Interesting parallels between the cost of shipping dry goods, and the prices of those goods themselves. The caveat is the past 2 years have been somewhat aberrational, and we would need to see much longer history:
Courtesy: Barry Ritholtz
Hat tip Bill King
Tags: Baltic Dry Freight Index, Baltic Dry Index, Barry Ritholtz, Bill King, Caveat, Commodities, Commodity Index, Dry Freight, Dry Goods, Hat Tip, Leads, Parallels
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China’s PMI numbers for February were released yesterday and received surprisingly little media attention. Although I am usually not keen to slice and dice single-month statistics too intensely, the latest suite of manufacturing indices does seem to warrant more than cursory attention.
Firstly, a summary of the numbers as provided by the China Federation of Logistics & Purchasing (CFLP) and reported by the Li & Fung Group.
PMI Report on China Manufacturing: February 2010
The rate of expansion of China’s manufacturing sector that accounts for more than 50% of the economy has moderated sharply, with the overall PMI falling to 52. Just on its own (excluding the non-manufacturing sector) it seems as if China’s year-on-year economic growth in the second quarter could slow to 10% and even less.
The following graph provides the same information, but over the longer term.
The manufacturing industry has started to shed excess inventories as stocks of major inputs indicate contraction. This does not bode well for metal prices in at least the short term.
New orders are still expanding but at a significantly reduced pace. However, new export orders fell sharply from 53,2 to 50,3, indicating only marginal expansion. New orders and new export orders lead the Economist Metals Index by approximately one month. The drop in especially new export orders does not augur well for metal prices and downside pressure can be expected.
The roll-over in new export orders is particularly evident and the question is whether this could indicate a trend change.
The drop in both new orders and stocks of major inputs perhaps explains the weakness in the Baltic Dry Index. Imports of raw materials such as ores and metals have probably dropped significantly.
A major question is how the slowdown in China is going to affect the rest of the global economy. The contraction in China’s PMI for imports indicates that the US GDP-weighted PMI for exports could be negatively influenced in especially the second quarter of this year.
Likewise the US GDP-weighted PMI for imports could be under pressure …
The further austerity measures put in place recently by the Chinese authorities still need to rub off on China’s economy. As such the outlook for commodities, the US and global economy has possibly darkened somewhat.
Elsewhere, the PMIs of India and South Korea were also published, with both economies expanding at the fastest pace in nearly two years. There are already calls for India to suspend the stimulatory measures in order to cool the economy.
One swallow does not make a summer, but I will be monitoring the Chinese situation closely to try to gauge the possible impact of any cooling on the developed economies.
Note: The graphs in this post were provided by Plexus Asset Management (based on data from CFLP, ISM, I-Net Bridge and Dismal Scientist.
Tags: Baltic Dry Index, BRIC, Canary In A Coal Mine, China, China Manufacturing, Contraction, Cursory Attention, Downside, Economic Growth, Economist, Economy China, Emerging Markets, Excess Inventories, Export Orders, Global Economy, Manufacturing Industry, Manufacturing Sector, Media Attention, Metals Index, Raw Materials, Second Quarter, Slowdown, Us Gdp
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“The Baltic Dry Index, which measures changes in the cost to ship goods by sea, is about as volatile as an option contract. As shown in the chart below, the index has had a number of major swings over the past few years and months. We can’t imagine what it must be like in the shipping industry to have to deal with these kinds of price changes all the time. Since December 2008, the index has risen by 547%, fallen by 50%, risen by 115%, and is currently down 42% since November 19th. Going back farther, from 2005 to mid-2008, the Baltic Dry rose 575%, and then it fell 94% from its peak to its trough on December 5th, 2008.” - Bespoke Investment Group
Source: Bespoke Investment Group, February 3, 2010
Tags: Baltic Dry Index, Investment Group, Option Contract, Price Changes, Shipping Industry, Swings, Trough
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Energy and Natural Resources Market
Strengths
Weaknesses
Opportunities
Threats
Tags: Advertisement Opportunities, Ak Steel, Baltic Dry Index, Bhp Billiton, Blast Furnace, Bureau Of Statistics, Carbon Steel Products, China, Cold Weather, Crude Steel Production, Emerging Markets, Gold, International Energy Agency, Kilowatt Hours, Lake Carriers Association, Market Strengths, National Bureau Of Statistics, Natural Gas Prices, Nickel Prices, oil, Oil Demand, Oil Market Report, Queensland Australia, Ravensthorpe Nickel, Steelmaking, Term Oil, Utilization Rates
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As shoppers were emptying their purses on Black Friday bargains, Dubai’s attempt to reschedule its debt roiled financial markets, plunging risky assets into the red. The government of Dubai requested a six-month payment freeze on the $59 billion debt issued by Dubai World - a state-owned conglomerate that has become known for its extravagant real estate projects.
Worries about Dubai’s debt woes rattled investors’ confidence, precipitating a sell-off in equities, high-yielding corporate bonds, commodities and the Baltic Dry Index, while mature-market government debt, the US dollar and the Japanese yen attracted safe-haven buyers. On Thursday and Friday, many emerging-market and high-yielding currencies declined sharply.
A fact not widely known is that Dubai has the worst debt per capita in the world. Ah well …
Source: Peter Brookes, Times Online
The credit-rating agencies promptly downgraded Dubai’s government-related debt and the cost of insuring against default jumped across the United Arab Emirates (UAE) region. As shown in the Bloomberg screenshot below, courtesy of Bespoke, the price of Dubai’s sovereign debt credit default swap (CDS) last week spiked up to 541 basis points. “Now that global markets have stabilized and exited crisis mode, an isolated event in Dubai where default risk doesn’t even spike to its 2009 highs [of almost 1,000 basis points] has caused a global market selloff,” remarked Bespoke.
Source: Bespoke, November 27, 2009.
Geoffrey Yu, strategist at UBS, said (via the Financial Times): “Although the majority of market observers believe the problems in Dubai are not insurmountable, the wider fallout has simply revealed how fragile markets are - and risk appetite may not be as strong as previously assumed, regardless of how profligate central banks globally have been in providing liquidity.”
Also as reported by the Financial Times, Julian Jessop of Capital Economics argued that Dubai’s move was unlikely to affect the positive outlook for emerging markets in the longer term: “We do not believe the events in Dubai mark a new phase in the global crisis. But if they are the catalyst for a more selective approach to investment, that might be no bad thing.”
In terms of banks’ exposure to Dubai, JPMorgan Chase comments (via The Big Picture) that the Royal Bank of Scotland underwrote more Dubai World loans than any other institution. In terms of capital at risk, HSBC has the largest exposure to the UAE.
The past week’s performance of the major asset classes is summarized by the chart below. Gold bullion (not shown on the graph) touched a record high of $1,194.90 on Thursday before tumbling to $1,136.80, but subsequently recovered to close 2.4% up for the week at $1,177.63. Similar volatility was seen in the oil price, with West Texas Intermediate Crude declining by more than $5 at one point on Friday, but later regaining some ground to end the week 1.8% down at $76.05.
Source: StockCharts.com
A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below.
The MSCI World Index (-0.1%) last week marked time, whereas the MSCI Emerging Markets Index (-2.5%) experienced more selling from risk-averse investors. However, the aggregate indices mask greatly varying performances. For example, among mature markets the Japanese Nikkei 225 Index (-4.4%) recorded a fifth consecutive down-week, suffering from the strong Japanese yen that recorded a 14-year low versus the US greenback. On the other hand, the Brazillian Bovespa Index (+1.1%) and the Russian Trading System Index (+1.8%) bucked the broader downtrend among emerging markets.
As far as the US indices are concerned, Friday’s losses wiped out the gains from earlier in the week, reversing a new recovery high of 10,464 made by the Dow Jones Industrial Index on Wednesday. By the close of the Thanksgiving-shortened week on Friday, the S&P 500 Index remained unchanged on the week, whereas the other major indices experienced a second down-week. Five of the ten economic sectors (as measured by the SPDR exchange-traded funds) closed higher for the week, with Telecoms (+1.8%), Health Care (+1.3%) and Utilities (+0.9%) outperforming, and Financials (-2.2%) in the red.
The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 17.5%, S&P 500 Index 20.8%, Nasdaq Composite Index 35.6% and Russell 2000 Index 15.6%.
Click here or on the table below for a larger image.
Top performers among stock markets this week were Bangladesh (+5.7%), Ecuador (+4.3%), Kuwait (+3.4%), Kenya (+2.1%) and Estonia (+1.9%). At the bottom end of the performance rankings, countries included Cyprus (‑15.6%), Vietnam (-11.7%), Serbia (-8.8%), China (-6.4%) and Greece (‑6.2%). The declines in the Shanghai Composite Index came in the wake of a warning by China’s banking regulator that it would refuse approvals for expansion and limit banking operations if lenders did not meet new capital adequacy requirements.
Of the 98 stock markets I keep on my radar screen, 30% recorded gains (last week 39%), 65% (58%) showed losses and 5% (3%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)
John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included United States Natural Gas Fund (UNG) (+10.0%), Rydex S&P Equal Weight Utilities (RYU) (+3.0%), Currency Shares Japanese Yen (FXY) (+2.6%), PowerShares DB Gold (DGL) (+2.5%) and Vanguard Extended Duration Treasury (EDV) (+2.5%).
At the bottom end of the performance rankings, ETFs included iShares MSCI Turkey Investible Market (TUR) (-5.6%), SPDR S&P Emerging Europe (GUR) (-5.4%) and Market Vectors Russia (RSX) (-4.9%).
Referring to the bull market in gold, the quote du jour this week comes from Richard Russell, 85-year-old author of the Dow Theory Letters. He said: “There’s still loads of scepticism about the rising price of gold and the bull market in gold. It’s been so long since the US public (since 1971) realized gold was real Constitutional money that they don’t know what to make of the gold action. They think gold near $1,200 an ounce is expensive and they’d rather have dollar bills.
“I’ve coined the phrase, ‘dollar-bugs’ for these ignorant Americans. I guess they’ll have to get educated the hard way, which means holding on to their fading Federal Reserve Notes, no matter what. As far as I’m concerned, it’s an amazing example of mass brainwashing. ‘Hey, I’d rather have junk paper turned out by the Fed than the real thing - gold.’ Pathetic. And the happy thought is that you can (legally) still swap your junk fiat paper for gold.”
Still on the topic of gold, Ian McAvity (Ian McAvity’s Deliberations) said: “Gold bubble? I regard such talk as nonsense … Gold is about 52% higher than the peak weekly average price of January 1980. The US CPI is 177% higher, US M-2 Money Supply is 464% higher, and the S&P is 892% higher. I don’t think it untoward to suggest gold is badly lagging a number of important yardsticks and at these levels has some catching up to do.”
In other news, MarketWatch reported that the number of distressed banks in the US rose to the highest level in 16 years in the third quarter. The Federal Deposit Insurance Corporation’s (FDIC) Deposit Insurance Fund, which is used to protect depositors, swung to an $8.2 billion loss in the third quarter, the largest drop since the savings-and-loan crisis of the 1990s.
Separately, according to MarketWatch, rates on 30-year fixed-rate mortgages averaged 4.78% last week, matching April’s all-time low of in Freddie Mac’s weekly survey of conforming mortgage rates. The mortgage rate averaged 5.97% a year ago.
Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. There is nothing specific to report here, other than that “gold” and “banks” are still prominent and “Dubai” is making an appearance.
Back to the stock markets: The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index and the Bombay Sensex Index, the indices in the table are all trading above their 50-day moving averages, with all the indices also above their respective 200-day moving averages.
However, many stock markets have already fallen to below their 50-day lines (not shown on this table, but indicated on the performance table higher up), pointing to possible further weakness. Also, the Japanese Nikkei 225 Index last week became the first major market to breach its key 200-day moving average, pointing to a very weak technical picture.
The October lows are also given in the table. A break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher-reaction lows.
Click here or on the table below for a larger image.
In addition to having retraced 50% of their bear market declines, the Dow Industrial and S&P 500 are up against significant medium-term downward trend lines. Also, negative divergences have been showing up in a number of breadth indicators, financial stocks and small caps, suggesting a more cautious tone.
According to Bespoke, last week’s sentiment survey from Investors Intelligence showed bullish sentiment among newsletter writers was near its highest levels since the March lows (50.6%), while bearish sentiment is at a five-year low (17.6%). This puts the spread between bulls and bears at 33, which is the highest level since December 2007. “High levels of bullish sentiment are typically considered contrarian, but we would note that sentiment can remain bullish for extended periods of time with little impact on the market. While it is true that markets typically peak when bullish sentiment is high, however, high levels of bullish sentiment don’t necessarily mean an imminent decline,” said Bespoke.
Source: Bespoke, November 25, 2009.
Casting his eye on 2010, Eoin Treacy (Fullermoney) said: “Most markets rallied from deeply oversold levels this year and have posted impressive advances since March. It is unreasonable to expect the same type of performance to be repeated next year. Nevertheless, monetary conditions are unlikely to pose a headwind and the environment is likely to remain largely bullish despite the potential for swift mean reversion in markets somewhat overextended relative to their 200-day moving averages.”
In my opinion, stock markets have run too far too fast - driven by an avalanche of liquidity - and they have moved out of alignment with economic and earnings growth that may not live up to the expectations being priced into equity valuations. I will bide my time while the fundamentals play catch-up.
For more discussion on the economy and financial markets, see my recent posts “Dubai’s latest mega-project - a massive default?“, “Japanese Nikkei 225 nosedives“, “Gold ETF makes it 9 up-days in a row“, “Gold bullion - overdue for a pullback?“, “Ritholtz: “Buy and hold” is a disaster“, “Charlie Rose in conversation with Barton Biggs“, “Picture du Jour: Will emerging-market outperformance last?” and “WealthTrack: Robert Kleinschmidt - reveling in contrarian investment philosophy“.
Twitter and Facebook
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those readers not doing so already, you can follow my “tweets” by clicking here. You may also consider joining me as a friend on Facebook.
Economy
“There has been no meaningful change in global business sentiment during the past three months. Since mid-August, business confidence has been consistent with a tentative global economic recovery,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses have remained consistently more upbeat about the outlook than their assessment of current conditions. Sales and hiring are soft, as are pricing and inventories. South American businesses and professional service firms are the most positive and North Americans and those working in government generally the most negative.”
Source: Moody’s Economy.com
Purchasing managers indices for the 16-country Eurozone region showed private sector activity expanding this month at the fastest pace in two years, led by France and Germany, reported the Financial Times. The composite index, covering Eurozone services and manufacturing, reached 53.7 in November, up from 53.0 in October, making it the fourth consecutive month of expansion.
As far as hard data are concerned, Germany’s economy expanded again in the third quarter of 2009. GDP rose by 0.7% on a seasonally adjusted basis from the previous quarter, when it expanded by a revised 0.4%. Economic activity was boosted by inventory restocking and spending on machinery and equipment.
Concerns remain about the pace of the global economic recovery, and therefore how quickly governments and central banks should withdraw emergency support measures. According to the Financial Times, Mr Strauss-Kahn, managing director of the International Monetary Fund, said the global economy stood at the cusp of recovery but remained vulnerable to shocks and policy missteps. Fiscal and monetary stimulus programs should not be stopped too soon, he said.
A snapshot of the week’s US economic reports is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)
Tuesday, November 24
• Minutes of November 3-4 FOMC Meeting - spots of optimism are visible, concerns about dollar, commercial real estate loans, and low interest rates are noticeable
• Widespread revisions of Q3 GDP
• Home prices - signs of stability remain in place
• Consumer Confidence Index moves up slightly
Monday, November 23
• Low mortgage rates and tax credit lift sales of existing homes
A very handy graph to assess the current state of the US economy comes courtesy of Russell Investments. Click here to link to the interactive version.
Source: Russell Investments, November 22, 2009.
The minutes of the Federal Open Market Committee’s (FOMC) November 3-4 meeting point to continued aggressive monetary policy in the near term. Although participants agreed that the recession was over, they expected the unemployment rate to remain elevated and the inflation rate to remain below the central bank’s optimal level. Participants expected economic growth to slow a bit in 2010 and then pick up again after that.
On the topic of the magnitude of the US economic recovery, David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, provided the following interesting snippet:
“The recession in the US may be over, but what sort of recovery lies ahead remains in question. All we can say is that when looking at what is normal in the context of a post-recession rebound during the post-WWII era, the first quarter of growth is closer to 7.3% at an annual rate, not 2.8% as we just saw in the latest real GDP estimate - the median was 6.3%. The fact that with the massive amount of stimulus - without it, growth would have flirted with 0% - this first quarter of positive growth was basically one-third of what is typical, really says something.”
Food for thought indeed.
Source: Gluskin, Sheff & Associates - Breakfast with Dave, November 26, 2009.
Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.
|
Date |
Time (ET) |
Statistic | For |
Actual |
Briefing Forecast |
Market Expects |
Prior |
|
Nov 23 |
10:00 AM |
Existing Home Sales | Oct |
6.10M |
5.85M |
5.70M |
5.54M |
|
Nov 24 |
08:30 AM |
GDP - Second Estimate | Q3 |
2.8% |
2.8% |
2.8% |
3.5% |
|
Nov 24 |
08:30 AM |
GDP Deflator - Second Estimate | Q3 |
0.5% |
0.8% |
0.8% |
0.8% |
|
Nov 24 |
09:00 AM |
Case Shiller 20 City Index | Sep |
-9.36% |
-9.25% |
-9.10% |
-11.30% |
|
Nov 24 |
10:00 AM |
Consumer Confidence | Nov |
49.5 |
46.3 |
47.5 |
48.7 |
|
Nov 24 |
10:00 AM |
FHFA Home Price Index | Sep |
0.0% |
-0.2% |
0.1% |
-0.3% |
|
Nov 24 |
02:00 PM |
FOMC Minutes | 11/04 |
- |
- |
- |
- |
|
Nov 25 |
08:30 AM |
Personal Income | Oct |
0.2% |
0.1% |
0.1% |
0.2% |
|
Nov 25 |
08:30 AM |
Personal Spending | Oct |
0.7% |
0.3% |
0.5% |
-0.6% |
|
Nov 25 |
08:30 AM |
PCE Prices | Oct |
0.2% |
0.2% |
0.1% |
-0.6% |
|
Nov 25 |
08:30 AM |
PCE Prices - Core | Oct |
0.2% |
0.1% |
0.1% |
0.1% |
|
Nov 25 |
08:30 AM |
Initial Claims | 11/21 |
466K |
510K |
500K |
501K |
|
Nov 25 |
08:30 AM |
Continuing Claims | 11/14 |
5423K |
5630K |
5565K |
5613K |
|
Nov 25 |
08:30 AM |
Durable Orders | Oct |
-0.6% |
0.3% |
0.5% |
2.0% |
|
Nov 25 |
08:30 AM |
Durable Orders ex Transportation | Oct |
-1.3% |
0.5% |
0.6% |
1.8% |
|
Nov 25 |
09:55 AM |
Michigan Sentiment | Nov |
67.4 |
65.0 |
67.0 |
66.0 |
|
Nov 25 |
10:00 AM |
New Home Sales | Oct |
430K |
420K |
404K |
405K |
|
Nov 25 |
10:30 AM |
Crude Inventories | 11/20 |
1.02M |
NA |
NA |
-0.887K |
Source: Yahoo Finance, November 27, 2009.
The European Central Bank (ECB) will make an interest rate announcement on Thursday (December 3). US economic data reports for the week include the following:
Monday, November 30
• Chicago PMI
Tuesday, December 1
• Construction spending
• ISM Index
• Pending home sales
• Auto and truck sales
Wednesday, December 2
• ADP employment report
• Fed Beige Book
Thursday, December 3
• Jobless claims
• Productivity
• ISM Services
Friday, December 4
• Nonfarm payrolls
• Factory orders
Markets
The performance chart from the Wall Street Journal Online shows how different global financial markets performed during the past week.
Source: Wall Street Journal Online, November 27, 2009.
“Regardless of the dollar price involved, one ounce of gold would purchase a good-quality men’s suit at the conclusion of the Revolutionary War, the Civil War, the presidency of Franklin Roosevelt, and today,” said Peter Burshre (hat tip: Chart of the Day). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist the readers of Investment Postcards to not only don decent suits, but also build considerable wealth with their investment portfolios.
That’s the way it looks from Cape Town (where I will be spending my time over the next few weeks, because my visit to New York had to be cancelled to attend to local business responsibilities).
Source: Wayne Stayskal, November 11, 2009.
Financial Times: Bets rise on rich country bond defaults
“The mounting level of debt in the industrialised world is prompting a growing number of investors to use the derivatives market to bet on the chance of rich governments defaulting on bonds.
“The volume of activity in sovereign credit default swaps - which measure the cost to insure against bond defaults - linked to the US, UK and Japan have doubled in the past year because of concerns about their public finances.
“CDS volumes for Italy, which has one of the highest debt burdens of the developed economies, are now the highest for an individual country, according to the Depository Trust & Clearing Corporation.
“In contrast, the outstanding volume of CDS linked to emerging nations such as Russia, Brazil, Ukraine and Indonesia have been flat or fallen in the past 12 months as investors have become less interested in trading the risks of those countries.
“In the past, the CDS market for developed countries was sluggish, because few investors saw the need to buy or sell protection against a risk of default that seemed exceedingly remote.
“However, rising debt levels and growing political and economic uncertainty have created a more active market, with more investors now seeking insurance. Meanwhile, many banks are prepared to offer protection in exchange for a fee.
“This fee has recently jumped, since the cost to insure the debt of developed countries has increased since the summer of last year, while the cost of insuring emerging market debt has fallen.
“Gary Jenkins, head of fixed income research at Evolution, said: ‘The biggest single risk hanging over the bond markets is the rapid rise in public debt in the industrialised world.
“‘If we get to a point where the market thinks the levels of debt are unsustainable, then we will see an almighty sell-off in the government bond markets, with yields soaring. Governments need to take action to cut deficits and debt.’
“Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: ‘It is not surprising that investors are increasingly worried about debt in the industrialised world. Debt to GDP of more than 100 per cent is difficult to sustain.’”
Source: David Oakley, Financial Times, November 22, 2009.
Financial Times: Dubai World
“Dubai has shocked investors by asking for a debt standstill at Dubai World, the government’s flagship holding company that has developed some of the world’s most extravagant real estate projects. The move raised the spectre of default in the Middle East’s trading hub just as early signs of economic recovery have emerged. John Paul Rathbone analyses recent developments in Dubai.”
Source: John Paul Rathbone, Financial Times, November 24, 2009.
Financial Times: Dubai shock after debt standstill call
“Dubai has shocked investors by asking for a debt standstill at Dubai World, the government’s flagship holding company that has developed some of the world’s most extravagant real estate projects.
“The move raised the spectre of default in the Middle East’s trading hub just as early signs of economic recovery have emerged. During the boom, Dubai rode the wave of easy credit generating phenomenal economic growth but was badly hit by the global credit crisis.
“Dubai’s surprise move angered some investors who had been reassured by local officials for months that the city would meet all obligations on its $80bn of gross debt in spite of recession and a real estate crash.
“‘Investors view this as shockingly bad news,’ said Rob Whichello of BNP Paribas. Two hours after announcing it had raised $5bn from two Abu Dhabi banks, the department of finance asked for a standstill until May 30 on all financing to the heavily indebted Dubai World and its troubled property unit Nakheel, which is due to pay back $4bn on an Islamic bond on December 14.
“Dubai also launched a restructuring of the government holding company, which oversees ports operator DP World, the UK-based P&O Ferries and troubled investment company Istithmar. Nakheel, the developer behind the city’s Palm Islands that boast celebrity owners such as David Beckham, has had to shed thousands of staff and left contractors out of pocket as local property prices halved and credit dried up.
“A symbol of Dubai’s pre-crunch excess, the government company has had to cancel plans for the world’s tallest tower and a constellation of reclaimed islands, as collapsing cash flow left the developer on the brink.
“‘This will destroy confidence in Dubai, the whole process has been so opaque and unfair to investors,’ said Eckart Woertz, economist with Dubai’s Gulf Research Centre.
“The gaping size of Dubai World’s $22bn debt problem has been apparent for a year. But the government’s level of support has been clouded by politics and a lack of clarity on how much it could raise from international markets and the oil-rich capital of the United Arab Emirates, Abu Dhabi.
“Bond markets reacted sharply to the news with investors demanding higher premiums to hold debt from the region. In London trade it cost about $460,000 annually over five years to insure $10m worth of Dubai government debt against default, compared with $360,000 on Tuesday. Prices rose for its neighbours with Abu Dhabi protection $100,000 more than on Tuesday.
“Standard & Poor’s and Moody’s Investors Service immediately downgraded the ratings of all six government-related issuers in Dubai following news of the repayment delay and left them on review for possible further downgrade.
“Moody’s cut ratings on some government-related entities to junk status, while S&P cut ratings on some entities to one level above junk.
“S&P said the restructuring ‘may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity’.”
Source: Simeon Kerr and Jennifer Hughes, Financial Times, November 25, 2009.
Eoin Treacy (Fullermoney): Dubai could trigger corrective phase
“Middle Eastern stock markets have been laggards over the last year despite the advance in oil prices. Laggards usually lag for a reason and these are now becoming apparent with yesterday’s announcement. This news has had little effect on the region’s stock markets which suggests either some expectations of credit problems are already in the price or the focus of these problems lies with the Dubai government and foreign creditors.
“Dubai took full advantage of loose credit conditions earlier this decade to build on a massive scale. A huge percentage of the world’s cranes were domiciled in the country and the ‘before and after’ pictures of the city were commonly used to illustrate the extent of the development. The aim of building a financial and tourist hub and becoming a gateway between Europe and Asia as a solution to the Emirate’s lack of oil and gas reserves is laudable, but as with any mania, the good idea was taken to excess. The contraction of global liquidity has put pressure on Dubai’s ability to attract investment and has contributed to the current problems.
“Countries that experienced the biggest building booms on credit alone are experiencing some of the deepest recessions. The US, UK, Ireland, Spain and a number of Eastern European and Middle Eastern countries share this characteristic. However, the stock market action of the last year demonstrates that not all countries have been affected the same way and those which avoided building to excess have largely avoided recessions and posted the best stock market performances.
“The extent to which British banks are exposed to Dubai World has begun to rekindle worries about contagion but I wonder how justified this is? Dubai’s big brother, Abu Dhabi, is on a sounder financial footing and remains likely to provide assistance. Creditors may have to endure a delay in getting their capital returned but massive writedowns akin to those experienced following Lehman Brothers’ bankruptcy are probably unlikely. However, the perception of these problems is more important in the short-term. Stock and commodity markets have had an exceptional run since March. The Dubai default could be a catalyst for a deeper corrective phase unfolding generally.”
Source: Eoin Treacy, Fullermoney, November 26, 2009.
Nouriel Roubini (Forbes): Will the world go shopping?
“Roughly one year ago, around the Thanksgiving festivities, the National Bureau of Economic Research announced that the US recession started in December 2007. One year later, though the US economy is in recovery mode, retailers are approaching the holiday season - which accounts for slightly less than one-fifth of yearly US retail sales - with some concern.
“A sharp collapse in US consumer spending since mid-2008 led to a particularly dismal 2008 holiday retail season. As per US Census Bureau estimates, core retail sales (which exclude autos, gasoline and building supplies) fell by 1.1% year on year during November and December 2008, compared to an average 4.6% year-on-year increase in holiday season sales over the past decade. Total retail sales suffered a larger collapse, falling 9.5% year on year.
“After collapsing in 2008, retail sales showed signs of stabilizing over the summer of 2009. While auto sales have fluctuated sharply during recent months due to the government’s ‘cash for clunkers’ initiative, core retail sales have risen for three consecutive months as of October 2009, creeping up at a pace of about 0.5% month on month. Entering the 2009 holiday season, the recent uptick in core sales offers hope for better than anticipated holiday retail sales.
“Economic indicators, however, suggest a note of caution. The renewal in US consumer confidence over the first half of 2009 faded. Successive grim reports on the employment situation revealed no quick end to labor market woes, lowering consumers’ income expectations. According to the October Reuters/University of Michigan Survey of Consumer Sentiment, in October 2009, consumers reported worsening personal finances for the 13th consecutive month, the ‘longest and deepest decline in the 60-year history of the surveys’.
“The poor state of personal finances has driven consumers to reduce debt at an accelerated pace. In September, consumer credit fell for the eighth consecutive month at an annualized pace of 7.2%. The poor health of personal finances, labor market uncertainty and the ongoing household balance- sheet repair will continue to promote frugal behavior by US consumers. The Conference Board consumer confidence surveys tell a revealing story: Consumers’ plans to purchase big-ticket appliances have declined in the run-up to the 2009 holiday season. This is a bit unusual as plans to buy big-ticket appliances usually display a sinusoidal pattern, with a trough in the month of October and a peak sometime the following spring.
“A measure of weekly retail sales released by the International Council of Shopping Centers and Goldman Sachs indicates that same-store sales flattened over the first three weeks of November, though compared to 2008, sales are up by a promising average pace of 2.9%. The National Retail Federation projects retail sales will fall 1% during this holiday season, compared to an average 3.4% annual gain in holiday sales over the past decade. After the sharp slide in 2008, a decline of ‘only’ 1% or even a small positive gain in 2009 holiday sales may seem like a welcome number; however, accounting for the base effects of a dismal 2008 season, the underlying reality for retailers remains grim for this holiday season.”
Click here for the full article.
Source: Nouriel Roubini, Forbes, November 26, 2009.
Financial Times: Divisions emerge on stimulus strategy
“Stark divisions are emerging among economic policymakers about how quickly governments and central banks should withdraw emergency support measures, with Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warning on Monday about the risks of early exit.
to shocks and policy mis-steps. Fiscal and monetary stimulus programmes should not be stopped too soon, he said.
“He added: ‘It is too early for a general exit. We recommend erring on the side of caution, as exiting too early is costlier than exiting too late.’
“His words may be of some use to the Obama administration, which is boxed in by increasingly shrill calls to reduce the budget deficit and by appeals from some liberal Democrats and economists to spur job creation with more public money.
“On the monetary policy side, Ben Bernanke, US Federal Reserve chairman, last week said ‘inflation seems likely to remain subdued for some time’ and reiterated that interest rates were likely to remain exceptionally low for ‘an extended period’, although he also said he was ‘attentive’ to the value of the dollar.
“Mr Strauss-Kahn’s stance contrasted with warnings by the European Central Bank that delays in unwinding exceptional measures taken to combat the economic crisis could backfire. Last Friday, Lorenzo Bini Smaghi, an ECB executive board member, said history showed that the late implementation of ‘exit strategies’ could cause future crises.
“Speaking in Madrid on Monday, Jean-Claude Trichet, ECB president, said the threats to public finances posed by government stimulus packages meant ‘there is an increasingly pressing need for ambitious and realistic fiscal exit strategies and for fiscal consolidation’. He said it was ’still premature to declare the financial crisis over. But when the appropriate time comes, there should be no concern about the ECB’s determination and ability to exit.’
“Mr Strauss-Kahn said the worst of the financial storm had passed but the global economy remained in a holding pattern - ’stable, and getting better, but still highly vulnerable’.”
Source: Brian Groom, Ralph Atkins and Tom Braithwaite, Financial Times, November 23, 2009.
Financial Times: Fed sees risks in low rates policy
“Federal Reserve officials have expressed concerns that near-zero interest rates could fuel ‘excessive risk-taking in financial markets’ but believe the possibility of such an outcome is ‘relatively low’ minutes from its November meeting show.
“Both China and Germany warned this month that the weak dollar and the Fed’s policy to keep US interest rates ‘exceptionally low’ for an ‘extended period’ could be laying the groundwork for a new speculative bubble.
“The central bank’s Federal Open Market Committee already had discussed this risk, according to the minutes released on Tuesday. In their meeting on November 3-4, the officials ‘noted the possibility that some negative side-effects might result from the maintenance of very low short-term interest rates for an extended period’.
“The minutes said: ‘While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.’
“The committee members took a fairly sanguine view of the dollar’s recent decline, which they described as ‘orderly’ and linked to improved risk appetite. However, the minutes note that ‘any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching’.
“In the meeting, the committee decided to stick to its interest-rate policy, saying the US economy was continuing to improve but that inflation risks were low. The committee members upgraded their forecasts for US growth in 2009 and 2010, but reduced their forecast slightly for 2011. They also lowered their unemployment expecations, forecasting a rate between 9.3 and 9.7 per cent next year, down from a previous forecast of between 9.5 and 9.8 per cent.
“The minutes were released after the commerce department said gross domestic product grew at an annual rate of 2.8 per cent in the third quarter, below its first estimate of 3.5 per cent.”
Source: Sarah O’Connor, Financial Times, November 24, 2009.
CNBC: FOMC minutes - reaction
“Dissecting the FOMC minutes with James Bianco of Bianco Research, Zane Brown of Lorb Abbett and CNBC’s Steve Liesman.”
Source: CNBC, November 24, 2009.
MoneyNews: Interest alone on Federal debt - $4.8 trillion
“When you think about the government’s exploding debt burden, you probably don’t focus on interest payments.
“But those payments will likely total $4.8 trillion over the next 10 years, amounting to more than half the government’s $9 trillion in debt.
“Interest rates are near zero now, thanks to the Federal Reserve’s massive monetary stimulus. But at some point the Fed will have to reverse that easing.
“‘When interest rates rise, even a small amount, the interest payments go up a lot because of the size of the debt,’ Charles Konigsberg, chief budget counsel of the Concord Coalition, told CNNMoney.com.
“The $4.8 trillion interest-payment estimate made by the Congressional Budget Office assumes some interest rate appreciation. But if rates rise higher than its estimates, the dollar total will be higher.
“The Obama administration has pledged to cut the budget deficit to 3 percent of GDP, down from 10 percent last year. But that goal may be more fantasy than reality.
“‘Even under the president’s (2010) budget as evaluated by the CBO, we do not get anywhere close to that,’ William Gale, a senior fellow at the Brookings Institution, told CNNMoney.com.”
Source: Dan Weil, MoneyNews, November 23, 2009.
Asha Bangalore (Northern Trust): Widespread revisions of Q3 GDP
“Real GDP grew at an annual rate of 2.8% in the third quarter, previously estimated as a 3.5% increase. Lower estimates of consumer spending (+2.9% vs. +3.4% in the advance report), outlays on structures ((-15.1% vs. -9.0% in the advance report), residential investment expenditures and (+19.5% vs. +23.4% in advance report), including a smaller contribution from inventories and a wider trade gap more than offset the upward revisions of government spending and equipment and software spending.
“Going forward, real GDP is projected to show a slightly slower pace of growth in the fourth quarter of 2009 and first quarter of 2010, partly because car sales of the future have been borrowed to take advantage of the ‘clash for clunkers’ program.
“Corporate profits from current production rose 10.6% in the third quarter, following a revised 3.7% gain in the second quarter. From a year ago, corporate profits fell 6.7%, the first single-digit decline after three straight quarters of significantly weaker profits. Corporate profits of the financial sector advanced 36.4% in the third quarter and made up the larger share of corporate profits. Corporate profits of the non-financial sector increased only 2.0%. The financial sector’s performance is artificially boosted by the support programs in place.”
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 24, 2009.
Clusterstock: The bloodbath in American manufacturing is over
“Manufacturing has been one of the hardest hit sectors around, but the pain is going away.
“Today’s chart shows the number of mass layoff events (at least 50 people whacked in one blow) per month in manufacturing, and as you can see, it’s way down from its peak, and now below the peak of the 2001-2002 recession.
“Still, we’ve got to see a lot of improvement before we’re at pre-crisis levels.”
Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, November 20, 2009.
Standard and Poors: S&P/Case-Shiller - Home prices show sustained improvement
“Data through September 2009, released today [Tuesday] by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, show that the US National Home Price Index improved in the third quarter of 2009, posting its second consecutive quarterly increase and further improvement in its annual rate of return.
“The chart above depicts the annual returns of the US National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller US National Home Price Index, which covers all nine US census divisions, recorded an 8.9% decline in the third quarter of 2009 versus the third quarter of 2008. This is a marked improvement over the 14.7% decline in the annual rate of return reported in the second quarter of 2009, and the 19.0% drop in the first quarter. The 10-City and 20-City Composites recorded annual declines of 8.5% and 9.4%, respectively. These two indices, which are reported at a monthly frequency, have generally seen improvements in their annual rates of return every month since the beginning of the year.
“‘We have seen broad improvement in home prices for most of the past six months,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘However, the gains in the most recent month are more modest than during the seasonally strong summer months.’”
Source: Standard and Poors, November 24, 2009.
Asha Bangalore (Northern Trust): Low mortgage rates and tax credit lift sales of existing homes
“Sales of all existing homes rose 10.1% to an annual rate of 6.1 million units in October. Attractive mortgage rates and the first-time home buyer tax credit of $8,000 helped to boost sales of existing homes. The tax credit program has been expanded and extended to April 30, 2010.
“Sales of single-family existing homes advanced 9.7% to an annual rate of 5.33 million units in October. Sales of single-family existing homes have moved up nearly 32% from the cycle low of 4.05 million homes in January 2009. The peak of single-family existing home sales was in September 2005 (6.34 million units).
“The median price of an existing single-family home declined 1.6% to $173,100 in October from the prior month and it is down 6.8% from a year ago. The year-to-year decline of the median price shows a significant moderation, with the October reading the smallest since June 2008.
“As a result of the low mortgage rates and the first-time home buyer tax credit of $8,000, the supply of unsold single-family existing homes in October dropped to nearly 7-month supply, which is slightly below the historical median of 7.2-month supply.
“The important implication is that the declining trend of the number of unsold existing homes should establish price stability. Additional home sales will be possible as the economy recovers and hiring recovers.”
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 23, 2009.
Clusterstock: The “distressing” gap between new and existing home sales
“This morning’s existing home sales number showed that sales surged in October by a surprising 10.1%. But new home sales continue to remain quite weak.
“Today’s chart, showing the ‘distressing’ gap between the two measures, comes courtesy of Calculated Risk, which explains:
“‘The initial gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn’t compete with the low prices of all the foreclosed properties.
“‘The recent spike in existing home sales was due primarily to the first time homebuyer tax credit.
“‘But what matters for the economy - and jobs is new home sales, and new home sales are still very low because of the huge overhang of existing home inventory and rental properties.’”
Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, November 23, 2009.
MoneyNews: Nearly 11 million US homes underwater
“Some experts say the housing market has bottomed, but one statistic indicates otherwise.
“The portion of US homeowners who are ‘underwater’ on their loans - that is, they owe more on the mortgage than the home is worth - surged to 23 percent in the third quarter, or almost 10.7 million households, according to First American CoreLogic, a real estate research firm.
“Many of the underwater homes will end up in foreclosure or on the already bulging market of homes for sale.
“Of the 10.7 million homes underwater, nearly half have a mortgage that is at least 20% percent higher than the home’s value, according to First American.
“More than 520,000 of these homeowners are in default on their mortgages.
“This ‘is an outstanding risk hanging over the mortgage market’, Mark Fleming, chief economist of First American, told The Wall Street Journal.
“‘It lowers homeowners’ mobility because they can’t sell, even if they want to move to get a new job.’
“Some homeowners who are underwater are fully capable of paying their mortgages, but are ditching their homes anyway - to the tune of 588,000.”
Source: Dan Weil, MoneyNews, November 24, 2009.
Clusterstock: We’re still generating too many negative equity mortgages
“In Washington, DC, the prevailing view these days is that unemployment is now the leading driver of mortgage defaults. This is one reason you can expect to see the next stage of the government’s attempt to rescue the housing market focus on saving jobs.
“But a new study out of Amherst Securities indicates that negative equity is by far the best default predictor of defaults. If that view is correct, the fact that we are still producing mortgages that quickly slip into negative equity should be terrifying. And, in fact, much of the recovery in the housing market appears to be built on thinly capitalized mortgages subsidized by low loan-to-value FHA guaranteed mortgages and the home-buyer tax credit.
“As the chart below shows, even home buyers who took out mortgages as late as this year are finding themselves with negative equity at historically high rates. We’ve come down from the worst levels of the housing boom but we are still well above healthy levels.
“In short, we may be witnessing a policy mistake of stunning proportions as lawmakers and regulators focus on job creation while ignoring the still problematic loan-to-value ratios in the housing market.”
Source: John Carney and Kamelia Angelova, Clusterstock - The Business Insider, November 24, 2009.
Yahoo Finance - Tech Ticker: Housing bottom? “Not even close,” Barry Ritholtz says
“A fifth-straight monthly gain for the Case-Shiller Index Tuesday and Monday’s stronger-than-expected existing home sales report is giving renewed hope to the housing bulls.
“‘Disregard them,’ says Barry Ritholtz, CEO of Fusion IQ, who notes the existing home sales number was juiced by sales of cheap condos and various government programs. Meanwhile, the Case-Shiller results were below expectations.
“We are ‘not even close’ to a bottom in housing, says Ritholtz, who estimates national house prices remain 15-20% overvalued, based on the traditional metrics of: median income-to-median sales price, the cost of owning vs. renting, and housing stock as a percent of GDP.
“‘Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels - that’s how you know the bottom is in,’ says the blogger and Bailout Nation author.
“The likely best-case-scenario for housing is several years of sideways action for prices, wherein population growth and a firmer economy combine to sop up the still huge inventory of homes on the market.
“‘And that’s if we’re lucky,’ Ritholtz says, citing the lackluster environment for jobs and wages, as well as CoreLogic’s analysis that 23% of all US mortgage holders are under water. With so many Americans owing more money than their homes are worth, the recent rise in foreclosures and so-called jingle mail is ‘not nearly done’, he warns.
“In sum, expect more homes for sale at distressed prices and more downward pressure on prices overall - unless the ‘real’ economy shows dramatic improvement, which Ritholtz doesn’t see anytime soon.”
Source: Aaron Task, Yahoo Finance - Tech Ticker, November 24, 2009.
Clusterstock: US weekly jobless claims the lowest since September 2008
“The Department of Labor reported today [Wednesday] that initial jobless claims for the week ending November 21 fell 35,000 on a seasonally-adjusted basis from the previous week.
“They rose 68,080 on a not-seasonally-adjusted basis, but this basically means that jobless claims rose less than normal for this time of year. Seasonal adjustments are widely used to spot overall unemployment trends since the employment market is indeed seasonal.
“As shown below, at 466,000, this most recent seasonally-adjusted claims number represents the best data point we’ve had since the week of September 13, 2008.
“Regardless of the potential for static in the weekly numbers, or errors due to seasonal adjustments, it’s now pretty clear that the overall rate of new jobless claims has indeed slowed substantially.”
Source: Vincent Fernando and Kamelia Angelova, Clusterstock - The Business Insider, November 25, 2009.
Angry Bear: Unemployment claims - 1975, 1982-83 and 2009
“The weekly initial unemployment claims are widely reported and various charts show how they have been falling since the peak. But it is hard to compare the drop in claims this cycle compared to after other severe recessions in the standard charts showing claims over time.
“So to make such comparisons easier I though readers might find a chart showing claims after the 1974 and 1982 recessions and this recession on the same scale.”
Source: Spencer, Angry Bear, November 25, 2009.
Asha Bangalore (Northern Trust): Consumer Confidence Index moves up slightly
“The Conference Board’s Index moved up to 49.5 during November from 48.7 in the previous month. The Present Situation Index (21.0 vs. 21.1 in October) fell, while the Expectations Index rose to 68.5 in November from 67.0 in the prior month. The number of respondents indicating that ‘jobs are hard to get’ rose to 49.8 from 49.4 in the prior month, while those noting that ‘jobs are plenty’ fell to 3.2 from 3.5 in September. The main message is that hiring remains weak.”
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 24,2009.
MoneyNews: Dreman - brace for 10 percent inflation
“David Dreman says investors should be prepared for high inflation rates - as high as 10 percent - to start within the next three years, and that the Obama administration is powerless to stop it.
“Dreman, the well-known contrarian investor and CEO of Dreman Value Management, told Fox Business that the stock market will see a correction, although ‘it’s anybody’s guess’ when that correction will occur.
“He said inflation could rise to be as high as 8 percent to 10 percent within the next three years.
“Dreman advises investors to hold onto their current stocks and ‘ride through’ the correction. He also advises investors to stay out of long-term bonds because they will take a hit.
“Instead, investors should go for very short-term bonds, equities, and real estate, he said.
“Dreman predicts that interest rates will remain low since ‘no administration’ will attempt to raise them with high unemployment rates. He said the current administration is both trapped and powerless.
“Dreman also said that gold is currently undervalued, despite breaking records daily.”
Source: MoneyNews, November 25, 2009.
Bloomberg: Late card payments rose in October, Moody’s reports
“US credit-card delinquencies climbed last month to the highest level since February as five of the six biggest card lenders posted increases, Moody’s Investors Service said.
“Loans at least 30 days overdue, a signal of future defaults, rose to 6.12 percent in October from 5.97 percent in September, Moody’s said in a report dated Nov. 20 and distributed today. So-called early-stage delinquencies, payments 30 to 59 days late, were unchanged at 1.66 percent.
“Banks typically write off card loans after 180 days, and defaults fell last month to 10.04 percent from 10.72 percent in September, reflecting lower delinquency rates earlier in the year. Credit-card defaults and delinquencies tend to track US unemployment, which climbed to 10.2 percent in October, the highest since 1983.
“‘Weak job creation, elevated bankruptcies and rising unemployment continue to weigh on results,’ John McDonald, an analyst with Sanford C. Bernstein & Co., said in a November 17 research note. ‘It still feels too early to declare victory.’
“Write-offs may peak at 12 percent to 13 percent in 2010, Moody’s analysts Will Black and Jeffrey Hibbs said in the report.”
Source: Peter Eichenbaum, Bloomberg, November 23, 2009.
Bloomberg: Strauss-Kahn says half of bank losses are undisclosed
“Dominique Strauss-Kahn, managing director of the International Monetary Fund, talks about bank losses and the outlook for a global economic recovery. Strauss-Kahn answers questions from delegates at the Confederation of British Industry’s annual conference in London.”
Click here for the article.
Source: Bloomberg, November 23, 2009.
Financial Times: S&P raises fears over health of some banks
“A study by Standard & Poor’s has raised questions over the financial strength of some of the biggest banks ahead of new rules that could require them to raise more funds.
“The analysis by S&P showed that HSBC is the best capitalised bank in the world, while Switzerland’s UBS, Citigroup of the US and several of Japan’s biggest banks are among the weakest.
“The ranking of 45 of the world’s leading banks will unnerve investors, highlighting once again the capital shortfall that institutions still need to make up over the coming years.
“Although some banks will be able to top-up capital through retained profits, analysts expect a string of rights issues from weaker banking groups as they try to raise tens of billions of dollars.
“S&P’s risk-adjusted capital (RAC) ratios - a measure of balance sheet strength - foreshadow the new capital ratio regime expected to be set by the Basel committee on banking supervision early next year.
“Its report, published on Monday, gave HSBC a 9.2 per cent ratio, compared with barely 2 per cent for the likes of UBS, Citigroup and Mizuho.”
Source: Patrick Jenkins, Financial Times, November 23, 2009.
The Wall Street Journal: Banks scramble as debt comes due
“Banks have spent the past year dealing with a mountain of bad assets. Now attention is turning to trillions of dollars of debt they have maturing over the next few years.
“Banks unable to maneuver around the challenge could be forced to refinance their debt at sharply higher costs.
“The situation was caused by banks engaging in cheap borrowing during the credit-market boom that began in the middle of the decade and lasted through 2007. As financial markets hit crisis mode, banks were propped up by government guarantees that enabled them to keep selling debt - but with much shorter maturities.
“About $10 trillion of debt comes due by the end of 2015, including $7 trillion by 2012, according to Moody’s Investors Service, which highlighted growing concerns about the banks’ looming liabilities in a report this month.
“The life span of bank debt has shrunk to historically low levels, forcing banks to deal with the problem sooner rather than later. Globally, the average maturity of new debt rated by Moody’s fell from 7.2 years to 4.7 years in the past five years.
“‘We thought that we should send a signal’ of warning, said Jean-Francois Tremblay, a Moody’s analyst and one of the report’s authors.
“The problem is especially acute for US and UK banks, which have been among the hardest hit by the financial crisis. In the US, banks have seen maturities drop to 3.2 years from 7.8 years in the past five years. In the UK, the average maturity for new debt fell to 4.3 years from 8.2 years, Moody’s said.”
Source: Carrick Mollenkamp and Serena NG, The Wall Street Journal, November 25, 2009.
Financial Times: Better climate for hedge funds
“The hedge fund sector looks to be going through the early stages of recovery, with industry flows turning positive and redemptions largely normalising to historical levels, says Huw van Steenis, head of banks and financials research at Morgan Stanley.
“‘Next year is likely to be a pivotal year for hedge funds, with the sector set to benefit from the rise in demand for better risk adjusted returns, the migration of talent from investment banks and trading off the back of a successful 2009,’ he says.
“Mr van Steenis believes sovereign wealth funds, foundations and pension funds have overtaken endowments and high net worth hedge fund of funds as the largest source of inflows - and thinks the market is underestimating the potential upsurge in demand for absolute return funds from private clients and smaller institutions.
“‘In the UK, in the third quarter alone, there were $2.1bn of inflows into absolute return funds - three times that in the first quarter. Our base case estimates that global assets under management in the sector will reach $1,750bn by the end of 2010 - where we were in the first half of 2007 - although we see risks posed by performance, regulation and reputational issues.
“‘The outcome of US/EU regulatory changes remains uncertain, but growing pragmatism should be the order of the day; we estimate that hedge funds funded 30-40 per cent of capital raised by US and European banks this year.’”
Source: Huw van Steenis, Financial Times, November 24, 2009.
Bespoke: Sovereign default risk
“Below we highlight current credit default swap prices and the year-to-date change for the sovereign debt of 39 countries. As shown, default risk has declined for every country except Japan in 2009, including Dubai.”
Source: Bespoke, November 27, 2009.
Yahoo Finance - Tech Ticker: A bad economy could spell good news on Wall Street for years to come
“The economic recovery isn’t as strong as first thought. Revised GDP figures released this morning [Tuesday] show the economy grew at a 2.8% annualized pace in the third quarter, less than the 3.5% initially reported. The revision was in line with expectations but shows the economy didn’t have as much momentum heading into the fourth quarter as previously believed.
“Unlike Wall Street traders, consumers seem to know the recovery is ‘anemic’, as Barry Ritholtz, CEO of Fusion IQ, describes it. The Conference Board’s latest confidence survey shows Americans feel worse about the current economic situation than they did in March, when the stock market was making new lows.
“What’s driving the disconnect between Wall Street and Main Street?
“Ritholtz says it’s a classic example of bad news being good news on Wall Street. ‘We’re in a cycle that’s not based on profitability, not based on expanding economy but based on all sorts of government supports,’ he says. ‘Bad news is going to be good news for the next couple of quarters probably.’
“That’s because low interest rates and liquidity provided by the Federal Reserve, coupled with government stimulus are enticing traders to buy into the market. ‘Cash is trash,’ says Rithotlz, who remains bullish on stocks.
“Ritholtz is confident that eventually fundamentals will prevail and thinks the market will take a hit once the economy shows signs of improvement, meaning the ‘extraordinary’ stimuli can be removed.
“But predicting the timing is anyone’s guess. ‘You could have this disconnect that goes on for not days, weeks or months but years and years,’ he says.
“So, in the meantime, Ritholtz - who correctly predicted the 2008 crash and told Tech Ticker’s audience ‘the mother of all bear market rallies’, was upon us in March - is still long stocks and likes commodities (thanks to a weak dollar) and emerging markets.”
Source: Peter Gorenstein, Yahoo Finance - Tech Ticker, November 24, 2009.
Financial Times: Getting technical
“There is one group of investors that has few doubts about the direction of the US stock market. Technical analysts - who scour price moves in charts for patterns of behaviour that they think will be repeated and drive future action - see plenty of signals that justify a continued move higher in the S&P 500 index of US stocks.
“Although there are many reasons to doubt the relevance of technical analysis, there are many investors who do trade on these signs. Indeed, much of the computer-driven, high-speed trading that has become a feature of stock trading uses such analysis to programme trades. At the very least, it is important to be aware of the key price levels that technical analysts are targeting.
“At its simplest in terms of technical signals, a rising support line connects the dips seen in the S&P 500 since it started its rally in March. This backs the idea that such a support will continue to prop up prices after any dips.
“In terms of specific levels, the most widely watched ones are those that cluster round key ratios identified by the mathematician Fibonacci in the 13th century. Under these ratios, technical analysts believe that once markets have rallied 50 per cent from a low, they tend to progress to a level marking a 61.8 per cent retracement.
“Taking the 2007 S&P 500 high of 1,576 as the top and the March 2009 low of 667 as a bottom, the eyes of these analysts are on the S&P reaching 1,121 - a level that would mark a 50 per cent retracement of the decline from the peak. The subsequent 61.8 per cent retracement level would be 1,229.
“Technical analysts similarly argue that charts signal continued dollar declines and rises in gold, silver and oil prices. With fundamental factors sending mixed pictures, more traders may grasp for the cryptic clues on short-term market moves provided by technical analysis.”
Source: Aline van Duyn, Financial Times, November 24, 2009.
Bespoke: Where are the Financials?
“Probably the main reason why the S&P 500 has struggled to take out old highs in recent weeks is the performance of the Financial sector. It’s actually surprising that the market is where it is given how poorly the Financials have done. As shown in the first chart below, the S&P 500 Financial sector can’t even get above its 50-day moving average, much less test its bull market highs from a month or so ago.
“The Financials led us into and out of the bear, and it’s hard to imagine the overall market continuing its bullish pace over the next few months without a resurgence in the Financials. The question right now is whether to treat the stagnation as a bullish signal to gain exposure to the sector or a bearish signal to sell the broad market.”
Source: Bespoke, November 23, 2009.
Bespoke: Goldman can’t get out of its own way
“While there probably aren’t a lot of people shedding tears over it, the stock of Goldman Sachs (GS) can’t seem to get out of its own way. We’ve highlighted the relative weakness in this stock several times over the last few weeks, so this shouldn’t come as any surprise, but GS is now on pace to close at its lowest levels since early November.
“Politicians in Washington and conspiracy theorists may be rejoicing in Goldman’s misery, but if there’s one thing Goldman employees can be thankful for it is that with the stock lagging the overall market, the intensity of public backlash directed towards the company seems to have abated. Next thing you know, the conspiracy theorists will claim that ‘evil’ Goldman is purposely making their stock weak just so they can buy back the stock at lower prices.”
Source: Bespoke, November 25, 2009.
Financial Times: Asian asset bubble fears overblown
“Fears that asset bubbles are being created in Asia by foreign capital inflows look overdone at this point, says Michael Spencer, Deutsche Bank chief Asia economist.
“He says that while a few narrow real estate markets may be starting to look pricey, equity markets for the most part appear to be at or near fair value.
“‘The bigger problem facing a number of key Asian economies is the extent to which their currencies are pegged to the dollar, and the Federal Reserve’s very stimulative policy stance.
“‘The monetary stimulus and capital flows these pegs are engendering are forcing [Asian] authorities to adopt more restrictive prudential regulations in an effort to avoid the inevitable inflation pressures and asset bubbles this arrangement will bring.’
“Mr Spencer says the possibility that this extends to capital controls cannot be ruled out - but argues that they would be used only as a last resort if monetary control could not be established through currency appreciation, rate hikes and sterilisation.
“‘We would anyway dispute the argument that capital flows or asset prices are at extremes. Asian equity prices may have risen sharply since the beginning of the year, but the regional index is only about 5 per cent higher than it was last summer. In a similar vein, while property prices in general are going up, it is only the luxury end that is ‘frothy’.’”
Source: Michael Spencer, Financial Times, November 25, 2009.
Reuters: Templeton’s Mobius eyes Libyan market
“Templeton Asset Management fund manager Mark Mobius said he was eyeing private equity and other investments in Libya and said the stock market had enormous potential for growth.
“Mobius, a prominent emerging market investor, told Reuters at the launch of a new Egyptian brokerage office in Tripoli he saw potential for tourism, infrastructure and telecoms investments.
“Libya, holder of Africa’s largest oil reserves, has attracted a wave of interest from Arab and international companies, operating mainly in energy and construction, since most international sanctions were lifted in 2004.
“‘This market is very exciting now because the government is embarking on a privatisation programme to list many of the state enterprises. Although the market is small now, the potential for growth is enormous,’ Mobius said, speaking late on Sunday.
“Libya has said it plans to sell shares in four state firms via initial public offerings (IPOs) in 2010 and will enact a law next year offering tax breaks to companies listing on the stock exchange in an attempt to get more Libyans to invest.
“The Libyan exchange now has 10 listed firms, mostly banks and insurance companies. Shares worth about 2.1 million dinars ($1.75 million) traded in October, a stock market report said.
“Foreign firms have been lining up for oil deals and infrastructure contracts in a country which boasts a long Mediterranean coastline but few top class hotels.
“‘The potential here for hospitality and tourism is tremendous. That’s one area. The other area is infrastructure, roads, bridges, whatever, if that’s privatised,’ Mobius said.”
Source: Shaimaa Fayed, Reuters, November 23, 2009.
MoneyNews: Forecasters see dollar decline next year
“The top performing forecasters in Bloomberg’s survey of 46 firms predict the dollar will continue falling next year.
“The sluggish economic recovery and exploding government debt burden will weigh on the currency, they say.
“Standard Chartered bank, which placed first in estimating the dollar-euro rate over the 18 months ended June 30, sees the euro rising 5.5 percent against the dollar next year, to $1.58.
“‘History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates,’ Callum Henderson, the bank’s head of foreign exchange strategy told Bloomberg.
“‘It’ll take time to drain the oversupply of dollars from the market. The dollar will remain weak until the Fed’s rates rise above the competitors.’
“All three of the top performers in Bloomberg’s survey see the dollar falling against the euro next year.
“That includes Aletti Gestielle (an Italian money management firm) and HSBC in addition to Standard Chartered.
“The dollar bears are contrarians, as 24 of the 37 predictions on dollar-euro have the greenback rising next year.
“But some of the most renowned currency experts anticipate the dollar will depreciate further.
“‘I think the dollar is an over-owned currency,’ Pimco managing director Bill Gross told CNBC. ‘The Chinese, the Asians have basically owned too many dollars for too long.’”
Source: Dan Weil, MoneyNews, November 23, 2009.
Richard Russell (Dow Theory Letters): Why gold?
“Let’s say you’re a multimillionaire. You’re seriously worried about what to do with your millions in savings. You don’t want to keep your money under your mattress or in your Frigidaire, so where should you keep it? US T-bills are now in a state of zero or even negative interest - you pay the government to hold your money, but you’re SAFE. T-bills have behind them the full faith and credit of the United States. Great, but, now you’re thinking the unthinkable - How good is the full faith and credit of the US? There are rumors that the credit rating of the US could actually be lowered. And with the massive unfunded debt of the US, that could happen, and worse - the dollar could cave in. What to do?
“And you ask yourself, ‘What’s safer than T-bills or even top-grade foreign short-term debt?’ The answer is that there is one item that’s safer - gold. Gold represents intrinsic value in and of itself and by itself. Gold needs no nation to back or guarantee its value. Gold is no single nation’s liability. Furthermore, gold has no maturity date and gold is so safe that it doesn’t need to pay interest to those who hold it. You decide to put your savings into gold rather than T-bills. And unlike T-bills today, gold doesn’t depend on anyone’s ‘full faith and credit’.
“The fact is that the so-called ‘opportunity cost’ of buying or holding gold is zero today. T-bills pay you nothing. The fact is that it’s cheaper, safer, and it makes more sense to hold gold at this time than at almost any time in my memory. And a lot of knowledgeable, big money investors are doing just that - buying and holding gold for safety and as a store of value.”
Source: Richard Russell, Dow Theory Letters, November 24, 2009.
TheStreet.com: $8,000 gold
“James Turk, author and founder of GoldMoney, argues that gold will hit $8K in 6 years’ time.”
Source: TheStreet.com, November 25, 2009.
International Monetary Fund: IMF announces sale of 10 metric tons of gold to the Central Bank of Sri Lanka
“The International Monetary Fund (IMF) announced today the sale of 10 metric tons of gold to the Central Bank of Sri Lanka. The sale was conducted on the basis of market prices prevailing on November 23, 2009 with proceeds equivalent to US$375 million. This transaction is part of the total sales of 403.3 metric tons approved by the Executive Board in September 2009, and it adds to the total of 202 metric tons already sold to the Reserve Bank of India and the Bank of Mauritius.”
Source: International Monetary Fund, November 25, 2009.
Financial Times: Gold rush forces US to clip Eagle sales
“The rush by retail investors into gold has forced the US government to suspend sales of the world’s most popular bullion coin, the American Eagle, after running out of inventories.
“The shortage, the second since the start of the financial crisis in August 2008, is the latest sign of investors seeking a safe haven into bullion amid the US dollar woes. Safe-haven buying spurred by concerns about the health of Wall Street and a spike in inflation due to a lax monetary policy have also benefited gold sales.
“‘The US Mint has depleted its current inventory of 2009 American Eagles one-ounce bullion coins due to the continued strong demand,’ the mint said in a statement late on Wednesday. It added that selling will resume ‘once sufficient inventories … can be acquired to meet market demand’.
“The US Mint has sold about 1.19m ounces of American Eagles so far this year, up almost 75 per cent from the same period last year and on track to be the highest annual volume in ten years, according to official data. Sales of American Eagle’s silver coins have hit 26m ounces, the highest level in at least 23 years.”
Source: Javier Blas, Financial Times, November 26, 2009.
MoneyNews: Banks say too much gold to store
“Gold prices have been soaring this year thanks to a weak dollar, and everyone wants in on the investment.
“For some banks, though, it is becoming clear that only the big institutional investors are welcome to store the precious metal in their vaults.
“So they’re telling smaller investors to get their gold out and store it elsewhere.
“HSBC has told retail clients to remove their small gold holdings from its vault in New York City, The Wall Street Journal reported.
“Small retail investors don’t turn enough profits for the bank like the big institutional investors do, the newspaper reported.”
Source: Forrest Jones, MoneyNews, November 24, 2009.
David Fuller (Fullermoney): Gold’s advance is not a bubble
“Intrinsic or not, I think value is in the eye of the beholder. The Fullermoney view for the last nine years is that gold is being gradually remonetised in the eyes of investors. That process has accelerated over the last year because we have witnessed nothing less than the greatest monetary reflation in history.
“What might we expect from gold over the short to medium term?
“Technically, gold looks temporarily overstretched and $1,200 is a minor psychological level. Consequently, we could easily see a short-term reaction and consolidation of perhaps $30 to $50 before this secular bull market powers on into 1Q 2010. If the consistency of the two earlier cycles commencing in September 2005 and September 2007 is maintained, gold should reach at least $1,300 between March and May of next year.
“I do not think that gold’s current advance is a bubble, although it is likely to become one eventually. A genuine bubble, as opposed to a market that happens to be rising at a time when most people are underinvested and therefore envious observers, will include gold fever of the sort we have not seen since 1979-1970.
“To put recent events in perspective, bullion consolidated for eighteen months prior to the last three month’s gains. It has rallied about $200 since the September breakout, which is approximately $100 less than the two earlier advances referred to above. Comparing those three moves, gold’s recent percentage move is clearly less to date than we saw on the two earlier advances. Lastly, the Amex Gold Bugs Index has yet to clear its 2008 high. This does not suggest a bubble to me.”
Source: David Fuller, Fullermoney, November 26, 2009.
Financial Times: Oil prices are too high
“An oil price at $80 a barrel is inconsistent with supply and demand dynamics, inventory levels and the current macroeconomic environment, says Alexander Redman, strategist at Credit Suisse.
“‘US gasoline demand is at lower levels than this time a year ago, while distillate demand remains well below the five-year range and jet plane storage continues to climb. Overall, US oil demand is still down by 3 per cent year-on-year.’
“At the same time, he says, US petroleum inventories are among the highest levels of this decade and a further 100m barrels of oil is being held globally offshore in tankers.
“Mr Redman says an examination of the longer-term association between the real oil price and global spare oil capacity indicates two important factors.
“‘First, the oil price only tends to spike up once spare capacity falls below the critical 2-3 per cent level - the International Energy Agency does not project this occurring again until 2014. Second, using the IEA’s estimate of 2010 spare capacity of about 8 per cent, the oil price would typically be closer to $40 a barrel.
“‘For now, the market appears to be pricing in the return to a tighter supply environment well into the next decade and disregarding the current glut in supply.
“‘Going forward, the Credit Suisse oil team is targeting $70 a barrel for WTI - and $68 a barrel for Brent Crude.’”
Source: Alexander Redman, Financial Times, November 26, 2009.
Financial Times: Eurozone PMI growth reaches two-year high
“The eurozone recovery is gathering pace in the final months of 2009, but warning signs of weaker growth next year have appeared.
“Purchasing managers’ indices for the 16-country region on Monday showed private sector activity expanding this month at the fastest rate in two years, with France and Germany powering the revival. However, the survey also pointed to a loss of momentum in coming months.
“The results add to evidence that the eurozone has returned to expansion, but that it risks seeing growth fade once government and central bank support measures are ended. The results are likely to add to policymakers’ wariness about the outlook for 2010.
“In a speech in Madrid, Jean-Claude Trichet, European Central Bank president, said: ‘We can spot a number of signs of stabilisation. But the crisis has debilitated the real economy … [and has] proved so deep because it has deprived our citizens of confidence.’”
“The eurozone recession ended in the third quarter, when gross domestic product rose by 0.4 per cent.
“November’s purchasing managers’ indices suggest the fourth quarter will see growth of a similar pace or faster. The composite index, covering eurozone services and manufacturing, reached 53.7 in November, up from 53.0 in October, making it the fourth consecutive month of expansion.
“However, Chris Williamson, chief economist at Markit, which produces the survey, said November ‘also saw the first signs of growth peaking’. New orders grew at a slower rate than in October, especially in the service sector. Job losses remained high and ‘highlighted the fragility of the recovery’, he added.”
Source: Ralph Atkins, Financial Times, November 23, 2009.
Financial Times: Japan says economy back in deflation
“The Bank of Japan moved towards a neutral stance on the risk of inflation on Friday even as the government formally declared that the world’s second-largest economy has entered deflation for the first time since 2006.
“The government’s declaration sets the scene for heightened tension with the bank, which has been resisting public calls by politicians for greater aggression in the fight against deflation.
“‘We want the BoJ to extend support on the monetary policy front in overcoming deflation,’ said Naoto Kan, deputy prime minister. Hirohisa Fujii, finance minister, and Shizuka Kamei, financial services minister, have also called on the central bank to do more.
“The bank’s policy board kept interest rates on hold at 0.1 per cent on Friday, but said ‘there is a possibility that inflation will rise more than expected’ due to higher commodity prices, offset by a risk it could fall due to lower public expectations for medium- to long-term inflation. In previous statements it only mentioned the risk of inflation declines.
“Consumer prices were down by 2.2 per cent on the previous year in September, or by 1.0 per cent excluding fresh food and energy. Although year-on-year inflation first turned negative in February, the government only now declared that ‘the Japanese economy is in a mild deflationary phase’.”
Source: Robin Harding, Financial Times, November 20, 2009.
Financial Times: Japanese export growth eases recession fears
“Strong demand from China and other Asian economies lifted Japanese exports, which last month fell at their slowest rate for a year, boosting hopes that the economy will continue to report healthy growth.
“In October, exports fell 23.2 per cent from a year earlier, compared with a 30.6 per cent decline in September, according to data released by the Ministry of Finance on Wednesday. The figure represented the smallest drop since October 2008, when exports fell 7.9 per cent.
“On a seasonally adjusted basis, the value of shipments rose for the third straight month by 2.5 per cent from September.
“Junko Nishioka, economist at RBS in Tokyo, said the fall in exports last month was smaller than expected and marked a ‘clear improvement’.
“‘It shows how rapidly the growth rate is improving. Overall, we can safely say that the worst is over and downside risk is limited,’ said Ms Nishioka.
“Japan’s economy grew at an annualised rate of 4.8 per cent in the third quarter, fuelled by a mix of stimulus-induced domestic demand, a bounceback in exports and rebuilding of inventories.”
Source: Justine Lau, Financial Times, November 25, 2009.
Financial Times: China banks prepare to raise capital
“China’s banks are preparing to raise tens of billions of dollars in additional capital to meet regulatory requirements following an unprecedented expansion of new loans this year, according to people familiar with the matter.
“China’s 11 largest listed banks will have to raise at least Rmb300bn ($43bn) to meet more stringent capital adequacy requirements and maintain loan growth and business expansion, according to estimates from BNP Paribas.
“China’s banking regulator has warned it would refuse approvals for expansion and limit banking operations if lenders did not meet new capital adequacy requirements, a move that has prompted the country’s largest state-owned banks to prepare capital-raising plans for next year and beyond.
“Expectations of giant cash calls from the listed Chinese banks spooked investors on Tuesday, helping to send the benchmark Shanghai Composite Index down 3.45 per cent on a day of record turnover on the Shanghai and Shenzhen markets.
“China’s banking regulator ‘is definitely aware of potential asset quality issues and is pushing for higher capital adequacy requirements to offset deterioration in asset quality’, according to Dorris Chen, an analyst with BNP Paribas.
“Following government orders to prop up the domestic economy in the face of the global crisis, Chinese banks extended a record Rmb8,920bn in loans in the first 10 months of the year, up by Rmb5,260bn from the same period a year earlier.
“This unprecedented loan expansion resulted in a record fall in their core capital adequacy rates from just over 10 per cent at the end of last year to 8.89 per cent by the end of September, a drop that worries regulators.”
Source: Jamil Anderlini, Financial Times, November 24, 2009.
Infectious Greed: China leaps to second spot in global science
“The latest Thomson ISI science data shows that China has leaped to second-spot worldwide in academic science, as measured by papers produced. The US still leads the way, at 340,000 publications per year (not shown), but China could surpass US production within five years at current rates of relative growth.
“Of course, paper production is only one measure. Citations matter at least as much, and that isn’t captured here. Nevertheless, it is striking stuff.”
Source: Paul Kedrosky, Infectious Greed, November 21, 2009.
MoneyNews: Roach - buy China after collapse
“Buy China, advises Morgan Stanley Asia chairman Stephen Roach - but only after it tanks following a market correction Roach says is long overdue.
“‘I think right now the markets have run too fast too far, liquidity-driven and they have moved out of alignment with what I think is a very sluggish underlying recovery in the global economy,’ Roach told CNBC.
“Roach says the Chinese have focused too much on its investment growths and depended too much on export sales.
“‘The crisis is a wake-up call that the external demand from the West won’t be there for a long time,’ Roach says, pushing China to find new sources of demand.
“‘Korea has shifted its major external market from America to China, as has Japan … so there’s a lot riding on the ability of the Chinese to stimulate this new source of internal demand that could benefit not just the Chinese, but the Koreans and the Singapore too,’ Roach notes.
“Overall, however, Roach remains bullish on China, seeing an upside in its services sector over the next 5 to 7 years.”
Source: Julie Crawshaw, MoneyNews, November 23, 2009.
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Risky assets last week again marched higher to the tune of economic data supporting the argument of a global economic recovery. A realization among investors that the economic transition from recession to recovery was gaining momentum resulted in many global stock markets and commodities scaling fresh peaks for the year.
Source: Steve Breen
The S&P 500 Index closed the week above the psychological 1,000 level, marking its highest level since November and capping four consecutive weeks of gains. And more upside lies ahead, said Abby Joseph Cohen, Goldman Sachs’ market strategist, who expects the Index to reach the 1,100 point by year end. (Is this a contrary indicator coming from a permabull?)
Many commodities such as crude oil, copper, aluminum, nickel, lead and zinc hit their highest levels of the year, not to mention sugar recording a 28-year peak. “The financial crisis has been addressed, the commodity crisis has not,” warned Goldman Sachs (via the Financial Times), predicting that this year’s rise in prices was “just the beginning” of another rally that was “ultimately likely to be even more extreme” than those seen in the past. However, the Baltic Dry Index - a measure of freight rates for iron ore and bulk commodities that correlates very well with base metal indices - has broken technical support on the downside and short-term weakness in metals prices looks likely, possibly as a result of the Chinese buying frenzy having come to an end.
While high-yielding commodity-linked and emerging-market currencies were in favor, the US greenback dropped to its weakest level since October before staging a rally on Friday after the announcement of the US employment data had pleased some traders (see comments in the “Economy” section below). Government bonds (with the exception of emerging markets) again sold off as the bond vigilantes cottoned on to the improved economic outlook.
The past week’s performance of the major asset classes is summarized by the chart below - a set of numbers that indicates continued investor appetite for risky assets (albeit with investment-grade and high-yield corporate bonds taking a breather).
Source: StockCharts.com
A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.
The MSCI World Index (+1.8%) and MSCI Emerging Markets Index (+1.1%) both made headway last week to take the year-to-date gains to +15.5% and an impressive +50.4% respectively. The US and other markets extended their rallies to four straight weeks in most instances, although some weakness crept in among developing countries such as China, India, Singapore and Taiwan. It is also noteworthy that emerging markets underperformed developed markets for the first time since the beginning of May. Could this be a first sign of a retrenchment in risk appetite?
Click here or on the table below for a larger image.
Stock market returns for the week ranged from top performers such as Bulgaria (+15.5%), Romania (+8.3%), Lithuania (+8.2%), Kazakhstan (+8.1%), Estonia (+8.0%) and the Czech Republic (+7.1%). These are all Eastern Europe countries playing catch-up as pundits came to the conclusion that the initial doomsday scenario for the region’s debt situation was not as bad as predicted. At the bottom end of the performance ranking, countries included Malta (‑5.8%), China (-4.4%), Singapore (-4.1%), Côte d’Ivoire (-3.9%), Greece (‑3.6%) and India (-3.3%).
After almost doubling since the beginning of the year and notching up seven straight weeks of gains, the Chinese Shanghai Composite Index declined by 4.4% last week - its worst performance for five weeks. The Index has broken its first level of support and it would not come as a surprise if lower Chinese equities serve as the catalyst for a pullback in global stock markets.
Source: I-Net Bridge
Of the 96 stock markets I keep on my radar screen, a majority of 74% (last week: 74%) recorded gains, 21% showed losses and 5% remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)
John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week were dominated by real estate funds, including iShares FTSE NAREIT Industrial/Office (FIO) (+19.0%), Cohen & Steers Realty Majors Index (ICF) (+17.8%) and SPDR DJ REIT Index (RWR) (+17.1%).
On the losing side of the slate, ETFs included ProShares Short Financials (SEF) (-10.2%), Vanguard Extended Duration Treasury (EDV) (-6.7%) and iShares Lehman 20-year Treasury Bond (TLT) (-4.6%). As a sector, biotechnology fared badly, as seen from the performance of iShares Nasdaq Biotechnology (IBB) (-3.5%).
As far as the credit markets are concerned, after having peaked at 4.82% on October 10, the three-month dollar LIBOR rate declined to a record low of 0.46% last week. LIBOR is therefore trading at 21 basis points above the upper band of the Fed’s target range - almost back to normal when compared to an average of 12 basis points in the year before the start of the credit crisis in August 2007.
The TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills) is a measure of perceived credit risk in the economy. Since the peak of the TED spread at 4.65% on October 10, the measure has declined to a 14-month low of 0.29% - a vast improvement and now actually below the 38-point average during the 12 months prior to the start of the crisis.
Source: Fullermoney.com
Still on credit, Floyd Norris said on his blog in The New York Times: “It is with a great sense of joy that I read today that Donald Trump is almost back in the casino business. So why do I feel joy at the news? If a casino company run by Mr. Trump can get credit, then the credit crunch must surely be over.”
The quote du jour this week concerns the US dollar and again comes from Richard Russell (Dow Theory Letters). He said: “Build a brick house. Then pull the bottom row of bricks out of the house, and what have you got? A wobbly wreck. The dollar is comparable to the bottom row of bricks in the US economy. Everything in this fair land from houses to stocks and bonds is denominated in dollars. But now the dollar is weak.
“The US Dollar Index is trading at a new low for the move - below its declining blue 50-day moving average. Worse, the 50-day average is well below its declining red 200-day average. Not a pretty technical picture. The BIG question: Is the dollar on its way to a major down-leg, or is the dollar just temporarily slipping? If it’s a big down-leg coming up, there’s going to be trouble, and the trouble will start with the bonds and with interest rates.”
Source: StockCharts.com
Other news is that the US Senate on Thursday approved a $2 billion extension of the government’s car sales incentive program, “Cash for Clunkers”, while the Federal Deposit Insurance Corp (FDIC) closed two more banks on Friday, bringing the tally of US bank failures in 2009 to 71 (96 since the beginning of the recession).
Also, according to the Financial Times, Bank of America is to pay $33 million to settle claims by US regulators that it made “materially false and misleading claims” to shareholders about bonuses that were paid by Merrill Lynch last year. Meanwhile, General Electric agreed to pay $50 million to settle the fraud charges brought by the Securities and Exchange Commission (SEC), accusing the company of bending its financial statements in 2002 and 2003 to boost its reported earnings, reported MarketWatch.
Next, a quick textual analysis of my week’s reading. No surprises here with the usual suspects such as “bank”, “market”, “prices”, “economy”, “government” and “recession” featuring prominently.
The key moving-average levels for the major US indices, the BRIC countries and South Africa (where I am based) are given in the table below. All the indices are trading above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines and therefore not threatening the bullish “golden crosses” established when the 50-day averages broke upwards through the 200-day averages.
Although these figures support the bullish case, one should bear in mind that some of the movements have been quite extreme, as borne out by the following:
• As far as mature markets are concerned, 76% are trading more than two standard deviations above their 50-day averages and 56% more than two standard deviations above their 200-day lines.
• Among emerging markets, 59% are trading more than two standard deviations above their 50-day averages and 68% more than two standard deviations above their 200-day lines.
These figures argue that some degree of reversion to mean is probably overdue. This could take the form of either a pullback or a consolidation (i.e. ranging) pattern. The June highs and July lows are also given in the table, as these levels define a support area for a number of the indices.
Click here or on the table below for a larger image.
Referring to my earlier comments about China, the graph below illustrates that for the fist time since mid-1999 emerging Asian stocks are trading at a premium of more than 35% to the 200-day moving average. This represents an overbought situation that is clearly not sustainable.
Source: US Global Investors - Weekly Investor Alert, August 7, 2009.
Considering the S&P 500’s ten economic sectors, Bespoke provides very useful “sparklines” from which one can see at a glance where sectors are trading relative to their normal ranges - one standard deviation above and below the 50-day moving average - over the last year. As shown below, nine out of ten sectors are currently trading in overbought territory, with most having just recently hit their most overbought levels of the last year. The energy sector is the only one not yet overbought, but getting close. “As you can see in the sparklines, most sectors hit their most oversold levels over the last year nearly ten months ago. It’s hard to believe that it has already been nearly a year since the crazy times of last September and October,” said Bespoke.
Source: Bespoke, August 4, 2009.
Turning to fundamentals, with the bulk of the Q2 earnings reports in the US now in, 67.9% of the companies have beaten earnings estimates and 37.6% both earnings and revenue estimates. But, according to Bespoke, the most bullish aspect of this earnings season has been guidance. “After three quarters where companies guiding lower far outnumbered companies guiding higher, the trend has reversed to the positive side. As shown, 8.4% of companies reporting earnings have raised guidance in Q2, while 6.1% of companies have lowered guidance. Just two quarters ago, 15.7% of companies lowered guidance, while just 2.7% raised guidance.”
Source: Bespoke, August 7, 2009.
The actual level of earnings nevertheless remains depressed, causing David Rosenberg (Gluskin Sheff & Associates) to comment as follows: “Based on past linkages between earnings trends and the pace of economic activity, believe it or not, the S&P 500 is now de facto discounting a 4.25% real GDP growth rate for the coming year. That is what we would call a V-shaped recovery. While it is possible, though in our opinion a low-odds event, it is doubtful that the economy is going to be better than that. So we have a market that is more than fully priced for a post-recession world - any further gains would suggest that we are moving further into the ‘greed’ trade.”
Looking at the next few weeks, my assessment remains as stated a few days ago: “I am of the opinion that stock markets have run away from fundamental reality and that a pullback/consolidation looks likely. Taking a slightly longer-term view, I think we are in a (possibly lengthy) bottoming-out phase as far as slow-growth (OECD) countries are concerned, but already in new (potentially volatile) uptrends regarding high-growth emerging and commodities-related markets.” Caution seems to be in order.
For more discussion on the direction of financial markets, see my recent posts “Global stock market moving averages hit full house“, “Bob Farrell’s 10 rules for investing“, “Bullion regains its glitter“, “Technical Talk: Balance bullish breadth with weak seasonal trends“, “Picture du Jour: Keep a close eye on lending standards“, and “Video-o-rama: Stabilization benefits risky assets“.
Economy
Business sentiment is continuing to improve across the globe. The results of last week’s Survey of Business Confidence of the World achieved its best level since early October, reported Moody’s Economy.com. Businesses’ broad assessments of current conditions and the outlook into 2010 have brightened meaningfully. However, despite the steady improvement in confidence, businesses are still very cautious and the Survey results remain consistent with a global economy that is still in recession.
Source: Moody’s Economy.com
“Global manufacturing is clearly on the rebound, with survey reports on Monday showing activity contracting at a significantly slower pace in the US and continental Europe, and UK industry back on a growth path. The upbeat results added to evidence that the world’s main economic regions stabilized in July, bringing closer the prospect of growth resuming,” said the Financial Times.
Considering hard data, the surplus on Germany’s foreign goods trade account rose to €11 billion on a seasonally adjusted basis in June, from a revised €10.2 billion in the previous month, according to the Federal Statistics Office. Exports rose at the fastest pace in almost three years. Although the surplus remains below the €18 billion recorded in June 2008, the outcome added to signs that Europe’s largest economy was emerging from recession.
The European Central Bank (ECB) left its monetary policy unchanged at a historical low of 1% in August, while the Bank of England (BoE) Monetary Policy Committee held its key repo rate steady at an all-time low of 0.5%, but increased the size of its asset purchase program by an additional £50 billion to £175 billion.
A snapshot of the week’s US economic reports is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)
Friday, August 7, 2009
• July employment report - moderation of jobless is noteworthy
Thursday, August 6, 2009
• Jobless claims data are mildly positive
Wednesday, August 5, 2009
• ISM Non-manufacturing Index shows mild decline
• Factory orders higher
Tuesday, August 4, 2009
• June pending home sales - more evidence that trough in sales is behind us
• Real consumption expenditures in reverse in June
Monday, August 3, 2009
• ISM Manufacturing Index - overall tone is positive
• Construction spending rebounds in June
Regarding Friday’s employment report being treated as a “green shoot” of major proportions, David Rosenberg said: “While it was by far the best jobs performance of the year, much of the better-than-expected tally in nonfarm payrolls reflected the bounce in auto production as well as the distortion from the federal census workers. Combined, these two influences effectively ‘added’ 100,000 to the headline number, so net-net, the consensus view of ‑325,000 was not as far off the mark as the market believed at first glance. It may be dangerous to extrapolate today’s report into a view that we are about to fully turn the corner on the job market front.”
Subsequent to the jobs report, interest rate futures moved to reflect a 25 basis-point increase in the Fed funds rate at the January meeting of the Federal Open Market Committee (FOMC). Markets are also pricing in a first quarter point rate hike for the BoE and the ECB by January and February respectively.
Nouriel Roubini (RGE Monitor) pointed out a few bright spots amid the global recession, as reported by Forbes. He said: “All economies have been affected by the crisis, but a combination of policy responses and strong fundamentals has given some countries, especially some emerging-market economies, a relative edge. These same strengths could lead these countries to perform better as the global recovery begins.
“What do these countries have in common? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in countercyclical fiscal and monetary policies - actions that were not possible in past crises.”
The countries identified by Roubini are Brazil, Australia, China, India, The Philippines, Indonesia, Poland, Norway, France, Canada, Egypt, Qatar and Lebanon.
Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.
|
Date |
Time (ET) |
Statistic | For |
Actual |
Briefing Forecast |
Market Expects |
Prior |
|
Aug 3 |
10:00 AM |
Construction Spending | Jun |
0.3% |
-0.4% |
-0.5% |
-0.8% |
|
Aug 3 |
10:00 AM |
ISM Index | Jul |
48.9 |
48.0 |
46.5 |
44.8 |
|
Aug 4 |
8:30 AM |
Personal Income | Jun |
-1.3% |
-1.0% |
-1.0% |
1.3% |
|
Aug 4 |
8:30 AM |
Personal Spending | Jun |
0.4% |
0.2% |
0.3% |
0.1% |
|
Aug 4 |
10:00 AM |
Pending Home Sales | Jun |
3.6% |
0.5% |
0.7% |
0.8% |
|
Aug 5 |
8:15 AM |
ADP Employment Change | Jul |
-371K |
-365K |
-350K |
-463K |
|
Aug 5 |
10:00 AM |
Factory Orders | Jun |
0.4% |
-0.5% |
-0.8% |
1.1% |
|
Aug 5 |
10:00 AM |
ISM Services | Jul |
46.4 |
48.5 |
48.0 |
47.0 |
|
Aug 5 |
10:30 AM |
Crude Inventories | 07/31 |
+1.67M |
NA |
NA |
+5.15M |
|
Aug 6 |
8:30 AM |
Initial Claims | 08/01 |
550K |
575K |
580K |
588K |
|
Aug 7 |
8:30 AM |
Nonfarm Payrolls | Jul |
-247K |
-370K |
-325K |
-443k |
|
Aug 7 |
8:30 AM |
Unemployment Rate | Jul |
9.4% |
9.7% |
9.6% |
9.5% |
|
Aug 7 |
8:30 AM |
Hourly Earnings | Jul |
0.2% |
0.1% |
0.1% |
0.0% |
|
Aug 7 |
8:30 AM |
Average Workweek | Jul |
33.1 |
33.0 |
33.0 |
33.0 |
|
Aug 7 |
3:00 PM |
Consumer Credit | Jun |
-$10.3B |
-$5.0B |
-$5.0B |
-$5.4B |
Source: Yahoo Finance, August 7, 2009.
Click here for a summary of Wells Fargo Securities’ weekly economic and financial commentary.
The Bank of Japan and the FOMC will make interest rate announcements on Tuesday (August 11) and Wednesday (August 12) respectively. US economic data reports for the week include the following:
Monday, August 10
None
Tuesday, August 11
Productivity, unit labor costs and wholesale inventories
Wednesday, August 12
Trade balance and Treasury budget
Thursday, August 13
Export and import prices, initial jobless claims, retail sales and business inventories
Friday, August 14
CPI, capacity utilization, industrial production and Michigan sentiment
Markets
The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.
Source: Wall Street Journal Online, August 7, 2009.
“Everyone is wrong in the markets at times. The difference between the great traders and the unsuccessful ones is in how long they stay wrong,” said Brett Steenbarger, editor of the TraderFeed blog and author of the books The Psychology of Trading, Enhancing Trader Performance and The Daily Trading Coach. I have the privilege of meeting with Brett, arguably one of the leading trading coaches, during his visit to Cape Town later this week and look forward to exchanging ideas with him. In the meantime, let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will keep the portfolios of Investment Postcards readers on target.
For short comments - maximum 140 characters - on topical economic and market issues, web links and graphs, you can also follow me on Twitter by clicking here.
That’s the way it looks from Cape Town (where plenty of sunshine makes it hard to believe that August is supposed to be a winter month).
Source: Tom Toles
Forbes: Are there bright spots amid the global recession?
“This week, I take a look at which countries have best weathered the global recession and credit crunch. All economies have been affected by the crisis, but a combination of policy responses and strong fundamentals has given some countries, especially some emerging market economies, a relative edge. These same strengths could lead the countries I highlight below to perform better as the global recovery begins, even if their growth rates remain well below 2003-07 trends.
“What do these countries have in common? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in countercyclical fiscal and monetary policies, actions that were not possible in past crises. In contrast, countries that borrowed heavily to finance domestic consumption in the days of easy money are now facing sharp economic contractions. Despite the relative strength of these countries, however, their ability to return to sustained growth will depend on structural reforms that support consumption.”
The countries are: Brazil, Australia, China, India, The Philippines, Indonesia, Poland, Norway, France, Canada, Egypt, Qatar and Lebanon.
Click here for the full article.
Source: Nouriel Roubini, Forbes, August 6, 2009.
Financial Times: Industrial output on the rebound
“Global manufacturing is clearly on the rebound, with survey reports on Monday showing activity contracting at a significantly slower pace in the US and continental Europe, and UK industry back on a growth path.
“The upbeat results added to evidence that the world’s main economic regions stabilised in July, bringing closer the prospect of growth resuming.
“‘Everyone is benefiting from improvements in all their export markets - so it is magnifying the impact,’ said Chris Williamson, chief economist at Markit, which produces purchasing managers’ surveys for Europe and Asia.
“However, a return to solid growth was still not certain in many parts of the world, economists warned. Much of the recent improvement reflected companies rebuilding inventories, and was boosted by China’s rebound, argued Marco Annunziata, chief economist at Unicredit. ‘I’m worried that the world economy doesn’t have the stamina to keep growing.’
“In the US, the July ISM manufacturing index rose 4.1 points to 48.94. This is the slowest pace of contraction since August 2008, before the collapse of Lehman Brothers, although still the 18th consecutive monthly decline. A figure below 50 marks the boundary between expanding and contracting activity.
“The eurozone manufacturing purchasing managers’ index was revised higher to show its second strongest rise since the survey began in 1998. But at 46.3 in July, up from 42.6 in June, the survey still suggested that recovery in the 16-country region was lagging behind that in the US and UK.
“Germany largely powered the eurozone’s improvement, reporting a record increase in its index and the first rise in new order volumes since June last year.
“But Markit described as ‘remarkable’ the turnround in the UK manufacturing index. The sector ‘has clearly pulled out of the nosedive it was in earlier this year’, said David Noble, chief executive of the Chartered Institute of Purchase and Supply, which co-produces the survey. The UK index rose from 47.4 in June to 50.8 in July, rising above the 50 level for the first time since March 2008.
“Japanese manufacturing is also expanding again, according to data last week, and Chinese manufacturing production rebounded further in July to rise at the fastest rate since May 2008, according to the country’s CLSA purchasing managers’ index. The index rose to 52.8 in July from 51.8 in June, marking the fourth consecutive month of expansion.”
Source: Ralph Atkins and Simone Baribeau, Financial Times, August 3, 2009.
Gillian Tett (Financial Times): The liquidity pipes remain clogged
“A decade ago, I was working as a reporter in Tokyo when I was asked to investigate the impact of Japanese-style quantitative easing. Back then, the Bank of Japan was pouring gazillions of yen into the money markets and politicians were angrily exhorting the Japanese banks to lend.
“Indeed, at one point, the Tokyo government even created quotas, which stipulated that banks should make a certain level of loans to worthy small enterprises to combat a pernicious credit crunch.
“But, when I examined what the Japanese banks were actually doing, the results were almost comical. In public the banks claimed they were lending to small enterprises; in reality some were only meeting the targets by lending to subsidiaries of Toyota.
“Faced with a political order to lend, in other words, Japanese banks were ducking round the rules - and the liquidity was notably not ending up where politicians (or central bankers) had hoped.
“Sound familiar? I am increasingly tempted to think so. In the last six months, European and US central banks have poured dizzying sums into the money markets and politicians have put pressure on the banks to lend. Last week, for example, Alistair Darling, UK chancellor declared his readiness to ‘get tough’ with banks that were failing to lend. On Thursday, the Bank of England triggered surprise by announcing an expansion of its quantitative easing scheme.
“But as I look at these endeavours, what springs to my mind is a vision of a plumber trying to force water into a domestic waterflow system whose pipes are badly clogged, if not broken. To be sure, liquidity is entering the banking pipes. Some is also trickling out at the end: banks still seem willing to lend to big, reputable companies (the Western equivalent of Toyota, as it were.)
“However, numerous small or risky corporate ventures in the west currently complain that they cannot get loans. Consumers are facing rising borrowing charges too. Thus, in the West, as in Japan a decade ago, the liquidity is still not necessarily flowing to those who need it most. Those pipes remain clogged, even as water is forced in.
“That, in turn, raises a fascinating question for investors and policy makers: where will all that ‘backflow’ of unusued liquidity, as it were, go? Right now, some seems to be sitting in a quasi stagnant pool, deposited into reserve accounts with central banks.
“Much also seems to be leaking into the government bond markets, or moving directly there (as in the case of the British central bank’s direct purchase of gilts). That is helping to keep long-term yields low, echoing the pattern seen previously in Japan.
“But the longer that the banking pipes remain partly or fully clogged and the governments keep pouring water into the system, the more that investors and policy makers need to watch what this liquidity ‘backflow’ might do; and not just in the gilts market, but other, less obvious corners of the global asset markets too.”
Source: Gillian Tett, Financial Times, August 6, 2009.
Floyd Norris (The New York Times): Donald is back
“If Donald Trump can borrow money to finance casinos, then the credit crunch must really be over.
“It is with a great sense of joy that I read today that Donald Trump is almost back in the casino business.
“The article reports that Mr. Trump and his daughter, Ivanka, along with ‘an affiliate of Beal Bank Nevada’, have bid $100 million to take Trump Entertainment Resorts out of bankruptcy. Shareholders will get nothing, I am sure, and those who previously lent to Mr. Trump’s casino enterprise will suffer as well.
“My favorite paragraph in the article is:
“‘My previous investment in the company was destroyed by excessive and restrictive debt,’ Mr. Trump said. ‘This reorganization changes all that. I am pleased that the reorganization affords me an opportunity to make a new investment and help revive a company that has borne my name, but not performed to my standards.’
“I like the phrase ‘excessive and restrictive debt’, spoken as if Mr. Trump had nothing to do with the company being burdened by debt. As for restrictive, I’m sure he did chafe at any restrictions at all.
“So why do I feel joy at the news?
“If a casino company run by Mr. Trump can get credit, then the credit crunch must surely be over.
“Have you defaulted on a mortgage loan? Or maybe two? Fear not. That leaves you with a better record than Trump casino companies.”
Source: Floyd Norris, The New York Times, August 4, 2009.
Financial Times: “Cash for clunkers” gets $2 billion boost
“The US ‘cash for clunkers’ programme, which pushed July car sales higher after a record-breaking slump, tripled in size on Thursday as the Senate extended it by $2 billion.
“Hostile amendments were easily defeated in a final vote of 60-37, following sustained White House and industry pressure.
“President Barack Obama commended the Senate for ‘acting in a bipartisan way’ with the vote.
‘Now, more American consumers will have the chance to purchase newer, more fuel-efficient cars and the American economy will continue to get a much-needed boost,’ he said.
“‘Cash for Clunkers’ has been a proven success: the initial transactions are generating a more than 50% increase in fuel economy; they are generating $700 to $1,000 in annual savings for consumers in reduced gas costs alone.
“‘This programme gives a much needed jolt to our economy and our manufacturers at a critical time,’ said Harry Reid, Senate Majority leader, after the vote.
“The initial $1 billion allocated to the programme has been nearly exhausted just days after its start. The House of Representatives voted last week to boost it with energy efficiency funds from the $787 billion economic stimulus package - the measure under the Senate’s consideration on Thursday.”
“Under the scheme, customers trading in a vehicle for one with more miles per gallon can qualify for a government subsidy of up to $4,500.
“‘This is a wildly popular programme and enormously successful and it helps many segments of our economy,’ Ray LaHood, secretary of transportation, said this week, adding that more than $700 million had already been spent subsidising almost 200,000 new vehicles.
“The extra $2 billion will allow 500,000 more vehicles to be traded in for more fuel efficient replacements.”
Source: Daniel Dombey, Financial Times, August 6, 2009.
Clusterstock: Thanks Cash-for-Clunkers!
“It wasn’t pretty, and it wasn’t by much, but Ford managed to report year-over-year sales growth in July. It was the first such gain since 2006, and they were helped in large part by Cash-For-Clunkers, which powered blistering car sales in the final week of the month. Of course, all those sales will come out of future sales … but that’s another problem.”
Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Business Insider, August 3, 2009.
Financial Times: Wall Street profits from trades with Fed
“Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.
“The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.
“However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.
“The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.
“‘You can make big money trading with the government,’ said an executive at one leading investment management firm. ‘The government is a huge buyer and seller and Wall Street has all the pricing power.’
“A former official of the US Treasury and the Fed said the situation had reached the point that ‘everyone games them. Their transparency hurts them. Everyone picks their pocket.’
“The central bank’s approach to securities purchases was defended by William Dudley, president of the New York Fed, which is responsible for market operations. ‘We believe that opting for transparency is a greater good,’ he said. ‘If we didn’t have transparency, we’d be criticised on other grounds.’
“Barney Frank, chairman of the House financial services committee, said the potential profiteering may be part of the price for stabilising the financial system.”
Source: Henny Sender, Financial Times, August 2, 2009.
Clusterstock: Finance jobs vanish into thin air
“The severe bloodletting in the construction industry is slowly waning. The pace of layoffs is coming well off its peak, according to ADP, probably since companies don’t have much more room to cut. But financial services? Despite the improved picture, the layoffs continue at a steady clip, with little month-over-month improvement.”
Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Businessinsider, August 5, 2009.
CNN Money: Recession is over, says economist
“When economist Dennis Gartman told subscribers of his newsletter in the fall of 2007 that the US was entering a recession, the Dow was at 13,500, and the official government call wouldn’t come for another full year.
“Now he’s ahead of officials and forecasters again. According to Gartman, the US recession that started in December 2007 is done.
“‘We saw it happen two weeks ago - it’s over,’ he said in a recent interview.
“Other well-known economists and market watchers have recently been hinting at the same thing. NYU economics professor Nouriel Roubini, also known as ‘Dr. Doom’ for his prescient predictions of the worldwide downturn, says the US recession will end later this year. Treasury Secretary Timothy Geithner said last weekend that the recession is easing. And President Obama told Univision last week, ‘We maybe are beginning to see the end of the recession.’
“But Gartman says the Great Recession ended in July.
“‘Too many people get too arcane and have too many arguments about why an economy goes into or comes out of a recession,’ he says. ‘Having done this for 35 years, I’ve fallen into using just a couple of indicators that characteristically have done a very good job.”
“‘The first is a spike downward in the number of weekly jobless claims, which unlike the unemployment rate, focuses on newly laid off workers. Gartman doesn’t seek a specific percentage decline (such as when a 20% decline denotes a bear market), but instead he waits for a sharp downward trend. ‘It’s like the definition of pornography: I’ll know it when I see it,’ he says.
“Gartman then looks at a ratio from the Conference Board: the percentage of coincident economic indicators to lagging indicators. The ratio measures changes in the economy by dividing coincident (or real time) economic indicators like industrial production and personal income by lagging indicators, like the unemployment rate. So, if during a recession coincident indicators increase at a faster clip than lagging indicators, the economy is expanding and the ratio rises.
“As Gartman notes, that ratio has been rising three months in a row. It increased to 90.5 in June from 89.4 in March. According to Gartman and Conference Board data, the fall in jobless claims and a rise in the ratio correlate with the end of recessions since 1959.
“He expects economic indicators to slowly turn positive by October, but he’s careful to remind investors that ‘the news is horrible at the bottom of a recession. It’s going to be terrible for another couple months’. Because it’s a lagging indicator, Gartman expects unemployment to rise into 2010.”
Source: Scott Cendrowski, CNN Money, August 6, 2009.
MoneyNews: Greenspan - recession over, growth ahead
“Former Federal Reserve Chairman Alan Greenspan thinks the economy has already turned around.
“Greenspan told ABC News on Sunday he’s ‘pretty sure we’ve already seen the bottom’.
“Now, companies must restock quickly to get ahead of demand, which he sees spiking higher in the third quarter.
“‘It strikes me that we may very well have 2.5% in the current quarter,’ he said.
“The economic contraction slowed in the second quarter, to 1% annualized, down sharply from a 6.4% drop in the first three months of the year. Forecasters had expected negative 1.5% growth in the second quarter.”
Source: Greg Brown, MoneyNews, August 3, 2009.
Rebecca Wilder (News N Economics): The oddities of this recession
“It is not a rule that the personal saving rate rises during a recession, just in this one. Take a look at the cumulative trajectory of the personal saving rate for this Great Recession compared to its predecessors, as represented by the ‘average recession’ since 1960.
“The chart illustrates the cumulative growth of the saving rate throughout the recession period and during the twenty-four months (of recovery) following the recession for the current cycle and the average over the latest 7 cycles. Note: convenience only, I call the end of the current cycle at point 0 or June 2009. I do not believe that the recession is actually over in June.
“Recently, the average saving rate, which is estimated monthly by the Bureau of Economic Analysis, surged since the onset of the longest recession in the post-War era. Consequently, the sharp ascent of the marginal saving rate is wreaking havoc on personal consumption spending, and thus, GDP.
“Interestingly, current saving trends mark opposing behavior relative to the ‘average’ recession occurrence, which is the indexed trajectory of the average saving rate spanning the 7 recessions since 1959. The saving rate drops during the average recession, and stabilizes thereafter. So far, the saving rate has a -50% correlation with the saving trend during ‘average recession’, and is moving against the broader historic trend. If saving continues its ascent, one can discount quite significantly the possibility of an ‘average recovery’ to a recession this deep (i.e. V).”
Source: Rebecca Wilder, News N Economics, August 5, 2009.
Bill King (The King Report): Taxes - statistic that yields the truest economic picture
Source: Bill King, The King Report, August 3, 2009 (hat tip: Matt Trivisonno).
MoneyNews: Stiglitz - Obama will have to raise taxes
“President Barack Obama will have to raise taxes if he wants to push through his healthcare reforms, says Nobel Laureate economist Joseph Stiglitz.
“And that’s not necessarily a bad thing - if tax increases take place down the road when economic recovery is more prevalent, he says.
“‘If we get a more balanced view of our balance sheet, we’ll realize that if we spend our money well then these great extra expenditures are going to actually make our economy more productive in the future,’ Stiglitz told Yahoo! Finance.
“Spending on technology, education and infrastructure ‘will generate revenues that will allow us in the future to pay back any borrowing or lower taxes’.
“President Obama said during his campaign that he would not raise taxes to finance healthcare reform. Yet his leading economists, Treasury Secretary Tim Geithner and National Economic Council Director Larry Summers, recently hinted that tax hikes may be necessary.
“Stiglitz says we’re already paying for not reforming healthcare by helping the uninsured with their medical costs - for instance, when hospitals write-off indigent care but raise prices on paying patients with health coverage.
“‘Right now we’re often paying for it in hidden charges so it’s like a tax but it’s a hidden tax,’ Stiglitz said.”
Source: Forrest Jones, MoneyNews, August 4, 2009.
Asha Bangalore (Northern Trust): July employment report - moderation of jobless is noteworthy
“The civilian unemployment rate edged down to 9.4% from 9.5% in July. The decline in the unemployment rate has to be viewed with caution because the dip in the jobless rate was due to a sharp drop of the labor force in July (-422,000), while employment declined 155,000. The payroll adjusted estimate of employment, a volatile series, rose 70,000 in July. There is a good chance that the August report will show an increase in the labor force after two monthly declines and a higher unemployment rate.
“Nonfarm payrolls fell 247,000 in July after an upwardly revised decline of 443,000 in June. The July drop in employment is the smallest decline since August 2008. The loss of jobs was smaller in most categories compared with the trend seen in recent months. The average loss of jobs in the May-July period is 331,000, nearly half of the pace recorded in the February-April span (-617,000). On a year-to-year basis, seasonally unadjusted payroll employment fell 4.18% during July vs. a 4.19% drop in June, probably the cycle high reading.
“Conclusion - The Fed policy statement of August 12 is most likely to reflect the mildly bullish nature of the July employment report and second quarter GDP report. The Fed is on hold for all of 2009, unless there is a robust turnaround in economic conditions. The small drop in the unemployment rate during July is not the beginning of consecutive monthly declines of the jobless rate, it occurred because a large number left the workforce in July. A significantly higher unemployment rate is nearly certain by the middle of 2010. Having said that, the improvements in the employment numbers are noteworthy as the economy is now recording smaller job losses than in the prior few months.”
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 7, 2009.
CNBC: July jobs report analysis
“Employers cut 247,000 jobs in July, far less than expected and the least in any month since last August, providing evidence the economy is turning. Mark Zandi of Moody’s Economy.com, Diane Swonk of Mesirow Financial, Robert Barbera of ITG and the CNBC news team share their analysis.”
Source: CNBC, August 7, 2009.
Asha Bangalore (Northern Trust): ISM non-manufacturing index shows mild decline
“The ISM Non-Manufacturing Survey results of July show a mild decline in the pace of activity. The composite index fell to 48.1 from 48.6 in the prior month. The index tracking new orders declined to 46.4 in July from 47 in the prior month. The responses of survey participants stressed ‘uncertainty’ and ‘caution’ about business conditions.”
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 5, 2009.
Asha Bangalore (Northern Trust): Factory orders higher
“Factory orders rose 0.4% in June compared with a 1.1% gain in the prior month. The June increase in factory orders reflects a revised 2.2% drop in bookings of durables and a 2.7% jump in orders/shipments of non-durables. The inventories-shipment ratio fell to 1.42 in June from 1.45 in the prior month. The cycle peak for the inventories-shipments ratio appears to have occurred in January 2009 (1.46). Factory inventories have declined for ten consecutive months ended June. Therefore, as the economy gathers steam a large increase in inventories should not be surprising.”
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 5, 2009.
Asha Bangalore (Northern Trust): ISM manufacturing report - overall tone is positive
“The ISM manufacturing survey for July shows a distinct improvement, with several of the sub-indexes posting readings exceeding 50. Index levels above 50 indicate growth, while readings below 50 denote a contraction in factory activity. In July, indexes tracking production, new orders, supplier deliveries, inventories, exports, backlogs, prices, and imports posted above 50 readings. The employment (45.6 vs. 40.7 in June) and inventories indexes (33.5 vs. 30.8) also advanced in July but they are holding below 50.0. Historically, the composite index crosses fifty at the end of a recession or several months after a trough is established.
“As the table shows, with the exception of the early part of the post-war period, the ISM composite index and indexes measuring new orders, production, and supplier delivery recorded readings above 50.0 after the trough of a business cycle. If history is a guide, today’s survey results of the factory sector sets up grand expectations for the economy and the factory sector. Additional data will be needed to confirm that the factory sector and economy are both turning around.”
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 3, 2009.
Asha Bangalore (Northern Trust): Jobless claims data are mildly positive
“Initial jobless claims fell 38,000 to 550,000 during the week ended August 1. Continuing claims, which lag initial claims by one week, rose 69,000 to 6.31 million. The insured unemployment rate has held steady at 4.7% for four straight weeks.
“Recipients of the Extended Benefits and Emergency Unemployment Compensation should be added to continuing claims to get the whole picture. Claims under these two programs lag initial jobless claims by two weeks and continuing claims by one week. The sum of seasonally adjusted continuing claims and seasonally unadjusted claims under the two special programs stands at 9.48 million, with the peak at 9.72 million (week ended June 27). Continuing claims have peaked and the year-to-year change of seasonally unadjusted initial claims is showing a decelerating trend.”
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 6, 2009.
The New York Times: Prolonged aid to unemployed is running out
“Over the coming months, as many as 1.5 million jobless Americans will exhaust their unemployment insurance benefits, ending what for some has been a last bulwark against foreclosures and destitution.
“Because of emergency extensions already enacted by Congress, laid-off workers in nearly half the states can collect benefits for up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s. But unemployment in this recession has proved to be especially tenacious, and a wave of job-seekers is using up even this prolonged aid.
“Tens of thousands of workers have already used up their benefits, and the numbers are expected to soar in the months to come, reaching half a million by the end of September and 1.5 million by the end of the year, according to new projections by the National Employment Law Project, a private research group.
“Unemployment insurance is now a lifeline for nine million Americans, with payments averaging just over $300 per week, varying by state and work history. While many recipients find new jobs before exhausting their benefits, large numbers in the current recession have been unable to find work for a year or more.
“Calls are rising for Congress to pass yet another extension this fall, possibly adding 13 more weeks of coverage in states with especially high unemployment. As of June, the national unemployment rate was 9.5%, reaching 15.2% in Michigan. Even if the recession begins to ease, economists say, jobs will remain scarce for some time to come.
“‘If more help is not on the way, by September a huge wave of workers will start running out of their critical extended benefits, and many will have nothing left to get by on even as work keeps getting harder to find,’ said Maurice Emsellem, a policy director of the employment law project.”
Source: Erik Eckholm, The New York Times, August 1, 2009.
Paul Kasriel (Northern Trust): Real consumption expenditures in reverse in June
“Real personal consumption expenditures (PCE) contracted by 0.1% in June after being unchanged in May. But real PCE is set to rev into forward gear in July due, in part, to the Car Allowance Rebate System (CARS), aka, ‘cash for clunkers’. This program was operative for only the last week of July, but it helped light motor vehicle sales accelerate 15.8% in July to an annualized pace of 11.2 million units. With clunkers lined up outside new car dealers’ lots waiting for their turn to be crushed, the Senate is likely to go along with the House and authorize an extra $2 billion to the program. This should help boost or maintain car and truck sales in August.
“Thus, it is likely that real PCE will see some growth in the third quarter. In turn, it is highly likely that real GDP as a whole will see some growth in the third quarter. But some of the expected third-quarter PCE and real GDP growth will have been ‘borrowed’ from the fourth quarter.
“Nominal personal income, which grew 1.3% in May, contracted by 1.3% in June. A lot of seniors got a one-time $250 gift from Uncle Sam in May, which helped boost May’s personal income. June personal income was held back not only because seniors did not get another special gift but also because nominal wage and salary income dipped by 0.4%. With the 0.5% increase in nominal PCE and the 1.3% decline in nominal personal income, the saving rate slipped back to 4.6% in June vs. its 6.2% level in May.
“In fits and starts, the personal saving rate is headed back up toward its more normal level of 8%. As households venture out along the investment risk curve with their past savings and future saving, away from government-guaranteed deposits, personal saving will translate into increased corporate spending.”
Source: Paul Kasriel, Northern Trust - Daily Global Commentary, August 4, 2009.
Paul Kasriel (Northern Trust): June pending home sales - more evidence that trough in sales is behind us
“Signed contracts on sales of existing homes increased 3.6% in June after an upwardly-revised 0.8% increase in May. The June data marks the fifth consecutive monthly increase in pending home sales. The pending-home-sales index is now at a two-year high. Of course, one of the reasons the sales are pending is that the buyers have to qualify for mortgages, a more difficult endeavor today than was the case a few years ago when the only requirement was a pulse - and that was more of a guideline than an absolute rule.
“I remain skeptical that the lows in house prices have been put in. But as for sales, I do believe we have seen the lows for this housing depression. There is a lag between when sales and starts pick up and when the GDP component ‘residential investment expenditures’ respond. But if we can believe Monday’s June nominal construction expenditures data, which showed an increase in residential construction expenditures, we are at or near a low for this GDP component.”
Source: Paul Kasriel, Northern Trust - Daily Global Commentary, August 4, 2009.
MoneyNews: Buffett - Housing problems over in 18 months
“Warren Buffett thinks most of the country’s housing woes will be over by the end of next year.
“‘We’re not too good at avoiding challenges, but we’re marvelous at surmounting them,’ Buffett told a crowd that had gathered in Des Moines to help a family-founded firm unveil one of the 10 largest furniture showrooms in the country.
“Looking around the store, he added, ‘I don’t see how anyone can be a pessimist about the future of the country.’
“On the mounting federal debt, he observed, ‘It is not dangerous where we are now. It may be dangerous where we are going.’
“And Buffett had this to say about taxes: ‘I would make the tax rates a little more progressive. I would help my cleaning lady and take a little more out of me.’”
Source: Julie Crawshaw, MoneyNews, August 3, 2009.
MoneyNews: Deutsche Bank - half of US mortgages underwater by 2011
“The percentage of US homeowners who owe more than their house is worth will nearly double to 48% in 2011 from 26% at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.
“Home price declines will have their biggest impact on prime ‘conforming’ loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.
“‘We project the next phase of the housing decline will have a far greater impact on prime borrowers,’ Deutsche analysts Karen Weaver and Ying Shen said in the report.
“Of prime conforming loans, 41% will be ‘underwater’ by the first quarter of 2011, up from 16% at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties’ value, up from 29%, it said.
“‘For many, the home has morphed from piggy bank to albatross,’ the analysts said.”
Source: MoneyNews, August 6, 2009.
The Epoch Times: US food stamp list tops 34 million
“For the first time, more than 34 million Americans received food stamps, which help poor people buy groceries, government figures said on Thursday, a sign of the longest and one of the deepest recessions since the Great Depression.
“Enrollment surged by 2% to reach a record 34.4 million people, or one in nine Americans, in May, the latest month for which figures are available.
“It was the sixth month in a row that enrollment set a record. Every state recorded a gain in participation from April. Florida had the largest increase at 4.2%.
“Food stamp enrollment is highest during times of economic stress. The US unemployment rate of 9.5% is the highest in 26 years.
“Average benefit was $133.65 in May per person. The economic stimulus package enacted earlier this year included a temporary increase in food stamp benefits of $80 a month for a family of four.”
Source: The Epoch Times, August 6, 2009.
The New York Times: Despite bailouts, business as usual at Goldman
“Lloyd Blankfein has a story about the cataclysm that nearly brought down all of Wall Street. It goes something like this: One by one, lesser banks were swept away by the financial storm of 2008. And as the floodwaters rose, no one, not even Goldman Sachs, seemed safe.
“The question, in Mr. Blankfein’s eyes, was how high the water would rise. But Washington stepped in with all those bailouts before the surge reached Goldman.
“The story, which was recounted by several friends and colleagues, represents a sobering private admission from Mr. Blankfein, Goldman’s chief executive.
“Publicly, it is a different story. Now that Goldman is minting money again, the bank insists that it was never in any real danger. Mr. Blankfein, in an e-mail message this week, disputed his private account, saying Goldman’s survival was never in doubt. Other Goldman executives reject the notion that the bank was rescued at all.
“‘We did not have a near-death experience,’ said Gary Cohn, Goldman’s president. The government saved the financial industry as a whole, but it did not save Goldman Sachs, he said.
“Rarely has the view from inside a company been so at odds with the view outside it. Could Goldman Sachs have lived if all those other giant banks had failed? Could it alone survive financial Armageddon?
“Goldman executives are dismissive, even defiant, when critics argue that the bank is playing a heads-we-win, tails-you-lose game with American taxpayers. And yet the questions keep coming. Last month the story of Goldman’s postcrisis success - and conspiracy theories surrounding it - leapt from the business pages to the cover of Rolling Stone.
“The idea that nothing has changed for Goldman Sachs strikes many outsiders as absurd. In this era of mega-bailouts, Goldman is widely perceived, on Wall Street and in Washington, as too big and important to fail. If its bets pay off, Goldman profits and its employees get rich. If its bets go bad, ultimately taxpayers will have to pick up the bill.
“‘Many observers on the market believe that Goldman and others of its size now have a free insurance policy,’ said Elizabeth Warren, the chairwoman of the Congressional oversight panel for the $700 billion bailout fund. ‘Whether they do or not is less important than the fact that many in the market believe they do. That means at some level Goldman is playing with the American taxpayers’ future.’
“Goldman executives dispute suggestions that high-stakes market gambles are behind its big profits - $3.4 billion in the second quarter. And they are dumbfounded when people like Ms. Warren suggest companies like Goldman, which paid back its bailout money last month, now operate with an implicit taxpayer guarantee.
“After so many wrenching changes on Wall Street and in the economy, it might come as a surprise that the post-bailout Goldman is virtually indistinguishable from the pre-bailout one.”
Source: Jenny Anderson, The New York Times, August 5, 2009.
Financial Times: SEC set to target flash trading
“The US Securities and Exchange Commission is preparing to clamp down on lightning-fast ‘flash’ trades made on electronic trading systems amid growing concerns that the practice puts some investors at a disadvantage.
“Mary Schapiro, SEC chairman, said on Tuesday that she had instructed her staff to find ‘an approach that can be quickly implemented to eliminate the inequity that results from flash orders’.
“The SEC has been looking into flash orders - in which some exchanges allow traders a look at share order flows a fraction of a second before the broader market - as part of a review of so-called ‘dark pools’, anonymous electronic trading venues that do not display public quotes for stocks. Ms Schapiro’s statement underscores the agency’s intention to respond quickly to market concerns.
“Flash orders have stoked the ire of some lawmakers, including New York Senator Charles Schumer, who last month started urging the SEC to ban the practice altogether. Mr Schumer said on Tuesday that Ms Schapiro had personally assured him that the agency plans to put a ban in place.
“‘It is also important to make sure flash orders aren’t just the tip of an iceberg lurking in the dark reaches of the market,’ he said. ‘There is a lot of mystery about what goes on in dark pools and in the realm of high-frequency trading generally.’
“Any proposals involving flash orders would have to approved by the full commission and be open to public comment.”
Source: Joanna Chung and Michael Mackenzie, Financial Times, August 4, 2009.
Financial Times: Market for leveraged loans hits 12-month high
“The prices of the most traded risky European and US loans have reached their highest levels for more than a year, in a further sign of improving conditions in credit markets.
“Over the past week, European leveraged loan prices reached 89.11% of face value, a high not seen since July 10, 2008, according to Standard & Poor’s LCD and Markit.
“The same is true for riskier US loans, for which the average price bid rose above 90% of face value for the first time since June 24, 2008.
“Growing confidence in an economic recovery was further highlighted by a fall in a key barometer of financial stress, the spread between three-month dollar Libor - the rate banks charge each other to borrow - and three-month US Treasury bills. This so-called TED spread fell to its lowest level for two years on Monday - 29.3 basis points - having reached a high of 464 basis points last October.
“The loans rally has been fuelled by growing demand for credit this year. David Shaw, co-head of European leveraged finance at Barclays Capital, said the rise in secondary leveraged loan pricing would support the issue of new leveraged loans.
“The rally in loan prices above a key threshold of 80-85% of face value will also reduce pressure on collateralised loan obligations, complex funds that pool loans, which at the height of the credit boom accounted for 60% of the demand for leveraged loans.”
Source: Anousha Sakoui, Financial Times, August 3, 2009.
Mark Schofield (Citi): Bond yield curve is flattening
“Last week’s US Treasury auction results point to the start of a new trend for the yield curve - a sustainable and structural flattening, says Mark Schofield, head of interest rate strategy at Citi.
“He notes that two dismal auctions of short-dated bonds, which some took as a sign that demand for US debt was drying up, were followed by a blow-out sale of seven-year notes, which were swept up at well below the prevailing yield.
“‘We have seen similar behaviour at the bottom of virtually every rate cycle over the past 20 years,’ Mr Schofield says. ‘But this time, the size of the demand shift was probably exaggerated by very low yields at the short end.’
“He says the move further out along the curve by yield-oriented investors has effectively left them taking on duration risk for the wrong reasons at the wrong point in the cycle.
“‘Once the cycle turns, yields will rise sharply, although longer maturities should hold up until shorter paper offers something closer to normal long-term average returns.
“‘Investors who think the Fed staying on hold will keep the curve steep and who expect to have time to reposition once the Fed’s intentions become clearer would do well to remember that in the 2003-5 cycle, the curve completed 30% of its eventual flattening before the first rate hike and 65% within six months of the first move.
“‘This flattening could ultimately rival the moves of 1992-4 and 2003-5.”
Source: Mark Schofield, Citi (via Financial Times), August 4, 2009.
Barnaby Martin (Bank of America-Merrill Lynch): A good year for corporate bonds
“The rally in the corporate bond market might have reached its fourth month but sufficient catalysts remain for another half-year of strong returns, says Barnaby Martin, credit strategist at Bank of America-Merrill Lynch.
“‘Bond spreads have yet to retrace back to pre-Lehman levels, leaving a strong valuation proposition still on the table,’ he says. ‘Credit fund inflows have jumped to very high levels and new cash is likely to push secondary market spreads tighter over the summer as supply tails off.’
“Mr Martin also points to a more favourable macro outlook as upgrades to earnings and economic growth filter through. While acknowledging that there are risks from growth being either too weak or too strong, he says a moderate recovery scenario should be good for credit.
“‘For bullish investors, one decision to make is whether to buy lower-rated bonds or to extend in maturity. While lower-rated credit still offers value, investors should not overlook duration.
“‘Bond curves are currently very dislocated due to poor secondary market liquidity and new issue focus. As liquidity improves in the secondary market, we expect curves to normalise, just as credit default swap curves have.’
“‘In the 2002-2004 recovery, long-dated bonds handsomely outperformed lower-rated bonds. We believe increasing duration makes sense in many issuers.’”
Source: Barnaby Martin, Bank of America-Merrill Lynch (Financial Times), August 6, 2009.
Bespoke: Credit default swap prices down but still elevated
“The credit default swap (CDS) became a buzzword during the financial crisis as their prices soared and some firms that wrote them had to be bailed out in part because they would never be able to actually pay them out if default actually occurred (think AIG). Below we provide a chart of an index that measures CDS prices for 125 North American investment grade credit vehicles. As shown, the index rose from 50 to more than 250 from September 2007 to early 2009. Since then, however, the index has declined 38.86% as the S&P 500 has risen 48%. While the drop has been significant, it’s still above pre-Lehman bankruptcy levels. While many investors are looking beyond the problems that occurred last fall and winter, credit market traders have not yet priced in a full recovery on Wall Street.”
Source: Bespoke, August 5, 2009.
Financial Standard: Faber - danger signs ahead but bargain stocks a-plenty
“Leading contrarian investor Dr. Marc Faber wears his ‘ultra bearish’ cap in his Australian visit, predicting another financial crisis could happen in the next five to 10 years - but even that doesn’t mean there aren’t any investment opportunities, particularly in Asia.
“Visiting Australia as a guest presenter for Treasury Asia Asset Management (TAAM), Dr. Faber said that the Federal Reserve’s policy in the past decade only added to the market volatility. By keeping rates artificially low and pumping money into the system, equities, markets and economies will face ‘unintended consequences’, including another financial crisis in the next five to 10 years.
“This crisis has not been fully cleansed out of the system, he said.
“He repeated his bearish views of the US dollar, which he believes will approach zero (not overnight, but it will happen) while many Asian currencies will rise on the back of a continually improving Chinese currency.
“Against that environment, he highlights various investment themes including going long on gold and silver (sovereign funds will likely buy gold when interest rates are around zero), corporate bonds and Asian equities (many markets in Asia are near 20-year lows).
“Tapping on socio-demographic trends, Faber is bullish on healthcare stocks in Asia, infrastructure stocks, commodities, REITs in emerging economies and tourism stocks (’every hotel will soon have a Chinese restaurant in it,” he said).
“As uncorrelated investments to more established equity markets, Faber also sees opportunities in plantations and farmland (in Latin America and Ukraine), Japanese banks and new regions including Cambodia and Mongolia.
“In short, Faber believes that based on how economies and markets fared over the last few years, a new world has emerged where it is now the poor countries driving global consumption and global markets.
“But for many fund managers who believe they can take a breather now that the GFC has passed, Faber believes US and European stock markets are still overvalued relative to the lows reached in previous recessions.
“‘The ultimate crisis is still ahead of us,’ he said.”
Source: Michelle Baltazar, Financial Standard, August 6, 2009.
Bespoke: Key ETF performance
“Over the last month, all asset classes except for the dollar and fixed income have been on a tear. There are lots of green arrows in the table below that show the recent performance of key ETFs.
“The S&P 500 tracking SPY ETF is up 14.24% over the last month, and most foreign ETFs are up even more. Australia (EWA), Brazil (EWZ), Canada (EWC), Germany (EWG), Mexico (EWW) and Russia (RSX) are all up more than 20%.
“Materials (XLB) and Financials (XLF) have been the two best performing sectors over the last month with gains of about 25%. Telecom (IYZ), Health Care (XLV) and Utilities (XLU) have gone up the least. And most commodities ETFs are up more than 10% as well.
“If you’ve been long and strong, you’ve got to have a smile on your face after a run like this.”
Source: Bespoke, August 5, 2009.
Bespoke: Year to date sector performance
“With the S&P 500 now up 10.77% year to date, there are still two sectors that are down for the year - Utilities and Telecom. These are defensive sectors so the fact that they’re underperforming in an up market isn’t surprising. Only three sectors are outperforming the S&P 500 so far this year - Technology (+37.13%), Materials (+31.37%), and Consumer Discretionary (19.32%). While the Financial sector has gained the most since the March 9 bottom, it is only up 5.88% year to date since it was down so much in the first two months of the year. If the rally continues, look for the outperformers to continue to do well and the defensive sectors to underperform.”
Source: Bespoke, August 3, 2009.
Eoin Treacy (Fullermoney): Impact of low interest rates on stock markets
“The global stock market universe can be broken up into two distinct groups; those that bottomed in October and November and those that hit important lows in March 2009. Subscribers will be familiar with this separation which we have highlighted repeatedly. Interest rates have fallen to record low levels across the OECD and have pulled back significantly in a number of other economies.
“In a bull market, rising interest rates serve to eventually choke off speculative demand and are often one of the prime reasons behind an index or sector topping out. Counter wise, following a bear market, when interest rates have arguably bottomed conditions are ripe for asset prices to appreciate. This spread of the US 10yr - US 2yr is currently testing its 20yr highs and is indicative of the condition of the US yield curve where banks can earn 250 basis points by borrowing at the short end and lending at the long end. At some point in the future, this spread will become inverted once more but that is likely to be a number of years from now.
“Interest rates remain a tailwind for stock markets at current levels … and currently offer no impediment to stock markets. This will not always be the case and as they advance over time, they will offer an increasingly powerful headwind.”
Source: Eoin Treacy, Fullermoney, August 6, 2009.
Bespoke: Q2 sector earnings growth
“While stocks have reported much better than expected numbers this earnings season, the year over year change in earnings has still been pretty bad. Overall, S&P 500 earnings are down 31.7% versus Q2 ‘07. Energy has seen the biggest decline in earnings at -67.9% (finally Financials don’t top the list), followed by Materials (-65.1%), Financials (-45.9%), and Industrials (-34.1%). These four are all underperforming the S&P 500 in terms of earnings. Six sectors are doing better than the index as a whole, and only two have seen year over year earnings growth - Health Care and Utilities.”
Source: Bespoke, August 3, 2009.
Bespoke: Guidance turns positive
“Probably the most bullish aspect of this earnings season has been guidance. After three quarters where companies guiding lower far outnumbered companies guiding higher, the trend has reversed to the positive side. As shown, 8.4% of companies reporting earnings have raised guidance in Q2, while 6.1% of companies have lowered guidance. Just two quarters ago, 15.7% of companies lowered guidance, while just 2.66% raised guidance.”
Source: Bespoke, August 7, 2009.
MoneyNews: Biggs - S&P will climb another 22%
“The Standard & Poor’s 500 Stock Index will climb by 22% as the global economy emerges from its recession buoyed by improving consumer spending and housing markets, according to investor Barton Biggs.
“Japanese stocks will also be attractive buys, also on expected improved consumer spending there as well as increased exports to China.
“‘I’m still bullish,’ Biggs, who runs New York-based hedge fund Traxis Partners, told Bloomberg radio.
“‘We’re going to have a pretty strong recovery in earnings both this year and next year.’
“In the United States, cost cuts at companies will eventually lead to better earnings. In Japan, elections are scheduled to take place next month and the new government will inherit an economy that is ripe for recovery.
“‘They’re going to really try to stimulate consumer spending,’ Biggs said of the new Japanese government.”
Source: Forrest Jones, MoneyNews, August 5, 2009.
Richard Russell (Dow Theory Letters): What I really think is going on
“We tend to forget that every move, large or small, in the stock market is entitled to a correction. I believe that the rise from the March lows is simply a correction of the huge bear market decline which preceded it.
“Normally, a secondary correction will recoup one-third to two-thirds of the ground lost during the preceding bear leg. To refresh your memory, the preceding bear leg carried from 14 164.58 on October 9, 2007 to 6 547.05 on March 9, 2009 - a total loss of 7,617 points. A one-third correction would carry the Dow to 9,083. A two-thirds recoup of the bear market losses could take the Dow back to 11,619.
“Subscribers should know that following the famous 1929 crash which took the Dow from 381 to 198, a correction took the Dow back to 294 in early 1930. That correction turned the entire investment community bullish. The public piled back into the market. However, the correction had nothing to do with an improving economy. In fact, the great 1929-1930 correction was followed by the greatest market wipe-out and economic depression in history.
“I don’t think the current rally is part of a new bull market for the following reasons:
(1) At the March lows there were none of the typical indications of a bear market bottom.
(2) At the March lows, valuations were far too high, and totally atypical of a bear market bottom.
(3) At the March lows sentiment was far too optimistic.
(4) Lowry’s Buying Power Index was too high compared with other bear market bottoms.
(5) Weeks after the supposed March ‘bear market bottom’, Lowry’s Buying Power Index dropped to a new low - below its low at the March ‘bottom’. In the 76-year history of Lowry’s, this has never happened following any true bear market bottom.
“To sum up, I don’t think the March low was the beginning of a new bull market, rather I believe it was the start of a correction of the preceding huge bear market decline. Then why is the bull in the box? Answer: Because the secondary trend has clearly turned up.
“Because of the strange background, I’m now being very cautious, this despite the Dow Theory bull signal. My suggestion is that my subscribers do the same. The market will always be there, and there will be more attractive times to load up on stocks. Remember, at this time we have a background of a weak dollar and weak bonds (meaning rising interest rates).
“Could the current upward correction be a sister to the 1929-1930 correction that followed the great crash? Is it a prediction of better times or is it just a normal correction following a huge bear market decline? I believe it is part of a normal correction of the 7,617 Dow points lost during the bear market decline of 2007 to 2009. There’s something spooky about the action - I don’t care for it.”
Source: Richard Russell, Dow Theory Letters, August 4, 2009.
Bespoke: Percentage of stocks above 50-day moving averages
“There are currently 435 stocks in the S&P 500 trading above their 50-day moving averages (87%). While this is a high number indicating broad market breadth, it still hasn’t reached the high seen during the spring rally when it got all the way up to 92%. During that rally, the percentage of stocks above their 50-days remained around 85% to 90% for a couple of months. We’ve just gotten back up to 87% in the last few days, so the bulls are hoping for another round of internal strength.
“The Financials have roared all the way back into first place based on this breadth indicator with a reading of 96%. Many investors had given up on the sector after it jumped out of the gate so fast and then stalled. Over the last couple of weeks, the Financials have definitely caught a second wind. Consumer Discretionary has also come back quite a bit, and it ranks second with a reading of 93%. The rest of the sectors are in the 80s except for Telecom, which is at 56%.”
Source: Bespoke, August 6, 2009.
Reuters: Lingering fear likely to hold up a wall of cash
“The sustainability of 2009’s financial market recovery will hinge to a large degree on investors continuing to switch out of their cash holdings, a move that is by no means certain.
“Fund trackers EPFR Global note that in the first six months of this year there were net outflows from money market funds amounting to $193 billion, some $107 billion alone in June.
“This is what has been behind much of the rally that has seen global equities gain more than 50% since early March and other riskier assets such as corporate and emerging market debt soar.
“The question is whether it will continue at the same pace.
“There is certainly the potential for it to do so. The cash redemptions seen this year compare with a massive net inflow into money markets of nearly $461 billion in 2008.
“So although survey sampling makes direct comparisons difficult, it is a reasonable assumption to make that around 60% of last year’s flight-to-quality inflows are still in place.
“If that low-yielding but relatively safe money were to tip into equity markets or other risk assets, a new global bull market would no longer be a question but a fact.
“Ranged against this, though, is a combination of factors - from the type of investor in cash to just plain fear of losses - that is likely to mitigate against a sudden flood of new investment.
“Indeed, there is some evidence - from both EPFR and Merrill Lynch’s latest fund manager survey that the pace of cash redemption has slowed or even reversed very slightly.”
Source: Jeremy Gaunt, Reuters, July 29, 2009.
BCA Research: US dollar - no long-term bottom
“The sharp rally at the end of 2008 pushed the trade-weighted US dollar to overvalued levels. As a result, the dollar still has more cyclical downside that should eventually see it weaken to deep undervalued levels.
“Since the breakdown of Bretton Woods in the early 1970s and the move to floating exchange rates, there have been only two major bottoms in the dollar: The late 1970s and the early 1990s. These bottoms shared two common features. First, the dollar had fallen to deep undervalued levels. Second, the US current account balance had improved markedly, moving to a small surplus position.
“These two conditions are not currently in place. While the US current account deficit has narrowed, it remains much wider than the levels seen at the dollar lows of the late 1970s and early 1990s. Moreover, the recent improvement in the US current account is entirely cyclical and the structural outlook has actually worsened with the plunging national savings rate. Specifically, the falling national savings rate means that US trend growth will be lower and it will come with a wider current account deficit.
“Bottom line: We do not believe the conditions for a major low in the dollar are in place yet. The dollar is not undervalued and due to the weak cyclical state of the economy, continued US policy reflation should see the trade-weighted dollar index overshoot to new lows in the months ahead. Stay strategically short dollars.”
Source: BCA Research, August 4, 2009.
Daragh Maher (Calyon): Sterling the recovery currency
“Sterling is the most undervalued of major currencies against the dollar argues Daragh Maher, FX strategist at Calyon.
“Mr Maher says sterling is undervalued using both a fundamental economic equilibrium approach and purchasing power parity analysis.
“Furthermore, speculators still remain positioned for further sterling weakness against the dollar. This means there is greater scope for the pound to appreciate if sentiment turns positive towards the currency as investors scramble to cover those positions.
“Mr Maher says the combination of a sharp contraction in global demand, a collapsing UK housing market and a UK banking crisis all took their toll on activity in the UK economy, and the pound was punished accordingly.
“But conditions have changed, he argues.
“‘Policy stimulus is helping drive a recovery in the UK,’ says Mr Maher. ‘The catalyst for a re-think on sterling is already evident with early signs of improvement in the economic cycle and the financial sector.’
“Low interest rates have eased pressure on many indebted households, while house prices have begun to stabilise. The credit crunch may also be easing, with UK banks indicating an intent to increase credit availability to households.
“‘We continue to target $1.75 in sterling against the dollar by the year-end, and $1.90 by the end of 2010.’”
Source: Daragh Maher, Calyon (via Financial Times), August 3, 2009 .
TheStreet.com: Gold bulls rev up
“Natalie Dempster, Head of Investment for the World Gold Council, expects a strong gold market for the rest of 2009 driven by investor demand and dollar weakness.”
Source: TheStreet.com, August 6, 2009.
Bloomberg: Roubini says commodity prices may rise in 2010
“Commodity prices may extend their rally in 2010 as the global recession abates, said Nouriel Roubini, the New York University economist who predicted the financial crisis.
“‘As the global economy goes toward growth as opposed to a recession, you are going to see further increases in commodity prices especially next year,’ Roubini said today at the Diggers and Dealers mining conference in Kalgoorlie, Western Australia. ‘There is now potentially light at the end of the tunnel.’
“Roubini, chairman of Roubini Global Economics and a professor at NYU’s Stern School of Business, joins former Federal Reserve Chairman Alan Greenspan in seeing signs of recovery. Commodity prices gained the most in more than four months on July 30 as investors speculated that the worst of the global recession has passed and consumption of crops, metals and fuel will rebound.
“‘The things he was saying provide good indicators for our business,’ Martin McDermott, a manager for metals project development at SNC-Lavalin Group Inc., Canada’s biggest engineering and construction company, said at the conference. ‘The commodities that we’re involved with, being copper, nickel, gold, iron ore, all seem to have positive signs and we hope to take advantage of that.’
“Roubini predicted on July 23 that the global economy will begin recovering near the end of 2009, before possibly dropping back into a recession by late 2010 or 2011 because of rising government debt, higher oil prices and a lack of job growth.
“China will meet its target of 8% growth in gross domestic product this year, Roubini said.
“A rise in commodity prices may help the Australian dollar, Roubini said today, adding he is ‘bullish’ on the currency. Countries including Australia, New Zealand and Canada have so-called commodity currencies because raw materials generate more than 50% of their export revenues.
“‘The recovery will continue slowly, slowly over time,’ Roubini said today. The global economy may contract 2% this year and swing to growth of 2.3% next year, he said.”
Source: Rebecca Keenan and Jason Scott, Bloomberg, August 3, 2009.
Financial Times: Raw material price rises “just the beginning”
“‘The financial crisis has been addressed, the commodity crisis has not,’ warned Goldman Sachs on Thursday, predicting that this year’s rise in prices was ‘just the beginning’ of another rally which was ‘ultimately likely to be even more extreme’ than those seen in the past.
“‘The reality is that the commodity problem is one of supply shortage due to years of under-investment,’ said Goldman. ‘This chronic problem has been exacerbated during the financial crisis by tight credit conditions and large price declines, which impacted producers.’
“Goldman predicted that, as the global economy recovered, commodity markets would return to the same conditions as mid-2008 when severe supply constraints drove prices sharply higher.
“Goldman said a co-ordinated policy response, similar to that which followed the financial crisis, would be required to resolve commodity shortages.”
Source: Chris Flood, Financial Times, August 6, 2009.
The Motley Fool: A conversation with T. Boone Pickens
“It’s no secret that America is at an energy crossroads. Energy prices are only expected to increase, and relying on foreign oil could pose a national security threat. Renewable energy seems like a possible alternative, especially with government incentives - yet capital markets aren’t permitting it right now.
“To gain some perspective on the multitude of issues that plague the energy space, I spoke with T. Boone Pickens, oil tycoon, champion of the Pickens Plan, and chairman of hedge fund BP Capital.
“Pickens says he’s moving forward with the Pickens Plan, despite having to postpone his wind farm project because of clamped capital markets and difficulties surrounding transmission of energy generation. Aside from the plan, the billionaire says the Commodities Futures Trading Commission’s (CFTC) potential regulation to limit trading in the oil futures markets doesn’t faze him. Pickens says he thinks oil is going to $75 a barrel by year-end - and higher in the longer term.
“We also discussed Pickens’ favorite energy companies to invest in. After crashing in 2008, Pickens - who has a 20% stake in his hedge fund - has seen his fund’s energy futures fund rise 79% this year, while his energy equity fund is up 14%.”
Click here for an edited transcript of the interview.
Source: Jennifer Schonberger, The Motley Fool, August 4, 2009.
Financial Times: BoE boosts quantitative easing programme to £175 billion
“Fresh doubts about the strength of the UK economic recovery emerged on Thursday after the Bank of England’s rate-setting committee surprised markets by voting to pump an extra £50 billion into the economy.
“The bank’s monetary policy committee voted to extend its so-called quantitative easing programme of buying government and corporate bonds from £125 billion to an unexpectedly large £175 billion, while holding interest rates at 0.5%.
“After the meeting, Mervyn King, governor of the Bank and Alistair Darling, chancellor of the exchequer exchanged letters about the expansion of the asset purchase facility - the government programme of gilt and corporate bond acquisitions.
“The decision came despite an array of brighter economic data this week, with upbeat survey results suggesting that the economy was emerging from recession. But the central bank said the ‘recession appears to have been deeper than previously thought’ in the UK, although it noted that the pace of contraction had moderated.
“Stocks rose as investors bet that the extra support would help the banks while gilt yields fell in the belief that the extra funds signalled any interest rate rise was even further away than had been thought.
“The European Central Bank also kept rates on hold as it made clear it had no intention of stepping up action to combat continental Europe’s recession.
“Jean-Claude Trichet, president, hinted strongly that the ECB forecast would be revised next month to show quarterly positive growth returning earlier than mid-2010, as envisaged. ‘A flat level of growth’ was possible this year, he said in a Reuters interview on Thursday night.”
Source: Vanessa Houlder and Jennifer Hughes, Financial Times, August 6, 2009.
MoneyNews: China will not tighten money until west does
“China will not tighten monetary policy before developed nations do so, because it first needs a recovery in exports to support the economy, a government researcher said in remarks published on Friday.
“Zhao Zhongwei, an economist at the Chinese Academy of Social Sciences, a government think-tank in Beijing, also said that easy credit was vital to stimulating private sector investment to drive the economy after a boost from public spending wears off.
“The timing of China’s exit strategy from its loose monetary policy would largely depend on the pace of its export recovery, he said.
“‘China’s external demand is still facing uncertainty, despite recent signs of a pick-up in developed economies,’ he said in an article published in the official China Securities Journal.
“China has begun to mop up liquidity at the margins after a record surge in bank lending fueled concern about bubbles forming in the country’s stock and property markets.
“Separately, another senior government researcher was cited by Xinhua news agency as saying that China is considering new ways to promote private sector investment in tandem with Beijing’s massive stimulus program.”
Source: Reuters (via MoneyNews), August 7, 2009.
Financial Times: China’s growth figures fail to add up
“China’s gross domestic product figures are among the world’s most closely watched since they can move markets or boost hopes of an imminent recovery.
“But the latest set of first-half numbers provided by provincial-level authorities are far higher than the central government’s national figure, raising fresh questions about the accuracy of statistics in the world’s most populous nation.
“GDP totalled Rmb15,376 billion ($2,251 billion) in the first half, according to data released individually by China’s 31 provinces and municipalities, 10% higher than the official first-half GDP figure of Rmb13,986 billion published by the National Bureau of Statistics.
“All but seven of the regions reported GDP growth rates above the bureau’s first-half figure of 7.1%. At the start of the year, Beijing set 8% as China’s growth target for the year.
“With the rest of the world looking to China as a beacon of expansion, the discrepancy is a reminder that statistics there are often unreliable and manipulated regularly by officials for personal and political purposes.
“In recent years, provincial figures have suggested consistently the world’s third-largest economy is bigger than Beijing’s published estimate, but the discrepancy appears to have widened this year.
“Even state-controlled media reports and editorials have in recent days raised questions over their accuracy.
“The Global Times, controlled by the People’s Daily, the Communist party mouthpiece, reported that the public reacted with ‘banter and sarcasm’ to NBS figures showing average urban wages in China rose 13% in the first half to $2,142.
“It quoted an online poll showing 88 per cent of respondents doubted the official numbers.
“An editorial on Tuesday in the China Daily, the government’s English-language mouthpiece, quoted another survey that found 91% of respondents sceptical of official data, up from 79% in 2007.”
Source: Jamil Anderlini, Financial Times, August 4, 2009.
Tags: Abby Joseph Cohen, Baltic Dry Index, BRIC, Canada, Commodities, Consecutive Weeks, Copper Aluminum, Copper Nickel, Economic Transition, Economy Section, Emerging Markets, Employment Data, ETF, Financial Times, Freight Rates, Gaining Momentum, Global Stock Markets, Goldman Sachs, Government Bonds, Greenback, India, Market Strategist, Metal Indices, Metals Prices, oil, Risky Assets, Steve Breen, Term Weakness
Posted in Emerging Markets, Gold, Markets | No Comments »
The Baltic Dry Index - a measure of freight rates for iron ore and bulk commodities - rose non-stop for 23 sessions until Wednesday, before declining somewhat yesterday. This surge represents a gain of 517% from its low on December 5. But one needs to put this in perspective: the Index fell by 94% from its high in May 2008, and therefore still needs to rise by a further 188% to match the previous peak.
More importantly, this rise seems to be more than a snap-back rally and points to better economic tidings. This becomes apparent when considering the close relationship between China’s Purchasing Managers Index (PMI) for New Export Orders and the Baltic Dry Index, showing both indices turning sharply higher.
Source: Plexus Asset Management (based on data from I-Net Bridge)
Also, the improvement in China’s PMI (with the composite Index back in expansionary territory above 50) and the Baltic Dry Index is consistent with the improvement in the Metals Index. (See my recent post “Secular bull in commodities remains intact“.)
Source: Plexus Asset Management (based on data from I-Net Bridge)
Tags: Asset Management, Baltic Dry Index, Bridge, Cape Town, Commodities, Composite Index, Export Orders, Freight Rates, Higher Source, Iron Ore, Metals Index, Perspective, Pmi, Postcards, Purchasing Managers Index, Relationship, Sessions, Snap, Target, Tidings
Posted in Commodities, Markets | No Comments »
Government bonds dominated action on financial markets during the past holiday-shortened week, as angst about inflation and massive issuance propelled yields to six-month highs in the US, Europe and Japan.
Bonds and other safe-haven assets such as the US dollar were out of favor as signs of a bottoming of global economies, albeit tentative, emboldened investors’ appetite for reflation trades like equities and commodities, including oil and precious metals.
Source: CXO Advisory Group
In addition to the major stock market indices rising for a third consecutive month, some of the other milestones achieved during the past week were the following:
• The S&P 500 Index rose by 5.3% in May for a three-month performance of +25.0% - the biggest three-month gain since August 1938.
• The Dow Jones Industrial Index advanced by 4.1% and 20.4% for May and the three-month period respectively - its largest three-month return since November 1998. (The last straight three-month gain was from August to October 2007, when the Index reached its bull market peak).
• The US dollar declined to a five-month low against the euro, losing 6.6% during May. The buck’s declines was even more pronounced against high-yielding currencies such as the Australian dollar (-9.4%) and the New Zealand dollar (-11.3%).
• The yield spread between two- and ten-year Treasury Notes reached a record 275 basis points on Wednesday before narrowing to 254 basis points by the close of the week.
• The Reuters-Jeffries CRB Index increased by 13.8% during May - its best monthly gain since 1974.
• The Baltic Dry Index - measuring freight rates of iron ore and bulk commodities - climbed every day in May to post its biggest monthly advance (+95.6%) on record.
• The price of West Texas Intermediate Crude recorded its largest monthly increase (+29.7%) since March 1999.
• Silver surged by 26.8% for the month - its strongest performance for 22 years. (Gold bullion advanced by 10.2% during May, and platinum by 8.2%.)
Back to long-term bonds. According to the Financial Times, Mike Lenhoff, chief market strategist at Brewin Dolphin Securities, said: “Bond markets may be telling us to expect inflation but, more importantly, I think they are telling us that policy makers the world over will succeed with their efforts to reflate the global economy.
“The trend of yields on corporate debt has been down, and that on Treasuries up, implying diminishing risk premiums - which is just what you would expect if markets are banking on recovery.”
The week’s performance of the major asset classes is summarized by the chart below.
Source: StockCharts.com
The MSCI World Index (+1.7%) and the MSCI Emerging Markets Index (+6.6%) last week added to the previous week’s gains to take the year-to-date returns to +5.4% and a massive +36.3% respectively.
Although the major US indices experienced declines on Monday and Wednesday, the weekly scoreboard ended in positive territory, as seen from the movements of the indices: S&P 500 Index (+3.6%, YTD +1.8%), Dow Jones Industrial Index (+2.7%, YTD -3.1%), Nasdaq Composite Index (+4.9%, YTD +12.5%) and Russell 2000 Index (+5.0%, YTD +0.4%).
The Dow remains the only major US index still in the red for the year to date - and, along with the FTSE 100, one of the few global indices in this unenviable position.
Click here or on the table below for a larger image.
Source: StockCharts.com
As far as non-US markets are concerned, returns ranged from top performers Macedonia (+10.8%), Croatia (+10.2%), Nigeria (+9.9%), Namibia (+8.5%) and Peru (+7.8%), to the Czech Republic (-6.6%), Denmark (-5.7%), Saudi Arabia (-4.4%), Latvia (-4.2%) and Côte d’Ivoire (-3.5%), which experienced headwinds. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)
Emerging markets (especially the BRIC countries) are showing mature markets a clean pair of heels, as can be seen from the rising trend line of the MSCI Emerging Markets Index relative to the Dow Jones World Index since late October. The fact that developing countries are outperforming the developed ones is a sign that global investors are taking more risk - a necessary ingredient for stock markets in general to show a further improvement.
Source: StockCharts.com
John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the leaders for the week included Claymore/Delta Global Shipping (SEA) (+10.5%), iShares MSCI Hong Kong (EWH) (+10.4%) and HOLDRS Merrill Lynch Market Oil Service (OIH) (+10.4%). Poor performers were all things “short”, with notable laggards being ProShares Short MSCI Emerging Markets (EUM) (-4.5%), ProShares Short QQQ (PSQ) (-4.1%) and ProShares Short Russell 2000 (RWM) (‑3.5%).
Further confirmation that the various central bank liquidity facilities and capital injections are having the desired effect of unclogging credit markets, comes from the Goldman Sachs’s Financial Stress Index (FSI). This index includes four factors related to the degree of impairment of financial markets: counterparty risk (US dollar 3-month LIBOR-OIS), liquidity risk (mortgage-backed security [MBS] to treasury repo differentials), refunding risk (commercial paper outstanding) and broader risk aversion (percentage of monies held in money-market mutual funds in relation to equity market capitalization).
As shown in the graph below, the FSI is now at its lowest level since the beginning of the credit crisis in August 2007.
Source: Goldman Sachs - Strategy Matters, May 15, 2009.
The decline of the US dollar and the rise in bond yields took on new momentum during the past few weeks. Deepening anti-dollar sentiment caused bets against the greenback on the Chicago Mercantile Exchange to rise to their highest level since the onset of the financial crisis, reported the Financial Times.
Source: StockCharts.com
Richard Russell (Dow Theory Letters) said: “The US Dollar Index is sitting on what I term ‘the edge of the cliff’. If the dollar falls apart, we’re dealing with a whole new story - it will affect almost all investments, US and foreign. The sliding dollar is already putting pressure on Treasury bonds, particularly the long-term maturities. This is causing our creditors (think China) to cut back.” The graph below shows that the sovereign debt bubble may be in the midst of bursting.
Source: StockCharts.com
The higher Treasury yields had a negative impact on mortgage rates, with the 30-year fixed rate increasing by 29 basis points to 5.27% on the week and the 15-year fixed rate by 25 basis points to 4.87%, as indicated by Bankrate.com. Yields on mortgage bonds for the first time exceeded the levels at which they were trading before the Fed’s announcement of expanding Treasury purchases to reduce lending rates. This raises the question of whether the Fed might soon increase its Treasury buy-backs.
The quote du jour comes from the “out-the-box” analyst Marc Faber who argued that the US economy would enter “hyperinflation” approaching the levels in Zimbabwe. “I am 100% sure that the US will go into hyperinflation,” Faber said in an interview with Bloomberg. “The problem with government debt growing so much is that when the time comes and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”
In other news, according to The Washington Post, senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a mishmash of bodies that failed to prevent banks from plunging into the worst financial crisis since the Great Depression.
Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “financial”, “gold”, “dollar”, “banks” and “credit” featured prominently. Surprisingly, “bonds” did not make the cloud despite playing a key role in market movements over the past few days.
Zeroing in on the US stock markets, this week’s survey of investor sentiment from the American Association of Individual Investors (AAII) shows an increase in both bearish and bullish sentiment. Bespoke reports that in the last week bullish sentiment increased from 33.7% to 40.4%, whereas bearish sentiment climbed from 45.4% to 48.6%. Bears therefore still outnumber bulls and are at their highest level since March 12.
Source: Bespoke, May 28, 2009.
An analysis of the moving averages of the major US indices shows all the indices above their 50-day moving averages, with the Nasdaq Composite after last week’s gains now also above the key 200-day line and the early January high. The highs of May 8 (already breached by the Nasdaq) are the most immediate targets to the upside, whereas the levels from where the rally commenced on March 9 should hold in order for base formations to remain in force.
Click here or on the table below for a larger image.
Eoin Treacy (Fullermoney) said: “… the logical areas for indices to encounter resistance are near round numbers. For the S&P, this would be 950 or 1,000. The FTSE 100 is currently encountering supply beneath 4,500. For India, 15,000 is the pertinent number. Brazil is currently in the region of 53,000, and if it breaks upwards from here, the next logical area for people to look at is 60,000.”
Adam Hewison of INO.com has again prepared another of his popular technical analyses - this time on the British pound, oil and gold bullion. Click here to access the short presentation.
Richard Russell, who has taken the stand that we are experiencing a bear market rally, said: “Lowry’s valuable statistics have been available for over 70 years. Normally, as a bear market nears its final low, Lowry’s Selling Pressure Index sinks dramatically, thereby providing evidence that the supply of stocks for sale is sinking. The Selling Pressure Index continues to decline after the bottom has passed. This is NOT what has happened before or since the March 9 lows.
“On the low of March 9 Lowry’s Selling Pressure Index stood at 884. At yesterday’s close the Selling Pressure Index stood at 868, only 14 points lower than it was on March 9. Meanwhile, on March 9 Lowry’s Buying Power Index stood at 120. At yesterday’s close, Buying Power was at 156, which was a gain of 36 points from the March 9 low.
“To move the stock market higher in a healthy way, Buying Power must rise while Selling Pressure must decline. As things stand, there’s still too much Selling Pressure (supply) built into this market.”
With the first-quarter earnings reporting season now winding down, analysts are shifting their focus to Q2. Albert Edwards, Société Générale’s strategist, observes (via Barron’s) that bottom-up company analysts forecast an unprecedentedly mild contraction in profit margins in the midst of the worst recession since the Great Depression. “This just doesn’t make sense to us. Analysts are ‘anchoring’ on recent unprecedented highs in margins as the new norm, instead of viewing them as bubble nonsense never to be seen again.” Time will tell whether the consensus earnings expectation for the S&P 500 of a 34.7% decline for Q2 2009 versus Q2 2008 is too optimistic.
As General Motors moved closer to a bankruptcy filing, possibly on Monday, I couldn’t help recalling the statement by former GM CEO “Engine Charlie” Watson: “What’s good for the country is good for General Motors, and vice versa.” Oh well.
For more discussion on the direction of stock markets, also see my recent posts “Video-o-rama: higher bond yields raise caution“, “Why Jeremy Grantham changed his mind“, “Dollar’s slide hurting foreign investors“, “Goldman: Past the worst?” and “Technical talk: S&P 500 testing resistance“. (Also, Donald Coxe’s webcast has been updated for May 28 and makes for good listening. This can be accessed from the sidebar of the Investment Postcards site.)
Twitter
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those not doing so already, you can follow my “tweets” by clicking here. The Twitter posts also appear on my Facebook page and in the sidebar of the Investment Postcards site.
Economy
“Sentiment among global businesses remains very poor, but it continues to slowly improve. Confidence has moved measurably higher since mid-March and is now close to where it was last November. Businesses are notably more upbeat about the outlook towards the end of this year …,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. The global economy remains mired in recession according to the Survey results, but the recession is becoming less intense.
Source: Moody’s Economy.com
“Taken separately, one can find many reasons not to rely on survey results, especially those from consumers. But put them together, and global survey results indicate that economic stabilization is afoot,” said Rebecca Wilder (News N Economics).
As seen from the chart below, the consumer and business survey results for the US, Japan and Germany have been improving for several months now, with the US showing a sizeable increase in May. The Eurozone has just seen its first improvement in economic sentiment since May 2007.
Source: News N Economics
Considering hard data, signs have also emerged that the global economy is stabilizing. Examples include a rebound in Japanese industrial production, the first rise in German retail sales in four months, and a rise in UK house prices in May.
Turning to the US, a snapshot of the week’s economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)
May 29
• Q1 real GDP preliminary estimate - minor revisions, message is unchanged
May 28
• New Home Sales flat in April, inventories are shrinking slowly
• Jobless Claims fall but continuing claims continue to advance
• Durable Goods Orders were weak in April, Defense Orders lifted total bookings
May 27
• Sales of Existing Homes moved up, but inventories remain elevated
May 26
• Chicago National Activity Index sends an upbeat message
• Consumer Confidence Index posts significant jump in May
• Case-Shiller Home Price Index - noteworthy price movements, but more is required
Referring specifically to US housing, John Mauldin (Thoughts from the Frontline) said: “Housing in many areas is starting to once again become affordable (see chart below) to more and more Americans and even first-time home buyers. The cure for the housing crisis is actually lower prices, as that brings more and more potential home buyers into the market. While housing sales are still quite depressed, what are selling are homes in foreclosure, as buyers perceive that there are bargains. And they are right.”
Source: Moody’s Economy.com
In his weekly Forbes column, Nouriel Roubini (RGE Monitor) commented as follows: “The crucial issue facing us is not whether the global economy will bottom out in the third or fourth quarter of this year, or in the first quarter of next year. It’s whether the global growth recovery, once the bottom is reached, will be robust or weak over the medium term - say 2010-11. … one cannot rule out a sharp snapback of GDP for a couple of quarters, as the inventory cycle and the massive policy boost lead to a short-term growth revival. My analysis, however, suggests that there are many yellow weeds that may lead to a weak global growth recovery over 2010-11.”
On a related note, Gillian Tett (Financial Times) asked whether one should expect a “V”-shaped recovery, or a scenario more like a “U” or a “W”. “Many years ago, when I was a rookie reporter, I learnt the Pitman system of shorthand. And it just happens that the half-squashed, asymmetrical ‘W’ pattern that I am struggling to describe is almost identical to the shorthand sign for ‘bank’.
“So there you have it: as long as we avoid a government bond crisis, my best prognosis is for a ‘bank’ shaped recovery-cum-stagnation, at least as depicted by shorthand. It is a fitting twist for a crisis that started with the shadow banks; perhaps the Gods of finance (and journalism) have a sense of humor after all,” said Tett.
Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.
|
Date |
Time (ET) |
Statistic |
For |
Actual |
Briefing Forecast |
Market Expects |
Prior |
|
May 26 |
9:00 AM |
S&P/Case-Shiller Home Price Index |
Mar |
-18.70% |
NA |
-18.4% |
-18.67% |
|
May 26 |
10:00 AM |
May |
54.9 |
43.0 |
42.6 |
40.8 |
|
|
May 27 |
10:00 AM |
Apr |
4.68M |
4.65M |
4.66M |
4.55M |
|
|
May 28 |
8:30 AM |
Durable Goods Orders |
Apr |
1.9% |
0.0% |
0.5% |
-2.1% |
|
May 28 |
8:30 AM |
Durables, Ex-Transport |
Apr |
0.8% |
-0.5% |
-0.3% |
-2.7% |
|
May 28 |
8:30 AM |
05/23 |
623K |
620K |
628K |
636K |
|
|
May 28 |
10:00 AM |
Apr |
352K |
365K |
360K |
351K |
|
|
May 28 |
11:00 AM |
Crude Inventories |
5/22 |
-5.41M |
NA |
NA |
-2.10M |
|
May 29 |
8:30 AM |
(preliminary) |
Q1 |
-5.7% |
-5.5% |
-5.5% |
-6.1% |
|
May 29 |
8:30 AM |
GDP Deflator |
Q1 |
2.8% |
2.9% |
2.9% |
2.9% |
|
May 29 |
9:45 AM |
May |
34.9 |
41.0 |
42.0 |
40.1 |
|
|
May 29 |
9:55 AM |
Mich Sentiment (revised) |
May |
68.7 |
68.0 |
68.0 |
67.9 |
Source: Yahoo Finance, May 29, 2009.
In addition to Federal Reserve Chairman Ben Bernanke’s testimony before the House Budget Committee (Wednesday, June 3), and interest rate announcements by the Bank of England and the European Central Bank (Thursday, June 4), 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 financial markets performed during the past week.
Source: Wall Street Journal Online, May 29, 2009.
British philosopher Bertrand Russell said: “If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence.”
Hopefully the “Words from the Wise” reviews offer material of the necessary substance that will guard against Investment Postcards readers merely having to rely on their instincts when taking investment decisions.
That’s the way it looks from Cape Town as May draws to a close.
Source: Mapleleafweb
Charlie Rose: A conversation about Bear Sterns and the economic crisis with Kate Kelly and William Cohan
“A conversation about Bear Sterns and the economic crisis with Kate Kelly, author of Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street and William Cohan, author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.”
Source: Charlie Rose, May 28, 2009.
The Wall Street Journal: How to fix the financial system
“The Committee on Capital Markets Regulation, a diverse group of academics, former government officials, and business leaders, plans to present a comprehensive list of recommendations Tuesday calling for an overhaul of the rules supervising financial markets. The recommendations will likely attract attention from key government officials because of the people’s credentials who put together the report, called “The Global Financial Crisis: A Plan For Regulatory Reform.”
“Among others, the report was penned by R. Glenn Hubbard, dean of the Columbia Business School, John L. Thornton, Chairman of the Brookings Institution, Hal S. Scott, Nomura Professor and Director of the Program on International Financial Systems at Harvard Law School, and Roel Campos, a former commissioner at the Securities and Exchange Commission. The report is thorough - the executive summary alone has 57 recommendations.
“Some of the key recommendations:
“1) Keep two or three regulators for the financial system - the Fed, a new US Financial Services Authority, and an investor and consumer protection agency. The USFSA ‘would regulate all aspects of the financial system, including market structure and activities and safety and soundness for all financial institutions.’
“2) Mandate centralized clearing of credit default swaps. To the extent that some CDSs stay outside a centralized clearing process, the committee calls for higher capital requirements to ‘compensate for increased systemic risk of these contracts’.
“3) Don’t make a hasty decision to raise capital requirements across the financial sector until more analysis is done. But the committee does recommend higher capital requirements for megabanks, such as those with more than $250 billion in assets. ‘Given the concentration of risks to the government and taxpayer, we recommend that large institutions be held to a higher solvency standard than other institutions, which means they should hold more capital per unit of risk.’
“4) Strengthen the ‘leverage’ capital ratio, and debate whether the leverage ratio should be based on common equity rather than total Tier 1 capital.
“5) Give the Fed temporary authority to evaluate confidential information supplied by hedge funds.
“6) Relax acquisition rules to make it easier for private equity firms to pump money into the banking sector.
“7) Create a comprehensive policy called the Financial Company Resolution Act, that would be allowed to put any financial company into receivership, not just ’systemically’ important ones.
“8) Ban or limit high-risk mortgages from being securitized.”
Source: Damian Paletta, The Wall Street Journal, May 26, 2009.
The Washington Post: US weighs single agency to regulate banking industry
“Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said.
“The agency would be a key element in the administration’s sweeping overhaul of financial regulation, which officials hope to unveil in coming weeks, including the creation of a new authority to police risks to the financial system as well as a new agency to protect consumers, according to three people familiar with the matter. Most of the proposals would require legislation.
“‘The president is committed to signing a regulatory reform package by the end of the year, and officials at the White House and the Treasury Department are continuing work with Congress on the final phases of a proposal, but there is no final proposal in place and any announcement will not be for a couple of weeks,’ said White House deputy spokesman Jennifer Psaki.
“Senior officials have reached agreement on aspects of the plan, according to a person familiar with the discussions.
“They favor vesting the Federal Reserve with new powers as a systemic risk regulator, with broad responsibility for detecting threats to the financial system. The powers would include oversight of previously unregulated markets, such as the derivatives trade, and of market participants such as hedge funds.
“Officials also favor the creation of a new agency to enforce laws protecting consumers of financial products such as mortgages and credit cards.
“And they want to merge the Securities and Exchange Commission and the Commodity Futures Trading Commission, which share responsibility for protecting investors from fraud.
“Other aspects of the plan remain under discussion, sources said, speaking on condition of anonymity because they were not authorized to disclose details.”
Source: Binyamin Appelbaum and Zachary Goldfarb, The Washington Post, May 28, 2009.
The Wall Street Journal: Fed cools banks’ faith in future revenue
“Big banks were hoping billions of dollars in future revenue would help them fill the capital holes found in the government’s stress tests earlier this month. Now the Federal Reserve is limiting how much of that performance can be counted, according to people familiar with the situation.
“The Fed’s decision is forcing Bank of America Corp. to come up with billions of dollars in capital from other sources, these people said. Other stress-tested banks also have revamped their capital-raising plans or might need to, including PNC Financial Services Group Inc. and Wells Fargo & Co.
“The move by the Fed, which began notifying banks last week, has deepened tensions over the stress tests, which are intended to help steady the banking industry and shore up confidence in the financial system. The results were announced May 7, and banks face a June 8 deadline for government approval of their capital-raising plans.
“Some banks had planned for financial performance in 2009 and 2010 to cover 20% or more of their capital shortfalls.
“Since announcing the stress-test results, though, Fed officials have grown concerned that some banks are leaning too heavily on future revenue projections, according to people familiar with the matter. Under the new requirement, projected revenue can be used for no more than 5% of the additional equity being demanded from the 10 banks.”
Source: Dan Fitzpatrick, The Wall Street Journal, May 28, 2009.
The New York Times: GM plan gets support from key bondholders
“As General Motors moved closer to a bankruptcy filing, possibly early next week, attention on Thursday turned again to the bondholders, the most important group that the company has yet to win over for its efforts to start fresh.
“Early Thursday, GM proposed a deal in which bondholders would receive up to a 25% stake - a bigger share than GM offered the autoworkers union - if they do not oppose its bankruptcy reorganization, and then said that a group representing many of the largest bondholders had accepted the offer.
“The proposal came as administration officials and GM began to discuss how the carmaker would look once it emerged from a court reorganization. The company is expected to seek bankruptcy protection by Monday, the deadline set by the Obama administration to restructure outside bankruptcy.
“In a regulatory filing, GM set Saturday afternoon as the deadline for other bondholders to support the plan. In addition to an ad hoc committee that supports the GM plan, which represents about 20% of GM’s debt, people with knowledge of the discussions said a second group, with about 30% of GM’s debt, was in talks with the Treasury.
“Administration officials said they considered the development positive. While the officials said there was no specific threshold for approval by the bondholders, a person briefed on the matter said that GM was seeking support from investors holding about 50% of GM’s $27 billion in bond debt.
“GM and the Treasury will re-examine the results after 5 p.m. on Saturday to gauge support before deciding how to proceed.”
Source: Michael de la Merced and Micheline Maynard, The New York Times, May 28, 2009.
Nouriel Roubini (Forbes): Ten risks to global growth
“Last week, I discussed why the US and global recovery will occur later than the optimistic consensus argues. This week, I will discuss why the recovery will be sub-par and below trends for a few years once it does occur, and why there is even the risk of a double-dip W-shaped recession.
“The crucial issue facing us is not whether the global economy will bottom out in the third or fourth quarter of this year, or in the first quarter of next year. It’s whether the global growth recovery, once the bottom is reached, will be robust or weak over the medium term - say 2010-11. … one cannot rule out a sharp snapback of GDP for a couple of quarters, as the inventory cycle and the massive policy boost lead to a short-term growth revival. My analysis, however, suggests that there are many yellow weeds that may lead to a weak global growth recovery over 2010-11.
“The current consensus among ‘green shoot’ optimists sees US economic growth going back in 2010 to a rate that is close to the 2.75% potential growth rate, and returning to potential by 2011. Many optimists go even further, arguing that the snapback of demand and production after the depressed levels of the current recession will lead growth to be well above trend (3.5% to 4%) for a couple of years, as most previous US recessions have been followed by a period of above-trend growth once the recovery gets going. Yet a detailed analysis suggests that growth will remain well below potential for at least two years - if not longer - as the severe vulnerabilities and excesses of the last decade will take years to resolve. Let us examine 10 factors that will cause below-potential economic growth over the medium term even after this recession is over.”
Click here for the full article.
Source: Nouriel Roubini, Forbes, May 28, 2009.
Bloomberg: US spends 14% of economic stimulus money in first 100 days
“About 14% of President Barack Obama’s $787 billion economic stimulus package has been allocated, creating 150,000 jobs in the 100 days since the measure was signed into law, the administration said.
“A report released today said the $112 billion in stimulus funds committed so far is going to projects across the country, from making public housing more ‘green’ in Washington to helping build a new library in Darlington County, South Carolina and buying a snow plow in Munising, Michigan.
“Obama said when he signed the bill Feb. 17 that it would create or save 3.5 million jobs by the end of September 2010. Today’s report didn’t measure how many jobs the stimulus has preserved.”
Source: Angela Greiling Keane, Bloomberg, May 27, 2009.
Bloomberg: Faber - US inflation to approach Zimbabwe level
“The US economy will enter ‘hyperinflation’ approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said. Prices may increase at rates ‘close to’ Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong.”
Click here for the article.
Source: Bloomberg, May 27, 2009.
Casey’s Charts: A 2,050% rise in price
“The costs of things as measured by the consumer price index have risen twentyfold since the Federal Reserve Act of 1913. This act empowered the central bank to create and control a new currency for the United States, the Federal Reserve Note. Over this same period, the federal deficit soared from $2 billion to over $11 trillion. Coincidence? We think not.
“After President Nixon cut the dollar’s ties to gold, funding the whims of government was no longer burdened by the need for higher taxes. Now any gaps in the budget can be filled by simply printing more dollars. And as you can see, the politicians didn’t hesitate to meet the challenge. Price levels and federal debt have risen hand-in-hand ever since.”
Source: Casey’s Charts, May 28, 2009.
John Taylor (Financial Times): Exploding debt threatens America
“Standard and Poor’s decision to downgrade its outlook for British sovereign debt from ’stable’ to ‘negative’ should be a wake-up call for the US Congress and administration. Let us hope they wake up.
“Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising - and will continue to rise - much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41% of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82% of GDP in 10 years. With no change in policy, it could hit 100% of GDP in just another five years.
“‘A government debt burden of that [100%] level, if sustained, would in Standard & Poor’s view be incompatible with a triple A rating,’ as the risk rating agency stated last week.
“I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200 billion. Income tax revenues are expected to be about $2,000 billion that year, so a permanent 60% across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?
“Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100% increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82%. A 100% increase in the price level means about 10% inflation for 10 years. But it would not be that smooth - probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.
“The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably. And 100% inflation would, of course, mean a 100% depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.
“Why might Washington sleep through this wake-up call? You can already hear the excuses.”
Click here for the full article.
Source: John Taylor, Financial Times, May 26, 2009.
USA Today: IRS tax revenue falls along with taxpayers’ income
“Federal tax revenue plunged $138 billion, or 34%, in April versus a year ago - the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says.
“When the economy slumps, so does tax revenue, and this recession has been no different, says Kerry Lynch, senior fellow at the AIER and author of the study. ‘It illustrates how severe the recession has been.’
“For example, 6 million people lost jobs in the 12 months ended in April - and that means far fewer dollars from income taxes. Income tax revenue dropped 44% from a year ago.
“‘These are staggering numbers,’ Lynch says.
“Big revenue losses mean that the US budget deficit may be larger than predicted this year and in future years.
“‘It’s one of the drivers of the ongoing expansion of the federal budget deficit,’ says John Lonski, chief economist for Moody’s Investors Service. The Congressional Budget Office projects a $1.7 trillion budget deficit for fiscal year 2009.
“The other deficit driver is government spending, which, the AIER’s report says, is the main culprit for the federal budget deficit.”
Source: John Waggoner, USA Today, May 26, 2009.
Asha Bangalore (Northern Trust): Q1 real GDP preliminary estimate - minor revisions, message is unchanged
“Real gross domestic product of the US economy declined at a 5.7% annual rate in the first quarter, marginally smaller than the advance estimate of a 6.1% drop. Consumer spending was weaker than the advance reading (+1.5% versus +2.2% in the advance report). Liquidation of inventories ($91.4 billion versus $103.7 billion) and the trade deficit ($302.6 billion versus $308.4 billion) were both smaller than the first estimate.
“Going forward, real GDP is expected to post declines in both the second and third quarters. Auto plant shutdowns and resumptions are most likely to exaggerate the projected decline and increase in headline GDP in the third and fourth quarters of 2009.”
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, May 29, 2009.
Asha Bangalore (Northern Trust): Chicago National Activity Index sends an upbeat message
“The Chicago Fed National Activity Index (CFNAI) in April moved up to -2.06 from -3.36 in March. Readings below zero denote an economy that is growing below trend. The index registered a trough in January 2009 (-3.99). The index is based on 85 indicators of national activity classified under four broad categories - production and income, employment, personal consumption and housing, and sales, orders, and inventories. In April, all of these four categories improved.
“The Chicago Fed suggests that the month-to-month movements of the index are volatile and recommends the 3-month moving average of the index as a better indicator of national economic growth. The 3-month moving average of the CFNAI was -2.65 in April versus -3.29 in March. This index bottomed out in January 2009 (-3.69).
“Setbacks from the auto industry restructuring should not be surprising. We will need to watch for a few months to confirm that it is not a false signal.”
Source: Asha Bangalore, Northern Trust, May 26, 2009.
Asha Bangalore (Northern Trust): Jobless claims fall but continuing claims continue to advance
“Initial jobless claims fell 13,000 to 623,000 during the week ended May 23. Continuing claims, which lag initial claims by one week, rose 110,000 to 6.788 million and the insured unemployment rate hit the 5.1% mark. The number of folks collecting unemployment insurance is troubling but the downward trend of initial jobless claims is the big positive aspect of the report.”
Source: Asha Bangalore (Northern Trust), May 28, 2009.
Standard & Poor’s: S&P/Case-Shiller Home Price Indices - recording record declines
“Data through March 2009, released today [Tuesday] by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, show that the US National Home Price Index continues to set record declines, a trend that began in late 2007 and prevailed throughout 2008.
“The chart above depicts the annual returns of the US National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller US National Home Price Index - which covers all nine US census divisions - recorded a 19.1% decline in the 1st quarter of 2009 versus the 1st quarter of 2008, the largest decline in the series’ 21-year history.
“‘Declines in residential real estate continued at a steady pace into March,’ says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.”
Source: Standard & Poor’s, May 26, 2009.
Asha Bangalore (Northern Trust): Sales of existing homes moved up, but inventories remain elevated
“Sales of existing homes increased 2.9% in April to an annual rate of 4.68 million. Purchases of both single-family (+2.5%) and multi-family homes (+6.4%) advanced in April. On a regional basis sales increased in the Northeast (+11.6%), South (+1.8%) and West (+3.5%) but fell 2.00% in the Midwest. The impact of auto industry restructuring is reflected in the weakness of home sales in the Midwest.
“There was a small improvement in the seasonally adjusted inventories of unsold single-family homes in April to a 9.18-month supply mark, down from a 9.38-month reading in March. The median inventories-sales ratio of existing home sales for the period June 1982 - April 2009 is a 7.11-month supply, with the ratio holding closer to a 5-month supply in the decade ending 2005. The still elevated level of inventories augurs poorly for home prices in the months ahead.”
Source: Asha Bangalore, Northern Trust, May 27, 2009.
Chart of the Day: Home / gold ratio in strong downtrend
“Today’s chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes 192 ounces of gold to by the median single-family home. This is considerably less that the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down 68% from its 2001 peak and remains within the confines of its four-year accelerated downtrend.”
Source: Chart of the Day, May 29, 2009.
Asha Bangalore (Northern Trust): Consumer Confidence Index posts significant jump in May
“The Conference Board’s Consumer Confidence Index rose to 54.9 from a revised 40.8 reading in April. The Present Situation Index advanced 3.4 points to 28.9 and the Expectations Index rose 21.3 points to 72.3.
“The 28 point jump in the April-May period is the second largest two-month gain seen in the history of the survey which began in 1967. The survey was held six times a year until the late-1970s. In 1974, the index increased 32.4 points over the span of the February and April surveys.”
Source: Asha Bangalore, Northern Trust, May 26,2009.
Asha Bangalore (Northern Trust): Durable goods boosted by defense orders
“Orders of durable goods increased 1.9% in April, after a 2.1% drop in the prior month. The 23.2% jump in orders of defense goods lifted the overall total. Bookings of non-defense capital goods declined 2.0% and that of non-defense capital goods excluding aircraft also dropped 1.5%. On a year-to-year basis, orders of durables fell 26.6% in April compared with a 24.7% drop in March.”
Source: Asha Bangalore (Northern Trust), May 28, 2009.
Bespoke: Rating agencies - sound and fury signifying nothing
“After S&P cut its credit outlook on the UK last week, we noted that listening to the ratings agencies is like making investment decisions based on last month’s newspaper. In this weekend’s Wall Street Journal interview, Dallas Fed President Richard Fisher seemed to agree with that sentiment:
“‘I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside.’ He says he also saw this ‘inherent conflict of interest’ as a fund manager. ‘I never paid attention to the rating agencies. If you relied on them you got … you know,’ he says, sparing me the gory details. ‘You did your own analysis. What is clear is that rating agencies always change something after it is obvious to everyone else. That’s why we never relied on them.’
“If the US ever loses its AAA credit rating, does anyone really think the ratings agencies will be ahead of the curve?”
Source: Bespoke, May 26, 2009.
Financial Times: JPMorgan warns on credit card woes
“Jamie Dimon, JPMorgan Chase chief executive, warned on Wednesday that loss rates on the credit card loans of Washington Mutual, the troubled bank acquired last year by JPMorgan, could climb to 24% by the year end.
“In the past, credit card loss rates have tracked the unemployment rate but that relationship has been breaking down for more troubled credit card portfolios, such as the $25.9 billion in WaMu credit card loans.
“At the end of the first quarter, 12.63% of the WaMu credit card loans were deemed uncollectable by JPMorgan. The bank estimates that figure could reach 18 to 24% by the end of 2009, depending on economic conditions.
“Describing credit cards as JPMorgan’s most challenged business, Mr Dimon said loss rates for the company’s larger $150 billion portfolio of Chase credit cards could reach 9% in the third quarter and as much as 10.5% by the end of the year, depending on housing and unemployment trends. That compares with first-quarter charge-off rates of 6.86% on the Chase card portfolio.
“Mr Dimon said he believed that a new law restricting higher interest rates on delinquent credit card debt for the first 60 days could make credit cards more expensive in the future.
“Banks are repricing credit cards and cutting credit lines before the new rules take effect, pushing borrowers into distress in some instances, according to industry executives.”
Source: Henry Sender and Saskia Scholtes, Financial Times, May 28, 2009.
CNBC: Bond market’s volatility
“Many concerns about the rising Treasury yields continue to undermine the Obama administration’s economic rescue plan, with James Galbraith, University of Texas; Jonathan Tisch, Loews Hotels chairman/CEO and CNBC’s Steve Liesman.”
Source: CNBC, May 29, 2009.
John Authers (Financial Times): Keep an eye on Treasuries
“Did the tide turn for US assets last week? For months, US Treasury bond prices have fallen, taking the dollar with them. The explanation was clear. Investors believed disaster had been averted. That meant taking greater risks once more and selling the secure US Treasury bonds bought during the panic.
“But the rise in bond yields and fall of the dollar took on new momentum last week, even as stock markets fell back. The 10-year bond yield hit 3.45%, a six-month high, while the dollar hit a five-month low.
“According to RBC, there were only 18 days in the past 20 years when the 10-year Treasury rose by 6 basis points or more, the dollar trade-weighted index fell 0.5 per cent or more and the S&P 500 fell more than 1.2%. None of them came from 2003 to 2008. But this happened on Thursday last week.
“The catalysts for the bad day appeared to be the news that dealers tried to sell the Federal Reserve far more bonds that day than the central bank was willing to buy, and the decision by Standard & Poor’s to put the UK on review for a potential sovereign downgrade - seen as a stalking horse for making the same move for the US.
“A rating agency move is not a good reason to sell US assets. The US Treasury has taxing authority. If it were ever to default, the result would be disaster for virtually all other governments, many of which are in a more parlous fiscal state than the US in any case. So some of the fear surrounding the dollar is a little irrational.
“But concern about the bond market is more meaningful. It is vital to keep US rates down, to revive both the housing market and the health of the banks. That is why the Fed is buying bonds. If even this drastic action is not enough to keep rates low, then these policy aims are in jeopardy. Last week that concern clarified in traders’ minds and it gave good reason to sell the dollar and US stocks.”
Source: John Authers, Financial Times, May 29, 2009.
Eoin Treacy (Fullermoney): Government bonds in downtrend
“Government bonds were the safe haven of choice for large numbers of investors during the most panicky period of this crisis. Three-month yields hit negative territory on a number of occasions in December as investors stampeded out of ‘risk assets’ and into government backed securities. Longer-dated issues surged to important highs in late December, which coincided with a yield of 2.5% on the 30yr and 2% on the 10yr.
“Since then yields have almost doubled as the perceived need for a ’safe haven’ has decreased and investors gradually begin to demand a great return for shouldering the risk of lending to governments in the process of massively increasing the supply of bonds.
“The spread between the 10yr and 2yr, commonly used as an approximation of the yield curve, hit a new high yesterday. In the past, an inverted yield curve has been a reliable lead indicator of recessions. This was borne out again between 2006 and mid 2007. However, peaks in the spread do not appear to reliably predict the end of recessions. In fact there appears to be a lag. The move to new high ground for this relationship is commensurate with the size and shape of this recession and when a peak becomes evident, it will likely lend confidence to investors.
“There is also now a marked difference with how investors are looking at inflation. In December the spread of 10yr yields over 10yr TIPS bottomed just above 0%. The spread has since rallied to almost 2% as investors weigh the risks of quantitative easing. There was also surely an element of hedging the potential for inflation while prices were so low in November and December. Since then prices have recovered to the 5yr average and are currently pressuring the lower side of the 5-month range.
“In the meantime, yields continue to rally from deeply oversold territory and are likely overdue a consolidation of recent gains. A sustained move below 3% would suggest a lengthier reaction. However, given the technical action, bond prices are likely to be shorts on significant rallies for the foreseeable future.
“While the government bond bubble may be in the process of bursting, corporate bond spreads are contracting rather swiftly. BBB Industrial spreads peaked in November near 440 basis points and have since fallen to 340. A sustained move back above 400 basis points would be needed to question potential for further contraction.”
Source: Eoin Treacy (Fullermoney), May 28, 2009.
MarketWatch: Market ends the month with more gains
“May marks the third straight month of gains for the stock market. But will June bring more reasons for optimism? Sam Stovall, chief investment strategist for Standard & Poor’s Equity Research, talks to Kelsey Hubbard about what the future might bring.”
Source: MarketWatch, May 29, 2009.
Bloomberg: Barton Biggs says rally may push S&P 500 to 1,050
“Barton Biggs, the former chief global strategist for Morgan Stanley who runs the New York-based hedge fund Traxis Partners LP, talks with Bloomberg’s Matt Miller about the outlook for stocks. The steepest rally since the 1930s for the Standard & Poor’s 500 Index may push the benchmark to 1,050 and emerging markets will continue to rise, Biggs said.”
Source: Bloomberg, May 29, 2009.
Bespoke: Sector performance during pullback
“The S&P 500 is down 3.89% since rallying 37% from March 9 through May 8. Below is a scatter chart showing sector performance during the 3/9-5/8 rally and during the current pullback. As shown, as performance during the rally gets better, it gets worse during the current pullback. So the sectors that rallied the most have generally pulled back the most.
“Financials are down the most of any sector since May 8 at -11.2%, but they were also up a whopping 110% during the rally. The Industrial sector has been the second worst since May 8 with a decline of 7.5%. Technology and Consumer Staples are the only two sectors that are up since May 8, so they’ve shown the best relative strength recently.”
Source: Bespoke, May 28, 2009.
Financial Times: Small caps outperform in second half of recession
“For US equity investors, it has long paid to think small and cheap. Seemingly minor differences in returns for opaque and dowdy companies compound impressively over the years. In the 80 years ended in 2008, investing in a basket of US small cap value stocks compiled by Al Frank Investments would have turned $1 into $46,603 with dividends reinvested against $1,097 for large growth stocks.
“The final stages of a boom, though, are an inauspicious time to own small companies. As the economy slows, they are often the first to feel the pinch: small businesses tend to be biased towards cyclical industries and mostly do not have the luxury of international diversification. Also, as bull markets near their apex, inflows from naïve retail investors may be concentrated in the largest, most liquid shares. True to form, small caps began to underperform the broader US market just as the housing bubble peaked. From April 2006 to the end of 2008, they shed 32% of their value compared with just 24% for large stocks.
“Conversely, much of small stocks’ historical edge comes from outperforming early in any recovery. Pinpointing the end of today’s downturn, which has now lasted twice as long as average, is hardly necessary. And do not bother looking to official arbiters of these things - the last eight downturns were only declared to be over, on average, 15 months afterwards. The recent outperformance of small stocks may thus be a leading indicator of a recovery next year.
“Had an investor in previous recessions known ahead of time the day the recession would end and bought small stocks immediately, it would have been too late, according to research by Russell Investments. The best time to maximise returns would be six to nine months before. Separately, analysts at Merrill Lynch showed that small caps underperformed by four percentage points in the first half of a recession but outperformed by nine points in the second half. Ignore small caps only if you think the halfway point of this crisis is still not even in sight.”
Source: Financial Times, May 25, 2009.
Barron’s: Profits squeezed at the margin
“That things are getting worse more slowly is the essence of the bullish argument for the US economy and, by extension, corporate profits. After the nosedive of the past two quarters, the rate of decline will flatten out and give way to an eventual ascent by later this year.
“But that takeoff could be slower and later than assumed …
“Smithers & Co. of London pointed out that the cyclical improvement in profitability would accrue less to equity holders than previous phases given the need to use those funds to bolster balance sheets.
“Deleveraging means paying down debt instead of paying out dividends or buying in stock. Indeed, as the pick-up in equity financing indicates, it means issuing new shares. ‘The growth rate in of earnings per share thus is likely to be worse than that indicated by profit margins alone,’ Smithers’ report concludes.
“Those margins, far from being depressed, remain near historical highs, a point which both Smithers and Albert Edwards, Societe Generale’s strategist, emphasize.
“Moreover, Edwards observes that the work of his colleague, quantitative analyst Andrew Lapthome, shows that bottom-up company analysts forecast an unprecedentedly mild contraction in profit margins in the midst of the worst recession since the Great Depression.
“‘This just doesn’t make sense to us,’ Edward writes in his Global Strategy Weekly. ‘Analysts are ‘anchoring’ on recent unprecedented high in margins as the new norm, instead of viewing them as bubble nonsense never to be seen again.’
“In the first-quarter reporting season now winding down, results exceeded expectations despite punk top-line growth. ‘Clearly companies have been cutting costs aggressively. This helps explain why we have seen massive job cuts in recent months,’ he adds. And with households’ deleveraging and purchasing power eroding, corporate revenue growth will be hit further.
“Those who didn’t get on board the rally that’s taken the US stock market up by a third from its early March lows face ‘career risk’ if, like most, they lost a boatload of money last year. That suggests they’ll try to ride winners to the extent they can. After mid-year, we’ll see if they can keep flogging them successfully.”
Source: Randall Forsyth, Barron’s, May 28, 2009.
Bespoke: International revenues and recent stock performance
“When the US dollar experienced its big decline in the years leading up to the 2008 rally, stocks with high amounts of international revenues outperformed as businesses in other countries bought more goods from US companies. As the dollar made its comeback last year and earlier this year, stocks that generated most of their revenues domestically outperformed. But now that the dollar has pulled back again, the international revenue trade has made a comeback.
“We broke up the S&P 500 into deciles (50 stocks in 10 groups) based on a stock’s percentage of international revenues and calculated the average performance of stocks in each decile since the May 8 market top. Over this same time period, the US dollar has declined quite a bit as well. As shown below, the 50 stocks with the highest percentage of international revenues are down just 1.3%, while the 50 stocks with the lowest percentage of international revenues are down 7.9%.
“Depending on which way you think the dollar will go from here, you can play stocks with high amounts of international revenues or low amounts.”
Source: Bespoke, May 28, 2009.
Bespoke: BRIC countries continue to surge
“Russia’s RTS stock index was up another 3.2% today [Friday], while China was up 1.71% and India was up 2.3%. The BRIC (Brazil, Russia, India, China) countries continue to surge higher in 2009, as they’ve far outpaced stock markets of so-called ‘developed’ countries. Below we highlight their year to date performance compared to the S&P 500. As shown, Russia is up a whopping 72.1% this year, followed by India at 51.6%, China at 44.6%, and Brazil at 39.7%. The S&P 500 is up 0.22%.”
Source: Bespoke, May 29, 2009.
InvestmentNews: “Shake hands” with government, the Pimco guru advises
“The credit crises and recent market collapse have resulted in ‘long-term changes that will establish a ‘new normal’,’ Bill Gross said yesterday.
“The managing director and co-chief investment officer of Pacific Investment Management Co. made his comments during a keynote address at the Morningstar Investment Management Conference in Chicago, which was sponsored by Morningstar Inc. of Chicago.
“That means economic growth of between 1% to 2% over the next several years, relatively high unemployment in the range of 7% to 8% and accelerating inflation, Mr. Gross said.
“That will crimp asset-manager profits because they will have to contend with a low-return environment, he said.
“Among other things, Mr. Gross recommended that investors look overseas, particularly in Brazil, India and China. ‘The growth will be in economies where consumers are a small portion of the economy,’ he said.
“Domestically, Mr. Gross suggested investors ’shake hands’ with government. Investors should look for what government is going to buy, and buy it first, he said.”
Source: David Hoffman, InvestmentNews, May 29, 2009.
CNBC: Mobius - emerging markets due for correction
“The emerging markets are due for a correction, though it will be short-lived, says, Mark Mobius, executive chairman at Templeton Asset Management. He shares his outlook, with CNBC’s Amanda Drury.”
Source: CNBC, May 29, 2009.
The Wall Street Journal: If you think worst is over, take Benjamin Graham’s advice
“It is sometimes said that to be an intelligent investor, you must be unemotional. That isn’t true; instead, you should be inversely emotional.
“Even after recent turbulence, the Dow Jones Industrial Average is up roughly 30% since its low in March. It is natural for you to feel happy or relieved about that. But Benjamin Graham believed, instead, that you should train yourself to feel worried about such events.
“At this moment, consulting Mr. Graham’s wisdom is especially fitting. Sixty years ago, on May 25, 1949, the founder of financial analysis published his book, ‘The Intelligent Investor’, in whose honor this column is named. And today the market seems to be in just the kind of mood that would have worried Mr. Graham: a jittery optimism, an insecure and almost desperate need to believe that the worst is over.
“You can’t turn off your feelings, of course. But you can, and should, turn them inside out.
“Stocks have suddenly become more expensive to accumulate. Since March, according to data from Robert Shiller of Yale, the price/earnings ratio of the S&P 500 index has jumped from 13.1 to 15.5. That’s the sharpest, fastest rise in almost a quarter-century. (As Graham suggested, Prof. Shiller uses a 10-year average P/E ratio, adjusted for inflation.)
“Over the course of 10 weeks, stocks have moved from the edge of the bargain bin to the full-price rack. So, unless you are retired and living off your investments, you shouldn’t be celebrating, you should be worrying.
“Mr. Graham worked diligently to resist being swept up in the mood swings of ‘Mr. Market’ - his metaphor for the collective mind of investors, euphoric when stocks go up and miserable when they go down.
“In an autobiographical sketch, Mr. Graham wrote that he ‘embraced stoicism as a gospel sent to him from heaven’. Among the main components of his ‘internal equipment’, he also said, were a ‘certain aloofness’ and ‘unruffled serenity’.
“Mr. Graham’s immersion in literature, mathematics and philosophy, he once remarked, helped him view the markets ‘from the standpoint of eternity, rather than day-to-day’.
“Perhaps as a result, he almost invariably read the enthusiasm of others as a yellow caution light, and he took their misery as a sign of hope.
“His knack for inverting emotions helped him see when markets had run to extremes. In late 1945, as the market was rising 36%, he warned investors to cut back on stocks; the next year, the market fell 8%. As stocks took off in 1958-59, Mr. Graham was again pessimistic; years of jagged returns followed. In late 1971, he counseled caution, just before the worst bear market in decades hit.”
Source: Jason Zweig, The Wall Street Journal, May 26, 2009.
BCA Research: US - devalue or deflate
“While the US dollar is becoming oversold and a short-term retracement is possible, we believe that the cyclical decline has further to run.
“In the aftermath of the burst credit/asset bubble, US policymakers face a choice: devalue or deflate. Indeed, governments around the world are facing similar conditions and are also attempting to reflate their economies. However, US reflationary policies are the most aggressive, which places the dollar at longer-term risk. The US fiscal deficit will top 14% of GDP this year and the Fed has already announced debt purchases which amount to 12.5% of GDP.
“Moreover, the FOMC minutes warned that the Fed is willing to increase its debt monetization operations. There are two ways that these policies are dollar negative. First, currency debasement/higher inflation means a lower nominal exchange rate in order to keep the real exchange rate stable. Second, the Fed’s efforts to suppress bond yields will impact cross-border capital flows. As the US current account deficit is now entirely the result of the budget deficit, foreign purchases of Treasurys is the most important flow for the dollar.
“Bottom line: The continuation of current US policies could eventually raise investor concerns of a dollar debasement. While some short-term technical indicators are warning that the US dollar is becoming oversold, our Foreign Exchange Strategy service recommends investors hold core short dollar positions.”
Source: BCA Research, May 28, 2009.
Financial Times: Bets against dollar highest since start of economic crisis
“Speculative bets against the dollar have risen to their highest level since the onset of the financial crisis.
“Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed that in the week ending May 19, bets against the dollar - short positions - versus the euro exceeded bets on dollar strength by 12,250 contracts.
“This net short position was the highest level since the week of July 15, when the dollar hit a record low of $1.6038 against the euro.
“Meanwhile, the net short position on the dollar versus the yen rose to 6,000 contracts, the highest since March.
“Analysts said the fact that net long positions in the Australian dollar also hit their highest level since July reflected the extent of deepening anti-US dollar sentiment among the speculative community.
“Ashraf Laidi at CMC Markets said considering that long positions in the euro and yen against the dollar were still about 11 times lower than their record highs, speculators had plenty of upside against the dollar in terms of quantity as well as price.”
Source: Peter Garnham, Financial Times, May 26, 2009.
Ambrose Evans-Pritchard (Telegraph): China warns Federal Reserve over “printing money”
“Richard Fisher, president of the Dallas Federal Reserve Bank, said: ‘Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature.’
“‘I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States,’ he told the Wall Street Journal.
“His recent trip to the Far East appears to have been a stark reminder that Asia’s ‘Confucian’ culture of right action does not look kindly on the insouciant policy of printing money by Anglo-Saxons.
“Mr Fisher, the Fed’s leading hawk, was a fierce opponent of the original decision to buy Treasury debt, fearing that it would lead to a blurring of the line between fiscal and monetary policy - and could all too easily degenerate into Argentine-style financing of uncontrolled spending.
“However, he agreed that the Fed was forced to take emergency action after the financial system ‘literally fell apart’.
“The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian process of ‘creative destruction’, has been running a fervent campaign to alert Americans to the ‘very big hole’ in unfunded pension and health-care liabilities built up by a careless political class over the years.
“‘We at the Dallas Fed believe the total is over $99 trillion,’ he said in February.”
Source: Ambrose Evans-Pritchard, Telegraph, May 26, 2009.
Bloomberg: Baltic Dry Index gains 5.9% to cap record monthly gain
“The Baltic Dry Index, a measure of shipping costs for commodities, climbed every day in May to post its biggest monthly advance on record.
“The index tracking transport costs on international trade routes added 196 points, or 5.9%, to 3,494 points, according to the London-based Baltic Exchange today. The gauge climbed 96% in the month.
“‘It’s amazing; the atmosphere is much more positive than it was a few months back,” said Herman Billung, chief executive officer of Golden Ocean Management A/S, which operates Norwegian billionaire John Fredriksen’s fleet of commodity carriers.
“‘It’s extremely dangerous to underestimate Chinese demand, which we’ve all had a tendency to do for a few years now.’
“As well as three straight months of record iron ore imports, Chinese shippers are stepping up purchases of coal and other commodities, Billung said by phone from Oslo today. Ships’ asset values are climbing because of the rising market, he said.”
Source: Alaric Nightingale, Bloomberg, May 29, 2009.
Financial Times: Opec bets on recovery to boost price
“The Organisation of the Petroleum Exporting Countries delivered on Thursday its most optimistic message about the global economy and the oil market since the start of the financial crisis last summer triggered a precipitous fall in prices from a record $150 a barrel to $30.
“‘We are beginning to see light at the end of the tunnel,’ Abdalla El-Badri, Opec secretary-general, said after the cartel agreed to leave its production level unchanged, betting that the global recovery would push oil prices to $75-$80 a barrel.
“‘We are seeing [oil demand in] the US picking up,’ Mr El-Badri added. ‘But, above all, which is the most important, we are seeing demand in China and India and Asia as a whole.’
“Because oil demand was closely correlated with economic activity, Opec’s cheerful view was a signal the global economy was slowly strengthening, analysts said.
“Ali Naimi, Saudi minister and one of the world’s most senior energy policymakers, added to the upbeat sentiment, saying: ‘The price is good, the market is in good shape and the recovery is under way, so what else could we want?’
“David Kirsch, an oil market analyst at PFC Energy, said in Vienna that Opec was leaving behind its worries about the global economy, last expressed at its March meeting. ‘Opec is witnessing early signs of economic recovery and financial flows into commodities,’ Mr Kirsch said.
“Opec delegates said that Saudi Arabia appeared confident that the flow of money into commodities - as investors worried about a pick-up in inflation or a further weakening of the US dollar - would help the cartel to support oil prices. Speculative flows, long an Opec foe, could turn into an ally, analysts said.”
Source: Javier Blas, Financial Times, May 28, 2009.
Riccardo Barbieri (Banc of America Securities-Merrill Lynch): Higher oil won’t derail recovery
“The recent rise in the oil price should not pose a threat to the global recovery - for now, believes Riccardo Barbieri, head of international economics at Banc of America Securities-Merrill Lynch.
“‘As long as prices rise only moderately from here, say revisiting the $80 a barrel level by year-end, this would not pose severe risks for the advanced economies, while the emerging ones would be able to tolerate even higher levels, say $100, in due course.’
“He says the key issue is whether oil’s increase is part of the ‘reflation trade’ seen in the equity and credit markets, or whether it reflects a significant rise in oil demand. ‘It seems that the oil market has mostly responded to improving expectations concerning the timing of the recovery more than to an actual pickup in demand,’ he says. ‘The oil futures curve has flattened significantly in recent weeks, with late-2009 and 2010 contracts rising a lot less than the front ones.’
“Mr Barbieri references work by the bank’s head of commodity research, Francisco Blanch, suggesting global inventories remain high and Opec is sitting on ample spare capacity. According to Mr Blanch, given the precarious state of the global economy, Saudi Arabia would boost production if prices moved up too quickly.
“‘In terms of price, our house view is that the line in the sand for Opec could be at $80. While this level may well be exceeded, it would not be sustainable without a strong pickup in demand if Opec boosted its output.’”
Source: Riccardo Barbieri, Banc of America Securities-Merrill Lynch (via Financial Times), May 26, 2009.
Richard Russell (Dow Theory Letters): The three phases of a gold bull market
“Every major primary bull market takes place in three sentiment phases. The first phase of the gold bull market occurred around 1999 to 2005. This was the ‘dirt cheap’ phase of gold when only the true believers assumed positions. Old timers probably remember back in 2000 when I wrote that the listed gold shares were so ridiculously cheap that they could be bought and ‘put away’ as perpetual warrants.
“The second phase of the gold bull market started around 2005 and is still in force. This is the phase where the seasoned professionals and a few more sophisticated funds take their positions. It is in the second phase where we see the most painful secondary corrections. And it is in the second phase where the public first notices the persistent rise in gold. In the current area, gold is just starting to attract the attention of the public.
“Every major primary bull market that I have studied or lived through ends up with a wildly speculative third phase. This is the phase where the public and the crowd rushes head-long into the market. We saw this last in the years around 2000 when people bought any kind of tech stock. ‘I don’t care what it is, if it’s tech, just get me in!’
“My belief is that we’re now nearing the beginning of the third speculative phase of the great gold bull market. The huge secondary reaction that has held gold in its grip since early 2008 is coming to an end. Interestingly, this reaction has taken the form of a large head-and-shoulders bottoming pattern. Most recently, gold has been climbing (almost unnoticed) up the formation’s right shoulder. If June gold can close above 1003, I believe that will signal the beginning of gold’s third speculative phase.”
Source: Richard Russell, Dow Theory Letters, May 26, 2009.
Ambrose Evans-Pritchard (Telegraph): Gold bugs at last have their perfect trinity
“The world’s top hedge fund manager John Paulson has built a gold position of at least $5.5 billion, the biggest such move since George Soros and Sir James Goldsmith bet on Newmont Mining in 1993.
“Britain has become the first of the Anglo-Saxon ‘AAA’ club to face a downgrade. As feared, the cancer of bank leverage is spreading to sovereign cores.
“Gold prices tend to slide in late May and languish through the summer, because of the seasonal ups and downs of jewellery demand. The trader reflex would be to short gold at this stage after its $90 vault to $959 an ounce over the past month. They may think again this year.
“Paulson & Co has bought $2.9 billion in SPDR Gold Trust, the biggest of the gold exchange traded funds (ETFs), which now holds 1106 tonnes - three times the Brown-gutted reserves of the United Kingdom.
“Mr Paulson has also built up a $2.3 billion holding of Anglo Ashanti, Goldfields, Kinross Gold, and Market Vectors Gold Miners. The fact that he is launching a ‘Paulson Real Estate Recovery Fund’, reversing the bet against sub-prime securities that made him rich, tells us all we need to know about his thinking. This is a liquidity-reflation play.
“You can argue - as do UBS, Merrill Lynch, ING, and Capital Economics, to name a few - that massive global stimulus is merely struggling to off-set a massive deflationary shock.
“So how will gold fare in a ‘Japanese’ stalemate world where neither inflation nor deflation gets the upper hand? The eight-year rally that has lifted gold from $254 to $959 may lose momentum for a while.
“‘The air is getting thin up here,’ said John Reade, precious metals guru at UBS. ‘Rich investors are no longer rushing out to buying gold bars as they did after the Lehman collapse. Still, we think it is highly significant that both China and Russia - two of the biggest holders of foreign reserves - are both buying gold,’ he said.
Personally, I remain a gold bug out of fear that the most corrosive phase of this crisis lies ahead. … gold has outperformed Wall Street’s S&P 500 index by 500% so far this century, as if able sniff out trouble in advance. Such runs tend to finish with a ‘parabolic’ blow-off before they die. Mr Paulson may yet make another fortune, whatever his reason.”
Source: Ambrose Evans-Pritchard, Telegraph, May 23, 2009.
Credit Suisse: Gold - how far can the rally go?
“Gold prices rallied over the past months, driven by investors, central banks or other hedgers looking for a safe haven. There is however still significant upside potential in the medium term, even if this safe haven effect has abated. Credit Suisse’s commodity analyst Eliane Tanner explains why.
“Strong monetary demand coupled with a muted supply outlook should keep gold prices well supported over the next few months. However, the decline in jewelry demand should limit the medium-term upside potential, since it is likely to diminish quickly when prices increase too high or too fast. But in turn, jewelry demand is set to provide a floor to prices when investment demand abates, as the lower prices should see non-monetary demand recovering. Credit Suisse therefore forecasts gold prices between 1,100 and 1,200 dollars per ounce by the end of the second quarter of 2010.”
Click here for the full article.
Source: Credit Suisse, May 25, 2009.
Ifo: Ifo Business Climate Index for Germany looking up
“The Ifo Business Climate Index for industry and trade in Germany rose once again in May. Although the firms have again assessed their current business situation more unfavourably than in the previous month, they have given clearly fewer poor assessments of their six-month business outlook. This points to a gradual stabilisation of economic output at a low level.”
Source: Ifo, May 25, 2009.
Nationwide:UK house prices rise for second time in three months
“Commenting on the figures Martin Gahbauer, Nationwide’s Chief Economist, said:
“‘The price of a typical house rose by 1.2% in May, providing further evidence of some improvement in housing market conditions over the last few months. At £154,016, the average house price is still 11.3% lower than a year ago, although this marks a significant improvement from the annual decline of 15.0% recorded in April. The 3 month on 3 month rate of change - a smoother indicator of short-term price trends - rose from -3.0% in April to -0.5% in May and now stands at its highest level since January 2008.
“‘Although the short-term trend in house prices has clearly improved from where it was at the beginning of the year, it is still too early to say that the market is turning definitively. During the downturn of the early 1990s, there were many months during which prices rose, only to fall back down again in subsequent periods.
“‘In the current downturn, the combination of rapidly rising unemployment and tight access to credit implies that the last of the price declines has probably not been seen yet. Nonetheless, the improvement in house price trends is consistent with signs of stabilisation in several other economic indicators and suggests that any further price declines may occur at a less rapid pace than in 2008.”
Source: Nationwide, May 29, 2009.
Tags: Advisory Group, Australian Dollar, Baltic Dry Index, Basis Points, BRIC, Crb Index, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Emerging Markets, ETF, Freight Rates, Global Economies, Government Bonds, India, Iron Ore, Jeffries, Market Peak, Metals Source, New Zealand Dollar, oil, precious metals, Reuters, Stock Market Indices, West Texas Intermediate
Posted in Emerging Markets, Gold, Markets | No Comments »
I posted an article a few days ago entitled “China - better days ahead?” and concluded as follows: “Will China’s command economy come to the Western world’s rescue? Time will tell, but there are rays of light, not least of which is a bullish-looking Chinese stock market.”
A short note from Jim O’Neil, Head of Global Economic Research of Goldman Sachs, subsequently arrived, saying: “Can China save the world? Not on their own is the simple answer, but they might have a good shot at it. It is increasingly clear to me, that China is at least ‘coping’ with the strains of this crisis and, indeed, looks to me as though they are through the worst.
“Last week’s rise in the official PMI and another huge credit expansion for February should make a number of people question their bearishness about China. If you add on the clear signs of some additional policy stimulus, and the huge easing in Chinese financial conditions, it continues to seem highly likely to me that in the second half of this year, China will be growing above 8% again.”
Although a mild pull-back of Chinese stocks occurred over the past few days in sympathy with global markets, the uptrend remains intact. Since the announcement of the first Chinese fiscal stimulus on November 10, the Shanghai Composite Index has outperformed the S&P 500 Index by 67%.This is illustrated by the rising trend of the red line in the graph below. Also of interest is the close historical correlation between the relative performance of the Shanghai Index versus the S&P 500 Index and the Baltic Dry Index (measuring freight rates of iron ore and bulk goods).
Source: Plexus Asset Management (based on data from I-Net Bridge).
The graph below, courtesy of Michael Pento, chief economist of Delta Global Advisors, argues that inflation expectations might be putting a floor under commodity prices, providing a credible explanation of why the Baltic Dry Index appears to be bottoming out.
Source: Bloomberg, March 5, 2009.
A few exchange-traded funds (ETFs) are available to investors wishing to obtain exposure to China. The two better-known funds are iShares FTSE/Xinhua China 25 Index (FXI) and SPDR S&P China (GXC). Another option is to obtain Chinese exposure indirectly through PowerShares Golden Dragon Halter USX China (PGJ), an ETF investing in US-listed companies deriving the majority of their revenue from China. A short description of these ETFs is provided by Tom Lydon in a Green Faucet blog post.
Wall Street’s leash may continue to negatively impact global markets for a while longer, but I will be surprised if China is not among the leaders in the next sustained rally.
Tags: Baltic Dry Index, Chief Economist, Chinese Stock Market, Chinese Stocks, Command Economy, Commodity Prices, Credible Explanation, Credit Expansion, ETF, Fiscal Stimulus, Freight Rates, Global Advisors, Goldman Sachs, Inflation Expectations, Michael Pento, O Neil, Plexus Asset Management, Rescue Time, Rising To The Occasion, Shanghai Composite Index, Shanghai Index
Posted in Credit Markets, Economy, Gold, Markets | No Comments »
The Baltic Dry Index, the indicator of global shipping activity is now sitting at 1014, having hit its low of 663 December 5, 2008. This is a valuable measure of global trade activity, and it is indicating a resumption of trade. It is still a long way off its all-time high of 11,793 of last spring, down 91.4% from the top, but up over 50% off its bottom.
We’ll keep watching this. This is bullish for both finished exports and commodities. Its still early, and this is a promising sign. The loss experienced in the index includes the value differential owing to the crash in commodity prices experienced during the last 6 months. The BDI Index fell off a cliff in September which coincided with the collapse of Lehman Brothers, which happened to be a large underwriter of trade related financing. With other banks unwilling to take Lehman’s place, trade fell into the crater left behind.
Global trade credit froze along with the credit market as it became very difficult, if not impossible to trade, with banks unwilling to issue letters of credit.
This is a sign that the trade finance market is thawing and that shipping can resume. A continuation of this trend should be considered bullish, particularly for China exports, global trade, and for commodities producing companies and countries.
The Baltic Dry Index does not measure the price of oil, although it does include the price of fuel as a component of the shipping cost.
Chart: Bespoke Investment Group
Tags: Baltic Dry Index, Banks, Bdi, Bdi Index, China Exports, Collapse, Commodities, Commodity Index, Commodity Prices, Commodity Producers, Crash, Differential, Failure, Finance Market, Global Shipping, Global Trade, Investment Group, Last Spring, Lehman Brothers, Letters Of Credit, Price Of Oil, Promising Sign, Resumption, Shipping Activity, Shipping Cost, Straight Days, Trade Finance, Underwriter
Posted in Commodities, Credit Markets, Markets, Oil and Gas | No Comments »
Despite a litany of bleak economic and corporate news confronting investors during the past week, global stock markets digested the bearish fodder with a sense of aplomb. The MSCI World Index and the MSCI Emerging Markets Index gained 4.4% and 10.9% respectively on the week, with other reflation trades such as gold (+9.1%) and oil (+20.4%) also putting in a strong performance.
But investor angst was never completely allayed as seen from the yields on US one- and three-month Treasury Bills briefly trading in negative territory for the first time since 1940, indicating the willingness of risk-averse investors to pay the government for the “privilege” of holding their money. Three-month T-Bills ended the week in positive territory but barely so at a minuscule 0.036% yield, indicating that liquidity was still being hoarded. (Also see my “Credit Crisis Watch“.)
Source: Nick Anderson, Slate
The week kicked off on a positive note after US president-elect Barack Obama had spelled out his plans on Sunday for the biggest infrastructure investment in the US since the 1950s. According to CNN, Obama said: “We understand that we’ve got to provide a blood infusion to the patient right now to make sure that the patient is stabilized. And that means that we can’t worry short term about the deficit [which might surpass $1 trillion before his spending plans are included]. We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving.”
“The resultant infrastructure and physical assets will be far better than endowing busted banks, insurance companies and other financial entities with US taxpayers’ cash, which effectively goes down a black hole,” remarked Bill King (The King Report).
Financial markets reacted negatively to the US Senate’s failure to agree on a $14 billion loan to the troubled automakers. The prospect of the biggest industrial failure in US history caused a sell-off on global stock markets, a widening of credit spreads and an onslaught on the US dollar.
However, the US Treasury was quick to signal its readiness to provide funds to prop up the “Big Three”, as quoted in the Financial Times: “Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry.” This indication resulted in an improved tone on financial markets by the close of the week.
Next, a tag cloud from the plethora of articles I have devoured over the past week. This is a way of visualizing word frequencies at a glance. Key words such as “credit”, “debt”, “economy”, “Fed”, “government”, “market”, “rates” and “stock” occur often, but “gold” is also becoming increasingly prominent.
Back to the issue of markets shrugging off bad news for the second week running. Richard Russell (Dow Theory Letters) commented as follows: “On top of everything else, Lowry’s Selling Pressure Index dropped substantially yesterday [Wednesday] and is now in a definite declining trend. At the same time, Lowry’s Buying Power Index is trending higher. Thus, the odds are saying that the trend of the stock market is turning up.
“This is all the more dramatic since this potential upturn has arrived in the face of black-bearish news. Markets bottoming and rising in the face of bearish news are often the most profitable ones. I have never seen a bear market hit its low amid happy news headlines.”
On a fundamental note, 39% of the constituents of the MSCI World Index sell at a discount to shareholders’ equity. “The cash-rich companies allow investors to pay nothing for future earnings streams,” said Jean-Marie Eveillard in an interview with Bloomberg.
A positive for the bulls is that the period post Thanksgiving through the end of the year has usually been a bullish time for stocks, based on studies by Jeffrey Hirsch (Stock Trader’s Almanac). Should the bullish seasonal tendencies provide a tailwind on this occasion, possible first targets are the 50-day moving averages of 8,784 for the Dow Jones Industrial Index (current level 8,630) and 910 for the S&P 500 Index (current level 880).
The last word on equities goes to Hong Kong-based Puru Saxena: “I cannot say with any certainty whether we are already in the early stages of the next cycle. Under my best case scenario, we are in the very early stages of a new multi-year bull market. And under my worst case scenario, we are going to get a very strong rebound (30% move higher in the S&P 500) over a short period of time, which will probably take the markets back to their 200-day moving averages.”
Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.
Economy
“Global business confidence has been shattered. Sentiment is equally negative in North America, South America and Europe. Asian business confidence is not quite as dark, but it is falling rapidly,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Pricing power is quickly evaporating and approaching that which prevailed in 2003, the last time deflation was a concern.” According to the survey results, the global economy is suffering a severe recession.
Economic indicators released in the US during the past week mostly pointed to a deepening recession.
BCA Research said: “The year-end spending season will be the biggest bust in several decades, as consumers have been hit by a double whammy: a meltdown in financial and residential asset prices; and a sharp rise in layoffs. The government’s failure to deliver a fiscal stimulus plan and unfreeze the credit markets imply that the recession will deepen and any recovery will be pushed farther into the future.
“The contraction in payrolls and economic growth will persist until there are some signs that policy actions are finally becoming effective. The fiscal stimulus plan needed to stabilize the economy will be massive and policy rates will stay near zero for a long time.”
The precarious position of the US consumer is illustrated by a plunge of 21.9 points to 63.7 in the annual average of the University of Michigan Consumer Sentiment Index - the largest annual average decline in the history of the Index which began in 1952, according to Asha Bangalore (Northern Trust).
The Fed fund futures are pricing in a 76% chance of a 75 basis-point cut in rates from 1.0% to 0.25% when the FOMC meets on December 16.
However, Bill King questioned the Fed’s approach: “[Effective] Fed funds traded at zero late last night. We have screamed for months that the official or ‘target’ Fed funds rate was irrelevant because the effective funds rate was much lower, and near zero. Now Fed funds are trading at zero. Yet there will be pundits and experts that will assert that the Fed might cut its target funds rate this week to 0.50% or even 0.25% - even though the cut in the target rate is meaningless. Now that the Fed is paying interest to banks, why did the Fed allow the funds rate to trade at zero? Yep, they are terrified by something.”
Also, the Fed is considering issuing its own debt to further expand money supply without clogging up bank balance sheets and making it harder for the Fed to maintain interest rates at the desired level. RGE Monitor said: “… there are upper limits to Treasury issuance and lower limits to the amount of Treasuries the Fed can sell off from the asset side of its balance sheet. One hurdle to issuing Fed bills: The Federal Reserve Act doesn’t explicitly permit the Fed to issue notes beyond currency.”
Elsewhere in the world, economic reports compounded anxiety about a severe global recession. Specifically, Chinese exports in November declined by 2.2% from a year earlier as a result of a drastic slowdown in demand in many of its main markets. The figures were far below forecasts and the +19% figure for October. “This is the worst collapse in Chinese exports since 1999 and is probably just the beginning of a prolonged export contraction,” said Isaac Meng, economist at BNP Paribas, as reported by the Financial Times.
Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.
Source: Yahoo Finance, December 12, 2008.
In addition to interest rate announcements by the FOMC (Tuesday) and the Bank of Japan (Thursday), next week’s US economic highlights, courtesy of Northern Trust, include the following:
1. Industrial Production (December 15): The 1.4% drop in the manufacturing man-hours index in November suggests a 1.0% decline in industrial production. The operating rate is projected to have dropped to 75.7. Consensus: -0.8%; Capacity Utilization: 75.7 versus 76.4 in October.
2. Consumer Price Index (December 16): A 0.7% decline in the CPI is forecast for November versus a 1.0% drop in October, reflecting largely lower energy prices. The core CPI is expected to have moved up by 0.1% after a 0.1% decline in October. Consensus: 1.3%, core CPI +0.1%.
3. Housing Starts (December 16): Permit extensions for new homes fell by 9.2% in October, inclusive of a 12.6% drop in permits issued for single-family homes. These figures suggest a sharp drop in housing starts (730,000). Consensus: 740,000 versus 791,000 in October.
4. Leading Indicators (December 18): Interest-rate spread and money supply are the only two components likely to make a positive contribution in November. Stock prices, initial jobless claims, manufacturing workweek, consumer expectations, vendor deliveries, and building permits are expected to make negative contributions. Forecasts of money supply and orders of consumer durables and non-defense capital goods are used in the initial estimate. The net impact is a 0.5% drop in the leading index during November, assuming building permits fell. Consensus: -0.5 %
5. Other reports: NAHB Survey (December 15), Current Account (Q4) (December 17), Philadelphia Fed Survey (December 18).
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, December 12, 2008.
Equities
Global stock markets rallied strongly during the past week as bargain-hunters looked past the grim economic and corporate reports. Both mature and emerging markets participated in the rally, as shown by the gains of the MSCI World Index (+4.4%) and the MSCI Emerging Markets Index (+10.9%). Notwithstanding the improvement, these indices were still down by 47.4% and 58.8% respectively since the peaks of October 2007.
Particularly noteworthy, the MSCI Emerging Markets Index has been outperforming the Dow Jones World Index since late October (rising green line), after a period of solid underperformance from May to October (falling line).
The chart below shows the performance of the four BRIC countries since the November 20 lows. Brazil (orange line), India (green) and Russia (red) have all recovered sharply, but China (blue) has underperformed after initial outperformance following the climactic[MR2] November 10 sell-off.
Click here or on the thumbnail below for a (pleasantly green) market map, obtained from Finviz, providing a quick overview of last week’s performances of global stock markets (as reflected by the movements of ADR stocks).
The Dow Jones Industrial Index was one of the few major indices to record a negative return during the past week, with US markets in general lagging other bourses as shown by the major index movements: Dow -0.1% (YTD -34.95), S&P 500 Index +0.4% (YTD -40.1%), Nasdaq Composite Index +2.1% (YTD ‑41.9%) and Russell 2000 Index +1.6% (YTD -38.8%).
The bar chart below shows the US sector performances over the week, and specifically how strongly energy and materials have recovered. Nine of the ten best-performing groups were related to commodities (diversified metals & mining, coal & consumable fuel, aluminum, steel, gold, oil & gas drilling, oil & gas exploration & production, gas utilities[MR3] , and oil & gas equipment & services).
Jamie Dimon, JPMorgan Chase’s (JPM) chief executive, prompted a sharp fall in financial shares with a warning that his bank was having a tough fourth quarter after a “terrible” November and December. Goldman Sachs’ (GS) earnings report on Tuesday is keenly awaited.
Based on the outperformance of emerging-market stocks and the sharp recovery of commodity-related groups, it would appear that investors are becoming less risk averse. Another example is the outperformance of small caps since the November 20 lows. A study published by Bespoke on December 8 highlighted the decile performance of stocks in the S&P 500 Index based on market cap. As shown by the chart below, the two deciles of the largest-cap stocks in the S&P 500 increased by about 17%, while the decile of the smallest-cap stocks was 54% higher.
Fixed-income instruments
The yields on government bonds generally edged up during the past few trading days after a record-breaking plunge since the beginning of November.
The UK ten-year Gilt yield increased by 17 basis points to 3.60% and the German ten-year Bund rose by 26 basis points to 3.30%. Although the US ten-year Treasury Note yield declined by 7 basis points to 2.59% on the week, the yield edged up from an earlier five-decade low of 2.48%.
John Hussman (Hussman Funds) expressed his concern about the level of Treasuries: “The problem with Treasury yields here is that while there are good economic reasons for the downward yield pressures, the levels are low enough to invite explosive spikes that can easily wipe out a year or more of yield-to-maturity in a few days.”
Emerging-market bonds moved in an opposite direction to mature bonds, with the JPMorgan EMBI Global Index gaining 2.4% during the week.
US mortgage rates were almost unchanged on the week, with the 30-year fixed rate rising by 2 basis points to 5.71% and the 5-year ARM declining by 1 basis point to 5.95%
The CDX and iTraxx credit indices, US Treasury Bills and high-yield spreads are still at distressed levels. Some improvement has been seen as a result of the central banks’ actions, notably the tightening of the TED and LIBOR-OIS spreads, and lower mortgage rates. However, credit spreads need to narrow further to indicate that liquidity is moving freely again and credit markets are starting to thaw. (Also see my “Credit Crisis Watch“.)
Currencies
The US dollar fell sharply as the recent relationship between risk aversion and dollar strength weakened as a result of US-specific factors like the deterioration in the US trade balance and the automaker woes. The greenback plummeted to a 13-year low against the Japanese yen and touched its lowest level against the euro for seven weeks.
As shown by the chart below, the dollar has broken below its 50-day moving average and seems to be topping out. Are foreign investors coming to the conclusion that the US currency, which briefly last week yielded a negative yield, is no longer an attractive option?
Over the week the US dollar lost ground against the euro (-5.0%), the British pound (-1.8%), the Swiss franc (-3.6%), the Japanese yen (-1.8%), the Canadian dollar (-2.0%), the Australian dollar (-3.0%) and the New Zealand dollar (-2.2%). The US currency also fell against emerging-market currencies[MR4] , like the South African rand (-2.0%).
The British pound came under renewed pressure as the worsening economic situation triggered concerns of a currency crisis. Sterling’s trade-weighted index fell to its lowest level since record-keeping began in 1981.
Commodities
The Reuters/Jeffries CRB Index (+8.8%) closed higher by the end of the week - only its sixth positive week since commodities peaked early in July. The Baltic Dry Index - a benchmark for shipping major raw materials including coal, iron ore and grain - bounced by 15.2% from very oversold levels.
The graph below shows the movements of various commodities over the past week, indicating an improvement across the whole complex (with the exception of natural gas) as a weak US dollar pushed prices higher.
The International Energy Agency urged a “substantial” cut in Opec output when the oil cartel meets next week, as global oil demand this year is expected to contract for the first time in 25 years. The price of West Texas Intermediate crude surged by 20.4% in expectation of a cut of at least 1 million to 1.5 million barrels a day.
Gold bullion (+9.1%) remained in favor with investors as a result of a solid supply/demand situation, store-of-value considerations and a weaker US currency. The chart below illustrates the strong inverse relationship between gold (green line) and the dollar (red line). In addition, gold has broken above its 50-day moving average (blue line) and trades at about the same level it started off in January 2008 - quite a feat in these difficult markets. Platinum (+4.9%) and silver (+8.5%) improved in tandem with the yellow metal.
After the storm comes the calm. With only 12 more trading days remaining before we wish the tumultuous 2008 goodbye, let’s hope the calm lies just ahead. And as Richard Russell reminds us: “Calm after a bearish trend is usually bullish.” Meanwhile, the news items and words from the investment wise below will hopefully assist in steering our portfolios on a profitable course.
That’s the way it looks from Cape Town.
Source: Dave Granlund
YouTube: The twelve days of bailouts
A bailout song for the holidays.
Source: YouTube, December 6, 2008.
New York Magazine: Oracles of doom
They always knew the economy would collapse. What do they think will happen next?
FORTUNE TELLER: Gerald Celente
Trends Research Institute founder; owner of collapseof09.com
TRACK RECORD
Predicted 1987 crash, 1997 Asian currency crisis; said in 2007 that US was headed for “economic 9/11″ in 2008.
CURRENT PREDICTION
“Products are going to be cheaper to buy, but guess what? You’re going to need more dollars to buy them because your dollar’s going to be worth less. There is no fiscal or monetary policy that can save this. You cannot save it by printing more money.”
FORTUNE TELLER: Nouriel Roubini
NYU business professor; chairman of RGE Monitor
TRACK RECORD
Predicted this year’s crisis in 2006, pointing to a housing bust, oil shocks, and interest-rate increases.
CURRENT PREDICTION
“It’s becoming a global recession. I expect it to be the worst US recession of the last 50 years. I expect a cumulative fall in output from the peak of 4% and the unemployment rate going all the way to 9%.”
FORTUNE TELLER: Peter Schiff
President of Euro Pacific Capital
TRACK RECORD
Published “Crash Proof: How to Profit From the Coming Economic Collapse in February 2007″; star of YouTube video “Peter Schiff Was Right 2006-2007.”
CURRENT PREDICTION
“I predicted that the economy would collapse. The bigger risk I saw was the government’s attempt to solve the problem by doing exactly what they’re now doing. They’re going to create another Great Depression, but worse, because the cost of living will go through the roof.”
FORTUNE TELLER: Richard Russell
Founder of the Dow Theory Letters
TRACK RECORD
Predicted bottom of 1974 bear market; exited market before crashes in 1987 and 2000.
CURRENT PREDICTION
“As long as we can hold the Dow above 7,470, I think the situation is hopeful. That’s the halfway level from when the bull market started in 1982 and when it ended in 2007. My guess is that it will break that level. Most bear markets have wiped out more than 50% of a bull market.”
FORTUNE TELLER: Barry Ritholtz
CEO and equity research director of Fusion IQ; blogger at The Big Picture
TRACK RECORD
Predicted downturn last year.
CURRENT PREDICTION
“In March, the first-quarter numbers start coming out, and that’s potentially a problem. It’s just going to be an issue of dealing with the market. If earnings continue to drop and you end up with multiple contractions, that basically takes you to a really bad, ugly place, which is an S&P at 400 or 500. I don’t think that’s likely, but it’s certainly possible.”
FORTUNE TELLER: Jeremy Grantham
Co-founder and chairman, GMO LLC
TRACK RECORD
His 1998 ten-year forecast showed severe market declines in 2007 and 2008; warned of global bubble in April 2007.
CURRENT PREDICTION
“I would think, just to guess, that the period of heroic volatility will end pretty soon and will be replaced by a rather 1974-ish environment, where you quietly get bitterly resigned to your steady diet of bad news.”
Source: Jeff VanDam, New York Magazine, December 7, 2008.
CNBC: Merrill Lynch - outlook for 2009
“An economic and investment outlook for 2009, with Merrill Lynch’s Richard Bernstein and Davis Rosenberg.
Source: CNBC, December 11, 2008.
Financial Times: Obama to focus on stimulus not deficit
“Barack Obama on Sunday spelled out his plans for the biggest infrastructure investment in the US for half a century. The president-elect argued that with the economy reeling, his incoming administration could not afford to worry about a spiralling budget deficit.
“Mr Obama’s proposals for government works on roads, bridges, internet broadband and school buildings, together with energy efficiency measures and health spending, are far more detailed than the normal announcements during a time of transition.
“At a time of deepening economic gloom - with half a million jobs lost last month alone - president George W. Bush has been largely absent from the recent economic debate. Mr Obama is highlighting his concern at the depth of the recession he will inherit, while fast-tracking his plans to counter it.
“‘Things are going to get worse before they get better,’ Mr Obama said on Sunday on NBC’s Meet The Press. He emphasised that his plans represented the largest US infrastructure programme since the federal highway system in the 1950s.
“‘The key is making sure we jump-start the economy in a way that doesn’t just deal with the short term, doesn’t just create jobs immediately, but also puts us on a glide path for long-term sustainable economic growth.’
“Noting the US budget deficit might surpass $1,000 billion before his spending plans are factored in, Mr Obama added: ‘We understand that we’ve got to provide a blood infusion to the patient right now to make sure that the patient is stabilised. And that means that we can’t worry short term about the deficit. We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving.’
“He wanted a strong set of financial regulations to make banks, credit ratings agencies, mortgage brokers and others ‘much more accountable and behave much more responsibly’.
“‘I am absolutely confident that if we take the right steps over the coming months that not only can we get the economy back on track but we can emerge leaner, meaner and ultimately more competitive and more prosperous,’ Mr Obama said at a subsequent press conference.”
Source: Daniel Dombey, Financial Times, December 7, 2008.
Bill King (The King Report): Obama Plan one of the better plans
“The Obama Plan to spend massive amounts of money on infrastructure in the US is one of the better plans being proffered to keep the US out of a depression. But it has its drawbacks.
“Other stimulus plans put money or entitlements in US consumers’ pockets. Most of the money ends up in China, Japan or OPEC. Most infrastructure spending will remain in the US. And instead of just passing out checks or larger entitlements, jobs, mostly temps, will be created and permanent assets will result.
“The resultant infrastructure and physical assets will be far better than endowing busted banks, insurance companies and other financial entities with US taxpayers’ cash, which effectively goes down a black hole.
“Obama’s Plan will boost blue collar employment, provided a limited number of illegals are hired. This will produce an income shift to blue collar and lower middle class households. But fired employees of financial, high tech and other high-end jobs are unlikely to participate. So the multiplier effect of increased income will be less on the economy in general.
“The negatives of the plan, besides the massive debt and likely corruption, is that it does not remedy structural problems in the US economy and financial system. There will be few new industries spawned and therefore few permanent well-paying jobs. Nothing addresses the savings and investment problems.
“There is too much capacity in the world. There are hundreds of empty or abandoned factories in China alone. Until excess capacity is scuttled and new industries appear, stable employment is a fantasy.
“The real problem, the one that solons will not address, is the US welfare state is busted. The Keynesian and monetary stimuli that were abused over many decades to paper over welfare state spending are now being escalated to an unsustainable degree in a last grand attempt to salvage the welfare state system.
“Like all state attempts to stave off a debt deflation by running the printing press and nationalization, it will likely result in a massive inflation that destroys the nation’s fabric and the financial assets of the upper middle class and elites. The middle and lesser classes have few financial assets.”
Source: Bill King, The King Report, December 9, 2008.
Financial Times: Treasury signals rescue for carmakers
“The US administration was on Friday scrambling to save Detroit’s troubled car industry, as General Motors said it was closing most of its North American manufacturing plants for the month of January in the wake of the Senate’s failure to agree a $14 billion loan for GM and Chrysler.
“The US Treasury signaled it was ready to step in with funds intended to prop up the financial system to prevent the biggest industrial failure in US history.
“‘Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,’ the Treasury said.
“GM’s bonds fell to a new low of 9-10 cents on the dollar on fears of a bankruptcy by America’s largest domestic carmaker, before recovering to 15 cents on the news that the Bush administration was looking for alternative financing.
“For weeks George W Bush, the US president, has resisted using the $700 billion troubled asset relief program to provide aid to the carmakers, arguing that such an interventionist step would be a misuse of funds.
“However, facing the prospect of the collapse of one or more of the Detroit companies, the White House indicated it had few other options. ‘A precipitous collapse of this industry would have a severe impact on our economy and it would be irresponsible to further weaken and destabilize our economy at this time,’ said Dana Perino, White House spokeswoman, specifically noting the possibility of using Tarp funds.
“A Chapter 11 bankruptcy filing by GM, the world’s biggest carmaker, would mark the biggest industrial failure in US history.”
Source: Daniel Dombey, John Reed and Bernard Simon, Financial Times, December 12, 2008.
Reuters: Fed mulls issuing own debt
“The US Federal Reserve is considering issuing its own debt for the first time, the Wall Street Journal said, citing people familiar with the matter.
“Fed officials have approached Congress about the move, which could include issuing bills or some other form of debt and would provide the central bank with more flexibility to tackle the financial crisis, the Journal said.
“The Fed can already print as much money as it wants, but issuing debt is largely the province of the Treasury Department.
“The Fed stepped in with emergency credit for investment bank Bear Stearns in March and insurer AIG in September, and threw open its direct loan window to Wall Street firms this year in a bid to stabilize financial markets amid a credit freeze.
“But with the credit crisis showing no signs of abating, and the narrow scope for further interest rate cuts from the present levels of 1%, economists expect the Fed to look at new ways to boost the supply and circulation of money to avoid a deflationary slump.”
Source: Reuters, December 10, 2008.
Paul Kasriel (Northern Trust): The credit rating on a benevolent counterfeiter’s debt - infinity A?
“Why would the Fed be contemplating issuing its own debt? To soak up in the future some of the massive credit the Fed has created in the past year or so. Why would the Fed not just sell US Treasury securities from its portfolio in order to soak up this excess Fed credit? Because, as shown in the chart below, the Fed’s outright holdings of US Treasury securities has dropped from a shade under $800 billion to about $475 billion as Fed credit outstanding has risen from a little over $800 billion to about $2.1 trillion. In percentage terms, the Fed’s outright holdings of US Treasury securities has gone from a bit over 90% of reserve bank credit outstanding to about 22-1/2%. The Fed is afraid it might run out of US Treasury securities to sell!
“I can see nothing sinister about all this. It is not a conspiracy to print money. Just the opposite. It is a way to destroy some of the paper the Fed already has ‘printed’.”
Source: Paul Kasriel, Northern Trust - Daily Global Commentary, December 10, 2008.
Bloomberg: Fed refuses to disclose recipients of $2 trillion
“The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from US taxpayers and the assets the central bank is accepting as collateral.
“Bloomberg filed suit November 7 under the US Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.
“The Fed responded December 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.
“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital, which oversees $22 billion in assets.
“The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.
“Congress is demanding more transparency from the Fed and Treasury on bailout, most recently during December 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had ‘been bamboozled’.
Source: Mark Pittman, Bloomberg, December 12, 2008.
The Wall Street Journal: Mayors get in line for US funds
“Big-city mayors will arrive on Capitol Hill Monday to lobby for more federal spending to be funneled to urban areas that they say drive the country’s economic engine.
“The push comes after a strong Democratic turnout in metropolitan areas helped President-elect Barack Obama - who is set to become America’s first urban president in almost half a century - win by such a decisive margin in November.
“A delegation of mayors, including Michael Bloomberg of New York and Antonio Villaraigosa of Los Angeles, plans to ask the federal government to distribute funds directly to cities instead of going through state governments. The group is set to present a list of more than 4,600 infrastructure projects that they say are ‘ready to go’.
“Tom Cochran, executive director of the US Conference of Mayors, which is organizing Monday’s event, said the next administration has signaled that it will coordinate financing for projects for an entire metropolitan area instead of dealing with cities and suburbs separately.
“‘I am of the opinion, based on our conversations with President-elect Obama, that he gets it,’ said Mr. Cochran. ‘You can’t just have a transportation system that stops at the city line.’
“Mr. Obama’s transition office is drawing up plans to create a White House office on urban policy, which would report directly to the president, to coordinate funding for cities from different federal agencies. Mr. Obama has pledged to provide new funding for job training, education and grants for local governments and organizations.”
Source: T.W. Farnam, The Wall Street Journal, December 8, 2008.
Bloomberg: Interview with Martin Feldstein
“Harvard University professor Feldstein discusses auto bailout, how to fix the housing market as well as Fannie and Freddie, and 3-month T-Bill rates below zero.”
Source: Bloomberg (via YouTube), December 9, 2008.
Ambrose Evans-Pritchard (Telegraph): Deflation virus is moving the policy test beyond the 1930s
“Debt deflation is tightening its grip over the entire global system. Interest rates are creeping towards zero in Japan, America, and now across most of Europe.
“We are beyond the extremes of the 1930s. The frontiers of monetary policy are being pushed to limits that may now test viability of paper currencies and modern central banking.
“You cannot drop below zero. So what next if the credit markets refuse to thaw? Yes, Japan visited and survived this policy hell during its lost decade, but that was a local affair in an otherwise booming global economy. It tells us nothing.
“This time we are all going down together. There is no deus ex machina to lift us out. Certainly not China, which is the most vulnerable of all.
“As the risk grows, officials at the highest level of the British Government have begun to circulate a six-year-old speech by Ben Bernanke - at the time of its writing, a garrulous kid governor at the US Federal Reserve. Entitled ‘Deflation: Making Sure It Doesn’t Happen Here’, it is the manual of guerrilla tactics for defeating slumps by monetary means.
“‘The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost,’ he said.
“His point was that central banks never run out of ammunition. They have an inexhaustible arsenal. The world’s fate now hangs on whether he was right (which is probable), or wrong (which is possible).
“As a scholar of the Great Depression, Bernanke does not think that sliding prices can safely be allowed to run their course. ‘Sustained deflation can be highly destructive to a modern economy,’ he said.
“Bernanke’s central claim is that the big guns of monetary policy were never properly deployed during the Depression, or during the early years of Japan’s bust, so no wonder the slumps dragged on.
“The Fed can create money out of thin air and mop up assets on the open market, like a sovereign sugar daddy. ‘Sufficient injections of money will ultimately always reverse a deflation.’
“Bernanke said the Fed can ‘expand the menu of assets that it buys’. US Treasury bonds top the list, but it can equally purchase mortgage securities from US agencies such as Fannie, Freddie and Ginnie, or company bonds, or commercial paper. Any asset will do.
“The Fed can acquire houses, stocks, or a herd of Texas Longhorn cattle if it wants. It can even scatter $100 bills from helicopters. (Actually, Japan is about to do this with shopping coupons).”
Source: Ambrose Evans-Pritchard, Telegraph, December 9, 2008.
Asha Bangalore (Northern Trust): Household net worth is shrinking rapidly
“Household net worth in the third quarter of 2008 was $56.5 trillion, down 4.7% from the second quarter. This is the largest quarterly decline since the second quarter of 1962 when net worth of households dropped 5.0%.
“Household spending will suffer as setback a household net worth shrinks, which is already visible in consumer spending data, and the proclivity of households to borrow will show a reduction. The chart below indicates that growth of both mortgage and consumer debt have fallen in the third quarter. The sharp drop in mortgage debt (-2.4%) reflects the impact of mortgage foreclosures and a drop in home purchases, while consumer debt grew at a 1.2% pace in the third quarter versus a 7.2% jump a year ago.”
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, December 11, 2008.
Asha Bangalore (Northern Trust): Weak trajectory for retail sales
“Retail sales fell 1.8% in November, after a 2.9% decline in the prior month. Retail sales have dropped for five straight months, the longest string of declines since record keeping for retail sales began in 1967. The wide swings of gasoline prices influence the headline of retail sales. Excluding gasoline, retail sales dropped 0.2% in November after a 1.6% plunge in the prior month. Retail sales excluding gasoline have recorded six consecutive monthly declines. Unit auto sales have fallen in ten out of eleven months of the year.
“The upshot is that with or without gasoline and autos, retail sales show an extraordinary weakness that is seen the overall consumer spending data and this weak trajectory for retail sales and overall consumer spending is predicted to prevail in the near term.”
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, December 12, 2008.
Asha Bangalore (Northern Trust): Consumer spending in post-war recessions
“The chart below illustrates the history of consumer spending during recessions. Consumer spending typically declines in recessionary periods with the exception of the 1948 and 2001 recessions.
“Our forecast includes