Bank of Canada Policy Music — Should I Stay or Should I Go?

Monday, May 31st, 2010

This arti­cle is a guest con­tri­bu­tion by David Rosen­berg, Chief Mar­ket Econ­o­mist, Gluskin Sheff.

BANK OF CANADA POLICY MUSIC — SHOULD I STAY OR SHOULD I GO?

We are within 24 hours of the most impor­tant Bank of Canada pol­icy meet­ing in well over a year. In some sense, it seems like an easy fore­cast to make see­ing as all the econ­o­mists that toil for the Bay Street banks are fore­cast­ing a rate hike tomor­row and the money mar­kets are almost priced the entire way for such a move. The rea­son why every­one is brac­ing for the first inter­est rate increase the coun­try has seen since July 2007 is because the Bank of Canada pur­pose­fully set that uni­ver­sal expec­ta­tion in motion when it decided not to drop the ref­er­ence in its last post-meeting press release back on April 20, 2010 to its long-standing pledge to main­tain its accom­moda­tive pos­ture at least through to mid-2010.

A lot has changed since that time.

There is no doubt that the vast major­ity of the eco­nomic releases before the last press state­ment, and since, reveal an econ­omy that has sus­tained the rock-solid momen­tum oh so evi­dent in that eye-rubbing 5.0% burst of GDP growth in the final three months of 2009. There is also no doubt that under­ly­ing infla­tion is a tad higher than the Bank of Canada thought it would be when it dropped the overnight rate to 0.25% just over a year ago.

But much of the data digested by the cen­tral bank, the mar­kets and econ­o­mists are all back­ward look­ing and mon­e­tary pol­icy should really be under­taken by look­ing through the front win­dow as opposed to the rear-view mirror.

If you go back to the sum­mer of 2007, you will see that the coin­ci­dent indi­ca­tors of eco­nomic activ­ity were firm, but the lead­ing indi­ca­tors con­tained in finan­cial mar­ket sig­nals were telling cen­tral banks to cool their jets on any future rate hikes; think of the mis­take it would have been for the Bank of Canada to have car­ried out any more tight­en­ing moves back then.

Pol­icy rates are at “emer­gency” lev­els and, at 0.25%, is not sus­tain­able. The prob­lem with rais­ing inter­est rates is that once a cen­tral bank embarks on that path, it’s a tough task to talk the mar­kets out of pric­ing in a whole cycle of increases. It’s like eat­ing potato chips — you can’t stop at just one.

So this is not just about rais­ing rates once — once you start, the mar­kets will begin to do the hik­ing for you as a cen­tral bank, which is why mort­gage rates have already started to rise sharply in advance of the Bank of Canada doing any­thing. It was what the Bank recently said — or more like it, what it didn’t say — that has already prompted finan­cial mar­kets to jump­start the rate cycle.

In my view, it does not make sense for the Bank at this point to start rais­ing rates since there is no much uncer­tainty over the eco­nomic back­drop given the recent events in Europe and the con­ta­gion risks glob­ally. The solid recov­ery view may still be intact, but it is far less of a sure thing than it was the last time the Bank of Canada met and tried to con­vince the mar­kets that a rate increase was imminent.

The stock mar­ket has been weak and volatile, and there is a very good chance that a new bear mar­ket has begun. Cor­po­rate bond spreads have widened mate­ri­ally, de facto rais­ing the costs of cap­i­tal and doing a good part of the Bank’s job already if tight­en­ing finan­cial con­di­tions is the pri­mary objec­tive going forward.

Com­mod­ity prices have weak­ened pre­cip­i­tously from their recent highs and this is not only a defla­tion­ary devel­op­ment but will also cut into cor­po­rate prof­its. And we still have not yet seen the full defla­tion­ary impact of the 22% runup in the Cana­dian dol­lar over the past year. But the key in all this is that risk pre­mia have risen across the planet, and when that hap­pens, busi­nesses tend to put their spend­ing and hir­ing plans on hold. Of course, the exact oppo­site hap­pened this past year, but what is done is done and mon­e­tary pol­icy must be forward-looking. The finan­cial mar­kets, as lead­ing indi­ca­tors of eco­nomic activ­ity, are sig­nal­ing a slower growth pro­file ahead.

Tags: Bank Of Canada, Canadian Market, Central Banks, Chief Market, David Rosenberg, Economic Activity, Economic Releases, Final Three Months, GDP Growth, Hike Tomorrow, Leading Indicators, Market Economist, Market Signals, Money Markets, No Doubt, Overnight Rate, Rate Hike, Rate Hikes, Rate Increase, Rear View Mirror, Street Banks
Posted in Bonds, Canadian Market, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

More Volatility as the Month Winds Down

Monday, May 31st, 2010

This arti­cle is a guest con­tri­bu­tion David Andrews, CFA, Direc­tor, Invest­ment Man­age­ment & Research, Richard­son GMP Ltd.

And so the debate con­tin­ues: are we expe­ri­enc­ing a price cor­rec­tion in an ongo­ing bull mar­ket or are we in fact wit­ness­ing a fun­da­men­tal change in the busi­ness prospects around the world? Height­ened mar­ket volatil­ity, which has been with us for sev­eral weeks now, is likely to con­tinue until con­clu­sive evi­dence shows the prob­lems plagu­ing periph­eral Europe can be con­tained and China can suc­cess­fully orches­trate an attempted eco­nomic “soft landing”.

Europe and the Euro (€) have con­tin­ued to dom­i­nate head­lines with the cur­rency hav­ing fallen 7.5% against the U.S. dol­lar in the month of May mak­ing it the worst per­former among 16 major cur­ren­cies in 2010. China put its influ­en­tial weight behind the Euro cur­rency last week as it quashed reports their vast Euro­pean debt hold­ings were under review. In a show of China’s grow­ing global influ­ence, the Euro cur­rency, most com­modi­ties, and global equi­ties all surged when China claimed those reports as “ground­less”. Despite the upward surge by equi­ties last Thurs­day, most stock mar­kets are expe­ri­enc­ing their worst month of May per­for­mance in quite some time. The Dow Jones Indus­trial Aver­age suf­fered its worst month of May since way back in 1940. Can stocks bounce back in June? Pre­vail­ing low inter­est rates, low infla­tion, and strong cor­po­rate prof­itabil­ity do pro­vide a pos­i­tive fun­da­men­tal back drop for equi­ties. It also helps that the Asian econ­omy remains strong and the North Amer­i­can is now show­ing signs of rebuild­ing its momen­tum. The caveat to this out­look, in the short term at least, looks to be more polit­i­cal than fun­da­men­tal in nature.

The pre­vi­ously announced €750 bil­lion bailout pack­age has lost much of its lus­tre. There is a grow­ing sense the EU/IMF bailout will be insuf­fi­cient to save Greece from default­ing on its debt oblig­a­tions. Per­haps more con­cern­ing is the poten­tial for the other “fis­cally chal­lenged” Euro­zone coun­tries to suf­fer a sim­i­lar fate. Either way, investors are now try­ing to gauge the future impact of slower growth, higher taxes, and the knock on effect to the global econ­omy. Both Spain and Italy announced bud­get cuts and higher taxes as they attempt to get their respec­tive fis­cal sit­u­a­tions in line with EU pre­scribed rules of deficits not exceed­ing 3% of GDP by 2014. It is prov­ing polit­i­cally dif­fi­cult to achieve these deficit tar­gets as recent aus­ter­ity mea­sures and bud­get cuts were passed by the minor­ity gov­ern­ment of Spain by the slimmest of mar­gins (1 sin­gle vote). As an aside, Fitch Credit Rat­ings took a page out of the “Bet­ter Late than Never” hand­book and down­graded Spain’s credit rat­ing one notch to AA+ last Fri­day. Adding to the market’s con­fu­sion ahead of the U.S. long week­end was the rat­ing agency’s deci­sion to main­tain the out­look on Spain as “Sta­ble”... Another wild card for mar­kets last week included North Korea as it rat­tled its sabre and threat­ened “all-out war” over accu­sa­tions by South Korea that the North was respon­si­ble for the sink­ing of a South Korean war­ship in March.

Crude oil also made head­lines last week, mostly for the wrong rea­sons. The oil leak­ing into the Gulf of Mex­ico has sur­passed the vol­ume spilled by the 1989 Exxon Valdez acci­dent mak­ing this the worst envi­ron­men­tal dis­as­ter in U.S. his­tory. Efforts are under­way to cap the leak but so far suc­cess has remained elu­sive. Pub­lic anger over the cat­a­stro­phe has increas­ingly tar­geted the Obama admin­is­tra­tion for its slow and unco­or­di­nated response to this grow­ing eco­log­i­cal prob­lem. Also last week, NOAA released its fore­cast for the 2010 Atlantic Hur­ri­cane sea­son. It appears this year may rival 2005(Katrina and Rita) for the fre­quency and inten­sity of storms. Oil and Nat­ural Gas prices both rose on the prospect of an intense sea­son that kicks off in June. Speak­ing of kick offs, Memo­r­ial Day week­end is the offi­cial start of the U.S. dri­ving sea­son where fuel demands begin to rise. Oil has returned to the mid $70s after hav­ing bro­ken below $70 last week. Prices will remain volatile until the eco­nomic impact of a weaker Europe becomes clear.

As pre­vi­ously men­tioned, the North Amer­i­can Econ­omy con­tin­ues to build momen­tum as evi­denced by bet­ter than expected U.S. home sales in April and ris­ing con­sumer con­fi­dence data for May. First quar­ter U.S. GDP (3.0% annu­al­ized growth) showed the world’s largest econ­omy is recov­er­ing, albeit at a mod­er­ate pace. This week, the mar­ket should focus on the May employ­ment report. Also to be released, but unlikely to move the market’s nee­dle, are vehi­cle sales and some man­u­fac­tur­ing data for May. Auto sales are expected to main­tain their upward tra­jec­tory but more crit­i­cal is the pace at which jobs are being added. The con­sen­sus view on employ­ment is for 500,000 new posi­tions added for the month. This fol­lows April’s data where a sur­pris­ingly strong 290,000 new jobs were added. The unem­ploy­ment rate should move down ever so slightly to 9.8% in the U.S.

In Canada, the big news this week will come on Tues­day when the much antic­i­pated Bank of Canada inter­est rate pol­icy is announced. The mar­ket is expect­ing the cen­tral bank to increase inter­est rates by at least 0.25%. The Cana­dian econ­omy will report growth for the first quar­ter this week as well, mak­ing it a third con­sec­u­tive quar­ter of stel­lar growth which should add to the cen­tral bank’s case for higher inter­est rates. We expect this inter­est rate announce­ment will be the first of sev­eral 0.25% increases over the next num­ber of quar­ters. Cana­dian employ­ment data for May will also be announced on Fri­day and we expect 20,000 new posi­tions were added help­ing to drop the Cana­dian unem­ploy­ment rate to 8.0%.

Tags: Amp Research, Asian Economy, Bailout Package, Business Prospects, Canadian Market, China, Commodities, Conclusive Evidence, Corporate Profitability, Debt Obligations, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, ETF, Fundamental Change, Global Equities, Global Influence, Imf Bailout, Low Interest Rates, Lustre, Market Volatility, Natural Gas, Quite Some Time, Stock Markets, Upward Surge
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David Rosenberg: Hold Off on Rate Hikes for Now — Surprising Downside GDP Revision

Monday, May 31st, 2010

This arti­cle is a guest con­tri­bu­tion by David Rosen­berg, Chief Mar­ket Econ­o­mist, Gluskin Sheff, in Toronto, Canada.

U.S. real GDP was clipped to a +3.0% annual rate in the first revi­sion to the Q1 data from +3.2% (and the actual +5.6% print for Q4). Out­side of inven­to­ries, prac­ti­cally every cat­e­gory was taken down with com­mer­cial con­struc­tion (now — 15.3% SAAR from –14.0%) and capex (+12.7% from +13.4%) the major cul­prits. What this means is that real final sales growth was shaved to a mere 1.4% annual rate from 1.6%, not to men­tion the 1.7% in Q4. Aver­ag­ing out the past four quar­ters, real final sales have aver­aged 1.3% at an annual rate, which rep­re­sents the weak­est post-recession recov­ery in demand on record – it is usu­ally run­ning closer to a 4% annual rate at this junc­ture, which is alarm­ing in view of all the bailout, mon­e­tary and fis­cal stim­u­lus in the system.

he equity mar­ket may have only fig­ured this out, but out­side of inven­to­ries, the U.S. econ­omy is barely grow­ing and is actu­ally stag­nant in real per cap­i­tal terms. We are not sure how an 80% rally off the lows could have ever been con­sid­ered by any­one as being con­sis­tent with such an ane­mic recov­ery in the real

econ­omy. And, if you are won­der­ing how on earth the yield on the 10-year Trea­sury note can pos­si­bly be any­where remotely close to 3%, it is because that is exactly where the trend in nom­i­nal GDP is — and we are well past the peak of all the gov­ern­ment stim­u­lus efforts. Believe it.

As Chart 1 below illus­trates, we are still in the throes of a defla­tion­ary expe­ri­ence. Price per unit of pro­duc­tion on the non­fi­nan­cial sec­tor declined at a 1.5% annual rate in Q1, the fourth decline in a row and down 1.9% year-on-year, which is the steep­est decline since Q1 1950.

Tags: Bailout, Canadian Market, Capex, Chief Market, Culprits, David Rosenberg, Fiscal Stimulus, Inventories, Juncture, Lows, Market Economist, Nominal Gdp, Rate Hikes, Real Gdp, Sheff, Throes, Time Unit, Toronto Canada, Unit Labour Costs, What This Means, Year Treasury Note
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Gold Demand Trends

Monday, May 31st, 2010

This arti­cle is a guest con­tri­bu­tion from Frank Holmes, US Global Investors.

The World Gold Coun­cil (WGC) sees a bright year for gold in 2010, with strong invest­ment demand com­ing from the U.S. and Europe, and ris­ing jew­elry demand in China and India.

That was one of the key mes­sages deliv­ered by the WGC in its web­cast this week that went over the gold demand trends for the first quar­ter of 2010.

The chart above shows how gold jew­elry bounced back in the lat­est quar­ter com­pared to the first quar­ter of 2009, despite sig­nif­i­cantly higher prices. In emerg­ing mar­kets, jew­elry demand was up 43 per­cent year-over-year.

In India, the demand was about 148 met­ric tons (4.8 mil­lion troy ounces), nearly four­fold higher than a year ear­lier.  The WGC says gold con­sumers in India and China, where the increase was also notable, are get­ting used to the idea of higher prices. In the U.S., jew­elry demand was down slightly.

Indus­trial demand was up 31 per­cent – much of this is related to improved con­di­tions for the elec­tron­ics industry.

While total iden­ti­fi­able demand was down on a year-over-year basis, net retail invest­ment demand was up 26 per­cent in the quarter.

This trend was led by the devel­oped world, where sov­er­eign debt con­cerns, con­ta­gion wor­ries and mas­sive bud­get deficits have shaken con­fi­dence in paper cur­ren­cies as a store of value. The WGC says pur­chases by gold-backed ETFs have risen in the cur­rent quar­ter, and that gold demand is espe­cially brisk among Ger­man and Swiss buyers.

Click here to view the pre­sen­ta­tion slides. You can view the full Gold Demand Trends report for free at www.gold.org.

Tags: Budget Deficits, China, Contagion, Electronics Industry, Emerging Markets, ETF, ETFs, Frank Holmes, Gold, Gold Demand Trends, Gold Jewelry, India, Investment Demand, Massive Budget, Metric Tons, Paper Currencies, Presentation Slides, Retail Investment, Sovereign Debt, Trends Report, Troy Ounces, Us Global Investors, Wgc, World Gold Council
Posted in ETFs, Gold, India, Markets | Comments Off

Index Summary and U.S. Equity Market Diary (5/31/2010)

Monday, May 31st, 2010

Index Sum­mary

• The major mar­ket indices were mixed this week. The Dow Jones Indus­trial Index fell 0.56 per­cent. The S&P 500 Stock Index gained 0.16 per­cent, while the Nas­daq Com­pos­ite fin­ished 1.26 per­cent higher.
• Barra Growth out­per­formed Barra Value as Barra Value fin­ished 0.07 per­cent higher while Barra Growth rose 0.25 per­cent. The Rus­sell 2000 closed the week with a gain of 1.90 percent.
• The Hang Seng Com­pos­ite fin­ished higher by 2.56 per­cent, Tai­wan was up 0.80 per­cent and the Kospi gained 1.41 percent.
• The 10-year Trea­sury bond yield closed at 3.29 per­cent, up 5 basis points for the week.

U.S. Equity Mar­ket Diary (5/31/2010)

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 1.9 per­cent. Other better-performing sec­tors included mate­ri­als and tech­nol­ogy. The three worst-performing sec­tors were con­sumer sta­ples, finan­cials, and tele­com services.

Within the con­sumer dis­cre­tion sec­tor the best-performing stock was Time Warner Cable Inc, up 8 per­cent. Other top-five per­form­ers in the sec­tor were Inter­pub­lic Group of Com­pa­nies Inc, GameStop Corp, Coach Inc, and Wynn Resorts Ltd.

Strengths

• The wire­less tele­com ser­vices group was the best-performing group for the week, up 8 per­cent, led up by Sprint Nex­tel Corp. One major bro­ker­age firm upgraded the stock to a “Buy” and another one reit­er­ated its “Buy” rec­om­men­da­tion. Both firms cited their belief that Sprint is doing a bet­ter job reduc­ing “churn” (the per­cent­age of con­trac­tual cus­tomers who can­cel service).
• The inde­pen­dent power pro­duc­ers & energy traders group out­per­formed, ris­ing 7 per­cent. All three stocks in the group (AES Corp, Con­stel­la­tion Energy Group Inc, and NRG Energy Inc) rebounded this week after sell­ing off in the prior week.
• The com­puter stor­age & periph­er­als group also out­per­formed, gain­ing 6 per­cent, led by NetApp Inc. The provider of inte­grated net­work stor­age and data man­age­ment hard­ware rose after report­ing earn­ings above the con­sen­sus esti­mate and issu­ing a stronger than expected fore­cast, cit­ing that demand for its stor­age gear is ris­ing as com­pa­nies mod­ern­ize aging data centers.

Weak­nesses

• The fer­til­izer & agri­cul­tural chem­i­cals group was the worst-performing group, down 6 per­cent, led by it largest mem­ber, Mon­santo Co. The firm cut its earn­ings fore­cast this week for the sec­ond time in seven weeks as it low­ered prices of its Roundup her­bi­cide to near the lev­els of generic ver­sions com­ing into the U.S. from China.
• The oil & gas equip­ment & ser­vices group under­per­formed, los­ing 6 per­cent. These stocks were weak after Pres­i­dent Barack Obama on Thurs­day announced a mora­to­rium on new off­shore drilling for six months.
• The edu­ca­tion ser­vices group under­per­formed, declin­ing by 5 per­cent. The for-profit edu­ca­tion stocks con­tinue to suf­fer from investor con­cern over uncer­tainty about the effect of pro­posed rules to be issued by the Depart­ment of Education.

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 time­frame, 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 Bond, China, Constellation Energy, Constellation Energy Group, Constellation Energy Group Inc, Consumer Staples, Dow Jones Industrial, Dow Jones Industrial Index, Gamestop Corp, Independent Power Producers, Interpublic Group, Interpublic Group Of Companies, Interpublic Group Of Companies Inc, Major Market Indices, Nrg Energy, Nrg Energy Inc, Sprint Nextel, Time Warner Cable, Treasury Bond Yield, Wireless Telecom Services, Wynn Resorts Ltd
Posted in Bonds, Energy & Natural Resources, Markets, Oil and Gas, US Stocks | Comments Off

Economy and Bond Market Diary (5/31/2010)

Monday, May 31st, 2010

The Econ­omy and Bond Mar­ket Diary (5/31/2010)

Trea­suries sold off this week as the mar­ket man­aged a mod­est rever­sal of the flight to qual­ity trade we have expe­ri­enced recently. The yield on the 30-year trea­sury rose by about 10 basis points this week.

May def­i­nitely had its share of neg­a­tive news, whether it was the stock mar­ket, Euro­pean credit cri­sis or the spill in the Gulf of Mex­ico. In spite of this, May con­sumer con­fi­dence rose to the high­est lev­els in two years. This is a very inter­est­ing coun­ter­point to the double-dip reces­sion crowd.

Strengths

• Con­sumer con­fi­dence rose to the high­est lev­els in two years.
• U.S. M2 money sup­ply has reac­cel­er­ated in recent weeks and the annu­al­ized four-week rate of change is up almost 19 per­cent. This is a very pos­i­tive devel­op­ment for both the econ­omy and finan­cial markets.
• April durable goods orders rose to the high­est level in three years.

Weak­nesses

• On the back of the expi­ra­tion of the home buyer tax credit in April, the inven­tory of unsold homes rose by the most in 10 years.
• In con­trast to the rise in the U.S. con­sumer con­fi­dence index, State Street’s Investor Con­fi­dence Index dropped to the low­est since Jan­u­ary 2009. Investor con­fi­dence in North Amer­ica and Europe fell while Asian con­fi­dence rose.
• First quar­ter GDP was revised to 3 per­cent, down from the 3.2 per­cent prior estimate.

Oppor­tu­ni­ties

• The cur­rent envi­ron­ment appears sim­i­lar to 2008 in many ways, although cru­cial dif­fer­ences are evi­dent. The econ­omy is recov­er­ing and global eco­nomic growth still looks like the most likely out­come. In addi­tion, while some fear/risk indi­ca­tors are ele­vated, they are nowhere near the panic lev­els seen dur­ing the past crisis.

Threats

• Until the Euro­pean sit­u­a­tion is resolved with some degree of cer­tainty, the mar­ket will be at the whims of macro risk factors.
• Con­cerns of a full-blown credit cri­sis have prob­a­bly dimin­ished some but can­not be ruled out.

Tags: 30 Year Treasury, Basis Points, Bond Market, Consumer Confidence Index, Credit Crisis, Double Dip Recession, Durable Goods Orders, European Situation, Global Economic Growth, Gulf Of Mexico, Investor Confidence, Market Diary, Money Supply, Negative News, Panic Levels, Quality Trade, Quarter Gdp, Risk Factors, Risk Indicators, Whims
Posted in Bonds, Markets | Comments Off

Gold Market Diary (5/31/2010)

Monday, May 31st, 2010

Gold Mar­ket Diary (5/31/2010)

For the week, spot gold closed at $1,214.38 per ounce up $37.28 or 3.17 per­cent. Gold equi­ties, as mea­sured by the Philadel­phia Gold & Sil­ver Index gained 4.71 per­cent. The U.S. Trade-Weighted Dol­lar Index con­tin­ued its upward march ris­ing 1.58 percent.

Strengths

• Chi­nese and Indian gold demand remained strong in the first quar­ter of 2010 despite high gold prices. The infer­ence is that con­sumers in these two impor­tant nations are becom­ing accus­tomed to higher gold prices. Indian and Chi­nese demand rose 698 per­cent and 11 per­cent, respec­tively, in the first quarter.
• Recent data shows Indian gold imports improved by 23 per­cent last month and accel­er­ated by 71 per­cent dur­ing April com­pared to the same peri­ods a year ago.
• Debt con­ta­gion fears in the euro zone have led to strong buy­ing in gold coins, gold bars, and gold exchange-traded funds dur­ing May.

Weak­nesses

• The Wall Street Jour­nal is fea­tur­ing a three-part series called “The Gold, The Bad and the Ugly.” In the first install­ment, the Jour­nal high­light some pos­i­tive aspects of gold, but included a graphic show­ing the gold price over­lay­ing the pre­vi­ous rise in the Nas­daq Com­pos­ite and an index of home­build­ing stocks to ques­tion whether gold is the next bubble.
• If the gold price were to rise to about $2,350 per ounce, this would just be the inflation-adjusted price of gold in 1980 dol­lars. Also of note, if one com­pared the amount of gold the U.S. held rel­a­tive to its debt in the 1970–1980 cycle, the amount of debt out­stand­ing today would put gold roughly in the $40,000 per ounce range.
• A $165 bil­lion bailout pack­age has been intro­duced by Con­gress to fund cur­rent short­falls for union pen­sion funds in dis­tress. The bill could impose an almost infi­nite lia­bil­ity on tax­pay­ers due to the pen­sions hav­ing to be paid out until the work­ers die.

Oppor­tu­ni­ties

• Wang Zheny­ing, deputy director-general of the Depart­ment of Finan­cial Mar­ket Man­age­ment at the Shang­hai office of the People's Bank of China, stated that China should improve gold invest­ment prod­ucts and develop more of them con­sid­er­ing the country’s sav­ings of more than 30 tril­lion Yuan.
• Pro­tec­tion of wealth is a major trend that will con­tinue accord­ing to Deutsche Bank as it increased its gold price fore­casts for this year and the fol­low­ing two years. Pre­dic­tions have been pushed to $1,215 for the end of 2010, $1,450 for the end of 2011, and $1,600 for the end of 2012.
• Pres­i­dent Obama recently issued an extended mora­to­rium on per­mits to drill new deep­wa­ter wells for the next six months. The U.S. Min­er­als Man­age­ment Ser­vices, which is the second-highest rev­enue pro­ducer for the gov­ern­ment behind the IRS, man­ages the nation’s nat­ural gas, oil and other min­eral resources, and now will have essen­tially no income com­ing in the door. This delay in drilling could cut 4 per­cent of U.S. sup­ply and have a big impact on the Gulf as close to 20 per­cent of Gulf coastal states’ wealth is reliant on the oil and gas indus­try. Besides push­ing oil prices higher, gold prices typ­i­cally rise when oil strengthens.

Threats

• To help investors under­stand the logic behind the pro­posed Aus­tralian wind­fall prof­its, Aus­tralia defined a wind­fall profit as any­thing that exceeds a return on assets of 5.3 per­cent, which is equal to Australia’s ten-year bond yield. This clearly shows Australia’s strat­egy of penal­iz­ing invest­ments that could pro­duce returns greater than buy­ing gov­ern­ment debt.
• Julius Malema, leader of the Youth League of the Africa National Con­gress, noted that despite objec­tions from Pres­i­dent Zuma, nation­al­iza­tion of South Africa’s mines could be imple­mented as a pol­icy in 2012.
• China is con­sid­er­ing amend­ing its resource tax to a more supply-demand out­look as new pol­icy would imple­ment taxes based on value of pro­duc­tion instead of cur­rent quan­tity of pro­duc­tion bench­mark. Although a change in pol­icy, this ref­or­ma­tion has the poten­tial to force prices higher as the mar­ginal cost of pro­duc­tion is likely to rise.

Tags: Bailout Package, China, Chinese Demand, Commodities, Deputy Director General, energy, Gold, Gold Coins, Gold Demand, Gold Equities, Gold Exchange Traded Funds, Gold Imports, Gold Market, gold market diary, Gold Price, Gold Prices, gold update, golds, India, Market Diary, Nasdaq Composite, Natural Gas, Natural Resources, Ounce Range, Philadelphia Gold, Shanghai Office, Silver, Silver Index, Spot Gold, Union Pension Funds, Wall Street Journal
Posted in Bonds, Energy & Natural Resources, Gold, India, Markets, Oil and Gas, Outlook, Silver | Comments Off

Energy and Natural Resources Market Diary (5/31/2010)

Monday, May 31st, 2010

Energy and Nat­ural Resources Mar­ket Diary (5/31/2010)

Strengths

• The price of crude oil gained nearly 6 per­cent to $74 a bar­rel this week in response to global equity mar­kets improv­ing from the prior week and con­cerns over fur­ther drilling restric­tions in the Gulf of Mexico.
• The price of nat­ural gas gained 7.7 per­cent to $4.34 per Mmbtu on spec­u­la­tion that hot weather will boost demand for gas-fired electricity.
• Bloomberg reports BHP Bil­li­ton is ask­ing Sum­it­omo Metal Indus­tries for $225 per met­ric ton for met coal for the sec­ond quar­ter vs. $200 per ton for the first quarter.
• Power gen­er­a­tion in China was up 22 per­cent year-over-year in April.

Weak­nesses

• In response to the oil spill in the Gulf of Mex­ico, Pres­i­dent Obama announced new reg­u­la­tions on deep­wa­ter oil pro­duc­tion that will ban new drilling per­mits in water depths below 1,000 feet.
• Arcelor­Mit­tal USA will tem­porar­ily idle sev­eral blast fur­naces and has put on hold some fur­nace con­struc­tion work in response to weak­en­ing mar­ket conditions.
• The price of iron ore fines (62%Fe) into China fell for the 13th day in a row accord­ing to Platts. Prices fell $1.00/dmt to $144.50/dmt and prices are now down 22 per­cent since their most recent peak on April 20.

Oppor­tu­ni­ties

• The Chi­nese Gov­ern­ment has approved the merger of Angang and Pan­gang Groups, which will cre­ate China's largest steel­maker with capac­ity of pos­si­bly 56 met­ric tons per year.
• Shang­hai Secu­ri­ties News reports that China may start a trial pro­gram this month to sub­si­dize cars pow­ered by alter­na­tive energy.
• Arcelor­Mit­tal, the world’s largest steel­maker, said it will invest $1.2 bil­lion in Brazil to boost out­put of steel prod­ucts for the bur­geon­ing con­struc­tion industry.

Threats

• Rio Tinto Plc Chief Exec­u­tive Tom Albanese said this week that the Aus­tralian government's planned new min­ing tax has already dam­aged the country's rep­u­ta­tion and is the biggest sov­er­eign risk issue the miner faces across its global port­fo­lio of assets.

Tags: Angang, Bhp Billiton, Blast Furnaces, Brazil, China, Commodities, commodities update, energy, Furnace Construction, Global Equity Markets, Global Portfolio, Hot Weather, Iron Ore Fines, Market Diary, Natural Gas, Natural Resources, Oil Spill, Price Of Crude Oil, Price Of Natural Gas, Rio Tinto Plc, Risk Issue, Shanghai Securities News, Sovereign Risk, Steelmaker, Sumitomo Metal Industries, Tom Albanese, Water Depths
Posted in Brazil, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Emerging Markets Diary (5/31/2010)

Monday, May 31st, 2010

Emerg­ing Mar­kets Diary (5/31/2010)

Strengths

• Philip­pines’ GDP expanded by a much higher than expected 7.3 per­cent year-over-year in the first quar­ter, the fastest pace since the sec­ond quar­ter of 2007, thanks to a strong recov­ery in exports, over­seas worker remit­tances, and con­sumer spending.
• The CPI in South Africa for April came in at 4.8 per­cent vs. 5.1 per­cent in March, partly due to the appre­ci­a­tion of the Rand. There are expec­ta­tions that the cur­rent inter­est rates of 6.5 per­cent will likely stay unchanged till the end of the year.
• Brazil bank loans in April rose by 1.1 per­cent month-over-month and 17.6 per­cent year-over-year on the back of robust eco­nomic per­for­mance. Non­per­form­ing loans decreased to 6.8 per­cent from 7 per­cent and com­pared favor­ably with the peak of 8.6 per­cent in June 2009.
• Turk­ish banks had a good start to 2010, beat­ing con­sen­sus esti­mates by 28 per­cent in the first quar­ter. Return on equity for the banks reached 27 per­cent in the first quar­ter, com­pared to 21 per­cent in the fourth quar­ter of last year.

Weak­nesses

• Thailand’s exports declined by 2 per­cent and imports by 5 per­cent on a month– over-month basis in April, affected by Thailand’s domes­tic polit­i­cal crisis.
• Mex­ico unem­ploy­ment in April rose to 5.4 per­cent from 4.8 per­cent in March, likely a tem­po­rary phe­nom­e­non as the coun­try ben­e­fits from the expan­sion of the U.S. econ­omy (up 3 per­cent in Q1).
• Cen­tral Euro­pean cur­ren­cies came under pres­sure from the Greek debt cri­sis con­ta­gion. Since the begin­ning of the year, the Hun­gar­ian forint is down 15.6 per­cent, the Pol­ish zloty is down 13.9 per­cent, and the Czech koruna is down 12.3 percent.

Oppor­tu­ni­ties

• The debt cri­sis in Europe and dra­con­ian poli­cies in China have dri­ven down the val­u­a­tion of Asian equi­ties to his­tor­i­cally attrac­tive lev­els ear­lier this week, when the price-to-earnings ratio based on profit in the next 12 months fell below the 15-year aver­age by one stan­dard devi­a­tion. His­tory sug­gests that over­sold sit­u­a­tions like this usu­ally har­bin­ger pos­i­tive mar­ket returns in the next 12 months.
• The auto indus­try in Mex­ico is seek­ing con­gres­sional approval for a 12-month sus­pen­sion of the Value Added Tax (VAT) on sales of new cars. Accord­ing to some esti­mates, a sus­pen­sion of the VAT would result in a 25–30 per­cent reduc­tion of the sticker prices on new cars and likely lead to a 10 per­cent increase in pro­duc­tion. Strong auto pro­duc­tion in Mex­ico has been one of the dri­ving forces of an eco­nomic recov­ery in Mex­ico this year.
• The United Nations will hold its cli­mate change forum in Can­cun from Novem­ber 29 to Decem­ber 10 and will require at least 20,000 hotel rooms for the par­tic­i­pants. This will be sup­port­ive of the ASUR air traf­fic in Cancun.
• Mr. Marek Belka, cur­rently hold­ing a senior posi­tion at the Inter­na­tional Mon­e­tary Fund, will likely be nom­i­nated for Pres­i­dent of the National Bank of Poland. We believe that the can­di­dacy of Mr. Belka will be well received by the mar­kets and improve the rela­tion­ship between NBP and the Finance Ministry.
• Moody's ser­vice said that it may upgrade Turkey’s credit rat­ing if the coun­try adopts leg­is­la­tion on fis­cal rule. The law was sub­mit­ted to par­lia­ment on Thurs­day and will be debated in late June to early August.

Threats

• The prospect of shale gas in Europe sub­sti­tut­ing exports from the for­mer Soviet Union states has been given much cov­er­age in the press; how­ever, uncon­ven­tional gas resources in Europe are 7 times smaller com­pared to North Amer­ica and are unlikely to achieve sim­i­lar economies of scale.

Tags: Asian Equities, Bank Loans, Brazil, BRIC, China, Consensus Estimates, Contagion, Current Interest Rates, Czech Koruna, Debt Crisis, Domestic Political Crisis, Economic Performance, Emerging Markets, European Currencies, Hungarian Forint, India, Nonperforming Loans, Polish Zloty, Price To Earnings Ratio, Quarter Return, Remittances, Return On Equity, Standard Deviation, Turkish Banks
Posted in Brazil, Markets, US Stocks | 1 Comment »

How to Make a Killing on the Coming Water Crisis

Sunday, May 30th, 2010

This arti­cle is a guest con­tri­bu­tion by John Thomas, of MadHedgeFundTrader.com.

If you think that the upcom­ing energy short­age is going to be bad, it will pale in com­par­i­son to the next water cri­sis, so invest­ment in fresh water infra­struc­ture is going to be a recur­ring long term invest­ment theme. (See my ear­lier efforts to get you into the water space at http://www.madhedgefundtrader.com/February_3__2009.html ). One the­ory about the end­less wars in the Mid­dle East since 1918 is that they have really been over water rights.

After all, they're not mak­ing it any­more. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quar­ters of that is locked up in ice at the North and South poles. In places like China, with a quar­ter of the world's pop­u­la­tion, up to 90% of the fresh water is already pol­luted, some irre­triev­ably so. Some 18% of the world pop­u­la­tion lacks access to potable water, and demand is expected to rise by 40% in the next 20 years. Aquifers in the US, which took nature mil­len­nia to cre­ate, are approach­ing exhaustion.

While mem­brane osmo­sis tech­nolo­gies exist to con­vert sea water into fresh, they use ten times more energy than cur­rent treat­ment processes, a real prob­lem if you don't have any, and will eas­ily dou­ble the end cost to con­sumers. While it may take 16 pounds of grain to pro­duce a pound of beef, it takes a stag­ger­ing 2,416 gal­lons of water to do the same. The UN says that $11 bil­lion a year is needed for water infra­struc­ture invest­ment, and $15 bil­lion of the US stim­u­lus pack­age will be sim­i­larly spent. It says a lot that when I went to the UC Berke­ley School of Engi­neer­ing to research this piece, most of the experts in the field had already been retained by major hedge funds!

With the Great Lakes account­ing for 15% of the world's total fresh water resources, the US is in a rea­son­able secure posi­tion, so this is pri­mar­ily an emerg­ing mar­ket play. At the top of the shop­ping list to par­tic­i­pate here should be the Clay­more S&P Global Water Index ETF (CGW), which has appre­ci­ated by 32% since I first brought it up. You can also visit the Pow­er­Shares Water Resource Port­fo­lio (PHO), the First Trust ISE Water Index Fund (FIW), or the indi­vid­ual stocks Veo­lia Envi­ron­ment (VE), Tetra-Tech (TTEK), and Pen­tair (PNR). Who has the world's great­est per capita water resources? Siberia, which could become a major exporter to China in the decades to come.

Copy­right © http://www.madhedgefundtrader.com

Tags: Berkeley School, China, Emerging Market, Energy Shortage, ETF, Fresh Water Resources, Hedge Funds, Infrastructure Investment, John Thomas, Long Term Investment, Osmosis, School Of Engineering, Sea Water, South Poles, Stimulus Package, Three Quarters, Uc Berkeley, Water Crisis, Water Infrastructure, Water Planet, Water Rights, World Population
Posted in ETFs, Infrastructure, Markets | Comments Off

Eric Sprott: "A Busted Formula"

Sunday, May 30th, 2010

This arti­cle is a guest con­tri­bu­tion by Eric Sprott and David Franklin of Sprott Asset Man­age­ment.

There’s noth­ing wrong with throw­ing a lit­tle money at a prob­lem to make it go away. There’s equally noth­ing wrong with throw­ing a lit­tle bor­rowed money at a prob­lem to make it dis­ap­pear, as long as you have the means to pay that bor­rowed money back.

But what hap­pens if you throw a lot of bor­rowed money at a prob­lem, and the prob­lem doesn’t go away? If you’ve ever expe­ri­enced a sit­u­a­tion like that you can prob­a­bly under­stand how Europe feels right now. It just unleashed a mag­nif­i­cent $1 tril­lion euro bailout and the mar­ket responded with a sell­off by the end of the week! So what hap­pened? That money was sup­posed to make the prob­lem go away, after all. And it was a lot of money. Why did the mar­ket respond to it with such disdain?

We believe the market’s reac­tion is con­firm­ing what we have long sus­pected: that these bailouts pro­vide next to no long-term value. They don’t pro­duce real jobs. They don’t improve pro­duc­tiv­ity. They just pro­long the pre­car­i­ous lever­age game played by the finan­cial sec­tor, and do so at tremen­dous cost to tax­pay­ers. "Bailout and Stim­u­late" has been the ral­ly­ing call for gov­ern­ments and cen­tral banks since the begin­ning of this finan­cial cri­sis – and it has cer­tainly had its impact over the last two years, but not the type of impact we need to pro­pel real, sus­tain­able growth. There are three recent, glar­ing exam­ples of this busted "Bailout and Stim­u­late" for­mula in action:

Exhibit A: The United States

From the out­set of this finan­cial cri­sis, the US Gov­ern­ment and Fed­eral Reserve have spent pro­lific amounts of money to save its banks and stim­u­late its econ­omy. Accord­ing to Neil Barof­sky, spe­cial inves­ti­ga­tor gen­eral for the Trou­bled Asset Relief Pro­gram, the United States has now spent approx­i­mately $3 tril­lion on var­i­ous pro­grams to stem the finan­cial cri­sis.¹ This fig­ure is expected to be updated again in July.

This $3 tril­lion expen­di­ture includes stim­u­lus pro­grams like ‘cash for clunk­ers’, the exten­sion of unem­ploy­ment ben­e­fits, infra­struc­ture spend­ing, the "Mak­ing Home Afford­able" pro­gram, as well as the activ­i­ties of the Fed­eral Reserve. To mea­sure what the fis­cal stim­u­lus has actu­ally accom­plished we looked to the US Fed­eral bud­get outlays/receipts to gauge the impact of the stim­u­lus on GDP.

Table A presents cur­rent dol­lar GDP increases year-over-year along­side cur­rent dol­lar bud­get deficits. Com­par­ing the two in cur­rent dol­lars pro­vides a sense of the hard dol­lar impact that stim­u­lus spend­ing has had on the econ­omy. As the chart illus­trates, the net impact of the stim­u­lus con­tri­bu­tions and promises made since 2008 have resulted in a com­bined bud­get deficit of close to $2.5 tril­lion dol­lars and an incre­men­tal net increase in GDP of $200 bil­lion. A $200 bil­lion return for a $2.5 tril­lion increase in debt rep­re­sents a ter­ri­ble return on invest­ment. It implies that the net impact of the stim­u­lus on GDP since 2008 has been a mere 9 cents for every deficit dol­lar spent. Buy­ing dimes with dol­lars is bad busi­ness, government-funded or not.

Another trou­bling sta­tis­tic relates to the cost of job cre­ation for the Amer­i­can Recov­ery and Rein­vest­ment Act (that’s the $787 bil­lion pro­gram designed to pro­duce real jobs in the United States). The White House esti­mates that it takes approx­i­mately $92,000 of gov­ern­ment spend­ing to cre­ate one job in the US. The White House jus­ti­fies this exor­bi­tant amount by stat­ing that at the cur­rent employ­ment level, each job in the US econ­omy gen­er­ates $105,000 in GDP, thus result­ing in good "bang for the (tax­payer) buck".⁵ Spend­ing $92,000 to gen­er­ate $105,000 in GDP seems jus­ti­fi­able on the sur­face. But fur­ther dig­ging reveals that the actual cost to save or cre­ate one job in the US was $117,933 per job from Feb­ru­ary to Decem­ber 2009.⁶ That’s well over $92,000, and more than the $105,000 "return" each job is sup­posed to pro­vide in GDP. If this met­ric is cor­rect, it means the US gov­ern­ment is actu­ally suf­fer­ing a neg­a­tive return from its job stimulus.

To fur­ther con­vo­lute the issue, one must also con­sider that the sup­posed $105,000 GDP return for each new job doesn’t incor­po­rate the fact that the $92,000 (or $117,933) spent to cre­ate it was BORROWED. Why does this aspect of gov­ern­ment expen­di­ture never make it into the analy­sis? Spend­ing $92,000 for a $105,000 pop in GDP rep­re­sents bad logic when that $92,000 isn’t yours to spend. If we incor­po­rate the inter­est costs required to bor­row the $92,000, are we really pro­duc­ing value or just dig­ging a deeper hole?

Numer­i­cal dis­crep­an­cies aside, the fact remains that GDP is a ter­ri­ble met­ric to mea­sure the return of a job pro­gram. GDP is tech­ni­cally the value of all fin­ished goods and ser­vices pro­duced in an econ­omy. From a busi­ness per­spec­tive, GDP is akin to rev­enue, which isn’t an asset, and is dif­fer­ent from ‘earn­ings’ or ‘prof­its’. Busi­nesses don’t hire addi­tional work­ers for their mar­ginal increase to ‘rev­enue’ – they hire to increase their mar­ginal ‘profit’. The White House approach to job stim­u­lus will max­i­mize spend­ing, not profit. Rather than max­i­mize spend­ing, why not max­i­mize actual employ­ment by find­ing a way to pro­duce a job for less than $92,000? Surely some of the fif­teen mil­lion unem­ployed work­ers in the US would appre­ci­ate some help in that area.⁷

Tags: Asset Management, Bailout, Bill Gross, Canadian Market, Central Banks, David Franklin, Disdain, Economy, Eric Sprott, Federal Reserve, Financial Crisis, Financial Sector, Glaring Examples, Gold, Governments, Leverage, Outset, Productivity, Selloff, Sustainable Growth, Taxpayers, Trillion, Us Government
Posted in Bonds, Canadian Market, Gold, Infrastructure, Markets, US Stocks | Comments Off

Hugh Hendry: "I would recommend you panic."

Sunday, May 30th, 2010

In this dis­cus­sion, Hugh Hendry of Eclec­tica Asset Man­age­ment, Gillian Tett of the Finan­cial Times and Prof Jef­frey Sachs of Colum­bia Uni­ver­sity dis­cuss the Euro­pean bank­ing situation.

“I would rec­om­mend you panic. The Euro­pean bank­ing sys­tem is in a cri­sis. Let’s purge this sys­tem of its rot­ten­ness. Let’s take on a reces­sion. It’s going to be tough, peo­ple are gonna lose their jobs. They are going to lose their jobs any­way. We can spread this over 20 years, or we can get rid of it over 3 years,” said Hendry.

This is a lively dis­cus­sion and worth­while view­ing material.

Source: BBC News­night (via YouTube, May 26, 2010 (hat tip: Zero Hedge).

Tags: 3 Years, Bbc, Columbia University, Eclectica Asset Management, European Banking System, Financial Times, Gillian Tett, Hat Tip, Hugh Hendry, Jeffrey Sachs, Jobs, Material Source, Newsnight, Recession, Rottenness, Youtube
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Global Markets — What's in Store?

Sunday, May 30th, 2010

Global equity mar­kets have been hem­or­rhag­ing from the debt cri­sis in the Euro­pean Union that began in Greece and sub­se­quently spread to Por­tu­gal and Spain’s equity mar­kets, los­ing more than 15% in terms of US dol­lars since the recent high in mid-April.

Source: I-Net Bridge.

With long-term trend-lines broken …

Source: I-Net Bridge.

… what are the equity mar­kets telling us?

Stock mar­kets are in a big way dri­ven by under­ly­ing eco­nomic fun­da­men­tal fac­tors. Per­haps the sin­gle most impor­tant indi­ca­tor of under­ly­ing global eco­nomic growth is the Global GDP-weighted Man­u­fac­tur­ing Pur­chas­ing Man­agers Index (PMI). The GDP-weighted PMI for each major eco­nomic region (Japan, U.S., U.K., Euro­zone and China) is weighted accord­ing to the sizes of their economies. A read­ing in excess of 50 indi­cates expan­sion of the global econ­omy while a read­ing below 50 indi­cates con­trac­tion. The GDP-weighted PMI leads global (OECD) eco­nomic growth by approx­i­mately one quarter.

Sources: I-Net Bridge, Plexus Asset Management.

Approx­i­mately 80% of the 12-month momen­tum of the MSCI World Index since 2003 can be explained by the Global GDP-weighted Man­u­fac­tur­ing PMI. From the graph below it is evi­dent that the global equity mar­ket ran sig­nif­i­cantly ahead of the under­ly­ing global economy.

Sources: I-Net Bridge, Plexus Asset Management.

Are stock mar­kets expect­ing an implo­sion of the Global GDP-weighted PMI sim­i­lar to that of 2008?

The sit­u­a­tion in 2008 was a global liq­uid­ity prob­lem where the trust between banks world­wide went for a loop, result­ing in inter­bank lend­ing rates sky-rocketing. The TED spread – three-month dol­lar Libor less three-month Trea­sury Bills – climbed to nearly 500 basis points as lenders per­ceived an increas­ing risk of default on inter­bank loans. Global trade effec­tively came to a stand­still that saw Pur­chas­ing Man­agers indices plummeting.

Although the TED spread has widened some­what in the past few weeks it remains within the range that per­sisted from 2002 to end 2006. It is there­fore evi­dent that the cur­rent debt cri­sis is not a global liq­uid­ity crisis.

Sources: I-Net Bridge, Plexus Asset Management.

While it can be expected that the Global Man­u­fac­tur­ing PMI will be neg­a­tively impacted by the debt cri­sis and fis­cal aus­ter­ity in the Euro­pean Union, it should be seen in con­text. The sit­u­a­tion in the Euro­pean Union is a debt prob­lem in the so-called PIIGS coun­tries (Por­tu­gal, Italy, Ire­land, Greece and Spain) that col­lec­tively amounts to approx­i­mately 35% of the EU’s GDP or 7.6% of Global GDP. Two thirds of total EU trade is intra-EU, while the EU accounts for approx­i­mately 40% of global imports.

Despite the cri­sis the pre­lim­i­nary Euro­zone Ser­vices PMI in May improved to 56.0 against 55.6 in April, while the man­u­fac­tur­ing PMI fell from 57.6 to 55.9 but was still expand­ing. While domes­tic demand in the Euro­zone may be fal­ter­ing, the man­u­fac­tur­ing PMIs for export orders have risen as the euro weak­ness has started to boost exports of major coun­tries in the Euro­zone such as Ger­many. With the Euro­zone GDP-weighted PMI (man­u­fac­tur­ing and ser­vices) lead­ing the econ­omy by approx­i­mately three months indi­ca­tions are that the region’s econ­omy in the sec­ond quar­ter may be grow­ing at a pace in excess of 2% com­pared to a year ago.

Sources: I-Net Bridge, Plexus Asset Management.

How­ever, given the leads and lags of the aus­ter­ity mea­sures intro­duced in the affected coun­tries the jury is still out on what the Euro­zone PMIs will be in the com­ing months.

The Baltic Dry Index, which mea­sures ship­ping rates and is an excel­lent indi­ca­tor of global trade, has turned the cor­ner for the bet­ter in March and is still ris­ing despite sig­nif­i­cant increases in capacity.

Sources: I-Net Bridge, Plexus Asset Management.

Apart from the Euro­pean routes Shang­hai Con­tainer­ized Freight indices have all picked up, with the North Amer­i­can routes being excep­tion­ally strong, echo­ing the strong pick-up in the Baltic Dry (Bulk) Index. How­ever, ship­ments to Europe have started to increase, while the North Amer­i­can routes have expe­ri­enced a con­tin­ued rise in trans­port demand for the past four months, result­ing in idle ships being recommissioned.

Sources: Chineseshipping.com.cn, I-Net Bridge, Plexus Asset Management.

The increase in freight rates and the con­tin­ued rise in export vol­umes to espe­cially the U.S. are good news for the Chi­nese economy.

Sources: I-Net Bridge, Plexus Asset Management.

The wors­en­ing debt cri­sis in the Euro­zone together with the sharp depre­ci­a­tion of the euro against the yuan will have a neg­a­tive impact on China’s econ­omy. The impact will be muted, though, as only 16% of China’s exports is des­tined for the Euro­zone. In the light of what is hap­pen­ing on the ship­ping front and the lim­ited over­all impact of the Euro­zone on China’s exports, China’s man­u­fac­tur­ing and non-manufacturing PMIs are likely to hold up in the short term. Fur­ther­more, the Chi­nese government’s recent deci­sion to defer the exit strat­egy of its fis­cal stim­u­lus pack­age has erased major con­cerns regard­ing the econ­omy, espe­cially in the short term. How­ever, GDP growth on a year-ago basis is likely to mod­er­ate to approx­i­mately 11% in the sec­ond quar­ter of this year.

Sources: Li & Fung, Plexus Asset Management.

It can be expected that the improved export tar­iffs and increased vol­umes will under­score both the U.S. PMI man­u­fac­tur­ing and non-manufacturing indices in the short term.

Sources: Li & Fung, ISM, Plexus Asset Management.

But the weak­ness of the euro together with lower demand as a result of the aus­ter­ity mea­sures is likely to hurt U.S. exports to the Euro­zone as the lat­ter accounts for 20% of the U.S. export mar­ket. Over the past two years, how­ever, a sig­nif­i­cant cor­re­la­tion has devel­oped between China’s man­u­fac­tur­ing PMI for imports and that of the U.S.’s GDP-weighted PMI for exports (man­u­fac­tur­ing and non-manufacturing). With China’s econ­omy expected to remain buoy­ant the U.S. GDP-weighted PMI for exports is likely to hold up above 50 – indi­cat­ing expan­sion – despite pos­si­ble falling exports to the Eurozone.

Sources: Li & Fung, ISM, Plexus Asset Management.

Although cir­cum­stances and fac­tors may change rapidly, a train smash sim­i­lar to 2008/2009 in the GDP-weighted man­u­fac­tur­ing PMI is unlikely. A decline towards the 50 level is pos­si­ble but it will con­tinue to indi­cate expan­sion of the global man­u­fac­tur­ing sec­tor, albeit at a slower rate. It there­fore appears that the sig­nif­i­cant ham­mer­ing of global stocks was a cor­rec­tion from an extremely over­bought mar­ket (as in 2004). I will not be sur­prised if the 200-day and 40-week mov­ing aver­ages will soon be tested and bro­ken on the upside (as in 2004). As always, I will be mon­i­tor­ing these devel­op­ments with a beady eye.

Tags: Basis Points, China, Debt Crisis, Economic Region, Eurozone, Fundamental Factors, Global Economic Growth, Global Economy, Global Equity Markets, Global Gdp, Global Liquidity, Global Markets, Implosion, Interbank, Liquidity Problem, Msci World Index, Purchasing Managers Index, Stock Markets, Term Trend, Treasury Bills, Trend Lines
Posted in Markets, US Stocks | Comments Off

The Real Deal

Friday, May 28th, 2010

It is easy to for­get the pic­ture of long-term eco­nomic growth given today's tur­bu­lent mar­kets. In 1925, the U.S. gross domes­tic prod­uct was $90.6 bil­lion. By 2009, the GDP had grown to $14.3 tril­lion. This equates to a stag­ger­ing 157-fold increase as a 6.2% annual aver­age growth com­pounded over 84 years (see the fol­low­ing graph). Even the Great Depres­sion appears as a tran­si­tory drop in this eco­nomic ascent while the –1.3% decline in 2009 barely reg­is­ters. Today, there are 25 U.S. cor­po­ra­tions that have mar­ket cap­i­tal­iza­tions in excess of the GDP in 1925.

GDP growth was dri­ven by three fac­tors – infla­tion, labour force growth and pro­duc­tiv­ity improve­ments. Although infla­tion of 2.8% per annum was a sig­nif­i­cant part of the 6.2% annual GDP growth, labour force and pro­duc­tiv­ity increases accounted for the bulk of eco­nomic growth. Real GDP per capita, the most rel­e­vant mea­sure of eco­nomic pros­per­ity and a rough proxy for pro­duc­tiv­ity, grew at 2.1% annually.

Ever-increasing cor­po­rate pro­duc­tiv­ity fos­tered by com­pet­i­tive, open mar­kets is the engine of long-term real wealth cre­ation. Investors' returns from div­i­dends and cap­i­tal appre­ci­a­tion reflect the growth in cor­po­rate earn­ings as ris­ing prices, an expand­ing pop­u­la­tion and labour force, and pro­duc­tiv­ity improve­ments lift GDP.

Tags: Bill Gross, Capital Appreciation, Corporate Earnings, Corporate Productivity, Dilution, Economic Prosperity, GDP Growth, Gdp Per Capita, Great Depression, Gross Domestic Product, Labour Force, Long Term Capital, Market Capitalizations, Open Markets, Productivity Improvements, Productivity Increases, Real Gdp Per Capita, Relevant Measure, S Corporations, Turbulent Markets, Wealth Creation
Posted in Markets, US Stocks | Comments Off

The Importance of Being Unhappy, and other Weekend Reads

Friday, May 28th, 2010

Here are this weekend's read­ing diver­sions for your enjoy­ment. We don't often think of being unhappy as some­thing that can serve us, but how else can we know what is great if we don't know what sucks. For exam­ple, if we over­pro­tect our chil­dren, do we not also run the risk of doing them the dis­ser­vice of not know­ing until its too late that some things are to be avoided. Just as we're told that every rejec­tion makes every accep­tance sweeter, and every cri­sis ups the value of seren­ity, being unhappy pro­vides a healthy con­trast that helps define our happiness.

Have a great weekend!

Just Lis­ten: Put Down the Black­berry and Con­nect With Your Children

I don't think par­ents have lost the "will" to con­nect, guide and teach their chil­dren, they too often just don't know the "way" to do it.

Tod­dlers who lie 'will do better'

"Their chil­dren are not going to turn out to be patho­log­i­cal liars. Almost all chil­dren lie.

No Time to Med­i­tate? Try This Quick and Effec­tive Method

A key goal of med­i­ta­tion is to calm a rac­ing mind. When we can learn how to turn down men­tal noise and tap into an inner still­ness, we con­nect with deeper feel­ings and the intu­itive guid­ance of our heart.

Sleep Tips: The Ulti­mate Body Bat­tery Recharge

If the only sleep you required was deep sleep (stages three and four) and REM sleep, you might only need about four hours a night. But we all know that with only four hours of sleep you will be pretty tired dur­ing the day.

Fight or Flight: Who Runs Your Life?

Do you sense any anx­i­ety in your stom­ach or your chest? Or per­haps you're feel­ing irri­tated and annoyed by what I just told you about yourself.

The Fun­ni­est Kids Test Answers Of All Time (PHOTOS)

Whether they're blam­ing an ele­phant or turn­ing math grids into Tetris games, these kids didn't mind enter­tain­ing (or insult­ing) the teacher. Vote for your favorite!

Belly fat linked to demen­tia, study shows

Belly fat is known to increase the risk for heart dis­ease, and now sci­en­tists say it might also increase the risk of dementia.

10 Amaz­ing Things You Didn't Know about Animals

The rep­tiles swal­low large stones that stay per­ma­nently in their bel­lies. It's been sug­gested these are used for bal­last in diving.

10 flat-belly food tricks

Sim­ple short­cuts that will help slim you down from Look Bet­ter Naked! by the edi­tor of Women’s Health

Braised rap­ini with feta and sun-dried tomatoes

Braised rap­ini with feta and sun-dried tomatoes

Researchers alarmed at bac­te­ria in Cana­dian bot­tled water

Cana­dian researchers say they've dis­cov­ered some bot­tled water in Canada con­tains more bac­te­ria than what comes out of the tap — although they won't reveal which brands are the culprits

Sexy cars may boost a guy's appeal, but leave women stuck in neutral

Turns out, there's basis for the stereo­types, with a new aca­d­e­mic study find­ing that men really are per­ceived as better-looking when seated in a high-status car.

Dad's men­tal health affects chil­dren too

Boys seemed par­tic­u­larly vul­ner­a­ble to the effects of their fathers' depres­sion, the study found. Sons of alco­holic fathers were at increased risk of seri­ous behav­ioral prob­lems and sub­stance abuse.

Crazy uses for ex’s wed­ding dress

"Did I men­tion that wed­ding dresses make incred­i­ble grill covers?"

The Impor­tance of Being Unhappy

When you are unhappy, let it stay for a while and con­sider what "pur­pose" this unhap­pi­ness is there to "serve". Take your own sweet time to stay unhappy. Then allow it to serve its pur­pose, play out its role, before get­ting in a hurry to ward it off. This means that being unhappy could in fact make you excited that you are on to the next best thing in life. This is the impor­tance of being unhappy!

10 Weird But Totally Nor­mal Things About Your Newborn

We've got the scoop on every­thing they won't tell you about at the hospital.

If Par­ent­ing was Salaried—What Moms are Worth

On any given day, a mom per­forms the duties of a facil­i­ties man­ager, a psy­chol­o­gist, a CEO, a jan­i­tor, a teacher, a cheer­leader, a nurse, a maid, a chauf­feur, a cook, and the list goes on. Phew!

Tags: Battery Recharge, Canadian Market, Deep Sleep, Dementia, Disservice, Diversions, Elephant, ETF, Heart Disease, Inner Stillness, Intuitive Guidance, Key Goal, Math Grids, Pathological Liars, Rejection, Rem Sleep, Serenity, Sleep Stages, Test Answers, Tetris Games, Time Photos, Ups
Posted in Canadian Market, ETFs, Markets | Comments Off

Chart of the Day: Emerging Europe Exports

Friday, May 28th, 2010

May 26, 2010

This week’s chart from Cit­i­group looks at Emerg­ing Europe’s expo­sure to the risks posed by West­ern Europe’s sov­er­eign debt woes.

The Euro­pean Union is the pri­mary export mar­ket for most of the coun­tries of Emerg­ing Europe, so any weak­ness in the euro makes their prod­ucts more expen­sive for EU residents.

The great­est EU expo­sure, accord­ing to Citi’s research, is faced by the Czech Repub­lic – nearly 70 per­cent of the nation’s GDP is export-dependent, and about 85 per­cent of its exports go to the EU. Hun­gary is nearly in the same position.

Citi points out that this expo­sure may not be as severe as it appears. Much of the export vol­ume from the Czech Repub­lic and Hun­gary goes to the EU (par­tic­u­larly Ger­many) as com­po­nents for fin­ished prod­ucts that are then exported. The weaker euro would ben­e­fit EU exports, which stands to insu­lates com­po­nent sup­pli­ers from Emerg­ing Europe to some degree.

At the other extreme in the chart above falls Turkey, whose econ­omy is less reliant on exports than the rest of Emerg­ing Europe, and Ukraine, whose top trade part­ner is Russia.

Citi also says that Emerg­ing Europe on the whole has lit­tle risk of the same sort of public-debt con­ta­gion that has the EU ail­ing and vul­ner­a­ble. The 2008-09 credit cri­sis ham­mered Emerg­ing Europe because of the region’s private-sector debt bur­dens, not its sov­er­eign debt.  A pos­si­ble excep­tion could be Hun­gary, whose pub­lic debt-to-GDP ratio is close to the EU average.

Tags: Citi, Citigroup, Component Suppliers, Contagion, Credit Crisis, Debt Burdens, Debt Woes, Emerging Europe, European Union, Export Market, Export Volume, Finished Products, GDP, Gdp Ratio, Hungary, Private Sector, Public Debt, Russia, Sovereign Debt, Trade Partner, Western Europe
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Finding a Niche in South Korea (Mark Mobius)

Friday, May 28th, 2010

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

The renewed ten­sions in the Korean Penin­sula sparked off by alle­ga­tions that North Korea tor­pe­doed and sank one of South Korea’s naval ships, have caused jit­ters to the mar­kets in the region recently.  I think the mea­sures by South Korean Pres­i­dent Lee Myung-Bak will, in the long run, prob­a­bly be pos­i­tive since it may accel­er­ate change in North Korea and result in a move towards open­ing up that country.

In the short term, of course, there will be anxiety, which could impact the mar­kets.  North Korea has been in a cri­sis con­tin­u­ously and the ten­sions have been present since the end of the Korean War.  Of course, we can never under­es­ti­mate the pos­si­bil­ity of full-scale war in the Korean Penin­sula. Hav­ing said that we believe the prob­a­bil­i­ties are quite low, given the inter­ests of all major par­ties on both sides to con­tain the situation. Despite all the geopo­lit­i­cal con­cerns, South Korea has con­tin­ued to grow its economy.

Read­ing the lat­est news head­lines reminded me of my recent trip to South Korea.  Land­ing at the new Incheon air­port in Seoul is a plea­sure. It’s hard to believe that mod­ern Incheon saw the land­ing of Gen­eral MacArthur’s Korean War troops, who risked the extreme tides that could quickly trans­form Inchon beaches into a muddy quag­mire.  When I was liv­ing in South Korea dur­ing the 1960s, I remem­ber being knee deep in the Incheon mud and tak­ing mud baths there.

On this trip to South Korea, we took a three-hour fast train to Pusan to see the oper­a­tions of var­i­ous fac­to­ries in the vicin­ity.  From Pusan city, we first drove to one of the high-tech machine fac­to­ries that dot South Korea’s coun­try­side and con­tribute to the country’s indus­trial and export strength.  We looked at the oper­a­tions of a com­pany that rep­re­sents the new gen­er­a­tion of high-quality, high-tech metal prod­ucts com­pa­nies.  After a lean 2009, new orders are begin­ning to come in from U.S. aero­space com­pa­nies, Chi­nese rail­ways and Indian power plants.  The firm makes very large machines, each cost­ing as much as US$1 mil­lion per unit. Domes­ti­cally, firms like this con­tinue to develop new types of machin­ery tools that can replace imported machin­ery tools at cheaper prices.  I’m always impressed by their capa­bil­i­ties in build­ing such large pre­ci­sion machin­ery tools, such as Com­puter Numer­i­cal Con­trol (CNC) gear hob­bing machines, required to make prod­ucts such as mega-ton gears, and CNC high fre­quency machines, for wind power components.

At another Pusan plant, new orders for indus­trial fit­tings were grow­ing.  This was our third visit to the fac­tory, and as before, the fac­tory yard was full of fin­ished indus­trial fit­tings wait­ing to be shipped.  About 60% of the firm’s com­po­nents are for petro­chem­i­cal plants, 17% for ships and drilling rig parts, and the rest for elec­tric power plants.  To cel­e­brate a mile­stone anniver­sary of its found­ing, the firm is aim­ing for an aggres­sive rev­enue tar­get by expand­ing its inter­na­tional pres­ence.  In order to tap that mar­ket it must be close to major inter­na­tional engi­neer­ing firms who place orders for plant com­po­nents, so it has opened a branch in the US.  Since power plant con­struc­tion is a poten­tially larger mar­ket than petro­chem­i­cal plants, the firm is putting more empha­sis on cus­tomers in the power plant con­struc­tion arena, par­tic­u­larly nuclear power plants, where the demand­ing spec­i­fi­ca­tions can be met by the company.

The third plant we vis­ited was also see­ing growth in new orders for its prod­ucts.  We learned that the firm had just been granted the abil­ity to sup­ply com­po­nents for nuclear power plants.    For its raw mate­ri­als, it cur­rently sources steel ingots domes­ti­cally and imports steel slabs from Brazil and Rus­sia, but in order to increase mar­gins, it plans to build an elec­tric arc steel pro­duc­tion facil­ity, which is expected to cut man­u­fac­tur­ing costs by 20%.

As always, vis­it­ing the heart of the action gives us a real sense of how busi­ness is doing on the ground, and I was encour­aged to see a pick up in new orders for the South Korean man­u­fac­tur­ers in Pusan.  They are cap­i­tal­iz­ing on their strengths to spe­cial­ize in niche markets.

Copy­right © 2010 Franklin Tem­ple­ton Investments

Tags: Brazil, Extreme Tides, Franklin Templeton Investments, General Macarthur, Incheon Airport, India, Jitters, Korean Peninsula, Korean War, Latest News Headlines, Lee Myung Bak, Living In South Korea, Mark Mobius, Mud Baths, Naval Ships, North Korea, President Lee, Russia, S Industrial, Scale War, South Korea, South Korean President, War Troops
Posted in Brazil, India, Markets | Comments Off

Marc Faber: Make Money on Stocks Volatility While Holding Physical Gold

Friday, May 28th, 2010

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By Dian L. Chu, Eco­nomic Fore­casts & Opinions

Dr. Marc Faber told investors to buy stocks on March 9, 2009 when S&P reached its low since 1996, and pre­dicted a 20% decline if the index broke a new high.

Now with the S&P down about 13% from that high, Faber talked to Bloomberg on May 24 about his lat­est call on the mar­kets, econ­omy and what he thinks are the best place to invest now.

S&P — Sup­port at 1,045, Resis­tance at 1,200

Faber now thinks the stocks are over­sold in the near term on extreme neg­a­tive sen­ti­ment towards the euro and North Korea, but there's strong sup­port around 1,045/1,050.

From a sea­sonal per­spec­tive, a sum­mer rally in June/July could be expected, with a lot of resis­tance around 1,200/1,220, fol­lowed by a down­turn and bot­tom­ing out in October/November. By then, another round of stim­u­lus could come in and prop up equi­ties as a stronger U.S. dol­lar and bond mar­ket would give the Fed ammu­ni­tion to ease the mon­e­tary policy.

(Note: In a sep­a­rate inter­view with Tom Keene on the same day, Faber says S&P could fall another 15%.)

Bear­ish About Every­thing, But Quite Happy to Hold Phys­i­cal Gold

“It’s a race in the pur­chas­ing power of paper money to the bot­tom, and the only assets that will, for sure, keep their pur­chas­ing power are pre­cious metals.”

Even though gold has been per­form­ing quite well in the last 18 months, it is "con­ceiv­able" that gold could go down some­what more.  Nevertheless, envi­sion­ing a forth­com­ing dis­as­ter in the next few years, Faber says he is quite happy to own phys­i­cal gold after look­ing at all asset classes.

Asian Equity Still Reasonable

Faber said investors may still buy a bas­ket of Sin­ga­pore, Thai or Hong Kong shares with about 5% div­i­dend, which would be good for a long term portfolio.

On The U.S. Economy

“Stocks could go up and the econ­omy can deteriorate...Government offi­cial should stay out of the econ­omy... Mr. Obama and his clowns around him don't under­stand... they're going to destroy the economy."

The fis­cal deficits will go up instead of down and Faber is not sure a recov­ery ever hap­pened.  Econ­omy will even­tu­ally set­tle at a lower level than pre-crisis–the New Normal–according to Faber.  Mean­while, huge fis­cal and mon­e­tary stim­u­lus, cou­pled with pri­vate sec­tor credit con­trac­tion, will ensure high volatil­ity in eco­nomic and finan­cial activity.

Make Money on Volatility

In a typ­i­cal Faber fash­ion, he ended the inter­view with the fol­low­ing remark:

"In the long term, as I always said, we are all doomed, but in the mean­time, because of the volatil­ity in the mar­kets, you can make money.  The key is to know when to stop, and when you stop, how and where to allo­cate assets."

My Take on Gold & Stocks

The rally in the past cou­ple of days, instead of a bona fide "recovery", are pri­mar­ily from shorts cov­er­ing after China reit­er­ated their com­mit­ment to keep­ing the euro in their esti­mated $2.4 tril­lion of reserves, and big fund man­agers in the U.S. held onto equi­ties while cut­ting bond holdings.

Most of the tech­ni­cal indi­ca­tors of SPX are not deci­sively bull­ish either.  The StochRSI is at 0.666 (a bad omen, I might add). close to 0.80, which is the level that could sig­nal a pull­back. (See Chart)

Gold and equi­ties have been trend­ing mostly in tan­dem while inversely with the euro since late last year. The cur­rent mar­ket sen­ti­ment most likely will not react kindly to any bad news or rumor about Europe or any­thing investors per­ceive that may neg­a­tively impact global eco­nomic or polit­i­cal stability.

Although uncer­tainty typ­i­cally buoys gold as investors seek store of value by sell­ing stocks and buy­ing into gold, a deep retreat of stocks could trig­ger enough mar­gin calls prompt­ing a sell­off of other asset classes includ­ing gold.

Mean­while, gold, now at around $1,212, close to its all time nom­i­nal high of around  $1,230 an ounce reached ear­lier this month, could be sub­ject to some near-term profit-taking and tech­ni­cal cor­rec­tion as well.

Eco­nomic Fore­casts & Opinions

Tags: Asian Equity, Asset Classes, Bond Market, China, Dian, Downturn, Dr Marc Faber, Economic Forecasts, Economy Stocks, Gold, Government Official, Negative Sentiment, North Korea, Obama, Paper Money, physical gold, precious metals, Purchasing Power, Stimulus, Summer Rally, Term Portfolio, Tom Keene, Volatility
Posted in Bonds, Gold, Markets, US Stocks | Comments Off

In Conversation with Dennis Gartman: Euro/yen, Gold, China and Real Estate

Friday, May 28th, 2010

Den­nis Gart­man dis­cussed the sig­nif­i­cance of the euro/yen cross to world mar­kets, gold, China, real estate and the econ­omy, with Bloomberg's Tom Keene and Ken Pre­witt, May 26, 2010.

The main under­ly­ing point Gart­man made is that the euro/yen cross serves as a reli­able indi­ca­tor of the direc­tion of risk in mar­kets, i.e. "Risk ON" or "Risk OFF." A falling euro/yen cross indi­cates a with­drawal from risk trades (increased risk aver­sion, weaker mar­kets), and a ris­ing euro/yen cross indi­cates a exten­sion of risk trades (increased risk tak­ing, stronger mar­kets). For this rea­son, it is worth keep­ing an eye on.

Below is the tran­script of the interview.

(This is not a legal tran­script. Bloomberg LP can­not guar­an­tee its accuracy.)

Den­nis Gart­man, Econ­o­mist at Gart­man Let­ter LC, talks to Tom Keene and Ken Pre­witt about the Euro-Yen

May 26, 2010

SPEAKERS: DENNIS GARTMAN, ECONOMIST, GARTMAN LETTER LC, TOM KEENE, EDITOR-AT-LARGE, BLOOMBERG NEWS KEN PREWITT, HOST, BLOOMBERG NEWS

07:20

TOM KEENE, EDITOR-AT-LARGE, BLOOMBERG NEWS: He's just come back from board meet­ings at North Car­olina State, where they will be in the Big Four next year in bas­ket­ball. We wel­come, Den­nis Gart­man. Mr. Gart­man, good morning.

DENNIS GARTMAN, ECONOMIST, GARTMAN LETTER LC: Good morn­ing, Ken, how are you?

Keene: Well, we're very, very good. Let's talk Euro-Yen. You and I love it equally. I would say tech­ni­cally it is incred­i­bly well con­tained. Is Euro-Yen about a stronger Yen, or is it about a weaker Euro?

Gart­man: Yes.

Keene: That was a good answer.

KEN PREWITT, HOST, BLOOMBERG NEWS: Yes, I liked that.

Gart­man: It is about a stronger Yen. It is about a weaker Euro. It is about a stronger Yen, which quite hon­estly makes very lit­tle sense other than peo­ple unwind­ing carry trades and it is about a weaker Euro, which does indeed make sense as I think the Euro, the Euro­pean Mon­e­tary Union has been splin­ter­ing apart, the cloth, I like to say of the Union has been torn. And I'm not sure that they'll be able to sew it back together.

Keene: All right.

Pre­witt: Den­nis, you keep an eye on Mrs. Watan­abe. First, who is that and sec­ond what's she up too?

Gart­man: Well, Mrs. Watan­abe is Mrs. Smith here in the United States. It's whom I refer to as the aver­age Japan­ese investor and quite hon­estly, one, she's get­ting quite old; two, she's a bit con­fused and three, she'd moved a great good deal of her money off­shore because rates in Japan for so long had been very, very low, lower than any place else in the world almost near zero where every­one else has fol­lowed. And I think Mrs. Watan­abe is prob­a­bly still con­fused. What's really hap­pen­ing is the hue, the larger insti­tu­tional investors who had used the Yen as their bor­row­ing weapon and had made trades abroad were either -

Keene: Right.

Gart­man: — were prob­a­bly unwind­ing mas­sive carry trades that they had put on over the course of many years.

Keene: Den­nis, in a minute here, I want to come back and talk about your ter­rific gold call. But in a minute here, I get so many emails that say, Tom, why do you care about Euro-Yen? Why does Den­nis Gart­man watch Euro-Yen?

Gart­man: I watch Euro-Yen because I think it's the tem­per­a­ture of the global cap­i­tal mar­ket gen­er­ally. As that cross gets stronger, it means money is being bor­rowed in Japan and put to work abroad, which is an ele­ment of risk being put on as that cross goes down. It means risk is being taken off the table. It's really a very good ther­mome­ter, a health gauge of the health of the global cap­i­tal market.

Tags: Accuracy, Basketball, Bloomberg News, Board Meetings, China, China Economy, China Real Estate, Commodities, Dennis Gartman, Direction, Economist, Euro, Euro Gold, European Monetary Union, Gold, Good Answer, Guarantee, Investor, Japan, Love, Mrs Smith, North Carolina State, Prewitt, Real Estate, Risk Aversion, Risk Trades, Speakers, Tom Keene, Trades, United States, Watanabe, World Markets, Yen
Posted in Bonds, Commodities, Gold, Markets | Comments Off

iPad + Velcro = Love

Friday, May 28th, 2010

iPad + Vel­cro from Jesse Ros­ten on Vimeo.

Hat tip kot­tke

Tags: Hat Tip, Love, Rosten, Velcro
Posted in Markets | Comments Off