News That Matters (August 31, 2011)

Wednesday, August 31st, 2011

FT.com
US and Euro­pean stock mar­kets man­aged to over­come the bleak results of two keenly watched sur­veys, which showed con­fi­dence slump­ing on both sides of the Atlantic, to eke out mod­est gains, the FT reports. http://ftalphaville.ft.com/thecut/2011/08/31/665386/stocks-eke-out-further-gains/

Europe’s top bank­ing reg­u­la­tor is draw­ing up options to help banks in Europe strug­gling to tap credit mar­kets for medium– and long-term fund­ing, the FT reports. Among the pol­icy pro­pos­als being con­sid­ered by the Euro­pean Bank­ing Author­ity is a new guar­an­tee scheme for bank bonds, http://ftalphaville.ft.com/thecut/2011/08/31/665361/europe-bank-regulator-plans-radical-funding-aid/

A dis­pute has erupted over con­trol of Libya’s $65bn sov­er­eign wealth fund, as the national tran­si­tional coun­cil attempts to main­tain sta­bil­ity in the oil-rich nation, reports the FT. Sev­eral NTC mem­bers have con­tested the author­ity of Mah­moud Badi http://ftalphaville.ft.com/thecut/2011/08/31/665346/dispute-over-control-of-65bn-libya-fund/

Local coun­cils plan to return to the cap­i­tal mar­kets en masse for the first time in decades as a result of George Osborne’s deci­sion last autumn to raise sharply the rates on cen­tral gov­ern­ment loans,http://ftalphaville.ft.com/thecut/2011/08/31/665336/councils-plan-return-to-capital-markets/

Chi­nese com­pa­nies and investors are step­ping up their pur­chases of indus­trial com­modi­ties such as cop­per, the FT reports. The wave of buy­ing is pro­vid­ing sup­port for met­als and min­er­als prices after com­modi­ties prices fell this month at wor­ries about a double-dip http://ftalphaville.ft.com/thecut/2011/08/30/665286/china-steps-up-copper-buying/

Temasek has emerged as a key player in the con­sor­tium that bought up half of Bank of America’s stake in China Con­struc­tion Bank for $3.3bn, reports the WSJ. Singapore’s sov­er­eign wealth fund had pared back its CCB shares ear­lier in the month in line with sales of hold­ings in Bank of China, http://ftalphaville.ft.com/thecut/2011/08/30/665266/temasek-moves-fast-in-buying-bofas-ccb-shares/

The United States is unlikely to embrace Yoshi­hiko Noda, Japan’s sixth prime min­is­ter in five years, as it shows its frus­tra­tion at the ‘revolv­ing door’ of Japan­ese pol­i­tics, the FT says. Wash­ing­ton does not expect the head of the country’s 95th cab­i­net to last beyond 2013′s gen­eral elec­tion. http://ftalphaville.ft.com/thecut/2011/08/30/665241/noda-not-seen-as-long-term-bet-for-japan-pm/

Mem­bers of the Fed­eral Reserve’s open mar­kets com­mit­tee wanted to make addi­tional asset pur­chases “to pro­vide more accom­mo­da­tion” in August’s meet­ing, before set­tling on com­mit­ting to keep rates low until 2013, http://ftalphaville.ft.com/thecut/2011/08/30/665186/fed-considered-more-substantial-move-in-august/

Con­sumer con­fi­dence in the United States has fallen to its low­est since April 2009, in the depths of the pre­vios reces­sion, Reuters reports. An index of con­sumer atti­tudes fell to 44.5 from 59.2 a month before, http://ftalphaville.ft.com/thecut/2011/08/30/665221/us-consumer-confidence-lowest-since-2009/

Italy’s centre-right coali­tion is to revise rad­i­cally a tax on high incomes intro­duced as part of the €45.5bn aus­ter­ity pack­age passed by the cab­i­net two weeks ago, in an attempt by Sil­vio Berlus­coni, prime min­is­ter, to win back sup­port for his rul­ing major­ity. The can­celling of the so-called “sol­i­dar­ity con­tri­bu­tion” for every­one but national leg­is­la­tors is to be bal­anced with new fis­cal mea­sures to com­bat tax eva­sion and the reduc­tion of tax breaks for co-operatives, said a state­ment issued after a long meet­ing between Mr Berlus­coni, Giulio Tremonti, his finance min­is­ter, and Umberto Bossi, leader of the North­ern League and a close gov­ern­ment ally. http://www.ft.com/intl/cms/s/0/d5a93728-d2e4-11e0-9aae-00144feab49a.html#axzz1WOELnKbv

A lead­ing Fed pol­i­cy­maker called for more mon­e­tary stim­u­lus on Tues­day as it emerged that staff at the US cen­tral bank have per­ma­nently cut their growth fore­casts. In an inter­view with CNBC, Charles Evans of the Chicago Fed said that he would “favour more accom­mo­da­tion” and became the first pol­i­cy­maker on the rate-setting Fed­eral Open Mar­ket Com­mit­tee to explic­itly coun­te­nance let­ting infla­tion rise above the Fed’s tar­get of 2 per cent in the short-term. http://www.ft.com/intl/cms/s/0/ac3a80c2-d31b-11e0-9ba8-00144feab49a.html#axzz1WOELnKbv

WSJ.com

Asian shares were mostly lower on Wednes­day amid cau­tious trade, with exporters in Tokyo strug­gling to make head­way amid weak global and domes­tic data. Japan’s Nikkei Stock Aver­age fell 0.2%, Australia’s S&P/ASX 200 was flat, South Korea’s Kospi Com­pos­ite tacked on 0.1% and New Zealand’s NZX-50 was off 0.5%. Dow Jones Indus­trial Aver­age futures fell four points in screen trade.  The weak back­drop for equi­ties kept the euro under pres­sure. The sin­gle cur­rency was also weighed by Tuesday’s dour con­sumer con­fi­dence read­ing for the region and an under­whelm­ing bond auc­tion under­scored the euro-zone’s debt tra­vails. http://online.wsj.com/article/SB10001424053111904332804576541283537990112.html?mod=WSJASIA_hpp_LEFTTopWhatNews

Indus­trial pro­duc­tion in Japan and South Korea fell short of expec­ta­tions in July, the lat­est sign Asia’s man­u­fac­tur­ing sec­tor may be los­ing momen­tum due to soft­en­ing U.S. and Euro­pean demand. Japan­ese indus­trial out­put in July was up 0.6% from the pre­vi­ous month, a fourth straight month of expan­sion, the Min­istry of Econ­omy, Trade and Indus­try said Wednes­day. But the median fore­cast of econ­o­mists by Nikkei and Dow Jones Newswires was 1.5%. Japan­ese com­pa­nies sur­veyed by the min­istry said on aver­age they expect to cut pro­duc­tion by 2.4% in Sep­tem­ber after a 2.8% increase in August.http://online.wsj.com/article/SB10001424053111904332804576541322576535978.html?mod=WSJASIA_hpp_LEFTTopWhatNews

Fed­eral Reserve offi­cials are as deeply divided as they’ve been in decades about how to spur the flag­ging econ­omy, records released Tues­day show, as they stake out posi­tions on what, if any, action to take at their Sep­tem­ber meet­ing. Min­utes of the Fed’s Aug. 9 meet­ing, released Tues­day after the nor­mal three-week lag, offered new evi­dence that some offi­cials wanted to imme­di­ately restart a con­tro­ver­sial bond-buying pro­gram aimed at spurring the econ­omy. Oth­ers felt that even the smaller steps the cen­tral bank instead chose were too aggres­sive.  Offi­cials con­sid­ered a range of actions—which included set­ting numer­i­cal tar­gets for infla­tion and http://online.wsj.com/article/SB10001424053111904332804576540651581740740.html?mod=WSJEurope_hpp_LEFTTopStories

India’s econ­omy grew 7.7% in the April-to-June period from a year ear­lier, its slow­est pace in six quar­ters, con­firm­ing fears that a series of interest-rate increases, com­bined with the global slow­down and a lack of local reforms, have kept growth well below the government’s esti­mate. The growth data, how­ever, don’t indi­cate a broad-based slow­down; the ser­vices sec­tor, which accounts for 58% of India’s gross domes­tic prod­uct, grew 10% despite a muted 5.1% expan­sion in indus­tries. India’s April-June expan­sion was only slightly lower than the 7.8% growth in the pre­ced­ing quar­ter, though it lagged behind the 8.8% increase in the same period last year. http://online.wsj.com/article/SB10001424053111904332804576539643029290116.html?mod=WSJEUROPE_hpp_MIDDLETopNews

Iran’s stead­fast sup­port for Syria’s régime has rapidly eroded Tehran’s cred­i­bil­ity among Arabs, leav­ing the coun­try with a foreign-policy dilemma as pop­u­lar upris­ings mount across the region. Sup­port­ing Pres­i­dent Bashar al-Assad will fur­ther dimin­ish Tehran’s already trou­bled stand­ing in the region, polit­i­cal ana­lysts say. But aban­don­ing him would crum­ble Iran’s plat­form in Syria.http://online.wsj.com/article/SB10001424053111904279004576526422995092978.html?mod=WSJEUROPE_hpp_MIDDLETopNews

The Euro­pean Com­mis­sion con­firmed Tues­day that mem­ber states are in the process of com­plet­ing an embargo on Syr­ian oil exports with the mea­sures due to come into effect in com­ing days. John Clancy, an interim spokesman for High Rep­re­sen­ta­tive for For­eign Affairs Cather­ine Ash­ton, said mem­ber states are now “dot­ting the I’s and cross­ing the T’s” on the sanc­tions. The focus “now is on get­ting these addi­tional sanc­tions or mea­sures in place … around the week­end.” Euro­pean Union for­eign min­is­ters will hold an infor­mal meet­ing at the week­end in Poland.http://online.wsj.com/article/SB10001424053111904332804576540033752414912.html?mod=WSJEUROPE_hpp_MIDDLETopNews

The first com­pre­hen­sive soil sur­vey from areas around the Fukushima Dai­ichi nuclear plant showed exten­sive ground con­t­a­m­i­na­tion and another report warned of the con­tin­ued threat to Japan’s food chain, under­scor­ing the major chal­lenges the coun­try still faces in its radioac­tive cleanup efforts. http://online.wsj.com/article/SB10001424053111904332804576540131142824362.html?mod=WSJEUROPE_hpp_MIDDLETopNews

Sen­ti­ment among euro-zone com­pa­nies and con­sumers plunged in August, the lat­est sign that steep declines in equity mar­kets ear­lier in the month, pub­lic anger over the sec­ond bailout of Greece and signs of fee­ble growth in Ger­many are tak­ing a severe toll on the eco­nomic out­look. The Euro­pean Cen­tral Bank stepped into the fray again as the euro bloc’s pri­mary cri­sis respon­der, buy­ing Ital­ian and Span­ish bonds ahead of a key sale of longer-term Ital­ian gov­ern­ment debt. The Eco­nomic Sen­ti­ment Index fell for a sixth straight month, to 98.3 in August from 103.0 in July, the Euro­pean Com­mis­sion said, thehttp://online.wsj.com/article/SB10001424053111904332804576539791615608416.html?mod=WSJ_hp_LEFTWhatsNewsCollection

U.S. home prices increased in the sec­ond quar­ter but fell com­pared with the same period last year, paint­ing a mixed pic­ture of the real-estate mar­ket amid plum­met­ing con­sumer con­fi­dence. The S&P/Case-Shiller Home Price Index, released Tues­day, rose 3.6% for the quar­ter ended in June, but fell 5.9% annu­ally, send­ing prices back to pre-boom 2003 lev­els. Con­sumer con­fi­dence, mean­while, sank to its low­est level in two years, accord­ing to the Con­fer­ence Board, a pri­vate research group.  Con­fi­dence fell to a read­ing of 44.5 in August from 59.2 in July. That is its low­est level since April 2009 and much worse than http://online.wsj.com/article/SB10001424053111904332804576540200549623660.html?mod=WSJ_hp_LEFTWhatsNewsCollection

Marketwatch.com
China’s con­sumer infla­tion may have tapered off, with consumer-price-index growth slow­ing in the remain­ing months of this year from a three-year high of 6.5% in July, said ana­lysts. Mizuho Secu­ri­ties’ Greater China chief econ­o­mist Shen Jian­guang and Qiao Yongyuan at con­sul­tancy CEBM, expected CPI to grow 6.2% in August. The slow­down of the U.S. econ­omy has to some extent sub­dued the rise of global oil prices, and thus alle­vi­ated China’s infla­tion­ary pres­sures, said Shen. Though food prices remain high, growth momen­tum eased in August from July, said Qiao. Indus­trial Secu­ri­ties chief econ­o­mist Lu Zheng­wei expected China’s full-year CPI growth to range from 5.4% to 5.6%, cit­ing a peak in July. http://www.marketwatch.com/story/china-inflation-winding-down-analysts-2011–08-30

Though the Fed­eral Reserve should not have pledged to keep rates at ultra-low lev­els through the mid­dle of 2013, the cen­tral bank shouldn’t revisit that com­mit­ment made ear­lier this month, accord­ing to Narayana Kocher­lakota, the Min­neapo­lis Fed pres­i­dent, one of three who dis­sented on that deci­sion. “I believe that undo­ing this com­mit­ment in the near term would under­cut the abil­ity of the Com­mit­tee to offer sim­i­lar con­di­tional com­mit­ments in the future – and this abil­ity has cer­tainly proved very use­ful in the past three years,” he said on Tues­day. How­ever, Kocher­lakota made the case against fur­ther eas­ing at its sched­uled Sep­tem­ber meet­ing. http://www.marketwatch.com/story/fomc-dissenter-says-fed-should-stick-to-pledge-2011–08-30

If you’re not inter­ested in 10 pages of two-column ver­biage, here are the con­densed min­utes from the Fed­eral Open Mar­ket Com­mit­tee meet­ing of Aug. 9:  “The economy’s lousy. It’s not our fault. We can do more things but they prob­a­bly won’t work, or at least not work well.” http://www.marketwatch.com/story/from-500-yards-out-fed-weighs-putter-or-wedge-2011–08-30

Reuters.com
Spot gold edged lower on Wednes­day as investors waited for more clues to eco­nomic con­di­tions and watched to see if the U.S. Fed­eral Reserve would deploy more stim­u­lus mea­sures, but the metal is poised for its biggest monthly gain since Novem­ber 2009. Spot gold inched down 0.2 per­cent to $1,833.29 an ounce by 0254 GMT, headed for a monthly rise of 13 per­cent, its strongest gain since Novem­ber 2009. It has risen nearly 30 per­cent so far this year, close to the gain for all of 2010. U.S. gold gained 0.4 per­cent to $1,836.50 an ounce, also on course for a 13-percent rise from a month ear­lier.http://www.reuters.com/article/2011/08/31/us-markets-precious-idUSTRE7781Q420110831

Italy returned to bond mar­kets on Tues­day with a 7.74 bil­lion euro sale that met rel­a­tively weak demand despite the ECB buy­ing Ital­ian debt in recent weeks, spark­ing a ner­vous reac­tion among investors. Traders said the Euro­pean Cen­tral Bank stepped in after the auc­tion to buy sig­nif­i­cant amounts of 10-year debt, bring­ing yields back down. The launch of a new 10-year bench­mark bond drew bids worth 1.27 times the 3.75 bil­lion euros sold, below the year’s aver­age bid-cover ratio of 1.4. The ECB began buy­ing Ital­ian debt on the sec­ondary mar­ket ear­lier this month, bring­ing bench­mark 10-year yields down from lev­els well above 6 per­cent, seen as unsus­tain­able, to around 5 per­cent. http://www.reuters.com/article/2011/08/30/businesspro-us-italy-debt-auction-idUSTRE77T1L720110830

Bloomberg.com
Oil declined, head­ing for the biggest monthly drop since May, as investors spec­u­lated that increas­ing crude stock­piles in the U.S. indi­cate fuel demand is fal­ter­ing in the world’s biggest con­sumer of the com­mod­ity. Crude for Octo­ber deliv­ery slid as much as 55 cents to $88.35 a bar­rel in elec­tronic trad­ing on the New York Mer­can­tile Exchange and was at $88.53 at 2:48 p.m. Syd­ney time. The con­tract yes­ter­day advanced $1.63 to $88.90. Prices are down 7.5 per­cent this month and 3 per­cent this year. Brent oil for Octo­ber set­tle­ment was at $114.07, up 5 cents, on the London-based ICE Futures Europe exchange. The Euro­pean bench­mark con­tract was at a pre­mium of $25.54 to U.S. West Texas Inter­me­di­ate futures, com­pared with a record close of $26.21 on Aug. 19. Brent is down 2.3 per­cent this month. http://www.bloomberg.com/news/2011–08-30/crude-in-new-york-declines-after-api-report-signals-increasing-stockpiles.html

Masaaki Shi­rakawa may become the first Bank of Japan gov­er­nor since the 1990s to fin­ish his term with­out rais­ing inter­est rates as entrenched defla­tion and the yen’s surge weaken the world’s third-biggest econ­omy. The 18-month overnight-index swap rate, an indi­ca­tion of what deriv­a­tive traders expect the Bank of Japan’s key inter­est rate will aver­age dur­ing the period, sank to 0.05 per­cent on Aug. 23, the low­est since at least Dec. 2005, and com­pared with the BOJ’s tar­get rate of zero to 0.1 per­cent, accord­ing to data com­piled by Bloomberg. JPMor­gan Chase & Co. and Mit­subishi UFJ Mor­gan Stan­ley Secu­ri­ties Co. have pushed back esti­mates for an increase in the overnight lend­ing rate to 2014 at the ear­li­est. http://www.bloomberg.com/news/2011–08-30/swap-rate-bets-signal-boj-s-shirakawa-will-never-raise-rates-japan-credit.html

South Korea’s indus­trial pro­duc­tion expanded at the slow­est pace in 10 months as weak­ness in global growth threat­ens the out­look for exports. Out­put rose 3.8 per­cent from a year ear­lier after gain­ing a revised 6.5 per­cent in June, Sta­tis­tics Korea said today. The median esti­mate of 11 econ­o­mists in a Bloomberg News sur­vey was for a 6.2 per­cent gain. Pro­duc­tion slid 0.4 per­cent from June, when it increased 0.9 per­cent. http://www.bloomberg.com/news/2011–08-30/south-korea-s-output-grows-less-than-forecast-3–8-as-global-demand-cools.html

The Philip­pine econ­omy grew less than econ­o­mists expected last quar­ter, adding to signs Asia’s expan­sion is eas­ing as fal­ter­ing global demand curbs exports. Gross domes­tic prod­uct increased 3.4 per­cent in the sec­ond quar­ter from a year ear­lier, com­pared with a revised 4.6 per­cent gain in the three months through March, the National Sta­tis­ti­cal Coör­di­na­tion Board said in Manila today. The median esti­mate of seven econ­o­mists sur­veyed by Bloomberg News was for growth to slow to 4.1 per­cent. http://www.bloomberg.com/news/2011–08-31/philippine-economy-expanded-slower-than-estimated-3–4-in-second-quarter.html

The ideas Pres­i­dent Barack Obama is con­sid­er­ing for his new jobs agenda could put hun­dreds of thou­sands of peo­ple back to work, and still have a lim­ited impact in an econ­omy that remains 6.8 mil­lion jobs behind its pre-recession peak, econ­o­mists said. Among the options Obama is con­sid­er­ing is a ver­sion of a tax credit for new hires that could spur the cre­ation of 900,000 addi­tional jobs at a cost of $30 bil­lion, accord­ing to an esti­mate by Michael Green­stone, an eco­nom­ics pro­fes­sor at the Mass­a­chu­setts Insti­tute of Tech­nol­ogy and for­mer chief econ­o­mist for Obama’s Coun­cil of Eco­nomic Advis­ers.http://www.bloomberg.com/news/2011–08-30/obama-may-back-hiring-credit-infrastructure-spending-yet-fall-shy-on-jobs.html

CNBC.com
Pock­ets of the fixed income and money mar­kets are start­ing to reflect con­cern that recent volatil­ity will extend past August, and that grow­ing risk aver­sion may again roil banks and fund­ing mar­kets. One sign of worry is the increas­ing reluc­tance of banks to use their bal­ance sheets to facil­i­tate trades, which has hit sec­tors from cor­po­rate bonds to the short-term repur­chase mar­ket, where there is $1.6 tril­lion in tri­party loans. http://www.cnbc.com/id/44335728

Bill Gross, man­ager of the world’s largest bond fund for Pimco, has admit­ted that it was a mis­take to bet so heav­ily against the price of US gov­ern­ment debt. Mr Gross emp­tied his $244 bil­lion Total Return Fund of US government-related secu­ri­ties ear­lier this year in a high-profile call that has back­fired as the bond mar­ket has ral­lied. As of Mon­day, Pimco’s flag­ship fund ranked 501th out of 589 bond funds in its cat­e­gory. http://www.cnbc.com/id/44323496

NYTimes.com
Exxon Mobil won a cov­eted prize in the global petro­leum indus­try Tues­day with an agree­ment to explore for oil in a Russ­ian por­tion of the Arc­tic Ocean that is being opened for drilling even as Alaskan waters remain mostly off lim­its. The agree­ment seemed to super­sede a sim­i­lar but failed deal that Rus­sia’s state oil com­pany, Ros­neft, reached with the British oil giant BP this year — with a few strik­ing dif­fer­ences. http://www.nytimes.com/2011/08/31/business/global/exxon-and-rosneft-partner-in-russian-oil-deal.html?_r=1&ref=global

Echo­ing a call by War­ren E. Buf­fett, mem­bers of the Euro­pean wealthy élite are urg­ing their gov­ern­ments to raise their taxes or enact spe­cial levies to help reduce grow­ing bud­get deficits. Mau­rice Lévy, chair­man and chief exec­u­tive of the French adver­tis­ing firm Pub­li­cis, on Tues­day became the lat­est Euro­pean busi­ness leader to ask for higher taxes on top earn­ers, writ­ing in The Finan­cial Times that it was “only fair that the most priv­i­leged mem­bers of our soci­ety should take up a heav­ier share of this national bur­den.” http://www.nytimes.com/2011/08/31/business/global/as-austerity-bites-europes-rich-speak-up-to-be-taxed.html?ref=global

Dailyfinance.com
While much of Europe is strug­gling to pay its way out of the debt cri­sis, Nor­way has been awash with cash and is set to get more. Two major oil finds are revi­tal­iz­ing the country’s aging energy sec­tor and promise to buoy it through the down­turn loom­ing over the global econ­omy. Although head­lines this sum­mer have been pre­dict­ing eco­nomic gloom — a flare-up in Europé ‘s debt prob­lems, falling bank stocks, another reces­sion in the U.S. — Nor­way has weath­ered the bad news. In fact, one of its main finan­cial con­cerns is how to keep all its money from over­heat­ing the econ­omy. “In Nor­way, we live in a big bub­ble, inde­pen­dent of what hap­pens in the rest of the world,” said Beni­amin Johansen, a per­son­nel con­sul­tant in Oslo. http://srph.it/o9PQr2

Foxbusiness.com
The head of Poland’s cen­tral bank said Tues­day that the longer the euro-zone coun­tries take to resolve the sov­er­eign debt cri­sis, the more likely it is that the bloc will have to issue eurobonds, or bonds backed col­lec­tively by all the mem­bers of the sin­gle cur­rency union. “The longer it takes to resolve the sit­u­a­tion in Greece, the more inevitable a eurobond becomes,” National Bank of Poland Gov­er­nor Marek Belka told Mar­ket­Watch in an inter­view. http://www.foxbusiness.com/2011/08/30/eurobond-becoming-more-likely-polands-belka/#ixzz1Wa2Ozrkz

The chief of Poland’s cen­tral bank said Tues­day that he expected infla­tion in the coun­try to keep eas­ing in the months ahead, but that it was still too soon to rule out future inter­est rate increases. “We expect infla­tion to keep reced­ing. But it’s far above our tar­get, 2.5%. In that sense, it’s too early to announce a change in our gen­eral stance of pol­icy,” Marek Belka told Mar­ket­Watch in an inter­view at the Haas School of Busi­ness at the Uni­ver­sity of Cal­i­for­nia, Berke­ley. http://www.foxbusiness.com/2011/08/30/polish-central-banker-sees-inflation-receding/#ixzz1Wa2YWpoZ

BBC.co.uk
Credit rat­ings agency Fitch has warned that it may cut China’s yuan debt rat­ing on con­cerns of ris­ing defaults. Fitch’s cur­rent rat­ing for China’s yuan-denominated debt stands at AA-. The warn­ing comes after Fitch revised its out­look on China’s local cur­rency debt from “sta­ble” to “neg­a­tive” in April this year. There have been grow­ing con­cerns of bad loans in China after the nation’s banks lent record sums of money in the last two years.  Andrew Colquhoun, head of Asia-Pacific Sov­er­eigns at Fitch Rat­ings was quoted by news agency AFP as say­ing that there was a “bet­ter than even chance” of a down­grade.http://www.bbc.co.uk/news/business-14726926

Span­ish politi­cians have over­whelm­ingly backed hold­ing a vote on intro­duc­ing a con­sti­tu­tional cap on bud­get deficits. The move all but guar­an­tees that the change will be adopted. Mem­bers of the lower house of Spain’s par­lia­ment voted 319 in favour and only 17 against hold­ing the debate and vote later this week. The reform would then go to the upper house next week. To change Spain’s con­sti­tu­tion requires three-fifths sup­port in both houses. http://www.bbc.co.uk/news/business-14721843

Euro­pean politi­cians must not ignore mar­kets, accord­ing to Sharon Bowles, chair of the Euro­pean Parliament’s eco­nomic and mon­e­tary com­mit­tee. Ms Bowles chaired the ses­sion on Mon­day about the euro­zone debt cri­sis. “Jean-Charles Juncker, the pres­i­dent of the Eurogroup… said, ‘We shouldn’t believe the mar­kets,’ and he got big applause,” she told BBC News. She added that the big prob­lem was that politi­cians thought the mar­kets would do noth­ing while they went on hol­i­day. http://www.bbc.co.uk/news/business-14713678

Telegraph.co.uk
The West­ern world is at mount­ing risk of a double-dip reces­sion after key mea­sures of con­fi­dence col­lapsed in both the United States and Europe, with Ger­many suf­fer­ing the steep­est one-month fall since records began in the 1970s.  The fund has slashed its growth fore­cast for Amer­ica and Europe, accord­ing to a leaked draft of its World Eco­nomic Out­look. It has called on both the US Fed­eral Reserve and the Euro­pean Cen­tral Bank to stand ready for “fur­ther eas­ing of mon­e­tary pol­icy” – imply­ing a fresh blast of quan­ti­ta­tive eas­ing (QE) by the Fed. http://www.telegraph.co.uk/finance/financialcrisis/8731894/Double-dip-fears-across-the-West-as-confidence-crumbles.html

Mort­gage approvals rose to a 14-month peak in July, the Bank of Eng­land reported, with econ­o­mists attribut­ing the pick-up to some bet­ter deals for buy­ers. The num­ber of mort­gage loans approved by lenders rose to 49,239, in line with the con­sen­sus fore­cast of 49,000 and up from 48,500 the pre­vi­ous month. That rep­re­sented the high­est fig­ure since May 2010, albeit still well below pre-crisis lev­els. “The lat­est rise in mort­gage lend­ing may be a response to the increas­ingly com­pet­i­tive mort­gage inter­est rates avail­able to some bor­row­ers in recent months,” said ana­lysts at Cap­i­tal Eco­nom­ics.http://www.telegraph.co.uk/finance/economics/8730730/Mortgage-approvals-highest-in-14-months.html

Britain’s debt bur­den has surged past the point at which it harms growth in every area of the nation’s bor­row­ing, the Bank for Inter­na­tional Set­tle­ments (BIS) warned. Just two other advanced economies analysed by the finan­cial watch­dog are into the dan­ger ter­ri­tory where “debt is bad for growth” for all three types of non-financial sec­tor bor­row­ing: gov­ern­ment, house­hold and cor­po­rate debt, said BIS econ­o­mists. http://www.telegraph.co.uk/finance/economics/8731819/UK-debt-levels-damaging-growth-warns-BIS.html

Pen­sion­ers retir­ing this year on a fixed income could see almost £10,000 wiped off the value of their pen­sion pot in real terms over the next two decades, the report claimed. To beat infla­tion and main­tain a decent stan­dard of liv­ing, pen­sion­ers would need a retire­ment income worth more than dou­ble what they had set aside for the next 20 years, the analy­sis by Pru­den­tial said.http://www.telegraph.co.uk/finance/personalfinance/pensions/8731674/Inflation-to-cut-pensioner-spending-power-by-60pc.html

Guardian.co.uk
The hous­ing mar­ket is in cri­sis as home own­er­ship tum­bles and house prices soar, a study has warned. Home own­er­ship in Eng­land will slump to just 63.8% over the next decade – the low­est level since the mid-1980s, the National Hous­ing Federation’s fore­cast, pub­lished on Tues­day, said. Huge deposits, com­bined with high house prices and strict lend­ing cri­te­ria, have sent home own­er­ship into decline, the fed­er­a­tion said. http://www.guardian.co.uk/business/2011/aug/30/home-ownership-fall-mid-80s-levels

Smh.com.au

National house prices accel­er­ated their falls in July amid uncer­tainty about the global econ­omy and the direc­tion of inter­est rates, with prices in Mel­bourne lead­ing the drop but Syd­ney edg­ing up. Cap­i­tal city home prices sank 0.6 per cent dur­ing the month, sea­son­ally adjusted, from a 0.3 per cent fall in June, said prop­erty research group RP Data-Rismark. Cap­i­tal city home prices fell 3.4 per cent in the first seven months of the year, leav­ing the median cap­i­tal city dwelling price at $455,000. http://www.smh.com.au/business/house-prices-extend-falls-in-july-20110831-1jkvh.html#ixzz1Wa73laeA

Straitstimes.com
US Pres­i­dent Barack Obama on Tues­day said that the US econ­omy had suf­fered a ‘heart attack’ and sur­vived but is not recu­per­at­ing quickly enough, as he geared up to unveil a major jobs plan. Mr Obama appeared on the Tom Joyner Morn­ing Show in what also appeared to be an effort to reach out to black vot­ers fol­low­ing crit­i­cism by African Amer­i­can lead­ers that he has not suf­fi­cient courted their com­mu­nity. http://www.straitstimes.com/BreakingNews/Money/Story/STIStory_707861.html

Xinhuanet.com
Net profit growth of Chi­nese listed com­pa­nies slowed in the first half of this year amid soar­ing infla­tion at home and eco­nomic uncer­tainty abroad, accord­ing to their half-year reports. Data from the Shang­hai and Shen­zhen stock exchanges shows that the prof­its of 2,272 listed firms totaled 998.94 bil­lion yuan (156.4 bil­lion U.S. dol­lars) in the first half of 2011, up 22.35 per­cent from a year ear­lier. Last year, China’s listed com­pa­nies reg­is­tered year-on-year net profit increases of more than 37.32 per­cent on aver­age. Of the com­pa­nies, ICBC, China’s largest bank, was the most prof­itable firm with 109.48 bil­lion yuan of profit, or about 11 per­cent of the total. http://news.xinhuanet.com/english2010/china/2011–08/31/c_131086332.htm

Spurred by favor­able per­for­mance of the gam­ing sec­tor, Macao’s Gross Domes­tic Prod­uct (GDP) for the sec­ond quar­ter of 2011 grew 24 per­cent year-on-year, accord­ing to the fig­ures released on Tues­day by Macao’s Sta­tis­tics and Cen­sus Ser­vice (DSEC). Ana­lyzed by major com­po­nents, exports of gam­ing ser­vices and invest­ment soared by 39 per­cent and 23.1 per­cent respec­tively in the period when total vis­i­tor spend­ing, exclud­ing gam­ing expenses, increased by 5.9 per­cent, the fig­ures indi­cated. http://news.xinhuanet.com/english2010/china/2011–08/30/c_131084973.htm

Russia’s bud­get sur­plus in the first half of 2011 exceeded 1.74 tril­lion rubles (over 62 bil­lion U.S. dol­lars), the Russ­ian sta­tis­tics agency Ros­stat said on Tues­day. This is a 6.4-time growth com­pared with the same period of 2010, said Ros­stat. Accord­ing to Moscow’s Vedo­mosti busi­ness daily, the rev­enue growth hap­pened largely due to the rais­ing domes­tic demands for durable goods and good har­vest.http://news.xinhuanet.com/english2010/world/2011–08/31/c_131085074.htm

Over­seas inter­ests could own up to 15 per­cent of New Zealand state-owned enter­prises in a par­tial pri­va­ti­za­tion set to go ahead next year, the gov­ern­ment announced Wednes­day. The gov­ern­ment was expect­ing strong demand from a large and grow­ing pool of New Zealand invest­ment funds for stakes in four energy com­pa­nies and the national car­rier Air New Zealand, Finance Min­is­ter Bill Eng­lish said in a state­ment. http://news.xinhuanet.com/english2010/business/2011–08/31/c_131085125.htm

Thehindu.com
Union Finance Min­is­ter Pranab Mukher­jee said: “… It [lower GDP growth] is no doubt dis­ap­point­ing. There is no room for com­pla­cency. We shall have to work very hard — the gov­ern­ment and the indus­try— and I am con­fi­dent that our work­ers and farm­ers would make their con­tri­bu­tion in ensur­ing growth with inclu­sion … When the final fig­ures for year will be avail­able, there may be a recov­ery … Of course [I am] not going to just now make any pro­jec­tions what would be the final fig­ures for the year”. http://www.thehindu.com/business/Economy/article2411818.ece

Economictimes.com
The out­put of eight infra­struc­ture indus­tries rose at its fastest pace in 15 months in July, rais­ing hopes of a robust indus­trial per­for­mance dur­ing the month.  The index for eight core sec­tor indus­tries – crude oil, petro­leum refin­ery prod­ucts, coal, elec­tric­ity, cement, steel, fer­til­iz­ers and nat­ural gas – rose 7.8% com­pared to 5.7% in July last year, indus­try min­istry data released on Tues­day showed. July’s core indus­tries per­for­mance has been led by steel, elec­tric­ity and cement, with the three grow­ing at 10% plus. http://economictimes.indiatimes.com/news/economy/infrastructure/core-sector-industries-grow-fastest-in-15-months-at-7–8-per-cent/articleshow/9803320.cms

The cen­tral government’s fis­cal deficit surged more than 2 fold to Rs 2.2 lakh crore dur­ing the first four months of the cur­rent fis­cal, on account of low rev­enue real­i­sa­tion and higher expen­di­ture.  The deficit was Rs 90,915 crore in April-July period of 2010. Fis­cal deficit, the gap between over­all expen­di­ture and receipts, in the first four months of the finan­cial year is almost 55 per cent of the Bud­get esti­mate of Rs 4.12 lakh crore for 2011-12, as per the lat­est data of the Con­troller Gen­eral of Accounts (CGA). http://economictimes.indiatimes.com/news/economy/finance/fiscal-deficit-surges-over-two-fold-in-april-july-to-rs2-2-lac-cr/articleshow/9800510.cms

Yonhapnews.co.kr
South Korean indi­vid­u­als and cor­po­ra­tions held a com­bined 11.48 tril­lion won (US$10.7 bil­lion) worth of wealth in over­seas accounts last year, the nation’s tax agency said Wednes­day. Indi­vid­u­als held a total of 975.6 bil­lion won in 768 accounts and cor­po­rate enti­ties held 10.51 tril­lion won in 4,463 accounts, accord­ing to the National Tax Ser­vice (NTS). The fig­ures were based on a vol­un­tary report last June by peo­ple who owned 1 bil­lion won or more in deposits, stocks and other forms in over­seas accounts for at least one day last year.http://english.yonhapnews.co.kr/business/2011/08/31/89/0502000000AEN20110831005300320F.HTML

South Korean banks’ lend­ing rates climbed to the high­est level in 18 months in July, due to effects from the cen­tral bank’s rate hike in June, the Bank of Korea (BOK) said Wednes­day. The aver­age rate for new loans extended to house­holds and com­pa­nies stood at 5.86 per­cent in July, up 0.06 per­cent­age point from the pre­vi­ous month, accord­ing to the BOK. The June rate marked the sec­ond straight monthly gain. The July read­ing marked the high­est level since 5.94 per­cent tal­lied in Jan­u­ary 2010. http://english.yonhapnews.co.kr/business/2011/08/31/33/0503000000AEN20110831004100320F.HTML

Themoscowtimes.com
Belaruss­ian Pres­i­dent Alexan­der Lukashenko said Tues­day that the coun­try would allow a free float of its cur­rency some­time between Sept. 12 and 15.  The gov­ern­ment deval­ued the ruble by some 50 per­cent this year, caus­ing panic buy­ing of sta­ples and huge lines at for­eign exchange offices.  For­eign cur­rency has been hard to come by since March, boost­ing the black mar­ket where for­eign cash can cost nearly twice as much as the offi­cial rate. http://www.themoscowtimes.com/business/article/belarus-lets-ruble-float/442929.html

Fin24.com
South Africa’s econ­omy grew at its slow­est pace in almost two years in the sec­ond quar­ter as the man­u­fac­tur­ing and min­ing sec­tors slumped after strikes, boost­ing the case for inter­est rate cuts while dent­ing the government’s job-creation hopes.  The slow­down will make it even harder for the legions of the country’s unem­ployed – more than a mil­lion have lost their jobs since 2009 – to find work, likely keep­ing the unem­ploy­ment rate above 25%. http://www.fin24.com/Economy/Slower-growth-boosts-case-for-rate-cut-20110830

South Africa’s debate on the ques­tion of nation­al­is­ing mines is dis­cour­ag­ing invest­ment, but the pol­icy will be clear by mid-2012, an adviser to mines min­is­ter Susan Sha­bangu told reporters on the side­lines of a min­ing con­fer­ence on Wednes­day. “The mat­ter will be put to bed by July next year when the rul­ing party holds its pol­icy con­fer­ence where­upon the issue will be debated, dis­cussed and per­haps will be adopted or not,” adviser Sandile Nogx­ina said. http://www.fin24.com/Companies/Mining/Nationalisation-debate-to-end-in-2012–20110831

Tags: Bank Of America, Bank Of China, Bank Regulator, Bonds, China Construction Bank, China Steps, Chinese Companies, Commodities, Commodities Prices, Credit Markets, Crude Oil, Double Dip, European Banking, European Stock Markets, Ft Reports, George Osborne, Gold, Government Loans, Guarantee Scheme, India, Industrial Commodities, Infrastructure, Last Autumn, National Transitional Council, Outlook, Policy Proposals, Rich Nation
Posted in Bonds, Brazil, Commodities, Gold, India, Infrastructure, Markets, Oil and Gas, Outlook | Comments Off

Emerging Markets Less Attractive Today (Greig)

Wednesday, August 31st, 2011

Emerg­ing Mar­kets Less Attrac­tive Today
August 29, 2011

Mon­e­tary tight­en­ing, infla­tion, and full val­u­a­tions make emerging-markets stocks look like a poor deal com­pared with developed-world equi­ties, says Willaim Blair's George Greig.

Tran­script:

Chris­tine Benz: You have long had a siz­able posi­tion in emerging-markets names, cer­tainly rel­a­tive to large-cap growth foreign-stock funds. Are you more inclined at this point to own developed-markets stocks straight up or to gain emerging-markets expo­sure via broadly diver­si­fied blue-chip multi­na­tion­als that have made great inroads into those markets?

George Greig: Well, we’ve been a lit­tle bit under­weight in emerg­ing mar­kets for most of this year really based on the mon­e­tary tight­en­ing and infla­tion pres­sure that we're see­ing in a lot of emerg­ing mar­kets, sort of a clas­sic over­heat­ing cycle that's affected India, Brazil, Turkey, and China, of course. And at the same time, we have also been influ­enced by rel­a­tive val­u­a­tion in that emerg­ing mar­kets are not as attrac­tive rel­a­tive to devel­oped mar­kets as they typ­i­cally have been dur­ing the last five to 10 years.

Benz: Are you feel­ing that com­mod­ity prices are pretty well in check cur­rently, and that should keep them from imped­ing growth in emerg­ing markets?

Greig: I think, yeah, this is going to be an inter­est­ing ques­tion as we look for­ward. If we have a slow­down in devel­oped mar­kets and that results in a cor­rec­tion in com­mod­ity prices, ulti­mately that will have a stim­u­la­tive effect on both devel­oped and emerg­ing mar­kets, and we could expect to sort of get a growth div­i­dend out of that. But there is a lag involved, and I think we might not kind of see that ben­e­fit until some­time next year.

Benz: How about the ques­tion of a property-markets bub­ble in China? Is that a con­cern of yours?

Greig: Yeah, that's a big con­cern. I think we are, just like every­one else, strug­gling to get data and infor­ma­tion on this to under­stand how much excess sup­ply there is in the mar­ket and how much price risk there is in terms of price trends rel­a­tive to income trends and so on.

I think that real estate and con­struc­tion in China is part of a theme of the econ­omy being too reliant on cap­i­tal invest­ment, fixed-asset invest­ment in gen­eral. And it's a big issue for us and for the mar­kets to try to under­stand what the mag­ni­tude and tim­ing of that cycle play­ing out will be. Does it have two years to go, three years to go, or two quar­ters to go? Remem­ber, there were peo­ple start­ing to warn about excesses in the U.S. mort­gage and hous­ing mar­kets as early as 2005, and the bub­ble didn't really burst for two or three years after that. In China, it's the same sort of sit­u­a­tion except the infor­ma­tion is much more opaque, so it's even harder to call the timing.

Benz: Now, has that think­ing affected how you want to posi­tion the port­fo­lio as it relates to your China expo­sure, either direct or indirect?

Greig: I'd say that it's made us a lit­tle more con­ser­v­a­tive about direct expo­sure in the finan­cial– and housing-related sec­tors. So, in some cases, where we see this risk build­ing, even though the fun­da­men­tals still look good now, we'll have smaller posi­tions or no posi­tions in some of these com­pa­nies just because we're a lit­tle bit uncer­tain about the sus­tain­abil­ity of that fun­da­men­tal per­for­mance in the face of this kind of cycle.

Source: Morn­ingstar, Inc.

Tags: 10 Years, Blair, Brazil, Cap Growth, Christine Benz, Commodity Prices, Dividend, Emerging Markets, Excess Supply, India, Inflation Pressure, Inroads, Little Bit, Multinationals, Property Markets, Relative Valuation, Slowdown, Stock Funds, Stocks, Underweight, Valuations, World Equities
Posted in Brazil, India, Markets | Comments Off

'All or Nothing Days' Approaching Record Highs

Wednesday, August 31st, 2011

We con­sider 'all or noth­ing' days in the mar­ket to be days where the net daily A/D read­ing in the S&P 500 exceeds plus or minus 400.  Includ­ing today's read­ing of 491, there have now been 12 all or noth­ing days in the last four weeks (20 trad­ing days).  Going back to 1990, there has only been one other period where the fre­quency of all or noth­ing days over a four week period was at or above the cur­rent level and that occurred in the Fall of 2008.

So far this year, there have now been 32 'all or noth­ing' days for the S&P 500.  On an annu­al­ized basis, this puts 2011 on pace to see 48 'all or noth­ing' days for the entire year, which would tie it with last year (2010) to be the sec­ond high­est annual total since at least 1990.

While the volatil­ity of the credit cri­sis has cer­tainly con­tributed to the uptick in 'all or noth­ing' days over the last few years, an even larger con­trib­u­tor has been the ETF indus­try.  It is not a coin­ci­dence that the increase in 'all or noth­ing' days has risen right in tan­dem with the explo­sion in vol­ume of ETFs like SPY.

Tags: Stocks
Posted in ETFs, Markets | Comments Off

Indian Economy Begins to Slow — Q2 GDP 7.7%

Wednesday, August 31st, 2011

by Trader Mark, Fund My Mutual Fund

It's been a very rough year for Indian stocks, and indeed much of the emerg­ing mar­ket space as cen­tral banks are fight­ing the easy money com­ing from the West (and Japan), by rais­ing rates.  Infla­tion­ary pres­sures are still a con­cern in many of these coun­tries, but it does appear the brakes are start­ing to work.  Of course the issue is not to break too hard.

India just reported a 7.7% GDP — while rip roar­ing in rela­tion to West­ern devel­oped economies, its sig­nif­i­cantly lower than we've seen the past few years.  (Last year I believe there was a print in the mid 9%s)  Looks like the con­struc­tion sec­tor has been hit the hard­est from higher rates.

Via BBC:

• India's econ­omy grew 7.7% in the three months from April to June, com­pared with the same period of 2010.  It was India'sweak­est growth for six quar­ters, but still bet­ter than had been expected.
• The slow­down is expected to con­tinue as India's cen­tral bank con­tin­ues to raise inter­est rates to con­trol infla­tion. "The lat­est growth num­ber rein­forces the view that although growth is slow­ing down, it is not col­laps­ing as feared by some," said Ashutosh Datar, econ­o­mist at IIFL in Mumbai.
• Indian Finance Min­is­ter Pranab Mukher­jee said he had been expect­ing a higher growth rate, but that given the muted recov­ery in the US and Europe, the fig­ures were "not that much disappointing".
• The Reserve Bank of India (RBI) has raised inter­est rates 11 times since March 2010. The next rate-setting meet­ing is on 16 Sep­tem­ber, when many econ­o­mists expect rates will rise again, to 8.25%.
• Infla­tion in July was 9.22%, which was well above the RBI's tar­get rate of 4% to 4.5%. "India has raised rates much faster than any other major coun­try, but infla­tion is also a big­ger prob­lem than in any other major econ­omy," said DK Joshi, chief econ­o­mist at Indian rat­ings agency Crisil. Con­struc­tion problems
• The sec­tor break­down showed that the con­struc­tion sec­tor had been one of the worst-performing parts of the econ­omy.  Con­struc­tion grew at an annual rate of 1.2% in the sec­ond quar­ter, down from 8.2% in the pre­vi­ous quar­ter, as ris­ing inter­est rates and delays in plan­ning approvals held up build­ing projects.
• The man­u­fac­tur­ing sec­tor grew 7.2%, an improve­ment from the pre­vi­ous quar­ter, but well below the 10.6% in the sec­ond quar­ter of 2010.
• While 7% is extra­or­di­nar­ily high by the stan­dards of Euro­pean coun­tries that are strug­gling to achieve 2%, there have been warn­ings from econ­o­mists that it would be inad­e­quate to fund the government's attempts to deal with India's endemic poverty.
• On Mon­day, a sur­vey by the Indian Cham­bers of Com­merce found that busi­ness con­fi­dence was at a two-year low.  It found that busi­nesses had "grow­ing appre­hen­sions about the world econ­omy enter­ing into another reces­sion", while also wor­ry­ing about how ris­ing inter­est rates were hit­ting domes­tic demand.

Copy­right © Trader Mark, Fund My Mutual Fund

Tags: 16 September, Bank Of India, Central Banks, Chief Economist, Construction Problems, Construction Sector, Easy Money, Emerging Market, India, Indian Economy, Indian Finance Minister, Indian Stocks, Inflationary Pressures, Joshi, Market Space, Perf, Pranab Mukherjee, Reserve Bank Of India, S Central, Sector Breakdown, Target Rate
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PIMCO's Bill Gross Admits He was Wrong on U.S. Treasuries — and by Definition Jeffrey Gundlach was Correct

Wednesday, August 31st, 2011

by Trader Mark, Fund My Mutual Fund

Two of the most well known bond gurus — PIMCO's Bill Gross and Doubeline's Jef­frey Gund­lach had polar oppo­site opin­ions on what U.S. debt would do once QE2 ended.  [Apr 14, 2011: [Video] Bond Guru Bets Against PIMCO's Bill Gross (and Con­ven­tional Wis­dom) on What Hap­pens After QE2 Ends]  Gross was with the con­sen­sus (yields would rise) while Gund­lach was with the minor­ity — Gund­lach was proven correct.

Now to give credit where credit is due, Gross is out today admit­ting his views were incor­rect — which is a rar­ity in the invest­ment community.

Via FT.com:

• Bill Gross, man­ager of the world’s largest bond fund for Pimco, has admit­ted that it was a mis­take to bet so heav­ily against the price of US gov­ern­ment debt. Mr Gross emp­tied his $244 bil­lion Total Return Fund of US government-related secu­ri­ties ear­lier this year in a high-profile call that has back­fired as the bond mar­ket has ral­lied. As of Mon­day, Pimco’s flag­ship fund ranked 501th out of 589 bond funds in its cat­e­gory.
• “Do I wish I had more Trea­surys? Yeah, that’s pretty obvi­ous,” Mr Gross told the Finan­cial Times last week, adding: “I get that it was my/our mis­take in think­ing that the US econ­omy can chug along at 2 per­cent real growth rates. It doesn’t look like it can.”
• When the yield on the 10-year Trea­sury was 3.5 per­cent in Jan­u­ary, Mr Gross warned that the risk of ris­ing infla­tion made gov­ern­ment debt a poor invest­ment. Bond prices move in the oppo­site direc­tion to bond yields, which he fore­cast would rise as Ben Bernanke, chair­man of the Fed­eral Reserve , brought the sec­ond pro­gram of bond buy­ing, known as quan­ti­ta­tive eas­ing, to an end in June.
• Mr Gross, one of the most influ­en­tial voices in the bond mar­ket, reit­er­ated his warn­ing to avoid trea­surys in June, and in the July dis­patch of his widely read Invest­ment Out­look, warned that promises to America’s age­ing pop­u­la­tion made them “debt men walking”.
• How­ever, this month, as tur­moil in equity mar­kets caused investors to rush to the safety of gov­ern­ment bonds, the 10-year Trea­sury yield dipped below 2 per cent, a 61-year low.
• The move has forced Mr Gross to reassess his bear­ish posi­tion on US debt in recent weeks. “We’ve mod­er­ated based on the out­look for the US econ­omy, based on what Bernanke has done at the Fed in the last month. Freez­ing rates for two years, that was a pretty sig­nif­i­cant state­ment in terms of the vul­ner­a­bil­ity of Trea­surys to go down in price and up in yield,” he said.  “It’s not nec­es­sar­ily a flip flop, as we don’t own tons of Trea­surys, but its a recog­ni­tion that the US and devel­oped economies are near the reces­sion­ary divid­ing point,” he said.
• Mr Gross still argues that on a long-term basis, gov­ern­ments are likely to use finan­cial repres­sion, where the rate of infla­tion is higher than bond yields, to erode the value of sov­er­eign debt over time.
• But he also sug­gested that the “new nor­mal” — Pimco’s view of the global eco­nomic out­look in which growth rates for devel­oped coun­tries are slower than in the past — may have to be revised down­wards to a “new nor­mal minus”.
• Mr Gross started to buy gov­ern­ment debt, as well as related secu­ri­ties and deriv­a­tives, in recent months. How­ever, he faces a chal­lenge to catch up to the bench­mark, which has returned 4.55 per­cent for the year so far, ver­sus the Total Return Fund’s 3.29 per­cent, accord­ing to Lip­per, a research group. “When you’re under­per­form­ing the index, you go home at night and cry in your beer,” he said, adding: “It’s not fun, but who said this busi­ness should be fun. We’re too well paid to hang our heads and say boo hoo.”

Copy­right © Trader Mark, Fund My Mutual Fund

Tags: 10 Year Treasury, Ben Bernanke, Bill Gross, Bond Fund, Bond Funds, Bond Market, Bond Prices, Bond Yields, Bonds, Chairman Of The Federal Reserve, Conventional Wisdom, Financial Times, Government Debt, Gundlach, Investment Bond, Investment Community, Investment Outlook, Outlook, PIMCO, Poor Investment, Treasuries, Treasurys
Posted in Bonds, Brazil, Markets, Outlook | Comments Off

Bill Gross: Investment Outlook (August 30, 2011)

Tuesday, August 30th, 2011

New-Fangled Love Songs

by Bill Gross, co-Chief, PIMCO

August 30, 2011

• Liq­uid­ity con­cerns may affect all Euro­pean periph­eral bond mar­kets unless the Euro­pean Cen­tral Bank coun­ters the rush for the exits with an enlarged daily checkbook.
• In the U.S., dis­cord between rich and poor has led to lower, not higher, Trea­sury yields as approach­ing reces­sion­ary winds force the Fed and pri­vate investors to favor bonds.
• We pre­fer invest­ing in the “cleaner” dirty shirt coun­tries of Canada, Aus­tralia, Mex­ico and Brazil, along with non-dollar cur­ren­cies that have strong trade ties with the Asian continent.

​Just an old-fashioned love song
Comin’ down in three-part har­mony.
Three Dog Night

In many ways the global eco­nomic cri­sis is like a mar­riage gone bad. As the Three Dog Night sang years ago, global economies have func­tioned har­mo­niously for many years, but sud­denly the love songs have become stri­dent and cacoph­o­nous, the pol­icy coör­di­na­tion mor­ph­ing into a war of the roses as opposed to a giv­ing of them. Instead of three-part har­mony we are now expe­ri­enc­ing, at a min­i­mum, tri-party dishar­mony, tee­ter­ing on the brink of “divorce,” which in eco­nomic par­lance means a pos­si­ble “devel­oped econ­omy” reces­sion – a down­turn from which rec­on­cil­i­a­tion may be dif­fi­cult due to a lack of pol­icy options and coöper­a­tion. But I get ahead of myself. Let’s first ring the wed­ding bells, then take you through an expla­na­tion of three sep­a­rate global mar­riages and how each of the part­ners have grown apart.

Europe Unites!
Oh those feisty Euro­peans! Always fight­ing like a dat­ing cou­ple and then finally resolv­ing their dif­fer­ences by say­ing “I do” some­time in the 1950s with the cre­ation of the Com­mon Mar­ket and the Euro­pean Eco­nomic Com­mu­nity (EEC). In doing so, France and Ger­many said “never again,” and even though they didn’t like each other (read “hate”) they decided to make eco­nomic lurv in the hopes that they wouldn’t destroy the con­ti­nent again. It later turned into a for­mal union, a Euro­pean Com­mu­nity (EC), where they invited lots of wit­nesses to the cer­e­mony and cre­ated instant fam­ily mem­bers, if that’s metaphor­i­cally pos­si­ble. Twenty-seven of them, includ­ing Italy, Spain and the U.K. were now rel­a­tives despite some lik­ing pasta and oth­ers pre­fer­ring hor­rid cuisines fea­tur­ing Shepherd’s Pie or fish and chips. The mar­riage pro­gressed to the point of a smaller mon­e­tary union some­time in 1999, but crit­i­cally, with­out a com­mon budget.

Hus­band and Wife – Ger­many and Greece – decided to have a joint bank account, but with sep­a­rate allowances and no over­sight. Greece could issue bonds at nearly the same yield as could its North­ern hard-working neigh­bors, but were free to spend it any way they chose. This was an eco­nomic ver­sion of an open mar­riage where one party gets to have all the fun and the other worked nine-to-five and came home too exhausted for whoopee. Well some­time last year, global lenders said enough is enough and soon the whole cheat­ing Euro­pean Union (EU) was at each other’s throats, hir­ing lawyers and threat­en­ing to break up. Calmer heads pre­vailed when the ECB decided to make nice and use its check­book. Last week Angela Merkel and France’s Sarkozy sort of got engaged for at least the sec­ond time, nix­ing expanded fund­ing for their South­ern neigh­bors and plac­ing the bur­den even more on the ECB. Who knows where it goes now, but let’s put it this way – Ger­many and France are sleep­ing in a king-size bed while the rest of its EU fam­ily are sleep­ing in sep­a­rate bed­rooms. As a result Euroland faces eco­nomic contraction.

Cal­i­for­nia Dreamin’
This impend­ing divorce in Amer­ica is not about sex or sleep­ing around, but more about romanc­ing the now stone-cold notion that any­one could be a mil­lion­aire in the good old U.S. of A. if only they worked hard enough. Our Statue of Lib­erty pro­claimed “give us your tired, your poor…” and sent many of them West to build a lit­tle house on the prairie or strike it rich in the gold­fields of Sacra­mento, Cal­i­for­nia or Skag­way, Alaska. Many of them did and a cen­tury later, the option-laden fields of Sil­i­con Val­ley pro­vided modern-day exam­ples of rags to riches fairy­tales come true. But this odd cou­ple mar­riage of rich (and poor hop­ing to be rich), now seems on rather shaky ground. Instead of bound­less oppor­tu­nity, the nurs­ery rhyme describ­ing Jack Sprat – who could eat no fat – and his wife – who could eat no lean – appears to be the starker of the two real­i­ties. There are the poor and there are the very rich, with the shrink­ing mid­dle class resem­bling Mr. Sprat rather than his wife.

Dur­ing this country’s recent eco­nomic “recov­ery,” real cor­po­rate prof­its increased by four times the amount of work­ing wages in dol­lar terms, and, as the chart below shows, are 50% higher than at the turn of the cen­tury while wages remain rel­a­tively unchanged, some­thing that has not occurred since this country’s nup­tials were con­cluded over three cen­turies ago. Is it any won­der that pre­lim­i­nary bat­tle­field skir­mishes in Wis­con­sin and Ohio between labor and cap­i­tal promise to spread across every state of this land? (Not Texas!) Is it any won­der that Repub­li­can ortho­dox­ies favor­ing tax cuts for the rich and Demo­c­ra­tic ortho­dox­ies pro­mot­ing enti­tle­ments for the poor threaten to ham­string any con­struc­tive efforts to reduce unem­ploy­ment over the fore­see­able future? We are wit­ness­ing roman­tic love turn­ing into a spite­ful, bit­ter clash between part­ners in name only.

The Asian Mir­a­cle
Con­fu­cius say, “Can there be a love which does not make demands on its object?” While not a mar­riage, there has def­i­nitely been a love affair between West­ern con­sumers and their Chi­nese pro­ducer “objects” for sev­eral decades now. We loved them because they made cheap goods, but some­how they seemed to love us more as they slowly but surely put their peo­ple to work while ours were hit­ting the unem­ploy­ment lines. Imper­cep­ti­bly, the devel­oped world’s man­u­fac­tur­ing base was grad­u­ally erod­ing and being replaced by secu­ri­tized finance that destroyed itself and nearly its economies in 2008.

China, mean­while, calmly played its cards with a decades-long plan cen­tered around cap­i­tal­is­tic mer­can­til­ism, a game the United States claimed to play best but some­how for­got most of the rules. Even when hold­ing the trump card of a reserve cur­rency, mer­can­tilis­tic dom­i­na­tion depends on mak­ing some­thing the rest of the world wants. We don’t and they do. The Chi­nese “object” has turned into an object les­son for devel­oped economies that debt-financed con­sumerism is reach­ing an end. This affair then, which has sus­tained global growth dur­ing much of the 21st cen­tury, is vul­ner­a­ble. Both par­ties still play kissy face and say “luv ya” (weak form for “I love you”) but there is ten­sion there. China ques­tions our credit qual­ity and the yields on their tril­lion dol­lars of Trea­sury bonds. The U.S. ques­tions their exchange rate and claims cur­rency manip­u­la­tion behind closed doors. This cou­ple claims to still be dat­ing, but “hook­ing up” may be more like it. Even then, no one stays the night, claim­ing they left their tooth­brush at home.

Judge Judy’s Ver­dict
What to do when a love affair goes bad? How should you invest when Euroland is at each other’s throat, when a thinly dis­guised bat­tle between labor and cap­i­tal freezes pol­icy action in the United States, when a mer­can­tilis­tic part­ner­ship between devel­oped and devel­op­ing nations pro­duces more ques­tions than answers, more losers than win­ners? Increase the odds for a divorce, we’d sug­gest, which in invest­ment mar­kets means focus­ing on the return of your cap­i­tal as opposed to the return on your cap­i­tal. Of the three rocky rela­tion­ships, Euroland has the most imme­di­acy. Mohamed El-Erian is increas­ingly of the per­sua­sion that one or more of the outer periph­ery (Greece, Ire­land and Por­tu­gal) may be forced to vacate the premises. If so, tech­ni­cally desta­bi­liz­ing liq­uid­ity con­cerns may affect all periph­eral bond mar­kets unless the ECB coun­ters the rush for the exits with an enlarged daily check­book.

In the U.S., strangely enough, mat­ri­mo­nial dis­cord between rich and poor has led to lower, not higher, Trea­sury yields as approach­ing reces­sion­ary winds force the Fed and pri­vate investors to favor bonds. There are lim­its, how­ever. Ten-year Trea­suries at 2.25% are dis­count­ing a heap of trou­ble (none of it strangely enough due to its own credit stand­ing), and nei­ther investor nor bor­rower may emerge from this brouhaha unscathed. We pre­fer the “cleaner” dirty shirt coun­tries of Canada, Aus­tralia, Mex­ico and Brazil, where higher yields and more pris­tine bal­ance sheets prevail.

And what of China and its fling as mer­can­tile dom­i­na­trix? Here to stay – get used to it, PIMCO would say, but at the same time a sub­stan­tial cur­rency reval­u­a­tion would assist its image and econ­omy in its new role as the global economy’s eco­nomic loco­mo­tive. Con­sider invest­ing, there­fore, in non-dollar cur­ren­cies that have strong trade ties with the Asian con­ti­nent. Global equi­ties? They’re cheap – div­i­dend yields are higher than bonds in many cases – yet if growth fal­ters there may be more down­side to come.

A good rela­tion­ship, as any adult knows, takes hard work and even then true love never runs smooth. We are into the “bumpy jour­ney” phase of our New Nor­mal where fear, lack of pol­icy options and loss of con­trol can dom­i­nate rela­tion­ships. At a min­i­mum, investors need to pre­pare for dishar­mony even with the hope of even­tual rec­on­cil­i­a­tion. Those old-fashioned love songs have become new-fangled freshly entan­gled ones from which an escape may be hard to envision.

William H. Gross
Man­ag­ing Director

Invest­ing in the bond mar­ket is sub­ject to cer­tain risks includ­ing mar­ket, interest-rate, issuer, credit, and infla­tion risk; invest­ments may be worth more or less than the orig­i­nal cost when redeemed. Equi­ties may decline in value due to both real and per­ceived gen­eral mar­ket, eco­nomic, and indus­try con­di­tions. Invest­ing in for­eign denom­i­nated and/or domi­ciled secu­ri­ties may involve height­ened risk due to cur­rency fluc­tu­a­tions, and eco­nomic and polit­i­cal risks, which may be enhanced in emerg­ing mar­kets. Cur­rency rates may fluc­tu­ate sig­nif­i­cantly over short peri­ods of time and may reduce the returns of a portfolio.

This arti­cle con­tains the cur­rent opin­ions of the author but not nec­es­sar­ily those of PIMCO and such opin­ions are sub­ject to change with­out notice. This arti­cle is dis­trib­uted for infor­ma­tional pur­poses only. Fore­casts, esti­mates, and cer­tain infor­ma­tion con­tained herein are based upon pro­pri­etary research and should not be con­sid­ered as invest­ment advice or a rec­om­men­da­tion of any par­tic­u­lar secu­rity, strat­egy or invest­ment prod­uct. Infor­ma­tion con­tained herein has been obtained from sources believed to be reli­able, but not guaranteed.

Tags: Asian Continent, Bill Gross, Bonds, Brazil, Canadian Market, Dating Couple, Dirty Shirt, Economy Recession, European Economic Community, European Economic Community Eec, Global Economic Crisis, Global Economies, Gold, Gross Co, Gross Investment, Investment Outlook, Old Fashioned Love Song, Outlook, Policy Coordination, Private Investors, Three Dog Night, Trade Ties, Treasury Yields, War Of The Roses, Wedding Bells
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The Summer Wind (Saut)

Tuesday, August 30th, 2011

The Sum­mer Wind

August 29, 2011

by Jef­frey Saut, Chief Invest­ment Strate­gist, Ray­mond James

“The sum­mer wind came blowin’ in from across the sea. It lin­gered there to touch your hair and walk with me”

... Frank Sina­tra, lyrics by Johnny Mercer

Irene “came blowin’ in” over the week­end for the first hur­ri­cane to hit the East Coast in years. In fact, New Eng­land has not expe­ri­enced a hur­ri­cane since “Bob” attacked in 1991. For over a year I have been com­ment­ing about the weird weather that was surely com­ing. Since then we have expe­ri­enced the antic­i­pated extremely cold wet win­ter, tor­na­dos in the Mid­west of his­toric pro­por­tions, floods around the world, hur­ri­canes, and droughts. Indeed, in Rus­sia droughts destroyed 40% of the grain crop, spark­ing an atten­dant rise in grain prices. The same drought caused 30 foot deep “cracks” to appear in the farm­lands north of China’s Inner Mon­go­lia Autonomous Region, keep­ing farm­ers out of the fields. Mean­while, other parts of China have been expe­ri­enc­ing floods and mud­slides. In this coun­try cer­tain regions have seen 100-year floods, while places like Texas have had 100+ degree tem­per­a­tures for months with no rain. I could go on, but you get the idea — the weather has turned unde­ni­ably weird.

To be sure, I have com­mented that while to some degree the envi­ron­men­tal­ists are right about the cli­mate change being attrib­ut­able to “man,” unde­ni­ably the weather is also being com­pounded by a La Niña weather pat­tern cou­pled with more vol­canic ash in the atmos­phere than any­one can remem­ber. That com­bi­na­tion has allowed the Trop­ics to expand as the Tropic of Can­cer and the Tropic of Capri­corn have moved toward the Poles. Well, that’s not fac­tu­ally cor­rect because the Trop­ics can’t really expand since they are defined as being 23° 16’ 16” above and below the equa­tor. What has expanded is the “reach” of the Hadley cell winds, which have moved closer to the North and South Poles. Recall the Hadley cell winds dom­i­nate the Trop­ics car­ry­ing hot equa­to­r­ial air up into the tro­pos­phere where atmos­pheric cir­cu­la­tion car­ries that air north and south. The air even­tu­ally sinks back to Earth. Where the air rises, the atmos­pheric pres­sure is low, caus­ing heavy rains and storms. Where it sinks, it pro­duces high pres­sure areas char­ac­ter­ized by deserts like the Aus­tralian Out­back. The shift in the Hadley cell winds has played havoc with the trade winds, pro­duc­ing droughts in oth­er­wise moist parts of the world and mon­soons in pre­vi­ously dry locals. Said “shift” has allowed trop­i­cal zones, and deserts, to expand. This is not an unim­por­tant event because the changed weather pat­terns have major impli­ca­tions for agri­cul­ture and the world’s soil bank.

To wit, much of the world’s top­soil is erod­ing and there­fore declin­ing in nutri­ent qual­ity. Accord­ing to wiseGEEK:

“Top­soil is the upper sur­face of the Earth's crust, and usu­ally is no deeper than approx­i­mately eight inches. The Earth's top­soil mixes rich humus with min­er­als and com­posted mate­r­ial, result­ing in a nutri­tious sub­strate for plants and trees. It is one of the Earth's most vital resources.”

Unfor­tu­nately, top­soil ero­sion is occur­ring much faster than nature can replace it. In addi­tion to the weather, mod­ern agri­cul­ture tech­niques have has­tened the ero­sion, as has row crop plant­ing (corn, soy­beans, cot­ton, tobacco, etc.) since row crops erode soil much faster than sod crops. Regret­tably, once soil is gone, you can’t get it back! Plainly, this has grave impli­ca­tions because as I have stated for years, “When per capita incomes rise, the first thing peo­ple want is clean water, the sec­ond is a bet­ter diet.” With per capita incomes ris­ing rapidly in emerg­ing coun­tries, the bur­geon­ing food demand has left global grain con­sump­tion exceed­ing pro­duc­tion; and over the next few decades the sit­u­a­tion is likely to get worse because food pro­duc­tion needs to expand by some 50% just to meet the esti­mated demand. Ladies and gen­tle­men, this means an addi­tional ~6 bil­lion acres of land is needed to meet the upcom­ing food demand, but only ~2 bil­lion acres of good land is avail­able. Thus, farm­land should be a good invest­ment and there are select pub­lic com­pa­nies that play to this theme. Also of inter­est are ag-centric “tech­nol­ogy” com­pa­nies that hope­fully can ame­lio­rate some of the upcom­ing food shortfall.

I revisit the weather, water, and agri­cul­ture themes today not only because they have been three of my long-standing themes, but to empha­size why they should con­tinue to be viable invest­ments going for­ward. Impor­tantly, water is by far the most under­val­ued asset I know of, yet it is dif­fi­cult to find water-centric invest­ments. Not so with agriculture.

As for the stock mar­ket, recently the most ubiq­ui­tous ques­tion has been, “Was that the bot­tom?” My response has been, “I think so.” Ver­ily, if one has been using the Octo­ber 1978 and 1979 bot­tom­ing pat­terns as a tem­plate, the cor­re­la­tion, at least so far, has been pretty remark­able. If that R² con­tin­ues, it sug­gests the “sell­ing cli­max” lows occur­ring on August 8 and 9 should prove to be the lows. How­ever, that does not mean we can’t spend a few more weeks in “bot­tom­ing mode.” As stated, the Octo­ber 1978 bot­tom­ing sequence took 6 – 7 weeks, while the 1979 sequence encom­passed only 4 – 5 weeks. The ideal chart pat­tern would be what a tech­ni­cal ana­lyst terms a “wedge” for­ma­tion (see chart below). Accord­ing to StockCharts.com:

“Wedge: A rever­sal chart pat­tern char­ac­ter­ized by two con­verg­ing trend­lines that con­nect at an apex. The wedge is slanted either down­wards or upwards demon­strat­ing bull­ish or bear­ish behav­ior respectively.”

While a “wedge” bot­tom­ing for­ma­tion should take a few more weeks to com­plete, many stocks have likely already bot­tomed. In past mis­sives we have used some of the names our fun­da­men­tal ana­lysts believe have bot­tomed. Names like: EV Energy Part­ners (EVEP/$65.85/Strong Buy), LINN Energy (LINE/$36.97/Strong Buy), Health Care REIT (HCN/$48.62/Outperform), Cam­pus Crest (CCG/$11.35/Strong Buy), Abbott Labs (ABT/$50.15/Outperform), and Cen­tu­ryLink (CTL/$34.44/Strong Buy) to name a few. Last week, how­ever, our energy team upgraded Chevron (CVX/96.85) to a Strong Buy and it is there­fore worth your con­sid­er­a­tion. For fur­ther infor­ma­tion on any of these, please see our ana­lysts’ comments.

The call for this week: Just like the surfer inter­viewed over the week­end who grabbed a board and leapt into the Irene-induced waves, investors need to “grab a board” and catch a wave if they want to achieve invest­ment suc­cess. But to do that, first you need to get into the water! The time to stand on-shore was months ago, not after a ~20% decline in the S&P 500 (SPX/1176.80) from its intra­day high on May 2 to its intra­day low on August 9. While we have been pretty con­ser­v­a­tive in our stock rec­om­men­da­tions over the past three weeks, we would become more aggres­sive if the SPX can break out above the recent rally-high of ~1208. And while the odds of a reces­sion have clearly increased (to 30%), my hunch remains we will avoid it. Accord­ingly, I will leave you with this quip from our restau­rant ana­lyst, “Every casual din­ing com­pany that has spo­ken to Wall Street has said they have seen no evi­dence of behav­ior change despite all the scary head­lines of the past six weeks or so. If we have a reces­sion, this would be the first one in my 25 years as an ana­lyst that was not fore­shad­owed with weak­ness at full ser­vice (the most dis­cre­tionary) restaurants.”

Click here to enlarge

Copy­right © Ray­mond James

Tags: Chief Investment Strategist, Climate Change, Degree Temperatures, Frank Sinatra, Frank Sinatra Lyrics, Grain Crop, Grain prices, Hadley Cell, Inner Mongolia Autonomous Region, jeffrey saut, Johnny Mercer, South Poles, Summer Wind, Tornados In The Midwest, Tropic Of Cancer, Tropic Of Capricorn, Volcanic Ash, Weather Pattern, Weird Weather, Wet Winter
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James Paulsen: Investment Outlook (August 29, 2011)

Tuesday, August 30th, 2011

A Cri­sis Pho­bic Invest­ment Culture?!?

by James Paulsen, Wells Cap­i­tal

One of the lega­cies of the Great 2008 Cri­sis is it pro­duced a wide­spread post-traumatic stress dis­or­der we have referred to as “Armaged­don hypochon­dria.” Sim­ply, FEAR has dom­i­nated this recov­ery. Despite one of the strongest two-year advances in stock mar­ket his­tory, through­out this period, investors have chron­i­cally and obses­sively feared yet another over­whelm­ing cri­sis. The cur­rent sum­mer drama rep­re­sents yet another panic sur­round­ing a list of per­sis­tent and seem­ingly ever-increasing worries.

As would any hypochon­driac, since the 2008 cri­sis the finan­cial mar­kets have often extrap­o­lated a dis­ap­point­ing report (a symp­tom) instantly to “eco­nomic death” (i.e., a double-dip reces­sion or depres­sion). Since all recov­er­ies ebb and flow, the con­tem­po­rary eco­nomic patient has of course exhib­ited many trou­bling symp­toms along the way—none yet, how­ever, which have ended the recovery.

The cur­rent sit­u­a­tion is no excep­tion. Just like last year, the econ­omy is in the midst of another soft patch. It could prove to be the start of a reces­sion, or like last year, prove just a tem­po­rary but scary pause in an ongo­ing eco­nomic recov­ery. There have been some “recession-like” reports of late (e.g., the Philly Fed Busi­ness Out­look Sur­vey and the recent reported col­lapse in con­sumer con­fi­dence) and the recent decline in the finan­cial mar­kets seem to sug­gest some­thing hor­ri­ble is com­ing. While a reces­sion may indeed loom on the imme­di­ate hori­zon, we cau­tion investors on the effi­cacy of sig­nals pro­vided by “sur­vey reports” and by emo­tional finan­cial mar­ket action against the back­drop of a cul­ture which is suf­fer­ing from Armaged­don hypochondria.

Quan­ti­fy­ing the Phobia?

The fol­low­ing charts pro­vide a quan­tifi­ca­tion of the ongo­ing “cri­sis men­tal­ity” evi­dent within the stock mar­ket dur­ing the last sev­eral years. Chart 1 is the cri­sis index. It gauges the degree of stress within the over­all finan­cial mar­kets. Move­ments below zero rep­re­sent peri­ods of ele­vated finan­cial mar­ket stress or a ris­ing poten­tial for a “cri­sis.” In a rough sense, this index por­trays the finan­cial mar­kets’ assess­ment of the prob­a­bil­ity of a cri­sis (i.e., the like­li­hood of cri­sis rises as this index declines).

Chart 2 exam­ines the rolling one-year regres­sion coef­fi­cient between the daily per­cent changes in the U.S. stock mar­ket and the daily changes in the cri­sis index. Until 1997, the regres­sion coef­fi­cient hov­ered around zero, sug­gest­ing move­ments in the cri­sis index had vir­tu­ally no impact on the stock mar­ket. Cri­sis men­tal­i­ties were not pro­nounced and the stock mar­ket seem­ingly was dri­ven more by fun­da­men­tals (e.g., earn­ings and val­u­a­tions). How­ever, the back-to-back Asian and Russ­ian crises of 1997 and 1998 sig­nif­i­cantly height­ened investor cri­sis sen­si­tiv­i­ties. As illus­trated in Chart 2, after the Asian/Russian deba­cles, the regres­sion coef­fi­cient hov­ered about 5 per­cent imply­ing that the stock mar­ket tended to fall (rise) by about 5 per­cent for every 1 point decline (increase) in the cri­sis index. Ever since, investor men­tal­i­ties sur­round­ing poten­tial cri­sis risk have remained ele­vated! Indeed, the dot-com melt­down in 2000 led to an addi­tional dou­bling in the stock mar­ket sen­si­tiv­ity coef­fi­cient to changes in the cri­sis index (i.e., the regres­sion coef­fi­cient spiked to more than 10 per­cent at its peak in early-2003). Even though the regres­sion coef­fi­cient did decline steadily dur­ing the last eco­nomic recov­ery (falling to only about 2 per­cent in 2007), it spiked again above 10 per­cent dur­ing the 2008 cri­sis and has only declined to about 8 per­cent so far in the cur­rent recovery.

Per­haps the water­shed shift in the last decade toward an intense focus on “cri­sis” is best illus­trated by Chart 3. It records the R-squared of one-year rolling regres­sions or the pro­por­tion of the total vari­abil­ity of the stock mar­ket which is “explained” by changes in the cri­sis index. That is, the pro­por­tion of mar­ket action explained by “cri­sis fears.” Prior to 1997, move­ments in the cri­sis index explained vir­tu­ally none of the vari­abil­ity in stock prices. There was not a very strong cri­sis men­tal­ity. By con­trast, dur­ing the last year, changes in the cri­sis index have explained almost 80 per­cent of the daily move­ments in the stock market!

The lost decade since the late 1990s has altered the focus from fun­da­men­tals to fear and has pro­duced an invest­ment class which is “cri­sis pho­bic”! What are the impli­ca­tions of such an invest­ment culture?

Reflec­tions on a Cri­sis Pho­bic Invest­ment Culture?

1. More emo­tional mar­ket episodes?

What has pro­duced the increased fre­quency of stock mar­ket swoons in recent years (e.g., the run on U.S. bank stocks in March 2009, the con­tem­po­rary Euro­pean bank stock run, a VIX read­ing above 80 in 2008 and twice in excess of 40 dur­ing this recov­ery, an unprece­dented “flash crash” dur­ing the 2010 soft patch, and a record-setting num­ber of days of 4 per­cent daily stock mar­ket moves a cou­ple weeks ago dur­ing the cur­rent soft patch)? Is it because of high fre­quency trad­ing, hedge fund actions, the increased pop­u­lar­ity of quan­ti­ta­tive trad­ing approaches, the intro­duc­tion of new “lever­aged” trad­ing instru­ments, insuf­fi­cient mar­gin require­ments, issues sur­round­ing the uptick short­ing rule, or illiq­uid mar­kets? Per­haps, but prob­a­bly not. Rather, the increased ten­dency of the finan­cial mar­kets toward emo­tional tantrums more likely reflects the birth and mat­u­ra­tion (over 10 years in the mak­ing) of a cri­sis pho­bic invest­ment culture.

Through­out most of the post-war era, the U.S. stock mar­ket was dri­ven pri­mar­ily by under­ly­ing eco­nomic and com­pany fun­da­men­tals and only infre­quently would price action sig­nif­i­cantly diverge because of some over­whelm­ing cul­tural panic. How­ever, the cri­sis pho­bic cul­ture evi­dent today has pro­duced a stock mar­ket seem­ingly dri­ven mostly by “fears” which are occa­sion­ally sup­pressed by solid fun­da­men­tals. As long as the cul­ture remains crisis-centric, the finan­cial mar­kets will likely be char­ac­ter­ized by more fre­quent emo­tional and volatile mar­ket episodes. Investors, how­ever, are prob­a­bly best served by stay­ing focused, not on the “rolling pop­u­lar­ized crises,” but rather on the under­ly­ing fun­da­men­tals and rel­a­tive valuations.

2. Are mar­ket sig­nals and sur­veys reli­able indi­ca­tors in a crisis-phobic culture?

Finan­cial mar­kets (e.g., stock, bond, and com­mod­ity price move­ments and high yield, swap, or LIBOR yield spreads) have tra­di­tion­ally rep­re­sented good lead­ing indi­ca­tors of eco­nomic fun­da­men­tals. How­ever, we think investors need to ques­tion whether these his­toric rela­tion­ships remain accu­rate and use­ful when the cul­ture is so crisis-phobic? When finan­cial mar­ket prices becomes so divorced from under­ly­ing fun­da­men­tals because of a wide­spread and intense panic, do they still offer the same fore­cast­ing con­tent they typ­i­cally do in calmer envi­ron­ments? For exam­ple, is the recent col­lapse in the 10-year bond yield to 2 per­cent sug­gest­ing a period of upcom­ing weak eco­nomic growth, a near-term defla­tion­ary surge, a Japan-style depres­sion, sim­ply an investor run to a safe haven asset, or does it just reflect the recent Fed announce­ment that inter­est rates will remain low until at least 2013? Who knows? And, if the 10-year yield is dis­torted or dis­con­nected from under­ly­ing eco­nomic fun­da­men­tals, the effi­cacy of other yield spreads must also be questioned.

Finally, are “sur­vey data” (e.g., con­sumer or busi­ness con­fi­dence reports) in such an emo­tion­ally charged, crisis-phobic, 24–7 media world pro­vid­ing the same eco­nomic sig­nals they have in times past? Per­haps mar­ket sig­nals and sur­vey data remain accu­rate win­dows to the future but until the cul­ture returns to one which is less crisis-phobic, we think investor cau­tion in inter­pret­ing these sig­nals is warranted.

3. Crisis-culture will dimin­ish if recov­ery continues!

As illus­trated in Chart 3, the U.S. has only had a sin­gle full eco­nomic recov­ery (i.e., the 2002 to 2007 recov­ery) since the invest­ment cul­ture first tended toward a cri­sis focus begin­ning in the late 1990s. As sug­gested by the rolling R-squared his­tory, the cri­sis cul­ture will likely decay as the eco­nomic recov­ery matures. Dur­ing the Asian and Russ­ian deba­cles in 1997 and 1998, the R-squared surged to about 60 per­cent, but a con­tin­ued eco­nomic recov­ery even­tu­ally caused the sen­si­tiv­ity of the stock mar­ket to “cri­sis” (the R-squared) to decline back to only about a 20 per­cent R-squared by 2000. Sim­i­larly, at the start of the last recov­ery in 2002, the trail­ing one-year R-squared to the cri­sis index was about 70 per­cent, but by 2006 this had also declined to below 20 percent.

Despite the cur­rent wide­spread focus on U.S. gov­ern­ment debt woes and on the Euro­pean sov­er­eign debt cri­sis, the con­tem­po­rary crisis-phobia will likely fade in the next few years if the eco­nomic recov­ery con­tin­ues. Our belief, as sug­gested by Charts 2 and 3 in the last recov­ery, is investors who can stay focused on the fun­da­men­tals and avoid hav­ing their invest­ment strat­egy derailed by ongo­ing cri­sis con­cerns will fare the best.

4. Is cri­sis focus a good indi­ca­tor of stock mar­ket risk?

As sug­gested by Chart 3, since cri­sis became a sus­tained focus in the late 1990s, the biggest risk for stock investors has usu­ally been when the trail­ing R-squared was low—that is, when the cul­tural mind­set was not as focused on the poten­tial for a cri­sis. At the top of the 2000 stock mar­ket, the R-squared was only about 20 per­cent (i.e., in the pre­vi­ous year, few feared a cri­sis). Sim­i­larly, the 2007–2008 stock mar­ket col­lapse began when the R-squared was only about 30 percent.

By con­trast, some of the best buy­ing oppor­tu­ni­ties in the stock mar­ket since the late 1990s have occurred when the R-squared (or cul­tural focus on the poten­tial for a cri­sis) was high. The 1998 stock mar­ket low dur­ing the Russ­ian débâ­cle occurred at an R-squared above 60 per­cent, the dot-com stock mar­ket col­lapse bot­tomed in late 2002 as the R-squared approached 70 per­cent, the 2009 stock mar­ket bot­tom was reached when the R-squared was around 50 per­cent, and the 2010 soft patch stock mar­ket bot­tomed as the R-squared surged toward 70 per­cent. Like a spike in the VIX volatil­ity index, today, with the cri­sis index R-squared near 80 per­cent (sug­gest­ing an intense and wide­spread cri­sis focus), Chart 3 sug­gests it may be a good time to buy.

5. What is the near-term poten­tial for stocks should the con­tem­po­rary cri­sis fear ease?

As shown in Chart 1, the cri­sis index has declined by about 2 points since this mini-panic began ear­lier this sum­mer. So what is the short-run poten­tial for stocks should cri­sis fears fade (as they did after last year’s soft patch panic) and the cri­sis index returns to the level it was prior to this panic? Chart 2 shows the stock mar­ket cur­rently exhibits about 8 per­cent sen­si­tiv­ity to every sin­gle point move in the cri­sis index. If the cri­sis index returned to its level ear­lier this sum­mer, it would rise by about 2 points. There­fore, the stock mar­ket could rise by about 16 per­cent should this mini-crisis end. From its cur­rent level of about 1175, a 16 per­cent advance sug­gests the S&P 500 would return to its recov­ery cycle high near 1365 achieved ear­lier this year.

6. What is the long-term poten­tial for stocks should crises fears ease?

Look­ing once again at Chart 3, what is the poten­tial for the stock mar­ket should the R-squared to cri­sis dimin­ish in the next sev­eral years as it did dur­ing the last recov­ery? Cur­rently, almost 80 per­cent of the move­ments in the stock mar­ket dur­ing the last year are due to cul­tural cri­sis fears. This intense cri­sis focus leaves lit­tle room for investors to base stock val­u­a­tions on fun­da­men­tals. More­over, it prob­a­bly explains why the S&P 500 cur­rently sells at only about 12 times year-end esti­mated earn­ings per share while the 10-year Trea­sury yield is only about 2.2 per­cent, and while in the lat­est quar­ter, U.S. cor­po­rate prof­its rose at the robust annual rate of 12.8 percent!

If cul­tural men­tal­i­ties were less crisis-phobic today, what would the PE mul­ti­ple be on the stock mar­ket com­ing off a 12.8 per­cent profit quar­ter with a 2.2 per­cent Trea­sury yield and only about a 1.6 per­cent core con­sumer price infla­tion rate? Cer­tainly, much higher than 12 times earn­ings! 16 times earn­ings? 17 times? This sim­ply illus­trates just how much the crisis-centric mind­set is depress­ing invest­ment poten­tial and it also sug­gest how much oppor­tu­nity there is to increase stock val­u­a­tions just by improv­ing the cul­tural mind­set. Long term, the real invest­ment oppor­tu­nity is not a dra­matic improve­ment in eco­nomic or profit growth (although either or both could occur), but rather is just a slow but steady decay in “crisis-fears” sim­i­lar to what we expe­ri­enced dur­ing the last recov­ery. What will the PE mul­ti­ple on the stock mar­ket be if the Rsquared in Chart 3 declines again at some point to only about 20 per­cent? Summary

The crisis-phobic cul­ture evi­dent since the late 1990s will not likely dis­ap­pear any­time soon. This means investors will just have to expect peri­odic intense pan­ics char­ac­ter­ized by extreme stock mar­ket volatil­ity. How­ever, those who can stay focused on the longer-term fun­da­men­tals and attrac­tive val­u­a­tions and not be spooked away from equi­ties dur­ing emo­tional pan­ics will likely be rewarded in the long-run. The cur­rent inten­sity of cri­sis fears will likely dimin­ish in the next sev­eral years. As the cul­ture slowly turns away from an immi­nent expec­ta­tion of cri­sis and focuses again more on fun­da­men­tals, the val­u­a­tions applied to the stock mar­ket should rise sub­stan­tially as greed slowly replaces fear.

Copy­right © Wells Cap­i­tal

Tags: Business Outlook Survey, Capital One, Consumer Confidence, Crisis Mentality, Double Dip Recession, Economic Recovery, Hypochondria, Hypochondriac, Investment Outlook, Last Several Years, Legacies, Outlook, Overwhelming Crisis, Phobia, Post Traumatic Stress, Post Traumatic Stress Disorder, Quantification, Stock Market History, Summer Drama, Survey Reports, Traumatic Stress Disorder
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Warren Buffett's Philosophy On Investing In Banks

Tuesday, August 30th, 2011

In light of last week's sur­prise announce­ment of Buffett's bailout redux of Bank of Amer­ica (the first one being Gold­man back in 2008), and fol­low­ing today's even more sur­pris­ing objec­tion by the FDIC which threat­ens to scut­tle the Bank of Amer­ica set­tle­ment and force Bank of Coun­try­wide Lynch to raise far more cap­i­tal, push­ing War­ren to dou­ble down on his invest­ment throwin more good money after bad, espe­cially if the legal case moves from an Arti­cle 77-friendly NY state court to Fed­eral, here are the philo­soph­i­cal thoughts from the Berkshire's ora­cles con­tained, in his "Col­lected Writ­ings", on his desire to put money into banks.

And we quote:

The bank­ing busi­ness is no favorite of ours. When assets are twenty times equity-a com­mon ratio in this industry-mistakes that involve only a small por­tion of assets can destroy a major por­tion of equity. And mis­takes have been the rule rather than the excep­tion at many major banks. Most have resulted from a man­age­r­ial fail­ing that we described last year when dis­cussing the "insti­tu­tional imper­a­tive:" the ten­dency of exec­u­tives to mind­lessly imi­tate the behav­ior of their peers, no mat­ter how fool­ish it may be to do so. In their lend­ing, many bankers played follow-the-Ieader with lemming-like zeal; now they are expe­ri­enc­ing a lemming-like fate.

Because lever­age of 20:1 mag­ni­fies the effects of man­age­r­ial strengths and weak­nesses, we have no inter­est in pur­chas­ing shares of a poorly-managed bank at a "cheap" price. Instead, our only inter­est is in buy­ing into well-managed banks at fair prices.

Per­haps a bet­ter title for this post would "Buf­fett on lemmings"...

Full humor­ous musings:

Buf­fett col­lected writings

Tags: Article 77, Bailout, Bank Of America, Berkshire, Case Moves, Fdic, Gold, Goldman, Humorous Musings, Legal Case, Lemmings, Objection, Oracles, Philosophical Thoughts, Redux, Small Portion, Strengths And Weaknesses, Surprise Announcement, Twenty Times, Warren Buffett, Zeal
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ECRI's Achuthan Sticking to Script that Slowdown is not Transitory

Tuesday, August 30th, 2011

via Trader Mark, Fund My Mutual Fund

The ECRI has been nail­ing the larger macro moves quite well the past few years, so I con­tinue to mon­i­tor what­ever they say.   There longer lead­ing indi­ca­tors started to take a quite neu­tral to bear­ish view this spring, which at the time was clearly out of the con­sen­sus.  At that time the herd said what­ever slow­down we might have, would be tem­po­rary and many were still look­ing for 3–4% GDP growth for the sec­ond half.

Some ear­lier videos here:
[Jun 14, 2011: Video — ECRI's Achuthan — Pro­longed U.S. Slow­down Under­way]
[Jul 7, 2011: Video — ECRI's Achuthan Stick­ing to Script that Slow­down is not Tran­si­tory]

The lat­est update would show no immi­nent change to that out­look per Yahoo Daily Ticker.  How­ever they do not yet think we are in reces­sion, nor are ready to declare we will be headed into one.

• Last spring, when most econ­o­mists were talk­ing about a second-half recov­ery, Eco­nomic Cycle Research Insti­tute co-founder Lak­sh­man Achuthan came on The Daily Ticker and declared a global sum­mer slow­down was coming.
• Now that Wall Street con­sen­sus has turned extremely bear­ish on the econ­omy, we fig­ured it was time to check back with Achuthan to get his cur­rent view.  "We've got more weak­ness in front of us," he says. "We don't see any upturn yet."
• Still, ECRI is not ready to declare a new reces­sion is immi­nent, much less already started as many oth­ers con­tend. "The jury is still out," Achuthan says. "Our indi­ca­tors have not gone to the point where we can def­i­nitely say 'boom it's a reces­sion.' Prob­lem is they haven't turned up either, it's a very per­sis­tent decline in these indicators."
• As for the myr­iad other econ­o­mists now putting odds on a reces­sion, Achuthan believes they are play­ing a "dan­ger­ous" game. "It's the illu­sion of pre­ci­sion," he says. "If you take a look at whoever's mak­ing those calls [and] look at their track record of call­ing reces­sions I think you'll be unimpressed."

Copy­right © Fund My Mutual Fund

Tags: Co Founder, Current View, Dangerous Game, Economic Cycle Research Institute, Economists, Ecri, GDP Growth, Herd, Imminent Change, Lakshman, Lakshman Achuthan, Last Spring, Leading Indicators, Mutual Fund, Outlook, Persistent Decline, Recession, Recessions, Slowdown, Upturn, Wall Street Consensus
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Compare and Contrast to the Great Depression — in Three Parts

Tuesday, August 30th, 2011

Every year, at about this time (roughly just before the Fed launches on yet another mon­e­tary eas­ing cru­sade) we get requests to decom­pose cur­rent events into their con­stituent pieces and present these in par­al­lel with the period in time between 1929 and 1939 bet­ter known as the Great Depres­sion. Why recon­struct the wheel when it was pre­cisely a year ago (and remem­ber: 2011 is a car­bon copy of 2010, so it is effec­tively yes­ter­day) that Guggenheim's Scott Min­erd did just that and in a far more polit­i­cally and gram­mat­i­cally cor­rect way than we ever could, not to men­tion with that many more pretty charts?

So with­out fur­ther ado, here is Scott Minerd's com­pare and con­trast of the Sec­ond Great Depres­sion (the one we are now debat­ing whether or not it has become a reces­sion or not once again) to the orig­i­nal source.

Part 1: ‘Com­pared to the Incom­pa­ra­ble’ (pdf)

Guggen­heim Part­ners Weekly Mar­ket Per­spec­tive August 17, 2010

Part 2: ‘The Fed, Now and Then’ (pdf)

Guggen­heim Part­ners Weekly Mar­ket Per­spec­tive August 24, 2010

Part 3: ‘Fol­low­ing the Mis­takes of a Hero’ (pdf)

Guggen­heim Part­ners Weekly Mar­ket Per­spec­tive Sep­tem­ber 1, 2010

Tags: Carbon Copy, Compare And Contrast, Compare Contrast, Constituent, Crusade, Current Events, Great Depression, Guggenheim Partners, Hero, Market Perspective, Original Source, Pdf, Politically Correct, Recession, S Scott, Wheel
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The End of the World, Part 1 (Mauldin)

Monday, August 29th, 2011

What Is the CBO See­ing (or Smok­ing?)
The End of the World, Part 1
Who Will Res­cue the Res­cuers?
The Prob­lems of Debt in the Euro­zone
Thoughts on Jack­son Hole
Some Thoughts on Get­ting Older

Fine, then. Uh oh, over­flow, pop­u­la­tion, com­mon food, but it'll do to

Save your­self, serve your­self. World serves its own needs,
lis­ten to your heart bleed – dummy with the rap­ture and
the revered and the right, right. You vit­ri­olic, patri­otic, slam,
fight, bright light, feel­ing pretty psy­ched.
It's the end of the world as we know it.
It's the end of the world as we know it.
It's the end of the world as we know it and I feel fine.

R.E.M. song from 1987

It’s not really the end of the world, but to read some of the analy­sis and data over the past week, it’s hard not to won­der if it’s not the begin­ning of the Endgame at the very least. There is more to cover than I can really do jus­tice to, but we will just start. We HAVE to look at the US data first (briefly) and then on to Europe, where it will may be the end of the euro exper­i­ment, depend­ing on two vot­ing pop­u­la­tions. Can you spell “Bank­ing Cri­sis,” gen­tle reader? A nod to Bernanke’s finger-pointing speech, some links on the scourge of high-frequency trad­ing, and we end on a pos­i­tive note about the Boomer gen­er­a­tion grow­ing older. And, I answer the ques­tion that is burn­ing in your brain: “How many years of US corn pro­duc­tion will China’s dol­lar reserves buy?” Write your answer down now. This let­ter may print out longer than usual, as there are plenty of charts. Let’s skip the “but firsts” and jump right in.

What Is the CBO See­ing (or Smoking?)

Last week I finally stopped being wishy-washy (with my 50–50% chance of a reces­sion call) and said the US would be in reces­sion within 12 months. And sug­gested that you con­sider mov­ing to the side­lines your longer-term equity invest­ments, except your con­vic­tion stocks. (I have some of those in the biotech space and sim­ply intend to buy more if the prices go down. But remem­ber, I am look­ing out ten years and expect an even­tual bub­ble, so I don’t care if I am early for some of my high-risk money.) Stocks typ­i­cally go down about 40% or more in a reces­sion. David Rosen­berg esti­mates that we have seen 27% of a typ­i­cal bear-market move, so that would sug­gest the pos­si­bil­ity of another 30% down­draft (give or take).

None of the data this week makes we want to change my opin­ion on reces­sion. Rich Yamarone (Bloomberg Chief Econ­o­mist) and I traded emails as we got new data this morn­ing, com­par­ing notes. He does bet­ter charts than I do, so we will use his. (I hear, by the way, that he is being addressed as Lord Vader in the halls of Bloomberg. Come to think of it, his voice is rather raspy.)

As he points out, when GDP year-over-year drops by more than 2%, we have always had a reces­sion. So with today’s second-quarter revi­sion (first revi­sion of many) down to just 1% (tech­ni­cally 0.99%, but we are among friends here), where are we? At 1.5% year-over-year. Here is the chart:

The nor­mally bull­ish staff at economy.com gave us this rather dis­mal para­graph tonight as a sum­mary to the week:

“The last week of the sum­mer brings a rare North­east hur­ri­cane and a heavy load of data that will show the econ­omy run­ning close to stall speed. Sec­ond quar­ter GDP was revised down to 1%, and the slight improve­ment in growth we expect for this quar­ter assumes no new finan­cial shocks. Upcom­ing indi­ca­tors for August will bear the mark of steep declines in stock prices. The employ­ment report will be the head­liner; non­farm pay­rolls are expected to rise just 30,000, and the unem­ploy­ment rate likely will tick up 0.1 per­cent­age point to 9.3%. We think the ISM man­u­fac­tur­ing sur­vey dipped into con­trac­tion ter­ri­tory for the first time in two years, and auto sales and con­sumer con­fi­dence likely also fell dur­ing the month. There will also be sig­nif­i­cant inter­est in the min­utes of the August Fed­eral Open Mar­ket Com­mit­tee meet­ing, espe­cially given Chair­man Ben Bernanke's omis­sion of details regard­ing pol­icy eas­ing options in his Jack­son Hole speech.”

Ugh. More on the Bernank later.

The Michi­gan Con­sumer Sen­ti­ment num­ber was just awful. It dropped 8 full points (which is huge for this index) to 55.7. The index has fallen nearly 20 points in three months. In the chart below, note the close pre­vi­ous cor­re­la­tion between sen­ti­ment and GDP. Which do you think is more likely to hap­pen: sen­ti­ment to rise or GDP to fall?

Unem­ploy­ment claims are back up over 400,000, to 417,000. If the employ­ment gain is really just 30,000, that bodes poorly for any recov­ery. So, exactly how does that square with the recent Con­gres­sional Bud­get Office (CBO) pro­jec­tions? Quoting:

“CBO expects that the recov­ery will con­tinue but that real (inflation-adjusted) GDP will stay well below the economy’s potential—a level that cor­re­sponds to a high rate of use of labor and capital—for sev­eral years. On the basis of eco­nomic data avail­able through early July, when the agency ini­tially com­pleted its eco­nomic fore­cast, CBO projects that real GDP will increase by 2.3 per­cent this year and by 2.7 per­cent next year. Under cur­rent law, fed­eral tax and spend­ing poli­cies will impose sub­stan­tial restraint on the econ­omy in 2013, so CBO projects that eco­nomic growth will slow that year before pick­ing up again, aver­ag­ing 3.6 per­cent per year from 2013 through 2016.”

Let me work you through the num­bers. We grew at less than a total of 1.4% for the first six months of 2011. To get to 2.3% as an aver­age for the year, we would need to grow by (back of the nap­kin) 3.2% for the last half of the year. We could reduce the deficit by a lot if we could sell what these guys are smok­ing to engen­der such opti­mism. I think demand would be strong, espe­cially on Wall Street. (Note: these are the same peo­ple that told us in 2000 that all gov­ern­ment debt would be gone by 2010. Just saying.)

Their pro­jec­tions are likely based on assump­tions about recov­er­ies from past reces­sions. But since 1945, all reces­sions have been business-cycle reces­sions. We are now in a deleveraging/balance-sheet/post-credit-crisis reces­sion for which we have no mod­ern analogs, except maybe Japan. And that hasn’t turned out too well, as in, two decades of going nowhere. Yet we are apply­ing the same method­ol­ogy (mas­sive debt and deficits along with zero inter­est rates) that did not work there, and will soon bring Japan to ruin.

We have a fun­da­men­tally dif­fer­ent eco­nomic sce­nario than at any time for the last 66 years. Why then should we expect the same out­come? EVERY indi­ca­tor (employ­ment, GDP, ISM, sen­ti­ment, etc.) is far below its aver­age result two years after the offi­cial end of a reces­sion. That should speak volumes.

So why does what the CBO says mean any­thing? Because Con­gress is mak­ing pro­jec­tions for future deficits, based on what appear to be wildly opti­mistic assump­tions. That means future deficits are likely to be worse than expected. If we enter reces­sion, as I expect, then rev­enues will be down (as unem­ploy­ment will be up and prof­its down) and expenses will go up. That de min­imis deficit reduc­tion cur­rently being nego­ti­ated by the “Gang of 12” will dis­ap­pear in a cloud of smoke and maze of mir­rors. This will mean that more pain in the terms of future spend­ing cuts and/or tax increases will be needed. (I know a fair num­ber of con­gres­sional staffers read this let­ter. Please pay atten­tion here – your bosses need to be given a“heads up.”)

If we are in for a slow-growth, Mud­dle Through decade, then the deficit pro­jec­tions by CBO are dis­mally off. Get the spread­sheets. Fac­tor in slower growth and higher unem­ploy­ment and two reces­sions by the end of the decade (typ­i­cal for the after­math of a banking/debt cri­sis), and see what those deficit pro­jec­tions look like.

Given the large amount of data com­ing next week, as the month ends, I will stop here and get back to the US next week.

The End of the World, Part 1

In try­ing to deci­pher Europe it is hard to know where to start, but let’s begin with some assumptions:

For the euro to sur­vive, one of two things must hap­pen. Either the Ger­mans (and the Dutch and Finns and French) decide to back the con­cept of some sort of eurobond financ­ing of the bal­ance sheets of the periph­eral coun­tries, OR there need to be mas­sive write-downs of insolvent-country debt and the var­i­ous coun­tries need to back­stop their banks, because bank losses will be massive.

The for­mer needs buy-in from Ger­man vot­ers. Polls show Ger­mans are against the idea of eurobonds by some­thing like 5–1 (75% against, 15% for). (More on Ger­many below.) The lat­ter option assumes the periph­eral coun­tries will lose access to the pri­vate bond mar­kets, thus forc­ing sud­den and enor­mous aus­ter­ity (read Depres­sion lev­els or worse). Will they sim­ply throw in the towel and leave the euro on their own, remain­ing in the free-trade zone but with their own cur­ren­cies, much as Den­mark, the Czech Repub­lic, or Swe­den are now? Or opt to suf­fer and remain in the euro?

Ger­many could decide not to back the periph­eral coun­try debt, and leave the Euro­zone. But this would be painful for Ger­mans. If you think the Swiss franc trade is crowded (and way over­val­ued) because peo­ple are look­ing for a safe haven, what would a new Deutschmark look like to investors? Switzer­land is a coun­try (and one of my favorite in the world, so no slight intended – I will be in Geneva for my birth­day in Octo­ber) of just over 7 mil­lion peo­ple, only some­what larger than the pop­u­la­tion of the greater Dallas-Fort Worth, Texas area where I live (although with much bet­ter weather!).

Ger­many, on the other hand, is the world’s 4th largest coun­try by GDP, with a pop­u­la­tion of over 82 mil­lion. It is well-run and respected. The new mark would climb to far higher lev­els against the remain­ing euro coun­tries and other cur­ren­cies, which for an export-driven nation would not be very help­ful. Mer­cedes and BMWs cost a lot now (and don’t for­get tool parts and other things Ger­many excels in mak­ing). Dou­ble the value of your cur­rency in a short time? Watch your mar­ket share drop. Painful is per­haps an inad­e­quate word.

So, what to make of the remarks this week by respected Ger­man lead­ers? Let’s fire up a few quotes here (http://www.telegraph.co.uk/finance/financialcrisis/8720792/Germany-fires-cannon-shot-across-Europes-bows.html):

“Ger­man Pres­i­dent Chris­t­ian Wulff has accused the Euro­pean Cen­tral Bank of vio­lat­ing its treaty man­date with the mass pur­chase of south­ern Euro­pean bonds. In a can­non shot across Europe’s bows, he warned that Ger­many is reach­ing bailout exhaus­tion and can­not allow its own democ­racy to be under­mined by EU mayhem.

“ ‘I regard the huge buy-up of bonds of indi­vid­ual states by the ECB as legally and polit­i­cally ques­tion­able. Arti­cle 123 of the Treaty on the EU’s work­ings pro­hibits the ECB from directly pur­chas­ing debt instru­ments, in order to safe­guard the cen­tral bank’s inde­pen­dence,’ he said. ‘This pro­hi­bi­tion only makes sense if those respon­si­ble do not get around it by mak­ing sub­stan­tial pur­chases on the sec­ondary market,’he said, speak­ing at a forum of half the world’s Nobel econ­o­mists on Lake Con­stance to review the errors of the pro­fes­sion over recent years.

“Mr Wulff said the ECB had gone ‘way beyond the bounds of their man­date’ by pur­chas­ing €110bn (£96.6bn) of bonds, echo­ing wide­spread con­cerns in Ger­many that ECB inter­ven­tion in the Ital­ian and Span­ish bond mar­kets this month mark a dan­ger­ous esca­la­tion.’” (Lon­don Telegraph)

Who Will Res­cue the Rescuers?

From the same arti­cle: “The blis­ter­ing attack fol­lows equally harsh words by the Bun­des­bank in its monthly report. The bank slammed the ECB’s bond pur­chases and also warned that the EU’s broader bail-out machin­ery vio­lates EU treaties and lacks ‘demo­c­ra­tic legit­i­macy’. The com­bined attacks come just two weeks before the Ger­man con­sti­tu­tional court rules on the legal­ity of the var­i­ous bailout poli­cies. The ver­dict is expected on Sep­tem­ber 7.”

Yet“Nobel lau­re­ate Joe Stiglitz told the forum that the euro is likely to fall apart unless Ger­many accepts some form of fis­cal union. ‘More aus­ter­ity for Greece and Spain is not the answer. Medieval blood-letting will kill the patient, and democ­ra­cies won’t put up with this kind of medicine.’ ”

His solu­tion? Ger­many will either have mas­sive bank­ing losses (see below) or assume some debt. Why give up the dream of a united Europe over a few tril­lion and your credit rat­ing? Yet (Ambrose Evans-Pritchard writ­ing in the Tele­graph):

“Marc Ost­wald from Mon­u­ment Secu­ri­ties said Ger­many is drift­ing towards a major con­sti­tu­tional cri­sis. ‘This has all the mak­ings of the revolt that unseated Hel­mut Schmidt [in 1982], and indeed has polit­i­cal echoes of the inef­fi­cacy of the Weimar régime,’ he said.

“Mr. Wulff said Germany’s pub­lic debt has reached 83pc of GDP and asked who will ‘res­cue the res­cuers?’ as the domi­noes keep falling. ‘We Ger­mans mustn’t allow an inflated sense of the strength of the res­cuers to take hold,’ he said.

“ ‘Sol­i­dar­ity is the core of the Euro­pean Idea, but it is a mis­un­der­stand­ing to mea­sure sol­i­dar­ity in terms of will­ing­ness to act as guar­an­tor or to incur shared debts. With whom would you be will­ing to take out a joint loan, or stand as guar­an­tor? For your own chil­dren? Hope­fully yes. For more dis­tant rela­tions it gets a bit more dif­fi­cult,’ he said.”

The final option is for the periph­eral nations to eschew aus­ter­ity and leave the Euro­zone, launch­ing their own cur­ren­cies again. This would mean long and painful bank hol­i­days and mas­sive losses for Euro­pean banks and local cit­i­zens, depend­ing on how many coun­tries left. And the law­suits would last for decades – noth­ing short of a full-employment act for lawyers all over the world.

And Merkel was not helped by her own Labor Min­is­ter, Dr. Ursula von der Leyen. Rather than sim­ply hand over fur­ther loans to Athens – money many Ger­mans believe they will never see again– Dr. von der Leyen sug­gests Berlin should ask for col­lat­eral. Gold, prefer­ably. From the Irish Times:

“One month after euro zone lead­ers agreed a bailout reform pack­age, and a month before the pack­age goes to vote before national par­lia­ments, a senior Ger­man min­is­ter appeared to be call­ing for a renegotiation.

“On an air­craft back from Bel­grade, a thin-lipped chan­cel­lor Angela Merkel report­edly told advis­ers: ‘I’m going to have to have a word with Ursula.’

“Even before she landed, Ger­man offi­cials were in full dam­age lim­i­ta­tion mode, work­ing the phones and issu­ing state­ments deny­ing the min­is­ter spoke for the gov­ern­ment. ‘This is sub-optimal,’groaned a senior gov­ern­ment source. ‘No one is amused.’ ”

Some back-bench min­is­ter? Hardly. Dr. von der Leyen, a 52-year-old mother of seven, is one of Dr. Merkel’s most ambi­tious min­is­ters and one of two names reg­u­larly men­tioned as a pos­si­ble successor.

But she only reflected a rather con­tentious Bun­destag meet­ing this week, in which one after another rep­re­sen­ta­tive voiced oppo­si­tion, invari­ably not­ing that the vot­ers disapproved.

Of course, none of this is helped by Fin­land nego­ti­at­ing a side col­lat­eral deal as part of their con­di­tions for approv­ing their por­tion of the next loan to Greece. And a cho­rus of coun­tries have jumped on that wagon. How do you explain to YOUR vot­ers that the Finns got actual in-the-bank col­lat­eral and you got noth­ing but Greek promises? But if every­one gets col­lat­eral, the whole deal will fall apart. What’s the point if you give back a large chunk of your loan? It just means you need even more!

The Prob­lems of Debt in the Eurozone

Let’s look at some charts. This first one is the amount of prin­ci­pal debt in terms of GDP from July 2011 to July 2012 (plus bud­get deficits, in red) needed by ten Euro­pean coun­tries. Note that France and Italy are well over 20%! Source: Peter­son Insti­tute of Inter­na­tional Eco­nom­ics (hat tip, Simon Hunt!)

“From the same report this chart illus­trates how Ger­many could become the banker for the Euro Zone. The ques­tion is will it? The ques­tion will be more clearly defined in Sep­tem­ber when Germany’s Con­sti­tu­tional Court will rule on the legal com­plaints against the Euro Zone res­cue pack­ages. If the com­ments being made by the Bun­des­bank and by the country’s Pres­i­dent are a hint as to the out­come of the court then a neg­a­tive rul­ing is a real risk. Who then will take the losses?” (Simon Hunt)

Note in the chart that Ger­many holds the largest per­cent­age of net debt.

Claims of Euro Area mem­bers from net­ting of Euro Sys­tem cross-border pay­ments (in bil­lions of Euros):

And then there are the interest-rate issues. Rates were ris­ing rapidly in Spain and Italy until the ECB stepped in. Every­one knows Greece, Ire­land, and Por­tu­gal are on life sup­port and can­not get debt on their own. The ECB inserted an IV into Spain and Italy and started them on a slow drip. The real ques­tion of the moment is, can they get off that sup­port and stand in the mar­kets on their own? The answer a few weeks ago was start­ing to look like “No.”

And look at the mas­sive growth in ECB lend­ing to Ital­ian banks, which are get­ting shut out of the “nor­mal” mar­ket. It has lit­er­ally more than dou­bled in a few months:

Credit spreads at French banks are blow­ing out. Review how much France has to bor­row in the next 12 months, in the first chart. Then look at their deficit-to-GDP (above 10%, accord­ing to Charles Gave) and real­ize that there is no rea­son why S&P should not down­grade them as well. How do they cut spend­ing? Taxes are already at 50% of GDP. Wealthy French have voted with their feet by mov­ing away.

The list of coun­try woes is long in Europe. Mas­sive unem­ploy­ment in Spain and Por­tu­gal. Deficits every­where. Vot­ing pop­u­la­tions in both cred­i­tor and debtor nations are upset.

It is only a mat­ter of time until Europe has a true cri­sis, which will hap­pen faster – BANG! –than any of us can now imag­ine. Think Lehman on steroids. The US gave Europe our sub­prime woes. Europe gets to repay the favor with an even more severe bank­ing cri­sis that, given that the US is at best at stall speed, will tip us into a long and seri­ous reces­sion. Stay tuned.

Thoughts on Jack­son Hole

Jack­son Hole often pro­vides fire­works and sig­nif­i­cant speeches. Bernanke came up with nei­ther this week, which I think is a good thing. But he did force­fully point out that the Fed has done about all it can do and that the forces of civil gov­ern­ment need to step up to the plate with cred­i­ble actions. It was as close to fin­ger point­ing as a Fed Chair­man can do, and parts of the speech actu­ally sounded as if he was try­ing to chan­nel his inner Richard Fisher (Dal­las Fed Pres­i­dent). Basi­cally, he said the Fed has done what it can with as easy a mon­e­tary pol­icy as is pos­si­ble and pru­dent. Quot­ing from Joan McCullough’s remarks on the speech:

“Yeah, the Fed under­es­ti­mated the sever­ity of our ills and so this recov­ery is gonna take longer than expected. But under­neath it all, the US still has the capa­bil­ity of gen­er­at­ing growth. Here are the pre­cise words with which he threw respon­si­bil­ity back at Con­gress and the Admin­is­tra­tion; he starts out kind of slow:

“ ‘… Notwith­stand­ing the severe dif­fi­cul­ties we cur­rently face, I do not expect the long-run growth poten­tial of the U.S. econ­omy to be mate­ri­ally affected by the cri­sis and the reces­sion if – and I stress if – our coun­try takes the nec­es­sary steps to secure that outcome.’

“Just in case they didn’t under­stand that they had just been handed the baton, he con­tin­ued with this:

“ ‘… most of the eco­nomic poli­cies that sup­port robust eco­nomic growth in the long run are out­side the province of the cen­tral bank.”

“With this clos­ing cas­ti­ga­tion cum zing:

“ ‘… Finally, and per­haps most chal­leng­ing, the coun­try would be well served by a bet­ter process for mak­ing fis­cal deci­sions. The nego­ti­a­tions that took place over the sum­mer dis­rupted finan­cial mar­kets and prob­a­bly the econ­omy as well, and sim­i­lar events in the future could, over time, seri­ously jeop­ar­dize the will­ing­ness of investors around the world to hold U.S. finan­cial assets or to make direct invest­ments in job-creating U.S. businesses.’ ”

As I said, for a Fed­eral Reserve Chair­man, that is as close to read­ing the riot act as you are going to get.

Some Thoughts on Get­ting Older

I turn 62 on Octo­ber 4 while in Geneva. I don’t feel that old, and hope I don’t look it, but the birth cer­tifi­cate ver­i­fies the age. I should note that my mother turned 94 last week and is still quite active. I was talk­ing with a Rice Uni­ver­sity class­mate (of ’72) and old friend, John Ben­zon, who has recently retired from Price Water­house and is try­ing to fig­ure out what “Act 2” will be. I real­ized that when we grad­u­ated, we had barely lived 1/3 of the lives we now have.

So with that on my mind, two items hit my inbox today. The first was from Lance Roberts of Streettalk Advi­sors. The San Fran­cisco Fed did a report recently that sug­gested that we aging Boomers will be a drag on the stock mar­ket as we sell to sup­port our retire­ment (shades of Harry Dent!). From the report:

“The baby boom gen­er­a­tion born between 1946 and 1964 has had a large impact on the U.S. econ­omy and will con­tinue to do so as baby boomers grad­u­ally phase from work into retire­ment over the next two decades. To finance retire­ment, they are likely to sell off acquired assets, espe­cially risky equi­ties. A loom­ing con­cern is that this mas­sive sell-off might depress equity values.”

You can read his short piece and the link to the Fed piece at http://www.streettalklive.com/financial-blog/253-boomers-are-going-to-be-a-real-drag.html.

I am not so sure, though. I think the Boomer gen­er­a­tion is a lit­tle dif­fer­ent from pre­vi­ous gen­er­a­tions. I remem­ber going to my grandmother’s in my early years, when my aunts and uncles were the age I am now. Even though active – and most lived well into their 90s – they had a far more seden­tary lifestyle than many Boomers do today. Boomers are more active and, whether for finan­cial rea­sons or sim­ply because they don’t want to retire (that would be me!), they are going to work longer than pre­vi­ous gen­er­a­tions. In fact, the only cohort that has seen their employ­ment rates rise is work­ers over the age of 55! Good for them (although tough on my young kids, who need those jobs).

Then I got this pic­ture from Jon Sundt, the pres­i­dent of Alte­gris, a close friend, and my busi­ness part­ner. He is 50, at the tail end of the Boomer Gen­er­a­tion. This is a wave he caught at the Mentawai Island Chain, 80 miles off the coast of Suma­tra, Indone­sia. He goes there every sum­mer. They go into the mid­dle of the Indian Ocean to find these large waves. And it is mostly Boomer surfers. (I’m not sure how much I like the guy who’s respon­si­ble for a large part of my monthly cash flow tak­ing these risks, but that’s another story!)

Go to a gym or run­ning trail: it is not just kids out there any more. There are lots of peo­ple my age where I work out. Some of the train­ers are over 50! We all have friends who are push­ing the enve­lope – climb­ing moun­tains, bik­ing, etc.

And the new biotech that will come out within the next five years is going to offer cures for many of the things that kill us sooner than we sim­ply wear out. Can­cer, Alzheimer’s, scle­ro­sis of the liver, viruses are all on the short tar­get list. I was talk­ing about this with Scott Burns, noted author and long-time news­pa­per colum­nist (and a long-time friend). He calls it “cat­a­strophic success”in his next book, as liv­ing longer is a “suc­cess,” but it makes our col­lec­tive pen­sion, Social Secu­rity, and Medicare prob­lems even worse. Maybe MUCH worse. I smiled and told him there are worse prob­lems than liv­ing longer. I intend to be writ­ing and trav­el­ing for a few more decades.

And as my Dad used to say (he made it to 86), “God will­ing and the creek don’t rise” I intend to do 62 pushups on Octo­ber 4^th, which will be a per­sonal best. I can’t do much about get­ting older (I will be very dis­ap­pointed if I do not get a whole lot older!), but I don’t have to go qui­etly into that dark night. And nei­ther do you, gen­tle reader. So, make sure you are around to read my mus­ings a whole lot longer, as well. If you hang around long enough, you will even see me turn bull­ish! It won’t be that long, I promise. It will seem like just a few weeks from now.

And while I was hav­ing lunch with Scott, he asked me the ques­tion, “How many years of US corn pro­duc­tion would the dol­lar reserves of China buy?” I mused, maybe 40. Wrong. It is only 12. And that is just corn. Not soy­beans, wheat or rice or cat­tle, hogs or chick­ens. Think about that and stand back in awe at the pro­duc­tiv­ity of the Amer­i­can farmer.

It is time to hit the send but­ton. I stu­pidly for­got to save this let­ter and had an unex­pected “hard” crash. I thought I lost almost the entire e-letter; but check­ing the Web, I found a back door to the tem­po­rary files where most of it was still store, so only lost a few hours re-creating it – but now it is late, 2 am). That means this let­ter might not be there Sat­ur­day morn­ing, and for that I apol­o­gize. Have a great week!

Your look­ing for­ward to the next third of this life analyst,

John Mauldin

John@FrontlineThoughts.com

Tags: Banking Crisis, Bonds, Cbo, Corn Production, Endgame, Equity Investments, Firsts, Gentle Reader, Gold, High Frequency, India, Jackson Hole, Jump Right, M Song, Mauldin, Pric, Rapture, Recession, Rescuers, S Finger, Scourge, Sidelines, Term Equity
Posted in Bonds, Brazil, Gold, India, Markets | Comments Off

Infographic: America, The Lawsuit-Happy Nation

Monday, August 29th, 2011

via Econ­Mat­ters

Accord­ing to the lat­est BLS national wage esti­mate through May 2010, the mean annual salary for lawyers was around  $129,440, which partly accounts for the fact that the U.S. has one of the high­est num­ber of lawyers per capita in the world.

Based on data from the Amer­i­can Bar Asso­ci­a­tion, there are over 1.2 mil­lion lawyers in the United States.  That's one attor­ney for every 254 Amer­i­cans, which also makes some of the stun­ning sta­tis­tics (and what a waste of resources) illus­trated in the info­graphic below some­what "logical":

• 15 mil­lion law­suits will be filed in 2011 across the U.S.
• A new law­suit every 2 seconds
• One law­suit for every 12 adults
• 21 U.S. states are fac­ing a med­ical lia­bil­ity crisis
• $248.1 bil­lion = the cost to the U.S. tort sys­tem (per­sonal injury) in 2009, or $808 per person
• The cost per capita of tort related law­suits has increased 800% between 1950 to 2009

The Great Reces­sion may have dimin­ished the abil­ity of lawyers to com­mand a higher salary, but prob­a­bly at the same time also has increased the like­li­hood of friv­o­lous lit­i­ga­tion, as the odds are good for some kind of set­tle­ment to avoid an even more costly trial, par­tic­u­larly when insur­ance com­pa­nies are involved.

click image to enlarge

More Resources at Para­le­gal Certification

Tags: 1 Billion, Adults, American Bar Association, Annual Salary, Capita, Costly Trial, Frivolous Litigation, Happy Nation, Infographic, Insurance Companies, Lawsuits, Lawyers, Likelihood, Medical Liability, Odds, Paralegal Certification, Personal Injury, Recession, Stunning Statistics, Tort System
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PIMCO Missed the Trade of the Year in the Treasury Market

Monday, August 29th, 2011

PIMCO Missed the Trade of the Year in the Trea­sury Market

By Econ­Mat­ters

PIMCO who spe­cial­izes in Bonds, hav­ing the largest bond fund in the world could not have been more wrong about an asset class, which is sur­pris­ing con­sid­er­ing their expe­ri­ence in this sec­tor. Bill Gross`s offi­cial dec­la­ra­tion that his firm was short­ing the US Trea­sury Mar­ket on April 11th of this year to the day marked the lit­eral dou­ble bot­tom in price/high in yield for the year, and it has been one heck of a one-way trade in the oppo­site direc­tion ever since.

Major Move — Trend Traders Dream

On April 11th the 10-Year Trea­sury was yield­ing 3.57% and on August 19th it reached a low yield of 2.06% that is a 151 basis point move in a lit­tle more than four months. Some­body at PIMCO is going to be receiv­ing the lower end of their dis­cre­tionary bonus range at the end of the year that`s for sure. But how could they make this mis­take in the first place?

"Sell in May, and Go Away" — Pat­tern Recognition?

We, at Econ­Mat­ters, used last year as a tem­plate and fore­cast the exact oppo­site trade around the same time in April as Bill Gross was going short the Trea­sury Mar­ket. We stated in one of sev­eral pieces on the sub­ject our hypoth­e­sis for the summer:

"If we look back at last year for guid­ance, we remem­ber that the Greek and Euro­pean cri­sis was known for months, the sell­off only occurred when con­di­tions were opti­mal. As in, the Fed remov­ing stim­u­lus from asset prices, lim­ited upside gains ver­sus sub­stan­tial down­side cor­rec­tion losses.

Then all of the sud­den we had a cri­sis on our hands, only dif­fer­en­ti­ated by the fact that Sell­ers stepped into the mar­ket, and all the sud­den, bad news was every­where. It is only bad news in mar­ket terms if buy­ers decide to sell, and just like in 2010, the above rea­sons serve as likely cat­a­lysts for sim­i­lar sell­ing this year around this time. Think along the lines of a 20–25% cor­rec­tion in most asset classes over the next 4 to 5 months.

Just think how much bet­ter your port­fo­lio would look if you locked in your prof­its last April, parked your money in a money mar­ket fund, waited for the Sum­mer sell­off, and then got back in the mar­ket dur­ing the his­tor­i­cally stronger invest­ment months for the last quar­ter of the year, (October-December) where money man­agers push up asset prices into the year end to make their numbers."

Well, what PIMCO and Bill Gross should have noticed is that around April 6th of 2010 the very same time Trea­suries went on a sim­i­lar run with a 3.97% yield on that date run­ning to a 2.38% yield on Octo­ber 8th in an eerily sim­i­lar 159 basis point move in the sub­se­quent six month time period (See Chart above).  What were they thinking?

End of QE2 = Start of Risk-Off Trades

The obvi­ous signs are that if you have a 25% cor­rec­tion in asset classes as highs are reached in early April, and QE2 comes to an end, remov­ing arti­fi­cially inflated stim­u­lus it was obvi­ous that we were going to expe­ri­ence the same sort of “flight to safety” trade as 2010 where bad news was really bad news because there was a huge arti­fi­cial sup­port that was being taken away from the mar­ket, and that when this flight to safety occurred, that bonds were going to be the main beneficiary.

You do not get a 25% cor­rec­tion in risk asset classes like Oil and Equi­ties and not have a stam­pede run into the “Safety Trade”. There are two main fun­da­men­tal trades in play these days, the “Risk On Trade” where you go out of Bonds and into Risk Assets like Com­modi­ties and Equities.  After all, this was Bernanke`s stated goal to incen­tivize investors to take on more risk by get­ting out of defla­tion­ary safe assets like bonds and into the riskier classes.

Well, when QE2 ended it was log­i­cal that the trade was going to morph into the other trade, the “Flight to Safety Trade” where investors go out of riskier assets like Com­modi­ties and Equi­ties and seek return of cap­i­tal in Bonds and Treasuries.

Bond King's Car­di­nal Sin

PIMCO made the car­di­nal sin of buy­ing at the prover­bial top of the Trea­sury mar­ket in terms of yield, or put another way, sell­ing at the bot­tom of the Trea­sury mar­ket in terms of price. And yes at times this can be a respectable tech­ni­cally based trad­ing strat­egy, but not in the con­text of other macro events tak­ing place regard­ing debt con­cerns in the US and Europe.

Flawed Infla­tion­ary Bias

I think part of the flaw in PIMCO`s analy­sis is that they looked around at com­modi­ties like Oil and this con­firmed their infla­tion­ary bias, i.e., a 70`s style infla­tion era of high com­mod­ity prices and bond vig­i­lantes demand­ing higher yield for financ­ing any debt.

But the flaw is that we were in a true infla­tion­ary period in the 1970`s due to high com­mod­ity prices and high inter­est rates, but the main dif­fer­ence between the two eras is that we are in a major defla­tion­ary era because of high debt issues on gov­ern­men­tal bal­ance sheets.

More­over, higher oil prices actu­ally are defla­tion­ary this time around because they are not due to fun­da­men­tal sup­ply short­ages like the 1970`s but rather arti­fi­cial mon­e­tary poli­cies. So when you cou­ple weak demand and high arti­fi­cially inflated Oil prices you get a defla­tion­ary stunt of eco­nomic growth and increase the chances of send­ing the econ­omy into a pro­longed reces­sion because the real econ­omy can­not sup­port higher Com­mod­ity prices.

And in any defla­tion­ary period the “Safety Trade” is going to pre­vail over the “Risk On Trade”.  I think this is one of the main errors in PIMCO`s analy­sis, they took the wrong read­ing from arti­fi­cially high Oil prices, they thought that these prices were here to stay when the demand lev­els were at a neg­a­tive year-over-year 3% read­ing mov­ing to the 5% neg­a­tive level.

Flawed Assump­tions in Model

The other main con­tribut­ing flaw in PIMCO`s analy­sis is prob­a­bly that they viewed the finan­cial world as it was at the begin­ning of April, and not how it was going to be in May. PIMCO looked around and sur­veyed their sur­round­ings, and then just extrap­o­lated the sta­tus quo at the time for­ward uti­liz­ing some for­ward look­ing mod­el­ing assump­tions, but they never really ques­tioned whether there was some­thing amiss with their sta­tus quo in the first place.

The real fault was not rec­og­niz­ing that the sta­tus quo was only a tem­po­rary phe­nom­e­non and about to change in a rad­i­cal way after the options expi­ra­tion in April; and the tem­plate for know­ing this was star­ing them in the face the entire time because the almost exact car­bon copy hap­pened the year before.

"Group Think" Scenario?

There are a lot of smart minds at PIMCO, and I am sure they real­ized they were wrong at some point on this trade and cut their losses. But oh what could have been? I guess a cou­ple of pos­si­ble take­aways from this failed strate­gic analy­sis and sub­se­quent trade on behalf of PIMCO is to have enough diver­gent views within an orga­ni­za­tion so that enough chal­leng­ing of ideas and assump­tions takes place in order to fer­ret out poten­tial short­com­ings in one`s orig­i­nal hypoth­e­sis before cap­i­tal is ever allo­cated to the trade. It seems that PIMCO suf­fered from a major dose of “Group Think”.

Ques­tion­able Decision-making Process

The more trou­bling part would be that ana­lysts within PIMCO were not lis­tened to at the ana­lyst level, and the strate­gic deci­sions were made solely at the Exec­u­tive level. The third alter­na­tive is that the ana­lysts were afraid to speak up once a base hypoth­e­sis was formed within PIMCO, and they didn`t feel com­fort­able “Rock­ing the Boat” so to speak.

His­tory Some­times Repeats Itself

The other les­son to be gleaned by this failed trade is that even the experts, the spe­cial­ists within their field make mis­takes, so the Bond Experts messed up what was prob­a­bly one of the eas­i­est bond trades of the last five years.

It was the per­fect setup, and all PIMCO had to do was read the cor­rect tea leaves, and make a for­tune for their clients. A sim­ple look back to last year was the writ­ing on the wall that PIMCO missed in their faulty Trea­sury short.

© Econ­Mat­ters 2011

Tags: 10 Year Treasury, 5 Months, asset class, Asset Classes, Asset Prices, Basis Point, Bill Gross, Bond Fund, Bonds, Catalysts, Commodities, Discretionary Bonus, Double Bottom, Downside, Dream On, Pattern Recognition, Point Move, Selloff, Stimulus, Treasury Market, Trend Traders, Us Treasury
Posted in Bonds, Brazil, Commodities, Markets | Comments Off

Oceans 2011: Venezuelan Gold

Monday, August 29th, 2011

Now might be a good time for Daniel Ocean to start assem­bling his gang of 11. Venezue­lan Pres­i­dent Hugo Chavez announced last week that he was order­ing the country’s ample gold reserves back to Cara­cas for safe keep­ing. Not a bad idea given the global geopo­lit­i­cal envi­ron­ment, but with some 211 tons of 400-ounce gold bars to be moved from bank vaults in Lon­don, Pres­i­dent Chavez has a logis­ti­cal night­mare on his hands.

How do you trans­port vast quan­ti­ties of gold nearly 4,000 miles from one con­ti­nent to another?

Reuters blog­ger Felix Salmon had an inter­est­ing piece this week break­ing down the major options.

The most direct route would be to fly the gold home, but there are a cou­ple of prob­lems with that option. It would take roughly 40 dif­fer­ent ship­ments to trans­port 211 tons of gold, the Finan­cial Times says. Inter­cept­ing just one ship­ment would net a rob­ber $300 mil­lion, Salmon says, and if not suc­cess­ful, you would have 39 more chances. It’s unlikely there’s an insur­ance com­pany out there that would take on the responsibility.

Another option is to ship by boat using the Venezue­lan Navy. The obvi­ous risk here is piracy. Europe-to-South Amer­ica ship­ping routes have a long his­tory of piracy. Throw in the Bermuda Tri­an­gle, hur­ri­canes and the incred­i­bly slow pace—you’d have a month’s worth of $12 bil­lion hand-wringing in Caracas.

The most inven­tive idea Salmon puts forth is to exchange it upon deliv­ery. Gold stored in the Bank of Eng­land gen­er­ally receives a 2 per­cent pre­mium for its safety and pres­tige. Chavez could trade his Bank of Eng­land bars with another coun­try upon the safe deliv­ery of their own gold bul­lion in Cara­cas. This would cost Venezuela at least the 2 per­cent pre­mium, but save the headache of trans­port­ing so much gold.

Even if the gold reaches Cara­cas safely, the chal­lenge of securely stor­ing it is immense. Salmon calls gold “the per­fect heist: anony­mous, untrace­able, hugely valu­able.” The trans­fer is so risky; this would be the world’s largest trans­fer of gold since 1936. There’s no offi­cial word on where Chavez will store Venezuela’s gold, but he said last week that “if there isn’t enough room to store the gold in the cen­tral bank vaults, I can lend you the base­ment of the Miraflo­res pres­i­den­tial palace.”

For the record, the U.S. houses its 8,100 tons of gold reserves in Cen­tral Ken­tucky at Fort Knox. The bul­lion vault lies in the cen­ter of a 110,000 acre base that’s also home to more than 10,000 troops and the mech­a­nized tank divi­sion of the U.S. army—a secu­rity sys­tem even Ocean’s 11 couldn’t crack.

We’ll have to wait and see how this story devel­ops, but it’s cer­tain oth­ers on both sides of the law are watch­ing closely as well.

All opin­ions expressed and data pro­vided are sub­ject to change with­out notice. Some of these opin­ions may not be appro­pri­ate to every investor. 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 its/their content.

Tags: Bank Of England, Bank Vaults, Bermuda Triangle, Financial Times, Geopolitical Environment, Gold, Gold Bars, Gold Bullion, Gold Reserves, History Of Piracy, Hugo Chavez, Logistical Nightmare, Perfect Heist, President Chavez, President Hugo Chavez, Safe Delivery, Shipping Routes, Slow Pace, Venezuelan Navy, Venezuelan President Hugo, Venezuelan President Hugo Chavez
Posted in Gold, Markets | Comments Off

Confidence Counts (Sonders)

Monday, August 29th, 2011

Con­fi­dence Counts

Liz Ann Son­ders, Senior Vice Pres­i­dent, Chief Invest­ment Strate­gist, Charles Schwab & Co., Inc.,
Brad Sorensen, CFA, Direc­tor of Mar­ket and Sec­tor Analy­sis, Schwab Cen­ter for Finan­cial Research, and
Michelle Gib­ley, CFA, Senior Mar­ket Ana­lyst, Schwab Cen­ter for Finan­cial Research

August 26, 2011

Key points

• Most of the nor­mally historically-telling lead­ing indi­ca­tors con­tinue to point to the United States avoid­ing a renewed reces­sion. How­ever, risks are clearly height­ened as con­tin­ued ero­sion of con­fi­dence could push per­cep­tion into reality.
• The Fed­eral Reserve con­tin­ues to be divided on whether to attempt fur­ther mon­e­tary stim­u­lus. We ques­tion if any efforts will have the desired impact. Mean­while, the Obama Admin­is­tra­tion and Con­gress con­tinue to scram­ble to be seen as doing some­thing to help, but also have lim­ited pol­icy options.
• Euro­pean pol­i­cy­mak­ers seem obliv­i­ous to the ero­sion of con­fi­dence (and the role it plays) in their finan­cial sys­tem and a euro­zone reces­sion is becom­ing more likely. Mean­while, the hope that China can lift all global eco­nomic boats may be diminishing.

Global mar­kets con­tinue to trade in a highly volatile fash­ion. Con­fi­dence is very ten­u­ous and it isn't tak­ing much for investors to react in a big way both on the buy and sell side. Much of the recent focus has been on the Euro­pean debt cri­sis. Fears of a new "Lehman-Part II" finan­cial cri­sis ema­nat­ing from across the pond have con­tin­ued to haunt investors, while clearly-slowing growth in Europe con­tributes to the uneasi­ness. The glob­al­iza­tion of the finan­cial sys­tem means that it can be dif­fi­cult to deter­mine the extent to which the ten­ta­cles of any bank­ing prob­lems in other coun­tries may fil­ter through to the US sys­tem. This uncer­tainty con­tributes to the insta­bil­ity and volatil­ity we’ve seen in the equity mar­kets over the past cou­ple of months.

It can be dif­fi­cult to be an investor dur­ing times such as this as emo­tions are run­ning high. How­ever, fear, panic, (or greed) are not solid pil­lars of a suc­cess­ful invest­ment strat­egy. In fact, his­tor­i­cally when volatil­ity spiked and investor con­fi­dence sank, as we have seen recently, the fol­low­ing year was quite pos­i­tive for equi­ties. Times like this test whether your invest­ment plan is one that you're actu­ally com­fort­able with for the longer term. We con­tinue to believe that investors who sell due to fear and panic will ulti­mately end up with a less suc­cess­ful result than those who stick with a well-thought out long-term plan. That of course requires dis­ci­pline around diver­si­fi­ca­tion and reg­u­lar rebal­anc­ing. There is always another poten­tial cri­sis around the cor­ner, as well as a pos­si­ble pos­i­tive sur­prise and try­ing to time the mar­ket in the short term can be a fool’s errand.

Reces­sion in the cards?
Clearly the risks of a renewed reces­sion in the United States have risen as evi­denced by both the stock and bond mar­ket action. Accord­ing to ISI Group, his­tor­i­cally when the S&P 500 was down 17% over 11 days, only twice did a reces­sion not follow—1987 and 2002. Mean­while, Trea­sury yields con­tinue to trade near record lows with the 10-year yield dip­ping below 2%. We never ignore what the mar­kets are say­ing, but we also need to look at the entire pic­ture that is devel­op­ing. First, the stock mar­ket is a forward-looking mech­a­nism, so by the time we know for cer­tain what growth rates look like for the third and fourth quar­ters, the mar­ket will be look­ing into 2012; so wait­ing for clar­ity is often not the best strat­egy before exe­cut­ing a long-term plan.

Tak­ing a look at the broader eco­nomic pic­ture yields what we believe is a less con­vinc­ing like­li­hood of reces­sion than the mar­ket appears to be pric­ing in. Again accord­ing is ISI's research, pre­vi­ous mar­ket routs as we've seen recently saw ini­tial job­less claims spike by around 50,000 fol­low­ing big drops like we've seen recently. There has yet to be a spike in claims as they remain near the 400,000 level, down from 420,000 or so ear­lier this sum­mer. Addi­tion­ally, although at ane­mic lev­els, the US econ­omy is still adding jobs.

Addi­tion­ally, despite a shaky mar­ket, a high unem­ploy­ment rate, a con­tentious polit­i­cal envi­ron­ment, and a very neg­a­tive news cycle in July, retail sales for the month jumped 0.5%; while exclud­ing autos and gas they rose 0.3% and June was revised higher. This comes despite the recent release of the Uni­ver­sity of Michigan’s Con­sumer Sen­ti­ment Index post­ing its low­est read­ing since 1980—indicating con­sumers don't always do what they say. Addi­tion­ally, accord­ing to Ned Davis Research, when con­sumer con­fi­dence was below 66 his­tor­i­cally (it’s now at 59.5) the aver­age stock mar­ket gain in the year fol­low­ing for the DJIA was 14.4%; far bet­ter than the per­for­mance seen dur­ing times of higher con­fi­dence. Also, indus­trial pro­duc­tion for July rose 0.9%, while durable goods orders sur­prised on the upside by jump­ing 4.0%, with June's num­ber revised higher. Finally, the Index of Lead­ing Eco­nomic Indi­ca­tors (LEI) con­tin­ues to indi­cate growth, ris­ing 0.5% in July. There is a caveat to the strength of the LEI: one of the key stronger com­po­nents has been the yield curve, which has his­tor­i­cally inverted (long rates drop­ping below short rates) before reces­sions. That’s less likely this time given that short rates are pegged to zero; so the lack of inver­sion may be send­ing a "false" pos­i­tive mes­sage about the economy.

LEI still pos­i­tive

Source: Fact­Set, U.S. Con­fer­ence Board. As of Aug. 19, 2011.

Declin­ing con­fi­dence and con­tin­ued ero­sion in the mar­kets can have a self-fulfilling aspect to them how­ever, which is one rea­son why the pos­si­bil­ity of a reces­sion has grown, in our opin­ion. The Philly Fed Index falling to –30.7 may be an exam­ple of this as the decline in the mar­ket may have influ­enced responses, which in turn led to a huge sur­prise on the down­side, which led to more mar­ket losses—a self-fulfilling prophecy. How­ever, actual data doesn't exactly match the sur­vey. We’ve seen indi­ca­tions of more con­fi­dence recently, such as the jobs data men­tioned above, as well as a recent Fed­eral Reserve sur­vey show­ing that demand for loans by busi­nesses is increas­ing, while credit stan­dards have loosened.

Increase in demand for loans encour­ag­ing

Source: Fact­Set, Fed­eral Reserve. As of Aug. 19, 2011.

A fork in the road
Despite some encour­ag­ing data, and rel­a­tively attrac­tive val­u­a­tions based on his­tory, we believe we're at an impor­tant inflec­tion point. Con­tin­ued dete­ri­o­ra­tion in con­fi­dence will likely lead to more neg­a­tive eco­nomic data, start­ing a neg­a­tive feed­back cycle from which it may be dif­fi­cult to escape. Con­versely, a renewed focus on the under­ly­ing fun­da­men­tals of the econ­omy and some pos­i­tive sur­prises could bol­ster con­fi­dence, push­ing investors on the side­lines to take advan­tage of rea­son­able val­u­a­tions and push mar­kets higher. We tend to lean to the lat­ter, but the risks of the for­mer are growing.

Wash­ing­ton at a loss
Fol­low­ing the unprece­dented step of putting a defin­i­tive time period on the near-zero inter­est rate pol­icy, spec­u­la­tion increased that the Fed would embark on a new stim­u­lus pro­gram; be it QE3, short­en­ing the dura­tion of their port­fo­lio (known as a "twist"), or low­er­ing the level of inter­est they pay on reserves. Some investors were look­ing for a repeat of the 2010 Jack­son Hole implied announce­ment of QE2. No such luck. We remain opposed to a new round of quan­ti­ta­tive eas­ing, and believe the bar is much higher—either a defin­i­tive return to reces­sion, or severe fears of defla­tion set­ting in. The unprece­dented dis­sent we saw at the last Fed meet­ing, with three mem­bers of the Fed­eral Open Mar­ket Com­mit­tee (FOMC) oppos­ing the change in the lan­guage, indi­cates to us that fur­ther action is fur­ther off than some are expecting.

And there may be lit­tle the Fed can do to over­come the per­ceived dys­func­tion on Capi­tol Hill and in the White House. The debt cri­sis debate shook con­fi­dence of busi­nesses and con­sumers alike, and the cur­rent envi­ron­ment lends itself to lit­tle in the way of needed reforms get­ting done prior to the 2012 elec­tions. We believe this will drag on con­fi­dence and the abil­ity of busi­nesses to plan for the future. We con­tinue to advo­cate a sim­pli­fied, reformed tax code for busi­nesses and con­sumers, a roll­back of many oner­ous reg­u­la­tions, a viable spend­ing plan, and real reform of Medicare and Social Security—but aren't hold­ing our breath.

Euro­zone reces­sion increas­ingly likely
Across the pond, the cri­sis of con­fi­dence in Europe could have a more last­ing neg­a­tive impact on eco­nomic growth than a decline in con­fi­dence and eco­nomic slow­down in the United States. Rea­sons include a weak start­ing point for growth in the euro­zone, debt mar­kets demand­ing steep near-term fis­cal spend­ing cuts to reduce deficits, and banks increas­ingly under the threat of a cash crunch.

Amid the neg­a­tives, there have been some pos­i­tive euro­zone devel­op­ments, such as the late-July sec­ond Greek bailout, although that is now in ques­tion; and expan­sion of capa­bil­i­ties of the Euro­pean Finan­cial Sta­bil­ity Facil­ity (EFSF), and pur­chases of Span­ish and Ital­ian debt by the Euro­pean Cen­tral Bank (ECB).

Pos­i­tive decline in yields, but will it last?

Source: Fact­Set, iBoxx. As of Aug. 23, 2011.

Despite the declines in Span­ish and Ital­ian sov­er­eign debt yields, the ECB's stay­ing power is ques­tioned amid its reluc­tance to selec­tively buy national debts and strict anti-inflation bias. As such, the ECB "ster­il­izes" its pur­chases by off­set­ting any liq­uid­ity injec­tions of money into the finan­cial sys­tem with with­drawals of liq­uid­ity else­where. In our opin­ion, the ECB's abil­ity to con­tinue these oper­a­tions may be lim­ited, and the ECB needs the EFSF's new pow­ers to be ini­ti­ated to relieve them from this responsibility.

Mod­i­fi­ca­tions to the EFSF have yet to be rat­i­fied by the 17 national par­lia­ments that use the euro, with votes not expected until late Sep­tem­ber or there­after. Mean­while, the sec­ond Greek bailout is now threat­ened by Finland's demand for Greece to post col­lat­eral as insur­ance against default, with other coun­tries also desir­ing sim­i­lar deals.

In our opin­ion, pol­i­cy­mak­ers in Europe con­tinue to find new ways of under­min­ing con­fi­dence, rang­ing from col­lat­eral demands to a renewed call for a finan­cial trans­ac­tions tax by Germany's Merkel and France's Sarkozy. Finan­cial mar­kets and banks are based on con­fi­dence and trust—that the peo­ple on the other side of the table (or trade) are going to "make good" on their oblig­a­tion to pay.

Euro­pean pol­i­cy­mak­ers seem to be in denial about the role of con­fi­dence in finan­cial sys­tems, and in response, a con­ta­gious ill­ness has begun to feed through in a "whack-a-mole" fashion—uncertainty tem­porar­ily sub­sides only to pop back up again. Cur­rent mea­sures are only tem­po­rary band-aids to address short-term liq­uid­ity needs and have yet to address longer-term sol­vency. We believe sev­eral mea­sures are needed for the euro­zone debt cri­sis to stabilize:

• Euro­pean banks need more capital.
• The EFSF needs to be made sig­nif­i­cantly larger.
• Greece needs a more sub­stan­tial debt restructuring.
• Gov­ern­ment rev­enue prospects need improve­ment through growth mea­sures such as labor reform and a move away from depen­dence on the pub­lic sec­tor for jobs.
• Tax col­lec­tion needs to be reformed.
• Closer fis­cal coör­di­na­tion is nec­es­sary, pos­si­bly through the issuance of a com­mon Eurobond.

Some of the mea­sures to sta­bi­lize the cri­sis could hap­pen quickly, while oth­ers may be tougher sells; in par­tic­u­lar the abil­ity to achieve closer fis­cal coör­di­na­tion. This is the under­ly­ing flaw of the euro exposed dur­ing this cri­sis: a cur­rency and mon­e­tary union with­out fis­cal union may be unsustainable.

Pos­i­tively, Ger­many and France have started to dis­cuss "har­mo­niz­ing" bud­gets, tax rates and eco­nomic gov­er­nance. How­ever, we believe this will be a long and bumpy road, because some coun­tries may be reluc­tant to give up their sov­er­eignty to pol­i­cy­mak­ers they don't elect—it lacks demo­c­ra­tic legit­i­macy, sim­i­lar to "tax­a­tion with­out representation."

Longer-term the euro may not be able to sus­tain its cur­rent struc­ture. While we don't believe a euro break-up is immi­nent, the desta­bi­liza­tion that this could entail keeps a lid on our enthu­si­asm for the region. Read more in A Tale of Two Europes.

Will China aid or ham­per global growth?
Global growth is under pres­sure due to the simul­ta­ne­ous and cumu­la­tive effect of an unprece­dented series of shocks, rang­ing from the Arab spring and rise in oil prices, extreme weather pat­terns, dis­as­ters in Japan, US debt ceil­ing debate and con­tin­ued euro­zone debt cri­sis of con­fi­dence. As such, are there areas glob­ally that could reac­cel­er­ate? The Inter­na­tional Mon­e­tary Fund (IMF) esti­mates that just over 50% of global eco­nomic growth in 2011 will orig­i­nate from emerg­ing mar­kets, despite con­sti­tut­ing only 35% of world gross domes­tic prod­uct (GDP).

How­ever, growth in China, a key dri­ver of many emerg­ing economies, could weaken more than we envi­sioned sev­eral months ago. Rea­sons include not only a poten­tial slow­down in exports, but also a pull­back in sev­eral pro­grams we believed had strong gov­ern­men­tal sup­port. These include a halt in new pro­pos­als for high-speed and con­ven­tional rail con­struc­tion, and a poten­tially reduced afford­able hous­ing build in 2012. While a more thought­ful approach to spend­ing is a good devel­op­ment, infra­struc­ture and hous­ing con­struc­tion com­prise nearly 50% of China's GDP, so a slow­down would likely be felt. In addi­tion to restraint due to still-high infla­tion, China does not appear close to step­ping up siz­able fis­cal or mon­e­tary stim­u­lus to "bailout" global growth.

How­ever, not all is neg­a­tive and we believe a hard land­ing in China will be avoided, as we detail in Bears and Bulls in the China Shop. Areas that still have need for infra­struc­ture spend­ing include access to water and address­ing power-grid inef­fi­cien­cies. Addi­tion­ally, man­u­fac­tur­ing in China could reac­cel­er­ate; the pre­lim­i­nary read for August as mea­sured by HSBC is fol­low­ing the sea­sonal trend of a July trough.

Chi­nese man­u­fac­tur­ing tends to trough in July

Source: Fact­Set, Bloomberg. As of Aug. 23, 2011.
Sea­sonal avg. over a six-year period exclud­ing a one-year period from May 2008 — June 2009.

Addi­tion­ally, the mes­sage from the mar­kets indi­cates there may not be undue stress in China's econ­omy, as Chi­nese banks, steel­mak­ers and real estate devel­op­ers traded on local exchanges have sig­nif­i­cantly out­per­formed the recent global sell­off. Lastly, the value of the yuan in the government's man­aged pro­gram and in the non-deliverable for­ward mar­ket (a mar­ket for non-convertible cur­ren­cies largely used for hedg­ing and spec­u­la­tion where notional amounts are not exchanged) has risen, typ­i­cally coin­cid­ing with growth in manufacturing.

China's mar­ket held up well on a rel­a­tive basis dur­ing the global sell­off, as expec­ta­tions may be low. While China, and thus emerg­ing mar­kets, could exit the cur­rent period of mar­ket volatil­ity in a more favor­able light, we are not yet ready to turn pos­i­tive, as new reduc­tions to key Chi­nese gov­ern­ment pro­grams give us pause and we need to see a down­ward trend in Chi­nese inflation.

Visit www.schwab.com/oninternational for more inter­na­tional perspective.

Impor­tant Disclosures

The MSCI EAFE® Index (Europe, Aus­trala­sia, Far East) is a free float-adjusted mar­ket cap­i­tal­iza­tion index that is designed to mea­sure devel­oped mar­ket equity per­for­mance, exclud­ing the United States and Canada. As of May 27, 2010, the MSCI EAFE Index con­sisted of the fol­low­ing 22 devel­oped mar­ket coun­try indexes: Aus­tralia, Aus­tria, Bel­gium, Den­mark, Fin­land, France, Ger­many, Greece, Hong Kong, Ire­land, Israel, Italy, Japan, the Nether­lands, New Zealand, Nor­way, Por­tu­gal, Sin­ga­pore, Spain, Swe­den, Switzer­land and the United Kingdom.

The MSCI Emerg­ing Mar­kets Index^SM is a free float-adjusted mar­ket cap­i­tal­iza­tion index that is designed to mea­sure equity mar­ket per­for­mance in the global emerg­ing mar­kets. As of May 27, 2010, the MSCI Emerg­ing Mar­kets Index con­sisted of the fol­low­ing 21 emerging-market coun­try indexes: Brazil, Chile, China, Colom­bia, the Czech Repub­lic, Egypt, Hun­gary, India, Indone­sia, Korea, Malaysia, Mex­ico, Morocco, Peru, Philip­pines, Poland, Rus­sia, South Africa, Tai­wan, Thai­land and Turkey.

The S&P 500® index is an index of widely traded stocks.

Indexes are unman­aged, do not incur fees or expenses and can­not be invested in directly.

Past per­for­mance is no guar­an­tee of future results.

Invest­ing in sec­tors may involve a greater degree of risk than invest­ments with broader diversification.

Inter­na­tional invest­ments are sub­ject to addi­tional risks such as cur­rency fluc­tu­a­tions, polit­i­cal insta­bil­ity and the poten­tial for illiq­uid mar­kets. Invest­ing in emerg­ing mar­kets can accen­tu­ate these risks.

The infor­ma­tion con­tained herein is obtained from sources believed to be reli­able, but its accu­racy or com­plete­ness is not guar­an­teed. This report is for infor­ma­tional pur­poses only and is not a solic­i­ta­tion or a rec­om­men­da­tion that any par­tic­u­lar investor should pur­chase or sell any par­tic­u­lar secu­rity. Schwab does not assess the suit­abil­ity or the poten­tial value of any par­tic­u­lar invest­ment. All expres­sions of opin­ions are sub­ject to change with­out notice.

The Schwab Cen­ter for Finan­cial Research is a divi­sion of Charles Schwab & Co., Inc.

Copy­right © Charles Schwab & Co., Inc.

Tags: Brazil, Canadian Market, Charles Schwab, Chief Investment Strategist, Crisis Fears, Debt Crisis, Erosion, Federal Reserve, Financial Crisis, Global Markets, India, Infrastructure, Leading Indicators, Lehman, Liz Ann, Market Analyst, Obama, Policy Options, Recession, Sector Analysis, Senior Vice President, Stimulus, Tentacles, Volatility
Posted in Brazil, Canadian Market, India, Infrastructure, Markets | Comments Off

News That Matters (August 29, 2011)

Monday, August 29th, 2011

via thetrader.se

FT.com
Euro­pean offi­cials rounded on Chris­tine Lagarde on Sun­day, accus­ing the man­ag­ing direc­tor of the Inter­na­tional Mon­e­tary Fund of mak­ing a “con­fused” and “mis­guided” attack on the health of Europe’s banks. Ms Lagarde, the for­mer French finance min­is­ter who replaced Dominique Strauss-Kahn as head of the IMF in July, used her address at an annual meet­ing of cen­tral bankers in Jack­son Hole, Wyoming, to call for an “urgent” recap­i­tal­i­sa­tion of Europe’s weak­est lenders, say­ing that shoring up the bank­ing sys­tem was key to cut­ting “chains of con­ta­gion” across the region. http://www.ft.com/intl/cms/s/0/fcb6037e-d194-11e0-89c0-00144feab49a.html#axzz1WOELnKbv

Ger­man “bad bank” agen­cies hold­ing bil­lions of euros of Greek debt have still to decide whether to join a bond swap designed to cut Athens’ refi­nanc­ing bur­den as part of an EU bail-out. Two of the Ger­man banks that are among the country’s largest hold­ers of Greek bonds have also to com­mit them­selves to the €135bn debt swap plan set to be launched next month. The uncer­tainty over which insti­tu­tions will sup­port the deal comes as Greece is warn­ing that the swap might not go ahead if fewer than 90 per cent of pri­vate investors agree to par­tic­i­pate. http://www.ft.com/intl/cms/s/0/49eb8d24-d151-11e0-89c0-00144feab49a.html#axzz1WOELnKbv

Anna Haz­are, the Indian anti-corruption cam­paigner, ended his pub­lic hunger strike on Sun­day after a rat­tled Con­gress party-led gov­ern­ment bowed to his demands for tougher laws. The 74-year-old social activist broke his 13-day fast with a cup of coconut water at the Ramlila Ground in cen­tral Delhi sit­ting on a daïs sur­rounded by chil­dren and dwarfed by a giant poster of Mahatma Gandhi, the Indian lib­er­a­tion leader whose exam­ple Mr Haz­are invokes. http://www.ft.com/intl/cms/s/0/2b7a2cf8-d15e-11e0-89c0-00144feab49a.html#axzz1WOELnKbv

Solid first-half prof­its at China’s state-owned oil com­pa­nies have paved the way for fur­ther expan­sion over­seas as the country’s oil needs con­tinue to rise. Sinopec, the world’s second-largest oil refiner, said on Sun­day it intended to raise up to Rmb50bn ($7.8bn) through the sale of bonds and con­vert­ible bonds to fund projects, boost work­ing cap­i­tal and pay debts. The instru­ments will be issued or placed with exist­ing share­hold­ers, Sinopec said. The fundrais­ing plan accom­pa­nied the company’s announce­ment of a 12 per cent rise in net profit, to Rmb41bn, in the first half of the year, beat­ing ana­lysts’ expec­ta­tions. http://www.ft.com/intl/cms/s/0/f72e5cb8-d170-11e0-89c0-00144feab49a.html#axzz1WOELnKbv

Food price infla­tion looks set to con­tinue as a threat into 2012 as expec­ta­tions for the US corn har­vest, the world’s largest, are being low­ered by the week. Ana­lysts and trad­ing exec­u­tives are cut­ting esti­mates of how many bushels each acre will grow as the effects of pun­ish­ing heat last month result in smaller ears of corn. The pri­vate sec­tor esti­mates are well below already dis­ap­point­ing offi­cial fore­casts pub­lished ear­lier this month. The US accounts for half the world’s corn exports and the size of the crop has an out­size impact on global prices. Corn is also a crit­i­cal feed­ing com­mod­ity, so a smaller crop would push prices higher, rapidly trans­lat­ing into more expen­sive beef, lamb, pork and poul­try and thus, higher food infla­tion. http://www.ft.com/intl/cms/s/0/1ae0fdd4-d179-11e0-89c0-00144feab49a.html#axzz1WOELnKbv

Con­sumers in the devel­oped world are becom­ing increas­ingly apa­thetic about global warm­ing, while Latin Amer­i­cans – who have suf­fered much from unusual weather pat­terns – are  becom­ing more con­cerned, accord­ing to a sur­vey. Nielsen’s global study of online con­sumers comes as sci­en­tists and politi­cians, among oth­ers, debate the role of global warm­ing in the sever­ity of Hur­ri­cane Irene, which lashed the Amer­i­can east coast over the week­end. Accord­ing to the global data and infor­ma­tion consultancy’s find­ings, the US recorded one of the steep­est declines in con­cern about global warm­ing: less than half of Amer­i­cans polled fret about cli­mate change and only 58 per cent of Brits. http://www.ft.com/intl/cms/s/0/9ec3dde6-d17f-11e0-89c0-00144feab49a.html#axzz1WOELnKbv

WSJ.com

Most Asian shares were higher Mon­day after Wall Street rose Fri­day as Fed­eral Reserve Chair­man Ben Bernanke’s closely watched speech at Jack­son Hole was met with mar­ket approval, but the Tokyo mar­ket remained hob­bled by a firm yen.  Japan’s Nikkei Stock Aver­age was flat in choppy trade, Australia’s S&P/ASX 200 added 1.3%, South Korea’s Kospi Com­pos­ite tacked on 1.8% and New Zealand’s NZX-50 was up 0.5%. Dow Jones Indus­trial Aver­age futures were up 16 points in screen trade. http://online.wsj.com/article/SB10001424053111904332804576537342369380496.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

The race for Japan’s next prime min­is­ter has come down to Japan’s trade and indus­try min­is­ter, backed by a pow­er­ful polit­i­cal patron, and the under­stated finance min­is­ter, whose impas­sioned last-minute plea for votes won him a slot in a runoff vote. Trade Min­is­ter Banri Kaieda emerged as the top vote-getter in the first round to select the new head of Japan’s rul­ing Demo­c­ra­tic Party of Japan, and there­fore next prime min­is­ter. But he failed to win an out­right major­ity of the 398 law­mak­ers eli­gi­ble to vote, forc­ing a sec­ond round of bal­lots later Mon­day after­noon against second-place vote-getting Finance Min­is­ter Yoshi­hiko Noda. The DPJ is vot­ing to pick the suc­ces­sor to Prime Min­is­ter Naoto Kan, who stepped down as DPJ leader on Fri­day. The vote comes as the coun­try faces a host of chal­lenges, includ­ing recon­struc­tion after the March 11 earth­quake and tsunami and a his­tor­i­cally high yen that threat­ens to under­mine a recov­ery. http://online.wsj.com/article/SB10001424053111904332804576537460602828904.html?mod=WSJAsia_hpp_LEFTTopStories

The People’s Bank of China will require banks to hold more types of deposits in reserve, effec­tively tight­en­ing credit con­di­tions fur­ther, accord­ing to a memo from the cen­tral bank seen by Dow Jones Newswires. The cen­tral bank will require banks to include so-called “mar­gin deposits,” or col­lat­eral deposited by cus­tomers for let­ters of credit and other guar­an­tees, in cal­cu­lat­ing the pro­por­tion of deposits that they must put aside for the required reserve ratio, accord­ing to the memo cir­cu­lated within a major domes­tic bank. http://online.wsj.com/article/SB10001424053111904199404576537342719553086.html?mod=WSJASIA_hpp_LEFTTopWhatNews

Tal­ly­ing how much Hur­ri­cane Irene will cost the U.S. econ­omy in terms of every­thing from smashed rooftops to lost Broad­way ticket sales will take time, but it’s already clear it will be less than many esti­mated. The storm swept up the East Coast over the week­end, caus­ing heavy flood­ing and killing at least 19 peo­ple. But dam­age appears to be less exten­sive than some ana­lysts had pre­dicted pos­si­ble from such a large storm. http://online.wsj.com/article/SB10001424053111903352704576536822416563928.html?mod=WSJ_hp_LEFTWhatsNewsCollection

After four years of fight­ing crises and pump­ing money into the finan­cial sys­tem, the world’s cen­tral bankers are con­clud­ing that the global econ­omy is still in a pre­car­i­ous posi­tion and the pol­icy appa­ra­tus is ill-equipped to help. The mood here in the Grand Tetons, where cen­tral bankers and pri­vate econ­o­mists from around the world gather each August, was dis­tinctly gloomy. Some econ­o­mists, among them Har­vard University’s Ken­neth Rogoff, say today’s painfully slow eco­nomic growth is the inevitable result of the mas­sive head winds that fol­low a reces­sion caused by a bank­ing and finan­cial cri­sis. Gov­ern­ment poli­cies, given already heavy bur­dens of debt on gov­ern­ments in the U.S., Europe and Japan, can’t over­come the relent­less efforts of house­holds and banks to reduce their debt loads.http://online.wsj.com/article/SB10001424053111904199404576536192343083636.html?mod=WSJEurope_hpp_LEFTTopStories

“Delay and pray” is not a viable fix for the house­hold sector’s woes. Indeed, it may only be mak­ing things worse. In a marked shift from their borrow-and-spend behav­ior dur­ing the boom, U.S. house­holds are now by and large pri­or­i­tiz­ing sav­ing and debt reduc­tion. On Mon­day, the Com­merce Depart­ment is to release July fig­ures likely to show the per­sonal sav­ing rate, or pro­por­tion of after-tax monthly income unspent, in the 5% to 5.5% range it has main­tained for roughly the past 18 months. http://online.wsj.com/article/SB10001424053111904009304576534712316091984.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

Hur­ri­cane Irene men­aced the East­ern seaboard, pound­ing tens of mil­lions of Amer­i­cans with wind, rain and floods—but largely spar­ing New York after an unprece­dented shut­down of the largest U.S. city ahead of the mas­sive storm. In New Jer­sey, the ocean surge and rain­fall caused severe inland flood­ing. Gov. Chris Christie said dam­ages there would total at least $1 bil­lion and could reach “tens of bil­lions of dol­lars.” Virginia’s gov­er­nor called the black­out in his state its second-largest ever and warned that elec­tric­ity might not be restored for a week.http://online.wsj.com/article/SB10001424053111904332804576536081445471562.html?mod=WSJEurope_hpp_LEFTTopStories

Private-equity shop Lone Star Funds and banks Wells Fargo & Co. and J.P. Mor­gan Chase & Co. are the win­ning bid­ders for Anglo Irish Bank Corp.’s hotly con­tested port­fo­lio of U.S. com­mer­cial real-estate loans, accord­ing to peo­ple famil­iar with the mat­ter. With a face value of around $9.5 bil­lion, the Anglo Irish port­fo­lio was one of the largest pools of commercial-property loans to hit the mar­ket since the down­turn. The pack­age offered debt related to some 250 prop­er­ties, includ­ing mar­quee names rang­ing from the Apthorp, a land­mark Man­hat­tan res­i­den­tial build­ing, to a Bev­erly Hills, Calif., shop­ping cen­ter to the Palmer House Hilton in Chicago. http://online.wsj.com/article/SB10001424053111904875404576534871364291538.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

Devel­oped nations from Japan to Amer­ica are des­per­ate for growth, but this tiny lake-filled Swiss can­ton is wrestling with a dif­fer­ent prob­lem: too much of it. Zug’s his­tory of rock-bottom tax rates, for indi­vid­u­als and cor­po­ra­tions alike, has brought it an A-list of multi­na­tional busi­nesses. Lux­ury shops abound, gov­ern­ment cof­fers are flush, and there are so many jobs that employ­ers some­times have a hard time find­ing peo­ple to fill them. http://online.wsj.com/article/SB10001424053111904875404576528123989551738.html?mod=WSJEUROPE_hpp_MIDDLETopNews

Two of Greece’s lead­ing lenders, EFG Eurobank Ergasias SA and Alpha Bank SA, are expected to announce on Mon­day a tie-up to cre­ate the country’s largest bank­ing com­pany and one of the biggest in south­east­ern Europe, three peo­ple famil­iar with the deal said Sat­ur­day. “We are expect­ing an announce­ment Mon­day,” one per­son said. “This will be a friendly merger, with a view to cre­at­ing an anchor bank for both Greece and south­east Europe and which will be one of the 25 largest banks in the euro zone.” The com­bined entity will have about €150 bil­lion ($217 bil­lion) in total assets—bigger than the cur­rent mar­ket leader National Bank of Greece SA—and about €80 bil­lion in deposits. http://online.wsj.com/article/SB10001424053111904875404576534513124691014.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

Marketwatch.com
Last month’s 117,000 expan­sion in non­farm pay­rolls wasn’t even strong enough to meet pop­u­la­tion growth — and the August report may even be worse. Econ­o­mists polled by Mar­ket­Watch are expect­ing the Labor Depart­ment on Fri­day to report just 46,000 jobs out­side of the farm sec­tor cre­ated dur­ing the month. If the con­sen­sus is any­where near being cor­rect, it would extend to four months a run of pal­try job cre­ation. And it’s this back­drop that is prompt­ing Pres­i­dent Barack Obama to deliver a major speech on Sept. 5 that in part will out­line new ini­tia­tives to revive the flag­ging labor mar­ket.http://www.marketwatch.com/story/jobs-ism-reports-may-spark-more-recession-talk-2011–08-28

Eco­nomic con­di­tions are not at the point now where the Fed­eral Reserve should ease mon­e­tary pol­icy fur­ther, James Bullard, the pres­i­dent of the St. Louis Fed, told Mar­ket­Watch in an inter­view. on Sat­ur­day. Bullard said he was not con­vinced that the econ­omy would suf­fer in com­ing quar­ters, as many lead­ing econ­o­mists are pre­dict­ing. “I think there are good rea­sons to be opti­mistic even though when you look around these days there is a lot of gloom and doom,” Bullard said. http://www.marketwatch.com/story/feds-bullard-sees-no-need-for-easing-2011–08-28

Reuters.com
Spot gold fell more than 1 per­cent on Mon­day, revers­ing a 3.2-percent rally in the pre­vi­ous ses­sion, as investors faced with uncer­tain­ties on the U.S. Fed­eral Reserve’s stim­u­lus plans decided to take some money off the table. Cash gold fell as much as 1.2 per­cent to $1,806.29 an ounce, before recov­er­ing slightly to $1,815.59 by 0249 GMT. Prices lost more than 1 per­cent last week, snap­ping seven straight weeks of gains. U.S. gold gained 1.2 per­cent to $1,819. http://www.reuters.com/article/2011/08/29/us-markets-precious-idUSTRE7781Q420110829

Brent crude fell below $111 on Mon­day as oil refin­ers and ter­mi­nals along the U.S. east coast weath­ered the worst of a trop­i­cal storm, eas­ing fears of fuel sup­ply dis­rup­tions in the world’s top oil con­sumer. Brent crude was down 71 cents at $110.65 a bar­rel as of 0227 GMT, post­ing its first fall in a week, and steep­est since August 18. U.S. crude slipped 8 cents to $85.29, swing­ing between a high of $85.72 and $85.11. http://www.reuters.com/article/2011/08/29/us-markets-oil-idUSTRE77838320110829

Ben Bernanke did not pre­scribe a new dose of med­i­cine for the ail­ing U.S. econ­omy at this year’s cen­tral bank con­fab amid Wyoming’s Teton moun­tains, but he didn’t give it a clean bill of health, either. That should be a reminder for investors — if any needed one — that the U.S. econ­omy remains frag­ile and will likely rivet atten­tion on eco­nomic data due in the com­ing week, topped by the monthly jobs report. Such wor­ries may add up to more volatil­ity for the stock mar­ket, par­tic­u­larly if the week ends with data show­ing the pace of U.S. hir­ing slowed and the job­less rate, which exceeds 9 per­cent, increased.http://www.reuters.com/article/2011/08/28/businesspro-us-markets-global-weekahead-idUSTRE77P5WG20110828

Bloomberg.com
Viet­nam ordered lenders to set aside more dol­lars as reserves for the third time this year, aim­ing to steady the national cur­rency and quell Asia’s fastest infla­tion. The reserve-requirement ratio on U.S. dol­lar deposits will rise to a range of 5 per­cent to 8 per­cent from 4 per­cent to 7 per­cent, effec­tive Sep­tem­ber, the State Bank of Viet­nam said on its web­site today with­out spec­i­fy­ing an exact date.http://www.bloomberg.com/news/2011–08-29/vietnam-raises-dollar-reserve-ratios.html

The dol­lar is poised for its biggest monthly gain since May, reclaim­ing its sta­tus as a haven while Switzer­land and Japan boost efforts to weaken their cur­ren­cies. The green­back has appre­ci­ated 1.2 per­cent in August against a bas­ket of the devel­oped world’s nine most-traded exchange rates, accord­ing to data com­piled by Bloomberg. That com­pares with a decline of 14 per­cent in the world’s reserve cur­rency from this time last year through July. Demand for U.S. assets is ris­ing even though the Fed­eral Reserve has pledged to keep its bench­mark inter­est rate near zero through mid-2013 and Stan­dard & Poor’s cut the nation’s credit rat­ing from AAA. The two other cur­ren­cies con­sid­ered havens in times of finan­cial and polit­i­cal strife — the Swiss franc and yen — are under siege by their gov­ern­ments and cen­tral banks after strength­en­ing to records. http://www.bloomberg.com/news/2011–08-28/dollar-undervalued-in-purchasing-parity-as-investors-seek-shelter-from-s-p.html

Cen­tral bankers gath­ered at an annual retreat in Jack­son Hole, Wyoming, this week­end had a mes­sage for polit­i­cal lead­ers: mon­e­tary pol­icy alone can’t keep the global expan­sion going. Fed­eral Reserve Chair­man Ben S. Bernanke urged adop­tion of “good, proac­tive hous­ing poli­cies” to reverse the depressed U.S. real estate mar­ket and warned law­mak­ers to avoid steps that may hurt short-term growth. Ewald Nowotny of the Euro­pean Cen­tral Bank Gov­ern­ing Coun­cil said euro-area gov­ern­ments should expand the pow­ers of their regional bailout fund. http://www.bloomberg.com/news/2011–08-28/central-bankers-urge-governments-to-keep-global-economic-expansion-intact.html

Bond investors are back­ing Fed­eral Reserve Chair­man Ben S. Bernanke’s fore­cast that the U.S. will avoid another reces­sion. The econ­omy has never con­tracted with the dif­fer­ence between 10– and 30-year Trea­sury yields as wide as the cur­rent 1.34 per­cent­age points, or 134 basis points, since the so-called long bond was first issued in 1977. The gap, which is more than dou­ble the 49 basis-point aver­age of the past 20 years, has ranged from neg­a­tive 56 to pos­i­tive 41.9 at the start of the last five reces­sions, begin­ning in Jan­u­ary 1980. http://www.bloomberg.com/news/2011–08-28/long-bond-shows-no-double-dip-in-yield-curve-five-times-average-since-1981.html

South Korean Finance Min­is­ter Bahk Jae Wan indi­cated that the gov­ern­ment may cut its growth fore­cast for this year amid signs of a global slow­down. “I see down­side risks grow­ing and so we may have to revise our growth fore­cast,” Bahk told reporters after a speech at a local forum in Seoul today. “We main­tain our 4.5 per­cent esti­mate for now.” He cited the threat from weaker expan­sions in major economies.http://www.bloomberg.com/news/2011–08-29/south-korea-indicates-cut-in-growth-forecast-looming-as-global-risks-rise.html

CNBC.com
Singapore’s econ­omy could get a shock if the U.S. falls into reces­sion, warned both rat­ings agency Fitch and invest­ment bank, Daiwa Cap­i­tal Mar­kets. Accord­ing to a Fitch report released Fri­day, if there is a reces­sion in the U.S., Sin­ga­pore “would expe­ri­ence the largest cumu­la­tive neg­a­tive shock to GDP of 4.1 per­cent­age points from 2011 to 2013.” This is because Singapore’s trade with the U.S. accounts for about 20 per­cent of its GDP – the largest expo­sure among emerg­ing Asian economies. http://www.cnbc.com/id/44284606

Fol­low­ing weeks of heavy losses for bank­ing stocks across Europe, the Sun­day Times in the UK reported Sun­day that Euro­pean offi­cials are work­ing on a “rad­i­cal plan” to pre­vent a fresh pan-European credit crunch. With­out cit­ing sources, the paper said offi­cials from the Euro­pean Cen­tral Bank and Euro­pean Com­mis­sion are con­sid­er­ing offer­ing cen­tral guar­an­tees over cer­tain types of debt issued by banks. http://www.cnbc.com/id/44303970

In Jack­son Hole, Wyoming, on Sat­ur­day, Jean-Claude Trichet, the pres­i­dent of the Euro­pean Cen­tral Bank, was due to give a speech to a meet­ing of pol­icy mak­ers hosted by the Fed­eral Reserve. As he pre­pared to speak, the euro zone faced huge prob­lems. So as Trichet pre­pared for his speech, he turned to the his­tory books and gave a mas­ter class on how to say some­thing while actu­ally say­ing noth­ing at all. http://www.cnbc.com/id/44304045

Foxbusiness.com
“There is good rea­son to hope that the cri­sis is over in two to three years’ time,” Euro­pean Finan­cial Sta­bil­ity Facil­ity (EFSF) chief Klaus Regling said, accord­ing to a pre­view of the weekly Ger­man mag­a­zine. But this depended on mem­ber states con­tin­u­ing to imple­ment reforms aimed at sort­ing out their bud­gets, he said. Regling dis­missed the idea that the euro zone could break apart. Both weaker and stronger coun­tries had a col­lec­tive inter­est in see­ing it sur­vive, he said. http://www.foxbusiness.com/markets/2011/08/28/euro-crisis-may-be-over-in-2–3-years-regling/#ixzz1WOMhXtfo

USAtoday.com
Short sales are increas­ing as a per­cent­age of home sales in many states, help­ing some neigh­bor­hoods and home­own­ers avoid the more dev­as­tat­ing impacts of fore­clo­sures. Short sales — when lenders allow finan­cially strapped bor­row­ers to sell homes for less than their unpaid mort­gage — accounted for 12% of home sales nation­wide in the sec­ond quar­ter. That’s up from 10% in the same period last year, says researcher Real­ty­Trac. The increases were sharper in some states, includ­ing Cal­i­for­nia, Nevada, Michi­gan, Geor­gia and Col­orado, the data show. In Col­orado, short sales were 17% of all sales in the sec­ond quar­ter, up from 10% a year ear­lier. In Cal­i­for­nia, they made up 25% of sales, vs. 18%. http://www.usatoday.com/money/economy/housing/story/2011–08-28/Number-of-short-sales-on-the-rise/50165284/1

Washingtonpost.com
While the Dow Jones indus­trial aver­age and the unem­ploy­ment rate get more atten­tion, the shop­pers out­side a Wal-Mart in North­ern Vir­ginia offered a taste of what some econ­o­mists believe is the more imme­di­ate rea­son that the U.S. econ­omy may be on the verge of another reces­sion. Amer­i­cans are still spooked. More than two years after the recession’s offi­cial end, peo­ple are dri­ving their cars a year longer, hold­ing back on jew­elry and fur­ni­ture, and swap­ping brand names for cheaper store brands at the super­mar­ket. More omi­nously, the once sturdy opti­mism of Amer­i­cans appears to have crum­bled, accord­ing to one key mea­sure. Break­ing from prece­dent, Amer­i­cans no longer believe they will make more money next year than this year, accord­ing to the Uni­ver­sity of Michigan’s Sur­veys of Con­sumers. These expec­ta­tions used to rebound after reces­sions; this time they didn’t. http://www.washingtonpost.com/business/economy/consumer-fears-put-economy-on-the-brink/2011/08/26/gIQAVbzclJ_story.html

Telegraph.co.uk
Ger­man Chan­cel­lor Angela Merkel no longer has enough coali­tion votes in the Bun­destag to secure back­ing for Europe’s revamped res­cue machin­ery, threat­en­ing a con­si­tu­tional cri­sis in Ger­many and a fresh erup­tion of the euro debt saga. Mrs Merkel has can­celled a high-profile trip to Rus­sia on Sep­tem­ber 7, the cru­cial day when the pack­age goes to the Bun­destag and the country’s con­sti­tu­tional court rules on the legal­ity of the EU’s bail-out machin­ery. http://www.telegraph.co.uk/finance/financialcrisis/8728628/Euro-bail-out-in-doubt-as-hysteria-sweeps-Germany.html

Record prof­its at Fox­tons saw the Lon­don estate agent seal its “best ever” year despite uncer­tainty over the econ­omy, its 2010 accounts show. Fox­tons – known for its branded Minis, trendy offices and con­fi­dent sales pat­ter – also pock­eted £3m from an unnamed adviser in April after set­tling a claim for “inad­e­quate advice”. The company’s founder Jon Hunt, who sold the agency for £375m at the height of the prop­erty boom in 2007 to BC Part­ners, the pri­vate equity group, col­lected around £1.2m of the set­tle­ment. http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/8728366/Record-profits-for-London-estate-agent-Foxtons.html

The num­ber of Britons forced to delay retire­ment into their late 60s and beyond has dou­bled over the past year as the ris­ing cost of liv­ing hits home, a major study has revealed. Wor­ry­ingly, one in seven over-65s say they still do not know when they plan to retire, while a third of those aged between 45 and 64 are unsure about when they can stop work­ing, the research found. Squeezed house­hold­ers have been left with lit­tle choice but to tear up their plans for retir­ing at 65 or ear­lier, the analy­sis said. http://www.telegraph.co.uk/finance/personalfinance/pensions/8728560/More-people-having-to-delay-retirement.html

The pro­por­tion of our income going on mort­gage pay­ments is at its low­est level for 12 years.The typ­i­cal mort­gage pay­ments for a new bor­rower both first-time buy­ers and home movers – at the his­toric aver­age loan to value ratio stood at 28pc in the sec­ond quar­ter of 2011: accord­ing to research by Hal­i­fax, this is the low­est level since 1999 and down by almost half from a peak of 48pc of aver­age dis­pos­able earn­ings in late 2007. There has also been a mod­est decline over the past year from 30pc in 2010, reduc­ing mort­gage pay­ments rel­a­tive to earn­ings fur­ther below the aver­age of 37pc recorded over the past 27 years. http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/8725676/Mortgages-at-their-most-affordable-since-1999.html

Independent.co.uk
The pres­i­dent of the Euro­pean Cen­tral Bank, Jean-Claude Trichet, used one of the last major speeches of his tenure as a rejoin­der to Amer­i­can traders and econ­o­mists pre­dict­ing the break-up of the euro­zone. Side-stepping more press­ing issues of how the ECB is respond­ing to the continent’s sov­er­eign debt cri­sis, Mr Trichet told fel­low cen­tral bankers in Jack­son Hole, Wyoming, that the US, too, was a region­ally diverse econ­omy held together under a sin­gle cur­rency. http://www.independent.co.uk/news/business/news/trichet-urges-eu-nations-to-work-together-2345671.html

Smh.com.au
House prices in Eng­land and Wales ticked down on the month in August and weak con­sumer spend­ing is likely to weigh on demand and prices for the rest of the year, prop­erty data firm Home­track said on Mon­day. House prices fell 0.1 per­cent on the month in August, leav­ing them 3.7 per cent below the August 2010 level, Home­track said. “Weak con­sumer sen­ti­ment, pres­sure on house­hold incomes and the uncer­tain eco­nomic out­look are likely to see demand weaken fur­ther over the remain­der of the year,” it said. http://www.smh.com.au/business/world-business/uk-house-prices-dip-in-august-20110829-1jh35.html#ixzz1WOPt99Gg

Xinhuanet.com
Since the begin­ning of 2011, China has taken a series of mea­sures to cool ris­ing prices, such as intro­duc­ing a pru­dent mon­e­tary pol­icy, boost­ing sup­ply and con­tain­ing inr­ra­tional demand while estab­lish­ing a price con­trol mech­a­nism. How­ever, it will be quite dif­fi­cult to meet the government’s annual infla­tion rate con­trol tar­get, which is around 4 per­cent for the year. Zhang Ping, the head of the National Devel­op­ment and Reform Com­mis­sion (NDRC), China’s top eco­nomic plan­ner, called for all macro con­trol poli­cies in force to be fully imple­mented, as “it could be dif­fi­cult to keep the con­sumer price index (CPI) growth below the government’s tar­get this year.” http://news.xinhuanet.com/english2010/china/2011–08/29/c_131080266.htm

South Korean Finance Min­is­ter said on Mon­day that it could cut eco­nomic growth out­look for this year, cit­ing height­ened exter­nal uncer­tain­ties. “The gov­ern­ment now sticks to the cur­rent eco­nomic out­look for this year, but I think the accu­rate fore­cast could be taken again later. Over­all, there are down­side risks on eco­nomic growth,” Min­is­ter Bahk Jae-wan said in a forum held in cen­tral Seoul. His remarks came after the finance min­istry revised down its eco­nomic growth out­look for this year to 4.5 per­cent from the prior 5 per­cent in June 30 when it announced its plan for the second-half eco­nomic pol­icy man­age­ment. http://news.xinhuanet.com/english2010/business/2011–08/29/c_131081236.htm

South Korea’s cur­rent account sur­plus widened to a nine-month high in July due to brisk exports and heavy for­eign buy­ing of local secu­ri­ties, the cen­tral bank said Mon­day.  The sur­plus reached 4.94 bil­lion U.S. dol­lars in July, up from a revised 2.03 bil­lion dol­lars tal­lied for the pre­vi­ous month, the Bank of Korea (BOK) said in a state­ment.  For the first seven months of this year, the accu­mu­la­tive sur­plus amounted to a com­bined 13.04 bil­lion dol­lars. The July fig­ure was the largest since Oct. 2010 when it recorded a 5.11 bil­lion dol­lars sur­plus, and the cur­rent account bal­ance has remained in the black for the 17th con­sec­u­tive month in July. http://news.xinhuanet.com/english2010/business/2011–08/29/c_131081021.htm

Cs.com.cn
The Russ­ian Min­istry of Eco­nomic Devel­op­ment expects Russia’s 2011 GDP to grow by 4.1 per­cent, lower than a pre­vi­ous fore­cast of 4.2 per­cent, Deputy Min­is­ter of Eco­nomic Devel­op­ment Andrei Klepach told reporters on Sat­ur­day. Klepach explained the revise was based on the weak data in the first half of this year, as the GDP growth in the first six months only reached 3.7 per­cent. “If you try to antic­i­pate the yearly fig­ure by extrap­o­lat­ing from this one (3.7 per­cent), we will have a 3.8–3.9 per­cent growth by the end of the year,” Klepach said. “But we still pre­sume that there is poten­tial for growth to be tapped in the sec­ond half of this year, and the first half’s fig­ures could be recal­cu­lated as well,” he added. http://www.cs.com.cn/english/ei/201108/t20110829_3033370.html

Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble said Sat­ur­day that the world risks a 7-year reces­sion due to slow­down and debt trou­bles in Amer­ica, Europe and Japan, urg­ing debt-ridden coun­tries resort to dras­tic aus­ter­ity.  It still needs time for euro­zone coun­tries to har­vest fruits for their eco­nomic and finan­cial reforms. Along with shad­ows of slow­down and debt cri­sis in major economies, the world econ­omy may wit­ness “seven lean years,” Schaeu­ble said in a clos­ing speech for the 4th Lin­dau Nobel Lau­re­ate Meet­ing for Eco­nomic Sci­ences held from Aug. 23 to 27. Orga­niz­ers held on Sat­ur­day the last round of dis­cus­sion at St. Gallen Uni­ver­sity in Switzer­land, one of most famous uni­ver­sity in Europe for eco­nomic stud­ies. http://www.cs.com.cn/english/ei/201108/t20110829_3033365.html

Economictimes.com
The growth rate in rural mar­kets has slipped below urban areas in the $30-billion pack­aged con­sumer goods sec­tor for the first time in three years, though both mar­kets are grow­ing at a fair clip. Mar­keters largely pointed to pos­si­ble down­trad­ing among rural con­sumers as value growth of cat­e­gories such as sham­poo, hair-oil and tooth­paste in urban areas out­paced rural growth dur­ing April-July, trig­ger­ing fears of a slow­down in demand if high infla­tion per­sists. http://economictimes.indiatimes.com/news/news-by-industry/cons-products/fmcg/soaring-inflation-triggers-fears-of-slowdown-in-rural-demand-of-fmcg-products/articleshow/9776090.cms

Themoscowtimes.com
Rus­sia for the first time is sell­ing weapons to Bahrain after Britain and France banned deliv­er­ies of secu­rity equip­ment to the Gulf monar­chy because of its crack­down on pro­test­ers. State arms traderRosoboronex­port says it wants more busi­ness in Bahrain. The coun­try is sell­ing AK-103 Kalash­nikovs with grenade launch­ers and ammu­ni­tion for tens of mil­lions of dol­lars to Bahrain, accord­ing to a per­son close to the Russ­ian Defense Min­istry who declined to be iden­ti­fied because the infor­ma­tion is not pub­lic. In Feb­ru­ary, France and Britain revoked export licenses for secu­rity equip­ment that could be used to quash inter­nal unrest in Bahrain after gov­ern­ment forces shot dead sev­eral pro­test­ers. At least 30 peo­ple were killed in this year’s upris­ing in Bahrain, a U.S. ally sit­u­ated between Qatar and Saudi Ara­bia that is home to the U.S. Navy’s Fifth Fleet. http://www.themoscowtimes.com/business/article/reports-of-small-arms-being-sold-to-bahrain/442780.html#ixzz1WOSQqcG9

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A Reprieve from Misguided Recklessness (Hussman)

Monday, August 29th, 2011

A Reprieve from Mis­guided Reck­less­ness

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

An imme­di­ate note on mar­ket con­di­tions. Last week's mar­ket advance cleared out the "pre­dictable" expec­ta­tion for con­struc­tive returns that briefly emerged from the recent mar­ket sell­off. That doesn't mean that the mar­ket can't advance fur­ther, but given that the expected return/risk pro­file of stocks has now shifted hard neg­a­tive again, any such advance would be a ran­dom fluc­tu­a­tion rather than a pre­dictable one. Strate­gic Growth and Strate­gic Inter­na­tional Equity have shifted from a briefly con­struc­tive posi­tion back to a full hedge. Our prin­ci­pal invest­ment posi­tion in Strate­gic Total Return remains a 20% allo­ca­tion to pre­cious met­als shares, where the ensem­ble of con­di­tions remains very favor­able on our mea­sures, despite what we view as a wel­come cor­rec­tion in the spot price of phys­i­cal gold. The Fund has a dura­tion of only about 1.5 years in Trea­sury secu­ri­ties, mostly dri­ven by a mod­est expo­sure in 3–5 year maturities.

It is now urgent for investors to rec­og­nize that the set of eco­nomic evi­dence we observe reflects a unique sig­na­ture of reces­sions com­pris­ing dete­ri­o­ra­tion in finan­cial and eco­nomic mea­sures that is always and only observed dur­ing or imme­di­ately prior to U.S. reces­sions. These include a widen­ing of credit spreads on cor­po­rate debt ver­sus 6 months prior, the S&P 500 below its level of 6 months prior, the Trea­sury yield curve flat­ter than 2.5% (10-year minus 3-month), year-over-year GDP growth below 2%, ISM Pur­chas­ing Man­agers Index below 54, year-over-year growth in total non­farm pay­rolls below 1%, as well as impor­tant cor­rob­o­rat­ing indi­ca­tors such as plung­ing con­sumer con­fi­dence. There are cer­tainly a great num­ber of opin­ions about the prospect of reces­sion, but the evi­dence we observe at present has 100% sen­si­tiv­ity (these con­di­tions have always been observed dur­ing or just prior to each U.S. reces­sion) and 100% speci­ficity (the only time we observe the full set of these con­di­tions is dur­ing or just prior to U.S. reces­sions). This doesn't mean that the U.S. econ­omy can­not pos­si­bly avoid a reces­sion, but to expect that out­come relies on the hope that "this time is different."

While the reduced set of options for mon­e­tary pol­icy action may seem unfor­tu­nate, it is impor­tant to observe that each time the Fed has attempted to "back­stop" the finan­cial mar­kets by dis­tort­ing the set of invest­ment oppor­tu­ni­ties that are avail­able, the Fed has bought a tem­po­rary reprieve only at the cost of ampli­fy­ing the later fallout.

Recall how the hous­ing bub­ble started. Back in 2002–2003, Alan Greenspan held short term inter­est rates at such low lev­els that investors felt forced to "reach for yield" — and they found that extra yield in mort­gage secu­ri­ties, which up until then had never expe­ri­enced major credit dif­fi­cul­ties. Wall Street quickly got a whiff of that, and real­ized that it could earn enor­mous fees by crank­ing out more "prod­uct" to sat­isfy investor demand. Soon, a flood of mort­gage secu­ri­ties was cre­ated fea­tur­ing increas­ingly com­plex struc­tures (in order to main­tain "AAA" sta­tus) while the pro­ceeds from issu­ing these secu­ri­ties were offered to bor­row­ers who were less and less cred­it­wor­thy. As long as a will­ing bor­rower could be found — how­ever unable to actu­ally pay off the mort­gage, and as long as a will­ing lender could be found — pressed to reach for yield by the Fed's dis­tortive low inter­est rate poli­cies, Wall Street and the bank­ing sys­tem got them together, and obscured the gap­ing chasm between actual and per­ceived credit risk through "finan­cial engi­neer­ing" that cre­ated slice-and-dice secu­ri­ties with mind-numbing complexity.

Once the hous­ing bub­ble col­lapsed, the Fed again responded with poli­cies aimed pri­mar­ily at dis­tort­ing the set of invest­ment oppor­tu­ni­ties through zero inter­est rates, pre­serv­ing the mis­al­lo­ca­tion of cap­i­tal toward spec­u­la­tive invest­ments (on Bernanke's mis­guided and empir­i­cally unsup­ported belief that con­sumers spend out of spec­u­la­tive gains). Yet the under­ly­ing debt bur­dens have not been restruc­tured, so con­sumers — par­tic­u­larly home­own­ers — con­tinue to pare back spend­ing in order to reduce those debt bur­dens. As a result, there is lit­tle expec­ta­tion of sig­nif­i­cant growth in demand, and com­pa­nies there­fore have lit­tle rea­son to hire new employ­ees — all of which rein­forces a "low level equi­lib­rium" in the economy.

The way to get out of this is to aban­don the mis­guided belief that eco­nomic pros­per­ity can be obtained by encour­ag­ing spec­u­la­tion and dis­tort­ing the set of invest­ment oppor­tu­ni­ties. Rather, we will even­tu­ally find, as was even­tu­ally also dis­cov­ered in the post-Depression stag­na­tion of the 1930's, that the way to get the econ­omy mov­ing again is to restruc­ture hope­lessly bur­den­some debt obligations.

Of course, this same story is play­ing out on a global scale. It is worth not­ing that the yield on 1-year Greek gov­ern­ment debt surged to 55% last week. At present, the global bond mar­ket is express­ing a 100% expec­ta­tion that this debt will default. The only ques­tion now is what the recov­ery rate will be.

Over the past three years, Wall Street and the bank­ing sys­tem have enjoyed enor­mous fis­cal and mon­e­tary con­ces­sions on the self-serving asser­tion that the global finan­cial sys­tem will "implode" if any­one who made a bad loan might actu­ally expe­ri­ence a loss. Because revers­ing this mantra is so dif­fi­cult, pol­icy mak­ers are likely to con­tinue fit­ful efforts to "res­cue" this debt for the sake of bond­hold­ers, through mech­a­nisms that are increas­ingly dis­taste­ful to the broader pop­u­la­tion. The jus­ti­fi­ca­tion for those poli­cies will there­fore have to be cou­pled with rhetoric that insti­tu­tions hold­ing these secu­ri­ties are too "sys­tem­i­cally impor­tant" to suf­fer losses.

On this note, it is crit­i­cal to remem­ber that nearly all finan­cial insti­tu­tions have enough cap­i­tal and oblig­a­tions to their own bond­hold­ers to com­pletely absorb restruc­tur­ing losses with­out cus­tomers or coun­ter­par­ties bear­ing any loss at all. So keep in mind that the debate here is not about pro­tect­ing cus­tomers or coun­ter­par­ties — it is really about whether the stock­hold­ers and bond­hold­ers of banks and other finan­cial insti­tu­tions should bear a loss. The "fail­ure" of a bank only means that exist­ing stock­hold­ers and bond­hold­ers are dis­en­fran­chised — the com­pany sim­ply takes on a new life under new own­er­ship. Exist­ing stock­hold­ers lose every­thing, unse­cured bond­hold­ers typ­i­cally lose some­thing, and senior bond­hold­ers get any resid­ual obtained as a result of the sale or trans­fer of the com­pany. If the global econ­omy is for­tu­nate, the finan­cial sys­tem two or three years from now will look much the same as it does today, but the own­er­ship and cap­i­tal struc­ture will have changed almost entirely. A major restruc­tur­ing of debt is the clear­est path to long-term eco­nomic recov­ery, and the accom­pa­ny­ing losses to those who reck­lessly made bad loans would be the high­est real­iza­tion of Schumpeter's idea of "cre­ative destruction."

From that per­spec­tive, War­ren Buffett's $5 bil­lion invest­ment in Bank of Amer­ica pre­ferred stock last week was essen­tially a defense of the old guard. Buf­fet observed, "It's a vote of con­fi­dence, not only in Bank of Amer­ica, but also in the country."

Yes — to be spe­cific, it's a vote of con­fi­dence that the coun­try will bail out Bank of Amer­ica in any future cri­sis. We should all hope that Buffett's invest­ment is suc­cess­ful — pro­vided there is no future cri­sis — and we should equally hope that Buf­fett loses the entire invest­ment otherwise.

A reprieve from mis­guided recklessness

On Fri­day, Ben Bernanke gave his long-awaited speech at Jack­son Hole, which notably did not include any pro­nounce­ment about a third round of quan­ti­ta­tive eas­ing. The stock mar­ket advanced any­way, largely because investors seemed to take Bernanke's com­ments as a cue that the Fed will revisit the prospect of QE3 in Sep­tem­ber. Specif­i­cally, ana­lysts focused on Bernanke's obser­va­tion that "the Fed­eral Reserve has a range of tools that could be used to pro­vide addi­tional mon­e­tary stim­u­lus. We dis­cussed the rel­a­tive mer­its and costs of such tools at our August meet­ing. We will con­tinue to con­sider those and other per­ti­nent issues, includ­ing the course of eco­nomic and finan­cial devel­op­ments, at our meet­ing in Sep­tem­ber, which has been sched­uled for two days (the 20th and the 21st) instead of one to allow a fuller discussion."

Part of the rea­son for the expanded dis­cus­sion, of course, is that three FOMC mem­bers have already declared mutiny, oppos­ing even the Fed's promise to hold inter­est rates near zero through mid-2013 (which is the most resis­tance to a Fed deci­sion in two decades). Still, this oppo­si­tion unfor­tu­nately seems to be for the wrong rea­son — not because they rec­og­nize that QE2 didn't actu­ally work, nor because they under­stand that con­sumers don't spend out of spec­u­la­tive gains — par­tic­u­larly in stocks and com­modi­ties, nor that they rec­og­nize that QE isn't effec­tive in reliev­ing any con­straints on the econ­omy — given that inter­est rates are already low and banks are already awash in liq­uid­ity (though not nec­es­sar­ily cap­i­tal — and there is a dif­fer­ence). Rather, the rea­son for their oppo­si­tion seems to be that they don't believe that eco­nomic con­di­tions war­rant fur­ther "stimulus."

Look. Imag­ine that Ben Bernanke announced that he is going to stop spit­ting water­melon seeds into a can. Should we all become con­cerned that he is sud­denly not doing enough to stim­u­late the econ­omy? Well, only if you think that spit­ting water­melon seeds into a can is stim­u­la­tive to the econ­omy. And this is pre­cisely the point. The suc­cesses of QE2 included a brief boost to pent-up demand which has already reversed, a boost to spec­u­la­tion in the stock mar­ket that has already reversed, a plunge in the value of the U.S. dol­lar that has per­sisted because the increased stock of U.S. dol­lars has per­sisted, and a wave of com­mod­ity hoard­ing that injured the world's poor by rais­ing prices of food and energy — because com­modi­ties are viewed as cur­rency sub­sti­tutes when gov­ern­ments are debas­ing pur­chas­ing power through money creation.

More­over, this fail­ure was pre­dictable even before the Fed launched QE2, because with near-zero inter­est rates, depressed long-term rates, and already mas­sive bank reserves, the pol­icy could not hope to relieve any con­straints that were actu­ally rel­e­vant to the econ­omy (see The Reck­less­ness of Quan­ti­ta­tive Eas­ing ); because con­sumers don't spend out of volatile forms of "wealth" (see Bub­ble, Crash, Bub­ble, Crash, Bub­ble... ); and because a mon­e­tary eas­ing that cre­ates infla­tion expec­ta­tions while press­ing down inter­est rates invari­ably leads to an "over­shoot­ing" depre­ci­a­tion in that cur­rency and a surge in com­mod­ity prices that are quoted in that cur­rency (see Why Quan­ti­ta­tive Eas­ing is Likely to Trig­ger a Col­lapse of the U.S. Dol­lar ). Of course, given that other cen­tral banks have also attempted to keep pace through com­pet­i­tive deval­u­a­tions, the most spec­tac­u­lar col­lapse of the dol­lar has been against the cur­rency sub­sti­tute that can­not be printed by fiat — namely gold.

Even Bernanke seemed to acknowl­edge that fur­ther attempts at mon­e­tary inter­ven­tion could only pro­vide short-term juice, say­ing "most of the eco­nomic poli­cies that sup­port robust eco­nomic growth in the long run are out­side the province of the cen­tral bank."

On that sub­ject, Bernanke offered some of the only sound words of his tenure, stress­ing that "U.S. fis­cal pol­icy must be placed on a sus­tain­able path that ensures that debt rel­a­tive to national income is at least sta­ble, or, prefer­ably, declin­ing over time," and warn­ing against exces­sive aus­ter­ity by observ­ing "Although the issue of fis­cal sus­tain­abil­ity must urgently be addressed, fis­cal pol­i­cy­mak­ers should not, as a con­se­quence, dis­re­gard the fragility of the cur­rent eco­nomic recovery.

Some­what sur­pris­ingly, Bernanke also out­lined sev­eral ele­ments of a more promis­ing pol­icy response, which were very con­sis­tent with our own views: "To the fullest extent pos­si­ble, our nation's tax and spend­ing poli­cies should increase incen­tives to work and save, encour­age invest­ments in the skills of our work­force, stim­u­late pri­vate cap­i­tal for­ma­tion, pro­mote research and devel­op­ment, and pro­vide nec­es­sary pub­lic infra­struc­ture. We can­not expect our econ­omy to grow its way out of our fis­cal imbal­ances, but a more pro­duc­tive econ­omy will ease the trade­offs that we face," adding that "Good, proac­tive hous­ing poli­cies could help speed that process."

The upshot is that it remains unclear whether the Fed will revert to reck­less pol­icy in Sep­tem­ber, or whether the grow­ing dis­agree­ment within the FOMC will result in a more enlight­ened approach — aban­don­ing the "activist Fed" role, and pass­ing the baton to pub­lic poli­cies that encour­age objec­tives such as pro­duc­tive invest­ment, R&D, broad-benefit infra­struc­ture, and mort­gage restruc­tur­ing — rather than con­tin­u­ing reck­less mon­e­tary inter­ven­tions that defend and encour­age the con­tin­ued mis­al­lo­ca­tion of resources and the repeated emer­gence of spec­u­la­tive bubbles.

Val­u­a­tion Review

As of last week, we esti­mate that the prospec­tive 10-year total return for the S&P 500 is back down to about 5.1% annu­ally. To put this expected return in per­spec­tive, the chart below reviews the prospec­tive return esti­mates from our stan­dard method­ol­ogy, going back to just before the Great Depres­sion. The chart also presents the actual sub­se­quent 10-year total returns achieved by the S&P 500. Note that a 5.1% prospec­tive return is cer­tainly not the worst level we've observed in his­tory, but it is far from the 7.5–13% range of prospec­tive returns that has char­ac­ter­ized the bulk of his­tor­i­cal data (and of course nowhere near the 20% prospec­tive returns that have marked "sec­u­lar" mar­ket lows).

Notice that the his­tor­i­cal data is not par­tic­u­larly sym­pa­thetic to the idea that low Trea­sury bill yields should be accom­pa­nied by high mar­ket val­u­a­tions and low prospec­tive returns on stocks. While it is true that very high inter­est rates and infla­tion rates seem to be accom­pa­nied with depressed prices and accord­ingly high prospec­tive mar­ket returns, it is clear that his­tory con­tains long peri­ods of near-zero inter­est rates cou­pled with depressed val­u­a­tions and very high prospec­tive mar­ket returns. As investors, we should hope for such oppor­tu­ni­ties, and I expect that we will even­tu­ally see them. Unfor­tu­nately, the tran­si­tion from here to there would not be pretty.

There are cer­tainly alter­na­tive meth­ods of val­u­a­tion embraced by Wall Street ana­lysts. In par­tic­u­lar, many ana­lysts view the mar­ket as "cheap" based on for­ward oper­at­ing earn­ings, with­out any con­sid­er­a­tion for the fact that stocks are a claim on a very long-duration stream of deliv­er­able cash flows (not a sin­gle year's results), and even less con­sid­er­a­tion for the fact that those for­ward oper­at­ing earn­ings incor­po­rate the assump­tion that profit mar­gins will achieve and sus­tain the high­est level of profit mar­gins in U.S. history.

Before accept­ing con­clu­sions based on a given val­u­a­tion model, investors should demand sim­i­lar evi­dence of its his­tor­i­cal reli­a­bil­ity. That evi­dence should be easy to pro­duce, of course, and yet ana­lysts typ­i­cally don't pro­duce it. Hint — for many of these approaches, this is because evi­dence link­ing those meth­ods to sub­se­quent mar­ket returns does not exist.

The chart below pro­vides a more com­pre­hen­sive view of the prospec­tive returns that would be asso­ci­ated with var­i­ous lev­els of the S&P 500, based on the fun­da­men­tals we presently observe. As a rule-of-thumb, this curve shifts to the right at a rate of about 6% annu­ally, which is the approx­i­mate growth rate of long-term nor­mal­ized fun­da­men­tals (earn­ings, div­i­dends, book val­ues, rev­enues, and even nom­i­nal GDP).

I rec­og­nize that after a decade of bub­ble val­u­a­tions (which has pre­dictably resulted in near-zero total returns for the mar­ket), the impli­ca­tions of this chart may seem pre­pos­ter­ous. Con­sid­er­ing the his­tor­i­cal accu­racy of this approach in pro­ject­ing sub­se­quent mar­ket returns, how­ever, we have to remem­ber that unthink­a­bil­ity is not evi­dence. It seemed equally unthink­able in 1999 that stocks might under­per­form Trea­sury bills for more than a decade (see The Impor­tance of Mea­sur­ing Returns Peak-to-Peak ), and that val­u­a­tions in 2000 could actu­ally imply a decade of neg­a­tive total returns, as our mod­els were then pro­ject­ing (see the August 2000 Huss­man Funds invest­ment let­ter). Yet that's pre­cisely what we observed.

His­tor­i­cally, the typ­i­cal bull-bear mar­ket cycle has pro­duced a range of 10-year prospec­tive returns in a band between about 7.5% and 13%. That band presently cor­re­sponds to a range for the S&P 500 index between 600 and 1000. A 10% prospec­tive return is right in the mid­dle, at about 800 on the S&P. Once you rec­og­nize that profit mar­gins are in fact cycli­cal, that range is about right, as uncom­fort­able as it may be to con­tem­plate. Jeremy Grantham of GMO esti­mates that fair value is "no higher than 950." A tighter norm for prospec­tive return between 9–11% maps to an S&P 500 between 750 and 850.

Finally, while I cer­tainly would not expect it in the absence of extreme macro­eco­nomic upheaval, major sec­u­lar under­val­u­a­tion as we observed in 1950, 1974 and 1982 would presently map to about 400 on the S&P 500. When you think of "once in a gen­er­a­tion" val­u­a­tions and "sec­u­lar bear mar­ket lows" — that num­ber, not any­thing near present lev­els, should be what crosses your mind. I am well aware that even dis­cussing num­bers like these, given the present mind­set of investors, is likely to be dis­missed as utterly ridicu­lous. Frankly, I would rather risk the ridicule of those who pay lip-service to research, cash flows, fun­da­men­tals, and value than to pre­tend these out­comes are impos­si­ble, when the his­tor­i­cal record (and even the expe­ri­ence of the past decade) strongly indi­cates otherwise.

As Howard Marks of Oak­tree Cap­i­tal has noted, "We hear a lot about 'worst-case' pro­jec­tions, but they often turn out to be not neg­a­tive enough.. most peo­ple view risk tak­ing pri­mar­ily as a way to make money. Bear­ing higher risk gen­er­ally pro­duces higher returns. The mar­ket has to set things up to look like that'll be the case; if it didn't, peo­ple wouldn't make risky invest­ments. But it can't always work that way, or else risky invest­ments wouldn't be risky. And when risk bear­ing doesn't work, it really doesn't work, and peo­ple are reminded what risk's all about."

Mar­ket Climate

As I noted at the out­set, the Mar­ket Cli­mate for stocks shifted from a briefly pos­i­tive con­struc­tive stance back to hard neg­a­tive last week. Accord­ingly, we closed our mod­est con­struc­tive posi­tion in Strate­gic Growth and Strate­gic Inter­na­tional Equity. Both are fully hedged at present. In Strate­gic Total Return, the pri­mary source of day-to-day fluc­tu­a­tions con­tin­ues to be our allo­ca­tion to pre­cious met­als shares, at about 20% of assets. The Fund also holds just over 4% of assets in util­ity shares, and has a dura­tion of about 1.5 years in Trea­sury secu­ri­ties of short– and intermediate-maturity.

Among the impor­tant fac­tors to watch here, yields shot above 50% on 1-year Greek gov­ern­ment debt, sug­gest­ing an accel­er­a­tion of liq­uid­ity and default con­cerns there. IMF chief Chris­tine Lagarde spoke at Jack­son Hole, say­ing that Euro­pean banks "need urgent recap­i­tal­iza­tion. They must be strong enough to with­stand the risks of sov­er­eigns and weak growth. This is key to cut­ting the risks of con­ta­gion... we risk see­ing the frag­ile recov­ery derailed."

Mean­while, the cor­po­rate bond mar­ket, which has held up until recently, saw a sharp but very ini­tial sell­off of about 2% early last week. Junk bonds have also dropped by about 5% so far this month. As Jef­frey Gund­lach of Dou­ble­Line Cap­i­tal observed, "some­thing funny is going on in the world of cor­po­rate bonds now. Some­thing looks bro­ken. It seems there's less will­ing­ness all of a sud­den to be lend­ing money to cor­po­ra­tions, maybe because the absolute yields are so low." Even so, he argued against reach­ing for yield too early into this emerg­ing weak­ness in cor­po­rate and speculative-grade debt, say­ing "I want fear. I want to buy things when peo­ple are afraid of it, not when they think that it's a gift being handed to them." Suf­fice it to say that in nearly every asset class, we are not there yet.

Tags: Bonds, Commodities, Consumer Confidence, Corporate Debt, Credit Spreads, Economic Evidence, Economic Measures, GDP Growth, Gold, Hussman Funds, Infrastructure, Investment Position, Market Advance, Nonfarm Payrolls, physical gold, precious metals, Principal Investment, Purchasing Managers Index, Random Fluctuation, Recklessness, Risk Profile, Treasury Securities, Treasury Yield Curve, Welcome Correction
Posted in Bonds, Brazil, Commodities, Gold, Infrastructure, Markets | Comments Off

Valuation Gap Makes Gold Miners Attractive But All Miners Aren’t Created Equal

Saturday, August 27th, 2011

Val­u­a­tion Gap Makes Gold Min­ers Attrac­tive But All Min­ers Aren’t Cre­ated Equal

By Frank Holmes, CEO and Chief Invest­ment Offi­cer, U.S. Global Investors

Gold­watch­ers were reminded gold’s volatil­ity works in both direc­tions this week, with prices falling more than $100 an ounce in just one day. We fore­casted the sell­off last week, explain­ing a 10 per­cent cor­rec­tion would be a non-event. Once again the CME Group hiked the exchange’s mar­gin require­ments for gold invest­ment to shake out over­lever­aged spec­u­la­tion. This is a pos­i­tive for long-term investors.

One mar­ket trend that seems to be attract­ing more and more atten­tion is the large per­for­mance gap between gold bul­lion and gold stocks. The price of gold bul­lion has increased roughly 28 per­cent in 2011, while the S&P/TSX Gold Index was down 1 per­cent as of Mon­day. This shouldn’t come as news for sub­scribers to these weekly alerts; we first dis­cussed this oppor­tu­nity back on June 17: Will Gold Equity Investors Strike Gold?

A report this week from BMO Cap­i­tal Mar­kets offered one rea­son behind the per­for­mance gap, “The rate of change in the gold price has been high over the past decade, per­haps too high for investors to gain con­fi­dence in that price as sus­tain­able for an equity invest­ment deci­sion.” BMO says it was hard to imag­ine gold prices could sus­tain a $1,000 an ounce lev­els five years ago, but “now it’s hard to see the gold price falling to that level.”

Using the implied value of a defined group of global gold stocks, it cal­cu­lated the inter­nal rate of return to mea­sure how gold stocks have under­per­formed com­pared to the yel­low metal. Over a period of nearly 20 years, BMO’s group of global gold stocks has never been this inex­pen­sive. Only twice—during the Tech bub­ble in 2000 and the finan­cial cri­sis of 2008—has the inter­nal rate of return com­pared so closely with the price of gold bullion.

RBC Cap­i­tal Mar­kets also sees poten­tial in unpop­u­lar, under­val­ued gold equi­ties and urged read­ers to take “a fresh look” at gold com­pa­nies in a report this week. RBC says gold com­pa­nies cur­rently have mar­gins that are at record highs and it believes mar­gins could be approx­i­mately $1,200 an ounce for the next 12 to 24 months. This is sub­stan­tially higher than the 10-year aver­age of $320 an ounce. Com­par­a­tively, many cur­rent projects were eco­nom­i­cally sound at $700-$1,000 per ounce gold prices, cre­at­ing $300–500 an ounce margins.

Right now, BMO cal­cu­lates the total cost to pro­duce an ounce of gold at roughly $900 an ounce, while the com­pany can turn around and sell that ounce for upwards of $1,400. This puts mar­gins near 40 per­cent, roughly twice what they were in 2007 and four times higher than in 2000.

Increased profit mar­gins put more money in gold com­pany cof­fers and this is reflected in the unprece­dented amount of free cash flow (FCF), RBC says. The firm says the indus­try has reached an inflec­tion point with a “sub­stan­tial wave of free cash flow” com­ing over the next 1 to 2 years.

You can see this incred­i­ble increase in Tier 1 pro­duc­ers, such as Bar­rick, Gold­corp, Kin­ross and New­mont Min­ing. Look­ing at their trail­ing 12 months of free cash flow over 10 years, FCF never rose above $2 bil­lion. How­ever, fol­low­ing the trend in gold prices, FCF among these Tier 1 com­pa­nies stair-stepped up to $4 billion.

Look­ing for­ward over the next few years, RBC esti­mates that if the price of gold remains at $1,850, FCF should stair-step even fur­ther, reach­ing nearly $12,000 by the end of Decem­ber 2013. BMO esti­mates the global gold com­pa­nies will accu­mu­late net cash of $120 bil­lion by 2015 if gold prices remain elevated.

Ris­ing FCF is espe­cially rel­e­vant to share­hold­ers, as it allows the gold com­pany to use that money to invest in projects that should enhance share­holder value. This could include pur­su­ing new projects, mak­ing acqui­si­tions, reduc­ing debt or pay­ing div­i­dends. Many gold com­pa­nies are opt­ing for the lat­ter and increas­ing div­i­dends but these increases haven’t kept up with the pace of ris­ing earn­ings. The aver­age pay­out ratio was roughly 20 per­cent in 2008 but cur­rently sits around 10 per­cent in 2011.

BMO says, “A div­i­dend pol­icy linked to the finan­cial per­for­mance of the com­pany offers investors addi­tional lever­age to the gold price. The pro­vi­sion of a mean­ing­ful and sus­tained div­i­dend has the poten­tial to broaden investor appeal and to instill fis­cal respon­si­bil­ity for man­age­ment.” I’ve often echoed sim­i­lar sentiments.

BMO says gold stocks are cur­rently trad­ing at his­tor­i­cally cheap lev­els, which the com­pany sees as an oppor­tu­nity investors can take advan­tage of. RBC attempts to quan­tify that oppor­tu­nity by say­ing “if gold prices remain ele­vated and/or investors accept a higher long-term gold price, we could see 25–50 per­cent upside in equities.”

How to Pick Gold Min­ers
With gold min­ers, in gen­eral, so attrac­tively val­ued rel­a­tive to the gold bul­lion price, the ques­tion becomes: Which stocks are the most com­pelling and have the best lever­age to robust pre­cious met­als prices?

First, an investor could begin the process through elim­i­na­tion. FINRA high­lighted some of the key warn­ing signs when ana­lyz­ing gold stocks, such as claims of being a “buy­out tar­get,” or spec­u­la­tive claims about reserve growth, and grandiose pre­dic­tions of expo­nen­tial growth, to name a few. FINRA says investors should be wary of “free lunch” pro­grams that claim prof­its in gold are “easy,” and we agree.

Research from geol­o­gist Robert Sibthorpe shows that only one in 2,000 (0.05 per­cent) com­pa­nies would ever find 1 mil­lion ounces of gold, and that only a third of those would be able to turn that find into pro­duc­tion. In addi­tion, research from Barry Cooper at CIBC shows that these dis­cov­er­ies are becom­ing even more dif­fi­cult. There were 51 gold/copper por­phyry dis­cov­er­ies of +3 mil­lion ounces dur­ing the 1990s, but only 24 of such dis­cov­er­ies occurred dur­ing the 2000s.

In order to find the dia­monds in the rough, I use what I call “The Five M’s” for min­ing stocks. I dis­cussed this process thor­oughly in The Gold­watcher: Demys­ti­fy­ing Gold Invest­ing, an investor’s guide­book to gold invest­ing I co-authored with John Katz a cou­ple of years ago.

The Five M’s are: Mar­ket cap, Man­age­ment, Money, Min­er­als and Mine life cycle.

1) Mar­ket Cap
Mar­ket cap is sim­ply the num­ber of shares out­stand­ing mul­ti­plied by the stock price. The gold sec­tor is bro­ken down into three sec­tors by mar­ket cap: Seniors (mar­ket caps >$10 bil­lion), inter­me­di­ates (between $2 and $10 bil­lion) and juniors (<$2 billion).

If a gold com­pany has 10 mil­lion shares out­stand­ing at $1 per share, the com­pany is val­ued at $10 mil­lion. The ques­tion any investor should ask is, “Is this com­pany really worth $10 mil­lion?” If the mar­ket pays $25 per ounce of gold in the ground, the com­pany should be val­ued at $25 mil­lion (1 mil­lion ounces in reserves X $25 an ounce). If the company’s mar­ket cap is only $10 mil­lion, it may look under­val­ued. Accord­ingly, if the company’s mar­ket cap is $50 mil­lion, it may appear to be overvalued.

For larger gold com­pa­nies, an investor can mea­sure a company’s mar­ket cap against its pro­duc­tion level, reserve assets, geo­graphic loca­tion and/or other met­rics to estab­lish rel­a­tive val­u­a­tion. For junior min­ing companies—an area of focus for our World Pre­cious Min­er­als Fund (UNWPX)—we look for bal­ance sheets with ample cash for explo­ration and devel­op­ment of prospec­tive reserves, but we resist pay­ing more than two times cash per share.

2) Man­age­ment
Essen­tially, man­age­ment of min­ing com­pa­nies must have both explicit and tacit knowl­edge to be suc­cess­ful. Explicit knowl­edge is aca­d­e­mic. How many PhDs or mas­ters in geology/engineering does com­pany man­age­ment have?

Tacit knowl­edge is more per­sonal in nature and much more dif­fi­cult to obtain. It is acquired over time through first-hand obser­va­tion, expe­ri­ence and prac­tice. How many years have they worked in the indus­try? Has man­age­ment ever suc­cess­fully com­pleted a project with sim­i­lar geopolitical/environmental constraints?

Suc­cess in the min­ing sec­tor, espe­cially the juniors, relies on the abil­ity to raise cap­i­tal and com­mu­ni­cate with investors. Often the heads of junior com­pa­nies are geol­o­gists or engi­neers who have no rela­tion­ships in the bro­ker­age busi­ness. This lack of rela­tion­ships impedes their abil­ity to gen­er­ate mar­ket sup­port. His­tor­i­cally, com­pa­nies with the high­est num­ber of retail share­hold­ers have the high­est price-to-book ratios and carry higher val­u­a­tions than peers.

Some of the most suc­cess­ful com­pany builders in the gold-mining indus­try are what I call the “finan­cial engi­neers” – peo­ple who have the rela­tion­ships and under­stand the cap­i­tal mar­kets and who know how to hire the best geo­log­i­cal and engi­neer­ing teams. We tend to have more con­fi­dence invest­ing in them.

3) Money
Min­ing is an expen­sive busi­ness. Often, com­pa­nies burn through sub­stan­tial amounts of cap­i­tal before gen­er­at­ing their first $1 in cash flow. A gold explo­ration com­pany has to deliver reserves per share to have a chance at another round of financ­ing. It has to con­vince the cap­i­tal mar­kets that it is an attrac­tive invest­ment on a per-share basis.

We call this the “burn rate”—how long will the company’s cur­rent cash lev­els last before it has to return for addi­tional financ­ing. If a junior explo­ration com­pany has $15 mil­lion in cash reserves and is spend­ing $3 mil­lion a month, it has five months to deliver enough reserves per share to con­vince cap­i­tal mar­kets it is worth the risk.

This cal­cu­la­tion can be done quickly. Explo­ration reserves are gen­er­ally val­ued at one-third the reserve val­ues of a pro­duc­ing mine—if pro­duc­ing reserves are val­ued at $150 an ounce, explo­ration reserves would be $50 per ounce.

The gold-equities mar­ket is gen­er­ally effi­cient at judg­ing reserves per share, so if the explo­ration com­pany doesn’t come up with the results nec­es­sary to get an evaluation—find gold for less than $50 an ounce—investors quickly lose con­fi­dence. There is an old rule when it comes to explo­ration com­pa­nies: don’t pay more than two times cash per share if there are no proven assets in the ground.

4) Min­er­als
Com­pared to the rest of the min­ing sec­tor, gold com­pa­nies have the high­est indus­try val­u­a­tions based on price to earn­ings, price to cash flow, price to enter­prise value and price to reserves per share.

Com­pa­nies oper­at­ing mines that pro­duce gold as well as indus­trial met­als tend to have lower val­u­a­tion mul­ti­ples. For exam­ple, the cur­rent price-to-earnings ratio for Freeport-McMoRan (FCX), is 8x-times for­ward earn­ings. This is con­sid­er­ably lower than Yamana (20x), Gold­corp (21x) and Agnico-Eagle (36x). Investors can use the low rel­a­tive val­u­a­tions of copper/gold pro­duc­ers to increase their mar­gin of safety in antic­i­pa­tion of an upward move in gold prices.

5) Mine Life­cy­cle
There are many delays and dis­ap­point­ments dur­ing the devel­op­ment and oper­a­tion of a gold mine. Input costs can rise out of con­trol (such as what hap­pened in 2008 when oil hit $140 per bar­rel), labor work­ers can strike, and political/environmental pol­icy shifts such as higher taxes or stricter envi­ron­men­tal reg­u­la­tions can shrink margins.

Dur­ing the explo­ration and devel­op­ment phase, the price of a gold stock often fol­lows a course that ends up look­ing like a double-humped camel (see graphic). First there’s eupho­ria over explo­ration results that are bet­ter than expected. The stock price rises as investors race to buy shares. Then real­ity sets in – this gold dis­cov­ery is still years away from being an actual pro­duc­ing mine. At this point, there’s a huge cor­rec­tion in the stock price.

Assum­ing the com­pany con­tin­ues down the path to devel­op­ment, its share price drifts side­ways until around six months before the first ounce of gold is expected to be pro­duced. At this point, the stock begins a strong new leg up when a more sophis­ti­cated set of share­hold­ers come into the mar­ket. Even­tu­ally the price drops off and then lev­els as the spec­u­la­tive money moves on to the next hot oppor­tu­nity and the com­pany tran­si­tions from explorer to producer.

U.S. Global’s Exper­tise
Clearly, the task of pick­ing which gold min­ers to invest in isn’t easy. We actively travel to min­ing projects in places such as Colom­bia, Panama and West Africa to “kick the tires” and ask tough ques­tions of man­age­ment. This is the value that our invest­ment team at U.S. Global Investors pro­vides for our share­hold­ers and how we seek to gen­er­ate alpha.

Tags: BMO Capital Markets, Chief Investment Officer, Equity Investors, Frank Holmes, Gold, Gold Bullion, Gold Equity, Gold Index, Gold Investment, Gold Miners, Gold Price, Gold Prices, gold stocks, Internal Rate Of Return, Margin Requirements, Performance Gap, Price Of Gold, Rbc Capital Markets, Strike Gold, Term Investors, U S Global Investors
Posted in Gold, Markets | Comments Off

U.S. Equity Market Cheat Sheet (August 29, 2011)

Saturday, August 27th, 2011

U.S. Equity Mar­ket Cheat Sheet (August 29, 2011)

The domes­tic stock mar­ket was higher this week with the S&P 500 Index gain­ing 4.74 per­cent. The fig­ure below shows the per­for­mance of each sec­tor in the index for the week. All ten sec­tors increased. The best-performing sec­tor for the week was tech­nol­ogy which increased 6.19 per­cent. Other top-three sec­tors were con­sumer dis­cre­tionary and indus­tri­als. Util­i­ties was the worst per­former, up 2.05 per­cent. Other bottom-three per­form­ers were con­sumer sta­ples and tele­com services.

Within the tech­nol­ogy sec­tor the best-performing stock was JDS Uniphase, which rose 13.26 per­cent. Other top-five per­form­ers were Flir Sys­tems, F5 Net­works, Jabil Cir­cuit and Har­ris Corp.

Strengths

• The con­struc­tion mate­ri­als group was the best-performing group for the week, up 17 per­cent, led by its sin­gle mem­ber, Vul­can Mate­ri­als. Short inter­est in the stock as a per­cent of the float at August 15 was 19.7 per­cent, so per­haps short-covering may have played a part in the strength.
• The health­care tech­nol­ogy group out­per­formed, ris­ing 16 per­cent on the strength of its sin­gle mem­ber, Cerner Corp. A bro­ker­age firm upgraded the stock on August 19 to “Out­per­form” from “Neutral.”
• The spe­cialty stores group rose 13 per­cent. Group mem­ber Tiffany & Co. reported sec­ond quar­ter earn­ings and rev­enue which hand­ily beat the con­sen­sus esti­mates, and it raised its full-year earn­ings outlook.

Weak­nesses

• The indus­trial real estate invest­ment trust (REIT) group was the worst-performing group, down 6 per­cent, led by its sin­gle mem­ber, Pro­L­o­gis. The weak­ness might be related to investor con­cern that a soft patch in the econ­omy could impact real estate values.
• The brew­ers group also under­per­formed, los­ing 0.47 per­cent, led by its sin­gle mem­ber Mol­son Coors Brew­ing. The com­pany this week announced three new exec­u­tive appoint­ments to its inter­na­tional beer busi­ness. The com­pany said it is com­mit­ted to accel­er­at­ing its expan­sion into new mar­kets. Beer demand in North Amer­ica and the U.K. has been sluggish.
• The paper pack­ag­ing group under­per­formed, gain­ing 0.87 per­cent. Group mem­ber Sealed Air Corp. was down 2 per­cent for the week. A major bro­ker­age firm noted that third quar­ter pro­tec­tive pack­ag­ing demand could be slug­gish (down 1 to 2 per­cent), and that year-to-date flex­i­ble pack­ag­ing vol­umes are down low sin­gle digits.

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

• A mid-cycle slow­down in the domes­tic econ­omy would be neg­a­tive for stocks.
• An esca­la­tion in con­cerns over sov­er­eign debt oblig­a­tions in Europe would be neg­a­tive for stocks.

Tags: Beer Business, Brokerage Firm, Cerner Corp, Consensus Estimates, Construction Materials Group, Consumer Staples, Domestic Stock Market, Estate Investment Trust, Executive Appointments, International Beer, Investor Concern, Jds Uniphase, Molson Coors, Molson Coors Brewing, Outlook, Performing Group, Real Estate Investment, Real Estate Investment Trust, Real Estate Investment Trust Reit, Real Estate Values, Vulcan Materials
Posted in Markets, Outlook | Comments Off