Advisor Alert - November 27, 2009

Friday, November 27th, 2009

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Words from the (investment) wise for the week that was (April 27 – May 3, 2009)

Sunday, May 3rd, 2009

“Goodbye safe havens, hello risky assets.” This was the refrain of investors’ theme song during the past week. Safe-haven assets were out of favor as better-than-feared corporate earnings and signs of a budding economic recovery emboldened investors’ appetite for reflation trades such as equities and commodities.

Investors’ sentiment improved notwithstanding a number of influences that could potentially disturb financial markets. These included a three-day delay in the release of the stress test results of the 19 biggest US banks until May 7, the plight of the beleaguered US automakers with General Motors (GM) proposing a sweeping debt-for-equity restructuring and Chrysler filing for Chapter 11 bankruptcy protection, and fears of an escalation in the number of swine flu (H1N1) cases.

Source: Vita

As to be expected given the countless catalysts, the past week’s trading was bumpy, but the major global stock market indices nevertheless managed to resume their eight-week rally. Further testimony of investors’ zest for risky assets came from the following:

• a solid performance by crude oil, base metal and agricultural commodities (with the exception of pork bellies and lean hogs - despite the fact that humans cannot contract swine flu by eating pig meat)

• tighter credit spreads (especially high-yield corporate bonds)

• a jump in Treasury Note yields to levels last seen in November

• a decline in the US dollar and Japanese yen as traders switched to high-yielding currencies such as the Australian dollar, New Zealand dollar and South African rand (all resource-linked currencies)

The performance of the major asset classes is summarized by the chart below, expanded to now also include Treasury inflation-protected securities (TIP) and investment grade (LQD) and high-yield corporate bonds (HYG).

Source: StockCharts.com

Marking eight straight weeks of gains, the MSCI World Index advanced by 1.6% (YTD -2.6%) on the week, the MSCI Emerging Markets Index by 2.3% (YTD +16.9%) and the Nasdaq Composite Index by 1.5% (YTD +9.0%) - the Nasdaq’s longest advance since December 1999. After recording declines during the prior week, the Dow Jones Industrial Average (+1.7%; YTD -6.4%) and the S&P 500 Index (+1.3%; YTD -2.8%) also added to the gains notched up since the rally commenced off the March 9 lows.

Global indices also celebrated solid gains for calendar month April, with the MSCI World Index (+10.9%) recording its top monthly advance since January 1987 and the MSCI Emerging Markets Index (+16.3%) its strongest monthly showing since December 1993. The S&P 500 (+9.4%) had its best month since March 2000, placing the Index in the middle of its top 20 monthly gains since 1950.

Click on the table below for a larger image.

Using four-day performances for markets that were closed for the May Day (International Workers’ Day) holiday on Friday, returns around the world ranged from top performers Indonesia (+8.7%), Ireland (+8.4%), Greece (+8.1%), the Czech Republic (+6.9%) and Turkey (+6.7%) to Luxembourg (-4.7%), Bulgaria (-4.0%), Malta (-2.7%), Macedonia (-2.6%) and Oman (-2.5%), which experienced selling pressure. The Mexican Bolsa Index surprised by only declining 3.0% amid swine flu fears. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

By the end of last week, more than 70% of the companies in the S&P 500 Index had reported first-quarter earnings. According to Bespoke, the Index’s annual decline in earnings (Q1 ‘09 versus Q1 ‘08) on Friday was of 32.3%. This compares with analysts’ estimates of -37.4% at the start of the earnings season. Also, as shown in the graph below, the percentage of companies beating earnings estimates has been rising steadily during the reporting period to 62% on Friday. ”With three quarters of companies having already reported, this earnings season is shaping up to be one of the best in years,” said Bespoke.

John Nyaradi (Wall Street Sector Selector) reports that the strongest exchange-traded funds (ETFs) on the week were the Market Vectors Coal (KOL) (+15.1%), iShares MSCI Taiwan Index (EWT) (+13.8%) and Claymore US-1-The Capital Markets Index (UEM) (+11.4%). On the other end of the performance scale the SPDR KBW Bank (KBE) (-6.1%), PowerShares Active US Real Estate (PSR) (-5.8%) and Vanguard Extended Duration Treasury Index (EDV) (-5.7%) performed poorly.

For April, the “ETF of the Month” was the iShares Dow Jones Real Estate Fund (IYR) that gained +22.6%. Click here for a chart.

An interesting analysis on country ETFs was published by Bespoke last week, specifically indicating that markets around the world are extended into overbought levels from their normal trading ranges. Click here for the study.

On the credit front, the cost of buying credit insurance for US and European companies eased during the past week, as shown by the narrower spreads for both the CDX (North American, investment grade) Index (down from 175 to 163) and the Markit iTraxx Europe Index (down from 153 to 139).

Another indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

Source: I-Net Bridge

The quote du jour relates to the stress test and belongs to Bill King (The King Report), who said: “A major problem with the ‘stress test’ is it depends on modeling and it’s the precise practice responsible for much of this economic and financial mess. It’s extraordinary that so many people believe that the Fed and Treasury, after missing the financial disaster, housing debacle, recession and derivative implosion, can now extrapolate economic conditions and resultant financial effects from its models. How did all that rocket-science modeling for subprime defaults and securitization workout? Yet many people already forget or ignore this reality.”

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “market”, “stock”, “economic”, “economy”, “bank” and “financial” again featured prominently. Let’s hope “flu” does not stake its claim among the dominant words over the next few weeks.

But back to the stock market. In order to gather some perspective on the current stock market rally, Chart of the Day highlighted the duration (calendar days) and magnitude (percentage gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). By means of illustration, the bear market rally that began in October 1931 lasted 35 calendar days and resulted in a gain of 35%. “… the current Dow rally (hollow blue dot labeled ‘You are here’) is slightly below average in both duration and magnitude relative to the average 1929-1932 bear market rally (hollow red dot),” said Chart of the Day.

Source: Chart of the Day, May 1, 2009.

As shown in the table below, the 50-day moving averages have been cleared comfortably by all the major US indices and the early January highs are the next important targets. As a matter of fact, the Nasdaq Composite Index is already above this level. It has to rise by a further 2.1% in order to reach the key 200-day moving average - an indicator often used to distinguish between primary bull and bear markets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to remain intact.

Two S&P 500 sectors - Consumer Discretionary (XLY) and Technology (XLK) - have actually just broken above their 200-day moving averages. Bespoke said: “This … signals the end to a long-term downtrend and the confirmation of an uptrend. It’s also a positive for the overall market that two cyclical sectors (one that is extremely tied to the consumer) are the first ones to break above their 200-days.”

Still talking technical analysis, Kevin Lane of Fusion IQ said: “The S&P 500 Index had stalled at the 878 level on three separate occasions over the past five months. However, prices then subsequently gave way to profit-taking and closed back below that level. Only a close above that level would open the way to higher prices.

“On the sentiment front, the CBOE Equity Put/Call Ratio, the AAII Bearish Sentiment Survey and the VIX’s deviation from its 50-day moving average have all moderated from constructive levels to more neutral levels. … these indicators are not at levels that would suggest sentiment is overly bullish yet, but their deterioration is enough cause for concern that a corrective wave may occur.”

“All the things are in place for the bear market to have ended,” Anthony Bolton, president of investments at Fidelity International in London, said in an interview with Bloomberg Television. “When there’s a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I’d like to bet against that.”

Remaining across the pond, David Fuller (Fullermoney) put matters in context as follows: “Base formations, confirming not only the ending of a bear market but the beginning of a new bull market, come in all shapes and sizes. The leading stock markets, which generally have better fundamentals, usually form smaller bases before commencing their uptrends, as we have seen with China and a number of other emerging markets from Asia to South America. Fundamentally weaker markets, such as the US and most of Europe, require a longer convalescence before a significant recovery occurs. This explains the new lows in late February and early March.

“This impressive rally is overextended in the short term, so we can expect it to spill over into a reaction and consolidation before long. The recent uptrend consistency will be followed by some choppy action as legitimate fundamental concerns remain.”

The last (cautionary) word goes to Richard Russell, writer of the Dow Theory Letters newsletter: “On the bear market decline, we never saw the great values that usually appear at major bear market bottoms. The ‘great value’ area is the place where I would normally suggest that investors load up with blue-chip stocks. For this reason, I would prefer waiting out this rally or making a limited trade with DIAs [Dow Diamonds ETF] with stops. I continue to believe this is an upward correction in an ongoing primary bear market. I note that many observers are saying that ‘this is a market that won’t go down’. Believe me, all markets go up - and all markets go down.”

And here is the venerable R man taking the bull by the horns!

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Investors “look past the valley“, “Sell in May and go away: Fact or fallacy?” and “Donald Coxe - Investment recommendations (April 2009)” (And also make a point of listening to Coxe’s webcast of May 1, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
“Global business sentiment is improving. Confidence remains very weak, but it improved last week to its best level since late last October. Much of the improvement has been in Asia and South America, although sentiment is more upbeat everywhere. Expectations regarding the outlook six-months hence are particularly buoyant,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com.

Although it is premature to conclude that the global recession is ending, a number of indicators, compiled by US Global Funds, could signal better times ahead.

• The inflation-adjusted inventory component of US GDP dropped by more than $100 billion in the first quarter of 2009. This figure represents nearly 1% of GDP. Such drops in the past have been associated with the end of recessions. At the least, it raises the chances of GDP growth in the current quarter.

• The latest industrial production (IP) numbers coming from Asia are positive. South Korea’s IP was up 5.2% from February, while Thailand’s IP improved by 2.5% and Japan’s gained 1.6%. Manufacturing inventories in South Korea and Japan continued their decline in March after peaking in late 2008.

• In China, the Purchasing Managers Index (PMI) rose for the fifth straight month in April (see blue line in chart below). The latest PMI figure is 53.5 - any reading over 50 indicates that the manufacturing sector is growing. The last time the PMI was this high was in May 2008. Another promising PMI figure, the employment sub-index, is also over 50, meaning that job growth in manufacturing is under way.

Source: Kevin, Sinolise.com, May 1, 2009.

The April update of the ISM Manufacturing Index shows that the US manufacturing sector failed to grow for the fifteenth straight month, but the April reading of 40.1 was significantly higher than the 36.3 figure for March. The index has been improving for four straight months.

Rebecca Wilder (News N Economics) summarized the global economic picture as follows: “Overall, hope that key economies are no longer in free fall is emerging; however, the economic decline is ongoing.”

In an interview with The Washington Post, Nouriel Roubini said: “I don’t believe we are going to end up in a near-depression. Six months ago I was more worried about an L-shaped near-depression. Today, after the very aggressive policy actions taken by the US and other countries … we are, instead, in the middle of a U.”

Turning specifically to the US, a snapshot of the week’s economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

May 01
• The ISM Manufacturing Survey points to imminent economic recovery, possibly in 2009
• Auto sales edged down in April

April 30
• Consumer spending and income decline
• Initial Jobless Claims declined but Continuing Claims advanced

April 29
• Federal Open Market Committee (FOMC) meeting ends with no surprises
• GDP growth - another quarter of deep and wide contraction in economic activity

April 28
• Case-Shiller Home Price Index confirms message from other reports
• Consumer Confidence Index improves mostly on surge in Expectations Index

The FOMC announced no change to monetary policy on Wednesday following the conclusion of its meeting. The communiqué said the Committee expected to keep the Fed funds rate target in the 0-0.25% range “for an extended period”. Moody’s Economy.com reported as follows: “The remarks on current economic conditions were less pessimistic than in recent months; the statement said that the pace of economic contraction ‘appears to be somewhat slower’ and that ‘the economic outlook has improved modestly’ since March.”

The FOMC included the following paragraph in the statement regarding its programs to buy agency debt, mortgage-backed securities and Treasuries: “The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.”

The dire tone of GDP growth in the last two quarters has invariably caused analysts to draw comparisons with the Great Depression. The table below, courtesy of Asha Bangalore (Northern Trust) compares the behavior of real GDP, unemployment, inflation and stock prices during the early-1930s with the current situation.

Click the table below for a larger image.

On the eve of the Berkshire Hathaway annual shareholders’ meeting in Omaha, Warren Buffett told CNBC that September’s “strike against the heart of the American system” was behind us, and that we have moved past the “economic Pearl Harbor”.

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, May 1, 2009.

In addition to Fed Chairman Ben Bernanke’s testimony before the Joint Economic Committee in Washington (Tuesday, May 5) and interest rate announcements by the bank of England and the European Central Bank (both on Thursday, May 7), the US economic highlights for the week, courtesy of Northern Trust, include the following:

Click here for a summary of Wachovia’s weekly economic and financial commentary.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.

Source: Wall Street Journal Online, May 1, 2009.

J. Kenfield Morley said: “In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well.” Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in properly assessing risks before making investment decisions.

Our thoughts are with those affected by the swine flu virus, and we pray that the spreading is contained. By the way, an interesting way of tracking the occurrences of the virus is by means of Google Maps (click on “Satellite” along the horizontal menu bar for the best image).

That’s the way it looks from Cape Town (yes, I’m actually back home for a change!).

Source: Mike Keefe, The Denver Post.

Financial Times: Bank objections delay stress tests
“US regulators will delay the release of stress test results for the country’s 19 biggest banks until next Thursday, after some lenders, including Citigroup and Bank of America, objected to government demands that they needed to raise billions in fresh capital.

“Citi, one of the biggest victims of the crisis that has already been bailed out three times by the government, is believed to have been told by regulators that it needs more than $5 billion in fresh capital, while BofA might need to convert $45 billion in government preferred shares into common equity.

“Both companies are still contesting the findings and might still persuade the government they need less, or no capital, according to people close to the situation. Citi’s own projections are believed to show the company will have hundreds of millions of dollars in excess capital.

“After a week of tense talks between regulators and the banks, government sources said the Treasury and the Federal Reserve were set to unveil the outcome of the tests after the market closes on May 7 - three days later than anticipated.

“The authorities’ decision to let the original timetable slip also reflects the widespread belief that, after months of speculation since the tests were first announced in February, their outcome has the potential to disturb the markets.

“Government sources said regulators were likely to release both aggregate and individual data for each of the 19 banks, detailing their losses and capital needs under adverse economic scenarios.

“Some of the banks will then supplement those data with regulatory filings and analysts’ calls. Bankers said a number of lenders had pleaded with regulators for more time to lay out plans to plug any capital shortfall identified in the stress tests, by raising equity from either the government or from the stock market.”

Source: Francesco Guerrera and Sarah O’Connor, Financial Times, May 1, 2009.

Option Armageddon: Stress test - tangible common equity
“Ahead of official announcements regarding stress test results, OA thought we’d publish our latest update for banks’ tangible common equity, a metric that is likely to figure prominently.

“A recent Reuters report said ‘US regulators want the top 19 banks being stress-tested to have at least 3% [TCE].’ In other words, regulators want leverage ratios below 33x.* Surreal, no? That the banking system has grown so bloated that 33x leverage can be considered ‘healthy?’

“Anyway, using the 3% Test, the results for the nation’s nine largest banks are mixed … four pass, five fail. And by the way, this is before ‘stressing’ the balance sheet per future ‘adverse’ scenarios. As you can see, most banks fail the test before they even sit for it …

“To be clear, this is not a prediction of the government’s verdict. As Jack Ciesielski of The Analyst’s Accounting Observer points out: “there is no iconic definition of TCE. Treasury may come up with one of their own that takes into account ‘questionable items’ so that all the banks pass. That would be totally consistent with early reports …”

Source: Rolfe Winkler, Option Armageddon, April 24, 2009.

Financial Times: US taxpayers to take majority GM stake
“US taxpayers would take a majority shareholding in General Motors under a sweeping debt-for-equity restructuring proposal that the carmaker revealed on Monday in a bid to avoid bankruptcy.

“Under the plan, GM said it would shut 13 of 47 plants by the end of next year, resulting in an additional 7,000 job losses. The latest job cuts would reduce GM’s US workforce from 61,000 last year to about 40,000 by the end of 2010.

“The carmaker, which lost its crown as the world’s biggest carmaker to Toyota last year, said it would give up its 83-year-old Pontiac brand and cut its dealership network from 6,200 to 3,600 by the end of 2010.

“Fritz Henderson, chief executive, said: ‘The objective here is not to survive. The objective is to develop an operating plan that allows us to win.’

“The Obama administration has set a June 1 deadline for GM to produce a viable turnaround plan in exchange for further government aid, or face bankruptcy. The carmaker has received $15.4 billion in emergency loans and expects the total to rise to about $20 billion by the end of next month.

“GM warned in a letter to bondholders that if the debt-for-equity swap failed to go through by June 1 it would ‘expect to seek relief through the US bankruptcy code’. In such circumstances, GM said bondholders might receive no ‘consideration at all’. GM set a May 26 deadline for bondholders to respond.

“Calling the proposal ‘neither reasonable nor adequate’, an ad hoc committee of GM bondholders said it believed ‘the offer to be a blatant disregard of fairness for the bondholders who have funded this company, and amounts to using taxpayer money to show political favouritism of one creditor over another’.”

Source: John Reed and Bernard Simon, Financial Times, April 27, 2009.

Financial Times: Chrysler files for Chapter 11 protection
“Chrysler filed for Chapter 11 bankruptcy protection on Thursday after President Barack Obama criticized hedge funds for blocking an out-of-court restructuring of the US carmaker’s $6.9 billion debt.

“The Obama administration said the owner of Jeep and Dodge would emerge from a ‘surgical’ bankruptcy process with more government aid and new shareholders, including Italy’s Fiat and the United Auto Workers union. Bob Nardelli, Chrysler chief executive, will step aside as part of the deal.

“Mr Obama praised JPMorgan Chase and other large banks for accepting the terms of the proposed restructuring plan. He laid blame for the bankruptcy filing on ‘a small group of speculators’ who refused to buy into an offer to swap Chrysler’s debt for $2.25 billion in cash.

“They were hoping that everybody else would make sacrifices and they would have to make none,” he said. “Some demanded twice the return that other lenders were getting. I don’t stand with them.”

“Under the plan outlined on Thursday, Chrysler will face 30-60 days in Chapter 11, which enables businesses to restructure and reorganize under court supervision. During that period, Chrysler will close most of its North American plants, idling tens of thousands of workers.

“When Chrysler emerges from bankruptcy it will be 55% owned by the UAW and a separate workers’ healthcare trust. Fiat will take an initial 20% stake with the option of increasing it over time.”

Source: Tom Braithwaite and John Reed, Financial Times, April 30, 2009.

Charlie Rose: A discussion about Chrysler’s bankruptcy plan
“A discussion about Chrysler’s bankruptcy plan with author Paul Ingrassia, Micheline Maynard, senior business correspondent for the New York Times and John Stoll of The Wall Street Journal.”

Source: Charlie Rose, April 30, 2009.

The Big Money: Dow Jones says it can measure economic sentiment by reading the press
“Just as a technological revolution is blowing up newsrooms across the country, Dow Jones has come up with an algorithm to prove that yesterday’s newspapers are useful for more than just fish wrap. According to the publishing giant, you can plumb the language and tone of newspapers to finger turning points in the economy.

“The news, it seems, is a moderately reliable economic compass. And today, Dow is quantifying that assertion with the release of its newly minted Economic Sentiment Indicator, a monthly assessment of the ‘tone’ of content in 15 metropolitan dailies. The ESI, informally known as the Optimism Index, is a simple barometer based on a scale of zero to 100 - the higher the number, the more upbeat the news and, by extension, the stronger the economy. Dow Jones back-tested the indicator to 1990 and found that it could signal critical turning points in the economy, sometimes a bit earlier than other economic measures.”

Source: Nancy Miler, The Big Money, April 30, 2009.

Bespoke: Tracking the business cycle through Google trends
“Google Trends is a cool tool that has been around for a few years that tracks search volume and news reference volume for various words and phrases. We like to use it as a sentiment gauge of the public. Below we highlight the Google Trends result for the word ‘recession’. As shown, there was a big spike at the start of 2008 when the economy began to stumble. Then it died down only to spike again in Q4 ‘08 when things got really bad. Over the last couple of months, however, the ‘recession’ worries seem to be dwindling again, but they are still elevated. It’s also interesting to note how little chatter there was about it in 2004, 2005, 2006, and 2007.”

Source: Bespoke, April 30, 2009.

Charlie Rose: A conversation about the economy
“A conversation about the economy with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP, Kate Kelly of The Wall Street Journal, Andrew Ross Sorkin of The New York Times and Joseph Stiglitz, economist and a member of Columbia University faculty.”

Source: Charlie Rose, April 24, 2009.

CNBC: Buffett - “economic Pearl Harbor” is over
“Billionaire investor Warren Buffett tells CNBC’s Becky Quick that this past September’s ‘strike against the heart of the American system’ is behind us, and that we have moved past the ‘economic Pearl Harbor’. However, he cautions that the war isn’t over just yet.”

Source: CNBC, May 1, 2009.

CNBC: Munger on Berkshire’s off year
“Berkshire vice chairman Charlie Munger discusses Berkshire’s difficult year and where he thinks the economy is headed, with CNBC’s Becky Quick.”

Source: CNBC, May 1, 2009.

The Washington Post: Roubini - “I am not Dr. Doom”
“Lally Weymouth of Newsweek and The Post sat down last week with economist Nouriel Roubini. Excerpts:

“Q. You are the economist known for predicting the economic downturn in 2008. What do you believe is happening to the economy today?

“A. The consensus among economists is that they see the economy that was contracting for the last two quarters at 6% going into positive economic growth by the second half of this year … I believe that the rate of economic contraction is going to slow from negative 6% in the last two quarters to negative 2% by the fourth quarter.

“Next year, I believe that the growth rate is going to be low - 0.5% for the US, compared to the consensus view of [plus] 2%. I believe the unemployment rate this year is going to go well above 10% and will be well above 11% next year, so even if we are technically out of a recession, we are going to feel like we are in a recession.

“I do agree that there is an improvement in the sense that the rate of contraction is not going to be as much as it has been in the last couple of quarters, but I still believe that the bottom of the economy [will be seen] toward the beginning or middle of next year. So my views are more bearish than the consensus.

“I believe things are going to be very mediocre throughout the world; in particular, in Europe and in Japan. They will only get out of their recession toward the end of next year.

“So you are still Dr. Doom?

“No, I am not Dr. Doom. I am Dr. Realist. I don’t believe we are going to end up in a near-depression. Six months ago I was more worried about an L-shaped near-depression. Today, after the very aggressive policy actions taken by the US and other countries … we are, instead, in the middle of a U.”

Click here for the full article.

Source: Lally Weymouth, The Washington Post, April 27, 2009.

Paul Kasriel (Northern Trust): Coming out of the downturn
“Paul Kasriel, Northern Trust’s Chief Economist, discusses the current economic climate and the potential impact on market consumption during any recovery.”

Source: Paul Kasriel, Northern Trust, April 30, 2009.

CNBC: Sheila Bair - the economy & financial crisis
“FDIC Chair Sheila Bair discusses the current state of the economy and the financial crisis.”

Source: CNBC, April 27, 2009.

CEP News: Fed keeps target rate and asset purchases unchanged
“The US Federal Reserve maintained the status quo on Wednesday. It kept rates unchanged, as expected, and maintained the amount of Treasuries, mortgage-backed securities and government sponsored enterprise (GSE) assets it intends to purchase.

“The Fed said it will evaluate the timing and amount of future asset purchases over time, and that the vote to keep the program as is was unanimous.

“In the monetary policy statement, the central bank said there are some signs that the economic outlook is improving, including stabilization in consumer spending and a slower pace of economic contraction.

“‘Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time,’ the statement read.

“Nevertheless, the Fed said the US will eventually resume a sustainable economic growth path.

“The Fed said it will employ all available tools to promote a recovery. As of the last meeting, the Fed plans to spend up to $1.25 trillion on agency mortgage-backed securities, up to $2,900 billion in agency debt and up to $300 billion in Treasury securities.”

Source: CEP News, April 29, 2009.

Asha Bangalore (Northern Trust): Another quarter of deep and wide contraction in economic activity
“Real gross domestic product (GDP) fell at an annual rate of 6.1% in the first quarter of 2009 after a 6.3% drop in the fourth quarter of 2008. Real GDP has declined at an annual rate of 6.2% in the last two quarters, which is the largest since the 1957:Q1-1958:Q2 period when the annualized reduction in real GDP was 7.4%.

“A decline in real GDP, albeit more modest, is projected for the second quarter. GM’s plans to cut production should translate into another noticeably weak third quarter headline for real GDP, followed by a stronger than previously expected fourth quarter. The annual decline in real GDP is now projected to be roughly 3.5% in 2009, which is a tad higher than the 3.3% decline assumed in the alternative adverse scenario of the stress test of the 19 major banks under the Treasury’s Capital Assistance Program.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 28, 2009.

Asha Bangalore (Northern Trust): ISM Manufacturing Survey points to imminent economic recovery, possibly in 2009
“The April survey results of the ISM Manufacturing Survey results indicate that the factory sector is contracting but the pace of contraction has slowed significantly. The composite index (PMI) rose to 40.1 in April from 36.3 in March. Indexes below 50.0 denote a contraction in activity but indexes moving toward 50.0 imply a deceleration in the pace of factory activity. The cycle low for the composite index is the December 2008 reading of 32.9.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 1, 2009.

Standard & Poor’s: S&P/Case-Shiller - home prices still declining
“Data through February 2009, released today [Tuesday] by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices shows continued broad based declines in the prices of existing single family homes across the United States, with 10 of the 20 metro areas showing record rates of annual decline, and 15 reporting declines in excess of 10% versus February 2008. For the first time in 16 months, however, the annual decline of the 10-City and 20-City composites did not set a new record.

“The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. The 10-City and 20-City Composites recorded annual declines of 18.8% and 18.6%, respectively. This is a slight improvement from their returns reported for January, where they fell by 19.4% and 19.0%, respectively.

“‘While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s.”

Click here for the full report.

Source: Standard & Poor’s, April 28, 2009.

Asha Bangalore (Northern Trust): Consumer spending and income decline
“Personal income fell 0.3% in March following a 0.2% drop in February. Personal income has declined in five out of the last six months. It is more troubling to note that personal income on a year-to-year basis grew only 0.3% during March, the smallest gain since 1959 when record keeping began for this series.

“Consumer spending, after adjusting for inflation, fell 0.2% in March after upwardly revised gains of 0.9% and 0.1% in January and February, respectively. In light of the absence of support from income, a setback to consumer spending in the near term is almost certain. In the meanwhile, personal saving as a percent of disposable income increased to 4.2% in March from 4.0% in February, putting the quarterly average at 4.2%, the largest average seen since the third quarter of 1998.”

Source: Asha Bangalore: Northern Trust - Daily Global Commentary, April 30, 2009.

Asha Bangalore (Northern Trust): Initial jobless claims declined but continuing claims advanced
“Initial jobless claims fell 14,000 to 631,000 during the week ended April 25, marking the third weekly decline in the last four weeks. The four-week moving average appears to have peaked in the week ended April 4.

“Continuing claims, which lag initial claims by one week, rose 133,000 to a new record high of 6.271 million and the insured unemployment rate advanced to 4.7% from 4.6% in the prior week.”

Source: Asha Bangalore: Northern Trust - Daily Global Commentary, April 30, 2009.

Asha Bangalore (Northern Trust): Consumer Confidence Index improves mostly on surge in expectations index
“The Conference Board’s Consumer Confidence Index shot up 12.3 points to 39.2 in April. The Present Situation Index moved up only 1.8 points to 23.7, while the Expectations Index increased 19.3 points to 49.5.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 28, 2009.

The American Banker: Credit card losses
“Credit card losses suddenly escalated in the first quarter as unemployment and other economic conditions worsened, spooking issuers to the point where most shied away from forecasting losses beyond the near term.”

Source: The American Banker, April 29, 2009.

Rasmussen Reports: 26% say US already has partially socialist economy
“Twenty-one percent (21%) of American adults say that the US economy is partially socialist and another five percent (5%) say generally speaking it’s already a socialist economy.

“A new Rasmussen Reports national telephone survey found that 26% believe the United States generally has a free market economy and that 41% say the country has a partially free market economy.

“Seventy-seven percent (77%) of all voters say they prefer a free market economy over a government-managed one. That’s up seven points since December.

“But only 53% of American adults believe capitalism is better than socialism. This clearly suggest that many Americans draw a sharp distinction between capitalism and a free market economy.

“Belief that the United States has a free market economy generally rises with income level. Those who earn the most are most confident that the market is at least partially free.”

Source: Rasmussen Reports, April 28, 2009,

Financial Times: Commercial mortgages at risk
“The volume of commercial mortgages at risk of default has quintupled since the beginning of 2008 as a deteriorating economy has made it increasingly difficult for shops and businesses to keep up with their payments.

“Special servicers, companies that collect payments from borrowers in distress on behalf of mortgage bond investors, reported $23.7 billion of mortgages under their care at the end of the first quarter, according to Fitch Ratings.

“That was five times higher than the $4.6 billion of mortgages needing special servicing at the end of 2007. Servicers experienced an almost 50% increase in the volume of distressed commercial mortgages in the first quarter alone.

“Mortgages for multi-family residential properties suffering from the housing downturn represented the largest share of the troubled loans at 31%, said Fitch. However, mortgages for shops and businesses were catching up, with retail loans at 28% of the distressed pools.

“Fitch analysts said they expect commercial mortgage defaults to continue to increase this year. At the end of the first quarter, defaults and payments more than 60 days late were at 1.53% of outstanding mortgages. Fitch said they could reach 4% by the end of 2010.”

Source: Saskia Scholtes, Financial Times, April 28, 2009.

Asha Bangalore (Northern Trust): 10-year Treasury Note yield and mortgage rates after March 18, 2009
“The March 18 FOMC policy statement noted the following:

‘To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.’

“The 10-year Treasury note yield closed at 2.51% on March 18, reflecting a 51 bps rally compared with the close on March 17, 2009, and has since held above the March 18 reading. The 10-year Treasury note yield on April 24 was 3.03% and as of this writing it was trading around 2.97%.

“The Fed has purchased $73.742 billion of Treasury securities between March 23, 2009 and April 27, 2009. The chart below indicates the Fed has not succeeded in guiding Treasury securities lower after the announcement. The goal of the purchase program is to buy $300 billion of longer-term Treasury securities over a six-month period. Effectively, the Fed has roughly $226 billion of Treasury securities more to purchase under this program.

“The good news is that mortgage rates have declined further after the Fed expanded the purchase of mortgage-backed securities ($1.25 billion, up from prior announcement of $750 billion) and agency debt ($200 billion, up from earlier plan of $100 billion) as per the March 18 announcement. The 30-year mortgage rate stood at 5.03% during the week ended March 20 and was quoted at 4.80% as of April 24.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 27, 2009.

Bespoke: Treasuries and high-yield bonds converge
“IEF is an ETF that tracks the price of long-term Treasuries (7-10 years), while HYG tracks the price of high-yield (junk) bonds. During the flight to safety panic that occurred in late 2008, Treasuries soared (yields fell), while junk bonds tanked (yields rose). This caused high-yield spreads to spike to levels not seen in decades. As the market has regained some of its footing in the last couple of months, however, spreads have begun to come in, and the price charts of IEF and HYG highlight this convergence. As shown, IEF (Treasuries) are getting close to testing February support, and the ETF is down from more than $100 to the low $90s. HYG, on the other hand, has rallied from the low $60s to the high $70s since the March equity market lows. If IEF breaks this support in the coming days, it will probably be a sign that the current trend will continue on for longer.”

Source: Bespoke, April 30, 2009.

Barron’s: Big money poll - the long view
“After the worst stretch for stocks in decades, America’s money managers say they’re bullish. But do they really believe it? Based on the results of our latest Big Money poll, the pros are hoping for the best, but … hold on! Aren’t those fresh bear tracks in the mud?

“Nearly 60% of our respondents call themselves bullish or very bullish about the stock market’s prospects through the end of 2009, a significant increase from the 50% who proclaimed themselves bulls last fall. Yet, signs of unease abound. For one, just 56% of today’s poll participants think the stock market is undervalued, down from 62% last fall. Thirteen percent say stocks are overvalued, up from a prior 7%. And an alarming 58% say the market hasn’t bottomed yet, even though the Dow Jones industrials hit a low of 6,469 in March, before recovering to a recent 8,100.

“The managers are similarly wary about the outlook for the economy, at least through the end of this year. And they are downright doubtful that the government’s first stimulus package, announced with fanfare shortly after the Obama administration moved into the White House, will be the last.

“Given these and other concerns, only 26% of the Big Money men and women expect to be net buyers of stocks in the next six months, although 66% say they will be putting more money to work in the 12-month span. But don’t look for fresh dough to flow solely to US equities. Just 44% of our respondents think the US will be the strongest market in the next year; 42% expect emerging markets to take the baton and lead. As Keith Wibel, a money manager at Foothills Asset Management in Scottsdale, Ariz., put it, ‘Confidence has been fractured. The psyche is slow to heal.’

“The market isn’t much faster. Big Money’s bullish cohort expects the Dow to end 2009 at 8,676, about 7% above current levels but flat for the year. Things, or at least stocks, will pick up thereafter, with the blue chips rising another 10% or so, to 9,488, by mid-2010. In concert with their short-term-skittish, long-term-sunny stance, more than 40% of bulls predict the Dow industrials will reach or breach 10,000 by the middle of next year.

“The optimists see the Standard & Poor’s 500 jogging to 906 by December 30, en route to 1,003 next June. The popular benchmark closed Friday at 866. Their mean predictions for the Nasdaq Composite: 1,683 by year end, and 1,841 by mid-2010, up from last week’s 1,694.

“Some big money managers are notably upbeat even - or especially - after a global financial meltdown has cut most stock indexes in half. ‘They don’t ring a bell when they announce a sale on Wall Street, but prices are as good as I’ve seen them in my entire career,’ says David Corbin, president of Corbin & Co. in Fort Worth, Texas.”

Source: Jack Willoughby, Barron’s, April 27, 2009.

Bespoke: Sector earnings growth in the first quarter
“More than 70% of the companies in the S&P 500 have now reported first quarter earnings, so the growth puzzle for the quarter is beginning to take shape. Below we highlight the current year over year % change in earnings for Q1 ‘09 versus Q1 ‘08. We also provide the estimates for these numbers as they stood just before earnings season began.

“As shown, the S&P 500 is currently seeing earnings decline by 32.3% in the first quarter. At the start of earnings season, this number was estimated at -37.4%, so it’s coming in a little better than expected. Consumer Discretionary looks the best when comparing actual versus estimates, but earnings have still declined by 52.5% in the sector. The only two sectors that are coming in weaker than expected are Financials and Energy.

“We also provide the price performance of the sectors since April 2nd. Interestingly, most of the sectors that are up the most are the worst in terms of actual earnings versus estimates.”

Source: Bespoke, May 1, 2009.

David Fuller (Fullermoney): Will stock markets stay above March lows
“The important question is whether or not Wall Street continues to range above its March lows? The answer will have significant implications for other stock markets.

“At Fullermoney, we maintain that the S&P 500 Index will most likely hold above its March low, as it continues to develop a base formation. The main reason, previously stated, is that we are witnessing the greatest attempt at asset reflation in human history. In comparison, it makes Greenspan look, well … almost Austrian and the USA is certainly not the only country engaged in a record reflation. The secondary reason is the record levels of cash held by institutional investors.

“Let us now consider three scripts for Wall Street and its implications for other stock markets: 1) the S&P keeps on rallying, surprising even the bulls; 2) the S&P ranges in extended base formation development for many more months; 3) the S&P rolls over and resumes its bear market by moving well beneath the March low.

1) In this event, the stock markets and sectors that are already considerably outperforming the S&P - mainly Fullermoney themes, including China-led emerging Asia, South American-led resources markets and technology - will continue to do much better than the S&P. Other OECD stock markets, (tech & telecom weighted Sweden excepted), will track the S&P, albeit usually with a slightly higher beta.

2) The Fullermoney themes in (1) above outperform, extending their ranging upward trends. Most OECD stock markets track Wall Street.

3) Fullermoney themes fall back and extend their base formations. Most OECD stock markets track Wall Street, with Sweden being the most likely exception.

“What do I expect? I think it will be (2) above, although possibly in combination with (1). I will not worry too much about (3), provided the S&P can maintain approximately half of its gains from the March low during the next reaction phase.”

Source: David Fuller, Fullermoney, April 29, 2009.

David Fuller (Fullermoney): Global stock markets leaders - what are they saying?
“Fullermoney has long maintained that the leaders lead in both directions. In other words, the leaders of a global stock market recovery will usually lead the next correction. The same applies in reverse.

“Which are the leaders and what are they indicating today?

“China is one of the few stock markets capable of providing a leash effect. Among bigger capitalisation markets, it has led on the upside since its October 2008 low. We pointed out China’s downside key day reversal on April 22 and it is experiencing downside follow through, indicating susceptibility to a further pullback. This will probably create another buying opportunity and I would only be concerned if the last reaction low near 2,040 was exceeded. Meanwhile, it will take an upward dynamic to check this reaction beyond a brief pause.

“Taiwan is a China satellite, strong on tech, which has once again been a leading sector. Consequently Taiwan has been an outstanding performer, that is until its downside key day reversal on April 17. This occurred near the psychological 6,000 level and we saw another downward dynamic today. A close above 6,100 is currently required to offset scope for an additional reaction.

“Brazil has been South America’s comparatively big-cap leader among these resources markets, often cited by Fullermoney. It shows none of the downside keys or other bearish dynamics and actually reached a new high on Friday, although that gain was not maintained today. A close under 44,270 would confirm an upside failure and susceptibility to an additional short-term reaction.

“Conclusion - Fullermoney anticipated the impressive global stock market rally, not least with the help of indices shown above, plus other regional leaders such as Sweden, which is still appreciating, albeit approaching lateral and psychological resistance near 800. We remain medium-term bullish but would be cautious in the short term.

“We have always spoken of a lengthy convalescence in response to the financial crisis. Consequently we have favoured accumulating equities on easing within this base building phase and early stage uptrends among the leaders.

“Meanwhile, there is still more than enough worrying news, in terms of corporate disappointments, to frighten buyers from time to time. Conversely, there is more than enough cash on the sidelines to cushion downside risk during the inevitable reactions and consolidations. For OECD laggards which experienced March lows, I would be concerned if they gave up more than half of their gains from those lows during a reaction.”

Source: David Fuller, Fullermoney, April 27, 2009.

Richard Russell (Dow Theory Letters): Lowry’s statistics do not favor a new bull market
“The Lowry’s statistics do not favor the argument that a new bull market has started. Normally, based on the long history of the Lowry’s studies, when a new bull markets starts, their Buying Power and Selling Pressure Indices move apart by roughly the same number of points.

“The fact - since the March 9 low, Lowry’s Buying Power Index has gained 57 points, but their Selling Pressure Index has only dropped 20 points. This is at sharp variance with all other bull market starts in the Lowry’s history.

“Basically, when a new bull market starts, the background is that the urge to sell has been exhausted. The pressure to press that market down further has disappeared. Thus, the market is left in the hands of those who wish to buy. In the current case, there is still a potential supply of stocks to be sold. In other words, the situation is not correct for the start of a new bull market, based on 76 years of the Lowry’s data.”

Source: Richard Russell, The Dow Theory Letters, March 31, 2009.

Bespoke: Mid-April short interest
“Short interest figures as of mid-April were released on Friday after the close and showed an overall decrease in short interest for NYSE and Nasdaq listed stocks. In the chart below, we show the average short interest as a percentage of float for S&P 500 stocks. After peaking at 5.6% in mid-March, short interest as of mid-April has now declined to 5.5% of the average stock’s float.

“At first glance, it is somewhat surprising that short interest has only declined by a marginal amount. Given the 25%+ rally in the S&P 500, one would expect to see short interest decline by a much larger amount. Digging into these numbers, however, the headline short interest numbers are somewhat misleading due to the extraordinarily large short interest in Citigroup (C). Due to the arbitrage taking place over the upcoming conversion of the preferred into common shares, Citi’s short interest represents 12.1% of the total short interest for the S&P 500. If one were to back Citi out of the calculations, short interest would be about 5.4% of the average stock’s float.

“Even though short interest has declined, there are still plenty of stocks investors are heavily betting against. For example, 82 stocks in the S&P 500 currently have over 10% of their float sold short, and 12 have more than 20% shorted. Given the state of the Financials, one would think most of the names would come from that sector, but the reality is that Citigroup (C) and Avalon (AVB) are the only two names from that sector to make the list. The Consumer Discretionary sector is currently the most popular on the “least popular” list (more than 20% sold short), as six of the 12 names are from the sector.”

Source: Bespoke, April 27, 2009.

Bespoke: Largest companies in the world
“… below we highlight the 25 largest companies in the world. For each company, we provide its country, sector, price (local currency), year to date change, and market cap in dollars. As shown, Exxon Mobil (XOM) is the biggest company in the world and the only one worth more than $300 billion. PetroChina ranks second and is the only other company worth more than $200 billion. The Industrial and Commercial Bank of China is the world’s third largest company, giving China two of the biggest three. Wal-Mart and Microsoft round out the top five. The United States still dominates the list with 12 of the 25 spots. China ranks second with four spots. General Electric used to be the biggest company in the world, but it has slipped all the way down to the 18th spot. Google (GOOG) is also on the list at number 22.”

Source: Bespoke, April 27, 2009.

Bespoke: Country ETFs overbought
“… we highlight below various country ETFs and their current trading levels. An ETF becomes overbought when it trades more than one standard deviation above its 50-day moving average. The % overbought number is how far the ETF is currently above this initial overbought level. This is the first time in quite awhile that all country ETFs have been overbought at the same time, and it’s a sign that markets around the world are extended from their normal trading ranges. The Taiwan ETF is the most overbought at 13.32%, followed by Italy (8.34%), India (7.92%), Brazil (7.14%), Sweden (7.08%), and South Korea (7.08%). Japan is the least overbought at 1.4%.”

Source: Bespoke, April 30, 2009.

The Wall Street Journal: The IMF’s gold gambit
“The fund’s misuse of bullion reserves is crucial to its plan to use the financial crisis to expand its power.

“The International Monetary Fund (IMF) deserves credit, figuratively speaking, for cleverly manipulating the financial troubles of emerging and low-income nations to procure a fresh infusion of capital for itself. But its tactics at this month’s G-20 summit in London - where President Barack Obama signed off on tripling the IMF’s lending resources - should not hoodwink anyone, least of all American taxpayers who pay the largest share of IMF expenses.

“Lost in the lofty talk about putting the IMF in the center of world economic recovery is the fact that the organization has been quietly attempting to ensure its own survival by seeking permission to engage in gold sales …

“The US should not replenish the coffers of a multilateral bureaucracy that quite literally lost its reason for being on August 15, 1971 - the day President Richard Nixon ‘closed the gold window’ and brought an end to the Bretton Woods agreement, which allowed countries to convert their dollar holdings, via the IMF, into gold at a fixed price. Instead, Congress should call for the IMF’s dismantlement and restitution of its assets.

“The most solid asset owned by the IMF, purely as a legacy of its original incarnation, is gold. The IMF holds 3,217 metric tons (103.4 million ounces) of gold, which makes it the world’s third largest official holder. Actually, it’s a misnomer to say the IMF ‘owns’ the gold since the bullion belongs, according to the IMF articles of agreement adopted at Bretton Woods in 1944, to its member nations.”

Source: Judy Shelton, The Wall Street Journal, April 28, 2009.

Julian Jessop (Capital Economics): China’s gold reserves jump
“The revelation of a jump in China’s official gold holdings to 1,054 metric tonnes is supporting gold prices and reviving fears that reserve diversification will undermine other dollar assets, notably US Treasuries.

“But the news may be less significant than some people think, says Julian Jessop, chief international economist at Capital Economics.

“‘Gold was in a bull market from 2002 to 2008, so it is no great surprise that China was buying over this period. The reported amounts are also small compared to the production from China’s own mines, official sales by other central banks, and the record purchases by private investors via exchange traded funds,’ he notes.

“‘What’s more, the fact that China has already increased its gold holdings by 75% does not necessarily mean further purchases and higher prices in the future. It would make more sense to announce an increase in gold holdings once a buying programme has been completed, rather than part way through.

“‘We are also sceptical that the increase in gold holdings tells us anything about the plans for purchases of other assets. Even if all of the additional gold were bought last year at the average 2008 price of $872 an ounce, the total cost would only be around $12.6 billion. This is just a drop in the ocean compared with the total increase in China’s official reserve assets last year of $419 billion.’”

Source: Julian Jessop, Capital Economics (via Financial Times), April 27, 2009.

The Wall Street Journal: Understanding swine flu
“The trouble starts in poor countries where too many people live in proximity to pigs and poultry.

“Unfortunately, conditions in many countries are conducive to the emergence of such new infectious agents, especially flu viruses, which mutate rapidly and inventively. Intensive animal husbandry procedures that place poultry and swine in close proximity to humans, combined with unsanitary conditions, poverty and grossly inadequate public-health infrastructure of all kinds - all of which exist in Mexico, as well as much of Asia and Africa - make it unlikely that a pandemic can be prevented or contained at the source …

“Pigs are uniquely susceptible to infection with flu viruses of mammalian and avian origin. This is of concern for a couple of reasons. First, pigs can serve as intermediaries in the transmission of flu viruses from birds to people. And when avian viruses infect pigs, they adapt and become more efficient at infecting mammals - which makes them more easily transmitted and dangerous to humans.

“Second, pigs can serve as hosts in which two (or more) influenza viruses infecting an animal simultaneously can undergo ‘genetic reassortment’, a process in which pieces of viral RNA (the virus’s genetic material, similar to DNA) are shuffled and exchanged, creating a new organism. The influenza viruses responsible for the world-wide 1957 and 1968 flu pandemics - which killed about 70,000 and 34,000, respectively, in the US - were such viruses, containing genes from both human and avian viruses …

“Because they have been stockpiled for use in the event of an avian flu pandemic, large amounts of the antiflu drugs Tamiflu and Relenza are available. However, they must be administered during the first couple of days after symptoms begin to be an effective treatment. They can also prevent the onset of the disease if administered in adequate doses prior to exposure. The danger of using antiflu drugs in poor countries with inadequate public-health facilities such as Mexico is that they may be administered improperly and in suboptimal doses, which would promote viral resistance and intensify an outbreak.

“If the swine flu outbreak becomes a pandemic with a high rate of severe complications (such as pneumonia) and death, we will need to be smart, nimble and flexible. That will involve triage on many levels - including decisions about which patients are likely to benefit from scarce commodities such as drugs and ventilators - as well as ‘social engineering’ determinations about issues such as mandatory quarantine, the canceling of public events, shutting airports and closing our southern border. Let’s hope it doesn’t come to that.”

Source: Dr Henry Miller, The Wall Street Journal, April 29, 2009.

John Authers (Financial Times): Swine flu
“The outbreak of swine fly has barely dented stocks in Mexico, which plainly stands at risk of severe economic damage from a disease that has been linked to the deaths of almost 200 of its citizens.”

Click here for the article.

Source: John Authers, Financial Times, April 30, 2009.

ETF Trends: Three ETF sectors that could feel impact from swine flu
“The swine flu epidemic, which could possibly turn into a pandemic, may not just be a hit to our health. It could also be a major hit to stock markets and related shares of exchange traded funds (ETFs).

“Many are worried about the economic effects of swine flu as it interrupts day-to-day living, travel and purchases. Some countries are already warning their citizens against travel to Mexico and the United States.

“Drug Makers. One beneficiary could be the pharmaceutical industry, though. Certain makers of drugs and vaccines may be caught off guard to the recent epidemic of swine flu, because of commercial orders getting impacted by government stockpile orders from the late avian flu threat.

“Retail & Consumer. Sam Stoval talked to Steve Chiotakis on MarketPlace and reports that the broader economic drawbacks of the swine flu hit upon trade and travel as well as day-to-day purchases. A short-term situation aside, if the outbreak were to remain out of control, consumers are likely to stay at home, which would effect gasoline, oil and energy consumption. Purchases on food and leisure items would dwindle, as well.

“Airlines. In an effort to secure borders and keep the swine flu contained, the United States is now screening for the swine flu at the Mexican border, and Europe’s Health Commissioner urged Europeans to avoid traveling to the United States or Mexico. Could people hold off on travel altogether because of this? According to Richard Aboulafia on MarketPlace, at least a half dozen airlines, including American, United and Continental, are waiving penalties for changing flights to or from Mexico.

“Upon arrival into the United States from an international flight, expect to be screened in customs, including having your temperature taken. Russia, Taiwan and China are all preparing to quarantine anyone with flu-like symptoms.”

Source: Tom Lydon, ETF Trends, April 27, 2009.

CEP News: UK consumer confidence up for the third straight month
“Confidence among UK consumers rose for the third straight month in April, according to the latest consumer survey report from the GFK Group.

“According to the report, consumer confidence in the UK improved slightly more than expected in April rising three points to -27. Economists had been expecting a -28 reading.

“The UK consumer confidence survey results were compiled from the responses of approximately 2,000 individuals over the age of 16. The survey was conducted on behalf of the European Commission.”

Source: Erik Kevin Franco, CEP News, April 29, 2009.

CEP News: UK Hometrack Housing Survey moderates slightly in April
“The UK housing sector’s decline abated slightly in April, according to the country’s Hometrack Housing Survey, released just after midnight on Monday (Sunday night EDT).

“On a monthly basis, the survey declined by 0.3%. This was less severe than march’s level, which fell an unrevised 0.6%. Hometrack announced that this was the slowest rate of month-over-monthly declines in a year.

“Similarly, the survey’s 10.1% annualized fall was slightly less severe than the prior month’s decline of 10.3%, a level that was also unrevised.”

Source: CEP News, April 26, 2009.

CEP News: Japan’s economy to contract 3.1% in 2009, BOJ says
“The Bank of Japan has revised down its economic growth forecasts for the 2009 fiscal year and projects corporate profits and household consumption to weaken further in the coming quarters.

“In its semi-annual economic outlook published on Thursday, the BOJ said it expects the economy to contract 3.1% in the 2009 fiscal year, down from the 2.0% decline previously forecast.

“Earlier in the day, the BOJ’s Policy Board voted unanimously to keep the overnight call rate targeted at 0.1%.

“According to the central bank, domestic private consumption will continue to deteriorate. However, the pace in export and production declines will ease as inventories are adjusted both domestically and abroad.

“‘Therefore, the pace of deterioration in economic conditions will likely moderate gradually and start to level out,’ the central bank said.

“The BOJ also noted that corporate financing conditions had begun to loosen compared to the latter part of 2008 due to improved issuing conditions in both the corporate bond and commercial paper markets.

“‘However, given the deterioration in corporate profits, the situation as a whole remains severe as an increasing number of firms are reporting that their financial positions are weak and lending attitudes of financial institutions are tight,’ the bank added.

“Looking ahead to the 2010 fiscal year, which begins on April 1, 2010, the BOJ projects that the economy will recover to a growth rate of 1.2%, with estimates out of the Policy Board ranging from +0.8% to +1.5%.”

Source: Todd Wailoo, CEP News, April 30, 2009.

CEP News: Japanese manufacturing PMI jumps in April
“Manufacturing conditions in Japan improved in April, according to a report from Nomura and the JMMA on Thursday.

“According to a report, the country’s manufacturing PMI advanced to 41.4 from 33.8 in March.

“Although the index remains below the 50 level, which indicates a contracting industrial sector, the figure is well above the 29.6 reading recorded in January.”

Source: Erik Kevin Franco, CEP News, April 29, 2009.

James Pressler (Northern Trust): Japan - deeper into the red
“At this early stage in the global recession, most of the industrialized economies are still only speculating when production will turn around or at least stop contracting so rapidly. The US consensus is that growth will return by the end of ‘09, while Europe remains a mixed bag of hard landings and slow recoveries. Today, Japan’s government released a revision of its own outlook, and placed itself amongst the worst-off of the G-7 countries.

“In the government’s latest biannual economic outlook, the fiscal year just ended in March experienced a 3.1% contraction in GDP, while the current FY2009-2010 will experience a sharper slide of 3.3%. The latter figure is a dramatic revision from October’s forecast of 0% growth, and is somewhat more pessimistic than recent statements from Tokyo suggesting a recovery starting in Q1 2010.

“Expectations for exports and business investment were also slashed across the board, with the only positive figure coming from minor growth in public consumption - courtesy of the fiscal stimulus package that came into effect at the beginning of the month. In short, the government has conceded that it will not be able to export its way out of this recession, and eight quarters of contracting GDP (starting in Q2 2008) might even be a little optimistic.

“However, something good may yet come out of all of this - at least for the ruling LDP. PM Taro Aso and his party have not surprisingly taken a beating in the opinion polls over the past six months, and with general elections due this year there was every likelihood that this icon of Japan’s government would be run out of Tokyo entirely. But, a scandal within the opposition Democratic Party (DP) has offered a brief window of opportunity and it appears Aso is pouncing on it. To counter the particularly negative themes of this latest outlook, Aso’s Cabinet is proposing another fiscal stimulus package for FY2010-11. Furthermore, his government submitted a supplementary stimulus package worth ¥15.4 trillion ($159 billion) and all but challenged the opposition-controlled upper house to stall the legislation and force him to call an early election. After being hobbled by scandal, Aso’s dare forces the DP to either roll the dice at the ballot box or cede the economic momentum back to the LDP.”

Source: James Pressler, Northern Trust - Daily Global Commentary, April 27, 2009.

Financial Times: Swiss seek tax treaty trade-off
“Swiss and US officials will meet in Bern on Tuesday for their first talks on a new tax treaty after Switzerland asked the Obama administration to drop a legal case involving the Swiss bank UBS in exchange for the accord.

“The talks were announced earlier this month.

“Tim Geithner, US Treasury secretary, this weekend met with Hans-Rudolf Merz, Swiss finance minister and head of state this year under the country’s rotating presidency.

“Mr Merz told Mr Geithner that an aggressive investigation by US tax authorities into accounts at UBS could make it very difficult to secure approval for a new tax treaty in the Swiss parliament and in a referendum.

“‘US officials told the Financial Times that Mr Geithner did not dismiss the importance of appropriately resolving the matter,’ one said.

“However, the official added: ‘Tax treaty negotiations will be conducted by the Treasury Department with input from the Department of Justice and the Internal Revenue Service. All pending enforcement decisions will be made by the Department of Justice and the IRS.’

“The US response suggests it might be possible for the two sides to strike a deal, though the official added: ‘Both President Obama and Secretary Geithner have made very clear their commitment to tackling tax shelters and other efforts to abuse US tax laws.’”

Source: Haig Simonian and Krishna Guha, Financial Times, April 26, 2009.

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Words from the (investment) wise for the week that was (April 13 – 19, 2009)

Sunday, April 19th, 2009

Spring is in the air – at least in the Northern Hemisphere and on global bourses. Last week marked the sixth consecutive up-week for stock markets as investors’ risk appetite returned amid signs of global economies and the financial sector embarking on the road to recovery.

Source: Tom Toles, The Washington Post.

Speculation that the unprecedented stimulus measures are starting to take root saw the safety appeal of government bonds diminishing, despite the buying support from central banks’ buying programs. Similarly, gold bullion struggled to find traction as investors continued to unwind positions. Silver and oil also languished in the red, but copper, other industrial metals and soya beans surged ahead.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com. A picture tells a thousand words …

Equity investors breathed a sigh of relief with Goldman Sachs (GS), JP Morgan (JPM), Citigroup (C) and General Electric (GE) all reporting better-than-expected first-quarter results. Goldie also announced a $5 billion capital raising. Meanwhile, the US Federal Reserve has told banks to keep mum on the results of “stress tests” that will gauge their ability to weather the recession, Bloomberg reported. This is to ensure the report cards don’t leak during earnings conference calls scheduled for this month.

The quote du jour belongs to Elizabeth Warren, chairperson of the Congressional Oversight Panel on Tarp, who said (as paraphrased by Jon Stewart): “Capitalism without bankruptcy is like Christianity without hell.” Fed chairman Ben Bernanke was in agreement, saying that “… any firm that cannot meet its obligations should bear the consequences of the marketplace. But recent circumstances have been truly extraordinary.”

Global stock markets, led by financials, added to the gains of the rally that commenced on March 10 (see table below). The MSCI World Index gained 2.3% (YTD -4.2%), the MSCI Emerging Markets Index 1.7% (YTD +13.5%) and the S&P 500 Index 1.5% (YTD -3.7%). These indices have risen by 28.0%, 32.6% and 28.5% respectively since the March lows.

Click on the table below for a larger image.

Returns around the world ranged from top performers Ukraine (+15.2%), Denmark (+12.3%) and Norway (+11.4%) to Côte d’Ivoire (-7.0%), Kenya (‑2.8%) and Ecuador (-2.6%) experiencing selling pressure. The Japanese Nikkei 225 Average (-0.1%) was the only major index not making headway, notwithstanding the government’s announcement to support the stock market. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

Focusing on the US stock markets, it is interesting to note that stocks across a broad front have participated in the six-week old rally. This is also illustrated by the graph below which, in addition to the customary market breadth measures, shows the outperformance since the March lows of the Rydex S&P Equal Weight ETF (+40.8%) compared with the S&P 500 Index (+28.5%) – a market-capitalization weighted index.

Source: StockCharts.com

John Nyaradi (Wall Street Sector Selector) reports that the strongest exchange-traded funds (ETFs) on the week were the Claymore/Delta Global Shipping (SEA) (+14.8%), iShares Dow Jones US Home Construction (ITB) (+11.9%) and SPDR S&P Homebuilders (XHB) (+11.2%). On the other end of the performance scale the Market Vectors Gold Miners (GDX) (-6.3%), ProShares Short Financials (SEF) (-4.9%) and United States Oil (USO) (‑4.0%) performed poorly.

On the credit front, the cost of buying credit insurance for US and European companies eased during the past week as shown by the narrower spreads for both the CDX (North American, investment grade) Index (down from 183 to 177) and the Markit iTraxx Europe Index (down from 156 to 146).

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “economic”, “economy”, “market”, “prices” and “China” featured prominently, with others such as “bank” and “government” just a notch behind.

Turning to the stock market again, the chart below from Ron Griess’s The Chart Store puts the movements of the S&P 500 since the beginning of 2007 in perspective.

As shown in the table below, the 50-day moving averages have been cleared comfortably by all the major US indices and the early January highs are the next important targets. As a matter of fact, the Nasdaq Composite Index is already 1.2% above this level. It has to rise by a further 6.7% in order to reach the key 200-day moving average – an indicator often used to distinguish between primary bull and bear markets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to remain intact.

From a technical perspective, a primary bear market still exists as long as the major indices remain below the January highs and the 200-day moving averages. Many of the rally’s leaders (indices and sectors) seem to be running into major resistance at these levels and look susceptible to retrace at least a portion of the gains since the March low.

Further evidence of a short-term top in the making comes from a chart showing the percentage of S&P 500 stocks trading above their 50-day moving averages. Altogether 90% of the stocks are currently trading above their 50-day lines – higher than the 80% level typically seen at prior peaks during this bear market. This looks overdone in the short term, but for a primary uptrend to manifest itself the bulk of the index constituents should remain above the 50-day line and also trade above their 200-day averages (26% at the moment).

Source: StockCharts.com

Still on the topic of whether stock markets are running out of gas, Adam Hewison of INO.com prepared a short technical analysis of the S&P 500’s most likely direction and important chart levels. Click here to access the video clip.

The sharp fall (-4.0%) on Friday in Taiwan – one of the strongest stock markets over the past few weeks – may be a precursor of short-term downside potential in other markets. (Click here for a chart.)

“Mistaking a temporary jump for a sustained bull market can be costly. In 41 so-called bear market rallies since 1928 – gains of more than 10% that are later wiped out – equities fell an average 25% after peaking,” warned Laszlo Birinyi (Birinyi Associates) via Bloomberg. “Buying stocks is like crossing Fifth Avenue when the light is red. You might make it, but the odds are not with you.”

David Fuller (Fullermoney) summarized the outlook as follows: “We are seeing nothing less than the greatest global asset reflation in history. This is bullish and all that bearish sentiment tells us that there is still plenty of cash on the sidelines, capable of fuelling additional gains in stock markets and commodities over at least the medium term.

“On a short-term basis, stock markets are technically overbought as the rally continues for a sixth consecutive week. However, this persistent, non-volatile strength provides clear evidence that demand has regained the upper hand. Consequently, downside risk should be limited to a temporary reaction and consolidation of recent gains, before cash on the sidelines supports additional strength.”

Interestingly, analyst earnings revisions for the S&P 1500 Index and most sectors have once again improved during the past week. According to Bespoke, analysts have cut estimates for 772 companies in the S&P 1500 and raised estimates for 290 over the last four weeks. This works out to a net of -482, which represents 32.1% of the Index - the highest level since late September. “… rather than dismiss these numbers as negative, we would continue to note that it’s a start, and before things start to get better, they have to get less worse,” said Bespoke.

Dozens more companies report on their first-quarter results next week, including heavy-weights like Bank of America (BAC), IBM (IBM), Apple (AAPL), Boeing (BA) and Morgan Stanley (MS).

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Are stock market gains built on solid foundations?“, “Moving averages - indicating bull or bear markets?“, “Technical talk: Buying power not tapped out yet” and “Commodities have turned the corner“. (And do make a point of listening to Donald Coxe’s webcast of April 17, which can be accessed from the sidebar of the Investment Postcards site.)

Twitter
In case you missed last week’s paragraph on Twitter, I regularly post short comments (maximum 140 characters) on topical economic and market issues on this fascinating medium. For those not doing so already, you can follow my “tweets” by clicking here. The Twitter posts also appear on my Facebook page and in the sidebar of the Investment Postcards site.

Economy
“Global business confidence remains very weak. Survey responses regarding sales, hiring, and equipment investment are notably poor. Businesses also report little pricing power,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. However, it is encouraging that businesses are becoming steadily less negative about the economy’s prospects later this year.

Fed chairman Bernanke introduced the term “green shoots” a few weeks ago and it has since become a part of economic and financial vocabulary.

Source: The New York Times, April 7, 2009 (hat tip: Northern Trust).

How widespread are the green shoots? I posted a short article last week on a recent research report by the Goldman Sachs Global Economics team, showing that the global economy appears to be stabilizing. To monitor whether economic data are indeed improving they have developed a simple Diffusion Index, recording whether a particular data series has increased or decreased relative to its previous reading. Thirty-four monthly economic data points from the US, Europe, China, Japan, Brazil, Russia, Korea and India are analysed.

After having languished below 50 since the spring of 2007, the Diffusion Index increased to above 50 in February and March. Any reading between 0 and 50 indicates the data are deteriorating, whereas above 50 implies improvement.

When looking regionally, the Goldman Sachs economists believe the worst of the cycle has been seen in the US and the UK, but this does not appear to be the case in Euroland and Japan.

Turning to the US, a snapshot of the week’s economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

April 17
• University of Michigan Consumer Sentiment Index - improvement in outlook for consumers

April 16
• Housing Starts appear to be establishing a bottom
• Jobless Claims - mixed news
• Philadelphia Fed Factory Survey - is regional progress a precursor of nationwide progress?

April 15
• Lower energy and food prices help to contain inflation
• Factory sector remains significantly weak
• Home Builders Survey shows optimism

April 14
• Retail Sales - story of weak consumer spending
• Wholesale prices report - benign figures
• Small businesses remain gloomy about the future

According to Moody’s Economy.com, the Federal Reserve’s Beige Book report - covering most of March and early April - indicated that overall economic conditions continued to deteriorate or remained weak. However, nearly half of the 12 reporting Fed Districts noted that in some sectors, conditions appeared to be moderating or stabilizing. Reports of a deceleration in the pace of decline or some levelling off appeared mainly in manufacturing and residential real estate.

Pulling the strings together, Asha Bangalore (Northern Trust) said: “… ‘green shoots’ are appearing simultaneously with spring and we will be watching for more signals that will herald the economic recovery. For now, it is not self-sustaining economic growth yet. Stability in the financial sector with clean balance sheets of banks and a working credit machine will be necessary for self-sustaining economic growth. The positive economic signals are small but significant because a further slide in economic activity is not the scenario one would want to envision in the sixth quarter of a recession.”

Back to the global economy, real GDP growth in China slowed from 6.8% in the fourth quarter of last year to 6.1% in the first quarter, the slowest year-over-year growth rate in about nine years.

Source: Financial Times, April 16, 2009.

Jay Bryson (Wachovia Economics Group) commented as follows: “In our view, the Chinese economy probably bottomed in the first quarter and growth should strengthen over the next few quarters. Although the global economy is very weak at present, many economies appear to be nearing inflection points. Therefore, exports should exert less drag on the Chinese economy over the next few quarters.

“In addition, there is still a fair amount of fiscal and monetary stimulus in the pipeline in China. Although the Chinese economy is not large enough to have a significant effect on the US economy, stronger growth in China should help American exports on the margin.”

Source: Dilbert.com, April 16, 2009 (hat tip: News N Economics).

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, April 10, 2009.

The US economic highlights for the week, courtesy of Northern Trust, include the following:

Click here for a summary of Wachovia’s weekly economic and financial commentary.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, April 17, 2009.

Bernard Baruch said: “If you get all the facts, your judgment can be right; if you don’t get all the facts, it can’t be right.” Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in gathering the most pertinent facts and making the right calls.

That’s the way it looks from Cape Town (from where I will be departing for Newport Beach, California in three days’ time).

Source: Peter Broelman, April 16, 2009.

Robert Shiller (Bloomberg): Depression lurks unless there’s more stimulus
“In the Great Depression of the 1930s the US government had a great deal of trouble maintaining its commitment to economic stimulus. ‘Pump- priming’ was talked about and tried, but not consistently. The Depression could have been mostly prevented, but wasn’t. Ultimately, the reason for this policy failure was inadequate understanding of the relevant economic theory.

“In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again. We appear to be in a much better situation due to the stronger efforts to date. Still, there is a danger that, because of a combination of faulty economic theory and inadequate appreciation of human psychology, as well as deep public anger, we will not continue with such stimulus on a high enough level.

“We desperately need to be persistent, keeping our government response adequate for the problem at hand on a sufficient scale and for sufficient time.

“It is now time to stimulate demand. It is also time to repair the credit system. Those are the two targets that must be hit to get us out of the current economic slump, and to restore confidence. It will be costly to meet both of these targets, and it will require new legislation to give enhanced regulatory powers to deal with a greatly changed financial system, now in a systemic slump.”

Click here for the full article.

Source: Robert Shiller, Bloomberg, April 15, 2009.

The Wall Street Journal: Bank stress tests, explained
“Gauging a bank’s health by seeing how much capital it would need to get through a deep recession seemed a good idea at the time, says WSJ economics editor David Wessel. But things have not gone as planned.”

Source: The Wall Street Journal, April 15, 2008.

Bloomberg: Fed said to order banks to stay mum on “stress test” results
“The US Federal Reserve has told Goldman Sachs Group, Citigroup and other banks to keep mum on the results of ‘stress tests’ that will gauge their ability to weather the recession, people familiar with the matter said.

“The Fed wants to ensure that the report cards don’t leak during earnings conference calls scheduled for this month. Such a scenario might push stock prices lower for banks perceived as weak and interfere with the government’s plan to release the results in an orderly fashion later this month.

“‘If you allow banks to talk about it, people are just going to assume that the ones that don’t comment about it failed,’ said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

“Regulators are using the tests to determine whether the 19 biggest banks have enough capital to cover loan losses during the next two years if the economy shrinks, unemployment surges and housing prices keep declining. The tests are a linchpin of the plan Treasury Secretary Timothy Geithner announced in February to bolster confidence in the nation’s banks and restore financial-market stability.”

Source: Bradley Keoun and Scott Lanman, Bloomberg, April 10, 2009.

CNBC: Bove & Ely - bank crisis over?
“Better than expected results from Wells Fargo, JPMorgan and Citi has investors wondering whether financials have turned a corner, with Dick Bove, Rochdale Securities and Bert Ely, Ely & Company.”

Source: CNBC, April 17, 2009.

CEP News: Fed’s beige book reveals glimmers of hope
“The Federal Reserve’s Beige Book revealed all 12 central bank districts saw weakening economic activity in the previous six weeks. However, the detailed report released Wednesday said five districts reported the pace of economic contraction was moderating.

“The manufacturing sector continues to suffer in most areas of the United States.

“The pharmaceutical industry in Boston and Chicago Fed regions saw solid demand and in the Dallas region, orders for petrochemical products are rising.

“The US real estate industry saw some small signs of improvement as well. While most districts reported depressed conditions, low mortgage rates and home prices meant some regions were reporting more buyers.

“An improvement in home sales was registered in the Richmond, Atlanta, Minneapolis, Kansas City and San Francisco area reports.

“The nonresidential real estate industry, however, was weak across the board.

“There was an increase in home loan demand in Kansas City, New York and Richmond regions. However, most areas reported meager demand for loans, and increasingly strict requirements for commercial loans.

“As for the labour market, the report read, ‘reports of layoffs, reductions in work hours, temporary factory shutdowns, branch closures and hiring freezes remained widespread across Districts.’

“In agriculture, most areas reported improving planting and harvesting conditions, save the Dallas and San Francisco area which are experiencing drought. Severe losses for dairy farmers in the Chicago and Dallas districts were also reported.

“All districts reported downward pressures on prices.

“All the data in the report was taken on or before April 6.

“The Beige Book is the central bank’s summary of economic news over roughly the past six weeks from the 12 Federal Reserve Bank districts.”

Source: Megan Ainscow, CEP News, April 15, 2009.

CNBC: Bernanke speaks - the financial crisis
“Fed Chairman Ben Bernanke discusses bank mergers, mortgage crises, the stimulus package and consumer confidence at Morehouse College in Georgia.”

Part 1:

Part 2:

Source: CNBC, April 14, 2009.

Asha Bangalore (Northern Trust): Bernanke’s speech
“Chairman Bernanke’s speech at Morehouse College in Atlanta was a succinct description of the events that have unfolded since August 2007. It was presented as answers to four questions: (1) How did we get here? (2) What is the Fed doing to address the situation? (3) Does the Fed’s response risk a surge in inflation down the road? (4) Why did the Fed and Treasury act to prevent the bankruptcies of major financial firms?

“Answers to these questions have been addressed on prior occasions. These are important questions and answers to each one of them clarify the Fed’s position and response as the crisis is being tackled. The response to question 3 about inflation stands out because how the Fed unwinds the aggressive steps will determine the credibility of the central bank going forward.

“‘We have a number of effective tools that will allow us to drain excess liquidity and begin to raise rates at the appropriate time; that said, unwinding or scaling down some of our special lending programs will almost certainly have to be part of our strategy for reducing policy stimulus once the recovery is under way.

“‘We are thinking carefully about these issues; indeed, they have occupied a significant portion of recent FOMC meetings. I can assure you that monetary policy makers are fully committed to acting as needed to withdraw on a timely basis the extraordinary support now being provided to the economy, and we are confident in our ability to do so.

“‘To be sure, decisions about when and how quickly to proceed will require a careful balancing of the risk of withdrawing support before the recovery is firmly established versus the risk of allowing inflation to rise above its preferred level in the medium term. However, this delicate balancing of risks is a challenge that central banks face in the early stages of every economic recovery. I believe that we are well equipped to make those judgments appropriately.

“‘In addition, when the time comes, our ability to clearly communicate our policy goals and our assessment of the outlook will be crucial to minimizing public uncertainty about our policy decisions.’”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 14, 2009.

Asha Bangalore (Northern Trust): Retail sales - story of weak consumer spending
“Retail sales fell 1.1% in March following a 0.3% increase in February (previously estimated as a 0.1% decline). Retail sales of January were revised up slightly to a 1.9% gain from a 1.8% increase. In March, the 1.6% drop in gasoline sales accounted for some of the decline. In addition, auto sales were reported as a 0.9% drop despite the increase in unit sales to 9.8 million units from 9.2 million in February. Excluding autos and gasoline, retail sales fell 0.8% in March after a 0.7% jump in February.

“The widespread weakness of retail sales in March leaves the level of spending less than the quarterly average which is an arithmetical disadvantage for second quarter retail sales. Retail sales fell at an annual rate of 4.9% in the first quarter after a 25.5% plunge in the fourth quarter. Excluding gasoline, prices of which led to sharp drop in retail sales in the fourth quarter, retail sales edged down 0.4% in the first quarter compared with a 10.6% drop in the fourth quarter.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 14, 2009.

Asha Bangalore (Northern Trust): Jobless Claims - mixed news
“Initial jobless claims fell 53,000 to 610,000 during the week ended April 11. The four-week moving average stands at 651,000, down from the cycle peak of 659,500. Historically, the four-week moving average peaks at the end of recession (see chart). If the four-week moving average were to post larger declines in the weeks ahead, it would be a meaningful signal that labor market conditions are turning the corner. It is premature to declare that a peak for four-week initial claims has been established.

“Continuing claims, which lag initial claims by one week, moved up 172,000 to 6.022 million, the first reading in excess of 6 million, and the insured unemployment rate rose to 4.5% from 4.4% in the prior week. These mixed signals should be sorted out in the weeks ahead.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 16, 2009.

Asha Bangalore (Northern Trust): New home construction appears to be bottoming
“Home construction appears to have established a bottom in January. Total housing starts fell 10.8% to an annual rate of 510,000 in March, the second-lowest on record. The record low is the 488,000 mark of housing starts in January 2009. It appears that housing starts readings of January 2009 could be the cycle low.

“The elevated level of inventories of unsold new homes is the main reason to be less optimistic about the March data of housing starts. There was a 12.2-month supply of unsold new homes in the marketplace as of February 2009; the record high of a 12.9-month supply of inventories was recorded in January 2009.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 16, 2009.

Asha Bangalore (Northern Trust): Home Builders Survey shows optimism
“The Housing Market Index (HMI) of the National Association of Home Builders increased to 14 in April from 9 in March, which is the first encouraging sign about the housing market in addition to the increase in sales of homes in February.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 15, 2009.

Asha Bangalore (Northern Trust): Factory sector remains significantly weak
“Industrial production fell 1.5% in March, matching the decline recorded in the prior month. In the first quarter, industrial production has dropped at an annual rate of 20%. Total capacity utilization was 69.3% in March, a historical low for the series which dates back to 1967.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 15, 2009.

Asha Bangalore (Northern Trust): Wholesale prices report - benign story for March
“The Producer Price Index (PPI) of Finished Goods fell 1.2% in March, inclusive of declines in prices of energy (-5.5%) and food (-0.7%). Energy prices fell at an annual rate of 2.7% in the first quarter after a 76.7% plunge in the prior quarter. Excluding food and energy, the core PPI of Finished Goods held steady in March. By contrast, food prices have fallen more sharply in the three months ended March (-10.1%) versus the three months ended December 2008 (-4.8%).”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 14, 2009.

Asha Bangalore (Northern Trust): Lower energy and food prices help to contain inflation
“The Consumer Price Index (CPI) fell 0.1% in March, following a 0.4% increase in February. The 0.38% year-to-year decline of the overall CPI is the first deflationary reading since 1955. Additional year-to-year declines are conceivable for the months ahead. The 3.0% drop in the energy price index and 0.1% decline of the food price index helped to bring down the overall CPI.

“Excluding food and energy, the core CPI moved up 0.2%, matching the gains seen in each of the prior two months. On a year-to-year basis, the core CPI increased 1.8%, down from the cycle high of a 2.54% gain in August 2008.

“Inflation, a lagging economic indicator, is contained for now. Concerns about inflation are growing in light of the size of the Fed’s balance sheet, which has expanded rapidly to support the financial system and stem the decline of economic activity. Chairman Bernanke has noted that the Fed has the policy tools and will to unwind the aggressive easing that is in place before inflationary trends become entrenched in the economy.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 15, 2009.

Dshort: Inflation - figures lie, and government liars figure

Source: Dshort, March 18, 2009.

The Wall Street Journal: Banks ramp up foreclosures
“Some of the nation’s largest mortgage companies are stepping up foreclosures on delinquent homeowners. That will likely lead to more Americans losing their homes just as the Obama administration’s housing-rescue plan gets into gear.

“JPMorgan Chase, Wells Fargo, Fannie Mae and Freddie Mac all say they have increased foreclosure activity in recent weeks. Those companies say they have lifted internal moratoriums which temporarily halted foreclosures.

“Some mortgage companies had stopped foreclosing on borrowers as they waited for details of the Obama administration’s housing-rescue plan, announced in February, which provides incentives for mortgage companies and investors to reduce borrowers’ payments to affordable levels. Others had temporarily halted foreclosures while they put their own programs in place, or in response to changes in state laws.

“Now, they have begun to determine which troubled borrowers are candidates for help, and to move the rest through the foreclosure process.

“The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off.”

Source: Ruth Simon, The Wall Street Journal, April 15, 2008.

Rebecca Wilder (News N Economics): More evidence that loan modifications may not put a floor under foreclosures
“The LA Times reports the broad results of a research paper produced at the Boston Fed, Reducing Foreclosures by Christopher L. Foote, Kristopher S. Gerardi, Lorenz Goette, and Paul S. Willen. According to the Times:

“‘Policies aimed at easing home loan terms for troubled borrowers may not be as effective in preventing foreclosures as more direct aid to homeowners, Federal Reserve economists have found.

“‘Job losses and falling home prices have a bigger effect on delinquencies than mortgage terms, and modifications aren’t necessarily a better deal for investors than foreclosures, two current and one former economist at the Boston Fed Bank and one Atlanta Fed researcher say in a paper posted Friday on the Boston Fed’s website.

“The results of this paper suggest that policies that encourage moderate, long-term reductions in DTIs [debt-to-income ratios] face important hurdles in addressing the current foreclosure crisis.

“Increasingly, borrowers are walking away from their mortgages, while at the same time, lenders may be unwilling to modify. This study suggests that Obama’s loan modification package may face some hurdles. To date, the results of government efforts to stem defaults are not encouraging.”

Source: Rebecca Wilder, News N Economics, April 11, 2009.

The New York Times: Big profits, big questions
“The question many Wall Streeters are asking is just how Goldman once again snatched victory from the jaws of defeat. Many point to Goldman’s expert manipulation of the levers of power in Washington … the firm has come to be known, as a headline in this newspaper last October put it, as ‘Government Sachs’.

“How can one ignore, the conspiracy-minded say, the crucial role that Henry Paulson, who followed Mr. Rubin to the top at both Goldman and Treasury, played in the decisions to shutter Bear Stearns, to force Lehman Brothers to file for bankruptcy and to insist that Bank of America buy Merrill Lynch at an inflated price? David Viniar, Goldman’s chief financial officer, acknowledged in a conference call yesterday the important role the changed competitive landscape had on Goldman’s unexpected firstquarter profit of $1.8 billion: ‘Many of our traditional competitors have retreated from the marketplace, either due to financial distress, mergers or shift in strategic priorities.’

“But he was largely mum on American International Group, which, Goldman’s critics insist, is the canvas upon which the bank and its alumni have painted their great masterpiece of self-interest. A few days after Mr. Paulson refused to save Lehman Brothers last September - at a cost of a mere $45 billion or so - he came to AIG’s rescue, to the tune of $170 billion and rising. Then he decided to install Edward Liddy - a former Goldman Sachs board member - as AIG’s chief executive. Goldman has since received some $13 billion in cash, collateral and other payouts from AIG - that is, from taxpayers …

“December 2008 was not included in Goldman’s rosy first-quarter 2009 numbers. In that month, Goldman lost a little more than $1 billion, after a $1 billion writedown related to ‘non-investment-grade credit origination activities’ and a further $625 million related to commercial real estate loans and securities. All told, in the last seven months, Goldman has lost $1.5 billion. But that number didn’t come up on Monday. How convenient …”

Source: William Cohan, The New York Times, April 14, 2009.

CNBC: Bove - Goldman raising $5 billion is wrong
“Goldman Sachs’ $5 billion capital raising is wrong, says Richard Bove, financial strategist at Rochdale Securities. He explains why to Michael Yoshikami, president & chief investment strategist at YCMNET Advisors & CNBC’s Maura Fogarty.”

Source: CNBC, April 14, 2009.

The New York Times: China slows purchases of US and other bonds
“Reversing its role as the world’s fastest-growing buyer of US Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China’s central bank.

“China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year.

“China has lent vast sums to the US - roughly two-thirds of the central bank’s $1.95 trillion in foreign reserves are believed to be in American securities. But the Chinese government now finances a dwindling percentage of new American mortgages and government borrowing.

“In the last two months, Premier Wen Jiabao and other Chinese officials have expressed growing nervousness about their country’s huge exposure to America’s financial well-being.

“Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend. A resumption of growth in China’s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.

“The main effect of slower bond purchases may be a weakening of Beijing’s influence in Washington as the Treasury becomes less reliant on purchases by the Chinese central bank.

“Asked about the balance of financial power between China and the US, one of the Chinese government’s top monetary economists, Yu Yongding, replied that ‘I think it’s mainly in favor of the US’.

“He cited a saying attributed to John Maynard Keynes: ‘If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.’”

Source: Keith Bradsher, The New York Times, April 12, 2009.

Hans Lorenzen (Citigroup): High-grade credit’s turning tide
“The tide may finally have turned for the high-grade credit market, says Hans Lorenzen, strategist at Citigroup.

“‘Over the last two years, credit markets have stumbled from one bad headline to the next,’ he says. ‘However, we now get a sense the consensus has become so bearish that events may actually begin to surprise on the upside.’

“Mr Lorenzen notes credit spreads on investment-grade corporate bonds remain at levels not seen since the Great Depression. ‘So the mere improvement in the rate of decline in economic activity we expect later this year should allow a reduction in credit risk premia,’ he says.

“He also points to several other positives. ‘The G20’s commitment to boost funding to emerging markets is encouraging, and the market is more upbeat on the prospects for policy intervention.’

“But he still has concerns. ‘New issuance continues at a blistering pace, soaking up much of the cash coming into the sector. A long-anticipated rise in defaults is also occurring, and rating agencies are downgrading at a near record pace.

“He also acknowledges that many banks remain constrained in their ability to lend. Above all, economic activity data will stay dire for now. ‘Yet, we are inclined to think all this is factored in. While many problems still lie ahead, for the first time since the credit crunch began, we believe high-grade credit spreads have reached their peak.’”

Source: Hans Lorenzen, Citigroup (via Financial Times), April 14, 2009.

Rebecca Wilder (News N Economics): Corporate spreads still seriously elevated
“I hadn’t looked at corporate spreads in a while - the firm’s borrowing costs relative to the government’s borrowing costs. Recently, the government’s cost of borrowing for a term of 10 years, the 10-year Treasury rate, decreased with the Fed’s efforts to buy longer-term Treasuries. And the reason that the Fed is buying Treasuries is to lower borrowing costs faced by firms and households (corporate rates, mortgages, auto loans, etc.), which has evidently helped …

… but corporate spreads are still very, very elevated.

“The chart lists the 10-yr Aaa and Baa yields over the likewise Treasury rate (the corporate spread) in basis points (bps, essentially rate*100) reported by the Federal Reserve. Corporate spreads surged in March 2008 when the Fed lent money to JPMorgan in order to facilitate the takeover of Bear Stearns. That was a year ago; and since then, credit spreads have risen to record highs and then ebbed only slightly.”

Source: Rebecca Wilder, News N Economics, April 12, 2009.

Financial Times: Credit quality of global groups at 25-year low
“The credit quality of global companies has deteriorated to levels not seen for more than a quarter of a century, according to Moody’s Investors Service.

“The ratings agency said the ratio of companies having their credit ratings cut versus the number of companies being upgraded - an indicator of declining credit quality - had reached its highest level since 1983.

“During the first quarter of 2009, the rate at which borrowers were having their ratings cut reached 13.8%, highlighting the negative credit climate in the first part of the year, analysts at Moody’s said.

“‘This downgrade rate is higher than pre-economic crisis figures,’ said Jennifer Tennant, Moody’s analyst. For the whole of 2006, the downgrade rate was 10.2%, and the average rate from 1983-2009 was 12.5% per year.

“The fall in the ratio of companies’ credit ratings being upgraded was also grim. During the first quarter of 2009 the upgrade rate was just 0.5%, compared with an average upgrade rate between 1983 and 2009 was 7.9%. There were only four upgrades for every 100 downgrades.”

Source: Anousha Sakoui, Financial Times, April 12, 2009.

Reuters: Pimco to launch fund linked to US asset plan
“Pimco, the world’s largest bond fund manager, plans to launch a closed-end asset-backed fund linked to the US asset plan, TALF, in the next 30 days, and is exploring business opportunities in China, its Asia president and director said on Wednesday.

“Under the US plan to sop up bad assets now choking bank balance sheets, public-private funds will get opportunities to buy so-called ‘legacy’ securities with a combination of private and government capital, possibly levered up by the government.

“Pimco’s TALF Investment and Recovery Fund will borrow from the Term Asset-Backed Securities Loan Facility, or TALF, to buy securities backed by consumer receivables and loans, and will deliver income flows to investors via interest payments from the purchased assets, Brian Baker told Reuters in Shanghai.

“‘We believe this financial crisis will be resolved by the US and other core financial market rehabilitation. So we want to invest in these core countries where the financial rehabilitation will be led and where policy makers will be most aggressive in addressing the financial crisis,’ Baker said.

“Pimco, the world’s best known bond manager under chief investment officer Bill Gross, manages $747 billion, according to the company’s website.”

Source: Reuters, April 15, 2009.

CNBC: McCulley - Pimco’s plans for financials
“The free-fall of the markets has been aborted and there is a bounce off a bottom, says Paul McCulley, Pimco portfolio manager/managing director.”

Source: CNBC, April 17, 2009.

Bespoke: S&P 500 moving average analysis
“The S&P 500 is currently trading above its 50-day moving average and below its 200-day moving average. The recent rally has also been one of the most impactful during the current bear market in regards to where the index is trading relative to both its 50- and 200-days.

“As shown in the second chart below, the S&P 500 is now 7.85% above its 50-day moving average, which is the most overbought reading for the spread since the bear market began. The index has also now traded above its 50-day for 11 days in a row, which is the longest streak since the 33-day period that ended last May.

“And finally, the S&P 500’s 200-day moving average spread is the highest it has been since the market really tanked last September. If the index can eventually trade above both its 50-day and 200-day, it will be a big positive for technicians looking for signs that the bear is officially over.”

Source: Bespoke, April 16, 2009.

Bespoke: S&P 500 financial sector overbought
“The S&P 500 Financial sector is now 28.5% above its 50-day moving average. Below we highlight the historical 50-day moving average % spread for the sector going back to 1990 (as far back as daily sector pricing goes). As shown, just as the sector hit extremes on the oversold side in recent months, we’ve now hit extremes never seen before on the overbought side.”

Source: Bespoke, April 16, 2009.

Bloomberg: Russell 2000 rising 36% flashes warning for S&P rally
“The Russell 2000 Index’s record one-month gain is sending danger signals to investors who remember how similar rallies in US stocks came to an end.

“The gauge of companies with a median value of $301 million is beating the Standard & Poor’s 500 Index, where stocks have an average market value of $6.5 billion, by 9.8 percentage points through last week.

“While small-caps tend to lead the way out of bear markets, when they have outpaced larger stocks by this much, both indexes erased gains and fell, according to data compiled by Birinyi Associates. Increased trading and ratios of advancing to falling stocks have also risen to levels that preceded declines, boosting investor concerns that the S&P 500’s 27% advance since March 9 will end the same way as the 24% rally that fizzled in January.

“‘This move is too explosive to be sustainable,’ said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $60 billion. ‘None of the structural underpinnings of the market have really changed. It’s going to be a multiyear healing process.’

“Mistaking a temporary jump for a sustained bull market can be costly. In 41 so-called bear market rallies since 1928 - gains of more than 10% that are later wiped out - equities fell an average 25% after peaking, according to Birinyi.

“‘Buying stocks is like crossing Fifth Avenue when the light is red,’ Birinyi said today in an interview with Bloomberg Television. ‘You might make it, but the odds are not with you.’”

Source: Lynn Thomasson, Bloomberg, April 13, 2009.

Bespoke: Percentage of stocks above 50-day moving averages
“After registering gains for five weeks in a row, there are now 84% of stocks in the S&P 500 trading above their 50-day moving averages. As shown below, this is the highest level over the last year.

“And six of the ten S&P 500 sectors have more than 90% of their stocks above their 50-days. Materials and Telecom are at 100%, while the Financial sector ranks third at 97%. Technology and Consumer Discretionary are at 95%, and Industrials is at 93%. Health Care has the second weakest breadth reading at the moment with only 51% of its stocks above their 50-days. And the most defensive sector in the market - Utilities - also has the smallest number of stocks above their 50-days at 49%.”

Source: Bespoke, April 13, 2009.

Richard Russell (Dow Theory Letters): Is this a true bear market bottom?
“… the market is now about one month off its March 9 low. Yet already the mood has changed, public sentiment is turning almost rosy, and analysts are openly urging people to buy stocks.

“The bear is doing its job. In less than a month, the Dow has recouped 20% of its 7,617 bear market losses. If the Dow was to retrace the normal one-third to one-half of its loss since late-2007, the following is where the Dow would be. A one-third recovery would take the Dow to 9,086. A one-half recovery would take the Dow to 10,355. Last Thursday the Dow ended the week at 8,083, which was 1,003 points short of a one-third recovery.

“It seems to me that this is awfully fast for the business news to turn rosy - only one month away from the March 9 ‘supposed’ bear market bottom. Bear market bottoms don’t tend to work that way. After a true bear market bottom, it often requires many months before the crowd and the media turn bullish.

“To repeat, I’m suspicious.”

Source: Richard Russell, The Dow Theory Letters, April 13, 2009.

Chart of the Day: “Smart money” positioning themselves
“Today’s chart illustrates how large commercial institutions (i.e. “smart money”) are positioning themselves in the current market environment.

“When the gold line in the bottom chart is at a high level, it suggests that the smart money is betting on a rally. Large commercial institutions have tended to position themselves for a rally around the time of a stock market trough.

“One exception to this prescient ability occurred in 2007 when large commercial institutions became bullish just prior to the beginning of the current bear market. However, they did move to a bearish position prior to the financial collapse in the latter part of 2008.

“What is of particular interest with today’s chart is that the smart money has not moved back into the market since the financial collapse of 2008. This suggests that the smart money is viewing the current rally that began on March 9 as a bear market rally.”

Source: Chart of the Day, April 14, 2009.

CNBC: Mobius - investing in the next frontier
“An investing legend who started his first fund at the same time of CNBC’s launch sheds light on emerging-market problem spots and opportunities, with Mark Mobius, Templeton Asset Management managing director.”

Click here for a Globe and Mail interview with Mobius.

Source: CNBC, April 17, 2009.

Bespoke: Emerging markets on a tear?
“The Wall Street Journal has an interesting article in its Money & Investing section today titled “Emerging Markets Go on a Tear“. China is one of the countries highlighted, which is now up 47% from its lows late last year. As shown below, however, China’s Shanghai Composite still has a long, long way to go before it makes a dent in the losses it experienced in ‘07 and ‘08. As shown, even after its 47% run, the index needs to gain 142% to reach its old highs. From its peak, China is still down 59%.

“Conversely, the S&P 500 is down 46% from its peak and only needs to gain 84% to reach its old highs. Emerging markets like China have rallied significantly, but since its starting base was so low, its market is still in worse shape than the US.”

Source: Bespoke, April 13, 2009.

CEP News: Bernanke says US dollar will remain dominant currency
“The US dollar remains the dominant world currency and US Treasuries remain a sound investment, Federal Reserve Chairman Ben Bernanke said in Atlanta, Georgia on Tuesday.

“In a Q&A session after his speech Bernanke said he does not see the US dollar’s role changing in the foreseeable future.

“The comments come after news reports that China is attempting to push wider use of the yuan in global markets. China has signed currency swap contracts with six nations since December 2008.

“China has also alluded to worries about the value of US bonds.

“Bernanke did address the US deficit problem in his speech on Tuesday, and said the government needs a plan to reduce long-term fiscal imbalances.

“For the time being, however, he said they have no choice but to spend.”

Source: Megan Ainscow, CEP News, April 14, 2009

Fin 24: Zim dollar shelved for a year
“Zimbabwe will not use its own local currency for at least a year, a state newspaper reported on Sunday, while it tries to repair an economy which critics say was destroyed by President Robert Mugabe.

“The southern African state has allowed the use of multiple foreign currencies since January to stem hyperinflation which had rocketed to over 230 million percent and left the Zimbabwe dollar almost worthless.

“The state-controlled Sunday Mail said the unity government of Mugabe and opposition leader Morgan Tsvangirai decided the Zimbabwe dollar should only be reintroduced when industrial output reaches about 60% of capacity from the current 20% average.

“‘The Zimbabwe dollar will be out for at least a year. We resolved that there will be no immediate plans to (re)introduce the money because there is nothing to support and hold its value,’ the newspaper quoted Economic Planning and Development Minister Elton Mangoma as saying.

“‘Our focus is to first ensure that we have a vibrant industry. If we try to reintroduce the local currency now, it will face the same fate of being wiped out of its value within weeks.’

“Critics say Mugabe, who has led Zimbabwe since independence from Britain in 1980, has destroyed one of Africa’s most promising economies through controversial policies, including the seizure of white-owned commercial farms for redistribution to inexperienced black farmers.

“Mugabe, 85, denies the charge and says the economy has been sabotaged by enemies opposed to his nationalist policies.”

Source: Fin 24, April 12, 2009.

Eoin Treacy (Fullermoney): Gold in no-man’s land
“Gold continues to go through a difficult phase as other commodities and stock market sectors move to relative outperformance. Gold, and other so-called ‘safe havens’ such as the US dollar, yen and Treasuries, have all retreated from their highs and remain vulnerable as long as the global appetite for risk continues to increase. However gold is different from these three vehicles, since it can be classed as real money rather than a paper asset whose supply depends on the whim of governments.

“Gold found support above the 200-day moving average last week, but needs to sustain a move back above $900 to indicate more than a temporary return of demand at that level. A sustained move above $967 would break the short-term progression of lower highs and a push back above $1,000 is needed to reassert the overall uptrend.”

Source: Eoin Treacy, Fullermoney, April 14, 2009.

Financial Times: Oil falls as IEA cuts demand forecast
“Oil prices fell below $50 a barrel on Monday after the International Energy Agency, the energy watchdog, reduced its demand forecast for the year.

“The IEA reported on Friday that global oil demand this year would fall by 2.4 million barrels a day as inventories in developed countries hit their highest levels in 16 years.

“This overshadowed the news that China’s daily crude oil imports rose to year highs in March, suggesting demand in the world’s second-biggest oil importer was starting to recover.

“However, Edward Meir at MF Global said: ‘It is important to remember that import levels are skewed by the fact that the government controls energy prices, so the ‘blip’ needs to be seen in that context.’”

Source: Neil Dennis, Financial Times, April 13, 2009.

Bloomberg: OPEC cuts thwarted as Brazil, Russia grab US market
“As OPEC nations make their biggest oil production cuts on record, Brazil and Russia are pumping more, threatening to send crude back below $50 a barrel as demand slows.

“US imports from the Organization of Petroleum Exporting Countries fell 818,000 barrels a day, or 14%, to 5.02 million in January from a year earlier, according to the latest monthly report from the Energy Department. At the same time, imports from Brazil more than doubled to 397,000 and Russia’s increased almost 10-fold to 157,000, a trend that continued in February and March, according to data from each country.

“While the median forecast in a Bloomberg News survey of 32 analysts shows crude in New York averaging $61 a barrel in the fourth quarter, up from the second-quarter’s estimate of $50, traders are increasing bets on a decline. The fastest-growing options contract on the New York Mercantile Exchange is for prices to fall below $40 a barrel by May 14.

“‘OPEC has done a good job keeping oil in the $50 area, but they will have to cut substantially more, maybe more than they are capable of, if they want higher prices,’ said John Kilduff, senior vice president of energy at MF Global in New York. ‘You are going to hear greater calls for non-OPEC producers to cooperate and make cuts.’”

Source: Mark Shenk, Bloomberg, April 14, 2009.

Newsweek: Rogers on commodities
“Jim Rogers, the legendary American investor, financial commentator and, along with George Soros, founder of the Quantum Fund, is the ultimate commodities bull. More than 10 years ago, he started the Rogers International Commodities Index, and in 2005 he wrote ‘Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market’. Below, he explains to Newsweek’s Rana Foroohar why oil is still black gold.

Foroohar: Inflation-adjusted, oil is the same price that it was in 1976, and in 1870. So why are you still a bull?
Rogers: It doesn’t matter. It’s also true that just about any stock you can think about is at or below where it was in the 1970s right now. So what? There are still 15- to 20-year periods when commodities, stocks and any other asset class goes up a great deal. In 1987 stocks collapsed by 40-80%. But people who were smart enough to stay in them made 1,000% returns in the next decade. The point is to take advantage of those periods and make some money.

What’s the fundamental case for commodities right now?
Supply is declining. There’s been 35 years of low investment in production capacity. The last lead smelter in the US was built in 1969! There’s been no major oilfield discovery in 40 years. Oil is in decline. According to the International Energy Agency, oil reserves are declining significantly. At this rate, in 20 years, there will be no oil left. The only people to make money in the next 20 years will make it in commodities. It’s the only asset class where the fundamentals are improving. I mean, look at Citigroup, look at GM. Those fundamentals are not improving.

Do you see commodities as an inflation hedge?
Absolutely. This is only time in history where you’ve got every central bank in the world printing money at the same time. Consumer prices are going to go way up. The public is already getting out of paper money, which is why you’re seeing gold go up.

Does the future growth of China factor into your bullishness?
China is tiny in comparison to the US economy. Anyone who thinks that the commodities story is driven by China needs to do more homework. In the 1970s, everyone was in recession, and you still had declining supply [in oil] and higher prices. Asia wasn’t even in the game then. China was run by Mao. But now, of course, there are those 3 billion people in Asia who are in the game. It’s just another factor.”

Click here for the full article.

Source: Rana Foroohar, Newsweek, April 11, 2009.

Financial Times: Beijing struggles to prop up growth
“China’s economy grew at an annual rate of 6.1% in the first quarter - its slowest pace since quarterly gross domestic product data was first published in 1992 - as Beijing struggled to prop up activity in the face of the global crisis.

“The increase was down from 10.6% growth in the same period a year earlier and 9% for the whole of 2008 but aggressive government stimulus measures begun in the fourth quarter last year have started to yield signs of recovery.

“The figure was ‘indeed quite an achievement’ against the background of the worsening global crisis and recession in many of the developed economies that China relies on to buy its exports, said Li Xiaochao, spokesman for the National Bureau of Statistics.

“Rapid cooling in the Chinese economy has been led by a collapse in exports and private sector investment. This has prompted the government to fast-track infrastructure projects and spending programmes, and order state-run banks to open the credit taps to flood the system with liquidity.

“Although there is still little evidence of new private sector investment, the government’s efforts have led to a rebound in investment figures and show signs of stimulating wider demand in the economy.

“Sun Mingchun, an economist at Nomura Securities, said economic data released on Thursday ‘showed that the economy has gained significant momentum since February’.

“The decline in Chinese exports decelerated in March, with exports falling 17.1% from a year earlier, compared with a 25.7% decline in February, leading some analysts to predict a stabilisation in trade. Others said further weakness in external demand was the main risk.”

Source: Jamil Anderlini, Financial Times, April 16, 2009.

James Pressler (Northern Trust): China - so much for fast recoveries
“It is not normally like us to say ‘we told you so’, but the release of briskly-compiled Q1 GDP figures for China provides a compelling argument to use that phrase - not that we would. The numbers came in below consensus, and should put to rest for the moment any suggestions that China is somehow amazingly resilient to global contagion.

“In our comment on April 2 we pondered over surprisingly high confidence figures suggesting that Q1 would show the first stages of a rebound. We had our doubts, and indeed, the 6.1% year-over-year growth figure was the worst posted since 1991. Now this figure is nothing to scoff at, but when any country experiences a slowdown in economic activity of at least four percentage points in less than a year, people should take notice.

“However, we do see some bright spots in today’s figures. Considering how dramatically export demand and other external indicators have fallen, the Q1 figure did not follow in step, which suggests that the first signs of Beijing’s fiscal stimulus are finding their way into the national accounts. (This would be the minor stimulus package announced prior to the Beijing Games, when the government offered additional spending to counter the effects of ‘Olympic hangover’.) This might just be enough to keep growth above the 6.0% mark until the real fiscal stimulus package kicks in and the ultra-high amounts of bank lending since November turn into real economic activity.

“Our wager is that Q2 GDP hovers right at the 6.0% level before a slow migration north, though underlying (and unreported) base effects in the data could put some variance in that movement. The overall trend, however, looks like a slow recovery starting in Q3.”

Source: James Pressler, Northern Trust - Daily Global Commentary, April 16, 2009.

Financial Times: Singapore’s economy sags as exports slow
“Singapore’s trade-dependent economy contracted by a record 11.5% in the first three months of 2009 from a year ago as exports fell by 17% in March, the 11th consecutive month of declines.

“The sharper than expected deterioration in the economy’s performance, after it contracted by 4.2% in the fourth quarter of 2008, forced the government to revise downward its full-year forecast to between minus 6% and minus 9%, making it Singapore’s worst postwar recession.

“The Monetary Authority of Singapore, the de facto central bank also devalued slightly the currency as it re-centred the secret policy band that pegs the Singapore dollar to a basket of international currencies.

“The latest data revealed the plunge in exports is slowing from a 35% drop in January and 24% in February. But there are worries that the continued weakness in the US economy will hurt exports for the rest of the year.

“Another warning sign is that the quarter-on-quarter decline in gross domestic product accelerated to 19.7% between January and March from 16.4% in the fourth quarter of 2008 as the economic slowdown spread to other trade-related domestic sectors, including transport and financial services.

“But economists believe that the dire figures for the first quarter could indicate that the economy has touched bottom and might start recovering or at least stabilise as the pace in the decline in export slows.”

Source: John Burton, Financial Times, April 14, 2009.

CNBC: Impact of political unrest on Thai markets
“Discussing how the political unrest in Thailand will impact investor sentiment, with Nicholas Kwan, regional head of research, Asia at Standard Chartered Bank, speaking with CNBC’s Karen Tso.”

Source: CNBC, April 15, 2009.

CEP News: UK house prices continue to slide
“The decline in UK house prices failed to abate in February, according to a report from the Department for Communities and Local Government (DCLG) on Wednesday.

“The DCLG’s house price index for the UK declined to 158.7, compared to January’s reading of 164.2.

“On an annual basis, the index is down 12.3% in February, a sharper decline than January’s 11.5% contraction.

“The report also suggests that the contraction is broad based with house prices in London falling 12.3% and prices outside the capital also falling 12.3% on the year.”

Source: Erik Kevin Franco, CEP News, April 15, 2009.

YouTube: Dow Jones by Downsize
“Dow Jones” is Downsize’s first single off their album “Going Out Of Business”. The video also features Nicole O’Connell.

Source: YouTube, March 2, 2009.

Tags: Ben Bernanke, Central Banks, Citigroup C, Congressional Oversight, Earnings Conference, Elizabeth Warren, Emerging Markets, ETF, Global Bourses, Global Stock Markets, Gold Bullion, Goldman Sachs, Government Bonds, India, Industrial Metals, Jp Morgan, Northern Hemisphere, oil, Oversight Panel, Results Of Stress, Risk Appetite, Sachs Gs, Soya Beans, Tom Toles
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Words from the (investment) wise for the week that was (March 30 – April 5, 2009)

Sunday, April 5th, 2009

“Words from the Wise” this week comes to you in a shortened format as my traveling in the US precludes me from doing my customary commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided.

Investors’ mood benefited last week from the potentially positive implications for the global economy emanating from the London G20 meeting, and the Financial Accounting Standards Board’s decision to relax mark-to-market accounting rules. And the previous week’s announcement of the Geithner plan to remove toxic assets from the balance sheets of banks was also still seen as a tailwind for stock markets.

Source: Chicago Tribune

Has the avalanche of policy actions and bank guarantees backstopped the global economy? If stock markets are a gauge of better tidings, it would seem that a bottoming phase might have started. Risk-taking investors pushed the S&P 500 Index to a straight four-week winning streak, registering a gain of 23.3% - the strongest since April 1933. But the jury is still out on whether the bear is simply offering a temporary reprieve.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.

For discussion about the direction of stock markets, see my recent posts “Video-o-rama: The road to recovery“, “Schiff interviews Faber“, “Stock market performance round-up: Signs of recovery” and “Donald Coxe: Investment Recommendations (March 2009)“. (And do make a point of listening to Donald Coxe’s webcast of April 3, which can be accessed from the sidebar of the Investment Postcards site.)

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “market”, “index”, “prices”, “economy” and “financial” featured prominently.

Economy
“Business pessimism remains deep and widespread across all industries and regions of the globe. Survey responses regarding hiring and equipment and software investment fell to record lows last week,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. However, the Survey concluded that it was encouraging that businesses were becoming steadily less negative about the economy’s prospects later this year.

Source: Moody’s Economy.com, March 30, 2009.

A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

April 03
• Employment situation remains grim

April 02
• China: Signs of a recovery - already?

April 01
• Factory sector is tiptoeing towards a recovery
• Housing market: Pending Home Sales Index - positive signs
• Auto sales stage small rebound
• Japan: More news about a worsening situation

March 31
• Case-Shiller Home Price Index - downward spiral of home prices persists
• Consumer confidence retraces a small part of loss

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, April 3, 2009.

In addition to interest rate announcements by the Bank of Japan (Wednesday) and the Bank of England (Thursday), the US economic highlights for the week include the following:

Source: Northern Trust.

Click here for a summary of Wachovia’s weekly economic and financial commentary.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, April 3, 2009.

John Maxwell said: “The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails.” (Hat tip: Charles Kirk.) Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in steering their investment portfolios to make the best use of the tailwinds and be cognizant of the dreaded headwinds.

That’s the way it looks from Cape Town (or, more accurately, from beautiful La Jolla, California, for the next few days).

Paul Kedrosky (Infectious Greed): The Trump-Madoff Connection
“I hear you are personally acquainted with Bernie Madoff, who visited your country club in Palm Beach.

“I met Madoff a number of times at Mar-a-Lago. He loved golf, and I’d also see him at my golf club, which is nearby. One time he said to me, ‘Why don’t you invest with me?’ I said jokingly, ‘No thanks, I can lose my own money.’”

From an interview with Donald Trump in weekend NYT.

Source: Paul Kedrosky, Infectious Greed, March 29, 2009.

CEP News: G20 commits to ambitious stimulus plan extending into 2010
“The G20 will stand together to engage in additional stimulus plans aimed at creating jobs, cleaning up financial institutions and stimulating emerging market economies, according to the communiqué released on Thursday.

“Member nations said total stimulus spending will reach $5 trillion by the end of 2010, and that they will add an additional $1 trillion in global stimulus through the IMF and other international agencies.

“Meanwhile, the IMF has been promised $750 billion in funding for its lending operations worldwide through the sale of some of its gold reserves to increase its capital base. The Fund will also deploy $250 billion in Special Drawing Rights, a move analysts have said would effectively amount to a broad creation of global money supply.

“The G20 also agreed to regulate ‘systemically important hedge funds’, and says it will work together to develop a framework for reforming financial institutions, including responsible compensation schemes for employees.

“On global trade, the Group has agreed to provide $250 billion in financing to stimulate global trade, and has voiced calls to conclude the Doha talks.

“The G20 has asked the OECD to publish a list of tax havens which the G20 will target to limit tax evasion.”

Source: Erik Kevin Franco, CEP News, April 2, 2009.

CNBC: One-on-one with Soros
“Discussing new promises to increase spending in emerging economies, with George Soros, Soros Fund Management and CNBC’s Maria Bartiromo.”

Source: CNBC, April 2, 2009.

CEP News: FASB eases mark-to-market accounting rules
“Accounting standards for US financial institutions were eased on Thursday when the US Financial Accounting Standards Board recommended allowing firms to use ‘significant’ judgment when valuing toxic assets on their books.

“Analysts interviewed by Bloomberg said the move could increase net income for financial institutions by as much as 20%, by significantly easing the hit that financial institutions have had to take on so-called toxic debt on their balance sheets.

“‘Cynics will claim this is a thinly veiled attempt to disguise the seriousness of the financial crisis and losses being faced,’ said Marc Chandler at Brown Brothers Harriman. ‘On the other hand, there are many who see the mark-to-market as an unreasonable demand for financial instruments with no markets.’

“Indeed, over the last several quarters, market participants have argued that interest in toxic assets, such as mortgage-backed securities, has essentially dried up, meaning that firms have had to value some assets as worthless even though they could eventually regain their worth.

“The decision also comes ahead of earnings season, with the first quarter of 2009 having ended last week, and with Alcoa expected to release their report on Tuesday. The FASB also said the decision will be retroactive, allowing firms to take less writedowns.

“Furthermore, analysts have argued that the decision will reduce the effectiveness of the US Treasury’s Public Private Partnership Investment Program, whereby the government will back the purchase of toxic assets.”

Source: Erik Kevin Franco, CEP News, April 2, 2009.

Barry Habib (Mortgage Success Source): The real reason behind the economic crisis - “mark to market”
“The current economic crisis is the top news story for nearly every media outlet. But, somehow, one of the most important factors that led to this challenging market is also one of the least discussed.”

Source: Barry Habib, Mortgage Success Source.

Financial Times: Bailed-out banks eye toxic asset buys
“US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000 billion plan to revive the financial system.

“The plans proved controversial, with critics charging that the government’s public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans.

“Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ‘gaming the system to reap taxpayer-subsidised windfalls’.

“Mr Bachus added it would mark ‘a new level of absurdity’ if financial institutions were ‘colluding to swap assets at inflated prices using taxpayers’ dollars’.

“Many experts think it is essential to take these assets from leveraged institutions such as banks that are responsible for the lion’s share of lending, into the hands of unleveraged financial institutions such as traditional asset managers, where they will have much less impact on the flow of credit to the economy.

“Banks have three options if they want to buy toxic assets: apply to become one of four or five fund managers that will purchase troubled securities; bid for packages of bad loans; or buy into funds set up by others. The government plan does not allow banks to buy their own assets, but there is no ban on the purchase of securities and loans sold by others.”

Source: Francesco Guerrera and Krishna Guha, Financial Times, April 2, 2009.

Financial Times: Obama gets tough on US car industry
“The Obama administration on Monday ratcheted up the government’s involvement in the US auto industry, raising the spectre of bankruptcy if debtholders, unions and executives at General Motors and Chrysler fail to make new sacrifices.

“Condemning ‘a failure of leadership’ from Washington to Detroit for the decline of America’s carmakers, President Barack Obama rejected the turnaround plans GM and Chrysler presented to his administration last month. He said the government would fund GM for 60 days as it tries to put together a more aggressive restructuring programme. He gave smaller Chrysler 30 days to strike an acceptable rescue alliance with Italian carmaker Fiat.

“The deadlines marked the latest step in the administration’s increasingly interventionist approach to the auto industry. Just hours after forcing Rick Wagoner out as GM chief, the Obama administration said it would let GM and Chrysler slide into bankruptcy if necessary to facilitate the industry’s restructuring. ‘Their best chance at success may well require utilising the bankruptcy code in a quick and surgical way,’ it said.

“Fritz Henderson, speaking on his first day as GM’s chief executive, indicated that he believed the risk of GM filing for bankruptcy had grown.

“The federal government appears to favour a restructuring plan - in development since November - under which GM could file for bankruptcy protection within a month and then split the viable parts of its business from its messier obligations, people close to the matter say.

“A ‘new’ GM containing the good assets - and backed by a plan to build and sell cars that the government feels is acceptable - could then emerge from bankruptcy protection.”

Source: Tom Braithwaite, Julie MacIntosh, Bertrand Benoit and John Reed, Financial Times, March 30, 2009.

MarketWatch: California may tap US Treasury, Europe for credit
“California’s ‘liquidity problems’ may force the state to seek federal backstops for sales of its short-term notes this summer, even though it received heavy demand from retail buyers in a recent bond sale, its state treasurer said Tuesday.

“California Treasurer Bill Lockyer said in an interview that the state is talking with Treasury Department staff, including Secretary Timothy Geithner, about getting federally issued letters of credit to back upcoming issues of short-term securities known as revenue anticipation notes.

“Lockyer also said the state will probably issue about $12 billion to $16 billion revenue anticipation notes this summer.

“But it may have trouble getting private banks to issue letters of credit to secure the notes, a possibility that’s prompted it to seek government backup.

“‘What we’re starting to talk to them about is … short-term liquidity problems’ at the state and its municipalities, he said.

“Backup from the federal government would be for ‘contingency’ purposes. ‘We may need to get letters of credit from Treasury,’ he added.”

Source: Laura Mandaro & Stacey Delo, MarketWatch, March 31, 2009.

Bloomberg: Financial rescue nears GDP as pledges top $12.8 trillion
“The US government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

“New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from US banks. The money works out to $42,105 for every man, woman and child in the US and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

“President Barack Obama and Treasury Secretary Timothy Geithner met with the chief executives of the nation’s 12 biggest banks on March 27 at the White House to enlist their support to thaw a 20-month freeze in bank lending.

“‘The president and Treasury Secretary Geithner have said they will do what it takes,’ Goldman Sachs Group Chief Executive Officer Lloyd Blankfein said after the meeting. ‘If it is enough, that will be great. If it is not enough, they will have to do more.’

“The following table details how the Fed and the government have committed the money on behalf of American taxpayers over the past 20 months, according to data compiled by Bloomberg.”

Source: Mark Pittman and Bob Ivry, Bloomberg, March 31, 2009.

The New York Times: Obama’s ersatz capitalism
“The Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win - and taxpayers lose …

“With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost …

“Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

“Some Americans are afraid that the government might temporarily ‘nationalize’ the banks, but that option would be preferable to the Geithner plan. After all, the FDIC has taken control of failing banks before, and done it well …

“What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a ‘partnership’ in which one partner robs the other.”

Source: Joseph Stiglitz, The New York Times, March 31, 2009.

CNBC: Roubini’s read on the recession
“The solutions and government interventions that need to be tackled in order to take the economy and financial system off of life support, with Nouriel Roubini, RGE Monitor chairman/NYU Stern School of Business professor, and Arianna Huffington, Huffington Post.”

Source: CNBC, March 31, 2009.

Financial Times: OECD predicts 10% jobless rate for 2010
“One in 10 workers in advanced economies will be without a job next year, ‘practically with no exceptions’, the head of the Organisation for Economic Co-operation and Development said on Monday.

“In a graphic indication of the global recession’s transmission from the financial sector to the rest of the economy, Angel Gurría warned that the ranks of the unemployed in the 30 advanced OECD countries would swell ‘by about 25 million people, by far the largest and most rapid increase in OECD unemployment in the postwar period’.

“He said the misery of joblessness - what Mr Gurría described as ‘rapidly turning into a jobs and social crisis’ - would come as the OECD expected advanced economies to contract by 4.3% in 2009 with little or no growth expected in 2010. The forecast is significantly worse than the International Monetary Fund’s most recent estimate of a 3-3.5% contraction for 2009.”

Source: Chris Giles, Ralph Atkins and Mark Mulligan, Financial Times, March 30, 2009.

Asha Bangalore (Northern Trust): Employment situation remains grim
• Civilian Unemployment Rate: 8.5% in March versus 8.1% in February, cycle low is 4.4% in March 2007.
• Payroll Employment: -663,000 in March versus -651,000 in February, net loss of 86,000 jobs after revisions of payroll estimates for January and February.
• Hourly earnings: +3 cents to $18.50, 3.35% yoy change versus 3.59% yoy change in February, cycle high is 4.28% yoy change in December 2006.

“The headlines and details of the employment report present a dismal picture of employment conditions in the US economy. The main message is that the Fed is on hold for the foreseeable future. That said, there are positive aspects in the report we are watching closely – employment in construction, manufacturing, and temporary help (see charts 7 and – and it is a matter of time before we can conclude if in fact these are meaningful signals of economic recovery.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 3, 2009.

CNBC: Pimco’s Gross talks jobs report
“Reacting to the jobs report and how the markets will respond, with William Gross, Pimco co-chief investment officer/founder.”

Source: CNBC, April 3, 2009.

Yahoo Finance: Nouriel Roubini sounds, GASP, positive about economy!
“Okay, not ‘positive’, exactly, but certainly less negative than he’s sounded over the past 18 months.

“NYU professor Nouriel Roubini, you’ll recall, is known as ‘Dr. Doom’, the most famous of the handful of economists who actually predicted the current debacle. A few days ago, after a speech in Italy, he was quoted as saying he might see some ‘light at the end of the tunnel’. And he repeats a similarly non-apocalyptic outlook on TechTicker in our interview here.

“To be clear: Roubini is NOT predicting an imminent recovery. He thinks that most economists are still way too bullish, that the stock market will retest its lows, and that unemployment will eventually rise over 10%. He just thinks that the quarter that is now ending, Q1, will be the worst rate of decline in the economy and that things will gradually stop deteriorating and then get better from here.”

Source: Yahoo Finance, March 31, 2009.

(in)efficient frontiers: Rising inflation expectations
“I’ve written in the past about the misinterpretation of yield numbers on TIPS (Treasury Inflation Protected Securities). While the yield numbers (and price when expressed as percentage of par unadjusted for the inflation index ratio) have given false readings, the dollar value of a basket of TIPS does offer insight. Consider the chart below:

“The chart illustrates the relative price performance of the Barclay’s iShare TIPS fund and the 10-year T-note futures over the last 4 months. As can be seen from the chart, the basket of TIPS in the iShare has appreciated by about 8% while the treasury contract has been roughly flat. The best explanation for this relative outperformance is rising inflationary expectations.

“Last fall, when TIPS falsely appeared to be signaling deflation, those who championed massive government spending cited TIPS performance as supportive evidence. Now that TIPS are clearly starting to warn of rising inflation, those same voices are noticeably silent on this fact.”

Source: Jeff Korzenik, (in)efficient frontiers, March 31, 2009.

CNBC: Bernanke - housing & the economy
“Federal Reserve chairman Ben Bernanke says the Fed has sought to avoid credit risk and allocation in lending programs.”

Source: CNBC, April 3, 2009.

Case Shiller: S&P/Case-Shiller - downward spiral of home prices persists
“Data through January 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of US home prices, shows continued broad based declines in the prices of existing single family homes across the United States, with 13 of the 20 metro areas showing record rates of annual decline, and 14 reporting declines in excess of 10% versus January 2008.

“The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. Following the lead of the 14 metro areas described above, the 10-City and 20-City Composites also set new records, with annual declines of 19.4% and 19.0%, respectively.

“‘Home prices, which peaked in mid-2006, continued their decline in 2009,’ says David Blitzer, Chairman of the Index committee at Standard & Poor’s. ‘There are very few bright spots that one can see in the data.’”

Source: Standard & Poor’s, March 31, 2009.

Asha Bangalore (Northern Trust): Pending Home Sales Index - positive sign
“The Pending Home Sales Index (PHSI) of the National Association of Realtors rose to 82.1 in February from 80.4 in the prior month. The PHSI leads actual sales of existing homes by one/two months. The February gain of the index is a positive sign for home sales during March/April 2009.”

Source: Asha Bangalore, Northern Trust, April 1, 2009.

Asha Bangalore (Northern Trust): Consumer confidence retraces a small part of loss
“The Conference Board’s Consumer Confidence Index rose slightly to 26 in March from a record low of 25.3 in February. The strength was entirely from the Expectation Index (28.9 versus 27.3 in February) as the Present Situation Index (21.5 from 22.3 in February) dropped in March.”

Source: Asha Bangalore, Northern Trust, March 31, 2009.

Asha Bangalore (Northern Trust): Factory sector is tiptoeing toward a recovery
“The ISM manufacturing survey results for March indicate that the factory sector is contracting less rapidly compared with the situation in February. The composite index edged up to 36.3 in March from 35.8 in February. The level of the composite index denotes a contraction of the factory sector but the March reading is now notably higher than the cycle low of 32.9 seen in December 2008. The New Orders Index (41.2, +8.1 points) recorded the largest gain among the different components of the survey.

“Indexes tracking production employment, exports, imports, backlogs, and prices advanced in March, while indexes measuring vendor deliveries and inventories fell.”

Source: Asha Bangalore, Northern Trust, April 1, 2009.

CNBC: Gross Talks Bonds
“Bond holders are still negotiating and hoping, with Bill Gross, Pimco, and CNBC’s Erin Burnett.”

Source: CNBC, March 31, 2009.

Bloomberg: Geithner’s non-recourse gift keeps on giving to Gross
“Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets may be a boon for Pimco’s Bill Gross.

“The plan may reward investors with 20% annual returns on ‘really ‘toxic’ mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with ‘non-recourse’ government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.

“Geithner’s Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings, freeing them to make loans while creating a potential windfall for investors. Federal Reserve Chairman Ben Bernanke said March 20 that ‘credit market dysfunction’ is countering efforts to fix the economy.

“‘One of the challenges has been that leverage has really been pulled away from the system and as a result the kinds of returns investors are looking for haven’t really been available,’ said Ken Hackel, head of fixed-income strategy at RBS Securities in Greenwich, Connecticut. RBS is one of the 16 primary dealers that are obligated to bid at the Treasury’s auctions of government debt and which trade with the Fed.

“Since Geithner unveiled the plan on March 23, Pimco, which manages the world’s biggest bond fund, and New York-based BlackRock, the largest publicly traded US asset manager, said they may be interested in participating in PPIP.

“‘This is perhaps the first win/win/win policy to be put on the table,’ Gross, co-chief investment officer of Newport Beach, California-based Pimco, said in an e-mailed statement last week.”

Source: Jody Shenn, Bloomberg, April 2, 2009.

Bespoke: 30-year fixed mortgage drops below 5%
“The national average 30-year fixed mortgage rate dipped below 5% as of last Friday to a level of 4.93%. The only other time it was below 5% in the last ten years was back in June 2003. One reason that the Fed is buying up Treasuries is to get this mortgage rate lower in order to help the consumer and the struggling housing market. So far the Fed announcement has done a pretty good job of lowering mortgage rates, but we’re sure they want to see it even lower.”

Source: Bespoke, March 30, 2009.

John Mauldin (Thoughts from the Frontline):
“Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the ‘70s.

“Let’s go back to the really long run. Starting in 1802, we find that stocks have beat bonds by about 2.5%, which, compounding over two centuries, is a huge differential. But there were some periods just like the recent past where stocks did in fact not beat bonds.

“Look at the following chart. It shows the cumulative relative performance of stocks over bonds for the last 207 years. What it shows is that early in the 19th century there was a period of 68 years where bonds outperformed stocks, another similar 20-year period corresponding with the Great Depression, and then the recent episode of 1968-2009.

Source: John Mauldin, Thoughts from the Frontline, March 30, 2009

Bespoke: Largest 4-week winning streak since 1933
“The S&P 500 has now been up for 4 straight weeks, registering a gain of 23.28%. Interestingly, the last time we had a 4-week winning streak that saw gains of at least 10% was 10/02-11/02, which was the start of the five year bull market that ran until 10/9/07. … this is the 3rd strongest 4-week winning streak on record, and the strongest since April 1933.

“The average change in the fifth week following these 4-week periods has been 0.24%, while the median change has been -0.35%. The average change over the next 4 weeks has been 1.87%.”

Source: Bespoke, April 3, 2009.

Bespoke: S&P 500 breaks above recent highs
“The S&P 500 took out its high from last week of 832 today, as the index is currently resting above the 840 mark. Technicians will be watching to see if the index can close above these prior highs, and if it does, it will be another positive for the uptrend that the market is currently in.”

Source: Bespoke, April 2, 2009.

Bespoke: Percentage of stocks above 50-day moving averages
“Currently, 75% of the stocks in the S&P 500 are trading above their 50-day moving averages. While this is a strong breadth measure, it has also been a level that has been met with selling pressure in the past. Health Care and Utilities are the only two sectors that still have less than half of their stocks trading above their 50-days. Technology, Consumer Discretionary, Materials, and Telecom all have more than 90% of stocks trading above their 50-days, which is definitely an overbought reading.”

Source: Bespoke, April 3, 2009.

Bespoke: Market volatility drastically lower, but still high
“In late 2008, the market experienced its most volatile 50-day period ever. At one point, the average daily move of the S&P 500 over the prior 50 days was +/-4%! While volatility is still very high, it has nearly been cut in half from its peak in late 2008. As shown below, the average daily change for the S&P 500 over the last 50 days has been +/-2.07%.”

Source: Bespoke, April 1, 2009.

Richard Russell (Dow Theory Letters): Identifying a bear market bottom
“First, based on the 76 years of the Lowry’s studies, prior to a bear market bottom, it is usual for their Selling Pressure Index (supply) to decline significantly, indicating that the desire to sell is being exhausting. Secondly, Lowry’s Buying Power Index (demand) begins to climb well before the final bear market bottom.

“This is NOT what has occurred. From its March 9 low, the Buying Power Index has risen an impressive 46 points. However, and this is the big problem, since March 9 Lowry’s Selling Pressure Index has declined by a mere 13 points. Thus, Selling Pressure has only dropped half as much as Buying Power has advanced. This suggests that there is still far too much desire to sell built into this market. Any cessation of buying will therefore succumb to selling, and this is NOT how new bull markets start. Selling Pressure is still far too high.

“From another standpoint I continue to believe that this advance is not the beginning of a bull market. Primary movements in the stock market tend to have a slow, persistent plodding look. In contrast, corrective moves tend to be rapid and violent, often spurred on by panic short covering. The action of this market since the March lows has the look of a secondary correction. The speed and the steep angle of ascent is suggestive of a bear market rally.

“Since March 9, the Dow has gained roughly 940 points in nine days. Thus, the Dow has regained 15% of its bear market losses in a mere nine days. This is bear market correction-type action.”

Source: Richard Russell, The Dow Theory Letters, March 31, 2009.

Richard Russell (Dow Theory Letters): Watch out for fizzling rallies
“The following from Financial Sense: The latest 23% surge in the Dow Jones Industrials towards the psychological 8,000-level, is its seventh significant rally of 1,000-points or more, since October 2007. During the bear market from 1929 to the bottom in 1932, the Dow Industrials fell by almost 90%. There were six bear-market rallies during that stretch, with returns of more than 20%, each one fueling a sense of renewed optimism. Yet each counter-trend rally ultimately fizzled-out and unraveled, before market indexes skidded to new lows.

“As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrials closed at 9,034 on January 2nd, its highest level since the autumn panic. The Dow Industrials melted down to as low as 6,500 on March 6, for an overall decline of 30% in two months, and to its lowest level in 12-years. The Dow Jones Commodity Index skidded to a six-year low, after tumbling by 57% since last July.

“We are now in the third Dow rally of 1000 points or more since October 7, 2007. The first over-1000 point rally started in March, 2008. The second started on November 17, 2008. The most recent over-1000 rally started on March 2, 2009. The first two rallies were wiped out with new lows in the Dow after the rallies fizzled.”

Source: Richard Russell, Dow Theory Letters, April 3, 2009.

Bespoke: Strategists continue to lower year-end S&P 500 price targets
“Below we have updated our table of strategist price targets for the S&P 500 at the end of 2009. UBS, Goldman Sachs, Credit Suisse, HSBC, and Barclays have all already lowered their year-end S&P 500 price targets. Bank of America actually recently increased their price target from 975 to 1,030. The average year-end S&P 500 price target is currently 956.5, which equates to a gain of just over 20% from the index’s current level. At the start of the year, the average year-end price target was 1,050.”

Source: Bespoke, March 31, 2009.

David Fuller (Fullermoney): Trillions of bailout money will buy downside cushion
“Forget a depression - the trillions of financial rescue packages will buy a downside cushion followed by economic recovery, even though more lagging bad data is in the pipeline.

“Forget another stock market meltdown - not all stock markets are equal but the bear has been ending since last October’s selling climax and the new bull is led by Asian emerging markets and South American resources markets.

“Forget long-dated government bonds as a safe haven - they are now a sucker’s game, propped up by the threat and occasional reality of quantitative easing, at a time when risk appetite is slowly returning.

“Forget US dollar safe haven - it is a Madoff-style Ponzi scheme, in which it pays to ask for your money back early.

“Expect commodity inflation - this is being led by precious metals and copper.”

Source: David Fuller, Fullermoney, March 31, 2009.

Jeffrey Saut (Raymond James): Kites!?
“Last week the DJIA and DJTA broke out above their respective 50-day moving averages (DMAs). They also now reside above their 10-DMAs and 30-DMAs. The 34% rally by the Transports since their March 9, 2009 low is particularly interesting given the Trannies’ economic sensitivity; and, amid cries that we are in a Great Depression environment.

“And don’t look now, but lumber has quietly gained nearly 30% since its February 2009 low. Again, that’s pretty impressive action given the current housing backdrop!

“Meanwhile, we are watching Personal Consumption Expenditures (PCE), for this is how recessions end. Indeed, if the ‘real’ PCE has stabilized, the end of the recession is not far off. Manifestly, the stock market always turns-up before the economy bottoms. So if the January/February strength in the PCE is for real, it is an extremely positive event. However, if the PCE strength is just a reaction to the +5.8% COLA adjustment, as well as the 13.2% increase in IRS tax refunds year/year, then the upcoming month’s data will revert to a more subdued reading. Accordingly, we are watching the PCE closely.

“While we are watching, however, our investments in platinum broke out to new reaction ‘highs’ last week, and indices playing to Brazil are attempting to break out to the upside. Still, it is day 16 in the ‘buying stampede’ and we have turned cautious. And, isn’t it interesting how the markets follow the news, for following ‘Friday’s fall’ (-148 DJIA) the Obama Administration warned that some banks will need more government aid and that bankruptcy might be the best option for GM and Chrysler.”

Source: Jeffrey Saut, Raymond James, March 30, 2009.

Bespoke: First quarter sector performance
“As shown in the chart below, the S&P 500 was down 11.7% in the first quarter of 2009. Six sectors outperformed the index, while four underperformed. The Financial sector was by far the worst performer with a decline of 29.5%. Industrials, Energy and Utilities were the three other sectors that underperformed the market as a whole. Only one sector finished the quarter in positive territory - Technology (4%). Consumer Staples, Consumer Discretionary, Health Care, Telecom, and Materials are the other five sectors that outperformed the market.”

Source: Bespoke, March 31, 2009.

BCA Research: Disenchanted with the US dollar
“The US dollar is unlikely to be dislodged as the dominant reserve currency any time soon.

“There are legitimate reasons for the Chinese to be worried about their dollar holdings: China’s foreign exchange reserves total $2 trillion, or 48% of GDP. The Chinese authorities are growing increasingly disenchanted with their exposure to the US dollar, worried that Fed policy is debasing the currency.

“Last week central bank Governor Zhou called for a reform of the international monetary system that would see the US dollar replaced as a reserve currency, such as the SDR. However, leaked parts of the upcoming G20 Communique do not hint that such a ‘super sovereign’ currency is being seriously discussed at high levels. Even if a consensus forms that a new reserve currency is a good idea, global authorities would have to convince international business people to invoice in SDRs. Moreover, a wide variety of financial assets denominated in SDRs would have to be developed and traded in deep markets. Such a massive undertaking would take many years to develop.

“More likely, China will continue to slowly diversify away from the US dollar into other countries, a process that has been ongoing for years. China is unlikely to suddendly ‘dump’ US dollar assets, as this would damage China’s own interests. Bottom line: The structural downtrend in the US dollar has probably resumed, but it should be a fairly benign adjustment.”

Source: BCA Research, March 31, 2009.

Financial Times: China and Argentina in currency swap
“China, which is pushing to end the dominance of the dollar as a worldwide reserve, has agreed a Rmb70 billion currency swap with Argentina that will allow it to receive renminbi instead of dollars for its exports to the Latin American country.

“Xinhua, the official Chinese news agency, said the deal was signed on Sunday by Zhou Xiaochuan, governor of the People’s Bank of China, and Martín Redrado, Argentine central bank president, in Medellín, Colombia, where they are attending a meeting of the Inter-American Development Bank.

“An Argentine official confirmed a deal had been discussed and said the fine print was being worked out and negotiations were ‘very advanced’.

“Beijing has signed Rmb650 billion of deals since December with Malaysia, South Korea, Hong Kong, Belarus, Indonesia and, now, Argentina in an attempt to unblock trade financing that has been severely curtailed by the crisis.”

Source: Jude Webber, Financial Times, March 31, 2009.

Bloomberg: Frank Holmes says “odds favor” oil prices rising to $65
“Frank Holmes, chief executive officer of US Global Investors, talks with Bloomberg’s Pimm Fox about the outlook for oil, gold and commodity prices. Holmes also discusses mark-to-market accounting and his investment picks of San Juan Basin Royalty Trust and AngloGold Ashanti.”

Source: Bloomberg, March 31, 2009.

CEP News: ECB’s rate cut takes into account subdued prices & weak demand, Trichet says
“The European Central Bank’s decision to lower interest rates to a record low of 1.25% took into account weak price pressures and deteriorating economic growth, said ECB President Jean-Claude Trichet, noting that further unconventional policy measures would be discussed in May.

“‘After today’s decision, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households,’ Trichet said during his press conference following the central bank’s rate announcement on Thursday.

“‘The Governing Council will continue to ensure a firm anchoring of medium-term inflation expectations,’ he said.

“Trichet said the ECB Governing Council ‘voted by consensus’ to lower the main refinancing rate by 25 basis points to a record low 1.25%. Economists, however, had expected a 50 bps cut.

“In his introductory remarks, Trichet noted that economic activity has weakened markedly in the euro area and that it will likely remain at a low level for the year.

“Nevertheless, falling commodity prices and large amounts of stimulus to the economy and the financial system should help consumption recover in 2010, he said, adding that risks to the economy are broadly balanced as a result.

“Disinflationary pressures, due largely to the sharp fall in global commodity prices, are likely to push price growth temporarily into negative territory, he said, but added that such developments are ‘not relevant from a monetary policy perspective’.

Source: CEP News, April 2, 2009.

CEP News: Government efforts having effect on financial markets, says ECB’s Bini Smaghi
“Signs that government stimulus measures are having a positive effect on financial markets are beginning to emerge, European Central Bank Executive Board member Lorenzo Bini Smaghi said.

“Government efforts, including fiscal stimulus plans and rescue measures, ‘are starting to be felt in financial markets,’ Bini Smaghi said in a speech given in Milan, Italy on Monday.

“However, the financial industry is still likely to contract, even after the global economy finally recovers, the central banker said. Smaller profit margins and a smaller labour force in the sector is to be expected, he said.

“At the same time, global trade is likely to increase at a slower pace than before the crisis, Bini Smaghi said, adding that risk aversion is likely to remain at high levels for some time.”

Source: CEP News, March 30, 2009.

CEP News: SNB to use “all means” to prevent deflation, says Hildebrand
“The Swiss National Bank will continue to intervene in foreign exchange markets to bring down the value of the franc and reduce the risk of deflation, the central bank chairman Philipp Hildebrand said.

“In March, the SNB reduced its three-month Libor target rate by 25 basis points and announced that it would begin purchasing foreign currency through FX markets in an effort to counteract further appreciation of the Swiss currency.

“‘A renewed appreciation of the franc contains the risk of a sustained deflationary dynamic in Switzerland,’ Hildebrand said at an event in Bern on Thursday. ‘It’s about preventing’ deflation ‘by all means’.”

Source: CEP News, April 2, 2009.

Reuters: Soros - Eastern Europe “prime candidate” for IMF help
“Billionaire investor George Soros said on Tuesday Eastern Europe was a ‘prime candidate’ for International Monetary Fund (IMF) support.

“Speaking at the London School of Economic ahead of the G20 summit, Soros said: ‘G20 should not just provide pious words but should take steps to stabilise periphery countries.’”

Source: Cecilia Valente, Reuters, March 31, 2009.

CEP News: German manufacturing PMI improves further
“Declines in German manufacturing activity continued to slow in March, Markit Economics confirmed on Wednesday. However, activity in the sector continues to contract at a sharp pace, the research firm added.

“The German manufacturing purchasing managers index rose to 32.4 in March, up one point from February’s figure and in line with both preliminary estimates and expectations.

“March’s increase marks the second consecutive month of improvement after PMI reached a 12-year low in January of 32.0.

“Nevertheless, the figure remains well in contraction territory, with the average taken across Q1 as a whole notably lower than the previous quarter’s figure.”

Source: CEP News, April 1, 2009.

CEP News: Improvement in UK services PMI suggests worst may be over
“The contraction in the UK services sector eased more than expected in March, suggesting that the worst in terms of activity declines has passed, Markit Economics said on Friday.

“The UK services purchasing managers index rose beyond expectations to 45.5 in March from February’s 43.2 level. Economists had expected a far more modest gain to 43.5 for the month. March’s gain is the largest recorded since last September.

“‘The latest upturn in the activity index and another improvement in business confidence to a post-Lehman Brothers high provide further evidence that the severe contractions in services output at the end of last year may now be behind us,’ Markit senior economist Paul Smith said.”

Source: CEP News, April 3, 2009.

Nationwide: UK – surprise bounce in house prices
• House prices increased by 0.9% in March
• House purchase activity reaches highest level since May 2008
• Welcome signals of market improvement but too early to talk of house price recovery

“Commenting on the figures Fionnuala Earley, Nationwide’s Chief Economist, said:

“‘Spring brought a surprise bounce to house prices in March. The price of a typical house increased for the first time since October 2007, rising by 0.9% during the month and reducing the annual rate of fall from -17.6% to -15.7%. This brings the price of a typical house to £150,946.

“The moderation in the annual rate of fall is somewhat distorted by conditions last year and so it would be unwise to draw strong conclusions from the significant slowdown in the annual rate of fall. Equally, while the rise in prices in March is welcome, it is far too soon to see this as evidence that the trough of the market has been reached.

“The Bank of England has already taken strong measures to ease the tensions in economic and financial markets by cutting rates and commencing quantitative easing. However it will take time for these to work through into the housing market before we can expect a sustained recovery in house prices.”

Source: Nationwide, April 2, 2009.

Li & Fung Research Centre: Chinese PMI rebounds to over 50%
“The PMI rebounded to 52.4% in March 2009, up from 49.0% in the previous month. The index was back to the expansionary zone of higher than 50% for the first time since October last year. Output index, new orders index and purchases of inputs index were also higher than the critical level of 50% in March. Except stocks of finished goods, all sub-indices were higher than their respective levels in the previous month. Of which, imports index grew strongly by 7.0 ppt. to 48.8% in March, compared to the previous month.”

Click here for the full report.

Source: Li & Fund Research Centre, April 2009.

China View: Soros - China’s system more suited to emergency conditions
“China has a system ‘which is more suited to these emergency conditions,’ the Hungarian-born US billionaire George Soros said in London on Tuesday, adding the Chinese government has more control over the banks.

“Speaking at a seminar organized by the London School of Economics ahead of the G20 summit, Soros said China has the means to stimulate its economy and keep the growth.

“He noted that China was ‘badly hit as the rest of the world,’ in some ways ‘even worse than some countries’ by the current economic crisis.

“Soros, however, predicted that China ‘will be coming out of the recession faster than the rest of the world’.

“The billionaire investor spoke highly of the stimulus packages that the Chinese government introduced, which have led to significant expansion of bank lending and a rally in the stock market.”

Source: China View, April 1, 2009.

James Pressler (Northern Trust): Japan - more news about a worsening situation
“Barring natural disaster, Japan’s fiscal year could not have started off any worse. Today’s release of the Tankan survey showed business confidence hitting a record-low level in Q1, and the near-term outlook plunging to new depths as well. The headline index for large manufacturing companies declined to -58 from an already-dismal -24 in Q4, while the index reflecting conditions looking forward continued its freefall from -36 to -51, suggesting conditions will remain horrible this spring. Furthermore, the confidence index came in lower than that quarter’s expectations index for the fifth straight time, undershooting projections by a full 22 points. As bearish as the economic environment seemed last quarter, business managers did not realize just how bad things could get.

“With global demand having all but dried up and the yen unwilling to depreciate significantly, it is readily apparent that Japan is not going to export itself out of its current recession. That being said, any near-term hope is going to have to emerge from fiscal stimulus. With today being the first day of the new fiscal year, it is also the first day under more relaxed fiscal policy and extra government spending. This will offer the economy a little boost while exports remain horribly weak, and possibly ease some of the pain from such a sharp economic contraction.

“From a GDP standpoint, the economy likely posted a year-over-year drop of 6% or more in Q1 due to external weakness. With some fiscal stimulus factoring in to the national accounts, the economy will not contract as sharply starting in Q2, but that does suggest any real economic growth before 2010 - just less pain.”

Source: James Pressler, Northern Trust, April 1, 2009.

Tags: Accounting Standards Board, Array, Asset Classes, Bank Guarantees, Chicago Tribune, Donald Coxe, Economy Business, Emerging Markets, Financial Accounting Standards, Financial Accounting Standards Board, G20 Meeting, Global Economy, Index Prices, Investment Recommendations, Market Commentators, Market Index, O Rama, Policy Actions, Stock Market Performance, Stock Markets, Tailwind, Word Frequencies
Posted in Bonds, Commodities, ETFs, Emerging Markets, Gold, Markets, US Stocks | Comments Off

Stock market performance round-up: Signs of recovery

Wednesday, April 1st, 2009

Has an avalanche of policy actions and bank guarantees backstopped the global economy? If stock markets are a gauge of better tidings, it would seem that a bottoming phase might have started. But the jury is still out on whether the bear is simply offering a temporary reprieve.

Meanwhile, bouncing off 12-year lows, the Dow Jones Industrial Average (+7.7%) in March produced the strongest monthly gain in more than six years. This followed the Average’s worst January (-8.8%) on record and its third worst February (-11.7%).

Coming off the March 9 lows, the S&P 500 Index has advanced 20.6% in the first 14 trading days of the nascent rally, the most since 1938, based on data compiled by New York-based S&P analyst Howard Silverblatt and reported by Bloomberg. The rapidity with which the price increases have happened is cause for concern, at least in the short term.

The ebb and flow of occurrences has affected stock markets around the word as shown by the charts below, illustrating the turnaround in bourses since the lows of November 20, the subsequent January/February pullback (in some cases breaching the November lows) and then the rally that commenced on March 10. The charts of the S&P 500, the MSCI EAFF Index (representing Europe, Australasia and the Far East - the main benchmark for non-US stocks) and the MSCI Emerging Markets Index show how the drama has been unfolding.

Source: StockCharts.com

Source: StockCharts.com

Source: StockCharts.com

Zeroing in on the numbers, the performances in the table below are given in local currency terms for different measurement terms ended March 31.

Click on the image for a larger table.

From the highs of October 2007 to the end of March, the MSCI World Index and the MSCI Emerging Markets Index lost 52.9% and 58.1% of their respective values. The worst performer was Ireland (-78.3%), with Venezuela (-17.8%) claiming the dubious honor of having fallen the least.

Considering the year to date, the Shanghai Composite Index (+30.3%) is in the lead, but the competition is mounting from a few markets that put in strong performances during March, notably Russia (+20.2%, YTD +25.8%) and Venezuela (+14.5%, YTD +22.2%).

Interestingly, mature countries are still in the red for the first three months of the year, whereas the developing markets have been the ones adding value. By means of example, all four BRIC countries - leaders in the previous bull market - are in positive territory for the year to date and also comfortably ahead of the pack since the November 20 lows. This is a sign that global investors are beginning to take more risk - a necessary ingredient for stock markets in general to improve further.

Source: StockCharts.com

The gains/declines mentioned above are all in local currency terms. However, converting the movements to US dollar shows a somewhat different picture for the non-dollar countries (see table below). In general, most indices in March showed improved gains as a result of the greenback’s weakness.

Click on the image below for a larger table.

Where to from now? A number of stock market indices tested their November lows early in March. In some cases the lows were momentarily breached, but most of these situations have subsequently reversed the damage by rallying strongly. This action indicates that base building remains a likely scenario.

Also, throughout the January/February sell-off, a number of indices remained well above their November lows - for example China’s Shanghai Composite Index and Brazil’s Bovespa Index. This provides strong evidence of base formation development and it would not be surprising to see these markets among the leaders of the next bull market.

Tags: Bank Guarantees, BRIC, Currency Terms, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Dubious Honor, Ebb And Flow, Global Economy, Index Show, Lows, Measurement Terms, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Policy Actions, Pullback, Rapidity, Reprieve, Stock Market Performance, Stock Markets
Posted in Bonds, Credit Markets, Emerging Markets, Markets, US Stocks | No Comments »

Corporate Bonds or Equities? Deflation or Inflation?

Monday, March 30th, 2009

The debate rages on, and it is between whether to invest in corporate bonds or equities, or if economic conditions are deflationary or inflationary? FT Alphaville, Fortune.com and Capital Spectator have covered this quite well. Here are all the pieces:

Of Bonds and Stocks and the Weimar Republic
(FT.com/Alphaville, March 30, 2009)
by Tracy Alloway

You’d have to be living under a bailout-sized rock not to be aware of the current debate surrounding equities vs corporate bonds.

HSBC has now thrown its hat in the ring, in a 24-page research note entitled “The triumph of the pessimists”, which looks at the behaviour of corporate bonds and equities over the past 140 years or so. Here’s the summary.

Lots of studies have looked at government bond and equity valuations, few at the relationship between corporate debt and equities. We’ve filled the gap, going back to the middle of the 19th century.

The results don’t look pretty for equities, which are likely to suffer a multi-year downgrading compared with corporate debt… Historically, there have been three multi-decade periods. Relative prices in the first two were very different to those in the third. Before the beginning of the last century, yields on corporate equity were sometimes lower than those on corporate debt and sometimes higher.

Over the following 50 years — from about 1907 until 1951 — they were almost always higher, sometimes a great deal higher. But for the 50 years starting in the early 1950s, dividend yields on equities fell sharply relative to yields on corporate bonds. By 2000, the peak of the cult of the equity, the relative yield of equities compared with government and corporate bonds had reached its lowest level ever.

In fact, the only significant period in which dividend yields weren’t higher than corporate bond yields was in the early 1930s (chart, using railway bond yields as a proxy for corporates, below), when dividend yields collapsed and corporate bond yields surged because of the cascade of Depression-related defaults, according to HSBC. Investors’ enthusiasm for equities was dulled, and, in a parallel with our current financial crisis, their appetite for corporate debt sharpened. Even as the economy improved and profits rose, investors attached an increasingly low valuation to dividend payments, resulting in increased dividend yields.

Fearing another depression, then, investors demanded more of their returns upfront. That’s why dividend yields went up and corporate spreads went down. Although stocks went up and down, the shift continued until 1950, by which time the trailing PE for the S&P had fallen to 6x, its dividend yield had reached 7.5%, yields on Baa bonds had fallen to 3.2% and spreads to less than 80bps. In the early 1930s, Baa yields reached 11% and spreads touched 725bps.

That was the cheapest that equities have ever been against corporate bonds. Over the next 50 years, not all at once and with big, sometimes huge setbacks, valuations of stocks compared with corporate bonds moved from their cheapest ever to their most expensive. Which … is the situation in which we find ourselves now.

Which leads us to today, when, according to HSBC, we’re facing two scenarios for corporate bonds and equities.

Over the past 18 months, the implosion of the global financial system has led to huge risk aversion and acute deflationary concerns, both of which have driven government bond yields lower still. Now, it could be that quantitative easing by central banks will lead to a pick up in inflationary concerns and worries about how governments will repay the huge numbers of bonds that they have issued and will continue to issue. That’s certainly not an argument that one should dismiss out of hand. That wouldn’t augur well for government bonds in the long term.

Alternatively, the situation we’re in now might echo the 1930s, when risk appetite was shot to pieces and, regardless of whether inflation fell through the floor or picked up somewhat, government-bond yields fell and then fell further. For their part, having spiked up hugely, corporate spreads declined for the rest of the decade. But as we saw earlier, if investors lapped up bonds, particularly corporate bonds, they shunned equities; earnings yields and dividend yields rose dramatically. In that environment, investors, in other words, were expressing a strong preference for safety and income over risk and capital gains.

Although we strongly suspect that the present world looks more like the second of these scenarios than the first, we really don’t know for sure. Perhaps it doesn’t much matter, as long as governments don’t unleash another huge inflation. For what is certainly true is that central bankers have now told us explicitly that they will not allow government bond yields to rise for the foreseeable future. Their aim is simple: to make risk-free assets so unattractive that investors wade into riskier markets, thus restoring confidence to the financial system and the economy as a whole. For now, it’s clear, equity markets have taken the hint, but corporate credit markets haven’t. That situation will, we think, be reversed.

This is a sentiment echoed in The Aleph Blog and Crossing Wall Street. The spread between corporate bonds and equities is getting big - corporates were sitting out of the recent rally. They are, as per HSBC’s research title, the pessimists.

However, as HSBC also notes, this is essentially a deflationary vs inflationary debate. In a deflationary environment, as in the Great Depression, corporate bonds, with their stable returns, make sense. In an inflationary environment those fixed returns are eroded. Equities, with their ability to raise prices in tandem with inflation (or as close as they can get) could be more attractive.

A slightly random example here - but the German stock market of the 1920s increased by a staggering amount as inflation shot through the roof. We’re far from hyper-inflation, but throwbacks to that era, like the below 1921 clipping from the New York Times, should give us pause for thought.

Related links:
Sunday links: Stocks vs bonds - Abnormal Returns
Is it back to the Fifties? - FT
Equity lives! - FT Alphaville
The death of equity - FT Alphaville

This entry was posted by Tracy Alloway on Monday, March 30th, 2009 at 16:32.

WHAT ARE MONEY MANAGERS THINKING? (Capital Spectator)

What are professional money managers thinking these days? A new poll by Russell Investments offers an answer. Among the highlights:

• 67% of managers are now bullish on corporate bonds
• 61% are bullish on high-yield bonds

In both cases, the percentages are a bit higher compared with the previous poll from last December. “In this environment of caution and realism, managers are finding opportunity in spreads between high-quality corporate bonds and Treasuries that are at historic levels,” Erik Ristuben, Russell’s chief investment officer, says in the accompanying press release. Expectations for junk bonds are also higher from late last year.

U.S. equities, on the other hand, have fallen in the eyes of managers. Value and small-cap equities suffer the most in terms of the current outlook, according to the Russell survey. Here’s an overview of how the changes in expectations for the various asset classes stack up:

Source: Capital Spectator

High-yield bonds: Appetite for risk

If you’ve got the stomach for it, industry watchers say now is the time to hit the bargain buffet.

By Beth Kowitt, reporter

Last Updated: March 30, 2009: 12:02 PM ET

NEW YORK (Fortune) — Like most investments with higher credit risk, the high-yield bond market took a huge hit in 2008 as investors fled to quality. But with the sector recently seeing its deepest discount ever - and even rallying a bit - some say it’s time to test the waters again.

“The values are just extraordinary,” says Martin Fridson, CEO of Fridson Investment Advisors and a high-yield bond specialist. “I think it’s an opportunity you’re not going to see very often in your lifetime.”

Fridson says the spread between high-yield bonds and treasuries over the last few months has been far beyond anything seen before. The option adjusted spread, which measures the difference, is about 17.6 points, according to Merrill Lynch data. A year ago, the spread was 8.2 points.

Lower valuations mean more upside, Fridson says, but they’re also the reason for investors’ hesitations. Default rates will likely run higher than during past recessions, he notes, partly because the quality of the sector has deteriorated since the last low cycle.

Lawrence Jones, associate director of fund analysis at Morningstar, said some experts he’s spoken with expect default rates, which have run between 2% and 3% the last few years, to reach between 10% and 15%.

“I see the opportunity,” Jones says, “but almost everyone who’s being straight with you will say there’s a lot of risk.”

You may know them as “junk”

High-yield bonds, or “junk” bonds, are defined by the industry as a bond with below a Standard and Poor’s BBB- rating. They have a higher risk of default (failure to make a scheduled interest or principal payment), and are subject to greater price swings than more highly rated bonds. But on the upside they also have a higher rate of interest.

Jones suggests making high-yield bonds a small part of your portfolio through bond funds run by experienced managers and research teams investing in better-quality high-yield securities. A fund provides the advantage of a manager’s expertise and also the diversification that’s needed to limit the risk of default in any single investment. And high-yield bonds can be highly illiquid, i.e., hard to unload if they’re thinly traded, but a fund gives you the security of getting in and out when you want.

Read the entire piece here.

Source: Fortune.com

Tags: 1930s, 1950s, Alphaville, Bailout, Capital Spectator, Cascade, Corporate Bond Yields, Corporate Bonds, Corporate Debt, Corporate Equity, Corporates, Debate Rages, Deflation, Dividend Yields, Economic Conditions, ETF, Ft Alphaville, Gap, Government Bond, Government Bonds, Pessimists, Relative Prices, Valuations, Weimar Republic
Posted in Bonds, Canadian Stocks, Credit Markets, ETFs, Markets, Outlook, US Stocks | No Comments »

Technical talk: Stocks nearing short-term resistance

Tuesday, March 24th, 2009

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

As we have said before, it is not the points gained or lost that matter, but rather the conviction behind the move. Monday’s internals did not disappoint, with the NASDAQ and NYSE both scoring up to down volume ratios and advancer to decliner ratios that were superbullish. This rally confirms the comments we made on March 10 and then again on March 18.

Excerpt from FusionIQ comments on March 10: “Market internals (i.e. the number of advancers to decliners and up volume to down volume) on today’s advance were the most bullish internal readings seen since the move off the 2002 lows … ” We also added: … “That said, we believe today’s rally is the start of a good move higher (again it may not be the ultimate low – only hindsight will tell us that); however, the surge of momentum suggests this rally will be worth participating in.”

On March 18 we stated: “So that said, we continue to view this current rally as having legs with maybe another 10–15% up from present levels. (So buying on dips with appropriate stop losses would make sense for the time being.) We also continue to view this as an opportunity to make money on the long side for a narrow window of time (1 to 3 months).”

We think the S&P 500 can still rally up to the 850 – 860 in the near term on the heels of the unwinding of the deeply oversold conditions, the large piles of sideline liquidity and additional money managers are allocating to stocks so as not fall too far behind their benchmarks. At the aforementioned S&P 500 level some more aggressive profit-taking is likely to ensue and it may be a good time to take some chips off the table (i.e. lock in some profits)

We would then look to reallocate on the next aggressive pullback. Techs continue to act better than the broader market and should dominate your portfolio more than any other sector at this point.

Source: Kevin Lane, Fusion IQ, March 24, 2009.

Tags: Advancer, Benchmarks, Decliners, Dips, E Lock, Hindsight, liquidity, Lows, Market Internals, Money Managers, Nasdaq, Nyse, Piles, Point Source, Profit Taking, Pullback, Sideline, Volume Ratios, Window Of Time, Would Make Sense
Posted in Markets, US Stocks | 1 Comment »

Technical Talk: S&P 500 up against resistance levels

Friday, March 13th, 2009

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

Back to where we started … As seen in the graph below the S&P 500’s multi-day rally back from the dead has brought the index smack dab backup towards its recently broken support zone near 780 to 740. This zone of resistance is likely to stall this rally short-term given the fact so much trading activity occurred around this level before it finally gave way. However we are never one to argue with the tape and certainly the advance/decline stats as well as the up to down volume readings the last two days suggest this market may be able to overcome this resistance easier than we would have previously imagined.

Click on the graph for a larger image

Additionally with AAII Bullish Sentiment as low as 18.92 last week there is certainly enough bearish sentiment out there to suggest investors are under-invested and sideline cash is quite ample to support a continued bear market bounce. With the quarter ending in just a few weeks we would also imagine that institutional (long only) managers will add liquidity here as to not fall too far behind the market relative return numbers.

If this resistance zone is taking out over the next few days week then the next resistance zone for the S&P 500 would be at 950.

Source: Kevin Lane, Fusion IQ, March 13, 2009.

Tags: Advance Decline, Bear Market, Bearish Sentiment, Bounce, Bullish Sentiment, Down Volume, Few Days, Fusion, Graph, Investors, Iq, Kevin Lane, liquidity, Rally, Relative Return, Resistance Levels, Return Numbers, Sideline, Support Zone
Posted in Markets, US Stocks | No Comments »

Video-Rama - Stock Markets - Turnaround Time

Friday, March 13th, 2009

Tuesday marked a reversal of fortune for global stock markets as investors adopted a more positive view of the prospects for the banking sector and cast aside concerns about the economy.

The movements of the major US indices over the past three days tell the story of the nascent rally: Dow Jones Industrial Index (+8.7%), S&P 500 Index (+11.0%), Nasdaq Composite Index (+12.4%) and Russell 2000 Index (+13.7%). A positive close by the end of trading today [Friday] will record only the second up-week out of 10 in 2009.

On the video front, footage was produced debating whether markets were witnessing A bottom or THE bottom and also the usual dosage of the dour outlook for economic growth and speculation about the “next penny” to drop.

Also included in this week’s compilation is a mega interview with celebrity stock endorser Warren Buffett, as well as a no-holds-barred face-to-face encounter between Jon Stewart and Jim Cramer (in three parts at the end of the post).

Bloomberg: Marc Faber says government actions will boost stocks
“Government spending will spur gains in the Standard & Poor’s 500 Index after it fell 56% from an October 2007 record, investor Marc Faber, the publisher of the Gloom, Boom & Doom report, said. ‘Equities could rally between here and the end of April,’ Faber said in an interview with Bloomberg Television. ‘The government’s efforts will fail to boost economic activity. They can boost stocks. Stocks have adjusted meaningfully.’”

Source: Bloomberg, March 9, 2009.

Charlie Rose: Barton Biggs on the stock market

Source: Charlie Rose, March 9, 2009.

Tech Ticker, Yahoo Finance: Ritholtz - get long torches & pitchforks; bailouts “absolutely asinine”

Source: Tech Ticker, Yahoo Finance, March 10, 2009.

Fox Business: Fleckenstein - not in a hurry to buy
“Bill Fleckenstein talks about the economy and why he isn’t rushing back to the market to buy.”

Source: Fox Business, March 5, 2009.

John Authers (Financial Times): China and the markets
“Should US or European stocks have sold off on the Chinese news [of poor exports]? Not necessarily. By this week, the S&P 500 had priced in much future bad news, says Authers.”

Click here for the article.

Source: John Authers, Financial Times, March 11, 2009.

CBS News: Your bank has failed - what happens next?
“What would happen if your local bank failed? Scott Pelley and ‘60 Minutes’ were given extraordinary access, as the Federal Deposit Insurance Corporation moves in to take over a failed bank in Chicago.”

Click here for the article.

Source: CBS News, March 8, 2009.

YouTube: Art Bell & Michael Panzer talking about the economic downturn
“Art Bell was joined by Wall Street veteran Michael Panzner, who discussed the dire economic circumstances in America and around the globe. According to Panzner, the US is not in a typical recession. Instead, he believes the crisis more closely resembles a depression, in which we can expect an extended period of economic contraction accompanied by deflation.”

Source: YouTube, March 7, 2009.

Bloomberg: Chang sees civil unrest spreading from global recession
“Ha-Joon Chang, a professor at the University of Cambridge, and Frank Holmes, chief executive officer of US Global Investors, talk with Bloomberg’s Pimm Fox about the outlook for the global economic crisis. Chang and Holmes also discuss the outlook for trade, the credit markets and investment strategy.”

Source: Bloomberg, March 9, 2009.

Financial Times: Geithner and the G20
“Timothy Geithner is calling for radical changes ahead of the Group of 20 finance ministers’ meeting in the UK this weekend, says Martin Wolf.”

Source: Martin Wolf, Financial Times, March 11, 2009.

CNBC: Warren Buffett - US economy has fallen off a cliff
“Billionaire investor Warren Buffett, says the Fed’s actions have prevented things from getting worse. The Berkshire Hathaway chairman/CEO says that it takes longer for Americans to regain confidence and only five minutes to become fearful, with CNBC’s Becky Quick.”

Source: CNBC, March 9, 2009.

CNBC: Warren Buffett - Finding the right solution
“Buffett discusses the President’s budget plan and how it will help the nation’s economic recovery.”

Source: CNBC, March 9, 2009.

Financial Times: Bernanke says crisis could end soon
“Federal Reserve Chairman Ben Bernanke told the Council on Foreign Relations that if the banking system can be stabilized, the economic recession - which began in December of 2007 - could come to a close within the next three economic quarters.”

Source: Financial Times, March 10, 2009.

CNBC: Bernanke Q&A
“Fed Chairman Ben Bernanke takes questions on the nation’s financial crisis.”

Source: CNBC, March 10, 2009.

Charlie Rose: A conversation with Timothy Geithner, US Treasury Secretary

Source: Charlie Rose, March 10, 2009.

The Street.com: Geithner - gone by June
“Chris Whalen Director of Institutional Risk Analytics tells TSC’s Debra Borchardt that Treasury Secretary Tim Geithner will be gone by June.”

Source: The Street.com, March 6, 2009.

Bloomberg: Feldstein says US unemployment rate may rise above 10%
“Martin Feldstein, an economics professor at Harvard University, talks with Bloomberg’s Kathleen Hays about the outlook for the US unemployment rate. Feldstein also discusses Citigroup’s financial position, regulation of the banking industry, and the state of US and European economies.”

Source: Bloomberg, March 10, 2009.

CNBC: Meredith Whitney - the next crunch
“Credit cards could be the next shoe to drop, with Meredith Whitney, Meredith Whitney Advisory Group CEO, and CNBC’s Maria Bartiromo.”

Source: CNBC, March 10, 2009.

NMATV: Classic Friedman
“Check out this interesting exchange between Milton Friedman and Phil Donahue back in 1979.”

Source: NMATV, February 9, 2009.

John Authers (Financial Times): Devaluation of Swiss currency
“John Authers says the Swiss National Bank’s announcement that it is intervening to push down the Swiss franc sounds alarming.”

Click here for the article,

Source: John Authers, Financial Times, March 12, 2009.

Telegraph: Ambrose Evans-Pritchard on gold

Source: Ambrose Evans-Pritchard, Telegraph, March 5, 2009.

CNBC: China is “flying on one engine”
“China’s urban fixed asset investment is much more important now as it is ‘flying on one engine’ now, notes Michael Kurtz, head of China research & China strategist at Macquarie Research. He explains why to Michael Yoshikami of YCMNET Advisors, Daryl Guppy of Guppytraders.com, CNBC’s Martin Soong & Amanda Drury.”

Source: CNBC, March 12, 2009.

The Wall Street Journal: Inside the Madoff Scandal
“How did one of the largest financial scandals of our time go on for so long without being detected? WSJ reporters offer insight into Bernard Madoff’s alleged Ponzi scheme.”

Source: The Wall Street Journal, March 12, 2009.

Jon Stewart (The Daily Show): Interview with Jim Cramer
In Part 1 Jim Cramer criticizes Rick Santelli’s rant and admits he made his own mistakes.

In Part 2 Jon presents Jim Cramer with some old footage from his shady hedge fund days in this exclusive, uncensored video.

In Part 3 Jim Cramer defends his role as a commentator on an entertainment show.

Source: Jon Stewart, The Daily Show, March 12, 2009.

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Tags: Barton Biggs, Bill Fleckenstein, Bloomberg Television, Business March, Charlie Rose, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, ETF, Global Stock Markets, Jim Cramer, Marc Faber, Market Source, Nasdaq Composite Index, Pitchforks, Reversal Of Fortune, Russell 2000 Index, Turnaround Time, Video Front, Warren Buffett, Yahoo Finance
Posted in Credit Markets, Economy, Gold, Markets, Outlook, US Stocks | No Comments »

Oil About Nordic American Tankers (NAT)

Monday, March 9th, 2009

Back in November, we recalled overhearing the interview with Herbjorn Hannson, CEO, and his report on the earnings of his company, Nordic American Tanker (NYSE: NAT), which in the midst of the turmoil of the market and worsening global economy, reported its 3rd best quarterly earnings in the history of the company, which has been in operation since 1997. Regrettably, but not because it got away, but rather, it was an interesting story, we did not publish a note about this then.

This is one of those rare instances of a company/stock story that sticks out like a bright beacon in the darkness to guide the way, as an example of what types of businesses are out there that are seriously worthy of consideration, if not investment. We are not making a recommendation here, just pointing out something really interesting. The shares are trading for around $23-25 and they have been more or less rangebound, having recently been as high as $35 during the last three months since November, when we first heard the story, and is now back down to same price it was at then, give or take a few bucks then. At 23-24 its a much better price resulting in a far more attractive yield of over 14%.

Nordic American Tanker (NYSE:NAT), 6 months, vs. 50 MA.

The company is debt-free, has consistently paid a cash-dividend of over 10%, has a strong cash position and unused credit lines totalling $500-million, and all they do is ship crude oil.

This is a must read, must view. Every now and then, there are some truly interesting stories worthy of your time and thought, if not action.

Herbjorn Hannson, CEO, Nordic American Tankers, pays a visit to CNBC February 13, 2009. Click play to watch:

Here is the transcript of Herbjorn Hansson, on CNBC, February 13, 2009, with Erin Burnett, Mark Haines and Doug Mavrinac, Head of Maritime Research for Jefferies.

Herbjorn Hansson, CEO, Nordic American Tanker, CNBC, February 13, 2009

Erin Burnett: With the drop in Crude oil prices, Nordic American Tankers share price has fallen about 12%; now crude as you can see is down about 22%. Despite that NAT came out with 4th quarter earnings this morning, and guess what, they were better than expected. What is going on here? Joining us on set is our friend, Herbjorn Hansson, CEO of Nordic American Tanker, and in Houston, Doug Mavrinac, Head of Maritime Research at Jeffries.

Herbjorn, first of all, I know that the link is not perfect between where crude oil prices are and where shipping rates are, but there is a big issue with demand around the world dropping. Is that really the story, or is this a time of great opportunity?

Herbjorn Hansson: In the short term, demand [for oil] is dropping, but we must remember that this is the first time in history that we have a recession in a globalized world. There are very strong forces at work, and we are the highest paying dividend stock on Wall Street. We have turned in more than 10% annually in cash dividend yield.

This is a time for opportunity for us, because if and when markets are down, many ship owners are in a distressed situation.

EB: They have a lot of debt, you don’t. You have no debt.

HH: No. No debt at all, and we have a strong cash position; we have an unused credit line of $500-million, and it is my firm view that when we re-emerge, if you wish, from this mess, we will be a much stronger company having more ships, so I’m optimistic, as far as our company is concerned. But of course, you know there may some muddy waters in the near term. But rates are excellent at this time, and another point, the Dry Cargo business is a completely different story.

Mark Haines: Rates are excellent at this time?
HH: Yeah, I would say so.
MH: Even though demand is down for oil?

HH: Yes, that’s true. We have something that’s called contango. The contango, and then we use oil tankers for storage, and that means that tankers are withdrawn from the market. That’s good for us. We are talking about substantial amounts. Secondly, also we see slow-steaming; the tankers go more slowly, and when you go down from 15 knots to 13.5 knots, that is a reduction of 10%, which is equivalent to 35-million deadweight tons which is a huge amount. I take a much more optimistic view. I believe that you in America, and China, on the international level will have to drag us from out of this. And you have put a lot of measures in hand and there is no question these measures will work.

Nordic American boosts oil tanker fleet to 15

By Jonathan Kent, Published: February 19. 2009 08:50AM, The Royal Gazette (Bermuda)

Bermuda-based Nordic American Tankers Ltd. yesterday boosted its earnings capacity with the delivery of its latest tanker, named Nordic Sprite.

The debt-free oil tanker operator has now expanded its fleet to 15 Suezmax tankers — so called because they are the largest-sized ships that can negotiate the Suez Canal — including two newly build vessels, expected to be delivered in December 2009 and April 2010.

In the midst of the global economic crisis, NAT continues to make a profit and pay out attractive dividends to shareholders. The company has a policy of paying out all of a quarter’s free cash flow as dividends — last week NAT announced a dividend of 87 cents per share for the fourth quarter.

With the shares trading at around $28.20 a share yesterday, that amounts to an annualised dividend yield of more than 12 percent.

Rates remain healthy in NAT’s business of hiring out tankers, even though the price of crude oil has plummeted from $147 a barrel last July to around $35 yesterday.

NAT said the average daily hire rate for each of its vessels in the spot oil market was $40,157 net. The company estimates its break-even price is less than $10,000.

The fourth-quarter rates were much higher than the $27,000 average NAT achieved in the same period for the prior year, despite the dramatic fall in the price of oil and the slump in demand.

What has helped to buoy rates is oil companies and commodity traders hiring out oil tankers to use for storage, because of the large differential between today’s lowly oil price and that purchased for delivery a few months later.

For example, at 2.46 p.m. yesterday afternoon, light, sweet crude oil for March delivery was trading at $35.09 a barrel on the Nymex Exchange in New York, while contracts for December 2009 delivery were selling for $47 a barrel.

Royal Dutch Shell and Citigroup are among the companies who have hired tankers to take advantage of the market in a practice known as “contango”. That has tied up a significant amount of tanker capacity, which has decreased the availability of vessels to actually transport oil, thereby boosting rates.

NAT said in its earnings statement last week that it believes approximately 35 very large crude carriers (VLCCs) are being used for storage now.

How long tanker rates can remain high is debatable, particularly with the global downturn keeping demand low, inventories growing in the US, the world’s biggest oil consumer, and the Organisation of Petroleum Exporting Countries likely to make further production cuts.

NAT chief executive officer Herbjorn Hansson told business TV channel CNBC last week: “There may be muddy waters in the near term, but rates are excellent.”

Yesterday, Goldman Sachs downgraded Bermuda-based Frontline, which is the world’s largest owner of supertankers, to “sell” from “neutral”, citing a weaker-than-average balance sheet and a likely drop in hire rates.

There will likely be a “sharp decline” in rental rates in the second quarter as ships stop storing oil at sea and Opec cuts output, analysts led by Hugo Scott-Gall in London wrote in a note.

The shares were added to the bank’s “conviction sell” list, having previously been rated “neutral”. The stock fell by around five percent in Oslo trading.

NAT’s debt-free status means it has a clean balance sheet. It has a history of selling shares to raise capital in order to add to its fleet, instead of borrowing money, since it started with its first three tankers in 1997.

While it could be argued this has had the effect of diluting the value of shares for existing shareholders, the tanker acquisitions have added to earnings capacity, as well as dividends. The strategy is paying off handsomely during the ongoing credit crunch, with companies finding it difficult to borrow money.

NAT said last week it had gained $107 million in cash on January 15 this year from a follow-on share offering and also boasts an untapped $500 million credit facility.

According to a report by Morgan Stanley, published last week, the company offers a “safe harbour in a choppy tanker market”.

“NAT is holding all the cards now, in our view and should greatly strengthen its relative position in a down market,” the report stated.

Nordic American Tanker Shipping Limited is an international tanker company that now owns 15 modern double-hull Suezmax tankers averaging approximately 155,000 deadweight tons (dwt) each. It owns and operates crude oil tankers. The Company’s fleet consists of 15 modern double-hull Suezmax tankers, of which two are newbuildings. These include Gulf Scandic, Nordic Hawk, Nordic Hunter, Nordic Voyager, Nordic Freedom, Nordic Fighter, Nordic Discovery, Nordic Saturn, Nordic Jupiter, Nordic Apollo, Nordic Cosmos and Nordic Moon. Source: Wikinvest.com

Disclosure: No positions in NAT

Tags: Afternoon Light, Boosts, Bright Beacon, Cash Dividend, Cash Position, Cnbc, Commodity Traders, Company Stock, contango, Crude Oil, Crude Oil Prices, Dividend Yield, Dramatic Fall, Erin Burnett, ETF, Flash Player 9, Free Cash Flow, Free Oil, Global Economic Crisis, Global Economy, Hansson, Interesting Story, Jefferies, Jonathan Kent, Light Sweet Crude Oil, Maritime Research, Mark Haines, Mid Thirties, Midst, Nordic American Tanker, Nordic American Tankers, Nymex, Nyse, oil, Oil Market, Oil Tanker, Oil Tankers, Price Of Crude Oil, Quarter Earnings, Quarterly Earnings, Rare Instances, Royal Dutch Shell, Royal Gazette Bermuda, Sized Ships, Sprite, Suez Canal, Suezmax Tankers, Sweet Crude Oil, Tanker Fleet, Three Months, Turmoil, Types Of Businesses
Posted in Credit Markets, Economy, Gold, Markets, Oil and Gas, US Stocks | No Comments »

Yamada Sees 44% of NYSE Stocks Under $10 as `Shocking’

Sunday, March 8th, 2009

This may seem as yet another gloomy outlook for US Stocks and for that matter stocks in general, however, its source, Louise Yamada, is by far, one of the most highly regarded technical analysts, globally, and with a superlative track record. Though she is a technical analysts she confirms that supply is still outstripping demand for stocks, and as long as their are less buyers than sellers, the Dow could sail through 6,000 to her secondary target of 4,000.

Here, she is covered by CNBC, Bloomberg, and Barrons:

Louise Yamada, the doyenne of market technicians, says the market “looks awful” and is calling for a primary target for the Dow of 6,000 pts, and her secondary target at 4,000 pts. She is one of the most widely followed technical analysts working today. Click play to view (transcript provided below if you can’t watch now)

 
Melissa Francis (CNBC): You have said, “Hope is not an investing strategy.”

Louise Yamada: Yes, thats true. I think there’s a lot of hope that things won’t go lower. I’m inclined to agree with prior comments that there’s not a lot to see that we have bases; that we have accumulation under way. Basically, what’s happening in the stock market as with everything that we follow in price is the study of supply and demand in the marketplace.

What we see is that the rallies are all being met with more supply, whether its mutual fund closings, whether its hedge fund closings, whether its people just trying raise some cash because they’re just unemployed, there seems to be a very consistent supply coming into the rally attempts.

MF: You say you think we’re going to go through 6,000?

LY:I think so. I think one of the things that we’ve been concerned about is that as price was approaching the 2002 low, that that 2002 low represents a 10-year support and its very familiar to what we have been seeing over the past year and a half, a lot of the overall sector work in 2006 and 2007 when the financials were creating this 10 year top and finally broke the support of the 2002 low.

The implication of the ‘bigger the top, the bigger the drop,’ is very real, and its always for reasons that we don’t always know, because the market is a discounting mechanism. But, it was clear at the time that what was happening in a 10 year breakdown, was very different to what was happening in 1998 financial crisis, or 1990 which were very small, and we said the implications here are greater than are being perceived.

And the same thing now could be said of the equity market with the break below the 2002 low. It concerns us greatly. You have 15 of the Dow stocks that are already broken below their 2002 low. Over the past year and a half, forget the teenagers and the toddlers that many of those stocks have regressed to, but you know, I disagree with the comment made about, “You could buy a stock at $2 because it’s like an option, but recognize that if you do that and it goes to $1, you’ve lost 50%.

MF: Louise, I know that you say that your next target after that is 4,000. You also say that Buy and Hold died a long time ago. A long time ago, you know, people who bought and held until the market hit 13,000, 14,000 did okay. Why do you think it died a long time ago? 

…If they sell, If they sold. But a lot of people didn’t. And therein lies the problem. People that bought in the 80s and 90s held through the 2000 crash, and then were in it again, for what has turned out to be a double top; perhaps a 10 year double top; many are still holding on.

I think its important to recognize, when the distribution starts to occur, the way it did for technology in 2000, and recognize that the Dow replaced stocks with Microsoft and Intel, right at the top in 1999, and Dow is a price-weighted average, so the larger priced stocks carry a lot more weight.

MF: So you’re saying that you have to be vigilant, and be awake, and sell stocks, now be a hog, and sell your stocks when you’ve made a little money. Or you’re saying you’ve got to be a day trader, that buying in your 401K is gone.

No, i don’t think you’re a day trader buying in your 410K. Technical analysis really helps people understand about when the structural run is over, in a sector or in a stock, just as in the 1973, Avon Products went from, 200 to 19. In 1986, Digital Equipment went from 200 to 19. There are ways to identify those breakdowns.

Enron, we were getting out under 60. There is an important characteristic of supply, that makes itself evident in a major top.

MF: Gotcha!, Louise Thanks so much. 

Listen to Louise Yamada, on Bloomberg discussing “shocking” state of the market.

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

And from Barron’s, Friday, March 6, 2009
http://online.barrons.com/article/SB123631957962750593.html

The eponymous head of Louise Yamada Technical Research Advisors points to broad market measures’ breaking their 2002 lows, which would equate to around 800 on the Standard & Poor’s 500, as the key indicator of the market’s overall trend. (The S&P 500 closed down at 682.55 Thursday, down 30.32 or 4.25%.)

In other words, after the dot-com crash of 2000-02, stocks rallied only to give back those gains, and them some.

That’s important, Yamada explains, because following the Crash of 1929, the great loss of wealth didn’t come in the initial decline. Fortunes were wiped out among investors who had tried to pick a bottom during the initial phase of the bear market of the early ‘Thirties.

“You never know how low is the low,” she remarks. Yamada sees the downside risk on the Dow Jones Industrial Average in the range of 4000 to 6000 (down from 6,594.44 Thursday) and 400 to 600 on the S&P 500.

Given the widespread talk of “capitulation” (See Thursday’s column, “Not There Yet?”) the desire to pick a bottom seems as strong as in the early 1930s. Consider a market bellwether such as General Electric . It traded at 30 last summer and had fallen below 13 at the worst of the November’s rout. But it’s been cut in half from those former lows since then.

While prices plunge, Yamada observes investors have far less they can count on. Buyers of preferred shares in banks, which offered them seemingly bond-like protection, are being turned into common stock, which puts them on the front lines to absorb losses.

Louise Yamada, founder of Louise Yamada Technical Research Advisors, was formerly Senior Technical Analyst, Vice-President for Research at Salomon Smith Barney, where she was responsible for sector analysis of the U.S. and global markets. She writes for widely acclaimed reports, including Portfolio Specialist, Market interpretations, Japan Portfolio Strategist, Latin American Strategist, Group Spectrum, and special research Trends reports. Her work has been the subject of two featured interviews in Barron’s. A graduate of Vassar College, Ms. Yamada teaches at the New York Institute of Finance and frequently appears as a guest on CNBC.

Tags: Accumulation, Barron's, Bloomberg, Cnbc, Consistent Supply, Doyenne, Economics, Economy, Gloomy Outlook, Hedge Fund, Louise Yamada, Market Technicians, Mf, Mutual Fund, Nyse Stocks, Primary Target, Rallies, Secondary Target, Sector Work, Stock Market, Supply And Demand, Technical Analysts
Posted in Bonds, Economy, Markets, Outlook, US Stocks | No Comments »

Technical talk: Bounce not that impressive …

Sunday, March 8th, 2009

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

Analyzing yesterday’s [Wednesday] activity two things jumped out first, after a recent aggressive multi-day sell off (and multi-week for that matter) the market could not hold on to a lousy 240 point gain, shaving off 100 Dow points in the last 1/2 hour. Second, was that the internals on the move were average, not stellar, with NASDAQ up to down volume very good at 4.75:1 but its advance decline ratio only registering a 2:5 to 1 ratio. On the NYSE the ratios were as bit better at 2.53:1 and 4:29 to 1 respectively.

However neither of these were what we would expect to see on a rally cementing a low, rather they were numbers that looked more associated with short covering and trader interest (not investor interest). Typically on days in the past that have been up real thrusts (bottom confirmation days) off real lows the up to down volume ratios are closer to 10:1 or greater with accompanying advance to decline ratios of at least 5:1.

When people are looking for lows or so afraid of missing the bottom (or a rally) then you can almost always count on it not being the real deal. Real rallies start when all hope is lost and investors become mentally worn out from calling for the bottom (so often) and being wrong that they finally stop trying.

Any rally at this point is an opportunity to make some short-term trading profits until market breadth stats improves measurably.

Source: Kevin Lane, Fusion IQ, March 5, 2009.

Tags: Advance Decline Ratio, Bounce, Confirmation, Dow Points, Down Volume, Internals, Investor Interest, Iq, Lows, Market Breadth, Nasdaq, Nyse, Point Gain, Profits, Rallies, Rally, Real Deal, Short Covering, Thrusts, Volume Ratios
Posted in Markets, US Stocks | No Comments »