UniCredit Bank Warns Plunge In Sterling And Gilts, Britain Is Next “To Be Pummeled By Investors”

Friday, March 12th, 2010

This article is a guest contribution from ZeroHedge.com.

Kornelius Purps, director of fixed income at Europe’s second-largest bank, UniCredit, has issued a stark warning to clients who wish to invest in the Britain: “I am becoming convinced that Great Britain is the next country that is going to be pummeled by investors.” Ambrose Evans-Pritchard reports reports that “Mr Purps said the UK had been cushioned at first by low debt levels but the pace of deterioration has been so extreme that the country can no longer count on market tolerance” and that “Britain’s AAA-rating is highly at risk. The budget deficit is huge at 13pc of GDP and investors are not happy. The outgoing government is inactive due to the election. There will have to be absolute cuts in public salaries or pay, but nobody is talking about that.” And everyone was wondering why the U in STUPID stand for UK (actually make that just CNBC, who never really bothered to even read the original definition). So can the whole sovereign default wave skip the PIIS and go straight to the U?

From the Telegraph:

“Sterling is going to fall further over coming months. I am not expecting a crash of the gilts market but we may see a further rise in spreads of 30 to 50 basis points.”
Yields on 10-year gilts have already crept up to 4.14pc, compared to 3.94pc for Italian bonds, 3.48pc for French bonds, and 3.19pc for German Bunds, though part of this reflects worries about higher inflation in Britain.
Ian Stannard, currency strategist at BNP Paribas, said markets are fretting over how the UK will cover its deficit following the pause in quantitative easing by the Bank of England. The Bank has absorbed £200bn of debt, more than total Treasury issuance over the last year.

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“The UK may have difficulty in attracting extra investors to fill the gap. We think they will have to do more QE as recovery falters,” he said.
BNP Paribas expects sterling to drop to $1.31 against the dollar this year and reach parity against the euro despite troubles in Club Med. “We’re very bearish on the UK,” he said.

And the biggest insult to the island nation? The insinuation that Greece is actually better off that Britain.

UniCredit said Greece is better placed than the UK in coming months even if deficits look comparable. “The polls point to a minority government in the UK, while Greece’s government can count on a majority to push austerity measures through parliament. Secondly, the British tax system offers less leverage for a rise in revenue,” he said.
Paradoxically, Greek tax evasion creates scope for a surge in revenues from tougher enforcement. “It is not out of the question that we will see a positive surprise in Greece: is there any such hope for Britain?” said Mr Purps.

Well Mr. Purps, this means that there is still hope for America. As the still sentient part of the population has decided to show the corrupt administration and the criminals on Wall Street the middle finger and maxed out their withholding exemptions, all it will take is an order from the US politbureau that the Treasury can withhold 100% of every paycheck, and in addition, garnish wages in perpetuity, DCFed at Ben Bernanke’s favorite discount rate of -100%.

Tags: Aaa, Ambrose, Bank Of England, Basis Points, Bnp Paribas, Budget Deficit, Bunds, Cnbc, Currency Strategist, Debt Levels, Evans Pritchard, Fixed Income, Gap, Gilts, Issuance, Outgoing Government, Plunge, Public Salaries, Qe, Stannard
Posted in Commodities, Markets | No Comments »

Economy and Bond Market Highlights

Monday, March 8th, 2010

The Economy and Bond Market

The yield on the 10-year U.S. Treasury Note increased by 7 basis points during the week to 3.68 percent. The entire move came on Friday after the February jobs report showed fewer job losses than expected and the unemployment rate holding steady.

U.S. manufacturing expanded in February for the seventh consecutive month. Although February’s ISM Manufacturing Index came in at 56.5, a drop from January’s 58.4 and lower than the consensus of 57.9, any reading above 50 indicates an expansion. This expansion from August thru February can be seen in the graph below.

Strengths

• The February nonfarm payroll report showed a loss of 36,000 jobs, fewer than the 68,000 than was expected. The unemployment rate for February was unchanged at 9.7 percent, better than expectations of 9.8 percent.
• As explained above, U.S. manufacturing expanded in February for the seventh consecutive month.
• Service industries in the U.S. strengthened more than anticipated. The ISM Non-manufacturing Index for February was 53.0, above the 51.0 expected and the level of 50.5 that was reported in January.
• Same-store retail sales increased for the third consecutive month in February. The International Council of Shopping Centers’ Index of 31 retailers (excludes Wal-Mart) showed a 3.7 percent same-store sales increase in February from a year earlier.
• Figures from the Commerce Department showed that personal spending rose by 0.5 percent in January over December, slightly more than the 0.4 percent expected.

Weaknesses

• Pending sales of existing homes fell 7.6 percent month-over-month in January, below expectations for a 1.0 percent increase. Poor winter weather was a contributing factor.
• Commerce Department figures showed that personal income rose month-over-month in January by 0.1 percent, less than the 0.4 percent expected.

Opportunities

• If financial markets are a good mechanism for discounting the future, the future appears relatively robust. The markets have been able to shake off bad news relatively easily recently, a good sign for the economic recovery.

Threats

• When governments around the world begin to wind down the monetary and fiscal stimulus programs put in place during the economic crisis, it will likely present a headwind for the economy.

Tags: Advertisement Opportunities, Basis Points, Bond Market, Commerce Department, Consensus, Financial Markets, Graph, International Council Of Shopping Centers, International Shopping, Ism Manufacturing Index, Job Losses, Jobs, Market Economy, Nonfarm Payroll Report, Personal Income, Retail Sales, U S Treasury, Unemployment Rate, Wal Mart, Winter Weather
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Roundup: Emerging Markets

Sunday, January 17th, 2010

Emerging Markets
Strengths

• China’s exports rose a stronger-than-expected 17.7 percent in December from a year earlier, the first positive growth since October 2008, and imports surged 55.9 percent. While low base effect from last year cannot be ignored, December’s nominal import value of $112.3 billion was a record high, and China overtook Germany as the world’s largest exporter in 2009 for the first time.
• China’s total vehicle sales jumped 46 percent year-over-year to 13.6 million units in 2009, surpassing the U.S. as the world’s largest auto market. Passenger car sales surged 53 percent year-over-year to 10.3 million units.
• Prices of billet exported from the Commonwealth of Independent States region have risen substantially over the past week, as trading activity resumed following the winter holiday period, according to Morgan Stanley research. Transactions are taking place at $450-455/ton, with demand coming mainly from the Far East and Middle East.

Weaknesses

• China unexpectedly raised the required reserve ratio for large banks by 50 basis points to 16 percent, effective January 18, reflecting government’s concern over excess liquidity and rapid asset price inflation, especially in real estate.
• Following a 5.6 percent inflation reading, the Hungarian Central Bank is likely to slow the pace of rate cuts. Hungary’s economy will remain in recession until the second half of the year on the back of tight fiscal policy and still high borrowing costs

Opportunities

• Sharper than expected recovery in China’s exports and rising inflation expectation domestically may prompt the country’s policymakers to allow the Chinese currency to resume appreciation against the U.S. dollar, a measure consistent with the government’s policy priority to boost consumption going forward. Among major beneficiaries of a stronger yuan will be industries related to outbound tourism including airlines and online travel reservation companies.



• Russian GDP contraction is estimated to decelerate to -5.3 percent in the fourth quarter compared to -9.8 percent in the third quarter. The beginning of economic recovery as well as the base effect means a substantial upside to 3-4 percent growth estimate in 2010.

Threats

• Chinese authority has been increasingly vocal about soaring real estate prices in top tier cities, especially in new, higher end residential properties, and more restrictive policies are likely to be applied to the physical property market. Chinese developers focusing on luxury products may be impacted the most.
• Rising commodity prices threaten to bring an end to the impressive improvement in Turkey’s non-energy current account balance. The current account deficit rose in November to $13 bln from $11.8 bln in October, as non-energy account surplus shrunk to $13.1 bln from $14.2 bln, according to Citi.

Tags: Asset Price, Auto Market, Basis Points, China, Chinese Currency, Commodities, Commonwealth Of Independent States, Emerging Markets, Excess Liquidity, Fiscal Policy, Holiday Period, Import Value, Largest Auto, Largest Exporter, Morgan Stanley, Passenger Car Sales, Policy Priority, Price Inflation, Reservation Companies, Reserve Ratio, Stanley Research, Time China, Winter Holiday
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Roundup: Economy and Bond Market (12/24/2009)

Sunday, December 27th, 2009

The Economy and Bond Market

The yield on the 10-year Treasury note increased by 26 basis points during the holiday-shortened week, leaving the yield at 3.80 percent. The spread between the two-year note and the 10-year note reached a record 285 basis points during the week, likely reflecting investor concern about future inflation levels.

Current inflation, as measured by the Personal Consumption Expenditure Core Price Index (PCE Deflator) shown below on a year-over-year basis, remains relatively contained. The November data released this week showed a 1.4 percent year-over-year increase and was flat on a month-to-month basis.

Strength

• Sales of existing U.S. homes in November rose 7.4 percent to an annual rate of 6.54 million homes, greater than the forecasted rate of 6.25 million.
• Price inflation data this week slightly beat expectations. The Personal Consumption Expenditure (PCE) Price Index for November was up 1.5 percent year-over-year versus a 1.6 percent consensus.
• Personal income in November increased 0.4 percent from October, the fifth consecutive month-over-month increase and the biggest monthly increase since May, while personal spending increased 0.5 percent. The increases left the savings rate unchanged at 4.7 percent for November.
• Initial jobless claims last week declined to 452,000, down from 480,000 the previous week. This was the lowest level since September, 2008. The four-week average for claims, which smooths out fluctuations, fell to 465,250, its sixteenth-straight weekly decline.
• Orders for durable goods increased 0.2 percent in November. However, durable goods orders excluding transportation increased by 2.0 percent, almost twice the 1.1 percent forecast.

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Weakness

• Sales of new U.S. homes in November fell 11.3 percent to a seasonally adjusted annual rate of 355,000, below the expected rate of 438,000.
• Real U.S. gross domestic product (GDP) for the third quarter was revised downward to 2.2 percent from the previously reported 2.8 percent.
• The Richmond Federal Reserve Bank’s Manufacturing Sector Activity Index fell to minus four in December from a positive one in November and a positive seven in October. The consensus expected it to rebound to five.

Opportunity

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4-5 percent. The global economic recovery appears to be taking hold.

Threat

• The Fed reiterated their monetary policy stance in the prior week and on the surface nothing really changed but they are incrementally moving to reduce the policy accommodation and often these things move quicker than many expect.

Tags: Admin Post, Amp, Avw, Basis Points, Bond Market, Cb, Ck, Consensus, D1, Decline, Deflator, Durable Goods Orders, Economy, Fluctuations, GDP, Gross Dom, Gross Domestic Product, Img Src, Inflation Data, Initial Jobless Claims, Investor Concern, Market Economy, Openx, Personal Consumption Expenditure, Personal Income, Price Index, Price Inflation, Random Number, Roundup, S Gross, Year Treasury Note
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Keep Your Eyes on the Yield Curve

Thursday, December 24th, 2009

Stocks are trading at or close to 2009 highs, being helped along by a record steepening of the yield curve. Put simply, on Tuesday the gap between 10- and 2-year US government bond yields hit its widest spread ever – 286 basis points, beating last week’s 276 basis points and the previous record set in August 2003 of 274 basis points.

From across the pond, David Fuller (Fullermoney) said: “Veteran subscribers will recall a remark often used on this site [Fullermoney]: Bull markets do not die of old age - to which I will add warnings by Roubiniesque economists. Instead, they are assassinated - usually by central banks. So how many rate bullets does it take to fell a bull? You may not be surprised to hear that there is no precise answer, because it depends mainly on sentiment and liquidity. We know when central banks start to reduce liquidity, or at least increase its price, but we do not know precisely when that will affect sentiment adversely.

“Note the still widening spread between US 10-year yields over 2-year yields, otherwise known as the yield curve, on this historical. It is still rising, indicating to me that quantitative easing continues. The time to start thinking about closing long portfolios in anticipation of the next bear market, I suggest, will be when the yield curve next inverts by moving below zero. However, the lead was so early last time (early 2006) that some of us became complacent about it.”

Source: Fullermoney

Tags: Anticipation, Basis Points, Bear Market, Bond Yields, Bull Markets, Bullets, Central Banks, David Fuller, Economists, Fullermoney, Gap, Government Bond, Inverts, Last Time, liquidity, Portfolios, Precise Answer, Quantitative Easing, Sentiment, Yield Curve
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Longer Term Bond Indicators Flash Sell

Friday, November 6th, 2009

The yield of ten-year US Treasury Notes has surged by 34 basis points since the middle of October as market participants started adopting a more upbeat outlook on the economy and shied away from safe-haven assets.

Unsurprisingly, the following comes from the minutes of the meeting of November 4 of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association: “Several members noted the graph discussing net fixed income supply in 2009 and 2010, and how issuance will ramp up dramatically in 2010. Federal Reserve purchases have taken an enormous amount of supply out of the market this past year across fixed income markets, but next year, financial markets should expect even greater issuance with no support. Such an outcome could pressure rates.” With quantitative easing set to expire during Q1, it is difficult not to see long-term rates rising, unless the economy falls back into the morass.

Turning to technical analysis, the chart below shows monthly data for the ten-year Treasury Note yield since 1998 and conveys an important message when considering the two momentum-type oscillators at the bottom (ROC and MACD). The ROC has just reversed course (crossing the zero line) for the first time since a buy signal was given at the beginning of 2007 and now indicates a primary sell signal. The MACD provided a similar indication six months ago.

Source: StockCharts.com

In conclusion, I concur with Bill King (The King Report) who said: “There is a very good chance that 2010 will see a horrid global bond market.”

Tags: Basis Points, Bill King, Bond Market, Chart Below Shows, Financial Markets Association, Fixed Income Markets, Global Bond, Good Chance, Macd, Market Participants, Minutes Of The Meeting, Morass, Oscillators, Safe Haven, Securities Industry And Financial Markets Association, Term Bond, Upbeat Outlook, Us Treasury Notes, Year Treasury Note, Zero Line
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Stocks Celebrate Black Monday with Fresh Peaks

Tuesday, October 20th, 2009

On the 22-year anniversary of the 1987 stock market crash yesterday, stocks marched to one-year highs, with the Dow Jones Industrial Index reclaiming the 10,000 level and the S&P 500 Index breaking through 1,100 (although it then declined again to fall shy of this number by two basis points by the closing bell).

First, some comments from regular contributor Kevin Lane, technical analyst of Fusion IQ.

“The S&P 500, which recently broke above a downtrend line (purple line in the chart below), is closing in on its 50% retracement level from the 2007 peak to the 2009 lows near the 1,120 level. This level may cause some minor profit-taking and retracement; however, only a move below 1,000, which would put the S&P 500 back below its recently broken downtrend line and near-term support, would be viewed as a negative. So, until a break of 1,000 occurs, price trends remain up and pullbacks are to be viewed as minor market noise. Again only if 1,000 is violated does the trend turn more corrective.

“We continue to wait to hear investors embrace this rally as a clue it may be nearing a near-term exhaustion peak; however, the overriding theme remains that the market “needs to correct” or is “way overdue” to correct. To further that point we talked to two investors last week that were still “uninterested” and “not invested” in the market even after this large run-up. Our rationale for their apathy is that they are still scarred from last year’s collapse and made the assumption this rally was not real or would soon revert to the negative environment of 2008.

“Typically markets have this way of going to extremes to either scare all investors to the sidelines or seduce them to come back into the markets. The current run with its persistence is doing its best seduction routine to extract the last bit of capital from even the most ardent doubting Thomas.

“While we could be wrong we think the market will remain generally strong, defying consensus (as it has for the last three months), and entice the remaining sideline capital back into the pool. Only at that juncture when sideline liquidity or buying power is exhausted will we have a correction of any magnitude.”

Still from a technical perspective, Adam Hewison (INO.com) sounded a cautious note as explained in one of his popular technical analysis presentations. Click here to access the presentation.

The current rally that commenced in March has lasted for 32 weeks. Interestingly, when considering the 32-week rolling rates of return of the S&P 500 Index the amplitude of the current cycle resembles that of the cycles of 1932, 1937-1938, 1974 and 1982 as shown in the graph below.

Source: Ron Griess, Thechartstore.com, October 16, 2009.

The question that invariably arises is what happened to the returns subsequent to the highs of the four previous cycles. The table below shows that the market mostly worked lower, but the last period was an exception.

Source: Ron Griess, Thechartstore.com, October 16, 2009.

All said, I am still following a cautious approach in anticipation of the market working off its overbought condition and fundamentals reasserting themselves. I will bide my time while the fundamentals play catch-up.

Tags: Apathy, Basis Points, Black Monday, Closing Bell, Collapse, Doubting Thomas, Dow Jones, Dow Jones Industrial Index, Exhaustion, Going To Extremes, Lows, Negative Environment, Price Trends, Pullbacks, Purple Line, Retracement Level, Seduction, Sidelines, Stock Market Crash, Technical Analyst
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Australia: Taking the lead with higher rates, but who will follow?

Thursday, October 8th, 2009

This post is a guest contribution by James Pressler* of The Northern Trust Company.

In a move that surprised some analysts, the Reserve Bank of Australia (RBA) hiked its Overnight Call Rate by 25 basis points to 3.25%. After a spate of strong economic indicators, signs of recovery from Australia’s major trade partners and a moderation in price increases, the markets had priced in some monetary tightening before year-end. This hike confirms those expectations, and along with a few choice comments in the RBA’s accompanying statement, implies that another hike could hit by year-end. Given the economy’s recent performance, we have no complaints about tighter policy.

Today’s headlines made a special effort to point out the RBA’s move was the first tightening amongst the G-20, but in all candor we humbly ask who else could have been a viable contender? With the Euro-zone still struggling with problems in some of its weaker member countries, the US in quantitative easing mode and having posted negative GDP growth since Q4 2008 (although Q3 2009 figures due October 29 should break that streak), and Japan’s base rate having flatlined years ago, only a few niche players within the G20 could even offer a challenge against Australia for first to hike.

But now that the RBA has made its move, the more interesting question is who will be the next to pull the trigger. Right now, the likely candidates are all in Asia: Singapore, South Korea and China. Singapore currently stands as the favorite simply due to timing - the Monetary Authority of Singapore meets on Monday, and now has the opportunity to tweak its monetary stance without being the first in the pool. Its economy posted one of the first technical recessions in Asia due to a plunge in net exports, but in turn its recovery has been quite brisk and without any price pressures. While the temptation to let the economy feed off of cheap credit is very strong, the authorities now have some incentive to remove the ultra- from its ultra-loose monetary policy and start the long process of normalizing interest rates.

Also worth mention is South Korea, which just a year ago had to reassure foreign investors it was in fact not going to slide into the abyss a la 1998. The economy did go through a four-quarter weak patch, but in fact did not experience a technical recession and like many others came back strong in Q2 this year - thanks in part to a little fiscal priming. More to the point, the Bank of Korea timed its moves well over the past year, moderating its rate cuts as to not feed into a domestic asset bubble. Now with Australia taking the lead, the Bank can offer a hike as keeping in line with the regional recovery.

China is the least likely of the three to make a move, although the People’s Bank of China (PBoC) can throw a curveball now and then. Officials have offered the usual batch of central bank talk to cover all possibilities while not committing to a particular position, but the central theme from the PBoC suggests that while a recovery is well underway, it is an uneven rebound and there is still significant fragility in certain parts of the economy. Along with a few other key words we think China will remain on hold until early-2010, although given how much bank lending grew in the first half of the year we cannot help but wonder if inflation is a concern.

With global trade having restarted - although from a lower base - it is no surprise that Asia is seeing the first fruits of recovery. Now that the RBA has validated its personal belief that the worst has passed with its own rate hike, other economies will follow suit before the year is over. Whether those economies are ready for higher interest rates, however, is another story altogether.

** James Pressler is an associate international economist at The Northern Trust Company, Chicago. He joined the bank in 1993 and has been in Economic Research since 1995.

Source: Northern Trust - Daily Global Commentary, October 6, 2008.

Tags: Asia Singapore, Bank Of Australia, Basis Points, China, Choice Comments, Euro Zone, G20, GDP Growth, James Pressler, Monetary Authority Of Singapore, Monetary Stance, Niche Players, Northern Trust Company, Price Increases, Price Pressures, Recessions, Reserve Bank Of Australia, Reserve Bank Of Australia Rba, Special Effort, Taking The Lead, Trade Partners
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Bonds & equities: Expect a major shift

Sunday, September 27th, 2009

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

The S&P has skyrocketed 58% since its bottom in early March, while the Dow is up 50% and the Nasdaq has surged 68% during that time. Meanwhile, bond prices led a rally as rates on the benchmark 10-year note have declined some 40 basis points since early August. This is good news for business: higher bond prices make it easier to refinance debt and stay in business.

Meanwhile, across the country, Main Street investors are weighing whether they should jump back into the market. However, the price correlation between equities and bonds of late has some argue that typically, if equities are trending higher, then bonds would head lower, and yield would be higher, due to concerns of higher inflation. This essentially describes “the Fed Model“, which is a theory of equity valuation popular among security analysts.

Now, the fact that bonds and equities in general are both firm seems to beg the question - which rally would end first - equities or bonds? This is an intriguing question which I will attempt to examine here.

A Split Personality Spells Uncertainty

Based on the Fed Model, bond yields should have an inverse relationship with the stock market in general. We can start by comparing the S&P 500 index (SPX) and the 10-year Treasury notes yield. As displayed in Fig. 1 by the two dotted trend lines, the correlation between stocks and bond yields is time-varying and, on average, negative over the last decade. Nevertheless, it appears, within the last two years, the negative correlation is more pronounced during the bear phase of the stock market from approximately May 2008 to March 2009 (Fig. 2 green circle).

This simple observation is actually supported by economic research suggesting that the lower expected inflation and the real interest rate is likely to increase the negative correlation between stock prices and bond yields; and that the sharp inverse between stock prices and bond yields in the 1990s bull market can be partially attributed to the lower inflation risk during this period.

The following are some plausible drivers of the current price co-movement between bonds and the equities market:

1. Fast money from Institutional and hedge funds is being allocated to both equities and bonds.

2. Flight from money markets to Treasuries due to the ultra-low interest rates in money markets and massive amounts of cash in the system as a result of the most synchronized global quantitative easing in history.

3. Depreciating US dollar is pushing up everything across the board from commodities, equities as well as bonds.

4. Market’s low expectation of future inflation signaled by the TIP spread of only about 1.75%. That is bond market’s 10-year expectation of inflation is now around 1.75%, lower than the inflationary expectations from 2003-2007 of around 2.5%. Low inflation expectation tends to push down bond yields and drive up the equities market.

5. Investors over-react to the “positive assertions” such as Federal Reserve Chairman Ben Bernanke statement that the recession is “likely over.”

Inflation & Interest Rate Expectations

There is often a multi-year lag between the cause (money-supply growth) and the effect (rising prices). So, even though we will probably be in the deflationary phase for the next 12 months or so, once economic growth starts kicking in, we’re bound to experience inflation.

What’s more, the current low inflation expectation of 1.75% is signaling the stock market is most likely mispriced and overvalued right now. Wider recognition of the inflation problem will eventually emerge. Inflation plus a recovery means sooner or later the Fed is going to have to start raising rates.

Higher interest rates and inflation expectations, coupled with the overvaluation in the equity markets could lead to a bear phase and the dreaded W-shape double dip economic scenario. This would mean a major decline in both the stock market and Treasury bond prices (a major rise in bond yields) and borrowing costs for companies will increase exponentially, thus further hindering future growth prospects in the economy.

Expect A Major Correction

The stock market is overvalued and due for a substantial pullback based on any measure of future earnings. Ultimately, bond yields are unsustainable long term, and must rise significantly to pay holders of US Debt for the risk of holding Treasuries against the backdrop of inflated government balance sheets, larger budget deficits, and associated interest expenses on the national debt.

It’s ironic that the takeaway from all this is that both the equities & bond market are mispriced and headed in the opposite direction over the next 24 months. Equities are way overpriced and headed for a major correction (Dow 8,000 level) is a more rational valuation even taking into account improved earnings in 2011.

Expect the 10-year Treasury yield to rise above the 5.25 level in 2011. Increased borrowing costs, a jobless recovery, the collapse of commercial real estate will provide quite a headwind for anyone thinking of making a killing in equities over the next 2 years from the long side.

Bottom Line - Portfolio Repositioning

Start investing in alternative investments like residential real estate, which is where most of the smart money will seek outsized returns, as slowly but surely the favorable long-term demographics start to kick in, as the population increases, excess housing inventory evaporates completely providing for a housing squeeze in 2011. Real estate is actually the best inflation hedge of all, as they call it “Real” for a reason, unlike the US currency.

Source: Dian Chu, Economic Forecasts & Opinions, September 24, 2009.

* Dian Chu is a market analyst, trader and financial writer for Zero Hedge, Seeking Alpha and Daily Markets. Her articles are also syndicated to Reuters, USA Today and BusinessWeek. Professional credentials include M.B.A., C.P.M. and Chartered Economist with extensive professional experience in market segment forecasting and strategies. She is currently working in the US in the energy sector.

Tags: 10 Year Treasury Notes, Basis Points, Bond Prices, Bond Yields, Commodities, Dian, Early August, Economic Forecasts, Equity Valuation, Fed Model, Intriguing Question, Inverse Relationship, Last Decade, Market Analyst, Negative Correlation, Real Interest Rate, Security Analysts, Split Personality, Stock Prices, Street Investors, Trend Lines
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Bill Gross: Investment Outlook (August 2009)

Thursday, July 30th, 2009

Bill Gross shares his latest take on markets, the economy and investing in his August 2009 investment outlook, “Investment Potions.”

Here are a few excerpts:

On price vs. performance - getting the potion you paid for…

But my point is that those who sell investment “potions” must wrap their product with an extra large ribbon because history is not on their side. Common sense would dictate that the industry as a whole cannot outperform the market because they are the market, and long-term statistics revealing negative alpha for the class of active managers confirms it. Yet, what a price investors are willing to pay! A recent Barron’s article pointed out that stock funds extract an average 99 basis points or virtually 1% a year in fees from an investor’s portfolio. Bond managers are more benevolent (or less pretentious) at 75 basis points, and many money market funds manage to subsist at a miserly 38. Still, those 38 basis points are as deceptive as the pea that disappears beneath the shell of a street-side con game.

What investors need to do in this new normal market…

Investors looking for love potions or successful investment strategies in this new normal economy dominated by deleveraging and reregulation must focus on some very macro-oriented ingredients as opposed to typical news-dominated minutiae. The latest quarterly earnings report from Goldman Sachs may be an indicator that the financial sector is getting some color in its cheeks, but it doesn’t really let you know what needs to happen in order for the real economy to stabilize as well.

Read the whole newsletter here, or click on the image below.

Source: PIMCO, August 2009 Investment Outlook

Tags: Barron, Basis Points, Bill Gross, Common Sense, Con Game, Financial Sector, Goldman Sachs, Gross Investment, Investment Outlook, Investment Strategies, Looking For Love, Love Potions, Market Investors, Minutiae, Money Market Funds, Portfolio Bond, Potion, Quarterly Earnings Report, Stock Funds, Term Statistics
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David Rosenberg: Corporate Bonds Still More Attractive Than Equities

Saturday, July 4th, 2009

The following paragraphs are excerpts from Thursday’s market musings by David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates in which he deliberates the investment merit of corporate bonds versus equities.

“First, while Baa corporate spreads have narrowed sharply from their Armageddon highs, at 370 basis points they are still pricing in a very bad economic and financial market scenario - still wider than at any point of the 2001 or 1990 recessions or the 1998 LTCM/Russian debt default freeze-up. In fact, history suggests that the corporate default rate would have to rise well above 7% for corporate bonds to deliver negative returns with yields as high as they are at around 7¼%. In a 1¼% inflation rate world, this is a hefty 8½% real rate for investors to chew on. Not too shabby.

“The comparable yield in the equity market, depending on whether one uses reported or operating P/E multiples on forward or trailing earnings, is little better than 6½%. So corporate debt still trumps stocks. And what this 200 basis point ‘yield gap’ is telling you is that either corporate bond prices will need to rally more down the road or we need to start seeing corporate earnings growth recover sharply enough to pull those multiples down to more attractive levels.

“We went back in time to see what the typical one-year total returns for the S&P 500 when the starting point for the P/E multiple is in a 10x-20x range and we get any sort of positive earnings growth in the ensuing twelve months, and indeed that total return growth averages out to be nearly +15%. This is why the valuation is important - when the starting point on the multiple is closer to 30x, you need to see at least 20% earnings growth in the coming year to generate any positive returns in equities at all.

“Our analysis would seem to suggest, given the multiple that coincided with the market trough, and under the proviso that we at least see some moderate positive growth in corporate profits, that the March lows will hold. Our challenge now is navigating the forecast after a massive 40%+ rally that has already occurred without any evidence of a meaningful earnings turnaround. The onus was on the bears back in March; the onus is now on the bulls.

“Our point is that the equity market has already gone beyond - by a factor of three! - what is normal in terms of the returns it usually generates in a given year when the starting point on the multiple is low to mid teens and earnings are up, say, roughly 10%. In other words, there is a whole lot of good news priced into stocks at current price levels.

“From our vantage point, a pullback towards 800 on the S&P 500 would not only be justified under the prospective earnings landscape, but would likely also provide a welcome buying opportunity.”

Source: David Rosenberg, Gluskin Sheff & Associates - Pastry with Dave, July 2, 2009.

Tags: Basis Point, Basis Points, Bond Prices, Chief Economist, Corporate Bond, Corporate Bonds, Corporate Debt, Corporate Earnings, David Rosenberg, Debt Default, Default Rate, Earnings Growth, Gluskin Sheff, Inflation Rate, Market Musings, Market Scenario, Proviso, Recessions, Russian Debt, S Market
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Corporate Spreads Still Have a Way To Go

Tuesday, June 23rd, 2009

Corporate spreads have declined considerably since the “panic peaks” of late last year. For example, the current Baa spread in the US is 374 basis points compared with 611 basis points in December as shown in the chart below.

The chart also shows corporate spreads during other periods of intense economic, financial and geopolitical strains. Strikingly, corporate spreads widened to 724 basis points in 1932 during the Great Depression.

David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, said: “To be sure, corporate spreads have come in a long way from their near crisis highs, but looking at prior peaks around major events and economic downturns, it does appear as though there is still a lot of very bad news priced into the sector.”

Most indications are that the credit market tide has turned on the back of the massive reflation efforts orchestrated by central banks worldwide and that the credit system has started thawing. However, although the convalescence process seems to be well on track, it still has a way to go before confidence in the world’s financial system returns to more “normal” levels, liquidity starts to flow freely again, and the economic recovery can commence.

Click here or on the image below for a larger chart.

Source: Gluskin Sheff & Associates, June 19, 2009.

Tags: Amp, Bad News, Basis Points, Cape Town, Central Banks, Chart Source, Chief Economist, Convalescence, David Rosenberg, Economic Downturns, Economic Recovery, Gluskin Sheff, Great Depression, liquidity, Periods, Postcards, Strains, Strategist, Target, Tide
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