Thursday, November 24th, 2011
In his latest Basic Points, “It’s the
Economy Banks, Stupid!,” dated November 18, 2011, Donald Coxe, Coxe Advisors LLP, makes the following recommendations, in the context of the full body of the issue. Here they are, Don Coxe’s investment strategy recommendations, in summary, paraphrased:
2. Investors in European bonds should scale back their exposure to euro-denominated bonds, and companies should try to raise money and/or borrow in euros. The euro is on its way down to much lower levels.
3. Trim positions in non-Canadian bank stocks to minimiums. ‘B5′ bank stocks seem to be cheap, when they may indeed be greatly overvalued. Dexia’s troubles are not exclusive – Remember the ‘cockroach’ principle.
4. Build positions in high-quality “bullet-proof” dividend-paying stocks. We don’t mean utilities, which represent some of the more obvious high yielding stocks – though owning these as part of a overall equity portfolio strategy is appropriate. By bullet-proof, we mean the high quality dividend-paying equities of financially strong, well-managed companies focused on delivering total return to shareholders by providing dividend growth in the context of sustainably rising profits.
5. Recession risk is not the important ball to keep an eye on, when considering endogenous risk to major equity indices; banking/bank risks are. The next recession is more likely to be mild compared to that of 2008, on account of interest rates remaining near zero percent.
6. Most central banks have lost pride in their own currency. As a group, they are competing with each other, in the ‘race to the bottom,’ the goal being to see whose is the most competitive. Outside of the global Depression, this course of events is without precedent, and inflation risks are escalating.
7. Replace overvalued government bonds with high-quality corporate bonds, in bond portfolios. Ignore the Capital Asset Pricing Model.
8. If the eurozone takes tough and dramatic policy changes to end the terminal struggling and/or sinking of bank stocks, there may be a buying opportunity for non-financial equities ‘surprisingly’ soon. Keep some cash available, be prepared, and be on the lookout for a opening in the market, in the midst of a flurry of sea changes in Europe. Soaring bank stocks too would be a sign.
9. The chance of an attack on Iran’s nuclear facility is unlikely, however, global, critical, pressure on Israel may make those in its government to move forward on its own accord, in spite of those countries who have never had a true relationship with Israel. Most of the great oil companies’ shares are cheap anyway, so you get the insurance against a raid for free. Keep good exposure to to oil stocks, but don’t speculate on an airstrike.
10. We continue to recommend that its better to invest in oil producing companies as compared to investing in shale gas companies. It remains to be seen what the political outcome/risk – though still remote – over this development will be.
11. Our favourites continue to be the Canadian oil sands stocks, since they have achieved our two most important criteria: they are long duration reserves, and they’re location is low risk, politically speaking. Political (activist) enemies of the U.S. will go to great lengths to constrain their output, and have a President who seems to be more concerned about pleasing them, rather than the oil industry – whom is his main ‘whipping boy,’ as he idealistically promotes ‘Green Energy.’
Canada needs to realize that the folks in Washington D.C.’s inner circle do not feel the same way about its friendship with the U.S., and to take on new initiatives regarding pipelines and other export strategies. Until then, institutional investors who have holdings in oils sands stocks can expect to continue to be unfairly roughed up in discussions with their green clients.
Source: Donald Coxe, Basic Points, November 18, 2011
Tags: agricultural, Agricultural Commodity, Bank stocks, Bullet Proof, Central Banks, Cockroach, Commodity Stocks, Dividend Growth, Dividend Paying Stocks, Don Coxe, Donald Coxe, Equity Portfolios, Global Depression, High Yielding Stocks, Inflation Risks, Investment Recommendations, Investment Strategy, Oil Sands, Portfolio Strategy, Precious Metal, Quality Bullet, Race To The Bottom, Recession, Shale
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Thursday, September 22nd, 2011
In his latest Basic Points, “The Deficient Frontier,” dated September 16, 2011, Donald Coxe, Coxe Advisors LLP, makes the following recommendations, in the context of the full body of the issue. Here they are in summary, paraphrased:
1. Stay away from shares of European banks, if you can.
With a candor that is nothing less than commendable, Deutsche Bank’s Josef Ackerman says that the state of the European banking system looks just like it did in 2008. Their total portfolio risks are high – and continuing to rise, as a result of the collapse of risk-free sovereign rate of return among so many EU Member countries.
2. Stay away from the shares of U.S. banks with questionable balance sheets, particular those which give senior executives substantial stock options, and are wasting the Fed’s (read Bernanke’s) supplied funds to buy back their own shares.
The performance of U.S. bank stocks has been deteriorating. In the meantime, tort lawyers have been given carte blanche to sue the large banks-possibly for triple the damages. Incidentally, after trade unions, tort lawyers (read ‘raptors’) are the second largest contributor to Democratic candidates.
3. Investors should continue to maintain their positions in Canadian Oil Sands shares, exercising caution however, about adding to these commitments.
The Keystone XL Pipeline, which is destined to carry Alberta Oil Sands oil to Oklahoma and Texas, will be decided upon this year by the Obama Administration. It remains to be seen if he will prevail over enviro-fanatics, and although he has been disappointing them of late, the possibility exists that he might let them have this ‘big’ one. On the other hand, there are 100,000 jobs at stake, which may override his political concern, leading to a green-lighting of the project.
Its astonishing that the world’s second or third largest oil reserves, held by America’s long-time friend and ally, could actually be a political hot potato.
4. Continue overweight (read ‘heavy’ weight) in precious metals, with a bias towards miners (gold stocks).
For ten years, they have been good, and should continue being so.
5. Continue overweight (read ‘heavy’ weight) in shares of agricultural companies.
Although they possess surprisingly high betas (to us, that is), the endogenous risk in the earnings of these companies is substantially better than those of many cyclical stocks, whether you’re considering commodity stocks or otherwise.
6. Keep holding a strong exposure to U.S. oil producers, particularly those operating on land.
West Texas and Brent Oil spreads have stayed at levels that must anger European governments. That goes for the spread between North American Natural Gas and European prices for the same. For the time being, this is the greatest economic advantage the U.S. has going for it, and on another note, it is the most reviled sector, as far as the Left goes.
7. Copper and Iron Ore prices indicate, or rather, appear to negate concerns of a slowdown in the global economy. Natural disasters and labour strikes have kept metals prices stable, however, only demand will be able to keep them there in time. Because we can’t see that in the near future, underweight base metals.
8. It has become necessary for bond investors to make sure the yields on their positions are in line with the risks they have been seemingly forced to assume, particularly in this time of unbelievable low (read’surreal’) interest rates.
Why are government bonds – for example, those of countries responsible for delivering the worst investment shocks – allowed to get away with paying investors, record-low interest rates (i.e. ten year yield at 60-100-year lows)?
What is the point of lending money to poorly managed governments who pay laughable rates?
It would better to count on income from great companies via their dividends.
9. The Canadian Dollar appears to have weakened.
Except for the fact that the Canadian economy has stuttered as a result of a slowdown in exports to the U.S., Canada still is, as far as we’re concerned, a haven nation for global investors.
Canadian banks continue to be substantially more attractive than their U.S. or European conterparts – even if that’s merely on a relative basis, which might not be saying much.
Canadian Government Bonds offer slightly higher yields, though they are higher quality than U.S. Treasurys.
American corporate bonds pay higher yields and are more attractive than Treasurys – and some even have higher ratings.
10. For Income-Oriented investors, High-quality (read ‘bullet-proof) dividend paying stocks should be the core investment class in investors asset allocation, for as long as interest rates continue to be forced down by central banks, and for as long as the ‘Deficient Frontier’ is relevant.
In a somewhat stagflationary world, earnings growth forecasts are less important a market consideration. For the time being, take the money (dividends) and try not to get caught up in the day-to-day price performance of your holdings.
Tags: Alberta Oil Sands, Bank stocks, Bernanke, Bonds, Canadian, Canadian Market, Canadian Oil Sands, Carte Blanche, Democratic Candidates, Donald Coxe, European Banking System, European Banks, Gold, Hot Potato, Investment Recommendations, Long Time Friend, Oil Reserves, Political Concern, Stock Options, Substantial Stock, Tort Lawyers, Trade Unions, U S Bank
Posted in Bonds, Brazil, Canadian Market, Gold, Markets | Comments Off
Sunday, December 20th, 2009
The December edition of Donald Coxe’s Basic Points research report (subtitled “Financial Heroin”) has just been published.
You may read it here.
Tuesday, November 24th, 2009
In his weekly conference call, November 20, Investment Strategist, Donald Coxe, of Coxe Advisors LLC, discussed the outlook for Natural Gas, Shale Gas, and the controversial accounting of natural gas reserves for the sake of boosting reserve life index (RLI). Coxe’s discussion about natural gas hinged on the much-asked question, “Will Natural Gas be the only major commodity not to participate in the commodity bull market?”
Here are the highlights of that discussion:
- Natural gas spot prices are too sensitive to changes in climate to be a reliable source of price trend information
- The March futures contract, backward looking for the last 4 years, for natural gas is a better indicator of trending because March is a median month, as it comes after the 3 coldest months of the year, reflecting the draw down in inventory.
- The chart shows the Hurricane Katrina relative spike, and then the sinking of prices for natural gas to new lows of $4.78/MCF.
- Natural Gas is the second most important commodity
- Historically Oil and Gas traded with good correlation to one another because of the ‘substitution-ality’ of the pair based on price.
- Commodity prices in the long term can be threatened by two factors – Substitution and/or technological advancement in extraction.
- Shale Gas horizontal drilling technology has smashed the price of natural gas relative to crude oil. It is an example of where technology is having a profound effect on price and supply.
- Problems are arising due to accounting rules that allow Integrated Oil and Gas firms to post proven gas reserves as a component of Reserve Life Index – 6 MCF of Natural Gas = 1 bbl. of crude oil.
- This is leading to vast “overstatements” of RLI at the integrated companies.
- Exxon, for example, went as far as to run ads saying they were the only oil and gas company to increase their production – virtually all from Shale Gas – but they counted that against crude oil.
- This is a widespread problem.
Coxe argues that unless accounting rules are changed, the more shale gas they find the more difficult it will be for investors. The mantra for investing in “reserves in the ground in politically secure areas of the world,” will require that investors do more digging through SEC Filings to uncover more information about reserves.
- On the upside for energy, a lack of sunspot activity means it’s likely to be a cold winter.
- Russia’s power and dominance over Europe in the oil and gas sector is being beneficially challenged by Exxon’s developments of discovered natural gas deposits in Germany.
- Europeans were panicked when Russia demonstrated that they could shut off gas to the Ukraine, forcing them to seek non-Putin arrangements for the long term.
Technological breakthrough has made it possible to extract natural gas profitably at $4.50 MCF and that means there is a price cap at that level.
Coxe recommends favouring “oily” companies, and be more cautious on evaluations of integrated oils, and notes that true oil reserves at some may just be too scanty.
Tags: Ality, Bbl, Commodities, Commodity Prices, Donald Coxe, Drilling Technology, Futures Contract, Horizontal Drilling, Hurricane Katrina, Investment Strategist, Life Index, Lows, Months Of The Year, Natural Gas, Natural Gas Reserves, oil, Oil And Gas Company, Price Commodity, Price Of Natural Gas, Price Trend, Profound Effect, Rli, Russia, Shale Gas, Technological Advancement
Posted in Energy & Natural Resources, Markets, Outlook | Comments Off
Tuesday, November 17th, 2009
Donald Coxe’s latest investment recommendations are out. You may read them here.
Friday, November 13th, 2009
In his November 6, 2009 weekly conference call, Don Coxe of Coxe Advisors discussed gold, the economy and commodities.
Coxe says that there are a host of reasons for the recent outperformance of gold, the least of which is the crumbling dollar. As long as interest rates are at zero, the carry trade in the US dollar will continue to flush liquidity into the markets and into gold, and as that involves shorting the dollar the dollar will continue to slump.
It also means that all assets could blow off together should there be any reversal in monetary policy resulting in a rate hike. That may still be a while coming as central bankers have stated a willingness to wait until next summer to revisit rates.
On a supportive note for gold, India and Sri Lanka have bought much of the IMF’s 430-tonne overhang of gold inventory, and China is said to be buying the rest.
However, Coxe says, don’t be fooled by the fact that gold and equities are doing well at the same time. The rise and outperformance in gold is also due to the appetite of large investors betting on long term prospects for inflation, now.
Good economic news from around the world last week, as well as promising news from the US, is a serious threat to the economy, the market. We had very positive news, for example, coming from India and China that growth would be better than expected, and their commodity demand continues to be sustainable. In the US, while capacity utilization still remains slack, wage demands have remained stable. Unemployment in the 10% range may be understated by the BLS though because of the way they account for part-time employment, says Coxe. Do-over economists have stated that unemployment could be 16-20%. The BLS has quietly said that there could be inflation in food prices.
Coxe said, “Those of us who accept David Dodge’s view that this has been a rebound, and not yet a recovery; a rebound from a dramatically oversold territory where it looked liked the world was coming to an end, to some optimism that things were going to get better, and pricing in how good things would be, then what it does, is put enormous pressure on central banks not to feed inflationary fears.”
“What we learned from the 70s, is once the inflationary fears start to work into peoples decisions, then all sorts of non-economic decisions are made which makes the inflation forces develop a life of their own. Specifically, changes in inventory policies, such as people buying now, rather than later, because they expect the price to go up, those kinds of things.”
“One of the things central bankers learned is that they must move before the surveys of inflation expectations start to show a sustained rise. Its when people predict that there’s nowhere for inflation to go but up, and its going up, that then its very difficult to hold off the inflation that occurs. What you have to do then [central banks] is dramatically raise rates.”
“So, we’ve seen those go past 20% in the US before, and those inflation expectations got crushed, and in the process the economy got crushed too.”
Good economic news from around the world, and domestically is actually bad news for investors and for the economy, as it means that we could end up in a situation similar to the mid-1970s when we had high unemployment coupled with interest rate hikes. If interest rates remain zero for too long, then the problem may end up being bubble-like economic conditions artificially enhanced by zero interest dollars, and could cause a central bank move swiftly, then, to reign in overheated conditions.
$1,100 gold is a sign that this could be happening. Coxe says that if commodity demand continues to strengthen and wage demands prove to be stickier than expected, the combination could be very bad as it would intensify inflation, and cause policymakers to raise rates at a time when there is high unemployment. That will choke off the fragile recovery and it will choke off the easy money.
Either way, Coxe says that you want to be in gold. You’re better off in gold has it will hold its value better than other “risk” assets. $1,100 gold is a warning sign; not a sign of a really good bullish environment to be investing in. Coxe finishes by saying, “Its the outperformance of gold that should give investors pause.”
Coxe goes out of his way to make sure he’s understood that commodity ETFs that invest in commodity futures are not a effective way to partake in the commodity trade, because of contango/backwardation effects. One way to go, and he makes his disclosures, as advisors is to the way of Coxe Commodity Strategy Fund, and otherwise, via the stocks of the commodities producers as he has discussed on a regular basis in the past.
Coxe also discussed crops, saying that while the warmer November weather was good for farmers, and crop prices came off as a result, they still had not accounted for crop blight.
Tags: Bank Move, Bls, Capacity Utilization, Carry Trade, China, Commodities, Conference Call, David Dodge, Don Coxe, Donald Coxe, Economic Conditions, Economic News, Emerging Markets, ETF, ETFs, Food prices, Gold, Imf, India, Interest Rate Hikes, liquidity, Mid 1970s, Monetary Policy, Outperformance, Overhang, Part Time Employment, Positive News, Rate Hike, Term Prospects, Wage Demands, Warning Sign
Posted in Canadian Market, China, Emerging Markets, ETFs, Gold, India, Markets | Comments Off
Sunday, April 5th, 2009
“Words from the Wise” this week comes to you in a shortened format as my traveling in the US precludes me from doing my customary commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided.
Investors’ mood benefited last week from the potentially positive implications for the global economy emanating from the London G20 meeting, and the Financial Accounting Standards Board’s decision to relax mark-to-market accounting rules. And the previous week’s announcement of the Geithner plan to remove toxic assets from the balance sheets of banks was also still seen as a tailwind for stock markets.
Source: Chicago Tribune
Has the avalanche of policy actions and bank guarantees backstopped the global economy? If stock markets are a gauge of better tidings, it would seem that a bottoming phase might have started. Risk-taking investors pushed the S&P 500 Index to a straight four-week winning streak, registering a gain of 23.3% – the strongest since April 1933. But the jury is still out on whether the bear is simply offering a temporary reprieve.
The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.
For discussion about the direction of stock markets, see my recent posts “Video-o-rama: The road to recovery“, “Schiff interviews Faber“, “Stock market performance round-up: Signs of recovery” and “Donald Coxe: Investment Recommendations (March 2009)“. (And do make a point of listening to Donald Coxe’s webcast of April 3, which can be accessed from the sidebar of the Investment Postcards site.)
Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “market”, “index”, “prices”, “economy” and “financial” featured prominently.
“Business pessimism remains deep and widespread across all industries and regions of the globe. Survey responses regarding hiring and equipment and software investment fell to record lows last week,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. However, the Survey concluded that it was encouraging that businesses were becoming steadily less negative about the economy’s prospects later this year.
Source: Moody’s Economy.com, March 30, 2009.
A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)
– Employment situation remains grim
– China: Signs of a recovery – already?
– Factory sector is tiptoeing towards a recovery
– Housing market: Pending Home Sales Index – positive signs
– Auto sales stage small rebound
– Japan: More news about a worsening situation
– Case-Shiller Home Price Index – downward spiral of home prices persists
– Consumer confidence retraces a small part of loss
Source: Yahoo Finance, April 3, 2009.
In addition to interest rate announcements by the Bank of Japan (Wednesday) and the Bank of England (Thursday), the US economic highlights for the week include the following:
Source: Northern Trust.
Click here for a summary of Wachovia’s weekly economic and financial commentary.
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.
Source: Wall Street Journal Online, April 3, 2009.
John Maxwell said: “The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails.” (Hat tip: Charles Kirk.) Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in steering their investment portfolios to make the best use of the tailwinds and be cognizant of the dreaded headwinds.
That’s the way it looks from Cape Town (or, more accurately, from beautiful La Jolla, California, for the next few days).
Paul Kedrosky (Infectious Greed): The Trump-Madoff Connection
“I hear you are personally acquainted with Bernie Madoff, who visited your country club in Palm Beach.
“I met Madoff a number of times at Mar-a-Lago. He loved golf, and I’d also see him at my golf club, which is nearby. One time he said to me, ‘Why don’t you invest with me?’ I said jokingly, ‘No thanks, I can lose my own money.’”
From an interview with Donald Trump in weekend NYT.
Source: Paul Kedrosky, Infectious Greed, March 29, 2009.
CEP News: G20 commits to ambitious stimulus plan extending into 2010
“The G20 will stand together to engage in additional stimulus plans aimed at creating jobs, cleaning up financial institutions and stimulating emerging market economies, according to the communiqué released on Thursday.
“Member nations said total stimulus spending will reach $5 trillion by the end of 2010, and that they will add an additional $1 trillion in global stimulus through the IMF and other international agencies.
“Meanwhile, the IMF has been promised $750 billion in funding for its lending operations worldwide through the sale of some of its gold reserves to increase its capital base. The Fund will also deploy $250 billion in Special Drawing Rights, a move analysts have said would effectively amount to a broad creation of global money supply.
“The G20 also agreed to regulate ‘systemically important hedge funds’, and says it will work together to develop a framework for reforming financial institutions, including responsible compensation schemes for employees.
“On global trade, the Group has agreed to provide $250 billion in financing to stimulate global trade, and has voiced calls to conclude the Doha talks.
“The G20 has asked the OECD to publish a list of tax havens which the G20 will target to limit tax evasion.”
Source: Erik Kevin Franco, CEP News, April 2, 2009.
CNBC: One-on-one with Soros
“Discussing new promises to increase spending in emerging economies, with George Soros, Soros Fund Management and CNBC’s Maria Bartiromo.”
Source: CNBC, April 2, 2009.
CEP News: FASB eases mark-to-market accounting rules
“Accounting standards for US financial institutions were eased on Thursday when the US Financial Accounting Standards Board recommended allowing firms to use ‘significant’ judgment when valuing toxic assets on their books.
“Analysts interviewed by Bloomberg said the move could increase net income for financial institutions by as much as 20%, by significantly easing the hit that financial institutions have had to take on so-called toxic debt on their balance sheets.
“‘Cynics will claim this is a thinly veiled attempt to disguise the seriousness of the financial crisis and losses being faced,’ said Marc Chandler at Brown Brothers Harriman. ‘On the other hand, there are many who see the mark-to-market as an unreasonable demand for financial instruments with no markets.’
“Indeed, over the last several quarters, market participants have argued that interest in toxic assets, such as mortgage-backed securities, has essentially dried up, meaning that firms have had to value some assets as worthless even though they could eventually regain their worth.
“The decision also comes ahead of earnings season, with the first quarter of 2009 having ended last week, and with Alcoa expected to release their report on Tuesday. The FASB also said the decision will be retroactive, allowing firms to take less writedowns.
“Furthermore, analysts have argued that the decision will reduce the effectiveness of the US Treasury’s Public Private Partnership Investment Program, whereby the government will back the purchase of toxic assets.”
Source: Erik Kevin Franco, CEP News, April 2, 2009.
Barry Habib (Mortgage Success Source): The real reason behind the economic crisis – “mark to market”
“The current economic crisis is the top news story for nearly every media outlet. But, somehow, one of the most important factors that led to this challenging market is also one of the least discussed.”
Source: Barry Habib, Mortgage Success Source.
Financial Times: Bailed-out banks eye toxic asset buys
“US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000 billion plan to revive the financial system.
“The plans proved controversial, with critics charging that the government’s public-private partnership – which provide generous loans to investors – are intended to help banks sell, rather than acquire, troubled securities and loans.
“Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ‘gaming the system to reap taxpayer-subsidised windfalls’.
“Mr Bachus added it would mark ‘a new level of absurdity’ if financial institutions were ‘colluding to swap assets at inflated prices using taxpayers’ dollars’.
“Many experts think it is essential to take these assets from leveraged institutions such as banks that are responsible for the lion’s share of lending, into the hands of unleveraged financial institutions such as traditional asset managers, where they will have much less impact on the flow of credit to the economy.
“Banks have three options if they want to buy toxic assets: apply to become one of four or five fund managers that will purchase troubled securities; bid for packages of bad loans; or buy into funds set up by others. The government plan does not allow banks to buy their own assets, but there is no ban on the purchase of securities and loans sold by others.”
Source: Francesco Guerrera and Krishna Guha, Financial Times, April 2, 2009.
Financial Times: Obama gets tough on US car industry
“The Obama administration on Monday ratcheted up the government’s involvement in the US auto industry, raising the spectre of bankruptcy if debtholders, unions and executives at General Motors and Chrysler fail to make new sacrifices.
“Condemning ‘a failure of leadership’ from Washington to Detroit for the decline of America’s carmakers, President Barack Obama rejected the turnaround plans GM and Chrysler presented to his administration last month. He said the government would fund GM for 60 days as it tries to put together a more aggressive restructuring programme. He gave smaller Chrysler 30 days to strike an acceptable rescue alliance with Italian carmaker Fiat.
“The deadlines marked the latest step in the administration’s increasingly interventionist approach to the auto industry. Just hours after forcing Rick Wagoner out as GM chief, the Obama administration said it would let GM and Chrysler slide into bankruptcy if necessary to facilitate the industry’s restructuring. ‘Their best chance at success may well require utilising the bankruptcy code in a quick and surgical way,’ it said.
“Fritz Henderson, speaking on his first day as GM’s chief executive, indicated that he believed the risk of GM filing for bankruptcy had grown.
“The federal government appears to favour a restructuring plan – in development since November – under which GM could file for bankruptcy protection within a month and then split the viable parts of its business from its messier obligations, people close to the matter say.
“A ‘new’ GM containing the good assets – and backed by a plan to build and sell cars that the government feels is acceptable – could then emerge from bankruptcy protection.”
Source: Tom Braithwaite, Julie MacIntosh, Bertrand Benoit and John Reed, Financial Times, March 30, 2009.
MarketWatch: California may tap US Treasury, Europe for credit
“California’s ‘liquidity problems’ may force the state to seek federal backstops for sales of its short-term notes this summer, even though it received heavy demand from retail buyers in a recent bond sale, its state treasurer said Tuesday.
“California Treasurer Bill Lockyer said in an interview that the state is talking with Treasury Department staff, including Secretary Timothy Geithner, about getting federally issued letters of credit to back upcoming issues of short-term securities known as revenue anticipation notes.
“Lockyer also said the state will probably issue about $12 billion to $16 billion revenue anticipation notes this summer.
“But it may have trouble getting private banks to issue letters of credit to secure the notes, a possibility that’s prompted it to seek government backup.
“‘What we’re starting to talk to them about is … short-term liquidity problems’ at the state and its municipalities, he said.
“Backup from the federal government would be for ‘contingency’ purposes. ‘We may need to get letters of credit from Treasury,’ he added.”
Source: Laura Mandaro & Stacey Delo, MarketWatch, March 31, 2009.
Bloomberg: Financial rescue nears GDP as pledges top $12.8 trillion
“The US government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.
“New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from US banks. The money works out to $42,105 for every man, woman and child in the US and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.
“President Barack Obama and Treasury Secretary Timothy Geithner met with the chief executives of the nation’s 12 biggest banks on March 27 at the White House to enlist their support to thaw a 20-month freeze in bank lending.
“‘The president and Treasury Secretary Geithner have said they will do what it takes,’ Goldman Sachs Group Chief Executive Officer Lloyd Blankfein said after the meeting. ‘If it is enough, that will be great. If it is not enough, they will have to do more.’
“The following table details how the Fed and the government have committed the money on behalf of American taxpayers over the past 20 months, according to data compiled by Bloomberg.”
Source: Mark Pittman and Bob Ivry, Bloomberg, March 31, 2009.
The New York Times: Obama’s ersatz capitalism
“The Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win – and taxpayers lose …
“With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost …
“Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.
“Some Americans are afraid that the government might temporarily ‘nationalize’ the banks, but that option would be preferable to the Geithner plan. After all, the FDIC has taken control of failing banks before, and done it well …
“What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a ‘partnership’ in which one partner robs the other.”
Source: Joseph Stiglitz, The New York Times, March 31, 2009.
CNBC: Roubini’s read on the recession
“The solutions and government interventions that need to be tackled in order to take the economy and financial system off of life support, with Nouriel Roubini, RGE Monitor chairman/NYU Stern School of Business professor, and Arianna Huffington, Huffington Post.”
Source: CNBC, March 31, 2009.
Financial Times: OECD predicts 10% jobless rate for 2010
“One in 10 workers in advanced economies will be without a job next year, ‘practically with no exceptions’, the head of the Organisation for Economic Co-operation and Development said on Monday.
“In a graphic indication of the global recession’s transmission from the financial sector to the rest of the economy, Angel Gurría warned that the ranks of the unemployed in the 30 advanced OECD countries would swell ‘by about 25 million people, by far the largest and most rapid increase in OECD unemployment in the postwar period’.
“He said the misery of joblessness – what Mr Gurría described as ‘rapidly turning into a jobs and social crisis’ – would come as the OECD expected advanced economies to contract by 4.3% in 2009 with little or no growth expected in 2010. The forecast is significantly worse than the International Monetary Fund’s most recent estimate of a 3-3.5% contraction for 2009.”
Source: Chris Giles, Ralph Atkins and Mark Mulligan, Financial Times, March 30, 2009.
Asha Bangalore (Northern Trust): Employment situation remains grim
– Civilian Unemployment Rate: 8.5% in March versus 8.1% in February, cycle low is 4.4% in March 2007.
– Payroll Employment: -663,000 in March versus -651,000 in February, net loss of 86,000 jobs after revisions of payroll estimates for January and February.
– Hourly earnings: +3 cents to $18.50, 3.35% yoy change versus 3.59% yoy change in February, cycle high is 4.28% yoy change in December 2006.
“The headlines and details of the employment report present a dismal picture of employment conditions in the US economy. The main message is that the Fed is on hold for the foreseeable future. That said, there are positive aspects in the report we are watching closely – employment in construction, manufacturing, and temporary help (see charts 7 and – and it is a matter of time before we can conclude if in fact these are meaningful signals of economic recovery.”
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 3, 2009.
CNBC: Pimco’s Gross talks jobs report
“Reacting to the jobs report and how the markets will respond, with William Gross, Pimco co-chief investment officer/founder.”
Source: CNBC, April 3, 2009.
Yahoo Finance: Nouriel Roubini sounds, GASP, positive about economy!
“Okay, not ‘positive’, exactly, but certainly less negative than he’s sounded over the past 18 months.
“NYU professor Nouriel Roubini, you’ll recall, is known as ‘Dr. Doom’, the most famous of the handful of economists who actually predicted the current debacle. A few days ago, after a speech in Italy, he was quoted as saying he might see some ‘light at the end of the tunnel’. And he repeats a similarly non-apocalyptic outlook on TechTicker in our interview here.
“To be clear: Roubini is NOT predicting an imminent recovery. He thinks that most economists are still way too bullish, that the stock market will retest its lows, and that unemployment will eventually rise over 10%. He just thinks that the quarter that is now ending, Q1, will be the worst rate of decline in the economy and that things will gradually stop deteriorating and then get better from here.”
Source: Yahoo Finance, March 31, 2009.
(in)efficient frontiers: Rising inflation expectations
“I’ve written in the past about the misinterpretation of yield numbers on TIPS (Treasury Inflation Protected Securities). While the yield numbers (and price when expressed as percentage of par unadjusted for the inflation index ratio) have given false readings, the dollar value of a basket of TIPS does offer insight. Consider the chart below:
“The chart illustrates the relative price performance of the Barclay’s iShare TIPS fund and the 10-year T-note futures over the last 4 months. As can be seen from the chart, the basket of TIPS in the iShare has appreciated by about 8% while the treasury contract has been roughly flat. The best explanation for this relative outperformance is rising inflationary expectations.
“Last fall, when TIPS falsely appeared to be signaling deflation, those who championed massive government spending cited TIPS performance as supportive evidence. Now that TIPS are clearly starting to warn of rising inflation, those same voices are noticeably silent on this fact.”
Source: Jeff Korzenik, (in)efficient frontiers, March 31, 2009.
CNBC: Bernanke – housing & the economy
“Federal Reserve chairman Ben Bernanke says the Fed has sought to avoid credit risk and allocation in lending programs.”
Source: CNBC, April 3, 2009.
Case Shiller: S&P/Case-Shiller – downward spiral of home prices persists
“Data through January 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of US home prices, shows continued broad based declines in the prices of existing single family homes across the United States, with 13 of the 20 metro areas showing record rates of annual decline, and 14 reporting declines in excess of 10% versus January 2008.
“The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. Following the lead of the 14 metro areas described above, the 10-City and 20-City Composites also set new records, with annual declines of 19.4% and 19.0%, respectively.
“‘Home prices, which peaked in mid-2006, continued their decline in 2009,’ says David Blitzer, Chairman of the Index committee at Standard & Poor’s. ‘There are very few bright spots that one can see in the data.’”
Source: Standard & Poor’s, March 31, 2009.
Asha Bangalore (Northern Trust): Pending Home Sales Index – positive sign
“The Pending Home Sales Index (PHSI) of the National Association of Realtors rose to 82.1 in February from 80.4 in the prior month. The PHSI leads actual sales of existing homes by one/two months. The February gain of the index is a positive sign for home sales during March/April 2009.”
Source: Asha Bangalore, Northern Trust, April 1, 2009.
Asha Bangalore (Northern Trust): Consumer confidence retraces a small part of loss
“The Conference Board’s Consumer Confidence Index rose slightly to 26 in March from a record low of 25.3 in February. The strength was entirely from the Expectation Index (28.9 versus 27.3 in February) as the Present Situation Index (21.5 from 22.3 in February) dropped in March.”
Source: Asha Bangalore, Northern Trust, March 31, 2009.
Asha Bangalore (Northern Trust): Factory sector is tiptoeing toward a recovery
“The ISM manufacturing survey results for March indicate that the factory sector is contracting less rapidly compared with the situation in February. The composite index edged up to 36.3 in March from 35.8 in February. The level of the composite index denotes a contraction of the factory sector but the March reading is now notably higher than the cycle low of 32.9 seen in December 2008. The New Orders Index (41.2, +8.1 points) recorded the largest gain among the different components of the survey.
“Indexes tracking production employment, exports, imports, backlogs, and prices advanced in March, while indexes measuring vendor deliveries and inventories fell.”
Source: Asha Bangalore, Northern Trust, April 1, 2009.
CNBC: Gross Talks Bonds
“Bond holders are still negotiating and hoping, with Bill Gross, Pimco, and CNBC’s Erin Burnett.”
Source: CNBC, March 31, 2009.
Bloomberg: Geithner’s non-recourse gift keeps on giving to Gross
“Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets may be a boon for Pimco’s Bill Gross.
“The plan may reward investors with 20% annual returns on ‘really ‘toxic’ mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with ‘non-recourse’ government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.
“Geithner’s Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings, freeing them to make loans while creating a potential windfall for investors. Federal Reserve Chairman Ben Bernanke said March 20 that ‘credit market dysfunction’ is countering efforts to fix the economy.
“‘One of the challenges has been that leverage has really been pulled away from the system and as a result the kinds of returns investors are looking for haven’t really been available,’ said Ken Hackel, head of fixed-income strategy at RBS Securities in Greenwich, Connecticut. RBS is one of the 16 primary dealers that are obligated to bid at the Treasury’s auctions of government debt and which trade with the Fed.
“Since Geithner unveiled the plan on March 23, Pimco, which manages the world’s biggest bond fund, and New York-based BlackRock, the largest publicly traded US asset manager, said they may be interested in participating in PPIP.
“‘This is perhaps the first win/win/win policy to be put on the table,’ Gross, co-chief investment officer of Newport Beach, California-based Pimco, said in an e-mailed statement last week.”
Source: Jody Shenn, Bloomberg, April 2, 2009.
Bespoke: 30-year fixed mortgage drops below 5%
“The national average 30-year fixed mortgage rate dipped below 5% as of last Friday to a level of 4.93%. The only other time it was below 5% in the last ten years was back in June 2003. One reason that the Fed is buying up Treasuries is to get this mortgage rate lower in order to help the consumer and the struggling housing market. So far the Fed announcement has done a pretty good job of lowering mortgage rates, but we’re sure they want to see it even lower.”
Source: Bespoke, March 30, 2009.
John Mauldin (Thoughts from the Frontline):
“Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the ‘70s.
“Let’s go back to the really long run. Starting in 1802, we find that stocks have beat bonds by about 2.5%, which, compounding over two centuries, is a huge differential. But there were some periods just like the recent past where stocks did in fact not beat bonds.
“Look at the following chart. It shows the cumulative relative performance of stocks over bonds for the last 207 years. What it shows is that early in the 19th century there was a period of 68 years where bonds outperformed stocks, another similar 20-year period corresponding with the Great Depression, and then the recent episode of 1968-2009.
Source: John Mauldin, Thoughts from the Frontline, March 30, 2009
Bespoke: Largest 4-week winning streak since 1933
“The S&P 500 has now been up for 4 straight weeks, registering a gain of 23.28%. Interestingly, the last time we had a 4-week winning streak that saw gains of at least 10% was 10/02-11/02, which was the start of the five year bull market that ran until 10/9/07. … this is the 3rd strongest 4-week winning streak on record, and the strongest since April 1933.
“The average change in the fifth week following these 4-week periods has been 0.24%, while the median change has been -0.35%. The average change over the next 4 weeks has been 1.87%.”
Source: Bespoke, April 3, 2009.
Bespoke: S&P 500 breaks above recent highs
“The S&P 500 took out its high from last week of 832 today, as the index is currently resting above the 840 mark. Technicians will be watching to see if the index can close above these prior highs, and if it does, it will be another positive for the uptrend that the market is currently in.”
Source: Bespoke, April 2, 2009.
Bespoke: Percentage of stocks above 50-day moving averages
“Currently, 75% of the stocks in the S&P 500 are trading above their 50-day moving averages. While this is a strong breadth measure, it has also been a level that has been met with selling pressure in the past. Health Care and Utilities are the only two sectors that still have less than half of their stocks trading above their 50-days. Technology, Consumer Discretionary, Materials, and Telecom all have more than 90% of stocks trading above their 50-days, which is definitely an overbought reading.”
Source: Bespoke, April 3, 2009.
Bespoke: Market volatility drastically lower, but still high
“In late 2008, the market experienced its most volatile 50-day period ever. At one point, the average daily move of the S&P 500 over the prior 50 days was +/-4%! While volatility is still very high, it has nearly been cut in half from its peak in late 2008. As shown below, the average daily change for the S&P 500 over the last 50 days has been +/-2.07%.”
Source: Bespoke, April 1, 2009.
Richard Russell (Dow Theory Letters): Identifying a bear market bottom
“First, based on the 76 years of the Lowry’s studies, prior to a bear market bottom, it is usual for their Selling Pressure Index (supply) to decline significantly, indicating that the desire to sell is being exhausting. Secondly, Lowry’s Buying Power Index (demand) begins to climb well before the final bear market bottom.
“This is NOT what has occurred. From its March 9 low, the Buying Power Index has risen an impressive 46 points. However, and this is the big problem, since March 9 Lowry’s Selling Pressure Index has declined by a mere 13 points. Thus, Selling Pressure has only dropped half as much as Buying Power has advanced. This suggests that there is still far too much desire to sell built into this market. Any cessation of buying will therefore succumb to selling, and this is NOT how new bull markets start. Selling Pressure is still far too high.
“From another standpoint I continue to believe that this advance is not the beginning of a bull market. Primary movements in the stock market tend to have a slow, persistent plodding look. In contrast, corrective moves tend to be rapid and violent, often spurred on by panic short covering. The action of this market since the March lows has the look of a secondary correction. The speed and the steep angle of ascent is suggestive of a bear market rally.
“Since March 9, the Dow has gained roughly 940 points in nine days. Thus, the Dow has regained 15% of its bear market losses in a mere nine days. This is bear market correction-type action.”
Source: Richard Russell, The Dow Theory Letters, March 31, 2009.
Richard Russell (Dow Theory Letters): Watch out for fizzling rallies
“The following from Financial Sense: The latest 23% surge in the Dow Jones Industrials towards the psychological 8,000-level, is its seventh significant rally of 1,000-points or more, since October 2007. During the bear market from 1929 to the bottom in 1932, the Dow Industrials fell by almost 90%. There were six bear-market rallies during that stretch, with returns of more than 20%, each one fueling a sense of renewed optimism. Yet each counter-trend rally ultimately fizzled-out and unraveled, before market indexes skidded to new lows.
“As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrials closed at 9,034 on January 2nd, its highest level since the autumn panic. The Dow Industrials melted down to as low as 6,500 on March 6, for an overall decline of 30% in two months, and to its lowest level in 12-years. The Dow Jones Commodity Index skidded to a six-year low, after tumbling by 57% since last July.
“We are now in the third Dow rally of 1000 points or more since October 7, 2007. The first over-1000 point rally started in March, 2008. The second started on November 17, 2008. The most recent over-1000 rally started on March 2, 2009. The first two rallies were wiped out with new lows in the Dow after the rallies fizzled.”
Source: Richard Russell, Dow Theory Letters, April 3, 2009.
Bespoke: Strategists continue to lower year-end S&P 500 price targets
“Below we have updated our table of strategist price targets for the S&P 500 at the end of 2009. UBS, Goldman Sachs, Credit Suisse, HSBC, and Barclays have all already lowered their year-end S&P 500 price targets. Bank of America actually recently increased their price target from 975 to 1,030. The average year-end S&P 500 price target is currently 956.5, which equates to a gain of just over 20% from the index’s current level. At the start of the year, the average year-end price target was 1,050.”
Source: Bespoke, March 31, 2009.
David Fuller (Fullermoney): Trillions of bailout money will buy downside cushion
“Forget a depression – the trillions of financial rescue packages will buy a downside cushion followed by economic recovery, even though more lagging bad data is in the pipeline.
“Forget another stock market meltdown – not all stock markets are equal but the bear has been ending since last October’s selling climax and the new bull is led by Asian emerging markets and South American resources markets.
“Forget long-dated government bonds as a safe haven – they are now a sucker’s game, propped up by the threat and occasional reality of quantitative easing, at a time when risk appetite is slowly returning.
“Forget US dollar safe haven – it is a Madoff-style Ponzi scheme, in which it pays to ask for your money back early.
“Expect commodity inflation – this is being led by precious metals and copper.”
Source: David Fuller, Fullermoney, March 31, 2009.
Jeffrey Saut (Raymond James): Kites!?
“Last week the DJIA and DJTA broke out above their respective 50-day moving averages (DMAs). They also now reside above their 10-DMAs and 30-DMAs. The 34% rally by the Transports since their March 9, 2009 low is particularly interesting given the Trannies’ economic sensitivity; and, amid cries that we are in a Great Depression environment.
“And don’t look now, but lumber has quietly gained nearly 30% since its February 2009 low. Again, that’s pretty impressive action given the current housing backdrop!
“Meanwhile, we are watching Personal Consumption Expenditures (PCE), for this is how recessions end. Indeed, if the ‘real’ PCE has stabilized, the end of the recession is not far off. Manifestly, the stock market always turns-up before the economy bottoms. So if the January/February strength in the PCE is for real, it is an extremely positive event. However, if the PCE strength is just a reaction to the +5.8% COLA adjustment, as well as the 13.2% increase in IRS tax refunds year/year, then the upcoming month’s data will revert to a more subdued reading. Accordingly, we are watching the PCE closely.
“While we are watching, however, our investments in platinum broke out to new reaction ‘highs’ last week, and indices playing to Brazil are attempting to break out to the upside. Still, it is day 16 in the ‘buying stampede’ and we have turned cautious. And, isn’t it interesting how the markets follow the news, for following ‘Friday’s fall’ (-148 DJIA) the Obama Administration warned that some banks will need more government aid and that bankruptcy might be the best option for GM and Chrysler.”
Source: Jeffrey Saut, Raymond James, March 30, 2009.
Bespoke: First quarter sector performance
“As shown in the chart below, the S&P 500 was down 11.7% in the first quarter of 2009. Six sectors outperformed the index, while four underperformed. The Financial sector was by far the worst performer with a decline of 29.5%. Industrials, Energy and Utilities were the three other sectors that underperformed the market as a whole. Only one sector finished the quarter in positive territory – Technology (4%). Consumer Staples, Consumer Discretionary, Health Care, Telecom, and Materials are the other five sectors that outperformed the market.”
Source: Bespoke, March 31, 2009.
BCA Research: Disenchanted with the US dollar
“The US dollar is unlikely to be dislodged as the dominant reserve currency any time soon.
“There are legitimate reasons for the Chinese to be worried about their dollar holdings: China’s foreign exchange reserves total $2 trillion, or 48% of GDP. The Chinese authorities are growing increasingly disenchanted with their exposure to the US dollar, worried that Fed policy is debasing the currency.
“Last week central bank Governor Zhou called for a reform of the international monetary system that would see the US dollar replaced as a reserve currency, such as the SDR. However, leaked parts of the upcoming G20 Communique do not hint that such a ‘super sovereign’ currency is being seriously discussed at high levels. Even if a consensus forms that a new reserve currency is a good idea, global authorities would have to convince international business people to invoice in SDRs. Moreover, a wide variety of financial assets denominated in SDRs would have to be developed and traded in deep markets. Such a massive undertaking would take many years to develop.
“More likely, China will continue to slowly diversify away from the US dollar into other countries, a process that has been ongoing for years. China is unlikely to suddendly ‘dump’ US dollar assets, as this would damage China’s own interests. Bottom line: The structural downtrend in the US dollar has probably resumed, but it should be a fairly benign adjustment.”
Source: BCA Research, March 31, 2009.
Financial Times: China and Argentina in currency swap
“China, which is pushing to end the dominance of the dollar as a worldwide reserve, has agreed a Rmb70 billion currency swap with Argentina that will allow it to receive renminbi instead of dollars for its exports to the Latin American country.
“Xinhua, the official Chinese news agency, said the deal was signed on Sunday by Zhou Xiaochuan, governor of the People’s Bank of China, and Martín Redrado, Argentine central bank president, in Medellín, Colombia, where they are attending a meeting of the Inter-American Development Bank.
“An Argentine official confirmed a deal had been discussed and said the fine print was being worked out and negotiations were ‘very advanced’.
“Beijing has signed Rmb650 billion of deals since December with Malaysia, South Korea, Hong Kong, Belarus, Indonesia and, now, Argentina in an attempt to unblock trade financing that has been severely curtailed by the crisis.”
Source: Jude Webber, Financial Times, March 31, 2009.
Bloomberg: Frank Holmes says “odds favor” oil prices rising to $65
“Frank Holmes, chief executive officer of US Global Investors, talks with Bloomberg’s Pimm Fox about the outlook for oil, gold and commodity prices. Holmes also discusses mark-to-market accounting and his investment picks of San Juan Basin Royalty Trust and AngloGold Ashanti.”
Source: Bloomberg, March 31, 2009.
CEP News: ECB’s rate cut takes into account subdued prices & weak demand, Trichet says
“The European Central Bank’s decision to lower interest rates to a record low of 1.25% took into account weak price pressures and deteriorating economic growth, said ECB President Jean-Claude Trichet, noting that further unconventional policy measures would be discussed in May.
“‘After today’s decision, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households,’ Trichet said during his press conference following the central bank’s rate announcement on Thursday.
“‘The Governing Council will continue to ensure a firm anchoring of medium-term inflation expectations,’ he said.
“Trichet said the ECB Governing Council ‘voted by consensus’ to lower the main refinancing rate by 25 basis points to a record low 1.25%. Economists, however, had expected a 50 bps cut.
“In his introductory remarks, Trichet noted that economic activity has weakened markedly in the euro area and that it will likely remain at a low level for the year.
“Nevertheless, falling commodity prices and large amounts of stimulus to the economy and the financial system should help consumption recover in 2010, he said, adding that risks to the economy are broadly balanced as a result.
“Disinflationary pressures, due largely to the sharp fall in global commodity prices, are likely to push price growth temporarily into negative territory, he said, but added that such developments are ‘not relevant from a monetary policy perspective’.
Source: CEP News, April 2, 2009.
CEP News: Government efforts having effect on financial markets, says ECB’s Bini Smaghi
“Signs that government stimulus measures are having a positive effect on financial markets are beginning to emerge, European Central Bank Executive Board member Lorenzo Bini Smaghi said.
“Government efforts, including fiscal stimulus plans and rescue measures, ‘are starting to be felt in financial markets,’ Bini Smaghi said in a speech given in Milan, Italy on Monday.
“However, the financial industry is still likely to contract, even after the global economy finally recovers, the central banker said. Smaller profit margins and a smaller labour force in the sector is to be expected, he said.
“At the same time, global trade is likely to increase at a slower pace than before the crisis, Bini Smaghi said, adding that risk aversion is likely to remain at high levels for some time.”
Source: CEP News, March 30, 2009.
CEP News: SNB to use “all means” to prevent deflation, says Hildebrand
“The Swiss National Bank will continue to intervene in foreign exchange markets to bring down the value of the franc and reduce the risk of deflation, the central bank chairman Philipp Hildebrand said.
“In March, the SNB reduced its three-month Libor target rate by 25 basis points and announced that it would begin purchasing foreign currency through FX markets in an effort to counteract further appreciation of the Swiss currency.
“‘A renewed appreciation of the franc contains the risk of a sustained deflationary dynamic in Switzerland,’ Hildebrand said at an event in Bern on Thursday. ‘It’s about preventing’ deflation ‘by all means’.”
Source: CEP News, April 2, 2009.
Reuters: Soros – Eastern Europe “prime candidate” for IMF help
“Billionaire investor George Soros said on Tuesday Eastern Europe was a ‘prime candidate’ for International Monetary Fund (IMF) support.
“Speaking at the London School of Economic ahead of the G20 summit, Soros said: ‘G20 should not just provide pious words but should take steps to stabilise periphery countries.’”
Source: Cecilia Valente, Reuters, March 31, 2009.
CEP News: German manufacturing PMI improves further
“Declines in German manufacturing activity continued to slow in March, Markit Economics confirmed on Wednesday. However, activity in the sector continues to contract at a sharp pace, the research firm added.
“The German manufacturing purchasing managers index rose to 32.4 in March, up one point from February’s figure and in line with both preliminary estimates and expectations.
“March’s increase marks the second consecutive month of improvement after PMI reached a 12-year low in January of 32.0.
“Nevertheless, the figure remains well in contraction territory, with the average taken across Q1 as a whole notably lower than the previous quarter’s figure.”
Source: CEP News, April 1, 2009.
CEP News: Improvement in UK services PMI suggests worst may be over
“The contraction in the UK services sector eased more than expected in March, suggesting that the worst in terms of activity declines has passed, Markit Economics said on Friday.
“The UK services purchasing managers index rose beyond expectations to 45.5 in March from February’s 43.2 level. Economists had expected a far more modest gain to 43.5 for the month. March’s gain is the largest recorded since last September.
“‘The latest upturn in the activity index and another improvement in business confidence to a post-Lehman Brothers high provide further evidence that the severe contractions in services output at the end of last year may now be behind us,’ Markit senior economist Paul Smith said.”
Source: CEP News, April 3, 2009.
Nationwide: UK – surprise bounce in house prices
– House prices increased by 0.9% in March
– House purchase activity reaches highest level since May 2008
– Welcome signals of market improvement but too early to talk of house price recovery
“Commenting on the figures Fionnuala Earley, Nationwide’s Chief Economist, said:
“‘Spring brought a surprise bounce to house prices in March. The price of a typical house increased for the first time since October 2007, rising by 0.9% during the month and reducing the annual rate of fall from -17.6% to -15.7%. This brings the price of a typical house to £150,946.
“The moderation in the annual rate of fall is somewhat distorted by conditions last year and so it would be unwise to draw strong conclusions from the significant slowdown in the annual rate of fall. Equally, while the rise in prices in March is welcome, it is far too soon to see this as evidence that the trough of the market has been reached.
“The Bank of England has already taken strong measures to ease the tensions in economic and financial markets by cutting rates and commencing quantitative easing. However it will take time for these to work through into the housing market before we can expect a sustained recovery in house prices.”
Source: Nationwide, April 2, 2009.
Li & Fung Research Centre: Chinese PMI rebounds to over 50%
“The PMI rebounded to 52.4% in March 2009, up from 49.0% in the previous month. The index was back to the expansionary zone of higher than 50% for the first time since October last year. Output index, new orders index and purchases of inputs index were also higher than the critical level of 50% in March. Except stocks of finished goods, all sub-indices were higher than their respective levels in the previous month. Of which, imports index grew strongly by 7.0 ppt. to 48.8% in March, compared to the previous month.”
Click here for the full report.
Source: Li & Fund Research Centre, April 2009.
China View: Soros – China’s system more suited to emergency conditions
“China has a system ‘which is more suited to these emergency conditions,’ the Hungarian-born US billionaire George Soros said in London on Tuesday, adding the Chinese government has more control over the banks.
“Speaking at a seminar organized by the London School of Economics ahead of the G20 summit, Soros said China has the means to stimulate its economy and keep the growth.
“He noted that China was ‘badly hit as the rest of the world,’ in some ways ‘even worse than some countries’ by the current economic crisis.
“Soros, however, predicted that China ‘will be coming out of the recession faster than the rest of the world’.
“The billionaire investor spoke highly of the stimulus packages that the Chinese government introduced, which have led to significant expansion of bank lending and a rally in the stock market.”
Source: China View, April 1, 2009.
James Pressler (Northern Trust): Japan – more news about a worsening situation
“Barring natural disaster, Japan’s fiscal year could not have started off any worse. Today’s release of the Tankan survey showed business confidence hitting a record-low level in Q1, and the near-term outlook plunging to new depths as well. The headline index for large manufacturing companies declined to -58 from an already-dismal -24 in Q4, while the index reflecting conditions looking forward continued its freefall from -36 to -51, suggesting conditions will remain horrible this spring. Furthermore, the confidence index came in lower than that quarter’s expectations index for the fifth straight time, undershooting projections by a full 22 points. As bearish as the economic environment seemed last quarter, business managers did not realize just how bad things could get.
“With global demand having all but dried up and the yen unwilling to depreciate significantly, it is readily apparent that Japan is not going to export itself out of its current recession. That being said, any near-term hope is going to have to emerge from fiscal stimulus. With today being the first day of the new fiscal year, it is also the first day under more relaxed fiscal policy and extra government spending. This will offer the economy a little boost while exports remain horribly weak, and possibly ease some of the pain from such a sharp economic contraction.
“From a GDP standpoint, the economy likely posted a year-over-year drop of 6% or more in Q1 due to external weakness. With some fiscal stimulus factoring in to the national accounts, the economy will not contract as sharply starting in Q2, but that does suggest any real economic growth before 2010 – just less pain.”
Source: James Pressler, Northern Trust, April 1, 2009.
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Monday, February 16th, 2009
Donald Coxe, Chief Investment Strategist, Coxe Advisors LLC’s, weekly conference call is an excellent source of outlook and insight from one of the market’s foremost thinkers.
GreenLightAdvisor.com has transcribed the February 13, 2009 call in its entirety for your review:
Donald Coxe, February 13, 2009
Thank you all for tuning in to the call that comes to you from Chicago.
The chart that we faxed out; we actually faxed out two of them this time; both of them were from election day, November 4, 2008. The Dow Jones Industrials and Gold. And our question that we asked rhetorically was:
“A difference of opinion on the Obama Program?”
When we’re in a situation where the only thing that seems to be working out big time for investors is Gold, then this is hardly a time when the illuminati in Washington are going to be very happy about what’s going on. So I want to begin by saying that the question about gold’s move is in itself something that we’ve got to analyze because its so powerful. And, Part of me says that now that there’s all of this enthusiasm and all the advertisements that I’m seeing on television from people that I wouldn’t want to spend an evening with are saying that you gotta buy gold. This is very reminiscent of the 1979-1980, which was the time that gold peaked in its triple waterfall situation. I don’t think that we’re anywhere near a top on gold but it still is something in effect where at least if you see it being discussed publicly, its by people who are mildly unsavory.
Well you can’t get this kind of move only from the mildly unsavory. And the question is, is the sustained selloff in the stock market at a time we’ve had a sustained rally in gold are they coming up with different interpretations on the Obama program. I think it is entirely credible to make out a case for buying gold on the basis that the program will work. Because if the program works, then what we’re going to have is an economic recovery, but given the sheer scale of what they’re pumping into the economy, and the debt that’s building up, then it’s going to be a 70s style economy in the sense that inflation rates are going to rise from a deflationary type situation, into a postive level and its everybody’s best guess as to whether that level is going to be painful or not, but its the kind of thing that would support the financial asset that benefits most from inflationary expectations.
On the other hand, you talk to people about it and what they’re saying is ‘no’, that these two charts are showing you the same thing, which is fear. That they don’t believe that the program is going to work; that its just going to make things worse, and therefore they’re fleeing out of assets denominated in paper money of all kinds and going into gold. And apparently the justification for that is particularly that the big Swiss banks are seeing is that their high net worth clients are taking out safety deposit boxes and putting gold bullion into them and not the kind of small wafers that are being peddled on television by these somewhat conspiratorial types.
Far be it for me to make the case for gold on the basis that the system is going to collapse. But on the other hand, if you get that value out of gold while still saying that there’s a better part of it I think then that’s a better story to have and one that I as a strategist who doesn’t like to predict armageddon can believe in. Besides which, there’s lots of evidence out there that armageddon is not the new consensus.
What we know from the 70s is that if you have a recession at a time of fast money supply growth that what happens is that the stock groups that tend to do best during the recession and to lead you out of the recession tend to be commodities. So the commodities stocks of course, were just hammered after the ‘midnight massacre’ of July 13, 2008 which is what really launched deflation in the world. But what’s interesting is what’s happened to them since then in relative strength. We come back to my old faithful of the IBD’s 197 industry subgroup rankings and what changes there are in that from week to week. This week, if we take the top 21 stock groups, we see that 7 of them, that is one-third of them are commodity groups led, of course, once again, by metals, ores, gold and silver; they’ve been at the top for some time. But we’ve got food flour and grain; we’ve got oil and gas transport pipeline, we’ve got oil and gas refining and marketing, I feel very good about the fact that pure refiners have done so well, I can tell you. Food, miscellaneous preparation, retail, wholesale food; and Oil and Gas, International Exploration and Production interestingly enough.
So, what that tells me is that this is the kind of swing at a time when everything looked bad, back in 1974, and by the way, things looked much worse then than they do now, in 1974. We were down to a 6 mulitple on the Dow. And the belief in equities as an asset class was being abandoned on all sides and unemployment was double digit levels and governments were falling; things were much much worse then. But, what you could see was the relative strength of the commodity groups, including, by the way, the supermarkets back then, which is interesting, because the supermarkets are doing well now. So, I would therefore like to take the view that what signals we’re getting for the market are that the market like all the pundits, isn’t sure that this $2-trillion that’s being thrown at the system is going to work. But the belief is if it does work, we’re going to have a greater demand for scarce assets, and that everybody recognizes that the huge selloff that we’ve had in commodities and commodities stocks means that scarcities could come back pretty quickly. And that’s exactly what happened in the 70s.
Now, I’m quite sure there’s a lot of you out there saying ‘you keep talking about the 70s, and its a different world.’ It is in many respects, but only in one, I think, that’s really crucial, and that is on the real estate side. Because back then what we had was the baby boomers were university graduates having to live with their parents or grandparents because there were no houses available for them. There was a housing shortage because of course, there was no way they could expand the housing market fast enough to take cognizance of the huge number of baby boomers coming out of high schools, community colleges, and universities; well we havn;t anything like that this time, because of the birth dearth that began back then. What we have is a situation where the housing supply was built on the assumption that things would be the same as they had been every other cycle and of course they aren’t the same, and they will never be the same the next 50 years. So that’s the big difference. We have demographic deflation across the industrial world and in that sense, what it means is that there is one asset class which cannot behave as it did back then. And back then, house prices, although it took them a while to start moving up, even though we had inflation, they did. In any case, you didn’t lose money on housing back then.
But as for the stock groups, what’s interesting is that despite what we have as this ‘pitiest’ price for West Texas Intermediate (WTI) of $35 bucks a barrel, what we see is that it seems to be the most artificial of prices because nothing else that you see on the screen relates to it. Oil for delivery in December is $53. Now I have never seen anything like that. I mean, imagine, a 50% premium for ten months. So this relates to the whole question that a battle is going on between Brent and WTI, and Dennis Gartman, and as usual, Dennis is the best at analyzing these things; he’s saying that the WTI contract is now just plain silly. Because it relates to such a tiny amount of oil, and the only place in the world where oil is in oversupply is in Cushing, Oklahoma. Well, if we look at other oil prices then, what we’re seeing is that despite the huge economic slowdown in the world, that we’ve got oil for delivery in December 2010, that we can believe these parts of the WTI contract because they are not related to storage problems around Cushing. These are way out on the (futures) curve and we’re looking at $60 oil out then.
I think that the fact that the oil stocks, despite the fact that spot WTI has gone to a new low, the oil stocks are actually starting to perform better, is people’s recognition that with the cutbacks that OPEC has already delivered and then the evidence that US consumption hasn’t fallen by 5%, 6%, or 7% as people thought; those statistics were clouded by what the retail gasoline sales were; and of course, what they did, because retail gasoline was down by 50%, was in trying to adjust for this after you took out state taxes and all these things, people got wrong what the actual volumes there were. So what we see is that the actual demand for oil in the world has not fallen off a cliff. Yes, the demand for industrial goods and consumer goods and ? and things like that has fallen of a cliff. But certainly not for most commodities, and particularly, not for oil. And with the move that we’re getting in the fertilizers, and I’d just like to mention once again, the value of the IBD survey, because way down, you get way down the list, number 56 on the list, and you see chemicals and fertilzers [12:23] but that this week and three weeks ago they were down in the depths at 154 and the charts show you that there has been a huge change in attitude towards the fertilizers and indeed towards the agricultural stocks generally.
Now, that’s not because I think the world has embraced our view of the strong possibility that the two centuries of global warming have come to an end, and that we might be entering a period of global cooling which would dramatically affect the outlook for crops in the northern hemisphere. No, I think its simply once again the recognition that although demand is reduced somewhat for key grains and feedgrains as a result of the economic slowdown, that it has not collapsed and the carry overs even though they’re bigger than they were a year ago, are not so great as to suggest that the prices farmers are going to get for their grain are going to be profitable. Yes, spot corn is $3.66, but the new corn that hasn’t been planted yet, which will be delivered in December is $4.07, and corn for the next year after that is $4.25. These are prices, that if you’re a farmer who does a good job producing it, could make a lot of money on it, despite the collapse in demand for ethanol. So, what I’m basically saying is that we already have two commodity groups which in the last few weeks have been moving up strongly, and they’re basically saying that you don’t have to take a bet on how the Obama program works out, as to whether or not this recession is going to drag out a couple more years. You can make money here.
In other words, the savagery with which all commodities and commodity stocks sold off during the collapse, particularly after the Lehman bankruptcy; that is behind us, and now investors are starting to look at what the world will be like if the program succeeds or if it fails, and at the moment, they’re not prepared to take bets, big bets on the program succeeding. Now, one of the reasons they’re not prepared to take big bets is because of the poor performance of the bank stocks. And, I’ve told you over and over again, and I’ll tell you again, that a bear market which begins with a breakdown in the financials doesn’t end until the financials outperform. And, we had that brief period of outperformance, but it was only, as we saw, by the kind of stuff that Alex Rodriguez was consuming. In this case it was financial steroids.
After the Midnight Massacre, when they made it illegal to sell short the bank stocks and also forced the hedgies to unwind their shorts on what they had, it was a situation where the bank stocks rallied to huge premium relative to the performance of the S&P 500, and after that was taken away, which, it was taken away after the end of September, they collapsed on relative strength, and they have not been able to rally from this huge discount on relative strength since then. So, as much as I would like to be able to say that we know that the worst is behind us for the broad stock market and the economy, I can’t say it until the bank stocks find a way of rallying.
I watched President Obama’s first press conference, and once again was very impressed with this man. He is articulate, he’s cool, he’s smoothe, he’s the real deal. However, we already knew that the stimulus proposal that he was endorsing had been drafted by Nancy Pelosi and friends; Barney Frank and people like that in the House. And therefore [16:30] what it was, was long on a far-left liberal wishlist items that they could never have gotten through Congress on their own, and short on genuine stimulus, such as tax cuts, or on the infrastructure type deals that everybody thought they were going to be emphasize, including $4-billion for ACORN; I mean, that is just staggering to me, that they would do that. ACORN is being charged and being investigated for vote fraud in quite a few states, and they also were also leading the pressure on the mortgage lenders to make 100% loans to Latinos and African-Americans on the interest of social justice. So, I mean, the idea that these people who are going to be able to use the money to get lawyers to defend them against vote fraud charges. That takes chutzpah, to include that in the National Stimulus Bill.
But that’s only $4-billion out of $800-billion, but the problem that happened and why the market has sold off since then is the recognition that what we were told was going to be targeted and temporary is anything but. Its all sorts of global-warming type programs, and things that again, maybe depending on your viewpoint, just fine ways to spend the taxpayer’s money, but we don’t need to work hard to figure out ways to spend the taxpayers’ money on a massive deficit. What we need is to do things that get people working.
Now its true, that Keynes famously said its better to pay somebody to dig holes and to fill them in, than not to have any activity at all. And so, what one can probably say about the rest of this bill is that even if you don;t think that a lot of the things they want to do are worth doing, as long as they do them soon, then probably there’s an advantage in doing them. The problem is that these will be built in as permanent new government programs which means that trying to deal with the deficit thereafter, will be a challenge beyond the best designs of Larry Summers.
But that’s way out in the future. Let’s talk about whether right now this is going to work. And once again, we have some evidence to the effect that things are getting better. Money supply growth right through the curve is now moving rapidly, and yes, its true that velocity has collapsed, but the experience of past recessions is, that you first of all grow the money supply, and then eventually, sometimes grudgingly, the velocity comes back, and when that does, then what you can get is a much faster recovery than any of the economists have forecast. I mean, it does turn around pretty rapidly.
So, in this case, we’ve not only got the remarkable stimulus from the central banks, which should start showing up, across the whole OECD in terms of money supply growth, but in addition, what we have is the bailouts in the banking system, and, again, you can argue wtih why this or that institution is getting help, and this or that institution is not; that’s not really important. What is important is that they are helping financial institutions and as long as they help the ones that can actually do something useful, then I’m not going to be too upset if they help those that don’t deserve to be helped, namely the big Wall Street banks. Those banks got into trouble because they gave up the business of banking for the business of gambling and speculation in order to create huge bonuses for the insider. There is no case other than counterparty risk case for throwing money at them.
What you need to do is give money to the banks that actually talk to customers face-to-face and do business with them face-to-face about their real needs, their loans, their letters of credit for trade, all of these things. And we had a period when the letters of credit had dried up all over the place across the world, because banks weren’t doing this. You couldn’t find anybody, because this is a low margin deal and there was a state of panic. What’s interesting is that trade does seem to be coming back. We’ve had a more than a doubling of the Baltic Dry Index; now I know that this is from an absolutely miniscule level – it was down 98%. But we’ve also got numbers coming out of China indicating that this is one place where they’ve managed to get both the money supply growing, and the velocity growing. So once again, these guys who say they follow the dictates of Mao, but not of capitalism, are doing a better job on applying Friedman and Keynes, than any of the governments in the so-called capitalist world.
But if you’re a commodity stock investor you actually care more about what’s happening in China, than what’s happening in Chicago. So, i think that you can make the case that the stock market is giving you signals that the economic recovery globally is going to come later in the year, but it will be led by the usual suspects in this decade, namely China and India, because India, although its not growing as fast as it was, is still growing, and they are also very aggressive about monetary expansion and assistance to financial institutions. So, I think, for those of you who have cash, and courage, that, and maybe that have read some of those individuals who are saying that we’re already in a depression and the only thing to be in is either cash or selling short, if you don’t share that stijian gloom, then you just look at the signals coming out of the IBD itself, as to which stock groups have moved from being blasted, to being in favour, and you can see a lot of stock charts indicating that the market is telling you who is going to lead us out of this. And that’s a road map that’s very useful.
Now all of this is going to be discussed in much greater detail in Basic Points which I’m pleased to say comes out at the end of next week, but we’re working on it now so we’re back in harness as it were. I’ll end by pointing out that, again, looking at this list what we see is that oddity that if you don’t look at the big moneycentre banks, which are still in ghaslty shape as their relative strength goes, there down at the bottom of the IBD list, but what you see is that regional banks, NorthEast, Midwest, Southeast, these banks that are banks and don’t create collateralized debt obligations, these stock groups are outperforming. There is one other group that’s come up strongly in the list, and I’m not sure that I can tell you what it means, but funeral services is another booming business and maybe this is a good time to stop and take your questions, because maybe I’m putting too much emphasis on which stock groups are attracting attention .
Let me sum it up by saying, I believe that going to the great economists of the past, that even if so much of what’s being done here is being done with bad motives, and its being given to bad people, its better probably than doing nothing, and by the way, I sort of admired Obama’s chutzpah is saying that the opposition were the Republicans who weren’t voting for this confection of Nancy Pelosi and left-wing of the party were in favour of doing nothing. It wasn’t the case at all. It was that they wanted to have tax cuts and targeted programs which was what had been promised three weeks before. I think, take the political debate out of it. This is the administration that won the election. These are the ones that are in power, there’s no point going off and insulting and what is likely here, is that we’re going to get a turn. Ans so, with that I believe that you follow the signals themselves and the groups that outperforming right now are likely to be the groups that will be outperforming 6 months from now. That’s the way it was in the 70s and as I say the only difference between now and the 70s is about an asset class that you’re not going to get much enthusiasm right now anyway, which is real estate. That’s it. Any questions?
(27:07 End of prepared portion)
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Posted in Commodities, Credit Markets, Economy, Emerging Markets, Energy & Natural Resources, Gold, India, Infrastructure, Markets, Oil and Gas, Outlook, Silver, US Stocks | Comments Off
Saturday, February 14th, 2009
Happy St. Valentine’s Day!
Here is a listing of the 15 most popular articles (ranked according to # of views) published at GreenLightAdvisor.com during the last 2 months:
Popular GreenLightAdvisor.com Articles:
- Jim Rogers: Outlook for 2009
- Warren Buffett Interview (01/19/2009)
- Donald Coxe: Have Commodities Started to Outperform?
- Bill Gross, Investment Outlook, December 2008
- Byron Wien: Ten Surprises for 2009
- Sprott: “So you think 2008 was bad?”
- Setting the Bull Trap
- Donald Coxe on BNN (12/12/2008)
- 20 Surprises for 2009: Doug Kass
- Buffett’s Metric says its time to buy
- George Soros: The New Paradigm For Financial Markets
- Is Wall Street Responsible for 2008’s Oil Bubble?
- Bill Gross: Investment Commentary (Jan. 2009)
- Stock Markets: Is This It?
- Jeremy Grantham: Riveting Interview
Tags: Bill Gross, Bnn, Commodities, Donald Coxe, Doug Kass, Financial Markets, George Soros, Gross Investment, Investment Commentary, Investment Outlook, Jeremy Grantham, Jim Rogers, Metric, New Paradigm, Sprott, St Valentine, Stock Markets, Surprises, Valentine S Day, Wall Street, Warren Buffett
Posted in Commodities, Energy & Natural Resources, Markets, Oil and Gas, Outlook | Comments Off
Wednesday, February 11th, 2009
Although we have anxiously awaited a new issue of Basic Points from Donald Coxe, since he announced his departure from BMO in December, he has continued to make himself available via conference calls. Among other things, Mr. Coxe did mention that there would be an issue this month. Here, however, is the full transcript of the February 6, 2009 conference call, that we have produced for your review:
Donald Coxe, February 6, 2009, 10:00 a.m. – Conference Call Transcript
The chart we sent out is the relative strength of the Reuters Jefferies CRB Index to the SP500.
The tagline was, “Have commodities started to outperform?”
There’s a lot in this chart and I want to take you through the story, where we’ve got just horrendous economic news. We’ve gone from the bad, to the terrible, to the scary, to the absolutely horrendous with both Canada and the US, announcing the worst job, losses either on record, or back to the middle of the 70s. And yet, we’ve got the stock market up, the TED spread narrowing, the VIX narrowing, and the BKX is strongly outperforming the S&P today.
So we’ve got very mixed numbers. if you’re looking at it from an economist’s standpoint, the world is just spiralling downward to disaster. But the commodity story is gradually changing, and remember as you can see from the chart, the relative strength off the CRB futures to the S&P was a terrific forecaster of what economic news was coming.
Commodities collapsed really before we had the collapse in the S&P, and one very brief spike, and then going down to a new low which was reached at the beginning of December. We’ve been just gradually working a little bit higher. Now you may say, well this is really struggling to find something good out there but theres much more than just this.
As you know, I’ve always put great strength on looking at Investors Business Daily Reports on their 197 stock groups that are traded in the US market. Now Remember, these aren’t just US stocks, these are stocks that trade on US stock exchanges, and over the years, I have found this to be one the most helpful tools in getting an idea of the way in which the market is dealing with its views of the future, as opposed to the economic numbers which basically reflect what is happening right now. When there’s a divergence between the two, quite often it turns out that the performance of the equity groups in the IBD was a better forecaster than any of the economic forecasts that were out there.
Now this isn’t a one hundred percenter, but its a very good indication and over the last few weeks, ie. since this new year began, there’s been a huge change in the makeup of the IBD list of 197 groups. As we look at it this morning, I recommend that you all use this: page B2 of the IBD, andif we look at it this morning, this is the relative ranks over the last 6 months, so therefore you don’t get an instant change. This is not an extremely short-term index; this shows you that over the last 6 months which stock groups have done best, and what’s really crucial is to see how they’ve changed their ranking because they show them, right now, three weeks ago, 6 weeks ago, and then way back; and what we see here is the number 1 ranked group in the whole group is metal ores, gold and silver, and they’ve got several stories in today’s IBD about various gold mining stocks and how well they’re doing.
That’s the number one group. Now, in the top twenty, and they always have a box around the top twenty group, we’ve had a big, big change in the last few weeks. We now have a total of 5 groups, which are commodity related which are ranked in the top twenty for performance over the last 6 months. #13; I’ve just come back from speaking to big group of grocery and wholesale conference in Nevada, and the #13 group is retail and wholesale food. #17 is oil and gas transports and pipelines; #18 is oil and gas refining and marketing; #21, just off the bottom of that, food, flour and grain; #23, food preparation; #26, oil and gas, international exploration and production; and, not doing as well, but not off the bottom of the chart, are Banks, North East, at #47; Banks, Southeast at #52, Finance, Savings and Loan #56, and moving up in just 3 weeks, from 165th rank to #66 is the fertilizer stocks. And, once again today, fertilizer stocks are strong, in fact, the agriculturals are very very strong today.
The importance from our standpoint of this is that the view out there within the commodity industries about the outlook is changing even while the economic numbers just get worse and worse and worse. And I’ve got to take you back to what happened back in the 70s, because this is almost eery as to how much this is the way things were in ’74, ’75, One of the statistics published about the unemployment numbers was that these were the worst unemployment numbers since 1975 in the US and Canada, they’re the worst on record. And Canada, of course, has great commodity orientation in its economy. The unemployment numbers tend to be coincident to lagging numbers, and the unemployment numbers will continue to get bad and worse.
Why is the stock market overall so strong? Well, this virtually guarantees that the stimulus package will get passed. Now I’m deeply disappointed in how the stimulus package has turned out. its turned out to be a grab bag of a whole bunch of liberal wishlist programs they figured they could never get passed through Congress under ordinary circumstances but by labelling them as stimulus ther’re going to be able to get them through.
Rahm Emanuel, who’s the head honcho, next to Obama, in the White House said, “It would be a shame to waste the worst financial crisis since the Great Depression.”
So, what we’ve got here is a wolf in sheep’s clothing, but at least we’ve got activity. And, the evidence on the financial side is that the massive re-liquifications that are being done by the Fed, and then the various bailout programs are having their effect, because the TED spread is way down at 92.50, and the VIX index is also way down. Either the stock market is dealing with a total unreality, or there’s already a change out there.
One of the surprises has been the strong performance of the base metals recently, and that’s because both China and Korea have announce that they’re going to be buying base metals to build into their national reserves. Korea is very frank about it because they want to protect margins of their industries against what they see is stronger demand later in the year.
Now this is a sort of a Sovereign Wealth Fund type deal, when commodity importing countries use their reserves to buy in cheap raw materials to protect their goods producing industries, but its interesting that it came on the same day this week. And this is a sign in the key Asian economies, that as bad as things are for them, their export numbers are terrible and all these things that we know about, and the Baltic Dry Index has doubled since being down 99%. Dennis Gartman remarks today in his great letter.
Does this just mean that we’re going down along with the economic numbers, or is the world changing? Its been out thesis that the commodities stocks would start to outperform before the stock market really had reached a recognizable bottom. And that was on the basis that they were the strongest groups going into the downturn, they were the group that led the downturn, and therefore what you want is to see whether that was that the whole story had changed, the whole story of commodities as an asset class, and that that was over. Or whether this was, as it was back in 1974 and 1975, a great pause in a much bigger trend. We, of course, are of the second view.
This is a pause, a dramatic pause, in a much bigger trend, and as you can also see from the chart, what happened with the commodities, was the real collapse occured as the banking crisis really got out of control, and we went to the low, where the CRB futures at the 1st of December, when the whole picture of the banking industry was really grim. This was a low on relative strength for them after the stock market had already reached its November low, so again, its a relative strength reading.
The fact that all commodity stock groups have been strong lately is in itself a really impressive sign of either, total un-reality out there, or that the market is sensing a big change in the wind. As I look at my screen here of all the commodity stocks, every single agricultural stock isi up except one. The oil stocks are somewhat mixed, although oil prices are down. The group is about flat. And of course the precious metals stocks notwithstanding that gold is pausing in here as a group are up, but the base metals stocks are all up, all up substantial amounts.
This again is like 1975, and I beleive that what we’re seeing here is a recognition that financial assets are going to have trouble doing as well as hard assets, because the sheer scale of the reflation, is so dramatic, far beyond anything that was done. Back in the 70s we had inflationary monetary policies which made things worse, but we didn’s have the derivatives there back then driving things. It was actually monetary growth which signalled to people that monetary growth was too much, and that we’re going to have more inflation. And Gold is giving the signal, coming off $38 on what was going to be its eventual run up to $825-850, much later.
For investors, this dramatic outperformance, a one-month date, its just been amazing to these stocks, the last month, I mean we’re talking of double digit returns for a great number of commodity stocks no matter which group you’re looking at. That’s why, of course, the IBD Stock Index shift. Because this is after all, you know, the stock market has been a really bad place to be, the worst January on record. The worst for the S&P on record and so the conventional strategists have gone back to the forecasting ability of the S&P in January and predicting that this could be a year as bad or worst than last year. I’m not going to make an overall stock market forecast here; that will come later. But when you look that while the stock market was going down, that all of a sudden the most beaten up group is starting to perform very strongly, what it is is a fundamental change, I believe, in direction, and therefore, our favourite group is going to continue to give good relative strength.
Now of course, relative strength can still be a negative if the stock market breaks through to new lows. I can’t talk right now about the alpha that you’ve got, but I can point out that despite all the problems we’ve had, we still have a gigantic contango in oil. Now this is being treated by most observers as a sign of weakness. Again, I go back to the 70s. What happened was oil swung into contango, and stayed there year after year. It hasn’t been in contango on a sustained basis, except during the period which ran for about 18 months earlier in this decade, when oil demand kept running ahead of supply, and gradually, people saw this happening, and bought out the futures curve farther, but we swung back into backwardation, and now we’re in this sustained contango. At meetings with clients in Las Vegas, the oil contango was for them, and this is the grocery industry, this is a big part of their costs, they kept saying, ” What does this mean? Why is it that oil prices even a few months out are way ahead, let alone, years out?”
My view is that this is an expression of the relative willingness of producers to sell forward, as against the willingness of consumers to lock in prices that they feel they can live with. And so we’ve got a gigantic rebalancing and hedging game going on here, and I don’t think much of this is speculative activity. I think the speculative activity got excreted from the system by the collapse of the hedge funds, and particularly after the collapse of Lehman, which locked in $65-billion of hedge fund assets, so that the big debate that we were having last spring was that oil breaking through a $100 was purely a speculative thing, and not reflecting reality. It turned out there was more speculation than even I understood. But, we certainly knocked that out because the big players have been decimated. This of course also spreads out into the valuations of the private equity companies which have been sort of the worst area of the financial market recently, apart from the Wall Street banks.
There’s these currents around here which indicate that there’s gradually a belief system that although China and India and Korea and these economies which were the drivers of the commodity bull market, are slowing down, and are having troubles. At the conference, the first speaker in the panel in the morning, who is a guy loaded with data; he’s from First Data. He was just back from China; he said that unemployment rate is skyrocketing over there, the government is desperate and they’re pulling out all the stops. What we know is this is a very responsive command and controlled economy and therefore they still have the liquid assets. Remember, they got a 40% savings rate in China, so those savings can be moved out into the economy. Where as opposed to the US, our savings rate has just finally crept above the zero rate.
If in fact then, these big economies are not going to collapse along with the OECD, then its a very clear cut case as to which asset class is going to do better than the other. That’s the hard asset class. Bbut what’s also fascinating is the change in the prices of the grains relative to other commodities. And, thats at a time when the USDA keeps increasing its estimates of the reserves on hand of the grains. i.e. we’re getting bearish news on the grains from the USDA, very disconcertingly bad news, in fact, as they’ve calculated that particularly in the case of corn, how much isi on hand, and it turns out to be more, and the reason for that is the bankruptcy of these ethanol companies, the Verasun’s of the world. So. of course, ethanol based consumption of corn has collapsed. But when you look out further out on the futures curve, what you see is strength, and then you come down on to the statistic that nobody wants to talk about, which is the sun spots and the weather.
Well, the weather data, you can pick your stories as you want. As I was flying out there, to Las Vegas, sitting watching CNN in the terminal, they had a great scene in Trafalgar Square, which was totally buried in snow, and they had kids rolling in the snow. The only other active people in the square other than the kids playing in the snow, were a group of war protesters. it was explained to us that they’re paid for being there. Once again another snow storm has hit England. Now this isn’t January, or December, its February.
The sunspots have still not come back. Right up to date, we’re still getting very low sunspot acivity. In another 6 weeks, my back of the envelope calculation works it out, if they don’t come back, we will have the longest sustained low sunspot activity, in about 2 centuries. At some point, this is going to start attracting attention from the people out there who are telling us that the only we have to fear is global warming and of course, naturally, in this collection of liberal wishlists that are going to get voted through the senate. There’s huge amounts of money to deal with Global Warming. And, this will another case I believe where the liberals’ agenda will be based on theories that are being exploded before our very eyes about the reality. If the correlations of past history work, then we’ve got a very late planting season coming up at the very least and so we start to count the time because if the sunspots haven’t returned by May, then based on correlations dating back to 1804 when the astronomer Royal, William Herschel, one of the greatest astronomers of all time, saw the correlation of sunspots and the price of wheat, then we’re going to have a shock to the global system, and I believe that that much history should be respected.
While I was on vacation, I read a History of Scotland, and one of the small stories was explaining why Scotland got taken over by Britain at the end of the 17th century. The biggest reason was 6 straight years of crop failure. Now this was the years of the ‘Maunder Minimum,’ in terms of sunspots, the lowest sunspot activity for which we have proven records, because they only, started keeping the sunspot data with the time of Galileo; and of course, Scotland is very far north, and the effect of cooling naturally is felt the further far north you are from the equator you are, because the tropical zones are such a huge percentage of the actual face of the Earth, because of the width of the Earth, the zones, that as you move further north, you get cooler temperatures, then the effect of any reduction of solar energy is felt much more powerfully. In other words the further north you are, the more damage is done from cooling on crop production.
That’s why it is that Brazil can continue to have terrific production of soybeans because they’re so close to the equator, in their main production zones. But what happened in Scotland, was that although crops were erratic, poor to marginally good at times in England, they were much better than in Scotland, because there, they had late Springs, and devastating frosts.
Now will all this repeat itself? The scientific community says ‘no.’ There’s a correlation that you can show, but they can’t show how it works. But as an historian, I have to tell you that I still believe this could prove to be one of the biggest stories of the year, but nobody’s talking about it.
Therefore, if you’re buying into the agricultural stocks, you don’t need to feel that you’re taking a bet on this, because the market is already taking a big bet on it; Not so. There’s just nobody out there except the Farmer’s Almanac, by the way, that said it was going to be a bad planting spring, because of sunspots. You may say, “Come on, you can’t cite the Farmer’s Almanac.” Well, the Farmer’s Almanac has managed to stay in business as long as it has by using the climatalogical data and they were quite candid about it, that it was because of sunspots, or the lack thereof. So that’s the only support there is at the moment that I’m aware of for our thesis.
So what you should do now, in terms of your overall equity exposure, the fact remains that the big stock indices are still weighted to the economy stocks and the financial stocks. The financials have a much lower weight than they had before, but within the financials, and that’s why I talked about these regional banks, I believe that what we’re going to see is continued great relative strength of the bank banks; the regional banks, those who actually know their customers, and do traditional banking, as opposed to the investment banks, and the glamorous Wall Street types who dissipated their stockholders’ equity by levering up with the colateralized debt obligations and all those other monstrous products that they didn’t understand. They ceased to be bankers, and became packagers of toxic waste which was re-labelled as great food.
So if we separate out from this the highly publicized banks which are on life support systems supplied by Washington, then I believe that there’s still enough relative strength being shown there that the economy is suffering, but just because Citibank and these other banks are down 80% or 90%, you shouldn’t say that that means the banking industry is down 80% or 90%.
So the economy is going to be a series of stories here and there, and I don’t believe we’re going to get economic numbers for some time, which are going to be the kind of things that are going to be stock market friendly, so I can’t make out at the moment a case for increased equity exposure. I can simply reiterate that within the equity group the signals that we’re getting are that the commodities selloff on relative strength is over, and that the fundamentals are that people are going to be starting to look further out. The stock market is supposed to be a forecasting tool. What they’re saying is that these reflations are eventually going to work enough so that the world will not go down the tubes, and there will be demand for hard assets. That’s the story of the 70s, and its going to come back in somewhat different form, its going to be a shock to the stock market, its going to be a shock, certainly to the intellectuals and the others in control of the media, but I do believe that this implies that the TSE will once again outperform the S&P this year and therefore, that the worst is over, that you pick your spots.
Now as far as weightings, we are coming out with an issue of Basic Points this month, and we will be publishing revised recommended weightings in the commodity groups. I’m at a bit of a disdavantage here, because I’ve got to; I know that the number of people on the call is a fraction of the number of people who read Basic Points, but I can simply tell you that I believe that we’re getting the signals already from what stock groups are doing as to where your emphasis should be. So I recommend that you check those out and that that be part of your guide as you’re figuring out you’re going to be allocating your capital or for those who are thinking of things like RRSP season in Canada, and haven’t given up the faith on stocks, which stocks it is you want to buy now to put in your RRSP. Not that you’re planning to go back and look at it 90 days from now to see how its done.
The fact remains that the billion people that we’ve added to the world’s consumption side, haven’t all turned poor, just because of all the unemployment in the US. So its still going to be a tough winter and a tough spring, but I think that the world of the future is starting to show itself and our job is to try to predict the future rather than getting to mired down in the gloom right now.
Remember the same economists were telling us things can only get worse. As recently as last June were predicting 2-3% economic growth. Now they’re saying there’s no hope, and I’m not ridiculing the economists, because there are a few of them like Nouriel Roubini, who correctly called it. David Rosenberg did a great job. But the economic consensus just suddenly changed and that’s why we had this V-shaped collapse which came as fast as the collapse came the last time in 1974. And at the worst in 1974, the multiple on the Dow got down to 6 (times). I don’t think that we’re going to see that this time, but it means that you’ve got to be cautious about having said that there’s definitely been a bottom in the S&P and the Dow. But I do believe we’ve seen the bottom for the commodity stocks as a group. That’s it.
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