Words from the (Investment) Wise (March 15, 2010)

Monday, March 15th, 2010

Shrugging off some lingering reminders of the credit crisis and recession, investors last week marked the one-year anniversary of the bear market low by pushing many benchmark equity indices to cycle highs.

Wall Street scaled 17-month highs on the back of easing concerns of sovereign debt defaults and increased hopes for a global economic recovery as the US dollar pulled back and the CBOE Volatility (VIX) Index approached 22-month lows. The Index is also referred to as the “fear gauge” of US stock markets and is used as a contrary indicator that moves inversely to equity prices, as seen in the chart below where it is plotted against the S&P 500 Index.

Source: StockCharts.com

Meanwhile, US Senate Banking Committee chairman Christopher Dodd plans to introduce a revised version of a financial regulatory reform bill on Monday. Dodd had hoped to release a bipartisan bill but has been unable to do so. Not a moment too soon, as a 2,200-page report by Anton Valukas, appointed by a US court to probe the reasons for Lehman’s failure in September 2008, raised serious questions about the bank’s top management, including former CEO Dick Fuld, and auditors Ernst & Young, reported the Financial Times.

Source: Doonesbury, SlateV.com, March 1, 2010. (Hat tip: The Big Picture)

The past week’s performance of the major asset classes is summarized in the chart below - a set of numbers indicating that a degree of risk taking has crept back into financial markets. Interestingly, similar to a number of stock market indices, investment-grade corporate bonds also scaled fresh cycle peaks, whereas high-yield bonds are testing their January highs. Although yields on US government bonds did not change much on the week, the bond market was actually quite strong in light of the US Treasury being able to sell $74 billion in 3-, 10- and 30-year Notes and Bonds at lower-than-expected yields. Fears of further monetary tightening in China weighed on the Shanghai Composite Index (shown in the table of global stock market performance lower down) and commodities. Gold and silver were also out of favor. (Click here for Adam Hewison’s (INO.com) latest technical analysis of the outlook for gold bullion.)

Source: StockCharts.com

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

The cyclical bull market that commenced on March 9, 2009 celebrated its first anniversary with gains across a broad front. The MSCI World Index and the MSCI Emerging Markets Index gained 1.4% and 1.8% respectively. Among mature markets, Japan (+3.7%) reached its highest close in seven weeks in expectation that further easing of monetary policy by the Bank of Japan (BoJ) on Wednesday will weaken the yen and boost exporters. The only weak spots were a few emerging markets such as China (-0.6%), Russia (-0.3%) and Venezuela (-0.1%).

Notwithstanding the huge rally since the March lows, only the Chile Stock Market General Index has been able to reclaim its 2007 pre-crisis peak and is now trading 9.3% higher. Mexico and Israel could be the next countries to eliminate the bear market losses. The Dow Jones Industrial Index and the S&P 500 Index are still 25.0% and 26.5% respectively down on their October 2007 bull market peaks.

All the major US indices are back in the black for 2010 to date. The small-cap Russell 2000 Index, a clear leader among the indices, has registered 20 out of 23 up-days since the low of February 8.

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

Advertisement

Top performers among the entire spectrum of stock markets this week were Kenya (+8.3%), Jamaica (+6.5%), Sweden (+5.4%), Nigeria (+5.3%) and Hungary (+4.6%). Debt-burdened Greece’s austerity plans gained favor with investors, pushing the Athex Composite Share Price Index up by +3.7 for the week. At the bottom end of the performance rankings, countries included Nepal (‑3.4%), Bangladesh (-2.3%), Macedonia (-1.6%), Peru (-1.5%) and Botswana (-1.4%).

Of the 94 stock markets I keep on my radar screen, 74% recorded gains, 21% showed losses and 5% remained unchanged. The performance map below tells the past week’s mostly bullish story.

Emerginvest world markets heat map

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

Seven of the ten economic sectors of the S&P 500 Index closed higher for the week, with defensive sectors Health Care, Consumer Staples and Utilities the only ones under water.

Source: US Global Investors - Weekly Investor Alert, March 12, 2010.

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included iShares MSCI Sweden (EWD) (+5.3), Claymore/Delta Global Shipping (SEA) (+5.0%), Market Vectors Indonesia (IDX) (+5.0%), First Trust Amex Biotech (FBT) (+4.5%), Claymore/NYSE Arca Airline (FAA) (+3.9%) and iShares Cohen & Steers Realty Majors (ICF) (+3.9%).

At the bottom end of the performance rankings, ETFs included iPath DJ AIG Sugar (SGG) (-12.2%), United States Natural Gas (UNG) (-4.7%), iPath DJ AIG Natural Gas (GAZ) (-4.5%), ProShares Short Financials (SEF) (-4.1%) and ProShares Short Emerging Markets (EUM) (-2.8%).

The table below, courtesy of Bespoke, highlights the performance of key ETFs across all asset classes over the last month, six months and year.

“Over the last year, just three ETFs shown are down - Natural Gas (UNG) at ‑48%, 7-10 Year Treasuries (IEF) at -4%, and 20+ Year Treasuries (TLT) at ‑13%. The best-performing ETF shown over the last year has been Russia (RSX) with a gain of 175%. India (INP) ranks second with a gain of 165%, and the Financial sector ETF (XLF) third with a gain of 144%,” said the report.

Source: Bespoke, March 9, 2010.

Referring to the ballooning US budget deficit, the quote du jour this week comes from 85-year-old Richard Russell, La Jolla-based author of the Dow Theory Letters. He said: “The estimates of budget deficits are so huge that they defy the ability of the average citizen to comprehend them. As the US continues to create more dollars, at some point our foreign creditors are going to want higher returns (rate) before they are willing to make loans to the US. Rising rates would be an extreme danger to the US. Not only would they hurt business. Rising interest rates mean a rising cost of carrying the national debt. The process of compounding the cost of the national debt would send US finances into a ‘death spiral’.

“I think institutional investors are holding off on buying stocks because they don’t see stocks as safe long-term holdings. Big money investors are looking ahead to higher interest rates. That combined with current high valuations for stocks constitutes a red flag for seasoned investors. The key here is probably the action of the bond market, and particularly long-dated Treasury bonds. The 30-year T-bonds would be particularly sensitive to Treasury financing looking years ahead.

“It is still not clear how the US is going to finance its enormous national debt. Reneging on the debt is unthinkable. To raise taxes and at the same time cut down on spending is almost an impossibility. That leaves inflation as the most probable answer. As soon as our creditors realize our ‘way out’ is inflation, they will halt their process of lending to the US, or at least halt lending at current low, low rates.”

Elsewhere, The New York Times reported that “the White House and Congressional leaders put Democrats on notice on Friday that they would push ahead next week toward climactic votes on the health care legislation.”
Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. The usual suspects such as “bank”, “China”, “debt”, “economy”, “Fed”, “market”, “policy” and “rates” featured prominently, with “Greece” taking a back seat after its prominence over the past few weeks.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town when not traveling) are given in the table below. With the exception of the Shanghai Composite Index, the indices in the table are all trading above their 50- and 200-day moving averages.

The table provides the February lows for the various indices as these must hold in order for the cyclical bull market to remain intact. Importantly, although the Shanghai Composite Index is trading a little below its key moving averages, it is still above the February low. On the upside, a break above 3,097 is required to again put the Index on a bullish path.

The Dow Jones Transportation Index, the Nasdaq Composite Index and the Russell 2000 Index all made new cycle highs during the week, with the S&P 500 closing at exactly the same level as its January high and the Dow Jones Industrial Index still 100 points short. (The fact that the Transports recorded a new high but not the Industrials represents a so-called Dow Theory non-confirmation.) However, the indices still have more work to do in order to reach pre-Lehman levels - 1,250 in the case of the S&P 500 (i.e. a gain of 8.7% from here).

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

Using Fibonacci retracement lines, the S&P 500 is now testing the 62% retracement line drawn from the May 2008 peak to the March 2009 bottom (see purple lines). According to John Murphy (StockCharts.com), a break of this key upside target raises the possibility that the Index could retrace 62% of the entire bear market that started in the fourth quarter of 2007, in which case the potential upside target is 1,232 (see green lines).

Source: StockCharts.com

Advertisement

Also commenting on the technical picture of the S&P 500, Kevin Lane (Fusion IQ) said: “Currently individual investor allocations towards equities are slightly below the mean, which puts us in a zone where, though reduced, buying power is still ample. With buying power relatively strong and the AAII Bull Sentiment Survey still at a relatively neutral reading, it’s hard to see a big correction here. What may be a likely scenario is as follows: the market continues to move up and investors, even the non-believers, start chasing stocks, putting their last bit of buying power into the market.”

Bill King (The King Report) believes the stock market could make some kind of top in the next 3-6 weeks. “The recovery rally is stretched, the Fed is scheduled to end its monetization this month, volume is contracting, the usual small cap-tech rally has accelerated and April 30 is the end of the best seasonal rally period; expiration is next week and Q1 performance gaming looms,” he said. “But most importantly, March and April often contain important reversals or significant declines for stocks. Curfew hour is approaching.”

From London, David Fuller (Fullermoney) adds the following perspective: “All technical evidence to date suggests we have seen a normal correction to the cyclical bull market’s trend mean represented by rising 200-day moving averages. The only minor negative is that persistent rallies have replaced short-term oversold conditions with short-term overbought readings. If this matters beyond brief pauses, we would see it in the form of downward dynamics and failed upside breaks from trading ranges. However, a more important factor is likely to be the months spent by most equity indices in ranging consolidations, as they gradually worked their way over to their rising moving average mean. In the absence of downward dynamics, perhaps caused by some currently unexpected fright, stock markets remain capable of running on the upside.”

On a somewhat longer-term horizon, Fuller identifies a number of possible warning signals to look out for: “1) Strong economic growth competes for capital and invites monetary tightening by central banks; 2) strong growth and too much speculation would lift oil prices over the low $80s highs for this cycle to date, towards headwind levels of $100 or more; 3) US 10-year Treasury yields above 4% would be an advance warning but the real danger area is above 5%; 4) a very weak USD could undermine confidence but this is clearly not a threat today.”

Although the fat lady has not yet made her appearance to signal the end of the bull cycle, the steepness of the nascent rally, together with resistance in the area of the January highs, could result in stock markets consolidating in order to work off a short-term overbought condition. On the fundamental front, tighter money does not necessarily spell a declining stock market, but turning off the “juice” will certainly remove a tailwind, making earnings growth the key determinant for generating further gains (especially in light of stretched valuations).

For more discussion on the economy and financial markets, see my recent posts “Video feast: Make Markets Be Markets“, “Stock market is overvalued, overbought and overbullish, according to Hussman“, “Technical talk: Hard to see a big correction here“, “Interview: James Montier on value investing“, “Interview: James Montier on behavioral investing“, “Stock markets - celebrating one year of gains, but only Chile above 2007 peak” and “Q&A on emerging markets with Mark Mobuis“. (And do make a point of listening to Donald Coxe’s webcast of March 12, which can be accessed from the sidebar of the Investment Postcards site.)

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

Economy
“There has been little change in global business confidence since the beginning of this year. Sentiment remains consistent with only a modest global economic recovery. Businesses are upbeat when broadly assessing current conditions and the outlook through this summer, but remain stubbornly cautious in their assessment of sales strength, hiring and inventories,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. South Americans are the most upbeat and North Americans the most nervous. Confidence is strongest among financial and business services firms and weakest among those working in real estate and government. Manufacturing firms are in between.

Source: Moody’s Economy.com

Referring to the precarious debt situation of many countries, Mohamed El-Erian, co-chief investment officer of Pimco, said on the company’s website: “Every once in a while, the world is faced with a major economic development that is ill-understood at first and dismissed as of limited relevance, and which then catches governments, companies and households unawares.”

As seen in the chart below (courtesy of US Global Investors), the sovereign debt-to-GDP ratio is much worse for the G-20 largest developed economies (about 100%) than for the 20 most important emerging markets (approximately 40%). The G-20 ratio is forecast to increase by another 20% over the next few years, while the emerging countries’ ratio is expected to decline as a result of smaller budget deficits.

Source: US Global Investors - Investor Alert, March 12, 2010.

Although developed markets still have higher sovereign credit ratings (left axis) than emerging markets (right axis), the ratings of emerging markets are improving, while those of developed markets are worsening significantly.

Source: US Global Investors - Investor Alert, March 12, 2010.

Back to El-Erian who said: “Governments naturally aspire to overcome bad debt dynamics through the orderly (and relatively painless) combination of growth and a willingness on the part of the private sector to maintain and extend holdings of government debt. Such an outcome, however, faces considerable headwinds in a world of unusually high unemployment, muted growth dynamics, persistently large deficits and regulatory uncertainty.

“Countries will thus be forced to make difficult decisions relating to higher taxation and lower spending. If these do not materialize on a timely basis, the universe of likely outcomes will expand to include inflating out of excessive debt and, in the extreme, default and confiscation.”

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

Friday, March 12, 2010
• Strength of February retail sales impressive, but Q1 consumer spending could show only tepid gain
• Rebound in business inventory accumulation in store for 2010?
• University of Michigan Consumer Sentiment Index again edges down

Thursday, March 11, 2010
• Flow of funds: Net worth of households grew, household debt reduction continues, net lending remains a challenge
• International trade:  Decline in oil and auto imports account for narrowing of trade gap
• Total continuing claims holding at elevated level

Wednesday, March 10, 2010
• Budget deficits:  The challenge ahead in a picture
• Wholesale inventories:  Inventory-sales ratio at record low

Considering the Fed’s Beige Book (released the week before last), David Rosenberg (Gluskin Sheff & Associates) said: “The Beige Book is very useful in terms of its timeliness and granularity to the sector level. I always make a note to check and see which industries are seeing positive and negative momentum. In the latest Beige Book the list of positives was longer than I have seen in at least the last two years (twice as many positive sectors as there were negatives).

“The positive mentions are: steel, natural gas, tech (especially semiconductors), software/information services, housing (entry level), tourism, staffing firms, chemical manufacturing, rail transports, airlines (fares stabilizing, leisure and business demand improving), heavy machinery (especially mining and agriculture equipment), plastic products, health care services, negative mentions, commercial real estate, banking, commercial aircraft, automotive, coal and petrochemicals.”

A majority of economists in the National Association of Business Economists’ semi-annual survey expressed the opinion, as reported by MoneyNews, that a rise in interest rates was both likely and appropriate in the next several months. “I’m a little worried that the extended period language [used in the Fed's statements] is conveying too much of a particular date to markets about interest rates,” added St. Louis Federal Reserve Bank President James Bullard.

Advertisement

Pimco’s co-chief investment officer and founder, Bill Gross, on the other hand, said he was skeptical of the economy’s ability to grow without the government programs and that it was possible for “some of the Fed’s liquidity programs to come back” if recovery was uncertain, according to CNBC reports (via MoneyNews). “When debt to GDP reaches 90%, as it looks like it will, growth slows and bad things happen. That’s the potential going forward, not a default,” he said.

Bill King is of the opinion that “the FOMC meeting next Tuesday will certify or annul the scheduled termination of quantitative easing (QE) - the monetization of mortgage-backed securities (MBS) and agencies - on March 31. The bubble meisters must also address the issue of keeping interest rates low ‘for an extended period of time’. This rhetoric is causing internecine fighting within the Fed. The financial center districts want to keep the juice flowing. Non-financial district presidents are more hawkish and concerned about inflation.”

Moving across the pond, amidst debt concerns regarding the PIIGS countries (Portugal, Ireland, Iceland, Greece and Spain), the European Union released a report on Friday showing Eurozone industrial production had increased in January at the highest rate since the start of records in 1990.

Further afield, Chinese exports increased by 45.7% in February on a year-ago basis, eclipsing forecasts and providing evidence of a strong economy. However, China’s inflation rate also rose significantly in February, registering a 2.5% increase from a year before - the highest in 16 months.

According to US Global Investors, the latest inflation figure surpassed the one-year deposit rate of 2.25%. Negative real interest rates may provide an additional incentive to drive asset prices higher, increasing the likelihood of the Chinese central bank raising interest rates from a five-year low.

Source: US Global Investors - Investor Alert, March 12, 2010.

On the question of exiting from monetary stimulus, the chart below shows Citi’s estimates (via US Global Investors) of upcoming rate increases in emerging countries in 2010. Higher rates are on the cards for countries where inflation pressures are building, notably Brazil and Turkey.

Source: US Global Investors - Investor Alert, March 12, 2010.

Week’s economic reports

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Mar 10	10:00 AM	Wholesale Inventories	Jan	-0.2%	-0.1%	0.2%	-1.0%
Mar 10	10:30 AM	Crude Inventories	03/06	1.43M	NA	NA	4.03M
Mar 10	02:00 PM	Treasury Budget	Feb	-$220.9B	-$223.0B	-$222.0B	-$42.6B
Mar 11	08:30 AM	Continuing Claims	2/27	4558K	4550K	4500K	4521K
Mar 11	08:30 AM	Initial Claims	03/06	462K	445K	460K	468K
Mar 11	08:30 AM	Trade Balance	Jan	-$37.3B	-$42.5B	-$41.0B	-$39.9B
Mar 11	12:00 PM	Flow of Funds	Q4	-	-	-	-
Mar 12	08:30 AM	Retail Sales	Feb	0.3%	-0.2%	-0.2%	0.1%
Mar 12	08:30 AM	Retail Sales ex auto	Feb	0.8%	0.2%	0.1%	0.5%
Mar 12	09:55 AM	Michigan Sentiment	Mar	72.5	74.6	74.0	73.6
Mar 12	10:00 AM	Business Inventories	Jan	0.0%	0.0%	0.1%	-0.2%

Source: Yahoo Finance, March 12, 2010.

Click the links below for Wells Fargo Securities’ research reports.
• Weekly Economic & Financial Commentary (March 12)
• Global Chart Book (March 2010)
• Monthly Economic Outlook (March 2010)

Next week sees interest rate announcements by the Federal Open Market Committee (FOMC) (Tuesday, March 16) and Bank of Japan (BoJ) (Wednesday, March 17). In addition, US economic data reports for the week include the following:

Monday, March 15
• Empire Manufacturing Survey
• Net long-term TIC flows
• Capacity utilization
• Industrial production

Tuesday, March 16
• Building permits
• Housing starts
• Import and export prices

Wednesday, March 17
• PPI

Thursday, March 18
• CPI
• Jobless claims
• Current account balance
• Leading indicators
• Philadelphia Fed

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

Source:Wall Street Journal Online, February 26, 2010.

Final words
Warren Buffett said: “The person that turns over the most rocks wins the game. And that’s always been my philosophy.” (Hat tip: Charles Kirk.) Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards to “turn over many rocks”, i.e. research matters properly in order to take prudent investment decisions.

That’s the way it looks from Cape Town (where a blogger is finishing off this post in order to celebrate his birthday for the rest of Sunday, while Lance Armstrong and over 40,000 cyclists are battling a stiff wind in the 2010 Cape Argus cycle race).

Source: John Darkow, Comics.com, March 5, 2010.

The Wall Street Journal: What was Lehman hiding?
A 2,200-page report on pre-collapse Lehman Brothers raises serious questions about Enron-style accounting, Peter Lattman reports on the News Hub panel.

Source: The Wall Street Journal, March 12, 2010.

Financial Times: New York ties with London for finance crown
“London has lost its crown as the pre-eminent home of banking and finance, as it tied for the first time with New York in the latest ranking of financial centres.

“Fears about a regulatory backlash and new taxes drove down London’s score by 14 points to tie with New York at 775 points, in the Global Financial Centres Index compiled by Z/Yen for the City of London Corporation.

Advertisement

“London was one of only four cities to lose points in the semi-annual ranking, which combines a survey of financial professionals with factors such as office rental rates, airport satisfaction and transport. New York’s score rose by only one point.

“Asian cities continue to rise in the ranking of 75 global centres. Hong Kong and Singapore posted double-digit gains in third and fourth place and the gap between London and New York and the rest of the world is at its narrowest since the survey began in 2007.

“‘This research is a wake-up call for decision-makers,’ said Stuart Fraser, policy chairman for the City of London Corporation, which promotes the UK financial services sector and provides local services. ‘You can’t take this route [of bashing banks and bankers] without endangering the competitiveness of London.’

“New York fared better than London for business environment, availability of people and infrastructure, even though those participating in the survey agreed that New York had taken the bigger hit from the financial crisis.

“The most recent rankings were based on surveys taken from July to December 2009, when discussion of tougher regulation and higher taxes in the UK was at fever pitch.”

Source: Brooke Masters, Financial Times, March 12, 2010.

David Rosenberg (Gluskin Sheff & Associates): What’s beige and what isn’t
“The Fed’s Beige Book is very useful in terms of its timeliness (information taken from mid-January to February 22) and granularity to the sector level. I always make a note to check and see which industries are seeing positive and negative momentum. In the latest Beige Book the list of positives was longer than I have seen in at least the last two years (twice as many positive sectors as there were negatives). Although, the number of Districts reporting improved economic conditions did fall to 9 from 10 in the prior report published on January 13th.

“In the latest Fed Beige Book, looking at the industry breakdown, we see that the list of positive outweighed the negatives. The positive mentions are:

Steel

Natural gas

Tech (especially semiconductors)

Software/Information services

Housing (entry level)

Tourism

Staffing firms

Chemical manufacturing

Rail transports

Airlines (fares stabilizing, leisure and business demand improving)

Heavy machinery (especially mining and agriculture equipment)

Plastic products

Health care services

Negative mentions

Commercial real estate

Banking

Commercial aircraft

Automotive

Coal

Petrochemicals”

Source: David Rosenberg, Gluskin Sheff & Associates, March 5, 2010.

MoneyNews: Fed’s Bullard impatient about low rate pledge for “extended period”
“A second senior Federal Reserve official has joined the ranks of those doubting whether the Fed should continue to commit to hold rates exceptionally low for an extended period, a sign pressures are building to drop the wording.

“‘I’m a little worried that the extended period language is conveying too much of a particular date to markets about … interest rates,” St. Louis Federal Reserve Bank President James Bullard recently told reporters before speaking on a panel organized by St. Cloud State University.

“‘I think the extended period language, to the extent it’s dictating a particular time horizon, is not what the committee wants to do,” said Bullard, a voter on the Fed’s interest-rate setting panel. ‘And that’s making me a little less patient with the extended period language.’

“Bullard’s stance allies him with Kansas City Fed Bank President Thomas Hoenig, who dissented at the central bank’s January meeting, saying economic conditions have improved sufficiently to drop the promise. Both are voters this year on the 10-strong policy-setting Federal Open Market Committee.

“Most policymakers want to maintain the pledge and the Fed is expected to renew it at its meeting this month. Discarding it would signal that the Fed could be within several months of raising borrowing costs.”

Source: MoneyNews, March 8, 2010.

MoneyNews: Gross - Fed will have to support economy if weakness remains
“The Federal Reserve might continue to buy mortgage-backed securities and take other measures to inject liquidity into a still ailing economy, says Bill Gross, co-chief investment officer and founder of Pimco and manager of the world’s largest bond fund.

“Many of the Fed’s liquidity programs are set to expire at the end of March, but monetary authorities might consider renewing such measures because growth won’t be strong enough without them.

“‘These things have all been very critical but let’s face it - they’re expiring at the end of March,’ Gross says. ‘The critical question … is do we really need Uncle Sam and the check writing to continue?’

“Gross says he is skeptical of the economy’s ability to grow without the government programs and adds it’s possible for ’some of these programs to come back’ if recovery is uncertain, CNBC reports.

“He said sees economic struggles continuing over a three- to five-year period - and even as long as 10 years, depending on circumstances.”

Source: Forrest Jones, MoneyNews, March 8, 2010.

MoneyNews: Former Fed Gov. Heller - double dip recession in cards
“The economy is headed back down, thanks to the exploding budget deficit, which will send interest rates soaring, says former Federal Reserve Gov. Robert Heller.

“‘A double dip recession is still very much in the cards,’ the now retired he says.

“‘The big elephant in the room that nobody talks about is the huge federal deficit, and that will eventually force up interest rates,’ Heller told CNBC.

“The deficit totaled $1.4 trillion last year and is expected to register about the same amount this year.

“‘As interest rates go up, it will kill both the business and consumer recovery,’ Heller said.

“‘Therefore, the economy is likely to go down again. Sooner or later we’ll see a spike in interest rates, and that’s the danger awaiting investors.’”

Source: Dan Weil, MoneyNews, March 5, 2010.

Bloomberg: Pimco’s El-Erian says public finance shock may deepen
“Mohamed El-Erian, whose company runs the world’s biggest mutual fund, said deteriorating public finances may affect the global economy more than is currently realized.

“‘The importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood,’ El-Erian, co-chief investment officer at Pacific Investment Management Co., wrote in an article on the Financial Times website. The potential damage from increased government borrowings is ‘at present being viewed primarily - and excessively - through the narrow prism of Greece.’

“Governments may have to raise taxes and slash spending to cope with swelling deficits after borrowing unprecedented amounts to stave off the global financial crisis, said El-Erian, who shares his job title with Bill Gross. A failure to carry out fiscal measures in time would raise the possibility of governments seeking to eliminate excessive debt through inflation or default, he said.

“Pimco has said debt strains in Greece, Portugal and Spain underscore its view that 2010 will be a year of slower-than- average growth, and predicts there will be a shrinking global role for the US economy.”

Click here for the full article.

Source: Garfield Reynolds, Bloomberg, March 11, 2010.

Bloomberg: Obama spending plan underestimates deficits, budget office says
“President Barack Obama’s budget proposal would create bigger deficits than advertised every year of the next decade, with the shortfalls totaling $1.2 trillion more than the administration projected, according to the Congressional Budget Office.

“The nonpartisan agency said yesterday the deficit will remain above 4 percent of the nation’s gross domestic product for the foreseeable future while the publicly held debt will zoom to $20.3 trillion, amounting to 90 percent of GDP by 2020. By then, interest payments on the debt will have quadrupled to more than $900 billion annually, the report said.

“Deficits between 2011 and 2020 would total $9.76 trillion, the CBO said.

“Economists generally consider deficits topping 3 percent of GDP to be unsustainable because that means government debt is growing faster than the ability to pay back the money.

“‘The news today from CBO is clear: The president’s budget will continue to lead our nation into a fiscal catastrophe - an ever worse one than the president’s own numbers suggest,’ Representative Paul Ryan of Wisconsin, the top Republican on the House Budget Committee, said yesterday.

“White House Office of Management and Budget spokesman Kenneth Baer said the report ‘highlights how sensitive and uncertain budget projections are’.

“Baer also said, ‘What is certain is that the irresponsibility of the past put the country on an unsustainable fiscal trajectory.’

“The CBO report is designed to give Congress an independent assessment of the administration’s budget request. The difference between the two outlooks is largely attributable to varying economic assumptions that affect projections of how quickly tax revenues will pour into the Treasury.

“Revenues will be about $2 trillion less than the administration projects, while spending will be lower by about $600 billion, according to the CBO report.”

Source: Brian Faler, Bloomberg, March 6, 2010.

Bespoke: The deficit blob
“Yesterday’s release of the monthly budget statement showed that the Federal government took in $108 billion and spent $328 billion, for a total monthly deficit of $221 billion. This marks the single largest monthly deficit reading in the history of the United States. The charts below show Federal Government revenues, spending, and deficits on a twelve month rolling basis. Not surprisingly, at a level of $1.48 trillion, this level is also at a record.

Advertisement

“With the stock market bottom more than a year in the past, and the economy showing clear signs of recovery, there is now widespread agreement that the US economy is emerging from crisis and no longer on the brink of collapse. For nearly two years now, Americans have been told by both Administrations that increased government spending was needed medicine to take the economy off of life support. Now that the economy is no longer on the brink, how much longer will Americans, and more importantly, the markets, accept this line of reasoning?”

Source: Bespoke, March 11, 2010.

MoneyNews: Romer - deficit a problem but don’t stop spending
“The gaping US budget deficit is cause for concern but clamping down on spending immediately would be ‘pound foolish’ and derail the recovery, a top White House economic adviser said Tuesday.

“Christina Romer, who heads the Council of Economic Advisers, said cutting back now ‘would inevitably nip the nascent economic recovery in the bud - just as fiscal and monetary contraction in 1936 and 1937 led to a second severe recession before the recovery from the Great Depression was complete.’

“Romer, in a speech to the National Association for Business Economics, also said President Barack Obama’s $787 billion stimulus package had been successful in pulling the economy out of a deep recession.

“However, she said additional measures were necessary to bring the jobless rate down from the current level of 9.7 percent, which she called ‘a terrible number by any metric’.

“Romer said Obama’s job creation proposals - a hiring tax credit, additional aid for cash-strapped states, and providing capital to small banks - would help to bring down the jobless rate although she acknowledged that the economy probably would not grow fast enough to quickly close the labor gap.”

Source: MoneyNews, March 9, 2010.

Richard Russell (Dow Theory Letters): Heading for inflation or deflation?
“It’s hard to believe, but there’s no consensus opinion on whether we’re headed for inflation or deflation. The fact is that the US national debt is now over $12 trillion. If the Treasury and the Fed just stare at this figure and don’t do anything the compounding interest on $12 trillion will ‘eat us up alive’. That’s the deflation part of the story. If the Fed and the administration cut back on the bail-out and stimulus programs, the US will probably sink back into an even more severe recession.

“The number one problem on the administration’s collective minds is the chronic unemployment that seems to be imbedded in the guts of the nation. The main ambition of every politician is to get reelected. Nobody’s going to get reelected while almost 20% of the voters in his district can’t find a job. So the problem for the Obama crowd is - how to create jobs. I believe their prescription for job-creation is ‘more inflation’. More printing of Federal Reserve Notes means that the banks will have even more money that they don’t want to lend. Thus, small business can’t get loans, and unemployment remains high.

“The reckless creation of fiat money is basically inflationary, but the trade-off is that the National Debt increases. Is there any painless way out of this predicament? None that I can figure out. With $12 trillion in national debt, the US must try to inflate the debt away or renege on it. Reneging on the debt is unthinkable, which leaves the inflation strategy. The problem must be addressed, since if it is not, the compounding factor will simply make the problem that much more intractable.

“The question becomes, will inflation produce more jobs? It was tried before during the Carter years, and the answer is that increased inflation does not guarantee more jobs.

“What about a lower dollar? A lower dollar helps US exports, but a lower dollar presents other problems. In the old days it was said that ‘we owe the debt to ourselves, so that it’s not a problem’. But today a large portion of our debt is owed to our friends overseas, and a lower dollar is the last thing they want to see.

“So what’s the argument for coming deflation? In my opinion, a collapse in the stock market and a severe consumer strike. A cutback on dollar production and a halt to the bail-out and stimulus strategy would also be very deflationary.

“The bottom line is that nothing has been decided yet, which is why the stock market has been acting so ’spooky’. In the meantime, unemployment continues to be the main headache for the administration and with unemployment comes a consumer strike on spending. As Oliver Hardy would say to Stan Laurel, ‘A fine mess you got us in.’ Yes, indeed.

“Inflation or deflation or both. We’ll know when it hits. And we will survive.

“Meanwhile, the so-called ‘Greatest Generation’ is passing on into history. There aren’t a lot of the old guys and gals left. Maybe it’s time for a new ‘Greatest Generation’.”

Source: Richard Russell, Dow Theory Letters, March 5, 2010.

Asha Bangalore (Northern Trust): Flow of funds - net worth of households grew, household debt reduction continues
“Net worth of households increased $682 billion to $54 trillion in the fourth quarter of 2009. In 2009, net worth of households moved up $2.8 trillion following a $13.1 trillion loss on 2008. The gains in equity prices in 2009 more than offset the losses of real estate holdings (-$905 billion) of households. There has been an 11.7% increase in household net worth from the trough in the first quarter of 2009.

“Although households experienced an increase in their wealth during 2009, they have significantly cut back on borrowing. In the fourth quarter of 2009, household net borrowing fell $54.4 billion, putting the annual decline at nearly $237 billion. The significant pace of debt reduction is a big negative for consumer spending.

“At the same time, net lending in the economy continues to be problematic. Net lending fell at annual rate of $577 billion in the fourth quarter vs. $361 billion drop in the third quarter. Self-sustaining economic growth is unlikely to occur if this situation persists in 2010.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 11, 2010.

Asha Bangalore (Northern Trust): International trade - decline in oil and auto imports account for narrowing of trade gap
“The trade deficit narrowed to $37.29 billion in January from a revised $39.9 billion deficit in December 2009. Exports and imports of goods and services dropped in January. Inflation adjusted exports of goods declined 1.6% and that of imports fell 3.1%.

“Exports of food (-2.3%), autos (-5.6%0, and capital goods excluding autos (-2.6%) accounted for a large part of the weakness in exports. On the imports side, autos (-8.0%), petroleum (-3.1%), and consumer goods excluding autos (-2.6%) posted the significant declines. The real trade deficit of goods narrowed to $41.0 billion in January from $43.8 billion in December. However, the January reading of the real trade deficit nearly matches the fourth quarter average, implying that international trade will have a positive effect on real GDP in the first quarter if the trade gap narrows noticeably in February and March.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 11, 2010.

Asha Bangalore (Northern Trust): Rebound in inventory accumulation in store for 2010?
“Total business inventories held steady in January. Factory inventories increased 0.2% in January, while wholesale and retail inventories dropped 0.2% and 0.1%, respectively. Total business sales advanced 0.6% during January, after a 1.00% increase in the prior month.

“The inventory-sales ratio of the business sector was down one notch to 1.25 in January; the record low for this ratio is 1.24 set in 2005. As the economy gathers momentum, inventories are projected to make a sizable contribution to real GDP, which could be in the first-half of 2010 or later in the year. The timing is unclear but it is nearly certain that an inventory accumulation led spike in real GDP is in store for 2010.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 12, 2010.

Asha Bangalore (Northern Trust): Total continuing claims holding at elevated level
“Initial jobless claims fell 6,000 to 462,000 during the week ended March 6. The four-week moving average of initial jobless claims is up nearly 8,000 from a low of 469,000 in February. Continuing jobless claims rose 37,000 to 4.558 million and the insured unemployment rate held steady at 3.5%.

“Total continuing jobless claims, inclusive of those under special programs, edged down slightly to 10.2 million during the week ended February 20; these claims have held at over 10 million for eleven consecutive weeks. A meaningful decline of these claims should signal that labor market conditions are indeed improving.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 11, 2010.

Asha Bangalore (Northern Trust): Strength of February retail sales impressive
“Retail sales increased 0.3% in February, after a downwardly revised 0.1% increase in January (previously reported as a 0.5% increase) and a 0.2% drop in December (prior estimate was 0.1% decline). Excluding gasoline and autos, retail sales advanced 0.9% in February reflecting gains in sales of furniture (+0.7%), apparel (+0.6%), electronics and appliances (+3.7%), sporting goods (+1.2%), and general merchandise (+1.0%).

“However, the January-February data of retail sales show a smaller increase in retail sales compared with the fourth quarter tally. Unless consumer outlays on services and March retail sales are significantly strong, the gain in consumer spending during the first quarter is most likely to be smaller than the fourth quarter’s annualized increase of 1.7%.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 12, 2010.

MoneyNews: Obama may pay homeowners to sell at loss
“The Obama administration, which has been trying to keep defaulting owners in their homes, reportedly will start paying some of them to leave under a new program that would let owners sell for less than they owe and will give them a little cash to boot.

“The new program implemented by President Barack Obama reportedly will allow homeowners to make short sales and receive a payment from the government to do so. A short sale occurs when someone sells his or her house for less than the value of the mortgage.

“With five million households behind on their mortgages, the Obama administration faces loud cries for more assistance. Its $75 billion mortgage modification plan hasn’t helped many homeowners.

“The new program, which takes effect April 5, makes mortgage lenders accept the short sales, which means they won’t be paid back the full amount of their loans, The New York Times reports.

“To entice all parties to participate, servicing banks will receive $1,000 for the first mortgage and another $1,000 for the second if there is one. That’s the same payment as in the mortgage modification plan.

“The new angle is $1,500 in ‘relocation assistance’ for the homeowner.

“‘We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender,’ said Seth Wheeler, a Treasury senior adviser.

“But lenders emphasize that participating homeowners won’t have it easy.

“‘This is not an opportunity for the customer to just walk away,’ J. K. Huey of Wells Fargo told The Times.

“‘If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ We’re not going to do a short sale.’”

Source: Dan Weil, MoneyNews, March 9, 2010.

Bloomberg: Fannie, Freddie ask banks to eat soured mortgages
“Fannie Mae and Freddie Mac may force lenders including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

“That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says US banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the US government, stuck the four biggest US banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

“The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two US-owned firms now buy at least 70 percent of new mortgages.

“‘If you want to originate mortgages and keep that pipeline running, you have to deal with the push-backs,’ said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, and former examiner for the Federal Reserve. ‘It doesn’t matter how much you hate Fannie and Freddie.’

“Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31, Freddie Mac had another $4 billion outstanding loan-purchase demands that lenders hadn’t met, according to the filing. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. Both firms were seized by the government in 2008 to stave off their collapse.”

Source: Bradley Keoun, Bloomberg, March 5, 2010.

Financial Times: Big bank oversight to stay with Fed
“Banks with more than $100bn of assets will be overseen by the US Federal Reserve in a regulatory reform plan that represents a partial victory for the central bank after months of attacks in Congress.

“Chris Dodd, the Senate banking committee chairman, had proposed hiving off all bank supervision to a single regulator but is set to propose this week that the 23 largest institutions stay under the Fed’s oversight, according to people familiar with the plans.

“At issue over the weekend was the regulation of several hundred state chartered institutions that also want to remain under the Fed’s supervision.

“While attention has been focused on argument between Democrats and Republicans over the powers and location of new consumer protection functions, which may also be housed within the Fed, other elements of regulatory reform - deemed more important by many institutions and policymakers - are close to fruition.

“A new ‘resolution’ regime to deal with failing, but systemically important, institutions would allow the government to wind up a company quickly to avoid contagion spreading through the financial system.

“But in a concession to Republican fears about giving government too much power over business, a bankruptcy judge would provide checks and balances.

“The regime is designed to prevent a repeat of the costly bail-out of AIG or the damaging bankruptcy of Lehman Brothers.

“But Democrats have had to come up with a complex system that incorporates a role for the judiciary to meet Republican concerns, while also limiting the time and scope of a judge’s intervention to prevent an unruly process that infects the entire financial system.

“The Fed’s retention of authority over the biggest banks is partly a result of demands by Tim Geithner, Treasury secretary and former president of the New York Fed, who has told senators that only the central bank is qualified to oversee the core of the system.”

Source: Tom Braithwaite, Financial Times, March 7, 2010.

The Wall Street Journal: Cracking down on swaps

“Following Greece’s economic crisis, European leaders are considering banning credit-default swaps, WSJ Brussels bureau chief Stephen Fidler reports on the News Hub.”

Source: The Wall Street Journal, March 10, 2010.

Financial Times: France and UK seek hedge fund deal
“Gordon Brown and Nicolas Sarkozy will on Friday try to hammer out a compromise deal over European Union reforms that the US and UK believe could damage the hedge fund and private equity industries.

“The British prime minister shares the concerns of Tim Geithner, US treasury secretary, that a draft EU directive to introduce tighter regulatory controls could impose new barriers to business.

“London believes that French cultural opposition to hedge funds lies behind the drive to clamp down on the operation of ‘alternative investment funds’. British officials say Mr Brown will discuss the issue when he meets the French president in London on Friday, ahead of an EU summit this month.

“The debate over the shape of financial regulation and the EU directive has raised transatlantic tensions.

“Mr Geithner, in a letter to Michel Barnier, Europe’s internal market commissioner, voiced concern about ‘various proposals that would discriminate against US firms’.

“The US has stopped short of threatening retaliatory action. However, if the directive becomes law in its current form, Europe-based fund managers could face reprisals in the US Congress for what is being seen as an attempt to dictate the global regulatory landscape.

“Senior EU officials hit back on Thursday at the US criticism. A spokesman for Michel Barnier, the new EU internal market commissioner who is responsible for financial services regulation and to whom Mr Geithner addressed his concerns, said that the EU decision to act on hedge funds was in line with a G20 decision to reinforce transparency in the financial system.

“Britain, Europe’s biggest centre for hedge funds, is leading opposition to aspects of the directive, which it fears could impede the operations of funds based in London.”

Source: George Parker, Sam Jones, Nikki Tait and Tom Braithwaite, Financial Times, March 11, 2010.

Financial Times: Eurozone eyes IMF-style fund
“Germany and France are planning to launch a sweeping new initiative to reinforce economic co-operation and surveillance within the eurozone, including the establishment of a European Monetary Fund, according to senior government officials.

“Their intention is to set up the rules and tools to prevent any recurrence of instability in the eurozone stemming from the indebtedness of a single member state, such as Greece.

“The first details of the plan, including support for an EMF modelled on the International Monetary Fund, were revealed at the weekend by Wolfgang Schäuble, the German finance minister.

“‘I am in favour of stronger co-ordination of economic policies in the EU and in the eurozone,’ Mr Schäuble told newspaper Welt am Sonntag.

“If France and Germany can agree on such proposals - long urged by Paris - they are likely to set the basis for the most radical overhaul of the rules underpinning the euro since the currency was launched in 1999.

“The German thinking emerged as George Papandreou, the Greek prime minister, flew to Paris to seek the support of Nicolas Sarkozy, French president, for his government’s drastic austerity programme.

“‘We must support Greece, because they are making an effort,’ Mr Sarkozy said before the meeting. ‘If we created the euro, we cannot let a country fall that is in the eurozone. Otherwise there was no point in creating the euro.’

“His words appeared to underline the greater readiness in France than in Germany to provide some sort of financial support or guarantee for the Greek economy. Angela Merkel, the German chancellor, insisted that no such support had been sought or discussed when she met Mr Papandreou on Friday.

“Both France and Germany agree Greece should not turn to the IMF for support, so the idea of an EMF has clear attractions for Paris, though it could hardly be set up in time to help Greece.”

Source: Quentin Peel and Scheherazade Daneshkhu, Financial Times, March 7, 2010.

John Authers (Financial Times): Credit market - no news is good news
“John Authers says that it is good news that the credit market is much less newsworthy than it used to be.”

Click here for the article.

Source: John Authers, Financial Times, March 10, 2010.

Advertisement

David Fuller (Fullermoney): What about US Treasury bonds?
“I remain a long-term bear of US Treasuries. It seems self-evident that US 10-year Treasury yields will revert to more normal levels of 5% to 6%, sooner or later. In the event of serious inflationary problems resulting from spiralling debt and money printing, they could even soar to levels not seen since the early 1980s.

“However, I remain an agnostic on timing. Arguments for yields remaining low for an indefinite period are equally convincing and this uncertainty is reflected by the ranging price action. So I will continue to watch, perhaps being tempted if rangebound 10-year yields retest their lower boundary near 3.15% and hold, or when they eventually maintain a break above 4%.

“Meanwhile, the longer they remain rangebound near current levels, signalling neither a Japan-style deflationary slump or growing inflationary pressures, the better it will be for the global equity bull market.”

Source: David Fuller, Fullermoney, March 9, 2010.

MoneyNews: China embraces US Treasuries, wary about buying more gold
“China, the world’s biggest holder of foreign exchange reserves, renewed its commitment to the US Treasury market on Tuesday but said it would be wary of adding to its gold holdings.

“The country’s chief currency regulator said China would attract more capital inflows this year, partly reflecting expectations of a stronger yuan, but he left the market none the wiser as to when Beijing might let the currency resume its rise.

“‘The US Treasury market is the world’s largest government bond market. Our foreign exchange reserves are huge, so you can imagine that the US Treasury market is an important one to us,’ Yi Gang, head of the State Administration of Foreign Exchange (SAFE), told a news conference.

“The exact composition of China’s reserves, the world’s largest, is a state secret and the subject of intense scrutiny by global investors aware that, with such large sums at stake, even marginal portfolio shifts have the potential to move markets.

“Speaking during the annual session of parliament, Yi expressed the hope that China’s presence in the US Treasury market would not become a political football. China, he stressed, was not in the game of short-term currency speculation.

“‘It is market investment behavior, and I don’t want it to be politicized,’ he said. ‘We are a responsible investor, and we can surely achieve a win-win result in the process of investing.’

“Yi dampened hopes of gold bugs that China might be itching to add to the 1,054 tons of the metal in its reserves.

“On a 30-year horizon gold was not a great investment, he said, and China would simply drive up prices if it piled into the market.

“‘It is, in fact, impossible for gold to become a major investment channel for China’s foreign exchange reserves. I have 1,000 tons now, and even if I doubled that holding, according to current prices, that would be about $30 billion,’ Yi said.”

Source: MoneyNews, March 9, 2010.

The Wall Street Journal: Bull market turns one
“As the bull market notches its first year anniversary, the News Hub panel weighs in on whether investors can still make money and how the market will react when the interest rates inevitably adjust.”

Source: The Wall Street Journal, March 9, 2010.

John Authers (Financial Times): Price of Nasdaq’s crash
“In a week of anniversaries, it is 10 years since the Nasdaq Composite peaked, crashed and burned. The dotcom bubble seems to be from another world, a speculative aberration that is now over.

“But we are still living with its consequences.

“The dotcoms were a classic tale of speculative excess and overvaluation, to be compared with Japan in the 1980s or the US in the 1920s. As a chart shows, the fallout was identical.

“But the Federal Reserve took deliberate steps to avoid a repeat of the US in the 1930s or Japan in the 1990s. It slashed interest rates, helping ensure that the macroeconomic damage from the dotcom crash, in the form of a very brief and shallow recession, was remarkably light.

“The consequences of those steps have proved to be long lasting. The 1990s were driven by ‘irrational exuberance’ - huge and naively confident investments in the stock market by retail investors.

“The past decade was driven by leveraged investors. Those low interest rates made it far cheaper for investors such as hedge funds to magnify their returns with leverage. Thus they came to drive the market.

“They were helped by another artefact of the dotcom crash. Mutual funds (and the portfolios of the new breed of day traders) crashed with the Nasdaq. Hedge funds, able to sell short and to switch between asset classes, were able to make money during the years of the dotcom bust. That in turn attracted huge new flows from institutions, who are as prone to chase performance as anyone else.

“As a result, many of the technical and leverage-driven strategies used by hedge funds, and by banks’ proprietary trading operations, became top-heavy. Far too much money was thrown at structured credit investments, or at emerging markets’ currencies.

“We all now know the consequences. A decade on, they are the consequences of the Nasdaq boom.”

Source: John Authers, Financial Times, March 9, 2010.

Bespoke: Bespoke’s international snapshot
“Below we provide our trading range charts for 20 major country indices around the world. For each chart, the blue shading represents the index’s ‘normal trading range’, which is between one standard deviation above and below the 50-day moving average (white line). The red shading represents between one and two standard deviations above the index’s 50-day moving average, and vice versa for the green shading. In general, the red shading is an initial overbought level, and a move above the red zone is an extreme overbought reading that suggests a short-term pullback is in the cards.

“Only Sweden and Malaysia are currently trading above the red zone into extreme overbought territory. Canada, Brazil, the UK and Switzerland are trading within their red zones and are trending nicely higher, while the rest of the country indices are within their normal trading ranges. None of the countries are currently oversold, but some of them don’t have attractive chart patterns. China, Hong Kong, Taiwan, South Korea and Spain are all struggling to stay above their 50-days at the moment and have a lot of work to do to return to long-term uptrends.”

Source: Bespoke, March 11, 2010.

Bespoke: S&P 500 sector breadth
“The percentage of stocks in the S&P 500 currently trading above their 50-day moving averages stands at 78%. As shown in the chart below, this is getting up to the top end of the range the indicator has seen during the bull market. It still has a little bit farther to go before it reaches extreme overbought territory.

“On a sector basis, Financials currently has the highest reading at 94%. This level is at the top of its range over the last year, and it’s the most overbought of any sector. Consumer Discretionary has the second highest reading at 89%, followed by Materials and Industrials which both stand at 81%. Telecom and Utilities - two sectors that have been severely lagging recently - have the lowest readings at 56% and 51% respectively.”

Source: Bespoke, March 11, 2010.

Bespoke: Large caps vs small caps
“While the last year has been a period where practically all stocks, regardless of style or size, have risen, some stocks have risen more than others. Small caps (Russell 2000) have risen 95%, while large caps (S&P 500) are up a relatively modest 68.5%. This trend, however, is anything but a recent one. Small caps have essentially been outperforming large caps for the last decade. The chart below shows the ratio of the S&P 500 divided by the price of the Russell 2000. When the line is rising, large caps are outperforming small caps, and when the line is declining, small caps are outperforming.

“Based on the relationship between the S&P 500 and the Russell 2000, relative performance between large and small cap stocks follows long-term cyclical trends. As shown in the chart below, periods of outperformance and underperformance by either category are measured in years rather than months. Even with the typical cycle lasting several years, though, the current cycle has been the longest of them all. After peaking out in 1999, large caps have been consistently underperforming small caps for ten years and counting. When it ends is anyone’s guess, but it’s hard not to argue that large caps are at least due for their day in the sun.”

Source: Bespoke, March 9, 2010.

Bespoke: Estimated earnings growth for Q1 ‘2010 and beyond
“Below we highlight the estimated year-over-year earnings growth for the S&P 500 for the next three quarters, along with expected growth ex financials. While ex-financials growth was low in Q4 ‘09, it is also beginning to pick up again. For the first quarter, S&P 500 earnings are expected to be up 28.7% versus Q1 ‘09. Earnings are expected to grow 28.6% in Q2 ‘10, and then drop a little to 22.3% in the third quarter.

“For the first quarter, seven sectors are expected to see year-over-year growth, while three sectors are expected to see a decline. The Materials sector is expected to see the most growth versus Q1 ‘09 at 144%, followed by Financials (86.6%), Technology (51.9%), Consumer Discretionary (47.8%), and Energy (44.7%). Telecom is the only sector expected to see a noteworthy decline at -15.1%. Utilities and Industrials are currently estimated to see year-over-year earnings fall by about 1%.”

Source: Bespoke, March 10, 2010.

Bloomberg: S&P rally slowed by fastest cash depletion since 1991
“Equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow.

“Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg.

“For Parnassus Investments and Janney Montgomery Scott LLC, depleted reserves is a sign returns will fall from last year, when the S&P 500 rose 23 percent, the most since 2003. Bulls say any pullback is a buying opportunity because investors have $3.17 trillion in money-market funds and may return to stocks after putting 16 times more money into bonds since last March.

“‘It’s not a red light, but it’s a flashing yellow light that the strongest part of the rally is probably over,’ said Jerome Dodson, who oversees $3.6 billion as president of Parnassus in San Francisco and estimates the S&P 500 will climb 6 percent to 9 percent this year. ‘There’s not as much buying power out there.’

Advertisement

“Investors are trying to gauge how much money is left to move shares after the S&P 500 surged 70 percent in the 10 months starting in March 2009, and then began an 8.1 percent slide on Jan. 19. The drop, which matches the average size of 117 ‘moderate corrections’ tracked by Birinyi Associates Inc. since 1945, may herald a second phase of the bull market after last year’s advance surpassed every rally since the 1930s.”

Source: Lynn Thomasson, Bloomberg, March 8, 2010.

David Fuller (Fullermoney): Stock markets have further upside potential
“It has been a good four weeks and counting for global stock markets. All technical evidence to date suggests that we have seen a normal correction to the cyclical bull market’s trend mean represented by rising 200-day moving averages. The only minor negative is that persistent rallies have replaced short-term oversold conditions with short-term overbought readings. If this matters beyond brief pauses, we would see it in the form of downward dynamics and failed upside breaks from trading ranges.

“However, a more important factor is likely to be the months spent by most equity indices in ranging consolidations, as they gradually worked their way over to their rising MA mean. In the absence of downward dynamics, perhaps caused by some currently unexpected fright, stock markets remain capable of running on the upside.

“Meanwhile, Wall Street has not led - it seldom does - but its all-important leash effect is positive. The US’s rally has been led by small-cap indices and the S&P is approaching its January high. Some temporary resistance may be encountered in this region but once again, a downward dynamic would be required to suggest more than a brief pause.

“China’s leash effect is second only to Wall Street and stopped being negative with the upside key day reversal on February 3. A break above 3,110 would reaffirm a new pattern of higher reaction lows, although considerably more strength is required to make the overall pattern unequivocally bullish once again.”

Source: David Fuller, Fullermoney, March 9, 2010.

David Fuller (Fullermoney): What will be the warning signs for equities?
“In reverse order, I maintain that we are in a cyclical bull market for equities and a secular bull trend for precious metals and most industrial commodities. For instance, gold has a 10-year uptrend - the S&P 500 clearly does not.

“However there has been a high degree of correlation so any sharp sell-off in equities will weigh on commodities for which there has also been considerable investment interest. Nevertheless, most commodities have bounced back quickly, bottoming in October 2008, for instance, in line with most other Fullermoney themes, while the S&P and most other OECD country stock markets did not reach their lows until March 2009.

“The main point behind my stock market warning signals, which I have mentioned before and will again, is that too much good news is bad news. 1) Strong economic growth competes for capital and invites monetary tightening by central banks; 2) strong growth and too much speculation would lift oil prices over the low $80s highs for this cycle to date, towards headwind levels of $100 or more; 3) US 10-year Treasury yields above 4% would be an advance warning but the real danger area is above 5%; 4) a very weak USD could undermine confidence but this is clearly not a threat today. Also watch the February lows for stock market indices; the cyclical bull is intact while they hold.”

Source: David Fuller, Fullermoney, March 5, 2010.

Bloomberg: Buy Asia stocks before “green” light, Goldman says
“Investors should buy Asian stocks outside Japan after valuations dropped and before sentiment strengthens further, Goldman Sachs Group Inc. said.

“‘By the time all the lights turn green, the race will already be well under way,’ Goldman Sachs analysts led by Timothy Moe wrote today. ‘Sentiment and valuation will improve as the year progresses, and we would prefer to be early.’

“The MSCI Asia-Pacific excluding Japan Index remains 0.5 percent lower this year, having rebounded from year-to-date losses of as much as 9.7 percent. Stocks slid earlier this year on concern that China will tighten lending to combat faster inflation and that Greece’s debt crisis will spread.

“Analysts’ earnings growth estimates for this year have climbed to 26 percent on average, near Goldman Sachs’s 30 percent forecast, according to the report. The most profitable securities firm in Wall Street history is predicting a 21 percent increase in Asian corporate earnings in 2011.

“The MSCI index’s valuation has dropped to 14.4 times estimated earnings from as high as 29.3 times in November, after profit estimates were upgraded, according to weekly data compiled by Bloomberg.

“‘We view the risk/reward balance very positively from a strategic perspective,’ the Goldman Sachs analysts wrote.

“Goldman Sachs said it remains most optimistic on the outlook for stock markets in China, South Korea and Taiwan. Indexes tracking Chinese shares traded in Shanghai and Hong Kong and Taiwan’s Taiex index have retreated at least 5 percent this year, among the 10 worst performers globally. South Korea’s Kospi index has fallen 1.4 percent.”

Source: Shiyin Chen, Bloomberg, March 11, 2010.

MoneyNews: S&P - US debt level poses risk to strong dollar
“The US dollar is still the most important world currency, Standard & Poor’s said on Thursday, but added that rising levels of US debt and dependence on foreigners to finance much of pose risks to the currency’s primacy.

“Without a credible plan to rein in fiscal spending, the agency said external creditors could reduce dollar holdings, which could put pressure on the United States’ ‘AAA’ credit rating, which keeps government borrowing costs low.

“For now, the credit ratings agency said the size of the US economy - the world’s largest - and the depth of its financial markets mean the dollar will continue to dominate global trade and foreign exchange transactions.

“Those advantages helped the dollar retain its top status despite the financial crisis of 2008-09, which began in the United States, S&P said in the report.

“The agency also said the dollar’s role is an important factor supporting the United States’ AAA credit rating - the highest investment-grade rating.

“The main risk to the dollar’s status comes from the growing amount of US government debt, S&P said, particularly the share held by foreign central banks and sovereign wealth funds.

“It also said widening US fiscal deficits were a risk, adding ‘without a medium-term fiscal consolidation plan that the market views as credible, external creditors could reduce their dollar holdings, especially if they conclude that euro zone members are adopting stronger macroeconomic policies.’”

Source: MoneyNews, March 11, 2010.

Financial Times: Beijing studies severing dollar peg
“China’s central bank chief laid the groundwork for an appreciation of the renminbi at the weekend when he described the current dollar peg as temporary, striking a more emollient tone after months of tough opposition in Beijing to a shift in exchange rate policy.

“Zhou Xiaochuan, governor of the People’s Bank of China, gave the strongest hint yet from a senior official that China would abandon the unofficial dollar peg, in place since mid-2008. He said it was a ’special’ policy to weather the financial crisis.

“‘This is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies.’

“Mr Zhou’s comments contrasted with recent Chinese comments on its currency policy in the face of international criticism that the renminbi was undervalued. In December, premier Wen Jiabao said: ‘We will not yield to any pressure of any form forcing us to appreciate.’ Chinese officials have repeatedly emphasised the need for a stable exchange rate.

“However, while the recent increase in consumer prices in China has strengthened the hand of those officials who think the currency should now rise, it is not clear that this argument has yet won over the country’s senior leaders.

“Indeed, Mr Zhou gave no hint about the possible timing of a shift in policy.”

Source: Geoff Dyer, Financial Times, March 6, 2010.

Bespoke: Bespoke’s commodity snapshot
“The stock market is up about 65% since the 3/9/09 low, but oil has actually outperformed stocks over this time period with a gain of 72.64%. Below we highlight the performance of ten major commodities over the last year. As shown, copper is up the most with a gain of 108%, while orange juice ranks second with a gain of 101%. Of the three main precious metals, platinum is up the most at 50%, followed by silver at +33.73%, and then gold at +22.16%. Even natural gas is up since the March 9th, 2009 low with a gain of 16%. Wheat and corn are the only commodities shown that are down over the last year. Corn is down 11%, while wheat is down 18.27%.”

Source: Bespoke, March 9, 2010.

Bill King (The King Report): Why is gold declining?
“Our view is gold is retrenching because:
• UK QE has ended (for now)
• US QE will end in three weeks (for now)
• The ECB did a massive €295B drain (can you imagine the market reaction if Bennie Mae drained $500B in one shot?]
• China is signaling that it wants to rein in inflation by tightening credit, hiking real estate down payments to 50% and allowing the yuan to appreciate
• Europe’s sovereign debt crisis has ebbed (for now)
• Food commodities have broken down
• Gold stocks have greatly underperformed gold since mid-January (gold stocks tend to lead)”

Source: Bill King, The King Report, March 11, 2010.

Financial Times: Goldman and JPMorgan enter metal warehousing
“As piles of base metals from aluminium to nickel build up due to poor demand, Goldman Sachs and JPMorgan have entered the little known but very profitable business of metal warehousing. The deals reflect banks’ appetite for exposure to physical commodities beyond traditional commodities derivatives.

Advertisement

“Stockpiles at London Metal Exchange’s registered depots surge to an all-time high of 6m tonnes - up from 1m in 2007. Traders and bankers say warehousing is a classic ‘anti-cyclical’ business as it flourishes when demand for metals is lacklustre and stockpiles mount.

“‘The business is booming right now,’ says a commodities banker in London.

“The current prosperous period contrasts with much of the 2000-2008 cycle, when strong economic growth and metals consumption reduced LME inventories to near-record lows, sharply cutting warehouses’ income.

“Traders say the bank decision will reshape the close-knit warehousing industry as Goldman Sachs and JPMorgan will control the depots where more than half of the LME’s registered stocks are held. The LME is the world’s largest metal exchange.”

Source: Javier Blas, Financial Times, March 2, 2010.

The Wall Street Journal: What’s behind oil’s spike?
“Oil prices hit an eight-week high today at $82 a barrel. WSJ’s Grainne McCarthy explains what’s behind the spike, including the potential for demand to pick up as the economy begins to recover. She joins Dennis Berman and Simon Constable in the News Hub.”

Source: The Wall Street Journal, March 10, 2010.

Bloomberg: Copper imports by China may fall 16%, analyst says
“China’s net imports of refined copper may fall 16 percent this year as manufacturers run down stockpiles and domestic production increases, an analyst at Shanghai Nonferrous Metals, said.

“Net inbound shipments may fall to 2.6 million metric tons, said Zhou Qian in an interview at a Nanjing conference today. Real demand may grow 14 percent to 7.55 million tons, he said.

“Inbound shipments of refined copper fell for the first time in three months in January as domestic supplies increased and seasonal demand slowed. The country has been running down stockpiles in bonded warehouses, Macquarie Group Ltd. has said. Traders store shipments in a bonded zone before paying duties.

“‘Downstream demand is expected to be quite strong from real estate and transport industries in 2010, and still grow modestly from the home appliance sector,’ Li Lan, a researcher at Beijing General Research Institute of Mining and Metallurgy, said in Nanjing. In addition, ‘demand from electronics makers may increase too as exports improve.’

“A steeper fall in imports may be avoided by firm demand and as scrap supplies fail to return to levels before the financial crisis, said Zhou. Buyers may run down stockpiles by about 350,000 tons this year, he said, without giving figures for total current inventories. China may produce 4.6 million tons of copper in 2010, up 12 percent from an estimated 4.11 million tons last year, Zhou said.”

Source: Richard Dobson and Tan Hwee Ann, Bloomberg, March 9, 2010.

Bloomberg: China may start raising interest rates as prices gain
“China’s inflation accelerated in February, according to a survey of economists, and exports climbed in the month, increasing the likelihood of the central bank raising interest rates from a five-year low.

“Consumer prices rose 2.5 percent from a year before, the most in 16 months, according to the median of 29 estimates in a Bloomberg News survey before tomorrow’s report. While the gain was likely exaggerated by seasonal factors, economists project the momentum to continue, sending the rate to as high as 4.4 percent during the year, a separate survey showed last week.

“Inflation, property speculation and risks for banks are among Premier Wen Jiabao’s prime concerns after a record 9.59 trillion yuan ($1.4 trillion) of loans jumpstarted growth last year. Central bank Governor Zhou Xiaochuan said March 6 that while stimulus policies must end ’sooner or later’, China needs to be cautious in timing an exit because a global recovery ‘isn’t solid’.

“‘We believe the central bank sees inflation as a big danger to the economy,’ said Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong. ‘As such, the central bank is likely to hike interest rates soon to manage inflation expectations.’

“Wang sees a 0.27 percentage point increase in the one-year lending and deposit rates as early as this month. In January, consumer prices rose 1.5 percent, the third monthly increase after a nine-month run of deflation.

“Price pressures are stemming from rising commodity costs, an overhaul of resource prices and the expansion of credit, the nation’s top economic planning agency said in a report to lawmakers last week. Producer prices may have climbed 5.1 percent in February, the biggest gain in 16 months, the Bloomberg News survey showed.”

Source: Paul Panckhurst and Chris Anstey, Bloomberg, March 10, 2010.

Financial Times: China export growth beats estimates
“Chinese exports rose 45.7 per cent in February from a year earlier, beating forecasts and providing fresh evidence of a robust recovery in the economy poised to overtake Japan this year as the world’s second-largest.

“‘The export number points to solid underlying improvement in external demand, which should provide significant support to China’s recovery in 2010,’ said Brian Jackson, an analyst at RBC Capital Markets. ‘This should make policymakers in Beijing more comfortable with the idea of allowing currency appreciation to help deal with building price pressures.’

“Chinese exports registered their biggest fall of the financial crisis in February 2009 and analysts were expecting high growth figures as a result but the performance last month was better than most had predicted. Exports had risen 21 per cent in January.

“Imports rose 44.7 per cent in February from a year before.

“‘The strong trade figures are partly due to a low base in February last year and but it is clear that exports are recovering strongly and this trend is likely to continue,’ said Zhu Jianfang, chief economist at Citic Securities in Beijing. ‘Rising imports show domestic demand is also very strong.’”

Source: Jamil Anderlini, Financial Times, March 10, 2010.

CNBC: China needs to drive consumption
“China needs to encourage consumption, says Tomo Kinoshita, deputy head of economics, Asia ex-Japan at Nomura International. He explains why inflation is not a big threat and why shifts in labor could become a problem, with CNBC’s Chloe Cho and Anna Edwards.”

Source: CNBC, March 11, 2010.

Financial Times: Debunking the myth of a China collapse
“Global sentiment towards China’s economy and asset markets has turned from exuberance just a few months ago to overriding concern about the side-effects of last year’s remarkable credit growth. A number of commentators have warned of credit excesses and an over-investment bubble, which they say could bring economic turmoil.

“Critics have also pointed to China’s Rmb 4,000bn stimulus programme and last year’s 33 per cent surge in new bank lending as obvious hallmarks of excess liquidity and a lowering of lending standards. Some have raised concerns about hidden debt risks among local government investment entities, while media reports of Chinese “ghost cities” and empty commercial property are cited as evidence of local excesses.

“The worst-case fears concerning the property market are based on a layer of truth and we have previously highlighted the untenable nature of price increases in some big cities, as well as the possibility that last year’s boom was partly fuelled by misdirected bank loans. However, there are crucial differences between China’s property markets and those of the US or Dubai.

“Unlike the dramatic increase in household leverage that precipitated the US sub-prime crisis, Chinese household debt amounts to approximately 17 per cent of GDP, compared to roughly 96 per cent in the US and 62 per cent in the eurozone. Homebuyers in China are required to make minimum downpayments of 30 per cent before receiving a mortgage, and at least 40 per cent for a second home.

“Although price increases in the Chinese residential market appear rapid (over 20 per cent in 2009), such headline figures cannot be viewed in isolation. Over the past 5 years, urban household incomes grew at a 13.2 per cent compound annual growth rate, compared to an 11.9 per cent CAGR in home prices. Pockets of overheating can be found in some regional markets: in Beijing, Shanghai, Shenzhen and Hangzhou, for instance, prices outpaced income growth by more than 5 percentage points over the same period. But this can be seen as a symptom of new urban wealth being put to speculative use rather than the profligate use of leverage.

“The combination of excessive leverage and mortgage securitisation were at the epicentre of the US sub-prime crisis. Both these factors are absent in the Chinese context. The commercial property sector has inspired just as much concern, with prices rising 16 per cent in 2009, despite low rental yields and prime office vacancy rates as high as 21 per cent and 14 per cent in Beijing and Shanghai, respectively. Yet occupancy and rental rates have started to pick up for prime properties.”

Click here for the full article.

Source: Jing Ulrich, Financial Times, March 10, 2010.

Bloomberg: Greek crisis is over, rest of region safe, Prodi says
“The worst of Greece’s financial crisis is over and other European nations won’t follow in its path, said former European Commission President Romano Prodi.

“‘For Greece, the problem is completely over,’ said Prodi, who was also Italian prime minister, in an interview in Shanghai today. ‘I don’t see any other case now in Europe. I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.’

“Greek officials are trying to convince investors they can cut the nation’s budget deficit, which at 12.7 percent of gross domestic product was Europe’s largest in 2009. The government last week announced spending cuts and tax increases totaling 4.8 billion euros ($6.5 billion), the third round of austerity measures this year.

“French President Nicolas Sarkozy said on March 7 the 16-nation euro region must support Greece, which has more than 20 billion euros of debt falling due in April and May, or risk destroying the currency. German Chancellor Angela Merkel, who runs Europe’s largest economy, has so far refused to give the green light to any aid package.

“Intervention by European nations to date ‘was enough’ and countries such as Spain and Portugal have ‘plenty of time’ to get their finances in order, said Prodi.

“Investors don’t yet share Prodi’s optimism about Greece. While the extra yield they demand to hold Greek 10-year debt rather than German equivalents has eased 88 basis points from a record of 396 in January, it’s still more than four times the level of two years ago. The premium on Spanish 10-year bonds is 69 basis points, twice what it was two years ago.

“Greek Prime Minister George Papandreou, during a trip to the US yesterday, said President Barack Obama supported the measures that Greece is taking to put its public finances in order.

“‘We’re not asking for a bailout, we’re not asking for financial help from anyone,’ Papandreou told reporters in Washington yesterday. ‘We are taking measures to put our economy on the right path.’”

Source: Bloomberg, March 10, 2010.

Telegraph: Fitch warns Britain and questions Greek rescue as sovereign risks grow
“Brian Coulton, the agency’s head of sovereign ratings, said the UK has seen ‘the most rapid rise in the ratio of public debt to GDP of any AAA-rated country’ and is courting fate with its leisurely plan to halve the deficit by the middle of the decade.

“‘It is frankly too slow, a pedestrian pace. Why the UK thinks it has more time than other countries, we’re not sure. This needs to be reoriented,’ he told the Fitch forum on sovereign hotspots.

“A string of European states are stepping up the pace of retrenchment, aiming to cut deficits to 3pc of GDP within three years. The risk is that Britain will soon stick out like a sore thumb, left behind with a shockingly large deficit long after such loose fiscal policy can be justified as a crisis measure. The UK deficit this year is 12.6pc of GDP, the highest among G10 states.

“The Government is clearly counting on a ‘Korean’ recovery, modelled on Korea’s fast return to trend growth following the Asian crisis in 1998. It relies on rising output and tax revenues to plug much of the deficit. ‘This is an optimistic assumption,’ said Fitch.

“There is a ‘distinct possibility’ that Britain will face something closer to Japan’s ‘Lost Decade’ when a bursting debt bubble left the country on a permanently lower growth path. ‘The UK faces the same massive deleveraging by the private sector,’ said Mr Coulton.”

Source: Ambrose Evans-Pritchard, Telegraph, March 9, 2010.

Tags: Asset Classes, Bipartisan Bill, Cboe, Chairman Christopher, Christopher Dodd, Corporate Bonds, Credit Crisis, Degree Of Risk, Dick Fuld, Doonesbury, Government Bonds, High Yield Bonds, Regulatory Reform Bill, Risk Taking, Senate Banking Committee, Set Of Numbers, Sovereign Debt, Stock Market Indices, Us Treasury, Vix Index
Posted in Markets | No Comments »

David Rosenberg: How to Play Inflation

Thursday, February 11th, 2010

Here is a reprise of David Rosenberg’s thoughts on how to prepare for inflation, from Breakfast with Dave, December 15, 2010.

HOW TO PLAY INFLATION?

There is no sense in being dogmatic. But just in case inflation were to stage a comeback, this is how one would prepare for it:

• Precious metals (while gold grabs the spotlight, silver has surged 52% this year and has far outpaced the 27% runup in gold; and the gold/silver ratio, while down from a peak of 84 to 66, is still above the average of 54 over the past three decades).
• An even steeper U.S. yield curve!
• TIPS (or real return bonds) - the 5-year TIPS breakevens right now point to an inflation expectation of just over 1.7%, whereas consumer expectations are closer to 2.6%.
• Short-term duration corporate bonds (and go out the credit curve).
• Commodity currencies - Canadian Loonie, New Zealand Kiwi, Aussie dollar, Brazilian Real, and Norwegian Kroner.
• Basic material stocks (including energy) as well as consumer staples (tobacco, food/beverage).

We don’t have a big inflation view, but you never score brownie points by being dogmatic. If (when?) the massive amounts of fiscal and monetary stimulus ever do show through in final inflation (this will hinge on a renewed expansion in household balance sheets and a fresh credit-creation cycle), these are the areas that would likely garner the most investor interest.

Source: Breakfast with Dave, December 15, 2010

Tags: Balance Sheets, Brownie Points, Canada, Commodities, Consumer Expectations, Consumer Staples, Corporate Bonds, Credit Creation, David Rosenberg, Food Beverage, Gold, inflation, Investor Interest, Massive Amounts, New Zealand Kiwi, Norwegian Kroner, precious metals, Real Return Bonds, Runup, Stimulus, Term Duration, Three Decades, Yield Curve
Posted in Markets | No Comments »

Words from the (Investment) Wise (November 29, 2009)

Sunday, November 29th, 2009

As shoppers were emptying their purses on Black Friday bargains, Dubai’s attempt to reschedule its debt roiled financial markets, plunging risky assets into the red. The government of Dubai requested a six-month payment freeze on the $59 billion debt issued by Dubai World - a state-owned conglomerate that has become known for its extravagant real estate projects.

Worries about Dubai’s debt woes rattled investors’ confidence, precipitating a sell-off in equities, high-yielding corporate bonds, commodities and the Baltic Dry Index, while mature-market government debt, the US dollar and the Japanese yen attracted safe-haven buyers. On Thursday and Friday, many emerging-market and high-yielding currencies declined sharply.

A fact not widely known is that Dubai has the worst debt per capita in the world. Ah well …

Source: Peter Brookes, Times Online

The credit-rating agencies promptly downgraded Dubai’s government-related debt and the cost of insuring against default jumped across the United Arab Emirates (UAE) region. As shown in the Bloomberg screenshot below, courtesy of Bespoke, the price of Dubai’s sovereign debt credit default swap (CDS) last week spiked up to 541 basis points. “Now that global markets have stabilized and exited crisis mode, an isolated event in Dubai where default risk doesn’t even spike to its 2009 highs [of almost 1,000 basis points] has caused a global market selloff,” remarked Bespoke.

Source: Bespoke, November 27, 2009.

Geoffrey Yu, strategist at UBS, said (via the Financial Times): “Although the majority of market observers believe the problems in Dubai are not insurmountable, the wider fallout has simply revealed how fragile markets are - and risk appetite may not be as strong as previously assumed, regardless of how profligate central banks globally have been in providing liquidity.”

Also as reported by the Financial Times, Julian Jessop of Capital Economics argued that Dubai’s move was unlikely to affect the positive outlook for emerging markets in the longer term: “We do not believe the events in Dubai mark a new phase in the global crisis. But if they are the catalyst for a more selective approach to investment, that might be no bad thing.”

In terms of banks’ exposure to Dubai, JPMorgan Chase comments (via The Big Picture) that the Royal Bank of Scotland underwrote more Dubai World loans than any other institution. In terms of capital at risk, HSBC has the largest exposure to the UAE.

The past week’s performance of the major asset classes is summarized by the chart below. Gold bullion (not shown on the graph) touched a record high of $1,194.90 on Thursday before tumbling to $1,136.80, but subsequently recovered to close 2.4% up for the week at $1,177.63. Similar volatility was seen in the oil price, with West Texas Intermediate Crude declining by more than $5 at one point on Friday, but later regaining some ground to end the week 1.8% down at $76.05.

Source: StockCharts.com

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

The MSCI World Index (-0.1%) last week marked time, whereas the MSCI Emerging Markets Index (-2.5%) experienced more selling from risk-averse investors. However, the aggregate indices mask greatly varying performances. For example, among mature markets the Japanese Nikkei 225 Index (-4.4%) recorded a fifth consecutive down-week, suffering from the strong Japanese yen that recorded a 14-year low versus the US greenback. On the other hand, the Brazillian Bovespa Index (+1.1%) and the Russian Trading System Index (+1.8%) bucked the broader downtrend among emerging markets.

As far as the US indices are concerned, Friday’s losses wiped out the gains from earlier in the week, reversing a new recovery high of 10,464 made by the Dow Jones Industrial Index on Wednesday. By the close of the Thanksgiving-shortened week on Friday, the S&P 500 Index remained unchanged on the week, whereas the other major indices experienced a second down-week. Five of the ten economic sectors (as measured by the SPDR exchange-traded funds) closed higher for the week, with Telecoms (+1.8%), Health Care (+1.3%) and Utilities (+0.9%) outperforming, and Financials (-2.2%) in the red.

The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 17.5%, S&P 500 Index 20.8%, Nasdaq Composite Index 35.6% and Russell 2000 Index 15.6%.

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

Top performers among stock markets this week were Bangladesh (+5.7%), Ecuador (+4.3%), Kuwait (+3.4%), Kenya (+2.1%) and Estonia (+1.9%). At the bottom end of the performance rankings, countries included Cyprus (‑15.6%), Vietnam (-11.7%), Serbia (-8.8%), China (-6.4%) and Greece (‑6.2%). The declines in the Shanghai Composite Index came in the wake of a warning by China’s banking regulator that it would refuse approvals for expansion and limit banking operations if lenders did not meet new capital adequacy requirements.

Of the 98 stock markets I keep on my radar screen, 30% recorded gains (last week 39%), 65% (58%) showed losses and 5% (3%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included United States Natural Gas Fund (UNG) (+10.0%), Rydex S&P Equal Weight Utilities (RYU) (+3.0%), Currency Shares Japanese Yen (FXY) (+2.6%), PowerShares DB Gold (DGL) (+2.5%) and Vanguard Extended Duration Treasury (EDV) (+2.5%).

At the bottom end of the performance rankings, ETFs included iShares MSCI Turkey Investible Market (TUR) (-5.6%), SPDR S&P Emerging Europe (GUR) (-5.4%) and Market Vectors Russia (RSX) (-4.9%).

Referring to the bull market in gold, the quote du jour this week comes from Richard Russell, 85-year-old author of the Dow Theory Letters. He said: “There’s still loads of scepticism about the rising price of gold and the bull market in gold. It’s been so long since the US public (since 1971) realized gold was real Constitutional money that they don’t know what to make of the gold action. They think gold near $1,200 an ounce is expensive and they’d rather have dollar bills.

Advertisement

“I’ve coined the phrase, ‘dollar-bugs’ for these ignorant Americans. I guess they’ll have to get educated the hard way, which means holding on to their fading Federal Reserve Notes, no matter what. As far as I’m concerned, it’s an amazing example of mass brainwashing. ‘Hey, I’d rather have junk paper turned out by the Fed than the real thing - gold.’ Pathetic. And the happy thought is that you can (legally) still swap your junk fiat paper for gold.”

Still on the topic of gold, Ian McAvity (Ian McAvity’s Deliberations) said: “Gold bubble? I regard such talk as nonsense … Gold is about 52% higher than the peak weekly average price of January 1980. The US CPI is 177% higher, US M-2 Money Supply is 464% higher, and the S&P is 892% higher. I don’t think it untoward to suggest gold is badly lagging a number of important yardsticks and at these levels has some catching up to do.”

In other news, MarketWatch reported that the number of distressed banks in the US rose to the highest level in 16 years in the third quarter. The Federal Deposit Insurance Corporation’s (FDIC) Deposit Insurance Fund, which is used to protect depositors, swung to an $8.2 billion loss in the third quarter, the largest drop since the savings-and-loan crisis of the 1990s.

Separately, according to MarketWatch, rates on 30-year fixed-rate mortgages averaged 4.78% last week, matching April’s all-time low of in Freddie Mac’s weekly survey of conforming mortgage rates. The mortgage rate averaged 5.97% a year ago.

Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. There is nothing specific to report here, other than that “gold” and “banks” are still prominent and “Dubai” is making an appearance.

Back to the stock markets: The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index and the Bombay Sensex Index, the indices in the table are all trading above their 50-day moving averages, with all the indices also above their respective 200-day moving averages.

However, many stock markets have already fallen to below their 50-day lines (not shown on this table, but indicated on the performance table higher up), pointing to possible further weakness. Also, the Japanese Nikkei 225 Index last week became the first major market to breach its key 200-day moving average, pointing to a very weak technical picture.

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

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

In addition to having retraced 50% of their bear market declines, the Dow Industrial and S&P 500 are up against significant medium-term downward trend lines. Also, negative divergences have been showing up in a number of breadth indicators, financial stocks and small caps, suggesting a more cautious tone.

According to Bespoke, last week’s sentiment survey from Investors Intelligence showed bullish sentiment among newsletter writers was near its highest levels since the March lows (50.6%), while bearish sentiment is at a five-year low (17.6%). This puts the spread between bulls and bears at 33, which is the highest level since December 2007. “High levels of bullish sentiment are typically considered contrarian, but we would note that sentiment can remain bullish for extended periods of time with little impact on the market. While it is true that markets typically peak when bullish sentiment is high, however, high levels of bullish sentiment don’t necessarily mean an imminent decline,” said Bespoke.

Source: Bespoke, November 25, 2009.

Casting his eye on 2010, Eoin Treacy (Fullermoney) said: “Most markets rallied from deeply oversold levels this year and have posted impressive advances since March. It is unreasonable to expect the same type of performance to be repeated next year. Nevertheless, monetary conditions are unlikely to pose a headwind and the environment is likely to remain largely bullish despite the potential for swift mean reversion in markets somewhat overextended relative to their 200-day moving averages.”

In my opinion, stock markets have run too far too fast - driven by an avalanche of liquidity - and they have moved out of alignment with economic and earnings growth that may not live up to the expectations being priced into equity valuations. I will bide my time while the fundamentals play catch-up.

For more discussion on the economy and financial markets, see my recent posts “Dubai’s latest mega-project - a massive default?“, “Japanese Nikkei 225 nosedives“, “Gold ETF makes it 9 up-days in a row“, “Gold bullion - overdue for a pullback?“, “Ritholtz: “Buy and hold” is a disaster“, “Charlie Rose in conversation with Barton Biggs“, “Picture du Jour: Will emerging-market outperformance last?” and “WealthTrack: Robert Kleinschmidt - reveling in contrarian investment philosophy“.

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

Economy
“There has been no meaningful change in global business sentiment during the past three months. Since mid-August, business confidence has been consistent with a tentative global economic recovery,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses have remained consistently more upbeat about the outlook than their assessment of current conditions. Sales and hiring are soft, as are pricing and inventories. South American businesses and professional service firms are the most positive and North Americans and those working in government generally the most negative.”

Source: Moody’s Economy.com

Purchasing managers indices for the 16-country Eurozone region showed private sector activity expanding this month at the fastest pace in two years, led by France and Germany, reported the Financial Times. The composite index, covering Eurozone services and manufacturing, reached 53.7 in November, up from 53.0 in October, making it the fourth consecutive month of expansion.

As far as hard data are concerned, Germany’s economy expanded again in the third quarter of 2009. GDP rose by 0.7% on a seasonally adjusted basis from the previous quarter, when it expanded by a revised 0.4%. Economic activity was boosted by inventory restocking and spending on machinery and equipment.

Concerns remain about the pace of the global economic recovery, and therefore how quickly governments and central banks should withdraw emergency support measures. According to the Financial Times, Mr Strauss-Kahn, managing director of the International Monetary Fund, said the global economy stood at the cusp of recovery but remained vulnerable to shocks and policy missteps. Fiscal and monetary stimulus programs should not be stopped too soon, he said.

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

Tuesday, November 24
• Minutes of November 3-4 FOMC Meeting - spots of optimism are visible, concerns about dollar, commercial real estate loans, and low interest rates are noticeable
• Widespread revisions of Q3 GDP
• Home prices - signs of stability remain in place
• Consumer Confidence Index moves up slightly

Monday, November 23
• Low mortgage rates and tax credit lift sales of existing homes

A very handy graph to assess the current state of the US economy comes courtesy of Russell Investments. Click here to link to the interactive version.

Source: Russell Investments, November 22, 2009.

The minutes of the Federal Open Market Committee’s (FOMC) November 3-4 meeting point to continued aggressive monetary policy in the near term. Although participants agreed that the recession was over, they expected the unemployment rate to remain elevated and the inflation rate to remain below the central bank’s optimal level. Participants expected economic growth to slow a bit in 2010 and then pick up again after that.

On the topic of the magnitude of the US economic recovery, David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, provided the following interesting snippet:

“The recession in the US may be over, but what sort of recovery lies ahead remains in question. All we can say is that when looking at what is normal in the context of a post-recession rebound during the post-WWII era, the first quarter of growth is closer to 7.3% at an annual rate, not 2.8% as we just saw in the latest real GDP estimate - the median was 6.3%. The fact that with the massive amount of stimulus - without it, growth would have flirted with 0% - this first quarter of positive growth was basically one-third of what is typical, really says something.”

Food for thought indeed.

Source: Gluskin, Sheff & Associates - Breakfast with Dave, November 26, 2009.

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

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Nov 23	10:00 AM	Existing Home Sales	Oct	6.10M	5.85M	5.70M	5.54M
Nov 24	08:30 AM	GDP - Second Estimate	Q3	2.8%	2.8%	2.8%	3.5%
Nov 24	08:30 AM	GDP Deflator - Second Estimate	Q3	0.5%	0.8%	0.8%	0.8%
Nov 24	09:00 AM	Case Shiller 20 City Index	Sep	-9.36%	-9.25%	-9.10%	-11.30%
Nov 24	10:00 AM	Consumer Confidence	Nov	49.5	46.3	47.5	48.7
Nov 24	10:00 AM	FHFA Home Price Index	Sep	0.0%	-0.2%	0.1%	-0.3%
Nov 24	02:00 PM	FOMC Minutes	11/04	-	-	-	-
Nov 25	08:30 AM	Personal Income	Oct	0.2%	0.1%	0.1%	0.2%
Nov 25	08:30 AM	Personal Spending	Oct	0.7%	0.3%	0.5%	-0.6%
Nov 25	08:30 AM	PCE Prices	Oct	0.2%	0.2%	0.1%	-0.6%
Nov 25	08:30 AM	PCE Prices - Core	Oct	0.2%	0.1%	0.1%	0.1%
Nov 25	08:30 AM	Initial Claims	11/21	466K	510K	500K	501K
Nov 25	08:30 AM	Continuing Claims	11/14	5423K	5630K	5565K	5613K
Nov 25	08:30 AM	Durable Orders	Oct	-0.6%	0.3%	0.5%	2.0%
Nov 25	08:30 AM	Durable Orders ex Transportation	Oct	-1.3%	0.5%	0.6%	1.8%
Nov 25	09:55 AM	Michigan Sentiment	Nov	67.4	65.0	67.0	66.0
Nov 25	10:00 AM	New Home Sales	Oct	430K	420K	404K	405K
Nov 25	10:30 AM	Crude Inventories	11/20	1.02M	NA	NA	-0.887K

Source: Yahoo Finance, November 27, 2009.

The European Central Bank (ECB) will make an interest rate announcement on Thursday (December 3). US economic data reports for the week include the following:

Monday, November 30
• Chicago PMI

Tuesday, December 1
• Construction spending
• ISM Index
• Pending home sales
• Auto and truck sales

Wednesday, December 2
• ADP employment report
• Fed Beige Book

Thursday, December 3
• Jobless claims
• Productivity
• ISM Services

Friday, December 4
• Nonfarm payrolls
• Factory orders

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

Source: Wall Street Journal Online, November 27, 2009.

“Regardless of the dollar price involved, one ounce of gold would purchase a good-quality men’s suit at the conclusion of the Revolutionary War, the Civil War, the presidency of Franklin Roosevelt, and today,” said Peter Burshre (hat tip: Chart of the Day). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist the readers of Investment Postcards to not only don decent suits, but also build considerable wealth with their investment portfolios.

That’s the way it looks from Cape Town (where I will be spending my time over the next few weeks, because my visit to New York had to be cancelled to attend to local business responsibilities).

Source: Wayne Stayskal, November 11, 2009.

Financial Times: Bets rise on rich country bond defaults
“The mounting level of debt in the industrialised world is prompting a growing number of investors to use the derivatives market to bet on the chance of rich governments defaulting on bonds.

“The volume of activity in sovereign credit default swaps - which measure the cost to insure against bond defaults - linked to the US, UK and Japan have doubled in the past year because of concerns about their public finances.

“CDS volumes for Italy, which has one of the highest debt burdens of the developed economies, are now the highest for an individual country, according to the Depository Trust & Clearing Corporation.

“In contrast, the outstanding volume of CDS linked to emerging nations such as Russia, Brazil, Ukraine and Indonesia have been flat or fallen in the past 12 months as investors have become less interested in trading the risks of those countries.

“In the past, the CDS market for developed countries was sluggish, because few investors saw the need to buy or sell protection against a risk of default that seemed exceedingly remote.

“However, rising debt levels and growing political and economic uncertainty have created a more active market, with more investors now seeking insurance. Meanwhile, many banks are prepared to offer protection in exchange for a fee.

Advertisement

“This fee has recently jumped, since the cost to insure the debt of developed countries has increased since the summer of last year, while the cost of insuring emerging market debt has fallen.

“Gary Jenkins, head of fixed income research at Evolution, said: ‘The biggest single risk hanging over the bond markets is the rapid rise in public debt in the industrialised world.

“‘If we get to a point where the market thinks the levels of debt are unsustainable, then we will see an almighty sell-off in the government bond markets, with yields soaring. Governments need to take action to cut deficits and debt.’

“Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: ‘It is not surprising that investors are increasingly worried about debt in the industrialised world. Debt to GDP of more than 100 per cent is difficult to sustain.’”

Source: David Oakley, Financial Times, November 22, 2009.

Financial Times: Dubai World
“Dubai has shocked investors by asking for a debt standstill at Dubai World, the government’s flagship holding company that has developed some of the world’s most extravagant real estate projects. The move raised the spectre of default in the Middle East’s trading hub just as early signs of economic recovery have emerged. John Paul Rathbone analyses recent developments in Dubai.”

Source: John Paul Rathbone, Financial Times, November 24, 2009.

Financial Times: Dubai shock after debt standstill call
“Dubai has shocked investors by asking for a debt standstill at Dubai World, the government’s flagship holding company that has developed some of the world’s most extravagant real estate projects.

“The move raised the spectre of default in the Middle East’s trading hub just as early signs of economic recovery have emerged. During the boom, Dubai rode the wave of easy credit generating phenomenal economic growth but was badly hit by the global credit crisis.

“Dubai’s surprise move angered some investors who had been reassured by local officials for months that the city would meet all obligations on its $80bn of gross debt in spite of recession and a real estate crash.

“‘Investors view this as shockingly bad news,’ said Rob Whichello of BNP Paribas. Two hours after announcing it had raised $5bn from two Abu Dhabi banks, the department of finance asked for a standstill until May 30 on all financing to the heavily indebted Dubai World and its troubled property unit Nakheel, which is due to pay back $4bn on an Islamic bond on December 14.

“Dubai also launched a restructuring of the government holding company, which oversees ports operator DP World, the UK-based P&O Ferries and troubled investment company Istithmar. Nakheel, the developer behind the city’s Palm Islands that boast celebrity owners such as David Beckham, has had to shed thousands of staff and left contractors out of pocket as local property prices halved and credit dried up.

“A symbol of Dubai’s pre-crunch excess, the government company has had to cancel plans for the world’s tallest tower and a constellation of reclaimed islands, as collapsing cash flow left the developer on the brink.

“‘This will destroy confidence in Dubai, the whole process has been so opaque and unfair to investors,’ said Eckart Woertz, economist with Dubai’s Gulf Research Centre.

“The gaping size of Dubai World’s $22bn debt problem has been apparent for a year. But the government’s level of support has been clouded by politics and a lack of clarity on how much it could raise from international markets and the oil-rich capital of the United Arab Emirates, Abu Dhabi.

“Bond markets reacted sharply to the news with investors demanding higher premiums to hold debt from the region. In London trade it cost about $460,000 annually over five years to insure $10m worth of Dubai government debt against default, compared with $360,000 on Tuesday. Prices rose for its neighbours with Abu Dhabi protection $100,000 more than on Tuesday.

“Standard & Poor’s and Moody’s Investors Service immediately downgraded the ratings of all six government-related issuers in Dubai following news of the repayment delay and left them on review for possible further downgrade.

“Moody’s cut ratings on some government-related entities to junk status, while S&P cut ratings on some entities to one level above junk.

“S&P said the restructuring ‘may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity’.”

Source: Simeon Kerr and Jennifer Hughes, Financial Times, November 25, 2009.

Eoin Treacy (Fullermoney): Dubai could trigger corrective phase
“Middle Eastern stock markets have been laggards over the last year despite the advance in oil prices. Laggards usually lag for a reason and these are now becoming apparent with yesterday’s announcement. This news has had little effect on the region’s stock markets which suggests either some expectations of credit problems are already in the price or the focus of these problems lies with the Dubai government and foreign creditors.

“Dubai took full advantage of loose credit conditions earlier this decade to build on a massive scale. A huge percentage of the world’s cranes were domiciled in the country and the ‘before and after’ pictures of the city were commonly used to illustrate the extent of the development. The aim of building a financial and tourist hub and becoming a gateway between Europe and Asia as a solution to the Emirate’s lack of oil and gas reserves is laudable, but as with any mania, the good idea was taken to excess. The contraction of global liquidity has put pressure on Dubai’s ability to attract investment and has contributed to the current problems.

“Countries that experienced the biggest building booms on credit alone are experiencing some of the deepest recessions. The US, UK, Ireland, Spain and a number of Eastern European and Middle Eastern countries share this characteristic. However, the stock market action of the last year demonstrates that not all countries have been affected the same way and those which avoided building to excess have largely avoided recessions and posted the best stock market performances.

“The extent to which British banks are exposed to Dubai World has begun to rekindle worries about contagion but I wonder how justified this is? Dubai’s big brother, Abu Dhabi, is on a sounder financial footing and remains likely to provide assistance. Creditors may have to endure a delay in getting their capital returned but massive writedowns akin to those experienced following Lehman Brothers’ bankruptcy are probably unlikely. However, the perception of these problems is more important in the short-term. Stock and commodity markets have had an exceptional run since March. The Dubai default could be a catalyst for a deeper corrective phase unfolding generally.”

Source: Eoin Treacy, Fullermoney, November 26, 2009.

Nouriel Roubini (Forbes): Will the world go shopping?
“Roughly one year ago, around the Thanksgiving festivities, the National Bureau of Economic Research announced that the US recession started in December 2007. One year later, though the US economy is in recovery mode, retailers are approaching the holiday season - which accounts for slightly less than one-fifth of yearly US retail sales - with some concern.

“A sharp collapse in US consumer spending since mid-2008 led to a particularly dismal 2008 holiday retail season. As per US Census Bureau estimates, core retail sales (which exclude autos, gasoline and building supplies) fell by 1.1% year on year during November and December 2008, compared to an average 4.6% year-on-year increase in holiday season sales over the past decade. Total retail sales suffered a larger collapse, falling 9.5% year on year.

“After collapsing in 2008, retail sales showed signs of stabilizing over the summer of 2009. While auto sales have fluctuated sharply during recent months due to the government’s ‘cash for clunkers’ initiative, core retail sales have risen for three consecutive months as of October 2009, creeping up at a pace of about 0.5% month on month. Entering the 2009 holiday season, the recent uptick in core sales offers hope for better than anticipated holiday retail sales.

“Economic indicators, however, suggest a note of caution. The renewal in US consumer confidence over the first half of 2009 faded. Successive grim reports on the employment situation revealed no quick end to labor market woes, lowering consumers’ income expectations. According to the October Reuters/University of Michigan Survey of Consumer Sentiment, in October 2009, consumers reported worsening personal finances for the 13^th consecutive month, the ‘longest and deepest decline in the 60-year history of the surveys’.

“The poor state of personal finances has driven consumers to reduce debt at an accelerated pace. In September, consumer credit fell for the eighth consecutive month at an annualized pace of 7.2%. The poor health of personal finances, labor market uncertainty and the ongoing household balance- sheet repair will continue to promote frugal behavior by US consumers. The Conference Board consumer confidence surveys tell a revealing story: Consumers’ plans to purchase big-ticket appliances have declined in the run-up to the 2009 holiday season. This is a bit unusual as plans to buy big-ticket appliances usually display a sinusoidal pattern, with a trough in the month of October and a peak sometime the following spring.

“A measure of weekly retail sales released by the International Council of Shopping Centers and Goldman Sachs indicates that same-store sales flattened over the first three weeks of November, though compared to 2008, sales are up by a promising average pace of 2.9%. The National Retail Federation projects retail sales will fall 1% during this holiday season, compared to an average 3.4% annual gain in holiday sales over the past decade. After the sharp slide in 2008, a decline of ‘only’ 1% or even a small positive gain in 2009 holiday sales may seem like a welcome number; however, accounting for the base effects of a dismal 2008 season, the underlying reality for retailers remains grim for this holiday season.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, November 26, 2009.

Financial Times: Divisions emerge on stimulus strategy
“Stark divisions are emerging among economic policymakers about how quickly governments and central banks should withdraw emergency support measures, with Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warning on Monday about the risks of early exit.

to shocks and policy mis-steps. Fiscal and monetary stimulus programmes should not be stopped too soon, he said.

“He added: ‘It is too early for a general exit. We recommend erring on the side of caution, as exiting too early is costlier than exiting too late.’

“His words may be of some use to the Obama administration, which is boxed in by increasingly shrill calls to reduce the budget deficit and by appeals from some liberal Democrats and economists to spur job creation with more public money.

Advertisement

“On the monetary policy side, Ben Bernanke, US Federal Reserve chairman, last week said ‘inflation seems likely to remain subdued for some time’ and reiterated that interest rates were likely to remain exceptionally low for ‘an extended period’, although he also said he was ‘attentive’ to the value of the dollar.

“Mr Strauss-Kahn’s stance contrasted with warnings by the European Central Bank that delays in unwinding exceptional measures taken to combat the economic crisis could backfire. Last Friday, Lorenzo Bini Smaghi, an ECB executive board member, said history showed that the late implementation of ‘exit strategies’ could cause future crises.

“Speaking in Madrid on Monday, Jean-Claude Trichet, ECB president, said the threats to public finances posed by government stimulus packages meant ‘there is an increasingly pressing need for ambitious and realistic fiscal exit strategies and for fiscal consolidation’. He said it was ’still premature to declare the financial crisis over. But when the appropriate time comes, there should be no concern about the ECB’s determination and ability to exit.’

“Mr Strauss-Kahn said the worst of the financial storm had passed but the global economy remained in a holding pattern - ’stable, and getting better, but still highly vulnerable’.”

Source: Brian Groom, Ralph Atkins and Tom Braithwaite, Financial Times, November 23, 2009.

Financial Times: Fed sees risks in low rates policy
“Federal Reserve officials have expressed concerns that near-zero interest rates could fuel ‘excessive risk-taking in financial markets’ but believe the possibility of such an outcome is ‘relatively low’ minutes from its November meeting show.

“Both China and Germany warned this month that the weak dollar and the Fed’s policy to keep US interest rates ‘exceptionally low’ for an ‘extended period’ could be laying the groundwork for a new speculative bubble.

“The central bank’s Federal Open Market Committee already had discussed this risk, according to the minutes released on Tuesday. In their meeting on November 3-4, the officials ‘noted the possibility that some negative side-effects might result from the maintenance of very low short-term interest rates for an extended period’.

“The minutes said: ‘While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.’

“The committee members took a fairly sanguine view of the dollar’s recent decline, which they described as ‘orderly’ and linked to improved risk appetite. However, the minutes note that ‘any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching’.

“In the meeting, the committee decided to stick to its interest-rate policy, saying the US economy was continuing to improve but that inflation risks were low. The committee members upgraded their forecasts for US growth in 2009 and 2010, but reduced their forecast slightly for 2011. They also lowered their unemployment expecations, forecasting a rate between 9.3 and 9.7 per cent next year, down from a previous forecast of between 9.5 and 9.8 per cent.

“The minutes were released after the commerce department said gross domestic product grew at an annual rate of 2.8 per cent in the third quarter, below its first estimate of 3.5 per cent.”

Source:  Sarah O’Connor, Financial Times, November 24, 2009.

CNBC: FOMC minutes - reaction
“Dissecting the FOMC minutes with James Bianco of Bianco Research, Zane Brown of Lorb Abbett and CNBC’s Steve Liesman.”

Source: CNBC, November 24, 2009.

MoneyNews: Interest alone on Federal debt - $4.8 trillion
“When you think about the government’s exploding debt burden, you probably don’t focus on interest payments.

“But those payments will likely total $4.8 trillion over the next 10 years, amounting to more than half the government’s $9 trillion in debt.

“Interest rates are near zero now, thanks to the Federal Reserve’s massive monetary stimulus. But at some point the Fed will have to reverse that easing.

“‘When interest rates rise, even a small amount, the interest payments go up a lot because of the size of the debt,’ Charles Konigsberg, chief budget counsel of the Concord Coalition, told CNNMoney.com.

“The $4.8 trillion interest-payment estimate made by the Congressional Budget Office assumes some interest rate appreciation. But if rates rise higher than its estimates, the dollar total will be higher.

“The Obama administration has pledged to cut the budget deficit to 3 percent of GDP, down from 10 percent last year. But that goal may be more fantasy than reality.

“‘Even under the president’s (2010) budget as evaluated by the CBO, we do not get anywhere close to that,’ William Gale, a senior fellow at the Brookings Institution, told CNNMoney.com.”

Source: Dan Weil, MoneyNews, November 23, 2009.

Asha Bangalore (Northern Trust): Widespread revisions of Q3 GDP
“Real GDP grew at an annual rate of 2.8% in the third quarter, previously estimated as a 3.5% increase. Lower estimates of consumer spending (+2.9% vs. +3.4% in the advance report), outlays on structures ((-15.1% vs. -9.0% in the advance report), residential investment expenditures and (+19.5% vs. +23.4% in advance report), including a smaller contribution from inventories and a wider trade gap more than offset the upward revisions of government spending and equipment and software spending.

“Going forward, real GDP is projected to show a slightly slower pace of growth in the fourth quarter of 2009 and first quarter of 2010, partly because car sales of the future have been borrowed to take advantage of the ‘clash for clunkers’ program.

“Corporate profits from current production rose 10.6% in the third quarter, following a revised 3.7% gain in the second quarter. From a year ago, corporate profits fell 6.7%, the first single-digit decline after three straight quarters of significantly weaker profits. Corporate profits of the financial sector advanced 36.4% in the third quarter and made up the larger share of corporate profits. Corporate profits of the non-financial sector increased only 2.0%. The financial sector’s performance is artificially boosted by the support programs in place.”

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

Clusterstock: The bloodbath in American manufacturing is over
“Manufacturing has been one of the hardest hit sectors around, but the pain is going away.

“Today’s chart shows the number of mass layoff events (at least 50 people whacked in one blow) per month in manufacturing, and as you can see, it’s way down from its peak, and now below the peak of the 2001-2002 recession.

“Still, we’ve got to see a lot of improvement before we’re at pre-crisis levels.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, November 20, 2009.

Standard and Poors: S&P/Case-Shiller - Home prices show sustained improvement
“Data through September 2009, released today [Tuesday] by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, show that the US National Home Price Index improved in the third quarter of 2009, posting its second consecutive quarterly increase and further improvement in its annual rate of return.

“The chart above depicts the annual returns of the US National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller US National Home Price Index, which covers all nine US census divisions, recorded an 8.9% decline in the third quarter of 2009 versus the third quarter of 2008. This is a marked improvement over the 14.7% decline in the annual rate of return reported in the second quarter of 2009, and the 19.0% drop in the first quarter. The 10-City and 20-City Composites recorded annual declines of 8.5% and 9.4%, respectively. These two indices, which are reported at a monthly frequency, have generally seen improvements in their annual rates of return every month since the beginning of the year.

“‘We have seen broad improvement in home prices for most of the past six months,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘However, the gains in the most recent month are more modest than during the seasonally strong summer months.’”

Source: Standard and Poors, November 24, 2009.

Asha Bangalore (Northern Trust): Low mortgage rates and tax credit lift sales of existing homes
“Sales of all existing homes rose 10.1% to an annual rate of 6.1 million units in October. Attractive mortgage rates and the first-time home buyer tax credit of $8,000 helped to boost sales of existing homes. The tax credit program has been expanded and extended to April 30, 2010.

“Sales of single-family existing homes advanced 9.7% to an annual rate of 5.33 million units in October. Sales of single-family existing homes have moved up nearly 32% from the cycle low of 4.05 million homes in January 2009. The peak of single-family existing home sales was in September 2005 (6.34 million units).

“The median price of an existing single-family home declined 1.6% to $173,100 in October from the prior month and it is down 6.8% from a year ago. The year-to-year decline of the median price shows a significant moderation, with the October reading the smallest since June 2008.

“As a result of the low mortgage rates and the first-time home buyer tax credit of $8,000, the supply of unsold single-family existing homes in October dropped to nearly 7-month supply, which is slightly below the historical median of 7.2-month supply.

“The important implication is that the declining trend of the number of unsold existing homes should establish price stability. Additional home sales will be possible as the economy recovers and hiring recovers.”

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

Clusterstock: The “distressing” gap between new and existing home sales
“This morning’s existing home sales number showed that sales surged in October by a surprising 10.1%. But new home sales continue to remain quite weak.

“Today’s chart, showing the ‘distressing’ gap between the two measures, comes courtesy of Calculated Risk, which explains:

“‘The initial gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn’t compete with the low prices of all the foreclosed properties.

“‘The recent spike in existing home sales was due primarily to the first time homebuyer tax credit.

“‘But what matters for the economy - and jobs is new home sales, and new home sales are still very low because of the huge overhang of existing home inventory and rental properties.’”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, November 23, 2009.

MoneyNews: Nearly 11 million US homes underwater
“Some experts say the housing market has bottomed, but one statistic indicates otherwise.

“The portion of US homeowners who are ‘underwater’ on their loans - that is, they owe more on the mortgage than the home is worth - surged to 23 percent in the third quarter, or almost 10.7 million households, according to First American CoreLogic, a real estate research firm.

“Many of the underwater homes will end up in foreclosure or on the already bulging market of homes for sale.

“Of the 10.7 million homes underwater, nearly half have a mortgage that is at least 20% percent higher than the home’s value, according to First American.

“More than 520,000 of these homeowners are in default on their mortgages.

“This ‘is an outstanding risk hanging over the mortgage market’, Mark Fleming, chief economist of First American, told The Wall Street Journal.

“‘It lowers homeowners’ mobility because they can’t sell, even if they want to move to get a new job.’

“Some homeowners who are underwater are fully capable of paying their mortgages, but are ditching their homes anyway - to the tune of 588,000.”

Source: Dan Weil, MoneyNews, November 24, 2009.

Clusterstock: We’re still generating too many negative equity mortgages
“In Washington, DC, the prevailing view these days is that unemployment is now the leading driver of mortgage defaults. This is one reason you can expect to see the next stage of the government’s attempt to rescue the housing market focus on saving jobs.

“But a new study out of Amherst Securities indicates that negative equity is by far the best default predictor of defaults. If that view is correct, the fact that we are still producing mortgages that quickly slip into negative equity should be terrifying. And, in fact, much of the recovery in the housing market appears to be built on thinly capitalized mortgages subsidized by low loan-to-value FHA guaranteed mortgages and the home-buyer tax credit.

“As the chart below shows, even home buyers who took out mortgages as late as this year are finding themselves with negative equity at historically high rates. We’ve come down from the worst levels of the housing boom but we are still well above healthy levels.

“In short, we may be witnessing a policy mistake of stunning proportions as lawmakers and regulators focus on job creation while ignoring the still problematic loan-to-value ratios in the housing market.”

Source: John Carney and Kamelia Angelova, Clusterstock - The Business Insider, November 24, 2009.

Advertisement

Yahoo Finance - Tech Ticker: Housing bottom? “Not even close,” Barry Ritholtz says
“A fifth-straight monthly gain for the Case-Shiller Index Tuesday and Monday’s stronger-than-expected existing home sales report is giving renewed hope to the housing bulls.

“‘Disregard them,’ says Barry Ritholtz, CEO of Fusion IQ, who notes the existing home sales number was juiced by sales of cheap condos and various government programs. Meanwhile, the Case-Shiller results were below expectations.

“We are ‘not even close’ to a bottom in housing, says Ritholtz, who estimates national house prices remain 15-20% overvalued, based on the traditional metrics of: median income-to-median sales price, the cost of owning vs. renting, and housing stock as a percent of GDP.

“‘Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels - that’s how you know the bottom is in,’ says the blogger and Bailout Nation author.

“The likely best-case-scenario for housing is several years of sideways action for prices, wherein population growth and a firmer economy combine to sop up the still huge inventory of homes on the market.

“‘And that’s if we’re lucky,’ Ritholtz says, citing the lackluster environment for jobs and wages, as well as CoreLogic’s analysis that 23% of all US mortgage holders are under water. With so many Americans owing more money than their homes are worth, the recent rise in foreclosures and so-called jingle mail is ‘not nearly done’, he warns.

“In sum, expect more homes for sale at distressed prices and more downward pressure on prices overall - unless the ‘real’ economy shows dramatic improvement, which Ritholtz doesn’t see anytime soon.”

Source: Aaron Task, Yahoo Finance - Tech Ticker, November 24, 2009.

Clusterstock: US weekly jobless claims the lowest since September 2008
“The Department of Labor reported today [Wednesday] that initial jobless claims for the week ending November 21 fell 35,000 on a seasonally-adjusted basis from the previous week.

“They rose 68,080 on a not-seasonally-adjusted basis, but this basically means that jobless claims rose less than normal for this time of year. Seasonal adjustments are widely used to spot overall unemployment trends since the employment market is indeed seasonal.

“As shown below, at 466,000, this most recent seasonally-adjusted claims number represents the best data point we’ve had since the week of September 13, 2008.

“Regardless of the potential for static in the weekly numbers, or errors due to seasonal adjustments, it’s now pretty clear that the overall rate of new jobless claims has indeed slowed substantially.”

Source: Vincent Fernando and Kamelia Angelova, Clusterstock - The Business Insider, November 25, 2009.

Angry Bear: Unemployment claims - 1975, 1982-83 and 2009
“The weekly initial unemployment claims are widely reported and various charts show how they have been falling since the peak. But it is hard to compare the drop in claims this cycle compared to after other severe recessions in the standard charts showing claims over time.

“So to make such comparisons easier I though readers might find a chart showing claims after the 1974 and 1982 recessions and this recession on the same scale.”

Source: Spencer, Angry Bear, November 25, 2009.

Asha Bangalore (Northern Trust): Consumer Confidence Index moves up slightly
“The Conference Board’s Index moved up to 49.5 during November from 48.7 in the previous month. The Present Situation Index (21.0 vs. 21.1 in October) fell, while the Expectations Index rose to 68.5 in November from 67.0 in the prior month. The number of respondents indicating that ‘jobs are hard to get’ rose to 49.8 from 49.4 in the prior month, while those noting that ‘jobs are plenty’ fell to 3.2 from 3.5 in September. The main message is that hiring remains weak.”

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

MoneyNews: Dreman - brace for 10 percent inflation
“David Dreman says investors should be prepared for high inflation rates - as high as 10 percent - to start within the next three years, and that the Obama administration is powerless to stop it.

“Dreman, the well-known contrarian investor and CEO of Dreman Value Management, told Fox Business that the stock market will see a correction, although ‘it’s anybody’s guess’ when that correction will occur.

“He said inflation could rise to be as high as 8 percent to 10 percent within the next three years.

“Dreman advises investors to hold onto their current stocks and ‘ride through’ the correction. He also advises investors to stay out of long-term bonds because they will take a hit.

“Instead, investors should go for very short-term bonds, equities, and real estate, he said.

“Dreman predicts that interest rates will remain low since ‘no administration’ will attempt to raise them with high unemployment rates. He said the current administration is both trapped and powerless.

“Dreman also said that gold is currently undervalued, despite breaking records daily.”

Source: MoneyNews, November 25, 2009.

Bloomberg: Late card payments rose in October, Moody’s reports
“US credit-card delinquencies climbed last month to the highest level since February as five of the six biggest card lenders posted increases, Moody’s Investors Service said.

“Loans at least 30 days overdue, a signal of future defaults, rose to 6.12 percent in October from 5.97 percent in September, Moody’s said in a report dated Nov. 20 and distributed today. So-called early-stage delinquencies, payments 30 to 59 days late, were unchanged at 1.66 percent.

“Banks typically write off card loans after 180 days, and defaults fell last month to 10.04 percent from 10.72 percent in September, reflecting lower delinquency rates earlier in the year. Credit-card defaults and delinquencies tend to track US unemployment, which climbed to 10.2 percent in October, the highest since 1983.

“‘Weak job creation, elevated bankruptcies and rising unemployment continue to weigh on results,’ John McDonald, an analyst with Sanford C. Bernstein & Co., said in a November 17 research note. ‘It still feels too early to declare victory.’

“Write-offs may peak at 12 percent to 13 percent in 2010, Moody’s analysts Will Black and Jeffrey Hibbs said in the report.”

Source: Peter Eichenbaum, Bloomberg, November 23, 2009.

Bloomberg: Strauss-Kahn says half of bank losses are undisclosed
“Dominique Strauss-Kahn, managing director of the International Monetary Fund, talks about bank losses and the outlook for a global economic recovery. Strauss-Kahn answers questions from delegates at the Confederation of British Industry’s annual conference in London.”

Click here for the article.

Source: Bloomberg, November 23, 2009.

Financial Times: S&P raises fears over health of some banks
“A study by Standard & Poor’s has raised questions over the financial strength of some of the biggest banks ahead of new rules that could require them to raise more funds.

“The analysis by S&P showed that HSBC is the best capitalised bank in the world, while Switzerland’s UBS, Citigroup of the US and several of Japan’s biggest banks are among the weakest.

“The ranking of 45 of the world’s leading banks will unnerve investors, highlighting once again the capital shortfall that institutions still need to make up over the coming years.

“Although some banks will be able to top-up capital through retained profits, analysts expect a string of rights issues from weaker banking groups as they try to raise tens of billions of dollars.

“S&P’s risk-adjusted capital (RAC) ratios - a measure of balance sheet strength - foreshadow the new capital ratio regime expected to be set by the Basel committee on banking supervision early next year.

“Its report, published on Monday, gave HSBC a 9.2 per cent ratio, compared with barely 2 per cent for the likes of UBS, Citigroup and Mizuho.”

Source: Patrick Jenkins, Financial Times, November 23, 2009.

The Wall Street Journal: Banks scramble as debt comes due
“Banks have spent the past year dealing with a mountain of bad assets. Now attention is turning to trillions of dollars of debt they have maturing over the next few years.

“Banks unable to maneuver around the challenge could be forced to refinance their debt at sharply higher costs.

“The situation was caused by banks engaging in cheap borrowing during the credit-market boom that began in the middle of the decade and lasted through 2007. As financial markets hit crisis mode, banks were propped up by government guarantees that enabled them to keep selling debt - but with much shorter maturities.

“About $10 trillion of debt comes due by the end of 2015, including $7 trillion by 2012, according to Moody’s Investors Service, which highlighted growing concerns about the banks’ looming liabilities in a report this month.

“The life span of bank debt has shrunk to historically low levels, forcing banks to deal with the problem sooner rather than later. Globally, the average maturity of new debt rated by Moody’s fell from 7.2 years to 4.7 years in the past five years.

“‘We thought that we should send a signal’ of warning, said Jean-Francois Tremblay, a Moody’s analyst and one of the report’s authors.

“The problem is especially acute for US and UK banks, which have been among the hardest hit by the financial crisis. In the US, banks have seen maturities drop to 3.2 years from 7.8 years in the past five years. In the UK, the average maturity for new debt fell to 4.3 years from 8.2 years, Moody’s said.”

Source: Carrick Mollenkamp and Serena NG, The Wall Street Journal, November 25, 2009.

Financial Times: Better climate for hedge funds
“The hedge fund sector looks to be going through the early stages of recovery, with industry flows turning positive and redemptions largely normalising to historical levels, says Huw van Steenis, head of banks and financials research at Morgan Stanley.

“‘Next year is likely to be a pivotal year for hedge funds, with the sector set to benefit from the rise in demand for better risk adjusted returns, the migration of talent from investment banks and trading off the back of a successful 2009,’ he says.

“Mr van Steenis believes sovereign wealth funds, foundations and pension funds have overtaken endowments and high net worth hedge fund of funds as the largest source of inflows - and thinks the market is underestimating the potential upsurge in demand for absolute return funds from private clients and smaller institutions.

“‘In the UK, in the third quarter alone, there were $2.1bn of inflows into absolute return funds - three times that in the first quarter. Our base case estimates that global assets under management in the sector will reach $1,750bn by the end of 2010 - where we were in the first half of 2007 - although we see risks posed by performance, regulation and reputational issues.

“‘The outcome of US/EU regulatory changes remains uncertain, but growing pragmatism should be the order of the day; we estimate that hedge funds funded 30-40 per cent of capital raised by US and European banks this year.’”

Source: Huw van Steenis, Financial Times, November 24, 2009.

Bespoke: Sovereign default risk
“Below we highlight current credit default swap prices and the year-to-date change for the sovereign debt of 39 countries. As shown, default risk has declined for every country except Japan in 2009, including Dubai.”

Source: Bespoke, November 27, 2009.

Yahoo Finance - Tech Ticker: A bad economy could spell good news on Wall Street for years to come
“The economic recovery isn’t as strong as first thought. Revised GDP figures released this morning [Tuesday] show the economy grew at a 2.8% annualized pace in the third quarter, less than the 3.5% initially reported. The revision was in line with expectations but shows the economy didn’t have as much momentum heading into the fourth quarter as previously believed.

“Unlike Wall Street traders, consumers seem to know the recovery is ‘anemic’, as Barry Ritholtz, CEO of Fusion IQ, describes it. The Conference Board’s latest confidence survey shows Americans feel worse about the current economic situation than they did in March, when the stock market was making new lows.

“What’s driving the disconnect between Wall Street and Main Street?

“Ritholtz says it’s a classic example of bad news being good news on Wall Street. ‘We’re in a cycle that’s not based on profitability, not based on expanding economy but based on all sorts of government supports,’ he says. ‘Bad news is going to be good news for the next couple of quarters probably.’

“That’s because low interest rates and liquidity provided by the Federal Reserve, coupled with government stimulus are enticing traders to buy into the market. ‘Cash is trash,’ says Rithotlz, who remains bullish on stocks.

“Ritholtz is confident that eventually fundamentals will prevail and thinks the market will take a hit once the economy shows signs of improvement, meaning the ‘extraordinary’ stimuli can be removed.

“But predicting the timing is anyone’s guess. ‘You could have this disconnect that goes on for not days, weeks or months but years and years,’ he says.

“So, in the meantime, Ritholtz - who correctly predicted the 2008 crash and told Tech Ticker’s audience ‘the mother of all bear market rallies’, was upon us in March - is still long stocks and likes commodities (thanks to a weak dollar) and emerging markets.”

Source: Peter Gorenstein, Yahoo Finance - Tech Ticker, November 24, 2009.

Financial Times: Getting technical
“There is one group of investors that has few doubts about the direction of the US stock market. Technical analysts - who scour price moves in charts for patterns of behaviour that they think will be repeated and drive future action - see plenty of signals that justify a continued move higher in the S&P 500 index of US stocks.

“Although there are many reasons to doubt the relevance of technical analysis, there are many investors who do trade on these signs. Indeed, much of the computer-driven, high-speed trading that has become a feature of stock trading uses such analysis to programme trades. At the very least, it is important to be aware of the key price levels that technical analysts are targeting.

“At its simplest in terms of technical signals, a rising support line connects the dips seen in the S&P 500 since it started its rally in March. This backs the idea that such a support will continue to prop up prices after any dips.

“In terms of specific levels, the most widely watched ones are those that cluster round key ratios identified by the mathematician Fibonacci in the 13th century. Under these ratios, technical analysts believe that once markets have rallied 50 per cent from a low, they tend to progress to a level marking a 61.8 per cent retracement.

“Taking the 2007 S&P 500 high of 1,576 as the top and the March 2009 low of 667 as a bottom, the eyes of these analysts are on the S&P reaching 1,121 - a level that would mark a 50 per cent retracement of the decline from the peak. The subsequent 61.8 per cent retracement level would be 1,229.

“Technical analysts similarly argue that charts signal continued dollar declines and rises in gold, silver and oil prices. With fundamental factors sending mixed pictures, more traders may grasp for the cryptic clues on short-term market moves provided by technical analysis.”

Source: Aline van Duyn, Financial Times, November 24, 2009.

Bespoke: Where are the Financials?
“Probably the main reason why the S&P 500 has struggled to take out old highs in recent weeks is the performance of the Financial sector. It’s actually surprising that the market is where it is given how poorly the Financials have done. As shown in the first chart below, the S&P 500 Financial sector can’t even get above its 50-day moving average, much less test its bull market highs from a month or so ago.

“The Financials led us into and out of the bear, and it’s hard to imagine the overall market continuing its bullish pace over the next few months without a resurgence in the Financials. The question right now is whether to treat the stagnation as a bullish signal to gain exposure to the sector or a bearish signal to sell the broad market.”

Advertisement

Source: Bespoke, November 23, 2009.

Bespoke: Goldman can’t get out of its own way
“While there probably aren’t a lot of people shedding tears over it, the stock of Goldman Sachs (GS) can’t seem to get out of its own way. We’ve highlighted the relative weakness in this stock several times over the last few weeks, so this shouldn’t come as any surprise, but GS is now on pace to close at its lowest levels since early November.

“Politicians in Washington and conspiracy theorists may be rejoicing in Goldman’s misery, but if there’s one thing Goldman employees can be thankful for it is that with the stock lagging the overall market, the intensity of public backlash directed towards the company seems to have abated. Next thing you know, the conspiracy theorists will claim that ‘evil’ Goldman is purposely making their stock weak just so they can buy back the stock at lower prices.”

Source: Bespoke, November 25, 2009.

Financial Times: Asian asset bubble fears overblown
“Fears that asset bubbles are being created in Asia by foreign capital inflows look overdone at this point, says Michael Spencer, Deutsche Bank chief Asia economist.

“He says that while a few narrow real estate markets may be starting to look pricey, equity markets for the most part appear to be at or near fair value.

“‘The bigger problem facing a number of key Asian economies is the extent to which their currencies are pegged to the dollar, and the Federal Reserve’s very stimulative policy stance.

“‘The monetary stimulus and capital flows these pegs are engendering are forcing [Asian] authorities to adopt more restrictive prudential regulations in an effort to avoid the inevitable inflation pressures and asset bubbles this arrangement will bring.’

“Mr Spencer says the possibility that this extends to capital controls cannot be ruled out - but argues that they would be used only as a last resort if monetary control could not be established through currency appreciation, rate hikes and sterilisation.

“‘We would anyway dispute the argument that capital flows or asset prices are at extremes. Asian equity prices may have risen sharply since the beginning of the year, but the regional index is only about 5 per cent higher than it was last summer. In a similar vein, while property prices in general are going up, it is only the luxury end that is ‘frothy’.’”

Source: Michael Spencer, Financial Times, November 25, 2009.

Reuters: Templeton’s Mobius eyes Libyan market
“Templeton Asset Management fund manager Mark Mobius said he was eyeing private equity and other investments in Libya and said the stock market had enormous potential for growth.

“Mobius, a prominent emerging market investor, told Reuters at the launch of a new Egyptian brokerage office in Tripoli he saw potential for tourism, infrastructure and telecoms investments.

“Libya, holder of Africa’s largest oil reserves, has attracted a wave of interest from Arab and international companies, operating mainly in energy and construction, since most international sanctions were lifted in 2004.

“‘This market is very exciting now because the government is embarking on a privatisation programme to list many of the state enterprises. Although the market is small now, the potential for growth is enormous,’ Mobius said, speaking late on Sunday.

“Libya has said it plans to sell shares in four state firms via initial public offerings (IPOs) in 2010 and will enact a law next year offering tax breaks to companies listing on the stock exchange in an attempt to get more Libyans to invest.

“The Libyan exchange now has 10 listed firms, mostly banks and insurance companies. Shares worth about 2.1 million dinars ($1.75 million) traded in October, a stock market report said.

“Foreign firms have been lining up for oil deals and infrastructure contracts in a country which boasts a long Mediterranean coastline but few top class hotels.

“‘The potential here for hospitality and tourism is tremendous. That’s one area. The other area is infrastructure, roads, bridges, whatever, if that’s privatised,’ Mobius said.”

Source: Shaimaa Fayed, Reuters, November 23, 2009.

MoneyNews: Forecasters see dollar decline next year
“The top performing forecasters in Bloomberg’s survey of 46 firms predict the dollar will continue falling next year.

“The sluggish economic recovery and exploding government debt burden will weigh on the currency, they say.

“Standard Chartered bank, which placed first in estimating the dollar-euro rate over the 18 months ended June 30, sees the euro rising 5.5 percent against the dollar next year, to $1.58.

“‘History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates,’ Callum Henderson, the bank’s head of foreign exchange strategy told Bloomberg.

“‘It’ll take time to drain the oversupply of dollars from the market. The dollar will remain weak until the Fed’s rates rise above the competitors.’

“All three of the top performers in Bloomberg’s survey see the dollar falling against the euro next year.

“That includes Aletti Gestielle (an Italian money management firm) and HSBC in addition to Standard Chartered.

“The dollar bears are contrarians, as 24 of the 37 predictions on dollar-euro have the greenback rising next year.

“But some of the most renowned currency experts anticipate the dollar will depreciate further.

“‘I think the dollar is an over-owned currency,’ Pimco managing director Bill Gross told CNBC. ‘The Chinese, the Asians have basically owned too many dollars for too long.’”

Source: Dan Weil, MoneyNews, November 23, 2009.

Richard Russell (Dow Theory Letters): Why gold?
“Let’s say you’re a multimillionaire. You’re seriously worried about what to do with your millions in savings. You don’t want to keep your money under your mattress or in your Frigidaire, so where should you keep it? US T-bills are now in a state of zero or even negative interest - you pay the government to hold your money, but you’re SAFE. T-bills have behind them the full faith and credit of the United States. Great, but, now you’re thinking the unthinkable - How good is the full faith and credit of the US? There are rumors that the credit rating of the US could actually be lowered. And with the massive unfunded debt of the US, that could happen, and worse - the dollar could cave in. What to do?

“And you ask yourself, ‘What’s safer than T-bills or even top-grade foreign short-term debt?’ The answer is that there is one item that’s safer - gold. Gold represents intrinsic value in and of itself and by itself. Gold needs no nation to back or guarantee its value. Gold is no single nation’s liability. Furthermore, gold has no maturity date and gold is so safe that it doesn’t need to pay interest to those who hold it. You decide to put your savings into gold rather than T-bills. And unlike T-bills today, gold doesn’t depend on anyone’s ‘full faith and credit’.

“The fact is that the so-called ‘opportunity cost’ of buying or holding gold is zero today. T-bills pay you nothing. The fact is that it’s cheaper, safer, and it makes more sense to hold gold at this time than at almost any time in my memory. And a lot of knowledgeable, big money investors are doing just that - buying and holding gold for safety and as a store of value.”

Source: Richard Russell, Dow Theory Letters, November 24, 2009.

TheStreet.com: $8,000 gold
“James Turk, author and founder of GoldMoney, argues that gold will hit $8K in 6 years’ time.”

Source: TheStreet.com, November 25, 2009.

International Monetary Fund: IMF announces sale of 10 metric tons of gold to the Central Bank of Sri Lanka
“The International Monetary Fund (IMF) announced today the sale of 10 metric tons of gold to the Central Bank of Sri Lanka. The sale was conducted on the basis of market prices prevailing on November 23, 2009 with proceeds equivalent to US$375 million. This transaction is part of the total sales of 403.3 metric tons approved by the Executive Board in September 2009, and it adds to the total of 202 metric tons already sold to the Reserve Bank of India and the Bank of Mauritius.”

Source: International Monetary Fund, November 25, 2009.

Financial Times: Gold rush forces US to clip Eagle sales
“The rush by retail investors into gold has forced the US government to suspend sales of the world’s most popular bullion coin, the American Eagle, after running out of inventories.

“The shortage, the second since the start of the financial crisis in August 2008, is the latest sign of investors seeking a safe haven into bullion amid the US dollar woes. Safe-haven buying spurred by concerns about the health of Wall Street and a spike in inflation due to a lax monetary policy have also benefited gold sales.

“‘The US Mint has depleted its current inventory of 2009 American Eagles one-ounce bullion coins due to the continued strong demand,’ the mint said in a statement late on Wednesday. It added that selling will resume ‘once sufficient inventories … can be acquired to meet market demand’.

“The US Mint has sold about 1.19m ounces of American Eagles so far this year, up almost 75 per cent from the same period last year and on track to be the highest annual volume in ten years, according to official data. Sales of American Eagle’s silver coins have hit 26m ounces, the highest level in at least 23 years.”

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

MoneyNews: Banks say too much gold to store
“Gold prices have been soaring this year thanks to a weak dollar, and everyone wants in on the investment.

“For some banks, though, it is becoming clear that only the big institutional investors are welcome to store the precious metal in their vaults.

“So they’re telling smaller investors to get their gold out and store it elsewhere.

“HSBC has told retail clients to remove their small gold holdings from its vault in New York City, The Wall Street Journal reported.

“Small retail investors don’t turn enough profits for the bank like the big institutional investors do, the newspaper reported.”

Source: Forrest Jones, MoneyNews, November 24, 2009.

David Fuller (Fullermoney): Gold’s advance is not a bubble
“Intrinsic or not, I think value is in the eye of the beholder. The Fullermoney view for the last nine years is that gold is being gradually remonetised in the eyes of investors. That process has accelerated over the last year because we have witnessed nothing less than the greatest monetary reflation in history.

“What might we expect from gold over the short to medium term?

“Technically, gold looks temporarily overstretched and $1,200 is a minor psychological level. Consequently, we could easily see a short-term reaction and consolidation of perhaps $30 to $50 before this secular bull market powers on into 1Q 2010. If the consistency of the two earlier cycles commencing in September 2005 and September 2007 is maintained, gold should reach at least $1,300 between March and May of next year.

“I do not think that gold’s current advance is a bubble, although it is likely to become one eventually. A genuine bubble, as opposed to a market that happens to be rising at a time when most people are underinvested and therefore envious observers, will include gold fever of the sort we have not seen since 1979-1970.

“To put recent events in perspective, bullion consolidated for eighteen months prior to the last three month’s gains. It has rallied about $200 since the September breakout, which is approximately $100 less than the two earlier advances referred to above. Comparing those three moves, gold’s recent percentage move is clearly less to date than we saw on the two earlier advances. Lastly, the Amex Gold Bugs Index has yet to clear its 2008 high. This does not suggest a bubble to me.”

Source: David Fuller, Fullermoney, November 26, 2009.

Financial Times: Oil prices are too high
“An oil price at $80 a barrel is inconsistent with supply and demand dynamics, inventory levels and the current macroeconomic environment, says Alexander Redman, strategist at Credit Suisse.

“‘US gasoline demand is at lower levels than this time a year ago, while distillate demand remains well below the five-year range and jet plane storage continues to climb. Overall, US oil demand is still down by 3 per cent year-on-year.’

“At the same time, he says, US petroleum inventories are among the highest levels of this decade and a further 100m barrels of oil is being held globally offshore in tankers.

“Mr Redman says an examination of the longer-term association between the real oil price and global spare oil capacity indicates two important factors.

“‘First, the oil price only tends to spike up once spare capacity falls below the critical 2-3 per cent level - the International Energy Agency does not project this occurring again until 2014. Second, using the IEA’s estimate of 2010 spare capacity of about 8 per cent, the oil price would typically be closer to $40 a barrel.

“‘For now, the market appears to be pricing in the return to a tighter supply environment well into the next decade and disregarding the current glut in supply.

“‘Going forward, the Credit Suisse oil team is targeting $70 a barrel for WTI - and $68 a barrel for Brent Crude.’”

Source: Alexander Redman, Financial Times, November 26, 2009.

Financial Times: Eurozone PMI growth reaches two-year high
“The eurozone recovery is gathering pace in the final months of 2009, but warning signs of weaker growth next year have appeared.

“Purchasing managers’ indices for the 16-country region on Monday showed private sector activity expanding this month at the fastest rate in two years, with France and Germany powering the revival. However, the survey also pointed to a loss of momentum in coming months.

“The results add to evidence that the eurozone has returned to expansion, but that it risks seeing growth fade once government and central bank support measures are ended. The results are likely to add to policymakers’ wariness about the outlook for 2010.

“In a speech in Madrid, Jean-Claude Trichet, European Central Bank president, said: ‘We can spot a number of signs of stabilisation. But the crisis has debilitated the real economy … [and has] proved so deep because it has deprived our citizens of confidence.’”

“The eurozone recession ended in the third quarter, when gross domestic product rose by 0.4 per cent.

“November’s purchasing managers’ indices suggest the fourth quarter will see growth of a similar pace or faster. The composite index, covering eurozone services and manufacturing, reached 53.7 in November, up from 53.0 in October, making it the fourth consecutive month of expansion.

“However, Chris Williamson, chief economist at Markit, which produces the survey, said November ‘also saw the first signs of growth peaking’. New orders grew at a slower rate than in October, especially in the service sector. Job losses remained high and ‘highlighted the fragility of the recovery’, he added.”

Source: Ralph Atkins, Financial Times, November 23, 2009.

Financial Times: Japan says economy back in deflation
“The Bank of Japan moved towards a neutral stance on the risk of inflation on Friday even as the government formally declared that the world’s second-largest economy has entered deflation for the first time since 2006.

“The government’s declaration sets the scene for heightened tension with the bank, which has been resisting public calls by politicians for greater aggression in the fight against deflation.

“‘We want the BoJ to extend support on the monetary policy front in overcoming deflation,’ said Naoto Kan, deputy prime minister. Hirohisa Fujii, finance minister, and Shizuka Kamei, financial services minister, have also called on the central bank to do more.

“The bank’s policy board kept interest rates on hold at 0.1 per cent on Friday, but said ‘there is a possibility that inflation will rise more than expected’ due to higher commodity prices, offset by a risk it could fall due to lower public expectations for medium- to long-term inflation. In previous statements it only mentioned the risk of inflation declines.

“Consumer prices were down by 2.2 per cent on the previous year in September, or by 1.0 per cent excluding fresh food and energy. Although year-on-year inflation first turned negative in February, the government only now declared that ‘the Japanese economy is in a mild deflationary phase’.”

Source: Robin Harding, Financial Times, November 20, 2009.

Financial Times: Japanese export growth eases recession fears
“Strong demand from China and other Asian economies lifted Japanese exports, which last month fell at their slowest rate for a year, boosting hopes that the economy will continue to report healthy growth.

“In October, exports fell 23.2 per cent from a year earlier, compared with a 30.6 per cent decline in September, according to data released by the Ministry of Finance on Wednesday. The figure represented the smallest drop since October 2008, when exports fell 7.9 per cent.

“On a seasonally adjusted basis, the value of shipments rose for the third straight month by 2.5 per cent from September.

“Junko Nishioka, economist at RBS in Tokyo, said the fall in exports last month was smaller than expected and marked a ‘clear improvement’.

“‘It shows how rapidly the growth rate is improving. Overall, we can safely say that the worst is over and downside risk is limited,’ said Ms Nishioka.

“Japan’s economy grew at an annualised rate of 4.8 per cent in the third quarter, fuelled by a mix of stimulus-induced domestic demand, a bounceback in exports and rebuilding of inventories.”

Source: Justine Lau, Financial Times, November 25, 2009.

Financial Times: China banks prepare to raise capital
“China’s banks are preparing to raise tens of billions of dollars in additional capital to meet regulatory requirements following an unprecedented expansion of new loans this year, according to people familiar with the matter.

“China’s 11 largest listed banks will have to raise at least Rmb300bn ($43bn) to meet more stringent capital adequacy requirements and maintain loan growth and business expansion, according to estimates from BNP Paribas.

“China’s banking regulator has warned it would refuse approvals for expansion and limit banking operations if lenders did not meet new capital adequacy requirements, a move that has prompted the country’s largest state-owned banks to prepare capital-raising plans for next year and beyond.

“Expectations of giant cash calls from the listed Chinese banks spooked investors on Tuesday, helping to send the benchmark Shanghai Composite Index down 3.45 per cent on a day of record turnover on the Shanghai and Shenzhen markets.

“China’s banking regulator ‘is definitely aware of potential asset quality issues and is pushing for higher capital adequacy requirements to offset deterioration in asset quality’, according to Dorris Chen, an analyst with BNP Paribas.

“Following government orders to prop up the domestic economy in the face of the global crisis, Chinese banks extended a record Rmb8,920bn in loans in the first 10 months of the year, up by Rmb5,260bn from the same period a year earlier.

“This unprecedented loan expansion resulted in a record fall in their core capital adequacy rates from just over 10 per cent at the end of last year to 8.89 per cent by the end of September, a drop that worries regulators.”

Source: Jamil Anderlini, Financial Times, November 24, 2009.

Infectious Greed: China leaps to second spot in global science
“The latest Thomson ISI science data shows that China has leaped to second-spot worldwide in academic science, as measured by papers produced. The US still leads the way, at 340,000 publications per year (not shown), but China could surpass US production within five years at current rates of relative growth.

“Of course, paper production is only one measure. Citations matter at least as much, and that isn’t captured here. Nevertheless, it is striking stuff.”

Source: Paul Kedrosky, Infectious Greed, November 21, 2009.

MoneyNews: Roach - buy China after collapse
“Buy China, advises Morgan Stanley Asia chairman Stephen Roach - but only after it tanks following a market correction Roach says is long overdue.

“‘I think right now the markets have run too fast too far, liquidity-driven and they have moved out of alignment with what I think is a very sluggish underlying recovery in the global economy,’ Roach told CNBC.

“Roach says the Chinese have focused too much on its investment growths and depended too much on export sales.

“‘The crisis is a wake-up call that the external demand from the West won’t be there for a long time,’ Roach says, pushing China to find new sources of demand.

“‘Korea has shifted its major external market from America to China, as has Japan … so there’s a lot riding on the ability of the Chinese to stimulate this new source of internal demand that could benefit not just the Chinese, but the Koreans and the Singapore too,’ Roach notes.

“Overall, however, Roach remains bullish on China, seeing an upside in its services sector over the next 5 to 7 years.”

Source: Julie Crawshaw, MoneyNews, November 23, 2009.

Tags: Baltic Dry Index, Black Friday Bargains, BRIC, Central Banks, China, Commodities, Corporate Bonds, Credit Default Swap, Credit Rating Agencies, Crisis Mode, Debt Woes, Default Risk, Dollar And The Japanese Yen, Emerging Markets, Estate Projects, ETF, Gold, India, Jessop, Market Observers, Mature Market, oil, Peter Brookes, Risk Appetite, Risky Assets, Sovereign Debt, Swap Cds, United Arab Emirates
Posted in Emerging Markets, Gold, Markets | No Comments »

Words from the (Investment) Wise (November 22, 2009)

Sunday, November 22nd, 2009

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

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

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

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

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

Source: StockCharts.com

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

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

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

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

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

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

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

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

Advertisement

Source: StockCharts.com

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

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

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

Advertisement

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

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

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

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

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

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

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

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

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

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

Source: StockCharts.com

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

Source: StockCharts.com

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

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

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

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

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

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

Source: Moody’s Economy.com

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

Source: Ifo, November 19, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Nov 16	08:30 AM	Retail Sales	Oct	1.4%	0.7%	0.9%	-2.3%
Nov 16	08:30 AM	Retail Salesex auto	Oct	0.2%	0.1%	0.4%	0.4%
Nov 16	08:30 AM	Empire Manufacturing	Nov	23.51	20.5	30.00	34.57
Nov 16	10:00 AM	Business Inventories	Sep	-0.4%	-1.0%	-0.7%	-1.6%
Nov 17	08:30 AM	Core PPI	Oct	-0.6%	0.2%	0.1%	-0.1%
Nov 17	08:30 AM	PPI	Oct	0.3%	0.7%	0.5%	-0.6%
Nov 17	09:00 AM	Net Long-term TIC Flows	Sep	$40.7B	$30.0B	$30.0B	$34.2B
Nov 17	09:15 AM	Capacity Utilization	Oct	70.7%	70.5%	70.8%	70.5%
Nov 17	09:15 AM	Industrial Production	Oct	0.1%	0.2%	0.4%	0.6%
Nov 18	08:30 AM	Housing Starts	Oct	529K	585K	600K	592K
Nov 18	08:30 AM	Building Permits	Oct	552K	585K	580K	575K
Nov 18	08:30 AM	CPI	Oct	0.3%	0.2%	0.2%	0.2%
Nov 18	08:30 AM	Core CPI	Oct	0.2%	0.0%	0.1%	0.2%
Nov 18	10:30 AM	Crude Inventories	11/13	-0.887M	NA	NA	1.76M
Nov 19	08:30 AM	Initial Claims	11/14	505K	510K	504K	505K
Nov 19	08:30 AM	Continuing Claims	11/13	5611K	5580K	5598K	5650K
Nov 19	10:00 AM	Leading Indicators	Oct	0.3%	0.5%	0.4%	1.0%
Nov 19	10:00 AM	Philadelphia Fed	Nov	16.7	12.0	12.2	11.5

Source: Yahoo Finance, November 20, 2009.

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

US economic data reports for the week include the following:

Monday, November 23
• Existing home sales

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

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

Thursday, November 19
• Thanksgiving Day

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

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

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

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

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

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

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

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

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

Click here for the full article.

Source: Financial Times, November 18, 2009.

Advertisement

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

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

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

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

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

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

Source: Ifo, November 19, 2009.

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

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

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

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

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

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

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

Click here for the full article.

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

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

Click here for the full article.

Source: Financial Times, November 17, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, November 16, 2009.

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

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

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

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

Source: MoneyNews, November 18, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Advertisement

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

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

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

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

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

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

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

Source: MoneyNews, November 18, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: BCA Research, November 20, 2009.

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

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

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

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

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

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

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

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

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

Source: Bespoke, November 16, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Advertisement

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

Source: Bespoke, November 19, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Financial Times, November 16, 2009.

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

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

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

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

Source: BCA Research, November 17, 2009.

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

Source: Bespoke, November 18, 2009.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Advertisement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Words from the (Investment) Wise (November 16, 2009)

Monday, November 16th, 2009

“Words from the Wise” this week comes to you in a shortened format as I do not have access to my normal research resources while on the road in Europe. Although very little commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.

While the Dow Jones Industrial Index and other benchmark indices reached 52-week highs last week and pleased Wall Street, the cartoonists reminded us that worrisome economic issues remained in Main Street …

Source: Jeff Parker, Comics.com, November 11, 2009.

The past week’s performance of the major asset classes is summarized by the chart below - a mixed bag, so to speak, with government bonds, equities, corporate bonds and gold closing the week in positive territory.

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below. With the exception of only a few indices - notably the Japanese Nikkei Dow that recorded a third consecutive down week - most global stock markets made headway last week, adding to the gains for the month.

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

Top performers among stock markets this week were Romania (+8.1%), Russia (+6.1%), Jamaica (+6.1%), Hungary (+5.2%) and Israel (+5.2%). At the bottom end of the performance rankings countries included Latvia (‑5.1%), Cyprus (-4.4%), Greece (-4.2%), Serbia (-4.0%) and Kuwait (‑3.8%).

Of the 99 stock markets I keep on my radar screen, 66% recorded gains (last week 52%), 31% (43%) showed losses and 3% (5%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included PowerShares Global Coal (PKOL) (+7.6%), iShares Cohen & Steers Realty Majors (ICF) (+7.4%), Vanguard REIT (VNQ) (+6.4%) and Market Vectors Russia (RSX) (+6.4%).

At the bottom end of the performance rankings, ETFs included United States Natural Gas (UNG) (-4.9%), ProShares Short Emerging Markets (EUM) (-3.7%), ProShares Short QQQ (PSQ) (-3.4%), SPDR Russell/Nomura Small Cap Japan (JSC) (-3.0%) and WisdomTree Japan Small Cap (DFJ) (-2.5%).

Still on the topic of ETFs, Clusterstock reported that investors have been pouring $108 billion into ETFs during the year to date, with $24 billion coming in during the last three months.

“Yet while investors have been pouring money into commodity, fixed income and global equity ETFs, one very important category has remained a complete pariah - US stocks. Despite the stock market rally …, money has continued to flow out of US equity ETFs. Thus while some might be able to argue that the crowd has jumped into commodities, fixed income and global equities, it’s pretty hard to say that investors are in love with stocks again …,” said Clusterstock.

Source: Clusterstock - Business Insider, November 11, 2009.

Referring to the surge in the gold price, the quote du jour this week comes from Richard Russell, 85-year-old author of the Dow Theory Letters. He said: “America’s Fed Chairman, Ben Bernanke, is convinced he knows the secret of avoiding hard times. The Fed can halt deflation and turn the picture into asset inflation. All it takes, thinks Bernanke, is zero interest rates and the creation of trillions of new dollars - and they will come, and they will spend. This is the path the Bernanke Fed has chosen. So far, it has not worked - they are not coming, and they are not spending. The Fed’s strategy has not even succeeded in bringing down unemployment. Bernanke’s solution - more of the same: ‘Whatever it takes, and as long as it takes.’

“Thus we have a strange and ironic situation. We have world deflation, and a Fed Chairman who believes he can manipulate the primary trend. Bernanke’s strategy is leading to a weakening dollar. The more dollars that are created, the weaker the dollar. As the dollar’s very status comes into question, wise and seasoned investors move to protect their wealth. They move to the time-honored ’safe haven’: the one unit of wealth that cannot be destroyed in that it is not a liability of any government. And, of course, I’m talking about the one unit of wealth that is never questioned - gold.

“So it’s the gold bull market that I trust and believe in. I think and I ponder - what can halt the gold bull market? The only thing that can halt the gold bull market is a complete reversal by the politicians and the Fed, and that would allow the US to sink into a state of deflation and depression. Unthinkable.”

Next, a quick textual analysis of my week’s reading - mostly done on airplanes and between meetings in Europe. This is a way of visualizing word frequencies at a glance. Although “bank” still features prominently, the key words have started taking on a more normal pattern compared to the crisis-related words that have dominated the tag cloud for many months. Unsurprisingly, “gold” is gaining in prominence.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index, most of the indices are trading above their 50-day moving averages, with all the indices also above their respective 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.

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

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

Still on charting, Adam Hewison (INO.com) sounded a cautious note on the outlook for the Dow Jones Industrial Index and S&P 500 Index as explained in one of his popular technical analysis presentations. Click here to access the presentation.

The announcement of Wal-Mart’s results marked the end of the Q3 earnings season. Research outfit Bespoke provided the following summary of the Q3 earnings results as well as Q4 estimates:

“The estimates for the year-over-year change in Q3 earnings at the start of earnings season were -23.2% for the S&P 500. Currently, the actual number sits at -17.2%. As shown below, the Financial sector has seen its earnings grow by 358.8% in Q3 ‘09 versus Q3 ‘08! Given how bad things were last year, it’s not surprising to see a reading this high, but it is a sign that things have gotten much better. Health Care, Utilities and Consumer Staples (all non-cyclical) are the only other sectors that have seen year-over-year earnings growth this quarter. Energy has seen the biggest decline in earnings at -62.9%, followed by Materials (-43.4%), Industrials (-37.3%), and Consumer Discretionary (-29.3%).

“The Financial sector is currently expected to see growth of 133.8% in Q4 ‘09 versus Q4 ‘08. This high estimate in the Financial sector helps put estimates for the entire S&P 500 at +65.2% in the fourth quarter. Ex-Financials, the S&P 500 is expected to see Q4 earnings actually decline by 7.6%. Technology is expected to see growth of 21.5% in Q4, while estimates for the Materials sector are currently at 97.5%.”

Source: Bespoke, November 11, 2009.

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

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

Source: Fullermoney.com

For more discussion on the economy and financial markets, see my recent posts “Picture du Jour: Dow rally in perspective“; “Richard Russell: Six reasons to invest in gold“; “Albert Edwards still über-bearish, calls for new lows in 2010“; “Roubini’s RGE: Global monetary policy outlook“; “Bull markets do not die of old age; they are assassinated - usually by central banks” and “WealthTrack: Jim Grant interview - transcript“.

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

Economy
The Recession Status Map below, courtesy of Dismal Scientist Economy.com, aggregates growth statistics from around the world and allows one to see at a glance which economies are in recession, at risk or beginning to recover. Click on the map to link to the interactive version.

Source: Dismal Scientist

“Global business confidence has remained largely unchanged during the past two months through mid-October. Sentiment is consistent with a very tentative and fragile global economic recovery,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses … are more upbeat about the outlook into next year … and their broad assessment of current business conditions. South Americans are the most positive, and North Americans generally the most negative.”

Source: Moody’s Economy.com

As far as hard data are concerned, the Eurozone emerged from recession in the third quarter, but the speed of the recovery fell short of expectations - and the growth rate of 0.9% achieved by the US. “Eurozone gross domestic product expanded by 0.4% compared with the previous three months, after having previously contracted for five consecutive quarters, according to official figures on Friday. Powering the rebound were Germany and Italy, which saw GDP rising by 0.7% and 0.6% respectively,” reported the Financial Times.

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

November 13
• Widening of trade deficit reflects oil imports and improving economic conditions
• Michigan Consumer Sentiment Index - households remained gloomy in November

November 12
• Noteworthy news from labor market - total continuing claims are trending down

November 10
• Yellen on budget deficit and inflation
• Inflation expectations - an update

November 9
• October Senior Loan Officer Opinion Survey - improved picture of lending conditions, but demand for loans was weak

Meanwhile, James Bullard, the president of the Federal Reserve Bank of St Louis, has told the Financial Times that uncertainty over the outlook for inflation “is as high as it has ever been since 1980″. “I think there’s still some risk of deflation, but I do think the deflation risk is fading as the economy recovers,” he said. In the medium term, “you have inflation that will be possibly substantially above target over a horizon of two to four years, and that, I think, is because of the combination of very large fiscal deficits in the US with very easy monetary policy.”

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 12	08:30 AM	Initial Claims	11/07	502K	525K	510K	514K
Nov 12	08:30 AM	Continuing Claims	10/31	5631K	5700K	5700K	5770K
Nov 12	11:00 AM	Crude Inventories	11/06	1.76M	NA	NA	-3.94M
Nov 12	02:00 PM	Treasury Budget	Oct	-$176.4B	-$150.0B	-$165.0B	-$155.5B
Nov 13	08:30 AM	Export Prices ex agriculture	Oct	0.3%	NA	NA	0.1%
Nov 13	08:30 AM	Import Prices ex oil	Oct	0.4%	NA	NA	0.5%
Nov 13	08:30 AM	Trade Balance	Sep	-$36.5	-$30.0B	-$31.8B	-$30.8B
Nov 13	09:55 AM	Michigan Sentiment	Nov	66.0	70.5	71.0	70.6

Source: Yahoo Finance, November 13, 2009.

Click the links below for the following economic reports:

• Wells Fargo Securities: Weekly Economic & Financial Commentary
• Wells Fargo Securities: Monthly Economic Outlook (November 2009)
• Wells Fargo Securities: Global Chartbook (November 2009)

In addition to a speech by Fed Chairman Ben Bernanke to the Economic Club of New York, US economic data reports for the week include the following:

Monday, November 16
• Retail sales
• Empire manufacturing
• Business inventories

Tuesday, November 17
• PPI
• TIC flows
• Capacity utilization
• Industrial production

Wednesday, November 18
• Housing starts
• Building permits
• CPI

Thursday, November 19
• Initial jobless claims
• Leading indicators
• Philadelphia Fed

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

Source: Wall Street Journal Online, November 13, 2009.

“Amateurs measure potential while professionals measure risk,” said hedge fund legend Steve Cohen, founder of SAC Capital Advisors (hat tip: The Kirk Report). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards to properly assess the risk associated with specific investments.

That’s the way it looks from Geneva (from where I will be making my way back to Cape Town later today).

Source: Larry Wright, Comics.com, November 10, 2009.

The Wall Street Journal: German, French economies continue to grow
“The euro zone’s two largest economies continued to recover from recession in the third quarter, as exports boosted both German and French gross domestic products.

“Germany’s GDP rose 0.7% in the three months to September 30 from a quarter earlier when adjusted for working days, data from the Federal Statistics Office showed Friday. Private consumption, however, dragged on the economy, the office said.

“In France, GDP grew for the second consecutive quarter, rising 0.3%, after shrinking for a year. Exports outpaced imports by growing 2.3%, with the result that the external sector contributed 0.4% to overall economic growth, the data showed.

“Household consumption, the main pillar of the French economy, remained unchanged from the previous three months, when it had gained 0.3%. Investment fell 1.4%, a faster pace of decline than the -1.2% posted in the previous quarter.

“The outlook for the German economy remains uncertain as unemployment is expected to rise in the coming months, hurting consumer demand. And with the euro trading at high levels against the dollar, German exporters may suffer from weaker demand, economists have said.

“The third-quarter growth marked the second quarterly gain after weak activity in the previous quarters, indicating that the euro zone’s largest economy is making progress in easing out of its worst recession since World War II.

“But overall economic activity remains low, with German GDP shrinking 4.8% in the third quarter from a year earlier, when adjusted for the number of working days each year, the data showed.”

Source: Andrea Thomas and Gabriele Parussini, The Wall Street Journal, November 13, 2009.

MoneyNews: Chanos - huge China crash coming
“To the growing number of China bears, add Kynikos hedge fund manager Jim Chanos, who is reportedly shorting the entire Chinese economy.

“Chanos, among the first to see through Enron’s web of accounting tricks, told Politico.com he sees a similar situation evolving in China - starting with the fact that the $4.3 trillion Chinese economy is under-performing despite a $900 billion stimulus program.

“Also, China seems to be cooking its books, making claims such as a huge surge in car sales while gasoline sales stay flat.

“Finally, there’s a concern that China may have too much capacity to produce too many goods for too few buyers, notes financial journalist Ed Conway.

“‘China has grown to its current size, as do most ‘young’ economies, by exporting cheap goods to richer countries. … (resulting in) the biggest trade surplus in history,’ Conway writes in the UK Telegraph.

“Chinese leaders, Conway points out, are doing whatever they can to keep the value of their currency low.

“‘Such a policy made sense when China had an economy that was relatively underdeveloped, and was trying to shield nascent exporters from volatility; but now, by keeping assets artificially cheap, it serves to exacerbate the bubble that is building up as a result of those low US interest rates,’ Conway writes.

“This, combined with trying to pump up the economy further by channeling cheap credit to companies, ‘could hardly be a more reliable recipe for an asset bubble,’ Conway says.”

Source: Julie Crawshaw, MoneyNews, November 12, 2009.

Asia Times.com: China trade surplus shadows Obama visit
“China’s surging trade surplus, with the increase last month almost double the September figure, makes it impossible that trade issues will not be a key topic when United States President Barack Obama makes his first visit to Beijing this Sunday.

“The surplus was US$24 billion in October, compared with $13 billion in September, bringing the total for the year so far to $159.23 billion.

“Trade tension between the two countries was already rising before the latest data were released on Wednesday, with the US imposing a series of anti-dumping sanctions on Chinese imports and Beijing investigating the possibility of action against imports from the US.

“This week, before leaving on his nine-day trip to Asia, Obama warned that the economic relationship between the countries had become deeply imbalanced in recent decades, with a trade gap between the countries and huge Chinese holdings of US government debt.

“The US and China had to work together on the big issues facing the world, and any competition between them had to be fair and friendly, Obama said in a White House interview with Reuters.

“He said he would be raising with Chinese leaders the sensitive issue of their currency, the yuan, which is seen by some in US industry as significantly undervalued and as an important contributor to the imbalances.

“‘As we emerge from an emergency situation, a crisis situation, I believe China will be increasingly interested in finding a model that is sustainable over the long term,’ Obama said. ‘They have a huge amount of US dollars that they are holding, so our success is important to them … The flip side of that is that if we don’t solve some of these problems, then I think both economically and politically it will put enormous strains on the relationship.’

“China holds about $2.27 trillion in foreign reserves, about two-thirds of it in US dollars, as of the end of September, up 19% from a year earlier. The country held Treasury bills worth about $797.1 billion in August, making China the world’s largest holder of US Treasuries outside the United States, according to the US Treasury Department.”

Source: Olivia Chung, Asia Times.com, November 13, 2009.

Clusterstock: California’s no. 2 export to China - trash
“American exports to China soared 341% from 2000 to 2008, according to the US-China Business Council. In fact, China is the third largest US export market, behind Canada and Mexico.

“Spearheading the charge is sunny California, the largest American exporter to China by state.

“No surprise, right? California’s right on the Pacific coast and filled with innovative companies.

“Well sort of.

“While computers and electronics are indeed California’s top export to the giant nation, the sad truth is that ‘Waste and Scrap’ are the Golden State’s second largest export to China. California sends about as much junk to China as both machinery and transportation equipment combined.

“The rest of the US isn’t doing that much better either. As a nation, ‘Waste and Scrap’ is America’s fifth largest export to China, at a whopping $7.6 billion. We might need to rethink what ‘Made in the USA’ exactly means to the Chinese.”

Source: Vincent Fernando and Kamelia Angelova, Clusterstock - Business Insider, November 12, 2009.

Financial Times: EU states given stark warning on debt levels
“The European Union’s public debt could by 2014 rise to 100% of gross domestic product - a year’s economic output - unless governments take firm action to restore fiscal discipline, EU finance ministers will be warned on Monday.

“The stark message is contained in a European Commission analysis, which highlights the rapid deterioration in EU public finances caused by emergency measures in the past 12 months to rescue Europe’s financial sector and combat recession.

“As recently as 2007, the euro area’s public debt was only 66% of GDP. But, even at this level, it was above the 60% target set for countries aspiring to join the eurozone.

“In its latest six-month economic forecast, published last week, the Commission predicted that the eurozone’s public debt would rise to 84% of GDP next year and 88.2% in 2011. But the new document paints a more sombre picture.

“The document says, based on projections of a return to long-term pre-crisis growth levels, that ‘without consolidation, the gross debt-to-GDP ratio for the EU could reach 100% of GDP as early as 2014, and keep on increasing’.

“The Commission identifies five countries as at particular risk - Greece, Ireland, Latvia, Spain and the UK - because their public finances will come under strain from large increases in pension and healthcare costs, and high deficits triggered by the financial crisis.”

Source: Tony Barber, Financial Times, November 8, 2009.

Financial Times: Uncertainty “high” over inflation outlook
“Uncertainty over the outlook for inflation ‘is as high as it has ever been since 1980′, James Bullard, the president of the Federal Reserve Bank of St Louis, has told the Financial Times.

“He said the US central bank still faced a lingering threat of deflation, but might have to pivot quickly once this danger passed to face the threat of excess inflation.

“His comments followed last week’s Fed meeting at which the US central bank signalled that it expected to keep rates on hold near zero for at least six more months but identified factors that could lead to earlier rate rises.

“‘I think there’s still some risk of deflation, but I do think the deflation risk is fading as the economy recovers,’ the St Louis Fed chief said in an interview.

“In the medium term, ‘you have inflation that will be possibly substantially above target over a horizon of two to four years, and that, I think, is because of the combination of very large fiscal deficits in the US with very easy monetary policy.’

“Mr Bullard - whose views do not neatly categorise him as a hawk or a dove - said: ‘For 2009, in particular, and maybe a little bit into 2010, you have to worry about getting out of the recession, establishing your recovery, making sure the recovery has really taken hold. And then, at the appropriate time, when things are all going forward, you have to switch gears and watch whether the inflation rate is coming up.’

“Mr Bullard said historically the Fed had waited until two-and-a-half to three years after a recession ended before raising rates. That, he said, ‘would put you in the first half of 2012′. But the committee might take into account a wider set of factors this time, including the danger that ultra-low rates could fuel asset price bubbles.”

Source: Krishna Guha, Financial Times, November 8, 2009.

Asha Bangalore (Northern Trust): Inflation expectations - an update
“Inflation expectations (as measured by the spread between the nominal Treasury security yield and TIP rate) have moved up 22 bps in six business days ended November 9 if the 10-year time span is considered, while the 5-year time span shows 18 bps increase in the same period.

“It is well known that inflation expectations are important in the formulation of Fed policy and this aspect is stressed in official policy statements and Fed rhetoric. Inflation expectations as of November 9 (222 bps using the 10-year span) is the highest since August 2008. After the collapse of Lehman Brothers, inflation expectations, much like other market indicators, moved to worrisome territory with a possibility of deflation being priced in. This situation has undergone a significant change with improving financial market and economic conditions in place at the present time. Consistent with more bullish economic data, inflation expectations have moved up to reflect the change in business conditions.

“Inflation expectations have risen in the past few days but there is an exaggerated concern about inflation evolving despite the fact that there is an enormous level of unused capacity across the economy. Inflation should not be problematic in 2010.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 10, 2009.

Bill King (The King Report): Dubious US economic statistics
“For years we inveighed about dubious, if not fraudulent, US economic statistics. Over the past year or so, an increasing number of analysts, pundits and media types have been converted to the cause. The New York Times this week reported that faulty export accounting is overstating GDP.

“Now Goldman’s Jan Hatzius is preaching the dubious economic data gospel.

“‘Today’s comment attempts to gauge whether the recent official estimates might have overstated the economy’s true growth because of an inability to capture the unusually poor performance of small firms. Our tentative conclusion is that the economy might have grown between ½ and 2 percentage points more slowly than indicated by the Q3 ‘advance’ estimate of 3.5% (annualized). However, even if this proves correct and eventually shows up in the revised data, the revision process could take several years.

“Over the years, we have addressed the problems with ISM and other PMI survey data. Mr. Hatzius:

“‘The weakness of the NFIB stands in stark contrast to other indicators such as the purchasing managers indexes published by the Institute for Supply Management, which have moved back to around their long-term averages, and real GDP, which grew an estimated 3.5% (annualized) in the third quarter. Small firms appear to be underperforming their larger peers, most likely because of differential access to credit.

“‘To illustrate how huge the gap between the NFIB and ISM has become, we regress the ISM on the NFIB using monthly data for the 1974-2006 period. (We only use data through 2006 to avoid biasing down the coefficients via an inclusion of the recent enormous gap.) The equation shows that the current level of the NFIB would have been expected to correspond to a manufacturing ISM index of 41.1, at a time when the actual ISM stands at 55.7…

“‘We have argued that the weakness of the small business sector may mean that real GDP in the third quarter in fact grew more slowly than the 3.5% ‘advance’ estimate. The reason is that the GDP data may not fully capture the performance of small firms, and specifically the formation and dissolution - i.e. the ‘birth’ and ‘death - of small firms…’ Amen, Brother Jan!”

Source: Bill King, The King Report, November 12, 2009.

MoneyNews: Edmund Phelps - recovery will lose steam
“Nobel laureate economist Edmund Phelps says the economic recovery will weaken soon.

“The economy ‘is groggy, but it’s getting to its feet’, he told Bloomberg.

“‘We’re already seeing a strong recovery. I just think that it’s going to run out of gas.’

“Phelps, a Columbia University professor, agrees with Pimco executives Mohamed El-Erian and Bill Gross that the economy has entered an extended period of slow growth and high unemployment.

“‘As output goes up, employment is going to continue to lag,’ Phelps said.

“‘Firms have gotten rid of a lot of their workforce cushion, so to speak, and they’re going to do without that for a quite a while.’

“The problem is structural, he said. ‘There are signs that the economy has lost its dynamism, its urge to innovate, or its ability to innovate.’

“Phelps said that the Obama administration’s fiscal stimulus program made sense, but that more stimulus isn’t necessary.”

Source: Dan Weil, MoneyNews, November 9, 2009.

Asha Bangalore (Northern Trust): Widening of trade deficit reflects oil imports and improving economic conditions
“The trade deficit widened to $36.5 billion in September vs. $30.8 billion in August. Exports (+2.9%) and imports (+5.8%) of goods and services grew in September. A large part of the import bill was due to an increase in oil imports resulting from higher prices and a larger quantity of imports (+7.0%). The trade deficit has risen about $10 billion in the past five months from a low of $26.4 billion in April 2009. The September trade data suggest a likely downward revision of the 3.5% gain in third quarter real GDP. The net impact will be known after inventories and retail sales data are published next week.”

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

Asha Bangalore (Northern Trust): Households remained gloomy in November
“The early-November University of Michigan Consumer Sentiment Index edged down to 66.0 from 70.6 in October. Both the Current Conditions Index (69.6 vs. 73.7 in September) and the Expectations Index (63.7 vs. 68.6 in October) declined. The weak labor market situation appears to have played a major role in households revising their assessment of economic conditions as the index has dropped for two straight months after posting a large increase in September.”

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

Asha Bangalore (Northern Trust): Job market - total continuing claims are trending down
“Initial jobless claims dropped 12,000 to 502,000 during the week ended November 7, the lowest reading in a year. Continuing claims, which lag initial claims by one week, declined 139,000 to 5.631 million.

“Total claims which include recipients under the special programs, Extended Benefits Program and Emergency Unemployment Compensation Program, were 9.81 million during the week ended October 24, down from 10 million during the week ended October 3. These data underscore the positive developments in the labor market amid the gloomy news about a climbing unemployment rate. Initial jobless claims data are a leading indicator, while the overall jobless rate is a lagging economic indicator.

“The 4-week moving average of initial jobless claims is 519,750 for the week ended November 7. Historically, the median of the four-week moving average of initial jobless claims is 347,000. In other words, the current 4-week moving average of initial jobless claims is nearly half way from the median level of jobless claims. At the cost of stating the obvious, robust growth of real GDP will be necessary for achieve more vibrant conditions in the labor market but the current improvements remain significant.”

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

Bloomberg: Obama administration accelerating review of ways to boost jobs
“President Barack Obama’s administration is accelerating plans to boost job growth, including more spending on infrastructure and business tax cuts, after the unemployment rate jumped to 10.2% last month.

“Obama and his advisers will within a matter of weeks review ideas for adding to the $787 billion stimulus passed earlier this year, an administration official said. Previously the president’s aides said they wanted to wait for the full impact of the earlier stimulus before taking additional action.

“‘My economic team is looking at ideas such as additional investments in our aging roads and bridges, incentives to encourage families and businesses to make buildings more energy efficient,’ additional tax cuts to spur hiring, and more steps to ease the flow of credit to small business, Obama said today at the White House following the Labor Department report.

“The president made his remarks after signing into law a measure extending an $8,000 tax credit for first-time homebuyers and benefits for unemployed workers, the first major expansion of provisions that were included in February’s economic stimulus. The legislation also provides tax refunds to money- losing companies.”

Source: Kate Andersen Brower and Roger Runningen, Bloomberg, November 6, 2009.

CNBC: Foreclosures fall again but improvement likely fleeting
“Foreclosure rates fell for the third consecutive month in October, but remained sharply higher than a year ago, according to a new report, with analysts cautioning that the improvement was at best temporary.

“The number of Americans receiving foreclosure notices was down 3% on a month-to-month basis, as 332,292 properties generated a foreclosure notice. That was 18.9% higher than last October. (Foreclosure notices are defined as a default notice, bank repossession or auction sale notice.)

“‘It’s good to see that foreclosures have slowed down marginally, but we don’t really think it’s a trend,’ said Rick Sharga, vice president of marketing at foreclosure tracking Web site RealtyTrac, which released the report.

“Legislation in some states has slowed foreclosures, says Sharga, but the impact will be temporary and won’t ultimately prevent most of them. In Nevada, for example, foreclosures dropped 26% from the previous month because of new legislation requiring mediation before initiating foreclosure proceedings.

“The data comes a couple of days after the Treasury Department released a report showing that more than 650,000 homeowners have taken trial loan modifications under the Making Home Affordable program, which was announced last February. About one-third of those modifications have been in California and Florida, which also happen to have some of the highest foreclosure rates in the country.”

Source: Joseph Pisani, CNBC, November 11, 2009.

Clusterstock: The bailout has transformed into an MBS buying program
“When the financial crisis hit its high tide last year the Federal Reserve used a couple of blunt instruments to rescue financial institutions.

“The largest of the credit easing policy tools were the Fed’s programs direct lending to financial institutions, including opening the discount window to investment banks and extending an unprecedented credit line to AIG. It also provided credit to ‘key credit markets’ in the form of loans and guarantees to money market funds and asset backed securities markets.

“But over the course of 2009, those program have shrunk or been phased out. Meanwhile, one program, the Fed’s purchase of mortgage back securities, has grown by more than enough to make up for the decline of those programs. What this means is that despite the rollback of some Fed bailout programs, the market is still highly leveraged to the balance sheet of the Fed.”

Source: John Carney and Kamelia Angelova, Clusterstock - Business Insider, November 9, 2009.

Financial Times: Health reformers prepare for Senate hurdle
“The first thing Barack Obama did late on Saturday night following the passage of the healthcare bill in the House of Representatives was to phone the heads of three industry lobby groups to thank them for their support. Not included on the list was the largest insurance lobby group, American Health Insurance Plans, which doggedly continues to oppose Democratic reform efforts.

“Amid all the late night celebrations after the razor-thin 220-215 vote for the bill, Karen Ignagni, head of AHIP, warned that it would be a much tougher battle to push reform through the Senate in the weeks ahead. ‘The current House legislation fails to bend the healthcare cost curve and breaks the promise that those who like their current coverage can keep it,’ she said. ‘The result will be increased costs and massive disruptions in the quality of coverage individuals and families rely on today.’

“On Sunday, Harry Reid, the Senate majority leader, who will now become the central figure in the drama of the weeks ahead, said ‘we stand closer than ever to reforming our broken healthcare system’.

“The battle is by no means even close to its finale. Mr Reid’s first task will be to persuade sceptical colleagues that the bill should retain the controversial ‘public option’ - a government insurance plan intended to keep the ‘insurers honest’. Even though Mr Reid has watered down that element by allowing states to opt out of it, many Democrats remain opposed.

“Secondly, Mr Reid will be under pressure to restore a strong ‘individual mandate’ that compels all Americans to take out insurance or pay a hefty fine. Dilution of that element is what led AHIP to come out strongly against healthcare reform last month.

“If and when Mr Reid cobbles together a majority in the Senate, Democrats then face the thorny task of stitching the very different House and Senate versions into one bill and then voting on that final product all over again.”

Source: Edward Luce, Financial Times, November 8, 2009.

Financial Times: US banks bill seeks to strip Fed of powers
“An influential US Senate committee has proposed a sweeping overhaul of the country’s regulatory architecture that would strip powers from the Federal Reserve and create a single banking regulator.

“Chris Dodd, chairman of the Senate banking committee, on Tuesday presented a more radical vision of regulatory reform than that proposed by the Obama administration. The move ushered into the open a behind-the-scenes struggle between banks, policymakers and regulators.

“Democrats lined up behind Mr Dodd as he presented the bill. But senior Republicans were missing from a press conference despite attempts by President Barack Obama to secure their support for one of his most important legislative goals.

“The proposal to consolidate regulators faces strident opposition from the Fed, the Federal Deposit Insurance Corporation and smaller regulators who argue they are best placed to supervise banks.

“Mr Dodd said most institutions should benefit from a regulator that would provide ‘clarity, cut red tape and make it easier to compete’ but banks would ‘no longer be able to shop for the weakest regulator’.

“Viral Acharya, professor of finance at the Stern School of Business at New York University, said he thought the idea of a single bank regulator was a bad idea. ‘I think it’s going to be too huge an overhaul of what exists,’ he said. The Fed and FDIC need to keep supervisory functions in order to inform their other roles, he argued.

“An Obama administration official said last week that he was open to the idea of consolidating bank regulators even though that went much further than initial plans from the Treasury.

“The Senate draft legislation also creates an agency to oversee systemic risk, which could call for banks to be broken up if they threatened the entire financial system and impose tougher capital requirements.

“The draft legislation, although more radical than other versions, stops short of forcing the break-up of healthy banks, which has been advocated by some economists.”

Source: Tom Braithwaite and Sarah O’Connor, Financial Times, November 10, 2009.

CNBC: Fed in the crosshairs
“Frederic Mishkin, former Federal Reserve Board Governor and a Columbia University economics professor, discusses Sen. Dodd’s financial reform bill and its potential unintended consequences.”

Source: CNBC, November 12, 2009.

The Wall Street Journal: Banks hasten to adopt new loan rules
“Banks are moving quickly to restructure commercial mortgages under new US guidelines that are more forgiving of battered property values and can help banks avoid bigger losses.

“Citigroup Inc., regional bank Whitney Holding Corp. and other lenders around the country are planning to review loans now considered nonperforming to determine if they can be reclassified under the guidelines announced October 30 by bank, thrift and credit-union regulators, according to bank executives and people familiar with the matter. The moves could help the banks absorb fewer losses on troubled real-estate loans and preserve capital.

“‘It’s a positive all the way around,’ said James Smith, chief credit officer for National Bank of South Carolina, a unit of Synovus Financial Corp.

“Matthew Anderson, partner at research firm Foresight Analytics, estimates that about two-thirds of the $800 billion in commercial real-estate loans held by banks that will mature between now and 2014 are underwater, meaning the loan amount exceeds the value of the property. The flexibility extended by regulators will apply to $110 billion to $130 billion of these loans, he said.

“The guidelines are controversial, with critics accusing the US government of prolonging the financial crisis by not forcing borrowers and lenders to confront inevitable problems.

“Regulators respond that they are being prudent, adding that a crackdown will occur at any banks misinterpreting last month’s announcement as an opportunity for leniency.”

Source: Lingling Wei and Peter Grant, The Wall Street Journal, November 12, 2009.

Reuters: Goldman Sachs boss says banks do “God’s work”
“The chief executive of Goldman Sachs, which has attracted widespread media attention over the size of its staff bonuses, believes banks serve a social purpose and are doing ‘God’s work’.

“In an interview with London’s Sunday Times newspaper, Lloyd Blankfein also said he believed big profits and bonuses at banks were a sign that the world economy was recovering.

“‘We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. We have a social purpose,’ he told the paper.

“The dominant Wall Street bank posted third-quarter earnings of $3 billion and plans to hand out more than $20 billion in year-end bonuses.

“Blankfein told the Sunday Times that the bank’s compensation practices correlated with long-term performance.

“‘Others made no money and still paid large bonuses. Some are not around anymore. I wonder why?’

“He added that he understood, however, that people were angry with bankers’ actions: ‘I know I could slit my wrists and people would cheer.’”

Source: Victoria Bryan, Reuters, November 8, 2009.

Financial Times: A lumpy ride for JGBs
“Government bond markets around the world are quite calm at the moment, but a sharp rise in Japanese government bond yields hints at what could be a lumpy ride to come. Jennifer Hughes, senior markets correspondent of the Financial mail, explains how the credibility of governments is key to keeping any bond market volatility to a minimum as large swathes of debt are offered to the market in the coming months.”

Click here for the full article.

Source: Financial Times, November 10, 2009.

Bespoke: 2009 country stock market performance
“Below we highlight the year-to-date percentage change (local currency) for the major equity indices of 82 countries. So far this year, 71 of the 82 countries are in positive territory, and the average change of all countries is 33.27%. With a gain of 20.76%, the S&P 500 is 13 percentage points below the average, yet it’s the second best G-7 performer behind Canada so far in 2009.

“The BRIC countries (Brazil, Russia, India, China) have been standouts this year. Russia is up the most out of all countries with a gain of 126.71%. Brazil, China, and India are all up more than 70%. Along with Russia, the Ukraine, Argentina, and Peru are up more than 100% year to date.

Eleven countries are down so far in 2009. Ghana is down the most at -48.26%, followed by Puerto Rico (-40.56%), Bermuda (-38.36%), and Costa Rica (-35.37%).”

Source: Bespoke, November 10, 2009.

Bespoke: S&P 500 breadth check-up
“Although the S&P 500 is within 1% of its closing high, breadth in this recent rally has been lagging. As of today [Tuesday], the cumulative A/D line for the S&P 500 since September 2008 is at 778, which is 571 below the highs from October. Given the fact that days where the S&P 500 has a 1% gain typically see a net A/D reading of about +300, it is likely that if we get a rally to new highs, it will not immediately be confirmed by breadth. Therefore, if the S&P 500 does manage to rally to a new closing high, investors with cash already on the sidelines may want to wait for breadth confirmation before putting any new funds to work.”

Source: Bespoke, November 10, 2009.

Bespoke: Breadth not yet confirming new highs
“As we noted on Tuesday [article above], breadth as measured by the cumulative advance/decline line has not yet confirmed the market’s recent rally to new highs. The same holds true for another breadth indicator that tracks the percentage of stocks trading above their 50-day moving averages. At prior highs during the current bull market, the percentage of stocks trading above their 50-days moved up to the 80%-90% mark. Currently, just 72% of stocks in the S&P 500 are trading above their 50-days, so less stocks have participated in the recent run-up.

“In the Financial sector, just 56% of stocks are currently above their 50-days, which is the weakest reading among all ten sectors. Consumer Staples currently has the highest reading at 83%, which is somewhat peculiar given that this sector usually only outperforms when the market is declining and not rising. Industrials and Health Care both have readings of 80% or better as well.”

Source: Bespoke, November 12, 2009.

Bespoke: Midcaps lead the way in 2009
“As shown below, the S&P Midcap 400 has outperformed its large and smallcap brethren so far in 2009. The Smallcap 600 has been the worst performer with a gain of 15.4%, but it was down the most during the declines in the first quarter, so it has had to make up the most ground. The S&P 500 is up 20.77% year to date, while the Midcap 400 is up 29.17%.”

Source: Bespoke, November 12, 2009.

Bespoke: Sector relative strength - technology & financials
“The charts below show the relative strength of the Financial and Technology sectors versus the S&P 500. In each chart, a rising line indicates that the sector is outperforming the S&P 500 while a declining line indicates underperformance. We have also included dots showing each time the Fed has left rates unchanged (blue dots). Believe it or not, the Fed hasn’t made a change in interest rates in the last year.

“Given the fact that Technology and Financials are the most widely followed sectors in the market, any meaningful rally in equities will need to see both Financials and Technology participating. As shown in the charts, while Financials have stopped rolling over, they are hardly outperforming. Since the last Fed meeting on November 4, Financials have merely been performing in line with the S&P 500. Unlike Financials, Technology stocks have been outperforming the market over the last several weeks. Even here though, the sector has yet to make a new high in relative strength. If the S&P 500 is going to stage a meaningful break above the 1,100 level, we will need to see these two sectors leading the way.”

Source: Bespoke, November 12, 2009.

Bespoke: Top line numbers not bad
“With everyone worried about the top line revenue numbers this earnings season, we’ve been tracking this data closely. As shown below, 59% of US companies have beaten revenue estimates this quarter, which is the highest reading over the last 5 earnings seasons. While it’s not in the 70-80% range we saw during the last bull market, the direction of the revenue ‘beat’ rate is trending higher, which is a positive for the market.”

Source: Bespoke, November 10, 2009.

MoneyNews: Prechter - 2008 crash just a warm-up
“Elliott Wave analyst Robert Prechter says the rally is over and predicts the start of ‘another wave of the bear market’, similar to the one investors experienced in 2008.

“‘I don’t think we’ve hit the V bottom yet,’ Prechter told CNBC.

“Prechter, who predicted last March that the Dow would top 10,000, says investors don’t need to be hurt in market downtrends.

“‘Just make sure you have stepped aside in the safest possible cash equivalents in the safest possible institutions,’ he advises.

“‘My message is very easy,’ Prechter says. ‘You want to be as safe as possible. You might miss an upside, but you won’t get hurt.’

“To achieve safety, Prechter advises investors to move their money into Treasury bills and make sure their banks are financially healthy.

“‘You don’t want to be in stocks, real estate, or commodities,’ says Prechter, who believes the number of bank failures is going to increase next year.

“Stocks are still overvalued, but they won’t be for long, according to Prechter. ‘It’s still too early, but there’s a great buying opportunity coming,’ he notes.

“Prechter is very bullish on the dollar, which he thinks is ‘going to be up for a year or two’ and bearish on gold.”

Source: Julie Crawshaw, MoneyNews, November 9, 2009.

MoneyNews: Citi - Treasury yields could torpedo rally
“Rising Treasury bond yields may put an end to the global stock rally, says Yutaka Yoshino, chief technical analyst at Citigroup in Tokyo.

“Investors have been borrowing dollars at low interest rates to invest in stocks around the world - the so-called carry trade.

“But if 10-year bond yields, now about 3.50%, surpass 3.55, that would signal a rise in US interest rates, Yoshino tells Bloomberg.

“That in turn could stanch investors’ desire for the carry trade.

“‘If we pass that 3.55 level on the yield, we stop being in a rebound phase (from the October 1 low of 3.18%) and enter into a rising trend,’ Yoshino said.

“‘Inflation concerns are starting to creep in, and the Federal Reserve has no control over long-term interest rates.’

“US stocks could drop as much as 14%, with the Dow Jones Industrial Average hitting 8,600, and Japan’s Nikkei 225 Stock Average may fall the same amount, he said.

“Yoshino’s calculations come from the Japanese technical analysis method of ‘ichimoku kinko’, which utilizes wave patterns and repeating trends. Ichimoku kinko was devised by a Japanese journalist more than 70 years ago and resembles the Elliott Wave theory popularized by Robert Prechter.”

Source: Dan Weil, MoneyNews, November 9, 2009.

MoneyNews: Siegel - stocks will rise, causing Fed hike
“Market guru and Wharton professor Jeremy Siegel says strong economic growth will keep pushing stocks higher and lead the Federal Reserve to raise interest rates in the first half of next year.

“Meanwhile, rising profits will send stocks up another 10% this year, he says.

“‘I think there are a lot of legs to this bull market. Profits are coming in extremely well in the third quarter.’

“The booming economy, along with rising bond yields and a weak dollar, will push the Fed to hike rates in the first half of next year, Siegel maintains. That’s earlier than most analysts expect.

“Fed officials ‘are going to basically say we’ve got to increase that rate because of the strength in the economy and to preserve the bond market and the dollar’, he says.”

Source: Dan Weil, MoneyNews, November 11, 2009.

Bespoke: Stock market returns lost in translation
“One of the side effects of a weaker dollar is that the returns for foreign investors who invest in US assets are diminished. While the value of the asset may rise in dollar terms, if the dollar is losing value, the investor takes a hit when they convert their funds back into their domestic currency. For example, while the S&P 500 has risen 20.2% so far this year in US dollars, investors outside of the US have generally seen much less impressive returns.

“In the table below, we looked at the YTD returns of the S&P 500 for investors in various currencies. Of the currencies we looked at, the only one that has seen a benefit from the currency translation is the Argentinian peso. Returns have been diminished once fluctuations are taken into account for all other currencies. And of course some countries have been affected more than others. So far this year, Brazilian investors who bought the S&P 500 at the end of last year have lost nearly 12 reals for every 100 they invested on January 1.”

Source: Bespoke, November 9, 2009.

Bespoke: International revenues making an impact
“When the dollar is in decline, companies that generate the bulk of their revenues overseas benefit as the weak dollar attracts purchases of US-made products by foreign companies and consumers. The most recent stock market rally/dollar decline this month has been led by companies that generate a big portion of their revenues outside of the US, which has been characteristic of the entire bull market as well.

“When breaking the S&P 500 into deciles (10 groups of 50 stocks) based on the amount of sales that companies generate overseas, the deciles of stocks with high international revenues have outperformed during the November rally, while the two deciles of stocks with very little or no international revenues have significantly underperformed.”

Source: Bespoke, November 11, 2009.

Moneycontrol.com: Mobius on emerging markets
“In an interview with CNBC-TV18, Mark Mobius, Managing Director of Temptation Asset Management, spoke about his reading on the emerging markets (EMs) and his outlook.”

Source: Moneycontrol.com, November 7, 2009.

The Wall Street Journal: World tries to buck up dollar
“Governments around the world stepped up efforts to stem the US dollar’s slide, as officials grow increasingly concerned about the impact of the weak greenback on their nascent economic recoveries.

“Thailand, South Korea, Russia and the Philippines have been snapping up dollars this week in order to hold down the value of their currencies, traders said Wednesday, as the US currency wallowed near 15-month lows.

“In Latin America, Brazil’s finance minister said the country’s currency remained too strong, sparking speculation that the government would intensify recent efforts to curb the real’s ascent. On Tuesday, Taiwan banned foreign investors from parking time deposits in the country in an effort to ease upward pressure on the local currency.

“The fresh buzz over the dollar’s fall prompted Treasury Secretary Timothy Geithner, visiting Tokyo on Wednesday, to repeat the Obama administration’s commitment to a strong dollar. Still, Washington hasn’t taken any concrete steps to arrest the slide. The weaker dollar is actually benefiting the US as it struggles to come out of recession by helping keep US exports competitive.

“China is coming under new pressure from Pacific Rim countries to let its dollar-linked currency rise in value. On Wednesday, China’s central bank made a nod to concerns about the declining dollar and yuan by issuing a rare change to the official language of its exchange-rate policy. The central bank said it would take major currency trends into account in setting policy, though it wasn’t clear what impact that may have on the yuan’s future value.

“The US wants to see a stronger yuan, though Washington has avoided explicit public pressure on China to abandon its policy of managing its currency. But in the jargon of finance ministers, Mr. Geithner has made clear that’s what he thinks should happen. In an op-ed piece in Thursday’s Wall Street Journal Asia, he emphasized the advantages of ‘market oriented exchange rates in line with economic fundamentals’.

“Asian finance ministers, now gathered in Singapore for a meeting of the 21-member Asia-Pacific Economic Cooperation forum, are expected to raise their concerns about both the dollar’s decline and the inflexibility of the Chinese yuan.

“The fear is two-fold. If currencies surge against the dollar, it damages the ability of countries in the region to compete in world markets, by making their exports more expensive. What’s more, one of their major competitors - China - ties its currency to the dollar. As the yuan sinks in tandem with the dollar, China is able to keep its export prices low and price out competition.

“A concluding statement from the assembled APEC officials is expected to underline the importance of flexible exchange rates to sustainable global growth - generally viewed as code for a rise in the Chinese yuan. Such efforts are unlikely to bear fruit in the near term, which means these countries must act on their own to slow their currencies’ rise.”

Source: Joanna Slater, William Mallard and Bob Davis, The Wall Street Journal, November 12, 2009.

Financial Times: Tough times ahead for rouble
“The best of the rouble’s recent rally seems to have passed - and the currency could drop as much as 15% against its trading basket next year, says Neil Shearing at Capital Economics.

“He notes that, since March, the rouble has risen by 15% against its dollar/euro basket, prompting Russia’s central bank to switch from intervening to shore up the currency to stepping in to stem further appreciation.

“‘The size of the rebound is perhaps surprising given the lingering fragilities in the Russian economy,’ Mr Shearing says. ‘The rally has been driven by developments on the current account side of the balance of payments and, more specifically, by the rebound in oil prices.’

“He notes that, in the past, any improvement to the trade surplus from rising oil prices was largely sterilised by the operations of the Oil Stabilisation Fund and had relatively little impact on the exchange rate.

“‘But things seem to have changed - the authorities have not made any deposits into either the Reserve Fund or the National Welfare Fund since August and thus the rebound in oil exports has led to a rally in the currency - so the prospects for the rouble, for now, are inherently tied to moves in the oil price.

“‘If our forecast for oil to fall to $50 a barrel by the end of 2010 proves correct, the rouble is likely to test the bottom band of its trading range against the dollar/euro basket.’”

Source: Neil Shearing, Financial Times, November 11, 2009.

David Fuller (Fullermoney): Gold bull market on track
“I would not expect gold’s secular bull market to end until short-term interest rates are considerably higher.

“Even if this hypothesis is correct, it is impossible to know in advance the level of short-term rates which would cause gold’s advance to reverse. My guess is that global rates will be rising behind an accelerating advance in the gold price, eventually leading to a spike peak for bullion.

“Meanwhile, everything that gold is doing currently remains consistent with its earlier breakouts from large (approximately eighteen-month) trading ranges from September 2005 to May 2006 and September 2007 to March 2008. If this behavioural consistency continues, gold would reach at least $1,300 between March and May of next year.

“I previously mentioned that if gold maintained its consistency of the last three months, we could expect another ranging consolidation in a $40 to $45 range, commencing near $1,125. However given the post-India purchase excitement, it might accelerate. Whatever, a break in the progression of higher reaction lows evident on the daily chart would be required to question the medium-term uptrend.

“Fullermoney remains bullish of gold bullion and its sister precious metals. Tactically, we prefer to buy them on pullbacks within the medium-term trends. Precious metals mining shares are much more volatile and could do very well if the metals continue to perform, as we expect.”

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

Richard Russell (Dow Theory Letters): Gold in strong bull market
“As matters stand today, I’m confident of only one rising tide or bull market. Let’s examine the whole picture. The world is suffering from over-production. In the space of a single decade, the population of the global economy has more than doubled. In our lifetime, we have seen China, India and most of Asia join the world economy. Initially, this was greeted as a great new source of purchasing power. I disagreed. I saw it as a great new source of supply. I was correct. China, India and Asia have produced a vast amount of goods, and as time goes on, this new competition has become increasingly more sophisticated and powerful.

“Three billion people (including their children) are willing to work for comparatively low wages, and they’re willing to work without benefits: no medical, no Social Security, no 401Ks, no state or corporate saving plans or help.

“The net result is over-production and world deflation. Whatever the US can make, whether it’s washing machines or women’s panties or garden hoses, the Chinese and Indians can make cheaper. We’re dealing with a world-wide deflationary tide.

“US politicians feel the pressure. A politician’s first duty is to get re-elected. When the people are unhappy, politicians hear the people’s complaints and hasten to give the people what they want. Making the voters happy is how the pols get re-elected.

“Ultimately, the pressure falls on the president and the party. The president, in turn, puts the pressure on the Federal Reserve. ‘Make the voters happy’ demands the president and the pols, and the Fed hastens to do what it does best. The Fed creates a torrent of money to offset the forces of deflation and it drops interest rates to zero. The problem is that the global forces of deflation are fundamental and powerful. The primary force of deflation is more powerful than the Fed and the rest of the world’s central banks taken together.

“America’s Fed Chairman, Ben Bernanke, is convinced that he knows the secret of avoiding hard times. The Fed can halt deflation and turn the picture into asset inflation. All it takes, thinks Bernanke, is zero interest rates and the creation of trillions of new dollars - and they will come, and they will spend. This is the path the Bernanke Fed has chosen. So far, it has not worked - they are not coming, and they are not spending. The Fed’s strategy has not even succeeded in bringing down unemployment. Bernanke’s solution - more of the same: ‘Whatever it takes, and as long as it takes.’

“Thus, we have a strange and ironic situation. We have world deflation, and a Fed Chairman who believes he can manipulate the primary trend. Bernanke’s strategy is leading to a weakening dollar. The more dollars that are created, the weaker the dollar. As the dollar’s very status comes into question, wise and seasoned investors move to protect their wealth. They move to the time-honored ’safe haven’: the one unit of wealth that cannot be destroyed in that it is not a liability of any government. And, of course, I’m talking about the one unit of wealth that is never questioned - gold.

“So it’s the gold bull market that I trust and believe in. I think and I ponder - what can halt the gold bull market?

“The only thing that can halt the gold bull market is a complete reversal by the politicians and the Fed, and that would allow the US to sink into a state of deflation and depression. Unthinkable.

“If gold goes parabolic, we will be in the third speculative phase of the gold bull market. This will be the final phase in which gold ‘blows its top’. No tree grows to the sky, and neither will gold.”

Source: Richard Russell, Dow Theory Letters, November 9, 2009.

Bloomberg: Faber - gold price won’t drop below $1,000 again
“Gold won’t fall below $1,000 an ounce again after rising 27% this year to a record as central banks print money to help fund budget deficits, said Marc Faber, publisher of the Gloom, Boom & Doom report.

“‘We will not see less than the $1,000 level again,’ Faber said at a conference today in London. ‘Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold.’

“China will keep buying resources including gold, he said.

“‘Its demand for commodities will go up and up and up,’ he added. ‘Emerging economies will grow at the fastest pace.’”

Source: Zijing Wu, Bloomberg, November 11, 2009.

Bespoke: Gold compared to silver and platinum
“Gold has been the talk of the town recently, with everyone wondering if the current rally is a bubble waiting to pop or just the beginning of a run to much higher prices. While gold is getting the attention, its sister metals - silver and platinum - have actually been outperforming.

“Below we provide historical charts of the ratio between gold and silver and gold and platinum. When the line is rising, gold is outperforming, while gold is underperforming when the line is declining. As shown, late last year both silver and platinum lost big ground to gold, with platinum and gold even reaching parity at one point. During the metals rally this year, however, silver and platinum have actually done better than gold.”

Source: Bespoke, November 11, 2009.

MarketWatch: Global energy agencies see world rebound in demand
“Two major agencies Tuesday forecast worldwide energy demand would soon rebound as the global economy recovers, and the US Energy Information Administration raised its forecast for oil prices, in part due to rising appetite in China.

“The EIA said it now expects global oil demand to increase next year by 1.26 million barrels per day, compared with a 1.1 million gain predicted in October, with developing countries the largest part of yearly growth. The EIA, which had bumped up its outlook for consumption last month, also raised its demand forecast for this year.

“‘Sustained economic growth in China and other Asian countries is contributing to the beginnings of a rebound in world oil consumption,’ the agency wrote in its monthly short-term energy outlook.

“As a result of this higher demand and the rise in oil prices since its last outlook, the US government agency lifted its price forecast.

“The price of West Texas Intermediate oil will average $77 a barrel during the period from October to March, the EIA predicted, up $7 a barrel from last month’s forecast. By December 2010, it forecast monthly average oil prices will rise to $81 a barrel, assuming global economic conditions keep improving.

“Earlier Tuesday, the Paris-based International Energy Agency said global energy use will decline this year because of the global economic crisis, but it will soon resume an upward trend if government policies don’t change.

“The IEA said world energy demand is projected to rise by 40% between now and 2030, reaching 16.8 billion tons of oil equivalent.

“Oil demand is expected to grow by 1% per year on average over the projection period, from 85 million barrels per day in 2008 to 105 million barrels a day in 2030, the IEA said.

“The Guardian newspaper quoted an unnamed IEA whistleblower as saying the market would struggle to produce even 90 million to 95 million barrels a day.”

Source: