Baltic Dry Index Leads CRB Commodity Index?

Tuesday, March 2nd, 2010

Tags: Baltic Dry Freight Index, Baltic Dry Index, Barry Ritholtz, Bill King, Caveat, Commodities, Commodity Index, Dry Freight, Dry Goods, Hat Tip, Leads, Parallels
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Bill King: Is Gold in a Bubble?

Friday, December 4th, 2009

This post is a guest contribution by Bill King, of The King Report.

A worse-than-expected ADP Employment Change for November (-169k vs. -150k exp) chilled traders’ appetite for stocks. But gold is a different animal, and it’s in a parabolic rise.

Bad news is really good news for gold because it means ‘more juice’.

Several weeks ago, we noted that gold was about 20% above its key 350-day moving average. We opined that gold wasn’t bubbling yet; gold would need to get 40% above the key moving average before it was bubbling. Gold is now (in overnight trading) 34% above its 350-day moving average ($916).

Gold got 40% above its 350-day moving average on May 15, 2006; it fell from 720 to 542 in one month. Gold also got 40% above its key moving average on 3/17/08; it declined from 1032 to 682 by 10/24/08.

Oil got about 60% above its 350-day moving average in 2008…Nasdaq got 75% above in 2000.

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Ambrose Evans-Pritchard: After quietly doubling reserves, China is wary of gold ‘bubble’
The Chinese authorities have given the clearest indication to date that they view the surge in gold to an all-time high of $1,217 (£730) an ounce as a speculative frenzy. Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”
News that the rising powers of Asia are shifting a chunk of their fast-growing reserves into gold in a flight from Western paper currencies has emboldened investors to take out large gold bets on the futures markets or through exchange traded funds, leading to the parabolic rise in price over recent weeks.

However, officials in Beijing are aware that China’s…central bank cannot buy much gold without
distorting the price, so they have adopted a de facto policy of buying in a calibrated fashion each time prices fall back to their rising trend line – “buying the dips” in trading parlance. Experts say that China is putting a floor under the gold price but does not chase rallies once they are under way.

Tags: 916 Gold, Ambrose, Bad News, Bill King, Bubbles, China, Chinese Authorities, Chunk, Clearest Indication, Different Animal, Emerging Markets, Employment Change, Evans Pritchard, Exchange Traded Funds, Fashi, Frenzy, Futures Markets, Gold, Moving Average, Nasdaq, oil, Ounce, Paper Currencies, S Central, Vice Governor
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Words from the (Investment) Wise (November 22, 2009)

Sunday, November 22nd, 2009

Stock markets succumbed to a bout of profit-taking last week, sparked by concerns that the rally has overshot the pace of economic recovery. Riskier assets were showing signs of fatigue as the US dollar - the catalyst of many recent moves - stabilized and was perceived to be near its trough (if only short-term in the books of ardent dollar bears).

The greenback, usually the remit of the US Treasury, received support from Fed Chairman Ben Bernanke in a speech. He noted that the Fed was “attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability.” These comments spurred some buying interest.

Bill King (The King Report) summarized the situation as follows: “For the past few months, bad economic news was perceived to be good news for stocks on the rationale that it ensured more juice. Dollar down, stocks and gold up has been the routine. Are we at an inflection point, where bad economic news is becoming bad news for stocks?”

Source: Ed Stein, Comics.com, November 20, 2009.

The past week’s performance of the major asset classes is summarized by the chart below. With the exception of equities and investment-grade corporate bonds, most asset classes closed higher on the week despite nervousness creeping in before the weekend. Gold bullion touched a record high of $1,152.74 on Thursday and helped platinum, silver, palladium and copper reach fresh peaks for the year.

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below.

The MSCI World Index (-1.1%) and the MSCI Emerging Markets Index (+0.3%) followed different paths last week, resulting in year-to-date gains of 24.5% and an impressive 70.2% respectively. Notwithstanding solid gains since the March lows, no major index has yet been able to reclaim the 2007 pre-crisis peaks.

As far as the US indices are concerned, the Dow Jones Industrial Index eked out a small gain for the week as investors emphasized high quality, but the other major indices all reversed a two-week up-patch. Six of the ten economic sectors closed lower for the week, with Technology (-1.4%) and Consumer Discretionary (-1.1%) underperforming,

The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 17.6%, S&P 500 Index 20.8%, Nasdaq Composite Index 36.1% and Russell 2000 Index 17.1%.

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

Top performers among stock markets this week were Bangladesh (+21.3%), Latvia (+4.5%), Kazakhstan (+4.3%), Qatar (+4.1%) and China (+3.8%. At the bottom end of the performance rankings, countries included Ecuador (‑9.3%), Egypt (-7.6%), Greece (-7.1%), Turkey (-7.0%) and Macedonia (‑6.3%).

Of the 98 stock markets I keep on my radar screen, 39% recorded gains (last week 66%), 58% (31%) showed losses and 3% (3%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

While other benchmark indices have been going from strength to strength, the Japanese Nikkei Dow has been in a downtrend since August and last week recorded a fourth consecutive down-week. The weakness in Japanese stocks coincided with a surge in the price of credit default swaps (CDSs) on Japanese government bonds (JGBs) - under stress of sovereign solvency fears. The chart below shows the significant underperformance of the Nikkei (red line) versus the S&P 500 (green line) - in absolute terms in the top section and on a relative basis (blue line) in the bottom part.

Source: StockCharts.com

John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included iShares Silver Trust (SLV) (+6.2%), PowerShares DB Silver (DBS) (+6.2%), PowerShares DB Base Metals (DBB) (+4.6%), SPDR S&P Metals and Mining (XME) (+3.8%) and Market Vectors Agribusiness (MOO) (+3.8%).

At the bottom end of the performance rankings, ETFs included iShares MSCI Turkey Investible Market (TUR) (-8.1%), HOLDRS Merrill Lynch Market Oil Service (OIH) (-4.3%), First Trust ISE-Revere Natural Gas (FCG) (-3.9%), SPDR S&P International Financial Sector (IPF) (-3.9%) and iShares Dow Jones US Home Construction (ITB) (-3.7%).

“Short-term US interest rates turned negative on Thursday as banks frantically stockpiled government securities in order to polish their balance sheets for the end of the year,” reported the Financial Times. Three-month T-Bills traded at a yield of -0.03% and six-month Bills fell to 0.12% - the lowest six-month yield since 1985. “Conventional wisdom says it’s year-end window dressing … But why Bills? If you want to park cash, why not place it in some short-term paper with a positive yield? … those pundits that exclaim there is no problem are not correct. If there were no concerns, the cash would not eagerly run to a negative yield vehicle,” observed Bill King.

Signs of heightened risk aversion also came from a widening of the spread of emerging-market bond yields over Treasuries and an increase in credit default swap spreads on corporate bonds and sovereign debt (notably the US and the UK). Risk aversion also resulted in the selling of some commodity-linked currencies.

In other news, a US congressional panel on Thursday approved the Ron Paul-Alan Grayson initiative to open the Federal Reserve’s monetary policy decisions to government audits. The panel approved the amendment to broader legislation to revamp financial rules, but put off a vote on the broader measure.

Also, the Fed announced a reduction in the term of discount window loans from 90 to 28 days, effective January 14, 2010. Asha Bangalore (Northern Trust) argued that the need for discount window loans had decreased significantly from the period following the collapse of Lehman Brothers. “This [Fed's announcement] marks the beginning of a gradual withdrawal of the extraordinary support the Fed has extended to the global financial system as signs of stability have emerged,” she said.

Next, a tag cloud of all the articles I read during the week. This is a way of visualizing word frequencies at a glance. “Gold” has been rising in prominence for a while, and now occupies the top slot in the media. Words such as “rates”, “dollar”, “prices” and “China” are not far behind.

Back to the stock markets: The S&P 500 Index broke above 1,100 on Monday, but reversed course later in the week and again closed below what was seen as an important resistance level.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index, the indices in the table are all trading above their 50-day moving averages, with all the indices also above their respective 200-day moving averages. However, many European markets have already fallen to below their 50-day lines (not shown on this table, but indicated on the performance table higher up), pointing to possible further weakness.

The October lows are also given in the table. A break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher-reaction lows.

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

In addition to having retraced 50% of their bear market declines and up-volume recently having been mediocre, the Dow Industrial and S&P 500 are up against significant medium-term downward trendlines. Also, negative divergences are showing up in a number of breadth indicators, often good leading indicators at tops, as discussed below.

The number of S&P 500 stocks trading above their respective 50-day moving averages has declined from 92.6% in September to 56.8%, having made a series of declining tops while the underlying index was making new highs for the move. “This means that less and less stocks have been helping the index move higher, and it’s definitely something that favors the bearish argument,” said Bespoke.

Source: StockCharts.com

The Bullish Percent Index shows the percentage of stocks that are currently in bullish mode as a result of point-and-figure buy signals. The figure is still relatively high at 77.0%, but the indicator appears to be topping out.

Source: StockCharts.com

Richard Russell, 85-year-old writer of the Dow Theory Letters newsletter, said: “I keep thinking that the stock market is on thin ice … I’m still bothered by the fact that this ‘bull market’ never started from an area where stocks were selling below ‘known values’. Every bear market I’ve ever seen has ended with stocks selling below ‘known values’. We never saw anything like that at the October 2008 lows or at the March 2009 lows. For this reason, I continue to think that maybe the final bear market bottom lies ahead. Suspicion, thy name is Russell.”

In case you have missed Adam Hewison’s (INO.com) short technical analysis videos during the past week, click on the following links to access these excellent presentations: S&P 500, Dow and Nasdaq, the US dollar, gold and crude oil.

As stated before, share prices have moved too far ahead of economic reality. This calls for a cautious approach in anticipation of the market working off its overbought condition and fundamentals reasserting themselves. I will bide my time while the fundamentals play catch-up.

For more discussion on the economy and financial markets, see my recent posts “Velocity of US money supply at long last edging up“, “2009 Rally vs. 1982 Bull Market“, “Picture du Jour: Plunging dollar erodes non-US investors’ returns“, “WealthTrack: Bruce Berkowitz - golden rules of investing“, and “Donald Coxe - Investment Recommendations (November 2009)“. (And do make a point of listening to Donald Coxe’s webcast of November 20, which can be accessed from the sidebar of the Investment Postcards site.)

Twitter and Facebook
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those not doing so already, you can follow my “tweets” by clicking here. You may also consider joining me as a friend on Facebook.

Economy
“Global business confidence is slowly improving. Businesses remain cautious, but sentiment is much better than at the beginning of the year and is consistent with a tentative global economic recovery,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses were much more upbeat … notably optimistic about the economy’s prospects next spring. South American businesses are the most positive, and North Americans generally the most negative.”

Source: Moody’s Economy.com

The Ifo World Economic Climate Indicator rose in the fourth quarter of 2009 for the third time in succession, with the economic climate improving in all major economic regions. The improvement was particularly marked in Asia, where the indicator even surpassed its long-term average, but the climate indicator also rose clearly in Western Europe and North America in the fourth quarter. While the recovery of the world economy is driven especially by Brazil as well as India, China and other Asian countries, the economic expectations are now optimistic almost everywhere, with the exception of several countries in Central and Eastern Europe.

Source: Ifo, November 19, 2009.

As far as hard data are concerned, the Japanese gross domestic product grew by 1.2% quarter on quarter between July and September - the biggest quarterly expansion since the first quarter of 2007. A growing trade surplus and stimulus-fuelled private consumption combined to help the world’s second-largest economy recover from its worst postwar recession.

The latest acronym used in the context of economic recovery is “LUV”, indicating an L-shaped economic recovery in Western Europe, a U-shaped improvement in the US and a V-shaped reversal in the BRIC and other emerging countries.

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

Thursday, November 19
• Index of Leading Economic Indicators underscores US economy will continue to grow
• Labor market data point to stabilizing conditions

Wednesday, November 18
• Higher prices for cars and energy lifted CPI in October
• Housing starts - permits show a more stable trend

Tuesday, November 17
• Fed reduces term of discount window loans
• Factory production slips in October
• Higher prices for food and energy lift wholesale prices, core price index declines

Monday, November 16
• Chairman Bernanke stresses job market and credit conditions; the dollar receives special mention
• October retail sales - noteworthy gains of several components

Bespoke’s “Economic Indicator Diffusion Index” measures the pace at which US indicators are coming in ahead of (or below) expectations over a 50-day period. Interestingly, the Index last week fell into negative territory as data reports failed to live up to (higher) expectations.

Still bearish, Nouriel Roubini (RGE), according to The Money Game - The Business Insider, predicts a slow recovery, quoting the following ten reasons why we will see a U-shaped US recovery:

1. A U-shaped US consumer. Roubini argues against a “V-shaped” recovery, which he says puts too much confidence in this year’s strong equity rally. Eighty percent of the population reacts to home prices, not equity prices, and he forecasts that home prices will fall further.

2. Difficult labor market conditions. Expect a strong second half of 2009 and a sluggish 2010, with growth below potential and continued job losses.

3. Balance sheet recession caused by over-leverage and debt accumulation. There are signs of a massive re-leveraging in the public sector. The cost of maintaining this level of debt will be very high and a drag on the economy.

4. Investment usually is a strong recovery component. But investment will not recover while one third of current capacity is not utilized.

5. A damaged financial system and the related credit crunch. Only half of the estimated $3 trillion global credit losses (IMF recently lowered their estimates) have been recognized so far. Expect more to come, especially in Europe.

6. Home prices said to fall further and commercial real estate bust continuing.

7. Exit strategy: Damned if you do and damned if you don’t. Removing fiscal accommodation will constrain a recovery that still appears weak. It has already been determined that it is too early to remove fiscal accommodation, but if it continues it will fuel persistent large budget deficits and lead to inflation.

8. Fall in potential GDP levels and possibly in potential growth.

9. Global imbalances: Over-spenders retrench while over-savers don’t compensate. Fall in demand from countries that tend to be over-spenders (US, UK) has not been neutralized by countries that tend to be over-savers (Japan, Germany).

10. Emerging markets (EMs) fared better, but can’t close the consumption gap. Can China/India be the engine of global growth? No. Can EMs decouple from anemic growth in G3? No. Is the policy response of China/Asia appropriate and sustainable? No. There are not the necessary social safety nets in EM countries, so the motive to save is high. Private demand has to take over and drive growth.

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

Source: Yahoo Finance, November 20, 2009.

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

US economic data reports for the week include the following:

Monday, November 23
• Existing home sales

Tuesday, November 24
• GDP
• Case Shiller 20 City Index
• Consumer confidence
• FHFA Home Price Index

Wednesday, November 25
• Personal income and spending
• PCE prices
• Initial jobless claims
• Durable goods orders
• Michigan Sentiment Index
• New home sales

Thursday, November 19
• Thanksgiving Day

The performance chart for various financial markets usually obtained from the Wall Street Journal Online is unfortunately not available this week.

“The recipe for perpetual ignorance is to be satisfied with your opinions and
content with your knowledge,” said Elbert Hubbard, American writer (hat tip: The Kirk Report). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will make a contribution towards continuously shaping new opinions and increasing the knowledge of the readers of Investment Postcards to enable them to make the appropriate investment decisions.

This week, the markets will be closed on Thursday, Thanksgiving Day, and on Friday from 13:00 EST.

That’s the way it looks from Cape Town (where I am enjoying beautiful summer days before making my annual early-December trip to New York City).

Source: Tom Toles, The Washington Post, November 17, 2009.

Clusterstock: The Journal has the richest readership among print publications
“The Wall Street Journal has the wealthiest readership among print readers according to a new survey from Mediamark Research & Intelligence, by way of BtoB Online.

“This is why Rupert Murdoch is trying to build stronger pay walls around his sites. He wants to protect his premium readership so he can keep charging high ad rates.”

Source: Jay Yarow and Kamelia Angelova, Clusterstock - The Business Insider, November 19, 2009.

Financial Times: Goldman’s PR problem
“Although the $500 million Goldman Sachs has pledged to help small businesses is the largest donation the company has ever made, the firm remains the whipping boy for Wall Street excess, says Francesco Guerrera.”

Click here for the full article.

Source: Financial Times, November 18, 2009.

Ifo: Clear improvement in the Ifo World Economic Climate Indicator
“The Ifo World Economic Climate Indicator rose in the fourth quarter of 2009 for the third time in succession. The rise in the indicator is the result of both more favourable expectations for the coming six months as well as less negative assessments of the current economic situation. The recovery of the world economy is driven especially by the dynamic development in Brazil as well as in India, China and other Asian countries.

“The economic climate improved in all major economic regions. The improvement was particularly marked in Asia, where the indicator even surpassed its long-term average. Also in Western Europe and North America the climate indicator rose clearly in the fourth quarter of 2009. The economic expectations are now very optimistic almost everywhere, with the exception of several countries of Central and Eastern Europe.

“In contrast, the current economic situation is still assessed as decidedly unfavourable in all major regions, although these assessments clearly improved over the previous quarter. The appraisals of the current economic situation are particularly negative in the euro area, North America, Central and Eastern Europe and Russia.

“The inflation expectations for 2009, on a worldwide average, are clearly lower than the inflation estimate for the previous year (2.5% compared to 5.4%). According to the expectations of the World Economic Survey (WES) participants, prices will increase only slightly in the course of the coming six months.

“The short-term interest rates will increase again in the coming six months for the first time in more than a year, in the opinion of the WES experts. In accord with the more favourable economic outlook, the WES experts anticipate that the long-term interest rates are also likely to increase in the coming six months in most countries.

“An increasing number of WES experts regard the euro as overvalued. The other major world currencies, the US dollar, the Japanese yen and the British pound, are now seen as properly valued, on average.”

Source: Ifo, November 19, 2009.

Bill King (The King Report): Sovereign solvency fears
“Over the past several weeks, credit default swaps (CDS) on sovereign debt have rallied sharply. Investors increasingly fear that the massive amounts of sovereign debt will not be repaid. The following CDS chart on JGBs is alarming.

“While the surge in CDS on Japanese debt has retrenched over the past week, the CDS on US and UK debt have rallied … Our guess is the market fears another downturn will lead to more stimulus and more governments absorbing crappy paper and risk from the private sector … The last crisis flamed on fears of bank and major corporate solvency. The next crisis could be characterized by sovereign solvency fears.”

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

The Wall Street Journal: China’s blunt talk for Obama
“China’s top banking regulator issued a sharp critique of US financial management only hours before President Barack Obama commenced his first visit to the Asian giant, highlighting economic and trade tensions that threaten to overshadow the trip.

“Liu Mingkang, chairman of the China Banking Regulatory Commission, said that a weak US dollar and low US interest rates had led to ‘massive speculation’ that was inflating asset bubbles around the world. It has created ‘unavoidable risks for the recovery of the global economy, especially emerging economies’, Mr. Liu said. The situation is ’seriously impacting global asset prices and encouraging speculation in stock and property markets’.

“Early Monday, a spokesman for China’s Ministry of Commerce added further criticism of the Obama administration, targeting recent measures by Washington against Chinese exports. ‘We’ve always known the US and the West as free market economies. But now we’re seeing a protectionist side,’ the spokesman, Yao Jian, told a monthly press briefing. Mr. Yao also rejected criticism of China’s currency policy, saying the yuan’s exchange rate has little to do with trade imbalances with the US and that China should keep the exchange rate stable.

“The Chinese comments signaled that Mr. Obama - on the third leg of a four-country Asian tour - can expect blunt talk from Chinese leaders on the economy. The issue could complicate his broad agenda in China that also includes efforts to extract new commitments on climate change and to encourage them to take a more active role to defuse nuclear threats in Iran and North Korea.”

Click here for the full article.

Source: Jonathan Weisman, Aaron Back and Andrew Browne, The Wall Street Journal, November 16, 2009.

Financial Times: Obama in China
“Barack Obama and Hu Jintao pledge to work together on a long list of pressing international issues during talks in the Chinese capital Beijing.”

Click here for the full article.

Source: Financial Times, November 17, 2009.

Reuters: China, US eye pact to help troubled banks
“Chinese and US regulators are negotiating a pact aimed at encouraging Chinese financial institutions to buy into small and medium-sized banks in the United States, bankers briefed on the plan said on Tuesday.

“Chinese bankers have complained that it’s been difficult for them to set up branches or invest in banks in the world’s leading economy, due partly to US regulators’ tough supervision and strict approval process for financial deals.

“But the global financial landscape has been revamped by the credit crisis, and cash-rich Chinese banks are now bigger players on the world scene and are scouting around for investment targets.

“To illustrate the global shake-down, Industrial and Commercial Bank of China is now the world’s biggest bank by market value, while Citigroup, once the world’s No.1 bank, is worth the same as a second-tier commercial bank in China.

“Two senior Chinese bankers said they had been invited this year by US officials, investment bankers and financial advisers to look at several potential investments in US banks, mostly in financial trouble.

“‘The trend is already there,’ said one Chinese banker. ‘Now they’re going to make this into an agreement to show there’s a change in official attitude toward Chinese investments in the US banking system,’ said the banker, who declined to be identified due to the sensitive nature of the matter.”

Source: George Chen, Reuters, November 17, 2009.

Financial Times: Geithner defends record to Congress
“Tim Geithner launched a fierce defence of his record as US Treasury secretary on Thursday as Republicans said his policies had failed and he should resign.

“In an unusually testy Congressional hearing, Mr Geithner told his Republican critics that he refused to take responsibility for ‘the legacy of crises you’ve bequeathed this country’.

“Kevin Brady, senior House Republican on the joint economic committee, told Mr Geithner he was a failure. ‘Unemployment skyrocketed … The deficit is becoming frightening … We are reduced to begging China to buy our debt and getting lectures from other nations on our financial disarray,’ he said. ‘The public has lost all confidence in your ability to do the job.’

“Mr Geithner shot back: ‘I agree with almost nothing in what you’ve said.’

“Although the US economy has started growing again, last month the unemployment rate breached 10% and is expected to stay high. With investment banks returning to profit but ordinary people still suffering, Republicans are increasing their attacks on the Obama administration over the economy.

“The Treasury secretary faced an array of questions and criticism during the hearing, which was ostensibly about plans to reform financial regulation. On that topic, Mr Geithner urged Congress to press ahead with legislation to reform the US regulatory system.

“He said reform would help to avoid a situation such as the government bail-out of insurance behemoth AIG in the future. He was criticised for his role in that rescue as then-president of the New York Federal Reserve.

“‘The United States of America … came into this crisis without anything like the basic tools countries need to contain financial panics,’ he said. ‘Coming into AIG, we had basically duct tape and string.’

“Mr Geithner also faced complaints that China was unfairly undervaluing its currency, the renminbi.

“He replied that he was confident Beijing would soon move to flexible rates. ‘They understand they need to do it, I think they want to do it, and I’m quite confident they will do it,’ he said.

“He also defended the ‘extraordinary’ actions taken to stabilise the economy and said the troubled asset relief programme was bringing good returns to US taxpayers.”

Source: Sarah O’Connor and Alan Rappeport, Financial Times, November 19, 2009.

Mark Felsenthal (Reuters): House panel OKs plan to open Fed policy to audits
“A US congressional panel on Thursday approved a measure to open the Federal Reserve’s monetary policy decisions to government audits, a surprise blow to the central bank’s efforts to shield its independence and a signal of frustration with the central bank.

“The provision, co-sponsored by Republican Representative Ron Paul and Democrat Alan Grayson, would allow a congressional watchdog agency to conduct a broad review of the US central bank’s policy and lending. Fed officials have strongly opposed it, saying it would cast doubt on the central bank’s independence from political pressure.

“The House of Representatives Financial Services Committee approved the amendment to broader legislation to revamp financial rules. The panel put off a vote on the broader measure.

“House Financial Services Committee Chairman Barney Frank, who opposed the Paul-Grayson measure, predicted it would be revisited when financial reform legislation is debated by the House.

“‘I think it’s going to be seen as weakening the independence of monetary policy with consequent negative implications,’ he told reporters after the vote. ‘I think people will be worried about the impact on the dollar and on interest rates, and I think that one may be revisited when we get to the floor.’

“However, Paul’s measure has earned support from more than half of the members of the House.

“The amendment is a further congressional slap at the US central bank after a Senate regulatory overhaul proposed stripping the Fed of its regulatory authority. Some lawmakers fault the Fed for failing to anticipate or prevent the financial crisis that pitched the economy into deep recession, while others are angry at its extensive emergency support for financial institutions.

“The Fed objected to the provision, saying it could raise financial market questions about its independence and could result in higher long-term interest rates as investors worry about inflation risks.”

Source: Mark Felsenthal, Reuters, November 20, 2009.

Bespoke: Government spending - where does it end?
“On Thursday, the Treasury Department released its monthly budget statement which summarizes revenues and spending for the month of October. After one looks at these figures, it’s hard to believe that they are accurate, but unfortunately they are. Unless you have been living under a rock for the last several years, you know that our Federal Government has been spending money at rates that would make even a sub-prime borrower blush. But even taking this into account, these numbers are still startling, if not scary.

“During the month of October, the Federal Government spent $2.30 for every dollar of revenue it took in. Given the fact that this is the fifth time this year that the ratio has exceeded two, one might think that this type of deficit spending is commonplace. However, going back to 1970, October was only the 13th month that the ratio ever exceeded two. Prior to 2008, the ratio exceeded two on average once every 6.5 years. In the last two years, the ratio has exceeded two on average once every three months!

“The charts below highlight the twelve-month rolling totals of government revenues and outlays. It doesn’t take an accountant to see that these two lines are moving in the wrong direction. Given the fact that nobody thinks Washington is going to reign in spending, the only way to solve the gap is through higher revenues (raising taxes) or increasing the money supply. Is it any surprise that barely a day goes by where the dollar doesn’t trade down in value?”

Source: Bespoke, November 16, 2009.

MoneyNews: Obama admits spending binge risks plunge into second recession
“President Barack Obama gave his sternest warning yet about the need to contain rising US deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.

“With the US unemployment rate at 10.2%, Obama told Fox News his administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction.

“His administration was considering ways to accelerate economic growth, with tax measures among the options to give companies incentives to hire, Obama said in the interview with Fox conducted in Beijing during his nine-day trip to Asia.

“‘It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a way that could actually lead to a double-dip recession,’ he said.”

Source: MoneyNews, November 18, 2009.

The Washington Post: Bailout program could be extended
“The Obama administration is poised to extend the life of the highly unpopular $700 billion financial bailout and, to display a commitment to fiscal responsibility, is planning to use much of the leftover funds to reduce the national debt, government sources said.

“Administration officials are grappling with how best to announce the extension of the Troubled Assets Relief Program at a time when the economy is struggling and the unemployment rate is at its highest point in 26 years. The officials are hoping that by putting roughly $200 billion toward paying down the $12 trillion national debt, they could mitigate the political fallout, the sources said.

“No final decision about the fate of the bailout has been made, and officials are keenly aware that their preferred course contains risks. Officials worry that lawmakers, seeking to fund their own projects, may try to tap any large sum of unused money set aside for debt reduction, the sources said, speaking on condition of anonymity because the internal deliberations were private.

“Congressional Democrats are already eyeing the unexpended bailout cash as a source of funding for new efforts to combat soaring unemployment. Rep. John B. Larson (D-Conn.), chairman of the House Democratic Caucus, said lawmakers could send an important message about their priorities by taking money from the financial bailout program and redirecting it to pay for road and bridge projects and other measures meant to create jobs.”

Source: David Cho, Michael Shear and Lori Montgomery, The Washington Post, November 19, 2009.

Asha Bangalore (Northern Trust): Chairman Bernanke stresses job market, credit conditions and dollar
“The Chairman spoke at length about credit conditions and the labor market. In his opinion, impaired financial market conditions have led to banks holding larger buffers compared to the situation prior to the onset of the current crisis. In addition, a shaky economic environment marked with high loan losses and uncertainty about regulatory capital standards are factors restraining the growth of credit. The impaired market for securitization is another aspect that is contributing to the reduction of credit availability.

“The main message is that the credit machine needs to function for self-sustained economic activity. There is a minor improvement to note on this front. Loan extensions remain noticeably weak but for the week ended November 4, the decline was smaller (6.5%) compared with recent weeks. It appears that a trough has been established. Additional improvements with positive readings will be necessary to declare the coast is clear.

“Bernanke also spoke extensively about the labor market and more or less reiterated the well known aspects of the current labor market conditions. He raised the issue of a ‘jobless recovery’ and highlighted the reasons for the likelihood of this situation.

“The explicit mention of the dollar was the most important departure from earlier speeches. He noted that the Fed is ‘attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability.’ Historically, the dollar is the domain of the Treasury Department.

“The inflationary implications of the weak dollar are restrained partly by the enormous slack in the economy. However, prices of imported goods excluding fuel have risen for three straight months and commodity prices have also risen. Although inflation expectations have risen in recent days, the overall picture is that of a contained situation. Inflation expectations will be watched closely in the months ahead.”

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

Asha Bangalore (Northern Trust): Fed reduces term of discount window loans
“The Fed announced a reduction in the term of discount window loans to 28 days from 90 days as of January 14, 2010. The Fed lengthened the maturity of discount window loans on August 17, 2007 to 30 days from a maximum term of overnight and extended it further to 90 days on March 16, 2008.

“As seen in the chart below, the need for discount window loans has reduced significantly from the period following the collapse of Lehman Brothers. This marks the beginning of a gradual withdrawal of the extraordinary support the Fed has extended to the global financial system as signs of stability have emerged.”

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

Financial Times: Short-term US interest rates turn negative
“Short-term US interest rates turned negative on Thursday as banks frantically stockpiled government securities in order to polish their balance sheets for the end of the year.

“The development highlighted the continuing distortions in the financial system more than a year after Lehman Brothers’ failure triggered a global crisis.

“The growing appetite for short-term government debt reflects an effort by banks to present pristine year-end balance sheets to regulators and investors - an effort known as ‘window dressing’ on Wall Street, analysts said.

“With the Federal Reserve maintaining an overnight target rate of zero to 0.25 per cent, investors are demonstrating a willingness to completely forgo interest income - or even to take a small loss - to own securities that are seen as safe.

“Ted Wieseman, economist at Morgan Stanley, said there was a ’squeeze in the [Treasury] bill sector’ that was ‘intensifying as investors stash money over year-end’.

“The scramble has been exacerbated by the fact that all leading US banks, many sitting on big trading profits, will this year close their books at the same time - at the end of December. In past years, investment banks such as Goldman Sachs and Morgan Stanley reported annual results in November.

“‘People are setting up for year-end early, and once you see bill rates going down quickly, it pulls in more buying,’ said Gerald Lucas, senior investment adviser at Deutsche Bank.

“On Thursday, Treasury bills maturing in January traded below zero per cent, traders said. Three-month bills traded at 1 basis point and six-month bills fell to a record low of 13 basis points - compared with 14 basis points at the height of the crisis last year.”

Source: Michael Mackenzie, Financial Times, November 20, 2009.

MoneyNews: Bullard - shrinking reserves key to exit plan
“A senior Federal Reserve official said on Wednesday the US central bank may start tightening financial conditions by adjusting its extensive asset purchase programs rather than raising interest rates.

“‘The market’s focus on interest rates is disappointing, given quantitative easing,’ St. Louis Federal Reserve Bank President James Bullard said in a presentation to a group of bankers. “Markets should be focusing on quantitative monetary policy rather than interest rate policy,” he said.

“‘The main challenge for monetary policy going forward will be how to adjust the asset purchase program without generating inflation while interest rates are near zero,’ Bullard said.

“Medium-term inflation hinges on what the Fed will do with this program, he said.

“Bullard said financial market focus on interest rates may in part be misplaced because the Fed has in the past waited two and a half to three years after the end of a recession before raising rates.

“‘Assuming that the (Fed) would behave the same way that it’s behaved in the past, this could mean that the (Fed) would not start increasing rates until early 2012,’ he said.

“However, the Fed will take into account the criticism that it fueled a housing bubble that contributed to the crisis by holding interest rates too low for too long in the early part of the decade, he said.”

Source: MoneyNews, November 18, 2009.

Bill King (The King Report): Getting more bearish on US economy
“Goldie’s Jan Hatzius is getting more bearish on the economy by the day.

“‘Despite the sharp pickup in real GDP growth since the dark days of early 2009, we estimate that real final demand - net of the boost from fiscal policy - is still contracting at an annual rate of around 1% in the second half of 2009. Although we expect a moderate recovery of around 2% by the second half of 2010, such a 3-percentage-point improvement would be insufficient to offset the loss of 4-5 percentage points of stimulus from fiscal policy and the inventory cycle. Hence, real GDP growth is likely to slow anew to a below-trend pace.

“‘The significantly stronger recovery that is now anticipated by a number of forecasters would require a much sharper acceleration in underlying final demand, along the lines of prior recoveries from deep recessions. But this ignores some key differences between the current situation and the aftermath of prior slumps. In particular, bank credit is tighter, the personal saving rate is much lower, the labor market is less cyclical, there is much more excess housing supply, and state and local budget gaps are deeper.’”

Source: Bill King, The King Report, November 17, 2009.

Asha Bangalore (Northern Trust): Leading Economic Index underscores US economy will continue to grow
“The Conference Board’s Index of Leading Economic Indicators rose 0.3% in October, after a 1.0% increase in the prior month. On a year-to-year basis, the leading index moved up 4.7% in the fourth quarter of 2009 (based on October data). The year-to-year change in the leading index has held in the positive territory for two consecutive quarters. The historical record of the leading index supports expectations of continued growth of real GDP in the near term.

“In October, six of the ten components of the leading index advanced - average manufacturing workweek, stock prices, interest rate spread, jobless claims, real money supply and orders of durable consumer goods. The remaining four components - orders on non-defense capital goods, vendor deliveries, building permits and consumer expectations - fell in October.”

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

Asha Bangalore (Northern Trust): Factory production slips in October
“Industrial production inched up 0.1% in October mainly due to a 1.6% increase in production at the nation’s utilities. Utilities and mining (-0.2%) components make up a small part of the total industrial production. Excluding these components, factory production slipped 0.1% in October after posting strong gains for three consecutive months.

“The weakness was in the durable goods component (-0.4%), while production of non-durable posted a small increase. Within durables, the gain in primary metals (+3.6%) was more than offset by declines in autos (-1.6%), furniture (-1.9%), electrical equipment (-0.9%) and computer and electronic products (-0.3%). Stepping back from these details, the small decline in factory production is not a severe setback. The process of recovery will be marked with some monthly readings showing declines. More importantly, the projected trajectory of factory activity in the coming months is positive.

“The operating rate of the nation’s industries moved up to 70.7% in October from 70.5% in the prior month. The capacity utilization rate of the factory sector held steady at 67.6% in October, which is noticeably higher than the 65.1% record low mark of June 2009.”

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

Asha Bangalore (Northern Trust): Labor market data point to stabilizing conditions
“Initial jobless claims held steady at 505,000 during the week ended November 14. Continuing claims, which lag initial claims by one week, declined 39,000 to 5.611 million. The insured unemployment rate held steady at 4.3%.

“Total claims which include recipients under the special programs, Extended Benefits Program and Emergency Unemployment Compensation Program, were 9.81 million during the week ended October 31, down from 10 million during the week ended October 3. Total continuing claims have held below 10 million for four straight weeks implying that although hiring is not advancing, job losses have stabilized.”

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

Clusterstock: The hires-and-fires gap brings good news for job seekers
“The unemployment rate is still miserable, but it’s not entirely bad news - at least if you find clever ways of slicing and dicing the data.

“Today’s chart measures the percentage difference between new hires and separations (people leaving a job). As you can see, the gap yawned late last year, as way more people left the workforce than were hired. But it’s coming back, getting closer to the 0% mark (even). And then of course, we just need to create a lot of jobs.”

Source: Vince Veneziani and Kamelia Angelova, Clusterstock - The Business Insider, November 16, 2009.

Asha Bangalore (Northern Trust): Housing starts - permits show a more stable trend
“Total housing starts fell 10.6% to an annual rate of 529,000, the lowest since April. The 35% plunge in construction of apartment building to a new record low of 53,000 units brought down the overall reading. The 6.9% drop in single-family starts to 476,000 is the lowest since May. Uncertainty about the extension of the $8,000 tax credit for first-time home buyers is seen as one of the reasons for the weakness in home construction. If this is accurate, a rebound is likely in November because the tax credit program has been extended to April 2010.”

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

Asha Bangalore (Northern Trust): October retail sales - noteworthy gains of several components
“Retail sales rose 1.4% in October, after downward revisions of retail sales in September (-2.3% vs. earlier estimate of -1.5%). The downward revision of retail sales in September combined with the widening of the trade deficit in September implies a lower estimate of third quarter real GDP (+3.5%).

“In October, retail sales excluding building materials (part of residential investment expenditure in GDP), autos (unit sales are consistent with auto spending component of consumer spending in GDP) and gasoline (excluded due to volatility of prices) advanced 0.5% after strong readings in August and September. In addition, retail sales excluding, building materials, autos, and gasoline rose 1.4% in October, the first year-to-year gain since October 2008. The main point is that consumer spending is recovering gradually.”

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

Bill King (The King Report): Sharp contraction in consumer credit
“John Williams: ‘As shown in the following graph, consumer credit outstanding fell at a 4.8% annualized rate, the deepest annual decline of the post-World War II era:

“‘The year-to-year contraction in September commercial and industrial (C&I) loans also set a post-World War II record decline, and October’s drop will be even worse. Based on 28 days of reporting, October C&I loans fell by about 16.2% year-to-year, following annual contractions of 10.6% in September and 7.1% in August.’”

Source: Bill King, The King Report, November 16, 2009.

Asha Bangalore (Northern Trust): Higher prices for cars and energy lifted CPI in October
“The Consumer Price Index (CPI) rose 0.3% in October after a 0.2% increase in the prior month. The details of the October CPI report indicate that higher prices for cars and energy were the predominant gains. The energy price index moved up 1.5% in October, with higher gasoline prices accounting for a large part of the increase. Food prices inched up only 0.1% following a 0.1% decline in the prior month. Year-to-date the CPI has risen at annual rate of 2.7% and from a year ago it fell 0.2%.

“The core CPI, which excludes food and energy, increased 0.2% in October. According to the BLS, higher prices for used and new cars and light trucks were responsible for 90% of the increase in the core CPI. Given the soft demand for cars and shaky balance sheets of households, it is unlikely that higher prices will stick in the months ahead.

“From a year ago, the core CPI increased 1.7% and is inching closer to the Fed’s threshold of tolerance (2.0%). However, the concentration of the gains in prices among two components - energy and autos - suggests that we need to wait for more evidence before we can confirm that inflation is problematic. Inflation will continue to rank low among the Fed’s priorities compared with economic growth and financial stability in the near term.”

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

MoneyNews: Sprott - hyperinflation on the way
“Eric Sprott, CEO of Sprott Asset Management, says quantitative easing is ‘just debasing the currency, which will eventually lead to hyperinflation’.

“The recent extension of the homeowner credit and giving corporations loss carry-backs while paying unemployment benefits for an additional 20 weeks, augur an inflationary if not a hyperinflationary scenario, Sprott notes.

“‘I really think that once the Fed has spent the $1.25 trillion buying the GSE paper that we might yet see another level of quantitative easing in the States,’ he says.

“Sprott does see one upside for investors, though: ‘You can just feel the momentum in gold - it’s picking up dramatically’ and so too are prospects for a plethora of little-known small and mid-cap gold stocks.

“‘There aren’t too many choices when you’re in debt to the level that the US government is,’ Sprott told The Gold Report.

“‘One way of calculating it says there’s $72 trillion of debt and another way suggests it is $100 trillion. It’s almost academic which calculation you use; it’s just an overwhelmingly serious problem … it certainly seems that (the Obama administration) is going to try to spend their way out of it,’ Sprott says.”

Source: Julie Crawshaw, MoneyNews, November 19, 2009.

Clusterstock: An inflation warning sign
“In a speech on Monday, Federal Reserve chairman Ben Bernanke said he did not see inflationary threats on the horizon.

“Perhaps that is because he’s looking in the wrong place. The prices of crude goods, those in the earliest stages of production, have been inflating for most of the year. The willingness to pay more for crude goods probably indicates that businesses are predicting selling finished goods at higher prices. In other words, this is a strong indicator of inflationary expectations.”

Source: John Carney and Kamelia Angelova, Clusterstock - The Business Insider, November 17, 2009.

Financial Times: “Sweet spot” of low interest rates
“Treasury bonds look to be pricing in a ’sweet spot’ of exceptionally low interest rates and benign inflation - but yields are likely to rise sharply next year, says Manoj Pradhan, global fixed income economist at Morgan Stanley.

“‘Our proprietary model puts the current fair value for 10-year Treasury bond yields at 3.3% - bang in line with actual yields,’ he says.

“But Mr Pradhan warns that significant uncertainty still surrounds inflation expectations. ‘It is hard to find investors who believe inflation over the medium to long run will be precisely in line with central bank targets.

“‘And even if you believe that inflation will play fair, investors seem to be receiving no compensation for the macroeconomic risks that have surely made an indelible impression over the past two years, or for the fiscal risks that abound.’

“Furthermore, Mr Pradhan says, the sanguine expectations in the US Treasury market have put pressure on yields elsewhere, making it difficult for early-hiking central banks to find policy traction through higher bond yields.

“‘We expect US 10-year yields to rise to 5.5% by the end of 2010 - an increase of 220 basis points that outstrips the 137 basis-point increase in the Fed funds rate expected over the same horizon. This bear steepening of the curve in 2010 may well be preceded by slightly lower 10-year yields in 2009.’”

Source: Manoj Pradhan, Financial Times, November 19, 2009.

BCA Research: Regional fixed income - allocation in a changing policy environment
“In some developed countries, a new interest rate cycle is underway. This development will be the main factor driving relative bond yields for the foreseeable future.

“In countries where the effects of the credit crunch were less severe, central bankers are becoming more confident that their economies are on solid footing. In some instances, policymakers have opted to begin renormalizing interest rates, while others are openly discussing ‘exit’ strategies. Correspondingly, the opportunities that will present in the government bond market in the coming months will take advantage of the relative timing and speed of this process. Monetary policy will tighten fastest in those countries where the recession was mildest (like in Australia) or where the boost to growth from resource-related prices is highest (as is the case in Norway).

“Our global fixed income strategists expect commodity-country bonds to continue to underperform. In contrast, the euro area and Japanese bond markets will outperform as their respective central banks have the most flexibility to stay on hold for the foreseeable future. The Fed will also remain on hold for an extended period, although a poor valuation starting point and increased debt issuance will act as a weight on Treasurys.”

Source: BCA Research, November 20, 2009.

Financial Times: Corporate bonds - all good things come to an end
“Credit markets are likely to offer lower returns in 2010 - although heightened volatility and increased supply should ensure an interesting year, says Stephen Dulake, head of credit research at JPMorgan.

“He notes that 2009 was a year when you could buy high-quality corporate debt and achieve equity-like returns. ‘However, all good things come to an end and next year we forecast high grade returns of around 3%, and coupon-like 7-8% returns for high yield.’

“But Mr Dulake says that low return does not necessarily equate to low volatility. ‘For example, we see the potential for risk markets to swing from pillar to post as investors oscillate from fearing deflation to fearing inflation,’ he says.

“He also argues that supply is likely to be greater than many expect.

“‘Our analysis suggests we could see investment grade companies issue €200 billion of bonds in 2010. This is double the average of the past decade and is a direct consequence of the sea-change in corporate liability management of the past 12-18 months. We expect this shift away from loans and toward bonds to be a multi-year process.

“‘Furthermore, a meaningful pick-up in merger and acquisition activity could also lead to an increase in supply.

“‘In high yield, we expect issuance of €35 billion in 2010, which would represent a record year and would in part be driven by leveraged corporates refinancing loans.’”

Source: Stephen Dulake, Financial Times, November 17, 2009.

Bespoke: YTD sector performance
“One would think that in a year where the average stock in the S&P 500 is outperforming the index by a wide margin (40.3% vs 22.9%), that most sectors would also be outperforming the overall index. Yet with the S&P 500 trading to a new high for the year, only three out of ten sectors are actually outperforming the index in 2009. Through this morning, Technology (55.1%), Materials (43.5%), and Consumer Discretionary (36.5%) are the three best performing sectors this year, while Telecom Services (-4.1%), Utilities (1.6%), and Consumer Staples (12.7%) have lagged the most.”

Source: Bespoke, November 16, 2009.

MoneyNews: Whitney - more bearish now than in a year
“Meredith Whitney says she hasn’t been as bearish as she is now in a year.

“‘I look at the board, and every stock from Tiffany to Bank of America to Caterpillar is up,’ Whitney told CNBC.

“‘But there’s no fundamental rooting for why these names are up, particularly in the consumer space.’

“Moreover, Whitney says she has never seen so much consumer credit contraction.

“‘You didn’t see this much even in the Great Depression,’ she says.

“‘$1.5 trillion in credit cards has been pulled from the system.’

“‘There’s nowhere to hide at this point.’

“Whitney expects banks will do another round of capital raising because the sector is inadequately capitalized at present and foresees ‘another leg down’ in the residential real estate market when mortgage rates and prices begin moving lower.

“Whitney still sees a much bigger risk related to residential mortgage exposure, rather than commercial, and advises investors to sit on their cash for a while because everything’s too expensive right now.

“However, though she expects a double-dip recession, Whitney says the second half of the ‘W’ will not be as severe.”

Source: Julie Crawshaw, MoneyNews, November 18, 2009.

Bloomberg: Mobius expects 40% BRIC stocks gain, says buy on dips
“Mark Mobius said stocks in Brazil, Russia, India and China are likely to rise by 30 to 40 percent within three to four years as higher economic growth and lower government debt spurs corporate earnings.

“Mobius, chairman of Templeton Asset Management Ltd., said he’s increasing holdings in all emerging markets, with particular focus on the four biggest developing-nation economies collectively known as the BRICs.

“‘BRIC countries are really at the top’ of our favorite holdings, Mobius, who oversees about $25 billion of emerging-market assets, said in an interview at the sidelines of a press conference in Istanbul today. ‘You can see BRIC countries have been best performing.’

“Russia’s RTS Index has surged 135 percent this year, the biggest gainer among 89 equity gauges worldwide, and Brazil, China and India rallied more than 75 percent as the global economic recovery spurred demand for commodity exports. While developed countries may shrink 4 percent this year, emerging markets as a whole may avoid a contraction with zero change in gross domestic product, Mobius said.

“While a ’sudden violent correction’ is likely in a bull market, investors should be ‘ready to buy’, Mobius told reporters.

“The biggest growth areas in emerging markets are in the consumer and commodity industries, with China and Brazil offering among the cheapest stocks worldwide, Mobius said.”

“The MSCI gauge of 22 developing countries is valued at 20 times reported earnings, according to data compiled by Bloomberg. The MSCI China Index trades at 17.7 times profit, while the MSCI Brazil Index is valued at 18.2 times earnings. That compares with a price-earnings multiple of about 30 for the MSCI All Country gauge of developed and emerging economies. The S&P 500 is valued at 22 times profit of the companies in the index.”

Source: Seda Sezer and Tian Huang, Bloomberg, November 18, 2009.

Bespoke: Checkup on China and the Baltic Dry
“China’s Shanghai Composite stumbled significantly during the late summer, but it has come back nicely with a gain of 24.5% off of its lows at the end of September. While its rally has been impressive, Shanghai has yet to take out its 2009 highs made in early August. At the same time, the cost to ship goods as measured by the Baltic Dry Index has increased 115% since its lows in September and has made a new 2009 high. Traders like to relate the Baltic Dry Index to how things are going in China, so with the Baltic Dry charging to new highs, will the Shanghai Composite follow?”

Source: Bespoke, November 19, 2009.

Times Online: Dollar carry trade could herald the next global crisis, analysts warn
“The global economy could be poised for the creation of a potentially explosive dollar carry trade, analysts said yesterday.

“The trade allows investors to borrow dollars at near-zero interest rates, which they use to fund asset-buying sprees around the world, and has been possible since the collapse of Lehman Brothers last year and the extreme monetary response to its aftermath.

“The warning was issued at the Apec summit of Asia Pacific leaders in Singapore and came after a variety of assets started to display bubble-like patterns of inflation: everything from gold and copper to fine wine and Hong Kong penthouses.

“As the carry trade grows more popular it could add more downward pressure to the already falling dollar, particularly if the ‘carried’ - borrowed - dollars are immediately sold to buy non-dollar denominated assets in China or Singapore.

“Analysts believe that it was the sudden unwinding of the yen carry trade - immense pockets of investment funded by cheaply borrowed yen - that sent the destructive ripples of the Wall Street crisis around the world last autumn.

“Carry trades, which essentially mean borrowing at low rates to fund higher return assets, make sense until markets turn sour and exchange rates shift too violently. At that point, the rush for the exit wildly exacerbates any crash. A collapse of the dollar carry trade has the potential to be particularly harmful because of its scale.

“While a few prominent financial figures have already warned of the threat of an emerging dollar carry trade, governments have steered clear of commenting on the issue until now.

“But talking on the sidelines of the Asia Pacific summit, Donald Tsang, chief executive of Hong Kong, admitted openly that the dollar carry trade had started to spread and that the prospect ’scared’ him.”

Source: Leo Lewis, Timesonline.co.uk, November 14, 2009.

The Wall Street Journal: It’s time to get dollar bullish
“After a dramatic decline in the USbcurrency, investors should consider going long the dollar via an ETF, says Barrons.com’s Bob O’Brien.”

Source: The Wall Street Journal, November 18, 2009.

Financial Times: IMF chief urges stronger renminbi for global balance
“A stronger Chinese renminbi is part of the reforms that Beijing needs to implement to increase domestic consumption and help ease global imbalances, the head of the International Monetary Fund said on Monday.

“Dominique Strauss-Kahn, managing director of the IMF, said the countries at the heart of global imbalances needed to take various measures to ease them.

“In the case of China, that means an increasing emphasis on domestic demand, especially private consumption, Mr Strauss-Kahn said in remarks prepared for a financial conference in Beijing.

“‘A stronger currency is part of the package of necessary reforms,’ he said. ‘Allowing the renminbi and other Asian currencies to rise would help increase the purchasing power of households, raise the labour share of income, and provide the right incentives to reorient investment.’

“Mr Strauss-Kahn noted that Chinese authorities were already taking steps to boost household consumption, including health care reforms.

“‘But more can be done to secure a lasting, structural shift towards consumption, by expanding the scope of social policies, moving ahead on financial sector reform, and undertaking corporate governance reforms,’ he said.

“Conversely, countries with large current account deficits need to increase savings, and for many of them, including the United States, fiscal consolidation must take priority, he said.

“Overall, the global economy appears to have turned a corner, Mr Strauss-Kahn said, but the biggest risk to the outlook is a premature withdrawal of policy stimulus.”

Source: Financial Times, November 16, 2009.

BCA Research: Asian currencies - near-term risks, but structurally sound
“There are strong long-term trends supporting further appreciation in Asian currencies, although a near-term pullback is likely if Chinese authorities do not allow the renminbi to appreciate. Valuations vary, but these currencies tend to be inexpensive.

“The real effective exchange rates of many Asian currencies have been quite subdued. Similarly, in nominal trade-weighted terms, many Asian currencies have not yet appreciated much over the past decade. As a result, from a ‘fair value’ perspective the Chinese RMB, the Korean won and the Taiwanese dollar currently look cheap, while the Singapore dollar is slightly expensive.

“Meanwhile, from a structural viewpoint, Asian currencies are being supported by the following trends: robust productivity gains, firming domestic demand, rising relative returns on capital, solid fiscal positions and widening trade surpluses with China. However, a major concern is that weak export prices will cause a pullback in EM currencies in the near-term. A large divergence has emerged between Asian export prices and appreciating regional currencies. This divergence will cap currency rallies in Asia, if China keeps the RMB at current levels.

“Our EM team concludes that on a long-term perspective, Asian currencies will benefit from decent valuations and structural backdrops but are at risk in the near-term. Stay tuned.”

Source: BCA Research, November 17, 2009.

Bespoke: Gold closing in on 20% above 200-day moving average
“Gold’s move over the past couple of months has been pretty incredible but not without precedent. As shown in the first chart below, the most recent leg up for gold has put it at 19% above its 200-day moving average. In the second chart, we highlight the historical 200-day moving average spread for gold. As recently as 2006 and 2008, the 200-day spread moved well above 25%, and back in 1980, the spread briefly got up to 136%! Gold is definitely overbought right now, enough so that the risk/reward tradeoff in the short-term is probably favoring the risk side. However, it has gotten much more overbought in the past than it is now, so it could still go higher before correcting.”

Source: Bespoke, November 18, 2009.

Richard Russell (Dow Theory Letters): Gold bull market - great persistency
“I think the most interesting action in the current picture is the action of gold. I get the feeling of a ground swell, some irresistible force that is driving gold higher. What’s interesting is that there are no wild spikes in gold, no fireworks, but a steady, persistent climb. This is powerful bull market action, and where it comes from nobody really knows. Is this the buying of millions of Chinese? Or is it the late-entrance of US hedge funds? Or is it short-covering on the part of squeezed COMEX speculators.

“In the end, does it matter who’s doing the buying? I know this - most Americans have been brain-washed after may years of anti-gold propaganda. Most Americans don’t know anything about gold. Most Americans have not been buying gold. Most Americans don’t realize that gold is the time-honored ultimate form of money. So the buying is probably coming from some place other than the US populace.

“So far the gold action is coming in via almost measured increases of 3 to 10 dollars a day. It’s as if the buyers are waiting for a correction, and when no correction arrives, they say ‘What the heck’ and they buy a quantity of gold, maybe not as much as they’d like, because they keep waiting for that elusive correction.”

Source: Richard Russell, Dow Theory Letters, November 18, 2009.

Richard Russell (Dow Theory Letters): The case for gold
“I like to keep it simple, and I like to understand the fundamentals. So here goes. The Fed and the other central banks can create ‘money’ out of thin air. By now, everybody on earth knows that. People also figure that if it’s an item that can be created without work and through an accounting entry, it can’t be real money, rather it’s simply a brand of ‘Monopoly money’.

“OK, then how about this? You can take the phoney money that the Fed creates and you can actually buy something real with it. That ‘real something’ can be gold or it can be a foreclosed home or it can be top-grade stocks like the thirty stocks that make up the Dow. Trade Fed-created junk for something real? Why not, it certainly makes a lot of sense.

“But there’s something else. Sophisticated investors are beginning to distrust ALL fiat or central bank-created ‘money’. Moreover, they distrust a situation where central banks all over the world are creating huge additional amounts of their phoney money. Knowledgeable investors are starting to place all fiat money into a single class. And they distrust that class. They distrust it because they think of it as ‘junk money gone wild’. Their reaction - turn in your junk money for the one type of intrinsic money that has represented wealth for 6000 years - gold.

“I’ve written many times that gold seems to be imbedded into the DNA of mankind. Today, with the world in turmoil, rich men may be saying to themselves, ‘I don’t know what’s going on any more, and frankly, I don’t know where I’ll be in ten years. But if I own a thousand ounces of gold, I’ll know I’m rich. I don’t know what the price of gold will be when this whole mess is over, but I know I’ll still be wealthy if I own a thousand ounces of gold.’ And that, to my mind, is some of the thinking behind the rising price of gold and maybe even of stocks.”

Source: Richard Russell, Dow Theory Letters, November 17, 2009.

The Wall Street Journal: John Paulson making big new bet on gold
“One of the biggest investors is placing a huge new bet on gold.

“John Paulson, who scored about $20 billion of profits between 2007 and early 2009 wagering against the housing market and financial companies, is launching a hedge fund dedicated to buying up shares of gold miners and other bullion-related investments, according to investors.

“Mr. Paulson told his investors he personally would invest between $200 million and $250 million in the new fund, which he said will begin on January 1, according to an investor at the meeting.

“Paulson & Co. already is a major holder of gold shares including AngloGold Ashanti and Kinross Gold, doing most of its buying early this year. Mr. Paulson currently has more than 10% of his $30 billion or so under management in gold-related investments, according to his investors. The moves have benefited from the recent surge in gold prices to nearly $1,150 an ounce.

“The gold fund will invest in gold-related shares and gold derivatives and will aim to outperform gold prices.

“Mr. Paulson noted that central banks around the globe have gone from sellers of gold to buyers, and that the global supply of gold is constrained.

“While harmful inflation isn’t on the horizon, he said, Mr. Paulson argued that there is a risk of a burst of inflation down the road. That’s because in the past there’s been a lag between a surge in money supply and higher inflation. Gold often does well when inflation rises.”

Source: Gregory Zuckerman, The Wall Street Journal, November 19, 2009.

Clusterstock: How the old gold bugs lost control of gold
“Latest data from the World Gold Council shows just how much the gold market has changed in just under two years. Essentially, the more traditional sources of demand for gold, i.e. jewelry, industry, gold bar hoarders, and coins have been falling.

“Meanwhile, gold demand from new retail investment products has skyrocketed from just 7% of total gold demand in 2007 to a whopping 27% most recently. That’s almost a 4x increase in their share of demand in under two years. Given that market prices are generally driven by incremental changes in supply and demand, clearly the new retail style gold players are now driving the market.

“The true gold bugs of yesteryear are no longer in charge. Though they’re probably not complaining given that retail demand is making them rich. Just realize that retail demand can be a fickle friend.”

Source: Vincent Fernando and Kamelia Angelova, Clusterstock - The Business Insider, November 19, 2009.

Financial Times: Global recovery threatens food price surge
“Conditions are ripe for a fresh surge in food prices as the global economy recovers, says the senior United Nations agriculture official.

“Jacques Diouf, director-general of the UN’s Food and Agriculture Organisation (FAO), believes that the world is not doing enough to avert another food crisis. His warning comes as leaders are expected to gather in Rome on Monday for the World Food Summit .

“‘When the recovery picks up, we will be back to square one,’ Mr Diouf told the Financial Times in an interview.

“He said the same structural problems behind last year’s spike in food prices were still affecting the market. These included lack of investment, surging demand in Asia and diversion of food commodities into biofuels.

“‘We have all the elements of the crisis,’ he said, adding that a weakening US dollar could exacerbate the upward price pressure in food commodities.

“Although the prices of some commodities, such as wheat and rice, have halved since their peak in mid-2008 because farmers in rich countries have expanded their output, they remain well above the pre-crisis level and near record levels in poor countries.

“Other food raw materials - particularly the so-called breakfast commodities such as cocoa, sugar and tea - are now trading at their highest level for about 30 years.

“Mr Diouf’s warning came as global food companies urged policymakers to strive for regulatory transparency and a boost in infrastructure spending to tackle the food crisis.”

Source: Javier Blas and Vincent Boland, Financial Times, November 15, 2009.

Financial Times: Fears of China property bubble
“A large bubble is forming in China’s property market as a result of Beijing’s credit-driven stimulus programme, one of the country’s most prominent real estate developers warned.

“Zhang Xin, chief executive of Soho China, one of the country’s most successful privately owned property developers, told the Financial Times the asset bubble was leading to rampant wasteful investment in the sector, undermining the country’s long-term growth prospects.

“‘Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real estate segment,’ Ms Zhang said. ‘The rising prices are a direct result of so much money coming from the banks and the Chinese banks should be very worried.’

“Ms Zhang’s assessment was echoed by Fan Gang, a member of the central bank’s monetary policy committee, who warned on Wednesday that real estate in cities such as Beijing, Shanghai and Shenzhen was expensive and there was a growing risk of asset price bubbles.

“Urban property prices in 70 big and medium-sized Chinese cities rose 3.9% in October from a year earlier, accelerating from September’s 2.8% rise, according to government figures.

“Price rises in top-tier markets such as Beijing and Shanghai have been much faster. Analysts say the rebound has largely been driven by an unprecedented government-led expansion of bank lending. It is also being driven by government policies, including tax breaks, low interest rates and smaller down-payment requirements.

“‘In Manhattan, they have vacancy rates of 10-15 per cent and they feel like the sky is falling, but in Pudong [the central business district in Shanghai] vacancy rates are as high as 50 per cent and they are still building new skyscrapers,’ Ms Zhang said.

“‘If you look at GDP growth, then China looks like a new engine driving the global economy, but if you look at how growth is being created here by so much wasteful investment you wouldn’t be so optimistic.’”

Source: Jamil Anderlini, Financial Times, November 18, 2009.

Financial Times: Pace of growth picks up in Japan
“Japanese gross domestic product grew 1.2 per cent quarter-on-quarter between July and September, as stimulus-fuelled consumer spending joined a growing trade surplus to help the world’s second-largest economy continue its climb out of its sharpest postwar recession.

“Monday’s preliminary data showed growth at its fastest in over two years and left little doubt the worst is over for an economy battered by collapsing external demand after last year’s financial crisis.

“The pace of third-quarter growth was equivalent to 4.8 per cent on an annualised basis, compared with the 2.6 per cent forecast by economists in a Kyodo News survey. However, Japan’s economy was still 4.4 per cent smaller than in the same quarter of 2008, showing how far it still has to go to make up the damage inflicted by global woes last winter.

“With stimulus programmes such as car subsidies due to expire and the temporary process of inventory restocking also a big contributor to GDP growth, many economists remain downbeat on prospects for the first half of 2010.

“‘It is difficult to interpret the Q3 inventory build-up as supportive of further strong growth in production,’ wrote Chiwoong Lee, economist at Goldman Sachs in a research note.

“Economists said worries about fragility in consumer sentiment meant Japan was likely to remain dependent in the near-term on the strength of export markets such as China.”

Source: Mure Dickie and Robin Harding, Financial Times, November 16, 2009.

Tags: Asset Classes, Ben Bernanke, Bill King, BRIC, China, Commodities, Corporate Bonds, Dollar Down, Dual Mandate, Dual Objectives, Ed Stein, Emerging Markets, ETF, Global Financial Stability, Global Stock Markets, Gold, Gold Bullion, India, Inflection Point, Interest Bill, Investment Stock, Maximum Employment, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, oil, Platinum Silver, Signs Of Fatigue, Us Treasury
Posted in Emerging Markets, Gold, India, Markets | No Comments »

Longer Term Bond Indicators Flash Sell

Friday, November 6th, 2009

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

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

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

Source: StockCharts.com

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

Tags: Basis Points, Bill King, Bond Market, Chart Below Shows, Financial Markets Association, Fixed Income Markets, Global Bond, Good Chance, Macd, Market Participants, Minutes Of The Meeting, Morass, Oscillators, Safe Haven, Securities Industry And Financial Markets Association, Term Bond, Upbeat Outlook, Us Treasury Notes, Year Treasury Note, Zero Line
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Stock markets - Is the uptrend still intact?

Sunday, October 25th, 2009

“I take the action of the stock and bond markets this week (and particularly today) very seriously. Extreme caution is advised. The primary trend of the market is bearish, and the secondary trend may now be turning down,” said Richard Russell (Dow Theory Letters) on Friday.

After equities’ seven month climb, stock markets certainly look vulnerable for a decline. Two downside reversal days - on Wednesday and Friday - would seem to indicate that stocks could commence a pullback to work off the overbought condition, allowing fundamentals to reassert themselves.

Bill King (The King Report) reported Art Cashin as saying that since June 2007 the Daily Sentiment Index (as published by Trade-Futures.com), which polls futures traders, has reported more than 90% bulls on the S&P only once. “When would you guess that time to be? July 2007? October 2007? Wrong. It was last month … optimism has soared, from 2% bulls in March to 92% bulls in September. The latest reading is 90% bulls.”

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based) are given in the table below. With the exception of the Dow Jones Transportation Index, which is trading marginally below its 50-day moving average, all the indices are still holding above their respective 50- and 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.

The October lows are also given in the table as a break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher reaction lows.

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

Still from a technical perspective, Adam Hewison (INO.com) sounded a cautious note on the Nasdaq Composite Index as explained in one of his popular technical analysis presentations. Click here to access the presentation. (The analysis was done on Tuesday, but is still as relevant today as it was a few days ago.)

Lowry’s Buying Power Index has been declining over the past few days, indicating that buying power might have exhausted itself and that short-term advances have been capped. With the Federal Reserve Board scheduled to end its quantitative easing program net Friday, I will bide my time while the fundamentals play catch-up. Meanwhile, caution remains the word.

Tags: 2 Bulls, Art Cashin, Bill King, Bond Markets, BRIC, Bric Countries, Cautious Note, Dow Jones, Dow Jones Transportation, Dow Theory Letters, Extreme Caution, Futures Traders, Moving Averages, Nasdaq Composite Index, Richard Russell Dow Theory, Sentiment Index, Stock Markets, Technical Perspective, Trade Futures, Transportation Index, Uptrend
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Zebras vs. institutional portfolio managers

Tuesday, September 29th, 2009

The following analogy comes from Ralph Wanger, founder of the Acorn Fund (via Bill King):

“Zebras have the same problem as institutional portfolio managers.

“Firstly, both seek profits. For portfolio managers above-average performance; for zebras, fresh grass.

“Secondly, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions.

“Thirdly, both move in herds. They look alike, think alike and stick close together. If you are a zebra, and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think that conditions are safe, the outside of the herd is the best, for there the grass is fresh, while the middle sees only grass that is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better. On the other hand - or other hoof - there comes a time when lions approach. The outside zebras end up as lion lunch, and the skinny zebras in the middle of the pack may eat less well but they are still alive.”

So much for herd mentality! But that does not necessarily call for going against the stream at all times. Don’t be a contrarian purely for the sake of being different. Do so only once you have done the necessary homework - proper research - to support your investment decisions.

Source: Bill King, The King Report, September 29, 2009.

Tags: Acorn Fund, Analogy, Bill King, Dislike, Grass, Herd Mentality, Herds, Institutional Portfolio, Institutional Portfolio Managers, Investment Decisions, Lion, Lions, Necessary Homework, Profits, Ralph Wanger, Risk Portfolio, Sake, September 29, Zebra, Zebras
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Bill King: The Folly of Government Statistics

Tuesday, August 4th, 2009

This post is a guest contribution by Bill King*, well-respected and straight-talking author of The King Report.

Most of the Street heralded the 1% decline in Q2 GDP because it was 0.5% better than consensus - even though the US government admitted in the release that its GDP estimates over the past several years were consistently wrong! So why should the latest report be any more accurate?!?!

We feel compelled to address the scheme of past-month lower revisions producing better-than-expected m/m or q/q results, even though the aggregate metric is worse than expected. We have incessantly noted and commented on this scam but most of the trading and investing universe omits it.

We will again utilize basic math to illustrate the scam. If Q4 ‘08 GDP was 100 units, and Q1 ‘09 was reported at -5.5% and Q2 ‘09 GDP was expected to be -1.5%, the expectation was for GDP of 100 units minus 5.5% or 94.5 units, minus 1.5% or 93.08 units.

With the revision of Q1 ‘09 GDP to -6.4% the Q1 GDP units become 100 minus 6.4% or 93.6 units. So Q2 is minus 1% or 92.664. Ergo aggregate GDP was worse than expected!!

As we warned, lower imports, a sign of economic weakness, contributed a net 1.4% to GDP.

Once again bean counters “fooled” with inflation to produce higher GDP than warranted.

John Williams (Shadow Government Statistics) said: “The relatively narrower quarterly contraction in the second quarter reflected the impact of greater weakness being thrown back into the first quarter, in revision, and the use of artificially reduced inflation. The implicit price deflator for the second quarter was 0.2% versus a revised 1.9% (was 2.8%) in the first quarter.”

Last week we complained that despite records in fiscal stimulus, Fed largesse, nationalization and rigging of markets the best that can be said is the pace of economic decline is slowing.

Despite a 10.9% surge in federal government spending and virtually no inflation adjustment, all that bean counters could fabricate (June data are still incomplete) is a 1% “official” decline in GDP.

The GDP report last Friday evinces the folly of US government economic statistics and Wall Street consensus analysis.

Source: Bill King, The King Report, August 3, 2009.

* Bill King is market strategist with Chicago-based broker-dealer M. Ramsey King Securities. He has over 30 years’ equity trading and management experience with major Wall Street firms including Nikko Securities International, E F Hutton, Nomura Securities International, Dean Witter, and Jeffries and Co. To subscribe to The King Report, e-mail Bill at billking@ramkingsec.com.

Tags: Basic Math, Bean Counters, Bill King, BRIC, Contraction, Economic Decline, Economic Weakness, Federal Government Spending, Fiscal Stimulus, Folly, GDP, Gdp Estimates, Government Statistics, Implicit Price Deflator, Inflation Adjustment, John Williams, Largesse, Nationalization, Q2 Gdp, Q4, Shadow Government
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Bill King: Reasons to Rally?

Friday, July 31st, 2009

Tags: 9m, Anxiety, Bill King, Chicanery, Exhaustion, Few Days, GDP, Gdp Report, Hundred Thousand, Initial Jobless Claims, Jobless Rate, Motorola, Plea, Pundits, Rally, Reason, Rebound, Tv Networks, Unemployment Benefits, Unemployment Rate
Posted in Gold, Markets | No Comments »

Bill King: Automated front-running on an unfathomable scale

Friday, July 10th, 2009

This post is a guest contribution by Bill King*, well-respected and straight-talking author of The King Report. GreenLightAdvisor has added supplemental notes on supporting material.

For the past several years Street operators have assumed that the computer jockeys who were being employed by proprietary trading departments on The Street were developing algorithms that would find other algorithms that represented buyside orders so prop desks could trade against those orders.

Another trading prop that has been occurring for years is certain firms feed their electronic trading systems into prop desks so traders can see in real time money flows into and out of stocks and groups.

However recent revelations are forcing the Street to consider the possibility of automated front-running on an unfathomable scale. The two “front-running” issues are: 1) “queuing” [of orders] - finding orders loaded into a system, particularly limit orders, and trading against them; and 2) “latency” - discovering and then front-running electronic orders by a penny or more by exploiting the latency or lag in execution.

HFT (high frequency trading) is being done on every electronically traded item on a global basis. Ergo, firms could be making pennies a few billion times per day … It was imperative for the NYSE and other exchanges to price securities in pennies to disguise “HFT” and to provide ample trading opportunities.

[GLA]

Bloomberg and others write about “HFT” as a result of a corporate espionage case involving Goldman Sachs and  the alleged theft of its proprietary trading software  by Sergey Aleynikov, a story that has broken wide open during the last two weeks:

Bloomberg : Aleynikov, 39, is the former Goldman computer programmer who was arrested on theft charges July 3 as he stepped off a flight at Liberty International Airport in Newark, New Jersey. That was two days after Goldman told the government he had stolen its secret, rapid-fire, stock- and commodities-trading software in early June during his last week as a Goldman employee. Prosecutors say Aleynikov uploaded the program code to an unidentified Web site server in Germany.

It wasn’t just Goldman that faced imminent harm if Aleynikov were to be released, Assistant U.S. Attorney Joseph Facciponti told a federal magistrate judge at his July 4 bail hearing in New York. The 34-year-old prosecutor also dropped this bombshell: “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”

Former Goldman Programmer Sergey Aleynikov Arrested for Theft Charges on July 3rd - Click play to watch:

How could somebody do this? The precise answer isn’t obvious — we’re talking about a black-box trading system here. And Facciponti didn’t elaborate. You don’t need a Goldman Sachs doomsday machine to manipulate markets, of course. A false rumor expertly planted using an ordinary telephone often will do just fine. In any event, the judge rejected Facciponti’s argument that Aleynikov posed a danger to the community, and ruled he could go free on $750,000 bail. He was released July 6.

Reuters: Federal authorities contend the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major financial institution generate millions of dollars in profits each year.

The platform is one of the things that gives Goldman an advantage over the competition when it comes to the rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and using secret mathematical formulas, allows the firm to make highly-profitable automated trades.

[GLA]

While the Street is percolating with anger and curiosity about “High Frequency Trading” there is also frustration and astonishment that the media, regulators and our duly elected are not addressing what could be the biggest financial abuse story of our times, if not history.

[GLA]

Bloomberg: Meantime, it would be nice to see someone at Goldman go on the record to explain what’s stopping the world’s most powerful investment bank from using its trading program in unfair ways, too. Oh yes, and could the bank be a bit more careful about safeguarding its trading programs from now on? Hopefully the government is asking the same questions already.

[GLA]

Though the blogoshpere is all over the ‘HFT’ trading story an important piece of the puzzle has not been publicized enough. Few people realize that exchanges actually pay firms to trade against order flow when they act as a SLP - “Supplementary Liquidity Provider”.

[GLA]

Read more about SLP here, here, and here.

[GLA]

Exchanges will pay firms ¼ of a penny if they “provide liquidity” when an order appears in their system. This is extra incentive to front run order flow … Theoretically a firm could “scratch” all day and profit.

Over the past decade the move to electronic trading and pricing in pennies was heralded by Street insiders as a means to improve liquidity for clients. This appears to be a deception. Virtually every facility benefitted proprietary trading at a select few firms. Who’s the patsy?

Anyone with a modicum of industry experience understands that “providing liquidity” is at best a euphemism for front-running order flow.

Source: Bill King, The King Report, July 10, 2009.

* Bill King is market strategist with Chicago-based broker-dealer M. Ramsey King Securities. He has over 30 years’ equity trading and management experience with major Wall Street firms including Nikko Securities International, E F Hutton, Nomura Securities International, Dean Witter, and Jeffries and Co. To subscribe to The King Report, e-mail Bill at billking@ramkingsec.com.

Tags: Bill King, Bloomberg, Commodities, Commodities Trading, Computer Jockeys, Computer Programmer, Corporate Espionage, Electronic Orders, Electronic Trading, Espionage Case, Global Basis, Goldman Computer, Goldman Sachs, High Frequency, Liberty International, Newark New Jersey, Nyse, Pennies, Proprietary Trading, Rapid Fire, Supplemental Notes, Supporting Material, Theft Charges, Trading Software
Posted in Gold, Markets | No Comments »

Bill King: Deflation trade back in vogue

Tuesday, June 23rd, 2009

This post is a guest contribution by Bill King*, well-respected and straight-talking author of The King Report.

For the past few weeks we have provided ample evidence, mostly via private industry data and oration, that “green shoots” are just another Bernanke equivocation and Street yearning.

We also opined that requisite “insider” banks have fleeced patsies for necessary capital, so market, beware.

Another of our themes is that the dollar, bonds and commodities keep checking the Fed across the big game board. And in order to avoid being checkmated, the Fed would have to sacrifice stocks.

The past week or so we have argued that this “second derivative” rally, which is the latest permabull/Street shill euphemism for “dead cat bounce”, is occurring on very poor technicals. Volume is contracting, which is contrary to the start of any bull market. And leadership is by the misfits, which is never good.

On June 16 we noted that technical indicators on the Dow Jones Transportation Average were declaring that its rally had ended; and because stocks were still in a ‘weekly’ sell, the daily ’sell’ signals took on added gravitas.

Numerous pundits noted that insider selling had reached 2007 levels as did sentiment “jigginess”.

And finally, if all of the above escaped one’s consciousness, Goldman CEO Lloyd Blankfein, a week and a half ago, stated that this is not a recovery, the recession will be ‘long and protracted’, and any recovery would be ’shallow’. Astute traders snickered that Goldman now had to be short.

Ergo, there have been enough warnings to induce the prudent to lighten up and move to the sidelines.

The FOMC Communiqué [on Wednesday, June 24] will be important only if it clearly indicates a significant change in policy. Anything else is a sideshow that will produce a fleeting effect on the markets.

So unless the Fed changes the table, the deflation trade is back in vogue. Stocks and commodities should fall; the dollar should rally. The big question is: will bonds rally or wallow?

… stocks CANNOT afford another spirited decline. 875 and 850 are support. 825 is the line of demarcation; a breach would induce great fear that the next down-leg was under way …The Dow Jones Industrial Average and S&P 500 Index are now a clear sell on a daily basis and have remained a sell on a weekly basis during the rally. Gold is a strong sell on a daily basis and is nearly a weekly sell.

The CRB, which is still a weekly sell, is now a daily sell … Gasoline and oil indicate sell, daily. Bonds and the dollar, both weekly sells, are close to signaling a daily buy.

Source: Bill King, The King Report, June 23, 2009.

* Bill King is market strategist with Chicago-based broker-dealer M. Ramsey King Securities. He has over 30 years’ equity trading and management experience with major Wall Street firms including Nikko Securities International, E F Hutton, Nomura Securities International, Dean Witter, and Jeffries and Co. To subscribe to The King Report, e-mail Bill at billking@ramkingsec.com.

Tags: Ample Evidence, Big Game, Bill King, Commodities, Dead Cat Bounce, Deflation, Dollar Bonds, Dow Jones, Dow Jones Transportation, Equivocation, Game Board, Misfits, Necessary Capital, oil, Oration, Private Industry, Shill, Sidelines, Sideshow, Stocks And Commodities, Technical Indicators, Transportation Average
Posted in Gold, Markets | No Comments »

Words from the (investment) wise for the week that was (February 9 – 15, 2009)

Sunday, February 15th, 2009

“Words from the Wise” this week comes to you from my abode in a visibly depressed Europe, from where I am compiling this report as welcome relief from gloomy conversations with taxi drivers and cheerless meals in deserted eateries.

Events during the past few days were dominated by the announcement of US Treasury Secretary Timothy Geithner’s financial stability plan and a deal reached by Congress on the economic stimulus bill. However, the much-anticipated bailout bang soon whimpered as investors were disappointed about the lack of “beef”. Meanwhile, markets were also mired in uncertainty on the back of fresh evidence of headwinds facing the global economy - notably in major economies such as the UK, continental Europe and Japan.

Jim Rogers gave the bank rescue plan a big thumbs-down: “(Geithner) … has been dead wrong about everything for 15 years in a row … This (the rescue plan) is not going to solve the problem, it’s going to make it worse.”

Referring to the stimulus bill, Steve Forbes said: “It’s just a grab bag of every spending proposal that’s been banging around Congress for years.”

And Bill King (The King Report) commented as follows: “A cure should have something to do with the diagnosis. The classic argument for fiscal stimulus presumes that the central cause of our current economic problems is this: We, the people and our government, are not doing nearly enough borrowing and spending on consumer goods. The government must step in to force us all to borrow and spend more. This diagnosis is tragically comic once said aloud.”

Stock markets were on the receiving end as risk-averse investors sought out the safe havens of the US dollar (+0.8% in the case of the US Dollar Index), gold (+3.1%) and bonds (with the yields of 10-year Bunds and Gilts down by 21 and 17 basis points respectively).

The week’s movements of the MSCI Global Index (-3.9%, YTD -9.0%) and MSCI Emerging Markets Index (-0.6%, YTD -2.2%) reflect global investors’ skepticism about the rescue plans. Strong performances came from China (+6.4%) and Russia (+14.3%), but still left these markets in the red by 61.9% and 63.0% since their respective bull market highs. As mentioned before, the chart pattern of the Chinese Shanghai Composite Index shows arguably one of the most bullish formations of the major stock market indices.

The major US indices suffered their worst weekly losses this year (to record five losing weeks out of six): Dow Jones Industrial Index -5.2% (YTD -10.6%), S&P 500 Index -4.8% (YTD -8.5%), Nasdaq Composite Index -3.6% (YTD -2.7%) and Russell 2000 Index -4.7% (YTD -10.2%).

John Nyaradi (Wall Street Sector Selector) pointed out that among the exchange-traded funds (ETFs) none of the main economic sectors registered positive returns, as summarized in the chart below. Not shown, the KBW Bank Index ETF (KBE) lost 14.3% on the week, and the Dow Jones US Real Estate Index ETF (IYR) 12.0%. The ProShares Short Dow30 ETF (DOG) led the way among inverse funds with a gain of +5.3%.

Source: StockCharts.com

As investors became more fearful of the economic situation, gold bullion (+3.1%) assumed its traditional safe-haven role. “Inflows into gold-backed exchange-traded funds surged in January, pushing their bullion holdings to an all-time high of 1,317 tons. Last month’s flows of 105 tons were above September’s previous record of 104 tons, and absorbed about half the world’s gold mine output for January,” said Barclays Capital, as reported by the Financial Times.

The chart below shows the long-term trend of the yellow metal (green line) together with a 14-month rate of change (ROC) indicator (red line). Monthly indicators come in handy for defining the primary trend. In this case the ROC line above zero depicts the bull market in bullion that commenced in 2001. And there is more to come: According to Gary Dugan, the chief investment officer of Merrill Lynch, gold prices may hit US$1,500 an ounce in the next 12 to 15 months.

Source: StockCharts.com

In addition to last week’s bailout actions, policymakers are also working on a housing subsidy plan that will use government money to help reduce interest rates for struggling borrowers. The details are to be announced by President Obama on Wednesday.

Needless to say, Capitol Hill’s various actions come at a hefty price. According to The Wall Street Journal, Strategas Research estimates that the federal budget will work out to roughly 13.5% of GDP in 2009. Asha Bangalore (Northern Trust) added: “2009 will go down in history as the year during which the US economy recorded the largest federal budget deficit as a percent of GDP in a span of eighty years, excluding the war years. The budget deficit as a percent of GDP through the war years of 1942 to 1945 was 14.2%, 30.3%, 22.7% and 21.5%, respectively.”

Next, a tag cloud of the text of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As the saying goes: A picture paints a thousand words …

But back to the stock market. Key resistance and support levels for the major US indices are shown in the table below. All the indices are trading below their 50-day moving averages and the Industrial and Transportation Averages have also breached the December 1 lows. The all-important November 20 lows are now within close reach - already broken by the Transportation Average - and must hold in order to prevent considerable technical damage.

Richard Russell (Dow Theory Letters), 84-year old doyen of investment newsletter writers, interprets the technical situation as follows: “The Point & Figure chart below may currently be the most important single chart in the world. This is the DJ Industrial Average, and it’s in the act of testing its November 20 low. If the Dow violates its low, it will have confirmed the prior bearish penetration of the Transportation Average. If that happens, the primary bear market will be reconfirmed. But if the Industrials stubbornly refuse to break to a new low, then the inference is that something else is happening. The inference is that the bear market may be forming a temporary bottom.”

“What I think we’ve seen, so far, is the end of forced selling. At this point, professionals are trying to gauge whether the huge market collapse of 2007-2008 has discounted the worst to come or whether ‘the worst’ still lies ahead,” said Russell. “The drama should be played out over the next week or so.”

Given all the cross-currents, short-term movements are almost impossible to predict and traders will simply have to remain level-headed and wait for Mr Market to show his hand, especially as far as the November 20 lows are concerned.

For more discussion about the direction of stock markets, also see my recent posts “Finally, the plan … sort of” and “Video-o-rama: Risk appetite fades on stimulus gloom“.

Economy
“There is no let-up in the dark pessimism that engulfs nearly all businesses across the globe. Global business sentiment weakened again in early February back close to the record low set in mid-December,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Confidence is poor across the globe; if there is a distinction it is that Asian businesses are a bit more upbeat than businesses everywhere else.”

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 reports.)

Friday, February 13
• Fiscal stimulus package in a nutshell
• Federal budget deficit in turbulent times
• Consumer sentiment remains gloomy

Thursday, February 12
• Retail sales stabilized in January, future remains gloomy

Wednesday, February 11
• Sharp drop in exports and imports reflects global recession

Tuesday, February 10
• Geithner unveils financial stability plan

Monday, February 9
• Market spreads - moving in the desired direction but more is necessary in the mortgage market

In last Sunday’s “Words from the Wise” I referred to the surge in the Baltic Dry Index (BDI) - measuring freight rates for iron ore and other bulk goods. The Index has gained 188% over the past two months after plunging by 94% since its high in May. In my opinion, the rally in the BDI is in the expectation (or, should I say, “hope”) that the manufacturing Purchasing Managers’ Indices (PMIs) will start improving, i.e. moving closer to the neutral level of 50 (see graph below). This does not mean the global economy will expand, but merely that the trough of the logjam in international trade might have been reached. Not shown, the trends of the BDI and credit spreads follow a strong inversely correlated path.

Source: Plexus Asset Management

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

Source: Yahoo Finance, February 13, 2009.

In addition to Fed Chairman Bernanke speaking at the National Press Club in Washington (Wednesday, February 18) and the Bank of Japan’s monetary policy announcement (Thursday, February 19), the US economic highlights for the week include the following:

Source: Northern Trust

Click the links below for the following reports:

• Wachovia’s Weekly US Economic & Financial Commentary (February 13, 2009)

• Wachovia’s Global Chartbook (February 2009)

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, February 13, 2009.

“It is the markets’ job to reallocate money from the ignorant to the intelligent, from the lazy to the hard working and studious, from the naive to the educated, and from the speculator to the investor,” said Barry Ritholtz (The Big Picture). Hopefully the “Words from the Wise” reviews offer assistance to Investment Postcards‘ readers not to get separated from their hard-earned funds in these taxing times.

That’s the way it looks from Cape Town (or, more accurately, from “gnomeland”, Switzerland, for the next few days).

Barry Ritholtz (The Big Picture): Stimulus package explained (Q&A)
“Sometime this year, taxpayers will receive an Economic Stimulus Payment. This is a very exciting new program that I will explain using the Q and A format:

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. No, they are borrowing it from China. Your children are expected to repay the Chinese.

Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.

Q. But isn’t that stimulating the economy of China?
A. Shut up.

“Below is some helpful advice on how to best help the US economy by spending your stimulus check wisely:

If you spend that money at Wal-Mart, all the money will go to China.
If you spend it on gasoline it will go to Hugo Chavez, the Arabs and Al Queda
If you purchase a computer it will go to Taiwan.
If you purchase fruit and vegetables it will go to Mexico, Honduras, and Guatemala (unless you buy organic).

If you buy a car it will go to Japan and Korea.
If you purchase prescription drugs it will go to India
If you purchase heroin it will go to the Taliban in Afghanistan
If you give it to a charitable cause, it will go to Nigeria.

“And none of it will help the American economy. We need to keep that money here in America. You can keep the money in America by spending it at yard sales, going to a baseball game, or spend it on prostitutes, beer (domestic only), or tattoos, since those are the only businesses still in the US.”

Source: Barry Ritholtz, The Big Picture, February 13, 2009.

CEP News: Financial rescue plan unveiled
“The US Treasury’s financial rescue package includes up to $1 trillion in insurance financing for the purchase of toxic assets, and the expansion of a Fed lending facility (TALF) - backing up to another $1 trillion in consumer debt including mortgage backed securities. Under the program, the US Treasury will enter into a private and public sector partnership where both sides will provide insurance financing on toxic debt.

“However, the final details of the toxic debt program remain unclear, according to Treasury Secretary Tim Geithner. ‘We are exploring a range of different structures for this program, and we will seek input from market participants and the public as we design it,’ Geithner said. ‘We believe this program should ultimately provide up to $1 trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works.’”

Source: CEP News, February 10, 2009.

BCA Research: Where’s the beef Mr. Geithner?
“There is still no clarity about how the US will ‘fix’ its troubled banking sector.

“Markets yesterday gave Treasury Secretary Geithner’s Financial Stability Plan a resounding thumbs down because of a lack of detail about how it will work, following a build-up of expectations that concrete measures were ready to go.

“The plan’s tenets are broadly sound - examining and stress testing bank balance sheets and then using government money to re-capitalize banks and eventually induce private sector purchases of the banks’ toxic assets; supporting a US$1 trillion Consumer and Business Lending Initiative modeled on the Fed’s Term Asset Backed Securities Loan Facility (TALF) to keep credit flowing to the private sector; and, launching a comprehensive program to stabilize the beleaguered housing sector.

“Yet, Geithner offered no specifics on the implementation process needed to identify and value the toxic assets, compel banks to disgorge them, and incentivize private capital to acquire them, though he indicated that details would be forthcoming in the weeks ahead. In short, many of the hurdles that befell the original TARP plan remain in place.

“Bottom line: Financial market risks will remain elevated until policymakers spell out more clearly how banks can be restored to health and encouraged to lend.”

Source: BCA Research, February 11, 2009.

CNN: Yves Smith - “Banks must be nationalized”
“Blogger Yves Smith says that ‘bad bank’ proposals won’t work; the government must take direct control of troubled lenders.”

Source: CNN, February 11, 2009.

Martin Wolf (Financial Times): Why Obama’s new Tarp will fail to rescue the banks
“Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.

“What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.

“Yet hoping for the best is what one sees in the stimulus programme and - so far as I can judge from Tuesday’s sketchy announcement by Tim Geithner, Treasury secretary - also in the new plans for fixing the banking system. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.

“The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this “progeny of the troubled asset relief programme” fails, Mr Obama’s credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.

Click here for the full article.

Source: Martin Wolf, Financial Times, February 10, 2009.

Bill King: Tell the truth about toxic assets
“Only weeks ago the fin media hyped the Great & Powerful Geithner as a market savior!

“Though Geithner offered up to $2 trillion to aid banks and credit markets, stocks tanked because the plan had few specifics and was lamer than what had been leaked and proffered over the past several weeks.

“More importantly, Geithner and Team Obama have been furiously polling private equity and Street titans to gauge their interest and participation thresholds in various bailout plans. Geithner’s lame plan implicitly indicates that few people wanted to participate in the leaked/proposed plans.

“Private investors know toxic paper remains incalculable with open-ended liability. The market understands that no bank bailout has been announced because there is no plan, barring an outright gift, that will fly with private investors. And an outright gift will infuriate taxpayers.

“Also, as any trader that has bought into any syndicate or group offering would tell you, a major problem is calculating the behavior of the other buyers. How much pain can they stand? When will they panic?

“If other buyers cannot endure pain or go bust themselves, bids will be hit and the entire buying group will suffer huge losses … It keeps coming back to toxic payer and transparency.

“Geithner asserted, ‘We will have to try things we’ve never tried before.’ You mean like telling the truth about the quantity and quality of toxic assets?”

Source: Bill King, The King Report, February 11, 2009.

Financial Times: Nouriel Roubini - Anglo-Saxon model has failed
“The Anglo-Saxon model of supervision and regulation of the financial system has failed, Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University, told the Financial Times on Monday.

“Answering questions from FT.com readers, Prof Roubini, who is widely credited with having predicted the current financial crisis, said the supervisory system “relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because - as a former chief executive of Citi put it - when the music is playing you gotta stand up and dance.”

“‘All the pillars of Basel II have already failed even before being implemented,’ he added, referring to the internationally agreed set of banking regulations that are forcing banks to set aside more capital to maintain their existing lending.

“Prof Roubini also predicted that it was possible another large bank could fail, saying: ‘In many countries the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system.’

“He also criticised the US and UK approach to bank bail-outs, comparing it with attempts by Japan in the 1990s to solve its banking crisis. ‘The current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze,’ he said.”

Source: Financial Times, February 9, 2009.

CEP News: US Senate approves $787 billion stimulus bill
“The US Senate approved President Barack Obama’s $787 billion stimulus bill late Friday night, satisfying his request that the bill be ready for signing after President’s Day long weekend.

“The bill, which Obama says is designed to energize the American economy and save 3.5 million jobs, passed in a 60-38 vote. Three moderate Republicans voted in support of the bill, giving it the crucial 60-vote support, which it needed to be approved.

“Earlier on Friday, the House or Representatives voted 246-183 in favour of the bill, while no Republicans supported the legislation.

“The bill contains roughly $212 billion, or 27%, in tax cuts for individuals and businesses. Republicans had wanted at least 40% of the bill to be dedicated to tax relief.

“A stabilization fund for education, police and fire services at the state level was set at $53.6 billion, and $87 billion was allotted for Medicaid.

“The final version of the bill scales back tax credits for home and car first-time buyers.

“The final version of the package also contains a softer version of the controversial ‘Buy American’ clause, which now stipulates that all government spending from the plan must use American-made products and labour, but only if this does not violate current trade deals with US trade partners.”

Source: CEP News, February 14, 2009.

Bloomberg: Krugman says stimulus not up to scale of recession
“Paul Krugman, a professor at Princeton University and winner of the 2008 Nobel Prize for economics, talks with Bloomberg’s Kathleen Hays about the likely effectiveness of President Barack Obama’s $787 billion economic stimulus plan. Krugman also discusses the outlook for government debt and potential nationalization of troubled banks.”

Source: Bloomberg, February 13, 2009.

Bloomberg: Feldstein says Senate stimulus bill better than House’s
“Martin Feldstein, an economics professor at Harvard University, talks with Bloomberg’s Kathleen Hays about the US economic stimulus package scheduled for a critical procedural vote in the Senate. Feldstein also discusses the outlook for Treasury Secretary Timothy Geithner’s financial rescue plan, the Federal Reserve’s efforts to increase consumer lending and the priorities of President Barack Obama’s Economic Recovery Advisory Board.”

Source: Bloomberg, February 9, 2009.

Bloomberg: US housing plan to fund interest-rate reductions
“The Obama administration’s housing plan will use government money to help reduce interest rates for struggling borrowers, while asking lawmakers to approve more ways to modify mortgages, according to a person briefed on the proposal.

“US Treasury Secretary Timothy Geithner intends to make the plan public in coming days, possibly within a week, said the person, who declined to be identified before the announcement. Some elements can begin immediately, and others must be considered by Congress.

“Foreclosure filings in the US surged 81% last year to 2.3 million, the highest on record, as home prices fell and tighter mortgage standards made it harder for homeowners to sell or refinance, according to RealtyTrac, a provider of real estate data. The administration has pledged to use $50 billion to $100 billion for housing relief, taken from the $700 billion bank rescue package enacted last year.

“‘Our focus will begin on using the full resources of the government to help bring down mortgage payments and help reduce mortgage interest rates,’ Geithner told the Senate Banking Committee yesterday.”

Source: Rebecca Christie and Margaret Chadbourn, Bloomberg, February 12 2009.

CEP News: JPMorgan and Citigroup announce moratorium on foreclosures
“Three major US financial institutions have announced they will halt foreclosures after coming under intense pressure from US politicians on Wednesday to do something to help US citizens weather the financial crisis.

“Citigroup announced it will be halting foreclosures starting February 12. The bank said it will uphold this commitment until US President Barack Obama has finalized the details of his plan to modify mortgage loans to benefit US residents at risk of losing their homes.

“Minutes later, JPMorgan announced it will also put a moratorium on foreclosures for a three-week period, or until March 6. Morgan Stanley later made a similar statement.

“Bank of America CEO Ken Lewis already announced a similar pledge earlier this week in a hearing before the House Financial Services Committee.

“On Wednesday, CEOs from Bank of America, Goldman Sachs, Citigroup, Morgan Stanley, Wells Fargo, JPMorgan Chase, Bank of New York Mellon and State Street all faced harsh criticism from lawmakers for allowing the financial system to come crashing down in 2008.

“All of the executives said they will do what they can to boost lending and stem foreclosures to aid the US economic recovery.”

Source: CEP News, February 13, 2009.

Peter Schiff (Seeking Alpha): This is just the beginning
“The intense scrutiny recently paid to my investment strategy in the immediate wake of the financial crisis of the last six months has unfortunately obscured the central element of my larger economic forecast. The standard line has been that although I was able to predict the crash, in the form of the housing collapse and the credit crunch, my expected fallout of a weaker dollar and global decoupling has been proven false. However, this assumes that the crash has fully played out. In reality, all we have heard thus far is the overture.

“In 2008, the bubble economy that I had meticulously described years ago finally hit the pin that I knew was out there. The corporate losses, frozen credit markets and plunging home prices were the opening salvo in the unfolding economic crisis. However, the vast majority of air has yet to leak out of the bubble. As it does, the US economic crisis will kick into a much higher gear. I have positioned my clients to withstand the full fury of the gale, and when it finally comes, the question ‘was Peter Schiff right?’ will finally be answered.

“Thus far, our economy has actually been spared the worst due to the temporary strength in the dollar and the recent desirability of our Government’s debt. These movements derailed the short-term performance of many of my investment recommendations (though clearly not to the extent alleged by my critics) and threw a life-line to the downing US economy. The demand for US Treasuries has led to one of the sharpest dollar rallies on record, which has helped bring about just as pronounced a decline in commodity prices. As a result, although consumer income has fallen, so too have prices and interest rates.”

Click here for the full article.

Source: Peter Schiff, Seeking Alpha, February 8, 2009.

Google Video: Peter Schiff’s presentation at the Global Competitiveness Forum

Source: Google Video, February 9, 2009.

Chales Munger (The Washington Post): How we can restore confidence
“Our situation is dire. Moderate booms and busts are inevitable in free-market capitalism. But a boom-bust cycle as gross as the one that caused our present misery is dangerous, and recurrences should be prevented. The country is understandably depressed - mired in issues involving fiscal stimulus, which is needed, and improvements in bank strength. A key question: Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes.

“Sensible reform cannot avoid causing significant pain, which is worth enduring to gain extra safety and more exemplary conduct. And only when there is strong public revulsion, such as exists today, can legislators minimize the influence of powerful special interests enough to bring about needed revisions in law.

“Many contributors to our over-the-top boom, which led to the gross bust, are known. They include insufficient controls over morality and prudence in banks and investment banks; undesirable conduct among investment banks; greatly expanded financial leverage, aided by direct or implied use of government credit; and extreme excess, sometimes amounting to fraud, in the promotion of consumer credit. Unsound accounting was widespread.

Click here for the full article.

Source: Charles Munger, The Washington Post, February 11, 2009.

CNN: Vanguard founder blames banks
“John Bogle, the founder of the Vanguard Group, says Wall Street’s risky business resulted in the worst recession he’s ever seen.”

Source: CNN, February 11, 2009.

Financial Times: Sales of PCs to fall for first time in eight years
“Problems in the personal computer business have increased the likelihood that 2009 will bring the first decline in PC sales since 2001, according to industry analysts.

“Evidence has been accumulating since the start of the year that the deterioration has reached unexpected parts of the market, with trouble appearing even in some emerging markets, which had previously been seen as the main source of growth.

“‘We’re definitely more pessimistic,’ said Loren Loverde at IDC, the technology research group.

“He said IDC’s latest official forecast, for 4 per cent growth in the number of PCs sold this year, was unlikely to hold: ‘As things sink in, it could easily be in negative territory.’

“Weak earnings reported last week by Lenovo, the world’s fourth-biggest PC maker, showed that corporate buyers in particular have been cutting back.

“That, and softening sales in emerging countries, suggests that the pain has spread beyond consumers in the developed world, who had been expected to be the main source of industry weakness.

“Last month Microsoft warned that the first half of this year at least could see even weaker conditions than the final quarter of last year, when an expected 10-12% increase in the PC market completely evaporated.”

Source: Richard Watersin, Financial Times, February 8, 2009.

CNBC: Marc Faber: “US will default on debt or enter hyperinflation”

Source: CNBC (via YouTube), February 5, 2009.

Asha Bangalore (Northern Trust): Housing market update - applications for both purchase and refinance decline
“The Purchase Index of the Mortgage Bankers Association fell to 235.9 during the week ended February 6 from 261.4 in the prior week. The Purchase Index is at its lowest level since the end of 2000.

“The Refinance Index fell sharply to 2722.7 from 3906.3 in the prior week. The 30-year fixed rate mortgage has risen to 5.19% during the week ended February 6 from a low of 4.89% in the week ended January 9. Although the Housing Affordability Index is at a record high, demand for homes will gather momentum only after employment conditions have improved.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 11, 2009.

Asha Bangalore (Northern Trust): Retail sales stabilized in January, future remains gloomy
“Retail sales moved up 1.0% in January, after a revised 3.0% drop in December. The gain in retail sales in January was a surprise. But, the good news does not imply that the weakness in consumer spending is behind us. Unemployment claims numbers were also published in addition to retail sales this morning. Jobless claims remain at elevated levels and reinforce expectations of a continued gloomy outlook. The bottom line is that consumer spending will be weak again in the first quarter, but by a considerably smaller degree. The weakness in the fourth quarter is most likely the worst performance of retail sales in the current downturn.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 12, 2009.

Asha Bangalore (Northern Trust): Consumer sentiment remains gloomy
“The University of Michigan Consumer Sentiment Index fell to 56.2 in the early-February survey from 61.2 in January. The Current Economic Conditions Index moved up slightly (67.1 versus 66.5). The Expectations Index dropped to 49.1 from 57.8 in January. The gloomy outlook should not be surprising given the nature of economic reports and financial market conditions. The level of the index is second only to the low readings seen in 1980.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 13, 2009.

Asha Bangalore (Northern Trust): Sharp drop in exports and imports reflects global recession
“The trade deficit of the US economy narrowed slightly to $39.9 billion in December. Both exports (-6.0%) and imports (-5.5%) of goods and services fell in December. The trade deficit of goods, after adjusting for inflation, was wider in December compared with November ($43.3 billion versus $40.1 billion in November). The headline GDP estimate is most likely to be revised down to a nearly 5.0% drop to reflect this discrepancy and that of inventories and construction outlays (net impact of both these components is also a weaker GDP), assuming insignificant revisions of retail sales during November and December.”

The Wall Street Journal: $100 bills as toilet tissue?
“Efforts to avoid a deflationary depression will probably produce the opposite - a nasty bout of inflation, says John Williams of Shadow Government Statistics, who advises hoarding gold and even Scotch to barter. Alistair Barr reports.”

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

Telegraph: GM and Chrysler “Chapter 11″ to protect US taxpayers
“The US government is exploring the possibility of placing General Motors and Chrysler in Chapter 11 bankruptcy protection in an effort to safeguard the $17.4 billion in loans extended to the two ailing car manufacturers.

“The move, which is one of a range of options understood to be being considered by government advisers, would ensure that taxpayers would be paid out first in the event that either company actually collapsed.

“Chapter 11 is designed to allow a company to undertake drastic restructuring measures while protecting it from its creditors. However both companies have in the past said that a move into Chapter 11 would destroy them, as customers would lose confidence and many suppliers would cease working with them.

“As the current loan agreements stand, the US Treasury’s loans stand behind those from other creditors, including banks such as Goldman Sachs and Citigroup, as those lenders have, according to Bloomberg News, first position on some assets.

“It is thought that Treasury officials are aiming to renegotiate their position in the debt chain ahead of a March 31 deadline. By then, both car manufacturers must show that they have begun to restructure their operations to such an extent that they will be able to return to profitability. If not, the government can demand return of the loans.”

Source: James Quinn, Telegraph, February 9, 2009.

Dealbreaker: CDS death bill introduced in the house
“H.R. 977 (The Derivatives Markets Transparency and Accountability Act of 2009), from the brilliant mind of Rep. Collin Peterson (D-MN), puts restrictions on OTC contracts and would ‘deny the Federal Reserve the authority to establish regulations or rules with regard to clearing OTC transactions.’

“Instead, OTC contracts must either be cleared centrally or reported to the CFTC. Ouch. This would pretty much end the custom options and swap business, making it very difficult to tailor specific instruments for specific risk.

“The bill also gives ‘the CFTC the authority to suspend credit default swap trading, with the concurrence of the president.’”

Source: Dealbreaker, February 12, 2009.

Bloomberg: Post-election movements of Dow

Source: Bloomberg (via Fullermoney), February 12, 2009.

Bespoke: A look at 10-year market returns
“The New York Times published an article this weekend highlighting that the current 10-year stretch that ended last month was the worst for the S&P 500 in at least the last 82 years. The Times looked at total returns for the S&P 500, and below we provide a similar analysis of the 10-year rolling price change of the Dow Jones Industrial Average going back to 1910.

“As shown, there have only been four other periods where the 10-year return has been negative, and three of the four periods saw returns float around the negative to flat line for quite some time. While it may have taken ‘buy-and-holders’ a few years to end up making money if they got in early when the 10-year returns went negative, they did end up making money.

“When looking at 10-year returns, however, where the market was 10 years ago is just as big of a factor as where it is now. Ten years ago, the market was just about to hit the peak of the Internet bubble, and once it burst, the 10-year return was destined to take a big hit right about now.”

Source: Bespoke, February 9, 2009.

Bespoke: Percentage of stocks above 50-day moving averages
“Below we highlight the percentage of stocks in the S&P 500 that is currently trading above their 50-day moving averages. As shown, even though the S&P 500 has been getting close to touching its November lows recently, 42% of stocks in the index are above their 50-days. This means breadth within the index is still strong even though the index itself has been struggling.

“On a sector basis, Financials have the weakest breadth with just 16% of stocks above their 50-days. Health Care, Energy, and Technology are the three sectors that currently have more than 50% of stocks above their 50-days.”

Source: Bespoke, February 13, 2009.

John Authers (Financial Times): The importance of dividends
“John Authers explains why dividends are the key to finding long-term value in equities.”

Click here for the article.

Source: John Authers, Financial Times, February 10, 2009.

Bespoke: Earnings season “beat rate” at 55%
“Along with guidance and a multitude of other indicators, we track the ‘beat rate’, which is the quarterly percentage of companies that report earnings that are better than analyst expectations. As shown in the chart below, this earnings season, 55% of US companies have reported better than expected earnings.

“Nearly 1,000 US companies have already reported, and there is only a week or so left of earnings season, so this number is definitely starting to firm up. The current ‘beat rate’ of 55% is the weakest reading in about 8 years, but it still hasn’t gotten as low as it got during the ‘00-’02 bear market. Bears will argue that the ‘beat rate’ needs to get down to the ‘00-’02 levels before a bottom can be put in, while bulls will argue that it’s an indication that things aren’t as bad as people think. Only the market will eventually tell us who is right.”

Source: Bespoke, February 9, 2009.

The New York Times: Why analysts keep telling investors to buy
“Even now, with the recession deepening and markets on edge, Wall Street analysts say it is a good time to buy. Still.

“At the top of the market, they urged investors to buy or hold onto stocks about 95% of the time. When stocks stumbled, they stayed optimistic. Even in November, when credit froze, the economy stalled and financial markets tumbled to their lowest levels in a decade, analysts as a group rarely said sell.

“And last month, as the Dow and Standard & Poor’s 500-stock index suffered their worst January ever, analysts put a sell rating on a mere 5.9% of stocks, according to Bloomberg data. Many companies have taken such a beating in the downturn, analysts argue, that their shares are bound to bounce back.

“Maybe. But after so many bad calls on so many companies, why should investors believe them this time?”

Source: David Ranson, The New York Times, February 8, 2009.

David Fuller (Fullermoney): Where should we look for global stock market leadership?
“Most analysts, not to mention those who are Americans, will inevitably hover over US stock market’s data, given the size and influence of that market. However, this mother ship seldom leads the global equity armada either north or south, although none will significantly diverge from Wall Street’s course for long.

“So where should we look for global leadership and what is Wall Street doing at present?

“Taken in reverse order, US stock market indices are ranging in potential base formation development. However, the Dow and S&P 500 are uncomfortably close to their November lows. Both need to sustain moves above this week’s highs to remain consistent with base development. While this may seem like a ‘big ask’ to some, the Nasdaq 100 is considerably firmer.

“However the largest capitalisation market seldom leads. With the US economy remaining the epicentre of global economic risk, there is no chance that it will lead on the upside, although it could still drag other stock markets lower.

“If the S&P and Dow stay within their current trading ranges, let alone move higher, markets with better fundamentals such as China and Brazil will do considerably better, as we are already seeing. Fortunately, they remain highly favoured Fullermoney investment themes.”

Source: David Fuller, Fullermoney, February 11, 2009.

Charles Dumas (Lombard Street Research): A bleak outlook for Asia
“The recent crash in Chinese imports augurs ill for the region - and Asian stocks are less likely to recover than their north American counterparts, says Charles Dumas, economist at Lombard Street Research.

“‘China’s imports are down 40% over six months, as are the exports of South Korea and Taiwan, and almost certainly Japan,’ he says.

“‘By contrast, the drop in Chinese exports has been a ‘mere’ 20%. This suggests that Chinese final assemblers of goods for export are lowering their sales expectations.’

“Mr Dumas acknowledges that the highly disruptive new year period means the position cannot be fully judged until March data are released. ‘But the scale of these trade declines means that in any scenario the outlook for this particular set of mercantilist ‘savings gluttons’ is for a much worse recession than in the deficit economies with currency and monetary flexibility - i.e. the Anglo-Saxons.’

“He suggests the fall in exports will wipe out more than half of China’s 10% trend growth - leading to a significant knock-on to consumer spending, he says.

“‘Of course, Beijing will strive to offset the collapse of private demand - but the chance of actual Chinese recession looks major.’

“In Japan, Mr Dumas says a fall of 30-40% in exports implies a fierce recession - and much the same applies to Korea and Taiwan.

“‘This Asian recession could be worse than the Asian crisis of 1997-98.’”

Source: Charles Dumas, Lombard Street Research (via Financial Times), February 11, 2009.

Moneywise: Could you profit from new frontiers?
“As developing countries appear to defy the global gloom, Liam Tarry looks at the opportunities - and risks - of investing these new frontier markets.

“Countries such as Vietnam, Nigeria and Kazakhstan are often associated with images of political unrest and corruption - few of us imagine that they could offer a sound investment opportunity. Yet these countries belong to a relatively unknown sector called ‘frontier markets’, which has performed very well in recent years. Although highly volatile, this sector may hold hidden treasures for those investors willing to take the risk.

“Frontier markets are, in essence, very small emerging markets. Just 15 years ago, the BRIC markets (Brazil, Russia, India and China) were classed as frontier markets, but they now form a part of many investors’ portfolios. Today’s frontier markets, however, are virgin territory for most of us. They can be found across the globe, from Bulgaria to Bangladesh and from Kazahkstan to Kenya.

“According to Morgan Stanley Capital International, which launched the MSCI Frontier Market Index in November 2007, there are about 20 frontier market countries vying to become tomorrow’s emerging markets.

“‘Frontier market economies are generally much smaller and less developed than emerging markets, but investors understand their potential to grow and become tomorrow’s success stories,’ says Mark Mobius, executive chairman of Templeton Asset Management and manager of its range of emerging market funds.

“So, if you dare to step into the unknown, you could find that high returns are there for the taking.”

Source: Liam Tarry, Moneywise, February 9, 2009.

Steven Lewis (Monument Securities): A yield too high?
“The Federal Reserve must tread carefully in regard to the sharp rise in Treasury bond yields over the past couple of months, warns Stephen Lewis, economist at Monument Securities.

“He says rising yields risk nullifying the actions being taken by the Fed and the Treasury in other policy areas to stimulate the economy. The authorities need to assess the impact of their fiscal and Tarp-related (troubled asset relief programme) measures on Treasury yields, he says, and balance the loss to demand from higher yields against the gains to demand expected from their actions.

“‘It is entirely possible that a point might be reached where the loss would exceed the gains. This would, in effect, set a limit to what the US authorities could do to support the economy.

“‘Any attempt to reflate the economy beyond that point would be as futile as an attempt to travel faster than the speed of light.’

“Mr Lewis says the Fed may believe it can circumvent this constraint by holding down yields in the marketplace.

“‘If they initiate a strategy of buying Treasuries in such circumstances, they will very likely find plenty of willing sellers.

“‘But to keep yields steady, the Fed might have to progressively increase the scale of its purchases, and eventually wind up holding most of the Treasury debt in issuance. This looks like a route-map to the destruction of financial markets and the establishment of a command economy.’”

Source: Steven Lewis, Monument Securities (via Financial Times), February 9, 2009.

Neil Mellor (Bank of New York Mellon): Why the ruble still looks risky
“The recent appreciation of the ruble by no means indicates that Russia has yet secured stability for the currency - particularly if oil prices continue to suffer from declining optimism about the global economy, says Neil Mellor, currency strategist at Bank of New York Mellon.

“He notes that the ruble’s jump on Wednesday was the biggest since the current composition of its euro/dollar trading basket was established two years ago. ‘On the face of it, the central bank’s efforts to steer the ruble away from the lower boundary of its trading band appear to be working,’ he says.

“‘But in doing so, the Bank has been obliged to draw upon its full arsenal; it has hiked interest rates, limited the money on offer at its liquidity operations, cautioned investors against depreciation bets and put its money where its mouth is by using up around one third of its reserves to defend the currency. Yet it remains to be seen whether this will be enough.’

“Mr Mellor says that for the week to February 6, the central bank spent a further $4.6 billion defending the ruble; and that if weakening optimism indeed bodes ill for the oil price, this might be at the lower end of the expenditure scale.

“‘The ruble might have enjoyed a degree of respite, but, at the very least until the price of oil shows greater signs of life, pressure on the currency is unlikely to desist - resulting in central bank intervention that can only further undermine confidence in Russia’s current credit ratings.’”

Source: Neil Mellor, Bank of New York Mellon (via Financial Times), February 12, 2009.

Bespoke: Baltic Dry, winning streaks, and China
“The Baltic Dry Index (BDI) has been making news lately after its impressive performance over the last few weeks. For those unfamiliar with the BDI, it measures the cost to transport raw materials by sea, and it is currently on a 16-day winning streak in which it has risen 126%. The last five trading days have seen the index rise 14.63%, 13.83%, 9.61%, 10.54%, and 8.80% - talk about a rally!

“And while the Baltic Dry doesn’t have much correlation with US stocks, it does follow China’s equity market pretty closely. Over the Baltic Dry’s 16-day winning streak, China’s Shanghai Composite index is up 14% as well, and it really looks like it’s beginning to turn a corner. Below we provide a chart of the Baltic Dry Index compared to China’s Shanghai Composite. While the percentage changes are more extreme for the Baltic Dry, the direction of its move is very similar to China. Given the fact that China is such an export based economy, it’s no surprise that this trend exists.

“Finally, it’s important to note a few things regarding the Baltic Dry. First, the index declined more than 94% from its peak to trough over the last two years. While it has made a nice move upward in the past few weeks, it is still way, way down from its highs.”

Source: Bespoke, February 10, 2009.

Bespoke: Commodity snapshot
“Below we provide our trading range charts of commodities. The green shading represents two standard deviations above and below the commodity’s 50-day moving average. Moves above or below this green shading are considered overbought or oversold.

“As shown, oil has once again taken a turn for the worse, and it is currently testing support at its prior lows over the past couple of months. Metals, on the other hand, continue to surge. Gold, silver, and platinum are all trading at the very top of their trading ranges. They’ve rallied nicely over the past few weeks, and a further move of 1% to 2% higher will put them at overbought levels.”

Source: Bespoke, February 12, 2009.

Richard Russell (Dow Theory Letters): Gold frenzy lies ahead
“There’s only one item that is bought through both fear and greed. That item is gold. Are you worried about the viability of the dollar? Then buy gold - (fear). Are you afraid that the gold market is getting away from you? Then don’t wait - buy gold (greed).

“Those subscribers who have heeded my advice - ‘buy gold’. They are doing OK today. Of course, for years I advocated buying gold coins and hiding them away and never looking at them or thinking of selling those little beauties. Now if you want gold, you have to buy ‘paper gold’ in the form of GLD. Which is probably OK. Below we see an up-dated chart of GLD. And we see the breakout today at 92.29. This completes a huge base, which started at the 69 box and since has been building and building.

“Today, with the upside breakout at the 93 box on the P&F chart, we’re forced to buy gold in the 944 (April futures) area. For those who missed out on gold when it was in the 700s and 800s, this is a scary proposition. So question - is it too late to buy GLD or high-premium coins if you can find them? As I see it, the frenzy, the speculative phase of gold, the rush of a frightened public lies ahead.

“Big bull markets always find a way to keep you frightened and OUT. Big bull markets are devils with no conscience - to get in you have to ‘close your eyes, and just do it’. Not easy, but in this business nothing is easy except losing money. ‘There’s no fever like gold fever.’ And I’m beginning, just beginning, to feel the fever now. When I look at the chart below, I can sense the fever rising.”

Source: Richard Russell, Dow Theory Letters, February 11, 2009.

Business Intelligence: Merrill Lynch - $1,500 target for gold
“Gold prices may hit US$1,500 an ounce in the next 12 to 15 months, Gary Dugan, the Chief Investment Officer of Merrill Lynch, said yesterday.

“Dugan termed his apprehensions of gold striking such a high as a ‘fear’ that may come true. He reasoned that such a price would mean the other commodities and streams of investments have been shunned by investors.

“With confidence in currencies shaken to the core, the yellow metal is increasingly assuming the role of ‘the most trusted currency’, Dugan said. ‘We have never seen such a rush to buy gold. It’s bringing in security and it’s still affordable.’

“Merrill Lynch commodity price forecast authored by Dugan showed that gold prices can rise from the currently prevailing US$913 per ounce to US$1,100 in the first quarter of 2009 and to US$1,150 in the second quarter. ‘While demand for gold has been rising production has been declining. South Africa, which accounts for the major share of global gold production, is facing political issues and has energy problems,’ Dugan said.

“With reports of declining returns from other investment options, ‘cash’ - keeping money safe in banks and investing in government bonds - is the option in front of investors, Dugan said.

“‘Fear’ and eventual decline of the greenback are the two factors that will drive gold prices, he said. While commodity markets could also bounce back in the first half of the year, a rebound is likely to be short-lived in the absence of strong US consumer demand.”

Source: Business Intelligence, February 8, 2009.

Financial Times: Bullion sales hit record in rush to safety
“Investors are buying record amounts of gold bars and coins, shunning risky assets for the relative safety of bullion amid renewed fears about the health of the global financial system.

“The US Mint sold 92,000 ounces of its popular American Eagle coin last month, almost four times that which it sold a year ago and more than it shipped during the whole of the first half of 2007.

“Other countries’ mints have also reported strong sales. ‘Large purchases of coins are perhaps the ultimate sign of safe-haven gold buying,’ said John Reade, a precious metals strategist at UBS.

“Inflows into gold-backed exchange traded funds surged in January, pushing their bullion holdings to an all-time high of 1,317 tonnes. Last month’s flows of 105 tonnes were above September’s previous record of 104 tonnes, and absorbed about half the world’s gold mine output for January, said Barclays Capital.

“‘We estimate that investment demand [into gold] could double in 2009 compared to 2007,’ said Mr Reade. ‘Purchases of physical gold have jumped over the past six months as investors’ fears about the current financial crisis … have intensified.’

“The move into gold is being driven by the very rich, with bankers saying that some clients are hoarding gold in their vaults. UBS and Goldman Sachs said last week that investor hoarding would drive prices back above $1,000 an ounce.

“Traders and analysts said jewellery demand, historically the backbone of gold consumption, had collapsed under the weight of the high prices. Sharp falls in demand in the key markets of India, Turkey and the Middle East have capped the potential of any price rally. But the lack of jewellery demand has not discouraged investors.

“GFMS, the precious metal consultancy, estimated bullion coin demand last year reached its highest level in 21 years.”

Source: Javier Blas, Financial Times, February 9, 2009.

CEP News: Euro Zone GDP contracts at record pace in fourth quarter
“The euro zone economy shrank at a record pace to end off 2008, suggesting that the current recession in the monetary union will be both deep and prolonged.

“According to advance estimates from Eurostat, the euro zone economy contracted by a record 1.5% in the fourth quarter of 2008 compared to the previous quarter. Economists had expected a more modest fall of 1.3% following Q3’s 0.2% decline.

“Germany led the way in declines, contracting 2.1% in the fourth quarter. Conversely, Slovakia was one of the few economies to show any gains over the period, rising 2.1% according to preliminary estimates.

“Year-over-year, overall output in the monetary union shrank by 1.2%, its sharpest pace in series history and down from both the 1.1% contraction expected and Q3’s annualized gain of 0.6%. Looking at 2008 as a whole, GDP growth slowed to 0.7%, down two percentage points from the rate in 2007.”

Source: CEP News, February 13, 2009.

David Fuller (Fullermoney): China has the money
“Every country faces the most serious economic problems in decades but you can be reasonably certain that US Treasury Secretary Tim Geithner and UK Chancellor of the Exchequer Allistar Darling would love to have China’s problems. China is a creditor nation with enviable amounts of cash.

“Yes, the export sector is in a mess and the PRC had been overly reliant on it for two decades. Nevertheless, by being the world’s manufacturer of first resort, China gained enormous technological know how. This will be invaluable as they move their manufacturing base to a more sophisticated level.

“China will not worry about lots of toy manufacturers going out of business. However consider these comments mentioned to me last weekend by a friend visiting from Hong Kong. China is making huge efforts to improve the economic wellbeing of its rural poor. For instance, he said the government has told manufacturers of refrigerators not to lay off workers or slash prices. Instead, it is buying surplus refrigerators at market prices and selling them to the rural poor at half price. There are plenty more rural poor who need looking after than unemployed factory workers in the Southern provinces, although China’s population statistics are astronomical for Western observers.

“The point is, China has the money to do that and does not need to borrow. However, the PRC is not just subsidising the poor with its vast surplus.

“For over a year it has been fashionable to say once again that: ‘Cash is king.’ To the extent that this is a truism, it means that anyone with cash can buy cheap assets when others are forced sellers. From Russia to Australia, China is buying cheap industrial resources for its long-term development.”

Source: David Fuller, Fullermoney, February 12, 2009.

Financial Times: Alarming times for China as exports fall
“Jung Ulrich, chairman, China equities at JP Morgan says the exports drop is a real cause of concern for the Chinese leadership. She tells FT’s capital markets correspondent David Oakley that there is little prospect of a return to 8% growth until world economy recovers.”

Source: Financial Times, February 11, 2009.

Bloomberg: China’s new loans rise by record on stimulus efforts
“China’s new loans rose by a record in January and money supply expanded at the fastest pace in more than a year as the government pressured banks to support a 4 trillion yuan ($585 billion) stimulus package.

“Banks extended 1.62 trillion yuan of new local-currency loans and M2, the broadest measure of money supply, climbed 18.8% from a year earlier, the People’s Bank of China said today on its website.

“The jump in new loans to twice the record set a year earlier shows China may succeed in reviving growth even as credit markets around the world remained locked and after developed economies slumped into what the International Monetary Fund calls a ‘depression’. Loan default risk is rising and represents the biggest single threat to Chinese lenders this year, Fitch Ratings said last month.

“‘We believe China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse,’ said Lu Ting and T.J. Bond, Merrill Lynch economists in Hong Kong. Soaring credit growth ‘might be at the cost of the future health of the banking system’.”

Source: Kevin Hamlin and Luo Jun, Bloomberg, February 12, 2009.

Financial Times: Economists warn of Chinese deflation
“China faces a bout of deflation, economists warned on Tuesday as data revealed that inflation dropped to its lowest in 2½ years in January and that the price of goods leaving factory gates fell 3.3% in January.

“In the latest sign of economic weakness in the country, consumer price inflation fell for the ninth month in a row to 1% in January from 1.2% the previous month as prices for clothing, transport and housing tumbled.

“Several economists forecast that consumer prices in China would begin to fall from this month.

“However, most analysts say that China will avoid a prolonged period of deflation, which could lead to a sharp drop in output as consumers and companies delay spending, because of the aggressive monetary and fiscal stimulus policies introduced by the Chinese authorities.”

Source: Geoff Dye, Financial Times, February 10, 2009.

Financial Times: Japan faces “unimaginable” contraction
“Japan’s economy faces an ‘unimaginable’ contraction, the chief economist of its central bank warned on Monday, as figures revealed surging bankruptcies and a big fall in machinery orders.

“The warning from Kazuo Momma, head of the Bank of Japan’s research and statistics department, underscored the gloom surrounding the world’s second-largest economy as export orders dry up, companies shut down production lines and consumers stop spending.

“Japan, where industrial output plunged a record 9.6% month on month in December, is due to announce fourth-quarter gross domestic product data next week. Polls of economists suggest GDP will have fallen more than 3% compared with the previous quarter - an annualised decline of more than 10%.

“‘From October to December the scale of negative growth [in GDP] may have been unimaginable - and we have to consider the possibility that there could be even greater decline between January and March,’ Mr Momma said in a speech on Monday.

“His remarks came as a private research company reported a 16% year-on-year rise in the number of bankruptcies among Japanese companies to 1,360 in January, the highest level for six years. Total debts left by failed companies rose 44% from a year earlier to Y839 billion ($9.2 billion), Tokyo Shoko Research said.”

Source: Mure Dickie, Financial Times, February 9, 2009.

Financial Times: Australian Senate passes A$42 billion stimulus plan
“Australia’s Senate on Friday passed a A$42 billion ($27.4 billion) economic stimulus package it had blocked the day before after frantic overnight negotiations won a vital extra vote allowing the government to over-ride opposition from conservative parties.

“Independent South Australian senator Nick Xenophon switched sides after winning a commitment from Wayne Swan, Australia’s Treasurer, that the Labor government would commit almost A$1 billion to help improve water flow in the ailing Murray-Darling river system.

“The unexpected second vote, in which senators backed the amended package by 30 votes to 28, boosted the Australian dollar on hopes the stimulus payments would reach households in time to avert recession in an economy badly hit by the global slowdown.

“‘I’m not sure whether this package is going to save this country from recession,’ Xenophon told parliament. ‘I’m pleased to say I believe we have been able to reach a compromise, which while not giving everybody what they want, may give everyone what they need.’”

Source: Kevin Brown, Financial Times, February 12, 2009.

Tags: Bailout, Bill King, BRIC, Bunds, Continental Europe, Economic Stimulus Bill, Emerging Markets, ETF, Fiscal Stimulus, Gilts, Global Economy, Global Index, Grab Bag, Headwinds, India, Jim Rogers, Safe Havens, Steve Forbes, Stock Markets, Taxi Drivers, Timothy Geithner, Treasury Secretary, Us Dollar Index, Welcome Relief
Posted in Bonds, Commodities, Credit Markets, Economy, Emerging Markets, Gold, India, Markets, Oil and Gas, Outlook, US Stocks | No Comments »

Finally, the plan…sort of

Wednesday, February 11th, 2009

I am spending the next few days in Europe on a short business trip. First stop is Dublin where the temperature is icy, the mood is dour, property prices are plunging, the queues for jobless claims are five hours long, the soon-to-be-unemployed are holding protest strikes, and the banks are on the edge of a financial precipice. Yes, it may be a movie with different actors, but the plot is the same as in many other countries.

Meanwhile in the US, Treasury Secretary Timothy Geithner yesterday disappointed the markets with the lack of detail on the administration’s Financial Stability Plan. After all, he did say a few days ago (paraphrasing): ” We are not going to put out the details of our plan until we get it right.” (Please click here for RGE Monitor’s discussion on whether the plan will work.)

The US stock market indices plunged as investors gave a thumbs-down to the announcement, with the S&P 500 Index losing 4.9% and the Dow Jones Industrial Index 4.6%. All market sectors were in the red with Financials (-10.9%) leading the sell-off, with trading volume on the NYSE the highest since mid-December and advances beating declines by seven to one.

According to Lowry’s reports, Friday was a 90% up-day, only to be followed yesterday by a 90% down-day. “Panic on the upside, then panic on the downside - this is one dangerous market,” said venerable Richard Russell (Dow Theory Letters)..

Bill King (The King Report) commented as follows on the bank rescue package: “Geithner and Team Obama have been furiously polling private equity and Street titans to gauge their interest and participation thresholds in various bailout plans. Geithner’s lame plan implicitly indicates that few people wanted to participate in the leaked/proposed plans.

“Private investors know toxic paper remains incalculable with open-ended liability. The market understands that no bank bailout has been announced because there is no plan, barring an outright gift, that will fly with private investors. And an outright gift will infuriate taxpayers. Geithner asserted, ‘We will have to try things we’ve never tried before.’ You mean like telling the truth about the quantity and quality of toxic assets?”

Back to the stock market, key resistance and support levels for the major US indices are shown in the table below. All the indices are trading below the 50-day moving averages and the Industrials and Transport have also breached the December 1 lows. The critical November 20 lows are now within close reach and must hold in order to prevent considerable technical damage.

Where to now? As pointed out before, the primary trend is still bearish. The chart below shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (ROC) indicator (red line) and the RSI oscillator (brown line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and again since December 2007. Having said that, the levels of both the ROC and RSI are massively oversold.

At this juncture, short-term movements are almost impossible to predict, although 90% down-days are usually followed by two- to seven-day bounces. Seven out of the eight most recent 90% down-days were followed by rallies, according to Richard Russell. Having said that, my belief is that traders will simply have to wait for Mr Market to show his hand, especially as far as the November 20 lows are concerned.

And while we wait, I am trying to capture a leprechaun and find the “hidden treasure” on the Emerald Isle.

Tags: Bank Bailout, Bill King, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Dow Theory Letters, Financial Stability, Jobless Claims, Market Sectors, Obama, Outright Gift, Precipice, Private Investors, RGE Monitor, Richard Russell Dow Theory, Short Business, Stock Market Indices, Thresholds, Us Stock Market, Us Treasury Secretary
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