Highlights from Warren Buffett's Letter to Shareholders 2010

Monday, February 28th, 2011

by Trader Mark, Fund My Mutual Fund

War­ren Buffett's much read annual let­ter is out and I've added some links below for those who are interested.

The full let­ter in pdf for­mat is here.

1) The NYT Deal­book does an overview in As Berk­shire Improves, Buf­fett Sings Praises of U.S.

2) The Asso­ci­ated Press writes War­ren Buf­fett Remains Opti­mistic About U.S. Future

Bil­lion­aire War­ren Buf­fettt wants Amer­i­cans to be opti­mistic about the country's future but wary about bor­row­ing money and the games pub­lic com­pa­nies play with profit num­bers they report.  He said a hous­ing recov­ery will likely begin within the next year.

3) WSJ Deal­book has quotes and quips from the let­ter below

Dis­cussing why Berk­shire keeps so much cash on hand:
Bor­row­ers then learn that credit is like oxy­gen. When either is abun­dant, its pres­ence goes unno­ticed. When either is miss­ing, that’s all that is noticed.
****

“Money will always flow toward oppor­tu­nity, and there is an abun­dance of that in Amer­ica.”
****

On human poten­tial and the nation’s future
Human poten­tial is far from exhausted, and the Amer­i­can sys­tem for unleash­ing that potential–a sys­tem that has worked won­ders for over two cen­turies despite fre­quent inter­rup­tions for reces­sions and even a Civil War—remains alive and effec­tive.
****

John Ken­neth Gal­braith once slyly observed that econ­o­mists were most eco­nom­i­cal with ideas: They made the ones learned in grad­u­ate school last a life­time. Uni­ver­sity finance depart­ments often behave sim­i­larly. Wit­ness the tenac­ity with which almost all clung to the the­ory of effi­cient mar­kets through­out the 1970s and 1980s, dis­mis­sively call­ing pow­er­ful facts that refuted it “anom­alies.” (I always love expla­na­tions of that kind: The Flat Earth Soci­ety prob­a­bly views a ship’s cir­cling of the globe as an annoy­ing, but incon­se­quen­tial, anom­aly.)
****

One foot­note: When we issued a press release about Todd [Comb's] join­ing us, a num­ber of com­men­ta­tors pointed out that he was “little-known” and expressed puz­zle­ment that we didn’t seek a “big-name.” I won­der how many of them would have known of Lou in 1979, Ajit in 1985, or, for that mat­ter, Char­lie in 1959. Our goal was to find a 2-year-old Sec­re­tariat, not a 10-year-old Seabis­cuit. (Whoops–that may not be the smartest metaphor for an 80-year-old CEO to use.)
****

On hedge funds:
The hedge-fund world has wit­nessed some ter­ri­ble behav­ior by gen­eral part­ners who have
received huge pay­outs on the upside and who then, when bad results occurred, have walked away rich, with their lim­ited part­ners los­ing back their ear­lier gains. Some­times these same gen­eral part­ners there­after quickly started another fund so that they could imme­di­ately par­tic­i­pate in future prof­its with­out hav­ing to over­come their past losses. Investors who put money with such man­agers should be labeled pat­sies, not part­ners.
****

Berk­shire and the housing/mortgage cri­sis:
Our bor­row­ers get in trou­ble when they lose their jobs, have health prob­lems, get divorced, etc. The reces­sion has hit them hard. But they want to stay in their homes, and gen­er­ally they bor­rowed sen­si­ble amounts in rela­tion to their income. In addi­tion, we were keep­ing the orig­i­nated mort­gages for our own account, which means we were not secu­ri­tiz­ing or oth­er­wise reselling them. If we were stu­pid in our lend­ing, we were going to pay the price. That con­cen­trates the mind. If home buy­ers through­out the coun­try had behaved like our buy­ers, Amer­ica would not have had the cri­sis that it did.
(Empha­sis added)
****

On home own­er­ship
Home own­er­ship makes sense for most Amer­i­cans, par­tic­u­larly at today’s lower prices and bar­gain inter­est rates. … But a house can be a night­mare if the buyer’s eyes are big­ger than his wal­let and if a lender–often pro­tected by a gov­ern­ment guarantee–facilitates his fan­tasy. Our country’s social goal should not be to put fam­i­lies into the house of their dreams, but rather to put them into a house they can afford.
****

On the worst of the global finan­cial cri­sis:
As one investor said in 2009: “This is worse than divorce. I’ve lost half my net worth–and I still have my wife.”

****
In dis­cussing the bazaar that is the com­ing annual meet­ing:
Remem­ber: Any­one who says money can’t buy hap­pi­ness sim­ply hasn’t learned where to shop.

Copy­right © Trader Mark, Fund My Mutual Fund

Tags: Anomalies, Associated Press, Billionaire, Borrowing Money, Commentators, Dealbook, Finance Departments, Flat Earth Society, Footnote, Frequent Interruptions, Human Potential, John Kenneth Galbraith, Letter To Shareholders, Lifetime University, Nyt, Recessions, Tenacity, University Finance, Warren Buffet, Warren Buffett, Wsj
Posted in Credit Markets, Markets | Comments Off

Canada Market Cheat Sheet (February 28, 2011)

Monday, February 28th, 2011

Canada Mar­ket Cheat Sheet (Feb­ru­ary 28, 2011)

TSX and Sub­groups — Week End­ing Feb­ru­ary 25, 2o11

TSX and Sub­groups — YTD to Feb­ru­ary 25, 2o11

Past One Year to Feb­ru­ary 25, 2011

Strengths

Canada Eco­nomic Growth Rate Accel­er­ates to 3.3% in 4th Quar­ter on Exports — Canada's eco­nomic growth rate accel­er­ated more than fore­cast from Octo­ber to Decem­ber on the biggest jump in exports since 2004 and faster con­sumer spend­ing. [Bloomberg]

OMERS pen­sion fund reports 11.5 perecnt gain for 2010 — Ontario Munic­i­pal Employ­ees Retire­ment Sys­tem (OMERS), one of Canada's largest pen­sion funds, said on Mon­day the value of its net assets rose 11.5 per­cent last year to C$53.3 bil­lion ($54.9 bil­lion), helped by stronger global finan­cial mar­kets. [Reuters]

Can Canada's econ­omy keep up its solid pace of growth? The econ­omy grew by 0.5 per cent in Decem­ber, The Globe and Mail's Tavia Grant reports today. In the fourth quar­ter, gross domes­tic prod­uct increased at an annual rate of 3.3 per cent. Both read­ings were bet­ter than econ­o­mists expected, with December's pace the best in nine months. Sta­tis­tics Canada also revised its read­ing for the third quar­ter, bring­ing the pace to 1.8 per cent from its ear­lier esti­mate of 1 per cent. Con­sumer spend­ing also helped pump up the econ­omy in the fourth quar­ter, accord­ing to the fed­eral sta­tis­tics gath­er­ing agency. [Globe and Mail]

Weak­nesses

Cana­di­ans urged to change spend­thrift ways — For the past 15 years, Cana­di­ans haven't been sav­ing money, in large part because there was no press­ing need. Ris­ing home prices made peo­ple feel richer, and sav­ing for a rainy day was a low pri­or­ity. But that eco­nomic era is fast com­ing to an end. A new report to be released Mon­day shows the toll that years of pas­sive sav­ings is tak­ing on the finan­cial pic­ture of Cana­di­ans. Hav­ing relied over­whelm­ingly on their homes to build per­sonal wealth, the report says the aver­age Cana­dian con­sumer now socks away con­sid­er­ably less than their U.S. neigh­bours, and will have to start sav­ing more as hous­ing prices mod­er­ate. [Globe and Mail]

House­hold debt sur­passes six-figure mark — The aver­age house­hold debt fig­ure at the end of 2010 was $100,879, with the debt-to-income ratio at a record 150 per cent, the report says. That means for every $1,000 Cana­dian fam­i­lies earn after tax, they now owe $1,500. Mort­gages account for two-thirds of that debt at $63,000 per house­hold. The other third is made up of per­sonal loans and credit card debt.

Oppor­tu­ni­ties

IS Gold Set To Rally? — Despite the fact that Gold is trad­ing near its record high, some sug­gest that Bul­lion will out­per­form Oil as surg­ing infla­tion will under­score the metal’s role as an invest­ment hedge. The chart to the left shows the price of both Gold and Oil since 2008. The chart below is the ratio of Gold to Oil, or how many bar­rels an ounce of gold will buy. At its peak in late 2008, an ounce of gold bought you about 28 bar­rels of crude oil. Cur­rently, oneounce buys about 15 bar­rels. Notwith­stand­ing OPEC’s spare pro­duc­tion capac­ity, energy mar­kets have priced in a con­sid­er­able risk pre­mium. If ten­sions ease and or pro­duc­tion comes on stream, oil prices could drop rather quickly. Gold has fallen 1.6% this year fol­low­ing a 30% rally in 2010. Crude is up about 5% this year fol­low­ing last year’s 15% rise.

Trim­ming Gas: Decreas­ing Gas Expo­sure In Favour of Gold (Lee) — For investors want­ing to main­tain some small-cap com­mod­ity expo­sure, we view gold as hav­ing a bet­ter risk/reward pro­file at this point, with bul­lion recently bounc­ing off sup­port at US$1310/ounce on Jan­u­ary 27, 2010. Small cap gold com­pa­nies through the BMO Junior Gold Index ETF (ZJG), is an alter­na­tive for investors look­ing for oppor­tu­ni­ties that have a higher sen­si­tiv­ity to gold bul­lion prices. For investors wish­ing to main­tain only an equity expo­sure, we rec­om­mend investors con­sider the BMO Dow Jones Indus­trial Aver­age Index ETF (ZDJ) given both its tech­ni­cal strength and attrac­tive val­u­a­tions rel­a­tive to other major global mar­ket indices. (Price-to-earnings ratio of 14.2x and div­i­dend yield of 2.4%)

Auto sec­tor to shoul­der big chunk of GDP gains — For­get about the thriv­ing oil patch, boom­ing condo mar­kets across the land or the arrival of the new RIM Play­Book next month: An old stan­dard will give the Cana­dian econ­omy a major boost in the first quar­ter – the auto industry.

As the indus­try recov­ers, the rip­ple effects of two com­pa­nies gear­ing up to pro­duce two new mod­els in the man­u­fac­tur­ing heart­land of South­ern Ontario are already being felt across the region.

See­ing the big pic­ture with small-cap com­pa­nies — Michael Decter is a Harvard-trained econ­o­mist, a for­mer back­room orga­nizer for the New Demo­c­ra­tic Party and a for­mer pub­lic ser­vant. That back­ground isn't typ­i­cal for a Bay Street fund man­ager, but then nei­ther are his recent returns. The secret of Mr. Decter's suc­cess? A knack for aggres­sive trad­ing, an empha­sis on look­ing at the big pic­ture, and a strong pref­er­ence for Cana­dian stocks. "Canada is a great play on Asia" because of this country's strength in com­modi­ties, says the 58-year-old chief exec­u­tive offi­cer of Toronto-based LDIC Inc., and author of Ten Good Rea­sons: Why now is the right time to invest in Canada, pub­lished in 2008. "The growth is not just China and India, but 44 Asian nations grow­ing at over 8 per cent a year." [Globe and Mail]

Threats

Strong Canada growth adds pres­sure for rate hike — Canada's econ­omy revved back to life in late 2010 after a period of lack­lus­ter growth, sup­port­ing expec­ta­tions of offi­cial inter­est rate hikes by mid year and push­ing the Cana­dian dol­lar to a three-year high.  [Reuters]

"All told, the last quar­ter of the year erased the dis­ap­point­ment of a slug­gish sum­mer, and points to a healthy start to the new year," said CIBC World Mar­kets chief econ­o­mist Avery Shen­feld. "Look for a more hawk­ish line from the Bank of Canada tomor­row that sets the stage for a rate hike in [the sec­ond quar­ter]. Bear­ish for bonds, bull­ish for the [Cana­dian dol­lar]." [Globe and Mail]

Tags: 4th Quarter, Avera, BMO, Canadian Market, Cheat Sheet, China, CIBC, Commodities, Consumer Spending, Economic Growth Rate, Employees Retirement System, energy, ETF, ETFs, Federal Statistics, Global Financial Markets, Globe And Mail, Gold, Gross Domestic Product, Household Debt, India, Net Assets, oil, Ontario Municipal Employees, Ontario Municipal Employees Retirement System, Pension Fund, Pension Funds, Personal Wealth, Saving Money, Spendthrift, Statistics Canada, Tavia, Week Ending February
Posted in Canadian Market, Commodities, Credit Markets, Energy & Natural Resources, ETFs, Gold, India, Markets, Oil and Gas | Comments Off

The 'Crude' Reality of Unrest

Monday, February 28th, 2011

The 'Crude' Real­ity of Unrest

by David Andrews, CFA-Director, Invest­ment Man­age­ment and Research, Richard­son GMP

Investor sen­ti­ment turned decid­edly more cau­tious this week with major North Amer­i­can indexes retreat­ing amid the grow­ing pro-democracy move­ment in the Arab world. Fol­low­ing the mostly peace­ful demon­stra­tions in Tunisia and Egypt, the pro-democracy ral­lies in Libya turned ugly as pro­test­ers were met with a stiff and inhu­mane response from pro-Gaddafi sup­port­ers. Mer­ce­nar­ies and Mili­tia were report­edly fir­ing on unarmed crowds amidst the inco­her­ent ram­blings of embat­tled leader, Muam­mar Gaddafi. Gaddafi went so far to sug­gest the pro­test­ers were being drugged and under the influ­ence of Al Qaeda. The unsta­ble sit­u­a­tion saw the price of Brent crude oil surge to 2–1/2 year highs near $120 a barrel.

As a result, Cana­dian com­muters felt the sting at the gaso­line pumps this week as prices seemed to increase a few cents a litre each night. Stock mar­ket investors also felt the pinch with the TSX slip­ping below the recently attained 14,000 level. Three con­sec­u­tive down ses­sions on the hol­i­day short­ened week (Cana­dian and U.S. exchanges were closed Mon­day) were fol­lowed by a Fri­day reprieve as Saudi Ara­bia announced it would increase its crude oil pro­duc­tion in an attempt to off­set any global sup­ply dis­rup­tion from Libya. The influ­en­tial Mate­ri­als and Finan­cial stocks surged and helped boost the index by 1.25% on the day and back above 14,000. For the week, the TSX lost a lit­tle more than half of one per­cent. The major U.S. indexes fell about 2 per­cent on the week as investors bet higher oil costs may unseat the early stages of the eco­nomic recovery.

Speak­ing of the econ­omy, there were a few pos­i­tive signs of things get­ting bet­ter with U.S. con­sumer con­fi­dence at 3 year highs in Feb­ru­ary despite higher food and fuel costs. U.S. weekly employ­ment data also showed fewer Amer­i­cans filed for job­less claims sug­gest­ing the employ­ment sit­u­a­tion is con­tin­u­ing the slow process of heal­ing. If employ­ment and con­fi­dence are a sil­ver lin­ing, hous­ing con­tin­ues to be the dark cloud. Jan­u­ary new home sales were again below already depressed expec­ta­tions. In Canada, retail sales in Decem­ber fell but most of that was due to the auto sec­tor. Ex autos, retail sales were up 0.6% which was expected.

IS Gold Set To Rally?

Despite the fact that Gold is trad­ing near its record high, some sug­gest that Bul­lion will out­per­form Oil as surg­ing infla­tion will under­score the metal’s role as an invest­ment hedge. The chart to the left shows the price of both Gold and Oil since 2008. The chart below is the ratio of Gold to Oil, or how many bar­rels an ounce of gold will buy. At its peak in late 2008, an ounce of gold bought you about 28 bar­rels of crude oil. Cur­rently, oneounce buys about 15 bar­rels. Notwith­stand­ing OPEC’s spare pro­duc­tion capac­ity, energy mar­kets have priced in a con­sid­er­able risk pre­mium. If ten­sions ease and or pro­duc­tion comes on stream, oil prices could drop rather quickly. Gold has fallen 1.6% this year fol­low­ing a 30% rally in 2010. Crude is up about 5% this year fol­low­ing last year’s 15% rise.

The Trad­ing Week Ahead

Cana­dian stock mar­ket investors are expect­ing the rest of the Big Banks will be able to fol­low the solid start to bank earn­ings sea­son set by CIBC and National Bank. Fol­low­ing a softer sec­ond half of 2010, the banks are poised to ben­e­fit from bet­ter mar­ket con­di­tions for their retail and whole­sale lend­ing busi­nesses. Investors look­ing for div­i­dend increases will have to wait on National and Com­merce but they may not have to wait on the oth­ers. Bank of Mon­tréal reports Tues­day and is fol­lowed by TD and Royal on Thurs­day. (Sco­tia reports March 8th).

U.S. report­ing sea­son has con­cluded with another upbeat quar­ter and sub­stan­tial pos­i­tive earn­ings sur­prises. The biggest pos­i­tive sur­prises were in the Mate­ri­als sec­tor where ele­vated com­mod­ity prices boosted the bot­tom line. Con­sumer goods, specif­i­cally Auto­mo­biles, pro­vided the biggest earn­ings dis­ap­point­ment in the fourth quar­ter on the S&P500.

The eco­nomic cal­en­dar will likely con­tinue with the theme of improv­ing con­sumer and busi­ness con­fi­dence but scant signs of improve­ment in the U.S. hous­ing mar­ket. Pend­ing homes sales in Jan­u­ary are expected to once again come in lower. The Feb­ru­ary employ­ment report is released on Fri­day. For the past three months we have over­looked dis­ap­point­ing results and explained them away by bad weather. We did not have weather issues of sig­nif­i­cance this month so the non farm pay­rolls on Fri­day could be significant.

Com­modi­ties prices, specif­i­cally oil & gold, will be influ­enced by the evolv­ing and volatile demon­stra­tions in the Mid­dle East and North Africa. Risk pre­mi­ums for both oil and gold remain rather ele­vated help­ing to push the loonie higher. Watch for no move in pol­icy by the Bank of Canada on Tues­day, but the word­ing of the state­ment will be scru­ti­nized for signs of their next move likely around mid 2011.

Copy­right © Richard­son GMP

Tags: Brent Crude Oil, Canadian Market, CIBC, Commodities, Consumer Confidence, Crude Oil Production, Democracy Movement, Employment Data, Employment Situation, energy, financial stocks, Food And Fuel, Gasoline Pumps, Global Supply, Gold, Incoherent Ramblings, Investor Sentiment, Jobless Claims, Muammar Gaddafi, oil, Oil Costs, Peaceful Demonstrations, Positive Signs, Silver, Stock Market Investors, Supply Disruption, Unstable Situation
Posted in Canadian Market, Commodities, Energy & Natural Resources, Gold, Markets, Oil and Gas, Silver | Comments Off

Sentiment Moderates as Market Finds Some Footing

Monday, February 28th, 2011

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

The mar­kets found their foot­ing a bit late late last week after three days of sell­ing.  The sta­bi­liza­tion occurred in and around key mov­ing aver­ages (the 50-day on the NASDAQ and the 40-day on the S&P 500).  Two fac­tors we noted dur­ing this recent run-up still per­sist; investor fund flows con­tinue to find their way into equity mar­kets and anec­do­tal sen­ti­ment is still doubt­ing and not embrac­ing this rally. That said, mea­sured sen­ti­ment also has mod­er­ated as seen in the chart below from the Amer­i­can Asso­ci­a­tion of Indi­vid­ual Investors (AAII), which shows bulls have fallen from north of 60% to 36% as of yes­ter­day. It’s hard to have big cor­rec­tions when liq­uid­ity flows are in and sen­ti­ment remains skep­ti­cal. While log­i­cally it may make sense that the mar­kets need to cor­rect, I found out a long time ago, and the hard way, that mar­kets don’t care what we think. Rather they march to their own drums and most times the obvi­ous and log­i­cal trade is the wrong trade.

Addi­tion­ally, mar­kets only cor­rect when trad­ing suc­cesses seduce investors into think­ing the game is easy and they have it all fig­ured out. This over­con­fi­dence lends itself to over-commitment on the long side via lever­age, until investors exhaust their buy­ing power. Markets don’t go down when every­one is sourc­ing for short trades or when the loud­est voices in the crowd are the skeptics. Moreover, it also takes per­sis­tent dis­tri­b­u­tion to turn the tide from up to down and, other than Tues­day, so far the sell­ers have only been a one-act (one-day) show.

For now, as uncom­fort­able as it may be for some, the trade is still up. It you are fully invested and with posi­tions that are sig­nif­i­cantly lower in cost basis, then firstly, con­grat­u­la­tions, and sec­ondly, sit just back and relax.  For those who fit the for­mer descrip­tion your job at this point is to make sure you have good trail­ing stops or hedges in place for when the cor­rec­tion does unfold.

The greater risk awaits those who are under­in­vested (or net short) and adding new posi­tions with at the money or slightly in or out of the money cost basis.  We say there is more risk sim­ply because the S&P 500 is up 24% from the August 2010 lows, just a mere six months ago. As leg­endary hedge fund man­ager David Tep­per of Appaloosa stated on CNBC just a few weeks ago, any time the mar­ket has a big rise there is sim­ply more inher­ent risk because prices get more expensive.

So, for the lat­ter group of investors, the trick is sim­ple; keep search­ing for setups on new money posi­tions that have good upside poten­tial (how­ever you mea­sure that, i.e. fun­da­men­tally derived tar­gets, point and fig­ure objec­tives or the next over­head resis­tance lev­els) but with lim­ited draw­down risk (i.e. the dif­fer­ence between cost and stop loss/exit point).

Now that we have talked strat­egy a bit, let’s take a look at some of the mar­kets’ tech­ni­cal levels. As seen below, the S&P 500 found sup­port in the 1,302 to 1,295 sup­port area (red lines). This level also coin­cided with the index’s up-trend line (green line). Any close below yesterday’s low would open up risk to the next down­side sup­port near 1,270.

As seen below, the trans­ports had much more dam­age done on the sell-off than broader mar­kets, by scor­ing a false break­out above their pre­vi­ous peak only to rapidly fall back below (pur­ple line) the pre­vi­ous peak.  Sub­se­quently the trans­ports dropped below 5,000 and bounced off sup­port in the 4,960 to 4,910 area (red dot­ted lines). At this point we view the weak­ness in the trans­ports as an inverse trade to the rise in crude and  not a buck­ling economy. Either way, any drop below this recent sup­port level would be a neg­a­tive on the transports.

To wrap up our mid-morning mis­sive, the trend is up until proven oth­er­wise and a few % points sell-down from the highs are not proof enough to get your bear claws out yet. Before we do that we first need to see how the indices regroup from the recent sell-off and whether they can muster news highs or fail to do so. Then we would need to see a few days of dis­tri­b­u­tion like Tues­day but only with more fre­quency and persistence.

To use an anal­ogy, when hunt­ing big game it’s bet­ter to travel in a pack than be a lone wolf and right now the lone wolf is the one search­ing for a top.  Wait for more evi­dence to appear before turn­ing neg­a­tive and only join the hunt when the pack (the sell­ers) are in full force.  If you devi­ate from the strat­egy you will con­tin­u­ally get nicked.

Source: Kevin Lane, Fusion IQ, Feb­ru­ary 25, 2011.

Tags: Aaii, Act One, American Association Of Individual Investors, Bulls, cost basis, Drums, Footing, Hedges, Iq, Leverage, liquidity, Moving Averages, Nasdaq, Overconfidence, Power Markets, Sentiment, Skeptics, Successes, Trailing Stops, Voices
Posted in Markets | Comments Off

Cash and Credit — Implications for the Financial Markets

Monday, February 28th, 2011

by John P. Huss­man, Ph.D., Huss­man Funds

Last week, the S&P 500 pulled back by less than 2% — cer­tainly not suf­fi­cient to clear the over­val­ued, over­bought, over­bull­ish, rising-yields syn­drome that we observe in the mar­ket, but enough to bring our esti­mate of S&P 500 10-year total returns from an expected 3.06% to an expected 3.25%.

From the stand­point of prospec­tive invest­ment returns, it is impor­tant to rec­og­nize that the main effect of quan­ti­ta­tive eas­ing has been to sup­press the expected return on vir­tu­ally all classes of invest­ment to unusu­ally weak lev­els. It's widely believed that some­how, QE2 has cre­ated all sorts of liq­uid­ity that is "slosh­ing" around the econ­omy and "try­ing to find a home" in stocks, com­modi­ties, and other invest­ments. But this is not how equi­lib­rium works.

Here's how equi­lib­rium does work. Every secu­rity that is issued has to be held by some­one, in pre­cisely the form in which it was cre­ated, until that secu­rity is retired. Period. That means that if the Fed cre­ates $2.4 tril­lion in cur­rency and bank reserves, some­body has to hold that money, in that form, until those lia­bil­i­ties are retired. The money ulti­mately can't go any­where. If some­one tries to get rid of their cash in order to buy stock, some­body else has to give up the stock and hold the cash. In the end, every share of stock that has been issued has to be held by some­body. Every money mar­ket secu­rity that has been issued has to be held by some­body. Every dol­lar bill that has been cre­ated has to be held by some­body. None of these instru­ments some­how "find a home" by going some­where else or becom­ing some­thing else. They are home.

Let me be clear — the addi­tional mon­e­tary base cre­ated by the Fed cer­tainly is "liq­uid­ity" from the stand­point of the bank­ing sys­tem, and does amount to fund­ing the U.S. deficit by print­ing money, until and unless the trans­ac­tions are reversed. As I've noted pre­vi­ously, at what is approach­ing 16 cents of base money per dol­lar of GDP, there will also be sig­nif­i­cant infla­tion­ary risk in the event of even mod­est upward pres­sure on short term inter­est rates. The point, how­ever, is that it is inco­her­ent to say that this "cash on the side­lines" will some­how find a home in some other finan­cial mar­ket, or any­where else in a man­ner that makes it van­ish from "the side­lines" — until it is explic­itly retired by the Fed.

So what is the effect of cre­at­ing an extra $600 bil­lion dol­lars of mon­e­tary base by hav­ing the Fed pur­chase $600 bil­lion dol­lars of Trea­sury debt? The same thing that hap­pens any­time any secu­rity is issued. Some­body has to hold it, and the returns on all other assets have to shift by just enough to make every­one in the econ­omy happy, at the mar­gin, to hold the out­stand­ing quan­tity of all of the secu­ri­ties that have been issued. In prac­tice, the only way you can get peo­ple to will­ingly hold $2.4 tril­lion in non-interest bear­ing cash is to depress the return on all close sub­sti­tutes to next to zero. So short-term Trea­sury bill yields have been pressed to nearly nothing.

Of course, peo­ple also look at risky assets and ask whether they might be able to get higher risk-adjusted returns by hold­ing those instead. In order to make peo­ple happy to hold the out­stand­ing quan­tity of zero return cash, the prospec­tive returns on other risky secu­ri­ties have also col­lapsed (secu­ri­ties are a claim to future cash flows — as investors pay a higher price, they implic­itly agree to accept a lower long-term return). In my view, this has gone on to an extent far beyond what is likely to be sus­tained, but thanks to eager spec­u­la­tion, the S&P 500 is now priced, by our esti­mates, to achieve annual returns of just 3.25% over the com­ing decade.

Like­wise, all of those secu­ri­ties yield­ing zero or nearly zero returns have to com­pete with com­modi­ties. Here, the mar­kets have responded to the mas­sive deficits of world gov­ern­ments by increas­ing their expec­ta­tions regard­ing infla­tion. Now, if you're look­ing at a zero nom­i­nal return on money-market instru­ments, as well as expected infla­tion over time, it's nat­ural to start hoard­ing com­modi­ties. See, if you expect your dol­lars to buy fewer goods and ser­vices in the future, and you're not earn­ing inter­est to make up for it, you'd pre­fer to stock­pile goods right now. This, of course, has cre­ated ter­ri­ble prob­lems for peo­ple in less-developed coun­tries, who are expe­ri­enc­ing soar­ing prices for food and fuel, but com­mod­ity hoard­ing was a pre­dictable out­come of QE2.

The real ques­tion is how high com­mod­ity prices have to rise until peo­ple are indif­fer­ent between hold­ing non-interest bear­ing cash, and com­modi­ties that are ele­vated in price. The basic answer is that com­mod­ity prices have had to "over­shoot" the expected future level of broad con­sumer prices by enough that both cash and com­modi­ties can now be expected to suf­fer a neg­a­tive real return as mea­sured against a broad bas­ket of con­sumer goods. This sort of over­shoot is nec­es­sary to make peo­ple indif­fer­ent between hold­ing one ver­sus another, and it restores equi­lib­rium in the face of the neg­a­tive real return avail­able on money mar­ket secu­ri­ties. As with stock prices, I believe that this has already gone too far, but the civil unrest in the Mid­dle East has cer­tainly wors­ened the sit­u­a­tion over the short-term.

This is a crit­i­cal point — com­mod­ity prices tend to swing by a much greater amount than con­sumer prices. You can eas­ily get peri­ods where gen­eral con­sumer prices are advanc­ing, yet com­modi­ties prices are advanc­ing slower or even falling. In my view, QE2 has pro­voked an "over­shoot­ing" advance in com­modi­ties prices, which has been nec­es­sary because the Fed is hold­ing real inter­est rates at neg­a­tive lev­els. In the face of mod­er­ately higher con­sumer price infla­tion, cou­pled with short-term inter­est rates at zero, the only way to get peo­ple to be com­fort­able hold­ing that much cash is to make the prospec­tive returns on every pos­si­ble alter­na­tive just as bad.

If investors don't under­stand that this is how QE2 is "work­ing," they are likely to be as blind­sided by the com­ing decade of weak invest­ment returns as they've been over the past decade. It's notable that the weak returns achieved by the S&P 500 over the past decade were pre­dictable, and our esti­mates of pro­jected total returns have remained quite accu­rate in recent years. It bears repeat­ing that our dif­fi­culty in 2009 was not that we viewed stocks as over­val­ued, but that we were forced to con­tem­plate data from peri­ods other than the post-war period, which had gen­er­ally required much more strin­gent cri­te­ria for accept­ing mar­ket risk. At the 2009 lows, stocks were priced to achieve 10-year total returns in excess of 10% annu­ally by our esti­mates. The prob­lem is that sim­i­lar expected returns were not suf­fi­cient to end prior declines dur­ing much lesser crises even in post-war data.

As for the Depres­sion, stocks were priced to achieve neg­a­tive 10-year returns, by our esti­mates, at the 1929 peak. After los­ing half their value, stocks were priced to achieve 10-year returns in excess of 10%. From there, stock prices dropped by an addi­tional two-thirds before bottoming.

What­ever value was avail­able at the 2009 lows is long gone. Our miss in 2009 was emphat­i­cally not the result of inac­cu­rate val­u­a­tion esti­mates — it was the result of hav­ing to con­tem­plate data out­side of the post-war period. I've exten­sively dis­cussed the adjust­ments we've made (see recent com­men­taries as well as our semi-annual report). Still, there is noth­ing in recent data, nor long-term his­tor­i­cal data, that cre­ates mean­ing­ful doubt for us that stocks are priced to achieve bit­terly small returns over the com­ing decade.

As it hap­pened, much of the 10-year prospec­tive returns that were priced into stocks at the 2009 low have been com­pressed into the advance since then. For long-term investors, there is now a great deal of risk with not much prospec­tive return to com­pen­sate them at cur­rent prices. There will still be peri­ods war­rant­ing at least a mod­er­ate expo­sure to mar­ket fluc­tu­a­tions based on shorter-term con­sid­er­a­tions, but with the mar­ket still char­ac­ter­ized by an over­val­ued, over­bought, over­bull­ish, rising-yields syn­drome, now is not one of them.

Sav­ings, Invest­ment and Credit Mar­ket Debt

Hav­ing dis­cussed QE2, let's move on to the broader sub­ject of "credit." Here also, there is a lot of con­fu­sion about how credit cre­ation is related to real eco­nomic activ­ity. My hope is that the fol­low­ing dis­cus­sion will clar­ify some of these rela­tion­ships. As usual, the best way to eval­u­ate the merit of somebody's analy­sis is if they show you the data, so I'll also show you the data.

Let's start by con­sid­er­ing an econ­omy that pro­duces 100 units of out­put. 80 are con­sumed, and 20 are saved as "invest­ment goods" to increase the abil­ity of the econ­omy to pro­duce more out­put in the future. On the "income" side, those 20 units would be con­sid­ered to be "sav­ings." On the "out­put" side, those 20 units would be clas­si­fied as "investment."

Tags: All Sorts, Bank Reserves, Banking System, Base Money, Commodities, Credit Implications, Dollar Bill, Equilibrium, Financial Markets, Hussman Funds, Investment Returns, Liabilities, liquidity, Monetary Base, Money Market, Printing Money, Quantitative Easing, Standpoint, Trillion, Trying To Find A Home
Posted in Commodities, Credit Markets, Markets | Comments Off

Charlie Maxwell: "We have enough oil."

Monday, February 28th, 2011

This week on Wealth­track Extra, Con­suelo Mack talks to Char­lie Maxwell, the “dean of energy ana­lysts”. Accord­ing to Maxwell, who is Wee­den & Co.’s Senior Energy Ana­lyst, OPEC had cut back oil pro­duc­tion before the Mid­dle East tur­moil erupted and has about 5 mil­lion bar­rels a day of unused capac­ity that it could bring on stream in a month. He is not ter­ri­bly con­cerned about a domino effect of insur­rec­tion spread­ing to the oil pro­duc­ing coun­tries that he says really count, namely Saudi Ara­bia, Kuwait, Iraq and Iran.

Maxwell also shares his invest­ment recommendations.

Note: The tran­script of this inter­view is not avail­able yet, but will be posted here as soon as it arrives.

Source: Wealth­track Extra, Feb­ru­ary 25, 2011.

Tags: Stocks
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off

GDP: Nothing Is Ever As It Seems

Monday, February 28th, 2011

This arti­cle orig­i­nally appeared on The Daily Capitalist

The revised real GDP num­bers for Q4 2010 were a dis­ap­point­ment for most econ­o­mists who fore­saw the third and fourth quar­ters to be much higher. The BEA's advance report last month said GDP was up 3.2%. The new num­bers show it was only up 2.8%. As I antic­i­pated in my arti­cle on the advance report, I expected the num­bers to be revised down­ward and they were. These facts fit into my the­sis that we are headed into stagflation.

First, the details. The con­sen­sus Q4 esti­mate of econ­o­mists was that GDP would be +3.4%. From the BLS release:

The increase in real GDP in the fourth quar­ter pri­mar­ily reflected pos­i­tive con­tri­bu­tions from per­sonal con­sump­tion expen­di­tures (PCE), exports, and non­res­i­den­tial fixed invest­ment that were partly off­set by neg­a­tive con­tri­bu­tions from pri­vate inven­tory invest­ment [see this on durable goods orders] and state and local gov­ern­ment spend­ing [this has to be a positive].

Imports decreased which are a sub­trac­tion in the cal­cu­la­tion of GDP.  The small fourth-quarter accel­er­a­tion in real GDP pri­mar­ily reflected a sharp down­turn in imports, an accel­er­a­tion in PCE, an upturn in res­i­den­tial fixed invest­ment, and an accel­er­a­tion in exports that were mostly off­set by down­turns in pri­vate inven­tory invest­ment and in fed­eral gov­ern­ment spend­ing, a decel­er­a­tion in non­res­i­den­tial fixed invest­ment, and a down­turn in state and local gov­ern­ment spending.

Final sales of com­put­ers added 0.30 per­cent­age point to the fourth-quarter change in real GDP after adding 0.29 per­cent­age point to the third-quarter change.  Motor vehi­cle out­put sub­tracted 0.31 per­cent­age point from the fourth-quarter change in real GDP after adding 0.49 per­cent­age point to the third-quarter change.

For the entire year of 2010:

Real GDP increased 2.8 per­cent in 2010 (that is, from the 2009 annual level to the 2010 annual level), in con­trast to a decrease of 2.6 per­cent in 2009.  The increase in real GDP in 2010 pri­mar­ily reflected pos­i­tive con­tri­bu­tions from pri­vate inven­tory invest­ment, exports, PCE, non­res­i­den­tial fixed invest­ment, and fed­eral gov­ern­ment spend­ing.  Imports, which are a sub­trac­tion in the cal­cu­la­tion of GDP, decreased [-12.4%].  The upturn in real GDP pri­mar­ily reflected upturns in exports, in non­res­i­den­tial fixed invest­ment, in PCE, and in pri­vate inven­tory invest­ment and a smaller decrease in res­i­den­tial fixed invest­ment that were partly off­set by an upturn in imports.

Prices as mea­sured by the GDP Price Index con­tin­ued their climb:

The price index for gross domes­tic pur­chases, which mea­sures prices paid by U.S. residents, increased 2.1 per­cent in the fourth quar­ter, the same increase as in the advance esti­mate; this index increased 0.7 per­cent in the third quar­ter.  Exclud­ing food and energy prices, the price index for gross domes­tic pur­chases increased 1.2 per­cent in the fourth quar­ter, com­pared with an increase of 0.4 per­cent in the third.

The price index for gross domes­tic pur­chases increased 1.3 per­cent in 2010, in con­trast to a decrease of 0.2 per­cent in 2009.  Current-dollar GDP increased 3.8 per­cent, or $538.8 bil­lion, in 2010.  In con­trast, current-dollar GDP decreased 1.7 per­cent, or $250.1 bil­lion, in 2009.

Just look­ing at spend­ing mea­sures, you can see the impact of the drop in imports. While real per­son con­sump­tion expen­di­tures (domes­tic goods only) were up 4.1% in Q4 (ver­sus 2.4% in Q3), real gross domes­tic pur­chases — pur­chases by U.S. res­i­dents of goods and ser­vices wher­ever pro­duced — decreased 0.6% in Q4, in con­trast to an increase of 4.2% in Q3.

If you need charts to see the stagfla­tion­ary trend, here:

These charts show a flat­ten­ing of out­put and a steady increase in prices. One might ask, with all of the mon­e­tary and fis­cal stim­u­lus efforts by the Fed and the Admin­is­tra­tion, why is out­put flat­ten­ing out while prices are increas­ing? The quick answer is that their poli­cies have failed, notwith­stand­ing their protests to the con­trary ("Yeah, but things would have been much worse ... blah, blah, blah.").

Is this a trend? I believe so. As I said in my arti­cle on the first release:

The bot­tom line is that we are see­ing mon­e­tary infla­tion and it is impact­ing prices. Real sav­ings is still in short sup­ply and that is inhibit­ing growth. Spend­ing will not revive the econ­omy, but an inflated money sup­ply will give the impres­sion of eco­nomic improve­ment, but it will be an ephemera. It will fur­ther neg­a­tively impact real sav­ings. I would expect weaker GDP num­bers in Q1 2011 (wait until the revised Q4 come out to see if I'm right). Unem­ploy­ment will remain high. This is a recipe for stagflation.

There is a new wrin­kle in this fore­cast: oil.

As David Rosen­berg said Thurs­day, ris­ing oil prices reflect a "geopo­lit­i­cal risk pre­mium" which is why bonds jumped this week:

Rosen­berg pointed out what is going through the minds of oil traders:

It is esti­mated that as much as 1 mbd of out­put has been taken out of the sys­tem from the Libya cri­sis and the out­sized move in the oil price is tes­ta­ment to the view of just how tight the global supply-demand back­drop has been. Imag­ine where the price would be if it weren’t for the spare capac­ity out of Saudi Ara­bia. Ana­lysts at Nomura are say­ing $220 a bar­rel is achiev­able if more pro­duc­tion is halted in Libya and Algeria. ...

Saudi Ara­bia has the capac­ity to fill the void left by Libya, but that misses the point. The risk of fur­ther unrest is ris­ing, espe­cially with sec­tar­ian issues in full force in Bahrain. This means that oil prices at a min­i­mum will retain a geopo­lit­i­cal risk pre­mium — most oil experts now peg this at $10-$15 a bar­rel. If coun­tries start to stock­pile more crude in light of cur­rent events, one can expect the oil price pre­mium to rise even fur­ther even if the sit­u­a­tion calms down over­seas. So no mat­ter what, bar­ring a sud­den down­turn in demand, and the one thing about oil (food too) is that demand is rel­a­tively inelas­tic over the near term, the risk is that we will see fur­ther increases in the price of crude even from cur­rent lofty levels.

Fri­day on Bloomberg TV, Rosen­berg said he sees ris­ing oil and food prices tak­ing 1% off GDP. He said that 2 of the 3 times that oil and food went up together resulted in a recession. It didn't hap­pen in 1996, he says, because of the forces of the tech boom.

It all depends, as they say. The issue is: how long will polit­i­cal roil­ing in the Mid­dle East con­tinue? ¿Quien sabe? My point is that we will see stagfla­tion regard­less of oil. As I pointed out in "A Note on Infla­tion: It's Here," the forces of infla­tion are already in motion and its effects are start­ing to show up, one of which is price inflation.

Again, we need to be mind­ful of what is "infla­tion:" it is always an increase in money sup­ply. One of the effects of infla­tion is price increases. Other effects, even more seri­ous, include the destruc­tion of real cap­i­tal (that is, cap­i­tal saved from pro­duc­tion or labor, not from print­ing fiat money). The destruc­tion of real cap­i­tal accom­pa­ny­ing infla­tion is the only expla­na­tion for stagflation.

The result of an oil shock will add to our eco­nomic woes, com­pound­ing the reces­sion­ary side of stagflation.

There has been a lot of buzz about stagfla­tion in the main­stream media lately. Most econ­o­mists pooh-pooh the idea. The rea­son is that they don't under­stand infla­tion, mostly con­fus­ing price increases as a cause of some­thing bad rather than aneffect of some­thing bad.

Mr. Rosen­berg is one of those who make this mis­take. He points to low wages and low capac­ity uti­liza­tion as the rea­son why we can't have stagfla­tion. Unfor­tu­nately that wasn't the case in the late '70s and early '80s. (See this chart show­ing low cap/u and high infla­tion at the same time.) Other econ­o­mists like this fel­low have entirely no under­stand­ing of the issue:

"The old way of think­ing used to be that you'd have a jump in crude-oil prices, lead­ing to an increase in infla­tion­ary expec­ta­tions, and that would push the long end of the yield curve higher," said Howard Simons, strate­gist at Bianco Research near Chicago. "Nice the­ory, but it hasn't worked over the last 10 or so years."

The thing I want to leave you with is Fed Vice-Chair Janet Yellen. Ms. Yellen gave a speech Thurs­day on improv­ing the Fed's com­mu­ni­ca­tions and thus our expec­ta­tions of what the Fed will do. This is the Blah, Blah The­ory of eco­nom­ics. The bot­tom line is that she and the Fed believe they can "jaw" their way to a bet­ter econ­omy. By telling us that they are going to con­tinue to be "accom­moda­tive" (i.e., "print" money) we will believe them and lend and buy and things will mag­i­cally improve.

Don't believe a word she says. This is the arro­gance of a cen­tral plan­ner talk­ing, believ­ing that she and her co-workers con­trol the econ­omy. Pull a lever here and there, and voila! things are all bet­ter. The econometrician's dream.

I can tell you with some cer­tainty that if things get worse, and if unem­ploy­ment stays high, which is what I believe is hap­pen­ing, they will panic and pull out all the stops.

Copy­right © The Daily Capitalist

Tags: Acceleration, Advance Report, Deceleration, Downturn, Durable Goods Orders, energy, Fourth Quarter, GDP, government spending, Inventory Investment, Negative Contributions, New Numbers, oil, Percentage Point, Personal Consumption Expenditures, Private Inventory, Q4, Real Gdp, stagflation, State And Local Government, Subtraction, Upturn
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off

12 Countries Most Likely to go Belly Up

Monday, February 28th, 2011

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

Risk analy­sis firm Maple­croft just released its new fis­cal risk index rank­ing of 163 coun­tries. Europe trumps all other regions with 11 out of twelve coun­tries rated as “extreme risk.” How­ever, quite sur­pris­ingly, only one PIIGS country–Italy which takes the top spot–is in the top 12.

The oth­ers include many big economies in Europe – Bel­gium (2), France (3), Swe­den (4), Ger­many (5), Hun­gary (6), Den­mark (7), Aus­tria (8), United King­dom (10), Fin­land (11) and Greece (12). Japan at No. 9 is the only other coun­try not in Europe within the high­est risk cat­e­gory (See map below).

Aging Demo­graph­ics
While high national debt and pub­lic spend­ing are two com­mon denom­i­na­tors, the study finds it is the aging demo­graph­ics that puts these coun­tries at extreme fis­cal risk. An aging pop­u­la­tion will place increas­ing pres­sure on pub­lic expen­di­ture such as pen­sion and health care, while a shrink­ing working-age pop­u­la­tion means less pro­duc­tiv­ity and less tax rev­enues to sup­port pub­lic spend­ing and debt payments.

High Depen­dency Ratio
Aging pop­u­la­tion also means high depen­dency ratio, or the num­ber of peo­ple 65 and older to every 100 peo­ple of tra­di­tional work­ing ages. For exam­ple, accord­ing to Maple­croft, the depen­dency ratio in France is 1 to 47 (i.e. 47%), Ger­many at 59%, Italy with 62%, and Japan at the very top with 74%, while the ratio in UK is cur­rently 25%, and is fore­cast to rise to 38% by 2050.

Low Senior Labor Par­tic­i­pa­tion Rate
Another prob­lem within Europe is that it has a low labor par­tic­i­pa­tion rate in the 65+ age bracket. In fact, the labor mar­ket par­tic­i­pa­tion of age 65+ amongst the ‘extreme risk’ nations range from 1.4% in France, 7.71% in UK, to 11.7% in Swe­den, vs. a 28% aver­age across all coun­tries ranked in the index.

Maple­croft cited pen­sions and dis­crim­i­na­tion as two exam­ples that would push peo­ple away from the work force.

U.S. – High Fis­cal Risk
Although the United States is not ranked among the “extreme fis­cal risk,” the nation is nev­er­the­less clas­si­fied as “high risk”, along with Spain, another PIIGS country, Turkey, Iraq, Aus­tralia, Canada and Russia.

Let’s take a look at the two met­rics men­tioned here.

The depen­dency ratio in the U.S. is 22 in 2010, but is pro­jected to climb rapidly to 35 in 2030, accord­ing to the U.S. Cen­sus Bureau, mainly due to baby boomers mov­ing up into the 65+ age bracket. The ratio then will rise more slowly to 37 in 2050.

The labor par­tic­i­pa­tion for age 65 and over in the U.S. is at 17.5 accord­ing to data at Bureau of Labor Sta­tis­tics (BLS). This is bet­ter than most of the Euro­pean coun­tries, but below the over­all aver­age of 28%.

U.S. in Wave 2
Most peo­ple typ­i­cally asso­ciate a country’s fis­cal risk to its government’s mon­e­tary and fis­cal poli­cies, and Lehman Broth­ers has taught us that bank­ing and hous­ing cri­sis could push the entire world into the Great Recession.

While these are all def­i­nite risk fac­tors, a highly pro­duc­tive labor force and rel­a­tively young pop­u­la­tion makeup tend to ensure more sus­tain­able pros­per­ity and bet­ter odds at climb­ing out of a hole.

The Maple­croft study concludes:

“…in high risk coun­tries, it is increas­ingly likely that the pri­vate sec­tor will be called upon to con­tribute in the form of pen­sions and pri­vate health care…. With­out sig­nif­i­cant adjust­ments, such as rais­ing taxes or reduc­ing spend­ing, coun­tries risk going bankrupt.”

So, while Europe is being forced to do all that amid sov­er­eign debt cri­sis in the mid­dle of wide­spread protests over raised pen­sion age and aus­ter­ity mea­sures, the U.S. and other “high fis­cal risk” coun­tries seem be set up as the wave 2 of this global fis­cal chain of events.

Source: Dian Chu, Eco­nomic Fore­casts and Opin­ions, Feb­ru­ary 25 2011.

Tags: Age Bracket, Age Population, Aging Population, Canadian Market, Common Denominators, Debt Payments, Dependency Ratio, Dian, Economic Forecasts, Europe Belgium, Extreme Risk, France 3, Labor Market Participation, Labor Participation Rate, Market Analyst, National Debt, Public Expenditure, Public Spending, Risk Analysis, Risk Category, Risk Index, Russia
Posted in Canadian Market, Markets | 2 Comments »

Booming Global Auto Market Good For Many

Sunday, February 27th, 2011

Boom­ing Global Auto Mar­ket Good For Many

By Frank Holmes and John Derrick

Per­haps no indus­try has expe­ri­enced a stronger recov­ery from the depths of the reces­sion than the global auto­mo­bile indus­try. Around the world, cars are rolling off the lot at a pace not seen in years. Global car own­er­ship is expected to rise 17 per­cent over the next five years, accord­ing to data from J.D. Power.

In the U.S., an improv­ing job mar­ket is giv­ing con­sumers con­fi­dence to pur­chase big-ticket items such as auto­mo­biles. A recent sur­vey from the Con­fer­ence Board shows a record num­ber of peo­ple (13 per­cent) are look­ing to pur­chase a vehi­cle in the next six months. That’s triple the amount of a year ago and the high­est in more than a decade.

In China, the auto sec­tor is really heat­ing up. Jan­u­ary total vehi­cles sales were up 13.8 per­cent on a year-over-year basis to 1.89 mil­lion vehi­cles, the high­est monthly total on record, accord­ing to ISI Group. The firm is fore­cast­ing total sales of 20.5 mil­lion units this year, up nearly 900 per­cent since 2000. By 2015, ISI esti­mates annual sales will total 30 mil­lion units.

Two things really stand out from the rise: 1) vehi­cle sales rose despite a roll­back in gov­ern­ment sub­si­dies, and 2) pas­sen­ger vehi­cles drove sales. ISI says that “per­sis­tent double-digit per capita real income growth is cre­at­ing a ‘car cul­ture’ in China.”

While thriv­ing, the car cul­ture is China is still in its infancy. Cur­rently, there are roughly 3.5 vehi­cles owned for every 100 Chi­nese cit­i­zens. How­ever, that fig­ure is very low com­pared to other coun­tries with sim­i­lar lev­els of GDP per capita.

You can see from this chart from Main First Bank that China and Thai­land have rel­a­tively sim­i­lar lev­els of GDP per capita, but the rate of vehi­cle own­er­ship in China is sig­nif­i­cantly lower. If China were to catch up with the trend of other coun­tries, the ratio would roughly be 10 vehi­cles for every 100 peo­ple. The same can be said for other coun­tries where incomes are ris­ing such as Turkey and India.

When you spot such a pow­er­ful trend, it’s impor­tant to look for the inter-market rela­tion­ships. The demand for new auto­mo­biles is gen­er­at­ing increased demand for auto sup­plies such as bat­ter­ies, tires, sen­sors, alu­minum and elec­tron­ics. It is also dri­ving demand for oil through gaso­line and diesel consumption.

The infra­struc­ture needed to han­dle all these vehi­cles is also in great demand. Roads and bridges need to be built and con­gested streets and high­ways need to be expanded and widened, dri­ving demand for cement and steel.

The stage is set for a boom­ing global auto mar­ket over the next sev­eral years. This could be a dri­ver for the entire sup­ply chain from basic com­modi­ties to high-end components.

Frank Holmes is CEO and chief invest­ment offi­cer for U.S. Global Investors. John Der­rick serves as direc­tor of research for U.S. Global Investors.

Tags: Auto Market, Auto Sector, Automobile Industry, Big Ticket Items, Car Culture, Car Ownership, China, Chinese Citizens, Commodities, Frank Holmes, Gdp Per Capita, Global Auto, Global Car, Gold, Government Subsidies, Inco, India, Infrastructure, Isi Group, J D Power, John Derrick, Million Vehicles, Next Five Years, oil, Passenger Vehicles, World Cars
Posted in Commodities, Energy & Natural Resources, Gold, India, Infrastructure, Markets, Oil and Gas | Comments Off

All-Canada, All-the-Time, Part II

Sunday, February 27th, 2011

All-Canada All-the-Time Part IIPrint

Posted on Feb­ru­ary 25, 2011

By Tom Bradley

As an adden­dum to my post last week (Risk-free? Be Care­ful What You Wish For), I want to revisit the words safe and Canada.

An excel­lent rea­son for invest­ing in Canada is that it’s a safe® way to play the emerg­ing mar­kets, specif­i­cally China. Our resource stocks in par­tic­u­lar will ben­e­fit from China’s unquench­able thirst for raw materials.

Why is Canada a safer way to play China? The argu­ment is that:

• Our cap­i­tal mar­kets are well regulated.
• Cor­po­rate gov­er­nance is best of class.
• Mar­ket trans­parency and cor­po­rate dis­clo­sure are good.
• And in gen­eral, our com­pa­nies are well funded, or at least have ready access to capital.

All of this is true and Canada may con­tinue to be an effec­tive way to play China, but whether it proves to be safer or not is yet to be seen. I say that because resource stocks are the most volatile way to play any eco­nomic trend. Com­mod­ity prices are unpre­dictable, highly cycli­cal and can­not be con­trolled by com­pany man­age­ment. And rely­ing on one big cus­tomer is always a risky strat­egy (as we’ve seen in the past, China can turn the tap on and off with­out notice).

The key point here (and in my pre­vi­ous col­umn) is that hold­ing a port­fo­lio that is all-Canada all-the-time may be a safe® way to play the emerg­ing mar­kets, but it’s not a safe strat­egy per se. Hav­ing expo­sure to the world’s grow­ing economies is a key piece of any invest­ment strat­egy, espe­cially with the devel­oped coun­tries being growth chal­lenged, but it’s a more volatile piece and needs to be appor­tioned accordingly.

Tags: Addendum, Canadian Market, Capital Markets, China, Commodity Prices, Company Management, Corporate Disclosure, Corporate Governance, Developed Countries, Economic Trend, Emerging Markets, Investing In Canada, Investment Strategy, Key Point, Market Transparency, Raw Materials, Resource Stocks, Risky Strategy, Tap, Tom Bradley, Unquenchable Thirst
Posted in Canadian Market, Markets | Comments Off

U.S. Equity Market Cheat Sheet (February 28, 2011)

Sunday, February 27th, 2011

U.S. Equity Mar­ket Cheat Sheet (Feb­ru­ary 28, 2011)

The fig­ure shows the per­for­mance of each sec­tor in the S&P 500 Index for the week. One sec­tor increased while nine decreased. The lone sec­tor with pos­i­tive per­for­mance was energy, up 1.07 per­cent. Sec­tors with the light­est declines were util­i­ties and con­sumer sta­ples. The indus­tri­als sec­tor was the worst per­former, down 3.31 per­cent. Other bottom-three per­form­ers were finan­cials and materials.

Within the energy sec­tor, the best-performing stock was Chesa­peake Energy, which rose 16.23 per­cent. Other top-five per­form­ers were Range Resources, Cabot Oil & Gas, Con­sol Energy and Rowan Companies.

Strengths

• The spe­cialty con­sumer ser­vices (H&R Block) was the best-performing group for the week, up 4 per­cent. The tax pre­parer said it expects “near break-even” results for its fis­cal quarter-ended Jan­u­ary 31, 2010.
• Five of the top-ten best-performing groups were energy-related (oil & gas explo­ration & pro­duc­tion, oil & gas drilling, coal & con­sum­able fuel, oil & gas stor­age & trans­porta­tion, and inte­grated oil & gas). These groups rose between 0.8 per­cent and 4 per­cent as the price of crude oil rose dur­ing the week.
• The pack­aged foods group out­per­formed, gain­ing 2 per­cent. The CEO for H.J. Heinz Co. said at an investor con­fer­ence that the com­pany expects third-quarter profit around 84 cents, beat­ing expec­ta­tions. Heinz also increased its full-year profit outlook.

Weak­nesses

• The gold group (New­mont Min­ing) was the worst-performing group, down 7 percent.
• The home­build­ing group under­per­formed, los­ing 7 per­cent. The Com­merce Depart­ment reported that Jan­u­ary new home sales declined 12.6 per­cent from Decem­ber to 284,000 units. This was below the 305,000 unit con­sen­sus estimate.
• The air­lines group (South­west Air­lines) was down 6 per­cent. The price of jet fuel is ris­ing due to ris­ing crude oil prices and is threat­en­ing air­line profits.

Oppor­tu­ni­ties

• There may be an oppor­tu­nity for gain in merger & acqui­si­tion (M&A) trans­ac­tions in 2011. Cor­po­rate liq­uid­ity is high, thereby pro­vid­ing the means to pur­sue acquisitions.

Threats

• Should investors’ expec­ta­tions for an improv­ing econ­omy not come to fruition on a rea­son­able time frame, it could be a threat to stock prices.
• Quan­ti­ta­tive eas­ing cur­rently being imple­mented by the Fed­eral Reserve might result in unin­tended consequences.

Tags: Airline Profits, Cabot Oil, Chesapeake Energy, Consensus Estimate, Consol Energy, Consumer Staples, Crude Oil Prices, energy, Gas Drilling, Gas Storage, Gold, Gold Group, H J Heinz, H J Heinz Co, Investor Conference, Newmont Mining, oil, Performing Group, Price Of Crude Oil, Profit Outlook, Range Resources, Rowan Companies, Southwest Airlines
Posted in Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook | Comments Off

The Economy and Bond Market Cheat Sheet (February 28, 2011)

Sunday, February 27th, 2011

The Econ­omy and Bond Mar­ket Cheat Sheet (Feb­ru­ary 28, 2011)

Trea­sury bonds ral­lied this week as safe-haven buy­ing was in vogue with ten­sions con­tin­u­ing to fes­ter in the Mid­dle East and North Africa. Eco­nomic data was mixed this week. One area that con­tin­ues to strug­gle to get off the mat is hous­ing. The chart below shows new home sales for Jan­u­ary remained near the lows hit last August.

Strengths

• Con­sumer con­fi­dence rose to a three-year high as con­sumer opti­mism on the future rose.
• Ini­tial job­less claims fell to 391,000 and offer hope that the employ­ment sit­u­a­tion is finally improving.

Weak­nesses

• With the unrest in Libya this week, West Texas Inter­me­di­ate (WTI) oil prices rose $12 and could poten­tially be a drag on global growth if sus­tained at these price lev­els. This can be seen almost imme­di­ately at the fuel pump.
• Hous­ing data remains week as new home sales dis­ap­pointed. Exist­ing home prices fell 3.7 per­cent year-over-year and are at the low­est level since April 2002.
• Fourth quar­ter GDP was revised lower to 2.8 per­cent from 3.2 per­cent and adds to the feel­ing of ane­mic eco­nomic expansion.

Oppor­tu­ni­ties

• In an inter­est­ing twist, higher oil prices may actu­ally act as a defla­tion­ary force if they mate­ri­ally slow global eco­nomic growth.

Threats

• In gen­eral, the econ­omy appears to be per­form­ing bet­ter than many expected and could be a threat to fixed-income mar­kets as yields move higher in response.

Tags: Bond Market, Chart Below Shows, Cheat Sheet, Consumer Confidence, Drag On, Economic Data, Economic Expansion, Employment Situation, Existing Home, Expansion Opportunities, Fixed Income Markets, Fuel Pump, Global Economic Growth, Global Growth, Initial Jobless Claims, oil, Oil Prices, Quarter Gdp, Treasury Bonds, West Texas Intermediate, Wti Oil
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Gold Market Cheat Sheet (February 28, 2011)

Sunday, February 27th, 2011

Gold Mar­ket Cheat Sheet (Feb­ru­ary 28, 2011)

For the week, spot gold closed at $1,410.20 per ounce, up $20.67 per ounce, or 1.49 per­cent for the week. How­ever, gold equi­ties, as mea­sured by the Philadel­phia Gold & Sil­ver Index, fell 0.11 per­cent. The U.S. Trade-Weighted Dol­lar Index moved fell 0.55 per­cent for the week.

Strengths

• Ris­ing ten­sions in the Mid­dle East and North Africa and con­cerns about loose money in the West once again sent investors look­ing to gold as a means to pro­tect their wealth. This caused gold to approach pre­vi­ous record-high price levels.
• The World Gold Coun­cil announced updates on new com­mer­cial uses for gold in auto­mo­tive emis­sions con­trol sys­tems which began being used dur­ing the first quar­ter of this year. Other recent devel­op­ments that could increase gold demand include uses in cat­a­lysts and nanopar­ti­cles to clean con­t­a­m­i­nated water sup­plies, reduce mer­cury emis­sions and improve the effi­ciency of pro­duc­tion of other com­mon chemicals.
• Devel­op­ing global polit­i­cal and finan­cial prob­lems pushed the sil­ver price to $34 per ounce, a new all-time high for the metal.

Weak­nesses

• With gold approach­ing its pre­vi­ous highs, investors have become a bit skit­tish. Over the last quar­ter, a num­ber of com­pa­nies have seen surges in their share prices, but this week some shorter-term investors were will­ing to sell their posi­tions with no con­cern over a 5 per­cent hit to the share price if they could lock in a short-term profit.
• This type of price action caused a surge in many volatil­ity indexes this week, which can worry investors.
• Ris­ing oil prices and a pickup in cap­i­tal costs, which were out­lined by a num­ber of com­pa­nies report­ing year-end results, are also of concern.

Oppor­tu­ni­ties

• In the report "Ungeared for Growth: Merg­ers, Acqui­si­tions and Cap­i­tal Rais­ing in Min­ing and Met­als," Ernst & Young (E&Y) pre­dicts this year will see strong growth in min­ing M&A "with com­pe­ti­tion becom­ing fierce." E&Y says the same fac­tors that drove growth in deals last year will con­tinue to drive the mar­ket in 2011. This includes: resource secu­rity, higher com­mod­ity prices, improved cash flow and avail­abil­ity of cap­i­tal, ongo­ing indus­try ratio­nal­iza­tion and the desire for greater ver­ti­cal integration.
• Min­ing will become a thriv­ing sec­tor in South Africa within the next five to 10 years, the South African Mines Min­is­ter Susan Sha­bangu says. "Our reg­u­la­tory frame­work is con­ducive to investors and they also have incen­tives to invest in our coun­try," Sha­bangu said.
• Charles Evans, Pres­i­dent of the Fed­eral Reserve Bank of Chicago, stressed the need for con­tin­ued “dovish” mon­e­tary poli­cies. While Evans did not specif­i­cally refer to a third round of quan­ti­ta­tive eas­ing (QE3), he hinted at such a move by say­ing that “the mes­sage that comes out of what I think of as high-quality research on this sub­ject is that pol­icy ought to remain accom­moda­tive for really quite a while, even a while after con­di­tions start to improve.”

Threats

• A bill pro­posed in the State of Wash­ing­ton seeks to cap­ture "the name, date of birth, sex, height, weight, race, and address and tele­phone num­ber of the per­son with whom the trans­ac­tion is made" of every pur­chaser of gold. Fur­ther­more, if passed, the bill will record "a com­plete descrip­tion of the prop­erty pledged, bought, or con­signed, includ­ing the brand name, ser­ial num­ber, model num­ber or name, any ini­tials or engrav­ing, size, pat­tern, and color or stone or stones" and price paid of course.
• What’s also sig­nif­i­cant in the bill is that any trans­ac­tion in the amount over $100 would require a sig­na­ture, photo and fin­ger­print of the per­son with whom the trans­ac­tion is made.
• Tiberius Asset Man­age­ment co-founder and head of trad­ing, Chris Eibl, said that if one looks at gold in the con­text of the rest of the pre­cious met­als com­plex, "gold will prob­a­bly be a mar­ket per­former and maybe slightly under­per­form ver­sus the other met­als such as plat­inum group met­als and maybe even silver."

Tags: Cheat Sheet, Contaminated Water, Dollar Index, Emissions Control, Gold, Gold Demand, Gold Equities, Gold Market, Loose Money, Mercury Emissions, Mergers Acquisitions, Nanoparticles, oil, Philadelphia Gold, Rising Oil Prices, Silver, Silver Index, Silver Price, Spot Gold, Term Investors, Term Profit, Volatility Indexes, World Gold Council
Posted in Energy & Natural Resources, Gold, Markets, Oil and Gas, Silver | Comments Off

Energy and Natural Resources Market Cheat Sheet (February 28, 2011)

Sunday, February 27th, 2011

Energy and Nat­ural Resources Mar­ket Cheat Sheet (Feb­ru­ary 28, 2011)

Strengths

• Global crude steel pro­duc­tion increased 5.3 per­cent on a year-over-year basis to 119.4 mil­lion tons in Jan­u­ary. The bulk of the increase is attrib­ut­able to China, accord­ing to the World Steel Association.
• Jan­u­ary daily pri­mary alu­minium out­put increased to 68.8 thou­sand tons (Kt) from 68.5Kt the pre­vi­ous month.
• Pre­cious met­als advanced strongly with gold hit­ting a five-week high after the U.S. Con­sumer Price Index (CPI) increased at the fastest pace in more than a year.
• Chi­nese seaborne met­al­lur­gi­cal coal imports for Jan­u­ary 2011 surged to 4.49 mil­lion tons. At 53 mil­lion tons on an annu­al­ized basis, this is the high­est level since July 2009 and the third-highest on record.
• Cop­per stock­piles mon­i­tored by the Shang­hai Futures Exchange dropped for the first time in four weeks, accord­ing to weekly exchange data. Inven­to­ries fell by 2,961 met­ric tons from a nine-month high last week to 158,101 tons, based on a sur­vey of eight ware­houses in Shanghai.

Weak­nesses

• The Amer­i­can Insti­tute of Archi­tects report­ing its ABI (Archi­tec­ture Billings Index) declined to 50, below December’s 53.9 read­ing. A score below 50 indi­cates a decline in demand for design ser­vices. China’s coal imports fell 4 per­cent last month as milder weather and ris­ing stock­piles prompted a decline in pur­chases. Imports came in at 16.56 mil­lion tons, down from 17.34 mil­lion tons in December.
• All met­als sold off heav­ily this week, as con­cerns over the esca­lat­ing Libyan cri­sis and emerg­ing mar­ket infla­tion­ary pres­sures drove com­mod­ity risk aversion.

Oppor­tu­ni­ties

• South Korea plans to stock­pile more cop­per to help shield the country’s econ­omy from any short­age of the metal caus­ing a spike in prices. The state-run Pub­lic Pro­cure­ment Ser­vice will boost reserves to 80 days of import demand by 2015 from the pre­vi­ous 60-day tar­get, accord­ing to a state­ment. The ser­vice cut the tar­get for the alu­minium reserve to 40 days of import demand from 60 days as there are many sup­pli­ers in the global mar­ket, leav­ing zinc and nickel tar­gets unchanged at 60 days.
• Rus­sia will cut its oil export tax from 65 to 60 per­cent in 2010 and may reduce it to 55 per­cent in 2014, accord­ing to the Min­istry of Energy.
• China plans to con­trol steel pro­duc­tion over the next five years and increase iron ore mine invest­ment over­seas, the China Iron & Steel Asso­ci­a­tion said. China will also pro­mote cross-regional merg­ers in the steel industry.
• India’s farm min­is­ter said that it will con­tinue export­ing wheat and rice, despite the impact on food price inflation.
• The Orga­ni­za­tion of the Petro­leum Export­ing Coun­tries (OPEC) said on Tues­day that it has a clear pol­icy of meet­ing any sup­ply short­age, but for now there is no lack of oil.
• Rio Tinto Group and BHP Bil­li­ton Ltd., the world’s sec­ond– and third-largest iron ore exporters, may raise con­tract prices about 23 per­cent in the sec­ond quar­ter as spot prices hit a record, accord­ing to cal­cu­la­tions based on The Steel Index pricing.

Threats

• Imme­di­ate oil mar­ket fears cen­ter on the fact that five countries—Bahrain, Yemen, Alge­ria, Libya and Iran—represent 10 per­cent of global oil pro­duc­tion. More far-reaching con­cerns are that the unrest in these coun­tries could spread to their neigh­bors that rep­re­sent a far larger share of the global oil production.
• Reuters reported that Japan aims to cut rare earth con­sump­tion by one third within a few years and reduce its reliance on China, by pro­vid­ing sub­si­dies for recy­cling and invest­ing in new ways to limit the use of rare earth metals.

Tags: American Institute Of Architects, China, Coal Imports, Commodity Risk, Consumer Price Index, Crude Steel Production, Emerging Market, energy, Exchange Data, Gold, Import Demand, Index Cpi, India, Inflationary Pressures, Institute Of Architects, Metallurgical Coal, oil, precious metals, Public Procurement Service, Risk Aversion, Russia, Shanghai Futures Exchange, Steel Association, Stockpiles, Target, World Steel
Posted in Energy & Natural Resources, Gold, India, Markets, Oil and Gas | Comments Off

Emerging Markets Cheat Sheet (February 28, 2011)

Sunday, February 27th, 2011

Emerg­ing Mar­kets Cheat Sheet (Feb­ru­ary 28, 2011)

Strengths

• The China Pas­sen­ger Car Asso­ci­a­tion announced pas­sen­ger vehi­cle sales for the first three weeks of Feb­ru­ary fell 33 per­cent month-over-month to 336,308 units. How­ever, sales are up 19 per­cent from the same time last year after adjust­ing for the Chi­nese New Year holiday.
• Over the long week­end, China com­mit­ted to appre­ci­a­tion of the yuan at a G20 meet­ing in France.
• China Vice Pre­mier Li Keqiang says the gov­ern­ment will strictly imple­ment mea­sures to con­trol the hous­ing mar­ket and ensure the com­ple­tion of con­struc­tion on 10 mil­lion units of social housing.
• The China Mete­o­ro­log­i­cal Admin­is­tra­tion is fore­cast­ing much needed rain and snow in China’s east­ern and cen­tral regions, which should help relieve drought con­di­tions and improve the wheat harvest.
• The China Machin­ery Indus­try Fed­er­a­tion (CMIF) said China's machin­ery indus­try is expected to see sales and pro­duc­tion up 15 per­cent this year.
• An offi­cial from the Nat­ural Resources Defense Coun­cil (NRDC) says the law that lim­its the pur­chases of pas­sen­ger vehi­cles by Bei­jing res­i­dents is not a good pol­icy because it hin­ders indus­trial growth and con­sumer spend­ing. The offi­cial sug­gests low­er­ing the vehi­cle pur­chase tax and increas­ing the usage tax.
• China aims to increase tourism rev­enue to 2.3 tril­lion yuan (RMB) by 2015, up from 1.44 tril­lion RMB cur­rently. If suc­cess­ful, tourism will account for 4.5 per­cent of GDP.
• China’s Twit­ter equiv­a­lent reached 90 mil­lion mem­bers today. Mem­ber­ship for Sina Weibo, the pop­u­lar Inter­net por­tal, is grow­ing by 5–6 mil­lion mem­bers a month, reflect­ing the grow­ing inter­est in social net­work­ing in China.
• China has signed an agree­ment to build a high speed rail from China to Kaza­khstan. In addi­tion, China will buy $8 bil­lion in ura­nium, roughly 55,000 tons, from the country.
• Despite infla­tion­ary pres­sures in other parts of the coun­try, Vivo, the largest mobile oper­a­tor in Brazil, posted stronger-than-expected results. Super­mar­ket chain, CBD Pao de Acu­car, also reported strong results.
• Russia’s oil out­put reached a post-Soviet peak of 10.2 mil­lion bar­rels per day in Octo­ber 2010 and has main­tained this level since. To off­set brown­field decline, total drilling meters should grow above 4 per­cent per year, accord­ing to Ural­sib pro­jec­tions. This should be sup­port­ive for strength in oil­field services.

Weak­nesses

• China imports 3 per­cent (about 150,000 bar­rels per day) of its oil from Libya but experts don’t expect the tur­moil to have much of a neg­a­tive effect on China’s energy sup­ply. China can off­set the reduc­tion in oil with coal and nat­ural gas until the cri­sis subsides.
• Fur­ther oil price increases may have a neg­a­tive impact on China because the coun­try buys more than half of its crude abroad.
• Fleury, a med­ical diag­nos­tics com­pany in Brazil, reported worse-than-expected earnings.
• Russia’s cen­tral bank raised its main bor­row­ing rates by 25 basis points, lift­ing the refi­nanc­ing rate from a record low of 7.75 per­cent as infla­tion started to approach 10 per­cent. The cen­tral bank also raised manda­tory reserve requirements.

Oppor­tu­ni­ties

• As their income rises, an increas­ing num­ber of Chi­nese are spend­ing on travel and tourism. There are 840 flights every day between China and South Korea and 6 mil­lion Chi­nese tourists vis­ited the coun­try last year. In addi­tion, it is esti­mated that there are 60,000 Chi­nese stu­dents who are now study­ing in Korea. Chi­nese tourists are also becom­ing the largest group of for­eign vis­i­tors to Japan.
• With an appre­ci­at­ing yuan, Chi­nese cit­i­zens will con­tinue to have more pur­chas­ing power. Also, a ris­ing yuan will help China curb infla­tion, increase domes­tic con­sump­tion, and ben­e­fit indus­tries that import cop­per, oil, iron ores and other base mate­ri­als since China is a net importer of those materials.
• Agro­su­per, the Chilean com­pany with a truly global reach spe­cial­iz­ing in pork, beef and salmon prod­ucts, will likely enter the San­ti­ago Stock Exchange dur­ing the sec­ond half of 2011. In light of the company’s excel­lent rep­u­ta­tion, we expect big inter­est from investors.
• The Peru­vian gov­ern­ment is tak­ing proac­tive mea­sures to fight infla­tion­ary pres­sures. Next week the gov­ern­ment will reduce taxes on fuel fol­low­ing a reduc­tion in the sales tax last week.
• Vedo­mosti, a Russ­ian news­pa­per, dis­cussed that the export duty for Russ­ian oil com­pa­nies may fall as much as 55 per­cent by 2014. Credit Suisse esti­mates that the drop in export duty improves upstream prof­itabil­ity by over 20 per­cent at cur­rent oil prices.

Threats

• Mid­dle East unrest increases China indus­trial costs and poten­tially tight­ens sup­ply of essen­tial basic materials.
• Local gov­ern­ments have joined China’s cen­tral gov­ern­ment in curb­ing hous­ing pur­chases by depress­ing pur­chase activ­i­ties in Feb­ru­ary, though the final effect won’t be felt for a cou­ple of months. In the face of mar­ket bear­ish­ness toward hous­ing, Vanke Co., China’s largest publicly-traded devel­oper, said it is con­fi­dent sales will stay above $15.2 bil­lion for a sec­ond year in 2011.
• The cost of insur­ing Turk­ish debt against default may rise as unrest in the Mid­dle East trig­gered more than a 20 per­cent jump in Brent crude. While Rus­sia ben­e­fits as an energy exporter, Turkey suf­fers as it imports 93 per­cent of its oil.

Tags: Beijing Residents, Brazil, Central Regions, China, China China, China Machinery, China Meteorological Administration, Chinese New Year, Drought Conditions, Emerging Markets, energy, Expec, High Speed Rail, Industry Federation, Li Keqiang, Machinery Industry, Natural Resources Defense, Natural Resources Defense Council, oil, Rain And Snow, Russia, Social Networking, Tax China, Tourism Revenue, Wheat Harvest, Yuan Rmb
Posted in Brazil, Credit Markets, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Trimming Gas: Decreasing Gas Exposure In Favour of Gold (Lee)

Friday, February 25th, 2011

Trim­ming Gas
Decreas­ing Gas Expo­sure In Favour of Gold

by Alfred Lee, CFA, DMS, Vice Pres­i­dent & Invest­ment Strate­gist, BMO ETFs & Global Struc­tured Invest­ments
BMO Asset Man­age­ment
alfred.lee[at]bmo.com

Feb­ru­ary 25, 2011
Recent Developments:

• On Octo­ber 6, 2010, we issued a BMO ETF Trade Oppor­tu­nity report, titled "M&ANIA", rec­om­mend­ing our small-cap com­mod­ity ETFs as an invest­ment oppor­tu­nity given the talks of "QE2" at the time and the increased merger and acqui­si­tion (M&A) activ­ity amongst junior com­mod­ity com­pa­nies. As a result, we sug­gested the BMO Junior Gas Index ETF (ZJN) as one our rec­om­mended picks in that report, which has since gained 38.0%.
• A month later, on Novem­ber 5, 2010, we fol­lowed up this report with another BMO ETF Trade Oppor­tu­nity report enti­tled "Don't Get Rolled When Invest­ing in Nat­ural Gas." In that report, we rec­om­mended nat­ural gas based invest­ments as we felt nat­ural gas prices were not yet pric­ing in the sea­sonal decline in inven­tory and sug­gested the BMO Junior Gas Index ETF (ZJN) as a means to cap­i­tal­ize on this trade. Nat­ural gas prices ral­lied fur­ther shortly after that report, which closed at $16.50 that day and now trades at $22.77.

Poten­tial Invest­ment Opportunity:

• Given recent warmer weather pat­terns and with the over­sup­ply issues of nat­ural gas, the price of the com­mod­ity has expe­ri­enced a down­ward trad­ing pat­tern since late Jan­u­ary 2011. The BMO Junior Gas Index ETF (ZJN) has con­tin­ued to trend higher show­ing a grow­ing diver­gence between its price and the under­ly­ing commodity.
• Although we wouldn't be sur­prised to see the shares of small-cap nat­ural gas com­pa­nies move higher from here given con­tin­ued M&A activ­ity, low inter­est rates and grow­ing investor risk appetite, we would advise investors to con­sider trim­ming posi­tions. Rather than com­pletely exit­ing posi­tions, investors may want to main­tain a con­stant dol­lar expo­sure and rede­ploy the cap­i­tal gain por­tion into other posi­tions. For exam­ple, an investor that bought $10,000 worth of ZJN on Octo­ber 6, would have a posi­tion cur­rently val­ued at approx­i­mately $13,800. Investors may want to con­sider trim­ming their posi­tions back to $10,000 and repo­si­tion the $3,800 in cap­i­tal gains into other investments.
• For investors want­ing to main­tain some small-cap com­mod­ity expo­sure, we view gold as hav­ing a bet­ter risk/reward pro­file at this point, with bul­lion recently bounc­ing off sup­port at US$1310/ounce on Jan­u­ary 27, 2010. Small cap gold com­pa­nies through the BMO Junior Gold Index ETF (ZJG), is an alter­na­tive for investors look­ing for oppor­tu­ni­ties that have a higher sen­si­tiv­ity to gold bul­lion prices. For investors wish­ing to main­tain only an equity expo­sure, we rec­om­mend investors con­sider the BMO Dow Jones Indus­trial Aver­age Index ETF (ZDJ) given both its tech­ni­cal strength and attrac­tive val­u­a­tions rel­a­tive to other major global mar­ket indices. (Price-to-earnings ratio of 14.2x and div­i­dend yield of 2.4%)

Chart A: Grow­ing Diver­gence Between Nat­ural Gas and Junior Gas Companies

Source: Bloomberg, BMO Asset Man­age­ment Inc.

Chart B: Gold Prices Recently Moved Higher From Support

Source: Bloomberg, BMO Asset Man­age­ment Inc.

Chart C: Small Cap Gold Com­pa­nies Have Higher Beta to Gold Prices

Source: Bloomberg, BMO Asset Man­age­ment Inc.

*All prices as of mar­ket close Feb­ru­ary 22, 2010 unless oth­er­wise indicated.

Dis­claimer:
This com­mu­ni­ca­tion is intended for infor­ma­tional pur­poses only and is not, and should not be con­strued as, invest­ment and/or tax advice to any indi­vid­ual. BMO ETFs are admin­is­tered and man­aged by BMO Asset Man­age­ment Inc., a port­fo­lio man­ager and sep­a­rate legal entity from Bank of Montréal.

Com­mis­sions, man­age­ment fees and expenses all may be asso­ci­ated with invest­ments in exchange traded funds. Please read the prospec­tus before invest­ing. The funds are not guar­an­teed, their val­ues change fre­quently and past per­for­mance may not be repeated.

^®Reg­is­tered trade-mark of Bank of Mon­tréal, used under licence.

Addi­tional Disclaimers

The Dow Jones Indus­trial Aver­age^SM is a prod­uct of Dow Jones Indexes, a licensed trade-mark of CME Group Index Ser­vices LLC ("CME"), and has been licensed for use. "Dow Jones^®", "Dow Jones Indus­trial Aver­age^SM", "Dow Jones Canada Titan 60" "Dia­mond" and "Titans" are ser­vice marks of Dow Jones Trade­mark Hold­ings, LLC ("Dow Jones") and have been licensed for use for cer­tain pur­poses. BMO ETFs based on Dow Jones indexes are not spon­sored, endorsed, sold or pro­moted by Dow Jones, CME or their respec­tive affil­i­ates and none of them makes any rep­re­sen­ta­tion regard­ing the advis­abil­ity of invest­ing in such product(s).

Tags: Alfred Lee, BMO, BMO ETFs, Canadian Market, Capital Gain, Commodity Etfs, ETF, ETFs, Gas Exposure, Gas Index, Gold, Investment Opportunity, Investment Strategist, Investor Risk, Low Interest Rates, Merger And Acquisition, Natural Gas Prices, Oversupply, Qe2, Risk Appetite, Seasonal Decline, Small Cap, Structured Investments, Trade Opportunity, Weather Patterns
Posted in Canadian Market, ETFs, Gold, Markets | Comments Off

Diet Soda May Lead to Stroke Risk? Really?, and other Weekend Reads

Friday, February 25th, 2011

Here are this weekend's read­ing diver­sions for your enlight­en­ment. Have a great week­end!

Judith J. Wurt­man, PhD: Drop­ping Sero­tonin Lev­els: Why You Crave Carbs Late in the Day

You may think you are the only mom who seems to go a lit­tle crazy around four or five p.m. when it is get­ting dark and it's too cold or icy to go out­side and your kids are get­ting cranky or worse. Join the club of moms who find their san­ity slip­ping a wee bit late every after­noon and resort to the only ther­a­peu­tic agent they can find: sweet or starchy snacks.

***

Super­foods for Your Heart | Reader's Digest

Pow­er­ful pro­tec­tion for your heart is as close by as the aisles of your local gro­cery store. These foods can res­cue you from artery attack­ing LDLs, shield you from the dam­ag­ing forces of free rad­i­cals, com­bat high cho­les­terol, and keep your heart safe.

***

John Shore: Elderly Par­ent Care­givers: How to Stay Sane

One of the most emo­tion­ally com­plex and dif­fi­cult things a per­son can expe­ri­ence is tak­ing care of an elderly par­ent. I recently spent time tend­ing to my aging, wid­owed father, and thought I'd pass along these 15 points, each of which I found to be sig­nif­i­cantly help­ful dur­ing this phase of my own life:

***

Anne Nay­lor: 7 Solid Rea­sons to Smile

Why smile? Because you can. I do not mean to be flip­pant. The bet­ter ques­tion might be, "Why would you want to smile?" — espe­cially if you are feel­ing sad, angry or frus­trated. I will come to that. Read on.

***

Dr. Michael J. Breus: Mela­tonin: Not a Magic Bul­let for Sleep

Mela­tonin is a hor­mone. It is not an herb, a vit­a­min or a min­eral. Hor­mones are nat­u­rally pro­duced by your body as you need them. This means that it is very unlikely that some­one has a mela­tonin defi­ciency. While mela­tonin could be con­sid­ered nat­ural, in most cases it doesn't come from the earth. There are excep­tions — foods that con­tain mela­tonin in them — but this is a dif­fer­ent type of mela­tonin than what is pro­duced in your brain.

***

Learn­ing a Sec­ond Lan­guage Pro­tects Against Alzheimer's

Psy­chol­o­gist Ellen Bia­lystok and her col­leagues at York Uni­ver­sity in Toronto recently tested about 450 patients who had been diag­nosed with Alzheimer's. Half of these patients were bilin­gual, and half spoke only one lan­guage.

***

Mem­ory Boost for Aging Adults: Take a Walk

For­get the brain puz­zles, mild exer­cise such as walk­ing can boost brain vol­ume and improve mem­ory in older adults, researchers have found.

***

Dr. Jim Tay­lor: Rais­ing Good Deci­sion Mak­ers

One of the most pow­er­ful ways you can encour­age your chil­dren to become suc­cess­ful, happy and con­tribut­ing peo­ple is to teach them good decision-making, and then to allow them to make their own deci­sions. The deci­sions that your chil­dren make as they approach adult­hood dic­tate the peo­ple they become and the life paths they choose.

***

10 Health Ben­e­fits of Cin­na­mon

Stud­ies have shown that just 1/2 tea­spoon of cin­na­mon per day can lower LDL cho­les­terol.

***

Diet Soda May Lead to Stroke Risk? Really?

When you grab a diet soda instead of the full-sugar ver­sion, you might think you're mak­ing the healthy choice — and you are, at least when it comes to your weight. But accord­ing to a new study, peo­ple who drink diet soda habit­u­ally could be putting them­selves at risk for stroke.

***

6 Foods That Weaken Bones

What you eat plays a big role in whether you're get­ting the nutri­ents you need to build strong bones. What might sur­prise you, though, is that your diet can also play a role in sap­ping bone strength. Some foods actu­ally leach the min­er­als right out of the bone, or they block the bone's abil­ity to regrow.

***

25 Super Foods For Women

You love to eat, but you also love to feel great. You can do both if you choose foods that make you smarter, leaner, stronger — and then use them in tasty new ways.

***

Tags: Aisles, Breus, Diet Soda, Diversions, Dr Michael, Elderly Parent, Enlightenment, Free Radicals, High Cholesterol, Judith J Wurtman, Late In The Day, Local Grocery Store, Magic Bullet, Melatonin, Naylor, Reader S Digest, Serotonin Levels, Starchy Snacks, Superfoods, Therapeutic Agent, Wee Bit
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Hugh Hendry Explains His "Self Loathing" And The "Voices Inside His Head"

Friday, February 25th, 2011

by The Poly­Cap­i­tal­ist, via Busi­ness Insider
When it comes to media appear­ances, major hedge fund man­agers can be a rather reclu­sive lot. Unless your name hap­pens to be Hugh Hendry.

Dur­ing [late January's] Alter­na­tive Invest­ment Con­fer­ence in Lon­don, the icon­o­clas­tic spec­u­la­tor waxed philo­soph­i­cal about his own "self loathing" and the "voices inside his head", described indi­rect ways to play the Chi­nese prop­erty bub­ble, and explained how des­per­ate he is to "see inside the enve­lope wait­ing in the future which con­tains my 10–15-20 year per­for­mance results."

Hendry's keynote was facil­i­tated by author Steven Drobny, who explained that his goal for this inter­view was to "get inside the head of Hugh Hendry". Also of note, Drobny pub­licly revealed for the first time that Hendry was in fact the anony­mous 'Plas­ticine Man' fea­tured in his recent book Invis­i­ble Hands: Top Hedge Fund Traders on Bub­bles, Crashes, and Real Money.

While Hendry declined Drobny's Freudian-esque invi­ta­tion to recline on a couch brought up on stage specif­i­cally for him, he did play along with Drobny's word asso­ci­a­tion game. When prompted with the names Ben Bernanke and Vladamir Putin, the same two words popped out of Hendry's mouth: "evil genius". What does that reveal about the way Hendry thinks? Per­haps not as much as the below con­fer­ence high­light reel which was dubbed "Hugh Hendry's Great­est YouTube Hits."

Hendry's grow­ing noto­ri­ety has man­aged to attract atten­tion on the other side of the pond. In a NY Times pro­file last sum­mer the Eclec­tica boss quipped “If there was a way to short Obama, I would”. At the con­fer­ence he clar­i­fied that his remark was not directed at Pres­i­dent Obama per­son­ally per se, just his policies.

For Hugh Hendry fol­low­ers much of what he said at the con­fer­ence may be famil­iar, but here are a few of the highlights:

• The euro is "mor­tally wounded but can limp on for awhile at the expense of ordi­nary peo­ple, mak­ing it expen­sive to spec­u­late against".
• His best trades are the ones where he doesn't "fear the con­se­quences of being wrong".
• He's not pos­i­tive (bull­ish) on any country.
• In his own opin­ion, one of the keys to his suc­cess is that from an early age he was "taught to misbehave."

When it came to talk­ing spe­cific invest­ments themes, Hugh out­lined his bear­ish stance on China: "the only thing unique about China's eco­nomic strat­egy are the sheer num­bers". Fun­da­men­tal to his bear­ish­ness is the fact that so much cap­i­tal in China has been directed for sov­er­eign, rather than purely eco­nomic purposes.

He com­pared China to a "sun mov­ing other plan­ets", and that "it's best not to short the main­land but instead short the satel­lites" or "dark side of the moon" as he called it. As such Hendry has a sig­nif­i­cant "bas­ket" of Japan­ese credit default swaps with a four year time hori­zon. He dis­cussed the evolv­ing Japan­ese steel indus­try and his expec­ta­tion that Japan­ese steel exports will con­tract sig­nif­i­cantly in the years to come.

Like Jim Chanos, he is extremely bear­ish on Chi­nese com­mer­cial real estate and even pro­vides a guided tour of empty Chi­nese high-rise build­ings in the below video.

Whether or not Hendry's bets will pan out within his time frame is an open ques­tion. But what is with­out ques­tion is that the finan­cial world is cer­tainly a more inter­est­ing and enter­tain­ing place with the out­spo­ken Hugh Hendry.

Copy­right © Busi­ness Insider

Tags: Alternative Investment, Ben Bernanke, Business Insider, China, Chinese Property, Drobny, Evil Genius, Hedge Fund Managers, Hugh Hendry, Investment Conference, Invisible Hands, Media Appearances, Ny Times, Obama, Performance Results, Plasticine, Self Loathing, Speculator, Vladamir Putin, Word Association Game, Youtube
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Fed to Start Tightening in Third Quarter

Friday, February 25th, 2011

The gen­eral con­sen­sus agrees with the min­utes of the FOMC of Jan­u­ary 26 that the highly accom­moda­tive mon­e­tary pol­icy will be main­tained owing to the expec­ta­tion that the weak­ness in the labour mar­ket will per­sist for a long time and infla­tion is still below tar­get. The FOMC expected to keep the fed funds rate near zero “for an extended” period. But will they?

I had a look at what trig­gered the Fed in the past to change direc­tion in their mon­e­tary pol­icy and espe­cially the fed funds rate. No, it was not infla­tion nor was it employ­ment as they pro­fess. It was con­sumer sen­ti­ment! Over the past 22 years it is evi­dent that the Fed changed pol­icy a quar­ter after the Con­fer­ence Board’s Con­sumer Sen­ti­ment Index crossed its 5-quarter weighted mov­ing aver­age. The only excep­tion was in the third quar­ter of 2005 when con­sumer sen­ti­ment briefly fell below the weighted mov­ing aver­age.  Yes, they are chartists just like us!

Sources: Con­fer­ence Board; I-Net; Plexus Asset Management.

The rea­son for the Fed’s behav­iour prob­a­bly lies in the fact that con­sumer sen­ti­ment nor­mally leads core infla­tion by approx­i­mately ten months. A strong and sus­tained rise in con­sumer sen­ti­ment is there­fore likely to lead to a higher core infla­tion rate ten months hence. In the cur­rent cycle, how­ever, the core infla­tion rate kept on falling despite con­tin­ued improved con­sumer sen­ti­ment. That can largely be ascribed to the con­tin­ued weak­ness in the hous­ing mar­ket and shel­ter in particular.

I am there­fore of the opin­ion that a sus­tained improve­ment in con­sumer sen­ti­ment in the next few months will again see some hawks rais­ing their heads in the FOMC as head­line infla­tion is also turn­ing for the worst. I would cer­tainly start to bet on the Fed rais­ing the fed funds rate in the third quar­ter of this year.

With con­sumer sen­ti­ment a major fac­tor in the Fed’s mon­e­tary pol­icy it is no won­der that the bond mar­ket slav­ishly fol­lows the Con­fer­ence Board’s Con­sumer Sen­ti­ment Index. The bond mar­ket obvi­ously sees a stronger econ­omy and higher infla­tion ahead.

It brings me to another point – where is the yield on the 10-year Trea­sury note head­ing? From the his­tor­i­cal rela­tion­ship between the 10-year yield and con­sumer sen­ti­ment over the past 12 years it is evi­dent that the 10-year note at 3.62% is aptly priced given the cur­rent level (60.6) of the Con­sumer Sen­ti­ment Index.

A sus­tained rise (as I expect) in this index in the com­ing months is likely to take the yield on the 10-year note higher. Where it will top out I do not know but an improve­ment in con­sumer sen­ti­ment to 80 could see the yield ris­ing to in excess of 4.1%. Obvi­ously, bonds will rally if con­sumer sen­ti­ment sur­prises on the downside.

What about U.S. equities?

As in the case of U.S. bonds the U.S. mar­ket sen­ti­ment is sig­nif­i­cantly influ­enced by con­sumer sen­ti­ment. For mar­ket sen­ti­ment I used Robert Shiller’s Cycli­cally Adjusted Price Earn­ings Ratio (CAPE) or PE10 for the S&P 500. It is sim­i­lar to the stan­dard price-earnings ratio but instead of divid­ing the cur­rent index by the past year’s earn­ings, it uses the aver­age earn­ings of the past ten years. It is appar­ent that the equity mar­ket play­ers are keen fol­low­ers of con­sumer sen­ti­ment as it is obvi­ously a major fac­tor in their val­u­a­tion models.

In light of the rela­tion­ship between the Con­sumer Sen­ti­ment Index and the S&P 500’s CAPE the cur­rent CAPE of 23.7 indi­cates to me that a level of about 77 for con­sumer sen­ti­ment is priced in by the U.S. equity mar­ket. That com­pares with the cur­rent 60.6 (January).

If con­sumer sen­ti­ment comes in weaker than the 77, I doubt whether it will result in a major train smash as long as the num­ber is much stronger than January’s. But what about infla­tion? Higher infla­tion was the rea­son why the S&P 500’s CAPE went side­ways from 2004 to 2007 despite con­sumer sen­ti­ment ris­ing fur­ther. I expect the same to hap­pen when con­sumer sen­ti­ment hits the 85 level. A level of 85 tran­spires to an S&P 500 CAPE level of 26, though − up approx­i­mately 10% from the cur­rent levels.

Tags: 22 Years, Bond Market, Briefly, Chartists, Consensus, Consumer Sentiment Index, Core Inflation, Expectation, Fed Funds Rate, Fomc, Hawks, Headline Inflation, Housing Market, Inflation Rate, Labour Market, Long Time, Monetary Policy, Moving Average, Plexus Asset Management, Target
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Unrest and its Effect on Oil

Friday, February 25th, 2011

We’ve all watched with uncer­tainty as an upris­ing in a small North African coun­try more than a month ago has turned into a rev­o­lu­tion for the entire region. The tur­moil has sent global mar­kets tum­bling and oil prices above $100 per bar­rel for the first time since 2008.

The events are unfold­ing so quickly that it may be dif­fi­cult to keep up to speed. I’ve found two good sources which help explain what is going on. The first is from The Wall Street Jour­nal and is an inter­ac­tive time­line that takes you all the way back to Decem­ber when the first signs of unrest began in Tunisia. You can also get a country-by-country break­down of the lat­est events and key sta­tis­tics at CNN.com. The break­down also includes some insight­ful maps and details on the ori­gins of the uprisings.

Oil has increased because many are expect­ing delays, if not an extended shut­down, of Libya’s oil pro­duc­tion. An Orga­ni­za­tion of Petro­leum Export­ing Coun­tries (OPEC) mem­ber, Libya is heav­ily depen­dent on its oil. The hydro­car­bon indus­try accounted for 95 per­cent of export earn­ings and 80 per­cent of the country’s fis­cal rev­enues in 2008, accord­ing to data from the Inter­na­tional Mon­e­tary Fund and the U.S. Energy Infor­ma­tion Administration.

The coun­try pro­duces 1.58 mil­lion bar­rels per day of oil, roughly 2 per­cent of global oil sup­ply. Most of this oil gets shipped to West­ern Europe, China and even the U.S. Other coun­tries, such as Alge­ria, which is Libya’s west­ern neigh­bor and pro­duces 1.25 mil­lion bar­rels per day, haven’t seen the same degree of protest, as of yet.

Amidst the tur­moil and uncer­tainty, it’s impor­tant to remem­ber this is a short-term spike. We expected to see $100 per bar­rel of oil prices some time this year and the upris­ing in Libya isn’t going to shut down the world’s oil industry.

If it turns out that Libya’s pro­duc­tion is shut down for an extended period of time, the mar­ket will even­tu­ally adjust. In fact, OPEC is sit­ting on three times Libya’s daily oil pro­duc­tion in excess pro­duc­tion capac­ity, accord­ing to Zacks Invest­ment Research.

What is more impor­tant for the long-term oil story is the eco­nomic recov­ery. Already in the U.S. gaso­line prices have hit sea­sonal highs. In order for oil prices to main­tain these lev­els, demand must be resilient. As Zacks says “oil spikes have a his­tory of get­ting in the way of eco­nomic sta­bil­ity and growth.”

BCA Research has some inter­est­ing data regard­ing the eco­nomic impact of ris­ing oil prices. The firm says that every $10 rise in oil prices trans­lates into a 0.1–0.2 per­cent reduc­tion in eco­nomic growth. This reduc­tion doesn’t mean much when we have a slow rise in prices over an extended period of time, but can become mean­ing­ful dur­ing a com­pressed time period.

We expect more volatil­ity in the near term as rev­o­lu­tion­ary forces over­throw oppres­sive regimes but our focus remains on the strength of the global eco­nomic recov­ery and its abil­ity to with­stand higher gaso­line and energy prices.

By click­ing the links above, you will be directed to third-party web­sites. U.S. Global Investors does not endorse all infor­ma­tion sup­plied by these web­sites and is not respon­si­ble for their content.

Tags: Barrel Of Oil Prices, China, Cnn, Country Breakdown, energy, Energy Information Administration, Export Earnings, First Signs, Global Markets, Global Oil, Hydrocarbon Industry, Interactive Timeline, International Monetary Fund, Key Statistics, oil, Oil Industry, Oil Production, Oil Supply, Opec, Organization Of Petroleum Exporting Countries, Petroleum Exporting Countries, U S Energy, Uprisings, Wall Street Journal
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