Chinese Stocks - Finely Balanced

Thursday, March 18th, 2010

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As reported over the weekend (via US Global Investors), the latest Chinese inflation figures surpassed the one-year deposit rate of 2.25%. Negative real interest rates may provide an additional incentive to drive asset prices higher, increasing the likelihood of the Chinese central bank raising interest rates from a five-year low.

Source: US Global Investors - Investor Alert, March 12, 2010.

Fears of further monetary tightening in China have recently been weighing on the Chinese stock market. Of all the bourses, the Shanghai Composite Index (3,046 at the time of writing) is the only one trading below its 200-day moving average (3,059), albeit after yesterday’s good performance by only 13 points. Clawing back to above this key line and also breaking its high of March 4 (3,097) would be bullish signs. However, the February low of 2,935 must hold in order for the cyclical bull market to remain intact.

Source: StockCharts.com

The Chinese stock market was the first to turn the corner after the credit crisis sell-off - a full five months before the majority of indices bottomed in March 2009 - and is being watched closely to ascertain whether this market would be the first to spell danger for global stocks, i.e. the proverbial canary in the coalmine.

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No reason to be overly concerned yet, argues David Fuller (Fullermoney) from across the pond: “People fear China’s credit tightening might trigger another significant sell-off in world markets. China’s monetary policy authorities need to get the balance right if they are to stem property speculation without overkill. This can be a fine balance but they have every incentive to succeed and their gradualist (baby-steps) approach to monetary policy tightening seems prudent. They will make some mistakes, like everyone else, but this is a medium-term risk and should have little effect on China’s long-term potential.”

He added: “Meanwhile, global stock markets have recently shown more evidence of a melt-up than a meltdown. Investors are climbing the ‘wall of worry’. I will worry more when they sound euphoric.”

Tags: 200 Day Moving Average, Asset Prices, Baby Steps, Bourses, China, Chinese Central Bank, Chinese Stock Market, Chinese Stocks, Credit Crisis, David Fuller, Fine Balance, Global Investors, Global Stock, Global Stocks, Gradualist, Key Line, Monetary Policy, Property Speculation, Shanghai Composite Index, Stock Mark, World Markets
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WSJ: India Joins China in Global Hunt for Commodities

Thursday, February 25th, 2010

This article is a guest contribution by TraderMark, of Fund My Mutual Fund Blog.

A few weeks ago we noted the world’s largest coal producer, Coal India, was on the hunt for global assets to expand their reach.  [Feb 12, 2010: WSJ - World's Largest Coal Producer Has $6 Billion in the Bank and is on the Prowl for Assets]  It appears this is now part of a broader national strategy mimicking what China has been doing the past half decade+.

If you have any Malthusian bones in your body,  [Mar 24, 2008: WSJ - New Limits to Growth Revive Malthusian Fears] [Jun 20, 2008: World Population to Hit 7 Billion by 2012] you have to wonder as certain countries waste all their national treasure on bailing out banks, financing the lifestyles of those who refuse to save for themselves, and funding pet projects of their politicians -  while others are attempting to snatch up as many long lived assets across the globe, what the long term implications will be.  This is more or less parallel to a company who lives for today - happy to kick the can down the road -  rather than spends heavily on R&D to prosper for tomorrow. Of course any such national directives would be considered “socialistic” in certain countries, hence anathema to even consider as national policy.   Oh well, much better to send countless paper monies out into the atmosphere to help prop up home prices and capital market values from going where they belong - a much sounder national directive.

Via WSJ:

• India wants to join the club of global energy giants.  Some of the country’s largest private and state-run firms are in hot pursuit of oil and gas assets overseas as they seek to take advantage of depressed asset prices during the downturn and break free of burdensome regulations at home.
• In the latest move, oil-to-textiles conglomerate Reliance Industries Ltd., run by billionaire Mukesh Ambani, raised its bid over the weekend for LyondellBasell Industries, a bankrupt petrochemical maker and oil refiner. The new bid values the Netherlands-based firm at $14.5 billion, according to a person familiar with the matter.  A deal with Lyondell would significantly advance the ambitions of Reliance’s Mr. Ambani to build a global energy conglomerate. It would create a behemoth with $80 billion in combined revenues and interests in oil-and-gas exploration, refining and petrochemicals used for food packaging to textiles. (Reliance is akin to a combination of General Electric and Exxon Mobil in the States - a powerhouse in India with hands in countless industries)
• Reliance, India’s largest private company by market value, already operates the largest oil refining complex in the world, a site in the western state of Gujarat that can process 1.24 million barrels of crude a day. The facility is designed to handle the kind of ultra-heavy crude that could be extracted from Value Creation’s oil sands.
• Reliance also is scouting other foreign targets, including Canada’s Value Creation Inc., which has large oil-sands deposits in Alberta, people familiar with the company’s thinking said. (China has also been in Canada purchasing oil sand deposits) Smaller rival Essar Group is stepping up its own bargain hunting abroad, with an eye on assets that Royal Dutch Shell PLC and other oil majors are unloading.
• In recent months, Reliance and Essar, both based in Mumbai, have hired top executives from global oil majors to aid their international expansion efforts.
• Meanwhile, India’s flagship state-run oil company, Oil & Natural Gas Corp., said recently it may spend as much as $30 billion over the next decade on an international acquisition binge.
• Indian companies are scouring the globe to secure crude resources and reduce their dependence on imported oil. India imports 70% of its oil, with a price tag of more than $90 billion annually. The companies are also looking to expand their global footprint with refineries and other assets in far-away markets. And they want relief from the regulatory headaches of their home turf, where government influence in exploration and pricing of natural resources has slowed expansion.
• India is likely to face competition as it shops for oil and gas, especially from Chinese firms. Last summer, Sinopec Group, a large Chinese oil company, paid $7.2 billion for Addax Petroleum, a Geneva-based company that has oil and gas assets in the Middle East and Africa.  “We see the international players being more often the buyers of these types of assets now, and there’s no reason to think that won’t continue,” said Jon McCarter, oil-and-gas transactions leader for the Americas at Ernst & Young.
• Cross-border acquisitions by Indian companies fell 37% last year to $11.4 billion, according to Dealogic. But activity is picking up as Indian companies rev up for big-ticket deals in sectors such as energy, telecommunications and media.
• The country’s largest cellphone company, Bharti Airtel Ltd., offered $10.7 billion last week for most of the Africa assets of Kuwaiti operator Mobile Telecommunications Co., known as Zain.  Essar Group, a conglomerate with $15 billion in revenue and interests in steel, oil and telecom, controls oil exploration blocks in places including Nigeria, Madagascar, Myanmar and Vietnam.  Now the company has emerged as an eager buyer for European and U.S. oil companies that are struggling with extra refinery capacity due to slumping demand for fuels.

You can almost feel the sands shifting under our feet, month by month - year by year.

Source: TraderMark, fundmymutualfund.com

Tags: Asset Prices, Burdensome Regulations, China, Coal India, Coal Producer, Commodities, energy, Energy Giants, Gas Assets, Global Assets, Global Energy, Global Hunt, Hot Pursuit, India, Long Lived Assets, Market Values, National Strategy, oil, Paper Monies, Pet Projects, Reliance Industries, Reliance Industries Ltd, Term Implications, World Population, Wsj
Posted in Emerging Markets, India, Markets | No Comments »

Doug Casey: “Stock market set to crash”

Friday, January 15th, 2010

Doug Casey is an American free-market market economist, financial author and entrepreneur. He has been writing a monthly investment newsletter, the International Speculator since 1979 and I always find his ideas quite refreshing.

In the paragraphs below, he is interviewed by Louis James, editor of the International Speculator.

L: So, what’s on your mind this week, Doug? I understand you’ve had a “guru moment”…

Doug: Well, it’s nothing but a gut feeling, but I think the stock market is riding for a big fall this year.

Everyone was afraid the world was going to come to an end a year ago, and it almost did. But governments all around the world stepped in and printed up trillions of their various currency units - it’s not just the United States. And still, retail price inflation hasn’t blossomed. It seems that governments are bent on keeping asset prices up to avert panic. They focus on controlling perception instead of fixing the problem. It stems from an economic version of the theory that all we need to fear is fear itself. As long as we have the right psychology, everything is going to be okay - total nonsense.

L: That old saw: as long as there’s confidence, all is well.

Doug: Yes. It’s the Wile E. Coyote theory of economics. As long as you never look down after running off a cliff chasing the roadrunner, you can keep treading air. Unfortunately, although the power of positive thinking may help in many ways, it’s of zero use if you continue living above your means and making stupid decisions.

L: Insolvency doesn’t seem to matter; as long as everyone has confidence that things will keep going, the experts believe they will. But in the real world, you can’t remain insolvent for long, even if “you” are the United States as a whole society.

Doug: Exactly. My thinking about the stock market is this: corporations have done as “well” as they have mainly by cutting expenses. Laying people off, that sort of thing. So the bottom lines have not fallen as far as we might expect - but the top line has been hit. Revenues are falling for corporations across the board.

L: And the market has to notice this reality sooner or later.

Doug: Yes. The world’s financial system has to adjust to a new reality, one with lower levels of consumption and differing types of production. The legions of unemployed are not going to go back to work anytime soon, at least not doing anything like what they were doing before the bubble burst. The economy is going to continue deleveraging. There’s going to be less debt to allow the purchase of all this stuff people have been buying, resulting in lower corporate earnings. So it’s hard to see revenues doing anything but continue to spiral downwards for years to come.

And then there are financial “accidents” waiting to happen.

L: Like the bank failures the government has admitted it expects this year? The FDIC says there will be more bank failures in 2010 than in 2009, with the spin being that 2010 will be the peak of the crisis.

Doug: Sure. But I also expect corporate bond failures. And there are other things out there. As Porter Stansberry (whose style as an analyst I really like) has pointed out, General Electric - which is really just a hedge fund disguised as an industrial concern at this point - is leveraged thirty to one. It’s a dead man walking. It’s the next AIG. When something like that happens, it really shakes Wall Street to its foundations.

So, I’ve been bearish on general equities for years, based on fundamentals. Whether they go up is no longer a reflection of prosperity - it’s a reflection of how much money the government creates and where it goes. But I am feeling particularly strongly bearish on Wall Street right now. That’s my gut. The social mood of the country is going to turn ugly and gloomy; people won’t want to call their brokers and “get into the market.”

The Greater Depression is going to be really serious. I can’t see buying stocks until dividend yields are in the 6-12% range. And people have forgotten the market even exists. Anyway, Baby Boomers, who own most stocks directly and indirectly, are going to be selling them to support themselves in retirement.

L: Would you recommend shorting GE?

Doug: It should be an easy bet, but the government is certain to try to prop it up, as it has other dinosaurs pursuing business models that no longer work, like General Motors - although it didn’t help their shareholders. “Too big to fail.” That makes shorting riskier. But GE still has a $179 billion market cap, so it should fall quite a bit from here, if not all the way to zero.

L: No way out for the stock market?

Doug: Well, the government has been suppressing interest rates for a long time now, which is exactly the opposite of what they should be doing. These artificially low interest rates discourage people from saving and encourage them to gamble, hoping to outrun inflation. But eventually the market will force interest rates to go higher, and that will kill the stock market, because the stock market does tend to fluctuate inversely with interest rates. High interest rates almost always mean a low stock market, and low interest rates tend to mean a high stock market. So it seems to me that there simply is no good news on the economic front. Interest rates are headed way up, both out of a need for capital and as a reflection of the high price inflation ahead.

L: This doesn’t sound like a guru moment - a flash of the famous Casey inspiration. This sounds more like a well-reasoned argument to me.

Doug: Well, when you get a really strong gut feeling, it’s usually because you intuit many things that are out there, subconsciously if not analytically. Look, dividends are dropping across the board. Top line earnings are dropping. Where net earnings have been maintained, it’s been by expense cutting.

L: Even if margins are maintained, the companies are getting smaller, and people are making less money, on the whole.

Doug: Right. And interest rates are at all-time lows. That’s the short sale of the decade, if you want to short something. Bet against bonds.

And there’s more. As the government takes over more and more of the economy, they’ll mismanage that activity, as they always - necessarily - do. Why do I say necessarily? Because they do things that are politically productive for them, not economically productive for society. That’s going to hurt productivity and profitability, misallocating and even destroying capital wherever they stick their noses. And, today, that’s absolutely everywhere.

Taxes, of course, will go way up. That’s going to give individuals less money to buy stocks. Corporations will have less money left over to reinvest or pay dividends with. All the draconian new rules they’re enacting in response to the crisis will only serve to inhibit entrepreneurial activity and investment. It will encourage speculation.

The real estate market has not, by any means, bottomed yet. What’s going to happen in the commercial and office real estate markets is just starting, and the housing market is still going to get worse.

All of this is very bearish for the stock market.

L: Not a single ray of light? No way you can be wrong?

Doug: The only bullish factor I can think of is that people might panic out of dollars and will buy anything that’s real - or at least represents actual wealth, as stocks are supposed to do. That’s the only reason I can think of for buying Wall Street, and it’s too early for that to happen. Retail inflation hasn’t reared its ugly head in a big way yet, and we’ll have to have big inflation numbers before Americans start really panicking out of the dollar.

L: That seems to still be a bit down the road.

Doug: Yes, and I hate making predictions about the direction of the stock market. It’s like that joke I like to tell about Einstein.

L: The one you used when we talked about interest rates.

Doug: Right. It makes no sense to be in the stock market at this point. Real estate is a terrible place to be. Bonds are a terrible place to be. Even cash, especially if you’re holding euros or dollars, is surprisingly risky, for all kinds of reasons (as we just spoke of regarding currencies). That makes this a truly unique time, in which there’s almost nothing that’s a good place to be.

L: Nothing? What about gold?

Doug: Gold had a good day today, and it’s back near its new record high again. I’m very bullish on gold, but I’m reluctant to tell people to go out and buy gold when its trading near a peak price - a price that’s quadruple the price when I was telling people to buy gold a few years ago. I still think gold is going over $2,500 or even $3,000, in today’s dollars, but it’s risen enough that it’s not going to be a one-way street straight up from here. It’s not being artificially suppressed to $35 anymore…

This is a very strange time - I’ve never seen anything quite like it - with no good places to be, at least as far as Americans in America are concerned. Maybe Canadians are next - their real estate market hasn’t really collapsed yet. If I still owned property in Canada - I used to live in Vancouver - I’d hit the bid tomorrow morning. The same in Australia, China, and the UK.

L: Okay, but back to gold - even if it is four times what it was a few years ago, with all the money creation that has gone on full throttle around the world since the crisis hit, that’s really not a concern. If gold corrects in a big way, back to three digits, maybe back below $900, or even below $800, given where gold has to go once price inflation follows monetary inflation, that correction just becomes a great buying opportunity for those who didn’t get in early.

Doug: I’m confident that within a couple years, gold is going to be trading at $3,000 or more per ounce. I really think that’s going to happen. I’d rather buy more at cheaper prices, of course, but the simple fact that it has quadrupled doesn’t prevent it from quadrupling again. And there is no gold bubble. The average guy hasn’t even thought about gold, much less bought any.

L: That makes sense. But about interest rates; the government has been keeping them artificially low for years - why can’t they just keep on doing that through the rest of this year and beyond?

Doug: They might be able to. After all, interest rates are like any other market; they are prices set by buyers and sellers. More buyers of bonds (bills, whatever) drive down interest rates. So, if the Federal Reserve comes in and buys bunches more of this stuff, yes, the immediate and direct consequence will be lower interest rates. But the indirect and delayed consequence will be vast quantities of new dollars, which is the actual cause and definition of inflation, and as a result, the market is going to demand higher interest rates in the U.S., just as it did in Zimbabwe.

Don’t forget that the U.S. government is going to run another trillion-dollar-plus deficit this year, plus they have to roll over another trillion of maturing paper. Who’s going to buy all that? Nobody - unless rates go much higher. Or the Fed buys it with newly created dollars.

L: No way out?

Doug: I hate to sound so definitive - it makes it easier to be wrong. I realize that in the art of predicting, you’re supposed to use lots of hedge clauses and never give both a price and a date in the same sentence. You’re supposed to be cryptic, like an oracle, or speak in meaningless generalities like a Fed chairman. I certainly don’t want to sound dogmatic, because almost anything is theoretically possible, but at this point, if the U.S. and the world avoid a financial catastrophe, it’s really, really going to surprise me.

I just don’t see any way around it, and most people simply do not think in these terms, so they are going to be blindsided. They listen to what they hear in the news, read in the papers, get from government pronouncements… Green shoots, things are getting better… To me it’s so wrong-headed what the governments are doing, it’s not just ignorance, it’s deliberate…

L: Malice?

Doug: Malice. That gets back to the confidence con. A lot of these morons think that’s really what it’s all about. Confidence and consumption - just the opposite of what’s needed right now.

L: When what’s needed is caution and saving. And at some level they must know that discouraging people from doing these things is wrong.

Doug: It depends on the degree to which you think these people are knaves or fools. I think they are both, but some are just stupid. Some are actually stupid in the sense of “unintelligent.” But more are stupid in the sense of evidencing an unwitting tendency to self-destruction.

L: Both evil and stupid? Great!

Doug: Yes, it’s a very dangerous combination for the world at large. But it characterizes exactly the type of person that gravitates into government.

L: So, it goes into a death spiral. They have to sweeten the pot more and more, or foreigners won’t accept increasingly worthless paper. Result: even a guy as smart as Bernanke is supposed to be could take the U.S. down the path of Mugabe.

Doug: No question. He’s warming up those helicopters as we speak. And unfortunately, it’s not just the U.S. at this point. China, which everyone seems to be thinking will save the world’s bacon, is in an unbelievable real estate bubble now. Prices have doubled and doubled again in the last five years. As you know from our conversation on real estate, I’ve had dealings in the Hong Kong market for a while now, and prices that apartments are going for in Hong Kong now are literally off the scale. Totally over the top. When that Chinese bubble bursts, you’re going to have scores of millions of Chinese - and the banks that lent them money - lose everything, just like Americans. It’s going to burst, and it’s going to be a disaster.

L: So, it’s truly a worldwide problem - no surprise there.

Doug: Yes. The bottom line is that all of this is bad for the stock market. The only good news is that those of us who are long gold are going to continue to do well. There’s also an excellent possibility that a bubble will be ignited in gold stocks.

L: But won’t gold stocks get whacked in a major market meltdown, if only temporarily, as they did in the crash of 2008?

Doug: That’s very possible, which is why you only want to own the best of the best gold stocks, with great people, projects of real merit, and enough cash to advance them for two years or more - the kind that you focus on in the International Speculator and the kind of profitable producers Jeff Clark focuses on in the Gold and Resource Report. Such companies can weather the storm - just as they did the crash of 2008.

Also remember that gold and gold stocks are different, almost opposite things; gold you own for security, gold stocks are for high-stakes speculation.

L: Got it. And now, so do our readers: hot off the presses, Doug Casey’s guru-sense is tingling, and it’s telling us another major stock market crash is likely this year. Hopefully, they will listen to you and be prepared.

Doug: Most won’t, but I’ll be glad for the ones who do.

L: A sobering conversation, but an important one. Thanks, Doug.

Doug: My pleasure.

Source: Conversations with Casey, January 13, 2010.

Tags: Asset Prices, Canada, China, Coyote, Currency Units, Doug Casey, Emerging Markets, Financial Author, Gold, Gut Feeling, Insolvency, International Speculator, Investment Newsletter, Market Economist, Paragraphs, Power Of Positive Thinking, Price Inflation, Roadrunner, Stock Market, Stupid Decisions, Theory Of Economics, Treading Air, Trillions, Wile E Coyote
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Central Banks Giveth, Central Banks Taketh Away

Friday, October 30th, 2009

Two articles published within a few weeks tell a compelling story of cause and effect. The first by Michael McKenzie, FT.com, is a history lesson. The second, by one of the finest financial columnists, Ambrose Evans-Pritchard, serves as a warning.

Central banks fuel risky assets, By Michael Mackenzie in New York

October 16 2009 20:56 | Last updated: October 19 2009 09:24

Thanks to generous liquidity support from central banks, risky assets have been moving in a broad relationship for some time, and this week several markets reached or approached key levels.

Of all the major markets, equities are the main barometer of risk taking. This week shares in Australia, Hong Kong, India, Russia, Europe, London, Brazil and New York all hit fresh peaks for at least the past 12 months.

Rising appetite for risk was perhaps most apparent in the US crude oil price breaking above $75 a barrel, which was its high in late August and had presented a barrier for oil bulls since June.

Central banks chill asset rally, by Ambrose Evans-Pritchard, October 30, 2009

The liquidity tide is turning. Authorities across large parts of the world have either begun to tighten the spigot or are taking steps to wean their economies off emergency stimulus. This is a treacherous moment for markets.

Oil-rich Norway raised rates a quarter point to 1.5pc on Wednesday, the first European country to move since the crisis. Governor Svein Gjedrem said asset prices have “risen sharply and probably excessively”. The Norges Bank is taking pre-emptive action to choke off a property bubble, though manufacturing remains sluggish. The era of “asset targeting” has begun.

Australia took the plunge earlier this month. It dodged recession over the winter and has since been lifted by China’s torrid demand for commodities. Israel kicked off in August.

Source: FT.com | Telegraph UK

Tags: Ambrose, Asset Prices, Cause And Effect, Central Banks, China, Commodities, Crude Oil Price, Emerging Markets, Evans Pritchard, History Lesson, India, Last Updated October, Late August, Liquidity Support, Michael Mackenzie, Michael Mckenzie, Norges Bank, oil, Quarter Point, Risky Assets, Russia Europe, Spigot, Taking Steps, Telegraph Uk, Torrid
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Bill Gross: Investment Outlook (October 2009)

Thursday, October 29th, 2009

Bill Gross, co-founder and co-CIO of PIMCO, is to my mind one of the shrewdest money men around. His monthly newsletter, this month entitled “Midnight Candles”, therefore always makes for thought-provoking reading.

He concludes the newsletter as follows:

“Asset appreciation in US and other G-7 economies has been artificially elevated for years. In order to prevent prices sinking even lower than recent downtrends averaging 30% for stocks, homes, commercial real estate, and certain high yield bonds, central banks must keep policy rates historically low for an extended period of time. If policy rates are artificially low then bond investors should recognize that artificial buyers of notes and bonds (quantitative easing programs and Chinese currency fixing) have compressed almost all interest rates.

“But while this may support asset prices - including Treasury paper across the front end and belly of the curve, at the same time it provides little reward in terms of future income. Investors, of course, notice this inevitable conclusion by referencing Treasury Bills at .15%, two-year Notes at less than 1%, and 10-year maturities at a paltry 3.40%. Absent deflationary momentum, this is all a Treasury investor can expect. What you see in the bond market is often what you get.

“Broadening the concept to the US bond market as a whole (mortgages + investment grade corporates), the total bond market yields only 3.5%. To get more than that, high yield, distressed mortgages, and stocks beckon the investor increasingly beguiled by hopes of a V-shaped recovery and ‘old normal’ market standards. Not likely, and the risks outweigh the rewards at this point.

“Investors must recognize that if assets appreciate with nominal GDP, a 4-5% return is about all they can expect even with abnormally low policy rates. Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets - while still continuously supported by Fed and Treasury policymakers - is likely at its pinnacle. Out, out, brief candle.”

Click here for the full article.

Source: Bill Gross, PIMCO - Investment Outlook, November 2009.

Tags: Asset Appreciation, Asset Prices, Bill Gross, Bond Investors, Central Banks, Chinese Currency, Commercial Real Estate, Gross Co, Gross Investment, High Yield Bonds, Inevitable Conclusion, Investment Grade, Investment Outlook, Maturities, Money Men, Nominal Gdp, PIMCO, Rage Rage, Treasury Bills, Us Bond Market
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Meredith Whitney: Banking Sector Outlook Less Optimistic

Monday, September 14th, 2009

Meredith Whitney says economic and banking fundamentals in the US have not changed in the last year. Whitney sounds less optimistic now than when she upgraded Goldman a few months ago.

Click play to view:
Part 1:

Part 2:

Whitney made the following points:

“No bank underwrote a loan with 10 percent unemployment on the horizon”.

“I think there is no doubt that home prices will go down dramatically from here, it’s just a question of when.”

She said local governments and states are chronically under-funded and “most states are under water,” adding to the problem of low private consumption.

“If you look at the drivers for unemployment I don’t see that reversing very soon,” Whitney said.

If consumers were to decide to spend, “that would be a game-changer,” but it would be an unnatural thing to do in a recession, she said.

“A lot of themes are constant, which is the US consumer and the small business doesn’t have any credit, credit is still contracting.” Whitney said.

Consumer debt and consumer credit have dropped according to the latest figures which also show that people have been spending more from their debit cards than from their credit cards.

“Obviously that doesn’t bode well for spending,” Whitney said.

Whitney maintains only one buy rating - GS - Goldman Sachs still has a lot of “gas in the tank” and it is taking up a lot of what Lehman left on the table.

“Banks are taking advantage of what the government is doing by artificially inflating asset prices so they can ride a steep yield curve and they’re going to have a third quarter that reflects that.”

The buy rating on GS is a reminder that PIMCO’s advice to “shake hands with the government,” and the ‘new normal,” remain significant themes in this market.

Source: CNBC.com, September 10, 2009

Tags: Asset Prices, Banking Sector, Banks, Cnbc, Consumer Credit, Consumer Debt, Consumers, Credit Cards, Debit Cards, Gold, Goldman, Goldman Sachs, Horizon, Lehman, Local Governments, Market Source, Meredith Whitney, No Doubt, Private Consumption, Recession, Reminder, Sector Outlook, Sounds, Unemployment, Yield Curve
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Bill Gross: From Feast to Fast - July 2009 Outlook

Friday, July 3rd, 2009

Bill Gross, the “Bond King” is going to great lengths to get us to understand that the world is in a state of reversion to what he and El-Erian, his co-chief at PIMCO coined as the “New Normal” 3 months ago, in his latest missive - “Bon” or “Non” Appétit?.

Our economy which once feasted, no, binged, unable to stop itself, on debt and leverage, and on the basis that home and other asset prices would rise to the sky, is now fasting, cleansing itself of the fat that accumulated, and it is a long-term process that will take many years to complete.

Click Play to Listen to Bill Gross’ Investment Outlook:

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.

Here are some of the highlights from the letter, which you may download here:

Gross re-iterates the “New Normal” - Its starting to sound a lot like “The Emperor’s New Clothes“:

Our economy’s lights, if not switched off in a rehash of the 1930s Depression, have certainly been dimmed in a 21st century version likely to be labeled the Great Recession. Much like John McSherry, U.S. and many global consumers gorged themselves on Big Macs of all varieties: burgers to be sure, but also McHouses, McHummers, and McFlatscreens, all financed with excessive amounts of McCredit created under the mistaken assumption that the asset prices securitizing them could never go down. What a colossal McStake that turned out to be. Now, however, with financial markets seemingly calmed and an inventory-based recovery in store for the balance of 2009, there is a developing optimism that we can go back to the lifestyle of yesteryear. PIMCO’s driving thesis however, if not a juxtaposition, is succinctly described as a “new normal” where growth is slower, profit margins are narrower, and asset returns are smaller than in decades past based upon the delevering and reregulating of the global economy, which in turn should substantially inhibit the “gorging” of goods and services that we grew used to in decades past.

Forecasts based on econometric models inevitably miss these secular/structural breaks in historical patterns because it is impossible to quantify human behavior, and long-term trends involving risk-taking and in turn derisking are decidedly human in their origin. Bell-shaped curves with Gaussian/random distributions fail to anticipate that human beings do not make decisions by chance or independently of each other, but in many cases in reaction to one another. Humanity’s personal and social computers appear to be programmed that way. And so, instead of “normal” distributions, economists and investors must learn to be on the lookout for “black swans,” and if not, then certainly “fat tails,” which differ from the measurement of natural phenomena accepted in science. “New normals,” flatter-shaped bell curves, and structural shifts in previously accepted standards become not only possible, but probable as human nature reacts to itself and its prior behavior. The efficient market hypothesis was always dead from the get-go, but academic tenure and Nobel prizes were food for the unwilling or perhaps unthinking.

Others are starting to wonder about the emperors new clothes, the “green shoots”:

I was impressed this weekend by an article in the Op-Ed section of The New York Times by staff writer Bob Herbert. “No Recovery in Sight” was the heading and his opening sentence asked, “How do you put together a consumer economy that works when the consumers are out of work?” That is really all one needs to ask when divining our economy’s future fortune. Unless an optimist can prescribe how to put Humpty Dumpty back together again and shuffle him/her back to work then there can be no return to an “old normal.” As unemployment approaches 10%, what is less well publicized is that the number of “underutilized” workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering. Commonsensically, one has to know that many or most of these are untrained for the demands of a green-oriented, goods-producing future economy. Imagine a welding rod in the hands of an investment banker or mortgage broker and you’ll understand the implications quicker than any economist using an econometric model.

Fifteen Words to describe the era that led us to our current economic crisis:

The supersizing of financial leverage and consumer spending in concert with the politicizing of deregulation describes in fifteen words our most recent brush with irrational behavior and inefficient markets. Greed will come again. But for now, the trend is the other way and it promises to persist for a generation at a minimum. The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007. Global estimates are less reliable, but certainly in multiples of that figure. And when potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3½%. There’s no magic in that number, and no model to back it up, just a lot of commonsense that says this is how people and economic societies behave when stressed and stretched to a near breaking point.

Where do we go from here:

Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be enclosed in a cage featuring government-mandated, consumer-oriented fasting. “Non Appétit,” not Bon Appétit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S. Because this is so, short-term policy rates will be kept low for longer than cyclical norms, and the outlook for risk assets - stocks, high yield bonds, and commercial and residential real estate will involve just that - risk. Investors should stress secure income offered by bonds and stable dividend-paying equities. Consumer Cuisinart consumption is a relic of the past.

Tags: Asset Prices, Asset Returns, Bill Gross, Burgers, Econometric Models, Excessive Amounts, Financial Markets, Global Consumers, Global Economy, Great Lengths, Gross Investment, Investment Outlook, John Mcsherry, Juxtaposition, Missive, Mistaken Assumption, PIMCO, Profit Margins, Recession, Reversion, Yesteryear
Posted in Emerging Markets, Markets | No Comments »

Green Shoots or Smoking Weed?

Monday, June 1st, 2009

This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.

Asset bubbles are strange animals. Ideally, you would like to punch the air out of them early before they become a real danger but, in practice, it is not quite so simple. Ben Bernanke and Alan Greenspan have actually both argued that asset bubbles cannot be detected and monetary policy should therefore not in any way be used to offset suspected bubbles.

I am not sure I agree with the two gentlemen, but that is less relevant for now. What is important to understand is what happens once the asset bubble bursts. In my experience, almost all post-bursting bubbles share two characteristics:

1) At the very least, asset prices revert to the mean, although many actually overshoot on the downside.

2) A long (and often painful) period ensues, where asset prices gradually claw back lost value. History suggests that this period is measured in years and sometimes in decades; never have asset prices recovered from a deflated bubble in just a matter of months.

The recent collapse of residential property prices - at this point still more advanced in the US than in Europe - is a classic asset bubble which is now deflating. The reason I have decided to write about it this month is because the “green shoot” campaigners are missing a hugely important point about the effect that falling US property prices are going to have - not just on the US but also on the global economy.

Recovery will prove temporary

Make no mistake. I always expected and continue to expect an economic revival later this year, which unfortunately will prove temporary. There are many good reasons to expect such a short-term recovery, as I discussed in detail in the April issue of this letter. However, it is what happens afterwards that I worry about. The economic uplift is likely to last no more than one or two quarters after which we will have to face more gloom and doom.

There are at least two reasons property prices are so important to the overall economy. The first reason has to do with leverage. There has been a lot of talk about de-leveraging in recent months, and the consensus seems to be that most of it is now behind us. Perhaps, in the narrowest possible sense, that is correct.

But leverage is not confined to hedge funds and banks. Many private households run heavily levered balance sheets as a result of their home ownership and it is this leverage that is rapidly growing at the moment. Why is that? Because leverage is a function of both the numerator and the denominator and, as American home owners are about to find out for the first time, falling property prices can have a devastating effect on your balance sheet.

Secondly, property wealth has become an important part of many people’s lives. In both the US and the UK (and in numerous other countries as well) many people have directed their savings towards property in recent years, and no small part of the profits have been recycled into the economy through equity withdrawal schemes. This has created a level of consumption which cannot be sustained if property prices do not continue to rise.

Click here for the full report.

* Niels Jensen has 24 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.

Tags: Absolute Return, Alan Greenspan, Asset Prices, Ben Bernanke, Bubble Bursts, Bursting Bubbles, Campaigners, Economic Revival, Economic Uplift, Executive Partner, Global Economy, Gloom And Doom, Important Point, Many Good Reasons, Niels Jensen, Painful Period, Smoking Weed, Strange Animals, Two Gentlemen, Value History
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Bill Gross: The Future of Investing - Evolution or Revolution?

Tuesday, April 14th, 2009

Bill Gross has recently published his April 2009 Investment Outlook: The Future of Investing, and it is serious food for thought. We’re a little late bringing this to your attention, because somehow we overlooked it during last week’s rush. Gross discusses the possibilities for the global economy and markets and deliberates consequentially on the reversal of 50 years’ worth of activities. Here is an excerpt:

I. Future of the Global Economy
The future of the global economy will likely be dominated by delevering, deglobalization, and reregulating, yet if so, it is important to state at the outset that we do not envision a mean reversion, cyclically oriented future, but instead a new world where players assume different roles, and models relying on bell-shaped/thin-tailed outcomes based on historical data are less relevant. Historical models look backward while modern-day finance is being fast forwarded and reconstituted almost as we speak.

II. The Future of Investing
Whether evolution or revolution it is important to recognize that the aftermath of an economic and investment bubble transitioning from levering to delevering, globalization to deglobalization and lax regulation to reregulation leads to an across-the-board rise in risk premiums, higher volatility and therefore lower asset prices for a majority of asset classes.

This issue of IO is longer than usual, very detailed, and insightful. We urge you to read it or make it your weekend reading. Gross is very close to the inner sanctum, and seems to understand things, along with El-Erian, in a way that only folks this close to the bond, credit and corporate debt markets can. Its their time, and its their world, and possibly something they have foreseen for some time.

The complete PDF can be downloaded here.

Tags: Aftermath, Asset Classes, Asset Prices, Bill Gross, Consequentially, Corporate Debt, Debt Markets, Erian, Excerpt, Food For Thought, Global Economy, globalization, Inner Sanctum, Investment Outlook, Mean Reversion, Outset, Risk Premiums, Transitioning, Volatility, Weekend Reading
Posted in Bonds, Credit Markets, Economy, Markets | No Comments »

Words from the (investment) wise for the week that was (March 16 – 22, 2009)

Sunday, March 22nd, 2009

Phew - what a week! What an announcement!

The Federal Open Market Committee (FOMC) on Wednesday left the Fed funds range unchanged at zero to 0.25%, but stunned the financial markets with an announcement that it would purchase up to $300 billion in longer-term Treasuries over the next six months.

Acting boldly in an attempt to get the economy breathing again, the policy board also committed to 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, as well as a further $100 billion in agency debt.

The objective of purchasing Treasuries is to orchestrate a reduction in long-term rates in the expectation that these lower rates would filter through to mortgage rates and other private sector loans. The average 30-year fixed-rate mortgage fell to 4.98% on Thursday, down from 5.47% in early December and a high of 6.46% in mid-October (see Freddie Mac’s weekly survey).

“They’re calling it ‘The Rambo Fed‘,” said Richard Russell (Dow Theory Letters). “Bernanke is not fooling around any longer. He’s playing all his cards. He’s going to put a floor under housing and boost asset prices in an all-out attack on the bear market. Bernanke will in no way accept deflation. The Fed will go all out in printing Federal Reserve Notes in its massive assault on deflation. Bernanke will accept a collapsing dollar rather than a repeat of the Great Depression.”

“These actions are high-quality bond-friendly and dollar-unfriendly,” commented Bill Gross of Pimco (via Reuters). “To the extent that they are successful and Treasury efforts match these efforts, certain risk assets may benefit as well, although their ultimate prices will reflect the ability of government to successfully reflate.”

On the announcement, the yield on the US ten-year Treasury Note recorded its sharpest fall since the Wall Street crash of 1987, the US dollar suffered its biggest weekly loss for almost 25 years, gold bullion surged by more than $80 at one stage, and oil and base metals gained handsomely.

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

Stock markets initially rose strongly on the Fed’s move to revive the economy, adding to the gains of the rally that commenced on March 10. Although stocks succumbed to profit-taking towards the close, indices nevertheless managed to register a second straight week of gains - the first such stretch since May 2008 in the case of the US bourses.

Elsewhere in the world stocks also performed strongly, with the MSCI World Index gaining 4.4% (YTD -14.2%) and the MSCI Emerging Markets Index ahead by 4.7% (YTD -2.5%). Returns ranged from +17.7% in the case of Romania to -5.6% for Bermuda. The Shanghai Composite Index (+7.2%) had another solid week and remains at the top of the field for the year to date with a 25.0% gain in US dollar terms. (Click here to access a complete list of global stock market movements, in local currency terms, as supplied by Emeginvest.)

As far as US exchange-traded funds (ETFs) are concerned, John Nyaradi (Wall Street Sector Selector) reports that the strongest sectors this week were energy, commodities and emerging markets. Leaders included SPDR S&P Oil and Gas Exploration (XOP) (+7.6%), PowerShares Commodity Tracking Index (DBC) (+9.4%) and iShares MSCI South Korea Index (EWY) +7.5%. On the other end of the performance spectrum Real Estate Investment Trust (REIT) stocks had a torrid time, with SPDR DJ Wilshire REIT (RWR) losing 12.3% and Vanguard REIT (VNQ) down by 10.3%.

Notwithstanding supply concerns and a US budget deficit expected to hit $1.8 trillion this year, government bond yields around the globe declined as the US central bank joined the Bank of England, the Bank of Japan and the Swiss National Bank in a policy of quantitative easing. Yields of 10-year Treasuries and Bunds were down by 22 and 5 basis points respectively on the week. However, the yield on the 10-year Gilt rose by 7 basis points even as the Bank of England continued to buy long-dated bonds.

“… I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high,” said Marc Faber in a CNBC interview. “There will be a time when the Federal Reserve will have to increase interest rates to fight inflation, and it will be reluctant to do so because the cost of servicing government debt will rise substantially.”

Not surprisingly, the US dollar got whacked. According to Bespoke, the US Dollar Index had its third biggest one-day decline (-2.69%) on Wednesday since daily pricing started back in 1970. The greenback broke below its 50-day moving average and short-term uptrend, but is still trading above its 200-day moving average and longer-term uptrend. Given the Fed’s “nuclear” strategy, further damage appears likely.

Source: StockCharts.com

In the expectation that the Fed’s printing of massive amounts of money will stoke inflationary pressures, Treasury Inflation-protected Securities (TIPS) surged to a level last seen in October 2009, as shown by the performance of iShares TIPS Bond ETF (TIP).

Source: StockCharts.com

Bernanke’s “inflate or die” approach also caused gold bullion to shine. After having traded below $884 prior to the Fed’s announcement, the yellow metal rose sharply to $967 before easing back to close the week at $952.

Commodities benefited as the Fed’s announcement saw the US dollar nose-diving, with West Texas Intermediate Crude (+10.7%) rising above $50 for the first time since November. Similarly, copper touched a four-month high as the price breached $4,000 a metric ton.

Next, a tag cloud of al 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”, “economy”, “Fed” and “government” featured prominently, whereas “China” is also attracting more attention by the week.

Turning to the stock market again, the 800 level on the S&P 500 Index needs to be exceeded for stocks to make further headway. It not only represents a 50% retracement of the January/March decline, but is also the resistance level of the two-month downtrend and the 50-day moving average.

Source: StockCharts.com

The key chart levels for the major US indices are provided in the table below.

Kevin Lane, technical analyst of Fusion IQ, said: “… we continue to view this current rally as having legs with maybe another 10-15% up from present levels. However, ultimately we think this rally will fade and we will get a retest of the recent lows (check the history books, we almost always get a retest). How the market handles that retest will tell us a lot with regard to the longer-term picture.”

“While our sense is that the rally has more to go on the upside in the weeks to come, we feel it is still too early to say the final bottom has been put in place,” added Jeffrey Saut of Raymond James.

Back to the venerable Richard Russell, who said: “The rally is running into some hesitation. Transports have been down four out of the last six sessions. When the Averages disagree, it’s often a sign of distribution. Let the market have its fun. As far as I’m concerned, the primary trend of the stock market remains bearish although the secondary trend has turned up. When a market becomes too oversold, the secondary correction acts like the ‘release valve’ in an over-heated boiler. Some of the steam escapes, and they call that an upward correction.

“Often, these explosive corrections look better than the real thing, Furthermore, they can prove costly to both bulls and bears. Corrections in a bear market are always tricky and deceptive, and I’ve learned not to fool with them.”

In the extreme bearish camp, Nouriel Roubini shared the following caveat emptor (via Tech Ticker, Yahoo Finance): “Dear investors, do enjoy this dead cat bounce and bear market sucker’s rally … don’t wait too long until you jump ship while the financial Titanic hits the next financial iceberg: you may get squeezed and crashed in the rush to the lifeboats.”

The Achilles heel of the stock market is the uncertainty regarding corporate earnings. The graph below, courtesy of Chart of the Day, illustrates that 12-month, as-reported S&P 500 real earnings have declined over 80% over the past 18 months, making this by far the largest decline on record (the data go back to 1936). “During Q4 2008, the S&P 500 came in with its first negative earnings quarter ever and the amount lost during the quarter was more than the index has ever earned during a single quarter,” said Chart of the Day.

Also, it is important that confidence be restored for the recent gains to be more enduring. The chart below shows the strong historical relationship between the US Consumer Confidence Index and the 12-month change in the S&P 500 Index. One needs to take a view on the direction of confidence, but should it for argument’s sake pick up from 30 to 40 by the end of June, the relationship indicates a S&P 500 decline of 30-35% in year-ago terms. Using end-of-quarter prices, this means an Index at between 832 and 896.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed’s medicine and whether credit markets are thawing and confidence is beginning to improve. Very selective stock picking is in order, but tread carefully otherwise.

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Fed employs nuclear option” and “Technical Talk: Rally continues …“. (And do make a point of listening to Donald Coxe’s webcast of March 20, which can be accessed from the sidebar of the Investment Postcards site.)

Invitation
I will again be embarking on a long-haul flight from Cape Town to the US in a week’s time. My final destination is San Diego where, amongst others, I will be attending a Richard Russell Tribute Dinner. However, in order to catch up with business associates and “feel” the East Coast economic temperature, I have arranged to connect via JFK and will be spending Tuesday, March 31 in New York City.

I am keen to meet as many of the Investment Postcards readers as possible on the one day I will be in the Big Apple and have scheduled an informal get-together in midtown Manhattan from 17:30 to 19:00 that afternoon. If you are interested in joining me for a drink, and “putting a face to the name”, please get in touch through the “comments” or “contact” sections of the site so that that I can send the details to you.

Economy
“Businesses remain darkly pessimistic across the globe. Sentiment hit a new record low in Asia last week and is close to record lows everywhere else,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Hiring intentions have taken a decided turn for the worse in recent weeks and suggest that there has been no let-up in the massive global layoffs and rising unemployment in March.”

Confidence is very poor across all industries, particularly in manufacturing, where it has never been as bleak. For example, Eurozone manufacturing activity continued to plummet in January, falling by 3.5% from the previous month, when it dropped by a revised 2.7%. In year-ago terms it fell by 17.3% - the steepest fall on record.

Source: Moody’s Economy.com

As shown by Rebecca Wilder (News N Economics), retail sales are likewise anemic around the world.

The World Bank has reduced its 2009 growth forecast for China from 7.5% to 6.5%, but indicated that the country’s economy was showing “early signs” of stabilization as government-sponsored investment mitigated the negative impact of contracting exports. “In an era when exports may continue to shrink due to an external demand collapse and consumption may prove difficult to stimulate as deflation has arrived, fixed asset investment championed by the government would be vital for China’s economic growth this year,” said US Global Investors.

“Although corporate savings played a more important role in financing investment than bank loans in the recent cycle, credit expansion, which has accelerated rapidly since December, remains a key driver for public sector investment which is likely to dominate this year.”

It hardly comes as a surprise that the International Monetary Fund has cut its forecast for global growth this year from +0.5%/-0.5% to -0.5%/-1.0%. According to CEP News, the report said Japan’s economy will contract by 5.8% in 2009, that of the US by 2.6% and the Eurozone’s by 3.2%. In 2010, the US and Eurozone are expected to see anemic growth, and the Japanese economy is forecast to see a mild annual contraction in GDP.

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.)

March 20
• None

March 19
• Index of Leading Indicators - continued contraction of economic activity
• Jobless claims - new high for continuing claims and insured unemployment rate

March 18
• Fed adopts more aggressive measures to fix the credit machine and facilitate working of the economy
• Higher gas prices mostly responsible for sharp increase in Consumer Price Index
• Current account deficit shrinks as imports fall

March 17
• Multi-family starts lift total housing starts; recovery in home building not there yet
• Core wholesale prices show moderating trend

March 16
• Factory production remains weak, but pace of decline shows moderation
• Home Builders Survey shows flickering signs of stability

“In sum, although the economy remains mired in a severe recession, we have seen nothing of late to dissuade us from our forecast of recovery getting under way in the fourth quarter of this year. In fact, what we have seen of late increases our confidence in the forecast,” concluded Paul Kasriel (Northern Trust).

Not disputing the downward momentum in economic data, Binit Panel, economist at Goldman Sachs, asked in a recent research report (via the Financial Times ) “what could go ‘right’ for the world economy”. He listed a number of developments that might be potential bright spots.

“First, a stabilization in consumer demand in the US - and an improvement in the UK and Germany.

“Second, an early end to the US housing downturn and a stabilization in the UK housing market.

“Third, the successful operation of the Federal Reserve’s term asset-backed securities loan facility, or Talf.

“Fourth, greater international co-operation - for example at the forthcoming G20 meeting.

“Fifth, better signs from the Bric (Brazil, Russia, India and China) emerging market economies - in particular China.”

Interestingly, after months of bleak economic news, an increasing proportion of Americans now say they are hearing a mix of good and bad economic news, while fewer say they are hearing mostly bad news. “As has been the case for the last few months, very few say they are hearing mostly good news about the economy,” reported The Pew Research Center for the People & the Press.

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

Source: Yahoo Finance, March 20, 2009.

In addition to Fed Chairman Ben Bernanke’s testimony to the House Financial Services Committee (Tuesday, 24 March), 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, March 20, 2009.

“You are too concerned about what was and what will be. There is a saying: yesterday is history, tomorrow is a mystery, but today is a gift. That is why it is called the present,” said Oogway (Kung Fu Panda - hat tip: Charles Kirk). These words ring especially true as I mourn the sad loss of Bennet Sedacca. He was not only a brilliant strategist and regular contributor to the Investment Postcards site, but also a dear personal friend. Rest in peace, Bennet.

That’s the way it looks from Cape Town.

The Wall Street Journal: Obama on The Tonight Show with Jay Leno
“President Obama took to Jay Leno’s stage and compared life in Washington to ‘American Idol’, where ‘everybody’s got an opinion’. The appearance on ‘The Tonight Show with Jay Leno’ was itself a sign of just how much the culture has changed in America, where comedy and politics often mix.”

Source: The Wall Street Journal, March 19, 2009.

CEP News: IMF slashes global growth forecast for 2009
“The International Monetary Fund cut its forecast for global growth in 2009. According to the report released on Thursday, global growth will contract between 0.5% and 1.0% this year and expand between 1.5% and 2.5% in 2010.

“The report said Japan’s economy will contract 5.8% in 2009, the US economy by 2.6%, and the euro zone economy by 3.2%. In 2010, the US and euro zone are expected to see anemic growth, and the Japanese economy is forecast to see a mild annual contraction in GDP.

“Going forward, the IMF said essential action includes additional easing in monetary policy, and more concerted action to steady markets - namely dealing with toxic bank assets.

“For its part, the US rescue plan was criticized by the IMF for lacking detail.

“Furthermore, there is a serious risk of deflation in some advanced economies, the report said. As for emerging economies, there is a ‘serious risk’ they will not have funding, the report added.

“At the G20 meeting on April 2 in London, world nations are expected to consider up to $500 billion in additional funding for the IMF in order to aid emerging economies.”

Source: Megan Ainscow, CEP News, March 19, 2009.

CEP News: FOMC keeps rates unchanged, announces purchase of $300 billion in Treasuries
“The Federal Reserve’s monetary policy board left the key interest rate unchanged, as expected, within a target range of zero to 0.25% on Wednesday, but announced it will purchase up to $300 billion in longer-term Treasuries over the next six months.

“The Federal Open Market Committee also committed to purchasing an additional $100 billion in agency debt, and 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.

“‘Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth,’ the statement reads.

“The FOMC said it continues to ‘employ all available tools to promote economic recovery and to preserve price stability’, a comment identical to the January statement. The statement also mentioned that ‘economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period’, also unchanged from last month.

“Absent from this month’s statement is the assessment that ‘conditions in financial markets have improved’.

“The committee said it expects inflation will remain subdued in light of increasing economic slack in the US and abroad. ‘Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term,’ the statement said.

“The committee also said it will continue to ‘carefully monitor the size and composition of the Federal Reserve’s balance sheet’ in light of evolving financial and economic developments.”

Source: Stephen Huebl, CEP News, March 18, 2009.

Reuters: Pimco’s Gross - unclear why Fed moved Wednesday
“Pimco’s Bill Gross said it is unclear what was behind the Federal Reserve’s surprise decision on Wednesday to buy up to $300 billion in Treasuries.

“The move came as the government prepares its latest efforts to resuscitate credit markets with a program aimed at consumer and small business lending.

“But that program faces an uphill battle given the backdrop of public outrage over the fact that taxpayer money will be used to pay $165 million in bonuses for executives at bailed-out insurer American International Group.

“As a result, the shock move by the Fed raises the question of whether the immediate effect of buying Treasuries was deemed necessary in the event these programs fail to produce credit market improvement as quickly as hoped.

“‘It’s unclear whether today’s policy changes by the Fed are coordinated with the Treasury,’ Gross, co-chief investment officer at Pacific Investment Management Co, told Reuters in an interview on Wednesday.

“The uproar over AIG’s retention bonuses are seen by many hedge funds, private equity and big money managers as significantly raising the risks associated with partnering with the government on its Term Asset-Backed Securities Loan Facility, or TALF, as well as the Treasury’s public-private plan to buy toxic assets from ailing banks.

“An irate US Congress, fuming over AIG’s bonus payments to executives after the insurer was bailed out three times using taxpayer dollars, are more likely than ever to change the rules of engagement - possibly retroactively - and that is unnerving money managers at hedge funds, private equity firms and banks on the eve of the long-delayed launch of the government’s newest rescue efforts.

“On Thursday, applications from investors are due to participate in the Treasury and Fed’s $1 trillion TALF program.

“Gross, who helps oversee more than $800 billion at Pimco, said the economy and, by extension, the financial markets ‘needed a substantial shot of adrenaline’.

“‘The Fed’s balance sheet may approach $3.5 trillion - nearly a 100% addition - which will help substitute for the private sector’s deleveraging over the past 12 to 18 months,’ Gross said.

“‘These actions are high-quality bond-friendly and dollar unfriendly,’ Gross said.

“‘To the extent that they are successful and Treasury efforts match these efforts, certain risk assets may benefit as well, although their ultimate prices will reflect the ability of government to successfully reflate.’”

Source: Jennifer Ablan, Reuters, March 18, 2009.

Bill King (The King Report): Why has Ben opted for nuclear option?
“Just a couple days ago, Ben Bernanke said the economy would bottom this year. Citi and GM don’t need any more taxpayer funds. Banks have earnings year to date; and stocks are rallying. So why has Ben opted to employ the nuclear option and commence a Weimar Watch? In a word: China

“We thought the main FOMC issue would be its monetization disposition. But we did not think that Ben would play his final option now. Either something systemic is terrifying Ben and the solons or China, as the US’s Creditor in Chief, told Hillary the cold hard facts of debtor life.

“And when the US didn’t respond fast enough, China publicly expressed their concern about US debt.

“The US cannot jump through the proverbial hoop and buy bonds from China. But it can monetize bonds in the market, which helps China indirectly, and directly if China hits the Fed’s syndicate bid.

“However, China cannot be happy that the dollar tanked. This not only nullifies much of the bond market rally in yuan terms, it also strengthens the yuan, which will further crimp China’s exports.”

Source: Bill King, The King Report, March 18, 2009.

BCA Research: The Fed gets more aggressive
“The FOMC’s increasingly aggressive actions highlight a deep concern about the economic outlook. The Fed will run the printing presses until it gets results.

“The FOMC remains very concerned about the economic and financial outlook. The Fed’s balance sheet recently has shrunk modestly, but that does not reflect any deliberate actions. The Fed’s support of commercial paper has unwound as activity in that market has declined. The Fed’s balance sheet should start to grow again as the TALF program ramps up.

“Moreover, the decision to boost purchases of agency debt and mortgages, and to start directly buying Treasurys, suggests that the Fed’s balance sheet will mushroom in the months ahead. The key point is that monetary policy will remain highly accommodative and proactive until there are signs that financial intermediation is working more effectively. The Fed’s actions should be positive for both stocks and bonds.”

Source: BCA Research, March 19, 2009.

Asha Bangalore (Northern Trust): The Fed’s announcement - indicators to track
“The Fed’s intention to purchases mortgage backed securities, agency debt, and long dated Treasuries amounting to the sum of $1.15 trillion is an aggressive move. This follows the plethora of programs in place and the $1 trillion TALF program, the first disbursement of funds under TALF will take place next week.

“How would we track the impact of this announcement and other programs in place? The immediate impact should be visible in credit markets as we have seen since the current crisis commenced in August 2007.

“The chart below illustrates the recent behavior of the federal funds rate, 10-year Treasury note yield and the Moody’s Aaa corporate bond yield. The 10-year Treasury note yield closed at 2.51% on March 18 after the FOMC policy statement was published from 3.00% earlier in the day. A statement on the New York Fed’s website indicates that the Fed’s purchase will focus on the 2- to 10-year sector of the nominal Treasury curve. The purchases will be conducted through the Fed’s primary dealers 2-3 times per week. Further details will be available early next week and the plan is to hold the first purchase operation late next week. The objective of the Fed’s explicit purchase of long-dated Treasuries is to bring down borrowing costs which in turn should be reflected in lower yields of other private sector securities in the weeks ahead.

“The increase in the purchase of mortgage-backed securities is focused on driving down mortgage rates. The Fed has been successful in this regard since the program was operational from early-January 2009. As of the week ended March 19, the 30-year fixed rate on mortgages was 4.98%, down from 5.47% in early-December and a high of 6.46% in mid-October.

“The TALF program is aimed at unlocking the frozen consumer and small business loan sector. The accomplishments of this program will be visible in the interest spreads with regard to asset-backed securities such as those of credit cards and autos. These spreads have narrowed since their peaks in late-2008. Additional improvements in these spreads would indicate that the Fed’s program is working in the desired direction. These actions combined with the fiscal policy stimulus package are expected to get the economy back on track.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 19, 2009.

CEP News: Fed expands collateral for TALF
“The Fed expanded the securities it will accept for its short-term lending program just hours before the revamped plan was set to begin.

“The program is designed to free up capital for lending by purchasing securities backed by high-quality assets from financial institutions. The Fed plans to spend about $1 trillion through the program.

“In a release on Thursday, the Fed said it will accept securities backed by mortgage servicing advances, securities backed by loans or leases relating to business equipment, and securities backed by floorplan loans.

“‘The additional new asset-backed securities categories complement the consumer and small business loan categories that were already eligible,’ the Fed said in a press release.”

Source: Adam Button, CEP News, March 19, 2009.

Bloomberg: Ross says TALF will help end recession “more quickly”
“Billionaire investor Wilbur Ross talks with Bloomberg’s Matt Miller in New York about auto supplier aid and the Term Asset-Backed Securities Loan Facility. Auto suppliers will get as much at $5 billion in US Treasury aid to avoid a collapse that would cripple the domestic industry, including federally funded General Motors Corp and Chrysler.”

Source: Bloomberg, March 19, 2009.

BBC News: US deficit “to hit $1.8 trillion”
“The US budget deficit will hit $1.8 trillion this year, a record amount, according to US Congress estimates.

“The White House said the prediction by the Congressional Budget Office (CBO) would not alter President Barack Obama’s policy agenda. Nor would it affect its goal to cut the deficit in half by 2013, it added.

“The massive deficit forecasts come after President Obama’s $3.55 trillion budget plan for the 2010 financial year, which includes big spending programs to address healthcare, education and curb greenhouse gas emissions.

“The CBO also issued gloomy forecasts for the US economy, projecting that it will contract 3% in 2009 before growing 2.9% next year and expanding 4% in 2011.”

Source: BBC News, March 20, 2009.

CNBC: Meredith Whitney - credit crunch & financials
“Weighing in on consumer credit and why mark-to-market will not really help banks, with Meredith Whitney, Meredith Whitney Advisory Group CEO.”

Source: CNBC, March 17, 2009.

Nouriel Roubini (Forbes): United States of Ponzi - behold the Madoff in the mirror
“A reporter contacted me recently with the following question:

“‘I am a reporter, and I am doing a story on Bernard Madoff’s life after pleading guilty. As part of this, I was wondering if you could comment on what significance he will have in the history of this period. Will he represent more than a scamster who stole a lot of money from a lot of people? As Bernie Ebbers and Ken Lay came to embody corporate greed and deceit, what will Madoff symbolize?’

“Here is my answer fleshed out in full:

“Americans lived in a ‘Made-off’ and Ponzi bubble economy for a decade or even longer. Madoff is the mirror of the American economy and of its over-leveraged agents: a house of cards of leverage over leverage by households, financial firms and corporations that has now collapsed in a heap.

“When you put zero down on your home, and you thus have no equity in your home, your leverage is literally infinite and you are playing a Ponzi game.

“And the bank that lent you, with zero down, a NINJA (no income, no jobs and assets) liar loan that was interest-only for a while, with negative amortization and an initial teaser rate, was also playing a Ponzi game.

“And private equity firms that did over a $1 trillion of leveraged buyouts (LBOs) in the last few years with a debt-to-earnings ratio of 10 or above were also Ponzi firms playing a Ponzi game.

“A government that will issue trillions of dollars of new debt to pay for this severe recession and socialize private losses may risk becoming a Ponzi government if - in the medium term - it does not return to fiscal discipline and debt sustainability.

“A country that has - for over 25 years - spent more than income and thus run an endless string of current account deficit - and has thus become the largest net foreign debtor in the world (with net foreign liabilities that are likely to be over $3 trillion by the end of this year) - is also a Ponzi country that may eventually default on its foreign debt if it does not, over time, tighten its belt and start running smaller current account deficits and actual trade surpluses.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, March 19, 2009.

Bespoke: Geithner gone chatter
“Many stories have popped up over the last couple of days about Treasury Secretary Tim Geithner’s job security. Of course, leave it up to Intrade to release a contract on the matter that people can trade. Intrade currently has two contracts allowing people to bet on Geithner’s departure. One is whether he will depart by the end of June, and the other is whether he will depart by the end of 2009. While the contracts have been ticking up in price lately, traders on Intrade aren’t betting big yet that his departure is imminent. The contract for Geithner’s departure by the end of June is currently putting the odds at 15%, while the end of the year departure odds are higher at 26%.”

Source: Bespoke, March 18, 2009.

Asha Bangalore (Northern Trust): Index of Leading Indicators - continued contraction of economic activity
“The Conference Board’s Index of Leading Economic Indicators (LEI) fell 0.4% in February, after a revised 0.1% increase in January (previously reported as a 0.4% increase). On a quarterly basis, the year-to-year change in the LEI advanced one quarter has a strong positive correlation with the year-to-year change in real GDP. The January-February average, the proxy for the first quarter, declined 3.5% from a year ago, a slightly smaller reduction than the 4.0% drop recorded in the fourth quarter of 2008. We are following this indicator closely to identify a turnaround in economic conditions.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 19, 2009.

Asha Bangalore (Northern Trust): Multi-family starts lift total housing starts
“Housing starts increased 22.2% to an annual rate of 583,000 during February, after posting double digit declines for three consecutive months. However, the bulk of the increase was from multi-family starts which rose 82.3%, while starts of single-family homes moved up only 1.1% to an annual rate of 357,000.

“Starts of single-family homes are still down 80.5% from the peak in January 2006.

“The surprise strength in housing starts in February, which was largely in the volatile multi-family sector, reduces expectations of a continued recovery of home building because single-family starts are the larger and more stable component of total housing starts. Moreover, the elevated inventory of unsold homes suggests that a robust recovery in home building will be possible only after there is a substantial reduction in the inventory of unsold new single-family homes.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 17, 2009.

Bill King (The King Report): Don’t trust housing starts
“The common excuse for Tuesday’s rally is the surge in condo construction that boosted housing starts. PUHLEASE! The wicked winter delayed construction. More importantly, from where will the jobs, income and financing to buy all the condos and homes be derived?

“Also, the spring selling season is commencing and we don’t know what seasonally adjusted magic was used to craft the numbers.”

Source: Bill King, The King Report, March 18 , 2009.

Asha Bangalore (Northern Trust): Current account deficit shrinks as imports fall
“The current account deficit of the US economy was $132.8 billion in the fourth quarter, down from $181.3 billion in the third quarter. During 2008, the current account deficit narrowed to $673.3 billion from $731.2 billion in 2007. This is the smallest current account deficit since 2004.

“The current account deficit as a percent of GDP was 3.7% in the fourth quarter of 2008, the lowest since the fourth quarter of 2001. On an annual basis, the current account deficit was 4.7% of GDP, the lowest since 2002. In sum, the current account deficit has narrowed to a significant extent.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 18, 2009.

Asha Bangalore (Northern Trust): Higher gas prices mostly responsible for sharp increase in CPI
“The Consumer Price Index (CPI) moved up 0.4% in February, following a 0.3% increase in January. Gains of the energy price index in January (+1.7%) and February (+3.3%) helped to raise the headline readings during these months. The Labor Department has indicated that about two-thirds of the all items increase was from higher prices for gasoline. The gasoline price index increased 8.3% in February after a 6.0% jump in January. The food price measure rose 0.1% in January and was followed by a 0.1% drop in February. Excluding food and energy, the core CPI has recorded gains of 0.2% in January and February. On a year-to-year basis, the CPI rose 0.2% in February after registering readings close to zero in each of the two prior months. The core CPI increased 1.79% in February versus a 1.68% increase in January.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 18, 2009.

Asha Bangalore (Northern Trust): Core wholesale prices show a moderating trend
“The Producer Price Index (PPI) for Finished Goods rose only 0.1% in February after a 0.8% gain in January, as the 1.6% drop in food prices offset the 1.3% jump in energy prices. The core PPI, which excludes food and energy, rose 0.2% in February compared with the 0.4% increase in the prior month.

“On a year-to-year basis, the finished goods wholesale price index fell 1.3% and the core PPI rose 4.0%. The core PPI posted a cycle high of 4.7% in October 2008.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 17, 2009.

Bespoke: The commodity rebate
“In the chart below we have calculated the cumulative daily price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) since the beginning of 2008. We then multiplied the changes by the annual per capita consumption of each item. While this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers’ wallets over the last 15 months.

“In July, when the price of oil and other key commodities were trading at record highs, the impact of rising prices was translating into an extra $4.77 per American per day versus the start of 2008.

“Ever since then, however, commodities have crashed back down to earth, resulting in an effective rebate for consumers. As a result, even after the recent rebound in oil prices, the average American is saving $4.10 per day due to lower commodity prices. While this may not sound like much, multiplied out over a year, it works out to just under $1,500 per year per individual, and nearly $6,000 per year for a family of four.”

Source: Bespoke, March 18, 2009.

The Wall Street Journal: Pension bills to surge nationwide
“Many state and city governments reeling from financial woes are about to get whacked again, this time by an unforeseen increase in their pension bill thanks to market declines.

“In an effort to stave off tax increases, New Jersey lawmakers on Monday will consider a bill that would allow municipalities to defer payment of half their annual pension bill, due April 1, for one year. Those towns, counties and schools that opt to defer would face a higher pension bill for years to come.

“Other states and municipalities are facing similarly difficult choices. In Pennsylvania, the state employees and public teachers pension funds both have warned that employer contribution rates could surge seven-fold from about 4% of payroll to 28%, starting in 2012. The Detroit police and fire pension plan might have to double employer contribution rates to 50% of payroll by 2011, according to the fund’s outside actuary.

“‘It’s going to be huge showdown’ between taxpayers and public employees, said Susan Mangiero, president of Pension Governance, a consulting and research firm in Trumbull, Conn. ‘The anger is more acute today when people are feeling economic hardship.’”

Source: Craig Karmin, The Wall Street Journal, March 16, 2009.

CEP News: US House passes bill to take back AIG bonuses
“The US House of Representatives passed a bill on Thursday that will recoup the majority of bonuses paid to AIG executives.

“AIG paid out $165 million in bonuses to executives after the company received up to $180 billion, in government aid, many executives whom politicians say were responsible for bringing the company to near-collapse.

“The US government kept the insurance giant on a lifeline by dumping several multi-billion dollar bailouts into it. The US government now owns 80% of the company.

“The bill passed by the House Thursday will impose a 90% tax on any bonuses paid out to executives earning $250,000 a year or more working at companies given more than $5 billion in government bailout cash.”

Source: Megan Ainscow, CEP News, March 19, 2009.

DK Matai (Silicon Valley Watcher): The size of derivatives bubble = $190K per person on planet
“According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland - the central bankers’ bank - the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, i.e., USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:

1. Listed credit derivatives stood at USD 548 trillion;

2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

a. Interest Rate Derivatives at about USD 393+ trillion;

b. Credit Default Swaps at about USD 58+ trillion;

c. Foreign Exchange Derivatives at about USD 56+ trillion;

d. Commodity Derivatives at about USD 9 trillion;

e. Equity Linked Derivatives at about USD 8.5 trillion; and

f. Unallocated Derivatives at about USD 71+ trillion.”

Source: DK Matai (via Silicon Valley Watcher), October 16, 2008.

Fabius Maximus: A look at the new world - after the downturn
1. Far less risk-taking in America.
2. Our financial system swings from disintermediation to re-intermediation.
3. The government becomes obviously insolvent.
4. Government controls not just the risk-free rate of interest, but also risk premia.
5. The end of the US dollar as the reserve currency.
6. The end of the US empire.
7. The US dollar declines in value so that our trade deficit goes away, and we can pay our foreign debts.

Source: Fabius Maximus (via RGE Monitor), March 19, 2009.

CNBC: Treasurys are “disaster waiting to happen”
“The Federal Reserve has no option but to start buying Treasurys as the government’s needs for financing are huge, but the government bond market is a disaster in the making, Marc Faber, editor and publisher of The Gloom, Boom & Doom Report, told CNBC.”

“Federal Reserve policymakers start a two-day meeting on Tuesday, weighing options on how to spur lending to help cash-strapped consumers kickstart the economy.

“Economists expect them to leave rates at zero and look to other ways of boosting liquidity, such as buying government bonds - a measure which has already been taken by the Bank of England.

“‘Well I think other central banks have done it already around the world but basically what it amounts to is money printing and in fact I don’t think that it will help the bond market at all in the long run,’ Faber told CNBC’s Martin Soong.

“‘… I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high,’ Faber said.

“‘The Federal Reserve will have to buy Treasurys, otherwise yields will go up substantially,’ he said, adding that as their reserves were dwindling, foreign investors were likely to scale down their purchases.

“But there will be a time when the Federal Reserve will have to increase interest rates to fight inflation, and it will be reluctant to do so because the cost of servicing government debt will rise substantially.

“‘So we’ll go into high inflation rates one day,’ Faber said.

“The stock market is likely to continue its bounce at least for a while, but the outlook is bleak, he added.

“‘I think we may still have a rally (in the S&P) until about the end of April and probably then a total collapse in the second half of the year sometimes, when it becomes clear that the economy is a total disaster,’ Faber said.”

Source: CNBC, March 17, 2009.

John Authers (Financial Times): Fed’s shock and awe
“John Authers on market reaction to the Federal Reserve’s decision to buy $300 billion in long-dated Treasury bonds.”

Click here for the article.

Source: John Authers, Financial Times, March 18, 2009.

Bespoke: S&P 500 financial sector approaches November lows
“It’s hard to believe, but even after the financial sector’s 50%+ rally since March 6th, it is still marginally below its closing low of 2008 on November 20th. As shown below, the sector is currently at levels that have the potential to provide short-term resistance.”

Source: Bespoke, March 19, 2009.

Bespoke: S&P 500 stops dead in its tracks at 50-day moving average
“As shown in the candlestick chart of the S&P 500 below, the index tested and then failed at its 50-day moving average resistance this morning. After a gain of nearly 20% off of its lows, the index is experiencing a bit of a pullback today. The 50-day is right at the 800 level for the S&P, and if the index can eventually break through it, it will then act as support instead of an upside barrier.”

Source: Bespoke, March 19, 2009.

Richard Russel (Dow Theory Letters): What are the signs of a final bottom?
“Will the evidence come from the D-J Averages? I think it might. At the final bear market bottom, we should see:

(1) a dramatic non-confirmation by either the Industrials or the Transports (this is what occurred in 1974).

(2) or we might see an extended ‘line’ in the Averages, in which the Averages fluctuate within a 5% zone for many weeks on low volume. At some point both averages will surge higher on increasing volume.

(3) Values - We will see blue chip stocks selling ‘below known values’ with P/E ratios at single digits and the yield on the Dow near 6%.

“In the area of the final bear market lows, public attitude towards stocks and the stock market will be black-pessimistic and even angry. Wall Street will be despised and denounced as a scam. Actually, we are beginning to see just a bit of that via the highly-publicized debate between Jim Cramer and John Stewart, in which Stewart literally calls both Cramer and Wall Street a fraud.

“Already the public is turning against Wall Street, and, of course, the Bernie Madoff scheme only adds to the public anger against the ‘crooks of Wall Street’. Already, the ‘buy and hold’ creed (religion?) is being denounced along with the image of stocks as wealth-building vehicles. Warren Buffett is being tarred and feathered - Berkshire Hathaway lost billions of dollars over the last year, despite Buffett’s cheer-leading role a few months ago when he announced that he was buying stocks.

“Taking it to the present, the big question is whether we have already seen the bottom of the bear market and whether the recent strength in the market is the beginning of a new bull market. My opinion is that the latest rally is part of a bear market correction - not the beginning of a new bull market. The primary trend was recently re-confirmed as bearish when both the Industrials and the Transports broke to simultaneous new lows.

“One hint as to where we are is that prior to a major low, Lowry’s Selling Pressure Index (supply) turns down while their Buying Power Index (demand) leads on the upside. This did not occur at or near the recent lows.”

Source: Richard Russell, Dow Theory Letters, March 16, 2009.

Forbes: Barry Ritholtz on whether the stock market is near the bottom

Source: Forbes, March 16, 2009.

Richard Bernstein (Banc of America Securities-Merrill Lynch): The best risk-reward potential
“Small-cap stocks have historically offered the best risk-reward potential to investors, while gold has offered the worst, says Richard Bernstein, chief investment strategist at Banc of America Securities-Merrill Lynch.

“He says: ‘Investors often lose sight of longer-term historical investment results, especially during short-term periods of extreme volatility and trending markets.

“‘We have investigated the true long-term risk/return characteristics of standard asset classes.’

“Instead of defining risk as the standard deviation of returns, Mr Bernstein defined it as the percentage of the historical returns that were negative. If an asset provided a negative return during five of 25 periods studied, the risk measure would be 20%.

“Mr Bernstein says longer time horizons tend to reduce the probability of losing money in an investment - although gold appeared to be an exception.

“He said: ‘Gold was the only asset class that generated a significant proportion of negative returns over 10-year periods.

“‘Small stocks offered the best risk/reward potential, regardless of time horizon.

“‘With the exception of gold, investors had little chance of losing money in our selected asset classes over 10-year time periods.

“‘Only in the current bear market did many equity benchmarks generate their first trailing 10-year losses for the periods we analysed.’”

Source: Richard Bernstein, Banc of America Securities-Merrill Lynch (via Financial Times, March 18, 2009.

Reuters: China and Russia question dollar’s reserve status
“China and other emerging nations back Russia’s call for a discussion on how to replace the dollar as the world’s primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

“Calls for a rethink of the dollar’s status as world’s sole benchmark currency come amid concerns about its long-term value as the US Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

“Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decision-making globally. Their first ever joint communiqué did not mention a new currency but the source said the issue was discussed.

“‘They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency),’ the source told Reuters, speaking on condition of anonymity.

“The source said the Chinese paper envisaged the International Monetary Fund’s Special Drawing Rights (SDRs) being first assigned a role of a clearing currency on some transactions and then gradually becoming the main global reserve currency. ‘They said that the role of reserve currency should be given to SDR,’ the source said.”

Source: Gleb Bryanski, Reuters, March 19, 2009.

Globalists: Skip Amero, bring on Acmetal
“Nobel Laureate Robert Mundell, the man behind the euro, is backing a proposal by Kazakh President Nursultan Nazarbayev to create a one world currency.

“That’s quite an endorsement for Nazarbayev, who is indisputably one of the world’s most corrupt dictators (he’s been running Kazakhstan since the Soviet era).

“Supporters of the currency, to be called the acmetal (or akmetal), say the proposal ‘holds great promise’.

“But I wonder, as Alan Watt did in his March 12 radio show, ‘Holds great promise for whom?’

“Nazarbayev, speaking at an economic forum in the glitzy new capital he has built on the Kazakh steppe, defended his proposal for the ‘acmetal’ world currency saying it might ‘look kind of funny’ but was not.”

Source: Mark Baard, Globalists, March 14, 2009.

CNBC: Dr Gloom - choose gold over AIG insurance
“Marc Faber, editor & publisher of The Gloom, Boom & Doom Report, a.k.a. Dr Gloom, would rather own gold as an insurance policy, than an insurance policy from AIG. He tells CNBC’s Amanda Drury how else he is investing his money.”

Source: CNBC, March 17, 2009.

Richard Russell (Dow Theory Letters): Why I am bullish on gold
“I started building my gold position in 1999. At the time gold was flat on its fanny well below 300 - what few gold mining shares were still alive were selling under $5. I wrote at the time that many gold shares were so cheap that you could buy them as if they were perpetual warrants. My gold position now is comparable to my market position back in 1958. My gold position represents maybe 30% of my total worth. Why have I done this again?

“For the following reasons:

(1) I believe gold is in a major or primary bull market. I believe the gold bull market is currently in its second phase. This is the phase where sophisticated and seasoned investors and the funds enter the market. I don’t believe the public is in the gold market to any extent. They are interested and watching the action, but they do not have the nerve to buy gold. In fact, the public doesn’t know how to buy gold, although ads are now appearing telling them of the ‘wonders’ of gold and how they can buy the coins (at huge premiums over spot gold).

(2) If there is only one bull market in progress, it will attract broad new coverage and attention - just as Thursday’s $70 rise in gold did.

(3) I believe the bear market in stocks will continue erratically and the deflationary trends will persist. This will drive Fed Chairman Bernanke up the wall, and I think he will stop at nothing (including massive printing of dollars) in his effort to halt deflation.”

Source: Richard Russell, Dow Theory Letters, March 20, 2009.

David Fuller (Fullermoney): IMF gold sales not great concern
“While I remain a long-term bull of gold and other precious metals, I have often mentioned in the last two years that we should expect some IMF gold sales to increase their lending capacity.

“Yesterday, I discussed this with a subscriber who used to work for the IMF. In addition to confirming that an additional $500 billion has been agreed for the IMF, he mentioned that each contributing country could pay 75% of their allocation in their own currencies, and the remaining 25% in either another viable currency or gold.

“Clearly, an extra $500 billion will not be sufficient in what is arguably the worst global recession since the ’30s. Additional contributions will be required. It is not unreasonable to assume that US, UK and most likely some other countries will print the 75% in their own currencies. Presumably individual Euroland countries cannot print euros but the ECB can and almost certainly will. This reinforces the long-term bullish outlook for gold.

“However, the prospect of IMF sales is a headwind for bullion. There are likely to be more central bank sales of gold under the Washington Agreement, than purchases by creditor nations during the economic slump. I also mentioned that gold had become a crowded trade on the brief look at $1000 in late February, adding that since fear was the most recent motive to buy gold, the yellow metal would be susceptible to a correction once stock markets firmed.

“I think any IMF gold sales would be handled discretely and it could also be a case of: ‘Sell the rumour, buy the news.’”

Source: David Fuller, Fullermoney, March 18, 2009.

Bespoke: Bespoke’s commodity snapshot
“Below we provide a table and chart of the recent performance of ten major commodities. As shown, copper is up the most year to date at 23.66%. Copper is followed by silver, platinum, and oil on the upside. At the start of the year, we pointed out that gold had been significantly outperforming silver, and that a long silver/short gold strategy may be a good play. That trade has worked out well so far this year. A similar trend has been happening with oil and natural gas lately, where oil has been rallying and natural gas has continued its decline. From their peaks last year, gold is still the commodity that has held up the best.”

Source: Bespoke, March 17, 2009.

Money News: Gartman - oil headed higher, sooner
“Economist Dennis Gartman, editor of the Gartman Letter, says oil is headed higher, possibly to $50 or $55 per barrel within the next three months.

“‘A huge sum of oil has been put in storage,’ Gartman told Bloomberg TV. ‘Over many months, when the contango was extraordinarily wide, you could make almost 30% or more.’

“Contango refers to the situation when distant-month futures contracts trade at a higher price than front-month contracts. In a wide contango, prices would be much higher in far out months than nearby ones.

“You make money off that ‘by buying front month crude, taking delivery if you had the storage facilities, and then selling deferred futures,’ Gartman says.

“‘If you were borrowing money at 5% and lending money via the crude future contango at 35%, you would have locked in profit.’

“But now, Gartman says, ‘we are seeing the inordinately wide contango coming in dramatically. When contango narrows, it is really saying to crude itself, we need you. There’s demand; please come out of storage.’

“Bottom line: ‘That’s bullish for crude,’ he says. “We can trade to $50 maybe $55 over the next two to three months,’ Gartman says.”

Source: Money News, March 13, 2009.

CEP News: Euro Zone industrial output falls at sharpest pace on record
“Euro zone industrial production fell at its sharpest pace on record to kick off the year, Eurostat reported on Friday.

“In the 12 months to January, euro zone industrial production fell 17.3%, down from both the 15.5% tumble expected and December’s 11.8% contraction.

“On a monthly basis, industrial output fell 3.5% in January, adding to the previous month’s 2.7% slide, which was revised down from -2.6%. Economists had expected a more pronounced decline of 4.0% for the month.”

Source: CEP News, March 20, 2009.

CEP News: German investor sentiment rises for fifth consecutive month
“German investor optimism towards the economic outlook continued to gain strength in 2009, according to the Centre for European Economic Research (ZEW).

“In a press release issued on Tuesday, the ZEW reported that investor sentiment rose to a reading of -3.5 in March, despite expectations of a fall back to -8.0 from -5.8 in February.

“While the improvement from February to March has slowed compared to previous months, the impression remains that investors are becoming more hopeful regarding the German economic outlook in six-months time, the ZEW said.

“‘According to the financial market experts, the economic slowdown is gradually phasing out,’ ZEW President Dr. Wolfgang Franz said. ‘The bottom of the recession is likely to be reached this summer.’

“Meanwhile, euro zone investor confidence also unexpectedly improved in March, rising to a reading of -6.5 from -8.7 previously. Economists had forecast a fall back to -12.0 for the month.”

Source: CEP News, March 17, 2009.

CEP News: EU leaders agree to stimulus spending, to increase aid to non-EMU members
“European Union leaders have agreed in principal to double the amount of aid allowed to non-euro zone member states and have reached a compromise on infrastructure project spending.

“Speaking to reporters following the first day of an EU summit held in Brussels on Thursday, Czech Prime Minister Mirek Topolanek said that the EU heads of state were close to agreeing on a €5 billion stimulus spending plan.

“Germany had raised concerns, but later compromised when it was agreed that the funds, to be used for infrastructure projects, would be spent by the end of next year.

“‘Substantial parts’ of the projects would need to be in progress by then, ‘otherwise it won’t contribute to dealing with the crisis, which will be over after a certain period of time,’ German Chancellor Angela Merkel said.

“Also speaking to the press on Thursday, European Commission President Jose Manuel Barroso said that the maximum amount of aid available to EU states outside the monetary union could rise to €50 billion from its current €25 billion level.

“The EU also pledged to increase funding to the International Monetary Union. The amount ‘should be quite a large figure’, Czech Finance Minister Miroslav Kalousek said to reporters late Thursday evening, adding that the range would likely be between €75 billion and €100 billion.”

Source: CEP News, March 20, 2009.

CEP News: UK house prices higher for second consecutive month
“UK house prices climbed 0.9% month-over-month to an average asking price of £218,081 in March following a 1.2% gain in February, according to property website Rightmove.

“The two consecutive months of gains come after three straight months of losses that saw the average price fall from £229,691 in October.

“On an annualized basis, house prices declined 9.0% in March, slightly less than the 9.1% annual decline in February.”

Source: Adam Button, CEP News, March 15, 2009.

Financial Times: Swiss warn lifting secrecy “will take time”
“Switzerland has warned countries against expecting swift results from its decision last week to water down bank secrecy laws, saying it could take years for the necessary legislation to come into action.

“Hans-Rudolf Merz, Switzerland’s finance minister, said renegotiating the country’s more than 70 double taxation treaties ‘won’t be so fast’ as each would have to be approved individually by the country’s parliament.

“New treaties could be subject to referendums, he told the Financial Times in an interview, while putting in place the rules prescribed by of the Organisation for Economic Co-Operation and Development would also require negotiations and ‘will take time’.

“The comments from Mr Merz, who is head of state under Switzerland’s rotating presidency, came as some of the countries that have pressed hard for greater international tax transparency greeted last week’s move with caution.”

Source: Haig Simonian, Financial Times, March 16, 2009.

RGE Monitor: China now expected to grow by 6.5% in 2009
“In a series of downward revisions, the World Bank is the latest to reduce its forecast of 2009 economic growth in China. As with many export-led economies, China has been hit hard by the precipitous decline in export demand, falling 25.7% in February 2009. For this reason, the World Bank reduced its 2009 growth forecast for China 1% to 6.5%. You can watch the World Bank’s quarterly update on video here.

“The new World Bank forecast is in line with that of the IMF; the IMF downgraded their forecast of 2009 Chinese economic growth to 6.7% at the end of January.

“The Chinese government recognizes that export-led growth is not sufficient in the current economic environment. In addition to supporting its export sector - the government plans to reduce export taxes to zero - the Chinese government is focusing on the domestic economy with fiscal stimulus measures and promoting domestic consumption. The fiscal stimulus already in place (4 trillion yuan announced in November) is probably passing through to the economy, as China’s PMI increased for the third consecutive month in February.

Chinese growth is expected to improve in 2010, where the World Bank forecast is 8.0%.”

Source: Rebecca Wilder, RGE Monitor, March 18, 2009.

China Daily: Slide in reserves reported
“China’s foreign exchange reserves slid the most in at least nine years in January, Reuters reported yesterday, citing an unidentified person ‘familiar with the situation’.

“The Reuters report did not disclose the exact amount of declining reserves, but said the decline was partly due to the US dollar’s appreciation and withdrawal of capital by foreign companies and investors hurt by the financial crisis.”

Source: China Daily, March 18, 2009.

CEP News: Chinese entrepreneur sentiment improving, says PBOC
“Chinese entrepreneur sentiment is recovering, while firms appear less worried about the economy, the People’s Bank of China said on Wednesday.

“According to the central bank’s first quarter entrepreneur survey results, sentiment regarding business operations is recovering. Meanwhile, bank lending levels have improved, as reflected in the sharp gain in the bank lending index, the PBOC added.

“Nevertheless, firms’ domestic and foreign orders indexes are still deteriorating, pointing to ongoing weakness in overall demand levels, the central bank said.”

Source: Todd Wailoo, CEP News, March 11, 2009.

Herald Tribune: Medvedev announces plan to rearm Russia
“President Dmitri A. Medvedev said Tuesday that Russia would begin a ‘large-scale rearming’ in 2011 in response to what he described as threats to the country’s security.

“In a speech before generals in Moscow, Mr. Medvedev cited encroachment by NATO as a primary reason for bolstering the military, including nuclear forces.

“Mr. Medvedev did not offer specifics on how much the budget would grow for the military, whose capabilities deteriorated significantly after the fall of Soviet Union.

“Russia has increased military spending sharply in recent years, but with the financial crisis and the drop in the price of oil, the country’s finances are under pressure, suggesting that it would be hard to lift these expenditures further.

“Even so, Mr. Medvedev’s timing was notable. He is expected to hold his first meeting with President Barack Obama in early April in London on the sidelines of the summit meeting of the Group of 20 industrialized and developing countries.”

Source: Clifford J. Levy, Herald Tribune, March 17, 2009.

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Bill Gross: Investment Outlook - BEEP BEEP!

Wednesday, February 4th, 2009

Bill Gross, Co-CEO, PIMCO, has published his latest (February) investment outlook, titled BEEP BEEP!

Here are some highlights:

…PIMCO’s thesis for several years has held that the levered global economy long ago morphed from a banking-dominated regime to one that hid behind securitized lending and structures resembling a “shadow banking” system. SIVs, hedge funds, CDOs and increasingly levered mortgage and investment banks fueled asset appreciation in all investment markets, which in turn propelled real economic growth and employment to unsustainable levels. But, with U.S. housing prices as its trigger, the delevering process did a Wile E. Coyote and headed over the cliff in mid-year 2007, dragging down almost all asset prices except government bonds. The real economy followed shortly thereafter, not just in the U.S., but globally, proving that linkages work on the “down” as well as the upside. To PIMCO, the remedy for this deflationary delevering and mini-depression is simple and almost axiomatic: stop the decline in asset prices. If that can be done, the real economy will level out as well. When home prices stop going down, newly created households will be more willing to take a chance on ownership as opposed to renting. If stock prices consolidate, recently burned investors will be more willing to invest, as opposed to stuffing their 401(k) mattresses with Treasury bills. Business investment, jobs, and profits should follow quickly behind.

The simplicity of the solution, however, is not easily achieved once deflationary momentum takes hold. Animal spirits, once dampened, are hard to reignite; “fear of fear itself” dominates greed. Under such circumstances, the benevolent hand of government is required and Keynes is reincarnated in an attempt to plug the dike via fiscal spending and imaginative monetary policies that support asset prices. PIMCO has recently been contracted to assist in several publically announced programs which have helped in that effort: the CPFF, which has benefitted commercial paper yields, and the Federal Reserve’s purchase program for agency-backed mortgage loans, which has lowered 30-year mortgage rates to 4.5% and fostered the affordability of new and secondary housing prices. These two programs, in our opinion, have been the major policy successes to date – not because of our involvement – but because they have supported and increased asset prices whose decline has been the major deflationary thrust behind the real economy. Stop asset prices from going down and with a 12-month lag, unemployment will stop going up, and President Obama’s targeted three million new jobs will have a fighting chance of being achieved.

…Rather, asset prices securitizing commercial real estate and credit card receivables, as well as plain old-fashioned municipal bonds, must stop going down if the real economy has any chance to revive by 2010.

Example: CMBS or commercial real estate mortgage-backed securities are now priced to yield over 12% vs. 5% in recent years. As real estate financing comes due and rolls over in the next few years, it is imperative these yields return to mid-single digits if shopping centers, retail malls, and office buildings are to remain viable. How best to bring those yields down is debatable: another CPFF-like structure with self-insurance and contributed fees as its equity backstop? A generous portion of remaining TARP billions providing a reserve cushion for Federal Reserve funding? A good bank, bad (aggregator) bank structure? All three are being debated by policymakers and we should have clarity within a week’s time. But one thing is certain: an economic recovery is dependent upon commercial real estate prices stabilizing and most retail stores staying open for business in the months and years ahead.

Read the complete newsletter here.

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