent should not change poli­cies that are going well in the coun­try. We con­cur. Look­ing back, we were all pleas­antly sur­prised by Pres­i­dent Lula – con­trary to expec­ta­tions before he took office, Pres­i­dent Lula cut gov­ern­ment expenses in Jan­u­ary 2003, help­ing trim the deficit from 4.2% of gross domes­tic prod­uct (GDP) in 2002 to 2.4% of GDP by 2004.[1] He has held the deficit under 4% of GDP every year since then, help­ing the coun­try earn investment-grade credit rat­ings from Stan­dard & Poor’s and Moody’s Investors Ser­vice.[2] As he nears the end of his term, I would con­sider award­ing this pres­i­dent high scores for the way he has steered the coun­try and its econ­omy. In my opin­ion, he has been a wise vision­ary, with his empha­sis on edu­ca­tion and homes for low-income indi­vid­u­als, and if these con­tinue to be empha­sized, we believe it will be very pos­i­tive for Brazil.

We would be con­cerned if the gov­ern­ment were to impose restric­tions on busi­ness growth, ele­vate taxes or restrict licenses. How­ever we have not seen this hap­pen­ing, which is good news to us. We also think that the government’s idea of cre­at­ing “national cham­pi­ons”, domestically-owned com­pa­nies who are top in their respec­tive indus­try, is good. The gov­ern­ment, wisely, is not just look­ing at Brazil but also at the global envi­ron­ment, and it sees that this coun­try needs strong com­pa­nies that can com­pete on a global scale. The biggest energy com­pany in Brazil cur­rently ranks as one of the top 10 largest cor­po­ra­tions world­wide. Many of these “national cham­pi­ons” were for­mer state-owned enter­prises, which had since been privatized.

We think that Brazil is the largest investable mar­ket in Latin Amer­ica. It is a strong com­mod­ity pro­ducer and exporter, and it is likely to ben­e­fit from ris­ing global demand for energy, met­als and other com­modi­ties. With its tremen­dous resources, not only min­eral but agri­cul­tural as well, Brazil’s econ­omy is less depen­dant on exter­nal forces than, for exam­ple, China’s, because Brazil has to import very lit­tle of the resources iden­ti­fied above.

His­tor­i­cally, polit­i­cal change and finan­cial mar­kets in Latin Amer­ica have had a rocky rela­tion­ship. But the region has pro­gressed sig­nif­i­cantly since a decade ago, with bet­ter reg­u­la­tory sys­tems, higher for­eign reserves and robust eco­nomic growth in many coun­tries. This year, we expect to see Latin Amer­i­can mar­kets con­tin­u­ing their sec­u­lar bull trend, though of course, there may be cor­rec­tions along the way.

[2] Source: EIU, as of Sep­tem­ber 2009

Source: Latin Amer­ica: Lead­er­ship in Chile and Brazil

Tags: Brazil, Central Chile, Chilean Government, Commodities, Countries In Latin America, Elections In Chile, energy, Executive Chairman, Franklin Templeton Investments, Harvard University, Head Of State, Latin American Countries, Major Exports, Mark Mobius, Mining Industry, Natural Phenomena, Natural Resources, President Of Chile, Presidential Elections, Research Investment, Santiago Chile, Sebastian Pinera, Swift Response, Volcanic Eruptions
Posted in Brazil, Commodities, Markets | Comments Off

Francis Chou: "Comments on the Market"

Monday, March 29th, 2010

This is an excerpt from Chou Asso­ciates' Fran­cis Chou's let­ter to share­hold­ers for 2009 which was recently pub­lished in the fund company's Annual Report for 2009.

Gen­eral Com­ments on the Market

SOVEREIGN GOVERNMENTS DO NOT DEFAULT ON THEIR DEBT?: It is hard to believe that gov­ern­ments can and do default on their debts and, as the fol­low­ing table shows, even with their power of tax­a­tion and the abil­ity to print money, gov­ern­ments have to obey the laws of eco­nom­ics. Just like an indi­vid­ual or a cor­po­ra­tion, if gov­ern­ments can­not ser­vice their debt, they either default or have their debt resched­uled. As the table also shows, it is not only poor emerg­ing third world or African coun­tries run by dic­ta­tors that default, but also long estab­lished democ­ra­cies with duly elected gov­ern­ments that are gov­erned by a rule of law and that are con­sid­ered mod­ern economies. It is an eye opener to see that since the year 1800, Greece has spent roughly 50% of its time either in default or debt resched­ul­ing; Spain has spent approx­i­mately 23% of its time in default; and Mex­ico and Rus­sia around 40%.

Source: This time is dif­fer­ent Eight cen­turies of finan­cial folly by Rein­hart & Rogoff

The table is impor­tant because it demon­strates that it is not too far­fetched to think that well-known demo­c­ra­tic coun­tries can and do default on their sov­er­eign debt.

WAS THE GREAT STIMULUS A SILVER BULLET? — THINK AGAIN: It now appears that the great stim­u­lus pro­vided by almost all gov­ern­ments has averted the sec­ond Great Depres­sion and the North Amer­i­can econ­omy may well be on its way to recov­ery. How­ever, look­ing for­ward, unless we find a cred­i­ble way to repay or at least com­fort­ably ser­vice the enor­mous and grow­ing bur­den of gov­ern­ment debt, we are going to face immense chal­lenges. By over­load­ing gov­ern­ments with too much debt, the stim­u­lus may have pushed the prob­lem from the pri­vate sec­tor to the gov­ern­ment sec­tor and may have made it worse. If we take a snap­shot of the grow­ing gross debt as a per­cent­age of GDP before and after the melt­down, we get a pretty good pic­ture of the poten­tial trou­ble some coun­tries may face in the future.

Source: JP Mor­gan pro­vided data on Brazil, China, India and Rus­sia. All other data obtained from the OECD.

At some level, debt becomes an intol­er­a­ble bur­den and increases the chance of a default. His­tor­i­cally, when gross debt exceeds 70% of a country's GDP, the warn­ing signs start flashing.

While we all wished the great stim­u­lus would prove to be a sil­ver bul­let that would resolve all the prob­lems stem­ming from the world finan­cial cri­sis, that has hardly been the case. If his­tory is any guide, it takes a long time for coun­tries to suc­cess­fully emerge from a finan­cial cri­sis. They must deal with a huge increase in unem­ploy­ment along with a pro­found increase in gov­ern­ment debt. The prob­lem is exac­er­bated by lower tax rev­enues in the future caused by lower out­put and unem­ploy­ment. We think the next few years will be rocky, with economies lurch­ing from one cri­sis to another.

As an investor, we believe there will be enor­mous oppor­tu­ni­ties but the key to invest­ment suc­cess will depend on how we avoid some of the inevitable pot­holes we will find in our path.

We would also like to add a caveat to those who are invest­ing in the Chou Funds: mar­kets are inher­ently volatile in the short term and can adversely affect the Chou Funds. There­fore, investors should be com­fort­able that their finan­cial posi­tion can with­stand a sig­nif­i­cant decline — say, 50% — in the value of their investment.

TOO BIG OR TOO WELL CONNECTED TO FAIL: One would imag­ine that the great finan­cial cri­sis would pre­cip­i­tate mean­ing­ful bank­ing and finan­cial reform but I doubt that will be the case. As long as the finan­cial insti­tu­tions are too big or so well inter-connected to the finan­cial sys­tem that their fail­ure may pre­cip­i­tate a chain reac­tion that threat­ens the world finan­cial sys­tem, the gov­ern­ment will pro­tect them from fail­ure. The res­cue of AIG turned out to be essen­tially a bailout of the invest­ment banks. When exec­u­tives, espe­cially CEOs, suf­fer no seri­ous finan­cial con­se­quences when their actions bank­rupt or put their com­pa­nies in deep finan­cial dis­tress, it encour­ages risky and uneth­i­cal behav­iour. Such per­verse incen­tives need to be dis­cour­aged. The Board of Direc­tors is sup­posed to pro­tect share­hold­ers but more often than not, direc­tors are just pat­sies for the CEOs. In a damn­ing 2,200 page report, writ­ten by bank­ruptcy exam­iner Anton Valukas on Lehman Broth­ers, he wrote of one episode on March 20, 2007, where the chief admin­is­tra­tive offi­cer, Lana Franks Har­ber of Lehman's Mort­gage Cap­i­tal divi­sion, e-mailed a col­league to sum­ma­rize her dis­cus­sion with Lehman Pres­i­dent Joseph Gre­gory with regard to her pre­sen­ta­tion to the Board of Direc­tors: "Board is not sophis­ti­cated around sub­prime mar­ket — Joe doesn't want too much detail. He wants to can­didly talk about the risks to Lehman but be opti­mistic and con­struc­tive — talk about the oppor­tu­ni­ties that this mar­ket cre­ates and how we are uniquely posi­tioned to take advan­tage of them." (ital­ics empha­sis added). The report then states, "Con­sis­tent with this direc­tion, the Board pre­sen­ta­tion empha­sized that Lehman's man­age­ment con­sid­ered the cri­sis an oppor­tu­nity to pur­sue a coun­ter­cycli­cal strat­egy.... Man­age­ment informed the Board that the down cycle in sub­prime pre­sented sub­stan­tial oppor­tu­ni­ties for Lehman."

More than once, under a bank­ruptcy restruc­tur­ing, I have seen the very CEOs who ran the com­pany into the ground get­ting 5% of the recap­i­tal­ized com­pany with­out putting up any of their own money. In most occu­pa­tions, there are penal­ties for egre­gious fail­ure but the CEOs of pub­lic finan­cial com­pa­nies are in a league of their own. Many get paid obscene amounts of money for risky and reck­less behav­iour. There is a joke on Wall Street: "Today, Pres­i­dent Obama announced a salary cap of $500,000 for exec­u­tives at banks and com­pa­nies that have received tax­payer bailout money. And the CEOs asked: 'Well, that's $500,000 a week, right?'".

DEBASEMENT OF CURRENCY: Almost all gov­ern­ments whose economies have been adversely affected by the finan­cial cri­sis have been pro­vid­ing all kinds of stim­u­lus funds to min­i­mize the impact of the liq­uid­ity and credit cri­sis on their economies. They are all falling over (com­pet­ing with) one another to see who can debase their cur­ren­cies further.

INFLATION OR DEFLATION: The huge sur­plus of excess capac­ity in almost every sec­tor in the world presents a strong case for defla­tion down the road. But with the explo­sion of gov­ern­ment debt in most of the world, it is hard to believe that gov­ern­ments will let future gen­er­a­tions deal with the enor­mous debt with cur­ren­cies that will have a higher pur­chas­ing power than they have now. His­tor­i­cally, the easy way out for gov­ern­ments has been to inflate their way out of their debt problem.

NON-INVESTMENT AND INVESTMENT GRADE BONDS ARE FULLY PRICED NOW: The his­tor­i­cally high spread between U.S. cor­po­rate debt and U.S. trea­suries nar­rowed in 2009. Three years ago, the spread between U.S. cor­po­rate high-yield debt and U.S. trea­suries was 311 basis points; at Decem­ber 31, 2009 it was 657 basis points, down from its Decem­ber 2008 peak of 1,900 basis points. Three years ago, the spread between U.S. invest­ment grade bonds and U.S.

trea­suries was about 85 basis points; at Decem­ber 31, 2009 it was 162 basis points, down from its Decem­ber 2008 peak of 592 basis points. (Source: JP Morgan)

Given the above, we believe that invest­ment and non-investment grade cor­po­rate bonds are now fully priced.

It is sim­i­lar with equi­ties. Most stocks are now close to being fairly priced and it is harder to find bar­gains. Although we won't likely see the lows that we saw in February/March of 2009, the risks of invest­ing in equi­ties are greater now.

Source: Chou 2009 Annual Report [PDF]

Tags: African Countries, American Economy, Brazil, BRIC, BRICs, Canadian Market, Chou Associates, Country Share, Democracies, Democratic Countries, Dictators, Eye Opener, Folly, Great Depression, India, Laws Of Economics, Letter To Shareholders, Power Of Taxation, Rule Of Law, Russia, Silver Bullet, Sovereign Debt, Sovereign Governments, Stimulus, Third World, Year 1800
Posted in Brazil, Canadian Market, India, Markets, Silver | Comments Off

Have Commodities Outpaced Fundamentals?

Monday, March 29th, 2010

Print this arti­cle | Email this article

Have metal prices and the prices of other com­modi­ties such as oil out­run the under­ly­ing fun­da­men­tals? The sig­nif­i­cant strength of the US dol­lar since Decem­ber last year has capped rises in com­mod­ity prices. How­ever, metal prices con­tinue to be dri­ven largely by Chi­nese demand, with China’s man­u­fac­tur­ing PMI for new export orders and total new orders lead­ing metal prices.

Although still indi­cat­ing expan­sion, the PMI for new export orders had sta­bilised at the higher level, but weak­ened recently, prob­a­bly as a result of the Chi­nese New Year hol­i­day. It remains sub­stan­tially below the highs achieved before March 2008, though. The man­u­fac­tur­ing PMI for new orders approached pre­vi­ous peaks before the hol­i­day affected the readings.

In the near term, it is likely that the Chi­nese author­i­ties’ drive to cool the econ­omy – through var­i­ous mon­e­tary mea­sures such as inter­est rate hikes and increas­ing bank reserve require­ments – is likely to lead to a softer but still expand­ing PMI for new orders. Stock build­ing as mea­sured by China’s man­u­fac­tur­ing PMI for stocks of major inputs is an impor­tant fac­tor in the met­als mar­ket. Although the pur­chas­ing man­agers were quite price sen­si­tive up to May last year – vary­ing their stocks accord­ing to price changes – the sen­si­tiv­ity has been absent since metal prices bot­tomed. The recent aus­ter­ity mea­sures imple­mented by the author­i­ties are likely to lead to some excess inven­to­ries in China find­ing their way back to the mar­ket­place and the pur­chas­ing man­agers again becom­ing more price sen­si­tive. The Baltic Dry Index – a mea­sure of global bulk freight rates – indi­cates that China’s man­u­fac­tur­ing PMI picked up in March.

The risks of invest­ing in com­modi­ties are increas­ing as we move for­ward. The metal mar­kets cur­rently smack of spec­u­la­tion and manip­u­la­tion. Metal stocks on the Lon­don Metal Exchange are cur­rently at lev­els sim­i­lar to those at the height of the global liq­uid­ity cri­sis. No won­der the Com­modi­ties Futures Trad­ing Com­mis­sion (CFTC) has called on Con­gress to impose hard-cap posi­tion lim­its on met­als to address exces­sive con­cen­tra­tions of posi­tions that could lead to the manip­u­la­tion of metal prices.

The ter­mi­na­tion of China’s accom­moda­tive mon­e­tary strat­egy, com­bined with the pub­lic debt malaise in the euro­zone, is likely to reduce the spec­u­la­tive demand for indus­trial met­als, espe­cially in the sec­ond half of this year. Com­mod­ity prices could fall hard and fast should the double-dip sce­nario for the West­ern World become a real­ity, but a weaker US dol­lar may reduce the pain.

The trad­ing range chart below shows that the Reuters/Jeffries CRB Index (267.3) has been trad­ing side­ways since Octo­ber and is at the moment neu­tral to some­what over­sold, being posi­tioned between one (yel­low shad­ing) and two (blue) stan­dard devi­a­tions below its 50-day mov­ing aver­age. Key lev­els to watch are the 200-day line – a mere 1 point away – and the Feb­ru­ary lows (258.6), lev­els that must hold in order for the cycli­cal bull mar­ket to remain intact. As always, I will be keep­ing a close eye on the sit­u­a­tion, espe­cially the new Chi­nese PMI report being released later this week.

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

Tags: Austerity Measures, Baltic Dry Index, Chinese Authorities, Chinese Demand, Chinese New Year, Commodities, Commodity Prices, ETF, Excess Inventories, Export Orders, Freight Rates, Global Liquidity Crisis, Interest Rate Hikes, Investing In Commodities, Liqui, London Metal Exchange, Metal Markets, Metal Stocks, Metals Market, Monetary Measures, Pmi, Price Changes, Purchasing Managers, Speculation
Posted in Commodities, Energy & Natural Resources, Markets | Comments Off

Bill Gross Prefers Stocks Over Bonds

Monday, March 29th, 2010

Email this arti­cle | Print this article

Bill Gross, founder and co-CIO of Pimco, said in an inter­view with CNBC that, all things con­sid­ered, he prefers stocks over bonds in the cur­rent invest­ing climate.

“Let’s sug­gest the econ­omy looks good, that risk assets – whether it’s high-yield bonds or whether it’s stocks – have a decent return rel­a­tive to the poten­tial of declin­ing bond prices. I’ll go with the stock mar­ket,” said Gross.

From CNBC: "While sov­er­eign issuance in coun­tries with stronger economies and lower debt—Gross men­tioned Ger­many and Canada specifically—look bet­ter, other coun­tries such as the US and United King­dom don't offer the same promise.

"That brings up the health care sit­u­a­tion and the $40 tril­lion worth of present value in terms of enti­tle­ments we have in the United States," he said. "We just added in my opin­ion another $500 bil­lion in terms of health care and the mar­kets are begin­ning to look at that suspiciously."

Gross spoke about an hour after a poorly received Trea­sury auc­tion of five-year notes sent US debt prices down sharply and yields jump­ing higher.

With the Fed­eral Reserve exit­ing its pur­chases of mortgage-backed secu­ri­ties, that will make the land­scape even more chal­leng­ing as the gov­ern­ment looks for the funds to pay for health care and other expen­sive enti­tle­ment programs.

"It will be up to us, to the market...to finance the ongo­ing deficit," Gross said. "So we're just going to have to be a lit­tle more cau­tious in sim­ply ascrib­ing an A-plus or B-minus to a bond auc­tion," he said.

That could, at the same time, cre­ate a friend­lier envi­ron­ment for stocks.

"All assets to some extent relate to the same conditions—economic growth, the poten­tial for infla­tion, cen­tral bank pol­icy," he said. "To the extent that stocks are now bask­ing in a growth revival,  more than green shoots, there is a chance that stocks keep going.""

Source: CNBC, March 24, 2010.

Tags: Assets, Bill Gross, Bond Auction, Bond Prices, Canadian Market, Cape Town, Care Situation, Climate, Cnbc, Current, Debt Prices, Decent Return, Economic Growth, Economy, Entitlement Programs, ETF, Federal Reserve, High Yield Bonds, Investing, Investment, Issuance, Mortgage Backed Securities, PIMCO, Postcards, Present Value, Revival, risk, Stock Market, Stocks, Stocks Bonds, Target, Treasury Auction, Trillion
Posted in Canadian Market, Markets | Comments Off

China’s Internet Boom

Sunday, March 28th, 2010

by Frank Holmes, Pres­i­dent & CEO, U.S. Global Investors
March 25, 2010

Lost in the scuf­fle between Google and the Chi­nese gov­ern­ment is how fast China’s Inter­net use is growing.

The total num­ber of Inter­net users in China grew by 86 mil­lion in 2009 to reach 384 mil­lion by year-end.  That’s well more than the entire pop­u­la­tion of the U.S. and Canada com­bined, and a 29 per­cent increase year-over-year.

Of that num­ber, 90 per­cent had broad­band con­nec­tions, accord­ing to the China Inter­net Net­work Infor­ma­tion Cen­ter (CNNIC).

Nearly 30 per­cent of Chi­nese are now Web users, and this sets the stage for explo­sive growth in the years ahead.

Once Inter­net pen­e­tra­tion in the U.S. reached 20 per­cent, it took just six years to get to 60 per­cent. Japan needed only three years to go from 20 per­cent to 40 per­cent, and Brazil went from 20 per­cent pen­e­tra­tion in 2005 to more than 35 per­cent by 2007.

While the high­est pen­e­tra­tion rates sur­round China’s largest cities, the mobile Inter­net is bring­ing the Web to rural and lower-income users. Mobile inter­net has low­ered the cost of entry for consumers—smart phones are cheaper then desktops.

A sur­pris­ing result from CNNIC: more than 45 per­cent of mobile Inter­net usage is from peo­ple with monthly income of 100 yuan ($14.65) or less.

A recent sur­vey reported by McK­in­sey & Co. shows that peo­ple in China’s 60 largest cities spend around 70 per­cent of their leisure time on the Inter­net. Most of this usage is for games, enter­tain­ment and shopping.

On the com­merce side, two of the biggest growth areas were online bank­ing and e-commerce. Users who book travel online jumped 78 per­cent last year. McK­in­sey says a sig­nif­i­cant num­ber of con­sumers ages 18 to 44 won’t pur­chase a prod­uct or ser­vice with­out first research­ing it on the Web.

As the Inter­net con­tin­ues to expand its reach into the lives of Chi­nese peo­ple, keep an eye on how users lever­age the tech­nol­ogy to improve their liv­ing standards.

Dis­clo­sure:

The fol­low­ing secu­ri­ties men­tioned in this post were held by one or more of U.S. Global Investors fam­ily of funds as of 12–31-09: Google Inc.

Tags: Book Travel, Brazil, Broadband Connections, Canadian Market, China, China Internet Network, Chinese Government, Explosive Growth, Frank Holmes, Google, Growth Areas, Internet Boom, Internet Network Information Center, Internet Penetration, Internet Usage, Internet Use, Largest Cities, Mckinsey, Mobile Internet, Network Information Center, Number Of Internet Users, Penetration Rates, U S Global Investors
Posted in Brazil, Canadian Market, Markets | Comments Off

The Health Care Opportunity

Sunday, March 28th, 2010

By John Der­rick, Direc­tor of Research, U.S. Global Investors

The health care over­haul leg­is­la­tion that Pres­i­dent Obama signed into law this week brought about strong opin­ions on both sides of the issue. There’s not much use in revis­it­ing the debate at this point, but a look at the market’s reac­tion could be instructive.

The broad mar­ket rose this week, per­haps glad to put the health care uncer­tain­ties behind it. On the other hand, the ini­tial reac­tion in the health care sec­tor was pos­i­tive, but by the end of the week, the sec­tor was down 1 per­cent. While there were some stock-specific neg­a­tives unre­lated to the leg­is­la­tion, cer­tain groups in the sec­tor fared worse than others.

The managed-care com­pa­nies, such as HMOs, were among the biggest losers – as a group they fell more than 3 per­cent, and sev­eral stocks in that group fell even fur­ther. Because the new law expands cov­er­age to 32 mil­lion cur­rently unin­sured, it may appear to be a pos­i­tive for the insur­ance com­pa­nies, which will have more cus­tomers. The poten­tial down­side, how­ever, is that they may be more costly cus­tomers – such as those with pre-existing con­di­tions – and the law reduced other subsidies.

In the long run, the biggest ben­e­fi­cia­ries may be the hos­pi­tals, as they will have many new pay­ing cus­tomers and a likely reduc­tion in bad debts. The phar­ma­ceu­ti­cal indus­try may also ben­e­fit from an increased cus­tomer base.

Our focus on gov­ern­ment poli­cies and our con­trar­ian ten­den­cies tell us that, after a decade of com­press­ing val­u­a­tions, an oppor­tu­nity may be at hand in health care.

Con­cerns remain that this leg­is­la­tion will com­press mar­gins in the indus­try and poten­tially sti­fle inno­va­tion, but land­mark events such as this week’s bill sign­ing often sig­nal turn­ing points in mar­kets as neg­a­tive sen­ti­ment bot­toms out and then reverses course.

Tags: Bad Debts, Biggest Losers, Broad Market, Costly Customers, Customer Base, Director Of Research, Government Policies, Health Care Concerns, Health Care Sector, Initial Reaction, Insurance Companies, John Derrick, Landmark Events, Negative Sentiment, Obama, Pharmaceutical Industry, Pre Existing Conditions, Strong Opinions, U S Global Investors, Valuations
Posted in Markets | Comments Off

Index Summary and Domestic Equity Market Diary (3/29/2010)

Sunday, March 28th, 2010

Index Sum­mary

• The major mar­ket indices were mixed this week. The Dow Jones Indus­trial Index rose 1.01 per­cent. The S&P 500 Stock Index advanced 0.58 per­cent, while the Nas­daq Com­pos­ite fin­ished 0.87 per­cent higher.
• Barra Growth under­per­formed Barra Value as Barra Value fin­ished 0.87 per­cent higher while Barra Growth gained 0.28 per­cent. The Rus­sell 2000 closed the week with a gain of 0.75 percent.
• The Hang Seng Com­pos­ite fin­ished lower by 1.21 per­cent; Tai­wan was down 0.27 per­cent and the Kospi advanced 0.69 percent.
• The 10-year Trea­sury bond yield closed at 3.85 per­cent, up 20 basis points for the week.

Domes­tic Equity Mar­ket Diary (3/29/2010)

The fig­ure above shows the per­for­mance of each sec­tor in the S&P 500 Index for the week. The best-performing sec­tor was con­sumer dis­cre­tion, up 2.4 per­cent. Other better-performing sec­tors included finan­cials and infor­ma­tion tech­nol­ogy. Under­per­form­ing sec­tors included energy, util­i­ties, and health care.

Within the tele­com ser­vices sec­tor the best-performing stock was Lennar Corp, up 13.6 per­cent. Other better-performing stocks in the sec­tor were Star­wood Hotels, and Har­man International.

Strengths

• The home­build­ing group was a top per­form­ing group for the week, up 7 per­cent, led by Lennar Corp. The com­pany reported a smaller than expected loss in the fourth quar­ter and expects to be prof­itable for all of 2010.
• The best per­form­ing group was con­sumer elec­tron­ics, led by its lone mem­ber Har­man Inter­na­tional. Moody’s changed the out­look of the com­pany to pos­i­tive from neg­a­tive. This impacts approx­i­mately $232 mil­lion of the company’s debt.
• The drug retail group out­per­formed, ris­ing 6.4 per­cent, led by CVS Care­mark. The com­pany sees their acqui­si­tion of Longs Drug stores being accre­tive to earn­ings this year by as much as 10 cents per share.

Weak­nesses

• Two health­care related groups were among the worst per­form­ers as man­aged health and biotech pro­duced losses greater than 3.5 per­cent. Humana Inc. warned that it may have to take charges in 2010 if they lose their Tri­care con­tract in 2011. Gen­zyme was the worst per­form­ing biotech stock on news that the FDA would take enforce­ment action against the com­pany for a series of man­u­fac­tur­ing prob­lems at one their plants.
• The edu­ca­tion group declined 3.7 per­cent, led by Apollo Group. The com­pany will be report­ing earn­ings at the start of next week.
• The inde­pen­dent power pro­duc­ers group under­per­formed, down over 4 per­cent, led by NRG Energy. A bro­ker­age firm removed the stock from its con­vic­tion buy list.

Oppor­tu­ni­ties

• There may be an oppor­tu­nity for gain in M&A (merger & acqui­si­tion) trans­ac­tions in 2010. Cor­po­rate liq­uid­ity is high, thereby pro­vid­ing the means to pur­sue acquisitions.

Threats

• Should investors’ expec­ta­tions for an improv­ing econ­omy not come to fruition on a rea­son­able time frame, it could be a threat to stock prices.
• As gov­ern­ments around the world begin to wind down the mon­e­tary and fis­cal stim­u­lus pro­grams put in place dur­ing the eco­nomic cri­sis, it will likely present a head­wind for stocks.

Tags: 10 Year Treasury, 10 Year Treasury Bond, Accretive, Caremark, Domestic Equity, Dow Jones Industrial, Dow Jones Industrial Index, Harman International, Index Summary, International Strengths, KOSPI, Lennar Corp, Lone Member, Longs Drug Stores, Major Market Indices, Market Diary, Nasdaq Composite, Performing Group, Starwood Hotels, Treasury Bond Yield
Posted in Markets, Outlook | Comments Off

The Economy and Bond Market Diary (3/29/2010)

Sunday, March 28th, 2010

The Econ­omy and Bond Mar­ket Diary (3/29/2010)

Trea­sury bond yields rose this week with long term yields hit­ting the high­est lev­els since last sum­mer. Trea­sury sup­ply con­tin­ues to hit the mar­ket with $118 bil­lion auc­tioned this week.

After show­ing some signs of sta­bi­liza­tion, the hous­ing mar­ket has rolled back over with new home sales hit­ting new record lows. While poor weather has been a fac­tor recently, longer term issues remain such a high unem­ploy­ment and com­pe­ti­tion from foreclosures.

Strengths

• Weekly ini­tial job­less claims fell this week bring­ing the four week aver­age down to the low­est lev­els since Sep­tem­ber 2008.
• Durable goods orders rose 0.5 per­cent and rein­forced the idea of con­tin­ued recov­ery in the man­u­fac­tur­ing sector.
• The euro­zone coun­tries agreed to a back­stop pro­vi­sion to sup­port Greece, which elim­i­nated some of the uncer­tainty sur­round­ing the situation.

Weak­nesses

• Feb­ru­ary new home sales hit new record lows. Exist­ing home sales also declined.
• Portugal’s credit rat­ing was cut, increas­ing con­cerns of Euro stability.
• U.K. retail sales rose 2.1 per­cent in Feb­ru­ary, which was the largest increase since May 2008.

Oppor­tu­ni­ties

• If finan­cial mar­kets are a good mech­a­nism for dis­count­ing the future, the future appears rel­a­tively robust. The mar­kets have been able to shake off bad news rel­a­tively eas­ily recently, prob­a­bly a good sign for the eco­nomic recovery.

Threats

• When gov­ern­ments around the world begin to wind-down the mon­e­tary and fis­cal stim­u­lus pro­grams put in place dur­ing the eco­nomic cri­sis, it will likely present a head­wind for the economy.

Tags: Backstop, Bad News, Bond Market, Durable Goods Orders, Economic Crisis, Economic Recovery, Eurozone Countries, Existing Home Sales, Financial Markets, Fiscal Stimulus, Headwind, Housing Market, Initial Jobless Claims, Manufacturing Sector, Market Diary, Poor Weather, Record Lows, Retail Sales, Term Yields, Treasury Bond Yields
Posted in Markets | Comments Off

Gold Market Diary (3/29/2010)

Sunday, March 28th, 2010

Gold Mar­ket

For the week, spot gold closed at $1107.50 per ounce up $0.50 or 0.05 per­cent. Gold equi­ties, as mea­sured by the XAU Gold & Sil­ver Index fell 2.76 per­cent. The U.S. Trade-Weighted Dol­lar Index gained 1.11 percent.

Strengths

• The deci­sion by the Fed to keep record low inter­est rates has helped keep a floor under gold.
• A story this week high­lighted the record out­flows of cash from money-market funds and con­cluded investors are becom­ing more com­fort­able with tak­ing risk.
• How­ever, another sur­vey reported that despite the S&P 500 ris­ing more than 70 per­cent since its low on March 9 only three out of every ten peo­ple have increased val­ues of their port­fo­lio through­out the last year. Per­haps most of the cash is being used to meet liv­ing expenses and not wealth creation.

Weak­nesses

• The Com­mod­ity Futures Trad­ing Com­mis­sion will soon debate whether there needs to be posi­tion lim­its on met­als such as gold, cop­per, and sil­ver to pre­vent price manip­u­la­tion. Cur­rently, there does not appear to be enough sup­port for such a mea­sure on the commission.
• Ini­tial job­less claims fell 14,000 to 442,000, which is the low­est level in six weeks. Also con­tin­u­ing claims fell to the low­est level since Decem­ber 2008.
• The sales of new homes sur­pris­ingly fell to a record low, rais­ing some ques­tions about the strength of the consumer.

Oppor­tu­ni­ties

• Mar­tin Muren­beeld of Dundee Wealth Eco­nom­ics recently stated, “Sov­er­eign debt prob­lems in the devel­oped economies will be exac­er­bated in the com­ing years by pen­sion and health care costs of retirees, fur­ther­more, and are hugely bull­ish for gold".
• Portugal’s credit rat­ing was low­ered by Fitch this week and fur­ther added to the woes of the euro. The dol­lar has been the short-term ben­e­fi­ciary of this flock to safety but the U.S. has its own prob­lems that will exac­er­bated by fur­ther expan­sion of our enti­tle­ment programs.
• Gold-copper por­phyry deposits are being pur­sued as the next panacea of growth for some of the major gold min­ing com­pa­nies. Unfor­tu­nately, the gold grades are very low and the eco­nom­ics of the min­ing project will depend on what the cop­per price does in the future. The prob­lem is that the cap­i­tal require­ments are often in the $3 to 4 bil­lion range. With cop­per prices being twice as volatile as gold it will be dif­fi­cult to imag­ine that these projects will com­mand a pre­mium valuation.

Threats

• In Car­son City, Nevada a dis­trict court judge has allowed a bal­lot ini­tia­tive to move for­ward that would change tax from “net pro­ceeds” to “gross pro­ceeds” of mines. In states such as Nevada that are search­ing for new sources of rev­enue, this change would have increased the min­ing industry’s tax bill more than 300 per­cent based on 2008 tax receipts.
• If an aid agree­ment is not put into action for Europe, the dol­lar could con­tinue to strengthen in the near term as the Euro decreases, caus­ing gold to look unat­trac­tive to traders.
• Sea­son­ally we are enter­ing a weak phase for gold prices until jew­elry buy­ers return at the end of the sum­mer to replen­ish stocks, how­ever the fragility of our econ­omy prob­a­bly doesn’t give one much rea­son to short gold at this point.

Tags: Bill Gross, Commodity Futures Trading, Commodity Futures Trading Commission, Dollar Index, Dundee Wealth, Futures Trading Commission, Gold, Gold Equities, Gold Market, gold market diary, Gold Mining, gold update, golds, Health Care Costs, Initial Jobless Claims, Low Interest Rates, Market Diary, Metals Copper, Money Market Funds, Porphyry Deposits, Position Limits, Price Manipulation, Silver Index, Sovereign Debt, Spot Gold
Posted in Markets, Silver | Comments Off

Energy and Natural Resources Market Diary (3/29/2010)

Sunday, March 28th, 2010

Energy and Nat­ural Resources Mar­ket Diary (3/29/2010)

The China auto­mo­bile mar­ket has been boom­ing while the rest of the world has strug­gled dur­ing the cri­sis. After an extended period of pro­duc­tion cuts, we should see a bounce in pro­duc­tion in these regions.

Strengths

• U.S. domes­tic steel mill uti­liza­tion increased to 71.1 per­cent for the week end­ing March 20 ver­sus 70.9 per­cent in the pre­vi­ous week. Quar­ter to date uti­liza­tion has aver­aged 67.3 per­cent ver­sus 62.8 per­cent in the 4Q09.
• Fin­ished steel prices con­tinue to rise strongly, with World Steel Dynamics's lat­est Steel Bench­marker bi-weekly price report show­ing increases in all regional prod­uct mar­kets cov­ered – hot-rolled coil, cold-rolled coil, plate and rebar in China, Europe and the U.S. – rang­ing from 7 per­cent to 12 per­cent over the last month. The world export prices for hot-rolled coil is now reported at US$635 per tonne free-on-board port, from less than US$600 per tonne in late February.

Weak­nesses

• Japan’s crude oil imports fell 5.7 per­cent to 17.87 mil­lion kilo­liters in Feb­ru­ary from a year ear­lier, accord­ing to a pre­lim­i­nary trade report released by the finance ministry.
• China’s Feb­ru­ary cop­per imports fell 12 per­cent com­pared with the pre­vi­ous month.

Oppor­tu­ni­ties

• Teck Resources Ltd., the second-largest seaborne exporter of steel­mak­ing coal, said global sup­plies will be crimped this year as Chi­nese imports may be near a 2009 record and exceed 30 mil­lion met­ric tons. “The seaborne mar­ket looks very tight for 2010 and prob­a­bly beyond because it will take some time for the major pro­duc­ers, includ­ing our­selves, to increase pro­duc­tion,” Teck CEO Don Lind­say said. Chi­nese imports of cok­ing coal touched a record 34 mil­lion tons last year, he said.
• Temasek Hold­ings Pte., Singapore’s state-owned invest­ment com­pany, is “fairly bull­ish” about min­ing invest­ments and is seek­ing oppor­tu­ni­ties in Africa, Mon­go­lia and in the rest of the world. The com­pany, which man­ages about S$172 bil­lion ($123 bn) worth of invest­ments, will work with “strate­gic” part­ners, includ­ing com­pa­nies and pri­vate equity investors, Nagi Hamiyeh, man­ag­ing direc­tor of invest­ments, said today in Singapore.
• Chi­nese alu­minum demand is expected to increase by 20 per­cent in 2010 to 17 mil­lion met­ric tons, accord­ing to Chi­nalco vice pres­i­dent Liu Xiangmin.
• China’s molyb­de­num con­sump­tion may grow 13 per­cent to 61,200 tonnes and pro­duc­tion may each 90,000 tonnes accord­ing to China Molyb­de­num Co.
• BHP has announced that its key Hay Point met­al­lur­gi­cal coal ter­mi­nal will be closed for a fur­ther 3 to 6 weeks fol­low­ing dam­age from cyclone Ului. Adding this to the recent sup­ply issues, the met coal mar­ket looks even tighter, with great poten­tial for spot prices to rise strongly in the near term.

Threats

The New York Times reported that the United Mine Work­ers of Amer­ica is call­ing for a boy­cott of BP PLC's gas sta­tions after the oil giant's CEO called it unwise for U.S. pol­i­cy­mak­ers to try to save coal jobs. In an inter­view the CEO said, refer­ring to House cli­mate leg­is­la­tion, “the coal sec­tor was dis­pro­por­tion­ately favored in the first go at this. It's about cre­at­ing jobs. We've got to find a bet­ter way to cre­ate jobs than pre­serv­ing coal jobs.”

Tags: Automobile Market, Chinese Imports, Commodities, commodities update, Crude Oil Imports, Domestic Steel, Don Lindsay, energy, Export Prices, Finance Ministry, Hot Rolled Coil, Kiloliters, Market Diary, Million Metric Tons, Natural Gas, Natural Resources, Product Markets, Regional Product, Steel Dynamics, Steel Mill, Steel Prices, Steelmaking, Temasek Holdings, Will Take Some Time, World Steel Dynamics
Posted in Energy & Natural Resources, Markets, US Stocks | Comments Off

Emerging Markets Diary (3/29/2010)

Sunday, March 28th, 2010

Emerg­ing Mar­kets Diary (3/29/2010)

Strengths

• Malaysia’s cen­tral bank raised its 2010 GDP fore­cast for the coun­try to 4.5 to 5.5 per­cent from its Octo­ber esti­mate of 2 to 3 per­cent, cit­ing recov­er­ing domes­tic demand and exports.
• Bank lend­ing in Brazil in Feb­ru­ary grew 0.8 per­cent month-over-month and 16.8 per­cent year-over-year while the delin­quency ratio eased to 7.2 per­cent from 7.6 percent.
• CPI in South Africa in Feb­ru­ary declined to 5.7 per­cent from 6.2 per­cent in Jan­u­ary, which likely played a role in a deci­sion by the Cen­tral Bank to cut inter­est rates by 50 bps to 6.5 per­cent. In addi­tion, lower-than-expected elec­tric­ity price increases (25 per­cent vs. 45 per­cent which Eskom had pro­posed over next three years) should reduce pres­sure on CPI expectations.
• Russia’s Cen­tral Bank also reduced inter­est rates by 25 bps to 8.25 per­cent, a twelfth cut since April 2009, when the rate was 13 percent.

Weak­nesses

• China focused equity funds expe­ri­enced net out­flows in nine out of the first eleven weeks of 2010, even as emerg­ing mar­ket funds con­tin­ued to draw inflows, accord­ing to EPFR.
• Stan­dard and Poor’s and Fitch expressed con­cerns that a pas­sage of com­pre­hen­sive fis­cal and labor reforms in Mex­ico is unlikely by the end of Pres­i­dent Calderon’s term in 2012.

Oppor­tu­ni­ties

• Mass demand for hous­ing in Indone­sia is being gen­er­ated from the country’s young and expand­ing pop­u­la­tion and greater avail­abil­ity of credit. 44 per­cent of the coun­try remains below 24 years of age, Greater Jakarta adds 1,000 peo­ple every day, and less than 1 per­cent of house­holds are respon­si­ble for a mort­gage, accord­ing to CLSA. This has already trans­lated into ris­ing domes­tic cement con­sump­tion, which climbed 13 per­cent year-over-year in the first two months of 2010, and should con­tinue to ben­e­fit cement pro­duc­ers with expo­sure to the cap­i­tal region.

  

• Chile’s Pres­i­dent, Mr. Sebas­t­ian Pin­era, indi­cated that the state may sell some assets in order to raise funds for recon­struc­tion of the coun­try fol­low­ing a series of earth­quakes that shook the coun­try in recent weeks. It is esti­mated that the earth­quakes caused dam­age of $30 bil­lion to the country’s infra­struc­ture and industry.
• Zain Group of Kuwait approved a sale of its African mobile assets to India’s Bharti Air­tel for $10.7 bil­lion. The com­bined entity will have around 165 mil­lion sub­scribers mak­ing Bharti one of the lead­ing emerg­ing mobile oper­a­tors with ser­vices in Africa and Asia. Com­pe­ti­tion for MTN of South Africa is bound to inten­sify, par­tic­u­larly in Nige­ria and Ghana.

Threats

• Sen­ti­ment might remain low towards Chi­nese steel­mak­ers amid fears of an eco­nomic slow­down as the gov­ern­ment con­tin­ues to with­draw liq­uid­ity. In par­tic­u­lar, Chi­nese steel­mak­ers have been under increas­ing pres­sure from accel­er­at­ing iron ore cost infla­tion since mid-2009 com­pared with their ane­mic prod­uct pric­ing power, with the poten­tial for more pain if the ongo­ing iron ore pric­ing nego­ti­a­tions make new con­tracts more expen­sive than anticipated.

  

• Pres­i­dent Calderon of Mex­ico offi­cially announced a ten­der for a new Riv­iera Maya air­port. Bids are expected to be sub­mit­ted by 15 April with a win­ner to be known by 12 May. Shares of ASUR (oper­a­tor of the Can­cun air­port) are expected to be volatile in the near term as a new air­port will likely lead to diver­sion of traf­fic, although it is not likely to be com­pleted until 2015.

Tags: 24 Years, Bps, Brazil, BRIC, BRICs, Calderon, Cement Consumption, Cement Producers, China, CPI, Delinquency, Electricity Price, Emerging Market Funds, Emerging Markets, Epfr, Equity Funds, GDP, Gdp Forecast, Households, India, Jakarta, Russia, S Central, S Young, Sebastian Pinera, Standard And Poor
Posted in Brazil, India, Infrastructure, Markets | Comments Off

Roundup of global stock market performances (April 22–26)

Sunday, March 28th, 2010

In the absence of the usual weekly “Words from the Wise” review (see Gone A.W.O.L – to Uruguay and San Diego), I this week just pro­vide a sum­mary of the move­ments of major global stock mar­kets for the past week and var­i­ous other mea­sure­ment periods.

With sov­er­eign debt con­cerns tak­ing cen­ter stage, the cycli­cal bull mar­ket that com­menced on March 9, 2009 showed some hes­i­tancy dur­ing the past week. Per­for­mances were mixed as seen from the MSCI World Index gain­ing a mea­ger 0.2% and the MSCI Emerg­ing Mar­kets Index los­ing 0.5%.

Among mature mar­kets, Japan recorded a seven-week win­ning streak and marched to an 18-month peak, ben­e­fit­ting from the weaker yen that boosted exporters.

Emerg­ing mar­kets were mixed with China (-0.3), Hong Kong (-1.5%), Brazil (-0.2%) and Rus­sia (-0.6%) all end­ing in the red. Emerg­ing mar­kets (+0.4%) have under­per­formed mature mar­kets (+2.1%) since the begin­ning of the year, and raises the ques­tion whether these mar­kets (and notably China) could lead global mar­kets down in the same way that emerg­ing mar­kets were the first ones to turn higher at the start of the nascent bull mar­ket. The Shang­hai Com­pos­ite Index is also the only major index trad­ing below its key 200-day mov­ing aver­age, albeit by only 13 points.

Notwith­stand­ing the huge rally since the March lows, only the Chile Stock Mar­ket Gen­eral Index and the Mex­ico Bolsa Index have been able to reclaim their 2007 pre-crisis peaks and are now respec­tively trad­ing 7.1% and 0.9% higher. Israel could be the next coun­try to elim­i­nate its bear mar­ket losses. The Dow Jones Indus­trial Index and the S&P 500 Index still need to rise 30.5% and 34.2% respec­tively to reach their Octo­ber 2007 bull mar­ket peaks.

Among the major US indices, the Dow Jones Trans­porta­tion Index (-0.8%) ended the week under water. The Dow Jones Indus­trial Index, S&P 500 Index and Nas­daq Com­pos­ite Index reg­is­tered a fourth con­sec­u­tive week of gains, although only just.

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

Top per­form­ers among the entire spec­trum of stock mar­kets this week were Turkey (+6.6%), Tan­za­nia (+6.1%), Ukraine (+4.9%), Uganda (+4.8%) and Bangladesh (+3.8%). At the bot­tom end of the per­for­mance rank­ings, coun­tries included Bermuda (-8.6%), Nepal (-2.8%), Cyprus (-2.8%), Jor­dan (-2.7%) and Viet­nam (-2.1%).

Of the 96 stock mar­kets I keep on my radar screen, 63% (last week 64%) recorded gains, 34% (33%) showed losses and 3% (3%) remained unchanged. The per­for­mance map below tells the past week’s mostly bull­ish story.

Emergin­vest world mar­kets heat map

Source: Emergin­vest (Click here to access a com­plete list of global stock mar­ket movements.)

The per­for­mance of the eco­nomic sec­tors of the S&P 500 ended mixed for the week, with six sec­tors clos­ing higher and four lower. Con­sumer Dis­cre­tionary (+2.4%) and Finan­cials (+2.1%) led the pack and Energy (-1.9%), Util­i­ties (-1.7%) and Health Care (-1.1%) formed the rear guard.

Source: US Global Investors – Weekly Investor Alert, March 26, 2010.

Tags: Bear Market, Brazil, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Dow Jones Transportation, Emerging Markets, Global Stock Market, Global Stock Markets, Hesitancy, Index Trading, Major Index, Market Losses, Mature Markets, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Nasdaq Composite Index, Russia, Shanghai Composite Index, Sovereign Debt, Taking Center Stage, Transportation Index
Posted in Brazil, Markets | Comments Off

The Stock Market Barometer: Blowing in the Wind (3/28/10)

Sunday, March 28th, 2010

WEEKLY REPORT (03–28-2010) Blow­ing in the Wind

"You'll notice that Bush never spoke when Cheney was drink­ing water; check it out! — Robin Williams

We are see­ing some inter­est­ing devel­op­ments in the mar­kets so I want to jump right into it and save all the social and polit­i­cal com­men­tary for the end. I would first like to focus on the US dol­lar since it is the hot topic of con­ver­sa­tion in the media, and its price move­ment is sub­ject to a lot of mis­in­ter­pre­ta­tion. The gen­eral line of think­ing espouses a new bull mar­ket for the green­back given the fact that the US econ­omy is on the mend. As you know by now I don't believe the econ­omy has bot­tomed and I cer­tainly don't buy into the idea of a new bull mar­ket for the green­back. Yes, we are expe­ri­enc­ing a reac­tion and it's one of the largest to date since the dol­lar topped in 2001, but that doesn't mean it's a new bull mar­ket. When­ever you want to see the big pic­ture in a mar­ket, it helps to get away from the here and now, and the best way to do that is with his­tor­i­cal weekly or monthly charts. Here I have posted a twenty-year weekly chart and I would like you to take a look at it:

The obvi­ous thing that sticks out is the mas­sive head-and-shoulders for­ma­tion with the neck­line com­ing in at 80.35. This is a for­ma­tion that took the bet­ter part of twenty years to com­plete and included a bull mar­ket top in 2001. Since the top was put in we have seen a sus­tained move down that pro­duced two lower highs (short hor­i­zon­tal blue lines) mixed with reac­tions of 10% or more. Today we are in the midst of a third reac­tion and I am con­vinced that it will also pro­duce another lower high. Recently the US Dol­lar Index moved back above the neck­line but that hap­pened with the pre­vi­ous reac­tion as well so you shouldn't read too much into it. A week ago the US Dol­lar Index also closed above strong resis­tance at 81.32 and closed out the week at 81.60. The dol­lar is not yet over­bought on any chart (daily, weekly, or monthly), but it is close. I sus­pect that some­time within the next week or two the dol­lar will test strong resis­tance at 83.35, it will become extremely over­bought as it does so, and we'll see a top in that area. With that said there is still good resis­tance at 82.41 to over­come and it could also pro­duce a top. Thursday's intra­day high at 82.24 came very close to test­ing the lat­ter sup­port level and I would look for another test this com­ing week.

Why is the dol­lar so strong? I nor­mally don't con­cern myself with the "why" behind a move­ment, but this is an inter­est­ing case. The world econ­omy has been deflat­ing for almost three years and, as a result cen­tral banks around the world have been print­ing obscene amount of fiat cur­ren­cies in an effort to rein­flate the econ­omy. The US Fed­eral Reserve is the leader of the pack when it comes to this print­ing mania. Of course this alone will not pro­duce a rally. What pro­duces a rally is the fact that most debt around the world is denom­i­nated in US dol­lars and defla­tion reduces income, there­fore rais­ing the cost of main­tain­ing that debt in real terms. That's where the demand for dol­lars has been com­ing from and it has off­set the sig­nif­i­cant decline in the for­eign appetite for US debt. Of course the world goes about mak­ing adjust­ments, and that is what is hap­pen­ing now. They'll cut costs, reduce debt, cut back on the con­sump­tion of raw mate­ri­als, and when they are done the dol­lar will roll over and fall. My guess is that we are almost done with this adjust­ment process.

Although the dol­lar has been on the rise and cur­ren­cies like the Euro has been taken out to the wood­shed, I would like to draw your atten­tion to an inter­est­ing phe­nom­e­non:

The Swiss Franc has given up very lit­tle ground and both the pri­mary trend as well as the sec­ondary trend is headed higher. The rea­son for this is that in the final analy­sis the Swiss will always pro­tect their prin­ci­pal busi­ness, money! The Swiss have been in the money busi­ness for four hun­dred years and will remain in the money busi­ness for the fore­see­able future. That means they most main­tain a strong cur­rency in spite of all the rhetoric to the con­trary. Prob­lems within the EU with Greece, Por­tu­gal, Ire­land, and Spain, as well as the stag­ger­ing debt load in the US, will con­tinue to drive investors to the Franc for a long time. That's why I've always rec­om­mended it to our clients.

Per­haps the most inter­est­ing mar­ket, and cer­tainly the most mis­un­der­stood mar­ket is the gold mar­ket. The mis­un­der­stand­ing is due to a blend of igno­rance and emo­tion, and it causes investors to buy high and sell low. This type of behav­ior has always dom­i­nated the gold mar­ket because it is the only real store of value that exists in the world today. Below I have posted a six-year weekly chart and I would like you to take a look at it:

Aside from the obvi­ous that we are in a bull mar­ket, there is one very impor­tant fea­ture to grasp, and that is the fact that gold is under­go­ing a period of con­sol­i­da­tion right now. We have seen this before, I have high­lighted three such peri­ods on this par­tic­u­lar chart, and they all end the same way, with an upside break­out and the gold price mov­ing con­sid­er­ably higher.

Most ana­lysts are inex­pe­ri­enced when it comes to gold and they miss this aspect of the yel­low metal's con­duct. Actu­ally since the bull mar­ket began back in 2001 we have seen five such peri­ods of con­sol­i­da­tion, and they should be appre­ci­ated for what they are, a sig­nal of higher prices to come. The cur­rent con­sol­i­da­tion is occur­ring within a range that stretches from 1,048.90 on up to 1,148.70 and is slowly shrink­ing, another fea­ture that occurred in all of the pre­vi­ous con­sol­i­da­tions. Unfor­tu­nately, most investors mis­in­ter­pret this behav­ior as a sign of weak­ness, and hav­ing bought at higher prices, they bail out just when they should have been buying.

That's the inher­ent sadis­tic beauty of a gold bull mar­ket, you know it's a bull mar­ket, you know the price is going higher, and yet you lose money! In the gold pits human emo­tions play on investors like no other mar­ket on earth. Everybody's in for the long run and yet every­body is upside down.

On Fri­day the spot price for the yel­low metal closed at 1,107.10 and that was a gain of thirty cents for the week. Yet if my e-mails are any indi­ca­tion, you would have thought that the gold price had fallen through the floor and gold bugs were being force fed to hun­gry lions. I warned many of you months ago that volatil­ity would increase and that is exactly what we are see­ing. As for the imme­di­ate future that has so many investors cap­ti­vated, I wouldn't be the least bit sur­prised to see the yel­low metal fall down to the 1,048.90 area one more time before turn­ing back up for good and that is reflected in the fol­low­ing Point & Fig­ure chart:

You can see a bear­ish price tar­get of 1,040.00 and that ties in nicely to the sup­port I men­tioned ear­lier. What hap­pens if sup­port at 1,048.90 fails to hold? Then we more than likely fall down to sup­port at 925.00 which is the bot­tom band of the ascend­ing pri­mary trend, but if his­tory repeats itself as it has on four pre­vi­ous occa­sions, gold will hold and head much higher. I will even go so far as to say that we'll see it start the move higher in April.

Now let's turn our atten­tion to the bond mar­ket as this week investors decided that US debt is not such a good deal. There were two sep­a­rate auc­tions this week that went poorly to say the least and that drove inter­est rates to the high­est level since December:

Like so many other mar­kets, we can see the for­ma­tion of a large head-and-shoulders pat­tern over a long period of time. Over the last two weeks the bond mar­ket sent an omi­nous sig­nal as it broke down below the neck­line and it hasn't looked back. Most peo­ple fail to under­stand the con­se­quences of such a move as higher rates mean that investors see increased risk in hold­ing US debt and it increases the cost of doing business/servicing debt. This comes at a time when the econ­omy teeters on the edge of a defla­tion­ary abyss and higher rates are just the ticket to push it over the edge. For peo­ple who are indebted, the ris­ing dol­lar together with the ris­ing inter­est rate is a dou­ble whammy that most will not recover from.

That just leaves us with stocks. The Dow con­tin­ues in a liq­uid­ity drenched world of its own and that is the pri­mary rea­son behind the sharp grind­ing move higher shown in the fol­low­ing chart:

The Dow is climb­ing at a greater than 45° angle and that is always dan­ger­ous as the slight­est cor­rec­tion can drive it below the bot­tom band of the ascend­ing trend line. You can see that in spite of a small gain on Fri­day, the Dow barely closed above the line. You can also see that the Dow is extremely over­bought and yet the RSI and MACD are still pointed higher. Only the his­togram is declin­ing. This last week we saw the Dow climb above good resis­tance at 10,817 and it really hasn't fal­tered although

it did fail to hold on to good gains from early morn­ing ral­lies on both Thurs­day and Fri­day. The ques­tion as to how high the Dow can go is a good one as there is no fur­ther Fibonacci resis­tance until 11,245, and this cor­re­sponds nicely with the 11,250 price tar­get from the pre­ced­ing Point & Fig­ure chart.

Per­son­ally I think the Dow is to be avoided at all costs. For those of you who bought the Dow on the major buy sig­nal two weeks ago, I would think seri­ously about tak­ing prof­its at the next new intra­day high. With the Dow now sport­ing a price/earnings ratio of 20, and an aver­age yield of 2.6%, it's about as expen­sive as it's been in a long time. Fur­ther­more vol­ume has not improved telling me that the large investors are still sit­ting on the side­lines. On the other hand there is no tech­ni­cal jus­ti­fi­ca­tion to sell the mar­ket short so all you can do is sit on the side­lines, watch, and wait. We are on the verge of another earn­ings sea­son and so far prof­its are the result of cost cut­ting rather than increased sales. I've been around long enough to know that if you cut too deeply into your cost struc­ture sales will suf­fer, and I believe that's where we're at right now. I sus­pect prof­its will dis­ap­point and that has yet to be priced in. As usual, patience is required.

In con­clu­sion we con­tinue to be force fed the notion that things are get­ting bet­ter in the United States. Unfor­tu­nately, unem­ploy­ment and hous­ing do not reflect the improve­ment and since most Amer­i­cans don't have much else, they're mired in the quick­sand of debt and sink­ing deeper with each pass­ing month. New home sales hit an all-time low in Feb­ru­ary while inven­tory increased to a 9.2 month sup­ply. This is not a pat­tern that is con–

sis­tent with the idea of an expand­ing econ­omy. Mean­while real M-3 con­tin­ues to con­tract and the signs of a fur­ther slow­down are every­where if one only cares to look.

This week Obama's health care pro­gram was passed by Con­gress and will serve to exac­er­bate the prob­lems, and the debt in the US. Oblig­ing mil­lions of Amer­i­cans to accept a pro­gram they can't afford and won't help them will only cre­ate social ill will. In the end the Obama plan will widen the deficit by tril­lions of dol­lars and will cost lives as an inef­fi­cient gov­ern­ment loses patients in bureau­cratic red tape. Right now every­body is being lulled to sleep by the tag team of a strong dol­lar and a strong Dow, but that is just so much sand in the eyes of the bear. Investors will find out the hard way that there it is not any dif­fer­ent this time around. There is no new par­a­digm and his­tory will repeat itself! As usual the aver­age man on the street will learn this the hard way.

team@thestockmarketbarometer.com

March 28, 2010

Tags: Big Picture, Blowing In The Wind, Cheney, Drinking Water, Economy, Greenback, Head And Shoulders, Head Shoulders, Hot Topic, Massive Head, Midst, Misinterpretation, Move Down, Neckline, Political Commentary, Resistance, Robin Williams, Stock Market Barometer, Twenty Years, Us Dollar Index, Wind 3
Posted in Markets | Comments Off

Howard Marks: "I'd Rather Be Wrong"

Sunday, March 28th, 2010

This arti­cle is a guest con­tri­bu­tion by Howard Marks, Oak­tree Cap­i­tal.

I'd Rather Be Wrong

Today’s posi­tions seem unusu­ally unyield­ing.  The Repub­li­cans’ con­ser­v­a­tive base demands adher­ence to the no-tax pledge, while lib­eral Democ­rats demand that their rep­re­sen­ta­tives pre­vent cuts in spend­ing for domes­tic pro­grams. These hard­ened (and polar) posi­tions greatly nar­row the pos­si­ble grounds for problem-solving.

Just a few weeks ago, I pub­lished “Tell Me I’m Wrong,” my lat­est list of things in the invest­ment envi­ron­ment that I find worth wor­ry­ing about.  I’m going to devote a few pages here – I promise this’ll be the short­est memo in years – to a point I touched on in “What Wor­ries Me” (August 28, 2008) but omit­ted from the more recent piece.

This memo will be about one of the inar­guably most depress­ing top­ics of our time: the seem­ing inabil­ity of gov­ern­ments and politi­cians to solve – or even tackle – the finan­cial prob­lems we face. Here’s the sit­u­a­tion in Washington:

• Many of our most sweep­ing finan­cial prob­lems, such as deficits, national debt, health­care costs, Social Secu­rity and Medicare, are long-term problems.
• It’s impor­tant that we tackle them early, since lim­it­ing their fur­ther growth can reduce the even­tual cost and dif­fi­culty of fix­ing them.
• But the process of solv­ing them will be unpleas­ant in the short term, entail­ing bad-tasting med­i­cine, while the ben­e­fits will only be seen in the long term, when today’s politi­cians will have left the stage.
• Finally, most politi­cians’ main con­cern seems to be get­ting them­selves and other mem­bers of their party elected.  Vot­ing for short-term pain in order to solve long-term prob­lems is gen­er­ally viewed as the wrong way to go about that.

This memo is inspired by two excel­lent news­pa­per arti­cles that appeared within the last month: “Party Grid­lock Feeds New Fear of a Debt Cri­sis,” by Jackie Calmes (The New York Times, Feb­ru­ary 17)[*] and “Per­ils of the Cal­i­for­nia Model” by David Wes­sel (The Wall Street Jour­nal, March 4).[†] Indi­cat­ing their impor­tance, The Times piece ran in the upper right-hand cor­ner of the front page, always the place for the top story of the day, and the Jour­nal story was car­ried on page A2.  I’ve included links below in the hope they’ll increase your like­li­hood of read­ing them.  As Calmes wrote in The Times (in both cases below, empha­sis added):

After decades of warn­ings that bud­get profli­gacy, esca­lat­ing health care costs and an aging pop­u­la­tion would lead to a day of fis­cal reck­on­ing, econ­o­mists and the nation’s for­eign cred­i­tors say that moment is approach­ing faster than expected, has­tened by a deep reces­sion that cost tril­lions of dol­lars in fore­gone tax rev­enues and higher spend­ing for safety-net programs.

Yet rarely has the polit­i­cal sys­tem seemed more polar­ized and less able to solve big prob­lems that involve trust, tough choices and lit­tle or no short– term gain. The main urgency for both par­ties seems to be about pin­ning blame on the other, before November’s elec­tions, for bud­get deficits now aver­ag­ing $1 tril­lion a year, the largest since World War II rel­a­tive to the size of the economy.

Two weeks later, Wes­sel put it this way in The Jour­nal:

The stale­mate over health-care leg­is­la­tion, despite wide­spread acknowl­edg­ment that the sta­tus quo is unsus­tain­able, under­scores the inabil­ity of the polit­i­cal sys­tem to cope with com­plex, long-term fis­cal issues. . . .

Today, the deficits pro­jected are big­ger than ever, baby boomers are begin­ning to retire, health-care costs keep ris­ing and, surely, we’re closer to the day when Asian gov­ern­ments grow reluc­tant to lend ever-greater sums to the U.S. Trea­sury at low inter­est rates.

The Con­gres­sional Bud­get Office projects cur­rent poli­cies would take the deficit from today’s 10% of gross domes­tic prod­uct to over 20% by 2020 and over 40% by 2080.  Yet today’s pol­i­tics appear more toxic, and the ranks of con­gres­sional lead­ers with the skill and desire to fash­ion com­pro­mises instead of talk­ing points are depleted.

Here we have remark­ably sim­i­lar themes voiced in what some would call “a Demo­c­rat news­pa­per” and in a stal­wart of the pro-business Repub­li­can estab­lish­ment.  Both arti­cles com­plain that the cur­rent trends in pol­i­tics reduce the like­li­hood that major prob­lems will be tack­led and solved . . . a rare exam­ple of agree­ment across the aisle.

That brings me to the sub­ject of one of today’s great­est stum­bling blocks, the absence of that elu­sive ideal: bipar­ti­san­ship. Let’s dis­cuss this issue in prin­ci­ple.  It’s likely that the “ins” always think the fact that vot­ers gave them con­trol means they should mostly get their way, and that “bipar­ti­san­ship” con­sists of the “outs” going along with them.  The outs, on the other hand, don’t take the elec­tion results to mean the minor­ity has no rights, and they feel per­fectly within their rights to use Congress’s rules and processes to fight for their point of view (which, on us-versus-them issues, equates to thwart­ing the efforts of the ins).

The Times arti­cle points out iron­i­cally that when con­trol of gov­ern­ment is divided between the two par­ties, they both feel some respon­si­bil­ity for solv­ing prob­lems, while today, with full con­trol seem­ingly in the hands of the Democ­rats, the Repub­li­cans are free to view their only role as dis­sent­ing and obstruct­ing.  And as the party in con­trol, the Democ­rats evi­dently feel no oblig­a­tion to yield on their positions.

Frankly, I wouldn’t be so unhappy if I were sure today’s bat­tles were being fought over prin­ci­ples.  What wor­ries me most is the appear­ance that, instead, they’re being fought for per­sonal and polit­i­cal advan­tage and to win elections.

Today I think few leg­is­la­tors from either party will vote for any­thing that would let mem­bers of the other party claim to have accom­plished some­thing.  That may be an exag­ger­a­tion, but I think it’s more true than false.  And I think that’s behind the recent deci­sions by a num­ber of senior leg­is­la­tors not to run for re-election.  I’ve had the priv­i­lege of get­ting to know Byron Dor­gan, the sen­a­tor from North Dakota, and I have no trou­ble believ­ing that was behind his deci­sion.  We’ve spo­ken about his frus­tra­tion with the con­tentious envi­ron­ment in Wash­ing­ton.  More recently, Evan Bayh of Indi­ana also said he wouldn’t seek another term in the Sen­ate because it’s impos­si­ble to get any­thing done in dys­func­tional Wash­ing­ton.  Here’s how he put it in a Feb­ru­ary 21 Op-Ed piece in The Times:

There are many causes for the dys­func­tion: stri­dent par­ti­san­ship, unyield­ing ide­ol­ogy, a cor­ro­sive sys­tem of cam­paign financ­ing, ger­ry­man­der­ing of House dis­tricts, end­less fil­i­busters, holds on exec­u­tive appointees in the Sen­ate, dwin­dling social inter­ac­tion between sen­a­tors of oppos­ing par­ties and a cau­cus sys­tem that pro­motes party unity at the expense of bipar­ti­san consensus.

Today’s posi­tions seem unusu­ally unyield­ing.  The Repub­li­cans’ con­ser­v­a­tive base demands adher­ence to the no-tax pledge, while lib­eral Democ­rats demand that their rep­re­sen­ta­tives pre­vent cuts in spend­ing for domes­tic pro­grams. These hard­ened (and polar) posi­tions greatly nar­row the pos­si­ble grounds for problem-solving.

Read the whole arti­cle here.

Tags: Adherence, Calmes, Debt Crisis, February 17, Gridlock, India, Investment Environment, Liberal Democrats, Medicare, National Debt, New York Times, Oaktree Capital, Perils, Politicians, Republicans, Seeming Inability, Social Security, Social Security And Medicare, Tax Pledge, Topics Of Our Time, Wrong Way
Posted in India, Markets | Comments Off

Another Step Toward Gender Equality in India

Sunday, March 28th, 2010

Email this arti­cle | Print this article

Women in New Delhi rally for rights

By Sunil Asnani, Research Ana­lyst, Matthews Inter­na­tional Cap­i­tal Man­age­ment, LLC

Week Ended: March 26, 2010

India’s upper house of par­lia­ment recently sup­ported a his­toric bill that would reserve one-third of its leg­isla­tive seats for women. The pass­ing of this con­tentious bill is an early step in the process of amend­ing the country’s constitution.

The bill, which had been stalled for over a decade by polit­i­cal oppo­nents on var­i­ous grounds, now requires lower house (Lok Sabha) and state leg­is­la­ture approval before it can become law. Its pas­sage in the upper house marks a his­toric event in the polit­i­cal sphere as it seeks to empower women to actively take part in India’s most crit­i­cal deci­sions by reserv­ing national and state gov­ern­men­tal seats on a rota­tional basis for 15 years. Once passed, India’s top leg­isla­tive bod­ies would have par­tic­i­pa­tion by more women than even the United States, which claims 17% par­tic­i­pa­tion by women in Congress.

Though India’s Con­sti­tu­tion is quite pro­gres­sive when it comes to gen­der issues, Indian women still face inequal­ity in many areas. Fewer women than men receive proper school­ing and nutri­tion, and women suf­fer from the ills of fetal homi­cide and infan­ti­cide. They are also sub­jected to vio­lence, and even homi­cide, related to dowry disputes.

While there is some cor­re­la­tion between gen­der equal­ity and eco­nomic devel­op­ment, it is inter­est­ing to com­pare the gen­der issues preva­lent in India and China, which have adopted dif­fer­ent paths to pros­per­ity. China seems to have engaged more women, who make up nearly half its work­force, com­pared to India, where women make up about a quar­ter of the work­force. How­ever, China also requires women to retire five years ear­lier than men, unlike India, which does not impose gen­der dis­crim­i­na­tion on a pol­icy level (with the excep­tion of the armed forces). On the polit­i­cal front, about one-fifth of China’s par­lia­ment is com­prised of women, com­pared to about
one-tenth in India’s case, but the real seat of power in China lies within the Com­mu­nist party, whose top lead­er­ship con­sists of an all-male rul­ing body. China’s one-child policy—designed to rein in pop­u­la­tion growth—freed up many women from hav­ing to care for a large fam­ily, but the pol­icy has had the effect of dis­tort­ing the ratio of male-to-female births as there appears to be pres­sure to pro­duce male heirs. No won­der more than 118 Chi­nese boys are born for every 100 Chi­nese girls. The aver­age for most indus­tri­al­ized economies is 107 boys for every 100 girls. India’s gen­der ratio at birth is slightly less tilted than China’s, but cer­tainly not a cause of pride. The male child con­tin­ues to bring more cel­e­bra­tion than do lit­tle girls.

India has a long way to go before it can claim gen­der equal­ity suc­cess, but plac­ing more women at the top of the polit­i­cal chain should be instru­men­tal in fur­ther­ing equal­ity in other aspects of Indian society.

Sunil Asnani
Research Ana­lyst
Matthews Inter­na­tional Cap­i­tal Man­age­ment, LLC

Tags: Capital Management Llc, Contentious Bill, Critical Decisions, Different Paths, Dowry, Gender Discrimination, Gender Equality, House Of Parliament, India, India Women, Indian Women, Legislative Bodies, Legislative Seats, Lok Sabha, Matthews International, One Fifth, Political Opponents, Political Sphere, Research Analyst, Rotational Basis, Upper House Of Parliament, Week Ended March
Posted in India, Markets | Comments Off