Words from the (investment) wise for the week that was (Jan 26 – Feb 1, 2009)

Sunday, February 1st, 2009

“Words from the Wise” this week comes to you in a shortened format as pressure from my “day job” precludes me from doing my customary commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided. (For more discussion about economies and financial markets, also see my post “Video-o-rama: Global economy – banked into submission“.)

Just a side note: As President Obama’s economic stimulus package makes its way to the US Senate and the government crafts plans to create a “bad bank”, the Chinese celebrated the Lunar New Year to usher in the Year of the Ox. According to Jim Trippon (China Stock Digest), the Chinese believe good and bad follow each other closely.

After a year of financial meltdowns in 2008, it is comforting to learn that the Year of the Ox is a sign of prosperity and has been very rewarding in the history of China. Are we unnecessarily concerned about the economic slowdown in China, and will the country’s vast foreign reserves come to the Western world’s rescue? If only hope were an investment strategy!

Why does the cartoon below remind me of Margaret Thatcher’s poignant observation: “The problem with socialism is that you eventually run out of other people’s money”?

Bill King (The King Report) said: “The Paradox of Thrift (or saving) is a reductio ad absurdum by John Maynard Keynes that avers that if everyone saves, aggregate demand will decline, and this will imperil the economy. We’d like to contribute the ‘Paradox of Spending’ to Econ 101. This maxim holds that if everyone spends, there are no savings; debt surges and the implosion of that debt collapses an economy.”

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 …

The US stock markets experienced their worst January in history, as seen from the movements of the major indices: Dow Jones Industrial Index -8.8%, S&P 500 Index -8.6%, Nasdaq Composite Index -6.4% and Russell 2000 Index -11.2%. This brings into question the January Barometer, stating “As January goes, so goes the year”.

Key resistance and support levels for the US indices are shown in the table below. The immediate upside target is the 50-day moving average, followed by the early-January highs. On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage. As seen from the table, the Dow has already breached its January 2 low and closed the week only marginally above the roundophobia number of 8,000.

As far as the outlook for the stock market is concerned, I will suffice with a comment from Richard Russell (Dow Theory Letters): “The stock market often tries to confuse us by coming up with something new. Assuming that the Averages do better than their preceding January peaks, it would have occurred without the usual heavy buying on rising volume. It may be that the January peaks will have to be bettered before the ‘real’ volume comes in. … we will have to monitor the stock market action carefully, to make sure we are not being sucked in to a fake rally as was the case following the 1929 crash.”

Also make sure to read my recent posts “Albert Edwards: Back in the bear camp” and “Jeremy Grantham – The bear buys stocks“.

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

Source: Yahoo Finance, January 30, 2009.

In addition to interest rate announcements by the Bank of England and the European Central Bank (Thursday, February 5), the US economic highlights for the week include the following:

Source: Northern Trust.

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

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

Source: Wall Street Journal Online, January 30, 2009.

Caution should be exercised, since the economic and earnings background remains precarious. And do remember Charles Darwin’s words: “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.”

That’s the way it looks from Cape Town.

NBR: Warren Buffett one on one
SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?

WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20th that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations. On the other hand, I don’t think there’s anybody better than you could have had; have in the presidency than Barack Obama at this time. He understands economics. He’s a very smart guy. He’s a cool rational-type thinker. He will work with the right kind of people. So you’ve got the right person in the operating room, but it doesn’t mean the patient is going to leave the hospital tomorrow.

SG: Mr. Buffett, I know that you’re close to President Obama, what are you advising him?

WB: Well I’m not advising him really, but if I were I wouldn’t be able to talk about it. I am available any time. But he’s got all kinds of talent right back there with him in Washington. Plus he’s a talent himself so if I never contributed anything for him, fine.

SG: But I know that during the election that you were one of his economic advisors, what were you telling him?

WB: I was telling him business was going to be awful during the election period and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that. But he’s got the right ideas. He believes in the same things I believe in. America’s best days are ahead and that we’ve got a great economic machine, its sputtering now. And he believes there could be a more equitable job done in distributing the rewards of this great machine. But he doesn’t need my advice on anything.

Click here for the full article.

Source: Susie Gharib, NBR, January 22, 2009.

CNN Money: House passes $819 billion stimulus bill
“The House on Wednesday evening passed an $819 billion economic stimulus package on a party-line vote, despite President Obama’s efforts to achieve bipartisan support for the bill.

“The final vote was 244 to 188. No Republicans voted for the bill, while 11 Democrats voted against it.

“The Senate is likely to take up the bill next week.

“‘I hope that we can continue to strengthen this plan before it gets to my desk,’ Obama said in a statement after the vote. ‘We must move swiftly and boldly to put Americans back to work, and that is exactly what this plan begins to do.’

“‘One week and one day ago, our new President delivered a great inaugural address … which I believe is a great blueprint for the future,’ said House Speaker Nancy Pelosi. ‘With swift and bold action today, we are doing just that – with this vote today, we are taking America in a new direction.’

“Next week, the full Senate will vote on its version, which differs in some significant ways from the House bill. The two chambers will then need to reconcile their differences before each vote on the final version. To pass the package in the Senate, Democrats will need 60 votes – meaning at least two Republicans.

“Congress has put the legislation on a fast track, as many lawmakers on both sides of the aisle agree that swift action is needed to help pull the economy out of a deep recession. Both Democratic and Republican leaders have said they aim to get the bill to Obama’s desk for him to sign before lawmakers’ Presidents Day recess in mid-February.”

Source: David Goldman, CNN Money, January 28, 2009.

CEP News: US Government plans to set up “bad bank” to buy toxic assets
“The US government is crafting plans to create a “bad bank” to purchase toxic assets from financial institutions and strengthen the balance sheets of financial institutions, according to a report from CNBC on Tuesday evening.

“The concept of a ‘bad bank’ is one which has been floated around by many countries across the globe as a means to add further stimulus to financial institutions and speed up market recovery. Nevertheless, the details of the plan have not been released.

“At the very least, CNBC quoted an unnamed Treasury official as saying that the government was planning a ‘major’ announcement next week.

“In the aftermath of the announcement, Bloomberg News cited ‘sources familiar with the matter’ that the Federal Deposit Insurance Corporation (FDIC) would be the likely candidate to run such an institution, arguing that Chairperson Sheila Bair has proposed issuing FDIC-backed debt to finance the project.

“Also on Tuesday, US Senator Chris Dodd, an active member in the crafting of recent financial legislation in the United States, said the creation of a ‘bad bank’ sounded like a good idea and confirmed that he is aware that the Obama administration is looking into such a matter.”

Source: CEP News, January 28, 2009.

CNBC: Plan for banks’ toxic debt may be unveiled next week

Click here for the article.

Source: CNBC, January 27, 2009.

Yahoo Finance: Good bank, bad bank or banana
“While the idea of the government becoming the de facto bad bank in a system-wide good bank-bad bank solution has some merit, there’s a big problem with the ‘aggregator bank’ idea that’s gaining momentum in Washington DC, says Lawrence J. White Professor of Economics at New York University’s Stern School of Business.

“‘Whether you call it a bad bank an aggregator bank or a banana doesn’t change the basic problem: You’ve got to figure out what price is going to get paid for the assets that leave the financial system and end up in this government entity,’ White says. ‘That’s the hard part.’”

Click here for the article.

Source: Yahoo Finance, January 27, 2009.

CNBC: Barry Ritholtz – suggestions on how to restructure banks

“1. Stop interfering with the markets!: Nationalizing banks isn’t market interference, keeping these mortally wounded banks alive is! Stop pussyfooting around and admit the truth. The market knows it, investors know it.

Let the FDIC do its job. That is:

2. Temporarily nationalize the banks: We know they are insolvent, and cannot survive without taxpayer money. Spending 150% of their market cap for an 8% share is absurd.

Wipe out the debt, liquidate bad common holders, fire the board and management, appoint new competent, risk sensitive management. They have six months to spin out a 10% stake in each of their holdings, followed by the rest within 5 years (10 at most).

3. Taxpayer owned: Once nationalized, that 10% spin out of the component parts would be in the form of preferred to taxpayers! For BAC, you would spin out Bank of America, Merrill Lynch, Countrywide, plus the ‘B/A Toxic Holdings I & II’. For Citi, it would be Travelers, Citi, Smith Barney, ‘Citi Toxic Holdings I & II’, etc.

4. Now recapitalize: With the toxic waste off of the books, you can easily recapitalize the banks. Give the old creditors a ‘sweetheart’ deal – they get a 10% stake also, but only if they buy a matching amount in the new bank.

5. Align compensation with long-term profitability: Stop rewarding traders for short term gains despite long term losses. Stop paying taxpayer monies out as dividends. Bonuses must be a function of the long term health of the company – not monthly volatility.”

Sources: CNBC and The Big Picture, January 29, 2009.

David Fuller (Fullermoney): What to do with bad assets
“The question of what to do about the bad assets on bank balance sheets has been circulating for some time. No one has yet come up with a sound method of valuing these assets and until they do, the uncertainty surrounding the situation will remain acute.

“US Aggregate Reserves for Depository Institutions in Excess of Required Reserves continue to climb to levels massively in excess of what is needed. Banks are doing everything they can to shore up their balance sheets because they do not know how they will be called upon to meet their outstanding obligations. The inability to value their assets is at the root of this problem.

“The de facto guarantees that have been put behind the major players in the banking system have helped to bring the TED spread down to much more reasonable levels. However, the difference between AA Bank spreads and BBB Bank spreads imply that investors continue to bet that high numbers of lower rated banks will default at some stage. This would seem to be common sense. A less leveraged, slimmed down banking sector will have less members and those either ‘too big to fail’ or with the healthiest balance sheets are most likely to survive.

“Personally, I am in favour of a form of the ‘bad bank’ solution. However, I see recapitalisation and the valuing of suspect assets as separate issues. If a ‘bad bank’ takes possession of illiquid, hard-to-value assets, it should do so at prices well below what banks would deem as breakeven. This is the only fair way to make sure that the taxpayer is not paying up for duff assets. Recapitalisation should subsequently be considered only where any opacity in a firm’s balance sheet has been cleared out; so that taxpayers know exactly what they are putting their money into.

“We know that a large number of hard-to-value assets have deep intrinsic value, which is not readily available to assess in today’s conditions. Price discovery will only become apparent when an active secondary market for such assets is created. The ‘bad bank’ will be key to creating and managing such a pool of liquidity. If the value of the bad assets turns out to be more than a bank received in bailout funds, they would have a justifiable cause to seek redress but that would be an issue for the courts subsequent to the financial crisis and not for now.”

Source: David Fuller, Fullermoney, January 29, 2009.

The New York Times: Sweden’s fix for banks – nationalize them
“The Swedes have a simple message to the Americans: Bite the bullet and nationalize.

“With Sweden’s banks effectively bankrupt in the early 1990s, a center-right government pulled off a rapid recovery that led to taxpayers making money in the long run.

“Former government officials in Sweden, many of whom come from the market-oriented end of the political spectrum, say the only way to solve the crisis in the United States is for the government to be prepared to temporarily take full ownership of the banks.

“Sweden placed its banks with troubled assets into a so-called bad bank, where they could be held and then sold over time when market and economic conditions improved. In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending.

“In the process, Sweden wiped out existing shareholders.”

Source: Carter Dougherty, The New York Times, January 22, 2009.

Bloomberg: Fannie to tap US for as much as $16 billion in aid
“Fannie Mae, the largest source of home-loan money in the US, said it will need to tap as much as $16 billion in emergency funds from the US Treasury Department to stay afloat as deterioration in the housing market persists.

“Fannie’s planned request, announced today, follows Freddie Mac, which said on January 23 that it will need as much as $35 billion more in federal aid. Unprecedented mortgage losses drove the net worth of both companies below zero last quarter, they said in separate securities filings.

“This will be Washington-based Fannie’s first draw on a $200 billion emergency fund set up by Treasury in September to keep the government-sponsored enterprises solvent. Fannie said losses on mortgage loans and a decline in the market value of its assets accounted for the shortfall in the fourth quarter.

“Fannie’s Treasury request was “much worse” than expected, said Rajiv Setia, a fixed-income strategist at Barclays Capital in New York. Setia estimates taxpayers will have to shell out at least $50 billion for Fannie and $70 billion for Freddie this year. One or both, especially Freddie, may exceed the Treasury’s backstop this year, he said.”

Source: Dawn Kopecki, Bloomberg, January 26, 2009.

Daily Mail: Revealed – day the banks were just three hours from collapse
“Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown’s Ministers has revealed.

“City Minister Paul Myners disclosed that on Friday, October 10, the country was ‘very close’ to a complete banking collapse after ‘major depositors’ attempted to withdraw their money en masse.

“The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals. Only frantic behind-the-scenes efforts averted financial meltdown.”

Source: Glen Owen, Daily Mail, January 24, 2009.

CEP News: IMF slashes global growth forecasts
“On the back of a $2.2 trillion loss on toxic US assets worldwide, the global economy is expected to contract in 2009 before recovering the following year, according to a report from the International Monetary Fund (IMF) on Wednesday.

“‘Unless stronger financial stains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth,’ read the report, which urged governments to continue taking action to rescue the financial system.

“‘We now expect the global economy to come to a virtual halt,’ said IMF chief economist Olivier Blanchard at a press conference.

“As a consequence, the global economy is expected to grow 0.5% in 2009 rather than by 2.2% as previously estimated, and expand by 3.0% in 2010.

“To address the situation, the IMF report voiced support for the so-called ‘bad bank’ approach where governments could set up a financial institution to purchase toxic assets, removing them from the balance sheets of banks.

“‘We think that more decisive action is needed now by both policy-makers and market participants, and with greater emphasis on balance sheet cleansing,’ said Jaime Caruana, financial counsellor of the IMF.”

Source: CEP News, January 28, 2009.

Bloomberg: Gloom deepens among world’s chief executives
“Gloom is deepening among business leaders, casting a pall over this year’s World Economic Forum in Davos, Switzerland.

“Just one in five of 1,124 chief executives in 50 nations said they were very confident about prospects for revenue growth in 2009, down from half last year, and more than a quarter said they were pessimistic, a survey by PricewaterhouseCoopers showed. The sentiment was the worst since the accounting and consulting firm began tracking the CEO outlook in 2003.

“‘The speed and intensity of the recession has rocked the psyches of CEOs and created a global crisis of confidence,” Samuel DiPiazza, PWC’s New York-based CEO, said in a statement.

“Such concerns are virulent as executives from JPMorgan Chase’s Jamie Dimon to Stephen Green of HSBC Holdings join more than 2,500 counterparts, academics and policy makers in the ski resort for five days of soul-searching and deal-making. They meet as the world economy hurtles deeper into recession, banks add to more than a $1 trillion in writedowns and governments tighten their grip over the financial system.

“‘The outlook is pretty grim,’ said Howard Davies, director of the London School of Economics and a former Bank of England policy maker who will be in Davos. ‘Things are not good and business surveys are coming out showing they’re getting even worse.’”

Source: Matthew Benjamin and Simon Kennedy, Bloomberg, January 28, 2009.

The Wall Street Journal: YouTubing in Davos with Huffington and Forbes
“YouTube’s Chad Hurley, Arianna Huffington and Steve Forbes share their views on Davos and the global economic crisis with WSJ’s Andy Jordan.”

Source: The Wall Street Journal, January 28, 2009.

Bloomberg: Roubini – “nowhere to hide” from global slowdown
“‘There is nowhere to hide,’ Nouriel Roubini, an economics professor at NYU’s Stern School of Business who predicted the financial crisis, said from Zurich in an interview with Bloomberg Television. ‘We have for the first time in decades a global synchronized recession. Markets have become perfectly correlated and economies are also becoming perfectly correlated. This is not your kind of traditional minor recession.’”

Click here for the article.

Source: Bloomberg, January 27, 2009.

Financial Times: Nations turn to barter deals to secure food
“Countries struggling to secure credit have resorted to barter and secretive government-to-government deals to buy food, with some contracts worth hundreds of millions of dollars.

“In a striking example of how the global financial crisis and high food prices have strained the finances of poor and middle-income nations, countries including Russia, Malaysia, Vietnam and Morocco say they have signed or are discussing inter-government and barter deals to import commodities from rice to vegetable oil.

“The revival of these trade practices, used rarely in the last 20 years and usually by nations subject to international embargoes and the old communist bloc, is a result of the countries’ failure to secure trade financing as bank lending has dried up.

“The countries have not disclosed the value of any deals, and some have refused even to confirm their existence. Officials estimated that they ranged from $5 million for smaller contracts to more than $500 million for the biggest.”

Source: Javier Blas, Financial Times, January 26, 2009.

Financial Times: Capital flows to developing world at risk
“Capital flows to emerging markets are in danger of collapsing this year as the financial crisis in advanced economies risks choking off the supply of credit to the developing world, an association of large banks warned on Tuesday.

“The Institute for International Finance forecasts net private sector capital flows to emerging markets will be no more than $165 billion this year, less than half the $466 billion inflow in 2008 and only one fifth of the amount sent in the peak year of 2007.

“The figures underscore the impact the banking crisis and risk-averse investors are having on emerging market economies, one of the central issues at this year’s World Economic Forum in Davos.

“Bill Rhodes, a senior Citigroup executive who is vice-chairman of the IIF, urged leading economies to co-operate with each other and the private sector to address the problem. ‘This is a worldwide recession the like of which we have not seen since World War II,’ he said. ‘There is no one country or group of countries that can do this on its own. The only way to solve it is co-ordination across the board.’

“Mr Rhodes also called on the International Monetary Fund to intensify its efforts to supply liquidity to emerging markets by extending the duration of the current facility from three months to more than a year. ‘The IMF’s resources need to be expanded and its approaches modified to provide financing to emerging markets that have been caught in a crisis not of their making.’”

Source: Peter Thal Larsen, Financial Times, January 27, 2009.

Paul Kedrosky (Infectious Greed): Fun with Fitch – sovereign hotspots
“Some slides from a useful new Fitch presentation on one of my favorite subjects: sovereign hotspots around the world.”

Source: Paul Kedrosky, Infectious Greed, January 29, 2009.

Asha Bangalore (Northern Trust): Fed reiterates support for credit markets
“The Federal Open Market Committee (FOMC) left the target federal funds rate unchanged at 0%-0.25%. Richmond Fed President Lacker cast the only dissenting vote as he would have preferred increasing the monetary base through purchases of Treasury securities rather than through the credit programs.

“The FOMC policy statement noted that the ‘Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time’. This part of the message is identical to the December 2008 statement.

“Overall, today’s [Wednesday] statement presented a broader picture of the economic situation and included some bullish expectations about the economy. By contrast, the December 16 policy statement focused largely on features of the Fed’s new regime. In particular, six aspects of the policy statement were different from the December 2008 announcement.

“First, significantly slowing global demand was mentioned versus the December statement that did not mention the global economy.

“Second, today’s statement noted that ‘conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions.’

“Third, the FOMC predicts that ‘a gradual recovery in economic activity will begin later this year’, and the statement indicated that ‘the downside risks to that outlook are significant’.

“Fourth, in December, inflation was expected to ‘moderate in coming quarters’. There is notable departure from this view because the Fed now ‘expects that inflation pressures will remain subdued in coming quarters’.

“Fifth, the FOMC indicated that it ‘is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets’.

“Sixth, today’s statement has an explicit discussion about the Fed’s balance sheet. As expected the Fed reiterated support of credit markets.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 28, 2009.

BCA Research: US LEI – uptick unsustainable
“The Conference Board’s leading economic indicator (LEI) ticked up in December, but we do not view this as the beginning of a sustained economic recovery.

“The tick up in the LEI was mainly due to the large positive contribution from real money supply and the yield curve. Meanwhile, measures of the real economy continue to weaken: large declines occurred in building permits, employee hours worked, supplier deliveries, while initial unemployment claims are skyrocketing.

“It is still unclear that monetary and fiscal policy are effective (private sector borrowing rates have only marginally fallen) and the housing market is still very weak.

“True, existing home inventories fell in December, but seasonal factors played a large role (inventories always fall during the autumn and winter). Improved activity levels during the spring selling season, should they occur, would be a more accurate signal that the housing market is stabilizing.

“However, the unemployment rate is set to still rise sharply, which will further undermine consumer confidence and spending, particularly on big ticket items. Bottom line: Economic data will continue to be weak and the LEI will likely slide further before a sustainable bottom is made.”

Source: BCA Research, January 29, 2009.

Asha Bangalore (Northern Trust): Q4 GDP Report – gain in inventories masks true weakness
“Real gross domestic product (GDP) declined 3.8% in the fourth quarter of 2008, the minus sign for GDP growth was not a surprise but a larger decline was widely expected. The increase in inventories (+$6.2 billion versus -$29.6 billion in Q3), which was largely unexpected, offset the weakness in demand and trimmed down the headline reading.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 30, 2009.

Bespoke: GDP price index enters the deflation zone
“While the markets have been focused on the better than expected GDP report for the fourth quarter, the GDP price index was potentially even more notable. While economists were looking for a quarter/quarter annualized increase of 0.4%, the actual level was a decline of 0.1%. This negative print is only the seventh time since the end of WWII (and the first time since 1954) that prices decrease based on this measure. For now at least, the Fed’s view that ‘inflation pressures will remain subdued in coming quarters’ appears to be right on target.

Source: Bespoke, January 30, 2009.

Richard Russell (Dow Theory Letters): Is inflation creeping back?
“Below is my inflation/deflation chart. This is simply the long T-bond divided by gold. When the ratio rise in favor of bonds, it’s saying that the bonds are stronger than gold, which is deflationary. When the ratio declines in favor of gold, it tells us that gold is gaining in relative strength, and that’s inflationary. Note the head-and-shoulders pattern just before the plunge – the plunge took the ratio below the rising trendline. This is the chart Bernanke has been waiting for.”

Source: Richard Russell, Dow Theory Letters, January 27, 2009.

Standard & Poor’s: S&P/Case-Shiller – home price declines continue
“Data through November 2008, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, shows continued broad based declines in the prices of existing single family homes across the United States, with 11 of the 20 metro areas showing record rates of annual decline, and 14 reporting declines in excess of 10% versus November 2007.

“‘The freefall in residential real estate continued through November 2008,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘Since August 2006, the 10-City and 20-City Composites have declined every month – a total of 28 consecutive months.’”

Source: Standard & Poor’s, January 27, 2009.

Asha Bangalore (Northern Trust): Existing home sales – inventories remain at elevated levels
“Sales of existing homes rose 4.7% in December after two monthly declines, inventories remain at elevated levels, and the median price of an existing single-family home fell in December. The gain in home sales is noteworthy while other aspects of today’s report are much the same as we have seen for several months. The important take-away in this report is that inventories of unsold existing homes remain at elevated levels. Although mortgage rates have moved up slightly, they remain at significantly favorable levels.

“The seasonally adjusted inventory-sales ratio of existing single-family homes fell to a 9.6-month supply from an 11.4-month supply in November. This appears impressive at the outset, but digging deeper it appears that the November reading was probably an aberration because the quarterly averages for 2008 range between a 9.8-month supply and a 10.26-month mark. Inventories of unsold homes need to shrink considerably more for home prices to stabilize.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 26, 2009.

Asha Bangalore (Northern Trust): New home sales plunge
“In December, sales of new homes declined, prices fell, and inventories were the highest on record. The main message from the December report is that homebuilders will continue to reduce production of new homes.

“The inventory of unsold new homes rose to a 12.9-month supply in December, the largest on record.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 29, 2009.

The Wall Street Journal: An upside to plunging home prices
“John Lonski, CEO of Moody’s Capital Markets Research Group, discusses the latest decline in home prices. He tells WSJ’s Kelly Evans that although it highlights plunging home prices and the deterioration of mortgage-backed securities, it’s promoting the stabilization of home sales.”

Source: The Wall Street Journal, January 27, 2009.

Asha Bangalore (Northern Trust): Durable goods orders post sharp drop
“Orders and shipments of durable goods fell in 2.6% in December, after a downwardly revised 3.7% drop in November. The declines in orders of durable goods were widespread.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 29, 2009.

Asha Bangalore (Northern Trust): Consumer confidence posts new low
The Conference Board’s Consumer Confidence Index fell to 37.7 in January from 38.6 in December. This is a new record low for the series which dates back to February 1967. The grim headlines and media coverage of the financial and economic turmoil and staggering layoff announcements justify the sober consumer outlook.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 27, 2009.

The Wall Street Journal: Lending drops at big US banks
“Lending at many of the nation’s largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available.

“Ten of the 13 big beneficiaries of the Treasury Department’s Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results.

“Those 13 banks have collected the lion’s share of the roughly $200 billion the government has doled out since TARP was launched last October to stabilize financial institutions. Banks reporting declines in outstanding loans range from giants Bank of America and Citigroup, each of which got $45 billion from the government; to smaller, regional institutions. Just three of the banks reported growth in their loan portfolios: US Bancorp, SunTrust Banks Inc. and BB&T Corp.

“The overall decline in loans on the 13 banks’ books – from about $3.36 trillion as of September 30 to $3.31 trillion at year’s end – raises fresh questions about TARP’s effectiveness at coaxing banks to reopen their lending spigots.

Source: The Wall Street Journal, January 26, 2009.

Richard Russell (Dow Theory Letters): Will new primary bull market be signalled?
“The Dow Theory to the fore. On January 20, the DJ Transportation Average broke below its November 20 bear market low of 2,988.99. The new low was not confirmed by the Industrial Average, which held above its own November 20 bear market low of 7,552.29. This non-confirmation set up the potential for a Dow Theory bull signal. If the Industrials and Transports can now muster the strength to rally above their preceding January peaks, (Industrials on January 6 at 9,015.10 and Transports at 3,717.26), a new primary bull market will be signaled.

“There are two concepts about this that bother me.

(1) If a new bull market is signaled, it would mean that the bear market of November 2007 to November 2008 ended in only one year. Since the preceding bull market (1982 to 2007) lasted 25 years, a one-year bear market (no matter how severe) seems too short in time to correct one of the greatest bull markets in history.

(2) Based on the Lowry’s figures, it appears that most of the upside progress since the November 20 bear market lows has been the result of a decline in selling pressure. Historically, the beginning of a new bull market has been characterized by not only a drastic drop in Lowry’s Selling Pressure Index, but also by heavy buying and strong upside volume (neither of which has been present).

“The stock market often tries to confuse us by coming up with something new. Assuming that the Averages do better their preceding January peaks, it would have occurred without the usual heavy buying on rising volume. It may be that the January 6 peaks will have to be bettered before the ‘real’ volume comes in. In other words, even if a new bull market is signaled in the weeks ahead, we will have to monitor the stock market action carefully, to make sure we are not being sucked in to a fake rally as was the case following the 1929 crash.”

Source: Richard Russell, Dow Theory Letters, January 29, 2009.

Bespoke: Fourth quarter earnings “beat rate” below 50%
“There’s still a long way to go before the fourth quarter earnings season comes to an end, but the first batch of reports indicate just how bad of a quarter it was. Since Alcoa kicked off earnings season earlier this month, only 45% of US companies have beaten analyst EPS estimates. As shown in the chart below, this would be the lowest reading since at least 1998. Even though analysts have been cutting estimates sharply over the past few months, companies still haven’t been able to beat at a better than 50% clip. Hopefully this ‘beat rate’ gets better as earnings season chugs along, but we wouldn’t count on it.”

Source: Bespoke, January 26, 2009.

Bloomberg: Earnings may slump 45%, Socgen says
“Analysts have cut their estimates for company earnings worldwide by $1 trillion since October, suggesting profits may tumble as much as 45% this year amid the global recession, according to Societe Generale SA.

“A profit slump of that magnitude would mean stocks are trading at 20 times future 12-month earnings, according to calculations by the quantitative analysis team at France’s third- largest bank, led by Andrew Lapthorne in London. The MSCI World Index currently trades at 10.7 times its members’ estimated earnings after plummeting 42% in 2008 and 11% so far this year, according to Bloomberg data.

“‘Global earnings forecasts are disintegrating as companies and analysts struggle to adjust to rapidly declining commodity prices, continuing financial sector losses and, of course, a crumbling global economy,’ wrote Lapthorne’s team in a report today. ‘There is little sign of this pace of downgrading abating. Equities will struggle.’”

“Analysts estimate companies on the Standard & Poor’s 500 Index will report a 28% drop in fourth-quarter profits, according to data compiled by Bloomberg. That compares with a 55% increase forecast in March 2008. Analysts currently predict earnings will decline 2.3% in 2009, the data show.

“SocGen’s strategy team estimated the 45% profit decline by extrapolating the pace of downgrades to earnings predictions since October. The team was ranked first by investors in Europe this year, according to Thomson Reuters Plc’s Extel survey.”

Source: Alexis Xydias, Bloomberg, January 23, 2009.

Bespoke: Sector relative strength – financials still lagging
“In our relative strength charts, we highlight how each sector has performed versus the S&P 500 over the last year. For each sector, rising lines indicate the sector is outperforming the S&P 500, while falling lines indicate underperformance. In each chart, we also note each Fed meeting over the last year. Red dots indicate meetings where the Fed lowered rates, while black dots indicate meetings where the Fed left rates unchanged.

“While the Financial sector has led the recent rally, a look at the sector’s long-term relative strength shows that they are nowhere near breaking the downtrend they have been in for at least a year now.

“While everyone is focused on the Financials, the Energy sector has been enjoying its position out of the spotlight. While the sector was killed in the summer and fall when the decline in oil kicked into high gear, since then, energy stocks have been steadily outperforming even as oil remains near its lows. Just imagine what could happen if oil actually started to rally.”

Source: Bespoke, January 29, 2009.

Bespoke: 10-year Treasury yield reaches key juncture
“Even with the Fed’s reiteration that they were considering outright purchases of US Treasuries, the yield on the 10-year has been climbing steadily higher from its lows in December. At 2.77%, the 10-Year is approaching yields that it traded at before the bottom dropped out in early December. How we trade in the next few days will go a long way in determining whether the current sell-off is simply profit-taking after a massive rally, or the beginning of the end of the latest bubble in asset classes (stocks, real estate, commodities, etc.).”

Source: Bespoke, January 29, 2008.

David Fuller (Fullermoney): Treasuries – a dangerous game
“The promise (threat?) by the Fed to purchase US long-dated securities has deterred me from shorting them to date, despite some very good sell signals …

“However I have also described the Fed’s frequent hints of its apparent willingness to buy US debt as akin to a con artist’s shell game. However in the Fed’s version, instead of trying to guess under which of three rapidly moving cups the pea lurks, we are guessing how and when we might see their bond purchases.

“I do not question the Fed’s word that it would be prepared to buy Treasuries to keep long-term rates low, if necessary. Instead, my point is that they may hope to avoid purchases if they persuade the market to do their work for them. In other words, I wonder how many people, from hedge fund managers to foreign governments, have bought or at least retained their Treasuries, despite historically low yields and rapidly increasing supply.

“This is a dangerous game. Financial history is full of instances where investors have been persuaded to pay record high valuations for assets, usually because: ‘It is different this time.’ Perhaps … for a while, but the bubble always bursts in a mean reversion process which usually ends in an overshoot of its own.

“The only way I can envisage significantly lower long-term yields for US Treasury bonds, would be if the economy slid into a lengthy deflation, as we saw with Japan in the late 1990s and earlier this decade, causing real interest rates to rise. This is a risk, but one that the Bernanke Fed has vowed to avoid. It has the means to do so.

“At Fullermoney, we think gold is replacing US Treasuries as the safe haven investment.”

Source: David Fuller, Fullermoney, January 30, 2009.

Bespoke: Credit default risk down but still high
“Below we highlight a chart of an index that measures the default risk of investment grade credit in the US. Throughout the credit crisis, default risk has risen sharply, although it has ticked lower since peaking in December. Any decline in default risk is a good sign, but it needs to fall much more before anyone can make the claim that things are ‘settling down’. As shown, the index has still not broken below the bottom of its uptrend line that formed back in April 2008.”

Source: Bespoke, January 27, 2009.

Bloomberg: Soros stopped betting against pound
“Billionaire investor George Soros, who made $1 billion selling the pound in 1992, said he is no longer betting against the UK currency after it reached $1.40.

“‘I did actually foresee the fall in sterling and that was one of the positions we carried,’ he told reporters at the World Economic Forum in Davos, Switzerland. Below $1.40 ‘it seemed to me the risk-reward was no longer clear’.

“Soros said today that he has made money from the financial crisis. The British government’s efforts to protect the banking system from the turmoil last week led to a drop in the pound to the lowest level against the dollar since 1985.

“‘We did have a short position in sterling, but it doesn’t mean I’m bearish on sterling today or bullish,’ Soros said. ‘It will continue to fluctuate.’

“Soros’s comments contrast with those of Jim Rogers, who co-founded the Quantum Fund with him and is now chairman of Singapore-based Rogers Holdings. Rogers said on January 20 that the pound was ‘finished’ because of turmoil in the banking system and a decline in North Sea oil output.”

Source: Simon Kennedy, Bloomberg, January 28, 2009.

Bespoke: Russian troubles
“Russia’s currency made news today for having its biggest two-day decline versus the dollar in a decade. For those interested, below we provide a long-term chart of the Russian ruble versus the US dollar. As shown, the amount of rubles that one dollar will get you has spiked significantly in recent months, going from about 23 rubles per dollar last May to its current level of 34.84 rubles per dollar.”

Source: Bespoke, January 29, 2009.

BBC News: Zimbabwe abandons its currency
“Zimbabweans will be allowed to conduct business in other currencies, alongside the Zimbabwe dollar, in an effort to stem the country’s runaway inflation.”

Source: BBC News, January 29, 2009.

Financial Times: Gold pushes above $900 in buying spree
“Strong investor buying on Monday pushed the price of gold above $900 a troy ounce, hitting a 3½-month high in dollar terms and posting all-time highs in euro and sterling, in a stark sign of money seeking refuge from equities and bond markets.

“Traders said that investors, particularly in continental Europe and the UK, were pouring money into gold exchange-traded funds – a popular way to gain access to the metal – and also noted strong buying of physical gold, from coins to bars.

“Edel Tully at Mitsui & Co Precious Metals in London said gold was the ‘obvious shelter’ for safe-haven investors.

“The total amount of gold held by the world’s gold ETFs last week rose for the first time above the 40 million ounce level. Together, such investment vehicles are now the largest holders of physical gold after the official reserves of the US, Germany, the International Monetary Fund, France and Italy.

“In the short term, traders said gold was likely to consolidate above $900 an ounce this week and could test the $930 an ounce level previously touched in October.”

Source: Javier Blas, Financial Times, January 26, 2009.

Bespoke: Will gold break its downtrend?
“After briefly piercing the $1,000 level in March of last year, the price of gold went into a long-term downtrend with a series of lower highs and lower lows. However, since bottoming out at $681 in October, gold has rallied to over $900 per ounce. This has brought the commodity right to the top of its downtrend line from the March 2008 high. While the current rally in gold has been attributed to fears over competitive currency devaluations across the globe, how the commodity acts in the coming days will go a long way in determining how valid those fears are.”

Source: Bespoke, January 26, 2009.

Richard Russell (Dow Theory Letters): Gold benefits from devaluations
“The world battle for exports, with the help of cheap currencies is on. They call it competitive devaluations, and the whole picture is not lost on gold. The move is starting – to move to hard assets. The hardest of all assets is gold. Gold, in case you forget, is pure wealth, it’s the only money with no debt against it or without a counter-partner. Gold needs no nation or central bank to attest, by fiat – that it’s money.”

Source: Richard Russell, Dow Theory Letters, January 26, 2009.

Bloomberg: StockCharts’s Murphy sees gold at $1,000 by year end
“John Murphy, chief technical analyst at StockCharts.com, talks with Bloomberg’s Brennan Lothery about the outlook for the gold price in 2009. Murphy also discusses commodity prices, the US equity market and investment strategy.”

Source: Bloomberg, January 27, 2009.

Bespoke: Baltic Dry Index up seven days in a row
“The Baltic Dry Index gained another 1% today, which makes seven up days in a row. Since bottoming in December, the Index has formed a nice uptrend, gaining over 50%. Longer term, however, the Index’s highs from last Spring are still a long way off. While the Index bottomed on December 5 with a 94.4% decline from its all-time high of 11,793, at its current level of 1,014, it is still down 91.4% from its May 20 high. In order to get back to those highs, the index would have to rally an additional 1,063%. Hey, you have to start somewhere.”

Source: Bespoke, January 28, 2009.

CNBC: Oil move to $20?
“Crude oil may fall to $20 this year, says Joe Petrowksi, Gulf Oil and Cumberland Farms CEO.”

Source: CNBC, January 27, 2009.

Victoria Marklew (Northern Trust): Eurozone – is that light at the end of the tunnel?
“Today’s [Tuesday] Ifo and last week’s Belgian leading indicator offer the tantalizing hope that the economic downturn across the Eurozone is starting to bottom out – but one month is not enough to call a trend, and the ‘zone’ in general, and Germany in particular, are still likely in for a rough first quarter of 2009.

“First, the Ifo index in Germany. The headline business climate index edged upward from 82.7 in December to 83.0 in January, the first improvement in eight months. Nevertheless, the difference between the current conditions and expectations indices remains wide, suggesting that the economy will contract again in Q1 2009 and that the government’s latest forecast of -2.25% real GDP growth this year is about right.

“Which takes us to our favorite Eurozone leading indicator, the Belgian National Bank’s (BNB) business confidence indicator. As we’ve noted before, thanks to Belgium’s strong trade ties with its neighbors (about 80% of Belgium’s manufacturing output is sold abroad, mostly to fellow EU members), the BNB’s business confidence index is a reliable leading indicator – about six months out – for GDP growth in the Eurozone as a whole.

“The Belgian and German data imply that the Eurozone as a whole will see a marked contraction in Q4 2008 and Q1 2009, flat-to-negative growth in the middle of the year, and a sustained improvement finally underway by Q4.”

Source: Victoria Marklew, Northern Trust – Daily Global Commentary, January 27, 2009.

CEP News: Spain is officially in a recession, says Central Bank
“With GDP contracting for two quarters in a row, the Spanish economy has officially entered into a technical recession, the Bank of Spain said in its quarterly GDP report released on Wednesday.

“According to the central bank, the Spanish economy contracted by 1.1% to Q4 from Q3, when output had fallen 0.2%. On an annualized basis, the economy declined 0.8% in Q4, down from Q3’s 0.9% increase. The Bank of Spain also reported that for 2008 as a whole, the economy grew at 1.1%, down from 2007’s 3.7% print.

“With the economy expected to decline 1.6% in 2009, the government is looking to spend upwards of €90 billion in stimulus measures. As a result of the pressures on public finances, Standard & Poor’s had reduced Spain’s sovereign credit rating from AAA to AA+ earlier in the month.”

Source: CEP News, January 28, 2009.

BCA Research: UK economy – in a deep recession
“The UK economy is the epicenter of the global housing/credit crisis and will need substantially more support from policymakers.

“Last week’s release highlighted that the UK economy contracted again in Q4 by more than expected to -1.8% YoY. More importantly, the outlook is grim given that the collapse in both commercial and residential real estate prices is still gaining momentum, banks have shut off the credit taps, and business sentiment surveys indicate that activity has ground to a halt.

“UK households face dramatic headwinds from plunging home prices and rapidly rising unemployment. Correspondingly, our models warn that retail sales growth will contract later this year, causing deflationary pressure to build further.

“Bottom line: In order to prevent debt-deflation from gaining further momentum, UK policymakers will need to continue stimulating aggressively (using both conventional and unconventional measures). While the collapse in the pound is helping ease overall monetary conditions, the lack of global trade limits the positive impact for the economy.”

Source: BCA Research, January 26, 2009.

US Global Investors: China – threat of capital flight
“While China’s capital outflow during the fourth quarter is only 2% of the country’s formidable foreign exchange reserve, the specter of liquidity fleeing China may continue to haunt investors as the worst-case scenario if the government’s policy efforts fail to revive the economy.”

Source: US Global Investors – Weekly Investor Alert, January 30, 2009.

Financial Times: Japan’s production falls record 9.6%

“Japanese industrial production fell a record 9.6% in December, while core annual inflation almost evaporated, reinforcing expectations of a record economic contraction as the global financial crisis worsens.

“Unemployment hit a three-year high, household spending dipped, and manufacturers saw no quick turnaround in the outlook for industry – the main driver of the world’s second-biggest economy – as inventories hit record highs despite factory closures and lay-offs.

“Subsiding inflation and worsening economic conditions are also stoking deflation worries, as in other major economies, which may prompt more central bank steps to support the staggering economy and free up frozen credit markets that are starving key companies of cash.

“Economists said fourth-quarter GDP figures, due out in February, would show Japan’s economy shrinking at a double-digit annual rate, and Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities, said early 2009 also looked bleak.”

Source: Reuters, Financial Times, January 30, 2009.

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Words from the (investment) wise for the week that was (Dec 29, 2008 – Jan 4, 2009)

Sunday, January 4th, 2009

Changing the digits on the calendar from ’08 to ’09 may not have transformed the dire outlook for the global economy, but during the holiday-shortened New Year week investors appeared adamant to put the rout of 2008 behind them.

Although mercifully the door has been closed on 2008, let’s recap some of the unprecedented movements experienced in financial markets during the year.

Equities:
– MSCI World Index: -42.1% (worst yearly performance since start of Index in 1970)

- S&P 500 Index: -38.5% (worst annual percentage decline since 1937 and 3rd worst on record; largest quarterly [4th quarter: -298] and daily [September 29: -107] points decline ever; 6th worst daily percentage decline [October 15: -9.0%])

- Dow Jones Industrial Index: -33.8% (worst annual percentage decline since 1931 and 3rd worst on record; largest quarterly [4th quarter: -2,330] and daily [September 29: -778] points decline ever; 6th worst daily percentage decline [October 15: -7.9%])

- S&P 500 and Dow Jones: There was no point in 2008 where the indices were up for the year at the close of a trading day. Since 1900, 2008 was only the 4th year (after 1910, 1962 and 1977) where the Dow never had a single day where it closed up for the year, according to Bespoke.

- FTSE Eurofirst 300 Index: -44.8% (worst yearly percentage fall since its creation in 1986)

- Nikkei 225 Average: -42.1% (biggest annual percentage decline on record)

- CBOE Volatility Index (VIX): Historical high in November based on new calculation, but remained below levels seen during the 1987 crash based on an previous calculation.

Treasuries:
– US Treasuries: Yields dropped to lowest levels since 1950.

- US 10-year Treasury Notes: Yields fell by 182 basis points – biggest yearly points decline since 1995 and the second biggest in the last 20 years.

Currencies:
– Japanese Trade-weighted Index: +25.0% (largest annual rise since currency was allowed to float freely in 1973)

- Pound against US dollar: -26.2% (worst annual decline since gold standard was abandoned in 1971)

- Pound against euro: -22.8% (worst yearly decline since launch of single currency in 1999)

Commodities:
– Reuters/Jeffries CRB Index: -36.0% (worst annual performance since inception of Index in 1956)

The table below highlights the performance of the principal asset classes for 2008. While West Texas Intermediate Crude (-53.5%), the S&P 500 Index (-38.5%) and the Reuters/Jeffries CRB Index (-36.0%) recorded large losses, US 30-year Treasury Bonds (+18.6%) fared very well, and the US Dollar Index (+6.0%) and gold bullion (+5.5%) also provided safe havens for risk-averse investors. (The returns for indices in individual countries are given in my December 31 “Stock market performance round-up”.)

But the few trading days since Christmas Eve witnessed a strong rebound in global stock markets as investors brushed aside bleak economic data. This resulted in market participants scooping up beaten-down stocks and commodities, mending some of the bruising sustained earlier in 2008. The better spirit of equities was reflected in losses for some government bonds.

Despite a grim ISM report (see section on Economy below), the S&P 500 Index jumped by 3.2% after the release of the data, propelling many stock market indices to almost two-month highs. The MSCI World Index (+5.9%), MSCI Emerging Markets Index (+5.3%), Dow Jones Industrial Index (+6.1%), S&P 500 Index (+6.8%), Nasdaq Composite Index (+6.7%) and the Russell 2000 Index (+6.1%) all gained handsomely (albeit on thin volume) during the week straddling New Year’s day.

Source: Daryl Cagle

December also marked the first monthly gain since August for the major US indices, with the Dow Jones and S&P 500 now up by 19.6% and 23.9% respectively since the lows of November 20, 2008.

The “storm” of 2008 has undoubtedly grown quieter in December, with the CBOE Volatility Index (VIX) having declined from 80.9 in November to 39.6 on Friday. Also, the average daily swing in the Dow Jones has fallen to ~300 points compared to ~430 points in November and ~590 points in October, according to Briefing.com.

Christmas Eve trading on Wednesday, December 24 marked the start of the Santa Claus Rally period, made up of the last five trading days of December and the first two of January. With one trading day to go on Monday, the combined gain for the S&P 500 Index for the first six days was 8.0%. The absence of a rally – and one now seems highly unlikely – has often been the harbinger of a sizeable correction or a bear market in the coming year. Hence the saying: “If Santa Claus should fail to call; bears may come to Broad & Wall.”

But risks remain plentiful and Bill King (The King Report) reminds us that “just as night follows day, international conflicts follow economic crises”. Escalating violence in the Middle East and tensions between Russia and the Ukraine served as a reminder and caused a 22.9% spike in the price of West Texas Intermediate Crude on the week.

Next, a quick textual analysis of my week’s reading material (done between New Year’s celebrations). No surprises here with keywords such as “economy”, “financial”, “market”, “prices” and “rates” featuring prominently.

Readers often ask me about Richard Russell’s (Dow Theory Letters) viewpoint on the stock market. Here is his latest take on matters: “It occurs to me that this is a good time to remember my old friend Marty Zweig’s classic warnings: ‘Don’t fight the tape, don’t fight the Fed’. Well, if you are bearish on 2009, you are indeed fighting the Fed and probably the tape. Why do I say that? Because the Bernanke Fed is going all out in its effort to turn the US economy around. Bernanke says the Fed will do whatever it takes to halt the current trend to deflation and to bring back prosperity and mild inflation to the US.

“The stock market seems to have finally climbed aboard the Fed’s bullish bandwagon. All of which brings us to a very dramatic and critical juncture. If the market heads higher in early January, I believe that money on the sidelines [$8.85 trillion – 74% of US market cap] could begin to turn optimistic and even bullish,” said the R man.

From across the pond, David Fuller (Fullermoney) added: “The crucial missing ingredient for stock markets to date has been confidence. Nevertheless that could change in January, given the high levels of cash held by most institutional investors. … if stock market indices surprise the bearish consensus and start to break upwards rather than downwards from their trading ranges, institutional investors will be under increasing pressure to participate.”

What the market does over the next few days will give a clue as to the rest of the year, according to Jeffrey Hirsch (Stock Trader’s Almanac). “S&P gains during January’s first five trading days preceded full-year gains 86% of the time.” He also draws attention to the so-called “January Barometer” which states “as the S&P 500 Index goes in January, so goes the year”. “The January Barometer predicts the year’s course with a .741 batting average. 12 of the last 14 post-election years followed January’s direction,” said Hirsch. Also, the “ninth” year of decades is generally an up year for the stock market with the Dow Jones down only three times in the last twelve decades.

The table below shows the key resistance and support levels for the major US indices. With most global indices having breached the 50-day moving average (and after year-end also having taken out the December peaks), the next target is the November 4 highs, followed by the key 200-day average. On the downside, the December 1 (not shown on table) and the all-important November 20 lows must hold for the uptrend to remain intact.

In my opinion, selective buying in global markets is in order, and ’09 may turn out to be a good year for a discerning stock picker. However, make sure to separate the wheat from the chaff because many companies will fall by the wayside during the new year. (Also see my posts “Stock market internals: further headway in 2009” and “Video-o-rama: Ring out the old, ring in the new” for more discussion of the outlook for stock markets in 2008.)

Economy
“Overall business confidence improved just a bit at the close of to 2008, but remains very dark with hiring intentions and expectations regarding the outlook in mid-2009 dropping to record lows,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. The Survey results indicate that the entire global economy is solidly in recession.

Further evidence of the worldwide economic crisis came from the Semiconductor Industry Association, reporting that global sales of semiconductors declined by 9.8% in November compared with a year ago, and by 7.2% since the previous month.

Data reports released in the US during the New Year week mostly confirmed the dismal economic outlook.

- The Institute for Supply Management’s Manufacturing Index is still contracting and fell by a larger-than-anticipated 3.8 points to 32.4 in December. The index is at its lowest level since 1980, with the forward-looking details also downbeat as new orders plunged to their lowest level since January 1948.

- The S&P/Case-Shiller Home Price Indices reported record annual declines, with the 10-City and 20-City Composite Indices falling by 19.1% and 18.0% respectively.

- The Conference Board’s Consumer Confidence Index declined in December to a historic low of 38 – down by 6.6 points from November’s 44.7. With consumer confidence in a perilous state, the outlook for spending appears dismal.

- Initial jobless claims decreased by 94,000 to 492,000 for the week ended December 27. Fewer-than-expected claims were filed, but holidays have been known to be more volatile for this indicator. Overall, labor market trends suggest persistent weakening.

- The ECRI Weekly Leading Index increased from 106.8 to 108 during the week ended December 26, but does not alter the Index’s overall downward trend. The meaningful decline in the ECRI indicates a severe slowdown that could last deep into 2009.

Commenting on the implications of the worsening employment situation for the US consumer, Mark Vitner (Wachovia Economics Group) said credit availability and housing affordability were two important elements of consumer buying decisions, but that an even more important variable was consumers’ comfort about their own employment and income prospects.

“Consumers typically have to have a job if they are going to buy a home or automobile. And even if consumers have a job, they are less likely to borrow and spend if they feel their job is at risk or their income could take a hit,” said Vitner.

Elsewhere in the world, major economies remain mired in a severe slump. “Europe, Germany, France, and the UK all reported declines in indexes of purchasing managers in December,” said Asha Bangalore (Northern Trust). China’s factory sector has contracted for the fifth month running according to the CLSA China Purchasing Managers’ Index. … the Australian … Manufacturing Index has recorded readings below 50 for seven consecutive months … In sum, weak economic conditions across the world is a challenge for policy makers in the months ahead.”

Source: US Global Investors – Weekly Investor Alert, January 2, 2009.

Assessing the global economic outlook, Nouriel Roubini (RGE Monitor) posed the following questions on RealClearMarkets: “So what lies ahead in 2009? Is the worst behind us or ahead of us?

“The United States will certainly experience its worst recession in decades, a deep and protracted contraction lasting about 24 months through the end of 2009. Moreover, the entire global economy will contract. There will be recession in the Eurozone, the UK, Continental Europe, Canada, Japan, and the other advanced economies. There is also a risk of a hard landing for emerging-market economies, as trade, financial and currency links transmit real and financial shocks to them,” said Roubini.

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

Source: Yahoo Finance, January 2, 2009.

In addition to the Federal Open Market Committee (FOMC) releasing the minutes of its December 16 meeting (Tuesday, January 6) and the Bank of England’s interest rate announcement (Thursday, January 8), the US economic highlights for the next week, courtesy of Northern Trust, include the following:

1. Employment Situation (January 9): Payroll employment is predicted to have dropped by 450,000 in December after a loss of 533,000 jobs in the prior month. The unemployment rate is expected to have risen to 7.0% during December from 6.7% in November. Consensus: Payrolls – -478,000 versus -533,000 in November, unemployment rate – 7.0% versus 6.7% in November.

2. Other reports: Consumer Confidence (December 30), Construction Spending, Auto Sales (January 5), Factory Orders, ISM Non-manufacturing, Pending Home Sales Index (January 6).

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, January 2, 2009.

Good riddance to 2008! Let’s hope that after one of the most tumultuous years in history, conditions will calm down – as always happens after a storm. And may this compilation of news items and words from the investment wise assist in keeping our portfolios on a profitable course.

To all the Investment Postcards readers, thank you for your loyalty and support. And remember, the biggest compliment you could give us is to broadcast word about the site and encourage your family, friends and colleagues to subscribe to the e-mail updates or RSS feeds.

Here’s wishing you a blessed and calm 2009!

Source: Daryl Cagle

 

YouTube: Uncle Jay’s review of 2008
“It’s been a whole year since Uncle Jay has SUNG an entire episode, and here’s the reminder why! It’s the year-end review of the news, and maybe it’ll seem a little better with music.“

Source: YouTube, December 21, 2008.

The New York Times: The year in the markets
Click the image for an interactive graph.

Source: The New York Times, December 31, 2008 (hat tip: Barry Ritholtz).

Bloomberg: A recap of 2008
“A two-minute look into the year that changed the economic landscape.”

Source: Bloomberg (via YouTube), December 31, 2008.

Win Rosenfeld (The Big Money): The five worst days of 2008
“You know it’s been a bad year when you’re arguing about what the five worst days were. Between the massive market fluctuations and the biggest banks going belly up, it’s hard to know where to start. From a crowded field of contenders, here are The Big Money’s five biggest buzz-killers.”

Source: Win Rosenfeld, The Big Money, December 30, 2008.

Bloomberg: Marc Faber’s 2009 outlook
Marc Faber says the global economy is going into severe recession and emerging markets will be hit the hardest.

Source: Bloomberg (via YouTube), December 31, 2008.

Bloomberg: Jim Rogers – “I’m prepared for the worst”

Source: Bloomberg (via YouTube), December 29, 2008.

CNBC: Map of the markets
“Where to put your money in 2009, with Michael Pento, Delta Global Advisors; David Kotok, Cumberland Advisors; Diane Brady, BusinessWeek; Dave Maney, Headwaters MB; and CNBC’s Rebecca Jarvis.”

Source: CNBC, December 31, 2008.

Bill King (The King Report): Unlikely that ’09 will be as ugly as ’08
“2008 will be a year of historic imfamy. The S&P 500 declined 38.5%, the biggest drop since 1937. The Dow Jones Industrial Average declined 33.8%, the largest drop since 1931.

“It is highly unlikely that 2009 will be as ugly. But this does not suggest that it will be a ‘good’ year.

“Back in October we commented that the stock market is following a clear historic pattern. A summer folly rally amid a receding economy and percolating financial duress produced an autumn collapse.

“And an October panic did not generate a low for stocks because during recessions, like in 1907 and 1929, October panic lows yield to new lows in November.

“But then a yearned rally appears. This usually extends into the first day or two of the New Year. But then January turns ugly on anticipated horrid earnings reports that will appear during the second and third weeks of the month. Finally there is a performance gaming rally over the last few days of January.

“When bonds rally sharply in Q4, they tend to make a significant peak early in January. Bonds by then are extended, even ‘over-invested’, and corporations and governments tend to burst the dyke by issuing beaucoup bonds for financing needs in the coming year.

“However, this year will be tricky because Weimar Ben is monetizing everything in sight. Weimar Ben can continue to monetize everything and anything – until the market revolts. And the revolt will likely come from the dollar.

“Though Ben and US solons desire a lower dollar in the hope of papering over the US’s intractable structural problems, there is a line of demarcation for the dollar. If the dollar descents below that incalculable threshold, it’s checkmate, Ben.”

Source: Bill King, The King Report, January 2, 2009.

Financial Times: 2009 – predictions of some known unknowns
“The Financial Times team of pundits is back, once again, to risk its professional reputation on bold predictions of some known unknowns.

“Will the recession end in 2009?

“No, as far as the US, the UK, Spain and Ireland are concerned; possibly Yes for other European economies and Japan. Whatever happens, 2009 will not be pleasant. For all the cuts in interest rates and taxes, higher unemployment will be the dominant issue of the first half of the year, outweighing gains to real incomes from these policies and lower commodity prices. Uncertainty will be the watchword for the year, making any prediction precarious, but there is still a good chance that rising incomes will become powerful forces in the continental European and Japanese economies later in the year. For those economies that need much bigger rises in household savings rates to adjust for the recession, recoveries will be delayed. There is also a good chance the world will enter a debt-deflation trap, although I hope the authorities will do everything to avoid this. But even if we experience genuine green shoots of recovery, as I expect, 2009 will be a year to forget.”

Click here for the full article.

Source: Financial Times, December 30, 2008.

Financial Times: Survey of economists – outlook for 2009
The Financial Times polled 67 leading economists for their views on the outlook for 2009. The full breakdown of their answers is given below.

1) Recession: How will this recession develop over the next twelve months? Will we see the green shoots of recovery by this time next year?

2) Risks: What are the three main risks that could profoundly exacerbate the recession? How concerned should people be?

3) Global outlook: Which part of the world will recover first and why?

Click here for the full article.

Source: Financial Times, January 1, 2009.

Edmund Conway (The Telegraph): Global economy to shrink for first time since the Second World War
“HSBC has warned that global gross domestic product will contract in 2009, describing this as ‘an extraordinary development in the modern era’. In a comprehensive examination of the economic crisis, it predicts that next year will be the worst in peacetime both for rich countries and the wider global economy since the Great Depression.

“And in a further blow to the Chancellor Alistair Darling, the bank warned that the UK will endure its worst year of growth since the bleak winter recession of 1947, forcing the Bank of England to slash interest rates to only a quarter percentage point above zero. The gloomy forecasts are far more pessimistic than those from the Treasury or the International Monetary Fund.

“Stephen King, HSBC’s chief economist, said: ‘For a while, it was possible to pretend that the financial and economic crisis was merely a problem for the major industrialised countries.

“‘Over the last three months, however, that theory has been blown out of the water. We have made savage downgrades to our forecasts with some of the emerging markets bearing the brunt of the bad news. On the basis of nominal GDP weights, we expect global GDP to shrink in 2009, an extraordinary development in the modern era.’

“He added that the serious risk now is that families and businesses will begin to hoard cash rather than spending it, as deflation rears its head across the rich world.

“‘Stuffing cash under the mattress, however, will only end in cumulative tears,’ he said. ‘This, after all, was part of the dynamic associated with the Depression in the 1930s.’”

Source: Edmund Conway, The Telegraph, December 27, 2008.

Wolfgang Münchau (Financial Times): World economy in 2009 �”� three priorities for recovery
“It is easy and difficult at the same time to predict the economy in 2009. It is easy to predict it will be an awful year for the US, Europe and large parts of Asia. The industrialised world will be in a deep synchronised recession. Global gross domestic product will probably contract also for the first time since the 1930s. There is not a great deal we can do to prevent this.

“The difficult part of the forecast is to predict whether policymakers will succeed in preventing the recession turning into a depression and lay the foundations for a sustainable recovery in 2010. What I can predict with near certainty is that policy will matter a great deal next year.

“We know that the current driving force behind this downturn is ‘deleveraging’. Overindebted households and undercapitalised banks are adjusting their balance sheets, building up savings in the first case and restricting lending in the latter. There is no chance of a sustained economic recovery until that process is almost complete.”

Click here for full article.

Source: Wolfgang Münchau, Financial Times, December 28, 2008.

Times Online: Car production faces global fall until 2010“Car production in North America will sink to its lowest level for more than 20 years next year and output in Europe will fall to a 12-year low, with Britain hit the hardest, according to PricewaterhouseCoopers (PwC).

“The accountancy firm is forecasting a 17% drop in the United States to 10.8 million cars and a 12% fall in the European Union to 15.5 million vehicles. Asia Pacific will experience the smallest fall, with a 5% decline to 26 million cars.

“PwC expects world production to fall by 10% to levels of output last seen in 2003.

“Calum McRae, automotive analyst at PwC, said: ‘These figures demonstrate that there is further gloom to come before we can possibly see the effect of any bailouts or incentives.’”

Source: Christine Buckley, Times Online, December 30, 2008.

Financial Times: IMF argues for large stimulus packages
“Across-the-board tax cuts or bail-outs of troubled industries such as the automotive sector are likely to waste government money while doing little to stimulate the global economy, the International Monetary Fund warned on Monday.

“As governments around the world bring in tax cuts and boost spending to combat the global recession, a study by the IMF said such programs must be large but carefully designed.

“‘There is a strong case for doing too much rather than too little,’ said Olivier Blanchard, the fund’s chief economist. But, he added, tax cuts should be aimed at people likely to spend money rather than save it.

“Although the IMF said it would resist giving a running commentary on policies, Mr Blanchard said signs of the stimulus plan emerging from the camp of US president-elect Barack Obama appeared to be hopeful. ‘The size corresponds roughly to what we think is needed,’ he said.

“Mr Obama’s team is reportedly considering a fiscal stimulus worth $675 billion to $775 billion, or 5% to 6% of US gross domestic product, likely to include substantial long-term investment spending.”

Source: Alan Beattie, Financial Times, December 29, 2008.

CNBC: Martin Feldstein on the stimulus package
“Discussing the kind of stimulus that should come out of Washington, with Martin Feldstein, Harvard University professor, President Emeritus of the National Bureau of Economic Research, & Council of Economic Advisors former chairman under President Reagan, with CNBC’s Steve Liesman.”

Source: CNBC, January 2, 2009.

Financial Times: GMAC gets $6 billion injection from US Treasury
“The US Treasury department late on Monday unveiled up to $6 billion in aid for GMAC, the financial services group which is critical to part-owner General Motors‘ turnaround.

“The Treasury said in a statement it would buy $5 billion in senior preferred equity with an 8% dividend from GMAC, characterizing the investment as part of ‘a broader program to assist the domestic automotive industry in becoming financially viable’.

“It will also lend GM up to $1 billion to participate in a rights offering at GMAC in support of GMAC’s reorganization as a bank holding company.

“Diminished access to capital had forced GMAC to cut back on vehicle financing, which in turn jeopardized GM itself.

“‘With the Treasury investment, we intend to resume our automotive lending quickly,’ GMAC spokeswoman Gina Proia said.

“The aid, which is being made under the Troubled Assets Relief Program (Tarp), comes after the Treasury earlier this month said it would extend a $17.4 billion emergency loan package to GM and Chrysler.”

Source: Nicole Bullock, Henny Sender and Bernard Simon, Financial Times, December 29, 2008.

Karl Denninger (Market-Ticker): GMAC’s “money-losing strategy” makes no sense
“The government ‘buys’ preferred equity that pays an 8% coupon. GMAC must pay that 8% coupon (9% if the government exercises the warrants).

“GMAC turns around and loans out money at 0% which it has to pay 8% to acquire, and at the same time decides that it will make loans to people with credit scores significantly worse than average, when before they would make loans only to people with scores that were slightly better than average. And we wonder how we got into this mess?

“The Federal Reserve and Treasury approved an application that contained as it’s essence an intentional money-losing business strategy, enabling the literal looting of the public treasury under the false pretense of an ‘investment’.”

Source: Karl Denninger, Market-Ticker, December 31, 2008.

Financial Times: Fed pushes on with mortgage bond plan
“The Federal Reserve pushed ahead with its plan to buy mortgage bonds issued by Fannie Mae and Freddie Mac on Tuesday, saying it would start buying early next month and purchase up to $500 billion by the end of June.

“The aggressive tactics – the Fed had previously said it would buy this amount over ‘several quarters’ – highlights the central bank’s determination to hammer down the risk spreads on the mortgage bonds and thereby reduce mortgage rates.

“The Fed also announced that it had selected four asset managers – BlackRock, Goldman Sachs, Pimco and Wellington Management – to manage the process. It had agreed a ‘competitive fee structure’ but did not disclose this.

“The Fed said ‘the program is being established to support the mortgage and housing markets and to foster improved conditions in financial markets more generally’.

“The move comes as policymakers at the central bank and in both the outgoing Bush and incoming Obama administrations look to target mortgage rates in the hope that lowering them would arrest the decline in house prices and thereby support financial asset prices.”

Source: Krishna Guha, Financial Times, December 30, 2008.

Bloomberg: Barclays’s head says “worst is ahead” for US economy
“Ethan Harris, co-head of US economic research at Barclays Capital, and Richard DeKaser, chief economist at National City Corp., talk with Bloomberg’s Peter Cook about the outlook for the US economy.”

Source: Bloomberg (via Blinx), December 31, 2008.

Paul Krugman (The New York Times): The yield curve is wonkish
“I’m a little late getting to this, but … I see that economists at the Cleveland Fed are taking some comfort from the positive slope of the yield curve. Long-term interest rates are higher than short-term rates, which is usually a sign that the economy will expand.

“Not this time, I’m afraid. It’s all about the zero lower bound.

“The reason for the historical relationship between the slope of the yield curve and the economy’s performance is that the long-term rate is, in effect, a prediction of future short-term rates. If investors expect the economy to contract, they also expect the Fed to cut rates, which tends to make the yield curve negatively sloped. If they expect the economy to expand, they expect the Fed to raise rates, making the yield curve positively sloped.

“But here’s the thing: the Fed can’t cut rates from here, because they’re already zero. It can, however, raise rates. So the long-term rate has to be above the short-term rate, because under current conditions it’s like an option price: short rates might move up, but they can’t go down.

“Indeed, if we look at Japan we find that the yield curve was positively sloped all the way through the lost decade. In 1999-2000, with the zero interest rate policy in effect, long rates averaged about 1.75%, not too far below current rates in the United States.

“So sad to say, the yield curve doesn’t offer any comfort. It’s only telling us what we already know: that conventional monetary policy has literally hit bottom.”

Source: Paul Krugman, The New York Times, December 27, 2008.

Karl Denninger (Market-Ticker): Uh oh … monetary multiplier below zero

“What is this?

“I could go through the derivation of how money supply works in a fractional reserve monetary system, but won’t, because most readers would have their eyes glaze over.

“The important part of this graph is what it denotes. Bernanke has lost control of ‘N’ (or velocity), which is the actual knob that he is trying to diddle when borrowing rates are changed (and in fact its the market that sets that, despite his protests).

“In fact the most useful tool in The Fed’s box in terms of influencing monetary policy is the soapbox, that is, jawboning (whether it be by cajoling or threatening.)

“The problem with an M1 multiplier below one is that the effect of printing money is of course multiplied by the velocity. That is, if you print up $10 into the economy the impact it has on economic activity depends on how many times that $10 circulates in a given amount of time. The more it circulates the higher the impact and the more your efforts do for the economy.

“The bad news is that when the multiplier is less than one the more money you spew into the economy the worse the impact, as you get less for each additional dollar.”

Source: Karl Denniger, Market-Ticker, December 30, 2008.

John Silvia (Wachovia Economics Group): ISM Manufacturing – economy remains in teeth of the recession
“December’s ISM manufacturing index came in at 32.4, well within recession territory and consistent with levels of the 1980-82 recession period. Weakness remains in new orders, production and employment. The inventory correction is ongoing. Prices paid fell sharply to 1949 lows and suggests lower inflation ahead.”

Source: John Silvia, Wachovia Economics Group, December 30, 2008.

Standard & Poor’s: Case-Shiller – home price declines worsen
“Data through October 2008, released today [Tuesday] by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, shows continued broad based declines in the prices of existing single family homes across the United States, with 14 of the 20 metro areas showing record rates of annual decline and 14 now reporting declines in excess of 10% versus October 2007.

“The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. Following the lead of the 14 metro areas described above, the 10-City and 20-City Composites set new records, with annual declines of 19.1% and 18.0%, respectively.

“‘The bear market continues; home prices are back to their March, 2004 levels.’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘Both composite indices and 14 of the 20 metro areas are reporting new record rates of decline.’”

Source: Standard & Poor’s, December 30, 2008.

Mark Vitner (Wachovia Economics Group): Consumer confidence falls to a new low“Worries about employment and income prospects were likely weighing on consumers’ minds this holiday season, contributing to a larger than expected drop in consumer confidence. The Consumer Confidence Index fell 6.7 points to an all-time low of 38.0 in December, with most of the drop in the present situation series.

“While the present situation index is responsible for most of December’s drop, the record low in the overall index is due mostly to consumers’ extremely pessimistic view of future economic conditions. The present situation index plunged 12.9 points in December to 29.4, which is the lowest reading since the aftermath of the 1990/91 recession. The future expectations component, however, remains near all-time lows, even though it declined just 2.4 points to 43.8 December and remains above its October low.

“The Consumer Confidence Index is one of the longest running measures of consumer behavior, dating all the way back to 1947. The index has a very good record of tracking the performance of overall economic activity but has a very mixed record as a leading indicator.”

Source: Mark Vitner, Wachovia Economics Group, December 30, 2008.

The Wall Street Journal: Retail sales plummet
“Price-slashing failed to rescue a bleak holiday season for beleaguered retailers, as sales plunged across most categories on shrinking consumer spending, according to new data released Thursday.

“Despite a flurry of last-minute shoppers lured by the deep discounts, total retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve, according to MasterCard Inc.’s SpendingPulse unit.

“When gasoline sales are excluded, the fall in overall retail sales is more modest: a 2.5% drop in November and a 4% decline in December. A 40% drop in gasoline prices over the year-earlier period contributed to the sharp decline in total sales.

“But considering individual sectors, ‘This will go down as the one of the worst holiday sales seasons on record,’ said Mary Delk, a director in the retail practice at consulting firm Deloitte LLP. ‘Retailers went from ‘Ho-ho’ to ‘Uh-oh’ to ‘Oh-no’.’

“Luxury goods, once considered immune from economic turmoil, were hardest hit, with sales falling 21.2%, compared with a jump of 7.5% a year ago, when the economy had just begun to sputter. Including jewelry sales, the luxury sector plunged by a whopping 34.5%.

“During the same period last year, overall retail sales rose a modest 2.4%, helped by late-season discounting that enticed procrastinating shoppers. But this year, after a moderate uptick in shopping activity boosted by steep promotions the Friday after Thanksgiving, shoppers closed their wallets and reopened them only cautiously, worried by job losses, a sinking stock market and a recession climbing into its second year.”

Source: Ann Zimmerman, Jennifer Saranow and Miguel Bustillo, The Wall Street Journal, December 26, 2008.

Reuters: Bush signs pension relief bill into law
“President George W. Bush on Tuesday signed into law a measure intended to help company pension plans and retirees that have been hard hit by the financial crisis.

“Despite some concerns about the legislation, Bush decided that in the current financial environment the benefits outweighed the problems, the White House said.

“Generally healthy multi-employer pension plans hurt by the stock market decline would not have to make drastic pension plan contribution increases and worker benefit cutbacks that many companies had feared.

“A multi-employer pension plan, unlike a traditional single-employer plan, covers workers from more than one company and allows workers to move from job to job and still contribute to the plan.

“People 70-1/2 years old or older would not have to take distributions from their retirement plans as required under current law, allowing them to keep savings intact and avoid a bear-market tax hit.

“White House spokesman Tony Fratto said the administration had concerns that the legislation would increase the costs of near-term claims on the Pension Benefit Guaranty Corporation and could result in some benefits lost to workers over the long term. ‘Our concerns with the legislation remain, but we do believe that, in this current economic environment and current economic circumstances, that the benefits of the legislation outweighed our objections,’ he said.”

Source: Tabassum Zakaria, Reuters, December 23, 2008.

Financial Times: Auditors urge rethink on pension
“Auditors are pressing companies to reconsider how they calculate their pension liabilities and urging them to use formulas that could give rise to much larger reported deficits than would be the case if they stayed with the current approach.
Market volatility has raised questions over the so-called ‘discount rate’ used to calculate the present-day value of a fund’s future liabilities.

“The lower the rate used, the higher the present liabilities will be. The rates currently used by companies to calculate those liabilities are roughly equivalent to those on less risky high-grade corporate bonds. However, these have soared amid the market turmoil, sharply shrinking reported fund deficits.

“Some schemes have actually reported a surplus even as the values of the stocks they hold have plunged.”

Source: Norma Cohen and Jennifer Hughes, Financial Times, December 30, 2008.

Financial Times: Money flows out of hedge funds at record rate
“Investors pulled a net $32 billion from hedge funds last month, making 2008 the first year in their recorded history that the funds have had significant outflows and ending the industry’s 18 years of asset growth.

“Money has been taken out of funds following every strategy, even those – such as macro funds – which were showing returns, according to data from fund trackers Hedge Fund Research.

“The funds enjoyed net inflows for the first part of the year, even as the financial crisis hit and traditional mutual funds began to show outflows.

“However, in September a tide of redemptions began, according to TrimTabs, another fund tracker.

“Conrad Gann, chief operating officer of TrimTabs, said: ‘We estimate outflows in November were $32 billion, and there is an additional pipeline of redemptions that have not been filled, there could be $80 billion [of redemptions] in December.

“‘There are $57 billion of redemptions that we know are in, that are not reflected yet,’ he said.

“Mr Gann said it was difficult to estimate outflows for coming months because hedge funds had different redemption cycles.

“In recent months funds have also tried to halt outflows by limiting or suspending investor withdrawals. This means that data on outflows, which reflect actual repayments to investors, understates the true picture.

“This is the first year since at least 1990 that hedge funds have seen a drop in assets.”

Source: Deborah Brewster, Financial Times, December 30, 2008.

MarketWatch: Sam Stovall bullish on 2009, his father less so
“It’s been a horrible year for stocks overall – the worst, in fact, since 1931. Oft-cited market pundit Sam Stovall of Standard & Poor’s and his father, Robert Stovall, a veteran money manager at Wood Asset Management, review the past year with MarketWatch’s Steve Gelsi.”

Source: MarketWatch, December 31, 2008.

Richard Russell: Stock crashes have look of completed declines
“Over the weekend, I reviewed the charts of hundreds of leading NYSE stocks. Many of these stocks have crashed. In almost all cases, RSI has plunged to severely oversold levels. I note that at the end of each crash, the price action has been forming a sideways pattern. These numerous crashes have the look of completed declines – declines from which bases are forming. Following a true crash, stocks and stock averages have a habit of recovering roughly 50% of the action lost in the crash.

“And I’m wondering whether these patterns are now indicating that a tradeable low has been reached by this bear market. The news continues awful, and yet these various stock bottoms, following crashes, appear to be holding.”

Source: Richard Russell, Dow Theory Letters, December 29, 2008.

Bloomberg: Leuthold – cash at 18-year high makes stocks a buy
“There’s more cash available to buy shares than at any time in almost two decades, a sign to some of the most successful investors that equities will rebound after the worst year for US stocks since the Great Depression.

“The $8.85 trillion held in cash, bank deposits and money-market funds is equal to 74% of the market value of US companies, the highest ratio since 1990, according to Federal Reserve data compiled by Leuthold Group and Bloomberg.

Leuthold, Invesco Aim Advisors, Hennessy Advisors and BlackRock, which together oversee almost $1.7 trillion, say that’s a sign the Standard & Poor’s 500 Index will rise after $1 trillion in credit losses sent the benchmark index for American equities to the biggest annual drop since 1931. The eight previous times that cash peaked compared with the market’s capitalization the S&P 500 rose an average 24% in six months, data compiled by Bloomberg show.

“‘There is a store of cash out there that is able to take the market higher,’ said Eric Bjorgen, who helps oversee $3.4 billion at Leuthold in Minneapolis. ‘The same dollar you had last year buys you twice as much S&P 500 as it did a year ago.’

“Leuthold Group, whose Grizzly Short Fund returned 83% in 2008 thanks to bets against equities, said in its December bulletin to investors that stocks offer ‘one of the great buying opportunities of your lifetime’.”

Source: Eric Martin and Michael Tsang, Bloomberg, December 29, 2008.

David Fuller: 10 tangible reasons for a rally
“I have listed and illustrated 10 tangible reasons for a rally (no cheerleading here), and also discussed a crucial missing ingredient.

1. Governments have flooded the system with liquidity. It takes time for this to filter through to the economy but it will reach the stock market more quickly.

2. Interest rates are at record lows for the US and UK, both short-term and long-term, and heading lower elsewhere. This is an ideal background for stock market recoveries.

3. Valuations are much improved, despite legitimate concerns over the earnings outlook for at least the first half of 2009. Equity yields are competitive with government bond yields, despite the near certainty of more dividend cuts than increases over the next six months.

4. Corporate bond yields peaked in October and November and have fallen significantly. They have also begun to improve their performance relative to government bonds.

5. Various measures of investor/advisor sentiment reached extreme lows in October.

6. The VIX Index peaked in October and is trending lower.

7. Commodity indices have fallen significantly, lowering inflationary pressures. Historically, equities have done best in disinflationary environments.

8. In many countries, the financial sector is showing strength relative to the broader indices. This is a key lead indicator.

9. Levels of cash are at record highs.

10. Most broad stock market indices show some evidence of base formation development. This is less clear for the DOW, but can be seen for the FTSE 100, DAX, SX5E, FSSTI and NKY, to mention a few of many.

“In conclusion, technical evidence remains more conducive to a stock market rally rather than another slump. Over the last three weeks we have repeatedly mentioned the December reaction lows. They need to hold to remain consistent with our expectations for a ranging stock market recovery extending well into Q1 2009.

“The crucial missing ingredient for stock markets to date has been confidence. Nevertheless that could change in January, given the high levels of cash held by most institutional investors. If stock markets languish in the New Year, as many expect, there will be little reason for investors to reinvest in the stock market. However, if stock market indices surprise the bearish consensus and start to break upwards rather than downwards from their trading ranges, institutional investors will be under increasing pressure to participate. Failure to do so would put them at a competitive disadvantage in terms of 2009’s performance.

“Lastly, if the global economy does not show evidence that the recession is ending by Q3 2009, in response to the stimulus programmes, stock markets will be susceptible to a significant retracement of gains achieved during the first half of the year.”

Source: David Fuller, Fullermoney, December 30, 2008.

Barron’s: Seasonal patterns for the market
“Barron’s Michael Santoli discusses what market patterns to expect in the closing days of 2008 and the beginning of 2009.”

Source: Barron’s, December 29, 2008.

Bespoke: Estimated earnings growth for the S&P 500
“Below we highlight historical earnings growth estimates for the S&P 500 for Q4 2008 and full-year 2009. As shown, EPS estimates have dropped sharply over the last few months, and analysts are currently expecting the S&P 500 to see year-over-year earnings fall by 12% in the fourth quarter.

“At the start of September, analysts were actually expecting growth of 40%, which was largely because financial companies were expected to bounce back from a very poor Q4 in 2007. Instead, these companies are struggling much more than they were at this time last year.

“Estimates for 2009 have been dropping significantly as well. Back in September, analysts were expecting 2009 earnings growth of 24.7% versus 2008. But estimates are now at just 4.5%, and judging by the current trend, analysts will be looking for negative 2009 growth in no time.

“Earnings for Materials are expected to fall the most at –63%, while Consumer Staples and Health Care are the only two sectors expected to see year over year growth.”

Source: Bespoke, December 29, 2008.

John Hussman (Hussman Funds): Prices of Treasury bonds at dangerous levels
“… bond yields at this point are vulnerable to very sharp reversals. Given the level of extension in yields, it would not be difficult for the bond market to generate losses of say 10% in the 10-year Treasury bond, and as much as 20% to 25% in the 30-year Treasury bond over a very short period of time. Straight Treasuries may have safety from default risk, but the price risk is becoming downright dangerous.

“Corporate yields are much more reasonable, but there will be more fallout in this sector, and as I’ve noted before, taking a significant position in corporate would be essentially like a ‘bottom call’ in stocks, since corporate bonds tend to trade much like stocks during periods of elevated default risk.

“For our part, we strongly prefer Treasury inflation protected securities here. Despite near term deflationary prospects, the enormous expansion in government liabilities is unlikely to be accompanied by long-term inflation rates near zero, which is essentially the level that is priced into TIPS at present.”

Source: John Hussman, Hussman Funds, December 29, 2008.

Bespoke: Economists’ interest rate projections
“Below we highlight average estimates for the 10-Year Treasury Yield and the Fed Funds Rate going out to Q1 ‘10 based on Bloomberg’s survey of more than 50 economists. As shown, economists are expecting the 10-Year Yield to increase steadily in 2009, while they don’t expect the Fed Funds Rate to move back up to 50 bps until the third quarter. By the first quarter of 2010, economists expect the Fed Funds Rate to be back up to 1.00%. It’s hard to find an economist or analyst on the street that doesn’t think Treasuries will fall after the gains they’ve had in recent months. However, just like oil’s rally from $110 to $120 to $140, asset classes can move in one direction a lot more than most people expect.”

Source: Bespoke, December 31, 2008.

Forbes: Big Brother investing
“William Gross has buying power few can match. The founder of money manager Pimco in Newport Beach, Calif. oversees $790 billion, most of it invested in fixed income. But now there’s a new bully on the block: Uncle Sam. The government is on a buying spree the likes of which has never been seen, its purchases of corporate debt held back only by the speed of the dollar printing presses.

“Many of the targets of Washington’s largesse are shaky financial outfits that Gross normally wouldn’t touch, like AIG. Its bonds trade now at 12% yield to maturity – junk level last summer. Investors may be fleeing, but Gross knows when he’s been outmuscled. In the past year the 64-year-old King of Bonds has bought $100 billion of preferred shares and senior debt of financial companies receiving taxpayer loans. His bet is that the government will throw good money after bad rather than let them fail.

“Gross may be buying what others are anxious to sell, but don’t interpret this as meaning he thinks the economy is soon recovering. In fact, he’s quite bearish. With stocks down 40% this year, he predicts Americans will shift from risk to thrift for at least a generation. He says higher savings, plus a move away from leverage by businesses and money managers, means the US economy will grow no more than 2% annually for years, a third slower than its 20-year average. Profit margins will narrow, stock gains will slow to a crawl and the government will find itself lending to the private sector for a long time.

“Gross’ theory is that the government will arrange to get itself paid back and that his investors can safely travel on the government’s coattails. Gross figures Washington is getting a return on its preferred securities, including the value of its equity warrants, of 6% annually. With investors fleeing banks, though, his yield is much higher for essentially the same securities: 10% to 13%. He says these issues are like $20 bills on the street that no one picks up because they can’t believe it’s true. ‘It’s the most incredible value I’ve ever seen,’ he says.”

Click here for the full article.

Source: Bernard Condon, Forbes, January 12, 2009.

Bespoke: High yield spreads contract 10% from December highs
“While it may be cold outside, the thaw we have been seeing in the credit markets reached a notable milestone on Friday. Based on data from Merrill Lynch indices, high yield spreads tightened from 1,979 to 1,955 basis points. From their peak reading of 2,182 basis points on December 15, high yield spreads have now contracted by 10.4%.

“While these levels are still extremely high, they are moving in the right direction. The hope now for the bulls is that this move is sustainable in the new year, when trading desks are back at fully staffed levels.”

Source: Bespoke, December 29, 2008.

BBC News: China to allow freer yuan trades
“China has said it is to allow some trade with its neighbours to be settled with its currency, the yuan. The pilot scheme was announced in a package of measures designed to help exporters hit by the global downturn.

“It means if the two parties to a trade have yuan available, they need not enter world exchange markets to pay. Most of China’s foreign trade is settled in US dollars or the euro, leaving exporters vulnerable to exchange rate fluctuations.

“The yuan is not yet a freely convertible currency.

“Officials did not say when the trial scheme would start. When it does, the yuan could be used to settle trade between parts of eastern China (Guangdong and the Yangtze River delta) and the territories of Hong Kong and Macau, and between south-west China (Guangxi and Yunnan) and the Asean group of countries (Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam).”

Source: BBC News, December 25, 2008.

Gulfnews: Single currency to increase clout
“A single currency backed by a common economic agenda and a unified monetary policy could make the Gulf a strong regional economic bloc, say economists and financial experts.

“‘The single currency is a huge opportunity for the Gulf region to make its economic clout felt in the international arena. Creation of a strong currency supported by nearly 50% of world’s oil wealth will prove to be a major stabilising factor for the regional economies,’ said Dr Nasser Saidi, Chief Economist of Dubai International Financial Centre.

“Besides attracting foreign investments, analysts say, a strong currency could become a key factor in preserving the region’s financial wealth and help recycle oil wealth within the region.

“Analysts believe the current global economic environment presents an ideal opportunity for the creation of a strong common currency that could emerge stronger than many international currencies such as the dollar, euro, yen and sterling.

“‘The Gulf common currency supported by the region’s resource wealth could become a major reserve currency attracting global reserves into the region. It could also help regional financial centres emerge as global financial centres competing with others such as New York and London,’ said Dr Saidi.

“Economists and currency experts believe the pegged currency regimes in the region and the direct link to the US monetary policy was one of the main reasons for the recent economic volatility in the region. Once the currency union is launched, the immediate priority of the Gulf Central Bank will be to launch a flexible monetary policy that ensures exchange rate stability.”

Source: Babu Das Augustine, Gulfnews, December 29, 2008.

Financial Times: Steel output set for historic drop
“The steel business faces a fall in production in 2009 of at least 10%, analysts say. This would be the biggest year-on-year fall for more than 60 years.

“According to the gloomiest projections, it could be at least four years before output returns to the levels of 2007.

“This would make the period of the expected downturn only the fifth occasion in the past century, leaving aside times of world war, when a slump in the steel industry has lasted four years or longer.

“The sector has been among those worst hit by this year’s financial storms, with share prices in many steel groups having fallen by more than two-thirds since the middle of 2008.

“Hit by a sudden reduction in orders in September and October from businesses such as construction, cars and white goods, many producers including Lakshmi Mittal’s ArcelorMittal, Severstal of Russia and Corus, owned by India’s Tata Steel, have sharply cut production.”

Source: Peter Marsh, Financial Times, December 28, 2008.

Asha Bangalore (Northern Trust): Global factory activity mired in a slump
“In Europe, Germany, France, and the UK all reported declines in indexes of purchasing managers in December.

“The overall Markit Eurozone Purchasing Managers’ Index (PMI) for the manufacturing sector declined to 33.9 in December, a record low in the 11-year history of the survey.

“The German Markit Purchasing Managers’ Index fell to 32.7, the lowest since the survey began in 1996, and the December decline marks the fifth monthly contraction in factory activity.

“The French Markit/CDAF purchasing managers’ index for manufacturing dropped to 34.9 in December versus 37.3 in November. This reading is the lowest since record keeping for this series began in April 1998.

“Britain’s manufacturing sector contracted for an eighth straight month running in December.

“China’s, factory sector has contracted for the fifth month running according to the CLSA China Purchasing Managers’ Index.

“Although the Australian Industry Group-PricewaterhouseCoopers Australian Performance of Manufacturing Index rose one point in December from November to 33.7 index points, this index has recorded readings below 50.0 for seven consecutive months, indicating an extended period of contraction in factory activity.

“In sum, weak economic conditions across the world is a challenge for policy makers in the months ahead.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 2, 2009.

International Herald Tribune: Germany resists calls to spend its way out of trouble
“With battle lines sharpening, the German government appears determined to resist calls to spend an additional €40 billion to fight its way out of the recession, according to officials attending a meeting in the Chancellery in the past week.

“Chancellor Angela Merkel is being pulled in all directions as she plans a January 5 follow-up to a meeting of German government officials, business executives and union leaders she called two weeks ago to discuss ways to counter the recession.

“The business community, leaders of German states and other European Union nations are calling for the additional spending, which would amount to $56 billion. Industry chiefs, meanwhile, are calling for tax cuts.

“Merkel, facing federal elections in September, has said the focus of any spending measures must be preserving jobs. At the meeting two weeks ago, industry lobbyists promised to go along on that point, but now they have backed away even as they exert more pressure on her.

“The European Union, while weakening its criticism of Merkel’s cautious approach to dealing with the economic crisis, still wants the German government to do more because of its size: It has the largest economy in Europe.

“Merkel, so far, has kept the lobbyists, the state leaders and the EU guessing about her final package.”

Source: Judy Dempsey, International Herald Tribune, December 26, 2008.

Reuters: Further house price declines in store for UK
“Housing prices in England and Wales fell 8.7% in 2008, bringing the average price of a house to 159,900 pounds, property consultant Hometrack said in its monthly survey on Monday.

“At 0.9%, the pace of monthly decline eased slightly from November’s 1.1% drop, although prices have now fallen consistently over the last 15 months and 9.3% since the start of the credit crunch in August 2007.

“British house prices tripled in the 10 years running up to their peak in the middle of last year, but have since fallen as much as 15% in other surveys as the global financial crisis has caused the supply of mortgages to dry up.

“‘The onset of recession and the prospect of rising unemployment over 2009 will continue to dampen confidence and in turn demand, which will inevitably lead to further house price falls over the next 12 months,’ said Richard Donnell, director of research at Hometrack.

“Two other key indicators – time taken to sell a property and proportion of the asking price achieved – demonstrate the current weak housing market.

“Hometrack found the average time to sell a property in December was 12 weeks, up from 8.3 weeks a year ago and a low of six weeks in April 2007. The proportion of the asking price being achieved reached 88.6%, down from 93.5% a year ago, and well down on the high of 95.7% seen in April 2007.”

Source: Maureen Bavdek, Reuters, December 29, 2008.

US Global Investors: China’s manufacturing PMI remains in contraction
“According to CLSA, China’s manufacturing activity, responsible for 43% of the country’s GDP, contracted for a fifth month in December though the figures were an improvement from November. A sustained de-stocking cycle in the industrial sector has pushed the employment situation to a 56-month low, a tangible menace for consumer confidence and social stability.”

Source: US Global Investors – Weekly Investor Alert, January 2, 2009.

CNBC: Expect a V-shaped recovery in China
“Sun Mingchun, senior China economist at Nomura, sees a V-shaped recovery in China, with GDP growth starting to rise in the second-quarter of 2009. He explains his optimistic outlook to CNBC’s Martin Soong.”

Source: CNBC, December 29, 2008.

Bloomberg: Japanese economy may shrink 12.1%“Japan’s economy will probably shrink at an annual 12.1% pace this quarter, the sharpest drop since 1974, as exports collapse, Barclays Capital said.

“Gross domestic product in the three months ending tomorrow will fall at almost three times the 4.1% rate previously predicted, said Kyohei Morita, chief Japan economist at Barclays in Tokyo, after reports last week showed industrial production and exports posted the biggest declines on record in November.

“‘Given the speed and the length of the contraction, this recession could be the most severe in the postwar era,’ Morita said. ‘We expect negative growth will continue for a fifth straight quarter to the April-June period of 2009.’

“A 12.1% annualized contraction would be the steepest since the first quarter of 1974, when the oil shock caused the economy to shrink 13.1%, according to Barclays.”

Source: Keiko Ujikane and Tatsuo Ito, Bloomberg, December 30, 2008.

CEP News: Singapore GDP contracts more than expected
“Singapore’s preliminary gross domestic product (GDP) contracted 12.5% in the fourth quarter, against expectations for a 3.4% quarter-over-quarter contraction and the upwardly revised 5.4% decrease seen in the third quarter, originally reported as -6.3%.

“GDP was down 2.6% year over year, against a 0.3% annual decline in the third quarter.

“The report, released by Singapore’s Ministry of Trade and Industry Friday morning said the sharpest annual declines were in the manufacturing sector, down 9.0% from one year ago. The construction sector was up 13.3% annually and the services and producing component was up 1.1%.”

Source: CEP News, January 2, 2009.

US Global Investors: Brazil’s manufacturing confidence plunges
“The Brazilian Manufacturing Industry Survey compiled by the Getúlio Vargas Foundation in Brazil revealed a significant decline in the seasonally-adjusted Industry Confidence Index, from 83.9 in November to 74.7 in December. This was the fourth consecutive decline in this leading indicator of economic activity. In December, the index fell to its second-lowest level since the data series was created in April 1995.”

Source: US Global Investors – Weekly Investor Alert, January 2, 2009.

Financial Times: Russia braced for unrest
“Russia is bracing for further unrest as the rouble on Friday slid to a new low against the euro after a succession of moves to devalue its currency.

“A cut on Friday extended six weeks of devaluations by Russia’s central bank designed to offset the impact of the global economic crisis and falling oil prices as the country’s main export commodity approached its lowest level since 2004.

“Mikhail Gorbachev, the former Soviet leader, warned Russia faced ‘unprecedentedly difficult and dangerous circumstances’ and could be ‘heading into a black hole’. ‘It is not clear what the fate of our rouble will be or if society has sufficient financial and moral resources,’ he said.

“After the depreciation, which was the eighth so far this month, the rouble declined as much as 1.2% to Rbs29.06 versus the dollar on Friday, a four year low. The rouble has now lost nearly 20% of its value against the US currency since August.

“Analysts at Barclays Capital said the best case scenario would see Russian policymakers, facing the mounting evidence of a recession, allowing a one-off depreciation of 10% or more.

“The rouble’s slide comes as the government faces scrutiny over its policies. A demonstration earlier this month in the far eastern city of Vladivostok marked the first major challenge to the Kremlin since the onset of the global financial crisis.

“Mikhail Sukhodolsky, a deputy interior minister, warned on Christmas Eve that there could be further protests. ‘The situation may be exacerbated by a growth in frustration of workers over the non-payment of wages or those threatened with dismissal,’ he said.

Source: Isabel Gorst and Anuj Gangahar, Financial Times, December 26, 2008.

The New York Times: Russia cuts off gas deliveries to Ukraine
“In the face of mounting economic troubles, Russia cut off deliveries of natural gas to Ukraine on Thursday after Ukraine rejected the Kremlin’s demands for a sharp increase in gas prices.

“A similar reduction in supplies to Ukraine in 2006 caused a drop in pressure throughout Europe’s integrated natural gas pipeline system and led to shortages in countries as far away as Italy and France.

“But with a recessionary drop in demand, ample supplies and assurances from both countries that gas would flow westward without interruption, there were few signs of the near hysteria in Europe that accompanied the 2006 cutoff.

“Even Ukraine, which says it has enough gas in reserve to last through the winter, took Russia’s action in stride, underscoring how the political potency of the Kremlin’s energy card has plunged along with the price of oil and gas.

“Gazprom, the Russian natural gas monopoly, likened its actions to a utility cutting off service to a deadbeat customer. “The message is very simple,” Ilya Y. Kochevrin, the executive director of Gazprom’s export arm, Gazexport, said in a telephone interview. ‘If you receive a product, you have to pay for it. If you don’t pay, you don’t receive it.’

“But energy experts said that the Kremlin’s decision to employ the gambit again in a pricing dispute with Ukraine was an indication as well of Russia’s deepening economic woes.”

Source: Andrew Kramer, The New York Times, January 2, 2009.

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Words from the (investment) wise for the week that was (November 24 – 30, 2008)

Sunday, November 30th, 2008

We are very pleased to welcome Dr. Prieur du Plessis as an editorial contributor to GreenLightAdvisor.com. Prieur du Plessis has 25 years’  of global experience in professional investment research and portfolio management. More than 1,000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He has also published a book, Financial Basics: Investment. He also authors a well read blog Investment Postcards from Capetown.

Prieur is chief executive and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and other African countries.

Plexus is the South African partner of John Mauldin, author of the Thoughts from the Frontline e-letter, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index methodology in the Pan-African area.

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The holiday-shortened Thanksgiving week brought investors an additional item to be thankful for when stock markets closed higher for five consecutive trading days – a rare winning streak last accomplished in July 2007. The S&P 500 Index gained 19.1% since the start of the rally on November 21 and 12.0% on the week, registering the largest weekly gain since 1974.

Source: Daryl Cagle

Worrisome economic reports were cast aside by equity bulls, arguing that the bad news had already been priced in. However, US Treasury Note yields were less sanguine and fell to its lowest level on record, pointing to deflation concerns and suggesting that investors remained skeptical about the government’s latest moves to help revive the ailing economy. Importantly, US three-month Treasury Bills were trading at a minuscule 0.03%, indicating that liquidity was still being hoarded.

President-elect Obama stressed the need for quick action to expedite an economic recovery and introduced his administration’s economic team, including former Federal Reserve Chairman Paul Volcker as head of a new White House Economic Recovery Advisory Board tasked to revive growth in the US. Involving the 81-year Volcker in this way is a smart move by Obama.

A catalyst for last week’s stock market recovery was the announcement on Monday of the US government’s rescue plan for Citigroup (C), including a direct $20 billion investment and $306 billion in asset guarantees.

With credit markets still not thawing after the introduction of various central bank liquidity facilities and capital injections, the Fed on Tuesday unveiled further steps aimed at lowering borrowing costs for consumers and home buyers. The Fed will buy $100 billion of debt from Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Home Loan Banks, and also purchase up to $500 billion of mortgage paper backed by the agencies. The Fed will furthermore lend $200 million to holders of key asset-backed securities regarding small business and consumer (auto, student, credit card) loans.

Source: The New York Times, November 25, 2008.

Commenting on the US government’s bailout actions and quoting from the Jerusalem Post, Bill King said: “There is one last thing that Hank, Ben and Geithner can do: ‘The country’s chief rabbis are calling for a mass prayer rally on Thursday in the hope that heavenly intervention will stem the global financial crisis.’”

Next, a tag cloud of the text of the dozens of articles I have devoured over the past week. This is a way of visualizing word frequencies at a glance. The usual suspects feature prominently, with “gold” attracting increasing attention.

Has the stock market reached a secular low or is it just bouncing off oversold levels? According to Fox Business Network, legendary investor Jim Rogers said: “We’re ready for a rally. I mean, the market in October and earlier this month has had a huge selling climax. I covered a lot of my shorts. Who knows if I’m right or not. But I expect the market to rally for some time. It may rally into next year. But … this is a false rally. It’s not going to be great. It’s not the end of the problems in America and it’s not the end of the bear market.”

A positive for the bulls is that the period post Thanksgiving through the end of the year has usually been a strong time for stocks. According to Jeffrey Hirsch (Stock Trader’s Almanac), “December is normally a banner month for stocks, ranking second [on the monthly calendar] for the Dow and S&P 500 and third for the Nasdaq.”

Should the bullish seasonal tendencies hold true on this occasion, possible first targets are the November 4 highs of 9,625 for the Dow (current level 8,829) and 1,006 for the S&P 500 (current level 896). This will also result in both indices clearing their 50-day moving averages.

“There is no doubt that time is needed for volatility to settle down before many will have the confidence to return to investing, but if one looks beyond the end of the year, 2009 will almost certainly be a better year for investors than 2008,” said David Fuller (Fullermoney) from London.

Although there is not yet conclusive evidence that we are leaving the corpse of the bear behind (especially with Q4 earnings disasters looming in January), it would appear that the nascent rally could have more steam left. (Also read my recent posts “Is the tide turning for stocks” and “Does the stock market rally have legs?“)

I am about to hit the road again – traveling to New York City – and blog posts will therefore take a back seat for the next week as I explore the Big Apple and meet with friends, blog readers and business associates in the cold weather and depressed economic climate.

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

Economy “Global business sentiment is as dark as it has ever been, although the free fall in confidence may be over,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Pessimism is pervasive across the entire globe, with the only distinction being that Asian businesses are somewhat less nervous than elsewhere. Pricing pressures are falling rapidly, although they are not yet consistent with outright deflation.” The global economy is suffering a severe recession according to the results of the business confidence survey.

Economic indicators released in the US during the past week all pointed to a deepening recession. According to Briefing.com, Q3 GDP was revised down to -0.5% from -0.3%, durable orders slumped by 6.2%, existing home sales fell by 3.1%, new home sales dropped by 5.3%, personal spending declined by 1.0%, and weekly initial claims, while improved from the prior week, continued to register a reading above 500,000.

The Chicago Purchasing Managers Index came in at 33.8, the weakest number since the serious recession of 1982. “The national number due next Monday will be just as ugly, as durable goods were down far more than expected, by a negative 6.2%,” added John Mauldin (Thoughts from the Frontline).

Commenting on the outlook for interest rates, Asha Bangalore (Northern Trust) said: “Going forward, real GDP is expected to show a decline that is upward of 4.0% in the fourth quarter of 2008. The Fed is widely expected to lower the Federal funds rate to 0.5% on December 16.” However, the Fed’s quantitative easing approach to monetary policy now seems to be targeting the quantity of money rather than its price.

Elsewhere in the world, the People’s Bank of China (PBoC) slashed its benchmark interest rates by 108 basis points and also lowered the reserve requirement for banks. This move indicates that China will be joining the rest of the world in a marked economic slowdown.

For the upcoming week, the European Central Bank and the Bank of England are expected to reduce interest rates by 50 and 75 basis points respectively in the light of a deteriorating economic outlook.

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

Source: Yahoo Finance, November 28, 2008.

In addition to the Fed releasing its Beige Book (Wednesday) and interest rate decisions by the European Central Bank and the Bank of England (Thursday), next week’s US economic highlights, courtesy of Northern Trust, include the following:

1. ISM Manufacturing Survey (December 1): The consensus for the manufacturing ISM composite index is 38.4 versus 38.9 in October.

2. Employment Situation (December 5): Payroll employment in November is predicted to have dropped by 300,000 after 240,000 jobs were lost in October. The unemployment rate is expected to move up two notches to 6.7%. Consensus: Payrolls: -300,000 versus -240,000 in October, unemployment rate: 6.7% versus 6.5% in October.

3. Other reports: Construction spending (December 1), auto sales (December 2), ISM non-manufacturing, productivity and costs (December 3), and factory orders (December 4).

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, November 28, 2008.

Equities Global stock markets surged during the past week on the back of a combination of bargain hunting and short covering, albeit on light trading volume as a result of the Thanksgiving holiday in the US.

Both mature and emerging markets shared handsomely in the rally that commenced on November 21, as shown by the subsequent gains of the MSCI World Index (+15.7%) and the MSCI Emerging Markets Index (+13.5%). Notwithstanding the improvement, these indices are still down by 43.8% and 57.7% respectively for the year to date.

Click here or on the thumbnail below for a (delightfully green) market map, obtained from Finviz, providing a quick overview of last week’s performances of global stock markets (as reflected by the movements of ADR stocks).

The US stock markets all rallied sharply over the week as shown by the major index movements: Dow Jones Industrial Index +9.7 (YTD -33.5%), S&P 500 Index +12.0% (YTD -39.0%), Nasdaq Composite Index +10.9% (YTD �‘42.1%) and Russell 2000 Index +16.4% (YTD -38.2%).

The bar chart below, also from Finviz.com, shows the US sector performances over the week, and specifically how strongly financials and materials have recovered.

As far as industry groups are concerned, the automobile manufacturing group (+82%) was the top performer for the week. General Motors Corp (GM) and Ford Motor (F) rose by 71% and 88% respectively on the expectation that auto makers will receive a government bailout.

The homebuilding group (+59%) was the second-best performer on the prospect that the US government’s latest rescue package will result in lower mortgage rates and mortgage credit becoming more readily available.

Seven of the ten underperforming groups were from the three top-performing sectors for the year to date – consumer staples, health care and utilities. These sectors, which typically outperform in a declining market, tend to lag in a rising market such as the one experienced last week.

Interestingly, the percentage of S&P 500 stocks trading above their 50-day moving averages has increased from almost zero in October to 19% on Friday – a promising improvement.

I often get asked by readers about Richard Russell’s (Dow Theory Letters) latest views. This is what the old-timer said on Friday: “The big question now is whether the tide is in the early process of turning bullish. If so, we should be seeing a series of constructive, even bullish days. … I wonder whether my more aggressive subscribers shouldn’t jump the gun and maybe buy the Diamonds (DIA) at the opening on Monday.”

Fixed-interest instruments The ten-year US Treasury Note yield declined to its lowest level since records began in 1958, closing 25 basis points lower on the week at 2.93% after falling as low as 2.82% earlier on Friday.

In addition to economic and deflation worries, Treasuries also benefited from lower mortgage rates as a result of the Fed’s decision to buy GSE-insured mortgage paper. The 30-year fixed mortgage rate dropped by 25 basis points to 5.84%.

“The lower mortgage rates threaten to trigger a wave of mortgage refinancing, the prospect of which has pushed investors to hedge that risk by buying ten-year Treasury debt, a benchmark for mortgage rates,” reported the Financial Times“.

The UK ten-year Gilt yield dropped by 9 basis points to 3.78% and the German ten-year Bund yield fell by 12 basis points to 3.26%. Emerging-market bonds also performed well, with the JPMorgan EMBI Global Index gaining 5.1% during the week.

Although some progress has been made as a result of central banks’ liquidity facilities and capital injections, the credit markets are not yet thawing (see my “Credit Crisis Watch” of November 28). The TED and LIBOR-OIS spreads have tightened since the panic levels of October 10, whereas the CDX and iTraxx indices have also shown some improvement over the past few days. However, US Treasury Bills and high-yield spreads are still at crisis levels.

Currencies Most currencies rebounded against the US dollar during the past week as the greenback came under pressure as a result the Fed’s new measures to unclog the credit markets.

Over the week the US dollar lost ground against the euro (-0.8%), the British pound (-3.1%), the Swiss franc (-0.8%), the Japanese yen (-0.3%), the Canadian dollar (-2.4%), the Australian dollar (-3.7%) and the New Zealand dollar (-4.3).

The US currency also fell against emerging-market currencies such as the Brazilian real (�‘7.7%), the Turkish lira (-6.0%) and the South African rand (-4.1%).

Interestingly, the Chinese renminbi (+6.9%) is the only major emerging-market currency that has appreciated against the US dollar over the year to date.

Commodities The Reuters/Jeffries CRB Index (+4.7%) closed higher by the end of the week – only its fifth positive week since commodities peaked early in July. Arguing against a more lasting reversal of fortune for commodities, the Baltic Dry Index – a benchmark for shipping major raw materials, including coal, iron ore and grain, and generally an excellent barometer of economic activity – declined by 14.5% to its lowest level since 1987.

The graph below shows the movements of various commodities over the past week, indicating an improvement across the whole complex as a weak US dollar pushed prices higher.

Gold bullion (+3.4%) remained in favor with investors as a result of a solid supply/demand situation, store-of-value considerations and a positive-looking chart (see below). A research report from Citigroup, as reported by the Telegraph, said gold could rise above $2,000 within two years. Platinum (+6.9%) and silver (+7.6%) – massive underperformers since March – were also in demand last week.

In the aftermath of Thanksgiving, may I remind you of the following old stock market adage: “The bears have Thanksgiving and the bulls have Christmas.” Let’s hope for an early Christmas! Meanwhile, the news items and words from the investment wise below will hopefully assist in steering our portfolios on a profitable course.

That’s the way it looks from Cape Town.

Hat tip: Mish (via Live Leak)

Big Think: Beyond the crisis – conversation with Larry Summers, George Soros and Robert Merton

Source: Big Think, November 2008.

PBS News Hour: Taleb, the risk maverick “Interview with Nassim Nicholas Taleb, famous economist and author of ‚The Black Swan’ and Dr. Mandelbrot, professor of Mathematics. Both say that the present economy is more serious than the Great Depression, and the economy during the American Revolution.”

Source: PBS News Hour (via YouTube), October 22, 2008.

IDD magazine: John Bogle – great expectations “John Bogle founded the Vanguard Mutual Fund Group in 1974. He served as its chairman and chief executive until 1996 and remained on as senior chairman until 2000.

“Recently, he wrote ‘Enough: True Measures of Money, Business and Life’, which was published by John Wylie & Sons.

“To call it a business book – a how-to or memoir – would be too simplistic. In fact, it is far from the typical business book because it offers some interesting life lessons on dealing with people, especially clients and customers.

“Bogle spoke with IDD last week, offering his thoughts on long-term investing and how it may come back – as opposed to rapid-fire maneuvers in and out of a company’s shares – and his thoughts on PE fund managers as well as hedge funds. Not surprisingly, they are not positive.

“As Bogle sees it ‘we have made Wall Street too much of a casino. It is totally dominated by speculation … we are engaged in an orgy of speculation the likes of which has never been seen in the history of this country.’

“His rule of thumb for investors: your bond position should equal your age. ‘I’m about 80% bonds. I started 65% about 15 years ago,’ says Bogle.

“Following are excerpts from the interview:

“IDD: How do you think the credit crisis will play out?

“BOGLE: The market can’t bail itself out of this mess. Wall Street has a lot to answer for to Main Street and yet Main Street, which is really where the tax base is, is going to have to bail out Wall Street for Wall Street’s errors. And that is, of course, a tragedy – an economic tragedy. But I am persuaded because I respect people like Larry Summers, I certainly respect Ben Bernanke. I am not so sure about Hank Paulson. I suppose I respect him in a way, but his issue is that he is an investment banker. So it should come as no surprise to anybody that he looks at these things from an investment banker’s perspective. How else can he look at them? It [the bailout] has to happen. I think it is too bad it has to happen, but I think we ought to get ready for building a better financial system, which means building a smaller financial system because what is going on Wall Street is a casino and our croupier has raked too much off of the table before we get paid.

“IDD: When you say our financial system gets smaller, what do you mean by that?

“BOGLE: Revenues will be less for a whole bunch of reasons. First, they are never going to be allowed – with the government being part owners of them – to have 35-to-1 leverage. Number two, we’re going to have better disclosure about what is on that balance sheet. When you think about it, if you are leveraged 35 to 1 and all your assets are Treasury bills I don’t see that as much of a problem. The problem is that none of them are Treasury bills. They are toxic mortgages and we need much better disclosure of that. The third thing is that they are going to have to be content with less revenues.”

Click here for the full article.

Source: Aleksandrs Rozens, IDD magazine, November 17, 2008.

Spiegel Online: George Soros – “The economy fell off the cliff” “George Soros, 78, has made billions as a hedge-fund manager and investor. Spiegel spoke with him about the current financial crisis, how he expects President-elect Barack Obama to respond to the economic disaster and the responsibilities borne by speculators.

“SPIEGEL: Mr. Soros, in spite of massive interventions by governments and federal banks the financial crisis is getting worse. The stock markets are in free fall, millions of people could lose their jobs. More and more companies are in trouble, from General Motors in Detroit to BASF in Ludwigshafen. Have you ever seen anything like it?

“Soros: Never. I find the present situation dramatic and overwhelming. In my latest book ‘The New Paradigm for Financial Markets: The Credit Crisis of 2008′ I predicted the worst financial crisis since the 1930s. But to tell you the truth: I did not actually anticipate that it would get as bad as it did. It has gone beyond my wildest imagination.

“‘I find the present situation dramatic and overwhelming.’

“SPIEGEL: What are your fears for the coming months?

“Soros: I think that the dark comes before dawn. The financial markets are under great pressure because of the lack of leadership during the transition period. In the next two months, the markets will experience maximum pressure. Then we will see some initiatives from the Obama administration. How long the crisis lasts will depend on the success of these measures.

“SPIEGEL: The markets don’t seem to have much confidence in the new president – in stark contrast to the enthusiasm in the population. Since Election Day on November 4, stocks have fallen by almost 20%.

“Soros: I have great hopes for Barack Obama. But at the time of the election the financial community had not yet fully grasped the magnitude of the economic decline. They did not anticipate that the default of Lehman Brothers would cause cardiac arrest in the markets. The economy fell off the cliff, you begin to see mangled bodies lying at the bottom.”

Click here for the full article.

Source: Spiegel Online, November 24, 2008.

The New York Times: Paulson on new moves in rescue plan “CNBC coverage of opening remarks by Treasury Secretary Henry Paulson in a news conference describing new steps to ease credit markets.”

Click here for the article.

Source: The New York Times, November 25, 2008.

Asha Bangalore (Northern Trust): Fed institutes two more programs to support working of financial markets “The Federal Reserve announced the creation of Term Asset-Backed Securities Loan Facility (TALF) in conjunction with the Treasury. The program that will involve the Federal Reserve Bank of New York lending up to $200 billion to holders of AAA-rated asset backed securities ‘backed by newly and recently originated consumer and small business loans’.

“The US Treasury Department, under the Emergency Economic Stabilization Act of 2008, will provide $20 billion of credit protection to the Federal Reserve Bank of New York for these non-recourse loans. The loans will involve a haircut based on the asset class and there is fee for participation.

“This new program is designed to address problems in the auto, student, credit card, and Small Business Administration guaranteed loans. Loans to consumers have become scarce because securitization of consumer loans has come to a standstill. Funding these loans should result in a resumption of the working of these markets. A date and details are being worked out.

“The Fed also announced it will start purchasing Government Sponsored Enterprises (GSE) – Fannie Mae, Freddie Mac, and Federal Home Loan Banks – this week. Spreads of these securities vis-à-vis Treasury securities have widened sharply in recent days. Purchases of $100 billion in GSE direct obligations and $500 of Mortgage Backed Securities will be undertaken under this program. The objective of this action is to increase the availability of credit for purchases of homes.

“These actions will raise reserves in the banking system and increase the size of the Fed’s balance sheet. The sum of today’s action is $800 billion. The Fed’s balance sheet as of November 25, 2008 had ballooned to 2.19 trillion from $995.57 billion as of September 17, 2008.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 25, 2008.

Bloomberg: US pledges top $7.7 trillion to ease frozen credit “The US government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

“The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

“When Congress approved the TARP on October 3, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

“Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.

“The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun October 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started October 14.

“William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as ‘too big to fail’, he said.”

Source: Mark Pittman and Bob Ivry, Bloomberg, November 24, 2008.

Barry Ritholtz (The Big Picture): Big bailouts, bigger bucks “Whenever I discussed the current bailout situation with people, I find they have a hard time comprehending the actual numbers involved. That became a problem while doing the research for the Bailout Nation book. I needed some way to put this into proper historical perspective.

“If we add in the Citi bailout, the total cost now exceeds $4.6165 trillion. People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay in American history.

“Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures combined:

- Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion – Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion – Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion – S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion – Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion – The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est) – Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion – Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion – NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

“That is $686 billion less than the cost of the credit crisis thus far. The only single American event in history that even comes close to matching the cost of the credit crisis is World War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion. The $4.6165 trillion dollars committed so far is about a trillion dollars ($979 billion dollars) greater than the entire cost of World War II borne by the United States: $3.6 trillion, adjusted for inflation (original cost was $288 billion).

“I estimate that by the time we get through 2010, the final bill may scale up to as much as $10 trillion dollars …”

Source: Barry Ritholtz, The Big Picture, November 25, 2008.

Casey’s Charts: Budgeting your future “The October statement of the US Treasury Department revealed that the federal deficit has reached the largest level on record. Over the last twelve months, the US government spent $618 billion dollars more than it was able to collect.

“The deficit is already enormous and with all signs pointing towards even greater government spending, the implications are astounding. Casey Research Chief Economist Bud Conrad predicts that next year’s budget deficit will be closer to the tune of $1.5 trillion!”

Source: Casey’s Charts, November 21, 2008.

Breitbart: IMF chief economist – worst of financial crisis yet to come “The IMF’s chief economist has warned that the global financial crisis is set to worsen and that the situation will not improve until 2010, a report said Saturday. Olivier Blanchard also warned that the institution does not have the funds to solve every economic problem.

“‘The worst is yet to come,’ Blanchard said in an interview with the Finanz und Wirtschaft newspaper, adding that ‘a lot of time is needed before the situation becomes normal.’

“He said economic growth would not kick in until 2010 and it will take another year before the global financial situation became normal again.

“The International Monetary Fund on Friday promised to help Latvia deal with its economic crisis after it assisted Iceland, Hungary, Ukraine, Serbia and Pakistan.

“But Blanchard said the IMF was not able to solve all financial issues, in particular problems of liquidity.

“Withdrawals of capital leading to problems of liquidity ‘can be so significant that the IMF alone cannot counter them’, he said, adding that massive withdrawals of investments from emerging countries could represent ‘hundreds of billions of dollars. We do not have this money. We never had it,’ he said.”

Source: Breitbart, November 22, 2008.

The Wall Street Journal: Obama names his economic team “Looking to hit the ground running on January 20 and restore confidence, President-elect Barack Obama seals up his economic appointments.”

Source: The Wall Street Journal, November 24, 2008.

Bloomberg: Obama names Volker to head panel on reviving economy “President-elect Barack Obama named former Federal Reserve Chairman Paul Volcker to head a new White House economic board that will propose ways to revive growth as the US grapples with an ‘economic crisis of historic proportions’.

“‘At this defining moment for our nation, the old ways of thinking and acting just won’t do,’ Obama said at a news conference in Chicago, his third in as many days.

“Volcker, 81, will be chairman of the President’s Economic Recovery Advisory Board. The panel’s top staff official will be Austan Goolsbee, a University of Chicago economist who will also be a member of the president’s Council of Economic Advisers.

“The panel, which will include experts from outside government, will meet about once a month and periodically brief Obama with advice on how to shore up financial markets. Volcker’s position will be part-time.

“‘Sometimes policymaking in Washington can become too insular,’ Obama said. ‘The walls of the echo chamber can sometimes keep out fresh voices and new ways of thinking, and those who serve in Washington don’t always have a ground-level sense of which programs and policies are working.’

“Volcker, who throttled the economy to crush inflation in the 1980s, was an adviser to Obama during the presidential campaign. He was a candidate for Treasury secretary, a job that went to Federal Reserve Bank of New York President Timothy Geithner.

“‘He is one of the most independent-thinking guys you could find and brings massive reputation,’ Ethan Harris, co-head of US economic research at Barclays Capital in New York, said before today’s announcement.”

Source: Kim Chipman and Catherine Dodge, Bloomberg, November 26, 2008.

ABC News: Summers to be top white house economic adviser at NEC “ABC News has learned that President-elect Obama has decided to name former Treasury Secretary Larry Summers the director of the National Economic Council, essentially the president’s senior economic adviser.

“Part of the Executive Office of the President, the NEC was created for the purpose of advising the President on matters related to US and global economic policy. The NEC has four functions, by executive order: ensuring that programs and policy decisions are consistent with the President’s economic goals, monitoring the implementation of the President’s economic policy agenda, coordinating policy-making for domestic and international economic issues, and coordinating economic policy advice for the President.

“Summers was the 71st Secretary of the Treasury, serving from July 1999 until the end of the Clinton administration in January 2001, having previously served as undersecretary for international affairs and deputy secretary of the Treasury. He also served as chief economist of the World Bank.

“At the Treasury Department in the 1990s, Summers worked closely with Tim Geithner, the man Obama intends to nominate to be the next Secretary of the Treasury. The two are said to have an excellent working relationship.

“Some Democrats say that Obama and Summers have an understanding that when current Federal Reserve Chairman Ben Bernanke’s term expires in 2010, Obama will name Summers to take his place.”

Source: ABC News, November 22, 2008.

Fox Business: Wilbur Ross on the next Treasury Secretary

Source: Fox Business, November 21, 2008.

Richard Russell (Dow Theory Letters): “Inflate or die, which one will it be?” “Suddenly, the whole investment world believes in deflation. The TIPS (inflation adjusted government bonds) have collapsed, commodities have crashed, gold goes nowhere, bonds remain near their highs, the dollar remains strong.

“Meanwhile, Bernanke and Paulson are battling the forces of deflation with all the ammunition at their command. I believe Fed chief Bernanke will fight deflation with the last dollar available at the Fed. Paulson will give the US Treasury away before he gives in to deflation and economic contraction.

“How will we know whether Bernanke-Paulson are winning their desperate anti-deflation battle? If they are winning, the dollar and bonds will head down and gold will head higher. If they are losing the battle, the Dow will break below 7,470 and the bear market will continue to eat away at US stocks and the US economy.

“What we are witnessing now is the single greatest economic battle of the century. ‘Inflate or die’, which one will it be?

“Remember, Bernanke’s worst nightmare is dealing with out-of-control deflation. The Fed can halt inflation by pushing up interest rates, but in the case of deflation, the Fed can be helpless. And I ask myself, what happens if Bernanke finds that he is losing the battle against deflation? In that case, we are all survivors. I’ve been there before – during the 1930s. I survived then, and I’ll survive now, and so will my subscribers.

“If Bernanke and Paulson are winning the anti-deflation battle, I believe the first ‘signal’ would be rising gold. So far, it appears to me that gold is undecided. Gold corrected down to the 717 area, then rallied above 800, and now appears to be in the process of testing the 800 level. It would be a plus for gold if December gold can hold above 800. Gold has never been a more important barometer for the future.”

Source: Richard Russell, Dow Theory Letters, November 26, 2008.

Asha Bangalore (Northern Trust): Q3 GDP preliminary estimate “Real gross domestic product declined at an annual average rate of 0.5% in the third quarter of 2008, slightly weaker than the advance estimate of a 0.3% drop. Going forward, real GDP is expected to show a decline that is upward of 4.0% in the fourth quarter of 2008. The Fed is widely expected to lower the Federal funds rate to 0.50% on December 16, 2008.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 25, 2008.

Barry Ritholtz (The Big Picture): ECRI leading indicators fall to lowest level ever “One of the questions I seem to be getting all the time is ‘when is this recession going to end?’ To answer that, I turned to Lakshman Achuthan of the Economic Cycle Research Institute (ECRI). Their leading versus coincident chart provides insight into that question.

“The cyclical turns in the leading occur before the coincident – they seem to diverge now and then, and that can be telling. The current story they tell is clearly one of a quickly worsening recession with no end in sight.”

Source: Barry Ritholtz, The Big Picture, November 26, 2008.

Wachovia: US economy in recession mode “Economic problems began to show up in our model in the fourth quarter of last year as the recession probability rose sharply to 75%, and since then the probability has remained high. While the official recession call will come from the National Bureau of Economic Research sometime next year, for decision-makers the operational guideline is a recession outlook today.”

Source: Wachovia, November 24, 2008.

Asha Bangalore (Northern Trust): Durable goods orders show widespread weakness “The 6.2% drop in orders of durable goods reflects widespread weakness in bookings of durable factory goods.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 26, 2008.

Breitbart: First-ever decline in online retail spending “Online retail spending fell four percent in the first weeks of November from the same period last year, the first ever such decline in e-commerce spending, online researcher comScore reported on Tuesday.

“The Reston, Virginia-based company said 8.2 billion dollars was spent online during the first 23 days of November, four percent less than during the same period last year, when 8.5 billion dollars was spent online.

“ComScore forecast that online retail spending for the November-December holiday period will be flat versus year ago, significantly lower than last year’s growth rate of 19 percent.

“‘With consumer confidence low and disposable income tight, the first weeks of November have been very disappointing, with online retail spending declining versus year ago,’ said comScore chairman Gian Fulgoni.”

Source: Breitbart, November 25, 2008.

Asha Bangalore (Northern Trust): Weakness in consumer spending most likely to persist “Nominal consumer spending fell 1.0% in October, while inflation adjusted consumer spending dropped 0.5%. Inflation adjusted consumer spending has declined for five straight months, the longest string of declines since the 1981-82 recession. Based on October data and conservative assumptions about November and December, consumer spending is most likely to post a 4.0% drop in the fourth quarter after a 3.7% decline in the third quarter.

“The 0.3% increase in personal income during October follows a 0.1% gain in September that was affected by hurricanes. Personal saving as a percent of disposable income was 2.4% in October compared with 1.0% in September. A small upward drift in personal saving is emerging.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 26, 2008.

Standard & Poor’s: S&P/Case-Shiller – national trend of home price declines continues “Data through September 2008, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, shows continued broad based declines in the prices of existing single family homes across the United States, a trend that prevailed since 2007.

“The decline in the S&P/Case-Shiller US National Home Price remained in double digits, posting a record 16.6% decline in the third quarter of 2008 versus the third quarter of 2007. This has increased from the annual declines of 15.1% and 14.0%, reported for the 2nd and 1st quarters of the year, respectively.

“‘The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s.”

Source: Standard & Poor’s, November 25, 2008.

The Wall Street Journal: US agrees to rescue struggling Citigroup “The federal government agreed Sunday night to rescue Citigroup by helping to absorb potentially hundreds of billions of dollars in losses on toxic assets on its balance sheet and injecting fresh capital into the troubled financial giant.

“The agreement marks a new phase in government efforts to stabilize US banks and securities firms. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to help shoulder bad assets, on a targeted basis, from specific institutions.

“Citigroup is one of the world’s best-known banking brands, with more than 200 million customer accounts in 106 countries. Its plunging stock price threatened to spook customers and imperil the bank.

“If the government’s rescue plan is a success, it could help bring stability to the entire financial system. If it doesn’t, even deeper doubts about the industry’s future could spread.

“Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies – the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. – will take on any additional losses, though Citigroup could have to share a small portion of additional losses.

“The plan would essentially put the government in the position of insuring a slice of Citigroup’s balance sheet. That means taxpayers will be on the hook if Citigroup’s massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour.

“In exchange for that protection, Citigroup will give the government warrants to buy shares in the company.

“In addition, the Treasury Department also will inject $20 billion of fresh capital into Citigroup. That comes on top of the $25 billion infusion that Citigroup recently received as part of the broader US banking-industry bailout.”

Source: David Enrich, Carrick Mollenkamp, Matthias Rieker, Damian Paletta and Jon Hilsenrath, The Wall Street Journal, November 24, 2008.

Paul Kedrosky (Infectious Greed): Citigroup – bad bank to create bad bank incubator “I know it isn’t precisely what this headline means – ‘bad bank’ is a euphemism in bailout circles for walling off from one another functional and non-functional parts of banks – but I still like this from the WSJ today.

“To my way of thinking, if we’re interested in creating bad banks, it’s worth knowing that Citi is a veritable ‘bad bank’ incubator.”

Source: Paul Kedrosky, Infectious Greed, November 23, 2008.

CNBC: Mobuis – attraction of Treasurys will wane with lower yields “Despite continued woes in the US economy, the greenback has seen an unexpected surge against currencies around the world. As investors become ever more risk averse, emerging markets are bearing the brunt of a flight to safety.

“But Mark Mobius, executive chairman of Templeton Asset Management, sees a reversal around the corner.

“‘As everyone is rushing into US Treasurys, they need US dollars to do that and have therefore sold everything in sight,’ Mobius told CNBC. ‘This is why emerging markets have gone down, why commodities have gone down as everyone is moving into dollars.’

“But Mobius said that ‘as US Treasury rates go down to 1% or below you will see the attraction of US Treasurys waning’.

“Mobius also believes that emerging markets have learnt a bitter lesson since the Asian Crisis of 1997-1998. ‘One big lesson was ‘don’t borrow in a currency you are not earning in’,’ he said.

“Emerging markets have also curtailed lending and built up foreign reserves, which they can call upon in almost ‘a reversal of 1997 where the emerging markets were debtors, they are now the creditors’, he added.

“But the surge in the greenback has taken a lot of investors by surprise, Mobius said.

“Having learned from the Asian crisis, companies hedged currencies and ‘ironically these hedges have really worked against them in some cases … as they are over-hedged and it went against them as they were expecting the dollar to go weaker and it went the other way,’ he said.”

Source: CNBC, November 20, 2008.

Bespoke: GSE mortgage spreads tighten “The Fed’s actions this morning [Tuesday] have certainly helped to thaw the credit markets so far. As shown below, spreads between 10-year Fannie Mae bonds and the 10-year US Treasury tightened significantly today. While they are certainly moving in the right direction, even after today’s record decline, spreads are still higher today than they were just a little more than two weeks ago.”

Source: Bespoke, November 25, 2008.

Bespoke: 30-Year fixed mortgage rates falling back “Talk of the 30-year fixed mortgage rate falling back below 6% filled the airwaves yesterday [Tuesday], so below we provide a two-year chart of the rate. Even as the Fed funds rate has fallen from 5.5% to 1%, mortgage rates have failed to decline along with it, which hasn’t done much to help the struggling housing market. Economists and investors are hoping that the Fed’s actions yesterday will start pushing mortgage rates lower. This will help ease the credit crisis as banks will become more willing to lend, providing better interest rates for potential homebuyers. 5.81% is better than the 6.4% seen at the start of the month, but the rate could still stand to drop quite a bit.”

Source: Bespoke, November 26, 2008.

Frank Holmes (US Global Investors): Stock market reversal is near “According to research from Thomas Weisel, the S&P 500 has been a ‘Buy’ since that index closed at 800 last Friday, based on its probability models. They say a verification could come in early December, when monthly liquidity figures come out – if there is extreme positive liquidity to accompany the technical ‘Buy’ signal, history shows that on average there’s a six-month price rally of 18.5%.

“Our oscillator tells us that, statistically speaking, the S&P 500 is extremely oversold and thus due for a reversal toward the mean. The chart above shows that the S&P 500 is now down about four standard deviations over 60 trading days, which is a far more dramatic decline than we saw in 1998, when Russia endured a currency crisis and the collapse of the hedge fund Long-Term Capital Management threatened the global financial sector, and in 2001 after the September 11 terror attacks.

“The possible turnaround that we are seeing is not wishful thinking, but it’s not a sure thing, either. Our confidence grows with every positive data point indicating that a reversal is near, and we will continue watching for these indicators …”

Source: Frank Holmes, US Global Investors – Weekly Investor Alert, November 28, 2008.

Eoin Treacy (Fullermoney): Start thinking about stocks to buy “Angst, fear and anxiety are all related emotions which come to the fore when we feel under pressure and begin to doubt our abilities as investors. However, when we see a market fall such as that of the last few months, we have to rein in the temptation to succumb to such emotions. It will prove more profitable over the medium to longer-term, to turn objective about the opportunities we are being presented with sooner rather than later.

“This does not mean one piles into the market with every spare unit of currency right now, but it is a time to begin to think about the shares one wants to own in a recovery environment. From a value perspective there are a number of instruments which have been hit particularly hard and somewhat unjustifiably by the credit / solvency crisis.

“We now need to begin to think more about recovery potential rather than further potential losses. Stocks and corporate bonds are no longer expensive, some are downright cheap. We have not reached the deep value levels seen in the past, but these need not necessarily appear at the numerical low for the market, if they appear at all. However, one looks at the market, given the extent of the fall, this is not a time to become increasingly bearish, but is one in which to make provisions and possible purchases for a recovery scenario.”

Source: Eoin Treacy, Fullermoney, November 27, 2008.

David Fuller (Fullermoney): Watch developments in US rather than invest there “I believe that America’s problems of debt and deficits are worse than for many other countries. More importantly, I will be guided by price charts, which reflect the collective decisions and views of everyone else. In terms of investment appropriateness, my current view is that I would rather watch developments in the US than invest there.

“The credit / solvency crisis is clearly America’s biggest problem at this time. This is not necessarily true for all other countries, although all are obviously affected to a greater or lesser degree by developments in the USA. I suggest that the West’s credit / solvency crisis was only the second biggest problem for Asia’s developing economies.

“Asia’s biggest recent problem, I maintain, was inflation, not least from previously soaring energy and food prices. That crisis, which in comparison was the USA’s second biggest problem, has largely disappeared today. I suspect commodity inflation will not re-emerge for at least the next year or two, subject to supply, global GDP and the USD.

“Consequently, I believe that developing Asia would be in an excellent position for recovery, were it not for the West’s ongoing credit / solvency crisis. Therefore, the worse the USA’s problems become, the more this will be a drag on Asia’s own recovery. Conversely, if the USA somehow avoids a destructive deflation, Asia should still bounce back more quickly.

“I will invest accordingly.”

Source: David Fuller, Fullermoney, November 26, 2008.

Jeffrey Saut (Raymond James): Geithner gotcha “We still think October 10 represented the capitulation ‘lows’. As Barron’s notes, ‘For a bullish spin, though a weak one, the market has not made a significantly lower low since October 10. The word ’significantly’ is important because some major market indexes, including the Nasdaq, have indeed been setting new lows. But the trend, if we can call it that, has been more sideways than decidedly down.

“A better, but still weak, bullish angle comes from trading volume, or the amount of money committed to either the bull or bear side each day. All of the higher volume days that have occurred since October 10 have come on days when prices rose. Theoretically, when prices are going up and volume increases, it means that investors are chasing the market higher. That’s a sure sign of demand. Subsequent declines occurred with lower volume, so we can conclude that the desire to sell was not quite as strong as it was before October 10.”

Source: Jeffrey Saut, Raymond James, November 24, 2008.

Bespoke: Analysts at their least bullish levels ever “While Wall Street analysts are typically known for being overly optimistic, based on at least one measure, they have never been less bullish. According to Bloomberg statistics that track analyst buy, sell, and hold ratings, only 36% of all ratings are currently buys. As the chart below shows, this is the lowest level since at least 1997, and significantly lower than the 75% level we saw in 1997 and 2000. However, since the Spitzer crackdown on Wall Street research and the bursting of the tech bubble, analysts have grown increasingly shy about putting a buy rating on a stock they cover.”

Source: Bespoke, November 25, 2008.

Bespoke: Q3 and Q4 sector earnings growth “With about 96% of S&P 500 companies having reported third quarter earnings, current EPS growth numbers for the quarter should be very close to what the final tally will read. As shown below, four sectors have had negative year over year growth in the third quarter, while six have had positive growth. Financials and consumer discretionary were once again the sectors that brought down the index as a whole. Financials have seen earnings decline by 129.7% in Q3 ‘08 versus Q3 ‘07. Consumer discretionary has seen earnings decline by 41.4%. Telecom and utilities are the two other sectors with negative Q3 earnings growth, and the S&P 500 as a whole currently stands at -18.4%. The energy sector has had by far the largest earnings growth at 57.4% versus the third quarter of 2007. Consumer staples ranks second behind energy at 10.9%, followed by health care, materials, technology, and industrials.

“So what does the fourth quarter look like? Analysts are expecting the S&P 500 to actually show positive year over year earnings growth in the fourth quarter of 4%. This is because the financial sector is expected to show growth of 64.2% due to the fact that Q4 ‘07 was so bad. Utilities, health care, and consumer staples are the other three sectors expected to see earnings growth, while consumer discretionary, materials, energy, telecom, technology and industrials are expected to see earnings declines.”

 

Source: Bespoke, November 23, 2008.

Naked Capitalism: Cheery chart – no corporate profits for two years during depression “In case you are starting to look to past crises for clues as to how our financial mess might play out, here is a Great Depression factoid (from Levy Forecast, November 2008):

“Note that the report itself argues that the US will have a ‘contained’ depression, with deep recession conditions for a protracted period and an anemic recovery. It does not believe the zero operating profits pattern of the Great Depression will be repeated.”

Source: Naked Capitalism, November 23, 2008.

Bloomberg: Hambro sees “great entry points” for commodity stocks “Evy Hambro, who manages the world’s largest mining and gold funds at BlackRock, talks with Bloomberg about the outlook for commodities and mining stocks.”

Source: Bloomberg, November 21, 2008.

Bloomberg: Marc Faber says gold is most precious asset

Source: Bloomberg, November 25, 2008.

Ambrose Evans-Pritchard (Telegraph): Citigroup says gold could rise above $2,000 next year “The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

“This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

“‘They are throwing the kitchen sink at this,’ said Tom Fitzpatrick, the bank’s chief technical strategist.

“‘The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

“‘Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.

“‘This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”

“Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. ‘If true, this is a very material change,’ he said.

“Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.”

Source: Ambrose Evans-Pritchard, Telegraph, November 27, 2008.

James Turk (GoldMoney): Scenario for gold is bullish “Gold soared $50 this past Friday. It began the day at $748 and was trading at $800 when the day ended.

“It is rare for gold to achieve such a huge one-day gain. In fact, I checked my records for the past twenty years and found only one other instance when gold climbed $50 or more in a day. Interestingly, the other occurrence was on September 17, 2008, barely two months ago. That rally also took gold back above $800.

“That these two rallies – unique and rare in their magnitude – occurred so near to one another is significant. Is there a message from these two events? Yes, indeed!

“Gold itself is telling us two things. First, there is an enormous short position in gold. Huge rallies occur for a reason, and short covering is always a factor. In order to limit their losses, shorts will bid up the market in a desperate attempt to cover their position. The rule of thumb is straightforward – the bigger the short position, then the bigger the rally.

“Second, and more importantly, these huge rallies are signaling that gold under $800 is too cheap. A higher price is needed to bring supply and demand back into balance.

“There is other, more than ample evidence to support this same conclusion. The demand for physical metal remains strong.

“Friday’s trading action adds to the growing body of evidence that the correction in gold that began after making a new record high in March above $1,020 is ending. The low in gold in all likelihood is probably in place. The $700 level has been tested and re-tested, and the huge rallies launched from prices below $800 mean that other attempts to take gold into the $700s will be met with good demand.

“Gold remains in a bull market, and so does silver. National currencies are in a bear market. Get ready for the next leg in the precious metal’s ongoing bull market.”

Source: James Turk, GoldMoney, November 24, 2008.

The Australian: Perth Mint suspends orders amid rush to buy bullion “Fears of the unknown long-term effects from the global financial crisis have sparked a new gold rush.

“With retail and wholesale clients around the world stocking up on the precious metal, the Perth Mint has been forced to suspend orders.

“As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.

“Perth Mint sales and marketing director Ron Currie said the unprecedented demand had forced the Mint to cease orders until January, with staff working seven days a week, 24-hour days, over three shifts to meet orders.

“He said Europe was leading the demand, with Russia, Ukraine, Middle East and US all buying – making up 80% of its sales.

“‘We have never seen this before and are working right at capacity. And we are seeing it from clients in the shop buying one ounce, right up to 30,000 ounces from overseas clients,’ Mr Currie said.”

Source: Sarah-Jane Tasker, The Australian, November 22, 2008.

Mike Wittner (Société Générale): Oil prices susceptible to further deleveraging “Unless oil prices melt down again this week, Opec will not cut production at this weekend’s informal meeting in Cairo and instead will wait until the cartel’s gathering in December to reduce output quotas by 1 million to 1.5 million barrels a day, says Mike Wittner, global head of oil research at Société Générale.

“Mr Wittner says that Opec simply does not have enough information on the effectiveness of the production cuts that it has already made, or sufficient feedback from its customers, to proceed with further reductions in output. ‘We see (a decision to maintain current production quotas) as a 60-40 probability and the outcome of the meeting could easily be affected by price action this week,’ says Mr Wittner, who notes that signals from Opec have been mixed so far.

“Mr Wittner says tanker tracking data suggest there has been a ‘very significant cut’ in Opec’s oil production in November, down 1.2 million barrels a day compared with October.

“But SocGen says fundamentals will be perceived to be weak until the market becomes convinced Opec has cut supplies, given that a tanker requires six weeks to travel from the Persian Gulf to the US. Only then will November’s cuts appear in lower crude imports and stocks, which is what the market wants to see.

“‘Oil prices will remain susceptible to further deleveraging (by hedge funds) and caution remains the order of the day,’ concludes Mr Wittner.”

Source: Mike Wittner, Société Générale (via Financial Times), November 25, 2008.

Financial Times: EU’s stimulus plan met with doubts “The European Union’s proposal on Wednesday for a €200 billion economic stimulus plan for the bloc was met by immediate doubts on whether member states would back the measures aimed at avoiding a deeper recession.

“The proposal envisages that about €170 billion would be contributed by the bloc’s 27 member states through tax and infrastructure plans. The European Commission and the European Investment Bank would provide the remaining €30 billion, partly through the accelerated pay-out of selected spending programmes.

“The package, which is larger than expected, represents about 1.5% of the EU’s gross domestic product. It needs to be reviewed by EU finance ministers next week and by government leaders in mid-December.

“Economists and politicians quickly questioned whether all member states would step up as required or whether individual governments’ responses would diverge from the Commission’s suggested measures.

“Analysts at Capital Economics, the consultants, said: ‘The proposed boost has yet to be agreed by member states and would sadly not do enough to bring European economies out of the gloom for some time anyway.’

“Business Europe, the main business lobby group in Brussels, agreed with the proposals but said a ‘clear commitment from EU member states’ was needed to implement stimulus packages of at least 1.2% of GDP.”

Source: Nikki Tait, Financial Times, November 26, 2008.

BBC News: Boost for Spanish and Italian economies “Spain and Italy have announced plans worth billions of euros to kick-start their economies.

“Italy approved an 80 billion euro emergency package that included tax breaks for poorer families, public works projects and mortgage relief.

“Spain unveiled an 11 billion euro plan aimed at creating 300,000 jobs.

“The announcements are the latest in a series of attempts by EU governments to shore up their economies as the financial crisis bites.

“Italian Prime Minister Silvio Berlusconi called on to Italians to keep on spending. ‘We have helped citizens, the less well off, so that they can continue to consume,’ he said. ‘The intensity and duration of the crisis depends on all of us.’

“Spain’s Prime Minister, Jose Luis Rodriguez Zapatero, said the money will be mainly invested in infrastructure and public works.

“Spain’s unemployment reached 12.8% in October – the highest in the eurozone.”

Source: BBC News, November 28, 2008.

BBC News: German business confidence dives “Business confidence in Germany fell in November to the lowest level since 1993, according to the key Ifo economic climate index. The index, based on a poll of 7,000 companies, has dropped for six consecutive months, the Munich-based Ifo institute said.

“The index stands now at 85.8, down 4.4 points from October.

“‘The downturn has worsened and will now have an impact on the labour market,’ Ifo said in a statement.

“Germany’s exports have been hard hit by falling demand worldwide, with some auto makers seeking state help to maintain production.

“On Friday another key indicator, the Markit purchasing managers’ index, revealed that business activity in the 15 countries sharing the euro had fallen in November to a ten-year low.”

Sources: BBC News, November 24, 2008 and Victoria Marklew, Northern Trust – Daily Global Commentary, November 24, 2008.

Financial Times: Eurozone set for rate cut of at least 50bp “Eurozone official interest rates are almost certain to be slashed again next week by at least half a percentage point after a survey on Thursday showed the region facing its worst downturn since the recession of the early 1990s.

“Economic confidence in the 15-country region crashed this month to its lowest point since August 1993, the European Commission reported. With inflation also falling rapidly, the European Central Bank has not sought to stop financial markets assuming its main interest rate will be cut next Thursday from 3.25% to 2.75% or below.

“Public ECB comments show the bank remains cautious about the pace of cuts, pointing to a half-point reduction next week – the same as in October and this month. But economic news has been consistently gloomier than expected, strengthening the case for a larger cut.”

Source: Ralph Atkins, Financial Times, November 27, 2008.

Financial Times: UK tax hit to fund £20 billion fiscal stimulus “Taxpayers face six years of austerity, paying for the consequences of recession and a £20 billion fiscal stimulus unveiled on Monday by Alistair Darling as he detailed the most dismal Budget outlook seen since 1993.

“National insurance contributions for both employees and employers will rise by 0.5%. Those earning more than £100,000 will pay more income tax – with those on £150,000 facing a new higher tax rate of 45% – and public spending faces its biggest squeeze for 15 years – although all these measures will not kick in until 2011, well after the next election. The tax clawback would leave someone earning £150,000 paying an extra £3,040 in tax.

“Mr Darling detailed the planned tax rises and spending restraint as he sought to show the City and foreign investors that Britain had a clear plan to restore prudence to the public finances after truly shocking forecasts for public borrowing in the next two years.

“Public borrowing will hit a record level of £118 billion in 2009-10 and will fall to a level the government considers prudent only in 2015-16, far later than City forecasts had expected.

“Government debt will blast through the current 40% of national income limit, racing to 57% in 2012-13, when it will top the £1,000 billion mark for the first time.

“Britain’s output will continue to fall until the second half of next year, the chancellor added, as he presented a gloomy forecast with the recession mitigated only in part by the fiscal boost delivered predominantly through a 2.5 percentage point cut in value added tax from next week and lasting until the end of 2009.

“Over the next year, the cut in the VAT rate to 15% will be augmented by £2.5 billion of additional capital expenditure projects brought forward from 2010-11, a £60 payment to every pensioner, an earlier increase in child benefit and a deferral in the planned increases in vehicle excise duties.

“Mr Darling also used the crisis to stage a series of tactical retreats from earlier decisions, announcing a rethink of his plans to reform air passenger taxes and an exemption from tax for the dividends of UK companies’ foreign subsidiaries.

“Together the Treasury assumes the £20 billion package – about 1% of national income for a little over a year – will prevent the economy sinking by a further 0.5%, although Mr Darling’s forecast was for a contraction of 0.75% to 1.25% in 2009.”

Source: Chris Giles and George Parker, Financial Times, November 24, 2008.

James Pressler (Northern Trust): China – getting serious about the slowing economy “The People’s Bank of China (PBoC) slashed its benchmark one-year loan and deposit rates by 108 basis points apiece today [Wednesday], reducing them to 5.58% and 2.52%, respectively. This dramatic move comes well after the industrialized economies coordinated a major monetary easing – most central banks have already turned their attention toward liquidity concerns and an eventual global recession. Only three months ago, Beijing had a proactive mindset, thinking about economic stimulus to compensate for the post-Games lull and a general slowdown in global production. The first question that comes to our mind is why does the government suddenly seem to be lagging in its response?

“One fact worth noting is that the immediate economic impact on the Chinese economy has not been as clear-cut as in the industrialized countries. The Olympic Games threw in plenty of distractions and had widespread effects on economic indicators. Retail sales were positively impacted from the many tourists flooding into the country, but conversely, industrial production fell off as many factories closed in response to temporary anti-pollution measures. The conclusion of numerous infrastructure projects shifted flows of goods and inputs, and plenty of other one-off factors added a lot of noise to China’s economic statistics. Only after the Games passed and some of those factors fell from the calculations did a clearer picture emerge, and the trends are not promising. Industrial production continues to fall, and monthly export growth is showing signs of weakness.

“To be fair, the PBoC issued minor rate cuts over the past three months, and the government did offer a supplementary fiscal stimulus package. Today’s more dramatic move suggests that PBoC officials are now firmly convinced that China will be joining the rest of the world in a significant economic slowdown. Some forecasts recently suggested that after GDP growth of nearly 12% in 2007, the economy could slow to below 10% this year and perhaps 7.5% in 2009. While the growth rate itself is still enviable, officials in Beijing realize all too well that a deceleration of over four percentage points will not go unnoticed, and they will likely be taking more action before the year is up.”

Source: James Pressler, Northern Trust – Daily Global Commentary, November 26, 2008.

Bloomberg: China reserves to pass $2 trillion; Russia’s fall “China’s foreign-exchange reserves may top $2 trillion for the first time by the end of this year, giving the world’s most-populous nation more firepower to stimulate its economy during a global recession.

“China’s holdings increased 25% in the first nine months of the year to stand at $1.906 trillion on September 30. Reserves shrank in Japan and Russia, the nations with the second- and third-largest stockpiles. Russia drained a quarter of its currency and gold assets in less than four months to prop up the ruble, which has dropped 14% since June 30.”

Source: Lee J. Miller and Zhang Dingmin, Bloomberg, November 28, 2008.

Breitbart: Analysts – India economy will be OK despite attacks “The terror attacks that rocked India’s financial capital may depress stocks, dampen tourism and slow new investment, but are unlikely to inflict long-term damage on the nation’s economy, analysts and business people said Thursday.

“‘This is a challenge for the government to maintain law and order in the country,’ said Takahira Ogawa, director of sovereign ratings at Standard & Poor’s in Singapore. ‘At this stage, I don’t think there will be any major impact on the macroeconomic or fiscal position of the government.’

“The attacks, which began Wednesday night when gunmen invaded two posh hotels, a restaurant and several other sites in downtown Mumbai, came as India was struggling to contain fallout from the global financial crisis.

“Foreign investors have already pulled $13.5 billion out of the nation’s stock market this year, driving the benchmark Sensex index down 57% and punishing the rupee. Liquidity has dried up, economic growth is slowing and people are spending less money.

“The attacks are ‘a challenge to the economic resurgence in India’, said Habil Khorakiwala, chairman of Wockhardt, an Indian pharmaceutical company.

“‘The targets identified clearly demonstrate that the intention is to create panic and shatter the confidence in the minds of investors in India and global investors coming to India,’ he said in a statement. ‘This war has to be fought together by all across, to protect the safety of Indian people, for economic resurgence and growth of the Indian nation.’”

Source: Breitbart, November 27, 2008.

BBC News: Saudi Arabia cuts interest rate “Saudi Arabia has cut a key interest rate and taken steps to encourage lending as it faces the slowdown. The central bank reduced the repo interest rate from 4% to 3%, in an attempt to boost liquidity. It also reduced the cash reserve requirements for banks, seen as a way to improve the availability of credit.

“The move came a day after the benchmark Tadawul All Share Index fell to its lowest level in five years, hit by the global slowdown and falling oil prices. The index shed 9.2% on Saturday, the start of its trading week. Since the start of the year the index is down more than 60%.

“The Gulf region has been hard hit by a huge fall in oil prices, a key export. Oil prices are around two thirds lower than they were in July when they hit a record above $147 a barrel.”

Source: BBC News, November 23, 2008.

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Words from the (investment) wise for the week that was (November 17 – 23, 2008)

Sunday, November 23rd, 2008

A new bout of fear gripped financial markets during the past week, causing the slide in global stocks, commodities and emerging-market assets to deepen. As investors’ angst escalated, positions in risky assets were liquidated in exchange for perceived safe havens such as the US dollar, government bonds and gold bullion.

“We have seen fundamental selling, technical selling, forced selling (deleveraging), short selling, capitulation selling and selling due to ennui,” commented David Fuller (Fullermoney).

Fueling the sell-off were mounting concerns that the economic recession could not only be more intense than previously feared, but also fall into a corrosive deflationary phase. Additionally, sentiment was undermined by renewed questions about the effectiveness of the US government’s bailout plans.

A clear sign of distress and fear was the US three-month Treasury Bill rate falling to zero on Thursday, before nudging up to (a still minuscule) 0.10% by the close of the week. “The financial situation at the moment is so bad that women are now marrying for love,” quipped an e-mail doing the rounds.

After the S&P 500 Index breached the grim milestone of the October 2002 lows and fell to levels last seen in 1997 – thereby threatening to wipe out the entire 2002 to 2007 bull market – Wall Street regained some confidence late on Friday. The trigger for a strong turnaround arrived just in time for the 15:00 witching hour and came in the form of Timothy Geithner’s (pronounced GYTE-ner) nomination as new Treasury Secretary, resulting in the S&P 500 recovering from an intraday loss of more than 1% to a gain for the day of 6.3%.

On the bailout front, the Detroit automakers sought $25 billion from the Treasury to avert bankruptcy. However, Congress withheld financial aid for the time being, giving the companies until December 2 to submit a “viable” recovery plan.

“Don’t be misled, though – the something that is rotten in the auto industry has nothing to do with the credit crunch, and everything to do with years of mismanagement, shoddy products and bad choices,” said Bloomberg columnist Mark Gilbert. “Consider the credit-rating histories of GM and Ford. For both companies, the rot started all the way back in August 2001, when Standard & Poor’s put the A grades they enjoyed for a decade on review for downgrade. In October of that year they each suffered a two-level cut to BBB+ that left them just three moves away from junk status.”

I received the following note from an American friend a few days ago: “…even the children in my son’s second grade class are depressed about the auto industry. I had to answer my son’s questions about bankruptcy since the kids are talking about it …” This comment says it all!

Elsewhere, Citigroup’s (C) share price plunged by 60.4% over the week to a 16-year low as the company wrestled the financial crisis and planned to slash 50,000 jobs. According to The Wall Street Journal, “Citigroup officials have been talking in recent days to Treasury Department and Federal Reserve officials, and those discussions are expected to continue throughout the weekend …”

A pointed comment regarding the principle of bailouts came from Jim Rogers, as quoted by the Financial Times: “What they’re doing is taking the assets away from the competent people, giving them to the incompetent people and saying to the incompetent: ‘Okay, now you can compete with the competent people, with their money.’ I mean this is terrible economics. This is outrageous economics.”

Next, a tag cloud of the text of the plethora of articles I have read since a week ago. This is a way of visualizing word frequencies at a glance. Keywords such as “banks”, “economy”, “market” and “prices” occur often, but words such as “gold” and “deflation” have also started creeping into the tag picture.

The following update on the stock market outlook arrived on Friday from Bennet Sedacca (Atlantic Advisors): “We have been barely invested, mostly void, in equities, since May. We went ½ long today near the lows for a rally that could last longer than some think. Mostly large cap, high-quality, excellent balance sheet companies with a little tech and financials thrown in. We must remember, buy when you can, not when you have to.”

Oversold conditions are bound to result in rallies from time to time (and possibly around Thanksgiving), but these should not be trusted at face value. For a more lasting market turnaround to happen, I would like to see evidence of base formations on the charts, a 90% up-day, and relative outperformance by the financial sector.

I am also closely monitoring the surges in the US dollar and Japanese yen – low-yielding currencies previously used for funding risky investments – as a break of the uptrends in these two currencies will be a good indicator of the forced deleveraging selling starting to subside. Once this situation has played itself out, we should see a return to lower volatility levels and a return of confidence. (Also read my recent posts “Economic woes torpedo stock markets” and “Panic-crash sentiment causes extreme volatility“.)

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

Economic reports
The Ifo World Economic Climate has worsened further in the fourth quarter of 2008 with the indicator falling to its lowest level in more than 20 years, according to the Ifo World Economic Survey. Not only the major economic regions of North America, Western Europe and Asia are affected, but also Central and Eastern Europe, Russia, Latin America and Australia. On the whole, the survey data point to a global recession.

Economic reports released in the US during the past week confirmed an increasingly dire situation.

- The US moved closer to deflation territory as the CPI decreased by 1.0% from September to October (the largest monthly decline since the 1930s), leaving the CPI 3.7% higher compared with a year ago and significantly down from September’s 4.9% rate. The continuing decline in US economic activity is pushing down inflationary pressure.

- Because of weak demand, producer prices for finished goods gave up ground for the third month in a row, falling by 2.8% in October largely as a result of much less expensive energy products.

- On par with expectations, residential construction slowed again in October, with a 4.5% month-on-month decline in total housing starts. At 791,000 annualized units, starts have hit another record low as exceptionally weak demand was constraining homebuilding.

- The NAHB housing market index fell further in November, setting a record low.

- Slumping demand is hitting US industry hard, although production bounced back in October from hurricane-related declines in September. Total industrial production increased by 1.3% after having fallen a downwardly revised 3.7% in September, but the indicator fell around two-thirds of a percent in September and October when excluding once-off effects.

- Initial claims for unemployment insurance benefits increased by 27,000 to 542,000 for the week ended November 15, putting claims at their highest point since the early 1990s. This is a serious warning signal about the health of the labor market.

- The Conference Board Index of Leading Economic Indicators declined by 0.9% in October, led by a sharp plunge in stock prices and decreases in residential building permits and consumer expectations. The LEI in the last three months has shown an acceleration in the rate of decline, adding to evidence that the US has entered a recession that will likely be much deeper than either of the previous two.

It comes as no surprise that the minutes of the Federal Open Market Committee’s meeting of October 28 to 29 indicate that members were extremely concerned about the near-term prospects for the economy, given the stresses in financial markets. With the problems in credit markets persisting, the FOMC’s forecast called for falling growth through the first half of 2009, with next year’s real GDP growth projection lowered to -0.2% to 1.1% (previously 2.0% to 2.8%).

Banks continue to hoard all the liquidity the Fed is injecting directly instead of lending it out. This raises the question: Is the Fed “pushing on a string”? Asha Bangalore (Northern Trust) commented as follows: “The lowering of the Fed funds rate, the Fed’s innovative programs to provide liquidity to financial institutions and more lenient rules for borrowing through the discount window appear to have exhausted the gamut of possibilities routed through monetary policy changes to influence aggregate demand.

“The provisions of the Emergency Economic Stabilization Act of 2008 allow for recapitalization of banks. The FDIC is working on obtaining an approval for the anti-foreclosure plan to address the housing market issues that are central to the current crisis. … the probability of a hefty fiscal stimulus package … is growing every day.”

Economic reports in other parts of the world were equally dismal.

Japan entered into its first recession in seven years as the financial crisis curbed demand for its exports. GDP growth contracted by 0.1% during the third quarter, or at an annualized rate of -0.4%, following a second quarter contraction of a massive 0.9%.

Source: Financial Times, November 17, 2008.

China also warned that the unemployment outlook was “grim” as a result of the financial crisis forcing the closure of more export-oriented factories.

In Europe, a further slowdown in economic activity caused the Swiss National Bank to announce a surprise 100 basis-point cut in its three-month target range to 0.5%-1.5% – the third emergency reduction in two months.

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

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Nov 17	8:30 AM	NY Empire State Index	Nov	-25.4	-26.0	-26.0	-24.6
Nov 17	9:15 AM	Capacity Utilization	Oct	76.4%	76.5%	76.5%	76.4%
Nov 17	9:15 AM	Industrial Production	Oct	1.3%	0.1%	0.2%	-2.8%
Nov 18	8:30 AM	Core PPI	Oct	0.4%	0.0%	0.1%	0.4%
Nov 18	8:30 AM	PPI	Oct	-2.8%	-2.0%	-1.8%	-0.4%
Nov 18	9:00 AM	Net Foreign Purchases	Sep	$66.2B	NA	$17.5B	$21.0B
Nov 19	8:30 AM	Building Permits	Oct	708K	760K	772K	805K
Nov 19	8:30 AM	Core CPI	Oct	-0.1%	0.1%	0.1%	0.1%
Nov 19	8:30 AM	CPI	Oct	-1.0%	-0.7%	-0.8%	0.0%
Nov 19	8:30 AM	Housing Starts	Oct	791K	780K	780K	828K
Nov 19	2:00 PM	FOMC Minutes	Oct 29	-	-	-	-
Nov 20	8:30 AM	Initial Claims	11/15	542K	505K	503K	515K
Nov 20	10:00 AM	Leading Indicators	Oct	-0.8%	-0.7%	-0.6%	0.1%
Nov 20	10:00 AM	Philadelphia Fed	Nov	-39.3	-30.0	-35.0	-37.5

Source: Yahoo Finance, November 21, 2008.

Next week’s US economic highlights, courtesy of Northern Trust, include the following:

1. Existing Home Sales (November 24): Sales of existing homes are predicted to have declined in October after a small gain in September. Sales of existing homes advanced by 7.8% from a year ago in September, after posting declines since late 2005. Consensus: 5.00 million versus 5.18 million in September.

2. Real GDP (November 25): Incoming economic reports suggest a small downward revision of real GDP in the third quarter to a 0.5% drop from the advance estimate of a 0.3% decline. Consensus: -0.5%

3. New Home Sales (November 26): Sales of new homes are expected to have fallen in October after a 2.3% increase in September. Sales of new homes have dropped by 32.1% from a year ago in September. Consensus: 450,000 versus 464,000 in September.

4. Durable Goods Orders (November 26): Durable goods orders (-2.0%) are predicted to have dropped in October reflecting declines in bookings of defense and aircraft, which posted large gains in September. Consensus: -2.6% versus +0.9% in September.

5. Personal Income and Spending (November 26): The earnings and payroll numbers for October indicate a steady reading for personal income in October. Auto sales fell sharply in October and non-auto retail sales were noticeably weak, pointing to a likely drop in consumer spending (-0.6%). Consensus: Personal income +0.1%, consumer spending -0.9%

6. Other reports: Case-Shiller Price Index, OFHEO Price Index, Consumer Confidence (November 25).

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

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

Source: Wall Street Journal Online, November 14, 2008.

Equities
Global stock markets suffered badly during the past week on mounting worries about the severity of the economic slowdown. The week’s movements – MSCI World Index -9.6% and MSCI Emerging Markets Index -11.8% – tell the story of a rough ride for bourses all over the world and marked a third straight week of losses. And the scoreboard would have been even worse if not for a dramatic late-session recovery in the US on the news that Timothy Geithner would be named Treasury Secretary.

Not a single developed market closed the week unscathed. Similarly, large losses also abounded among emerging markets, with the sole exception being the Shanghai Stock Exchange Composite Index that recorded only a relatively small 0.9% decline. The Index plunged by 72.0% since its high of October 16, 2007 until hitting a low on November 4, but has subsequently bounced by 15.4% to flirt with its 50-day moving average and roundophobia 2000 level. Will the upside leadership for global stock markets come from China on this occasion?

The chart below shows the performances of the four BRIC countries during the past week.

Click here or on the thumbnail below for a (very red) market map, obtained from Finviz, providing a quick overview of last week’s performances of global stock markets (as reflected by the movements of ADR stocks).

The US stock markets all declined sharply over the week as shown by the major index movements: Dow Jones Industrial Index -5.3 (YTD -39.3%), S&P 500 Index -8.4% (YTD -45.5%). Nasdaq Composite Index -8.7% (YTD �‘47.8%) and Russell 2000 Index -10.9% (YTD -46.9%).

The S&P 500 closed below its October 2002 low of 777 on Thursday, but Friday’s rally (+6.3%) to 800 put it back above this key support level. The Dow remained above its 2002 low of 7,286 on Thursday and closed 760 points above this level after Friday’s surge.

Click here or on the thumbnail below for a market map, also from Finviz.com, showing the performances of the various segments of the S&P 500 over the week.

As far as industry groups are concerned, gold (+19%) was the top performer for the week, led by Newmont Mining (NEM) on the back of a sharp rise in the price of gold bullion.

On the other side of the performance spectrum, the industrial real estate investment trust (REIT) group (-40%) was the worst performer. The diversified financial services group (-38%) was the second worst performer, with each of the group’s large banks – Citigroup (C), JPMorgan Chase (JPM) and Bank of America (BAC) – dropping sharply. Investor concerns about future credit losses, valuations of “toxic” securities on the banks’ books, job layoffs and capital adequacy issues were the drivers for the declines.

David Fuller (Fullermoney) commented as follows on the outlook for stock markets: “… we have yet to see evidence of bottoming out on many major stock market charts. While this is worrying, to put it mildly, and sentiment is diabolical, investors should recall an extremely important behavioural conditioning process. The crowd has always turned progressively more bearish with each additional decline towards the eventual low for every bear market. This is inevitable as more people sell, and unfortunately, few are more bearish than a battered holdout who finally capitulates.

“If global stock markets are not close to a major buying opportunity, then I suggest we should all head to sea and become Somali pirates.”

Fixed-interest instruments
Government bond yields across the world plunged last week as spooked investors rushed out of equities into sovereign debt.

The ten-year US Treasury Note yield declined by a massive 57 basis points to 3.18%, the UK ten-year Gilt yield dropped by 20 basis points to 3.87% and the German ten-year Bund yield fell by 30 basis points to 3.38%. However, emerging-market bonds, in general, lost ground as further deleveraging took its toll on risky assets.

The yield on ten-year Treasuries touched a 5½-year low (3.01%) on Thursday before rebounding by the close of the week, whereas the yield on 30-year bonds dropped to its lowest level (3.53%) since the start of regular issuance in 1977 before snapping back by 14 basis points.

US mortgage rates also declined, with the 30-year fixed rate dropping by 9 basis points to 6.09% and the 5-year ARM also by 9 basis points to 5.89%.

A number of indicators show that the credit crisis is still severe. For example, credit default swaps that measure default risk for investment grade debt are trading at their highest levels of the bear market. This is seen from Bespoke’s index that measures default risk for 125 companies with investment grade debt ratings.

Currencies
The week’s feature among currencies was safe-haven flows into the US dollar and Japanese yen as investors liquidated risky assets previously funded with these low-yielding currencies.

The Swiss franc came under pressure as the Swiss National Bank slashed interest rates a full percentage point to 1% as an emergency step to soften the economic slowdown.

The chart below illustrates the accent of the US dollar and Japanese yen since September 15. (The US dollar is measured against a trade-weighted basket of currencies, whereas all the other currencies are measured against the US dollar.)

Emerging-market currencies had another bad week as a result of increasing risk aversion. Examples of losses against the greenback include the Brazilian real (�‘10.4%), the Turkish lira (-4.5%), the South Korean won (-6.7%) and the South African rand (-4.4%).

RGE Monitor raised the question whether Bulgaria and the Baltic states will be forced to reset their fixed exchange rate pegs to the euro as a result of their large external imbalances and the global financial crisis. “Because of their fixed exchange rates, these economies cannot conduct independent monetary policy so the burden of macro-economic adjustment falls on fiscal policy.”

Commodities
The Reuters/Jeffries CRB Index (-6.5%) witnessed a further decline amid fears of a protracted global economic recession and expectations that demand will drop.

Gold bullion (+6.6%) bucked the trend and surged as the yellow metal found support among nervous investors as a safe store of value. A report that China might embark on a gold-buying program provided an additional boost.

On the other hand, West Texas Intermediate crude declined by a further 13.3% to $49.9 – a level not seen since May 2005. OPEC meets on November 29 to consider additional production cuts.

The graph below shows the movements of various commodities over the past week – a continuation of the intense bear market that has been in force since the beginning of July.

Lau-Tzu said: “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” Wise words indeed, but hopefully the news items and words from the investment wise below will cast some light on the lie of the investment land. And may the markets bring you additional reason to celebrate a joyous Thanksgiving.

That’s the way it looks from Cape Town.

Source: Pat Oliphant, Slate

Barry Ritholtz (The Big Picture): Record-breaking data everywhere!
“One of the interesting aspects of this unprecedented housing collapse, credit crisis, economic recession and market crash has been all the new records we keep seeing:

- Over the past year, the S&P 500 Index lost ~$1 trillion more than the entire 2000-2002 bear market, according to Standard & Poor’s. From the October 2007 highs of 1,565, to yesterday’s close of 806.58, the S&P 500 market capitalization lost $6.69 trillion. That’s almost $1 trillion more than entire 2000-03 bear market losses of $5.76 trillion. (Marketwatch)

- The S&P 500 hasn’t been this far below its 200-day moving average on a percentage basis since the Great Depression. (Doug Kass)

- CPI: US consumer prices in October registered their largest single-month decline since before World War II. It is the largest monthly drop in the 61-year history of the data;

- PPI, down 2.8% for the month, was also a record-breaking drop.

- The dividend yield on the S&P 500 is now greater than the yield on the 10-year Treasury. That hasn’t happened since 1958. (Barron’s)

- First-time claims for US unemployment insurance rose to the highest level since September 2001. The total number of people on unemployment benefit rolls jumped to the highest level since 1983.

- Housing starts fell to 791,000, off 38% from a year ago. That’s the slowest pace of starts since data began being compiled in 1959. Starts are now down 65% from the early 2006 peak – this has become the very worst housing downturn on record.

- Permits for new houses, at a 708,000 pace, were off 40% from a year ago, also the lowest total since it has been tracked starting in 1960. Put this into context of population – in 1960, the total US population stood at 180 million – 60% of today’s 300 million.

- The 30-year return for BBB-rated corporate bonds is now greater than the 30-year return for stocks. So it has not paid to take equity risk for 30 years! (The Street.com)

- The TIPS Spread ( Treasury Inflation Protected Securities versus the 10-year Treasury) is at a record low 54 basis points (1997).

- The Russell 3,000 now has 1,228 stocks a share price under $10. That’s 42% of the index. At the market’s 2002 lows, there were significantly less stocks trading below $10/share – just 884. (Bespoke)”

Source: Barry Ritholtz, The Big Picture, November 20, 2008.

The Wall Street Journal: Obama likely to pick Fed’s Geithner for Treasury
“President-elect Barack Obama is expected to nominate as Treasury Secretary Timothy Geithner, the president of the Federal Reserve Bank of New York and a figure who has been deeply involved in tackling the financial crisis.

“Mr. Geithner, 47 years old, would be one of the youngest-ever US Treasury secretaries. His nomination would come as Wall Street is being challenged by the financial crisis and a Washington power vacuum, and as the world’s debt markets show fresh signs of falling into deeper problems.

“Mr. Obama is expected to introduce his entire economic team on Monday, according to people familiar with the matter. The president-elect has been under pressure to speed up his transition as stock markets this past week fell to lows not seen since the late 1990s.

“Mr. Geithner served as a Treasury attaché in Japan in the 1990s and later at the International Monetary Fund. He was a protégé of former Treasury Secretaries Lawrence Summers and Robert Rubin. Mr. Summers, who was also a potential candidate, instead is expected to take a position within the White House as an economic adviser.

“Mr. Geithner has spent most of his career managing government responses to financial crises, from the 1990s bailouts of Mexico, Indonesia and Korea, to the debt-market meltdown that has brought Wall Street to its knees this year.

“Mr. Geithner (pronounced GYTE-ner) pushed for earlier intervention in the financial markets to stem the financial crisis, and looks likely to continue that activist approach in his new job. Among his first priorities could be a large fiscal-stimulus package.

“Unlike previous picks for Treasury secretary, who hailed from Wall Street, industry or the Senate, Mr. Geithner has been a technocrat most of his career.”

Source: Jonathan Weisman, Deborah Solomon and Jon Hilsenrath, The Wall Street Journal, November 22, 2008.

The Wall Street Journal: Paulson – we’re not experimenting with bailout
“Treasury Secretary Henry Paulson defended the Bush Administration’s $700 billion bailout plan, telling WSJ’s Alan Murray he doesn’t think he’s doing FDR-like experimentation with liquid assets.”

Source: The Wall Street Journal, November 17, 2008.

CNBC: Bernanke testimony
Federal Reserve chairman Ben Bernanke testifies before the House Financial Services Committee.

Source: CNBC, November 18, 2008.

Financial Times: US economy chiefs say policies bear fruit
“The cost of insuring top quality US companies against default hit a record high on Tuesday even as Hank Paulson and Ben Bernanke told Congress that their radical policy actions to ease the credit crisis were starting to bear fruit.

“‘We have turned the corner in terms of stabilising the system and preventing collapse,’ said Mr Paulson, Treasury secretary. He called for patience, saying: ‘There is a lot of work that still needs to be done in terms of recovery of the financial system.’

“Mr Bernanke said there were ‘some signs that credit markets, while still quite strained, are improving’.

“However, the Federal Reserve chairman noted that ‘overall credit conditions are still far from normal, with risk spreads remaining very elevated’.

“On Tuesday, the CDX index that measures the cost of insuring investment grade companies against default closed at a record high on mounting concern about the global economy, and there were fresh signs of dislocation in the swaps market.

“Meanwhile, indices that measure the value of securities backed by residential and commercial property loans – which have plunged since Mr Paulson abandoned his plan to buy toxic assets last week – continued to plumb new depths.”

Source: Michael Mackenzie and Krishna Guha, Financial Times, November 18, 2008.

The Wall Street: Paulson, Summers, Rubin debate crisis
“Current Treasury Secretary Henry Paulson and predecessors Lawrence Summers and Robert Rubin locked horns over the best way to get the US economy back on track.”

Source: The Wall Street Journal, November 17, 2008.

Bespoke: Paulson trying to rewrite his own history
“Treasury Secretary Henry Paulson spoke at the Reagan Library this afternoon, and judging by the speech, it appears as though Mr. Paulson is embarking on a PR campaign to rewrite the history of his handling of the credit crisis. One line that stood out was when he said: ‘By pro-actively addressing the problems we saw coming …’

“Judging by excerpts of prior comments the Treasury Secretary made during 2007, if Mr. Paulson saw the problems coming, he wasn’t telling anybody.

“Marketwatch 3/13/07: Paulson also said the fallout in subprime mortgages is ‘going to be painful to some lenders, but it is largely contained.’

“Reuters 4/20/07: ‘I don’t see (subprime mortgage market troubles) imposing a serious problem. I think it’s going to be largely contained.’

“Bloomberg 5/22/07: Paulson, also speaking to CNBC, said the housing slump was ‘largely contained‘ and that market’s correction was mostly ‘behind us.’

“Bloomberg 6/20/07: Subprime fallout ‘will not affect the economy overall.’

“Forbes 7/27/07: Appearing on CNBC with other members of the Bush administration’s economic team, he again said mortgage industry problems would be ‘largely contained.’

“Boston.com 8/1/07: Paulson added that he did not see anything that caused him to reconsider his view that the economic damage from the housing correction was ‘largely contained.’

“Another classic line from today was, ‘As I assess our current situation, I believe we have taken the necessary steps to prevent a financial collapse.’ Mr. Paulson, what is it going to take for you to consider this a financial collapse?

“Given that the extent of the credit crisis was underestimated by almost everyone, you can give Paulson somewhat of a pass for missing it. But to try and rewrite history through speeches even while the credit crisis is still playing out is inexcusable.”

Source: Bespoke, November 20, 2008.

Financial Times: Congress reaches an impasse on car bailout
“The US Congress is unable to approve a new emergency loan to the country’s troubled car sector, Democratic leaders said on Thursday.

“Industry chiefs’ pleas for aid appeared to backfire after two days of hearings on Capitol Hill. News of the impasse over one of the hardest-hit sectors of the US economy came as President George W. Bush agreed to extend unemployment benefits after US weekly jobless claims hit a 16-year high.

“Harry Reid, Senate majority leader, and Nancy Pelosi, speaker of the House of Representatives, said there were not enough votes to pass a $25 billion loan for Detroit that Democrats had advocated. They said car companies had to be more specific about restructuring.

“The pair gave the big three carmakers – General Motors, Ford and Chrysler – until December 2 to submit a ‘viable’ recovery plan, with the prospect of convening hearings immediately afterwards and possible congressional votes a week after that.

“The announcement came in spite of last-minute efforts by six Democratic and Republican senators from car-producing states to reach a deal on a bridging loan.”

Source: Daniel Dombey, Andrew Ward and Bernard Simon, Financial Times, November 20, 2008.

ABC News: Auto bailout – would be better to burn the money
“Congress is debating cutting the Big Three Autos a check … something to tide them over through these tough times. General Motors is bleeding money … some 2 billion dollars a day. Bail them out or let them go bankrupt? That’s the billion dollar question. And its billions of your money.

“One side says give them money – they’re too big to fail, too many jobs will be lost, the American economy will be hit hard, they need time to get fuel efficient cars to the market.

“The flip side – let them fail, they brought this on themselves, pouring 25 billion into these failed models is a waste, bankruptcy protections will let them out of their incredibly expensive labor contracts.

“… David Yermack from NYU Stern Business School chimed in: ‘The implications of this story for Washington policy makers are obvious. Investing in the major auto companies today would be throwing good money after bad. Many are suggesting that $25 billion of public money be immediately injected into the auto business in order to buy time for an even larger bailout to be organized. We would do better to set this money on fire rather than using it to keep these dying firms on life support, setting them up for even more money-losing investments in the future.’”

Source: ABC News, November 17, 2008.

Paul Kedrosky (Infectious Greed): The auto bankruptcy teeter-totter
“GM, for its part, isn’t taking this lying down. It has posted a video on YouTube explaining – okay, propagandizing – the implications of letting it die. Watch it to see how the straight-to-consumer “Save us!” game is played.”

Source: Paul Kedrosky, Infectious Greed, November 15, 2008.

CNBC: Financial crisis tab already in the trillions
“Given the speed at which the federal government is throwing money at the financial crisis, the average taxpayer, never mind member of Congress, might not be faulted for losing track.

“CNBC, however, has been paying very close attention and keeping a running tally of actual spending as well as the commitments involved.

“Try $4.28 trillion dollars. Not only is it a astronomical amount of money, it’s a complicated cocktail of budgeted dollars, actual spending, guarantees, loans, swaps and other market mechanisms by the Federal Reserve, the Treasury and other offices of government taken over roughly the last year, based on government data and new releases. Strictly speaking, not every cent is directed as a result of what’s called the financial crisis, but it arguably related to it.”

Source: CNBC, November 17, 2008.

Reuters: Financials need at least $1 trillion – analyst
“The US financial system still needs at least $1 trillion to $1.2 trillion of tangible common equity to restore confidence and improve liquidity in the credit markets, Friedman Billings Ramsey analyst Paul Miller said.

“Eight financial companies – Citigroup, Morgan Stanley, Goldman Sachs Group, Wells Fargo, JPMorgan Chase, AIG, Bank of America Corp and GE Financial – are in greatest need of capital, he said.

“‘Debt or TARP capital is not true capital. Long-term debt financing is not the solution. Only injections of true tangible common equity will solve the current crisis,’ he said.

“Currently, the US financial system has $37 trillion of debt outstanding, he noted.

“Combined, these eight companies have roughly $12.2 trillion of assets and only $406 billion of tangible common capital, or just 3.4%, the analyst said.

“Miller said these institutions need somewhere between $1 trillion and $1.2 trillion of capital to put their balance sheets back on solid ground and begin to extend credit again, given their dependence on short-term funding and the illiquid nature of their asset bases.”

Source: Reuters, November 20, 2008.

Mr Mortgage: The great mortgage modification pump
“Reworking loans to make ‘payments affordable’ without permanently reducing principal balances is the worst possible thing that can be done because it ensures the housing and foreclosure crisis will be with us for a long time. If these programs are widely accepted, housing is a dead asset class indefinitely …

“This style of modification does not sit well with owners of mortgage securities either, which make up the bulk of distressed mortgages. This is because deferred interest, 40-year terms and interest only teaser periods, greatly reduces the cash flows and lengthens the duration of the security.”

Click here for the full article.

Source: Mr Mortgage, November 19, 2008.

Credit Suisse: More fiscal action needed to ease crisis
“The US, Europe and Japan are in significant recession, says Giles Keating, Head of Global Research at Credit Suisse. He explains how the financial crisis is evolving and why capital injections are needed.”

Source: Credit Suisse, November 12, 2008.

The Wall Street Journal: Discussing the Great Depression
“Dorothy Womble and William Hague survived the Great Depression. They share their stories of living during that time as children.”

Source: The Wall Street Journal, November 14, 2008.

Reuters: Fed’s Hoening – Fed has done “as much as it can”
“Kansas City Federal Reserve President Thomas Hoenig said on Monday the US central bank has done what it can to buffer the economy through a downturn, and a painful process of readjustment is likely ahead.

“‘The Fed has done about as much as it can do,’ he said in an interview on PBS’s Nightly Business Report. Interest rates are already extremely low, he noted, according to a transcript of the program.

“‘We might put it out there, but banks are not able to, given their own capital constraints, able to lend as aggressively,’ he added.

“Hoenig said he was surprised at how quickly economic activity has slowed, but that a sharp reversal of consumption was clearly a key development.

“‘The consumer factor was a major part of the strong slowdown and the actual entering into the recession,’ he said.

“‘Part of it is working through the deleveraging,’ he said. ‘I don’t know of any painless way to rebalance your economy, you have to go through this adjustment, and we will get through it, but it’s not going to be without consequence,’ he added.”

Source: Mark Felsenthal, Reuters, November 17, 2008.

Bloomberg: NABE’s Varvares says US recession to extend into 2009
“Chris Varvares, president of Macroeconomic Advisers LLC and president of the National Association for Business Economics, talks with Bloomberg about the results of NABE’s survey of business economists.”

Click here for the article.

Source: Timothy R. Homan, Bloomberg, November 17, 2008.

Bloomberg: Nouriel Roubini – “I fear the worst is yet to come”

Source: Bloomberg, November 20, 2008.

Clusterstock: Roubini – How are we screwed? Let us count the ways
“Nouriel Roubini weighs in with another treatise of doom, this time focused on consumer spending. He lists 20 reasons consumer spending is headed to hell in a handbasket, taking the economy down with it. We’re short on Prozac, so we’ll summarize only a handful here, and we’ll let Nouriel take it away:

“Today’s news about October retail sales (-2.8% relative to the previous month and now down in real terms for five months in a row) confirm what this forum has been arguing for a while, i.e. that the US has entered its most severe consumer-led recession in decades. At this rate of free fall in consumption real GDP growth could be a whopping 5% negative or even worse in Q4 of 2008. And this is not a temporary phenomenon as almost all of the fundamentals driving consumption are heading south on a persistent and structural basis …”

Click here for the article.

Source: Henry Blodget, Clusterstock, November 15, 2008.

Asha Bangalore (Northern Trust): What is the Fed’s next move?
“The minutes of the October 28 to 29 FOMC meeting were published this afternoon [Wednesday]. The main thrust of these minutes is that economic growth is the topmost concern. The minutes noted that ‘members also saw the substantial downside risks to growth as supporting a relatively large policy move at this meeting, though even after today’s 50 basis point action, the Committee judged that downside risks to growth would remain. Members anticipated that economic data over the upcoming intermeeting period would show significant weakness in economic activity, and some suggested that additional policy easing could well be appropriate at future meetings.’

“The target rate was lowered to 1.0% on October 29, with the effective rate trading between 22 bps and 37 bps since then. Is there a benefit to lowering the Federal funds rate? A lower Federal funds rate, as suggested in the minutes of the October 28-29 meeting, would only accomplish validating the already low effective Federal funds rate. It is possible the Fed could cut the Federal funds rate and abandon attempting to manage the effective rate such that it trades close to the target rate. It appears that the Fed may be considering the possibility of a zero federal funds eventually, if economic conditions warrant it.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 19, 2008.

Bloomberg: Fed to cut rates to zero on deflation risk, JPMorgan predicts
“The US Federal Reserve will probably cut interest rates to zero percent over the next two months to staunch deflation, according to JPMorgan Chase.

“The Fed will lower borrowing costs by 50 basis points at each of the next two policy meetings on December 16 and January 28, JPMorgan economist Michael Feroli wrote in a note to investors yesterday. The central bank will hold rates at zero for the rest of 2009 to prevent prices from spiraling down as companies cut jobs and banks reduce lending, stifling spending, Feroli said.

“The Fed may not be the only central bank to begin offering free money to jolt life into their recessionary economies and keep prices rising as the 15-month credit crisis deepens. The Bank of Japan cut its benchmark rate to 0.3% last month, and the European Central Bank has signaled it’s ready to lower rates further after two reductions in the past six weeks.

“‘Taking the target rate to zero percent would not be costless for the Fed,’ Feroli said. Public confidence may drop ‘if there is a perception that the Fed has run out of ammo’.”

Source: Jason Clenfield, Bloomberg, November 20, 2008.

Asha Bangalore (Northern Trust): Leading index points to further weakening of economy
“The Conference Board’s Index of Leading Economic Indicators (LEI) dropped 0.8% in October after a revised 0.1% increase in September. The LEI has dropped in four of the last six months. On a year-to-year basis, the LEI has dropped 3.5%, the largest monthly decline for the current cycle.

“The LEI has sent a reliable warning of weakening economic conditions for all recessions since 1960, with the exception of the 1967 dip (the economy was weak in this period but it was not a recession).”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 20, 2008.

Asha Bangalore (Northern Trust): Industrial production is significantly weak
“The headline industrial production index rose 1.3% in October, after a 3.7% drop in September. The September estimate now shows a larger drop than the original estimate of a 2.8% decline due to revised estimates of the impact of Hurricanes Gustav and Ike on the chemical industry. According to the Fed, excluding the special factors of hurricanes and Boeing strike, industrial production dropped 2/3 percent in both September and October.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 17, 2008.

Asha Bangalore (Northern Trust): Decline in housing starts stress persistence of housing turmoil
“Total housing starts dropped 4.5% to an annual rate of 791,000 in October, reflecting a decline in starts of both multi-family and single-family units. These numbers along with the record low of the Housing Market Index of the National Association of Home Builders in November imply that the bottom of housing starts is not here yet.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 19, 2008.

Asha Bangalore (Northern Trust): Housing market update – grim news bolsters Sheila Bair’s plan to stem the crisis
“The grim housing market news continues to support opinions that the mortgage problem is the key to a resolution of the current financial market crisis. The crux of the issue is that falling home prices, foreclosures, and rising inventories need to be replaced by more stable conditions for the economy to turnaround. The National Association of Home Builders reported in the November survey that the Housing Market Index fell to 9.0 from 14.0 in October to establish a new record.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 18, 2008.

Asha Bangalore (Northern Trust): Consumer Price Index plunges
“Today the BLS reported that the Consumer Price Index (CPI) fell by 1.0% both seasonally adjusted as well as unadjusted. On an unadjusted basis, this was the largest monthly decline in the CPI since January 1938.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, November 19, 2008.

BCA Research: Heading for deflation?
“A deflation scare will grip the developed world over the next 12 to 24 months.

“Our research on past real estate bear markets and subsequent banking sector stress (throughout Europe, the US and Japan) highlights that these episodes always lead to a recession, followed by a multi-year period of sub-par growth (i.e. negative output gap). In turn, excess supply helps dramatically drive down core CPI inflation in the years that follow. Granted, it could be argued that the previous episodes occurred during a period of strong structural disinflationary trends, thereby amplifying the magnitude and duration of the decline in price pressures.

“Nonetheless, core CPI inflation is likely to drop sharply throughout the G7 over the next 12 to 24 months, to lows at least comparable to the 2003 deflation scare. In turn, it is likely that the US prints very low positive or even mildly negative headline CPI numbers, given the drag resulting from the recent plunge in food and energy prices.

“Headline inflation is less likely to turn negative in Europe given the rigidity of the price structure but a deflation scare similar to the US earlier this decade is likely. The implication is that policymakers will continue to ease aggressively and then stay on hold for an extended period, benefiting our long duration call. “While the longer-term consequences of such actions may be inflationary, government bond yields will adjust lower in the near term.”

Source: BCA Research, November 17, 2008.

Bloomberg: Bond-market yields signal deflation worldwide
“Bonds worldwide are showing that investors are betting that slumping economic growth will lead to deflation in every major economy. Britain’s five-year breakeven rate went negative Tuesday for the first time since Bloomberg records began in 1996.”

Source: Bloomberg, November 19, 2008.

Financial Times: In a weird world, yields on Tips point to deflation
“Would you believe that we shall actually have significant deflation in the US next year? And the year after that? And flat consumer prices for the year following? That’s happened only once in a developed country since the 1930s – when Japan recorded a negative 1.6% consumer price index for 2002.

“Yet, if you believe the yields on US Treasury inflation protected bonds, or Tips, we shall have a 2.2% fall in prices in 2009, a 2.5% decline in 2010 and only flat prices in 2011. If that turns out to be true, the real interest rate burden on even the highest-rated borrowers will be extremely hard to bear.”

Source: John Dizard, Financial Times, November 18, 2008.

John Davies (WestLB): Buy German bunds
“The 10-year German Bund yield could fall to a record-equalling 3 per cent in the months to come in response to worries about the eurozone economy, believes John Davies, bond analyst at WestLB.

“‘Given the contracting economy and mounting threat of deflation, we now expect the European Central Bank to cut rates to 1.5% by the summer [from 3.25% now], which is lower than the market expects,’ he says.

“Mr Davies notes that the rapid steepening of the spread between two-year and 10-year German yields, which started in September, has slowed as the market moves to price in rates of 2% by the spring.

“But he says: ‘Given our forecast of a more aggressive ECB rate cut cycle, we fully expect the curve-steepening trend to remain safely intact.’

“While the steepening will primarily be driven by moves at the short end of the curve, long-end yields will fall as recession fears overshadow a jump in new issuance, Mr Davies says.

“‘We expect the 10-year yield to fall from 3.6% to 3.25% within the next three-to-six months, and even test the 3% record low set in September 2005. It is only the rise in supply next year that stops us projecting a sub-3% yield.’”

Source: John Davies, WestLB (via Financial Times), November 18, 2008.

Bloomberg: China passes Japan as biggest US Treasuries holder
“China surpassed Japan in September to become the biggest foreign holder of US Treasuries, as foreign investors sought the relative safety of government debt as stocks plunged 9.1% that month.

“Total net purchases of long-term equities, notes and bonds increased a net $66.2 billion in September from $21 billion the previous month, the Treasury said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $143.4 billion, compared with net buying of $21.4 billion the month before.

“China led all foreign official investors in September by posting a net increase in US Treasuries for the sixth month in the past seven, bringing its total ownership close to $600 billion. Japan was a net seller of Treasuries for the fourth month in the past six.

“‘The details of the report paint a much more positive picture of cross-border investments than expected,’ said Michael Woolfolk, a senior currency strategist at Bank of New York Mellon Corp. ‘China, along with others, is showing more demand than anticipated for US assets.’”

Source: John Brinsley and Rebecca Christie, Bloomberg, November 18, 2008.

Bespoke: High yield spreads – no slowdown in sight
“If you’re looking for signs of stabilization in the credit markets, the high yield market is not a good place to start. Based on data from Merrill Lynch, high yield bonds are yielding nearly 1,800 basis points more than comparable Treasuries. In the last month alone, spreads have risen by more than 200 basis points, and since bottoming in the Summer of 2007 at 241 basis points, they are up 645%. To put this in perspective, with the 10-year US Treasury now yielding 3.4%, a high-yield borrower would need to pay roughly 21.4% per year to take out a ten-year loan. With terms like these, who needs loan sharks?”

Source: Bespoke, November 19, 2008.

Bespoke: Financial weapons of mass destruction aimed at Omaha
“Warren Buffett is credited with coining the phrase ‘financial weapons of mass destruction’ with respect to derivatives. However, after some big unrealized losses on index options that Berkshire has written in the last couple of years, it now appears as though the derivative market is taking aim at Omaha. Over the last eight days, the cost to insure debt of Berkshire Hathaway has risen to 475 basis points per year. To put this into perspective, Morgan Stanley’s credit default swaps are currently trading at 456 basis points, and that is the highest of the big global banks and brokers. Berkshire Hathaway has long been considered one of the safest of the safest financial companies, but if Black October 2008 has taught us anything, it’s that nothing is safe.”

Source: Bespoke, November 20, 2008.

Bespoke: S&P 500 200-day moving average spread at -32%
“Multiple market pundits have recently mentioned that the S&P 500 is trading the furthest below its 200-day moving average since the Great Depression. Below we have plotted the 200-day spread indicator going back to 1927. The index is currently trading 32% below its 200-day moving average, which is indeed the most negative spread since 1937. While the spread can remain negative for quite some time, the reaction to the upside has been extreme once the market turns. In the 1930s, and even following the big declines in the 70s, 80s, and early 2000s, the spread turned violently positive in the months following the ultimate low in the 200-day spread. Unfortunately, nobody knows when that low will be.”

Source: Bespoke, November 17, 2008.

Barron’s: Reversal of fortunes between stocks and bonds
“… the dividend yield on the Standard & Poor’s 500 stock index touched 3.57% at 1:13 PM Eastern time [on Tuesday], exceeding the 3.54% yield on the benchmark Treasury 10-year note, according to Bloomberg News. That’s something that hadn’t happened since 1958.

“I was aware that there was a time when equities provided more income than bonds, but that belonged to a long-gone era. That was a time I knew of only from old movies, yellowed newspaper clippings and stacks of old Life magazines. It was when gentlemen wore suits and fedoras, not just to work but even to the ballpark; when the Dodgers played in Brooklyn; a bygone era already a half century ago.

“To contemporary market observers, it’s more than nostalgia. For the S&P 500 to yield more than Treasuries suggests the market is very cheap by historical standards, says Jack Ablin, portfolio strategist for Harris Private Bank. ‘Dividend yield, like price-to-sales, is one of those persistent metrics. We can all quibble about earnings, but dividends, particularly those of the entire S&P 500, are remarkably consistent,’ he adds.

“‘You can fake earnings through account hanky-panky, but you cannot fake dividends,’ agrees Barry Ritholtz, chief executive of Fusion IQ. So after a 47% drop, stocks look relatively cheap for the first time in a long time, he adds.

“Scott Minerd, chief investment officer for Guggenheim Partners, calls the drop in Treasury yields below the S&P 500 dividend yield a ‘straw in the wind’ that the stock market may be bottoming. Still, he thinks the market is signaling that dividend cuts are in the offing, but this recessionary trend also will push Treasury yields still lower.”

Click here for the full article.

Source: Barron’s, November 19, 2008.

John Authers (Financial Times): US stocks fall on deflation fears

Click here for the article.

Source: John Authers, Financial Times, November 19, 2008.

Frank Holmes (US Global Investors): An emotionally impaired market
“Global equities are now trading on their lowest valuations since the early 1980s. History says we should expect stock prices to turn up before earnings do. A recovery in earnings, when it happens, has previously been a robust second leg for more significant price appreciation. The second leg will take place when the earnings recession ends and profits begin to recover. Investment research based on historical patterns by Citigroup suggests the second leg is about 12 months away. With this in mind, we’re nibbling on stocks we believe are undervalued based on fundamental screens and have been hit the hardest as candidates for price appreciation.

“Weak earnings and expectations of more bad news to come have weighed heavily on stock prices. The global equity market trades on 10 times trailing earnings and over 15 times expected trough earnings. The 40-year average global price-to-earnings ratio is 17 times. Citigroup’s research demonstrates that the global equity market is extremely undervalued, but valuations could continue to fall through year end.

“We believe the market and economy are now being emotionally impaired due to the cascading negative news by unbalanced media. Today [Friday] is the first day this week without negative grandstanding politicians on TV and the market was up. Stocks are so oversold and markets, as we have commented in the past, are due for a substantial rally. We believe the market is looking for certainty that President-elect Obama and his team are not going to raise taxes in this economic environment. If the new administration reverses course and denounces tax hikes for two years and proposes a budget to rebuild our infrastructure, then this week could have been the bottom for the market.”

Click here for article by Robert Buckland, Citigroup’s Chief Global Equity Strategist.

Source: Frank Holmes, US Global Investors – Weekly Investor Alert, November 21, 2008.

Bespoke: Trailing 12-month P/E ratios are low
“The S&P 500 Financial, Consumer Discretionary, and Telecom sectors currently have negative P/E ratios, which makes the overall index’s P/E high at 18.41. Sectors whose P/Es aren’t negative have very low trailing P/Es versus historical readings. The Energy sector currently has the lowest P/E at 6.55. The second lowest is Materials at 9.14, followed closely by Industrials at 9.44. And the Technology sector, which usually has a relatively high P/E, currently has a P/E of just 12.49.”

Source: Bespoke, November 17, 2008.

Bloomberg: Mobius says he’s buying China, India, South Africa
“Mark Mobius said he’s ‘aggressively’ buying consumer stocks, including cell-phone companies, retailers, banks and furniture makers, as faster economic growth in China, India, South Africa and Turkey offsets sagging demand from developed nations.

“‘We see a consumer boom in all of those countries,’ Mobius, who oversaw more than $24 billion in emerging-market stocks on September 30 as executive chairman at Templeton Asset Management, said in a Bloomberg Television interview from Johannesburg. ‘Per-capita income is growing at a very rapid pace in these countries.’

“China announced a $586 billion stimulus plan on November 9 after its gross domestic product grew 9% in the third quarter, the slowest pace in five years. India’s central bank estimates growth will slow to 7.5% this year and next, from an annual average of 8.9% in the past four years. Emerging markets will expand at an average of 5% in 2009, compared with 1% in developed countries, Mobius forecast on October 21.

“The global economic downturn may not be as long or severe as expected because of the coordinated fiscal and monetary stimulus put forth by policy makers worldwide, the 72-year-old investor said today.

“The slowdown ‘will be rather short-lived and, of course, the markets will anticipate this’, Singapore-based Mobius said. ‘There will be some deceleration, but these are still fast- growing countries.’”

Source: Fabio Alves and Monica Bertran, Bloomberg, November 17, 2008.

David Powell (Bank of America): Is the dollar’s recent rally coming to an end?
“David Powell, currency strategist at Bank of America, believes the dollar has lost several important sources of support.

“The global shortage of dollar liquidity – one of the primary reasons for the US currency’s strength as the financial crisis escalated in September – has been sharply reduced by the extraordinary measures introduced by central banks to ease money market stress, he says.

“Furthermore, the repatriation of the dollar, which prevented its retracement as tensions in the wholesale funding markets were reduced, may no longer provide the currency with much support moving forward. Private sector flow data indicate the repatriation of foreign investments to the US is slowing sharply, Mr Powell says.

“‘A third factor behind the resilience of the dollar seems to have been the steady return offered by longer-dated US Treasuries, when compared with the sharp drop in German Bund yields. However, the fall in the euro against the dollar appears excessive even when compared to drop in the 10-year Bund-Treasury yield spread.

“‘In addition, a dollar retracement is likely to gain momentum from the pattern of seasonal weakness normally seen in December. As such, we affirm our year-end euro/dollar forecast of $1.38 and outlook for a return to $1.44 by the first quarter of 2009 before the pair resumes a more gradual sell-off.’”

Source: David Powell, Bank of America (via Financial Times), November 19, 2008.

Financial Times: Jim Rogers – the dollar is a flawed currency
The following is an excerpt from an online interview with Jim Rogers.

“FT: It’s a year since we last interviewed you. You were aggressively bearish about the dollar, but you thought there would probably be a rebound and you would take that as an opportunity to further get out of the dollar. Have you made a further exit from the dollar?

“JR: Not yet, no. And the reason I haven’t is because we’re in a period of forced liquidation of everything. We’ve only had eight or nine periods like this in the past 150 years, where everybody has to reverse their positions on everything. There is a gigantic short position in the dollar and they’re all having to cover as they reverse their positions, so this rout is going to go on much further than I would have expected, to my delight, because then I’ll get to sell at higher prices. I don’t know whether I’ll get out this month or this year even, maybe next year, but I do plan to get out of the rest of my US dollars, because this is an artificial rally caused purely by short covering.

“FT: How will you tell when that deleveraging is finally over?

“JR: I’m sure I won’t get it right, but I do hope that when there’s a lot of euphoria about the dollar and everybody’s saying, well, see, there’s no problem with the dollar … I hope I’m smart enough to recognise it and finally get out of the dollar, because it is a flawed and maybe, even, doomed currency.

“FT: Do you see the sell-offs we’ve seen in commodities as a drastic correction?

“JR: Well, we’re in a period of forced liquidation of all assets … we’re getting the business cycle effect on demand right now, certainly, but unless the world’s in perpetual economic decline, commodities are the only thing going to come out of this okay.

“FT: Does this mean you’re actually buying back into commodities at the moment, or is this an area you’re standing clear of?

“JR: No, no. In October when I started covering my shorts in the US stock market, I started buying Chinese shares, Taiwan shares, I started buying commodities again. No, no, I’ve added to those positions.

“FT: What’s your strategy towards emerging market stocks?

“JR: My hope is that I’m smart enough and brave enough at some point along the line to buy some of them back. But I’m not even thinking about it right now … The world’s financial situation is in a mess, and there are a lot of people who have to liquidate. I mean, we must have had 30,000 MBAs flying around the world looking for emerging markets. All of that money has got to come home.

“FT: How do you think the world should go about redesigning the regulatory system, and are you worried that we’re going to end up with a swing towards over-regulation?

“JR: Well, we probably will, The problem is that people like Alan Greenspan would never let the market work … For 15 years, under Greenspan, and now Bernanke, they would not let the market work. Had they let Long-Term Capital Management fail back in 1998, we wouldn’t have these problems now, I assure you. Lehman Brothers would have been smashed. Goldman Sachs, Bear Stearns, would have been smashed. We wouldn’t have these problems now. That only happened because every time they turned around they propped these guys up, gave them more money, and that’s why we have the problem … But now, of course, they’re going to blame it on other people and cause more regulations.

“FT: You’re arguing we need to allow some more big institutions to fail?

“JR: One failed. Why didn’t they let Fannie Mae and Freddie Mac? I mean, I was short Fannie Mae, and they should have let it fail, go to zero. AIG, they should have let it fail, they should have let all of these guys fail, and we would clean out the system … What they’re doing is they’re taking the assets away from the competent people, giving them to the incompetent people and saying to the incompetent: ‘Okay, now you can compete with the competent people, with their money.’ I mean this is terrible economics. This is outrageous economics.”

Source: Jim Rogers, Financial Times, November 17, 2008.

Bloomberg: China should buy gold for reserves, Association says
“China, the second-biggest overseas holder of US Treasuries, should increase its bullion holding to diversify its reserves because the dollar may decline, the country’s gold association said.

“‘China should have at least several thousand tons of gold in its reserves, five to six times the officially announced 600 tons,’ Hou Huimin, vice chairman of the China Gold Association said from Beijing. The group represents producers, traders and retailers.

“The US budget deficit climbed to a record in October, and some investors are betting the dollar may weaken as the Treasury would need to sell more debt to finance its $700 billion financial-rescue package. Gold has tumbled 29% from its March record.

“‘There’s no doubt that gold would be attractive, as US debt is likely to swell,’ said Kenichiro Ikezawa, who oversees about $3 billion as a fund manager at Daiwa SB Investments in Tokyo. ‘In the long term, both the dollar and Treasuries will probably weaken. It’s possible that China will buy more gold, though the country is likely to do so gradually.’”

Source: Xiao Yu and Ron Harui, Bloomberg, November 14, 2008.

Reuters: Iran switches reserves to gold
“Iran has converted financial reserves into gold to avoid future problems, an adviser to President Mahmoud Ahmadinejad said in comments published on Saturday, after the price of oil fell more than 60% from a peak in July.

“Iran, the world’s fourth-largest oil producer, is under UN and US sanctions over its disputed nuclear programme and is now also facing declining revenue from its oil exports after crude prices tumbled.

“‘With the plans of the presidency … the country’s money reserves were changed into gold so that we wouldn’t be faced with many problems in the future,’ presidential adviser Mojtaba Samareh-Hashemi was quoted as saying by business daily Poul.

“Iranian officials in July denied reports that Iranian banks were moving funds from Europe, with one report suggesting as much as $75 billion had been withdrawn and converted into gold or placed in Asian banks, because of a threat of tightening sanctions.”

Source: Zahra Hosseinian, Reuters, November 15, 2008.

The New York Post: Global run on gold coins
“There’s a worldwide run on gold coins. Even as the price of the precious metal itself comes under pressure along with commodities like oil and copper, people around the world are demanding so many of the valuable coins that government mints are having difficulty filling orders.

“A spokesperson for the US Mint tells me that gold coins in this country, for the past month, ‘are being allocated because of an increased demand’.

“And the price that the government charges coin dealers has recently been increased by as much as 10% for a 10-ounce coin.

“And even when gold coins are available, dealers report that customers are paying a bigger premium than they would have just a few months ago.

“In one sense, the attraction for gold coins isn’t surprising. Since ancient times, gold has been considered the safest investment to hold in times of uncertainty.

“With fears of future inflation rising and concern about the value of paper currency and government-debt increasing with each new recovery plan announced in Washington and in foreign capitals, the desire to hold gold grows.

“That part makes perfect sense. But there’s another more puzzling aspect to the recent gold rush. Even as the demand for gold coins such as the Canadian Maple Leaf or the Krugerrand of South Africa has grown, the market price of the precious metal itself is off its highs.

“Bill Murphy, chairman of the Gold Anti-Trust Action Committee, says the price of spot gold is even more perplexing given the demand for coins and the fact that central banks in Europe have stopped selling gold into the open market.

“‘Gold should be moving up,’ Murphy says. ‘How could there be such a dichotomy between the historic high premium for coins all over the world and the low Comex price?’

“His answer? ‘Today the public is buying gold like crazy, but the US government and the banks that hold bullion are intentionally keeping the price down.’”

Source: John Crudele, New York Post, November 18, 2008.

James Pressler (Northern Trust): Japan enters first recession in 7 years
“Today’s indicators out of Japan confirmed what we had expected – that Japan is in recession, though the consensus believed there were enough one-offs to growth to keep the headline figure on the positive side of zero. Real GDP contracted by 0.1% from the previous quarter after a sharper fall of 0.9% in Q2 (originally -0.7%), with Q3 consumption rising by 0.3% after a fall of 0.6%. True, there were factors that perked up private consumption, but they were not enough to overcome a weak net exports figure that will only get worse in the coming quarters.”

Source: James Pressler, Northern Trust – Daily Global Commentary, November 17, 2008.

YouTube: Bloomberg Voices – Japan enters recession

Source: YouTube, November 17, 2008.

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