Words from the (Investment) Wise (February 28, 2010)

Sunday, February 28th, 2010

As investors vacillated about the impact of developments in Greece, together with the uncertainty of strong fourth-quarter economic data possibly not carrying over to the first quarter, stock markets experienced two sharp sell-offs and two rebound rallies, limping to small gains on Friday but ending the week modestly down.

Renewed fears over Greece’s debt woes, disappointing German business confidence statistics and lower-than-expected US consumer confidence data tempered investor optimism for risky assts, triggering haven demand for government bonds and the Japanese yen.

Fed Chairman Ben Bernanke provided some support for stock markets on Wednesday by indicating in his testimony to the US House Financial Services Committee that the fed fund rate will remain at exceptionally low levels for an extended period. However, the flip side of the coin is his gloomy picture of the economy still battling high unemployment and a weak housing sector.

“Greece hasn’t gotten so much press since 146 BC when the Romans took over,” said Paul Kasriel (Northern Trust). In news after the close of the markets, the Financial Times reported: “Germany’s biggest banks are looking at a rescue plan for Greece under which they would buy Greek debt backed by financial guarantees from Berlin. One senior German bank official said serious thought was being given to a plan for the German government, working through KfW, its development bank, to issue guarantees to banks that bought Greek debt.”

Source:  Patrick Blower, Guardian

The past week’s performance of the major asset classes is summarized in the chart below - a set of numbers indicating that a degree of risk aversion has crept back into financial markets. Interestingly, unlike equities, both investment-grade and high-yield corporate bonds ended the week in the black. “We believe investors can capture attractive yields and excess spread in the high-yield market with relatively low default risk,” Andrew Jessop, high-yield portfolio manager at Pimco, said in a note on the company’s website (via MoneyNews).

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.

It was essentially a flat week, with the MSCI World Index declining by 0.1%, but the MSCI Emerging Markets Index managing to eke out a positive return of 0.3%. With the Chinese returning from the lunar holiday, Hong Kong (+3.6%) put in one of the better performances among important markets, whereas mainland China (+1.1%) also closed the week in the black.

Notwithstanding the huge rally since the March lows, only the Chile Stock Market General Index has been able to reclaim its 2007 pre-crisis peak and is now trading 9.4% higher. Mexico could be the next country to eliminate the bear market losses.

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

Top performers among stock markets this week were Ukraine (+4.5%), Greece (+3.7%), Hong Kong (+3.6%), Cyprus (+3.2%) and Thailand (+3.0%). At the bottom end of the performance rankings, countries included Turkey (‑6.8%), Malta (-5.7%), Austria (-5.2%), Argentina (-4.9%) and Latvia (-4.2%). Turkey suffered from tensions between the government and the military. Debt-ridden European countries such as Italy (-3.2%), Spain (-3.2%), Ireland (-3.2%) and Portugal (-2.1%) featured strongly at the bottom end of the performance ranking.

Of the 96 stock markets I keep on my radar screen, 33% recorded gains, 60% showed losses and 7% remained unchanged. The performance map below tells the past week’s somewhat bearish story.

Emerginvest world markets heat map

Source: Emerginvest (Click here to access a complete list of global stock market movements.)

Eight of the ten economic sectors of the S&P 500 Index closed lower for the week, with Financials and Consumer Discretionary the only two sectors not under water. (Who would have guessed the Conference Board’s Consumer Confidence Index would fall to its lowest level since July 2009 on Tuesday?)

Source: US Global Investors - Weekly Investor Alert, February 26, 2010.

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Vanguard Extended Duration Treasury (EDV) (+4.3%), iShares MSCI Thailand (THD) (+3.9%) and CurrencyShares Japanese Yen (FXY) (+3.1%).

At the bottom end of the performance rankings, ETFs included iShares MSCI Turkey (TUR) (-8.8%), Claymore/MAC Global Solar Energy (TAN) (-7.2%) and United States Natural Gas (UNG) (down 5.1%).

Referring to a regulatory report released on Tuesday by the Federal Deposit Insurance Corp (FDIC), the quote du jour this week comes from Addison Wiggin, co-author of Financial Reckoning Day Fallout and The New Empire of Debt. He said in a column on The Daily Reckoning site: “The FDIC is even more broke than it was three months ago. The fund the FDIC uses to ‘insure’ your bank account went $20.9 billion in the red during the fourth quarter of 2009. That’s more than twice the deficit reported when the fund first entered negative territory in the previous quarter. Incredibly, the FDIC is still trying to reassure us that all is well because it’s collecting three years of advance payments on the annual assessments paid by its member banks. The fees total $45 billion - barely twice the amount of the current deficit. Yeah, we feel better.

“On top of that, the FDIC’s list of ‘problem banks’ grew during the fourth quarter from 552 to 702. That’s the highest number since 1993 (when, we presume, more independently owned banks were around, so it’s worse than it sounds). Hmmm, let’s see. The number grew 27% in just one quarter. At this pace, every bank in the country will be on the problem list by the fourth quarter of 2012. Another tidbit from the FDIC’s report: Bank lending last year dropped at the biggest clip since 1942. Of course, in that year, the entire economy was shifting to a war footing. So it’s safe to say what we’re seeing now is another unprecedented postwar occurrence.”

Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. “Bank”, “debt”, “economy”, “Fed”, “rate” and “market” all featured prominently, but it was somewhat surprising to see “China” commanding more media mentions than “Greece”.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town when not traveling) are given in the table below. With the exception of the Dow Jones Transportation Index, the Nasdaq Composite Index and the Russell 2000 Index, the indices in the table are all trading below their 50-day moving averages, but all the indices are still above their respective key 200-day moving averages. However, a red light is starting to flash regarding the Shanghai Composite Index, which is within striking distance (20 basis points) of this key support line.

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

Commenting on the technical picture of the S&P 500, Kevin Lane (Fusion IQ) said: “The Index hit minor resistance a few trading sessions back near the 1,112 level. Until this level is taken out the near-term directional bias remains neutral. Lower down, the key level to watch is in the 1,072 area. This support level represents a much more significant uptrend line and if violated would suggest a bigger correction.

“Sentiment indicators are neutral at present, which is a positive, while market breadth remains a mixed bag. Clearly the recent trading activity suggests volatility will be more present in day-to-day trading than over the past few months.”

On the topic of charts, when considering S&P 500 monthly data, going back to 1998, three momentum-type oscillators (RSI, MACD and ROC) all still signal a bullish trend (see chart below). According to Yahoo Finance - Tech Ticker, Barry Ritholtz (The Big Picture) is not as bullish as he was last March when he called the market bottom, but is sticking with stocks. “The easy thing to do now would be to go to cash,” he said, “[But] I rarely find the easy trade is the one that makes you money.” (Incidentally, the long-term chart for US government bonds is in bearish mode.)

Source: StockCharts.com

David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, said: “Let’s face it, the surprise two months into the year is that the stock market is down more than 1% and 10-year Treasury yields are also down 20bps. It is still early in the year to be sure but it also seems clear that the economic data are starting to show some fragility. The S&P 500 has done little more than hover around the 1,100 mark now for six months in what can only be classified as a major topping formation. The VIX index is at 20, not 40; market vane sentiment is closer to 60 than 30; the US dollar is strong, not weak; policies are moving tighter, not easier; and the government is now aiming to curtail the banks whereas a year ago it was all about saving them.

“With a V-shaped earnings recovery already priced in and economic houses, like MacroEconomic Advisors, calling for 4% GDP growth for 2010, it certainly is difficult to highlight where the upside surprises for the market are going to be.”

From across the pond, David Fuller (Fullermoney) adds the following perspective: “Do we have a real crisis today? It is real enough for Southern European countries and obviously heightens sovereign debt concerns from Greece to the USA via the UK, but is this another global crisis? I do not think so, at least not yet although the OECD countries’ problems are far from resolved.

“The loss of upside momentum by most stock markets and many commodities, including precious metals, clearly indicates that global investors have reduced leveraged exposure in the last three months. Whether this is a normal correction (our previously stated 40% possibility) or likely to become a self-feeding and more significant pullback (also a 40% possibility) is hard to gauge, but action near the 200-day moving averages will be revealing. Even in the latter instance, I do not think the global economic background justifies a resumption of bear markets (20% possibility), which were discounting near-depression conditions between 4Q 2008 and 1Q 2009.”

I side with Fuller on his conclusion, but am also cognizant of the 12-month momentum of the S&P 500 narrowly tracking the US GDP-weighted PMI (see graph below). Current levels of the S&P 500 indicate the market is expecting a GDP-weighted PMI in excess of 60.0 vs a current level of 52.3. If the S&P 500 maintains its current levels around 1,100, the 12-month momentum will drop to 39% at the end of March and 27% at the end of April this year. Even this drop in momentum requires the GDP-weighted PMI to rise to 55 and higher. Although not impossible, it seems improbable given the sub-par economic recovery. It can therefore be deduced that the US equity market is somewhat overpriced even if the GDP-weighted PMI should improve to 55. Understandably, Marc Faber suggests (via a Financial Times interview) “investors should make 2010 the year of ‘capital preservation’”.

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

For more discussion on the economy and financial markets, see my recent posts “Montier: Was it all just a bad dream? Or, ten lessons not learnt“, “Barry Ritholtz sticks with stocks, especially emerging markets“, “Q4 earnings in perspective“, “Face to face with Marc Faber” and “Is the credit malaise really over?” (And do make a point of listening to Donald Coxe’s webcast of February 26, which can be accessed from the sidebar of the Investment Postcards site.)

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Economy
“Business sentiment has improved markedly since hitting bottom about a year ago. This improvement has been about the same across the globe, with South Americans somewhat more optimistic and North Americans somewhat less so,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. Businesses are most upbeat when responding to broader questions about current conditions and the outlook into this summer, but remain cautious when responding to specific questions regarding the strength of sales, pricing, inventories and hiring.

Source: Moody’s Economy.com

Meanwhile, the Ifo Business Survey for industry and trade in Germany clouded over somewhat in February. For the first time in ten months, the business climate index has not risen, blaming especially the situation in retailing, which experienced a setback in February. On the whole, the firms have assessed their current business situation somewhat more unfavorably than in the previous month.

Source: Ifo Business Survey, February 23, 2010.

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

Friday, February 26
• Existing home sales and inventories disappoint
• Minor revisions of Q4 real GDP

Thursday, February 25
• Have durable goods orders and shipments turned the corner?
• Total continuing claims remain at elevated level

Wednesday, February 24
• Chairman Bernanke repeats “Fed fund rate to remain exceptionally low for an extended period”
• Sales of new homes post new record low
• As Greece goes, so goes the US?

Tuesday, February 23
• Consumer confidence slips in February
• Case-Shiller Home Price Index records seventh monthly gain

Monday, February 22
• Fed’s Yellen underscores that removing monetary accommodation now is inappropriate
• Chicago Fed Index advances in January

Referring to Fed Chairman Bernanke’s testimony, Asha Bangalore (Northern Trust) said: “The most important message from Chairman Bernanke’s testimony is that the federal fund rate will be held at 0%-0.25% for an extended period. In light of the higher discount rate (0.75% vs. 0.50%) announced on February 18, 2010, market participants obtained confirmation from the Chairman that the change in the discount rate was a removal of emergency accommodation put in place to address the financial crisis and not a sign of tightening of the monetary policy stance.”

“I don’t think the Fed dares increase the fed fund or policy rate in the face of unemployment at double-digit type of levels. This is more of a technical maneuver,” Bill Gross of Pimco told Reuters (via MoneyNews).

In related news, the Treasury said on Tuesday that it would bolster its Supplementary Financing Program by selling $200 billion in short-term debt and storing the proceeds at the central bank, thereby helping the Fed remove reserves from the financial system.

Summarizing the growth outlook, Bangalore said: “Going forward, the US economy is predicted to show moderate growth in the first three quarters of 2010 and strong growth in the final three months of 2010, with the virtuous cycle of real and financial recovery working together to lift economic growth.”

Bespoke highlights a daily Life Evaluation Poll conducted by Gallup.com and Healthways in which participants are asked whether they are “thriving”, “struggling” or “suffering”. As shown below, 56% now say they’re thriving, while 41% say they’re struggling (3% are suffering, which is not shown on the chart). ”These readings are at just about the widest spread we’ve seen since the markets’ recovery began,” remarked Bespoke.

Source: Bespoke, February 26, 2010.

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
Feb 23	9:00 AM	Case-Shiller 20-city Index	Dec	-3.08%	-4.5%	-3.1%	-5.34%
Feb 23	10:00 AM	Consumer Confidence	Feb	46.0	56.5	55.0	56.5
Feb 24	10:00 AM	New Home Sales	Jan	309K	325K	354K	348K
Feb 24	10:30 AM	Crude Inventories	2/19	3.03M	NA	NA	3.08M
Feb 25	08:30 AM	Initial Claims	02/20	496K	425K	460K	474K
Feb 25	08:30 AM	Continuing Claims	02/13	4617K	4570K	4570K	4611K
Feb 25	08:30 AM	Durable Orders	Jan	3.0%	1.6%	1.5%	1.9%
Feb 25	08:30 AM	Durable Goods - ex Transportation	Jan	-0.6%	0.7%	1.0%	2.0%
Feb 25	10:00 AM	FHFA Housing Price Index	Dec	-1.6%	0.4%	0.4%	0.4%
Feb 26	08:30 AM	GDP - second estimate	Q4	5.9%	6.0%	5.7%	5.7%
Feb 26	08:30 AM	GDP Deflator - second estimate	Q4	0.4%	0.6%	0.6%	0.6%
Feb 26	09:45 AM	Chicago PMI	Feb	62.6	57.5	59.7	61.5
Feb 26	09:55 AM	U Michigan Consumer Sentiment - final	Feb	73.6	72.7	73.9	73.7
Feb 26	10:00 AM	Existing Home Sales	Jan	5.05M	5.10M	5.50M	5.44M

Source: Yahoo Finance, February 26, 2010.

Click here for a summary of Wells Fargo Securities’ weekly economic and financial commentary.

Next week sees interest rate announcements by the Bank of England (BoE) and the European Central Bank (ECB) (Thursday, March 4). In addition, US economic data reports for the week include the following:

Monday, March 1
• Personal income
• Personal spending
• PCE prices
• Construction spending
• ISM Manufacturing Index

Tuesday, March 2
• Auto sales
• Truck sales

Wednesday, March 3
• Challenger job cuts
• ADP employment
• ISM Services Index
• Fed’s Beige Book

Thursday, March 4
• Jobless claims
• Productivity
• Factory orders
• Pending home sales

Friday, March 5
• Nonfarm payrolls
• Consumer credit

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, February 26, 2010.

Final words

Sam Stovall, chief investment strategist for Standard & Poor’s Equity Research Services, said: “If everyone is forecasting something, then you know it won’t come true.” (Hat tip: Charles Kirk.) Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards in guarding against popular (and often wrong) market views.

That’s the way it looks from Cape Town with its sun-drenched days.

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Source: Adam Zyglis, Comics.com

Real World Economics Review Blog: Greenspan, Friedman and Summers win Dynamite Prize in Economics
“Alan Greenspan has been judged the economist most responsible for causing the Global Financial Crisis. He and 2nd and 3rd place finishers Milton Friedman and Larry Summers, have won the first - and hopefully last - Dynamite Prize in Economics.

“They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.

“More than 7,500 people voted - most of whom were economists themselves - from the 11,000 subscribers to the real world economics review. With a maximum of three votes per voter, a total of 18,531 votes were cast.

“This blog established the prize in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, ‘Black Swan’ event. In reality, the public perception that economic theories and policies helped cause the crisis is correct.”

Source: Real World Economics Review Blog, February 22, 2010.

BCA Research: Sowing the seeds of the next fiscal crisis?
“Mushrooming government indebtedness has reemerged to the forefront as a major issue. “Global policymakers learned from the volatility during the first half of the 20th century: when faced with an adverse economic shock, the natural tendency for a modern economy with leverage is to deflate and undergo an Austrian-style cleansing process. Thus, there is an incentive for authorities to reflate each time economic and financial problems break out, encouraging a further buildup of debt and leverage in the economy (i.e. push today’s problems forward to the next generation).

“We have coined this the Debt Supercycle. Unfortunately, the dramatic increase in the policy response needed to end the current recession suggests that the Debt Supercycle is nearing an end. In fact, we would argue that the household sector in the US, UK, and many parts of the euro area have already moved beyond their natural debt ceilings, due in part by lax bank lending standards in recent years.

“Given that authorities have reached the limit of their ability to convince households to take on more leverage, governments have instead been forced to leverage themselves to prevent a deflationary economic adjustment. In addition, the nature of the synchronized global downturn meant that substantial currency depreciation was not a viable reflation option for policymakers. As such, monetary and fiscal policy had to do the heavy lifting. Sizable deficits were a necessary evil if authorities wanted to avoid a sustained period of debt-deflation.”

Source: BCA Research - Daily Insights, February 26, 2010.

David Fuller (Fullermoney): Concentrate long-term investments in low risk countries
“There has been a great deal of discussion in the financial press about whether Greece will successfully navigate the crisis it now finds itself in, if the Eurozone will survive a sovereign debt default should one occur and if there is a risk of contagion for countries such as the UK, Japan and the US. These are all important questions which we will have definitive answers for in the coming months and years but to my mind there is a more important question that needs to be addressed first.

“All the issues facing these governments are in essence related to a problem with too much debt and leverage and not enough tax receipts to pay it down. The questions so far have focused on how one country or another might survive this crisis but from the perspective of a judge at an international beauty contest do we want to invest in these countries at all since there are plenty more where these problems are relatively minor if they exist at all?

“Commodity producers such as Australia and Canada have come through this crisis comparatively unharmed. Most of the others are primarily in the so-called emerging markets. Brazil is now a net creditor, China has the biggest foreign currency reserves in the world. Large numbers of countries in Latin America and Asia run trade surpluses. If we look at the world with a broader perspective we see clearly where risk and leverage are concentrated.

“The outcome of the major challenges facing the US, UK, Eurozone and Japan are crucial because of the effect they have on the global market. However, we do not have to invest in the debt, currencies or equities of these countries. Others are better equipped to deal with these issues from a position of strength. They have shown to be credible managers of their economies in a truly testing era and it is surely in these countries one should concentrate long-term investments.”

Source: David Fuller, Fullermoney, February 24, 2010.

Financial Times: Experts eye possible Greek bail-out
“As Greece battles to stop its public finances from drowning in debt, technical experts in eurozone capitals are already looking at the shape of a possible bail-out - despite a chorus of governments insisting that no plans for such a move exist.

“Even Berlin has become so worried about the stability of the euro - and of German banks holding Greek debt - that officials have begun toning down Germany’s “No financial aid for Greece” mantra.

“One senior German official said Berlin and other eurozone governments were prepared to lend Athens money or buy its sovereign bonds, should the Greek administration run into trouble rolling over debt on the markets.

“Lorenzo Bini Smaghi, of the European Central Bank’s executive board, told Italian television that it was ‘possible that money will be needed’ to help Greece. But it would be a sum ‘much more limited’ than the figure of about €20bn ($27bn) discussed by eurozone officials this month.

“Athens has about €20bn in debt coming due in April and May, which will need to be refinanced. Eurozone nations hope that current Greek reforms will convince investors to buy its bonds - with the eurozone only covering any shortfall.

“German officials have said any funding gap the zone might have to fill could well prove ‘quite small’. Berlin might push for the symbolism of all euro nations chipping in modest amounts to meet this shortfall, according to these officials.

“A tried-and-tested allocation key under consideration for this approach is based on the gross domestic product and population-weighted shareholdings of the European Central Bank. By this measure, Berlin would cover 28 per cent of Greece’s funding gap, Paris 21 per cent and Rome 18.

“The bigger the Greek funding need, however, the more this would strain other budgets also under pressure in Italy, Spain, Portugal and Ireland. For this reason, a French official said helping Athens could yet be voluntary.

“In a sign that any help would be decided in an ad hoc manner, a German official said measures would be agreed ‘on a case-by-case basis’. It would be up to each country to decide for itself how to structure its contributions.”

Source: Gerrit Wiesmann and Peggy Hollinger, Financial Times, February 23, 2010.

The Wall Street Journal: Greek debt crisis - Athens choked by general strike
“A massive general strike to protest EU-mandated austerity measures closed banks, government offices and post offices, crippling the Greek capital on Wednesday. The Wall Street Journal’s Andy Jordan reports from the streets of Athens.”

Source: The Wall Street Journal, February 24, 2010.

MartinKronicle: Greece and California death match
“The spreads between Greece/German bunds and California/30-yr Treasuries are widening. Investors are demanding more for carrying the risk. The downgrade in CA paper yesterday will give the Greek bonds a run for their Drachmas …

“According to a Reuters report, the spread between 10-year Greek government bonds and the benchmark Euro zone German bunds has risen to an 11-month high of 298 bps, up from 265 the day before. The high is 300 bps set about a year ago. The equivalent for Spanish bonds is trading at 81 bps premium over German bunds.

“According to an article in Bloomberg, the spreads between CA debt and the 30-year bond are also widening and PIMCO was quoted as saying that the CA debt crisis is headed back to disaster levels.

“Bloomberg: ‘A taxable California bond that matures in 2039 traded today for an average yield of 7.79 percent in blocks of more than $1 million, the highest since December 28, according to Municipal Securities Rulemaking Board data. That opened a gap of 3.15 percentage points between California’s bond and 30-year Treasuries, according to Bloomberg data.’

“Yikes …!

“Add to that the fact that S&P downgraded California’s debt rating to AA- from AA … not that I hold S&P in any esteem - I don’t. But the fact is that CA will now have to pay higher coupon payments on the issuance of new debt thanks to the downgrade. They deserved it.”

Source: MartinKronicle, February 24, 2010.

Financial Times: Goldman role in Greek crisis probed
“The US central bank is looking into Goldman Sachs’s role in arranging contentious derivatives trades for Greece, which helped the country to massage its public finances, Ben Bernanke, chairman of the Federal Reserve, revealed on Thursday.

“‘We are looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece,’ Mr Bernanke said, apparently referring to Greek currency transactions structured by Goldman.

“Testifying before Congress, Mr Bernanke also responded to concerns that instability in markets for Greek debt and other securities has been heightened by trading in other derivatives, known as credit default swaps, which compensate investors in case of default.

“Mr Bernanke said default swaps are ‘properly used as hedging instruments’ and that ‘using these instruments in a way that intentionally destabilises a company or a country is counterproductive’.

“The Securities and Exchange Commission is ‘examining potential abuses and destabilising effects related to the use of credit default swaps and other opaque financial products and practices’, said a spokesman.

“Separately, Phil Angelides, chairman of the US Financial Crisis Inquiry Commission, told the Financial Times he was concerned about the practice of creating securities and ‘fully betting against them’ - and about Goldman’s role in particular. Goldman declined to comment.”

Source: Alan Rappeport, Tom Braithwaite and David Oakley, Financial Times, February 25, 2010.

Financial Times: Bernanke signals US rates to be kept low
“US interest rates will remain at exceptionally low levels for an ‘extended period’ in spite of the ‘nascent’ economic recovery, Ben Bernanke, chairman of the Federal Reserve, told Congress on Wednesday.

“Mr Bernanke painted a gloomy picture of the economy, still struggling with high unemployment and a weak housing market. Inflationary pressures, the main driver of tighter monetary policy, were likely to remain ’subdued’, he said.

“Facing lawmakers for the first time in his second term as Fed chairman, he told the House financial services committee: ‘The Federal Open Market committee continues to anticipate that economic conditions - including low rates of resource utilisation, subdued inflation trends and stable inflation expectations - are likely to warrant exceptionally low levels of the federal funds rate for an extended period.’

“The insistence that rate rises are months away will damp fears that last week’s increase in the discount rate - at which commercial banks can borrow emergency cash from the central bank - from 0.5 per cent to 0.75 per cent heralds a swifter tightening of monetary policy.

“Fed officials, including Mr Bernanke, have indicated it was simply a move to unwind emergency liquidity measures put in place during the crisis, as a result of improving conditions in the financial markets, and not a tightening move. Goldman Sachs economists said it was ‘crystal clear’ the Fed did not anticipate raising rates soon.

“Nevertheless, the Fed this month began to lay out its vision for the sequence of measures that it expects to take to withdraw reserves from the financial system once the economic recovery is sufficiently strong. Although the economy grew at an annualised rate of 5.7 per cent in the fourth quarter of 2009, economists are expecting the pace of growth to slow over the course of the year. The Fed is expecting growth of 3 per cent to 3.5 per cent this year.

“‘A sustained recovery will depend on continued growth in private sector final demand for goods and services,’ said Mr Bernanke.

“Mr Bernanke also addressed the fallout from the financial crisis. He said the US central bank would step up surveillance of financial institutions and agreed that congressional investigators should be allowed to audit the emergency facilities put in place during the crisis.”

Source: James Politi, Financial Times, February 24, 2010.

MoneyNews: Pimco - Fed move isn’t start of tightening cycle
“The Federal Reserve’s surprise move on Thursday to raise the interest rate it charges banks for emergency loans does not mean that a full-fledged tightening cycle has begun, the manager of Pimco, the world’s biggest bond fund, told Reuters.

“‘I don’t think it’s the beginning, really, of a tightening from the standpoint of monetary policy,’ Bill Gross told Reuters soon after the Fed’s decision.

“‘I don’t think it is the beginning of an increase in the fed funds rate or in terms of interest on reserves that has been discussed as well.’

“The US central bank took pains to draw the distinction between the discount rate and its target for the overnight interbank rate, its main monetary policy tool. That rate remains unchanged near zero percent as a fragile US economic recovery struggles to gain traction.

“‘Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities,’ the Fed said in a statement.

“‘The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy,’ it said.

“‘I don’t think the Fed dares increase the fed funds or policy rate in the face of unemployment at double-digit type of levels. This is more of a technical maneuver,’ said Gross.

Source: MoneyNews, February 19, 2010.

Financial Times: Fed efforts boosted by Treasury’s $200 billion debt plan
“The Federal Reserve’s ability to drain excess liquidity from the financial system received a boost on Tuesday when the Treasury revived a plan to sell $200bn in short-term debt and store the proceeds at the central bank.

“The move comes as the Fed lays the groundwork to shrink its balance sheet in preparation for the time when the economy is sufficiently strong to require a tightening of monetary policy.

“By bolstering its Supplementary Financing Programme, the Treasury would help the Fed remove $200bn in reserves from the financial system. Some economists said that this would help bring the Fed’s main interest rate closer to the upper end of its current 0-0.25 per cent target.

“‘This move does mean there will be $200bn fewer reserves in the banking system, which could provide a little bit of lift to the effective fed funds rate,’ said Michael Feroli of JPMorgan. ‘As such, it could be seen as a first step in putting the Fed in position to raise rates.’

“However, the move was described as a ‘purely technical adjustment in liquidity’ by Joseph Abate of Barclays Capital. He said: ‘The $200bn worth of reserves drained … is unlikely to have a noticeable effect on the effective funds rate, which remains locked under 15 basis points.’

“The Fed did not comment on the move, but Ben Bernanke, chairman, could address the issue when he faces Congress on Wednesday. The Treasury programme was introduced during the crisis to help the Fed better manage its balance sheet.

“It had been wound down since last September, when the government’s borrowing capacity ran up against the US debt ceiling. Congress recently agreed to raise the debt ceiling to $1,900bn, making it possible to revive the programme.”

Source: James Politi, Financial Times, February 24, 2010.

TheStreet.com: Stiglitz says beware of double dip
“Joseph Stiglitz, Nobel prize winning economist and the author of Freefall, says the worst effects of the credit crisis may be behind us, but the American economy remains highly vulnerable to a double dip recession.”

Source: TheStreet.com, February 24, 2010.

Asha Bangalore (Northern Trust): Minor revisions of Q4 real GDP
“Real gross domestic product grew at an annual rate 5.9% in the fourth quarter of 2009, slightly higher than the previously reported increase of 5.7%. Upward revisions of inventories, exports, structures, and equipment and software more than offset downward revisions of consumer spending, government spending, and residential investment expenditures to yield a higher headline reading compared with the advance estimate.

“At the cost of reiterating, the fourth quarter headline GDP number is large but not strong because real final sales increased only 1.9% in the fourth quarter, while inventories accounted for nearly seventy percent of the increase in real GDP during the fourth quarter.

“Going forward, the US economy is predicted to show moderate growth in the first three quarters of 2010 and strong growth in the final three months of 2010, with virtuous cycle of real and financial recovery working together to lift economic growth.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 26, 2010.

Asha Bangalore (Northern Trust): Total continuing claims remain at elevated level
“Initial jobless claims rose 22,000 to 496,000 in the week ended February 20. Essentially, initial jobless claims established a bottom in January and have once again resumed an upward trend, which is very worrisome. Continuing claims, which lag initial claims by one week, were virtually steady at 4.617 million and the insured unemployment rate was unchanged at 3.5%.

“Total continuing claims, inclusive of claims under special programs, fell slightly to 10.29 million during the week ended February 6 from 10.56 million in the prior week. Total continuing claims have risen 3.95 million over the past year. The labor market remains the biggest concern of the FOMC, competing closely with the housing market.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 25, 2010.

Clusterstock: The unemployment chart you’ll love and hate
“Here’s an unemployment chart you’ll both love and hate, from Citi’s Steven Wieting.

“As shown below, since 1980, employment (in red) has fallen after corporate profits (in black) have risen, and vice versa. The relationship is very clear.

“Problem is, there’s about a one-year lag between the two trends. This highlights what should simply make sense - companies hire people once they see profits rebounding, and more importantly once they believe that adding more people will lead to higher profits. Still, this fact of economics isn’t fun for the unemployed.

“But here’s the good news. Given the recent rebound in corporate profits the US has already experienced, there is a very high chance that employment will get better over the coming twelve months. One can’t stress enough the fact that employment is a lagging indicator.”

Source: Vincent Fernando and Kamelia Angelova, Clusterstock - Business Insider), February 25, 2010.

Financial Times: US senate moves ahead on $15 billion jobs bill
“The US Senate on Monday voted to move forward on a $15 billion jobs bill proposed by Harry Reid, leader of the Democratic majority in the Senate.

“The 62-30 vote in favour of ending ‘cloture’ prevents a Republican filibuster and came as an exception to the months of gridlock in Congress. It will pave the way for a jobs bill to clear the Senate, just as other critical employment benefits are set to expire.

“Democrats needed to secure two Republican votes to block the filibuster and one came thanks to Scott Brown, making his first vote since he filled Edward Kennedy’s former seat in Massachusetts.

“‘I hope this is the beginning of a new day in the Senate,’ Mr Reid said, invoking Mr Brown by name for his bipartisanship.

“The scaled-back measure is expected to create 250,000 jobs through an array of tax credits and payroll tax exemptions to stimulate hiring. The bill frees businesses from payroll taxes on workers who are hired after more than 60 days of unemployment and gives them a tax credit of $1,000 for new hires that they keep for more than a year.

“The bill also provides funding for highway and transportation projects, allows companies to write-off equipment purchases as expenses and expands the Build America bond scheme to help subsidise school and energy projects.”

Source: Alan Rappeport, Financial Times, February 22, 2010.

Standard and Poors’: Home prices continue to send mixed messages
“Data through December 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of US home prices, show that the US National Home Price Index fell in the fourth quarter of 2009 but has improved in its annual rate of return, as compared to what was reported in the third quarter.

“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 2.5% decline in the fourth quarter of 2009 versus the fourth quarter of 2008. This is a significant improvement over the annual rates reported in the first, second and third quarters of the year, at -19.0%, -14.7% and -8.7%, respectively. In December, the 10-City and 20- City Composites recorded annual declines of 2.4% and 3.1%, respectively. These two indices, which are reported at a monthly frequency, have seen improvements in their annual rates of return every month since the beginning of the year.

“‘As measured by prices, the housing market is definitely in better shape than it was this time last year, as the pace of deterioration has stabilized for now. However, the rate of improvement seen during the summer of 2009 has not been sustained,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s.”

Source: Standard and Poors’, February 23, 2010.

VisualEconomics: Cost of home ownership
“The last three years have seen a significant drop in the cost of housing in the United States; bringing prices back down from once astronomical levels.”

Source: VisualEconomics, February 23, 2010.

Asha Bangalore (Northern Trust): Existing home sales and inventories disappoint
“Sales of all existing homes fell 7.2% to an annual rate of 5.05 million units in January after a 16.2% drop in December. Sales of existing single-family homes declined 6.9% to an annual rate of 4.43 million units. Purchases of existing single-family homes have risen nearly 9.0% from the trough in January 2009. Sales of existing homes fell in all four regions across the nation during January. It appears that the extension of the first-time home buyer tax credit program is yet to translate into increased sales; the program expires in April 2010.

“The median price of an existing single-family home was down 0.4% from a year ago to $163,600. There is a gradual stabilization of home prices visible in latest movements of the median price of an existing single-family home but the recent increase in inventories of unsold homes casts a shadow on projections of further improvements on the price front.

“The seasonally adjusted inventory-sales ratio of single-family existing homes rose to 8.4-month supply during January from a 7.6-month mark in December.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 26, 2010.

Asha Bangalore (Northern Trust): Consumer confidence slips in February
“The Conference Board’s Consumer Confidence Index fell to 46.0 in February from 56.5 in the prior month. This is the lowest since July 2009. Sluggish employment conditions are seen to be a major reason for the loss of confidence in February after a string of three monthly gains. The Present Situation Index (19.4 vs. 25.2 in February) and the Expectations Index (63.8 vs. 77.3 in February) declined in February.

“The number of respondents indicating that ‘jobs are to hard to get’ rose in February (47.7% vs. 46.5% in January), while the number claiming that ‘jobs are plentiful’ fell (3.6% vs. 4.4% in January). The net of these two indexes tracks the unemployment rate closely. The difference between these two indexes widened to 44.1 in February from 42.1 in January, suggesting that the jobless rate is most likely to inch higher in February.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 23, 2010.

Asha Bangalore (Northern Trust): Have durable goods orders and shipments turned the corner?
“The headline number for orders of durable goods in January (+0.3%) is strong. But, shipments of durable goods edged down 0.2% after a 2.4% increase in the prior month. The durable goods numbers always show big swings because of large ticket items. The January increase in orders was lifted by the 126% increase in orders of aircraft, with orders excluding transportation posting a 0.6% drop. One way to sort out the large deviations of month-to-month data is to look at year-to-year changes. On a year-to-year basis, orders (+9.9%) and shipments (+1.5%) of durable goods posted gains in January, after an extended period of declines going back to early-2008. This change in trend is noteworthy and warrants close watching.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 25, 2010.

Financial Times: Foreclosures in the US
“Aline van Duyn, US markets editor of the Financial Times, says that a number of American homeowners whose houses are worth less than their mortgages are choosing to let their homes go into foreclosure and let the banks suffer the losses.”

Source: Financial Times, February 22, 2010.

Clusterstock: Bankers getting paid a lot to sit on their hands and do nothing
Yesterday we pointed you to the latest data from the St. Louis Fed showing that bank lending continues to plunge. Rather than ply businesses with loans, banks are instead opting to hoard cash and buy Treasuries.

“And yet despite the lending shutdown, bonuses are back up, per fresh data out today from the New York Comptroller. In other words, sitting on your hands and doing nothing is a pretty lucrative gig.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Business Insider, February 23, 2010.

Financial Times: Number of US “problem” banks soars
“The number of problem banks in the US continued to soar in last year’s fourth quarter, hitting their highest level since 1993, according to a regulatory report released on Tuesday.

“The findings by the Federal Deposit Insurance Corp suggest that, although the US economy is on the mend, the financial industry, bedevilled by souring residential and commercial real estate loans, will take longer to recover.

“The FDIC said 702 banks were considered troubled at the end of 2009, up from 552 three months earlier. Problem assets totalled $402.8bn in the final period, compared with $345.9bn in the third quarter. By contrast, Lehman Brothers listed $639bn in assets at the time of its bankruptcy filing in September 2008.

“No longer confined to Wall Street, the financial crisis has cascaded over to regional and community banks that are feeling a disproportionate amount of the pain. ‘The great recession has very much become a Main Street problem,’ said Richard Brown, the FDIC’s chief economist.

“Although bank earnings showed a slight improvement in the fourth quarter, totalling $914m against a $37.8bn loss in the year-ago period, they still remain below historical highs. Any improvement in earnings, the FDIC said, was concentrated among the largest institutions.

“For the full year, banks earned $12.5bn, up from $4.5bn in 2008 but far below the $100bn recorded in 2007.

“Loan losses jumped for the 12th consecutive quarter to total $53bn, an increase of 37 per cent over the year-ago period. On an annualised basis the rate of losses accounted for in the quarter was the highest in more than two decades.

“Losses rose in all significant categories, including residential mortgage loans and credit card debt. One of the fastest growing categories for uncollectable debt was commercial real estate.

“Although the level of bank failures is alarming, it pales against the troubles of the savings and loan crisis. At the height of that meltdown, in 1987, some 2,165 banks were considered troubled and problem assets totalled $833bn.

“But the full weight of the current crunch has yet to be felt. The FDIC took over 140 banks in 2009 and analysts expect more to follow. The FDIC said on Tuesday it set aside another $17.8bn in the fourth quarter for bank failures. It expected total bank failures to cost $100bn from 2008 to 2013.”

Source: Suzanne Kapner, Financial Times, February 23, 2010.

John Authers (Financial Times): US yield curve
“We ignore the yield curve at our peril. That is one of the lessons from the financial implosion that started in 2007, but how do we apply it now?

“The yield curve is the popular name for the spread between the yields on 10-year and two-year Treasury bonds. Usually, investors require a bigger yield to compensate them for the greater risks that come with lending money over a longer term.

“When short-term yields rise above long-term ones, then market jargon holds that the yield curve is “inverted”. This has been a great recession indicator, as it implies the market thinks short-term interest rates must imminently be cut. Each of the past seven recessions was preceded by a brief period when the yield curve was inverted and there has only been one false signal.

“But what happens when the yield curve gets very steep? That is happening now and there are few, if any, precedents. Last week, 10-year yields exceeded two-year ones by 2.94 percentage points, the highest figure since the Federal Reserve’s records for this indicator began in 1976.

“Its previous peaks were at about 2.5 percentage points in October 2003, when a brief bull market in equities was gathering pace, and October 1992, when years of expansion for both markets and the economy lay ahead.

“Should this, then, be regarded as a big reason for optimism? Perhaps not. An implicit bet that rates will rise over the next 10 years is not daring when rates are virtually at zero. Neither is a call for an intermediate economic recovery after a savage recession.

“In any case, the extremes that financial markets have touched in the past few years make it dangerous to read any indicator with too much confidence. But it does seem to suggest that the market is more convinced than economists both that central banks will be raising rates sooner rather than later and that the US economy is enjoying a true recovery.”

Source: John Authers, Financial Times, February 22, 2010.

MoneyNews: Rogers - China will keep dumping US Treasuries
“China will continue to sell US Treasuries in the future, says Jim Rogers, co-founder of the Quantum Fund.

“China will unload more debt as the ‘euro scare’ continues, he said.

“The government reported that appetite for Treasuries declined by the largest amount in December as China reduced its allocation by $34.2 billion to $755.4 billion. Japan made a similar move and lowered its amount by $11.5 billion to $768.8 billion.

“‘I am surprised China has not dropped more,’ Rogers told CNBC.

“The United States should be concerned about this change in investments, he said.

“‘The US should be worried about everyone lightening up - not just China,’ Rogers said.

“Lawrence Summers, director of the White House National Economic Council, said the paring back is not a concern, CNBC reported.

“‘The truth is that these numbers fluctuate and that there’s a wide range of holders of Treasury debt. What’s been very clear from the market responses over the last two years is that the United States is seen as a major source of quality and a place people run to when they’re uncertain,’ he said.

“Other analysts said the amount of US government debt held by the Chinese is likely to be a larger amount since they also buy anonymously via banks in Switzerland, Britain and other countries, the Associated Press reported.

“‘We do not believe that the Chinese are dumping Treasuries. What they are doing is diversifying the channels through which they make these purchases so that it is much more difficult for the market to ascertain what they are doing,’ said Arthur Kroeber, managing director of GaveKal Dragonomics, a Beijing research firm.”

Source: Ellen Chang, MoneyNews, February 25, 2010.

MoneyNews: Pimco - junk bonds may post double digit returns in 2010
“US high-yield bonds could post investment returns in the high single digits to the low double digits this year after their record 58 percent return in 2009, Pimco, the world’s biggest bond fund, said in a new report.

“With yields still attractive and the risk of a financial system collapse largely in the past, ‘we believe investors can capture attractive yields and excess spread in the high-yield market with relatively low default risk,’ Andrew Jessop, high-yield portfolio manager at Pacific Investment Management Co, said in a note on the company’s website.

“High-yield bonds also look attractive compared with equities, which typically depend on faster growth to perform well at this point in the economic cycle, Jessop said.

“However, Pimco’s forecast is that slower economic growth will become the ‘New Normal’ amid broad deleveraging trends, increased regulation and deglobalization, he said.

“‘In that environment, many investors believe equities could continue to underperform high-yield’ bonds, he said.”

Source: MoneyNews, February 24, 2010.

Bespoke: Country and region ETFs
“Below we highlight the recent action in a number of country and region ETFs. For each ETF, we provide its 5-day price change, its percentage from its 50-day moving average, and its percentage overbought or oversold. An ETF is overbought if it’s trading more than one standard deviation above its 50-day, and the percentage number shown indicates how far the ETF is trading above its overbought level. One standard deviation below represents the oversold level.

“As we highlighted in our prior post, the US has been outperforming emerging markets recently. Where the various country ETFs are trading versus their 50-days shows a similar trend. The S&P 500 tracking SPY ETF is one of just four ETFs highlighted below trading above its 50-day moving average. The only other country ETFs trading above their 50-days are Australia (EWA), Canada (EWC), and Mexico (EWW). All of North America is doing well. If we look at the various regional ETFs (Europe, Emerging Markets, Asia, etc.), all of them are still trading below their 50-days.”

Source: Bespoke, February 22, 2010.

Bespoke: Welcome back - USA back in style
“In the charts below, we show the performance of ETFs which track the S&P 500 (SPY) and the MSCI Emerging Market Index (EEM). The third chart shows the relative strength of emerging markets versus the S&P 500. In the relative strength chart, a rising line indicates that emerging markets are outperforming the US, while a falling line indicates the US is outperforming.

“Based on the performances of both ETFs over the last several years, investors have become conditioned to the theme that when equities are rising, emerging markets typically outperform the US. On the other side of the coin, during periods when equities are weak, US stocks have typically held up better than their emerging market peers. As seen on the relative strength chart, the only period where US stocks meaningfully outperformed emerging markets was during the credit crisis (red line in all three charts).

“The existence of this long-term trend makes recent developments all the more interesting. Since the recent lows in early February, equity markets around the world have all recovered to some degree. However, unlike prior rebounds, emerging markets have been underperforming. In fact, while the major US averages (S&P 500, DJIA and Nasdaq) closed above their 50-day averages on Friday, all four BRIC countries (Brazil, Russia, India, and China) had yet to achieve that milestone. Whether or not this trend fizzles out or is an early warning sign for the global economy is debatable, but in either case, emerging market investors would be wise to be on alert.”

Source: Bespoke, February 22, 2010.

Bespoke: S&P 500 sector stats
“As shown below, Consumer Discretionary and Consumer Staples are currently trading the farthest above their 50-day moving averages of the ten sectors. The other two sectors currently above their 50-days are Industrials and Financials. Below we provide the year-to-date change, % from 50-DMA, dividend yield, P/E ratio, price to sales ratio, and price to book ratio for the various sectors. Across the board, we use red to green as the color code from lowest to highest, but obviously for ratios, the lower the better.

“While it used to have one of the highest yields, the Financial sector currently has the second lowest yield at 1.15%. It also has the highest P/E ratio at 66.44, but it has the lowest price to book at 1.14. Consumer Staples, Consumer Discretionary and Telecom have the lowest price to sales ratios, while Technology has the highest. Technology also has the highest price to book.”

Source: Bespoke, February 24, 2010.

Bespoke: Retail sector closes at new bull market high
“Yesterday’s weak Consumer Confidence report has many worried that the consumer is still down in the dumps. If so, no one has told the consumer sectors of the stocks market. As shown below, the S&P 500 Retail sector actually made a new bull market high today. The S&P 500 still has a ways to go to get back to new highs. While the Consumer Confidence report is indicating a weak consumer, the market still seems to be predicting strength from the consumer. If it weren’t for groups like retail, the overall market would be doing worse.”

Source: Bespoke, February 24, 2010.

Bespoke: Percentage of stocks above 50-day moving averages
“As shown below, 55% of stocks in the S&P 500 are currently trading above their 50-day moving averages. The index itself is still trading below its 50-day, so breadth in this case is strong. Looking at sectors, Energy and Consumer Discretionary have the highest percentage of stocks above their 50-days at 69%. Consumer Staples ranks third at 64%. Technology, Materials, Utilities, and Telecom are the four sectors with readings that are still below 50%.”

Source: Bespoke, February 19, 2010.

Bespoke: Final earnings season stats
“The fourth quarter earnings season came to an end yesterday with Wal-Mart’s report. Below we highlight the final earnings and revenue beat rate for all US companies that reported this earnings season. For the third quarter in a row, 68% of companies beat earnings estimates. The revenue beat rate was really strong this quarter at 70% - the highest reading since Q4 ‘04. Does this put the ’strong bottom line, but weak top line’ bearish argument to rest?”

Source: Bespoke, February 19, 2010.

MoneyNews: Biggs - US, Asian stocks will rally higher
“Stocks have further room to rise, thanks to buoyant global economic growth, says Barton Biggs, managing partner at hedge fund firm Traxis Partners.

“‘There is every reason to believe the US is in a strong recovery, and Asia is in a very strong recovery,’ he says.

“While Europe’s growth has been a bit disappointing, the Greek crisis could actually help economies on the continent by pushing the euro down, he told Bloomberg.

“‘A little weakness in the euro is probably good for European exports and for the European economy.’

“Biggs thinks the European Union is handling the Greek situation properly.

“‘The Europeans sent the right message, saying if you can convince us you’re going to practice some discipline, then we’ll take care of you. And I think that’s going to happen.’

“Biggs also approves of China’s steps to deflate its credit bubble.

“‘The Chinese authorities are doing the right thing in terms of gradually tightening. … In all probability China is going to have a soft landing.’

“So what does all this mean for stocks?

“‘On balance, … I’m pretty bullish here,’ Biggs said.”

Source: Dan Weil, MoneyNews, February 22, 2010.

BCA Research: Hot money flows are driving the US dollar trend
“Recent data shows that speculative flows have been a major driver of the bounce in the dollar, especially versus the euro. ‘Hot money’ positions have now reached levels where marginal dollar buyers will be increasingly scarce. For the dollar’s recovery to persist and to be a genuine cyclical advance, it needs the tailwind of long term capital inflows.

“Foreign flows into US equities and Treasury bonds have accelerated smartly and net sales of agency bonds have come to a halt. But capital flows should be analyzed alongside trade and current account deficit positions. While foreign portfolio flows into the US are improving, the US trade account is deteriorating anew. Moreover, capital outflows by US-based investors have resumed. The sum of net long term portfolio inflows and the trade deficit, a monthly proxy for the basic balance, remains well below the 2002 - 2007 average, which was a period of steady dollar weakness.

“Over the coming months, the cyclical economic recovery and the record low national savings rate should keep the US current account deficit on a widening path. This will make it difficult for the basic balance to improve. Indeed, the healthiest environment for the dollar is when the current account deficit is financed by private sector capital inflows. This is typically a sign of strong US growth and attractive expected returns.

“History shows that whenever the US becomes reliant on foreign monetary authorities, the dollar has been under pressure. Foreign reserve accumulation can prevent a dollar crash, but it has never led to sustainable dollar strength. Bottom line: Trends in long term capital flows suggest that the dollar is not yet in a sustainable bull trend.”

Source: BCA Research, February 25, 2010.

MoneyNews: Soros - euro’s future in question even if Greece saved
“A makeshift assistance should be enough to rescue Greece but bigger problems facing Europe would leave the future of the euro currency in question, billionaire investor George Soros said.

“Writing in the Financial Times, Soros said what the European Union needed was more intrusive monitoring and institutional arrangements for conditional assistance.

“He said a well organized euro bond market was desirable.

“‘A makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large of a portion of euro land to he helped in this way,’ Soros said.

“‘The survival of Greece would still leave the future of the euro in question.’

“Greece’s deficit swelled to 12.7 percent of gross domestic product in 2009, way above the EU’s cap of 3 percent.

“Greece has pledged to reduce its budget deficit to 8.7 percent in 2010.”

Source: MoneyNews, February 22, 2010.

Bespoke: Commodity snapshot
“Below we highlight the year-to-date change for ten key commodities. As shown, orange juice has gotten off to a nice start (+13.15%), while natural gas has once again resumed its seemingly perpetual decline (-13.75%). Platinum is the second best performing commodity shown with a gain of 5.34%, followed by gold at +1.59%, and oil at +0.34%. While gold and platinum are up in 2010, silver is down 2.69%.”

Source: Bespoke, February 26, 2010.

Reuters: India seen as potential buyer for IMF gold
“India’s central bank, which has increased its gold holdings to diversify its reserves, looks set to be a buyer again when the International Monetary Fund begins selling 191.3 tonnes of the precious metal amid volatility in major currencies.

“The uncertain outlook for two of the world’s major reserve currencies - the dollar and euro - provides a spur for central banks, including India’s, to buy gold. India’s gold holdings lag those of major economies despite a big purchase in October.

“‘India is no stranger to gold. They are gearing up for growth and want to recalibrate their reserves,’ said Mark Pervan, senior commodities analyst at ANZ.

“‘They can’t lift their gold holdings from domestic output, unlike China. And they have shown an appetite to buy in the past.’

“Reserve Bank of India officials declined to comment on their gold plans but some said the central bank considered gold to be a safe investment strategy.

“The IMF said last Wednesday it would soon begin selling the gold in the open market in a phased manner to avoid disrupting the market.

“The sale is part of an IMF programme announced last year to sell a total of 403.3 tonnes of gold, or about one-eighth of its total stock.

“China, with about $1.6 trillion in reserves, is a producer of gold and is unlikely to buy the gold being offered by the IMF, the official China Daily reported on Wednesday.”

Source: Abhijit Neogy and Suvashree Dey Choudhury, Reuters, February 24, 2010.

BusinessWeek: Soros more than doubled gold ETF stake in Q4
“Billionaire George Soros’s Soros Fund Management LLC more than doubled its holding in the biggest gold exchange-traded fund in the fourth quarter after bullion advanced 8.9 percent to a record.

“The $25 billion New York-based firm became the fourth-largest holder in the SPDR Gold Trust, adding 3.728 million shares valued at $421 million, according to a filing with the US Securities and Exchange Commission yesterday. Its investment was worth about $663 million, the fund’s largest single investment, as of December 31.

“Soros joined China Investment Corp. and central banks including those in China and India in acquiring gold. China Investment, the $300 billion sovereign wealth fund based in Beijing, took a 1.45 million-share stake in the SPDR Gold Trust worth $155.6 million, according to a SEC 13F filing posted on February 5.

“SEC filings are done quarterly, with a 45-day lag, so Soros could have sold some or all of the position since then. Soros, speaking last month at the World Economic Forum in Davos, called gold the ‘ultimate asset bubble’ and said the price could tumble, according to a report in the UK’s Daily Telegraph newspaper.”

Source: Katherine Burton and Glenys Sim, BusinessWeek, February 17, 2010.

MoneyNews: Credit Suisse - gold set to surge to $1,227
“Credit Suisse analyst David Sneddon says the price of gold is poised to move sharply higher.

“‘If we look at the (rising) momentum chart … it suggests to us that price should follow suit,” he told CNBC.

“‘We think gold is going all the way back up to $1,227.’

“Gold denominated in euros shows a much more bullish position than denominated in dollars, Sneddon says. ‘Gold in euros has moved to an all time high with all the euro weakness that’s been going on,’ Sneddon observes.

“Gold priced in euros reached a record today as European Union finance ministers failed to agree on measures to help Greece reduce its budget deficit, Bloomberg reports.

“The precious metal climbed to a four-week high in New York, before paring gains, on speculation that wider Greek budget deficits will spur demand for the metal as an alternative to holding currency.”

Source: Julie Crawshaw, MoneyNews, February 23, 2010.

Financial Times: China taps more Saudi crude than US
“Saudi Arabia’s oil exports to the US last year sank below 1m barrels a day for the first time in two decades just as China’s purchases climbed above that level, highlighting a shift in the geopolitics of oil from west to east.

“The drop in US demand for oil from the kingdom, traditionally one of its primary sources, is the result of overall lower energy consumption but also greater reliance on imports from Canada and Africa.

“China’s economic growth, meanwhile, is prompting Beijing to buy more Saudi oil, a trend Riyadh has encouraged through refinery joint ventures.

“‘China offers demand security, something that for a long time the oil-producing countries including Saudi Arabia have called for,’ said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh. ‘As global demand has been picking up in the east … Saudi Arabia has been looking east.’

“Barack Obama, US president, wants to reduce US dependence on foreign oil and encourage renewable fuels. Meanwhile, Saudi Arabia wants stable markets for its oil reserves.

“The divergence will provide the backdrop as Steven Chu, US energy secretary, visits Riyadh on Monday. His agenda reflects Washington’s focus, with an emphasis on technology research rather than oil politics.”

Source: Gregory Meyer, Financial Times, February 21, 2010.

Financial Times: Harsh winter hits European recovery hopes
“Severe winter weather could have hit economic growth significantly in continental Europe, and especially Germany, at the start of this year, dealing another blow to the region’s recovery hopes.

“Disruption in the construction, retail and leisure industries caused by exceptionally low temperatures and persistent snow is likely to have set back further an economic turnround that had already shown signs of losing momentum in the final months of last year - before the bitter weather took grip.

“In Germany, growth in the first quarter of this year could have been reduced 0.3 percentage points, according to Frankfurt-based Commerzbank. January’s weather was the coldest since 1987 and the 12th coldest January since 1900, according to the German weather service.

“Axel Weber, Bundesbank president, told Reuters this month that German gross domestic product ‘could move sideways or even contract slightly in the first quarter’.

“Jörg Krämer, Commerzbank’s chief economist, said, however, that lost business could be made up, and ‘people’s perceptions of the performance of the German economy are driven by the data on manufacturing - that is, excluding construction’.

“Purchasing managers’ indices on Friday showed that German manufacturing ‘grew strongly’ in February, he added.”

Source: Ralph Atkins, Financial Times, February 21, 2010.

Nationwide: House prices slip in the winter snow during February
“The price of a typical UK property fell by a seasonally adjusted 1.0% month-on-month (m/m) in February, ending a strong run of nine consecutive monthly increases. The relatively smoother three month on three month rate of inflation remained positive at +1.6%, though this is down from +2.0% in January and a peak of +3.7% in September 2009. The annual rate of price inflation still managed to increase from 8.6% to 9.2% year-on-year, as this month’s fall was smaller than the 1.5% m/m decline recorded in February 2009. The average price of a typical property sold in the UK during February was £161,320.

“There is evidence from a range of indicators that the market may have lost momentum in early 2010 as the stamp duty holiday ended and house hunters were obstructed by the icy weather. New buyer enquiries dropped sharply in the New Year and there was also an associated drop in the number of new mortgages taken out by homebuyers in January. This drop in demand seems to have fed into agreed prices during February.

“Judging from the fall in retail sales during January, however, the housing market does not appear to be the only sector of the economy to have experienced a setback related to adverse weather and the expiry of economic stimulus measures. At this stage, it is difficult to gauge how much of the drop in housing activity is attributable to one-off factors and therefore whether February’s fall in prices is just a temporary blip or the start of a new trend.”

Source: Nationwide, February 26, 2010.

Nouriel Roubini (Forbes): Easy money in China
“When will Beijing tighten monetary policy?

“A credit-fueled investment boom successfully boosted China’s growth to 8.7% in 2009, but cheap money drove up asset prices as well, especially in property markets. As China’s output gap closes, loose money is now set to become inflationary, particularly if China’s potential growth rate has come down slightly, as we think it has. The People’s Bank of China (PBoC) has twice hiked banks’ required reserve ratios (RRR) in 2010, following a return to net liquidity reductions through open-market operations in October 2009, but we suspect that the tightening moves have had little effect. China’s monetary policy has shifted toward a neutral stance in recent months, but it will have to tighten further if inflation and the property bubble are to be contained.

“China has not yet started to tighten liquidity significantly, nor has it laid out a clear path for its exit from the extraordinarily loose monetary conditions put in place at the end of 2008. The recent RRR hike, which came into effect on Feb. 25, will drain just over 300 billion renminbi (RMB) in liquidity, but in the first two weeks of February, the PBoC injected a net RMB 508 billion into the banking system through open-market operations to ensure that banks had enough cash on hand for last week’s Chinese New Year holiday. It is widely expected that the bank will drain this liquidity after the holiday, and the RMB300 billion withdrawn through the RRR hike will prove helpful but insufficient in this effort. Tuesday’s RMB 17 billion one-year bill sale suggests that the central bank may be waiting to see the effect of the RRR hike before moving to a more aggressive tightening stance. It will be difficult, however, for the central bank to tighten very much, even if it had the political backing to do so.

“Other sources of liquidity make this task harder. There are RMB 1.2 trillion in central bank bills and repurchase agreements set to expire in the next two months. In March alone, RMB 680 billion in bills will expire, more than double the RMB 290 billion monthly average over the past four months. Banks are already thought to be holding about 1.5% of deposits in additional excess reserves at the PBoC, dulling the impact of the RRR hike even further.

“The political will to tighten monetary conditions looks weak in China, particularly concerning any appreciation of the RMB. On Monday President Hu Jintao headed a Politburo meeting on economic issues that reiterated the ‘active’ fiscal and ‘moderately loose’ monetary policies put in place at the end of 2008. On March 5 Premier Wen Jiabao will present the government’s work plan to the National People’s Congress (nominally China’s highest government authority), likely reiterating this stance.

“Still, we expect the gradual tightening of monetary policy will continue in the coming weeks and months. Rising inflationary pressures are likely to push China’s policymakers to tighten monetary conditions in Q2. This will cause some pain to important interest groups this year, and in our view, policymakers will look to distribute the pain, including by allowing higher consumer inflation.”

Click here for the full article.

Source: Nouriel Roubini, Adam Wolfe and Rachel Ziemba, Forbes, February 25, 2010.

Financial Times: Japan exports jump on Asian recovery
“Strong shipments to Asia helped Japan report the biggest increase in exports in almost 30 years in January, underlining the strength of the country’s economic recovery.

“The value of exports increased 40.9 per cent last month from a year earlier, the fastest pace since February 1980, according to the Ministry of Finance. The increase, however, has been helped by a plunge in exports in the same period a year ago as a result of the global financial crisis.

“Shipments to Asia, which accounted for more than half of total exports, were up 68.1 per cent on the previous year while exports to China, its biggest trading partner, rose 79.9 per cent.

“Like other Asian economies, Japan has benefited from the robust recovery of China, which spurred demand for everything from cars to cement.

“In January, shipments of motor vehicles were up 342.8 per cent while the value of auto parts sales rose 156.6 per cent.

“China’s expanding manufacturing sectors also led to strong demand for chemicals from Japan, which jumped 107.5 per cent, and machinery, which rose 68.8 per cent.

“Japan’s trade data came after Taiwan and Thailand reported unexpectedly strong economic growth this week due to solid exports to China. Taiwanese exports to China, its biggest trading partner, rose 45 per cent year-on-year in the fourth quarter. In Thailand, January’s exports to China grew 94 per cent year-on-year.

“Economists warned that the pace of increase in exports was likely to moderate in the coming months.

“‘Fiscal stimulus programs that supported auto exports in 2009 have now expired in China, the US and EU economies. The boost from inventory adjustment abroad is also beginning to wane,’ said Nikhilesh Bhattacharyya at Moody’s Economy.com.

“‘This should result in slower growth in exports, which would be reflective of the weak growth now being seen in advanced economies across the globe,’ he said.

“In January, imports rose for the first time since October 2008, rising 8.6 per cent. Japan posted a trade surplus of Y85.2bn last month.”

Source: Justine Lau, Financial Times, February 24, 2010.

Financial Times: Toyota’s damaged reputation
“Spencer Jakab, Lex columnist of the Financial Times, says Toyota’s slow response to addressing safety problems brought the world’s largest carmaker to its knees.”

Source: Financial Times, February 24, 2010.

Tags: Ben Bernanke, Biggest Banks, Business Confidence, Consumer Confidence Data, Debt Woes, Default Risk, Excess Spread, Fed Fund Rate, Financial Guarantees, Financial Services Committee, German Bank, Government Bonds, High Yield Corporate Bonds, House Financial Services Committee, Investor Optimism, Japanese Yen, Paul Kasriel, Quarter Stock, Risk Aversion, Risk Equities, Sell Offs
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Worse than Enron?

Friday, December 4th, 2009

Nomi Prins, former Managing Director at Goldman Sachs and former head of international analytics for Bear Stearns in London, says that after poring  over thousands of pages of SEC filings of the biggest banks, she is concerned that the Enron scandal could be made trivial by the banks’ scandal that is in the making.

The nation’s biggest banks, plumped up on government capital and risk-infused trading profits, have been moving stuff around their balance sheets like a multi-billion dollar musical chairs game.

I was trying to answer the simple question that you’d think regulators should want to know: how much of each bank’s revenue is derived from trading (taking risk) vs. other businesses? And how can you compare it across the industry—so you can contain all that systemic risk? Only, there’s no uniformity across books. And, given the complexity of these mega-merged firms, those questions aren’t easy to answer.

Goldman Sachs and Morgan Stanley, for example, altered their year-end reporting dates, orphaning the month of December, thus making comparison to past quarterly statements more difficult. In the cases of Bank of America, Citigroup and Wells Fargo, the preferred tactic is re-classification and opaqueness. These moves make it virtually impossible to get an accurate, or consistent picture of banks ‘real money’ (from commercial or customer services) vs. their ‘play money’ (used for trading purposes, and most risky to the overall financial system, particularly since much of the required trading capital was federally subsidized).

Source: The Daily Beast, December 3, 2009
*Nomi Prins is author of It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street (Wiley, September, 2009). Before becoming a journalist, she worked on Wall Street as a managing director at Goldman Sachs, and running the international analytics group at Bear Stearns in London.

Tags: Analytics, Backroom Deals, Balance Sheets, Bank Of America, Bear Stearns, Becoming A Journalist, Biggest Banks, Citigroup, Enron Scandal, Gold, Goldman Sachs, Government Capital, Morgan Stanley, Musical Chairs, Nomi, Pillage, Play Money, Quarterly Statements, Real Money, Systemic Risk, Wells Fargo
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How You Finance Goldman Sachs’ Profits - a Goldman insider’s view

Friday, July 31st, 2009

By Nomi Prins, via Mother Jones

July 28, 2009 — This is perhaps the most important thing I learned over my years working on Wall Street, including as a managing director at Goldman Sachs: Numbers lie. In a normal time, the fact that the numbers generated by the nation’s biggest banks can’t be trusted might not matter very much to the rest of us. But since the record bank profits we’re now hearing about are essentially created by massive federal funding, perhaps it behooves us to dig beneath their data. On July 27, 10 congressmen, led by Rep. Alan Grayson (D-Fla.), did just that, writing a letter to Federal Reserve Chairman Ben Bernanke questioning the Fed’s role in Goldman’s rapid return to the top of Wall Street.

To understand this particular giveaway, look back to September 21, 2008. It was a frenzied night for Goldman Sachs and the only other remaining major investment bank, Morgan Stanley. Their three main competitors were gone. Bear Stearns had been taken over by JPMorgan Chase in March, 2008, Lehman Brothers had just declared bankruptcy due to lack of capital, and Bank of America had been pushed to acquire Merrill Lynch because the firm didn’t have enough cash to survive on its own. Anxious to avoid a similar fate, hat in hand, they came to the Fed for access to desperately needed capital. All they had to do was become bank holding companies to get it. So, without so much as clearing the standard five-day antitrust waiting period for such a change, the Fed granted their wish.

Bank holding companies (which all the biggest financial firms now are) come under the regulatory purview of the Fed, the Office of the Comptroller of the Currency, and the FDIC. The capital they keep in reserve in case of emergency (like, say, toxic assets hemorrhaging on their books, or credit derivatives trades not being paid) is supposed to be greater than investment banks’. That’s the trade-off. You get access to federal assistance, you pony up more capital, and you take less risk.

Goldman didn’t like the last part. It makes most of its money speculating, or trading. So it asked the Fed to be exempt from what’s called the Market Risk Rules that bank holding companies adhere to when computing their risk.

Keep in mind that by virtue of becoming a bank holding company, Goldman received a total of $63.6 billion in federal subsidies (that we know about—probably more if the Fed were ever forced to disclose its $7.6 trillion of borrower details). There was the $10 billion it got from TARP (which it repaid), the $12.9 billion it grabbed from AIG’s spoils—even though Goldman had stated beforehand that it was protected from losses incurred by AIG’s free fall, and if that were the case, would not have needed that money, let alone deserved it. Then, there’s the $29.7 billion it’s used so far out of the $35 billion it has available, backed by the FDIC’s Temporary Liquidity Guarantee Program, and finally, there’s the $11 billion available under the Fed’s Commercial Paper Funding Facility.

Tactically, after bagging this bounty, Goldman asked the Fed, its new regulator, if it could use its old risk model to determine capital reserves. It wanted to use the model that its old investment bank regulator, the SEC, was fine with, called VaR, or value at risk. VaR pretty much allows banks to plug in their own parameters, and based on these, calculate how much risk they have, and thus how much capital they need to hold against it. VaR was the same lax SEC-approved risk model that investment banks such as Bear Stearns and Lehman Brothers used, with the aforementioned results.

On February 5, 2009, the Fed granted Goldman’s request. This meant that not only was Goldman getting big federal subsidies, but also that it could keep betting big without saving aside as much capital as the other banks. Using VaR gave Goldman more leeway to, well, accentuate the positive. Yes, Goldman is a more risk-prone firm now than it was before it got to play with our money.

Which brings us back to these recent quarterly earnings. Goldman posted record profits of $3.4 billion on revenues of $13.76 billion. More than 78 precent of those revenues came from its most risky division, the one that requires the most capital to operate, Trading and Principal Investments. Of those, the Fixed Income, Currency and Commodities (FICC) area within that division brought in a record $6.8 billion in revenues. That’s the division, by the way, that I worked in and that Lloyd Blankfein managed on his way up the Goldman totem pole. (It’s also the division that would stand to gain the most if Waxman’s cap-and-trade bill passes.)

Since Goldman is trading big with our money, why not also use it to pay big bonuses? It’s not like there are any strings attached. For the first half of 2009, Goldman set aside $11.4 billion for compensation—34 percent more than for the first half of 2008, keeping them on target for a record bonus year—even though they still owe the federal government $53.6 billion, a sum more than four times that bonus amount.

But capital is still key. Capital is the lifeblood that pumps through a financial organization. You can’t trade without it. As of June 26, 2009, Goldman’s total capital was $254 billion, but that included $191 billion in unsecured long-term borrowing (meaning money it had borrowed without putting up any collateral for it). On November 28, 2008 (4Q 2008), it had only $168 billion in unsecured long-term borrowing. Thus, its long-term unsecured debt jumped 14 percent. Though Goldman doesn’t disclose exactly where all this debt comes from, given the $23 billion jump, we can only wonder whether some of it has come from government subsidies or the Fed’s secret facilities.

Not only that, by virtue of how it’s set up, most of Goldman’s unsecured funding comes in through its parent company, Group Inc. (Think the top point of an umbrella with each spoke being a subsidiary.) This parent parcels that money out to Goldman’s subsidiaries, some of which are regulated, some of which aren’t. This means that even though Goldman is supposed to be regulated by the Fed and other agencies, it has unregulated elements receiving unsecured funding—just like before the crisis, but with more of our money involved.

As for JPMorgan Chase, its profit of $2.7 billion was up 36 percent for the second quarter of 2009 vs. the same quarter last year, but a lot of that also came from trading revenues, meaning its speculative endeavors are driving its profits. Over on the consumer side, the firm had to set aside nearly $30 billion in reserve for credit-related losses. Riding on its trading laurels, when its consumer business is still in deterioration mode, is not a recipe for stability, no matter how much cheering JPMorgan Chase’s results got from Wall Street. Betting is betting.

Let’s pause for some reflection: The bank “stars” made most of their money on speculation, got nearly $124 billion in government guarantees and subsidies between them over the past year and a half, yet saw continued losses in the credit products most affected by consumer credit problems. Both are setting aside top-dollar bonuses. JPMorgan Chase CEO Jamie Dimon mentioned that he’s concerned about attracting talent, a translation for wanting to pay investment bankers big bucks—because, after all, they suffered so terribly last year, and he needs to stay competitive with his friends at Goldman. This doesn’t add up to a really healthy scenario. It’s more like bad déjà vu.

As a recent New York Times article (and many other publications in different words) said, “For the most part, the worst of the financial crisis seems to be over.” Sure, the crisis may appear to be over because the major banks of Wall Street are speculating well with government subsidies. But that’s a dangerous conclusion. It doesn’t mean that finance firms could thrive without the artificial, public-funded assistance. And it certainly doesn’t mean that consumers are any better off than they were before the crisis emerged. It’s just that they didn’t get the same generous subsidies.

Additional research by Clark Merrefield.

Nomi Prins is an economist and frequent contributor for Mother Jones. Her most recent book is It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street. To read more articles by Nomi Prins, click here

Source:  Mother Jones

Tags: Alan Grayson, Bank Holding Companies, Bank Of America, Bank Profits, Bear Stearns, Biggest Banks, Commodities, Comptroller Of The Currency, Credit Derivatives, Federal Assistance, Federal Reserve Chairman, Goldman Sachs, Investment Banks, Jpmorgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, Mother Jones, Office Of The Comptroller Of The Currency, oil, Rapid Return, Writing A Letter
Posted in Gold, Markets | No Comments »

Words from the (investment) wise for the week that was (April 20 – 26, 2009)

Sunday, April 26th, 2009

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

On Friday, Federal Reserve regulators have released a white paper outlining the criteria they used to assess the financial health of the nation’s 19 biggest banks. On the same day they also briefed the banks about how their companies had fared in the examination. The banks will have until Tuesday to dispute any of the results before they are made public on May 4.

According to the Financial Times, senior Fed officials said US authorities will ask some of the country’s biggest banks to raise more capital following the completion of bank stress tests. The officials also indicated that a second, larger, group of banks will be asked to improve the quality of their capital by increasing their amount of common equity.

Last week investors’ mood was also influenced by tentative signs of economic stabilization in a number of countries and a barrage of earnings report - generally better than feared. As the equity rally ground to a halt on some bourses, the US dollar and government bonds offered little safety appeal and edged weaker. Gold, on the other hand, advanced after China revealed it has almost doubled its gold reserves since 2003. Treasury Inflation Protected Securities (TIPS) also improved on the week.

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

After rising for six consecutive weeks, global stock markets experienced a volatile week, including the worst losses since early March on Monday. In the end, the MSCI World Index gained 0.1% (YTD -4.1%) on the week and the MSCI Emerging Markets Index 0.7% (YTD +14.2%), but the S&P 500 Index shaved off -0.4% (YTD -4.1).

Click on the table below for a larger image.

As far as the earnings season is concerned, Bespoke indicated that 156 S&P 500 companies had reported earnings by Thursday, beating estimates in 67% of the cases. Also, so far earnings are down 16.6% versus the first quarter of 2008. While down, this is much better than the -37.3% expected at the start of the earnings season. “The earnings season still has a long way to go, but the current trend has investors optimistic,” said Bespoke.

“The growth rate of the ECRI Leading Index has been steadily heading higher over the last month, pointing to the recession moderating or ending later in the year,” said Moody’s Economy.com. Interestingly, Chart of the Day compared the 26-week rate of change (ROC) of the ECRI Leading Index with the S&P 500 and found that, with a few exceptions (i.e. early 1974, early 2000s - which were ultimately not significant troughs) the stock market began to perform well soon after the ROC of the Index “troughed” in a significant manner.

“What all of this is saying is not that the economy is expected to improve, but rather that the deterioration is expected to stop. This glimmer of hope has in the past been enough to encourage forward-looking investors to move back into the stock market,” concluded Chart of the Day.

In an attempt to cast light on the debate of whether we are dealing with a bull market or a bear market rally, William Hester (Hussman Funds) highlighted the following: “Contracting volume is not enough evidence to qualify that this is a bear-market rally with certainty. There are other measures that are showing more strength - such as various indicators of market breadth. But new bull markets, whether at their inception or soon after, have a history of recruiting noticeable improvements in volume. So far this rally lacks that important quality. Over the next few weeks stock market volume will be a metric to watch closely.”

The stock market will show its hand in due course, but it is crucial that the lows of March 9 hold in order for base formation development to remain intact. Should these levels - 677 for the S&P 500 and 6,547 for the Dow Jones - be breached, further downside movements may be in store.

For more discussion on the direction of stock markets, see my recent posts “Video-o-rama: Economy - Recovery or relapse?” and “Has stock market rally run its course?” (And do make a point of listening to Donald Coxe’s webcast of April 24, which can be accessed from the sidebar of the Investment Postcards site.)

Next, a quick textual analysis of my week’s reading. No surprises here, with key words such as “banks”, “market”, “economy”, “economic”, “government” and “prices” featuring prominently.

Economy
“Global business sentiment remains very poor, but it has taken on a slightly better hue in recent weeks. Broad assessments of current and prospective conditions have also moved up measurably since the beginning of the year,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “It is premature to conclude that businesses are turning measurably more upbeat, but recent survey results are somewhat encouraging.”

For a further perspective on the outlook for the global economy, also read my posts “Economic rate of decline slowing down?“, “Goldman raises China’s growth forecasts” and “Chinese economy on the rebound“.

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

April 24
• New Home Sales appear to be stabilizing
• Durable Goods Orders report - weak, but pace of decline is moderating

April 23
• Sales of Existing Homes appear to be stabilizing at a low level
• Initial Jobless Claims erase part of the improvement seen in recent weeks

April 22
• House Price Index points to moderation in pace of decline

April 20, 2009
• Leading Index - continues to send message of weak economic conditions
• Chicago Fed National Activity Index shows a small but noteworthy improvement

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
Apr 20	10:00 AM	Leading Indicators	Mar	-0.3%	-0.3%	-0.2%	-0.2%
Apr 22	10:35 AM	Crude Inventories	04/17	+3857K	NA	NA	+5670K
Apr 23	8:30 AM	Initial Claims	04/18	640K	620K	640K	613K
Apr 23	10:00 AM	Existing Home Sales	Mar	4.57M	4.70M	4.65M	4.71M
Apr 24	8:30 AM	Durable Orders	Mar	-0.8%	-2.0%	-1.5%	2.1%
Apr 24	8:30 AM	Durable Orders, Ex-Auto	Mar	-0.6%	-1.5%	-1.3%	2.0%
Apr 24	10:00 AM	New Home Sales	Mar	356K	340K	337K	358K

Source: Yahoo Finance, April 24, 2009.

In addition to interest rate announcements by the Federal Open Market Committee (FOMC) (Wednesday, April 29) and the Bank of Japan (Thursday, April 30), the US economic highlights for the week include the following:

Source: Northern Trust.

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

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

Source: Wall Street Journal Online, April 24, 2009.

“To find yourself, think for yourself,” said Socrates (hat tip: Charles Kirk.) And we know the stock market is a dangerous place if you don’t think rationally and know your own investment personality. Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in crystalizing their thoughts to come up trumps with their investment decisions.

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

Source: Slate.com

Financial Times: IMF puts financial losses at $4,100 billion
“The deteriorating global economy means financial institutions now face total losses of $4,100 billion on loans and other assets, the International Monetary Fund said on Tuesday, urging governments to take ‘bolder steps’ to shore up institutions - including nationalising them where necessary.

“The IMF said in its Global Financial Stability Report that many loans sitting on institutions’ balance sheets were eroding in value, not just the toxic sub-prime securities which first triggered the crisis.

“The IMF estimated that total writedowns on US assets would reach $2,700 billion, up from the $2,100 billion estimate it made in January and almost double what it forecast in October last year. Including loans originated in Japan and Europe, the writedowns would hit $4,100 billion, it added.

“Banks would bear about two-thirds of the losses, it said, with insurance companies, pension funds, hedge funds and others taking the rest.

“Efforts to cleanse these bad assets from balance sheets and replenish viable institutions with capital had so far been ‘piecemeal and reactive’, the IMF said, calling for more decisive government action.

“‘The current inability to attract private money suggests the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares even if it means taking majority, or even complete, control of institutions,’ it said.”

Source: Sarah O’Connor, Financial Times, April 21, 2009.

The New York Times: Regulators disclose criteria for bank “stress tests”
“Federal regulators released the criteria they used to assess the financial health of the nation’s 19 biggest banks on Friday, but provided little new information for investors to distinguish the industry’s weak players from the strong.

“In a 21-page report, the Federal Reserve regulators broadly laid out the tools they used to project bank losses if the economy worsens, and officials established an unspecified baseline to measure how much additional capital the banks should add as a buffer against higher losses. But they provided no concrete metrics to assess the depths of the troubles facing the industry or specific banks.

“Still, the Federal Reserve report suggested that regulators are focusing on the amount of capital that they want banks to hold in common stock, which makes it easier for them to absorb future losses as the recession wears on. That could force at least a handful of the 19 banks to raise significant amounts of new capital and could lead to greater government ownership stakes in the banks.

“‘Losses associated with the deepening recession and financial market turmoil have substantially reduced the capital of some banks,’ the Federal Reserve report on the stress test said. ‘Lower overall levels of capital - especially common equity - along with the uncertain economic environment have eroded public confidence in the amount and quality of capital held by some firms, which is impairing the ability of the banking system to perform its critical role of credit intermediation.’

“The stress test criteria were released as federal regulators started briefing top executives from the 19 large banks about how their companies fared on the examination. In closed-door meetings at the regional Federal Reserve Bank offices, the regulators plan to review their preliminary findings and inform bankers if they need additional capital. The banks will have until Tuesday to dispute any of the results before they are made public on May 4.”

Source: Eric Dash, The New York Times, April 24, 2009.

The New York Times: US may convert banks’ bailouts to equity share
“President Obama’s top economic advisers have determined that they can shore up the nation’s banking system without having to ask Congress for more money any time soon, according to administration officials.

“In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.

“Converting those loans to common shares would turn the federal aid into available capital for a bank - and give the government a large ownership stake in return.

“While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.

“The Treasury has already negotiated this kind of conversion with Citigroup and has said it would consider doing the same with other banks, as needed. But now the administration seems convinced that this maneuver can be used to make up for any shortfall in capital that the big banks confront in the near term.

“Each conversion of this type would force the administration to decide how to handle its considerable voting rights on a bank’s board.

“Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them.

“Treasury officials estimate that they will have about $135 billion left after they follow through on all the loans that have already been announced. But the nation’s banks are believed to need far more than that to maintain enough capital to absorb all their losses from soured mortgages and other loan defaults.”

Source: Edmund Andrews, The New York Times, April 19, 2009.

Financial Times: US to put conditions on Tarp repayment
“Strong banks will be allowed to repay bailout funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.

“‘Our general objective is going to be what is good for the system,’ the senior official said. ‘We want the system to have enough capital.’

“His comments come as Goldman Sachs, JPMorgan Chase and other relatively strong banks are pressing to be allowed to repay their bailout funds. On Sunday, Lawrence Summers, President Barack Obama’s top economic adviser, told NBC’s Meet the Press that repayments could eventually help the government provide further resources to help the sector. Such a move could also allow healthier institutions to differentiate themselves from weaker banks and free them from constraints on executive pay, and other activities, that come with bailout money.

“‘Not surprisingly different banks are in different situations; they are going need different levels of assistance of taxpayers,’ Mr Obama told a press conference at a summit in Trinidad on Sunday, while promising: ‘I’m not going to simply put taxpayer money into a black hole.’

“The official, meanwhile, said banks that had plenty of capital and had demonstrated an ability to raise fresh capital from the market should in principle be able to repay government funds. But the judgment would be made in the context of the wider economic interest. He said the government had three basic tests. It needed first to ‘make sure the system is stable’. Second, to not create ‘incentives for more deleveraging which would deepen the recession’. Third, to make sure the system had enough capital to ‘provide credit to support the recovery’.”

Source: Krishna Guha and Daniel Dombey, Financial Times, April 19, 2009.

Fox Business: Will banks make the grade?
“Rochdale Securities analyst Dick Bove on the 19 banks receiving government ’stress test’ results today [Friday]. Bove says the results could be dangerous to the overall economy and wonders if the banks that fail could raise capital either from the government or the marketplace.”

Source: Fox Business, April 24, 2009.

PBS: Bill Moyers talks to Simon Johnson and Michael Perino
“Bill Moyers talks about the economy and Wall Street’s future with Simon Johnson, former chief economist of the International Monetary Fund (IMF) and a professor at MIT Sloan School of Management, and Michael Perino, professor of law at St. John’s University and an advisor to the Securities and Exchange Commission.”

Source: Bill Moyers Journal, PBS, April 24, 2009.

Bill King (The King Report): Ken Lewis’s testimony
“NY AG Andrew Cuomo in a letter to Congressional Leaders about Ken Lewis’s shocking testimony:

‘Immediately after learning on December 14,2008 of what Lewis described as the “staggering amount of deterioration” at Merrill Lynch, Lewis conferred with counsel to determine if Bank of America had grounds to rescind the merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event (”MAC”) occurred. After a series of internal consultations and consultations with counsel, on December 17,2008, Lewis informed then-Treasury Secretary Henry Paulson that Bank of America was seriously considering invoking the MAC clause. Paulson asked Lewis to come to Washington that evening to discuss the matter.

‘At a meeting that evening Secretary Paulson, Federal Reserve Chairman Ben Bernanke, Lewis, Bank of America’s CFO, and other officials discussed the issues surrounding invocation of the MAC clause by Bank of America. The Federal officials asked Bank of America not to invoke the MAC until there was further consultation. There were follow-up calls with various Treasury and Federal Reserve officials, including with 2 Treasury Secretary Paulson and Chairman Bernanke. During those meetings, the federal government officials pressured Bank of America not to seek to rescind the merger agreement. We do not yet have a complete picture of the Federal Reserve’s role in these matters because the Federal Reserve has invoked the bank examination privilege…

‘On the issue of terminating management and the Board, Secretary Paulson indicated that he told Lewis that if Bank of America were to back out of the Merrill Lynch deal, the government either could or would remove the Board and management. Secretary Paulson told Lewis a series of concerns, including that Bank of America’s invocation of the MAC would create systemic risk and that Bank of America did not have a legal basis to invoke the MAC (though Secretary Paulson’s basis for the opinion was entirely based on what he was told by Federal Reserve officials).

‘Secretary Paulson’s threat swayed Lewis. According to Secretary Paulson, after he stated that the management and the Board could be removed, Lewis replied, “that makes it simple. Let’s deescalate.” Lewis admits that Secretary Paulson’s threat changed his mind about invoking that MAC clause and terminating the deal. Secretary Paulson has informed us that he made the threat at the request of Chairman Bernanke. After the threat, the conversation between Secretary Paulson and Lewis turned to receiving additional government assistance in light of the staggering Merrill Lynch losses.’”

Source: Cuomo’s letter, April 23, 2009 (hat tip: The King Report).

Calculated Risk: BofA CEO - “Credit is bad, going to get worse”
“BAC CEO Ken Lewis on the conference call:

“‘Let me make a couple comments about our given environment. Credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve. Whether that turn is later this year or in the first half of 2010, I’m not going to hazard a guess … For the rest of the year we look for charge-offs to continue to trend upward …”

Source: Calculated Risk, April 20, 2009.

CEP News: IMF revises down global growth estimates

“The International Monetary Fund expects the global economy to contract 1.3% in 2009, a downward revision from the previous forecast calling for a contraction of between 0.5% and 1.0%, according to its semi-annual report released on Wednesday.

“The Fund also said that in 2010 the global economy should grow 1.9% versus a previous forecast for 3% growth.

“‘This is not the time for complacency, and the need for strong policies, both on the macro and especially on the financial fronts, is as acute as ever,’ said IMF chief economist Olivier Blanchard. ‘But, with such policies in place, there is light at the end of this long tunnel. World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year.’

“All G7 nations are expected to contract in 2009 with the US economy shrinking 2.8% in 2009, with zero growth in 2010.

“The Japanese economy is expected to contract 6.2% in 2009 and grow 0.5% in 2010, the euro zone economy is forecast to shrink 4.2% in 2009 and 0.4% in 2010, the Canadian economy is seen falling 2.5% in 2009 and growing 1.2% the following year, and the UK economy is expected to decline 4.1% in 2009 and 0.4% in 2010.

“‘These projections are based on an assessment that financial market stabilization will take longer than previously envisaged, even with strong efforts by policy-makers,’ according to Blanchard and José Viñals, head of the IMF’s Monetary and Capital Markets Department, in a joint statement.”

Source: CEP News, April 22, 2009.

BCA Research: From economic free-fall to sliding
“The flow of economic and earnings data has continued to beat expectations in recent weeks, helping to gradually heal investor sentiment.

“Our global leading economic indicator and boom/bust index have both ticked higher, albeit from historically depressed readings. Similarly, purchasing managers’ surveys and business confidence measures appear to have bottomed across the developed world, after free-falling late last year. Even last week’s release of the Fed’s Beige Book highlighted that the level of economic activity remains extremely weak, although slightly less so than the previous report.

“Still, the economy has merely shifted from falling off a cliff to sliding down a slope. The latter is certainly less terrifying and justifies the unwinding of Armageddon trades but is hardly bullish. Risk assets may continue to move higher from oversold levels over the next few weeks but sustained upside will require evidence that the spate of positive second derivative of growth indicators will turn into a meaningful recovery.

“Aggressive fiscal stimulus in most countries, combined with the potential for a positive inventory adjustment, should stabilize GDP growth in Q3 and Q4. However, an ongoing improvement in growth conditions will be reliant on fixing the global banking system and credit channels, allowing liquidity to begin flowing to the real economy. While our financial sector stress index has eased modestly, it remains extremely elevated. Similarly, bank lending surveys have improved but standards are not yet easing.

“Bottom line: Policymakers will need to continue acting aggressively for the recovery in risk assets to persist. We are positioned modestly in favor of reflation but prefer taking bets in fixed income spread product rather than equities due to relative value and a better yield pickup in case a sustainable upleg takes time to develop.”

Source: BCA Research, April 24, 2009.

Nouriel Roubini (Rediff News): End of economic gloom?
“Mild signs that the rate of economic contraction is slowing in the United States, China and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies.

“The emerging consensus among economists is that growth next year will be close to the trend rate of 2.5%.

“Investors are talking of ‘green shoots’ of recovery and of positive ‘second derivatives of economic activity’ (continuing economic contraction is the first, negative, derivative, but the slower rate suggests that the bottom is near).

“As a result, stock markets have started to rally in the US and around the world. Markets seem to believe that there is light at the end of the tunnel for the economy and for the battered profits of corporations and financial firms.

“This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow from -6% in the last two quarters, US growth will still be negative (around -1.5 to -2%) in the second half of the year (compared to the bullish consensus of +2%).

“Moreover, growth next year will be so weak (0.5 to 1%, as opposed to the consensus of 2% or more) and unemployment so high (above 10%) that it will still feel like a recession.

“In the euro zone and Japan, the outlook for 2009 and 2010 is even worse, with growth close to zero even next year. China will have a more rapid recovery later this year, but growth will reach only 5% this year and 7% in 2010, well below the average of 10% over the last decade.

“Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world.”

Click here for the full article.

Source: Nouriel Roubini, Rediff News, April 15, 2009.

Alan Abelson (Barron’s): Don’t bank on it
“David Rosenberg of Bank of America/Merrill Lynch last week offered some worthwhile observations on the stock market and the economic landscape that just happen to buttress our own reservations.

“He points out that the two groups that paced the sharp upswing were financials and consumer cyclicals, in which there are, respectively, net short positions of 5 billion and 2.7 billion shares. Which strongly suggests that not an insignificant part of the rally has been provided by shorts running for cover.

“He also points out that the Russell 2000 small-cap index is up 36% since the March low, and has outperformed the S&P by some 980 basis points. As David says, ‘the last time it pulled such a massive rabbit out of the hat’ was in the stretch from late November to early January, and the major averages proceeded to make new lows two months later.

“Another amber light he spots is investor confidence. Over the past five weeks, he reports, Rasmussen, which takes a daily reading, has seen its investor-confidence index surge 32 points, an unprecedented climb in so short a span. This could be, he suspects, a ‘fly in the ointment for a sustained equity-market rally’.

“David has four markers that will signal to him that the economy is finally making the turn and starting an extended expansion. The first is home prices. The second is the personal-savings rate. Marker No. 3 is the debt-service ratio, and No. 4 is the ratio of the coincident-to-lagging indicators of the Conference Board.

“Aggregating those four markers, he calculates that we are roughly 44% of the way through the adjustment process. That is a tick up from where we were last month. However, the improvement, he laments, has been very modest and very slow.

“We should add that he also stresses that it’s critical for both the economy and the market that payrolls stop shrinking. All the talk about jobless claims “stabilizing” is so much poppycock, he snorts. That number of claims, he notes, is still consistent with monthly payroll losses of around 700,000. As with industrial production, which is also in a vicious slump, employment must stop falling before a recession typically ends.

“‘Call us when claims fall below 400,000,’ he says, which is his estimate of ‘the cut-off for payroll expansion/contraction’.

“Until then, he warns, ‘the recession will remain a reality. Rallies will be brief, no matter how violent, and green shoots are a forecast with a very wide error term attached to it.’”

Source: Alan Abelson, Barron’s, April 18, 2009.

Barry Ritholtz (The Big Picture): The (false) glimmer of hope
“Nice cover image from The Economist on the brown shoots.

“Excerpt: ‘But, welcome as it is, optimism contains two traps, one obvious, the other more subtle. The obvious trap is that confidence proves misplaced - that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths.’”

Source: Barry Ritholtz, The Big Picture, April 23, 2009.

Horowitz & Company: Recessions - past and present

Source: Horowitz & Company, April 2009.

Asha Bangalore (Northern Trust): Leading Index - continues to send message of weak economic conditions
“The Conference Board’s Index of Leading Indicators (LEI) dropped -0.3% in March 2009, after a revised 0.2% decline during February. The LEI posted the last increase in June 2008. On a year-to-year basis, the quarterly average of the LEI fell 3.8% after a 4.0% decline in the fourth quarter. The LEI appears to have established a bottom in the fourth quarter of 2008.

“The main message is that the LEI continue to point to weak economic conditions in the near term. More is required to declare that the economy is out of the woods.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 20, 2009.

Asha Bangalore (Northern Trust): Chicago Fed National Activity Index shows a noteworthy improvement
“The Chicago Fed National Activity Index (CFNAI) was -2.96 in March versus -2.82 in February. The 3-month moving average of the index provides a more consistent picture of national activity. In March, the 3-month moving average increased to -3.27 from -3.57 in February. A bottom of the 3-month moving average of the CFNAI is associated with the likely end of a recession, most of the time. We will be tracking this information to get a heads up about the economy.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 20, 2009.

Asha Bangalore (Northern Trust): House Price Index points to moderation in pace of decline
“The Federal Housing Finance Authority’s (previously OFHEO) House Price Index (HPI) for February moved up 0.7% in February after a 1.1% increase in January. From a year ago the HPI dropped 6.43% compared with a 6.88% decline in January. The sharpest decline was recorded in November 2008 (-9.06%). The Case-Shiller Home Price Index for February will be published on April 28. In January the Case-Shiller Home Price Index fell 19% from a year ago following an 18.6% drop in December.

“Two out of three house price indexes appear to have established a tentative bottom. The New York Times (For Housing Crisis, the End Probably Isn’t Near) story suggests that additional price declines, probably of a large magnitude, are likely in the near term. The elevated level of inventories of unsold homes and the weakness in employment conditions support the conclusion of the article. However, we should bear in mind that other sectors of the economy are showing preliminary signs of stabilization that could translate into a recovery given the historical size of the monetary and fiscal policy stimulus put in place.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 22, 2009.

Asha Bangalore (Northern Trust): Sales of existing homes appear to be stabilizing at a low level
“Sales of all existing homes dropped 3.0% at an annual rate of 4.57 million units in March. Sales of existing single-family homes declined 2.8% to an annual rate of 4.10 million units in March. Sales of single-family existing homes have moved in a narrow range of 4.06 million - 4.25 million in last five months, suggesting that a bottom at a low level is being established. The Beige Book, prepared for the April 28-29 FOMC meeting, noted that there were ‘some signs that conditions may be stabilizing’.

“The seasonally adjusted inventory-sales ratio for existing single-family homes rose slightly to a 9.6-month supply mark in March from a 9.5-month supply in the earlier month. This ratio appears to have peaked in November 2008 (11.3 month supply) and has since moved in a narrow range between 9.96 months and 9.53 months.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 23, 2009.

Asha Bangalore (Northern Trust): New home sales appear to be stabilizing
“Sales of new homes dropped 0.6% to an annual rate of 356,000 in March following an upwardly revised gain in sales during February (358,000 versus earlier estimate of 337) and January (331,000 versus earlier estimate of 322,000). The level of new home sales suggests that sales are stabilizing. … year-to-year decline in sales in new homes in March was smaller than in prior months.

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 24, 2009.

Asha Bangalore (Northern Trust): Initial Jobless Claims erase part of the improvement seen in recent weeks
“Initial jobless claims moved up 27,000 to 640,000 in the week ended April 18 and erased a part of the decline seen in the prior two weeks.

“Continuing claims, which lag initial claims by one week, advanced 93,000 to 6.137 million, a new record. The insured unemployment rate rose to 4.6% from 4.5% in the previous week. The insured unemployment rate has risen one percentage point in a short span of 10 weeks which has occurred only on two other occasions. The jobless claims report presents a serious challenge to policymakers.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, April 23, 2009.

Casey’s Charts: Pouring fuel on the fire
“In November, the Fed announced its intent to purchase agency mortgage-backed securities directly from the market ‘to reduce the cost and increase the availability of credit for the purchase of houses’.

“After pumping $350 billion worth of freshly printed dollars into the system, they’ve succeeded in forcing mortgage rates to near historic lows. Great news for homeowners able to refinance; yet new home sales remain stagnant.

“There’s no telling when the housing market will stabilize. But the Fed is certain to continue fueling the fire with cheap money until recovery signs appear.”

Source: Casey’s Charts, April 21, 2009.

Bloomberg: Zero percent on Treasury Bills as China, Fed converge
“The last time US Treasury bill rates headed toward zero percent investors were panicking. Now it’s an indication Federal Reserve Chairman Ben Bernanke’s efforts to revive credit markets are starting to work.

“Rates on three-month bills turned negative in December for the first time since the government began selling them in 1929 as investors sacrificed returns to preserve principal. After increasing at the start of the year, rates have dropped 0.20 percentage point since the beginning of February to 0.13%.

“Demand for bills is rising again because investors including foreign central banks are snapping up the shortest-term US securities as the Federal Reserve buys Treasuries to drive down borrowing costs in a policy of so-called quantitative easing. China, the largest US creditor, with $744 billion of debt, has questioned the practice and shifted purchases to bills from longer-maturity securities.

“‘There’s a group of investors out there who are looking at what the Fed is doing and the policy action they’ve taken and the asset purchases, and saying ultimately this is inflationary,’ said Stuart Spodek, co-head of US bonds in New York at BlackRock. ‘You’re going to invest in very short-term bills because you absolutely need not just the quality but also the absolute liquidity.’

“China bought $5.6 billion in bills and sold $964 million in US notes and bonds in February, according to Treasury data released April 15. It was first time since November that China purchased more bills than longer-maturity debt.”

“While Treasury depends on China to fund the deficit, exports account for about 40% of gross domestic product for the world’s most populous nation. China’s exports to the US jumped 40% in March after slumping for five consecutive months.

“‘China and the US have a symbiotic relationship,’ said Win Thin, a senior currency strategist in New York at Brown Brothers Harriman & Co. ‘We need each other.’”

Source: Daniel Kruger, Bloomberg, April 20, 2009.

SmartMoney: Could municipal bonds really default?
“When Warren Buffett speaks, it’s usually worth paying attention. This time, the Oracle of Omaha is voicing concerns about the ability of some battered local and state governments to pay off their debts. The idea of cities and states facing insolvency is alarming for sure, and Buffett isn’t alone. Moody’s recently assigned a ‘negative outlook’ to the creditworthiness of all the nation’s local governments. The agency has rarely made such a sweeping generalization but said the magnitude of this recession warranted the move. The comments are the latest to have shaken the once-staid world of municipal bond investing.

“Traditionally, muni bonds offered lower yields - usually about 20% less - than Treasury bonds, since their income isn’t taxed. But the group was crushed last year, sending prices down and yields up. Now bargain hunters have started to emerge, attracted by yields that are as much as 70 basis points, or 0.7%, more than similar 10-year Treasurys, for example. As a result, the S&P Muni Index has climbed 7% this year, compared with the nearly 6% decline in the broader stock market.

“These low prices reflect investor concerns about possible downgrades, says Daniel Solender, director of municipal bond management at Lord Abbett. The Federal Reserve’s buying spree in other areas of the bond market is also depressing yields of Treasury bonds and making municipal bonds all that more attractive. And then there is the $100 billion fiscal stimulus headed toward the states that should help offset the shortfall in tax revenue, says TD Ameritrade Chief Investment Strategist Stephanie Giroux, who adds that historically there has only been a 1% default rate for muni bonds.”

Source: Reshma Kapadia, SmartMoney, April 23, 2009.

Bespoke: Muni Bond ETF makes a comeback
“Investing in municipal bonds is a paradox for investors right now. On one hand, they are attractive because of their tax-free status since taxes are expected to rise. On the other hand, with the economy as bad as it is, municipalities could come under duress and be at risk of default. Based on the performance of the National Muni Bond ETF (MUB) in recent months, it looks like investors are weighing the tax advantage more heavily against default risk. As shown below, MUB is up 14.4% from its lows last year, and it is trading near its all-time highs since the ETF was released in 2007.”

Source: Bespoke, April 24, 2009.

David Fuller (Fullermoney): Clues to stock market outlook
“Few of the Western stock market indices have rallied sufficiently to confirm that the bear market is over. Irrefutable confirmation, in our view, will not occur until share indices break above their 200-day moving averages, which then also turn upwards. Obviously markets will be well off their lows when this evidence of at least medium-term uptrends is apparent.

“However, there are many technical clues along the way. The first, specific to Western stock markets, is that tech-weighted indices such as Sweden’s OMX and the USA’s Nasdaq 100 did not break to new lows in February and March. Tech is often a lead indicator. The second clue is the number of downside failures which occurred with weaker indices. Third is the orderly and persistent six-week rally which tested the previous rally high in some although not all of these indices - Germany’s DAX, for instance and the S&P 500 got close to that 880 level which we have often mentioned in the past.

“There were enough downward dynamics yesterday [Monday] to suggest that reactions and consolidations were commencing in response to the short-term overbought conditions previously mentioned. If so, and if Western stock market indices hold at least half of their gains since the March lows during this pause, which could last for a number of weeks, and then move to new recovery highs, the bear market pattern of lower rally highs followed by new lows will have been broken. There is also a possibility that indices only hover near current levels for a short while before extending their rallies. If so, many would break their previous rally highs, providing a fourth clue by these indices that their bear market was over.

“I remain reasonably optimistic because we have already seen a bullish lead from many favoured Fullermoney themes, led by China and Brazil among the bigger capitalisation emerging markets, as mentioned so often in recent months.

“Meanwhile, all stock market indices show varying degrees of the ranging, base building reversion to the mean (the latter is represented by the 200-day MAs) which this service has been forecasting since the selling climax in late October and November. Consequently, downside risk, even for the weakest stock markets, currently looks to be no worse than base formation extension, consistent with the long convalescence also forecast.”

Source: David Fuller, Fullermoney, April 21, 2009.

Richard Russell (Dow Theory Letters): Are we in a bear market rally or a new bull market?
“(1) The market turned up in a V-shaped reversal off the March 9 low. However, almost all bull markets start with a period of accumulation. This entails a sideways move, sometimes taking weeks or even months. Or it may require a non-confirmation of the Averages as per December 1974. At the March low, we saw neither - no indication of accumulation. And that bothers me.

“(2) At the March lows, we did not see the ‘great values’ that usually accompany major bear market bottoms (i.e. P/E’s in the 5-8 area, average dividend yields of 5-6%).

“(3) The market was severely oversold at the March lows, a condition that often sets off a ‘relief’ (‘let off the pressure’) rally. The advance was probably triggered by the severely oversold condition of the market.

“(4) The one thing a money-manager cannot afford to do is be on the sidelines during ‘what could be’ a major rally. Once the market started up from the March 9 low, many money managers leaped in. The big short positions were immediately squeezed. The rise became a momentum advance. Retail buyers moved in, many trying to retrieve some of their brutal losses.

“(5) The rally moved up ‘too fast’ - action more typical of a bear market rally than the slow, plodding rise that is characteristic of the advance in a new bull market.

“(6) Two groups that led the rally were Financials and Consumer Cyclicals. Interestingly, these two groups contained respectively 5 billion and 2.7 billion shares sold short. This suggests strongly that a significant part of the rally was fired up by short-covering in these two groups (thanks Alan Abelson for this information).

“(7) Many investors and analysts turned optimistic after the market had rallied for only a few weeks. At true bear market bottoms, investors remain stubbornly sceptical or bearish for months after the bottom. Remembering 1974, people were actually angry when I turned bullish at the bottom. I was receiving hate letters and subscription cancellations.

“All of the above have kept me skeptical and cautious about this rally.”

Source: Richard Russell, The Dow Theory Letters, April 20, 2009.

Eoin Treacy (Fullermoney): Stock markets are vulnerable to a pullback
“In the short-term, all stock markets are vulnerable to a pullback for a number of reasons. The six week rally is beginning to look overextended. Some of the leading shares and commodities are beginning to lose their uptrend consistency. Taiwan’s key reversal on Friday is notable in this regard. Israel needs to rally from near current levels if it is to remain consistent. The same can be said for copper and platinum. However all of these markets have already posted impressive gains and have room to consolidate above their bases.

“Markets such as the Dow Jones Industrial or the FTSE 100 rallied well over the last six weeks but only managed to push partly back into their previous ranges. Taking the performance of leading global stock indices into account, we can probably deduce that they are in the bottoming process. However, the case that they have hit their absolute lows is much less clear than for the leading markets.

“‘Buy and hold’ is a suitable strategy for when relatively consistent uptrends have been established. These are not present in the lagging markets and it is too early to say with the leading markets. The conditions will be more suitable for such a strategy when the 200-day moving average has turned upwards and indices find support near it on downward reactions within their uptrends. However, let us not forget that the conditioning process of the bear market will influence or ability to stay with uptrends once they get going.

“… the Dow Jones World Stock Index has not reverted to its mean in the same way that some of the leading markets have. This supports the lengthy convalescence hypothesis for lagging markets. This index is capitalization weighted and heavily influenced by US shares, particularly in the oil and banking sectors. Neither of these is currently leading.

“As for the S&P 500, one could have argued that the rally from the November low was a failed break. However, the index was unable to sustain the initial rally and the progression of lower highs remained in place. It broke downwards again in February and made a new low. On this occasion, the rally has been larger and the Index is pressuring the progression of lower highs so an argument can again be made for a failed downside break. However, we have quoted 880 as an important level for the S&P for a number of months. It continues to need a sustained push above this level to reaffirm support from the lows.”

Source: Eoin Treacy, Fullermoney, April 20, 2009.

Bloomberg: S&P 500 will rise to 1,100 this year, Leuthold says
“Steve Leuthold, whose Grizzly Short Fund returned 74% last year betting against US stocks, said the Standard & Poor’s 500 Index will surge to 1,100 after valuations got to the cheapest levels of his career in March.

“Leuthold, 71, who helps manage $3.2 billion as founder of Minneapolis-based Leuthold Weeden Capital Management, said most investors should have 65% of their assets in stocks.

“‘This market was about as cheap as I’ve seen in my 45 years in this business,’ Leuthold said in a Bloomberg Television interview today. ‘We’re probably going to see the economy start turning upward, not now but toward the end of the year. The market is a lead economic indicator, so the time clock is about right for the market to turn up.’

“Leuthold also said that financial shares won’t be the stock market’s leaders. He favors technology and biotechnology companies and advised investors to avoid ‘defensive’ consumer shares and utilities.

“‘Investors should start buying gold over the next year or so because of the threat of inflation,’ Leuthold said. He started buying the precious metal three weeks ago.”

Source: Rita Nazareth and Erik Schatzker, Bloomberg, April 14, 2009.

Bespoke: Q1 earnings growth better than expected so far
“A fifth of the companies in the S&P 500 have reported earnings for the first quarter, and so far earnings are down 16.6% versus the first quarter of 2008. While down, this is much better than the -37.3% expected at the start of earnings season. When comparing actual earnings versus estimates, Consumer Discretionary, Financials, and Energy are leading the way. Consumer Discretionary was expected to see a year over year decline of 103.4% at the start of earnings season, but the companies that have reported in the sector have only seen earnings decline 22.2% so far. And Financials are actually showing earnings growth with 26.3% of the reports in.

“On the downside, the Industrial sector is the only one where actual earnings have come in weaker than expected. Earnings season still has a long way to go, but the fact that growth has come in better than expected thus far has been one factor driving the market higher.”

Source: Bespoke, April 22, 2009.

Bespoke: Earnings season beat and miss rates
“A total of 430 US companies and 156 S&P 500 names have reported their quarterly numbers since earnings season began with Alcoa’s report on April 7. We’re always monitoring how companies are reporting versus expectations, and below we highlight the percentage of companies beating and missing estimates as earnings season has progressed.

“At the start of earnings season, more companies were missing estimates than beating, however, this trend has changed significantly as the bulk of reports have come in this week. At the end of last week, 50% of US companies had beaten estimates, and this number has increased every day this week to its current level of 57%. Last quarter only 55% of companies beat estimates, so if we begin to see the ‘beat rate’ increase quarter over quarter instead of decrease, it will be a positive sign for the market.

“And stocks within the S&P 500 are reporting even better numbers. Again, after a slow start, the current ‘beat rate’ for the 156 S&P 500 companies stands at 67%. Earnings season still has a long way to go, but the current trend has investors optimistic.”

Source: Bespoke, April 23, 2009.

Bespoke: Retail stocks show relative strength
“At a time when the US consumer is supposed to be all but dead, retail stocks have been soaring. As shown below, the S&P 500 Retail group is up 51.29% since its low last November. Interestingly, when the overall market broke to new lows in early March, the Retail group failed to make a new low, which is indicative of its relative strength.

Source: Bespoke, April 21, 2009.

Casey’s Charts: SPDR Gold Shares growing rapidly
“SPDR Gold Shares (GLD), an exchange-traded fund, first hit the market in November 2004 with 260,000 ounces of gold. Today, GLD is the world’s 6th largest holder of physical gold with over 35 million troy ounces in the vault. In fact, since the general market meltdown last fall, the ETF has added over 16 million ounces and ended 2008 with a 5% gain - not many investments can make that claim.

Source: Casey’s Charts, April 23, 2009.

Vitaliy Katsenelson (Contrarian Edge): Who’s going to buy gold?
“After muting CNBC for years, I turned it on by accident yesterday and learned something very interesting. The gold ETF (GLD) is the sixth largest holder of gold in the world - the whole world, even ahead of China. When investors buy GLD they have to go out and buy gold driving up the prices. This raises a little question - who will be buying this gold from GLD when investors will decide to sell it?

“Gold is one of those weird assets where nobody knows what it is really worth. You cannot run discounted cash flow analysis to value it - it has no cash flows. It is an asset where perception and reality are deeply intertwined.

“Investors buying the gold ETF (GLD) are influencing the price of gold which is fair for the most part as otherwise they’d be buying the real thing. Though of course the ease of buying GLD creates a slightly higher artificial demand, but still it is fair game.

“The violent sell off in GLD will drive the prices of gold down dramatically unless a real buyer steps in (like another government sick of owning the US debt for instance) and the gold price could get cut in half overnight. Suddenly perception of not being a store of value will create a reality of gold not being a store of value. The gold game will be over.”

Source: Vitaliy Katsenelson, Contrarian Edge, April 18, 2009.

Guardian: Zimbabwe’s central bank raided private accounts to prop up ministries
“Zimbabwe’s central bank governor admitted today that he took hard currency from the bank accounts of private businesses and foreign aid groups without permission, saying he was trying to keep his country’s cash-strapped ministries running.

“In a statement that would be unthinkable coming from most central banks, the governor of the Reserve Bank, Gideon Gono, appeared to be issuing a plea to keep his job in the face of growing criticism.

“Gono said it was time ‘to let bygones be bygones’ now that Zimbabwe has a new coalition government dedicated to reversing its economic decline.

“The central banker said he gave the money he took from the hard currency accounts as loans to various ministries, and the private accounts would be reimbursed when the ministries repaid the loans. He said the bank’s efforts ‘sustained the country’ in its hour of need.

“Gono’s statement showed the practice was widespread. It was first hinted at last year, when the international aid agency Global Fund threatened to cut off funds to Zimbabwe for fighting Aids, tuberculosis and malaria unless money taken from its account was returned. The central bank returned $7.3 million to Global Fund.

“The raiding of foreign currency accounts is just one of the highly questionable actions for which Gono has been sharply criticised.

“In the last two years, Gono has slashed 25 zeros from the local currency, printed more local money without backup reserves or assets and distributed agricultural equipment to many in President Robert Mugabe’s party who were given farms seized from white people.”

Source: Guardian, April 20, 2009.

Barron’s: Jim Rogers isn’t buying a US stock recovery
“Legendary investor Jim Rogers is skeptical of the latest rally in equities - as well the health of the global economy. As such, he is scorning stocks and bonds while embracing commodities as his investment vehicle of choice. Barron’s John Kimelman got the chance to interview the CEO of Rogers Holdings, with the following excerpts appearing on the website yesterday:

Q: When you last did a lengthy interview with Barron’s magazine a year ago you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?

A: No. I’ve sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the US since then. I’m not buying anything in China right now because the Chinese market ran up maybe 50% since last November. It’s been the strongest market in the world in the past six months and I don’t like jumping into something that has been that run up. Still, I’m not thinking of selling these stocks either. I think if it goes down I’ll buy more. I think you will find that it’s the single strongest market in the world since last fall.

Q: That being said, you currently think Chinese stocks are bid-up now, so you’re not buying at these levels. So what have you been buying lately?

A: I have been buying commodities through the Rogers commodity indexes I developed because my lawyer won’t let me buy individual commodities. I recently bought all four Rogers indexes - the Elements Rogers International Commodities Index (ticker:RJI) as well as the three specialty indexes, the International Metals (RJZ), the International Energy (RJN), and the International Agriculture (RJA.) That’s how I invest in commodities and that’s what I bought last week. I have been buying these shares since last fall and up to last week.

Q: Now despite the recent stock-market rally that started in March, many US stocks are trading well off their 2007 highs. How come you see no value to this market?

A: I am not buying US companies mainly because I think we may have seen a bottom but I don’t think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.

Q: Can you summarize the reasons for your bullishness about commodities?

A: It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years. And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it’s going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to. And in the meantime reserves are declining. As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.

That does not mean that if suddenly the US goes bankrupt that everything won’t collapse in price. But I would rather be in commodities because it’s the only thing I know where the fundamentals are improving. They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view.”

Click here for the full article.

Source: Barron’s, April 20, 2009.

Bespoke: Baltic Dry Index on 9-day winning streak
“The Baltic Dry Index is used to track the globalization trade, as it measures the supply and demand for the shipment of goods around the world based on transport costs. The Baltic Dry Index has had some big ups and downs this year, going on multiple winning and losing streaks. This year alone, the index has had a 17-day winning streak, a 21-day losing streak, and it’s currently on another 9-day winning streak. The trend in 2009 has been upward, however, as the index is up 145%. And it’s still important to remember that we’re working off a very low base after the globalization bubble burst last year. The index is still off 84% from its highs in May of 2008.”

Source: Bespoke, April 24, 2009.

Bespoke: Bespoke’s commodity snapshot
“Below are our trading range charts for some commodities. The green shading represents 2 standard deviations above and below the commodity’s 50-day moving average. When the price moves above or below this green shading, the commodity is in extreme overbought or oversold territory.

“As shown, after reaching overbought territory a few weeks ago, oil has pulled back to just above the middle of its trading range. After trending higher since last October, gold and silver have recently moved to the bottom of their trading ranges, but they bounced nicely off of oversold territory a couple days ago. Platinum has held up better than gold and silver and is closer to the top of its trading range than the bottom.

“Not shown, copper continues to trend higher, along with orange juice, while corn, wheat, and coffee are in a sideways trading pattern.”

Source: Bespoke, April 23, 2009.

Financial Times: China reveals big rise in gold reserves
“China has quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal, it emerged on Friday, in a move that signals the revival of bullion after years of fading importance.

“Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954 billion in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.

“The news could spark interest in gold among other central banks. ‘When the largest holder of foreign exchange reserves discloses an increase in gold holdings, other countries may decide to think more carefully about underweight gold positions,’ said John Reade, a precious metals strategist at UBS.

“The increase in China’s gold reserves has come primarily from domestic production and refining. However, the news raises questions about the future of Beijing’s foreign reserves policy.

“Ahead of the G20 summit in London this month, China suggested global reliance on the US dollar as a reserve currency should be reduced.

“China has been diversifying away from the dollar since 2005, when it broke the renminbi’s peg to the US currency and officially marked it to a basket of currencies, but it still holds more than two-thirds in US dollar-denominated assets by most estimates.

“As its trade surplus and forex reserves ballooned in recent years, Beijing continued to buy huge amounts of US Treasury bonds while raising the proportion of purchases it allotted to other currencies and to gold.

“‘China’s announcement signals a broader shift in central banks’ attitude towards gold,’ said Philip Klapwijk, chairman of GFMS, the precious metal consultancy.”

Source: Jamil Anderlini and Javier Blas, Financial Times, April 24, 2009.

Eugen Weinberg (Commerzbank): Copper rallies too soon
“The rally in the copper market, where prices have risen by about 50% in the past eight weeks, looks to be premature, says Eugen Weinberg, commodities analyst at Commerzbank.

“He notes three main points put forward by market bulls.

“First, signs of a stabilising economic environment justify a cyclical recovery in base metal prices; second, purchases by China’s State Reserve Bureau will prevent a strong decline in demand; third, London Metal Exchange copper inventories have declined sharply, and falling inventory levels normally point to a market tightening.

“But Mr Weinberg believes an improvement in the economic situation is still uncertain. ‘And even if sentiment indicators have sustainably turned round, previous economic cycles have not seen a recovery in base metal prices right after sentiment has bottomed.’

“He also believes that the purchases by the SRB in China can only support prices in the short term. ‘Given that its strategic stockpiling effort is at an advanced stage, the SRB will gradually withdraw from the market during the coming weeks. The shrinking LME inventories, especially in warehouses in Asia, reflect the strong Chinese import-driven pull.

“‘We therefore expect a significant correction in the copper price during coming weeks - although this might be delayed by rising interest from financial investors.’”

Source: Eugen Weinberg, Commerzbank (via Financial Times), April 23, 2009.

Reuters: Boone Pickens sees oil at $75/bbl at end-year
“Texas oil billionaire T. Boone Pickens on Monday reiterated his prediction that crude oil prices would hit $75 a barrel this year as producers scale back production.

“Pickens said about OPEC producers: ‘They told you they want $75 by the end of the year, I would count on that, I believe them.’

“OPEC has scaled back output to help support crude prices, which have dropped from record highs over $147 a barrel in July to around $47 a barrel on Monday.

“‘I think you are going to clean up the stocks because the people who have the oil are cutting supply,’ Pickens said at an alternative fuels and vehicles conference, referring to the nearly 19-year high on US inventories of crude oil reported last week by the federal government.

“The United States would likely burn through its supply overhang in three months, he told reporters.”

Source: Reuters, April 20, 2009.

CEP News: Euro zone PMIs hit six-month highs, suggesting economic stabilization may be in sight
“Euro zone output improved by a record margin in April, suggesting that the economy could begin to stabilize by the end of the year, Markit Economics reported on Thursday.

“According to advance estimates, the euro zone manufacturing purchasing managers index hit a six-month high of 36.7 in April, beating expectations of a 34.7 print.

“The services PMI also reached its highest level in six months, rising to 43.1 in April, up 1.7 points from the forecasted figure and up 2.2 points from March’s level.

“Taking both the manufacturing and services PMIs together, Markit noted that the composite PMI jumped by a record 2.2 points to a six-month high of 40.5 in April, up from both the 38.9 print expected and the previous month’s 38.3 reading.

“The improvements were widespread in the month, Markit said, noting that declines in new business and backlogs of work had eased sharply. Furthermore, the ratio of new orders to stocks rose to its highest level since August, hinting at good news to come regarding future output, Markit said.

“However, employment levels continued to contract, falling at record speeds as companies adjusted to weakening demand, the report said.

“Despite the strong gain in the PMI figures, Markit senior economist Chris Williamson warned against being overly optimistic.

“‘The ongoing severity of the situation should not be underestimated,’ he said ‘The latest numbers are still consistent with a double-digit annual rate of decline of manufacturing output and a quarterly rate of contraction of GDP of at least 0.5%.’”

Source: CEP News, April 23, 2009.

CEP News: ZEW headline figure rises to 2-year high on strong German investor optimism
“Stronger-than-expected German investor optimism for the six-month outlook pushed the Centre for European Economic Research’s economic sentiment indicator above zero for the first time since July 2007 and to its highest level since June of the same year.

“According to the ZEW, the German economic sentiment indicator rose to +13.0, overshadowing both the +2.0 reading expected and March’s -3.5 level. However, the research firm was quick to add that the headline figure still remains significantly below its long-term average of 26.1 points.

“In a report issued on Tuesday, the ZEW noted that sentiment likely benefited from recent government stimulus packages, as well as easing inflationary pressures and the improving economic outlook in both the US and China

“‘Along with other indicators, the ZEW sentiment indicator reveals that there are well-founded expectations that the downward dynamics of the business cycle are bottoming out,’ ZEW President Dr. Wolfgang Franz said. ‘It is even becoming more likely that the economy will slowly recover in the second half of this year.’”

Source: CEP News, April 21, 2009.

Ifo: Rise in the Ifo Business Climate Index
“The Ifo Business Climate for industry and trade in Germany has improved somewhat in April. The firms are no longer quite so dissatisfied with their current business situation than in the previous month. With regard to the business outlook for the coming half year, the sceptical assessments have again been reduced somewhat. It is thus likely that the decline in economic output will slow clearly.”

Click here for the full report.

Source: Ifo, April 24, 2009.

Financial Times: Darling “flying on a wing and a prayer”
“Martin Wolf, FT chief economics commentator, analyses the UK Budget 2009. He says nothing in today’s Budget will ensure chancellor Alistair Darling’s optimistic growth forecasts will be achieved and that he is at the mercy of a global recession. He says the government appears to want to spend as if nothing has happened at least until next year and the election.”

Source: Financial Times, April 23, 2009.

CEP News: UK plans to borrow £703 billion over five years to fight recession
“The UK government plans to borrow a record £703 billion over the next five years - £269 billion more than in the previous budget - to continue supporting a suffering economy and counteract large job losses.

“Presenting the fiscal 2009 budget on Wednesday, UK Chancellor of the Exchequer Alistair Darling said the UK economy is expected to contract 3.5% in 2009 and grow 1.25% in 2010.

“To counteract large declines in employment, the UK is proposing to spend an additional £1.7 billion to create jobs and provide guarantees for the unemployed over a period of 12 months. The initiative applies to persons under the age of 25 and is expected to support 250,000 jobs.

“On housing, the UK plans to guarantee asset-backed securities and extend mortgage support to people who lost their jobs, and extend the stamp tax duty holiday on homes worth up to £175,000 until the end of the year. The budget also allots £500 million in aid to homebuilders.

“Also included is an automobile scrapping agreement that will offer a £2,000 discount to those trading in used cars for new ones. The initiative will be in place until March 2010.

“The budget also allots £750 million to set up a strategic investment fund.

“The UK’s Debt Management Office will issue £220 billion in gilts over the 2009-2010 fiscal year to finance £175 billion in public borrowing. Total borrowing is projected to decline to £97 billion by 2013-2014.

“Public borrowing will total 11.9% of GDP in 2010, said Darling, who wants to cut the current budget deficit in half over the next four years.”

Source: Erik Kevin Franco, CEP News, April 22, 2009.

CEP News: UK house prices post three-month winning streak
“UK house prices continued moving higher in April, marking three-months of gains, according to a report from Rightmove.

“House prices climbed 1.8% in April to an average price of £222,077. A month earlier, house prices had increased 0.9% to an average price of £218,081.

“On an annual basis, house prices are down 7.3% in April, better than March’s 9.0% decline.

“Although the news bodes well for the Island Nation who’s housing sector was hard-hit by the financial crisis, house prices in London plunged 3.2% month-over-month in April, reversing a 3.1% gain the month prior. This resulted in an annual decline of 4.1% versus the 1.8% contraction seen in March.”

Source: CEP News, April 19, 2009.

Financial Times: Japan to issue $110 billion bonds for stimulus
“Japan is to issue an extra Y10,800 billion ($110 billion) of government bonds this fiscal year to help it tackle its worst recession since the second world war.

“The bonds will fund the bulk of the government’s $154 billion stimulus plan and will bring its expected total new issuance for the fiscal year starting this month to a record Y44,100 billion, a 33% rise on last year.

“This comes as governments around the globe are taking on record debt levels to bail out loss-making banks and bolster economies as they attempt to spend their way out of the downturn.

“The US is expected to issue about $2,000 billion in the fiscal year starting last October, more than double last year. The eurozone governments are set to raise €800 billion ($1,050 billion) this calendar year, 23% up on 2008.

“The UK government in Wednesday’s annual Budget statement is expected to announce plans to issue £180 billion ($270 billion) in the 2009/10 financial year, a 25% rise on last year’s record levels.

Source: Lindsay Whipp, David Oakley and Michael Mackenzie, Financial Times, April 21, 2009.

Tags: Asset Classes, Biggest Banks, Bourses, Canada, Consecutive Weeks, Economic Stabilization, Emerging Markets, ETF, Fed Officials, Financial Health, Financial Times, Global Stock Markets, Gold Reserves, Government Bonds, Inflation Protected Securities, Interesting News, Market Commentators, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Number Of Countries, oil, Stress Tests, Treasury Inflation Protected Securities
Posted in Bonds, Commodities, Credit Markets, Emerging Markets, Gold, Markets | No Comments »

More volatility coming and more ETF options

Friday, January 25th, 2008

Jan. 25, 2008 - Watch out below. There is sure to be more volatility to the downside in the coming weeks, as the carry trade and proprietary traders continue to unwind profitable trades.

Finding themselves unable to collect on credit default swaps vis-a-vis AMBAC, MBIA, ACA, large institutions (banks) and hedge funds are finding themselves under pressure from a substantial cash call.

An example of this danger came to light when a little-known firm called ACA Financial Guaranty caused some of Wall Street’s biggest banks to write down billions of dollars in holdings, restating their value on corporate balance sheets. ACA revealed last month that it had promised to cover $60 billion worth of mortgage and corporate debt, but had enough cash to cover only a fraction of that. Merrill Lynch, Citigroup and financial institutions in Canada and France, which had all sold swaps to ACA, set aside billions in case the firm collapsed.

Most of the strength that the market is witnessing is due to short covering and this will manifest itself over and over during the next two to four weeks.

Institutions are still unwinding their profitable trades to raise cash. The market goes down. Then short covering occurs, and you get what appears to be a bounce or recovery in stock prices. The problem is that as long as the cash call remains larger than the outstanding short positions the market will continue to trend lower.

Don Coxe, in January’s Basic Points, puts it in these terms:

Sadly, the central bankers have been forced into injections of all-time record amounts of liquidity. Jim Cramer and some other prominent apologists for Wall Street glitterati screamed, “The Fed doesn’t get it,” and demanded bailouts for their buddies who faced demotion from Croesus status to morally cretinous status. The biggest benefi ciaries from these bailouts were not overstressed homeowners, but the biggest, baddest, borrowers who had made the biggest, baddest, bets through use of complex derivatives.

Despite strong openings today, both the Dow and TSX look unable to hang on to gains. You also have to look at trading volume for clues about the weakness of the recovery. Volumes are down 20% at the NYSE and 15% at NASDAQ.

Assuming you agree with the idea that there is more downside in the market, there are some relatively new and interesting ways that you can take positions on the short side to reduce downside that do not involve derivatives or short positions. In particular there are a new breed of ETFs that provide short exposure to various sectors and country bets. These are aptly referred to as ’short’ and ’double-short’ ETFs.

ProShares has created ETF’s that trade inversely with the markets. These allow investors and traders to hedge against market downturns or that want to bet against the market. These ETFs are very liquid and actively traded and are designed to go up when indexes go down. As a reminder, the SHORT funds use no leverage, but the UltraShort funds employ leverage. Here is partial list by Fund (Ticker):

• UltraShort QQQ (AMEX: QID)
• UltraShort Dow30 (AMEX: DXD)
• UltraShort S&P500 (AMEX: SDS)
• UltraShort MidCap400 (AMEX: MZZ)
• UltraShort SmallCap600 (AMEX: SDD)
• UltraShort Russell2000 (AMEX: TWM)
• UltraShort MSCI EAFE (AMEX: EFU)
• UltraShort FTSE/Xinhua China 25 (AMEX: FXP)… short selling FTSE Xinhua 25 index (FXI).
• UltraShort Basic Materials (AMEX: SMN)
• UltraShort Consumer Goods (AMEX: SZK)
• UltraShort Consumer Services (AMEX: SCC)
• UltraShort Financials (AMEX: SKF)
• UltraShort Health Care (AMEX: RXD)
• UltraShort Industrials (AMEX: SIJ)
• UltraShort Oil & Gas (AMEX: DUG)
• UltraShort Real Estate (AMEX: SRS)
• UltraShort Semiconductors (AMEX: SSG)
• UltraShort Technology (AMEX: REW)
• UltraShort Utilities (AMEX: SDP)
• Short MSCI Emerging Markets (AMEX:EUM)
• Short MSCI EAFE (AMEX: EFZ)
• Short QQQ (AMEX: PSQ)
• Short Dow30 (AMEX: DOG)
• Short S&P500 (AMEX: SH)
• Short MidCap400 (AMEX: MYY)
• Short SmallCap600 (AMEX: SBB)
• Short Russell2000 (AMEX: RWM)

On the TSX in Canada, Horizons BetaPro Funds have launched ‘double-short’ ETFs that trade inversely with the market (they also have corresponding ‘double-bull’ versions of these). Canadian investors and traders can use these to protect against downturns or simply bet against the market.

• Horizons BetaPro COMEX® Gold Bullion Bear Plus ETF (TSX: HBD)
• Horizons BetaPro S&P/TSX Global Mining® Bear Plus ETF (TSX: HMD)
• Horizons BetaPro DJ-AIGSM Agricultural Grains Bear Plus (TSX: ETF HAD)
• Horizons BetaPro S&P/TSX 60® Bear Plus ETF (TSX: HXD)
• Horizons BetaPro S&P/TSX Capped Financials® Bear Plus ETF (TSX: HFD)
• Horizons BetaPro S&P/TSX Capped Energy® Bear Plus ETF (TSX: HED)
• Horizons BetaPro S&P/TSX Global Gold® Bear Plus ETF (TSX: HGD)
• Horizons BetaPro NYMEX® Natural Gas Bear Plus ETF (TSX: HND)
• Horizons BetaPro NYMEX® Crude Oil Bear Plus ETF (TSX: HOD)
• Horizons BetaPro COMEX® Gold Bullion Bear Plus ETF (TSX: HBD)
• Horizons BetaPro S&P/TSX Global Mining® Bear Plus ETF (TSX: HMD)

Look at it this way; if you already have long positions that have appreciated, but you’ve got a longer term holding period in mind that is not determined by market conditions, this may a viable option to capture some of the potential downside.

Tags: Agricultural Grains, Apologists, Bailout, Banks, Basic Points, Bear Plus, Benefi, Biggest Banks, Bullion, Canada, Carry Trade, China, Citigroup, Collapse, Corporate Balance Sheets, Corporate Debt, Credit, Credit Default Swap, Credit Default Swaps, Crude Oil, Derivatives, DOG, Dollar, Don Coxe, DUG, DXD, EFZ, Emerging Market, Emerging Markets, energy, ETF, EUM, Fed, Fed Doesn, Financial Guaranty, Financial Institutions In Canada, Financials, France, FTSE, FXP, Glitterati, Gold, Gold Bullion, Grain, Hedge Fund, Hedge Funds, Horizons BetaPro, Investment, Jim Cramer, liquidity, Markets, Mbia, Merrill Lynch, Mining, Miscellaneous, Mortgage, MYY, MZZ, Natural Gas, Nymex, oil, Profitable Trades, Proprietary Traders, Proshares, PSQ, QID, Rally, Real Estate, REW, risk, RWM, RXD, SBB, SCC, SDD, SDP, SDS, Short Covering, Short Selling, SIJ, SKF, SMN, SRS, SSG, Stock Prices, Substantial Cash, SZK, Trading, TSX 60, TWM, ultrashort, Value, Wall Street
Posted in Canadian Stocks, Commodities, Credit Markets, ETFs, Emerging Markets, Gold, Markets, Oil and Gas, Outlook, US Stocks | No Comments »

Breakingviews: Sovereign Wealth Funds Risk Index

Friday, January 25th, 2008

Jan. 25, 2008 - Today, we received this piece about Breakingviews.com’s new SWF Risk Index:

Breakingviews sovereign wealth fund risk index

By Una Galani AND Simon Nixon

To see the full index with detailed rankings, click on the link below

BV SWF Risk Index

Sovereign Wealth Fund Index: Sovereign wealth funds were hardly talked about twelve months ago. Now they are one of the hottest topics in global financial markets. Over the last year, these state-owned entities have spent over $75bn snapping up stakes in some of the world’s biggest banks, taken big positions in stock exchanges on both sides of the Atlantic and even attempted a takeover of one of Britain’s leading supermarkets.

Such funds have existed for decades, but the shift in global economic power and the current weakness in western markets has given SWFs – forecast to grow assets fivefold to $13.4tr by 2017 – new influence and raised new fears about their motives. Critics such as President Sarkozy of France and some US politicians worry that SWFs tend to be secretive, target political as well as financial returns, and operate at the whim of governments not always sympathetic to western economic and political interests…

Tags: Banks, Biggest Banks, Brazil, Breakingviews, BRICs, China, Economic Power, Emerging Markets, France, Fund Index, Fund Risk, Galani, Global Financial Markets, Markets, Miscellaneous, Motives, Nixon, Political Interests, risk, Risk Index, Russia, Sarkozy, Stock Exchanges, Supermarkets, Swf, SWFs, Takeover, Target, Twelve Months, Western Markets, Whim
Posted in Markets | No Comments »