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

Monday, March 15th, 2010

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

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

Source: StockCharts.com

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

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

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

Source: StockCharts.com

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

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

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

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

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

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

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

Emerginvest world markets heat map

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

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

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

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

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

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

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

Source: Bespoke, March 9, 2010.

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

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

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

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

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

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

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

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

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

Source: StockCharts.com

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

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

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

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

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

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

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

Source: Moody’s Economy.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Week’s economic reports

Source: Yahoo Finance, March 12, 2010.

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

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

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

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

Wednesday, March 17
• PPI

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Steel

Natural gas

Tech (especially semiconductors)

Software/Information services

Housing (entry level)

Tourism

Staffing firms

Chemical manufacturing

Rail transports

Airlines (fares stabilizing, leisure and business demand improving)

Heavy machinery (especially mining and agriculture equipment)

Plastic products

Health care services

Negative mentions

Commercial real estate

Banking

Commercial aircraft

Automotive

Coal

Petrochemicals”

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

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

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

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

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

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

Source: MoneyNews, March 8, 2010.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, March 11, 2010.

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

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

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

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

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

Source: MoneyNews, March 9, 2010.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Wall Street Journal: Cracking down on swaps

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click here for the article.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: MoneyNews, March 9, 2010.

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

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

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

“But we are still living with its consequences.

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, March 11, 2010.

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

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

Source: Bespoke, March 11, 2010.

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

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

Source: Bespoke, March 9, 2010.

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

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

Source: Bespoke, March 10, 2010.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: MoneyNews, March 11, 2010.

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

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

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

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

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

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

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

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

Source: Bespoke, March 9, 2010.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: CNBC, March 11, 2010.

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

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

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

Source: Bloomberg, March 10, 2010.

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

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

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

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

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

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

Tags: Asset Classes, Bipartisan Bill, Cboe, Chairman Christopher, Christopher Dodd, Corporate Bonds, Credit Crisis, Degree Of Risk, Dick Fuld, Doonesbury, Government Bonds, High Yield Bonds, Regulatory Reform Bill, Risk Taking, Senate Banking Committee, Set Of Numbers, Sovereign Debt, Stock Market Indices, Us Treasury, Vix Index
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Chris Wood: The U.S. Will be the Endgame

Monday, March 8th, 2010

In this video interview, Chris Wood, CLSA’s Asia strategist and author of the top “Greed & Fear” newsletter, shares his views on global markets with CNBC.

Click here or the image of the report to read Wood’s full report that precedes his appearance on CNBC below.

Wood said: “My view is that there is an inevitable endgame as a result of all this massive spending of taxpayer money in the West and Japan to bail out bankrupt banking systems, so in my view unfortunately the end game will be systemic government debt crisis in the western world.

“It will probably happen in Europe and will climax in the US, and I am expecting on a five year view the collapse of the US Dollar paper standard … The key reason why that is the endgame is that this credit crisis we saw in the west in 2008 and 2009 has simply been deferred, because 95% of the so-called government policy solutions to deal with this crisis have simply been to extend government guarantees.

“So the problem has been transferred from the private sector to the public sector. It is just a matter of time before investors revolt against these sovereign guarantees … The crisis is going to happen first in Europe. The US will be the endgame.” (Hat tip for transcript: Zero Hedge.)

Source: CNBC, March 1, 2010.

Tags: Banking Systems, Clsa, Cnbc, Collapse, Credit Crisis, Debt Crisis, Emerging Markets, End Game, Endgame, Global Markets, Government Debt, Government Guarantees, Government Policy, Greed, Hat Tip, Matter Of Time, Policy Solutions, Revolt, Strategist, Taxpayer Money, Video Interview
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David Darst - Robert Kessler - Interview Transcript (Feb. 19)

Sunday, February 28th, 2010

Connie Mack recently interviewed David Darst, chief investment strategist for Morgan Stanley Smith Barney, and Robert Kessler, head of Kessler Investment Advisors, which runs portfolios for institutional investors and governments around the world. This is a MUST view/read interview. The complete transcript follows.

CM: David Darst is known as a master of the art of asset allocation. He is the chief investment strategist for Morgan Stanley Smith Barney. David is also a teacher and prolific author, and his latest book is The Little Book that Saves Your Assets . And it’s great to have you both here. Thanks so much for joining us on WealthTrack.
Robert Kessler, U.S. Treasuries, you make your living in investing and managing portfolios of U.S. Treasuries, and as long as I’ve known you, they have been denigrated by most of the competition except in this most recent period when everyone rushed to Treasuries, but now the naysayers are back again. So why are they wrong again about Treasuries?

ROBERT KESSLER: It’s not a question of being wrong or right. A Treasury is really a benchmark to almost every other asset class. So as a benchmark, you can’t be wrong or right about a benchmark. It’s just simply matter of spread between what other asset classes are selling at. So in the Treasury market, we’re lucky enough to be able to have a choice of overnight Treasuries, which is cash, or longer-term Treasuries. And longer term Treasuries are really based on whether you believe inflation is going to be an issue or whether disinflation will be an issue.
So right now we’re in what we call a credit crisis. We’re in a credit recession. And during credit periods of time, you don’t want to own risk assets, and if you don’t want to own risk assets, you want to go to something that has very little risk, which is a Treasury. Now the question becomes: do you own Treasuries as bills overnight or do you really believe that rates are going to come down because there’s very little inflation in the world? So since we believe rates will come down because there is very little inflation, then Treasuries become very attractive.

CONSUELO MACK: All right. So let me stop you there and we’re going to follow up on that in a couple of minutes. David Darst, as a global strategist first and as an asset allocator second, how do you view this?

DAVID DARST: It’s a great point because really, inflation is a monetary phenomenon. We have a big war going on between this monetary phenomenon called inflation potential down the road.

CONSUELO MACK: Right.

DAVID DARST: And deflation is a credit phenomenon. And right now credit is contracting. The latest month figure for December showed it contracted, consumer credit, Consuelo, by $2.5 billion. That’s 11 months in a row the government has been keeping these numbers since 1943. It’s never contracted for 11 months in a row. So right now we have this epic, titanic struggle between the deflation phenomenon, credit contracting and the inflation phenomenon, which is the government attempting to pump up the money supply, add liquidity to the system, which people, makes them worry about inflation down the road. So we feel that maybe Treasury bonds, Treasury securities, you can have them in the portfolio right now, you need to have a little offense as well as a little defense. Treasury securities are a defensive investment in our opinion. Last two years ago they were up 20%. They were up 20% in 2008 when the stock market went down 37%. Last year, ten-year Treasuries lost 9.9% on a total return basis.
I’m very receptive. For a person basically to say stay away from Treasuries means they think interest rates are going to rise. That means the consumer is going to come back. That means that credit is going to stop contracting and we’re going to worry about inflation. But over the next 12 months, I’m not so sure those things are going to be an issue, Consuelo.

CONSUELO MACK: So short term at any rate, next 12 months, Treasuries are probably a good place to be defensive.

DAVID DARST: I think you can have some in the portfolio. We are underweight. We are underweight. Normal is 16%. We’re 7%. That’s our largest single underweight. We are very underweight because we’re worried about the health of sovereign credit finance about the condition of the U.S., the U.K., the European community and so forth, the condition of these finances. So much money has been issued.

CONSUELO MACK: Okay. How do you answer that argument because, in fact, as you know, that most people who are looking at U.S. Treasuries are saying, we’ve got a record deficit; we have to finance that record deficit. If we are basically having to sell a lot of Treasury bonds, that is going to mean that the value of the dollar of our securities is going to go down. And then, in fact, that means that it’s going to be inflationary for the U.S. So how do you respond to that argument? Why aren’t you worried about the size of the deficit and what we have to finance being inflationary?

ROBERT KESSLER: Let me answer two questions. The first question is this concept of the deficit. There is this constant talk of deficits lead to inflation. We don’t really have any indication that that’s true. In the Depression in the United States, we had huge deficits, of course, and we had no inflation. We had deflation. Japan has gone through 20 years now of deficits that are far, far higher than ours, and they have deflation. So we don’t know anything about the inflation side of it. What’s really important is that if people can’t raise prices and there’s an awful lot of excess capacity in the world and wages are going down and unemployment keeps staying kind of sticky at these very, very high levels, it’s very difficult to have inflation.
And so there is no inflation. That’s not our issue. The real issue is– television was interesting today because not only are we dealing with Greece, Greece is very interesting because we’re bailing out Greece and bailing out perhaps Portugal next, but we’re probably going to bail out New Jersey after that. Because New Jersey just announced today that they’re running into a huge deficit, too.

CONSUELO MACK: As are a lot of states.

ROBERT KESSLER: As are a lot of states. So we have states having problems, lowering wages, firing people; very, very difficult to raise prices and consequently, very difficult to have inflation.

CONSUELO MACK: All right. So you think we’re deflationary. You think the credit contraction you think which is extraordinary is actually, we’re in the beginning stages of it. You’re not thinking a year down the road, you’re thinking for inflation, you’re thinking, what three, four, five…

ROBERT KESSLER: It sounds like I’m being very pessimistic.

CONSUELO MACK: You’re a bond person.

ROBERT KESSLER: No, no but I don’t want to be pessimistic. We just got back from the Middle East. I have to tell you, not only is everything for rent in the Middle East, not only are buildings completely unoccupied, but banks, since we deal with banks, banks right now are doing one trade. They’re doing what we call a carry trade, meaning they’re buying their sovereign debt, either U.S. sovereign debt or their sovereign debt short term and they’re carrying it at very low cost.

CONSUELO MACK: Because they can borrow it at very low cost.

ROBERT KESSLER: Because they can borrow at very low cost, as is JP Morgan in the United States and as is Morgan Stanley and everyone else. So the fact of the matter is when people say we’re in a bear market in Treasuries, it’s ridiculous. Last year, even though David is correct, the ten-year Treasury was down 9%. The fact of the matter is we made more money last year in two-year Treasuries than any year I can think of because everyone was carrying a two-year Treasury at zero and getting a point. Now, in bank talk…

CONSUELO MACK: So they were borrowing at lower than 2% and then they were buying the two years… So they made?

ROBERT KESSLER: They do it at a very high leverage level because they don’t need to do very much with a capital question. So the fact of the matter is you have this bull market going on and yet everyone is saying, anything but Treasuries. Tell that to JP Morgan.

CONSUELO MACK: Right. So David, not to completely focus on Treasuries, but as far as asset allocation, you said that your biggest underweight is U.S. Treasuries right now.

DAVID DARST: It’s sovereign credit, Consuelo.

CONSUELO MACK: Across the board.

DAVID DARST: It would include U.K., it would include Canada, it would include Europe.

CONSUELO MACK: And the reason for that is what?

DAVID DARST: Well, the sovereign… we believe there’s so much issuance of sovereign debt; we do believe that the balance sheet of the Fed has ballooned from $900 billion to $2.2 trillion. We do see the deficits as being quite large on out into the future. And we do believe that these trillion dollar and trillion and a half dollar deficits are going to have to be bought and to entice people, which will cause higher interest rates. So that’s why Morgan Stanley’s economists have a big out-of-consensus call, which Robert is very familiar with. And by the way, the word Robert means bright fame. His name means bright fame. Now Robert is familiar with this- Morgan Stanley is expecting 5.5%. And every conversation I get into, I have to argue we think that inflation fears will be higher towards the end of 2011. We see all this slack. But there’s concern. Supply, which you mentioned, that is the excess issuance by the Treasury, and also the Fed, and I know there’s a lot of disagreement over this, we expect them to begin their exit strategy later this year, second half of this year.

CONSUELO MACK: And exit strategy could mean raising the federal funds rate?

DAVID DARST: Higher short-term interest rates, and that means we think higher long-term interest rates. We take a little bit of respectful issue with Robert Kessler’s brilliance over here. But we believe the essence of our underweight versus sovereign debt is because of enormous supply and people’s concern. Inflation is the biggest… The biggest inflations of all times have all come from fighting deflation. In the 1946 to 1949 period in Germany, in communist China, in the 1920s and 1923 period of Weimar Germany, the biggest inflations have all come from fighting deflation.

CONSUELO MACK: So what’s interesting is the common ground is here. Right now we are fighting deflation, which is actually positive at least for the next 12 months, possibly for…

DAVID DARST: Steroids, financial steroids. Mark McGuire has admitted to it and the Fed is taking financial steroids.

ROBERT KESSLER: Let me be a little contrary for a second.

CONSUELO MACK: For a second?

ROBERT KESSLER: All right, for 30 seconds. The fact of the matter is we talk about this exit strategy all the time about the Fed. I’m into the entrance strategy. I am trying to figure out how we’re going to help out 8.5 million people who don’t have jobs. It’s probably closer to 17 million because that’s really a more correct figure.

CONSUELO MACK: The ones who have been discouraged and not looking for jobs anymore.

ROBERT KESSLER: Why we’re talking about exit strategies is very, very disconcerting to me.

CONSUELO MACK: Because the Fed is actually. Bernanke is talking about it, right.

ROBERT KESSLER: What we’re talking about again is Wall Street and the banking industry. When you get to, excuse me, the middle of the United States, at least where I live.

DAVID DARST: Right, you live in Denver.

ROBERT KESSLER: In Denver. People don’t have a clue to what JP Morgan is doing or Morgan Stanley is doing. What they’re looking for is their job, and when someone says, excuse me, I think it will be a good idea to raise interest rates, they can’t even borrow money; not only can’t they borrow money, no one will lend them any money. So they’re really…

CONSUELO MACK: Like the credit contraction you were talking about.

ROBERT KESSLER: So the issue is why are we talking about exiting the strategy?

DAVID DARST: The reason we’re talking about exit strategy is psychological. It’s the use of Shakespearean language and words to try to divert people from worrying about the debasement of the currency, internally and externally. And that’s why he’s saying it. And I agree with you. I don’t see rates jacking way up very quickly. This is going to be gradual, but we went from $900 billion Fed balance sheet to $2.2 trillion. And it is very, very important.
Sarkozy, during the last four weeks– opening speech at the World Economic Forum said that in 2011 France is going to be head of the G7 and the G20 and he says his number-one agenda item is to create a new world monetary system, a new system without the United States dollar as the primary reserve currency. The reason they talk about exit strategy, Robert, is to keep people from going to this new currency.

CONSUELO MACK: So how concerned are you about the fact that the dollar could be replaced as the reserve currency?

ROBERT KESSLER: First of all, for a second I’m going to represent Main Street as opposed to Wall Street, and Main Street doesn’t have a clue to what we’re talking about.

CONSUELO MACK: Right.

ROBERT KESSLER: Believe me. This all gets very, very complicated to talk about.

CONSUELO MACK: And our viewers are investors.

ROBERT KESSLER: They’re investors, so my answer to all of this is the United States will continue to be the reserve currency. There’s nothing wrong with the dollar. Everyone will put money into the dollar, as we’re doing today. Today is a very, very good example. We had a 30-year auction today. What was exciting about it, even though it didn’t go over very big as an auction, didn’t go well, but what was exciting about it is 23% of the auction was bought by Americans. What we call direct investors.

CONSUELO MACK: We’ve seen a trend here where the direct investors, Americans are buying more and more of their Treasury securities.

ROBERT KESSLER: And so when you look at the American dollar, as you can look at the Japanese yen- the reason the yen has stayed strong for so long is because the Japanese support their own country.

DAVID DARST: Internal savings, financing.

ROBERT KESSLER: And in the United States, we are beginning to do the same thing. And so even though we have a deficit, if we’re willing to pay for it, then frankly there’s nothing so terrible about the deficit.

DAVID DARST: Your legion of viewers in the aggregate have 25% stocks, 25% their home and 7% bonds. That’s why, as you’ve pointed out on the show, Consuelo, over the nine months from March through December, they, we all put $315 billion net into bond funds and ETFs, $35 billion into non-U.S. stocks and minus $24 billion into U.S. stocks. So there has been this trend. 1982, the average baby boomer, the median age was 25 years old. Today it’s the reverse of the digits- 52 years old. People have been killed by the dot com meltdown, the housing price meltdown and the financial stock meltdown and that want to set aside some money. So your point is an excellent point, Robert. They want to put this money and maybe some of the buyers will be U.S. households.

ROBERT KESSLER: Let me add one more statistic.

CONSUELO MACK: Very quickly because we have to get to the One Investment.

ROBERT KESSLER: The statistic being, that if Americans begin to invest in Treasuries the way they have in the past, then there would be no deficit. There would be simply no deficit.

DAVID DARST: We’re sitting on $8 trillion of cash right now. And they need only $1.5 trillion, but we need higher rates, Robert, to entice us to take it out of the cookie jar and the mattress and put it in Treasuries.

CONSUELO MACK: So one quick question for you, David Darst, and this is put your asset allocation hat on again. What are you overweighting, in a minute or less?

DAVID DARST: We’re overweighting corporate credit to summarize quickly. That would be high yield bonds, and high grade bonds.

CONSUELO MACK: Because of the yield.

DAVID DARST: The yield is more attractive. We are overweight in real estate investment trust, which have a nice yield to them.

CONSUELO MACK: Right.

DAVID DARST: We’re overweight in emerging market stocks and Canadian stocks, Australian stocks, and in small cap stocks. They have basically taken a little gas in the first part of this year. We think that’s a pause, a healthy, needed correction that we will believe as the economies grow around the world- we just jacked up our China forecast to above 10% for this year- and we think probably world growth will surprise to the up side. Maybe that’s why yields will surprise to the up side, too. Interest rates.

CONSUELO MACK: Very interesting. And so let’s go to the One Investment for our investor viewers out there, and Robert Kessler, guess what you’re recommending.

ROBERT KESSLER: A quick comment.

CONSUELO MACK: Yes.

ROBERT KESSLER: A quick comment. I am so weary of people who wear white suits and recommend emerging markets. Now, David’s not.

DAVID DARST: White suits?

ROBERT KESSLER: White suits.

DAVID DARST: Tom Wolf.

ROBERT KESSLER: Right.

CONSUELO MACK: I don’t understand that.

ROBERT KESSLER: Consequently, what I’m saying is I think you want to be in everything that is risk-averse. And therefore I would suggest that a Treasury, whether it’s overnight money or it’s ten or a 30-year Treasury, I think the ten year will probably outperform everything this year, and that’s a way-out kind of a call, but I do think that rates are going to substantially come down, and they do usually the second or third year after a recession, and since we’re only a year into this, we have a long ways to go, and I think you’ll see the ten-year Treasury probably back at 2% range or lower. And that’s a big move.

CONSUELO MACK: Wow. And David Darst, you’re thinking defensive action, too.

DAVID DARST: I am, Consuelo. Procter & Gamble (PG), which I’ve recommended on the show before- they have 23 products with over $1 billion in annual sales, and they have 20 products in addition with over $500 million in annual sales. They just changed leaders. Robert McDonald takes over from A.G. Lafley. McDonald has been with them for 29 years. He sold Folgers Coffee. He’s selling off the pharma area to focus on personal care, on household products and human well-being, okay. We see three billion people every day out of six billion in the world that are touched by a Procter & Gamble product.

CONSUELO MACK: Wow.

DAVID DARST: He wants it to go up to four billion. Only 30% of their revenues are outside the U.S. and Europe. Stock sales are 14 times last year’s earnings. It yields 2.9%. They’ve not been buying stocks in a year and a half. They’ve just begun to buy stocks, and the last thing is it was only up 1% last year with its lag to market. It went down less than the market. It went down 14 in ‘08 when it went 37 down, up 1% last year. We think this is a company that’s been a defensive stock about to go on the offense.

CONSUELO MACK: So we have a diversified portfolio right here between the two of you. Robert Kessler from Kessler Investment Advisors, thank you so much for coming in from Denver and from New York, it’s great to have you regardless, David Darst from Morgan Stanley Smith Barney, thanks so much for joining us.
At the conclusion of every WealthTrack, we tried to leave you with one action to take to build and protect your wealth over the long-term, as well. This week we’re revisiting a retirement income theme that we and many of our guests have emphasized over the years. This week’s Action Point is: lock in some retirement income for life.
How do you do that? The Obama administration recently came out in support of annuities as a tool to deliver a form of “guaranteed lifetime income.” Specifically, President Obama has called for a change in federal rules to allow adding annuities to 401(k) retirement plans.
Until that becomes a reality, one way to assure a stable flow of income that you can count on for life is to buy the simplest, plain vanilla version, an immediate fixed annuity, also known as a single premium immediate annuity. You turn over a one-time payment to an insurance company, and it in turn will provide you with a predictable and guaranteed monthly income as long as you live. To make sure it’s there, that it is as long as you live, only work with life insurance companies that have the highest credit ratings, and don’t put all your eggs in one basket.
The financial advisors we have talked to recommend investing only a portion, no more than one-third of your retirement assets, in annuity products, and also recommend consider staggering the amount you put in over a number of years, so you can adjust your income stream as you need it. To get an idea of what kind of monthly income a given amount will return, go to immediateannuities.com for a quote.
Now what troubles many people about these immediate fixed annuities is that you might die before you have recovered your investment, your heirs don’t get any benefit, and inflation can eat away at the value of the income stream. So the insurance industry, in its infinite wisdom, has responded with variations on immediate annuities that address these concerns. The tradeoff is the adjustments reduce the monthly income. Annuities are not right for everyone, but as a vehicle to create your own guaranteed pension plan for life, an immediate fixed annuity is definitely worth considering.
That concludes this edition of WealthTrack. Join us for one of our Great Investors series next week. I’ll sit down with Steven Romick, portfolio manager of the FPA Crescent Fund, a finalist for Morningstar’s Domestic Equity Fund Manager of the Decade award. In the meantime, to watch this program again, please go to our website, wealthtrack.com. Starting Monday, you can see it as streaming video or a podcast. Thank you for visiting with us. And make the week ahead a profitable and a productive one.

Source: Consuelo Mack, WealthTrack, February 19, 2010
http://www.wealthtrack.com/transcript_02-19-2010.php

Tags: Asset Allocation, asset class, Asset Classes, Bonds, Chief Investment Strategist, Connie Mack, Credit Crisis, David Darst, Disinflation, Institutional Investors, Interview Transcript, Kessler Investment Advisors, Morgan Stanley, Naysayers, Prolific Author, Recession, Robert Kessler, Smith Barney, Stanley Smith, Treasuries, Treasury Market
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China, The Countervailing Force

Monday, February 22nd, 2010

If the by-products of the western credit crisis - tight credit, stimulus and quantitative easing, zero-percent interest rates,  winning trades in risk - are elemental to the prevailing trend, then China, with its massive $586-billion spending program, its $1.35 trillion in new lending, and its (too?) rapid recovery, should be viewed as a significant balancing concern.

China is the countervailing global economic force, the antithesis of America, its cash-rich economy cantilevered against the weight of its debt-laden counterpart. Whether we believe it or not, China’s decisions do affect us, either balancing in our favour or not.

In a decade, China has amassed the bulk of it $2.4-trillion (U.S.) foreign exchange reserve, making it the lead financier of the spendthrift U.S. economy, owing to blockbuster exports growth to consumers seeking cheap manufactured goods.

In 2008, however, the credit crisis hollowed out the export sector as credit, the global shipping business, and consumption froze, and it’s growth engine seized. China’s reaction was, forcibly, to fix its exchange rate, and subsequently embark on a bold and massive $586-billion spending plan.

Read the full article here.

Pierre Daillie, (AdvisorAnalyst.com), GlobeAdvisor.com, February 21, 2010.
http://www.globeadvisor.com/advisoranalyst/aa20100221.html

Tags: Antithesis, Blockbuster, Cantilevered, China, Counterpart, Credit Crisis, Economic Force, Emerging Markets, Exchange Reserve, Export Sector, Financier, Global Shipping, Globeadvisor, Hollowed, Prevailing Trend, Rapid Recovery, Rich Economy, Shipping Business, Spendthrift, Stimulus, Tight Credit, Zero Percent
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China Holds the Trump Card?

Monday, January 25th, 2010

China is trouncing its economic competition when it comes to manufacturing exports. In 2008, China decided to hitch its trailer to the U.S. dollar, fixing its exchange rate at 6.83 yuan. This was a wise move on China’s part considering at the time, its export sector got destroyed by the global credit meltdown, and the shipping business all but died, following the bust at Lehman Brothers.

At the same time, China embarked on a bold $586-billion (U.S.) stimulus in the fourth quarter of 2008 to spend its way domestically out of the credit crisis, and loosened bank lending (which added $1.3-trillion in new domestic bank credit). This initiative on its part meant that China was able to stockpile cheaper commodities, buying them ahead of demand, and pump liquidity into its real estate and equity markets, while waiting patiently for its coveted export sector to return to prominence.

Read the whole article…

Pierre Daillie, (AdvisorAnalyst.com), GlobeAdvisor.com, January 25, 2010.

Tags: Bust, China, Commodities, Credit Crisis, Economic Competition, Emerging Markets, Exchange Rate, Export Sector, Fourth Quarter, Global Credit, Globeadvisor, Initiative, Lehman Brothers, liquidity, Meltdown, Prominence, Shipping Business, Stimulus, Time China, Trillion, Trump Card, Wise Move, Yuan
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The Scale of Paulson’s Gold Purchases

Monday, December 7th, 2009

John Paulson (unrelated to Hank, ex-US Treasury Secretary), US hedge fund manager, shot to fame by capitalizing in spectacular fashion on the credit crisis by, among others, betting against a number of financial institutions. In the process, he raked in some $20 billion.

He more recently developed an affinity for gold and is also launching a gold fund on January 1. However, what came as an eye-opener to me was the extent of Paulson’s existing gold holdings, as highlighted in the table below by Joshua Brown, writer of the The Reformed Broker blog. The fact that some pretty serious countries are included on the list makes the comparison quite remarkable.

Quite extraordinary! Imagine having to undo this position when the time comes.

Source: The Reformed Broker, November 24, 2009.

Tags: Advertisement, Affinity, Blog, Credit Crisis, Extent, Eye Opener, Financial Institutions, Gold, Gold Fund, Gold Holdings, Hedge Fund, January 1, Joshua Brown, Spectacular Fashion, Us Treasury Secretary
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WealthTrack: Robert Rodriguez – concerned about the future

Tuesday, December 1st, 2009

This week Consuelo Mack is joined on WealthTrack by Robert Rodriguez of First Pacific Advisors. His 25-year track record of running both a top performing stock and bond fund has earned him the accolade “best fund manager of our time”. The outspoken Rodriguez - who sheltered shareholders from the credit crisis - explains why he is even more worried about the future and how he intends to invest as a result.

Note: The transcript of this interview is below:

CONSUELO MACK: This week on WealthTrack’s “Great Investors” series: he races Porsches for fun and runs top performing stock and bond funds for his profession. What makes First Pacific Advisors’ Robert Rodriguez step on the investment brakes or the accelerator? That’s next on Consuelo Mack WealthTrack.
Hello and welcome to this “Great Investors” edition of WealthTrack. I’m Consuelo Mack. This week our great investor is Robert Rodriguez, a maverick money manager who has accomplished a feat no one else has. For the last 25 years, he has run not one, but two top performing mutual funds, in not one, but two asset classes: a stock fund and a bond fund. As widely followed personal finance columnist Jason Zweig put it, that is the investing equivalent of running two marathons at the same time, which is why Zweig calls him the best fund manager of our time.
Rodriguez is the CEO of Los Angeles-based First Pacific Advisors and co-portfolio manager of FPA Capital, a mid cap value fund, and FPA New Income, his bond fund, which just celebrated its 25th year in positive territory. Last year he and his co-manager Tom Atteberry were named Morningstar’s fixed income managers of the year for their outstanding long-term stewardship. It is an honor Rodriguez has won two other times as well for both the stock and the bond fund, making him only the second fund manager to be honored three times. The first was last week’s great investor, Bill Gross.
Rodriguez, who races Porsches as a hobby, has a high octane personality but a low tolerance for investment pain. He knows what it is like to lose. A first generation American, his paternal grandparents lost everything in the Mexican Civil War of 1910. His grandfather did not survive the war. His grandmother and six children nearly starved to death. It took them almost six years to come to the United States legally, a route his grandmother insisted on taking so her children could walk down the street with their heads held high.
Throughout his 39-year investment career, Rodriguez has taken the high integrity path, sometimes to his business detriment. He was one of the first to rail against the dot-com and credit bubbles, raising large defensive cash positions, early moves that lost him clients. He is an outspoken critic of the U.S. government’s stimulus packages, burgeoning debt levels and business intervention. Four years ago he moved from California to Nevada to protest the golden state’s budget excesses and income taxes, the highest in the nation. And he does not mince words in criticizing Wall Street and the mutual fund industry. In a wide ranging interview, I asked Rodriguez about his exceptional track record which he attributes to discipline and the ability to balance fear and greed.

ROBERT RODRIGUEZ: I think we have a healthy dose here of skepticism about our capabilities. When you’ve had some serious failures, it forces you to look inwardly, and I don’t know of too many organizations where an investment professional puts his worst investment failure on his website. And it just tells you that no matter how skilled you are in this field, there are new ways to snatch defeat from the jaws of victory. So you have to balance these things. And we test ourselves daily on this, whether we’re correct in our assumptions, but we don’t want to let the day-to-day machinations in the marketplace disturb our long-term thinking.

CONSUELO MACK: You had in the Income Fund, you had your 25th straight up year, which is just unheard of. But in the FPA Capital Fund, in the stock fund, you had your worst year ever, down 35%, so what did you learn from last year?

ROBERT RODRIGUEZ: Well, we did as much as we could. I felt that by June of ‘08 there was nothing more we could do.

CONSUELO MACK: You had raised 45% cash?

ROBERT RODRIGUEZ: 45% cash, we’re getting redeemed, you can’t really take it any higher because the more higher you go, the faster the money goes out. So you have to strike a balance. And our largest exposure was to energy. We have a five and ten year horizon on, that we’ve been in the field for ten years after my being out of the sector for nearly 18 years. So there’s the long-term view versus the short-term risk. And we did reduce our exposure in energy, prior to going into it. And we said now it’s up to the gods. They went down with the market very hard and the first phase of an economic or stock market debacle, everything goes down. Then in the second phase they start to separate and in the third phase you start to see what really is going to work. Well, this year I would say what was taken away from us last year has been, a large part, has been given back to us this year for the right reasons. And so I have to think probably look at both years combined to say, all right, how did you go through this cycle, how did the others go through this? And then over the next five years, is your analysis correct? We happen to think it is, and if we are then our shareholders will be rewarded for that.

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CONSUELO MACK: You’ve quoted in one of your speeches and one of your shareholder letters too that legendary economist John Maynard Keynes describing the long-term investor as eccentric, unconventional and rash in the eyes of the average opinion, which fits you to a tee, actually. So where does the eccentric and unconventional side of Bob Rodriguez come from? Where did you get this?

ROBERT RODRIGUEZ: I really don’t like following the norm. If I follow the norm, I would never have been in this business. My last name is not a competitive advantage when I entered the field, and had to knock down a lot of doors, and you had to do things to separate yourself from the crowd, so that all started way back when I was very young. My first time I got anything to do with the investment field was writing a letter to the Federal Reserve chairman when I was ten. It was a school assignment.

CONSUELO MACK: And he wrote you back.

ROBERT RODRIGUEZ: And he wrote me back, and I said gee that’s kind of neat, how many people would do that. What’s the down side? So I started thinking differently about what the norm is, and then how can you turn that to your competitive advantage? So it’s always been that way. I would say when I was in graduate school or just going into graduate school, I discovered Graham and Dodd during the summer before I was coming back to graduate school. And it really struck home, and I had the good fortune of meeting Charlie Munger in our investment course there.

CONSUELO MACK: Warren Buffett’s kind of unknown partner.

ROBERT RODRIGUEZ: As Warren Buffett says, he’s the smart one. And after the class I asked him, I said what can I do to make myself a better investor, beyond just what I’m doing here and researching, et cetera? And he said, read history. Read history. Read history. And if people had read history about the economic crises of before, not only the depression but even before then, they would have said this is an old friend, and so that helped. It’s come from a number of different parts, but I think really not being afraid to fail and be different. That’s what it took in order to differentiate in this business.
I had a friend of mine who was a growth stock manager who got just before the debacle of 2000, we were having lunch together in January of 2000 and he was buying all this dot com, and I said why are you buying this crap? And he says, because you have to, he says yes, if I don’t buy it we won’t be competitive. I said, but don’t you realize, you are at the epicenter of a debacle that’s going to occur? And when you get destroyed, you know, you could either have cash or you can buy these things. If you have cash, you get fired. If you buy the dot-com and it blows up, you get fired. So in both cases you’re fired. What’s the difference? Over here the one with the cash, where you held your investment discipline, you can rebuild your business. Over here, you’ve destroyed your credibility, you can never rebuild.

CONSUELO MACK: Let’s talk about some of your unconventional current calls. You’re describing the current economic state that we’re in as a repression, which it’s not as bad as the Great Depression, but it’s also worse than a recession. Where is this repression taking us? What’s it going to feel like?

ROBERT RODRIGUEZ: Here in the firm, we’re using a new term for the economy. We’re calling it the caterpillar economy. Where it goes up and goes down, goes up and goes down, but it doesn’t move forward very fast, after this waterfall collapse that we had. And this is different from any other kind of economic environment that we’ve been in since the depression. You don’t destroy the consumer’s balance sheet, like what’s gone on. You don’t have the leverage in the system that we have and expect to come out of it the way we’ve come out of other periods. The president, I argue, that I think he’s on the wrong road and when I compare him to let’s say FDR. When he came into power, the debt to GDP was barely 17% when FDR came here, whereas now we’re now at 65% going to 75, going to 90% this year.

CONSUELO MACK: IMF says 100 some odd percent?

ROBERT RODRIGUEZ: Right. And by the way, those numbers when FDR came into power did not include, because we didn’t have any, entitlements. So if you add on the entitlements, it’s even far larger. So as I’ve argued, we do not have the balance sheet flexibility today as we did in FDR’s time. So if they want to go down, they being the Congress and the executive branch et cetera, and they want to build up these larger programs, they’re going to come at a price. And in our opinion that price will be in the debt market, and in the Treasury market longer term. With higher interest rates.

CONSUELO MACK: Bob, you saw the credit crisis coming about five, at least five years ago. And at that time you predicted that there was a new financial system that was going to be created and a new era. So what’s this new financial system that we can look forward to?

ROBERT RODRIGUEZ: I think, first of all, about four years ago we started talking about the breakdown in underwriting standards, et cetera. With the demise of Bear Stearns in March of last year, and what the response was by the federal government and the Fed, that’s when we wrote “Crossing the Rubicon,” that we had crossed over into a new financial era, a new system. And little did we know how far that was going to occur, within six months.
So we’re still in this process of defining what this new system is. As a result, it is very difficult to define what appropriate valuation levels are going to be, because the goal posts keep getting moved. Look at Chrysler- we were extremely vehement against Chrysler and what happened there, where senior secured creditors were treated in such a shabby manner, it really ran over, you know, the sanctity of contract. So we’re in a new system. That means the government is a larger percentage of GDP. The larger the percentage of GDP, the more likely GDP will grow at a substandard rate for an elongated period of time.
We’re in the group, and I’m in the group, where the new world order that you were referring to, that I’ve referred to, is that the U.S. is going to have to change its economic system; that our foreign counterparts that have basically grown on the backs of U.S. consumer have got to turn inwardly for their growth. As a result, as they turn inwardly for their growth, such as China, the U.S. has to expand its exports. I don’t see anything like that coming out of the administration or the incentives or anything else. As a result, the more the government takes a larger share of the economy, the likelihood we will be in a substandard period of growth and profit margins will also be substandard.

CONSUELO MACK: So how do you invest in an environment that is going to be substandard growth, that you don’t know what the rules of the game are because you don’t know what the government is going to do next, what do you do?

ROBERT RODRIGUEZ: It’s going to be very hard. As a result, on the fixed income side, we’re still maintaining our highest levels of quality. We haven’t gone into the lower rungs of the high yield area, even though there’s been big rungs there, because we think this is a head fake of what’s going on in the economy and this rebound, the green shoots that people talk about. So we’re going to stay high quality and let other people destroy themselves.
On the equity side, we think you have to be very focused in terms of the industries you go after. So we have a natural decline rate in, let’s say energy, supplies of energy. So we think longer term- three, five, ten years. Energy prices are going to be considerably elevated from where they are today. So we have a heavy exposure there.

CONSUELO MACK: Heavy, like 55% of the FPA Capital Portfolio, is that right, is in energy?

ROBERT RODRIGUEZ: Well, about 41% of the total portfolio, about 55% of the equity. Okay. So we’re looking for other areas to deploy capital that will both benefit from the international side but also from the commodities side.
So we see, you have to be rifle shooting over the course of the next five years or ten years, and that’s why I gave a speech in Chicago at Morningstar that in my opinion, a highly diversified equity fund in this new order will be at a competitive disadvantage, especially if it carries management fees, et cetera, so you’re going to have to do something different from the rest of the market in order to differentiate again, and that’s what we’re doing.

CONSUELO MACK: So let’s talk about the investment industry, which you have been highly critical of, and the OPM attitude, “other people’s money” attitude that you feel that the industry has been excessively greedy, not really paying attention to shareholders interests.

ROBERT RODRIGUEZ: Let’s say abusive. I mean, how are mutual funds sold? They’re brought out when the particular area is the hottest. So you sell what you can sell, and most of the time that is the absolute wrong time to be marketing that kind of product. So it’s not investment oriented, it’s marketing oriented. It’s a marketing mindset, and as long as we have a marketing mindset in the industry and managers are fearful of under performing their bogey and having what we call tracking error where you deviate too far from your benchmark and god forbid you have too much volatility: all of these things will work to hit the industry. With this collapse, with the technology collapse and now with the credit collapse, the question I’m asking is: if active managers could not identify the two greatest speculative blowoffs in the last 75 years, when will they? And secondly, what are you buying from an active manager if they can’t identify these things? You might as well go to an index.

CONSUELO MACK: Talk to me though about the shakeup that you think is going to happen in the mutual industry. Tell me what kind of a shakeout you expect.

ROBERT RODRIGUEZ: I just think that first of all, we have too many funds. When you sit there with 8,000 funds, and then you have 25 different share classes, it’s quite complicated. And what is the investor getting for all of that? There’s an expense to that, and the higher the expense in a lower return environment means you have less margin of safety for a total return.

CONSUELO MACK: So let’s also talk about the fact that you are a long-term investor, but you told me that you look out– some people say long term like a couple of years, you’re really talking about five to nine years. And you made a decision about six years ago to take a sabbatical next year from your firm in 2010. And one of the reasons that you decided to take a sabbatical as well is because you looked out beyond the current crisis and you see something even bigger and scarier coming?

ROBERT RODRIGUEZ: I see another crisis coming.

CONSUELO MACK: What is that and like when?

ROBERT RODRIGUEZ: It’s the explosion in the treasury debt, and the finances of this country. We still have time. But to, shall we say, become fiscally responsible. Am I optimistic about us doing that? No. You’re residing in the state of California that I left here four years ago, because in my opinion, the system was fundamentally broken and the state was going to experience a devastating recession on the down side.

CONSUELO MACK: Which it is right now.

ROBERT RODRIGUEZ: Which it is right now. I believe the system in
Washington is fundamentally broken. And as a result, the explosion in dealt that I foresee in the next three years and if other programs are added on it will accelerate it, then I think we have a real problem brewing in our finances here. I’m estimating somewhere in the neighborhood of five to seven years from here.

CONSUELO MACK: Do you envision any time in FPA Income basically going out the risk curve a little bit? I mean, is there anything– you’ve got about 90% in triple A rated securities in the portfolio?

ROBERT RODRIGUEZ: We are 22% in cash and we’re barely over a one-year duration. We’ve had as much as 25% of the fund in high yield. We would love to go out on the risk curve. In the last six months, eight months, it’s been highly profitable, just like the stock market has rallied. Is this sustainable? We don’t think so. We think there’s other dominos to fall that can disrupt this. So we don’t like the odds. Plus in New Income, people come into the bond fund in New Income because they can trust it. It’s when they couldn’t trust virtually anything else in this country, other than Treasuries, our bond fund grew in the neighborhood of 60 to 80%. People came in because they could trust it. Well, here we are saying, how do we be good stewards going forward? Do we bet with other people’s money or do we invest as if it’s our money? That’s what we’re doing, we’re waiting for that opportunity.

CONSUELO MACK: Bob, what’s your advice to individual investors who have had severe wealth destruction in their investment portfolios over the last couple of years? How can they rebuild that kind of wealth loss?

ROBERT RODRIGUEZ: I wish there was an easy, nice comforting answer to it. Unfortunately, there isn’t. In my opinion it will take probably upwards of eight or ten years for the S&P 500 to get back to where it was in October of ‘07. And thus there has been severe capital destruction, and for some it’s permanent because of where they are in their life cycle. If you’re in your 20s and 30s and 40s, you have the benefit of time. If you’re in your 60s and you’re part of the baby boom generation and you got destroyed, guess what, you better be working. You better find a job. Those things there. You move in, you may become a renter out there.

CONSUELO MACK: If can you sell your house.

ROBERT RODRIGUEZ: Well no, the house gets taken, at least if they would allow it to go. But there is no God given right to an easy retirement. It was a fool’s paradise out there. My parents and grandparents did not have an easy retirement. The world is unsafe and unstable. We had in this country, I believe, a perverse view of what reality truly was, and now that veil is being lifted, and I’m sorry, but it’s going to take a long time and that nice retirement home or continuous vacations may not be there.

CONSUELO MACK: You told me that you see things that other people don’t see.

ROBERT RODRIGUEZ: Sometimes.

CONSUELO MACK: So what are you seeing now that other people aren’t seeing?

ROBERT RODRIGUEZ: I think the difference is many of us see the buildup of federal liabilities. But there’s this feeling, well, it’ll be okay, we’ll get through it. Well, that was the same not too long ago when the house prices were going through and people would raise the question, what happens if housing prices get hit? Don’t worry about it, we’ll get through it. There’s always that element. So I think the question is, as you have to place the odds, what are the odds that we’ll get through this with the least amount of pain? I think that’s where the difference comes.
If you want to be on the optimistic side and say we’ll get through it and you’re wrong, your shareholders pay for it and your clients pay for it. If we’re right and we’ve done our job correctly, we protect capital in the negative side, and if we’re wrong, we just don’t earn as much as our competition. I think that’s a better combination than destroying your clients and saying, well, we’ll go out and get some more new clients out there. I don’t like that one.

CONSUELO MACK: That’s a great way actually to end the interview. So Bob Rodriguez, thank you so much for giving us your time.

ROBERT RODRIGUEZ: Thank you.

CONSUELO MACK: Next week in our “Great Investors” series, we are devoting our program once again to one of the money managers we have identified as the next generation of great investors. AQR Capital Management’s outspoken managing and founding principal, Cliff Asness, will discuss how he is applying his value oriented and computer driven hedge fund strategies to the mutual fund world.
In the meantime, to access the collective wisdom of our other great investors, go to our website, weathtrack.com. Have a great weekend and make the week ahead a profitable and a productive one.

Source: Wealthtrack, November 27, 2009.

Tags: Accolade, Advertisement, Asset Classes, Atteberry, Bill Gross, Bond Fund, China, Commodities, Consuelo Mack, Credit Crisis, Emerging Markets, First Pacific Advisors, Gold, Investor Bill, Jason Zweig, Mack, Mid Cap Value, Mid Cap Value Fund, Money Manager, Personal Finance, Robert Rodriguez, Running, Shareholders, Stock And Bond, Stock Fund, Term Stewardship, Time Rodriguez, Top Performing Mutual Funds, Top Performing Stock, Wealthtrack
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Why China Can’t Divorce the Dollar

Friday, October 16th, 2009

Yesterday, we discussed the hype about the imminent death of the US dollar that is bubbling up these days, that is sending the Canadian dollar to parity, stocks and gold to new highs, and lifting commodity prices in general. In his FT.com column, Martin Wolf contends that it is the success of American economic policy that is sinking the dollar, and on the subject of China says:

Relevant policy is made by the Federal Reserve, which has no mandate to preserve the dollar’s external value. The only way China’s policymakers can preserve the domestic value of external holdings is to support the dollar without limit, which compromises China’s domestic monetary stability and will prove self-defeating in the end.

Wolf’s thesis is that the zeroing out of interest rates and re-liquidification of the US economy in the face of the credit crisis has crowded investors, both domestic and foreign, out of money market instruments and short term treasuries, into risk assets for yield or growth. It is the crowding out that has proven to be a success for the market and, as consequence, the devaluation of the greenback.

This presents short-term problems for China and its export recovery, but it is not yet time for China to deal with the advent of divorce from the US dollar as a reserve currency.

Mark Gimien, says China is not about to stop propping up the dollar, because in the meantime, the value of the RMB is rising, making its exports more expensive.

The dollar-renminbi trade is a perfect case study in being careful what you wish for. Though American exporters complain about an undervalued renminbi, China’s currency management turns out to have some enormous advantages for the American economy. China’s voracious demand for dollars—and the Treasury bonds to sink those dollars into—is a key reason why the U.S. government can borrow cheaply and keep U.S. interest rates low.

…

For a while now, economists have wondered when China will tire of lending cheaply to the U.S. government. The longer the process continues, the more China stands to lose over the long run; China is effectively propping up the dollar, and, thanks to its enormous holdings of Treasury bonds, gets left holding the proverbial bag when the dollar falls in value—as it already has in relation to the euro. Eventually, the thinking among economists goes, China will tire of getting rock-bottom interest on U.S. Treasuries while watching the value of its dollar-hoard shrink. This is why people like Ferguson and New York University economist Nouriel Roubini—one of the more prescient (and pessimistic) observers of the meltdown—are predicting an economic divorce between the two massive trading partners.

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So should we be worried? In the long run, yes—but we probably won’t see a massive and sudden catastrophe. China does want to disentangle itself from its reliance on the dollar. To do that, though, it also has to decrease its reliance on exports to the United States. That won’t happen overnight. As bad as the financial meltdown has been for the United States, it has been even worse for much of the rest of the world. The United States is the world’s consumer of last (and, well, first, too) resort, so the irony of American economic problems is that, as an oft-repeated adage has it, a U.S. sneeze tends to cause pneumonia in its trade partners.

One of the key economic memes of the past years has been the emergence of a robust Chinese consumer middle class. It is absolutely true that China’s middle class and its domestic consumption have both grown dramatically. Even in this economic climate, Chinese retail sales are up by double digit percentages. China remains, however, an export-led economy.

Another question to ponder from the domestic China perspective is one of confidence. How confident would the Chinese be in their own currency if it were not pegged to the US dollar?

When you cut through all of the noise surrounding the fate of the dollar, and look at the economic probabilities, the conclusion you can make is that China and the world for that matter have got far more incentive at the hinge of our economic crisis to do their respective parts to defend balance, not as a favour or whim, but as a matter of economic continuity. China’s best move is a smoother and longer term transition to independence from its symbiotic co-existence with the US dollar economy.

A US/China divorce is many years away, a long term proposition at worst. The more important issues in the present still rest on how monetary authorities will rebalance currency valuations, and that ultimately will slow or reverse the flow of liquidity out of the dollar. A reversal in the dollar’s decline would be negative for equity markets and other risk assets in the short term.

Tags: American Economic Policy, American Economy, American Exporters, Canada, Canadian Dollar, China, China Currency, Commodities, Commodity Prices, Credit Crisis, Currency Management, Devaluation, Economist Nouriel Roubini, Economy China, Emerging Markets, Enormous Advantages, Export Recovery, Federal Reserve, Gold, Greenback, Hype, Imminent Death, Mandate, Martin Wolf, Meltdown, Monetary Stability, Money Market Instruments, New Highs, New York University, Parity, Policymakers, Relevant Policy, Reserve Currency, RMB, Rock Bottom, Treasuries, Treasury Bonds
Posted in Gold, Markets | No Comments »

Mobius, Rogers, and IMF Love China

Thursday, October 1st, 2009

China is getting a great deal of attention upon its 60th anniversary. This is great news for the Canadian economy and investors in Canada’s well-positioned market. Bloomberg reports today that the IMF has raised its 2010 GDP growth forecast for China to 9%. It also trimmed its forecast for India by 0.1% to 6.4% from 6.5% which is still very good, given that India has not embarked on as bold a spending strategy. The two are altogether different though. China is an economy now more equitably balanced between its exports sector and domestic spending, with domestic spending taking a near 60% share of the economy, versus 60% exports just ten years ago. India’s GDP consists of 85% domestic spending and has been far better insulated economically from the credit crisis, that the Indian parliament was not forced into providing a massive stimulus as India’s economy was not as vulnerable to a downturn in exports as China’s was. The silver lining here is that China’s bold 4-trillion Yuan (US$ 586-billion) stimulus may successfully transform China into a formidable domestically biased economy, well ahead of original expectations, from once being held as export dependent or vulnerable to export shocks.

As the year progresses though, India’s GDP forecast may get upgraded again on increased spending plans. During the course of the last year, India has begun a new political cycle, and its incumbent Congress party won a mandate in the election earlier this year. In the midst of the credit crisis in the spring, and in the midst of campaigning, India’s spending plans were criticized as being somewhat anemic as compared to China’s. In hindsight, it would have been political suicide if the incumbent party had embarked on bold stimulus initiatives when so many were fearful of the credit crisis. Don’t ignore India at China’s expense. On this basis, its very likely that the Indian government will step up spending, though on a gradual basis over the coming year, which could push growth forecasts higher for 2010. It is notable that India has a sound fiscal position and a nice and clean banking system, and a strong tradition of high savings rates.

Investors looking at investing in emerging markets should consider positions in both India and China, rather than one or the other. These are the only two economies in the world that have sustained their records of growth throughout the current crisis.

Either way, if you choose not to invest directly in India and China, this is good news for the commodities complex, and its good news for Canadian investors taking exposure in the commodities sector.

Mark Mobius says China is his top pick among the emerging markets:

Jim Rogers says he likes China for the next 60 years:

HSBC CEO, Sandy Flockhart says China is the strategically the most important market to HSBC:

Tags: 60th Anniversary, Canada, Canadian Economy, Ceo, China, China China, China Economy, China Mark, Commodities, Congress Party, Credit Crisis, Domestic Spending, Downturn, Emerging Markets, Gdp Forecast, GDP Growth, Great News, Hindsight, Imf, Incumbent Party, India, India Economy, India S Economy, Indian Government, Indian Parliament, Jim Rogers, Love, Mark Mobius, Mobius, Political Suicide, Sandy, Silver Lining, Stimulus
Posted in Emerging Markets, Markets | No Comments »

Mortgage Resets: Have We Been in The Eye of the Hurricane?

Monday, September 28th, 2009

We originally published the main body of this story in mid-June this year, and are reprising it now as the chart below from Credit Suisse’s chart is making the rounds again, given there is talk that the monetary authorities are considering halting quantitative easing operations (i.e. printing money). We may have gotten through the last 6 months, thanks largely to the Fed’s QE induced liquidity, which fuelled a very strong rally off the March lows. The question is, “Has it worked?”

The equity market seems to indicate “yes,” and now it remains to be seen in the next two quarters if it has indeed worked.

The passing of a hurricane is quite an event, and a strong one can wreak havoc. In the eye of a hurricane, there is an eerie calm, and quiet, and the sun often shines brightly. The bigger the hurricane, the bigger the eye. This is then usually followed by a secondary lashing as the back end of the hurricane passes. Is this what’s in store for the mortgage and credit market over the next 2 years as the banking system faces its next round of resets?

Have the banks hoarded cash for this reason? Is it enough?

According to statistics provided by Credit Suisse, we are in the midst of a mortgage-paper-resets lull (the space between the two humps), as seen by the chart below. Doug Short (dshort.com) has kindly added the S&P500 chart to the one produced by CS. In a nutshell, banks (and the credit market) have gotten a much needed break from the enormous pressure of having to ensure that the liquid assets are available for the re-financings that are in the works.

Given the size of the Option-ARM (Adjustable Rate Mortgages) portion of the scheduled resets, there is much cause for concern, especially for the banking sector, and the credit market in general. This picture of the mortgage reset histogram is reminiscent of the passing of a hurricane. The tail end of the hurricane this time includes not only the Option ARMs but also the Alt-A (better than subprime) mortgages.

The S&P 500 is up nearly 36% from its bear market low on March 9th. Sentiment is somewhat less negative on several fronts. Credit crisis indicators, the ADP employment report, bank stress test leaks, and the market rally itself have all encouraged optimism that the worst is over.

According to Wall Street, the market is forward looking. But has the market really discounted the future impact of continuing mortgage resets? Here’s a widely circulated Credit Suisse histogram of resets to which I’ve added a thumbnail of the S&P 500 matching the timeline from October 2007 to the present. There are a lot more resets ahead — option-adjustable, prime and alt-A — over the next 2 1/2 years.

Click image to enlarge:

Tags: Adjustable Rate Mortgages, Banking Sector, Banking System, Bear Market, Credit Crisis, Credit Suisse, Employment Report, Eye Of A Hurricane, Eye Of The Hurricane, Financings, Histogram, Lashing, Liquid Assets, liquidity, Lows, Market Rally, Monetary Authorities, Mortgage Paper, Mortgage Resets, Option Arms, P500, Printing Money, Qe, Stress Test, Strong One, Subprime Mortgages
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Barry Ritholtz: Analyzing the Analyzers

Saturday, August 1st, 2009

This is a guest post by Barry Ritholtz, editor of The Big Picture Blog and author of the newly released book, Bailout Nation

One of the more fascinating things about a crisis and its resolution is the post-mortems: The after-the-fact analyses that some folks do to explain what occurred.

These analyses are fascinating for what they reveal about the beliefs, methodologies, biases and cognitive failures of the many crisis watchers.

Human fallibility being what it is, we can divide this universe into 3 buckets of observers:

(1) Those who get it mostly wrong.

(2) Those who can correctly describe a small slice of what happened.

(3) Those who understand the full boom and bust - how all the moving parts came together to cause the crisis.

The first bucket is the easiest to both understand and dismiss: It contains the ideologues and market worshipers, as well as the perma-bulls - none of whom have much in the way of methodology. They are believers who know that in the long run stocks (and houses for that matter) will come back, whether we are dead or not. For the most part, they missed all of the warning signs of recession, credit crisis and boom and bust of the housing collapse. They called it a “mental recession”.

This motley crew says it was all the fault of too much regulation, no it was CRA/Fannie Mae - Why do we even have a Fed? That was the cause - No its mortgage interest deduction - No its all Barney Frank’s fault, no wait, it was caused by too much minority home buying - No, it goes back to FDR - No, its all the Government’s fault, there should be no State - All hail John Galt, we should be free without any government intervention whatsoever - Bababooey!

As you might imagine, their ravings throw off a lot more heat than light. They provide no insight into the what actually occurred - But hey, its great theater.

The second group is a lot more instructive and interesting. They accurately detail a tiny aspect of the crisis in great detail. These observers are like the six blind men describing an elephant: Partly correct, yet mostly incomplete. Their individual descriptions accurately describes various body parts (trunk, tusk, ear, etc.) but they never describe the creature in its entirety.

This group includes those who blame the entire debacle on derivatives or the formula for Value at Risk. The original concept of securitization. Wildly misaligned compensation incentives. They blame the ratings agencies and/or the deification of markets via EMH [efficient market hypothesis], or the massive increase in use of credit since the 1950s. Some blame allowing Lehman to fail as the cause; others blame bailing out Bear Stearns, yet still others say it was all Goldman Sach’s fault. Fill in your own blank.

In the hunt for the unified field theory of the economic crisis, these observers may accurately describe a single aspect of what happened, but they fail to capture the fullness of what caused the debacle. They miss the crisis’ gestalt.

Lastly, we have the Big Picture observers (no pun intended). These folks try to put all of the moving pieces together. They look for proximate causes, not abstract theories. They try to see how one event led to the next event and the next and so on down the entire cascading collapse. These folks understand complexity, causation, risk, statistics and cycles. They are pragmatic, not ideological.

They are unfortunately, all too rare.

I only can wish that more of the people trying to repair what happened, and prevent the next crisis, were in the third group ….

Source: Barry Ritholtz, The Big Picture, July 30, 2009.

Tags: Bailout, Barney Frank, Barry Ritholtz, Biases, Boom And Bust, Buckets, Cra, Credit Crisis, Fannie Mae, Fdr, Government Intervention, Hail John, John Galt, Mortgage Interest Deduction, Motley Crew, Moving Parts, Post Mortems, Second Group, Warning Signs, Worshipers
Posted in Gold, Markets | No Comments »

Adam Hewison: 5 New Educational Trading Video Tutorials

Thursday, July 23rd, 2009

Adam Hewison released five new free educational and analytical videos from his “Digital Studios” from Market Club. Each video is about 5 minutes in length and no registration is required to view them. Hewison, a seasoned trader, is a pleasure to listen and learn from.

In the first video (image and link above) is entitled: “Pre-Earnings Apple (AAPL) Analysis” Hewison discusses the technicals/chart and recent “Trade Triangles” as being critical for determining the next likely move in Apple (he has been right on this as price rised as he ‘predicted’ in the video here after earnings). The video teaches how charting relates to earnings and why charts often have clues to upcoming moves.

Here are the links to the other videos you might find interesting, based on your trading style (stocks, ETFs, or FOREX):

“How you SHOULD Have Traded Goldman Sachs (GS)”
“My gut reaction is how can an institution that so embodies Wall Street be making so much money as if the credit crisis never happened.

In today’s short video I’m going to be analyzing the stock of a Wall Street juggernaut known as Goldman Sachs. The video shows you how you could have used MarketClub’s “Trade Triangle” technology to make a ton of money just like Goldman Sachs.”

“What’s the Best Trading Strategy for USO (US Oil Fund ETF)”?:
“You’ll quickly see how the MarketClub “Trade Triangle” strategy is working in this market. In this short video, I give you a specific triangle to look for in the future and how this market can play out in the next two months.”

“The Cyclic Pattern in Gold Prices”
“In today’s video on gold I’m going to share with you my thoughts on the cyclic pattern of this market. I’ll show you where I believe the lows have been put in place, and also where I expect the next high will come in.”

If you’re interested in gold this is definitely a video you shouldn’t miss. I will also show you exactly where our “Trade Triangle” technology recently kicked in a buy signal for this market.”

“Revisiting and Re-Analyzing the USD/JPY FOREX Pair”
“MarketClub’s “Trade Triangle” technology alerted our members of a sell signal today (7/21) and I wanted to share it with you. The video is short, to the point and shows what I expect will happen to the dollar vis-a-vis the yen in the next several weeks.”

All these videos were released instantly (without delay) to Market Club Members (please click for more information) along with access to current and past “Trade Triangle Signals” and scans for stocks, ETFs, and Markets.

Tags: Aapl, Credit Crisis, Cyclic Pattern, Earnings, Educational Videos, ETF, Free Videos, Gold Prices, Goldman Sachs, Gut Reaction, Juggernaut, Lows, oil, Pleasure, Rised, Stocks, Trade Triangle, Trading Stocks, Trading Strategy, Triangle Technology, Triangles, Video Image, Video Tutorials, Wall Street
Posted in Gold, Markets | No Comments »