Words from the (Investment) Wise (January 17, 2009)

Sunday, January 17th, 2010

“Words from the Wise” this week comes to you in a somewhat shorter format as I do not have access to all my normal research resources while spending a few days with the gnomes in Geneva (also see my post “Blogging gone AWOL - to Switzerland“). Although the commentary is not as comprehensive as usual, a full dose of excerpts from interesting news items and quotes from market commentators is included.

With investors’ hopes of an economic recovery that might have gotten ahead of reality, the Dow Jones Industrial Index experienced its largest one-day drop (-0.9%) of the year in a sell-off on Friday - unnerved by China starting to rein in liquidity and cautious earnings guidance - causing the benchmark US indices to register a fourth down-week over an eight-week period. Not surprisingly, the CBOE Volatility (VIX) Index, also referred to as the “fear gauge” of US stocks, gained 1.2% over the week.

Providing “entertainment” of a dubious kind and reminding one of the 1933 Pecora Commission, the Financial Crisis Inquiry Commission on Wednesday started interrogating four of Wall Street’s top executives in Washington and promised to use wide-ranging powers to establish the causes of the financial crisis and pursue any wrongdoing.

Meanwhile, Christina Romer, who heads the president’s Council of Economic Advisers, said (via MoneyNews) the payment of big year-end bonuses for bailed-out financial institutions would be “ridiculous” and “offensive” and “is going to offend the American people. It offends me”.

Similarly, according to The Canadian Press, President Barack Obama said with reference to his proposed plans to impose a levy on big financial institutions to recoup some of the costs of the financial crisis: “If the big financial firms can afford massive bonuses, they can afford to pay back the American people.”

Source: Steve Sack, Comics.com

The past week’s performance of the major asset classes is summarized in the chart below - a set of numbers indicating a degree of risk aversion has crept back into financial markets. Steps by the People’s Bank of China to tighten liquidity by increasing the bank reserve requirement ratio and raising inter-bank interest rates negatively impacted oil and other commodities, causing the first decline in five weeks.

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 and the MSCI Emerging Markets Index declined by 0.2% and 0.6% respectively during the past week. Among mature markets, Japan (+1.7%) bucked the trend and added a seventh consecutive week of gains - coinciding with a weaker yen over the period. (Also see my post “What to expect from Japan’s new finance minister“.) Among emerging countries, Russia (+7.2%) performed solidly, while China (+0.9%) also eked out a gain after having to balance adverse monetary developments in that country with impressive trade data early in the week.

Notwithstanding the huge rally since the March lows, only the Chile Stock Market General Index - again a solid performer on the expectation of a positive election result - has been able to reclaim its 2007 pre-crisis peak and is now trading 8.1% higher. Mexico could be the next country to eliminate the bear market losses.

As far as the US indices are concerned, Wall Street managed to hit 16-month highs on Monday and then again on Thursday, but reversed course on Friday as traders closed positions before the Martin Luther King long weekend, pulling indices into the red.

Seven of the ten economic sectors (as measured by the SPDR exchange-traded funds [ETFs]) closed lower for the week, with the defensive sectors outperforming the cyclical ones. Health Care (+1.4%), Consumer Staples (+0.8%) and Utilities (+0.6%) returned gains, whereas all the other sectors were under the water. Small caps, in particular, led the way down on Friday.

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

Top performers among stock markets this week were Estonia (+15.6%), Venezuela (+9.6%), Lithuania (+8.7%), Kazakhstan (+7.2%) and Kenya (+5.7%). At the bottom end of the performance rankings, countries included Greece (-7.9%), Jamaica (-6.7%), Cyprus (-6.5%), Luxembourg (-4.9%) and Portugal (-1.2%). “Greece on Thursday announced an ambitious three-year plan to curb its runaway budget deficit but failed to convince skeptical markets that its targets for growth and fiscal reform were feasible,” reported the Financial Times.

Of the 96 stock markets I keep on my radar screen, 53% recorded gains (last week 79%), 41% (15%) showed losses and 6% (6%) remained unchanged. The performance map below tells the past week’s rather bullish story

Emerginvest world markets heat map

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

John Nyaradi (Wall Street Sector Selector) reports that as far as ETFs are concerned the winners for the week included iShares MSCI Japan (EWJ) (+4.8%), Claymore/Delta Global Shipping (SEA) (+3.6%), Vanguard Extended Duration Treasury (EDV) (+3.3%) and iShares MSCI Austria (EWO) (+2.7%).

At the bottom end of the performance rankings, ETFs included Claymore/MAC Global Solar Energy (TAN) (-8.7%), PowerShares WilderHill Clean Energy (PBW) (-7.2%), Claymore/AlphaShares China Real Estate (TAO) (-6.6%) and United States Oil (USO) (-5.7%).

Referring to the modern robber barons, or “banksters”, and Obama’s proposed bank tax to recoup bailout costs, the quote du jour this week comes from long-timer Richard Russell, writer of the Dow Theory Letters. He said: “Obama is fighting two wars, the war in Afghanistan and the war in Iraq. Now he’s got a third war going, the war on Wall Street. He’s joining the populist fury over Wall Street and its bonuses. It’s ‘payback time’, and Obama proposes a $90 billion tax on Wall Street’s banks.

“The Prez utters the words the crowd loves to hear, ‘We want our money back, and we’re going to get it.’ Obama’s words dovetails with Democrats’ worries that they would be blamed for the recession and the debts. Blame it on Wall Street, and get even with those greedy devils; maybe tax the greedy devils out of existence or at least tax their stinkin’ bonuses away. As Obama’s assistant Rahm Emanuel put it, ‘Its a shame to let a good crisis go to waste.’

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“The $90 billion Obama will extract from Wall Street won’t even begin to shrink the monster deficit the Fed has run up. Let the next administration (probably Republicans) deal with that problem.”

How the lie of the land has changed! The Financial Times yesterday headlined an article: “Obama is right to clobber Wall Street”.

Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. As to be expected with the banking shenanigans moving to center stage, “banks” commanded poll position.

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 (discussed above), the indices in the table are all trading above their 50-day moving averages, with all the indices also comfortably above their respective key 200-day moving averages.

As far as the S&P 500 Index is concerned, an upward sloping trend line extends from the August lows. A break below this line’s support level of 1,080 (and the December low of 1,092) could signal a deeper pullback.

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

Last week I discussed a long-term chart of the S&P 500. Let’s now also consider monthly data, going back to 1998, for the 10-year Treasury Note. As shown below, the MACD oscillator provided a sell signal about seven months ago and Treasuries are still classified as being in a primary bear market.

Source: StockCharts.com

This raises the question of when rising long-term rates start ruining the equity party. “For me, a sustained move above 4% by ten-year Treasuries will be equivalent to a yellow caution light for equity investors. Above 5%, stock markets could be in dangerous territory, as we saw in the last cycle,” commented David Fuller (Fullermoney). ”I will continue to view US Treasury 10-year yields as a lead indicator. Currently, they are still in a ’sweet spot’. However, when they move higher I will monitor stock market indices, particularly for Wall Street, even more closely for signs of fatigue in the form of inconsistencies, not least a loss of upward momentum.”

Looking beyond the low-growth economies of mature countries, Jeremy Grantham of GMO said (via Fortune): “I think there is a nascent bubble in emerging markets. Over the next three to five years, emerging markets are likely to sell at a handsome premium P/E because of the respect for their higher GDP growth.”

To which money man Bill Gross, head honcho of Pimco, added (according to Fortune): “If you’re looking for growth, you should venture outside the US. Brazil, China and other Asia equities are the cherry on top of the melting sundae. It’s not only their internal economies; they’re in better shape from the standpoint of reserves and balances. Ten years ago Brazil was a basket case and beggar. Now it has hundreds of billions of dollar reserves.”

Back to the US stock markets, John Hussman (Hussman Funds) is treading carefully with the current stock market make-up, saying: “There’s no denying that the beliefs of investors have been far more important, in the intermediate term, than economic realities, which are revealed more slowly and sporadically. Yet despite the high level of bullishness here, the market has gained only a few percent beyond its September highs. Most of what we are seeing now is a tendency to make marginal new highs, back off slightly, and then recover that ground enough to register another marginal new high.

“As I’ve noted frequently, when market conditions are characterized by unfavorable valuations, overbought conditions, over-bullish sentiment, and upward yield pressures, the market’s tendency is exactly that - to make continued marginal new highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere.”

As we embark on the earnings season, the S&P 500 as a whole is expected to grow by 62.1% in Q4 2009 versus Q4 2008. As shown in the graph below, courtesy of Bespoke, the bulk of the growth is expected to come from the Materials and Financial sectors - the only two sectors with Q4 growth expectations that are higher than the S&P 500. Technology and Consumer Discretionary are the other two sectors expected to see growth. On the other hand, “Energy and Industrials are both expected to see earnings decline by more than 20% in the fourth quarter, while Telecom is not far behind at -19.2%. Health Care, Consumer Staples, and Utilities are all expected to see a drop of about 5%,” said Bespoke.

Source: Bespoke, January 12, 2010.

I do not have much to add to my conclusion of last week and repeat it: “It goes without saying that the strong rally since March is bound to be followed by a correction at some stage. But rather than pre-empting (and more often than not getting it wrong as a result of short-term noise), I will be guided by the longer-term charts and the yield curve to identify a major top. Meanwhile, I am watching valuations carefully, and specifically how the Q4 earnings reports stack up. (See my post “Earnings into focus“.)

“Although I am treading with caution after the 74% rally in the mature markets and 108% in emerging markets, I am not ignoring good old stock-picking, and specifically those companies with strong balance sheets that will be growing their dividends over time with a reasonable degree of certainty.”

For more discussion on the economy and financial markets, see my recent posts “Lessons from Bernstein, Rosenberg and Farrell“, “El Erian: Markets not facing reality of slow economy“, “Mark Mobius on emerging market valuations“, “Earnings into focus“, “Picture du Jour: Dow rally in perspective“, “Wealthtrack - making money in 2010 in stocks, bonds and foreign markets“, “Doug Casey: ‘Stock market set to crash’” and “Picture du Jour: Weak hands are heavily long the greenback“. (And do make a point of listening to Donald Coxe’s webcast of January 15, 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
“Global business sentiment has remained largely unchanged since the summer, consistent with a global economic recovery that is holding its own but is not gaining significant traction. Confidence is generally stronger in South America and among business services firms and weakest in North America and among those that work in real estate,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. Businesses are most upbeat when responding to broad questions about current conditions and expectations through mid-2010, but remain cautious when responding to specific questions about sales, pricing, inventories and hiring.

Source: Moody’s Economy.com

Meanwhile, sovereign debt default looms, according to George Magnus, senior economic adviser at UBS Investment Bank. He said (as reported by the Financial Times): “Concerted fiscal restraint could trigger another recession, but the lack of it could end up in bigger default risks. Even Japan, now into its third ageing decade, may be vulnerable, while some eurozone countries, though sheltered from currency turbulence, may yet falter in their deflation commitments and compromise the integrity of the single currency as we know it. The UK still lacks a credible debt management strategy, and the US cannot take investor goodwill for granted.”

Interestingly, the Financial Times says mounting fears about government debt has now caused the cost of insuring against the risk of debt default by European nations to exceed that for top investment-grade companies for the first time. “It now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the UK, than it does for the collective risk of Europe’s top 125 investment-grade companies, according to indices compiled by data provider Markit.”

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.)

Friday, January 15
• Inflation - “Don’t worry, be happy”, for now
• December industrial production - mixed news from the nation’s factories

Thursday, January 14
• December retail sales - mixed news, focus on details necessary
• Ballooning Treasury deficits - it takes both outlays and receipts to tango
• Total continuing claims matter the most

Wednesday, January 13
• Recent Fed rhetoric and highlights from the Beige Book

Tuesday, January 12
• Trade deficit widens in November, volume of trade maintains upward trend

Monday, January 11
• Inflation expectations approach pre-crisis range

The latest Beige Book, published on Wednesday in preparation of the next Federal Open Market Committee (FOMC) meeting on January 26-27, indicates a modestly improving economy.

Regarding the benign CPI numbers, Asha Bangalore (Northern Trust) said: “The Fed continues to be a sweet spot with regard to inflation and can continue to focus on economic growth for several more months. Although the Fed has begun examining the ways in which inflation emerges at the December Federal Open Market Committee (FOMC) meeting, the more vigorous debate and concern about inflation is topic for several months ahead.”

“The Federal Reserve is unlikely to raise interest rates before next year,” Richard Clarida, global strategic adviser for money manager Pimco, told Bloomberg (via MoneyNews). “The Fed has never hiked until they have seen a sustained decline in unemployment. By the Fed’s own forecast, that is at least a year away. I don’t think the Fed’s going to do anything with rates until 2011 or perhaps very late in 2010.”

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

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Jan 12	08:30 AM	Trade Balance	Nov	-$36.4B	-$31.0B	-$34.6B	-$33.2B
Jan 13	10:30 AM	Crude Inventories	1/08	3.70M	NA	NA	1.33M
Jan 13	02:00 PM	Fed’s Beige Book	-	-	-	-	-
Jan 13	02:00 PM	Treasury Budget	Dec	-$91.9B	-$97.0B	-$92.0B	-$120.3B
Jan 14	08:30 AM	Initial Claims	01/09	444k	450K	437K	433K
Jan 14	08:30 AM	Continuing Claims	1/2	4596K	4725K	4750K	4807K
Jan 14	08:30 AM	Retail Sales	Dec	-0.3K	1.0%	0.5%	1.8%
Jan 14	08:30 AM	Retail Sales ex - auto	Dec	-0.2%	0.5%	0.3%	1.9%
Jan 14	08:30 AM	Export Prices ex - agriculture	Dec	0.5%	NA	NA	0.6%
Jan 14	08:30 AM	Import Prices ex - oil	Dec	0.4%	NA	NA	0.4%
Jan 14	10:00 AM	Business Inventories	Nov	0.4%	0.5%	0.3%	0.4%
Jan 15	08:30 AM	Core CPI	Dec	0.1%	0.1%	0.1%	0.0%
Jan 15	08:30 AM	CPI	Dec	0.1%	0.2%	0.2%	0.4%
Jan 15	08:30 AM	Empire Manufacturing Survey	Jan	15.92	5.00	12.00	4.50
Jan 15	09:15 AM	Capacity Utilization	Dec	72.0%	72.3%	71.8%	71.5%
Jan 15	09:15 AM	Industrial Production	Dec	0.6%	1.0%	0.6%	0.6%
Jan 15	09:55 AM	Michigan Sentiment	Jan	72.8	71.5	74.0	72.5

Source: Yahoo Finance, January 15, 2010.

Click the links below for three research reports from Wells Fargo Securities:

• Weekly Economics & Financial Commentary (January 15, 2010)
• Global Chartbook (January 2010)
• Monthly Economic Outlook (January 2010)

US economic data reports for the coming week include the following:

Tuesday, January 19
• Net long-term TIC flows

Wednesday, January 20
• Building permits
• Housing starts
• Core PPI
• PPI

Thursday, January 21
• Jobless claims
• Leading indicators
• Philadelphia Fed

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

Final words
Morris King “Mo” Udall, American politician (1922-1998) said: “If you can find something everyone agrees on, it’s wrong.” (Hat tip: David Fuller.) Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards in guarding against popular (and often wrong) market views.

That’s the way it looks from an icy cold Geneva (from where I will be making my way back to Cape Town on Monday).

Source: RJ Matson, Comics.com

CNN Money: Four pros - investing in the next decade
“The coming 10 years won’t necessarily resemble the past 10. Fortune enlisted four investing sages - Rob Arnott, Jeremy Grantham, Bill Gross and Jeremy Siegel - who lay out the opportunities and pitfalls.”

Click here for the full article.

Source: CNN Money, January 14, 2010.

Richard Russell (Dow Theory Letters): Pondering a deflation scenario
“I’ve been pondering over the following strange situation. The Dow is actually lower today than it was ten years ago. What does this really mean? To me, it means that the market over the last ten years has been discounting ‘no growth’ ahead. When you take an unbiased look at the picture, compared with gold almost everything today is cheaper than it was a few years ago. Since gold is the universal immutable standard around which everything else (including the dollar) fluctuates, this means that the price of literally everything has been going DOWN against the standard which is gold.

“This is deflationary. Of course you can say that a loaf of bread costs more now than it did a year ago, and this is inflationary. True, it’s inflationary in terms of dollars, but the dollar is lower in terms of gold. So in terms of gold, everything is deflating.

“This deflationary trend is continuing, and what’s more it’s continuing against a veritable ocean of central-bank created currencies. Subscribers know that I believe this bear market will end, as most others have, with stocks selling at extreme great values - dividends high, price/earnings low. And you ask, ‘How can this possibly occur?’

“This is the question I’ve asked myself. And the answer I come with is that stocks will be hit by brutal world deflation. That’s what the miserable performance of the Dow is telling me. That’s what the poor performance of everything else against gold is telling me. I’m not talking about the performance over recent months, but their performance over the years.

“Yes, I know that the conventional wisdom is that we’re heading for all-out inflation. This forecast is based on the thesis that the only way to handle America’s deadly multi-trillion debts is to inflate them out of existence. But suppose the Fed is unable to engineer inflation? Look how hard they’ve been trying over the last year to restart inflation. And what’s happened to housing, the chief object of the Fed’s inflation target? Housing prices have gone nowhere, well maybe they’re less weak then they were six months ago. But inflation in home prices? It’s just not happening.

“And now political pressure is on the Fed to cut back on stimulus, money-creation and at the same time raise interest rates. This, if it happens, will definitely be deflationary, and it will hit housing and the economy.

“Ever since World War II the Fed has been on the inflation path. Leverage, rising debt, speculation, and higher prices have been the ‘law’ of the land. Now, I believe we have hit the inflection point; we are just entering the huge deflationary spiral that will unwind six decades of leverage and inflation.

“In the big picture what I see is that China and Asia will become (they already are) phenomenal producers. The developed nations will not be able to compete with them. The result will be a crushing decline in the price of manufactured goods, which, in turn, will impact on all goods including foodstuffs and services and medical services. In a vain effort to compete with China, India and Asia, currencies will be devalued across the board.

“Currencies will sink in the face of competitive devaluations (think Venezuela), and whatever can go bankrupt will go bankrupt. Debt will become a dirty word again, as it was during the 1930s (if you can’t pay for it with cash, live without it).

“The one item that will withstand this crushing force of deflation will be gold, whereas most items have been sinking against gold. If the deflation that I foresee arrives, items will be plunging in price against the standard - gold. This will be the great deflation that nobody foresees and nobody understands and nobody has protected themselves against.

“When you’re willing to agree that gold, not the dollar, is the universal immutable standard, you can see that the forces of deflation are taking over.

“For the sake of argument, let’s just say that I am correct. Then as the great deflation envelopes the land, all things (merchandise, stocks, currencies) will sink against gold. So gold then becomes the single item that is not declining, because gold is the standard, and the standard can’t go down against the standard. In that case, everyone will opt for the safety of gold. Gold will be seen as the final and ultimate protection against deflation.

“Question - Russell, let me play the devil’s advocate. Suppose you are dead wrong, and suddenly all the money that the central banks have injected into the system ‘catches on’. Then what?

“Answer - In that case gold surges higher. It goes higher because the amount of fiat currency being produced is far greater than the available amount of gold. The sheer amount of new currencies overwhelms the relatively fixed amount of gold.

“Question - Then, Russell, you’re saying that gold is the place to be whether inflation or deflation materializes.

“Answer - Yes, that’s the way I see it. Gold will be ‘the last man standing’, as it is now in Venezuela and Zimbabwe.”

Source: Richard Russell, Dow Theory Letters, January 14, 2010.

George Magnus (Financial Times): Sovereign default risks loom large
“The sustainability of sovereign debt hangs heavily over bond markets, and the prospects for economic and financial stability.

“Since 2007, OECD government deficits have risen by 7 per cent of GDP to just over 8 per cent, and debt, excluding contingent liabilities, has risen by about 25 per cent of GDP to just over 100 per cent.

“The biggest increases have occurred in Iceland, Ireland, the US, Japan, the UK, and Spain. There is no peacetime precedent for the current speed and scale of public debt accumulation and it is difficult to assess the social tolerance for high debt levels, and for the pain of protracted fiscal restraint. In several EU member states, the threshold has already been breached. The spectre of sovereign default, therefore, has returned to the rich world.

“Default does not have to mean outright debt repudiation. It can mean some type of moratorium on interest payments, and the restructuring of loan terms. Richer nations are assumed to be above such measures, but not in extreme circumstances. The US abrogated the gold clause in government and private contracts in 1934, and in 1971, it abandoned the gold standard altogether.

“Default can also occur via inflation, currency debasement, the imposition of capital controls, and the imposition of special taxes that break private contracts. Seen in this light, a few countries in eastern and western Europe may already be technically at risk of default.

“At the moment, higher spreads on sovereign bonds and credit default swap rates do not provide convincing evidence of an imminent default crisis, per se. Japan’s public debt has already risen above 200 per cent of GDP, but the government can borrow for 10 years at 1.4 per cent, while Australia’s government debt is about 25 per cent of GDP, but it pays over 5.5 per cent. Other rich countries with varying debt ratios all pay roughly 3.5-4 per cent. However, the status quo is not sustainable.

“Concerted fiscal restraint could trigger another recession, but the lack of it could end up in bigger default risks. Even Japan, now into its third ageing decade, may be vulnerable, while some eurozone countries, though sheltered from currency turbulence, may yet falter in their deflation commitments and compromise the integrity of the single currency as we know it.

“The UK still lacks a credible debt management strategy, and the US cannot take investor goodwill for granted.”

Click here for the full article.

Source: George Magnus, Financial Times, January 13, 2010.

CNBC: Bullard on US interest rates
“The greenback extended declines partly because of comments from St Louis Federal Reserve Bank president, James Bullard, that interest rates may remain low for quite some time. In an exclusive interview with Cheng Lei, Bullard says that maintaining low interest rates is all data dependant.”

Click here for a BusinessWeek article.

Source: CNBC, January 12, 2010.

MoneyNews: Pimco’s Clarida - Fed unlikely to hike rates this year
“The Federal Reserve is unlikely to raise interest rates before next year, says Richard Clarida, global strategic adviser for money manager Pimco.

“‘The Fed has never hiked until they have seen a sustained decline in unemployment,’ now 10 percent, he told Bloomberg.

“‘By the Fed’s own forecast, that is at least a year away.’ And thus, so is a rate hike, Clarida says.

“‘I don’t think the Fed’s going to do anything with rates until 2011 or perhaps very late in 2010.’

“In addition to improvement in the labor market, the Fed would want to see durable sources of demand in the economy before it raises rates, Clarida says.

“‘We had very modest growth in the third quarter (2.2 percent) and perhaps somewhat stronger growth in fourth quarter,’ he said.

“‘But all that is being driven by an inventory rebound and some temporary fiscal stimulus. The Fed’s going to want to see some durable demand from consumers, exports and investment.’

“It’s too soon to say the consumer sector has stabilized, Clarida says.

“‘If you believe as I do that the household sector in the next five years will be deleveraging, that means there will be more (trouble) to come.’”

Source: Dan Weil, MoneyNews, January 11, 2010.

Reuters: White House plans more to trim joblessness
“President Barack Obama plans more economic stimulus measures to bring down the high US unemployment rate, while cutting the bulging budget is a longer-term challenge, a top White House economic aide said on Sunday.

“‘We are … talking about actions right now to jump-start job creation,’ White House Council of Economic Advisers Chairwoman Christina Romer said on CNN’s State of the Union.

“‘You don’t get your budget deficit under control at a 10 percent unemployment rate,’ she said.

“Beating back unemployment will be a key yardstick by which US voters will measure Obama’s success in November congressional elections and will go a long way to determining his own long-term political future.

“Also troubling to many is a budget deficit that has ballooned from spending aimed at cushioning workers and businesses through the worst recession in decades.

“‘We have to do something,’ Romer said. ‘There are more targeted actions that we think absolutely will help.’

“Obama will focus is on getting the US fiscal house in order over the longer run, she said.

“Congress is considering proposals to help labor markets that include a $155 billion jobs package that has already cleared the House of Representatives.”

Source: Mark Felsenthal, Reuters, January 10, 2010.

Asha Bangalore (Northern Trust): Recent Fed rhetoric and highlights of Beige Book
“In speeches late yesterday [Tuesday], Fed Presidents Plosser and Fisher of Philadelphia and Dallas, respectively, were of the opinion that unemployment rate is most likely to trend higher than the December jobless rate of 10.0%. However, both of these non-voting hawkish members of the FOMC expressed concerns about inflation.

“Plosser was of the opinion that the Fed needs to be pre-emptive such that inflationary expectations remain anchored and an inflationary situation is avoided. He also noted that there is ‘extraordinary uncertainty about the prospects for inflation over the next two to five years.’

“President Fisher’s speech focused on lawmakers in Washington attempting to reduce the power and independence of the Fed.

“This morning [Wednesday], President Evans of Chicago, also a non-voting member of the FOMC, presented the Chicago Fed’s forecast for the economy in 2010. He reiterated that restrictive bank credit and cautious households and businesses are restraining the pace of recovery but indicated that these ‘headwinds’ would fade in the latter half of 2010.

“The next FOMC meeting is on January 26 and 27, with four new regional Fed Presidents as voting members - Presidents Bullard of St. Louis, Sandra Pinalto of Cleveland, Rosengren of Boston and Hoenig of Kansas City. President Hoenig is the most hawkish of these new voting members, with President Bullard painted as a hawk, while President Pinalto is seen as a centrist and President Rosengren is classified as a dove.

“The latest Beige Book, published today in preparation for the FOMC Meeting, indicates a modestly improving economy. Ten Districts indicated improving conditions compared with the last Beige Book reporting increased activity in eight Districts. Mixed conditions were reported for the Districts of Philadelphia and Richmond.

“The Beige Book assessment of consumer spending in the holiday season is consistent with the tally of chain store sales reports which indicated gains in retail sales from a year ago but below the levels seen in 2007.

“The labor market information in the Beige Book confirms the grim details of the December employment report published last week.

“Price and wage pressures were not problematic.

“The housing market was depicted as recovering from the lows of early-2009, with low mortgage rates and home buyer tax credit program lifting sales. The non-residential real estate sector remains a source of serious concern in nearly all Districts.

“On the financial side, weak demand for all loans, excluding residential mortgages, a deterioration of credit quality, increased loan delinquencies and defaults were noted. Against this backdrop, it is certain the Fed will hold the monetary policy stance unchanged. The minutes of the December FOMC meeting included differences in opinion about the Fed’s mortgage purchase program and prospects about inflation. The latest information does little to clarify these muddy waters. The nature of the incoming data after a deep recession and a financial crisis is bound to be mixed and present differences in the evaluation of the status of a recovering economy. Criticisms about the Fed’s handling of crises in the past suggest that the Fed is likely to err on the side of being cautious with an emphasis on economic growth.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 13, 2010.

Paul Kasriel (Northern Trust): Ballooning Treasury deficits - it takes both outlays and receipts to tango
“On Wednesday, the US Treasury reported a record cumulative deficit over the 12 months ended December 2009 of $1.472 trillion. Although the editorial board of the Wall Street Journal surely will rail against exploding federal spending, it will probably fail to mention another key driver of ballooning federal deficits - collapsing federal receipts.

“Yes, as shown below, the year-over-year growth in 12-month cumulative federal government outlays remains in double digits, which it entered in October 2008. But notice that the growth rate in federal outlays is slowing. It peaked at 19.2% in July 2009. As of December 2009, the year-over-year growth in 12-month cumulative federal outlays had slowed to 11.8% - the slowest since December 2008’s 12.8% growth. But look at what has been happening to the year-over-year rate of contraction in 12-month cumulative total federal receipts. In the 12 months ended December 2009 vs. the 12 months ended December 2008, total federal receipts contracted by 17.1%, a slightly slower rate of contraction than the 17.6% rate of contraction in the 12 months ended November.

“Of course, receipts are contracting. The US economy has only recently emerged from its longest and deepest recession in the post-war era in which both corporate profits and wage/salary income collapsed. Moreover, personal income taxes were cut by both the Bush (Jr.) and Obama administrations, something the editorial board of the Wall Street Journal presumably approved of.

“In sum, although high growth in federal spending is contributing mightily to our record federal deficit, the rate of growth in that spending is slowing. What often is forgotten is that the rate of contraction in federal receipts has accelerated.”

Source: Paul Kasriel, Northern Trust - Daily Global Commentary, January 14, 2010.

Asha Bangalore (Northern Trust): US trade deficit widens
“The trade deficit of the US economy widened to $36.4 billion in November from a revised $33.9 billion in the previous month. The inflation adjusted trade deficit of good in the October-November months nearly matches the average of the third quarter of 2009. The trade deficit is predicted to post a smaller deficit in the fourth quarter and help to lift overall GDP.

“Following the recession when world trade shrunk significantly, the volume of exports and imports now show a noticeable upward trend. In November, exports of goods and services rose only 0.9% to $138.2 billion, the highest since in the past year. Imports of goods and services increased 2.6% in November to nearly $175 billion, also the highest in the past year.”

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

Clusterstock: Shipping into US unexpectedly jumped in December
“Shipping into the US climbed from November to December, defying typical seasonal trends and perhaps demonstrating growing demand in the US

“‘December was a surprisingly good month that put a promising end to 2009,’ the research company Panjiva said in a report issued today.

“Specifically:

“There was a 3% increase in the number of global manufacturers shipping to the US market.

“There was a 2% increase in the number of US companies receiving waterborne shipments from global manufacturers.

“Traditionally, these numbers decline from November to December (-5% in 2009 and -1% in 2008).

“You can expect that the good news will continue, although it may be more confusing than clarifying. For the first quarter, the year-over-year comparisons will likely look very good. But that will largely be a result of the global trade free fall in 2009. A better comparison is probably against 2008 or 2007.”

Source: John Carney and Kamelia Angelova, Clusterstock - Business Insider, January 12, 2010.

Asha Bangalore (Northern Trust): Industrial production - mixed news from the nation’s factories
“The Industrial Production Index rose 0.6% in December after a similar increase in November. However, the reasons for the gain were different. The December increase in production reflects a 5.9% jump in activity at utilities due to inclement weather, while the November gain was largely due to a 0.9% increase in factory production. In December factory production slipped 0.1%. “A mixed performance is seen in factory data for December. Production of consumer goods (+0.6%) and business equipment (+0.9%) increased but construction supplies fell 2.0%. Industrial production has risen 4.7% from the cycle low in June 2009.

“Production at factories has risen 4.5% from the cycle low in June 2009, while on a year-to-year basis, factory production dropped 1.9% in December. The decelerating pace of decline of factory production is noteworthy. The operating rate of the factory sector (68.9%) is still close to the historical low of 65.1%, which implies that businesses have room to meet a growth in demand without undertaking an expansion of capacity. There is nothing in this report that points to an inflationary threat and it is not likely to be seen for several more months.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 15, 2010.

Asha Bangalore (Northern Trust): Retail sales - mixed news
“Retail sales fell 0.3% in December, after an upwardly revised estimate for November (1.8% increase vs. 1.3% in the previous estimate). At first blush, the headline for December looks weak and contradicts the chain store sales reports published last week. These details should help to sort out the report.

“First, unit auto sales increased in December (11.2 million vs. 10.9 million in November) vs. the decline (-0.8%) reported in the retail sales report. Unit auto sales matter for consumer spending in the GDP report for the fourth quarter. But, the fourth quarter average for unit auto sales fell at an annual rate of 20.4% after a nearly 108% jump in the third quarter due to the cash for clunkers program. Therefore, unit auto sales will be a negative for fourth quarter consumer spending. Second, the upbeat chain store sales information published last week were comparisons from a year ago. Retail sales from a year ago presented in today’s report also show strong gains (see chart 4). The 2009 sales numbers look rosy compared with the 2008 weak holiday sales numbers. Third, on a quarterly basis, retail sales excluding autos or excluding auto and gas are stronger in the fourth quarter compared with the third quarter (see table below). Fourth, the level of retail sales excluding gasoline ($318.44 billion) in December compared with the fourth quarter average ($318.2 billion) is virtually flat, implying the absence of an arithmetical advantage.

“The main take away is that consumers are spending but gains are essentially lackluster when the details are sorted out.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 14, 2010.

Asha Bangalore (Northern Trust): Inflation - “Don’t worry, be happy,” for now
“If there is good cheer to go around, it is from inflation, for now. The Consumer Price Index (CPI) edged up 0.1% in December, putting the year-to-year change at 2.7%. The large jump after a string of declines in the eight months ended October 2009 is primarily due to higher energy prices. The energy price index moved up 0.2% in December, but was up 18.2% from a year ago. Food prices rose 0.2%, which translates into a 0.5% drop in food prices in all of 2009.

“Excluding food and energy, the core CPI, inched up 0.1% in December, with the year-to-year increase at 1.8%, matching the gain seen in 2008. The cycle low for the year-to-year increase of the core CPI is a 1.4% gain posted in August 2009. The main reason for the significantly contained core CPI is the decelerating trend of the shelter index (the single-largest component of the core CPI). The 0.3% year-to-year gain of the shelter index in December is smallest increase since record keeping began in 1953 for this price index.

“The Fed continues to be a sweet spot with regard to inflation and can continue to focus on economic growth for several more months. Although the Fed has begun examining the ways in which inflation emerges at the December FOMC meeting, the more vigorous debate and concern about inflation is topic for several months ahead.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 15, 2010.

Reuters: Fannie, Freddie re-defaults reach 34 pct
“More than a third of US residential loans modified by Fannie Mae and Freddie Mac early last year were in arrears again after six months, though the default rate has improved, according to the regulator of the two largest mortgage finance companies.

“About 34 percent of homeowners with loans guaranteed by the companies modified in the first quarter of 2009 were at least 60 days delinquent, the Federal Housing Finance Agency said in a quarterly report on Friday.

“That compares with 39 percent of mortgages going bad after the companies agreed to ease terms of the loans in the last quarter of 2008, the report said.

“The re-default measures cover loans modified before the start of President Barack Obama’s Home Affordable Modification Program that gives lenders a standard blueprint to ease terms of loans for troubled borrowers.”

Source: Al Yoon, Reuters, January 8, 2010.

Financial Times: US commercial property attracts new wave of money
“The beleaguered US commercial real estate sector has been attracting a new wave of money from sources including foreign banks, US private equity firms, and a leading Chinese sovereign wealth fund.

“Market participants warn that the activity represents ‘bottom-feeding’ by opportunistic investors whose strategies could be derailed by rising interest rates. Also, sums are tiny compared with the debts that need refinancing. Nevertheless, the growing interest from investors is a sign of stabilisation, making it less likely that worsening commercial real estate conditions will sink banks and choke off a US recovery.

“‘We believe the real story is that capital is ready to buy, even though it may not be so visible today,” said Bob Steers, co-chairman of Cohen & Steers, a real estate investment firm.

“Recently, state-owned China Investment Corporation has enlisted Cohen & Steers, Angelo Gordon and Morgan Stanley to identify commercial real estate opportunities, people familiar with the matter say.

“A public sign of such activity came on Friday when Colony Capital won a Federal Deposit Insurance Corporation auction for $1bn of commercial property loans formerly held by failed banks in states hit hard by the real estate downturn.

“The deal valued the loans at 44 cents on the dollar and was structured so the FDIC contributes $136m and holds 60 per cent of the equity, while Colony, a Los Angeles investment firm, puts in $90m for the remaining 40 per cent.

“Tom Barrack, Colony founder, called the investment ‘an implicit bet that rates stay low’ and warned: ‘If rates go up, everyone will be crushed.’”

Source: Henny Sender, Financial Times, January 10, 2010.

MoneyNews: Boskin: US economic data is almost criminal
“Former White House economist Michael Boskin says American investors no longer place much credibility in the economic and fiscal statistics being reported by the US government, and are ‘increasingly inclined to disbelieve them’.

“Boskin, the one-time economic adviser to President George H.W. Bush, says that solid, reliable information is needed by investors, because ‘as a society, and as individuals, we need to make difficult, even wrenching choices, often with grave consequences’.

“To base those decisions on misleading, biased, or manufactured numbers, is not just wrong, ‘but dangerous’, he wrote in The Wall Street Journal.

“But, due to the obvious fudging of numbers involved in the government’s health care insurance industry reform effort, most Americans now believe the health-care legislation will actually raise their insurance costs, rather than reduce them, and increase the federal budget deficit, rather than contain it.

“That’s not the only area where cynicism over official statistics is growing.

“‘Most Americans are highly skeptical of the claims of climate extremists,’ writes Boskin, now a professor of economics at Stanford University and a senior fellow at the Hoover Institution.

“And because of the spin over ‘jobs created and saved’ by the stimulus, they have a ‘more realistic reaction to the extraordinary deterioration in our public finances than do the president and Congress,’ Boskin adds.

“Squandering their credibility with these numbers games will only make it more difficult for America’s elected leaders to garner support for difficult decisions from a public increasingly inclined to disbelieve them, writes Boskin.”

Source: Gene Koprowski, MoneyNews, January 14, 2010.

Financial Times: FDIC chief blames Fed for crisis
“The Federal Reserve was blamed by a fellow regulator for contributing to the financial crisis on Thursday as the central bank and one of its former chairmen fought back against congressional moves to curb its powers.

“In unusually pointed criticism, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, told the Financial Crisis Inquiry Commission that ‘much of the crisis may have been prevented’ had the Fed dealt with subprime mortgages seven years before it did.

“In New York, Paul Volcker, former Fed chairman and now White House economic adviser, was making the case for the defence.

“He said there was ‘a compelling case that central banks should have a strong voice and authority in regulation and supervisory matters’.

“Both Ms Bair and Mr Volcker carry weight on Capitol Hill, where the Fed has drawn blame for aspects of the crisis.

“Mr Volcker told the Economics Club of New York he was ‘particularly disturbed’ about moves to take away the Fed’s regulatory function.

“Chris Dodd, Senate banking committee chairman, has proposed consolidating bank supervision into a single regulator.

“The Fed published a paper on Thursday, which had been sent to Mr Dodd on Wednesday, arguing that its financial stability and monetary policy roles were complemented by supervising bank holding companies.

“Mr Volcker said: ‘What seems to me beyond dispute, given recent events, is that monetary policy and the structure and condition of the banking and financial system are irretrievably intertwined.’”

Source: Tom Braithwaite, Financial Times, January 14, 2010.

Bloomberg: Federal Reserve seeks to protect US bailout secrets
“The Federal Reserve asked a US appeals court to block a ruling that for the first time would force the central bank to reveal secret identities of financial firms that might have collapsed without the largest government bailout in US history.

“The US Court of Appeals in Manhattan will decide whether the Fed must release records of the unprecedented $2 trillion US loan program launched after the 2008 collapse of Lehman Brothers Holdings Inc. In August, a federal judge ordered that the information be released, responding to a request by Bloomberg LP, the parent of Bloomberg News.

“‘This case is about the identity of the borrower,’ said Matthew Collette, a lawyer for the government, in oral arguments today. ‘This is the equivalent of saying ‘I want all the loan applications that were submitted.”

“Bloomberg argues that the public has the right to know basic information about the ‘unprecedented and highly controversial use’ of public money. Banks and the Fed warn that bailed-out lenders may be hurt if the documents are made public, causing a run or a sell-off by investors. Disclosure may hamstring the Fed’s ability to deal with another crisis, they also argued. The lower court agreed with Bloomberg.

“”The question is at what point does the government get so involved in the life of the institution that the public has a right to know?’ said Charles Davis, executive director of the National Freedom of Information Coalition at the University of Missouri in Columbia. Davis isn’t involved in the lawsuit.

“The ruling by the three-judge appeals panel may not come for months and is unlikely to be the final word. The loser may seek a rehearing or appeal to the full appeals court and eventually petition the US Supreme Court, said Anne Weismann, chief lawyer for Citizens for Responsibility and Ethics, a Washington advocacy group that supports Bloomberg’s lawsuit.

“New York-based Bloomberg, majority-owned by Mayor Michael Bloomberg, sued in November 2008 after the Fed refused to name the firms it lent to or disclose the amounts or assets used as collateral under its lending programs. Most were put in place in response to the deepest financial crisis since the Great Depression.”

Source: David Glovin and Thom Weidlich, Bloomberg, January 11, 2010.

Financial Times: Wall Street titans face the flak
“Four of Wall Street’s top executives offered some contrition and a defence of their actions on Wednesday, as the head of the Financial Crisis Inquiry Commission promised to use wide-ranging powers to establish the causes of the financial crisis and pursue any wrongdoing.

“Lloyd Blankfeinof Goldman Sachs, Jamie Dimon, chief executive of JPMorgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America maintained a united front as the Financial Crisis Inquiry Commission, headed by Phil Angelides, probed the bail-out of AIG, risk management and executive compensation.

“Mr Blankfein, whose bank has become a lightning rod for public anger at Wall Street, bore the brunt of the panel’s questions. He mounted a robust defence after being asked whether part of his business was akin to selling a car with faulty brakes and then buying an insurance policy. But he added: ‘Anyone who says I wouldn’t change a thing, I think, is crazy.’

“The Goldman boss said that he and his rivals had been insufficiently sceptical of loose credit standards.

“‘We rationalised [it] because a firm’s interest in preserving and growing its market share, as a competitor, is sometime blinding - especially when exuberance is at its peak.’

“Mr Angelides, a former California treasurer appointed head of the panel by Congress last year, told the witnesses on the first day of public hearings: ‘We’re after the truth … the hard facts … we’ll use our subpoena power as needed. And if we find wrongdoing, we’ll refer it to the proper authorities.’

“Bonuses are drawing increasing political fire on Capitol Hill as the banks prepare to announce billions of dollars in pay-outs over the next few days.

“‘Clearly Wall Street has to be a lot more attuned to what’s going on in the economy,’ said Mr Mack. But he said that compensation had to allow the banks to compete for staff. ‘I have to run a company.’

“As part of a plan to quell anger and ensure that any government bail-out losses are recouped, the Obama administration is planning to impose a levy on banks.

“Mr Dimon told reporters: ‘Using tax policy to punish people is a bad idea.’ He added that the banks should not be paying for losses caused by car companies and other industries.

“Mr Dimon acknowledged that ‘certain subprime mortgages  …  weren’t great products. I think there were some unscrupulous mortgage salesmen and mortgage brokers. And, you know, some people mis-sold.’

“Mr Dimon and Mr Moynihan agreed that banks should not be considered ‘too big to fail’.

“Mr Obama will on Thursday announce a new levy on banks to try to recoup some of the stimulus funding they received.”

Source: Tom Braithwaite and Francesco Guerrera, Financial Times, January 13, 2010.

The Wall Street Journal: Goldman Sachs CEO singled out
“The Wall Street Journal’s Jerry Seib joins the News Hub from Washington, where he says Goldman Sachs CEO Lloyd Blankfein became a target at a hearing before the Financial Crisis Inquiry Commission.”

Source: The Wall Street Journal, January 13, 2010.

MoneyNews: Romer - big bonuses to bankers are offensive, ridiculous
“A White House economic adviser says big year-end bonuses for bailed-out financial institutions would be ‘ridiculous’ and ‘offensive’.

“Christina Romer says the Bush administration’s $700 billion bailout was necessary to avoid a collapse of the financial system.

“Now that banks are returning to profitability as a result of government help, Romer says that paying out billions of dollars in bonuses ‘does seem really ridiculous’.

“Romer, who heads the president’s Council of Economic Advisers, say that kind of big payout ‘is going to offend the American people. It offends me.’”

Source: MoneyNews, January 11, 2010.

Financial Times: Obama vows to recover crisis cash
“Barack Obama slammed ‘obscene’ bank bonuses on Thursday, as the US president formally revealed plans to impose a levy on big financial institutions to recoup some of the costs of the financial crisis.

“‘We want our money back and we’re going to get it,’ Mr Obama said, pledging to ‘recover every single dime the American people are owed’ for the troubled asset relief programme bail-out fund.

“Appearing keen to pick a political fight with the big banks, Mr Obama faulted them for trying to ‘return to business as usual’ with ‘risky bets to reap quick rewards’ and compensation practices that did not reflect the state of the nation.

“‘I’d urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or your citizens but by rolling back bonuses,’ he said. Aides said the levy would recover at least $90bn from 50 of the largest institutions, including US subsidiaries of foreign banks and insurance companies as well as US banks.

“Treasury secretary Tim Geithner told the Financial Times that the US would urge other countries to adopt a similar principle of recouping bailout costs from the financial sector. ‘We are going to see if we can encourage policymakers in other important financial centres to do something similar,’ he said.”

Source: Krishna Guha, Financial Times, January 14, 2010.

Financial Times: Banks braced for Basel battle
“Banks are gearing up to fight a proposal by global regulators to sharply increase capital requirements for institutions that bring in outside investors to fund subsidiaries, saying it will cripple their ability to expand in emerging markets.

“Bank executives fear the provision would create huge holes in the capital stocks of a wide range of UK, European and Japanese financial institutions, at a time when they are already under pressure to increase their regulatory capital.

“Analysts described the proposal as one of the most ‘draconian’ and ‘potentially devastating’ parts of a package of measures put forward in December by the Basel committee, which sets global standards that are implemented by local regulators.

“Credit Suisse analysts calculate the rule would substantially reduce the estimated equity buffers that banks hold against potential losses.

“They estimate the so-called equity tier one capital ratio, a key measure of balance sheet strength which excludes hybrid capital such as preference shares, would be cut by 0.7 percentage points from the current 9.6 per cent.

“In essence, the Basel committee wants to force banks to stop counting minority-owned stakes as part of their equity capital but insists they continue to recognise the entire potential losses of any subsidiary.

“Regulators are essentially saying that banks are on the hook for all the losses of their subsidiaries, but that equity owned by minority investors in a particular subsidiary would not be available to absorb group losses elsewhere in the world.

“Banking analysts at Citi and Evolution have concluded that HSBC, BNP Paribas, Credit Agricole and Natixis would be particularly hard hit. The banks either did not respond or declined to comment.”

Source: Brooke Masters and Patrick Jenkins, Financial Times, January 12, 2010.

The Wall Street Journal: Beware of bond bubble
“Bond traders are leery of a possible growing bond bubble. If the bubble bursts, people’s retirement savings may be in jeopardy, SmartMoney’s Russell Pearlman reports.”

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

Financial Times: Rate rise fears spark rush to issue bonds
“Businesses and governments have rushed to raise tens of billions of dollars from bond markets in a frenetic round of new year fundraising amid fears that interest rates are set to jump.

“A flurry of issuers, including Virgin Media, BMW and Manchester United football club, turned to the capital markets on Monday aiming to raise more than $20bn.

“Poland and Mexico were among a number of governments that also tapped international investors.

“So far this month more than $75bn has been raised, more than two-thirds of this by financial institutions trying to repair their balance sheets in the wake of the economic crisis.

“Last week, the US corporate bond market had its second busiest day on record.

“Wayne Hiley, of Barclays Capital, said a recent rally in the corporate bond markets had lowered the interest rate premium to government bonds that businesses pay. ‘There are issuers who are saying ‘let’s take advantage of this’ even if they hadn’t planned to come to the market until later on,’ he said.

“Companies usually aim to sell bonds early in the year when investors have fresh funds and before many companies enter a ‘purdah’ period ahead of earnings announcements.

“However, the current round of capital raising is particularly intense. Some companies believe a recovery in economic growth this year will lead to central banks raising interest rates, pushing up the cost of borrowing.

“Other companies, fearing market turbulence as the authorities begin to unwind last year’s emergency monetary and fiscal measures to prop up the economy - which have included buying bonds - are borrowing as much as they can while demand for debt remains strong.”

Source: Jennifer Hughes and Aline van Duyn, Financial Times, January 11, 2010.

Financial Times: Sovereign bonds seen as riskier than corporates
“The cost of insuring against the risk of debt default by European nations is now higher than for top investment-grade companies for the first time, as mounting government debt prompts fears over the health of many leading economies.

“It now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the UK, than it does for the collective risk of Europe’s top 125 investment-grade companies, according to indices compiled by data provider Markit.

“Markit’s iTraxx Europe index of 125 companies is trading at 63 basis points, or a cost of $63,000 to insure $10m of debt over five years. This compares with 71.5bp, or $71,500, for Markit’s SovX index of 15 European industrialised nations.

“Fears over sovereign risk have risen sharply in the past few months as investors have become increasingly alarmed over rising budget deficits and record levels of government bond issuance needed to pay off public debt.

“By contrast, hopes of a recovery have helped support corporate credit markets. Since September, the SovX index has jumped 20bp, while the iTraxx Europe index has narrowed 30bp.

“Bankers are even warning that big economies, such as the US and the UK, could lose their top-notch triple A status because of the deterioration in public finances.”

Source: David Oakley, Financial Times, January 12, 2010.

MoneyNews: Gross - German, Brazil bonds better than Treasuries
“Bill Gross, who manages the world’s biggest bond fund for Pimco, expects German and Brazilian bonds to outperform US Treasuries.

“In the US, the budget deficit, which totaled $1.4 trillion last year, will push up Treasury yields faster than German government bonds, Gross said.

“And while the US will likely endure huge deficits for years, Germany has a constitutional amendment requiring a balanced budget by 2016.

“‘(It) is the most fiscally conservative, has half the deficit of the United States, potentially has a low inflation rate, and they yield about the same,’ Gross told Bloomberg, comparing US and German 10-year government bonds.

“The 10-year US Treasury now yields about 45 basis points more than the equivalent 10-year bund.

“Brazilian bonds, which make up 2 percent of Gross’ Pimco Total Return Fund, also are attractive, he says.

“‘Brazil has the highest real interest rates in the world,’ he pointed out.

“Brazil’s 10-year government bond yields 11.22 percent.”

Source: Dan Weil, MoneyNews, January 14, 2010.

Bespoke: Strategists get stock happy
“Each week Bloomberg asks Wall Street strategists (the same ones polled for their year-end S&P 500 price targets) for their recommended portfolio allocations to stocks, bonds, and cash. Currently, the consensus recommended stock allocation is 60.5%. As shown in the chart below, this number has spiked significantly in recent weeks. Throughout the financial crisis, strategists lowered their recommended stock allocations pretty much every week. They missed the bottom, however, as the market turned before their consensus hit bottom. During the week of the Lehman collapse, strategists were recommending that investors have 56.6% of their portfolio in stocks.

“Add this as another indicator that is currently back to its pre-Lehman levels, while the S&P 500 is still has about 9% to go.

“The current reading of 60.6% is up quite a bit from its level at the market lows. This doesn’t yet suggest that strategists are too bullish, however, as their average recommendation during the ‘03-’07 bull market was about 64%.”

Source: Bespoke, January 14, 2010.

Bespoke: And you thought the rally in equities was impressive
“Even though the S&P 500 has rallied more than 60% off its March 2009 lows, the index is still well below the 1,251.70 level it closed at on the Friday before Lehman’s bankruptcy filing. While the rally has been quite impressive, it pales in comparison to the gains we’ve seen in the corporate bond market. As of last week, the spread between Baa rated corporate bonds and 30-year US Treasuries had narrowed to its lowest levels since July 2007! Yes, you read that right - July 2007. Back then, the S&P 500 was trading above 1,500.”

Source: Bespoke, January 11, 2010.

Bespoke: Estimated Q4 S&P 500 and sector earnings growth
“S&P 500 earnings are currently expected to grow by 62.1% in Q4 ‘09 versus Q4 ‘08. In the first chart below, we highlight how this growth estimate has changed since the start of the fourth quarter. As shown, estimates are essentially right where they were at the start of Q4, but there was a lot of movement in the estimate throughout the quarter. From October to the end of November, the growth estimate rose on a weekly basis all the way up to 75.7%. Since peaking, however, estimates headed lower by quite a bit until finally bumping up from 60% to 62.1% in the last week. As we enter earnings season, it’s probably a good thing for the bulls that expectations have come down a little.

“While the S&P 500 as a whole is expected to grow by 62.1% in the fourth quarter, the bulk of this growth is expected to come from the Materials and Financial sectors. As shown below, these are the only two sectors with Q4 growth expectations that are higher than the S&P 500. And more sectors are still expected to see a decline in earnings than a rise. Energy and Industrials are both expected to see earnings decline by more than 20% in the fourth quarter, while Telecom is not far behind at -19.2%. Health Care, Consumer Staples and Utilities are all expected to see a drop of about 5%. Technology and Consumer Discretionary are the other two sectors expected to see growth.”

Source: Bespoke, January 12, 2010.

John Authers (Financial Times): Too soon for complacency
“Markets have set themselves up for some bad news to send them spinning. On Tuesday, the bad news broke.

“Markets move on the interaction of news with flows of greed and fear among investors. When fear is lowest, the danger of a fall is greatest.

“This week the CBOE Vix Index, measuring volatility in US stocks, hit its lowest level since May 2008, when a lull after the Bear Stearns rescue gave way to an implosion.

“Another great contrarian indicator is the survey of sentiment by the American Association of Individual Investors. Last week, this showed the lowest proportion of self-described “bears” since February 2007 - when volatility first started to spike as investors at last began to grasp the severity of the subprime mortgage crisis in the US.

“Bearishness in this survey hit an all-time high in March last year when the current rally first started, showing how much money can be made by betting against extremes of sentiment.

“Even bulls should concede that this optimism looks overdone. Stock market valuations enshrine very strong earnings growth for this year, while there are numerous possibilities of macroeconomic shocks around the world.

“Tuesday, China tightened monetary policy, in a necessary action which displeased the market, while the European Commission condemned Greece for falsifying data, in a broadside that raised fears once more that Greece could default without being bailed out by fellow eurozone members.

“Meanwhile, Alcoa, the aluminium producer, revealed disappointing results to launch the US earnings season for the fourth quarter of last year.

“If not exactly the sum of all fears, this combination of bad news showed that it is too soon for complacency. There are real risks in many different places and the chance of a sharp correction looks high. In that context, Tuesday’s falls for stock markets around the world look surprisingly muted.”

Source: John Authers, Financial Times, January 12, 2010.

Bespoke: Volatility at lowest level since May 2008 - should you care?
“Now that the VIX index is at its lowest levels since May 2008, and down nearly 80% from its record high in late 2008, there is a growing concern among some investors that there is not enough fear in the marketplace. As the chart below indicates, the current level of 17.55 is lower than the long-term average of 20.3 since 1990. However, during the mid-nineties and the middle part of this decade, which were both good periods for equity investors, the VIX not only traded at and below current levels, but it also remained at those levels for several years.

“While the VIX’s decline over the last year indicates that investors are not as fearful as they were a year ago, can you blame them for not being so? Things haven’t quite returned to normal, but they are a lot closer now than they were then.”

Source: Bespoke, January 12, 2010.

CNBC: Kass’ correction
“The man who called the bottom now calls for a correction, with Douglas Kass of Seabreeze Partners.”

Source: CNBC, January 13, 2010.

David Fuller (Fullermoney): Treasuries above 5% could harm equities
“The main risk to economic recovery will surface when long-dated interest rates back up, presumably as quantitative easing (QE) is phased out. However, every seasoned financial observer, including those at the Fed and US Treasury, will be aware of this risk. Therefore, will they blur the date at which QE supposedly ends? Will they extend it? Might they agree to no more than a partial phase-out, retaining the freedom to squeeze ‘bond vigilantes’ if rates rise too quickly?

“My guess in response to these questions is, yes, one way or another. After all, the Fed has always been active in government bond markets and it will not want to leave yields looking exposed, like ducks in a shooting gallery. Whether the Fed and US Treasury can prevent rates from rising too quickly, possibly later this year, remains to be seen.

“I will take my cue from the chart action, with particular interest in how higher yields affect stock markets. For me, a sustained move above 4% by US 10-year Treasuries will be equivalent to a yellow caution light for equity investors. Above 5%, stock markets could be in dangerous territory, as we saw in the last cycle.

“However every forecast for a precise repetition of a previous cycle assumes that all other factors remain equal, which of course, is never the case. Therefore stock markets, which remain mostly in consistent uptrends today, could weaken sooner or later relative to long-term rates.

“Consequently I will continue to view US Treasury 10-year yields as a lead indicator. Currently, they are still in a ’sweet spot’. However when they move higher I will monitor stock market indices, particularly for Wall Street, even more closely for signs of fatigue in the form of inconsistencies, not least a loss of upward momentum.

“Lastly, an eventual break in 10-year yields to the downside below 3%, which I do not expect, could also be bearish for equities by signalling weaker GDP growth and rising deflationary pressures.”

Source: David Fuller, Fullermoney, January 11, 2010.

Bespoke: The smaller the better
“The average S&P 500 stock is up 3.50% so far in 2010. We broke the index into 10 deciles (10 groups of 50 stocks) based on market cap and calculated the average YTD percent change of the stocks in each decile to see how a company’s size has impacted performance so far this year. As shown below, the 50 biggest stocks in the S&P 500 are up an average of 2.4% year to date. The 50 smallest stock in the index are up an average of 6.5%. In general, the bigger the stock, the smaller the gain so far in 2010.”

Source: Bespoke, January 14, 2010.

MoneyNews: Goldman - big banks, Latin America are best buys for 2010
“A recent report from Goldman Sachs’ shows the investment bank forecasting that big banks with consumer exposure and commodities will be among the best bets for 2010.

“Goldman says that corporate profits will grow, especially in tech, business travel, office supplies and advertising - and that excess corporate cash will drive more mergers and acquisitions, bigger dividends and more stock buybacks.

“Tech growth will be built on the move towards cloud computing and a corporate level refresh of personal computers and servers.

“E-commerce will also continue to grow, taking advantage of its strength to draw business away from traditional competitors.

“Commodity prices will rise as demand outpaces supply, and inflation on key agricultural and protein commodities will boost the agricultural and supermarket industries, but damage internationally underexposed restaurant companies because increased foreign demand won’t benefit their bottom lines.

“Market-oriented Latin American nations and China are best positioned for what Goldman describes as the “post-crisis economy” and will outpace slow US recovery.

“As a supplier of natural resources, Latin America is becoming the go-to destination for new commodities consuming behemoths, particularly China.

“Obamacare, Goldman claims, is less important than the fundamentals for health care, where financial engineering increasingly generates med-tech earnings per share.

“Brazil’s economy will not need additional stimulus in 2010, although some measures introduced in 2009 could become permanent.”

Source: Julie Crawshaw, MoneyNews, January 12, 2010.

BCA Research: Interest rate differentials are likely to weigh against the US dollar
“The upturn in the global economy, a renewed widening of the US current account deficit and a Federal Reserve that keeps interest rates near zero will spell trouble for the US basic balance and keep the dollar under downward pressure.

“During 2002-2008, there was a marked divergence between the widening US current account deficit and falling real yields, which weighed on the dollar. The current account represents the US’s need for foreign capital. Meanwhile, real interest rates help to attract the required inflows. As these two variables moved in opposite directions, i.e. the current account widened and real rates fell, the dollar suffered as a consequence. Then, the Great Recession narrowed the US current account deficit and the deflationary pressures lifted real interest rates. This combination helped support the dollar in late 2008 and into early 2009. But with the deflationary impulse receding, real interest rates are falling again. As the US current account begins to widen and diverge with real interest rates, the dollar will face renewed downward pressure.

“Bottom line: Low real interest rates and a renewed cyclical widening of the US current account deficit should push the dollar lower in the coming months. This dynamic will be in place at least until the Fed begins to normalize interest rates, i.e. for most of 2010.”

Source: BCA Research, January 12, 2010.

CNBC: Implications of a strengthening yuan
“Beijing will probably appreciate the yuan by about 3-3.5% in 2010, predicts Tony Raza, director of asset allocation at UOB Asset Management. He outlines the implications this yuan appreciation will bring.”

Source: CNBC, January 11, 2010.

Bespoke: Commodity prices and the consumer
“Since the start of 2010, the rally in commodities has been a boon for companies and investors in the Energy and Materials sectors. Consumers, on the other hand, are increasingly feeling the impact on their wallets. In the chart below we have calculated the cumulative daily price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) since the beginning of 2008. We then multiplied the changes by the annual per capita consumption of each item. When the line is in positive territory, commodity prices are acting as a tax on consumers, while readings in negative territory are indicative of a windfall for consumers. Although this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers’ wallets over the last 24 months.

“As shown in the chart, the rally in commodities in 2008 was especially painful on consumers. During the Summer of 2008, commodity prices were acting as a $4.77 per capita daily tax on US consumers versus the start of the year. When the credit crisis escalated, commodities tanked, thus erasing the entire tax (and then some) on consumers. By the time commodity prices bottomed in early 2009, US consumers were now benefitting from nearly a $5 daily windfall due to the decline. Since commodity prices bottomed early last year, however, that windfall has been slowly dwindling away. While US consumers are still benefitting from lower commodity prices compared to the start of 2008, the windfall is less than 30% of what it was nearly a year ago.”

Source: Bespoke, January 11, 2010.

MoneyNews: Pickens - forget the wind, go with natural gas
“Famed Texas billionaire T. Boone Pickens is dramatically changing his position on alternative energy.

“Pickens spent most of the last two years, and $62 million of his oil investing fortune, on an advertising campaign in which he sought to persuade Americans to adopt his plan for wind-based energy.

“The scheme called for a massive expansion of wind energy to displace natural gas, leaving natural gas for use in vehicles, thus displacing foreign oil.

“‘No American with a television set could escape Mr. Pickens’s argument last year. But somehow, a mass conversion to natural gas cars failed to ensue,’ a recent report in The New York Times stated.

“But, now Pickens is changing his pitch.

“Pickens said Wednesday he has cut in half an order for General Electric Co. wind turbines and plans to use the rest in other areas instead of Texas, where he once planned a massive wind farm, the Associated Press reported.

“Pickens, who heads the hedge fund BP Capital Management LP in Dallas, purchased 333 turbines from GE, which was about half his initial order of about 687 turbines.

“Pickens scrapped his plan for a 1,000-megawatt wind farm in West Texas last summer because of technical problems in getting power from the site to transmission facilities.

“Pickens now is spending millions more on a new campaign, with the first advertisements scheduled to be broadcast Thursday on cable stations across the country.

“His aides reckon that a stronger message, concentrating on the national security aspects of energy independence, will be quite effective after the thwarted Christmas Day airliner bombing and other, recent terrorist actions in the United States.

“Natural gas is said to be the cleanest fossil fuel, emitting fewer greenhouse gases than either coal or oil.

“Many energy experts say they think it is underutilized as a fuel, especially since new technologies recently unlocked huge reserves in shale gas fields across the country.

“Some, however, say putting in place the infrastructure for natural gas vehicles would be too costly, and battery-powered electric cars and hybrids are a much better alternative.”

Source: Gene Koprowski, MoneyNews, January 14, 2010.

Financial Times: China’s exports rise as economy picks up
“China’s exports rose in December for the first time in 14 months, providing fresh evidence of recovery in the global economy but also placing renewed pressure on Beijing to appreciate its currency.

“Following strong export figures last month from South Korea and Taiwan, China said on Sunday that its exports climbed 17.7 per cent, well ahead of the modest increase that economists had predicted. These numbers put China on track to overtake Germany as the world’s largest exporter.

“Chinese imports surged by 55.9 per cent in December, the latest indication of buoyant domestic demand in China, although the figures are also likely to increase concerns about potential inflationary pressures.

“Exports to China’s two biggest markets both rebounded last month, with sales to the US increasing 15.9 per cent and to the European Union 10.2 per cent.

“However, the year-on-year comparisons were inflated by the low base of the previous year’s figures. Economists said some of the improvement was due to restocking by companies that had run down inventories.

“‘While December’s export figures are encouraging … a recovery to pre-crisis levels appears some time away,” said Jing Ulrich, head of China equities and commodities for JPMorgan.

“Andy Rothman, CLSA’s chief China economist, said a resumption of export growth was necessary before Beijing restarted appreciation of the renminbi, suspended over a year ago in the crisis. He said Beijing was unlikely to act on one month’s figures alone. But if the export recovery continued, China’s leaders would have the political cover to resume renminbi appreciation by mid-year, with a possible rise of 3 per cent for 2010.

“‘Beijing has been waiting for three things to happen before resuming gradual appreciation: strong economic recovery in China; stability in the US and European economies; and several months of [positive] Chinese export growth, which is important to sell appreciation to the domestic audience.’

Source: Patti Waldmeir, Financial Times, January 10, 2010.

Financial Times: China raises bank reserve requirements
“China has increased the amount banks must set aside as reserves in the clearest sign yet that the central bank is trying to tighten monetary conditions amid mounting concerns of overheating and inflation as a result of the credit boom.

“The People’s Bank of China also raised interest rates modestly in the inter-bank market on Tuesday for the second time in less than a week, as it engages with commercial banks in a tug-of-war over rapid lending.

“Stock markets and commodities fell in Asia on Wednesday after the surprise decision, sparking concerns that the move could slow China’s purchases of natural resources and other imported goods from around the region.

“Economists said that Tuesday’s announcements were a warning to the banks against lending too aggressively following reports in state media that loans in the first week of 2010 reached Rmb600bn ($88bn), not far short of the monthly average last year.

“‘This is a warning across the bows of the commercial banks,’ said Tom Orlik, of Stone & McCarthy in Beijing. ‘The central bank said that the high level of bank lending needs to come to an end but that the commercial banks do not seem to be taking it seriously.’

“Reserve requirements were raised by 0.5 percentage points, while rates on one-year paper increased by 0.08 per cent and on three-month paper by 0.04 per cent.

“The moves underline the increasingly delicate task the PBoC is facing in managing the consequences of China’s credit binge, when lending more than doubled from Rmb4200bn in 2008 to above Rmb9000bn last year.”

Source: Geoff Dyer, Financial Times, January 12, 2010.

The Wall Street Journal: China’s hot money headache
“While Beijing battles its coldest winter in half a century, Chinese officials are battling a major hot money problem. Heard on the Street’s Andrew Peaple ponders the government’s efforts to restrain the flow of funds into China.”

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

Bloomberg: China’s property prices rise most in 18 months
“Rong Ren, chief executive officer of Harvest Capital Partners, talks with Bloomberg’s Bernard Lo about the implications of China’s increase in the proportion of deposits banks must set aside as reserves. Ren, speaking in Hong Kong, also discusses his strategy for investing in China’s retail malls and development projects.”

Click here for the full article.

Source: Bloomberg, January 14, 2010.

Financial Times: Greece unveils 3-year plan to curb deficit
“Greece on Thursday announced an ambitious three-year plan to curb its runaway budget deficit but failed to convince sceptical markets its targets for growth and fiscal reform were feasible.

“The stability and growth plan calls for the budget deficit to be cut from 12.7 per cent to 2.8 per cent of gross domestic product by the end of 2012.

“The economy is projected to shrink by 0.3 per cent this year before rebounding with growth of 1.5 per cent in 2011 and 1.9 per cent in 2012.

“The deficit would be reduced this year by 4 percentage points of GDP, with deep cuts made in hospital and defence spending where waste and corruption are widespread, according to officials. Revenue increases would be driven by higher excise taxes on tobacco and alcohol, an overhaul of the tax system and a crackdown on tax evasion.

“‘This plan can be achieved, we’re confident of that,’ said George Papandreou, the prime minister, after an outline was presented at a televised cabinet meeting.

“The plan is seen as Greece’s passport to borrowing almost €54bn ($78bn) on international markets to fund a swollen public debt expected to rise this year from 113 per cent to more than 120 per cent of GDP.

“But markets reacted negatively almost as soon as George Papaconstantinou, finance minister, finished his presentation at a cabinet meeting broadcast live on Greek television under the government’s policy of promoting transparency.

“The cost to insure Greek debt rose to fresh heights as investors continued to worry about the parlous state of the country’s finances. The Greek bond markets also sold off, dipping to 12-month lows.

“‘We think these forecasts are too optimistic … we doubt the government will meet its fiscal targets - the recent renewed surge in government bond yields may therefore have further to go’, said Ben May of Capital Economics in note published on Thursday.

“‘The two targets - growth and public deficit - are inconsistent and at least one won’t be achieved,’ BNP Paribas said in a note.”

Source: Kerin Hope and David Oakley, Financial Times, January 14, 2010.

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Joe Stiglitz: Bigger is Better

Monday, December 1st, 2008

Joe Stiglitz writes in the New York Times:

Joseph Eugene Stiglitz (born February 9, 1943) is an American economist and a professor at Columbia University. He was chairman of the Council of Economic Advisers from 1995 to 1997 and was awarded the Nobel prize in economics in 2001, and is the author, with Linda J. Bilmes, of “The Three Trillion Dollar War.” He is also the former Senior Vice President and Chief Economist of the World Bank.

A $1 Trillion Answer, by Joseph E. Stiglitz, Commentary, NY Times: What President-elect Barack Obama will need to do is horribly complicated but also very clear.

First, he must stop the economy from going deeper into recession. Then he needs to bring about a robust recovery, preferably in ways that support the long-term needs of the United States: by repairing our neglected public works, invigorating our technological leadership, making our society greener, fixing our health care problems, healing our social and economic divide, and restoring our social compact.

It will not be easy. President Bush’s legacy of debt and the opposition of those who benefit from the status quo present major obstacles. There is an emerging consensus among economists that a big — very big — stimulus is needed, at least 0 billion to trillion over two years. Mr.

Obama’s announced goal of 2.5 million new jobs by 2011 is too modest. In the next two years, almost four million workers will enter the labor force — or would if there were jobs. Combined with the loss of employment this year, that means we should be striving to create more than five million jobs.

A large stimulus package can always be trimmed later if it’s not needed…

Faint measures would be foolhardy. A weaker economy will suffer lower tax revenues, more foreclosures and more bankruptcies. Once a firm is bankrupt, you can’t unbankrupt it by providing a stronger stimulus later on.

… But what you do with the money counts… The money needs to be spent carefully to ensure that every dollar provides as much stimulus now as possible while also contributing to long-term growth.

… Americans are rightly afraid of losing their jobs, and with that, their

health insurance and their homes. We need to provide health insurance to the unemployed and to the uninsured, and we need to do it quickly, possibly through an expanded and more efficient Medicare.

We also need to stem the flood of foreclosures. If we help poorer homeowners, banks will benefit, too… And we need to change the bankruptcy laws to help homeowners.

… Deregulation and the failure to adopt regulations to cover risky new financial products have contributed much to the current mess. So far, we have merely given banks more money to spend recklessly. We have done little to change the banks’ incentives or constraints.

… If the asset program is not changed and if regulations are not imposed to change the behavior of those who got us into this situation — who enriched themselves at the expense of their shareholders — then confidence will not return. Those who got us into this crisis cannot have undue influence in shaping the response.

America has great assets, including a productive labor force and the best universities in the world. None of these assets so far has been impaired by Wall Street’s follies. These strengths, coupled with a sensible and fair economic stimulus package and judicious regulation, will help our economy recover.

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

Sunday, November 30th, 2008

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

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

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

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

Source: Daryl Cagle

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Yahoo Finance, November 28, 2008.

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

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

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

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

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

Source: Wall Street Journal Online, November 28, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That’s the way it looks from Cape Town.

Hat tip: Mish (via Live Leak)

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

Source: Big Think, November 2008.

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

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

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

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

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

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

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

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

“Following are excerpts from the interview:

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

Click here for the full article.

Source: Spiegel Online, November 24, 2008.

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

Click here for the article.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TOTAL: $3.92 trillion

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

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

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

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

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

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

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

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

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

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

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

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

Source: Breitbart, November 22, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: ABC News, November 22, 2008.

Fox Business: Wilbur Ross on the next Treasury Secretary

Source: Fox Business, November 21, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Wachovia, November 24, 2008.

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

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

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

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

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

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

Source: Breitbart, November 25, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: CNBC, November 20, 2008.

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

Source: Bespoke, November 25, 2008.

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

Source: Bespoke, November 26, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

“I will invest accordingly.”

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

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

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

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

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

Source: Bespoke, November 25, 2008.

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

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

 

Source: Bespoke, November 23, 2008.

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

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

Source: Naked Capitalism, November 23, 2008.

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

Source: Bloomberg, November 21, 2008.

Bloomberg: Marc Faber says gold is most precious asset

Source: Bloomberg, November 25, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: BBC News, November 28, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Breitbart, November 27, 2008.

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

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

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

Source: BBC News, November 23, 2008.

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