Mobius, Rogers, and IMF Love China

Thursday, October 1st, 2009

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

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

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

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

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

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

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

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

Buffett: Economy has Hit Plateau at Bottom - No double dip

Thursday, September 17th, 2009

Warren Buffett says the US economy says the economy is not getting worse, nor is it getting better, but has “hit a plateau at bottom.”

“We have not bounced but we’ve quit going down,” Buffett, the 79-year-old chief executive officer of Berkshire Hathaway Inc., said today in an interview on CNBC.

“We’re through the worst of it in residential real estate in all probability,” Buffett said today, adding that he doesn’t expect a “double-dip” recession.

…

Buffett, known as the “Oracle of Omaha,” told a conference in California that his company was buying equities because “I am getting a lot for my money.”

…

“We’re gonna have unusual losses in credit cards and in commercial real estate” in the economy, Buffett said today. “But we’re a lot better off than we were a year ago. I mean for one thing, some of the toxic assets have been flushed through. There’s been capital raised.”

…

Buffett reiterated his praise for Federal Reserve Chairman Ben S. Bernanke, Treasury Department Secretary Timothy Geithner and former Treasury Secretary Henry Paulson, calling them “heroes” for their management of the economy since last year.

“You can look back and say you could have done this a little differently or that a little differently, but at the time I called it an economic Pearl Harbor and in the end we got through Pearl Harbor,” Buffett said. “And it could have turned out a lot differently.”

Buffett on Bailouts and the Crisis

Buffett on Heroes and a Second Downturn

Buffett on Lehman and Last Year

Sources: Bloomberg | CNBC

Tags: Berkshire Hathaway, Berkshire Hathaway Inc, Bernanke, Chief Executive Officer, Cnbc, Commercial Real Estate, Credit Cards, Department Secretary, Double Dip Recession, Downturn, Federal Reserve Chairman, Harbor Buffett, Henry Paulson, Lehman, Oracle Of Omaha, Pearl Harbor, Residential Real Estate, Timothy Geithner, Treasury Department, Treasury Secretary, Warren Buffett
Posted in Markets | 1 Comment »

Rosenberg: The recession is dead, long live the recession!

Friday, August 21st, 2009

Since joining Gluskin Sheff & Associates from Merrill Lynch a few months ago, the daily research reports from chief economist and strategist David Rosenberg have been a breath of fresh air in the world of the “dismal science”. His notes yesterday on the typical macro-economic environment prevalent once the stock market has rallied by 49%, and how the current landscape stacks up against the historical average, are proof of the useful input that has regularly been forthcoming from Rosenberg. The paragraphs below are excerpts from his report.

We can understand that there is a growing list of economists calling for the end to the recession, and that may or may not be the case actually, judging by the performance of all four ingredients that go into the NBER decision-making wheel. But let’s be charitable and assume that the herd is correct this time around - a 49% rally from the lows and the degree of multiple expansion suggests that the S&P 500 has gone beyond just discounting the end of the downturn but is now embedding a 4.0% real GDP growth rate for the coming year. That is not our view, and even if it is attainable, guess what? It’s priced in. Corporate bonds (and Treasuries too) are discounting around a 2.0% GDP trend, which looks more realistic.

The market has turned in a performance that is double what is ‘normal’ between the lows and the end of the recession, and after such a rally, which is unprecedented actually, the end of the recession isn’t even a debate … at this time, what is ‘normal’ is that we are a full year into the next economic expansion. Did the economy really bottom in August 2008? From our lens, there is always a catalyst or a spark for the next economic expansion and bull market. In 2003, it was leverage and a housing boom. What is it today? Cash for clunkers? Digitized medical technology? Chinese consumption? Government incursion into the economy and capital market? Perhaps we should also recognize that heading into the post-recession environment of 1991, there was a tailwind from sub $20/bbl oil; and heading into the 2003 rebound, we had sub $30/bbl oil; so it may pay to ask the question as to how $70+ oil is going to play in the recovery, unless we are talking about recoveries in Saudi Arabia, Qatar and the UAE?

CHART 1: SHARPEST EQUITY MARKET RALLY EVER IN THE CONTEXT OF PRICING OUT THE RECESSION

United States: S&P 500 Composite (% change from market trough during recession to the official end of the downturn)

It could well be that all the effort the government is making to stave off the decline in the record debt load the U.S. is carrying will just delay the inevitable for another day. The fact that the Fed is extending TALF to buy up distressed commercial real estate debt, not to mention financing RVs and mobile homes. Moreover, the Administration’s move to take over two auto companies and then immediately offer rebates (now that the government is an owner, it can do all it can in its powers to rev up sales) is a signpost that every effort is going to be made to perpetuate discretionary spending even though the boomers are not financially prepared for retirement, and that every effort will be made to resist the need for the household sector to pare their record level of liabilities on their balance sheets. You cannot possibly make this stuff up, but now appliance manufacturers have successfully lobbied for a “cash for clunker” program of its own! See Program to Offer Appliance Rebates on page A3 of the WSJ - a $300 million federal program to incentivize homeowners to replace old refrigerators, air conditioners, washer-dryers and dishwashers with new “high-efficiency” units!

However, the catch-22 is that not until the culture of credit and conspicuous consumption has been replaced by a renewed focus on retirement planning and financial prudence will it be safe to call for the fundamental lows in the market. A 49% flashy bear market rally notwithstanding, we are not at some natural equilibrium point in the economy as the Federal Reserve and the government have moved to cannibalize their own balance sheets as an offset to the necessary deleveraging in the private sector.

Source: David Rosenberg, Gluskin Sheff & Associates, August 20, 2009.

Tags: Breath Of Fresh Air, Chief Economist, Corporate Bonds, David Rosenberg, Digitized, Dismal Science, Downturn, Economic Environment, Economic Expansion, Gdp Growth Rate, Incursion, List Of Economists, Lows, Medical Technology, Merrill Lynch, oil, Real Gdp Growth Rate, Recession, Stock Market, Strategist, Treasuries
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Exit strategy – a deft and fortunate Fed?

Wednesday, July 22nd, 2009

This post is a guest contribution by Asha G. Bangalore* of The Northern Trust Company.

Chairman Bernanke’s testimony and Wall Street Journal article outlined the Fed’s exit plan and addresses his critics with regard to a lack of transparency about the exit strategy. There is no doubt the Fed will be able and has the tools to unwind the massive monetary stimulus in place at the present time.

More importantly, the question is if the Fed can identify the appropriate “time” and “magnitude” of monetary policy tightening. There is no precise checklist to guide a central bank about when and by how much to tighten monetary policy. The Fed’s steps will entail judgments as the economy stabilizes and moves along a new growth path.

Going back in time, there are two cases that come to mind. First, is the case of 1937 when unsuitable and hasty monetary and fiscal policy changes halted the recovery of the economy and reversed course such that the economy recorded the second leg of the downturn during 1937-38 (see chart 2). The main lesson from this experience is to avoid the mistakes of this period. The Fed raised the reserve requirements in July 1936 to reduce excess reserves banks were holding which it viewed as a threat to price stability. During this time period, banks were overwhelmed with fear about financial panics and wanted to hold excess reserves. When the Fed raised reserve requirements and excess reserves of banks were reduced, they stopped lending. This, in turn, led to another period of economic decline.

The second case is the more recent episode when the Fed held the federal funds rate at 1.00% from June 2003 to June 2004 in order to prevent a deflationary situation from taking hold. This stance of the Fed has come under severe scrutiny and has been identified as an incorrect policy posture in terms of the duration of an easy policy which eventually led to the housing market boom.

Based on the 1936/37 experience, the Fed will err on the side of delaying tightening, while the 2003/2004 episode suggests that the Fed will have to weigh the risks of maintaining easy monetary policy for an extended period. Both these historical episodes indicate the Fed is not infallible and suggests that the timing and magnitude of monetary policy changes is a tight rope walk. Therefore, it appears that the Fed will have to be not only deft but also lucky to be successful in the management of monetary policy in the months ahead. It is well-known, that the Fed has not been preemptive and has applied monetary policy brakes too late and too strong in the post-war period, with the exception of the 1995 soft-landing event.

Noteworthy excerpt’s from Bernanke’s testimony:

The Economy: “The U.S. economy contracted sharply in the fourth quarter of last year and the first quarter of this year. More recently, the pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization. The labor market, however, has continued to weaken. Consumer price inflation, which fell to low levels late last year, remained subdued in the first six months of 2009.”

Risk –“Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.”

Inflation: “All participants expect that inflation will be somewhat lower this year than in recent years, and most expect it to remain subdued over the next two years.”

Monetary Policy: “The FOMC anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period.

In light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery. Accordingly, as I mentioned earlier, the FOMC believes that a highly accommodative stance of monetary policy will be appropriate for an extended period.”

The options the Fed has in its arsenal to tighten monetary policy are discussed in Bernanke’s article in the Wall Street Journal (Bernanke Op-ed in WSJ: The Fed’s Exit Strategy - WSJ.com). To be sure, the Fed is not limited to these alternatives only.

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 21, 2009.

*Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Tags: Bernanke, Company Chairman, Downturn, Economic Decline, Excess Reserves, Exit Plan, Exit Strategy, Federal Funds Rate, Financial Panics, Fiscal Policy Changes, Going Back In Time, Growth Path, Housing Market, Market Boom, Monetary And Fiscal Policy, No Doubt, Northern Trust Company, Price Stability, Street Journal Article, Wall Street Journal
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Kass: 2009 Report Card and Surprises Update

Tuesday, July 21st, 2009

Each year in late December, Doug Kass, CIO, Seabreeze Partners, publishes his 20 Surprises for the coming year.  Yesterday, with more than half of the year behind us, Kass published his report card on his 2009 calls.

Kass got it right or mostly right on the most important of his market and economic calls, except for the prediction on (3) commercial real estate. Kass is refreshingly modest about the whole predictions thing, though he does deserve a pat.

It was quite a list, the article is worth reading, and here is the report card summary, call by call:

1. The Russian mafia and Russian oligarchs are found to be large investors with Madoff.
Grade: A

2. Housing stabilizes sooner than expected.
Grade: B+

3. The nation’s commercial real estate markets experience only a shallow pricing downturn in the first half of 2009.
Grade: F-

4. The U.S. economy stabilizes sooner than expected.
Grade: B

5. The U.S. stock market rises by close to 20% in the year’s first half.
Grade: C+

6. A second-quarter “growth scare” bursts the bubble in the government bond market.
Grade: B+

7. Commodities markets remain subdued.
Grade: B

8. Capital spending disappoints further.
Grade: B

9. The hedge fund and fund of funds industries do not recover in 2009.
Grade: A-

10. Mutual fund redemptions from 2008 reverse into inflows in 2009.
Grade: B+

11. State and municipal imbalances and deficits mushroom.
Grade: A

12. The automakers and the UAW come to an agreement over wages.
Grade: B

13. The new administration replaces SEC Commissioner Cox.
Grade: F

14. Large merger of equals deals multiply.
Grade: F

15. Focus shifts for several media darlings.
Grade: C+

16. The Internet becomes the tactical nuke of the digital age.
Grade: A

18. The Fox Business Network closes.
Grade: C-

19. Old, leveraged media implode.
Grade: A

20. The Middle East’s infrastructure build-out is abruptly halted owing to “market conditions.”
Grade: B+

Kass’s entire analysis is worth reading here.

Source: Kass: Grading and Updating 20 Surprises for 2009

Tags: Automakers, Business Network, Commercial Real Estate, Commodities, Darlings, Doug Kass, Downturn, Financial Adviser, Government Bond Market, Grade C, Hedge Fund, Merger Of Equals, Mutual Fund Redemptions, New Administration, Quarter Growth, Russian Mafia, Russian Oligarchs, Seabreeze Partners, Tactical Nuke, Thestreet Com, U S Stock Market, Uaw, Update News, Worth Reading
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Paul Kasriel: Coming Out of a Downturn

Wednesday, July 15th, 2009

As we see glimmers of an exit from the recession, Paul Kasriel, Northern Trust’s chief economist, examines evidence to answer the question “Is the Worst Over?”

Click here or on the image below to view the video clip.

Source: Paul Kasriel, Northern Trust, July 10, 2009.

Click here for the transcript of the interview.

Tags: Cape Town, Chief Economist, Downturn, Exit, Northern Trust, Paul Kasriel, Postcards, Recession, Target, Video Clip
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Stock market performance during economic cycles

Wednesday, July 1st, 2009

An interesting analysis on the performance of the S&P 500 Index during various phases of the economic cycle was highlighted in a recent report by Citigroup Investment Research & Analysis, courtesy of US Global Investors.

The table below shows the performance of the Index in 15 complete economic cycles since 1921 and part of the current economic cycle. The performance has been broken down into five phases of each economic cycle: early expansion, middle expansion, late expansion, early contraction, and late contraction.

Interestingly, the average and median figures show that most of the stock market performance occurs in the early and middle expansion phases, and in the late contraction phase.

In order for this study to be of use one obviously needs to know where in the economic cycle we are. In this regard, Merrill Lynch (again via US Global Investors) has just published The Global Wave indicator, which quantifies trends in global economic activity. This measure signaled a downturn in September 2007 and troughed in June, suggesting that the global economy could be on the road to recovery. Following troughs in The Global Wave, global emerging markets tend to be the best-performing category with a median return of 39.6% over the subsequent 12 months, whereas the US usually lags with a more pedestrian 10.0%.

Based on past economic cycles, the above studies indicate a favourable environment for stocks over the next six to 18 months, short-term corrections aside.

Source: US Global Investors - Weekly Investor Alert, June 19, 2009.

Tags: 12 Months, Cape Town, Citigroup, Contraction Phase, Downturn, Economic Cycle, Economic Cycles, Emerging Markets, Favourable Environment, Global Economic Activity, Global Economy, Global Investors, Global Wave, Investment Research, Median Figures, Merrill Lynch, Postcards, Stock Market Performance, Target, Troughs
Posted in Emerging Markets, Markets | No Comments »

The Recession in Historical Context

Thursday, June 18th, 2009

How does the current economic and financial downturn match up to past contractions?

In an attempt to present matters in historical context, Paul Swartz of the Council on Foreign Relations recently published a chart book showing that the current economic environment has been more severe than a typical recession. He specifically highlights the following four conclusions:

• Financial markets have dramatically improved, but from an extremely low base. Rather than pricing in disaster, they anticipate tough times ahead. For example, the charts on the spread for AAA and BAA bonds show the credit market moving from unprecedented panic to a level of fear that is merely in keeping with the worst experiences since 1945.

• Real economy indicators show signs of stabilization. See in particular the charts on manufacturing sentiment, non-farm payrolls, oil prices, and car sales. Nonetheless, many of these indicators remain worse than anything hitherto experienced in the postwar period.

• The collapse in the federal government’s finances is unprecedented, raising questions about how the government deficit will be brought under control.

• By most measures, the current recession is far milder than the Great Depression. But the appendix shows that house prices have fallen much more sharply than in the 1930s.

The charts below plot current indicators (in red) against the average of all post-World War II recessions (blue). To facilitate comparison, the data are centered on the beginning of the recession (marked by “0″). The dotted lines represent the most severe and the mildest experiences in past cycles. The last few charts specifically compare the current downturn with the Great Depression.

The year-over-year fall in real gross domestic product (GDP) is now competing to be the worst in the postwar period.

The federal budget has deteriorated far more rapidly than in any past recession, in part due to the first economic stimulus and bank bailouts. The current stimulus implies an even larger and more prolonged deficit in the future.

Global trade collapsed in the fourth quarter of 2008 and first quarter of 2009 in a way never seen in the postwar era.

Unemployment initially increased at a rate consistent with past recessions. However, the latest data show the worst labor market in the postwar period.

The fall in nonfarm payroll shows rapid deterioration in the labor market. The deterioration has slowed, but will this improvement be enough to slow knock-on effects?

Industrial production (IP) held up well when the recession began but collapsed in the second half of 2008. The current collapse is creating a new postwar record.

A rise in oil prices is typical before the start of a recession, and a fall is typical as a recession proceeds. This time oil prices initially continued to rise after the onset of the recession. Conversely the recent fall has been larger than usual, even allowing for the rebound in the spring. The recent fall has dramatically changed the geopolitical position of oil exporters.

The ISM survey offers a forward-looking indicator of industrial production. A number above 50 in the ISM survey implies manufacturing growth whereas a number below 50 implies contraction.

Auto sales typically fall by 20% in a recession. This time around they have fallen by over 40%.

Consumer sentiment typically starts falling before the recession begins, but turns around soon after. However, pessimism seems particularly strong this time.

Most post-World War II recessions were preceded by a tightening of monetary policy. This one was not. Easing started sooner and happened faster than is typical. Although the Fed’s ammunition in nominal target rate cuts is gone, it has continued to ease in other ways.

The spread of investment-grade debt - a measure of the risk that high-quality corporate bonds will default - typically rises during a recession. The rise during the current cycle is unprecedented. The credit markets’ recent improvement still leaves spreads at historic highs.

The spread on BAA debt (the lowest investment grade rating) is an indicator of the risk that lower quality companies will default. The recent rise in the BAA spread is unprecedented. As the financial system has stabilized, the credit markets have improved, but the current implied default rates suggest a rough period for corporations.

Equity markets start to fall nearly eight months before a recession begins.
In this cycle, a fall in equity markets preceded the recession. However, the subsequent fall has been larger than normal, and the markets have not recovered on schedule.

The last few charts compare the current recession with the prewar average and the Great Depression.

The thick red line represents the current recession; the thin blue line, the postwar average; the thick green line, the Great Depression; the thin orange line, the prewar average.

Due to financial system deleveraging, the economy is enduring uncomfortably low inflation. The current recession looks more like a prewar recession than a postwar recession or the Great Depression.

Production in this cycle has collapsed relative to the postwar average, but is in line with the prewar average. The current collapse does not compare to that of the Great Depression.

Although the labor market has deteriorated more than at any time since World War II, it is much healthier than during the Great Depression.

US trade - the sum of exports and imports - has collapsed dramatically. But it will have to deteriorate further to compare to the Great Depression.

Government intervention is much less controversial than prior to World War II. Thus government stimulus occurred faster than was the case during the Great Depression. Government net financial investment (bank bailouts) has contributed a substantial portion of expenditures.

So far, equity market performance has lined up with the Great Depression.

One area in which this downturn has been far worse than the Great Depression has been in home prices.

Source: Paul Swartz, Quarterly Update: The Recession in Historical Context, Council on Foreign Relations, June 5, 2009.

Tags: Contractions, Council On Foreign Relations, Dotted Lines, Downturn, Economic Environment, Economic Stimulus, Economy Indicators, Federal Budget, Government Deficit, Great Depression, Gross Domestic Product, Historical Context, House Prices, Non Farm Payrolls, oil, Oil Prices, Paul Swartz, Postwar Period, Recession, Recessions, World War Ii
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Doug Kass: Recipe for Recovery

Sunday, February 22nd, 2009

Thanks to the work of MarketFolly.com, we can get a glimpse into the dealings of some of the most prominent and successful hedge funds and institutional investors. These are useful as they point to tactical opportunities and sometimes, when hedge funds take short positions, they provide lucid guidance, pointing to areas or stocks in the market that should be sold or avoided, or for those with the stomachs, to follow short.

Doug Kass’ recent piece, ‘Fear and Loathing on Wall Street,’ highlights some excellent points. In it, he creates a list of things the markets need to see to begin their return to normality:

• Bank balance sheets must be recapitalized. We await a bank rescue package in the week ahead.
• Bank lending must be restored. Bank lending standards remain tight. For now, we are in a liquidity trap.
• Financial stocks’ performance must improve. We are not yet there. Financials’ performance is still drek.
• Commodity prices must rise as confirmation of worldwide economic growth. There has been some recent evidence of higher commodities, but it’s still inconclusive.
• Credit spreads and credit availability must improve. While credit spreads are improving, the yield curve is rising and interest rates have rebounded, the transmission of credit remains poor. Time will tell whether monetary and fiscal policies will serve to unclog credit.
• We need evidence of a bottom in the economy, housing markets and housing prices. The economy’s downturn continues apace. Months of inventory of unsold homes are declining and so are mortgage rates, but home prices have yet to stabilize despite an improvement in affordability indices.
• We also need evidence of more favorable reactions to disappointing earnings and weak guidance. We are not yet there, but this will tell us a lot about the state of the stock market’s discounting process.
• Emerging markets must improve. China’s economy (PMI and retail sales) and the performance of its year-to-date stock market have turned decidedly more constructive.
• Market volatility must decline. The world’s stock markets remain more volatile than a Mexican jumping bean.
• Hedge fund and mutual fund redemptions must ease. While I am comfortable in writing that most of the forced redemptions have likely passed, we will find out more over the next few months. Regardless, the disintermediation and disarray of hedge funds and fund of funds have a ways to go.
• A marginal buyer must emerge. Pension funds seem to be the likely marginal buyer as they reallocate out of fixed income into equities, but we have not yet seen the emergence of this trend.”

Read the entire piece.

This article was contributed by MarketFolly.com.

Tags: Affordability, Balance Sheets, Bank Balance, Commodity Prices, Credit Availability, Credit Spreads, Doug Kass, Downturn, ETF, Fear And Loathing, financial stocks, Fiscal Policies, Hedge Funds, Institutional Investors, Liquidity Trap, Mortgage Rates, Poor Time, Recovery Thanks, Stomachs, Tactical Opportunities, Yield Curve
Posted in Commodities, Credit Markets, Economy, Emerging Markets, Markets | No Comments »

Setting the Bull Trap

Wednesday, January 7th, 2009

This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management.

Long time students of the market will tell you that “the crowd is usually wrong at the extremes”. Judging by what I see, hear and read in the media, the current consensus is that stocks bottomed on November 20th-21st, an economic recovery will begin in the second half of 2009, corporate bonds are a buy, stocks are cheap and the stock market is now discounting all the bad news. This is surely a sign that the worst is likely behind us.

Even though I was looking for a low in the S&P 500 around 750 (it bottomed around 740 on November 21st only to close at 800 the same day), I continue to believe that was a low point, but not THE low point for this bear market. We were large buyers of Mortgage Backed Securities during the Wall Street de-leveraging and have been rewarded with handsome gains, although we began to take some profits on Friday where appropriate.

Corporate bond spreads have tightened during a slow holiday season as well as spreads in CMBS (Commercial Mortgage Backed Securities). Corporate spreads may or may not tighten further as I believe there will be a wave of issuance at every level - Government, Emerging Markets, Corporations, Municipalities, etc. Treasury yields have crashed as the Fed has taken the Federal Funds Target Rate to a range of 0-0.25%.

Stocks have rallied even more to S&P 931 and could possibly make a run at 1,000-1,100 if “performance anxiety” sets in among those portfolio managers that are afraid to miss the rally. We are not afraid of missing the rally because we are absolute return investors and have the luxury of having missed the big down move from nearly 1,600. The managers that are subject to performance anxiety are the same group that managed to a market benchmark only to get tattooed during the downturn.

The Fed is punishing savers and the Prudent Man by manipulating interest rates to zero. You can sit in cash and earn zero or you can be forced out on the risk spectrum just so you can keep up with inflation or your benchmark. Forcing money into risky assets is perhaps the most dangerous experiment ever done, and is so large in scale and so unprecedented that we have no idea how it will end. I expect it to end poorly and with hyper-inflation. The funneling of assets into risk is masking the deteriorating fundamentals and giving the appearance of a market that has bottomed. But this is sleight of hand, an illusion.

The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card - and with our money no less. They are also setting up the ULTIMATE BULL TRAP - a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter, there will only be sellers left.

Click here for Bennet’s full report.

* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.

Bennet graduated from Rutgers University in 1982 with a degree in Economics.

Tags: Absolute Return, Bear Market, Buy Stocks, Commercial Mortgage Backed Securities, Corporate Bond Spreads, Corporate Bonds, Downturn, Economic Recovery, Emerging Markets, Holiday Season, Issuance, Level Government, Mortgage Backed Securities, Performance Anxiety, Portfolio Managers, Prudent Man, Stock Market, Target Rate, Time Students, Treasury Yields
Posted in Bonds, Emerging Markets, Markets | 2 Comments »

Rx for China: US Recession

Saturday, January 5th, 2008

Finally, The Economist has published a story, An Old Chinese Myth, which confirms the decoupling of Asia ex-Japan is actually real. A recession in the US is welcome in China, as it will help to moderate China’s growth at the margins, something that its macro-economic policy has not had much success in doing. In any event the article is a good read, and if you are investing in China, this is welcome news for you too.

An American downturn will cause China’s economy to slow. But the likely impact is hugely exaggerated by the headline figures of exports as a share of GDP. Dragonomics forecasts that in 2008 the contribution of net exports to China’s growth will shrink by half. If the impact on investment is also included, GDP growth will slow to about 10% from 11.5% in 2007. This is hardly catastrophic. Indeed, given Beijing’s worries about the economy overheating, it would be welcome.

The American government frequently accuses China of relying excessively on exports. But David Carbon, an economist at DBS, a Singaporean bank, suggests that America is starting to look like the pot that called the kettle black. In the year to September, net exports accounted for more than 30% of America’s total GDP growth in 2007. Another popular belief looks ripe for reappraisal: it seems that domestic demand is a bigger driver of China’s growth than it is of America’s.

With China’s true export-to-GDP ratio at under 10%, and NOT as high as the Headline exports-to-GDP ratio of 37%, a US slowdown would perhaps have the impact of an interest rate hike on the Chinese economy. This may just what the doctor ordered in China’s case. 

Tags: American Government, Asia, Beijing, China, China Economy, China S Economy, Chinese Economy, Chinese Myth, Decoupling, Downturn, economic policy, Economist, Economy, Emerging Markets, GDP, GDP Growth, Gdp Ratio, Interest Rate Hike, Investing In China, Investment, Japan, Margins, Popular Belief, Recession, Singapore, Slowdown, Us Slowdown, Welcome News
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