Pesticide in Your Toothpaste,
and other Weekend Reads

Friday, April 30th, 2010

Here are this weekend's read­ing diver­sions. Oh, the things we take for granted... What are these chem­i­cals exactly that we're putting into our bod­ies day after day, with­out ever ask­ing or won­der­ing, "What is that?"

Have a great weekend!

7 things you should say in an inter­view

Dur­ing the inter­view process, you want to high­light as many of your strengths as pos­si­ble. An easy way to do this is by slip­ping a few sim­ple phrases into your next job inter­view. Here are seven things you should say in an interview.

Why We Need to Limit Salt in Pack­aged Foods

If you were hav­ing lunch at a restau­rant, black bean soup could be the health­i­est thing on the menu.

Pes­ti­cide in Your Toothpaste?

While many of these prod­ucts are diluted in tooth­paste form, and mixed with water, they are still irri­tants through pro­longed usage. For exam­ple, exer­cise cau­tion if your tooth­paste con­tains Sodium Lau­ryl Sul­fate (SLS).

Erec­tile Dys­func­tion: A Bless­ing in Disguise

Sev­eral stud­ies have shown that men with ED have a sig­nif­i­cantly higher risk of car­dio­vas­cu­lar dis­ease — heart attacks and strokes

Acid Reflux: The Truth Behind Heartburn

Dis­play­ing a bot­tle of acid-lowering med­i­cine sur­rounded by bot­tles of hot sauce and chicken wings only encour­ages you to indulge in tempt­ing food, then take a pill to solve the problem.

How To Say I Love You

The trick is to under­stand your true feel­ings and what those feel­ings actu­ally mean to you.

The Elder­car­ing Chal­lenge, Car­ing for a Dif­fi­cult Parent

"You're not a bad daugh­ter," I told my patient, a grown woman with chil­dren of her own.

10 Foods for Healthy Eyes

You need to start with a base of core nutri­tion, but by adding a few eye healthy foods to that base, you may be able to see improve­ments in your eye health. Here's a list of ten dif­fer­ent foods that can help to pre­serve or even improve your vision.

5-Minute Colon Can­cer Test Could Save Thousands

The test involves hav­ing a pen-sized tube inserted into the colon so doc­tors can iden­tify and remove small polyps.

Tags: Black Bean Soup, Cancer Test, Chicken Wings, Colon Cancer, Could Save Thousands, Different Foods, Diversions, Exercise Caution, Eye Health, Grown Woman, Healthy Foods, Heart Attacks, Hot Sauce, Job Interview, Pesticide, Risk Of Cardiovascular Disease, Sodium Lauryl, Tempting Food, Toothpaste, True Feelings
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10 Things You Don’t Know (or were misinformed) About the GS Case

Friday, April 30th, 2010

Tags: Bad Ass, Barry Ritholtz The Big Picture, Billionaire, Criminal Case, Crosshairs, Dismay, Elses, Exceptional Service, Gold, Guilty Mind, Letter Of The Law, Mass Murderers, Material Misrepresentation, Mens Rea, No Brainer, Real Deal, Risk Of Life, Robert Khuzami, Rule 10b, Sec Enforcement, Voluntary Risk
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Tracking China's Deals

Thursday, April 29th, 2010

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This arti­cle is guest con­tri­bu­tion by Frank Holmes, U.S. Global Investors.

While the rest of the world suf­fered through its worst finan­cial cri­sis in a half cen­tury, China went shop­ping. Since 2005, China has made 185 deals worth $100 mil­lion or more, total­ing more than $222 billion.

The largest of these deals was the $12.8 bil­lion joint ven­ture between Chalco and Alcoa made to pur­chase 12 per­cent of Rio Tinto back in 2008. This deal was struck in Aus­tralia which has been China’s most pop­u­lar des­ti­na­tion both in terms of quan­tity and dol­lar amount.

Indica­tive of the large future the Chi­nese gov­ern­ment has in store for its coun­try, the most pop­u­lar sec­tors for these deals have been met­als and energy, respectively.

Forbes just pub­lished an inter­est­ing inter­ac­tive map based on data from the Her­itage Foun­da­tion detail­ing these transactions.

click for larger image

As you view the pre­sen­ta­tion, pay spe­cial atten­tion to how the pace picks up. By the sec­ond half of 2009, China is aver­ag­ing more than seven $100 mil­lion deals a month.

You can check out the full inter­ac­tive ver­sion at Forbes.com

Tags: 100 Million, Alcoa, Chalco, China, Chinese Government, Financial Crisis, Forbes, Frank Holmes, Heritage Foundation, Interactive Map, Interactive Version, Joint Venture, Metals, Pace, Rest Of The World, Rio Tinto, Second Half, Sectors, Shopping, Tracking Email, U S Global Investors
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Canada: Goodbye Old Friend — An American Perspective

Thursday, April 29th, 2010

This arti­cle is a guest con­tri­bu­tion by Richard Thies, North­ern  Trust.

April 20, 2010

There comes a time in every man's life when he must say good­bye to old friends. This process can be dif­fi­cult, but some­times your old friends are noth­ing but a bad influ­ence. The excep­tion­ally accom­moda­tive mon­e­tary pol­icy shared by the US and Canada has become a bad influ­ence on the Cana­di­ans. When the Fed said it was going to 'keep rates low for an extended period,' the Bank of Canada (BOC) enacted a 'con­di­tional com­mit­ment' to do the same through Q2 2010. But as often hap­pens, the two friends drifted apart and with each pass­ing data release it became clear that the Cana­di­ans really were no longer in the same boat as the US. This morn­ing, the BOC paved the exit-road by end­ing their con­di­tional com­mit­ment to keep rates at 0.25%, set­ting the stage for a June hike of the overnight rate.

Bar­ring a major sur­prise, Canada will thereby become the first G7 coun­try to begin its tight­en­ing cycle. The main fac­tors influ­enc­ing their deci­sion appear to have been the heady rebound of the hous­ing mar­ket and recent head­line infla­tion num­bers (Charts 2 and 3) as well as excep­tional fis­cal stim­u­lus unex­pect­edly spilling over into the early part of this year, fur­ther fuel­ing eco­nomic activ­ity. Despite these rea­sons, it is not with­out some reser­va­tion that the BOC waves good­bye to the Fed, on what is likely to be a steadily widen­ing rate spread between the two nations — the spread will likely be around 125 bps by the end of the year. The per­sis­tent strength of the C$ is a prob­lem for Canada's large export sec­tor and the tight­en­ing will exac­er­bate this issue, fur­ther impair­ing US con­sump­tion of Cana­dian goods (though it is good news for upstate New York shop own­ers). Also, the Cana­dian econ­omy, while ben­e­fit­ing from com­mod­ity demand in emerg­ing mar­kets is still reliant on a rebound in the rest of the indus­tri­al­ized world. In spite of the con­tin­ued drags, the BOC expects the econ­omy to return to full capac­ity by Q2 2010 and to expe­ri­ence growth of 3.7% this year, com­pared to our esti­mate of a 2.8% expan­sion in the US. So, good­bye old friend, we'll see you on the exit road some­time next year.

Tags: American Perspective, Bad Influence, Bank Of Canada, Bps, Canadian Economy, Canadian Market, Conditional Commitment, Economic Activity, Emerging Markets, Exit Road, Export Sector, Fiscal Stimulus, G7 Country, Goodbye Old Friend, Headline Inflation, Housing Market, Inflation Numbers, Northern Trust, Old Friends, Overnight Rate, Thies, Two Friends
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Declining Bank Loans – Write-Downs or Pay-Downs? (Paul Kasriel)

Thursday, April 29th, 2010

This arti­cle is a guest con­tri­bu­tion by Paul Kas­riel, Chief Econ­o­mist, North­ern Trust.

April 29, 2010

We men­tioned in our April 2010 U.S. Eco­nomic and Inter­est Rate Out­look [It's Been A While] that the ongo­ing con­trac­tion in com­mer­cial bank lend­ing was an impor­tant fac­tor curb­ing our enthu­si­asm about near-term growth in U.S. aggre­gate demand. But we did acknowl­edge that our lack of opti­mism might be mis­placed if the cause of the con­tin­ued con­trac­tion in bank lend­ing was due more to write-downs of loans gone sour rather than of pay-downs of loans. We argued that if bank loans were falling because the dol­lar amount of write-downs exceeded the dol­lar amount of new loans being granted, the write-downs were imma­te­r­ial with respect to new spend­ing. The spend­ing with respect to the bank loans now being writ­ten down occurred in the past, when the loans were orig­i­nally granted. If, how­ever, bank loans were now falling because the dol­lar amount of pay-downs exceeded the dol­lar amount of new loans being granted, then this would have neg­a­tive impli­ca­tions for near-term aggre­gate demand. The enti­ties pay­ing down their debt would be cut­ting back on their cur­rent spending.

When we wrote that April out­look, we did not know how to deter­mine whether write-downs or pay-downs were dom­i­nat­ing the behav­ior of bank loans. One of our read­ers, Jim Fick­ett, who pub­lishes an invest­ment com­men­tary called "ClearOn­Money", showed us how to make the dis­tinc­tion. Fick­ett pointed out to us that, by definition:

$ change in bank loans = $ amount of new loans — $ amount of pay-downs — $ amount of write-downs.
Although there are no data on pay-downs, there are Fed­eral Reserve data on loan charge-offs (i.e., write-downs.).

If the terms of the iden­tity are re-arranged, we find that:
(2) $ change in bank loans + $ amount of write-downs =
$ amount of new loans – $ amount of pay-downs.

So, if the sum of the dol­lar change in bank loans/leases plus the dol­lar amount of charge-offs, i.e., the left-hand side of iden­tity (2), is neg­a­tive, then, by def­i­n­i­tion, the dif­fer­ence between the dol­lar amount of new loans granted minus the dol­lar amount of pay-downs, i.e., the right– hand side of iden­tity (2), must also be neg­a­tive. And if this is the case, then the dol­lar amount of pay-downs must exceed the dol­lar amount of new loans granted.

Let’s go to the data. Chart 1 shows the quar­terly dol­lar amount of net charge-offs on com­mer­cial bank loans/leases and the quar­terly dol­lar change in com­mer­cial bank loans/leases. In Q4:2009, net charge-offs totaled $49,363 mil­lion and bank loans/leases con­tracted by $62,321 mil­lion. In Chart 2, the dol­lar amount of net charge-offs is added to the dol­lar change in bank loans/leases, which is the left-hand side of iden­tity (2). In Q4:2009, this sum was minus $12,958 mil­lion. From iden­tity (2), this also means that the dol­lar amount of loan pay-downs exceeded the dol­lar amount of new loans granted by $12, 958 million.

Chart 3 shows the sum of the dol­lar change in bank loans/leases plus the dol­lar amount of net charge-offs on a four quar­ter mov­ing total basis. In the four quar­ters ended Q4:2009, the sum of the change in bank loans/leases plus net charge-offs was minus $205,135 mil­lion. Thus, accord­ing to iden­tity (2), the amount of pay-downs exceeded the amount of new loans granted by $205,135 million.

The upshot of all this is that the record decline in com­mer­cial bank loans/leases that the U.S. expe­ri­enced in 2009 was dom­i­nated by pay-downs of loans rather than write-offs. Pay-downs have neg­a­tive impli­ca­tions for new aggre­gate demand whereas write-downs are irrel­e­vant (at least directly) with regard to new aggre­gate demand. Write-downs do have indi­rect neg­a­tive impli­ca­tions for new aggre­gate demand to the degree that write-downs result in the reduc­tion of bank cap­i­tal. The decline in cap­i­tal lim­its the abil­ity of banks to cre­ate new credit. This might explain why banks allowed their out­stand­ing loan bal­ances to con­tract net of write­downs. The con­tin­ued con­trac­tion in com­mer­cial bank loan/lease bal­ances is cause for cau­tion with regard to the near-term growth in eco­nomic activity.

Paul Kas­riel is the recip­i­ent of the 2006 Lawrence R. Klein Award for Blue Chip Fore­cast­ing Accuracy

The opin­ions expressed herein are those of the author and do not nec­es­sar­ily rep­re­sent the views of The North­ern Trust Com­pany. The North­ern Trust Com­pany does not war­rant the accu­racy or com­plete­ness of infor­ma­tion con­tained herein, such infor­ma­tion is sub­ject to change and is not intended to influ­ence your invest­ment decisions.

© North­ern Trust, 2010

Tags: Aggregate Demand, April 29, Bank Loans, Charge Offs, Chief Economist, Contraction, Distinction, Dollar Bank, Dollar Change, Entities, Federal Reserve, Federal Reserve Data, Interest Rate Outlook, Investment Commentary, Leases, Negative Implications, Northern Trust, Optimism, Paul Kasriel, Respect
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John Hussman: Looking Back, Looking Forward

Thursday, April 29th, 2010

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This arti­cle is a guest con­tri­bu­tion by John Huss­man, Huss­man Funds.

As of last week, our most com­pre­hen­sive mea­sure of mar­ket val­u­a­tion reached a price-to-normalized earn­ings mul­ti­ple of 19.1, exceed­ing the peaks of August 1987 (18.6) and Decem­ber 1973 (18.3). Out­side of the val­u­a­tions achieved dur­ing the late 1990's bub­ble and the approach to the 2007 mar­ket peak, the only other his­tor­i­cal obser­va­tion exceed­ing the cur­rent level of val­u­a­tion was the extreme of 20.1 reached just prior to the 1929 crash. The corol­lary to this level of rich val­u­a­tion is that our pro­jec­tion for 10-year total returns for the S&P 500 is now just 5.3% annually.

While a num­ber of sim­ple mea­sures of val­u­a­tion have also been use­ful over the years, even met­rics such as price-to-peak earn­ings have been skewed by the unusual profit mar­gins we observed at the 2007 peak, which were about 50% above the his­tor­i­cal norm — reflect­ing the com­bi­na­tion of boom­ing and highly lever­aged finan­cial sec­tor prof­its as well as wide mar­gins in cycli­cal and commodity-oriented indus­tries. Accord­ingly, using price-to-peak requires the addi­tional assump­tion that the profit mar­gins observed in 2007 will be sus­tained indef­i­nitely. Our more com­pre­hen­sive mea­sures do not require such assump­tions, and reflect both direct esti­mates of nor­mal­ized earn­ings, and com­pound esti­mates derived from rev­enues, profit mar­gins, book val­ues, and return-on-equity.

That said, val­u­a­tions have never been use­ful as an indi­ca­tor of near-term mar­ket fluc­tu­a­tions — a short­com­ing that has been ampli­fied since the late 1990's. The les­son that val­u­a­tions are impor­tant to long-term invest­ment out­comes is under­scored by the fact that the S&P 500 has lagged Trea­sury bills over the past 13 years, includ­ing div­i­dends. Yet the fact that these 13 years have included three suc­ces­sive approaches (2000, 2007, and today) to val­u­a­tion peaks — at the very extremes of his­tor­i­cal expe­ri­ence — is evi­dence that investors don't appre­ci­ate the link between val­u­a­tion and sub­se­quent returns. So they will pre­dictably expe­ri­ence steep losses and mediocre returns yet again. Iron­i­cally, before they do, it also means that investors who take val­u­a­tions seri­ously (includ­ing us) can expect tem­po­rary peri­ods of frustration.

I've long noted that the analy­sis of mar­ket action can help to over­come some of this frus­tra­tion, as stocks have often pro­vided good returns despite rich val­u­a­tions so long as mar­ket inter­nals were strong, and the envi­ron­ment was not yet char­ac­ter­ized by a syn­drome of over­val­ued, over­bought, over­bull­ish, and ris­ing yield con­di­tions. In hind­sight, the stock mar­ket has fol­lowed this typ­i­cal post-war pat­tern, and we clearly could have cap­tured some por­tion of the market's gains over the past year had I ignored the risk of a sec­ond wave of credit strains (which I remain con­cerned about, pri­mar­ily over the com­ing months).

It is impor­tant to rec­og­nize, how­ever, that even if we had approached the recent eco­nomic envi­ron­ment as a typ­i­cal, run-of-the-mill post­war down­turn, we would now be defen­sive again, as a result of the cur­rent over­val­ued, over­bought, over­bull­ish, ris­ing yields syn­drome. I do rec­og­nize that my cred­i­bil­ity in sound­ing a cau­tious note would presently be stronger if I had ignored fur­ther credit risks and cap­tured some of the past year's gains. But the awful out­come of this same set of con­di­tions, which we also observed in 2007, should pro­vide enough credibility.

Look­ing Back, Look­ing Forward

Last year, in the August 31 mar­ket com­ment A Tale of Two Data Sets, I observed "If we had a rea­son­able basis to believe that the recent eco­nomic down­turn was an ordi­nary run-of-the-mill post-war reces­sion hav­ing no last­ing struc­tural impact, and believed that the record profit mar­gins observed in 2007 (about 50% above the his­tor­i­cal norm) could be recov­ered and sus­tained, we would infer an aver­age return/risk pro­file for the mar­ket that is still much less favor­able than we have nor­mally observed fol­low­ing bear mar­ket lows, but strong enough to war­rant the removal of a good por­tion of our hedges out­right, with a will­ing­ness to remove another por­tion of our hedges on mar­ket weakness.

"On the other hand, using the same essen­tial mea­sures of val­u­a­tion and mar­ket action, but includ­ing peri­ods of major eco­nomic dis­lo­ca­tion into the dataset, pro­duces aver­age return/risk infer­ences that are sub­stan­tially less favor­able. Indeed, the rea­son we were some­what “burned” dur­ing the fourth quar­ter of 2008 is that we expected – too early, in hind­sight – a pow­er­ful rebound from the extremely over­sold con­di­tions we observed, based on nor­mal mar­ket behav­ior. The larger dataset also includes peri­ods of sim­i­larly pow­er­ful rebounds – but the attempt to par­tic­i­pate in them is less appeal­ing due to their lack of pre­dictabil­ity as well as their some­times abrupt and costly endings."

Given that val­u­a­tions and mar­ket action have gen­er­ally been a use­ful guide to set­ting invest­ment expo­sure in nor­mal post-war mar­ket cycles, it may be help­ful to detail how these fac­tors behaved dur­ing the period between 1929 to 1935, which rep­re­sents the great­est period of credit strains observed in U.S. data. Though not all of the data we use in our mar­ket and eco­nomic analy­sis is avail­able for this period, some of it can be esti­mated and prox­ied enough to allow us to char­ac­ter­ize the key results. The results below are spe­cific to meth­ods we actu­ally use, but I expect that they could be broadly repli­cated using any basic com­bi­na­tion of val­u­a­tions (say, Shiller PEs), and mar­ket action (say, mov­ing aver­ages or breadth measures).

At the out­set, I should note that over­all, our gen­eral cri­te­ria of val­u­a­tion and mar­ket action would have been quite help­ful dur­ing the Depres­sion. When we apply the meth­ods that we devel­oped for post-war data to Depression-era data, we find that there was clearly suf­fi­cient evi­dence from val­u­a­tions and mar­ket action to war­rant a strong avoid­ance of risk dur­ing much of that period, and even­tu­ally to estab­lish a sig­nif­i­cant expo­sure to mar­ket fluctuations.

But here is the dif­fi­culty. The pri­mary ben­e­fit of the mar­ket action cri­te­ria was in avoid­ing risk, while nearly all of the gains from apply­ing our approach would have been attrib­ut­able to the val­u­a­tion con­sid­er­a­tions we use. While apply­ing post-war cri­te­ria would have resulted in an over­all gain between 1929 and 1935, the bulk of that gain was dri­ven by mar­ket expo­sure accepted dur­ing peri­ods of excep­tion­ally low val­u­a­tions. Neg­a­tive mar­ket action was a pow­er­ful sig­nal to avoid mar­ket risk, but except when val­u­a­tions were extremely favor­able, pos­i­tive mar­ket action con­tributed noth­ing on its own.

What is most strik­ing about Depression-era data between 1929–1935 (and post-credit cri­sis data more gen­er­ally) is that when we exam­ine peri­ods when one would gen­er­ally grade mar­ket action as favor­able on the basis of major trends and mar­ket inter­nals, we find that tak­ing pos­i­tive expo­sures would actu­ally have resulted in a net loss. This is due to the abrupt­ness of trend rever­sals, so even peri­odic gains of 30–50% would have been largely erased through a com­bi­na­tion of abrupt ini­tial losses and sub­se­quent whip­saws. While the com­pound net loss from peri­ods of "trend fol­low­ing" over the full period was tol­er­a­ble (about a –25% draw­down), that fig­ure rep­re­sents a com­bi­na­tion of large indi­vid­ual gains and losses — sub­stan­tial volatil­ity, with a neg­a­tive over­all con­tri­bu­tion to returns.

Par­ti­tion­ing the data pro­vides a clearer pic­ture. When val­u­a­tions exceeded even 12 times nor­mal­ized earn­ings (on our most com­pre­hen­sive mea­sure dis­cussed above), seem­ingly "favor­able" mar­ket action was fol­lowed by pro­found losses aver­ag­ing –69.8% on an annu­al­ized basis (gen­er­ally reflect­ing a few weeks of ver­ti­cal losses until enough dam­age was done to kick the mar­ket action mea­sures neg­a­tive). Once the ini­tial dam­age was done com­ing off of the uptrend, val­u­a­tions over about 12 were still hos­tile, but were asso­ci­ated with slightly less pro­found losses aver­ag­ing –37.7% annualized.

In con­trast, only when val­u­a­tions became quite depressed did the com­bi­na­tion of favor­able val­u­a­tions and mar­ket action pro­duce pos­i­tive sub­se­quent returns. Mul­ti­ples below 12, cou­pled with favor­able mar­ket action, were asso­ci­ated with annu­al­ized returns of 12.5%, while mul­ti­ples below 12 cou­pled with unfa­vor­able mar­ket action were asso­ci­ated with fur­ther mild losses aver­ag­ing –4.5% annualized.

In 2009, we observed only a few weeks in March when the S&P 500 was priced at less than 12 times nor­mal­ized earn­ings (again, on our best mea­sure). At that time, indi­ca­tors of mar­ket action were still neg­a­tive. Faced with two pos­si­ble data sets, one assum­ing fur­ther credit strains and one assum­ing that the prob­lems had been solved, I noted "even giv­ing the two pos­si­bil­i­ties equal weight is harsh, because as I've repeat­edly noted, post-crash mar­kets have included advances as large, and larger, than we've observed since March, but with dev­as­tat­ing follow-through." Need­less to say, sharply neg­a­tive return fig­ures don't "aver­age in" very well.

How to respond?

Which brings us to the present. As of last week, even from a strictly post-war stand­point, a defen­sive invest­ment stance is war­ranted, based on a syn­drome of over­val­ued, over­bought, over­bull­ish and rising-yield con­di­tions. Equally impor­tant is how to respond appro­pri­ately as these con­di­tions change.

First, my pri­mary con­cern with regard to fresh credit strains would be the period of recog­ni­tion. We may very well have a multi-year period over which the full effects of delever­ag­ing is actu­ally felt, but the most dam­ag­ing declines often occur where real­ity departs mate­ri­ally from expec­ta­tions. The past year has been seen an eas­ing of credit strains even as the vol­ume of delin­quent loans has hit new records, par­tially because of the aban­don­ment of mark-to-market account­ing, and partly because mort­gages are long-term assets and it's pos­si­ble to kick the can down the road with mort­gages that aren't being ser­viced. It's unlikely in any event that these prob­lems have actu­ally been solved, because we can't rec­on­cile the quan­tity of delin­quent loans with the tamer fig­ures for fore­clo­sures and write­downs. Still, we need sev­eral more months of data before we can start rely­ing on "extend and pre­tend" to dis­pense with the prob­lem through an extended period of char­ge­offs and Fannie/Freddie bailouts. Mean­while, I remain concerned.

The econ­omy and the mar­kets have enjoyed a great deal of pos­i­tive effect from the enor­mous deficit spend­ing of the past 18 months (if it doesn't seem that the econ­omy has ben­e­fited, con­sider the dis­mal the pro­file of GDP and per­sonal income when stim­u­lus spend­ing and trans­fer pay­ments are excluded). It's not at all clear that these effects are durable, and it's also not clear to what extent bank assets have been marked up, passed off to Fan­nie and Fred­die, or oth­er­wise obscured.

Here is pre­cisely how we plan to approach the cur­rent uncertainties.

First, over the next few months, we are con­tin­u­ing to allow for uncer­tainty as to whether we should assume a "typ­i­cal post-war" cycle or a "post-crash, credit strained" envi­ron­ment. As noted above, the pri­mary dis­tinc­tion between these data sets is how the mar­ket responds to val­u­a­tions and mar­ket action. Accord­ingly, the main strate­gic dif­fer­ence between "post-war" and "credit-strained" cri­te­ria is that val­u­a­tions take a larger role rel­a­tive to mar­ket action in a delever­ag­ing cycle.

Over the course of 2010, absent very clear (i.e. crisis-level) addi­tional credit strains, our weight­ing toward "post-war" cri­te­ria will increase in an approx­i­mately lin­ear way. If we don't observe a sig­nif­i­cant second-wave of credit strains this year, I am com­fort­able with our stan­dard post-war cri­te­ria to address any resid­ual risks. If we do observe such strains, my pri­mary con­cern would be the ini­tial period of recog­ni­tion. We would still grad­u­ally move our weights toward "post-war" cri­te­ria, but at a slower rate.

Based on the con­vex­ity analy­sis that I dis­cussed late last year, my impres­sion is that it is more appro­pri­ate to weight invest­ment posi­tions rather than expected returns from the two pos­si­ble data sets. For exam­ple, if we weight expected returns, it is nearly impos­si­ble to give any weight at all to a credit strained envi­ron­ment and still jus­tify a pos­i­tive invest­ment posi­tion, because of the size of the losses that can emerge in credit-strained con­di­tions. In con­trast, if the invest­ment posi­tion would be zero based on "credit strained" cri­te­ria and 60% based on typ­i­cal post-war cri­te­ria, a 60/40 weight­ing, respec­tively, would result in a weighted expo­sure of 24%.

Presently, if the Mar­ket Cli­mate was to improve based on our stan­dard post-war cri­te­ria, we would move 40–50% in the direc­tion of that expo­sure. For exam­ple, if the mar­ket declines enough to clear the over­bought, and over­bull­ish com­po­nents of present con­di­tions, or if yields decline suf­fi­ciently to remove the present upward pres­sures we observe, and pro­vided that mar­ket inter­nals do not dete­ri­o­rate notably, we would be left with a stren­u­ously over­val­ued mar­ket, but with favor­able mar­ket action and no neg­a­tive syn­dromes. That wouldn't war­rant a fully invested posi­tion in any event, but we would become decid­edly more constructive.

What if the mar­ket sim­ply moves higher? It is safe to say that at cur­rent val­u­a­tions, a con­tin­ued exten­sion of over­val­ued, over­bought, over­bull­ish con­di­tions, with no reprieve from inter­est rate pres­sures, would keep us in a hedged stance. The Strate­gic Growth Fund is not appro­pri­ate for investors who wish to spec­u­late under that spe­cific set of con­di­tions, because we have no his­tor­i­cal evi­dence that it is sen­si­ble to take mar­ket risk, on aver­age, once that syn­drome emerges.

Ide­ally, any removal of the cur­rent over­val­ued, over­bought, over­bull­ish, rising-yields syn­drome would involve a sub­stan­tial improve­ment in val­u­a­tions, an ini­tial dete­ri­o­ra­tion in mar­ket action, and then an even­tual firm­ing of inter­nals. That out­come would allow us much greater lat­i­tude in accept­ing mar­ket exposure.

In short, accept­ing a greater level of mar­ket expo­sure will require, at min­i­mum, that we clear the present syn­drome of over­val­ued, over­bought, over­bull­ish, rising-yield con­di­tions. The quick­est way to a more con­struc­tive invest­ment stance would be a mean­ing­ful improve­ment in val­u­a­tions (which would most likely be asso­ci­ated ini­tially with a dete­ri­o­ra­tion in mar­ket action), and no fur­ther credit strains. That would allow us to estab­lish a strong mar­ket expo­sure on early evi­dence of improved mar­ket action. If we do observe sig­nif­i­cant fresh credit strains, our val­u­a­tion cri­te­ria will be more demand­ing, par­tic­u­larly in the ini­tial recog­ni­tion phase. In any event, how­ever, we will grad­u­ally tran­si­tion toward stan­dard "post-war" cri­te­ria as we move through 2010 — slower if we observe credit strains, but oth­er­wise in a roughly lin­ear way as we move through the year.

Presently, the mar­ket is stren­u­ously over­val­ued, faces a syn­drome of overex­tended con­di­tions that has his­tor­i­cally proved hos­tile, and relies on the absence of fur­ther credit strains to an extent that strikes me as incred­i­ble. Our invest­ment objec­tive con­tin­ues to focus on out­per­form­ing our bench­marks over the com­plete mar­ket cycle, with smaller peri­odic losses than a pas­sive invest­ment strat­egy. We've achieved that objec­tive since the incep­tion of the Funds, and I'm com­fort­able that we have the tools to achieve that objec­tive as we go for­ward. I frankly don't know which direc­tion the mar­ket is headed here, but I hope I've made it clear how I expect to approach the evi­dence, and why.

Mar­ket Climate

As of last week, the Mar­ket Cli­mate in stocks remained char­ac­ter­ized by an over­val­ued, over­bought, over­bull­ish, rising-yields syn­drome that has his­tor­i­cally pro­duced peri­ods of mar­ginal new highs, slight declines, and yet fur­ther mar­ginal highs, fol­lowed some­what unpre­dictably by nearly ver­ti­cal drops. I've often accom­pa­nied the descrip­tion of this syn­drome with the word "excru­ci­at­ing," because the appar­ent resiliency of the mar­ket and the cel­e­bra­tion of each fresh high, can make it dif­fi­cult to main­tain a defen­sive stance. Inter­est­ingly, the ana­lysts at Nau­tilus Cap­i­tal recently noted that the most closely cor­re­lated peri­ods in mar­ket his­tory to this one were the advances of 1929 and 2007. While exact repli­ca­tion of those advances would allow for a cou­ple more weeks of fur­ther strength, we've gen­er­ally found it dan­ger­ous to expect his­tory to do more than rhyme. These hos­tile syn­dromes have a ten­dency to erase weeks of upside progress in a few days.

In bonds, the Mar­ket Cli­mate last week remained char­ac­ter­ized by rel­a­tively neu­tral yield lev­els and unfa­vor­able yield pres­sures. While we would be inclined to increase the dura­tion of the Strate­gic Total Return Fund mod­estly if the 10-year Trea­sury yield was to push beyond 4% or so, we are com­fort­able with our cur­rent dura­tion of just under 4 years. For now, I con­tinue to be con­cerned about poten­tial credit strains, which may pro­vide the oppor­tu­nity to accu­mu­late pre­cious met­als, TIPS, and pos­si­bly for­eign cur­rency expo­sure on asso­ci­ated price weakness.

Tags: 13 Years, Assumption, Assumptions, Book Values, Corollary, Dividends, ETF, Extremes, Financial Sector, Hussman Funds, John Hussman, Long Term Investment, Market Fluctuations, Market Peak, Market Valuation, Metrics, Profit Margins, Return On Equity, Shortcoming, Treasury Bills, Valuations
Posted in Markets, US Stocks | Comments Off

FOMC Policy Statement – Status Quo, but Cautiously Bullish

Thursday, April 29th, 2010

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

The FOMC left the fed­eral funds rate band 0%-0.25% intact, no sur­prises here. Several mod­i­fi­ca­tions to the March state­ment were nec­es­sary in light of recent eco­nomic reports point­ing to improv­ing eco­nomic conditions. Here are the changes from the March 16, 2010 meeting:

Fed funds rate: In today’s state­ment, the much cited phrase “war­rant excep­tion­ally low lev­els of the fed­eral funds rate for an extended period” was left untouched.

Dis­sent – Pres­i­dent Hoenig of the Fed­eral Reserve Bank of Kansas has now dis­sented at three con­sec­u­tive meetings. In Hoenig’s opin­ion, the excep­tion­ally low level of the fed­eral funds rate is no longer nec­es­sary and it has the poten­tial to build up “finan­cial imbal­ances and increase risks to longer-run macro­eco­nomic and finan­cial stability.”

Econ­omy: In its March state­ment, eco­nomic activ­ity was seen to be strength­en­ing. Today, the Fed retained this view. The labor mar­ket is now seen as “improv­ing” com­pared with the March por­trayal that it is “stabilizing”. Restraints from high unem­ploy­ment, mod­est income growth, lower hous­ing wealth, and tight credit con­tinue to be per­ti­nent fac­tors hold­ing back the pace of con­sumer spending. In today’s mis­sive, con­sumer spend­ing is deemed to have “picked up” vs. “expand­ing at a mod­er­ate rate” in the March statement. Although hous­ing starts are at a depressed level, they have “edged up,” which is more bull­ish than the March state­ment when hous­ing starts were seen as flat.

Infla­tion: The lan­guage regard­ing infla­tion was left intact vs. the March state­ment.  Infla­tion is pre­dicted to be sub­dued for some time.

Fed’s bal­ance sheet: The Fed’s port­fo­lio includes $1.25 tril­lion agency mortgage-backed secu­ri­ties, an asset acquired to sta­bi­lize the hous­ing mar­ket and hold down mort­gage rates. The wide­spread spec­u­la­tion that today’s announce­ment would include indi­ca­tions of the Fed’s plan to liq­ui­date these hold­ings proved incorrect. Undoubtedly, the meet­ing would have included dis­cus­sions about the bal­ance sheet of the Fed. In our opin­ion, the out­right sale of mortgage-backed secu­ri­ties is many months ahead and will be tied to devel­op­ments in the hous­ing market. In the early stages of tight­en­ing mon­e­tary pol­icy, reverse repos, term deposits and higher inter­est rates on excess reserves will be favored over sale of mortgage-backed securities.

Fur­ther insight on the Fed’s deci­sion is also pro­vided in the video clip below, fea­tur­ing Ken Volpert, a Van­guard prin­ci­pal, and Bill Gross, co-CIO & founder of Pimco.

Sources: North­ern Trust – Daily Global Com­men­tary, April 29, 2010 and CNBC, April 28, 2010.

Tags: Bill Gross, Consecutive Meetings, Consumer Spending, Depressed Level, Economic Activity, Economic Conditions, Economic Reports, Fed Funds Rate, Federal Funds Rate, Federal Reserve Bank, Financial Stability, Hoenig, Housing Market, Housing Starts, Missive, Moderate Rate, Mortgage Backed Securities, Mortgage Rates, Northern Trust Company, Pertinent Factors, Tight Credit
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Fred Hickey: If We Continue Down This Path, the Outlook is General Impoverishment for the Country

Thursday, April 29th, 2010

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A few weeks ago, I asked Fred Hickey what he would do as chair­man of the Fed­eral Reserve.  In the remain­der of our inter­view, I asked Fred (Fred Hickey is author of The High Tech Strate­gist Newslet­ter, and a par­tic­i­pant in the annual Barron's Round­table).  whether we can avoid reces­sions in a busi­ness cycle, what will hap­pen to the US Dol­lar, how our cred­i­tors are behav­ing, and what advice he can offer given the new eco­nomic environment.

Damien Hoff­man: Fred, can we cre­ate a per­pet­ual busi­ness cycle where we don’t get recessions?

Fred: No. I have a quo­ta­tion on my board here that says, “The final out­come of the curve expan­sion is gen­eral impov­er­ish­ment.”  That means if we con­tinue down this path the out­look, unfor­tu­nately, is gen­eral impov­er­ish­ment for the country.

I hope that’s not how it’s going to play out. But I’m not par­tic­u­larly opti­mistic with the cur­rent lead­er­ship that we have in gov­ern­ment today.

At some point the dol­lar is going to break down — really break down. Right now there’s still a rush to safety from the worry about Europe. But I don’t know why they’re so wor­ried about Europe when we’re the ones with the tril­lions of dol­lars of deficits.

Damien: It’s an ironic flight to safety. It’s almost a cos­mic comedy.

Fred: It’s just a Pavlov­ian reac­tion. How­ever, at some point that won’t be the reac­tion and the dol­lar will get crushed. Even­tu­ally there will be some recog­ni­tion that this coun­try is broke. No one seems to be talk­ing about this, but in a recent US Trea­sury for­eign hold­ings report I saw a flat line where the main­land Chi­nese were not buy­ing our trea­suries any­more. Their posi­tion was hold­ing; mean­ing, they were buy­ing just enough to off­set the matur­ing bonds. Now we’re see­ing out­right declines. This has gone on for sev­eral months and now it’s an out­right decline.

Damien: What about the Russians?

Fred: The Rus­sians are also reduc­ing their posi­tions. They reduced $10 bil­lion in Decem­ber and it’s dropped from a $140 bil­lion almost to $118 bil­lion over the last few months.

The Rus­sians have been out there say­ing they’re buy­ing gold, Cana­dian bonds, and diver­si­fy­ing their posi­tions. Well, here they are doing it. At some point, enough peo­ple around the world will say they don’t want to be in dol­lars any­more and they will get out. It looks to me that the Chi­nese and the Rus­sians are get­ting out.

The smart guys are leav­ing the ship and it looks to me like we’re replac­ing them with are our own printed money as well as hedge funds who are bor­row­ing money and buy­ing trea­suries. This is a very bad group to have. Those are not long term hold­ers. That could reverse very quickly. If that hap­pens you can have a dol­lar collapse.

Damien: So is gold the hard cur­rency which will con­tinue to win?

Fred: I never lose sleep with my big gold posi­tion, but I do lose sleep when I have a big dol­lar posi­tion. I always see pull­backs in gold as buy­ing oppor­tu­ni­ties because what I’ve dis­cussed are the big forces really mov­ing things. There are very few peo­ple on this planet that under­stand the big macro pic­ture behind the move­ment to gold. We’re now in a 10 year bull mar­ket in gold. We ran a twenty year bear mar­ket, so it might be a twenty year bull mar­ket. We may be only halfway through.

I’m not sweat­ing $1100 gold as the top like so many oth­ers in this coun­try. They see bub­bles every­where in gold. They never saw the bub­ble in real estate, never saw the bub­ble in stocks, never saw any­thing. How­ever, all these peo­ple in the U.S. see a bub­ble in gold. I don’t see it. I sleep like a baby with my gold position.

Damien: Fred, given the sit­u­a­tion our coun­try faces, what type of advice do you give your children?

Fred: That’s a hard ques­tion. First, you must be will­ing to work hard at any­thing you do. Try to find some­thing you enjoy and you can feel good about. It helps you work hard.

Save your money and don’t build up debts. I never get myself in any kind of trou­ble because I never had any debt. So, if I’m wrong I’m never going to get really destroyed because I don’t have lever­age. Debt is a four let­ter word. I’m an old fash­ioned guy.

Don’t ignore his­tory. There are a lot of lessons to be learned that many peo­ple seem to never learn. I have my kids read­ing what I con­sider to be many of the invest­ment classics.

Damien: That’s great advice espe­cially keep­ing out of debt. If most Amer­i­cans just fol­lowed that one sim­ple prin­ci­ple, we’d be in a whole dif­fer­ent posi­tion right now.

Fred: If most indi­vid­u­als and our government.

Damien: Right. Well, thank you very much for the rare inter­view, Fred. Our read­ers really appre­ci­ate you tak­ing the time.

Fred: My plea­sure. All the best.

Tags: Barron, Business Cycle, Chairman Of The Federal Reserve, Cosmic Comedy, Creditors, Declines, Economic Environment, Federal Reserve, Fred Hickey, High Tech Strategist, High Tech Strategist Newsletter, Hoffman, Impoverishment, Mainland, Pavlovian Reaction, Recessions, Russians, Treasuries, Trillions, Us Treasury
Posted in Canadian Market, Emerging Markets, Gold, Outlook | Comments Off

Chart Du Jour: Greek Drachma vs. Euro

Thursday, April 29th, 2010

By Dian L. Chu, Eco­nomic Fore­casts & Opinions

Europe's hopes of con­tain­ing the cri­sis dimmed as Spain became the third euro-zone nation to be hit with an S&P down­grade in just two days, fol­low­ing steeper cuts on Por­tu­gal and Greece.

Fears of a Greek con­ta­gion to other euro zone nations ratch­eted higher on that news spark­ing a mar­ket sell­off across the globe, send­ing the euro to fresh lows against the dol­lar, and inten­si­fied the pres­sure to final­ize a res­cue plan for Greece.

Blam­ing the Euro Cur­rency Union

The ongo­ing Greek debt cri­sis has revived the old argu­ments that all national gov­ern­ments need mon­e­tary sov­er­eignty. Finan­cial Times colum­nist Samuel Brit­tan also recently sug­gested that if Greece has its own currency,

“...it can issue its own money; so it can pur­sue a fis­cal pol­icy attuned to domes­tic needs, with­out being depen­dent on the inter­na­tional bond market.”

All Bet­ter With The Drachma?

So, what if Greece had stayed with the Drachma, and never switched to the euro? Would this debt cri­sis be averted?

Unfor­tu­nately, as illus­trated by the chart from the Coun­cil on For­eign Rela­tions (CFR), in the six years before join­ing the euro, only 27% of Greek debt was issued in drachma. At the end of 2000, just before Greece joined the euro zone, 79% of its out­stand­ing debt was already denom­i­nated in euros, and a mere 8% in drachmas.

Blame It On Prof­li­gate Spending

This could only lead to an inescapable con­clu­sion as noted by the CFR,

“Even if Greece had remained out­side the euro zone, its depen­dence on euro bor­row­ing would only have increased. A falling drachma would merely have brought the cur­rent cri­sis to a head ear­lier by accel­er­at­ing the rise in Greece’s debt-to-GDP ratio (think Iceland)….problem is exces­sive for­eign bor­row­ing, a prob­lem with which Greece has strug­gled since the early 19th century.”

Moral Haz­ard?

Mean­while, a Greek offi­cial said the IMF is con­sid­er­ing increas­ing the Greek loans to €100 bil­lion to €120 bil­lion ($132.5 bil­lion to $159 bil­lion) over three years, from the cur­rent €45 bil­lion, but expressed doubts about whether the boost would happen.

The actions of the EU and IMF are send­ing a mes­sage to investors that it is not impor­tant that PIIGS nations have exces­sive and unsus­tain­able pub­lic spend­ing and fis­cal deficits, because ulti­mately the coun­tries of the euro zone who will resolve the problem.

There doesn’t have to be a res­cue plan for Greece, as long as the mar­kets believe in “the money­len­der of the last resort” (the coun­tries of the euro zone.)

In that sense, the debt-rescue-or-not saga of Greece could drag on for a while before some uncom­mon event forces a con­crete res­o­lu­tion out of the EU and IMF.

Eco­nomic Fore­casts & Opinions

Tags: Bond Market, Contagion, Council On Foreign Relations, Currency Union, Debt Crisis, Drachmas, Economic Forecasts, Euro Zone, Financial Times, Financial Times Columnist, Fiscal Policy, Gdp Ratio, Greece Fears, Inescapable Conclusion, International Bond, Joining The Euro, Monetary Sovereignty, Moral Hazard, National Governments, Selloff
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Stock market sentiment – indicating top

Thursday, April 29th, 2010

In addi­tion to fun­da­men­tal and tech­ni­cal analy­sis, it is par­tic­u­larly impor­tant to mea­sure the crowd’s sen­ti­ment regard­ing extreme bear­ish­ness or bull­ish­ness. A con­ve­nient tool for this is pro­vided by the Investors Intel­li­gence sur­vey of invest­ment advisors.

Accord­ing to the lat­est read­ing (April 27), 54.0% of advi­sors are bulls (up from 34.1% in Feb­ru­ary) and 18.0% are in the bear camp (down from 27.8% in Feb­ru­ary). As shown below, the last time bull­ish sen­ti­ment was at this level was in Decem­ber 2007 when the S&P 500 Index was trad­ing 26% higher at 1,500.

Source: Bespoke, April 28, 2010.

“Bulls around 55% and fewer than 20% bears are the first indi­ca­tions of a mar­ket top. As men­tioned last week, we now clas­sify the advi­sory sen­ti­ment as neg­a­tive, sim­i­lar to the out­look that started this year [and pre­ceded a 9% cor­rec­tion]. Mar­kets can still move higher and the bulls could approach 60% before a final top is in place. In the near-term, though we would expect a mod­est pull back to con­sol­i­date the near three-month rally. At present we do not project a cor­rec­tion approach­ing 10%,” said the report.

I am hold­ing a cau­tious stance here.

Tags: Bear Camp, Bears, Bullish Sentiment, Bulls, Crowd, Extreme Bearishness, Intelligence Survey, Investment Advisors, Investors Intelligence, Last Time, Market Sentiment, Mentioned Last Week, Rally, Stock Market
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Charlie Rose: Analysis of the Goldman Sachs Senate hearings

Thursday, April 29th, 2010

Char­lie Rose dis­cusses the Gold­man Sachs Sen­ate hear­ings with Gretchen Mor­gen­son of “The New York Times”. Also weigh­ing in are William Cohan “The New York Times”, Gillian Tett of the “Finan­cial Times” and Evan Thomas of “Newsweek”.

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

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

Click here for a tran­script of the interview.

Source: Char­lie Rose, April 27, 2010.

Tags: Charlie Rose, Cohan, Evan Thomas, Financial Times, Gillian Tett, Gold, Goldman Sachs, Gretchen Morgenson, Image, Interview Source, New York Times, Newsweek, Senate Hearings
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Greece – GIIPS – Eurozone – Big Problem

Thursday, April 29th, 2010

This post is a guest con­tri­bu­tion by Rebecca Wilder*, author of the of the News N Eco­nom­ics blog.

Greece is now “high yield”, “junk”, “below invest­ment grade”, at least accord­ing to S&P. What I mean by that is S&P now rates Greece’s for­eign and local cur­rency sov­er­eign debt at the BB+ level (with a neg­a­tive out­look), below the sometimes-coveted invest­ment grade sta­tus, BBB– is the min­i­mum. Why did S&P feel the need to do this now? Just cov­er­ing its *ss – Greek debt was rated A– as recently as Decem­ber 2009.

On to the Ger­mans. What they are doing is actu­ally quite strik­ing: offer­ing a bailout in order to appease mar­kets so that inter­na­tional investors will pick up the Greek bill (never was going to hap­pen any­way); and then telling mar­kets that bond investors in Europe will take a hair­cut so that inter­na­tional investors won’t pick up the Greek bill. I guess the light-bulb finally went on that there is a con­ta­gion brew­ing here because bunds are tight, while all Periph­eries are wide.

The orig­i­nal bailout will likely be offered to sat­isfy Greece’s near-term oblig­a­tions. How­ever, in the mean­time the prob­a­bil­ity that the liq­uid­ity cri­sis spreads across the GIIPS (Greece, Italy, Ire­land, Por­tu­gal, and Spain) – espe­cially Por­tu­gal with a 2009 cur­rent account deficit equal to 10.3% of GDP, mak­ing it shock­ingly sus­cep­ti­ble to cap­i­tal out­flows – is rising.

We’re in cri­sis mode – the calm before the storm. I see the Euro­zone dis­as­ter hap­pen­ing in three waves:

First, there is a liq­uid­ity cri­sis in Greece (already underway).

Sec­ond, it turns into a full-fledged finan­cial cri­sis for the GIIPS. The cap­i­tal account drops pre­cip­i­tously with investor con­fi­dence in GIIPS mar­kets, leav­ing the very vul­ner­a­ble coun­tries, like Por­tu­gal and Spain with cur­rent accounts very much in the red, seri­ously short of cash.

What Ger­many wants out of Greece (and any bailout there­after) is the equiv­a­lent of an eco­nomic ana­conda. It will force Greece to meet the lim­its of the EMU Sta­bil­ity and Growth Pact (3% of GDP) by some period, let’s say 2012.

Of course that can­not hap­pen with­out an epic surge in exports. Here’s the death spi­ral: sharp aus­ter­ity mea­sures trans­late into unem­ploy­ment, eco­nomic con­trac­tion, defla­tion, and yes, higher deficits. There’s just no way out of it.

So what is the be all and end all pol­icy script? Regain com­pet­i­tive­ness in world mar­kets, no less. The Econ­o­mist on Por­tu­gal:

Low growth reflects a dis­as­trous loss of com­pet­i­tive­ness since the coun­try joined the euro. Por­tu­gal has lost export-market share to emerg­ing economies (includ­ing those of east­ern Europe) that churn out sim­i­lar low-value prod­ucts. This is largely due to a steady rise in unit labour costs, as wage increases out­stripped pro­duc­tiv­ity growth (see chart).

The IMF’s con­sul­ta­tion on Italy, as per its lat­est Arti­cle IV report:

Eco­nomic rigidi­ties, along with Italy’s spe­cial­iza­tion in prod­ucts with rel­a­tively low value added, have also been con­tribut­ing to a steady ero­sion of com­pet­i­tive­ness. Con­se­quently, Italy has been los­ing its mar­ket share of world trade.

And my favorite part of the Italy Arti­cle IV:

In the past, other coun­tries have over­come sim­i­lar chal­lenges from very dif­fi­cult start­ing posi­tions with com­pre­hen­sive pol­icy packages.

Note the very incrim­i­nat­ing term, “com­pre­hen­sive”. That usu­ally includes expan­sion­ary mon­e­tary pol­icy and the depre­ci­a­tion of a cur­rency to drive export income, both of which elude any of the GIIPS countries.

The Econ­o­mist por­trays Portugal’s path away from depression-land via export income by low­er­ing ridicu­lously high labor costs (i.e., pro­duc­tive labor as mea­sured by the unit labor cost index) rel­a­tive to those in Ger­many. As such, Por­tu­gal should be able to pick up exports while the gov­ern­ment drops the deficit and con­stricts domes­tic demand. Notice the catchy title!

But what they fail to illus­trate is the fact that all of the GIIPS are in EXACTLY THE SAME UNCOMPETITIVE BOAT!

So we get to the final stage, GIIPS go depres­sion­ary, and the eco­nomic con­ta­gion spreads across the Euro­zone, hit­ting yes, Ger­many. Notice that Ire­land is the only GIIPS with a fight­ing chance, accord­ing to the Eurostat’s forecast.

I’m mar­ried to a Ger­man – I under­stand stub­born­ness. But this time, being stub­born is just going to get the Ger­mans in trouble.

The GIIPS are 34% of Euro­zone GDP – try to export your way out of that one when 1/3 of the “Zone” is reduc­ing costs and cut­ting wages. It’s a fal­lacy of com­po­si­tion to assume that the GIIPS are cut­ting spend­ing while the aggre­gate remains intact. Fur­ther­more, each EU coun­try exports an aver­age of 68.6% within Europe, so Germany’s clearly going to feel this, too – at least if the “Zone” gets past the imme­di­ate liq­uid­ity crisis.

Nobody talks about this – but Greece can secede from the EU as per the Lis­bon Treaty.

Source: Rebecca Wilder, News N Eco­nom­ics, April 28, 2010.

* Rebecca Wilder is an econ­o­mist in the finan­cial indus­try. She was pre­vi­ously an assis­tant pro­fes­sor and holds a doc­tor­ate in economics.

Tags: Anaconda, Bailout, Bbb, Bond Investors, Calm Before The Storm, Contagion, Crisis Mode, Current Account Deficit, Current Accounts, Greece Italy, International Investors, Investment Grade, Investor Confidence, Liquidity Crisis, Negative Outlook, Peripheries, Sovereign Debt, Term Obligations, Three Waves, Vulnerable Countries
Posted in Markets, Outlook | Comments Off

Rosenberg – 12 things that could upset the stock market apple cart

Wednesday, April 28th, 2010

By now we know David Rosen­berg, Chief Econ­o­mist and Strate­gist of Gluskin Sheff & Asso­ciates, missed out on the global stock mar­ket rally and remains firmly in the equity bear camp. With stock mar­kets com­ing off the boil, maybe Rosie’s moment has arrived. It is there­fore oppor­tune to focus on his list of the dirty dozen of fac­tors that could upset the stock mar­ket apple cart.

1.  Wildly bull­ish sen­ti­ment read­ings. The lat­est Investors Intel­li­gence sur­vey is now up to 53.3% for the bulls (ver­sus 51.1% the pre­vi­ous report­ing week) while the bear camp has dwin­dled fur­ther, to 17.4% (ver­sus 18.9% a week ago). Bull­ish sen­ti­ment rose for the third con­sec­u­tive week and bear­ish sen­ti­ment has not been this low since Jan­u­ary 12. As Bob Farrell’s Rule num­ber 9 stip­u­lates, when all the fore­casts and experts agree, some­thing else is bound to happen.

2.  Uncer­tainty over the com­ing U.S. midterm elec­tions in November.

3.  A more hawk­ish Fed (futures pric­ing in 40% odds of a rate hike by the Novem­ber meeting).

4.  Tougher profit com­par­isons in the com­ing quarters.

5.  The fad­ing of the fis­cal and mon­e­tary stim­u­lus. The tax cred­its expire on Fri­day, the Fed has already stopped buy­ing mort­gage bonds, and the pace of new trial mod­i­fi­ca­tions under the Treasury’s Home Afford­able Mod­i­fi­ca­tion Pro­gram has begun to slow.

6.  Fresh uncer­tainty sur­round­ing bank­ing indus­try reg­u­la­tion. Gold­man is likely the thin edge of the wedge. A pro­posal is gain­ing ground on Capi­tol Hill to force banks to spin off their derivatives-trading oper­a­tions, which would rep­re­sent a severe blow to one of Wall Street’s most prof­itable businesses.

7.  Higher tax rates to pay for the mas­sive $1.4 tril­lion fed­eral bud­get deficit. The Bush cuts that low­ered taxes on high-wage earn­ers, cap­i­tal gains and div­i­dends are set to expire at the end of 2010. The top mar­ginal tax rate will jump to 39.6% from 35.0%, and the cur­rent 15% rate on cap­i­tal gains and div­i­dends will go back to 20.0% and 39.6%, respectively.

8.  Huge over­hang of unsold houses. As of March, banks and invest­ment trusts had an inven­tory of about 1.1 mil­lion fore­closed homes, up 20% from a year ear­lier, accord­ing to esti­mates from LPS Applied Ana­lyt­ics. Another 4.8 mil­lion mort­gage hold­ers were at least 60 days behind on their pay­ments or in the fore­clo­sure process, mean­ing their homes were well on their way to the inven­tory pile. That “shadow inven­tory” was up 30% from a year earlier.

9. Sov­er­eign debt prob­lems in Greece and spillover to Por­tu­gal and pos­si­bly Spain.

10. Ongo­ing com­mer­cial real estate trou­ble, which have resulted in 55 bank fail­ures this year.

11. Under­funded state pen­sion plans.

12. A prop­erty bub­ble in China – the gov­ern­ment is now con­sid­er­ing intro­duc­ing new or higher taxes on real estate, pos­si­bly a prop­erty tax, in order to cool down a boom­ing prop­erty mar­ket now widely being described as a bub­ble (prices up well over 10% from a year ago).

Source: Gluskin Sheff & Asso­ciates – Break­fast with Dave, April 27, 2010.

Tags: Apple Cart, Bear Camp, Bearish Sentiment, Bob Farrell, Bullish Sentiment, Chief Economist, China, David Rosenberg, Derivatives Trading, ETF, Federal Budget Deficit, Global Stock Market, Gluskin Sheff, Gold, Intelligence Survey, Investors Intelligence, Marginal Tax Rate, Market Rally, Midterm Elections, Mortgage Bonds, Profitable Businesses, Thin Edge, Wage Earners
Posted in Energy & Natural Resources, Markets, Oil and Gas, US Stocks | Comments Off

China Interrupted

Tuesday, April 27th, 2010

This arti­cle is a guest con­tri­bu­tion by Tom Bradley*, Pres­i­dent and Co-Founder, Steady­hand Invest­ment Funds

I am not an econ­o­mist and have never been to China.

But I am an investor and a stu­dent of mar­ket cycles, and as such, I’m always wary when some­thing that is far from cer­tain starts being assumed as part of the foun­da­tion of the cap­i­tal mar­kets. Today China is one of those ‘uncer­tain assump­tions’. While investors worry about Greece, the hous­ing mar­ket and cor­rup­tion on Wall Street, they are count­ing on China being immune to an eco­nomic down­turn – 8–10% growth will con­tinue unin­ter­rupted. This is a par­tic­u­larly impor­tant assump­tion for Cana­dian investors because our mar­ket has so much pinned on the China miracle.

I bring this up again now because I came across a cou­ple of excel­lent pieces over the last week. While flopped on the couch at the cabin, I watched a Char­lie Rose inter­view with James Chanos, who is a famous and con­tro­ver­sial short seller. In the course of mak­ing his clients gobs of money on Enron, he built his rep­u­ta­tion as a thought­ful and savvy investor. Mr. Chanos is short­ing China.

His argu­ment focuses on China’s depen­dence on con­struc­tion (56% of GDP) and invest­ment spend­ing. He pro­vides some color on how the prop­erty mar­kets work and the degree to which spec­u­la­tors are involved. If you watch it, remem­ber that he is talk­ing his book (i.e. he has a vested inter­est in view­ers turn­ing against China.)

I also read a White Paper by Edward Chan­cel­lor from GMO (you have to reg­is­ter on their web­site to read the arti­cle). Mr. Chan­cel­lor is a more learned stu­dent of cycles and bub­bles than I am, and GMO, under the lead­er­ship of Jeremy Grantham, has proven in the past to be astute at flag­ging mar­ket extremes.

For those who are keen on China, the GMO piece will pro­vide a dose of real­ity. It method­i­cally goes through ten aspects of the bub­bles of the last three cen­turies and then dis­cusses how China mea­sures up. Need­less to say, Mr. Chan­cel­lor scores it high on all ten measures.

The Chanos inter­view and GMO paper include and add to the con­cerns that I have about the China assump­tion. In no par­tic­u­lar order they are:

• Abnor­mally high rates of cap­i­tal spend­ing are good at fuel­ing eco­nomic booms and set­ting up sub­se­quent busts. The GMO piece refers to an IMF World Eco­nomic Out­look which points out that coun­tries with a high invest­ment share of GDP (China is off the scale on this mea­sure, as was Japan in the 80’s) tend to suf­fer the steep­est and most pro­longed eco­nomic downturns.
• Gov­ern­ments are poor cap­i­tal allo­ca­tors and China’s cen­tral author­ity is call­ing all the shots. Both Chanos and Chan­cel­lor have some sober­ing tales about how uneco­nomic much of the stim­u­la­tive spend­ing has been.
• Cheap money and under­val­ued cur­ren­cies also lead to poor cap­i­tal allo­ca­tion.
• Aggres­sive growth tar­gets and poor trans­parency are a bad com­bi­na­tion. I liken China to a com­pany that shows a rapid and con­sis­tent rate of growth, even though the under­ly­ing busi­ness is far from steady and pre­dictable. As Mr. Chan­cel­lor points out, “when­ever an eco­nomic indi­ca­tor is made a tar­get for con­duct­ing pol­icy, then it loses the infor­ma­tion con­tent that would qual­ify it to play such a role.” When non-transparent com­pa­nies finally miss their tar­get, they always ‘blow up real good’. That’s because we find out that they were stretch­ing and strain­ing to keep up appear­ances such that by the end the cup­board is bare. In the case of China, we already know what we’ll be read­ing about when the down­turn hits – empty fac­to­ries, apart­ment build­ings and high­ways; an over-levered and over­built hous­ing mar­ket; insol­vent banks and a poor demo­graphic profile.

China is going to grow rapidly. It will become an ever increas­ing force in the world econ­omy. That we can assume. But we have to be less defin­i­tive about the path the coun­try will take to get there and how much of that suc­cess is fac­tored into asset prices around the world.

Related read­ing:
China Inc. — Buy, Hold or Sell
China Unin­ter­rupted

*About Tom Bradley

Tom is the Pres­i­dent and co-founder of Steady­hand. His edu­ca­tion includes a Bach­e­lor of Com­merce degree from the Uni­ver­sity of Man­i­toba (1979) and an MBA from the Richard Ivey School of Busi­ness (1983). Tom has 26 years of expe­ri­ence in the invest­ment indus­try. He started his career in 1983 as an Equity Ana­lyst at Richard­son Green­shields. Tom spent eight years with the firm, the last three as Direc­tor of Insti­tu­tional Sales. In 1991, he joined Phillips, Hager & North as a Research Ana­lyst and Insti­tu­tional Port­fo­lio Man­ager. Tom was appointed to the Board of Direc­tors of PH&N in 1996. He took on the role of Chief Oper­at­ing Offi­cer in 1998, and was appointed Pres­i­dent and Chief Exec­u­tive Offi­cer in 1999, a role that he held until he resigned from the firm in 2005. Tom writes a col­umn every sec­ond Sat­ur­day in the Globe and Mail. Aside from stocks and (to a lesser extent) bonds, his pas­sions include ski­ing, golf, music and The Fam­ily Guy.

Tags: Bubbles, Canadian Investors, Capital Markets, Charlie Rose, Charlie Rose Interview, China, Co Founder, Dose Of Reality, Economic Downturn, Edward Chancellor, Gmo, Housing Market, Investment Funds, James Chanos, Jeremy Grantham, Market Cycles, Mr Chancellor, Property Markets, Savvy Investor, Speculators, Tom Bradley, Vested Interest
Posted in Canadian Market, Markets, Outlook | Comments Off

Making History with Infrastructure ETFs

Tuesday, April 27th, 2010

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This arti­cle is a guest con­tri­bu­tion by Tom Lydon, ETFTrends.com.

Infra­struc­ture invest­ment is perched on the edge of his­tory, and we’re in the thick of it. Between 2009 and 2015, tril­lions will be spent around the world build­ing up bridges, roads, water sys­tems and much more. By invest­ing in infra­struc­ture exchange traded funds (ETFs), you can be posi­tioned to ben­e­fit directly.

Gov­ern­ments around the world have pledged to spend tril­lions of dol­lars over the next few years on the biggest global build-out of phys­i­cal eco­nomic assets in the his­tory of man. Eric J. Ger­rit­sen for The Jour­nal of Com­merce reports that this boom is already in place and it will trans­form the way the world appears.

• Some of the changes expected to occur include how the world looks, gets edu­cated, moves goods and ser­vices, cre­ates wealth, treats the sick, cares for the poor, pow­ers its homes and busi­nesses and wages war. [Build­ing Blocks of Infra­struc­ture ETFs.]
• The Obama admin­is­tra­tion will spend $150 bil­lion of its $787 bil­lion stim­u­lus plan on infra­struc­ture and is expected to add to that.
• Many other coun­tries are also going to invest in this sec­tor: China has pledged $585 bil­lion and stands ready to do more; India is expected to spend $500 bil­lion on infra­struc­ture from now until 2015; the Euro­pean Union, $252 bil­lion; Japan, $129 bil­lion; Canada, $12 bil­lion; Aus­tralia, $4.7 bil­lion, Sin­ga­pore, $13.8 bil­lion; Ger­many, $42 bil­lion. [4 ETFs for India's Grow­ing Econ­omy.]
• CIBC World Mar­kets esti­mates total infra­struc­ture spend­ing over the next 20 years at $35 tril­lion. Some $3 tril­lion of fis­cal adren­a­lin will be injected into the global econ­omy in the next 24 months alone. [Brazil's Infra­struc­ture ETF.]

A grow­ing num­ber of infra­struc­ture ETFs have launched in recent months, giv­ing investors more flex­i­bil­ity in how they access this growth. Pow­er­Shares, iShares and Emerg­ing Global Advi­sors all have funds aimed specif­i­cally at growth in emerg­ing mar­kets. State Street and iShares also have broader funds that tar­get both devel­oped and devel­op­ing coun­tries. Many of these ETFs have heavy weight­ings in util­ity com­pa­nies, so if you’ve already got util­i­ties expo­sure, check twice to be sure you’re not dou­bling up.

For more sto­ries about infra­struc­ture, visit our infra­struc­ture cat­e­gory.

• SPDR FTSE/Macquarie Global Infra 100 (NYSEArca: GII): This ETF has the heav­i­est U.S. weight­ing in an infra­struc­ture fund at close to 40%; also holds Ger­many, Japan, France, United King­dom, Spain and more.
• Pow­er­Shares Emerg­ing Mar­kets Infra­struc­ture (NYSEArca: PXR): Gives expo­sure to China, Brazil, South Africa, United States, Tai­wan and more.
• iShares S&P Global Infra­struc­ture Index (NYSEArca: IGF): Gives expo­sure to the United States, Ger­man, France, Aus­tralia, Canada, Italy and more.
• iShares S&P Emerg­ing Mar­kets Infra­struc­ture (NASDAQ: EMIF): Con­tains expo­sure to China, Brazil, South Korea, Czech Repub­lic, Mex­ico, Rus­sia and Chile.
• Emerg­ing Global Shares INDXX China (NYSEArca: CHXX): Con­tains expo­sure to real estate man­age­ment and devel­op­ment, met­als and min­ing, elec­tri­cal equip­ment, power pro­duc­ers, tele­com, trans­porta­tion and more.
• Emerg­ing Global Shares INDXX Brazil (NYSEArca: BRXX): Con­tains expo­sure to met­als and min­ing, power pro­duc­ers, trans­porta­tion infra­struc­ture, elec­tric util­i­ties, tele­com and more.
• UBS E-TRACS Aler­ian MLP Infra­struc­ture ETN (NYSEArca: MLPI): This brand-new fund launched on March 31; the fund’s con­stituents earn at least 50% of their earn­ings from assets that aren’t directly exposed to com­mod­ity price changes. ETNs are debt instru­ments backed by the full faith and credit of the issuer. [Dif­fer­ences Between ETFs and ETNs.]

For more sto­ries about the growth of the infra­struc­ture sec­tor, check out our infra­struc­ture cat­e­gory.

Source: ETFTrends.com, Mak­ing His­tory with Infra­struc­ture ETFs, Tom Lydon, April 21, 2010

Tags: Adrenalin, Brazil, BRIC, BRICs, Bridges, Building Blocks, Canadian Market, Cares, China, CIBC, Commerce Reports, Economic Assets, Emerging Markets, ETF, ETFs, European Union, Exchange Traded Funds, Gerritsen, Global Advisors, Global Economy, India, Infrastructure Investment, Journal Of Commerce, Russia, Stimulus Plan, Trillion, Trillions, Wages, Water Systems, World Markets
Posted in Brazil, Canadian Market, ETFs, India, Infrastructure, Markets | Comments Off

Technical talk: S&P 500 remains in uptrend, but divergence starts showing up

Tuesday, April 27th, 2010

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

As seen in the chart below, the S&P 500 still remains above its uptrend line (green line). As long as this is the case investors have to respect the long trade. Only a break below the uptrend near 1,200 fol­lowed by a close below last Thursday’s intra-day low (1,190) would change this pos­ture and sug­gest a more defen­sive tone to investors’ portfolio.

Cur­rently there is a minor diver­gence between price and momen­tum as mea­sured by the RSI (red arrows). Typ­i­cally, near top­ping processes (whether large or minor tops) price moves higher while RSI moves lower, so at a very min­i­mum it is some­thing to reg­is­ter in the back of one’s head.

Remem­ber risk man­age­ment is not a pas­sive activ­ity but an ongo­ing re-adjustment process. The higher we go the harsher the cor­rec­tion when it ulti­mately occurs. Take an active look at your cur­rent stop losses and value at risk today and see if they need any readjusting.

Source: Kevin Lane, Fusion IQ, April 27, 2010.

Tags: Break, Divergence, Fusion, Investors, Iq Chart, Last Thursday, Losses, Momentum, Passive Activity, Posture, Red Arrows, Register, Risk Management, Tops, Uptrend Line, Value At Risk
Posted in Markets | Comments Off

Actively Managed ETFs: What’s Fact, What’s Fiction

Tuesday, April 27th, 2010

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This arti­cle is a guest con­tri­bu­tion from Tom Lydon, ETFTrends.com.

One of the major talk­ing points when it comes to actively man­aged exchange traded funds (ETFs) is the issue of trans­parency. Are they really as trans­par­ent as their index-tracking counterparts?

The SEC has deemed that for an ETF to be an ETF, one of the require­ments it must meet is trans­parency. Nat­u­rally, this doesn’t excite all providers, some of whom may be loath to dis­close their hold­ings and, in turn, their port­fo­lio man­age­ment strat­egy. [Rea­sons You May Like Active ETFs in Your Port­fo­lio.]

Shishir Nigam for Active ETFs In Focus reports that many argu­ments and mis­con­cep­tions about active ETFs are based on inac­cu­rate facts and it’s impor­tant to bring some clar­ity to this much-debated issue. [Active ETFs: A Slam Dunk?]

• Active ETFs have less trans­parency than other ETFs: Active and index ETFs are dif­fer­ent in their trans­parency in that man­agers in active funds can hold any­thing they want when­ever they want. Hold­ings, though, are dis­closed daily.
• Active ETF dis­clo­sure can result in front-running: The logic behind this argu­ment is that if an active manager’s hold­ings are dis­closed reg­u­larly, then short-term traders could use that dis­clo­sure to bid up their trades. Some providers have put in place a lag of one day, which has helped alle­vi­ate some of these concerns.
• Dis­clo­sure can harm return to active ETF investors: In this mis­con­cep­tion, it’s not front-running that’s the issue, but the con­se­quences that come from reveal­ing a long-term strat­egy. It’s a legit­i­mate con­cern, Nigam notes, but the need investors have for trans­parency might out­weigh these issues.

For more sto­ries about active ETFs, visit our actively man­aged ETF cat­e­gory.

Source:  ETFTrends.com, April 24, 2010

Tags: April 24, Clarity, Consequences, Counterparts, Disclosure, ETF, ETFs, Exchange Traded Funds, Focus Reports, Legitimate Concern, Logic, Management Strategy, Misconception, Misconceptions, Portfolio Management, Slam Dunk, Talking Points, Term Strategy, Term Traders, Trades, Transparency
Posted in ETFs, Markets | Comments Off

Tom Bradley's Thoughts on ETFs

Tuesday, April 27th, 2010

Tom Bradley, CEO of Steady­hand Funds, shared his thoughts about ETFs in a Globe and Mail edi­to­r­ial, April 16, 2010. His thoughts are rel­e­vant and wor­thy of con­sid­er­a­tion: In a nut­shell, Bradley says

1) that ETFs are not all as sim­ple as they've been made out to be,
2) they're not so pre­dictable,
3) their fee halo some­times shrouds hid­den fees,
4) they can some­times be illiq­uid, and don't always trade at a price (or at NAV) that is fair to the aver­age investor,
5) 90% of the offer­ings are suit­able for 10% of investors
6) talk of ETFs is often over-generalized.

Not that simple...

Will I own stocks, com­modi­ties or deriv­a­tives? Is there any lever­age? What index is the fund repli­cat­ing? Is it cur­rency hedged? How well does it trade? Are there other fees or costs?

In the rush to catch the wave, the ETF providers have clut­tered what was a pris­tine land­scape just a few years ago.

Not so predictable...

And in gen­eral, the track­ing error of ETFs (the amount a fund's return diverges from that of the tar­get index) have widened over the past few years. Accord­ing to the Wall Street Jour­nal, U.S. ETFs on aver­age missed their tar­gets by 1.25 per cent in 2009, more than dou­ble the 2008 gap.

Their fee halos...

Despite the trend to higher fees, there is still a halo around ETFs. This was par­tic­u­larly notice­able recently when some actively man­aged ETF's were rolled out and the 20-per-cent per­for­mance fee was hardly men­tioned in the commentaries.

They trade at a price, not NAV...

How­ever, many of the new funds are extremely illiq­uid and require trad­ing expe­ri­ence to ensure that the price paid is at or near the value of the fund. For long-term investors who are look­ing for cheap, broad-based mar­ket expo­sure, nego­ti­at­ing a trade in the open mar­ket and pay­ing a bro­ker­age com­mis­sion is not always so great a deal. For some, buy­ing a mutual fund after the mar­ket closes at net asset value (cal­cu­lated to four dec­i­mal points) may be more appeal­ing and practical.

The 90/10 Rule...

It's all about mar­ket tim­ing, sec­tor rota­tion and trad­ing. In other words, we have arrived at a point when 90 per cent of new offer­ings are suit­able for only 10 per cent of investors.

Let's stop over-generalizing...

We can no longer naively say that ETFs are sim­ple, low cost, index-based, tax effi­cient and have a trad­ing advan­tage. Or con­versely, that mutual funds are none of those things. It's time to stop gen­er­al­iz­ing and go back to the beach in search of the next wave.

Source: The Globe and Mail, ETF providers have clut­tered a pris­tine land­scape, Tom Bradley, April 16, 2010

Tags: Asset Value, Brokerage Commission, Commentaries, Commodities, Decimal Points, Derivatives, ETF, ETFs, Gap, Globe And Mail, Halos, Leverage, Market Exposure, Mutual Fund, Nutshell, Performance Fee, Pristine Landscape, Target Index, Term Investors, Tom Bradley, Tracking Error, Wall Street Journal
Posted in Commodities, ETFs, Markets | Comments Off

Sprott: The Banking Crisis Turned Into A Sovereign Debt Crisis, And Now It's Turning Into A Banking Crisis Again

Tuesday, April 27th, 2010

This arti­cle is a guest con­tri­bu­tion from Joe Wiesen­thal, of The Busi­ness Insider

Cour­tesy of John Mauldin's mid-week Out­side The Box newslet­ter, Eric Sprott touches on one of the lesser-discussed aspect of the Greece cri­sis, namely its effects on the country's banks.

What's inter­est­ing is that in the stan­dard for­mu­la­tion — the one that's gained cur­rency thanks to Ken Rogoff — it's sov­er­eign debt crises that fol­low bank­ing cri­sis (which is what we're expe­ri­enc­ing right now).

Sprott brings it full circle.

Here's part of it:

One aspect of the Greek sit­u­a­tion that has been obscured by all the recent polit­i­cal wran­gling is the cri­sis' impact on the Greek banks. Although the banks were sup­posed to be rock solid after all the government-injected cap­i­tal they received (not to men­tion zero-percent inter­est rates and gen­er­ous lend­ing terms from the Euro­pean Cen­tral Bank), data shows that Greek bank deposits have fallen 8.4 bil­lion euros, or 3.6 per­cent, in two months since Decem­ber 2009. With no restraints on cap­i­tal flows within the Euro­pean Union, Greek savers are free to trans­fer their assets else­where. Given that bank deposit guar­an­tees in Greece are the respon­si­bil­ity of the national gov­ern­ment rather than the Euro­pean Cen­tral Bank, we sus­pect Greek cit­i­zens are pulling money out of their banks because they ques­tion their government's abil­ity to hon­our its domes­tic deposit guar­an­tees. We envi­sion Greek depos­i­tors ask­ing them­selves how a gov­ern­ment that can't raise enough money to stay sol­vent can then turn around and guar­an­tee their bank deposits? It's a fair ques­tion to ask.

The Greek bank stocks have been thor­oughly pun­ished through­out the cri­sis. Chart A plots an index con­sist­ing of the four largest Greek bank stocks and shows an aver­age decline of 47% since Novem­ber 2009. The deposit with­drawals from these banks have been so dam­ag­ing to their respec­tive bal­ance sheets (remem­ber bank lever­age?) that the Greek banks have asked to bor­row 17 bil­lion euros left over from a 28 bil­lion euro sup­port pro­gram launched in 2008.3 You see the con­nec­tion here? Greece expe­ri­enced a finan­cial cri­sis, fol­lowed by a sov­er­eign cri­sis, fol­lowed by another finan­cial cri­sis. There is no doubt that the Greek cri­sis has helped drive the gold spot price to its recent all time high in euros. Gold is a pru­dent asset to own in times of cri­sis, and it's pos­si­ble that a por­tion of the Greek deposit with­drawals were rein­vested into the pre­cious metal. The fact remains, how­ever, that if the Greek gov­ern­ment can­not stem the out­flows of deposits soon, the EU will have no other choice but to under­take a real sov­er­eign bailout with all its bells, whis­tles and ardu­ous protocols.

Once again, the ques­tion is: Is Greece Europe's Bear Stearns:

It's a vicious spi­ral from finan­cial cri­sis to sov­er­eign debt cri­sis to bank­ing cri­sis, and there is no rea­son it can't spread to other Euro­pean coun­tries suf­fer­ing from sim­i­lar fis­cal imbal­ances. With Spain and Por­tu­gal next in line with their own sov­er­eign debt issues, we can expect depos­i­tors in these coun­tries to make sim­i­lar runs to the bank for their cash. "Guar­an­teed by Gov­ern­ment" is truly begin­ning to lose its potency in this envi­ron­ment. The Inter­na­tional Mon­e­tary Fund (IMF) seems to be prepar­ing for such a sce­nario with its recent announce­ment of a ten­fold increase in its emer­gency lend­ing facil­ity. The IMF's New Arrange­ments to Bor­row (NAB) facil­ity is designed to pre­vent the "impair­ment of the inter­na­tional mon­e­tary sys­tem or to deal with an excep­tional sit­u­a­tion that poses a threat to the sta­bil­ity of that sys­tem." The NAB facil­ity has grown from US$50 bil­lion to US$550 bil­lion with the mere stroke of a pen. Does the IMF know some­thing that the mar­ket doesn't?

Tags: Balance Sheets, Bank Deposits, Bank stocks, Banking Crisis, Business Insider, Capital Flows, Debt Crisis, Depositors, Enough Money, Eric Sprott, Gold, Greek Bank, Greek Banks, Greek Citizens, John Mauldin, National Government, Restraints, Solvent, Sovereign Debt, Wiesenthal, Withdrawals
Posted in Markets | Comments Off

Hugh Hendry: "I Don't Sell Dreams, I Live in the Real World."

Tuesday, April 27th, 2010

This arti­cle is a guest con­tri­bu­tion from Court­ney Com­stock, at The Busi­ness Insider.

There's a great inter­view with the eccen­tric hedge fund man­ager Hugh Hendry of Eclec­tica Cap­i­tal in Invest­ment Week.

Here's the short ver­sion of what he said:

On the China "bub­ble": "China has not demon­strated an abil­ity to cre­ate wealth. It has demon­strated an abil­ity to cre­ate GDP growth, which is a func­tion of spend­ing money...Infrastructure projects and steel plants that are pub­licly commissioned...If you build a high-speed rail link and antic­i­pate it improv­ing the pro­duc­tiv­ity of the econ­omy over the next 10 years, but actu­ally it does not, it means you will have to raise Gov­ern­ment bor­row­ing or tax the pop­u­la­tion to sus­tain the neg­a­tive cash­flow." More on China from Hendry.

On what's wrong with the invest­ment world: "We have cre­ated a hunger just to make money, spec­u­la­tive money and damn the con­se­quences almost – we are either all invest­ing in houses or stocks, soon to be Chi­nese stocks with Anthony Bolton. But, it has also cre­ated a Pavlov­ian response where every cri­sis was an oppor­tu­nity to buy more. I think time is reced­ing, it is pass­ing, it is leav­ing us behind. My dif­fi­culty is that I do not sell dreams. I live in the real world."

On his invest­ment strat­egy: "We are con­cerned about the world being pro­foundly defla­tion­ary and there­fore are reluc­tant to take a lot of eco­nomic risk. So the busi­nesses we select to buy today are large-cap names, so I can sell them and not be trapped in them. They are busi­nesses that have a lack of eco­nomic sen­si­tiv­ity. I have a tremen­dous amount invested in the tobacco indus­try. I think it could sur­vive a con­sumer depression."

On infla­tion: It could reside in the future [espe­cially if you ban short-selling]. "If you want to cre­ate infla­tion, what you will see is that we will have a ban on short sell­ing. We will have a ban on naked credit default swaps." Watch Hendry vig­or­ously defend short sell­ing.

The full inter­view is on Invest­ment Week.

And for more from Hendry, read an arti­cle he penned in the Tele­graph.

Tags: Business Insider, Cashflow, China, Chinese Stocks, Comstock, Credit Default Swaps, Economic Risk, Ell, GDP, GDP Growth, Hedge Fund Manager, High Speed Rail, Hugh Hendry, Hunger, inflation, Infrastructure Projects, Investment Strategy, Investment World, Pavlovian Response, Spending Money, Steel Plants, Tobacco Industry
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