World Economic Reports for the week of July 17-24 (Rebecca Wilder)

Friday, July 24th, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News ‘n’ Economics blog.

This week, a compilation of indicators shows that the recovery is tentative at best - more likely, a global bottom has not yet been found. The leading indicators are stronger in some countries; exports are still declining at an annual pace of 20+ percent but stabilizing; and volatile retail sales growth rates are, well, quirky. Must wait for a trend - the US stock market(s) certainly see one coming!

In June, offset by the housing component, the Canadian leading indicator index slides for the second month. In contrast, the US leading indicator took its third consecutive bump. The leading indicator index is more like a coincident index, as many of the components are already known. According to the Conference Board (US), the bump was widespread:

Seven of the ten indicators that make up The Conference Board LEI for the U.S. increased in June. The positive contributors – beginning with the largest positive contributor – were interest rate spread, building permits, stock prices, weekly initial claims (inverted), average weekly manufacturing hours, index of supplier deliveries (vendor performance), and manufacturers’ new orders for consumer goods and materials*. The negative contributors – beginning with the largest negative contributor – were real money supply*, manufacturers’ new orders for nondefense capital goods*, and index of consumer expectations.

The real money supply is slightly worrisome - the Fed is letting it slip.

Export growth stabilizing in Asia and Europe - the EU (16) (i.e., the Eurozone), ran a surplus in May. On the surface that is great news - exports drive much of the growth in big EU countries (i.e., Germany). But below the surface and on a seasonally adjusted basis (page 5 of the EU’s trade report release), the May surplus was driven by a drop in imports rather than an increase in exports. Over the year, exports are stabilizing, but this report shows that global trade with Europe is still very, very weak.

Discounts on food and clothing drove retail sales in the UK up 2.8% over the year in June (see jka economics blog for a nice take on the report). Obviously, though, UK consumers have been quite fickle, as this series has proven to be very volatile in 2009. Same for Italy and Canada - a trend, i.e., at least three consecutive months of data, should be formed before any conclusions can be made.
And finally, the crash of energy prices has brought global inflation into negative territory. Stephen Gordon’s take of the Canadian report is good

:

“Happily, the good people at Statistics Canada went to great lengths to point out exactly how and why the y/y headline number was negative, so - with the notable exception of the Globe and Mail - journalists were able to put together stories that weren’t teeth-grindingly stupid.”

And that’s all (well, some of) what she wrote, folks.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

Tags: Asia And Europe, Canada, Capital Goods, Coincident Index, Consumer Expectations, Consumer Goods, Economic Reports, Eu Countries, Eurozone, Great News, Initial Claims, Leading Indicator, Leading Indicators, Money Supply, Real Money, Retail Sales Growth, Stock Prices, Supplier Deliveries, Supply Manufacturers, Us Stock Market, Vendor Performance
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Rebecca Wilder: Waiting on the Sidelines (June 5 – 12)

Monday, June 15th, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.

This week’s economic reports show a global economy hanging in the balance: signs of stabilization present, but the lagged economic reports still show no decided turning points. Exports are crashing - China and Canada, who depend on exports to fuel economic growth, are seeing export income fall at an increasing annual pace. Canada’s housing market is suffering, but it’s decline is not even comparable to its southern neighbor. Unemployment rates surge as resource utilization falls precipitously, and taking prices down to negative territory. However, the recent uptick in oil - uptick! more like a rocket-powered boost - will relieve the drag on headline prices.

Exports continue to disappoint in China, Canada and the US. Foreign demand for economic growth is out for the count. From the WSJ:

“Although recent economic data offer increasing evidence of a recovering Chinese economy, the external environment remains weak, spelling ever more dependence on domestic demand for growth,” Morgan Stanley economists said in a note after the data were issued Friday, predicting Beijing won’t shift its monetary policy stance in the near term”.

Canada’s housing market is taking a serious tumble. However, one cannot compare this housing market recessionary response to the meltdown in the U.S. The Canada Housing and Mortgage Corporation, a bottom may be forming:

Housing starts are expected to improve throughout 2009 and over the next several years to gradually become more closely aligned to demographic demand, which is currently estimated at about 175,000 units per year.

And reality rears its ugly head as unemployment rates surge in the US, Canada, and Australia.

Inflation is (almost) negative across the board - Germany posts 0.0% annual inflation in May.

The weak global economy will keep inflation low, but the surge in oil - already over 15% since the May average - will relieve the drag on headline inflation!

Industrial production may have found its bottom in the UK, but not in Germany! Germany, the Eurozone’s biggest economy, helped to push the Eurozone’s industrial production down 21.6% in April.

Overall, signs of a bottom are certainly forming; however, we wait for a turning point to show up in most of the lagged reports (1-3 months).

Source: Rebecca Wilder, News N Economics, June 12, 2009.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

Tags: Canada, Chinese Economy, Drag On, Economic Data, Economic Reports, Export Income, External Environment, Global Economy, Hanging In The Balance, Housing Market, Housing Starts, Monetary Policy Stance, Morgan Stanley, Mortgage Corporation, Negative Territory, oil, Resource Utilization, Southern Neighbor, Ugly Head, Unemployment Rates, Uptick, Wsj
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Words from the (investment) wise for the week that was (June 1 – 7, 2009)

Sunday, June 7th, 2009

Ups and downs on financial markets were plentiful during the past week, but investor sentiment, on balance, brightened on the back of constructive financial and economic data - capped by a better-than-expected US non-farm payrolls report on Friday.

“It appears that the global economy has finally found the ripcord,” said Rebecca Wilder (News N Economics) in her weekly review of global economic reports.

“The global economic reports are becoming saturated with signs of forming a bottom. Auto sales in Japan and the US are improving somewhat; exports are dangling in the double-digit loss rates; and GDP really couldn’t get much worse (the inventory cycle alone will create some growth). Finally, money growth rates are slowing, perhaps an indication that policymakers feel that the worst is behind us,” she commented.

Source: Scott Stantis, June 1, 2009.

As the risk appetite of investors swelled on the prospect that the global economy was on the mend, many stock markets reached their highest levels this year, and metals and oil continued their surge. After trending down since early March, the US dollar snapped back on the employment data, but government bonds tanked as yields rose to six-month highs. Interbank lending rates edged down, whereas corporate bond spreads touched their lowest levels since October. Gold and silver - strong performers in recent times - took a breather, but platinum gained strongly from better vehicle sales in many parts of the world.

The week’s performance of the major asset classes is summarized by the chart below.

Source: StockCharts.com

The MSCI World Index (+1.3%) and the MSCI Emerging Markets Index (+1.8%) last week added to the rally’s gains to take the year-to-date returns to +6.7% and a massive +38.8% respectively. Both these indices have only had one down-week since the advance commenced in early March.

The major US indices gained for a third straight week - and for the eleventh week out of the past 13 - as seen from the movements of the indices: S&P 500 Index (+2.3%, YTD +4.1%), Dow Jones Industrial Index (+3.1%, YTD ‑0.2%), Nasdaq Composite Index (+4.2%, YTD +17.3%) and Russell 2000 Index (+5.7%, YTD +6.2%).

The Dow remains the only major index still in the red for the year to date, albeit only by 0.2%, trailing the Nasdaq (+17.3%) by a wide margin.

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

As far as non-US markets are concerned, returns ranged from top performers Vietnam (+16.3%), Serbia (+12.0%), Qatar (+10.9%), Egypt (+10.2%) and the Czech Republic (+10.0%), to the Ghana (-8.7%), Cyprus (-5.6%), Pakistan (-‑5.3%), Croatia (-5.0%) and Estonia (-3.7%), which experienced headwinds. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the “ETF of the Month” was PowerShares India Portfolio (PIN), which gained a whopping +32.5% during May. The leaders for the week included Claymore/MAC Global Solar Energy (TAN) (+10.9%), Market Vectors Coal (KOL) (+9.4%) and United States Oil (USL) (+7.0%). Poor performers were again all things “short”, with notable laggards being ProShares Short Russell 2000 (RWM) (-7.8%), ProShares Short QQQ (PSQ) (-5.1%) and ProShares Short Dow30 (DOG) -5.4%.

The higher Treasury yields had a further negative impact on mortgage rates, with the 30-year fixed rate increasing by 19 basis points to 5.46% on the week and the 15-year fixed rate by 15 basis points to 5.02%, as indicated by Bankrate.com.

“That’s quite a jump,” said Donald Rissmiller, chief economist at New York-based Strategas Research Partners, in a Bloomberg interview. “The more rates go up, the more we need home prices to go down to equalize consumers’ payments. It’s those payments that have brought about a level of stability in housing unit sales.” Policymakers might be forced to increase their Treasury buy-backs.

The quote du jour comes from Dallas Fed President Richard Fisher who seems to share Bespoke’s concern that listening to the rating agencies is like making investment decisions based on last month’s newspaper. In a recent Wall Street Journal interview, he said: “I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside.” He said he also saw this “inherent conflict of interest” as a fund manager. “I never paid attention to the rating agencies. If you relied on them you got … you know. You did your own analysis. What is clear is that rating agencies always change something after it is obvious to everyone else. That’s why we never relied on them.”

In other news, during his first visit to Beijing as Treasury secretary, Timothy Geithner went out of his way to assure the Chinese that their large holdings of US dollar assets were secure and that the US administration remained committed to a strong dollar and keeping inflation under control. Although the Chinese leaders did not again raise their unease that the US will inflate away its mounting debt, there were “plenty of other signs of concern”, including tough questioning at Peking University, reported the Financial Times.

Regarding the outlook for the Chinese renminbi versus the US dollar, James Grant (Grant’s Interest Rate Observer) said: “We are bearish on the renminbi. On the other hand, we are also bearish on the US dollar, euro, pound, Swiss franc and Zimbabwean dollar. We hate them all, with appropriate analytical nuances. Show us a monetary asset whose value is not subject to governmental debasement, and we will show you a Krugerrand.”

According to MarketWatch, President Barack Obama plans to announce on Monday how his administration is speeding up implementation of his $787 billion economic stimulus plan.

Oh yes, General Motors filed for Chapter 11 bankruptcy protection, and was duly replaced as one of the 30 constituents of the Dow, whereas a judge cleared the path for Chrysler to exit bankruptcy by approving the sale of the bulk of the automaker’s assets to a new entity to be managed by Italy’s Fiat.

Next, a quick textual analysis of my week’s reading. No surprises here, with the words “financial”, “bank”, “economy” and “market” still dominating the media. But, strikingly, “value” and “yields” have soared in prominence as pundits debate whether equities and government bonds have seen secular turning points.

Focusing on the US stock markets, the most recent Investors Intelligence sentiment report shows that 42.5% of portfolio managers are now bullish on equities versus 25.3% that are bearish. While the high level of bullish sentiment seems to indicate an overbought market, the spread of 17.2% between bulls and bears is still below the ten-year average of 19%, according to Bespoke.

Interestingly, Barclays Capital issued a report on Monday showing that only 17.5% of the 605 global investors interviewed for its quarterly FX investor sentiment survey thought risky assets have further to rise. “Just 4.5% of respondents believe the trajectory of the global economy over the next year will be ‘V-shaped’ - indicating weakness followed by a sharp recovery,” reported the Financial Times.

An analysis of the moving averages of the major US indices shows all the indices (with the exception of the Dow Jones Transport Index) above their 50- and 200-day moving averages and May 8 highs. The S&P 500, Nasdaq and Russell 2000 have also now surpassed their early January peaks.

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

Kevin Lane, technical analyst of Fusion IQ said: “While crossing the 200-day line is more a psychological milestone than anything else, it does suggest that upward price strength momentum is persistent. Can we have pullbacks along the way still? Of course. However, there is now no real resistance on the S&P 500 until the 1,000 level. As long as breadth remains strong it is hard to expect any major corrections, but given the extended nature of the market we would keep trailing stops higher.”

On the downside, the levels from where the rally commenced on March 9 should hold in order for base formations to remain in force.

A useful indicator of market breadth is a chart showing the percentage of New York Stock Exchange stocks trading above their 50-day moving averages. Although this measure has declined from 94% in early May to 87% on Friday, it is still at a level typically seen at prior peaks during the bear market (see green chart below). This looks overdone in the short term. Secondary corrections aside, the primary trend of the market is now bullish as the bulk of the index constituents (66%) are trading above their 200-day averages (see red chart below).

Source: StockCharts.com

Source: StockCharts.com

Bill Gross, co-founder and co-CIO of PIMCO, advised the following in his latest newsletter: “Bond investors should confine maturities to the front end of yield curves where continuing low yields and downside price protection are more probable. Holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same.

“All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago. Staying rich in the ‘new normal’ may … require investors to resemble … Will Rogers, who opined in the early 30s that he wasn’t as much concerned about the return on his money as the return of his money.”

From across the pond, David Fuller (Fullermoney) said: “We could be seeing one of those occasional all-change signals in terms of short-term trends. Basically, while medium-term trends are bullish for stock markets and commodities, but bearish for the USD and long-dated government bond prices, many of these trends are overstretched in the short term. For leading stock markets, this will probably be limited to reversion to the mean in terms of 200-day moving averages, which are beginning to rise.”

And lastly, John Murphy (StockCharts.com) concurs, remarking: “As good as the spring rally has been, I believe the market is still in need of some corrective action (or consolidation) before moving substantially higher. V bottoms are extremely rare. W bottoms are a lot more common. So are head and shoulder bottoms. It seems unlikely that the market will continue to rally in a straight line. More basing activity is most likely needed. And that’s going to require more time.”

I am busy studying the relationship between stock market movements and the Purchasing Managers Index (PMI) and should have a post on this up on the site within the next few days. Keep an eye out for this article to cast light on the likely outcome of the battle between the bulls and bears.

For more discussion on the direction of stock markets, also see my recent posts “Video-o-rama: Figuring out the lie of the financial land“, “Baltic Dry Index - more than a snap-back rally“, “Asian markets won’t retest lows, says Chris Wood“, “Secular bull in commodities remains intact“, “How far can the dollar fall?“, “Technical talk: Breaching the 200-day line” and “Green shots or smoking weeds?“. (Also, Donald Coxe’s webcast has been updated for June 5 and makes for good listening. This can be accessed from the sidebar of the Investment Postcards site.)

Economy

The global economy continues to make its way back from the abyss and based on the relationship between the US/EU/Japan PMI and global industrial production, better tidings seem to be in the offing. But although stabilization has set in, the PMIs for all the countries besides China are still below 50 and therefore need to do more work before entering the expansion phase.

Source: US Global Investors - Weekly Investor Alert, June 5, 2009.

In line with market expectations, the Bank of England (BoE) Monetary Policy Committee and the European Central Bank (ECB) left their key policy interest rates at 0.5% and 1.0% respectively. The BoE also decided to continue with its current £125 billion asset purchase programme which it began in March, whereas the ECB announced a €60 billion plan to buy euro-denominated covered bonds.

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

June 5

• Mixed bag of labor market news - a tad more positive than negative

June 4

• Jobless Claims report points to small but noteworthy improvements • Revisions of output raise productivity estimate - trend needs to improve

June 3

• Chairman Bernanke’s testimony touches on expected issues, emphasizes fiscal balance • Challenger report points to sharp decline in layoffs • ISM Non-manufacturing Survey slightly better

June 2

• Auto Sales advanced in May • Pending Home Sales Index surges in April

June 1

• ISM Manufacturing Survey advances in May, noteworthy jump of New Orders Index • Increase in Personal Income reflects impact of fiscal stimulus, consumer spending remains weak • Construction Spending advances in April, reflecting positive contribution from residential sector

Fed Chairman Ben Bernanke in his testimony to the House Budget Committee on Wednesday reiterated his view that he was expecting to see growth “later this year”. He cautioned as follows: “Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.”

Employment losses were far lower than expected in May, with non-farm payrolls declining by 345,000, well below the expected 520,000. Bespoke prepared a scatter chart that compares the monthly non-farm payrolls data with the difference between the actual number and the estimates. Going back to 1998, this month’s report appears to be an outlier. Although still one of the weakest job reports over the last 11 years, it was also the third-best when comparing actual data to estimates.

Source: Bespoke, June 5, 2009.

A research note by Merrill Lynch (via US Global Investors) directed the attention to the ECRI Weekly Leading Index that has rebounded sharply from the lows and has improved for ten consecutive weeks. “This index is a timely leading indicator for future GDP growth and while it is not out of recession territory yet it appears to be well on its way, as indicated in the chart,” said the report.

Source: US Global Investors - Weekly Investor Alert, June 5, 2009.

Given the “less bad” economic reports, investors in interest rate futures are now betting the Fed will hike rates by year-end, according to MarketWatch. The December Fed funds futures contract on Friday priced in a Fed funds rate of approximately 0.5% compared with 0.3% a week ago.

Summarizing the economic outlook for the US, Asha Banglore (Northern Trust) said: “The Fed is in a watch-and-wait mode. Credit market spreads have narrowed significantly from their highs in the early part of the year. Positive economic reports by way of the ISM Manufacturing Survey, stability of home sales, glimmers of improvement in the May employment data, a decline in continuing jobless claims, and the downward trend of initial jobless claims are factors that are encouraging. The coast is not clear and more is necessary to declare the recession has ended.”

The last words come from David Rosenberg, chief economist & strategist of Gluskin Sheff & Associates: “Recession pressures may well be subsiding next to the sharp contraction earlier this year; however, deflation risks are not only lingering but in fact are intensifying. We still believe the V-shape recovery hopes that have underpinned the equity market while undermining the bond market in recent months will inevitably prove to be under water.”

Week’s economic reports

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

Source: Yahoo Finance, June 5, 2009.

In addition to the release of the Fed’s Beige Book (June 10) and the meeting in Rome of the G8 finance ministers (June 11 & 12), 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.

Markets

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

Source: Wall Street Journal Online, June 5, 2009.

James W. Frick said: “Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” (Hat tip: Charles Kirk.)

Let’s hope that the news items and quotes from market commentators included in the “Words from the Wise” review will help Investment Postcards readers to prioritize properly and spend their investment dollars judiciously.

For short comments - maximum 140 characters - on topical economic and market issues, web links and graphs, you can also follow me on Twitter by clicking here.

That’s the way it looks from a wintery Cape Town.

Source: John Darkow, Columbia Daily Tribune, June 3, 2009.

David Fuller (Fullermoney): Outlook for major asset classes “Cash (fiat currency positions) - These need to be managed if purchasing power is to be preserved. For instance, barely two months ago people were still referring to the USD as a ’safe haven’, but it is predictably and clearly sliding once again. In contrast, the currencies of emerging Asia/Pacific and resources exporters are in fashion once again.

“Monetary metals - We are living through the greatest monetary reflation in global history. Until reined in, this is the key driver of many trends. Connecting the dots, precious metals such as gold, silver and platinum are obvious beneficiaries.

“Commodities - Chart action supports Fullermoney’s contention that the commodity supercycle was sharply interrupted by the global recession, not halted. We still have a chance to repurchase many of these resources cheaply once again, before they reach price levels which choke off demand. Inflation hedge money is moving into most commodities. Fullermoney has previously mentioned a resources war, hopefully of the non military variety. Currently, this is being won by China which continues to boost its strategic reserves, while also using its financial surplus to secure long-term supplies at attractive prices.

“Stock markets - Equities are proving to be inflation hedges and economic recovery candidates of choice, along with monetary metals plus industrial and agricultural commodities. Consequently the next bubbles will emerge from these groups, as I have said before. However performance varies considerably. Price charts are the best guide and Fullermoney themes - emerging Asia, resources, technology - remain in leading positions. We can expect a multi-month correction once this maturing first upward leg runs out of momentum. For leaders, this will probably be limited to reversion to the mean in terms of 200-day moving averages, which are beginning to rise.

“Government bonds - The bear market in long-dated issues is underway, although it may experience some temporary respite when stock markets undergo corrections. Among corporate bonds, conservative investors may prefer to not stray from quality issues, unless you are specialists in this area. Too many corporate hangovers are due to excessive balance sheet leverage.”

Source: David Fuller, Fullermoney, June 3, 2009.

Financial Times: Fed dismisses Tarp objections

“US regulators insisted that JPMorgan Chase and American Express raise equity this week before repaying bail-out funds, in spite of strong objections from executives who claimed the banks did not need the money, people close to the situation said.

“In fraught talks last week, Wall Street chiefs disagreed with the authorities over whether the Federal Reserve should require an equity offering as a condition for inclusion in the first wave of repayers of the troubled asset relief programme.

“People close to the situation said the Fed imposed the requirement on JPMorgan and Amex because they were the only institutions that had passed the recent ’stress tests’ but had not yet raised equity.

“The offerings by JPMorgan, which sold $5 billion of shares on Tuesday, and Amex, which raised $500 million, took many investors by surprise because the two were among the eight banks deemed not to need capital after last month’s tests.

“Jamie Dimon, JPMorgan’s chief executive, said on Monday he did not believe that the ability to tap capital markets should have been a relevant test for his bank.

“‘Any argument you could think of, you could assume we made with our regulators. And, as you could also expect, they won,’ he said. ‘The primary reason was access to equity capital markets, and it’s hard for me to imagine that really applies in JPMorgan’s case.’”

Source: Francesco Guerrera, Henny Sender and Krishna Guha, Financial Times, June 4, 2009.

Financial Times: CCB reveals aversion to western bank stakes

“Chinese banks are shunning investments in western banks because they hold doubts about their financial health, one of China’s most senior bankers has warned.

“Guo Shuqing, chairman of China Construction Bank, said Chinese banks also were being deterred by a lack of growth potential in developed markets

“‘It’s very difficult at the moment because there are still so many uncertainties,’ Mr Guo told the Financial Times in an interview on Monday. ‘We are not very interested on expanding our business in developed countries because the market is limited and growth potential is not there because of over-banking.’

“The warning came as Goldman Sachs on Monday sold up to $1.9 billion worth of shares in Industrial and Commercial Bank of China, in the latest high-profile divestment of stock in a mainland lender.”

Source: Jamil Anderlini and Sundeep Tucker, Financial Times, June 1, 2009.

Bloomberg: Dudley’s TALF comments add signs of a PPIP stall

“The Federal Reserve may not start lending against residential mortgage-backed securities under its Term Asset-Backed Securities Loan Facility, Federal Reserve Bank of New York President William Dudley indicated.

“‘We’re still in the process of assessing whether a legacy RMBS program is feasible, and if it were feasible, whether it would be significant enough to make a major impact,’ Dudley said at a conference today in New York hosted by the Securities and Financial Markets Association and Pension Real Estate Association.

“His comments add to signs that Treasury Secretary Timothy Geithner’s Public-Private Investment Program to boost debt prices and rid banks of devalued assets to expand lending is stalling, after helping to spark a rally in stocks and bonds. The Federal Deposit Insurance Corp. yesterday delayed a test sale of bad loans held by US banks that had been billed as a tryout for its role.

“Responding to questions after a speech at the conference, Dudley said each home-loan security is different and must be separately evaluated for the size of the haircut that should be applied, so ‘there’s a huge administrative hurdle’ to expanding the TALF to the bonds.

“Under the PPIP, which was announced in March, funds run by private managers buying so-called legacy securities may be able to supplement Treasury co-investments and loans with additional TALF financing. Under a ‘Legacy Loans Program’, FDIC-guaranteed debt would provide the leverage.

“TALF loans may also be available to other investors as the government seeks to boost prices for the more than $2.5 trillion of US residential and commercial mortgage bonds without government backing to free banks and funds to create new credit.

“Since the PPIP was announced, US banks have raised capital through stock sales and by converting preferred shares, and as of yesterday the total reached almost $100 billion, according to data compiled by Bloomberg.”

Source: Jody Shenn, Bloomberg, June 4, 2009.

CNBC: GM CEO discusses bankruptcy

“General Motors CEO Fritz Henderson discusses his company’s bankruptcy filing and what’s next for the automaker, with CNBC’s Phil Lebeau.”

Source: CNBC, June 1, 2009.

Jon Stewart (The Daily Show): BiG mess

“As long as the American taxpayers are buying companies like GM, is there any way they could grab a couple of them that make money?”

Source: Jon Stewart, The Daily Show, June 2, 2009.

CNBC: Reviving the global economy

“World leaders are gathering in Russia for answers on how to prevent another financial crisis and build a sustainable economy. CNBC’s Maria Bartiromo is at the event.”

Source: CNBC, June 5, 2009.

Bloomberg: Zoellick warns stimulus “sugar high” won’t stem unemployment

“World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the ‘real economy’ and rising joblessness threatens to set off political unrest across the globe.

“‘While the stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working,’ Zoellick said in an interview yesterday with Bloomberg Television. ‘When unemployment increases, that’s probably the most political combustible issue.’

“Zoellick’s caution is a contrast with private economists, who are raising their outlooks for growth from India to China as stimulus measures take effect. The biggest developed and emerging nations have committed spending increases and tax cuts totaling 2% of their combined economies, a level the International Monetary Fund recommended to end the recession.

“The World Bank is monitoring private companies’ abilities to roll over ‘a lot’ of debt in the developing world, Zoellick said. At the same time, he played down risks to the global recovery posed by rising US Treasury yields, saying that ‘in terms of absolute levels, rates are still pretty low for most players’.

“Zoellick also said that the dollar will remain the world’s main currency ‘for a long time’, and noted that investors flocked to the dollar as a haven during the worst parts of the financial crisis.”

Source: Timothy Homan, Bloomberg, May 30, 2009.

Bespoke: International Purchasing Manager Indices on the up

“While the stabilization of economic activity in the US has been well documented, similar trends have been evident across the globe. The charts below show the monthly Purchasing Managers Indices for some of the largest global economies.

“For each of these indices, readings over 50 indicate a growing economy, while readings below 50 imply contraction. As shown, the PMIs for each country have shown sharp rebounds from their lows earlier in the year. However, while stabilization is better than nothing, the PMIs for every country with the exception of China are still below 50.”

Source: Bespoke, June 3, 2009.

John Authers (Financial Times): Decoupling retold

“John Authers says this time there is a difference in the emerging markets decoupling story - the market really seem to believe it.”

Click here for the article.

Source: John Authers, Financial Times, June 4, 2009.

Financial Times: Geithner says China backs US stimulus

“China has expressed confidence in the US economy and the Obama administration’s policies on fighting the recession, the US Treasury secretary said on Tuesday.

“Speaking on the second day of a closely watched visit to Beijing, Tim Geithner said there was ‘a very sophisticated understanding’ in China about why the US needs to run large budget deficits in the short term, although he repeated the pledge to sharply reduce deficits when the crisis is over.

“‘I sense  …  a fair amount of confidence not just in the basic underlying strength of the US economy but in our capacity not just to solve this crisis, to get growth back on track, but to go back to living within our means,’ Mr Geithner told reporters.

“During the visit, his first to Beijing as Treasury secretary, Mr Geithner went out of his way to assure the Chinese that their large holdings of US dollar assets were secure and that the administration remained committed to a strong dollar and keeping inflation under control.

“In recent months, Chinese leaders have issued a string of warnings about the risks that the US will inflate away its mounting debt burden.

“Although Chinese officials did not bring up the issue again in public during the visit, there were plenty of other signs of concern, including the tough questioning Mr Geithner received from students after giving a speech at Peking University.

“Mr Geithner said that his confidence in the US dollar was shared by Beijing. ‘I believe the Chinese expect the dollar to be the principal reserve currency for a long period of time, as do we,’ he said.

“Mr Geithner said the two countries had already demonstrated they could co-operate in laying a foundation for economic recovery. ‘I think probably because of the actions put in place by your government and by President Obama, we are starting to see some early signs of stabilisation and recovery in the global economy,’ he said in a meeting with Hu Jintao, China’s president.

“Mr Hu said the visit by Mr Geithner, who irritated Beijing when he said during his confirmation hearing that China ‘manipulated’ its currency, had helped improve co-operation between the two countries.”

Source: Kathrin Hille, Financial Times, June 2, 2009.

Financial Times: US dollar backed as reserve currency

“A leading Chinese financial official on Monday rejected suggestions the US dollar could be replaced quickly as the global reserve currency, as US Treasury secretary Tim Geithner arrived in China on his first official visit.

“‘In the short term I don’t think we can find another currency to replace the US dollar,’ said Guo Shuqing, chairman of China Construction Bank and former head of the country’s foreign exchange administrator. ‘The US dollar is the main currency because their economy is number one in terms of competitiveness, in terms of innovation.’

“Speaking in an interview with the Financial Times, Mr Guo also raised doubts about a proposal from China’s central bank governor, Zhou Xiaochuan, to replace the dollar with a ’super-sovereign reserve currency’ based on special drawing rights issued by the International Monetary Fund.

“‘We’ve had SDRs for many years but everybody knows they don’t work so well,’ said Mr Guo. ‘People worry about US dollars very much because of the imbalances in the current account but that has been the case for many years - they have had a deficit in the current account since the very beginning of the 1970s.’

“The bulk of China’s total international investment position is held in US dollar assets and only 6% is in the form of direct investment.

“Fears that US moves to tackle the recession could undermine the value of the dollar have led to calls from senior Chinese officials, including Mr Zhou, for more conservative fiscal policy and suggestions that the dollar be replaced as the world’s reserve currency.”

Source: Lionel Barber, Martin Wolf, Jamil Anderlini and Kathrin Hille, Financial Times, June 1, 2009.

Carpe Diem: Treasury spread model suggests economic recovery has started

“According to the New York Fed, ‘Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity.’

“The New York Fed just released its latest ‘Probability of US Recession Predicted by Treasury Spread’, with data through May 2009, and the Fed’s recession probability forecast through May 2010. The NY Fed’s model uses the spread between 10-year and 3-month Treasury rates (currently at 3.11%) to calculate the probability of a recession in the United States twelve months ahead.

“The Fed’s data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then in almost every month. For May 2009, the recession probability is only 1.54% and by May 2010 the recession probability is only .17%, the lowest level since June 2005.

“Further, the Treasury spread has been above 2% for the last 15 months, a pattern consistent with the economic recoveries following the last six recessions. The pattern of the recession probability index so far this year (going below double-digits and declining monthly) is very similar to the pattern starting in March 2002 that signalled the end of the 2001 recession.

“Bottom line: Looking forward to next year, there is almost no chance that the recession will continue into 2010. Further, my reading of the New York Fed’s Treasury spread model suggests that an economic recovery is probably already underway, and the Fed’s model predicts the end of the recession in 2009.”

Source: Mark Perry, Carpe Diem, June 4, 2009.

Financial Times: US sees light at end of the tunnel

“Is the US recession over? A handful of bullish economists are starting to claim that it is, or that it very soon will be.

“‘The trough of the recession is imminent, if it has not already been passed,’ said Neal Soss, chief economist at Credit Suisse.

“‘I have declared the recession (almost) officially over,’ Marc Prado, market strategist at Cantor Fitzgerald, told clients this week. ‘The May data clearly has turned the corner.’

“This is still very much a minority view. Most economists think the economy is stabilising but the low point has not yet been reached.

“‘It is not impossible. But it seems early to me, with payrolls still contracting at 500,000 plus as of May,’ said Jan Hatzius, chief economist at Goldman Sachs.

“Richard Berner, chief US economist at Morgan Stanley, agrees. ‘I think a few months later - perhaps September to October.’

“The National Bureau of Economic Research business cycle dating committee, which decides when recessions begin and end, has not even begun discussing the end date and will probably not reach a verdict for 18 months or more.

“But the fact that the end of the recession is being discussed at all is a sign of how far the debate has moved on. The ‘recession is over’ camp highlights new claims for unemployment benefits and new orders for manufacturing goods.”

Source: Krishna Guha and Sarah O’Connor, Financial Times, June 4, 2009.

Financial Times: US car sales boost mirrors global rise

“All major carmakers posted higher sales in the US last month than in April, with heavy discounting boosting even General Motors and Chrysler, which are both in bankruptcy protection.

“The US uptick mirrors an improvement in many other parts of the world. The market is ’starting to make a turn for the positive’, said Mike DiGiovanni, GM sales analyst. ‘We think we are starting to emerge from this global downturn.’

“Mr DiGiovanni estimated that worldwide car and light truck sales rose to an annualised 63.6 million units in May, from 60 million in April and a trough of 56 million last November.

“Industry sales in China soared 47% in the year to May, with GM posting a 75% jump. ‘That market is smoking hot,’ Mr DiGiovanni said, ascribing the surge to government stimulus measures.

“In the US, sales rose to an annual rate of 9.9 million units in May - well below the 14.3 million units sold in May 2008, but up from an average of 9.5 million in the first four months of the year, according to Autodata.”

Source: Bernard Simon, Financial Times, June 2, 2009.

Financial Times: Bernanke warns on deficit

“Ben Bernanke urged Congress on Wednesday to act now to bring down long-term budget deficits, warning that a failure to do so might lead to a future debt trap.

“The Federal Reserve chairman said the recent sharp increases in bond yields ‘appear to reflect concern about large federal deficits’ as well as improved optimism about the economy and other factors.

“Mr Bernanke said large deficit-funded actions to fight the crisis were ‘necessary and appropriate’. But he said ‘near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances’.

“Warning of the risk of a future debt trap, he said: ‘We cannot allow ourselves to be in a situation where the debt continues to rise. That means more and more interest payments, which swell the deficit, which leads to an unsustainable situation.’

“The Fed chief’s warning came as he reiterated his view that he expects to see growth ‘later this year’ with ’some stabilisation in final demand including consumer spending’. However, he remained cautious with numerous caveats.

“Mr Bernanke said that to encourage lenders to finance the US at reasonable rates ‘we do have to persuade them that we are going to be serious about returning to a more balanced fiscal situation going forward’.

“Mr Bernanke made no reference to the possibility of increasing Fed purchases of Treasuries to lean against the rise in yields.

“In effect, he put responsibility for dealing with debt concerns squarely in the hands of Congress and the Obama administration.

“‘The Federal Reserve will not monetise the debt,’ Mr Bernanke said.”

Source: Krishna Guha, Financial Times, June 4, 2009.

Paul Ashworth (Capital Economics): The Fed’s next move

“Speculation that the Federal Reserve could soon expand its asset-purchasing scheme to halt the recent rise in Treasury yields looks misplaced, believes Paul Ashworth at Capital Economics.

“‘We expect the Fed to remain sidelined for now for a number of reasons,’ he says.

“First, the rise in actual borrowing costs for households and companies has been a lot more modest than the jump in the 10-year Treasury yield, Mr Ashworth says.

“Second, Fed officials are likely to view the rebound in yields as, at least partly, a consequence of the improvement in economic and financial conditions.

“Third, to the extent that the recent rise in yields reflects concerns about the ballooning Federal budget deficit, the Fed won’t want to risk being seen to be monetising that deficit.

“Fourth, he says, the Fed still hasn’t bought half the assets that it has already pledged to purchase - so it still has a lot of work to do.

“Finally, the more assets the Fed buys now, the harder it will be for it to shrink its balance sheet back down when the time comes.

“‘The Fed evidently is not targeting a certain level for Treasury yields,’ Mr Ashworth says. ‘But that does not necessarily mean yields will continue climbing inexorably.

“‘Our view is that yields will drop back as the economic recovery proves disappointing and falling wages return the focus to the dangers of deflation.’”

Source: Paul Ashworth, Capital Economics (via Financial Times), June 4, 2009.

Asha Bangalore (Northern Trust): Mixed bag of labor market news - a tad more positive than negative

“The unemployment rate rose to 9.4% in May, the highest since July 1983. The jobless rate is a lagging indicator which peaks at the conclusion of a recession or several months after the end of a recession. Our forecast of a recovery in the fourth quarter of 2009 implies a higher unemployment rate by the end of the year or in the early part of 2010. The Supervisory Capital Assistance Program (stress test) assumes an 8.4% and 8.8% annual average unemployment rate in 2009 and 2010 under the baseline scenario. The more adverse alternate scenario assumes jobless rate averages of 8.9% and 10.3%, respectively, in 2009 and 2010. The average unemployment rate in the first five months of 2009 is 8.5%.

“Nonfarm payrolls fell 345,000 in May, following upward revisions of March and April estimates which resulted in 82,000 fewer job losses during these months. The pace of job losses in May is noteworthy because it is noticeably smaller than the average losses seen in recent months (average of job losses three months ended April is 612,000 and six months ended April is 643,000).”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, June 5, 2009.

CNBC: Bond King parses jobs data

“Pimco’s William Gross parsing today’s employment report data.”

Source: CNBC, June 5, 2009.

Asha Bangalore (Northern Trust): ISM manufacturing advances

“The ISM manufacturing survey for May shows a further improvement in factory conditions in May from the trough of December 2008. The composite index moved up 2.7 points to 42.8, which is still associated with a contracting factory sector but at a significantly slower pace that the cycle low pace registered in December. Readings below 50 are associated with a decline in activity. Indexes tracking new orders, production, supplier deliveries, exports, and imports were higher in May compared with the prior month’s readings.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, June 1, 2009.

Asha Bangalore (Northern Trust): ISM Non-Manufacturing Survey slightly higher

“The non-manufacturing ISM composite index moved up slightly to 44.0 in May from 43.7 during April, denoting a smaller contraction in the pace of activity during May versus April. Indexes tracking new orders (44.4 versus 47.0 in April), exports, and imports fell in May, while indexes measuring employment (39.0 versus 37.0 in May) and supplier deliveries (50.0 versus 45.5 in May) advanced. The overall tone of the report was soft, raising expectations of a likely robust increase in June, given the nature of other incoming reports.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, June 3, 2009.

Asha Bangalore (Northern Trust): Increase in personal income reflects impact of fiscal stimulus

“Personal income rose 0.5% in April following a 0.2% drop in the prior month. Wages and salaries held steady in April, while an increase in unemployment compensation and credit from the program Making Work Pay accounted for the big jump in personal income. Consumer spending after adjusting for inflation fell 0.1% in April, putting the second quarter projected decline in consumer spending around 2.0%.

“Saving as percent of disposable income increased to 5.7%, up from 4.5% in March and 0.0% in May 08.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, June 1, 2009.

John Authers (Financial Times): Inflation expectations are rising

“The last time inflation expectations were this high was the week before the Lehman collapse last September, says John Authers.”

Click here for the article.

Source: John Authers, Financial Times, June 2, 2009.

Richard Koo (Nomura): Ignore sovereign ratings

“The threat of rating agency downgrades to the debt of countries in balance sheet recessions, such as the US and UK, should be ignored by financial authorities and market participants, says Richard Koo, chief economist at Nomura.

“He argues that this is because fiscal expansion is the only remedy available to fight a recession caused by a private sector minimising debt instead of maximising profits.

“Mr Koo points to the top ratings given to securities built from subprime mortgages as evidence that agencies are far from being omniscient. He also notes that the agencies offered no meaningful justification for their downgrades of Japan’s debt a decade ago.

“‘Ultimately, market participants - fed up with unrealistic demands of rating agencies - ended up ignoring their ratings. Despite the fact that Japan was assigned a lower credit rating than Botswana for some time, Japanese government bond yields have remained at historic lows throughout the last 10 years.’

“Mr Koo says it was due to market participants ignoring rating agencies and continuing to buy JGBs that Japan’s government could cheaply fund its fiscal outlays, which ultimately allowed the economy to pull itself out of recession.

“‘Agencies’ actions can hinder governments trying to implement the right policies. It is to be hoped that UK and US officials and bond investors have the same courage as their Japanese counterparts.’”

Source: Richard Koo, Nomura (via Financial Times), June 2, 2009.

Financial Times: Konyn on Asia’s risk of UK-style ratings downgrade

“Mark Konyn, chief executive of RCM Asia-Pacific, a unit of Allianz Global Investors which manages $11 billion in assets, assesses the risk of Asia suffering a UK-style ratings downgrade and gives his outlook for Japan.”

Source: Financial Times, June 1, 2009.

Financial Times: Leverage creeps back on to the radar

“Investors and policymakers have been scouring the financial landscape looking for green shoots.

“One hint of these can be found in an elegant building in London’s Knightsbridge district, which houses the CQS funds.

“A few months ago, hedge funds such as CQS, one of Europe’s largest credit funds, were finding it almost impossible to get leverage, or loans from banks to trade. The shock of the Lehman Brothers collapse left banks frantically hoarding any cash they had.

“Now CQS says the climate is easing - a touch.

“‘At the peak of the euphoria you would get 20 times leverage. It was mad,’ says Michael Hintze, a former Goldman Sachs trader who co-founded CQS a decade ago. ‘Then it all disappeared. You could hardly get any leverage at all last autumn.

“‘[But] now we can get three times leverage on many assets. Not all - you cannot get leverage on most asset backed securities [such as mortgage bonds] or many Asian assets.

“‘There is still a lot of unwinding to go. But it is improving. It started to improve in late March and into early April.’”

Source: Gillian Tett, Financial Times, June 1, 2009.

BCA Research: The real reason behind the Treasury selloff

“The Treasury selloff in recent weeks is largely due to an escalation in the real component of yields, and more specifically due to a significant increase in the term premium.

“While inflation expectations have drifted higher in recent weeks, the majority of the selloff in yields has been centered in the real component. Real yields are normally correlated with growth expectations, however this time the blowout appears to be linked to various sources of uncertainty not directly linked to the economic outlook.

“While measures of short-term uncertainty pertaining to credit risk (such as the VIX) have collapsed, other measures of bond market volatility have surged along with uncertainty over the long-run effects of policymakers’ actions. Thus much of the increase in the real component of yield is explained by a backup in the term premium, a measure of the compensation bond investors receive for assuming the risk that yields do not follow the path discounted in the forwards curve.

“Our sense is that the term premium has seen its structural low and is embarking on a multi-year uptrend. On a cyclical basis however, the rise in the term premium seems overdone. Bottom line: The term premium is extremely elevated and more likely to fall than rise in the months ahead, which should limit the upside for Treasury yields from current levels.”

Source: BCA Research, June 3, 2009.

Financial Times: Bond yields attract interest

“The unprecedented steps taken by central banks in response to the credit crisis have bolstered confidence in the global economy’s recovery prospects and fuelled strong gains for equities and commodity markets since March.

“The Bank of England and European Central Bank are both expected to keep interest rates on hold on Thursday, but mounting upward pressure on long-term bond yields will focus attention on whether policymakers are considering extending unconventional measures to support liquidity and confidence.

“While rising bond yields reflect the continuing improvement seen in leading indicators - a significant theme of this week’s data releases - lingering doubts remain over the effectiveness of quantitative easing as surveys of credit conditions indicate that financing for many companies remains problematic.”

Source: Chris Flood, Financial Times, May 31, 2009.

Reuters: Federal Reserve puzzled by yield curve steepening

“The Federal Reserve is studying significant moves in the US government bond market last week that could have big implications for the central bank’s strategy to combat the country’s recession.

“But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.

“Do rising US Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more US Treasuries.

“Or does the steepening yield curve mean investors are worried about the deterioration in the US fiscal outlook, or the potential for a collapse in the US dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.

“Another possibility is that China, the largest foreign holder of US Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities.

“With officials still grappling to divine the factors steepening the yield curve, a speedy decision on whether to ramp up the Treasury debt purchase program or the related plan to snap up mortgage-related debt seems unlikely.

“‘I’m in wait-and-see mode,’ said one Fed official who spoke on the condition of anonymity. ‘We laid out the asset purchase plan and we’re following it. That is going to have some affect on various interest rates, but together with a hundred other things. So I don’t think we should be chasing a long-term interest rate,’ the official said.

“Economists at Barclays Capital in New York have argued that the Fed should announce plans to increase its planned purchases of longer-dated Treasuries to $1 trillion from $300 billion to drive yields back down, lower home mortgage rates again, and support the embryonic economic recovery.”

Source: Alister Bull, Reuters, May 31, 2009.

Bespoke: 30-year mortgage rates

“Much has been said about the rise in mortgage rates over the past few weeks. Market participants are worried that the Fed’s actions are not working, and that this will impede already fearful potential homebuyers from making purchases. Below is a historical chart of the national average 30-year fixed mortgage rate. After making a ten-year low in late April at 4.85%, rates have jumped 50 basis points to 5.35%. The jump is significant, but 5.35% is still extremely low compared to the 10-year average. Unfortunately, the direction of rates seems to impact consumer psychology more than the actual level.”

Source: Bespoke, June 4, 2009.

Bespoke: Default risk continues its decline

“As the stock market continues higher, corporate default risk continues to decline. Below is a chart of the IBOX North American CDS (credit default swap) Index that looks at default risk for 125 investment grade entities. After finally topping out a few months ago, default risk is now down 35% from its highs. While credit default swap prices have fallen quite a bit, they’re still at historically elevated levels, and the IBOX index remains just above its pre-Lehman levels.”

Source: Bespoke, June 4, 2009

Bespoke: Most overbought ETFs

“With stocks rallying around the world, the many ETFs that track various equity markets have moved significantly above their 50-day moving averages. Below we highlight the most overbought ETFs in relation to their 50-day moving averages. v”As shown, the Russian stock market ETF (RSX) is the most overbought, trading 36.17% above its 50-day. India (INP) ranks second at 35.72%, followed by the steel ETF (SLX), emerging market Europe (GUR), metals and mining (XME), and Singapore (EWS). The majority of the ETFs on this list track countries. The rest are generally concentrated in the commodities area.”

Source: Bespoke, June 2, 2009.

Bespoke: Investors Intelligence Sentiment Survey

“The most recent Investors Intelligence weekly sentiment survey showed that the spread between bullish (42.5%) and bearish (25.3%) newsletter writers reached its highest level since January 2008. While high levels of bullish sentiment are typically a contrarian market signal, we would note that even with the recent increase, the current spread between bulls and bears (17.2%) is still below the ten-year average of 19%.”

Source: Bespoke, June 3, 2009.

Financial Times: Investors sceptical on stock market rebound

“The majority of the world’s leading investors do not believe the recent strong performance of stocks and other risky assets is sustainable, according to a report released on Monday.

“The FTSE All World equities index has surged more than 60% since hitting a low for the year in March.

“But Barclays Capital has revealed that just 17.5% of the 605 investors interviewed for its quarterly FX investor sentiment survey - including central banks, asset managers, hedge funds and international corporate customers - think risky assets have further to rise.

“This is one aspect of a generally gloomy outlook for the global economy, which undermines optimism that ‘green shoots’ of recovery are starting to emerge.

“Just 4.5% of respondents believe the trajectory of the global economy over the next year will be ‘V-shaped’ - indicating weakness followed by a sharp recovery.

“Investors are most optimistic on Asia’s prospects, with 57.5% believing emerging market currencies in the region will outperform those in Latin America and eastern Europe in the next three months.

“‘There is a very strong consensus that Asia will be the beneficiary of the ‘China effect’,’ said Mr Woo.

“‘There is strong faith that China’s massive stimulus programme will boost the economy and the region.’”

Source: Peter Garnham, Financial Times, June 1, 2009.

Yahoo Finance, Tech Ticker: A bull in March, Doug Kass now sees “potholes on the road to higher prices”

“Doug Kass, founder and president of Seabreeze Partners, is a rare bird, having been both bearish at the top in late 2007 and bullish at the bottom in March 2009. Once a dedicated short-seller, Kass opened a long-short fund in January 2009 and made a ‘generational low’ call on the market the week of the March 9 lows.

“At The Big Picture Conference in New York Wednesday, Kass told me he still believes those March lows will hold and isn’t expecting any major downdraft for the Dow and S&P. But the veteran hedge fund manager believes the S&P is now likely to settle into an 890-to-950 trading range and said his prior upside target of 1050 for the S&P now seems ‘ambitious’.”

Source: Yahoo Finance, Tech Ticker, June 4, 2009.

Donald Luskin (SmartMoney): Good news has arrived for investors

“I’m happy to report that my very favorite macroeconomic indicator has turned positive. I’m not talking about Friday’s surprisingly not-bad jobs report. It’s something I like even more.

“It’s my favorite because it has nothing to do with macroeconomics, and it is based on analysis that is always wrong. And yet, it works.

“I’m talking about consensus forward earnings for the stock market. That means taking all the Wall Street analysts’ guesses for earnings one year in the future for whatever companies they happen to cover, averaging them, and then capitalization-weighting them so you get the aggregate consensus for the whole S&P 500.

“No analyst’s estimate for a particular company is a forecast of the overall economy. It may take the economy into account in some way, but it’s mostly just a forecast for what a single company will do.

“And as we all know, Wall Street analysts are almost always way off target. They’re generally way too bullish. And a lot of people believe they’re corrupt, as well, giving flattering appraisals of companies that their investment firms would like to do business with.

“But it turns out that when you average them all together, their errors and their biases cancel out. And in the aggregate, they can be used as a bottom-up view forecast of the whole economy.

“And it works. Turning points in aggregate consensus forward earnings for the S&P 500 — that is, when they’ve stopped growing and started falling - have perfectly forecasted the last three recessions, including the current one.

“And when they turned up, they perfectly forecasted the recoveries from the last two recessions. The great news is that they’re on the very verge of turning up right now. It’s just a matter of days.

“Three months ago, within days of the bottom in stocks, aggregate forward earnings started to turn around. It was less than a ringing endorsement at first. It just meant that the decline in earnings was now expected to get less bad - not that earnings would actually grow. But it was a perfect buy signal.

“And now aggregate forward earnings are on the verge of forecasting that earnings growth is back. It’s a buy signal. And if the pattern holds, it will be a good one.

“So call me a cautious bull. I now have almost no doubt that the recession is over. I am very confident that stocks won’t make new lower lows in this cycle. So at the very least, I can conclude that there’s more room on the upside than on the downside.”

Click here for the full article.

Source: Donald Luskin, SmartMoney, June 5, 2009.

Bloomberg: Boockvar says Dow in “new era” without GM, Citigroup

“Peter Boockvar, an equity strategist at Miller Tabak & Co., talks with Bloomberg’s Deirdre Bolton and Erik Schatzker about the removal of General Motors Corp. and Citigroup Inc. from the Dow Jones Industrial Average. GM and Citigroup were replaced by Cisco Systems Inc. and Travelers Cos. Boockvar also discusses the outlook for stocks and bonds, Federal Reserve policy and investment strategy.”

Source: Bloomberg, June 1, 2009.

Bloomberg: Mobius says money supply to “explode”, lift markets

“The money supply is set to ‘explode’ worldwide and boost emerging-market stocks as central banks pump cash into the financial system to counter the global recession, Templeton Asset Management’s Mark Mobius said.

“‘Everyone is scared of deflation, so they are printing money,’ Mobius, who helps oversee about $20 billion of emerging-market assets as executive chairman of Templeton, said at a press briefing in London. ‘It’s beginning to flow out, with greater confidence, into emerging markets.’

“The MSCI Emerging Markets Index, a 22-country benchmark for developing-nation equities, surged 37% this year as central banks led by the US Federal Reserve reduced interest rates and purchased assets to revive economic growth. The European Central Bank and the Bank of England today kept their benchmark interest rates at the lowest levels on record.

“The Fed said its M2 gauge of money supply, which includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks, savings and private holdings in money-market funds, rose at a 9% annual rate in the week ended May 18, above the target of 5% the Fed once set for maximum growth. The central bank no longer has a formal target.

“Mobius, voted among the ‘Top Ten Money Managers of the 20th Century’ by the Carson Group, said emerging-market equities will rise faster than developed-country stocks and that Templeton is buying shares in Russia. The nation’s benchmark RTS Index has jumped 75% this year, the second-best performing market worldwide after Peru.”

Source: Michael Patterson, Bloomberg, June 5, 2009.

Michael Hartnett (Banc of America Securities-Merrill Lynch): Gulf equity markets

“Gulf equity markets look like a compelling trade for investors seeking laggards in emerging markets, says Michael Hartnett, chief global equity strategist at Banc of America Securities-Merrill Lynch.

“‘Emerging markets are up 33% this year and inflows into the asset class remain strong,’ he says. ‘By contrast, Gulf markets are up just 1.2% year to date and inflows are non-existent.’

“Mr Hartnett points out that Gulf equities have not only lagged behind the surging oil price, but also Russia’s equity market.

“‘Russia has oil; the Gulf has oil. Russian equities are up 67% in 2009; Gulf equities are up 1% in 2009,’ he says. ‘Oil prices are above $60 a barrel and likely to rise further, according to our commodities team. Gulf markets tend to lag movements in the oil price by about three months.’

“He notes that emerging market small-cap shares, a group of stocks that, like the Gulf, are often deemed ‘risky and illiquid’, started to significantly outperform EM large caps in the past month. ‘Gulf equities have room to catch up with the rally in small-caps,’ says Mr Hartnett.

v”Within the region, he believes Dubai is the best trading buy. ‘It is hard to find much that has underperformed US banks in the past three years,’ he says. ‘But Dubai has, thanks to a real estate and oil bust. In addition, Dubai has been a big underperformer relative to regional Gulf markets.’”

Source: Michael Hartnett, Banc of America Securities-Merrill Lynch (via Financial Times), June 1, 2009.

Bloomberg: Gross says diversify from dollar as deficits surge

“Bill Gross, founder of Pacific Investment Management Co., advised holders of US dollars to diversify before central banks and sovereign wealth funds ultimately do the same amid concern about surging deficits.

“Treasury Secretary Timothy Geithner’s plan to bring the budget back into balance won’t be successful as consumers shrink spending and the US growth rate slows, Gross said in a Bloomberg Radio interview today [Thursday]. The budget deficit will be narrowed to ‘roughly’ 3% of GDP from a projected 12.9% this year, Geithner said June 1.

“‘I think he’ll fail at pulling a balanced rabbit out of a hat,’ Gross said from Pimco’s headquarters in Newport Beach, California. ‘They are talking about - once the economy in the US renormalizes - the move back toward balance or much less of a deficit. I suspect that will be hard to do.”

“Higher savings rates and an increase in the cost to service the national debt will drag on the US economy, likely meaning ‘trillion-dollar deficits are here to stay’, Gross wrote in his June investment outlook posted today on the firm’s Web site.

“The US growth rate ‘requires a government checkbook for years to come,’ Gross wrote. Coupled with Medicare and Social Security entitlements, government borrowing could reach 300% of GDP, meaning ‘the Chinese and other surplus nations cannot fund the deficit even if they were fully on board,’ he wrote.

“China, the largest US creditor, with $767.9 billion of debt, has shifted purchases of Treasuries into shorter-maturity securities amid concern about unprecedented debt sales.”

Source: Dakin Campbell, Bloomberg, June 4, 2009.

Numis Master: Zimbabwe may yet defeat inflation

“What do you do with obsolete coins or bank notes even collectors don’t want? If you live in the United States you hawk them to unsophisticated buyers who fancy themselves as investors or collectors, selling them through television home shopping networks, Sunday newspaper ads, or via telemarketing. If you live in the African nation of Zimbabwe, where television, newspapers, and telephones are a luxury, you sell your obsolete coins or bank notes to tourists.

“That, according to the March 23 The Globe and Mail newspaper, is exactly what Zimbabwe’s street hawkers are doing. The now defunct Z$100-trillion bank notes are being sold to foreign tourists for Z$2 each - in some foreign currency rather than in Zimbabwe dollars, of course!

“Obsolete coins for sale, you ask? Don’t count on it. Since the coins have metal content they will likely sell for their scrap value, even if their face value is so low the coins won’t buy anything. According to The Globe and Mail, ‘The currency with the never-ending string of zeroes is quickly fading into history, just two months after the latest notes were printed by the inexhaustible central bank. Also disappearing is Zimbabwe’s phenomenal level of hyperinflation, which last year reached a stunning 89.7 sextillion percent (a number expressed with 21 zeroes), making it the most extreme hyperinflation crisis of any country in modern times.’

“After a number of currency reforms that ended in failure it appears the government may have finally found a formula that works. According to the newspaper account, ‘Zimbabwe’s new coalition government has cracked both problems with an absurdly simple solution: It has abruptly switched to foreign currencies, allowing customers to pay for products with US dollars or South African rand or Botswana pula. The entire economy, almost overnight, has switched to a unique system of multiple foreign currencies.’

“‘The dollarization (and rand-ization and pula-ization) of the Zimbabwean economy,’ The Globe and Mail article continues, ‘has finally slain the dragon of hyperinflation, providing the first fragile signs of hope for a devastated country.”

Source: Richard Giedroyc, Numis Master, June 1, 2009.

Bloomberg: Commodities rise most in 24 years; Goldman sees gain

“Manufacturers preparing for an economic rebound are rebuilding inventories of everything from benzene to plywood, sparking a commodities rally that Goldman Sachs Group Inc. says will produce 19% returns in a year.

“The Journal of Commerce index that tracks prices of 18 industrial materials gained 9.5% in May, the most in a month since the measure began in 1985. Goldman’s forecast on May 8 would beat the firm’s estimate for a 4% rise in the Standard & Poor’s 500 Index this year.

“Aurubis AG, the top manufacturer of copper-wire rods for cars, said last week that demand improved since April. Huntsman Corp., the biggest maker of epoxy adhesives, said May 8 that second-quarter results will benefit from improved sales to customers who have depleted stockpiles. Dow Chemical Co., the largest US chemical maker, said its plants operated at 70% of capacity in April, up from 45% in December.

“While the US economy contracted 6.3% in the fourth quarter and probably will shrink 2.8% this year, based on the median estimates in a Bloomberg survey of 61 economists, commodity prices show that investors and corporate purchasing agents anticipate a rebound will begin later this year.

“‘When you see copper and commodities doing well, then it’s a sign that there are meaningful parts of the global economy that are stronger,’ said Evan Smith, co-manager of the San Antonio-based US Global Investors Global Resources Fund, which is up 37% this year. ‘We like the outlook for commodities right now.’”

Source: Millie Munshi, Bloomberg, June 2, 2009.

Bloomberg: Northwestern Mutual makes first gold buy in 152 years

“Northwestern Mutual Life Insurance Co., the third-largest US life insurer by 2008 sales, has bought gold for the first time the company’s 152-year history to hedge against further asset declines.

“‘Gold just seems to make sense; it’s a store of value,’ Chief Executive Officer Edward Zore said in an interview following his comments at a conference hosted by Standard & Poor’s in Brooklyn. ‘In the Depression, gold did very, very well.’

“Northwestern Mutual has accumulated about $400 million in gold, and Zore said the price could double or even rise fivefold if the economy continues to weaken. Gold gained 10% last month, the most since November. The commodity has more than tripled since 2000, rising for eight straight years.

“‘The downside risk is limited, but the upside is large,’ Zore said. ‘We have stocks in our portfolio that lost 95%.’ Gold ‘is not going down to $90.’”

Source: Andrew Frye, Bloomberg, June 4, 2009.

CommodityOnline: IMF gold sale - US congress approval next week

“The International Monetary Fund’s decision to sell its gold reserves could get the necessary approval from the US Congress next week.

“At the G20 summit in London in April, participating countries agreed the IMF could sell 403.3 metric tons of gold as part of efforts to leverage up to $6 billion in concessional loans for low-income countries over the next few years.

“In order for the sale to proceed, 85% of IMF shareholders need to approve the proposal. Since the US has 17% of the votes, it has a de facto veto over the proposal, which requires Congressional approval, but IMF Managing Director Dominique Strauss-Kahn told Dow Jones Newswires this week he expects Congress will soon approve the sale.

“On Friday, analysts said US Congress may approve International Monetary Fund gold sales as early as next week.

“‘This issue appears now fully priced into the gold market and any announcement confirming sales should not move the market - apart from perhaps a knee-jerk reaction,’ said John Reade, an analyst at UBS.”

Source: CommodityOnline, May 29, 2009.

Bespoke: Oil up 99% in 75 trading days

“Oil has rallied more over the last 75 trading days than it did at any time during its entire bubble run from 2001-2008. In fact, its current rally of 99% since the February 12 low is nearly double the highest 75-day rally during the last oil bull (From December 2001 to April 2002, oil rallied 55% over 75-days.)

“Oil has also gone from $33.75 to $67.75 in just 75 trading days. During the 2001-2008 oil bubble, it took 409 trading days to complete the same task from January 2004 to August 2005. While many investors are arguing that oil’s rally is a good sign for the global economy and equity markets, let’s hope it doesn’t keep up the pace, or else we’ll be right back to $150 in no time.”

Source: Bespoke, June 2, 2009.

Bloomberg: JPMorgan hires supertanker for storage

“JPMorgan Chase & Co., the second largest US bank by deposits, hired a newly built supertanker to store heating oil off Malta, shipbrokers reported, in the company’s first such booking in at least five years.

“The bank hired the Front Queen for nine months, according to daily reports from Oslo-based SeaLeague A/S and Athens-based Optima Shipbrokers. David Wells, a spokesman for JPMorgan in London, declined to comment.

“JPMorgan, which has never hired an oil tanker based on data compiled by Bloomberg going back five years, follows companies including Citigroup Inc.’s Phibro LLC unit and BP Plc in hiring ships to store crude or oil products at sea. The firms are seeking to take advantage of higher prices later in the year.”

Source: Alaric Nightingale, Bloomberg, June 4, 2009.

The Economic Times: Jim Rogers - fund managers can become farmers

“Even if you are outright bearish, don’t short the market. Stocks could touch crazy levels, but they may be in currencies which are worthless.

“Indeed, a sovereign default and currency turmoil could rattle world markets in a year or two. In a chat with the Economic Times, global investor Jim Rogers says cotton, silver and sugar can be hot picks.

“At one stage we were inundated with gloomy forecasts, which were further reinforced by the IMF and World Bank. And then suddenly stocks surged - something most were not prepared for. How risky is the market today?

“Central banks all over the world have printed huge amounts of money, and the real economy is not strong enough for all this money to be absorbed … so, it’s going into stocks and real assets such as commodities. It’s a mistake what they are doing. It’s giving short-term pleasure, but there’s long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road.

“The American bond market is already beginning to go down dramatically as people realise that the American government has to sell huge amount of bonds, and secondly, there is going to be inflation, serious inflation, as it was always in the past when you had governments printing huge amounts of money.

“Stocks are rising even as fiscal deficit is widening. Somewhere it has to snap … It’s going to snap. Later this year, next year, we are going to have currency problems, maybe even a currency crisis. I don’t know with which currency - maybe with the pound sterling, maybe with the US dollar, who knows. It maybe with something none of us have at the moment. When you have a currency crisis, stocks will be affected, many things will be affected. It is not sound, what’s happening out there in the world.”

Click here for full article.

Source: The Economic Times, June 4, 2009.

Steve Barrow (Standard Bank): Latvia - return of risk aversion

“Current tensions in Latvia could be a catalyst for a return of broader risk aversion, warns Steve Barrow, currency strategist at Standard Bank.

“‘Latvia might seem distant from other countries and markets, but as we saw with the US subprime crisis, the flap of a so-called ‘butterfly wing’ in some remote area can cause a hurricane for other markets,’ he says.

“Mr Barrow says it is not surprising that Swedish banking stocks and the krona have been unsettled by the possibility of a Latvian devaluation.

“‘Swedish bank loans to Latvia account for almost 60% of Latvia’s overseas liabilities on an immediate borrower basis.”

“But he says it should be remembered that European banks excluding Sweden account for the rest of Latvia’s overseas liabilities - so if Latvia’s problems intensify, there could be a hit for the eurozone, and the euro, as well.

“A key issue is whether there would be any contagion effect. ‘Any Latvian devaluation could impinge on other Baltic countries,’ he says. Moreover, if banking problems develop in creditor countries like Sweden, they could spill over to other banks in developed markets.

“‘In short we feel this situation is worth watching - and not just for its impact on the krona. It does have the capacity to lift risk-aversion at a time when there are already some very tentative signs that risk-taking might be about to wane a bit.’”

Source: Steve Barrow, Standard Bank (via Financial Times), June 4, 2009.

Tags: Asset Classes, Corporate Bond, Economic Reports, Emerging Markets, Employment Data, ETF, Global Economy, Government Bonds, India, Interbank, Inventory Cycle, Investor Sentiment, Money Growth, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Non Farm Payrolls, October Gold, oil, Ripcord, Risk Appetite, Scott Stantis, Stock Markets, Ups And Downs
Posted in Emerging Markets, Gold, Markets | No Comments »

Rebecca Wilder’s economic updates (May 29 – June 5): Looking hard at the bottom

Sunday, June 7th, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.

The global economic reports are becoming saturated with signs of a forming bottom. Auto sales in Japan and the US are improving somewhat; exports are dangling in the double-digit loss rates; and GDP really couldn’t get much worse (the inventory cycle alone will create some growth). Finally, money growth rates are slowing, perhaps an indication that policy makers feel that the worst is behind us.

The lagging information: Q1 GDP was just awful

Looking behind: Inflation still falling on seriously weak demand in Q4 2008 and Q1 2008, although recent oil swings might throw a wrench in the trend.

Some troubling news still: exports anemic..still. South Korea released its May data on exports (Malaysia, India, Indonesia, and Thailand through April), which stumbled another 8.7% to -28.3% over the year. Not a good sign for May export reports across the rest of Asia.

Good news (possibly): Auto sales in Japan and the US may have troughed. The upward momentum is surely a good sign for consumer spending numbers, but notice sales are still down 19% and 20% over the year!

Finally, money supply growth rates are slowing. In the US and UK, I take this as a sign that central banks are slowing their easing strategies somewhat. However, in the EU, the lack of QE policy allowed M3 growth fall to its slowest annual pace since 2001, 4.9%.

It appears that the global economy has finally found the ripcord.

Source: Rebecca Wilder, News N Economics, June 5, 2009.

*Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

Tags: Assistant Professor, Auto Sales, Cape Town, Central Banks, Consumer Spending, Doctorate, Economic Reports, Economic Updates, Economist, Emerging Markets, GDP, Global Economy, India, India Indonesia, Inventory Cycle, Money Growth, Money Supply Growth, oil, Q4, Qe, South Korea, Target, Upward Momentum
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Rebecca Wilder’s economic updates (May 14–21): still bad, but flood of shocking reports ebbs

Sunday, May 24th, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.

This week was a little light on global data. Given that the trade data is looking “better” in some areas (which really means not falling as quickly in some cases, see this post and this post), it is likely that Q1 will be the worse quarter for many Asian economies who rely heavily on exports for growth. It’s bad, though, with Japan, Taiwan, and Singapore all falling 9% or more over the year! Inflation is slowing substantially in some areas, negative in others. And finally, it looks like US capital markets got a small bump in March, as foreigners returned to risk. Overall, the global economic reports remain in the red, but the shockingly bad reports are fading.

GDP in Asia: waiting to exhale

The chart illustrates annual GDP growth through Q1 2009 for Hong Kong, Japan, Taiwan, Indonesia, and Singapore. Looks bad, but Indonesia is showing some resilience, although GDP is now growing at its slowest pace since January 2004.

More scary inflation charts: disinflationary pressures strong - deflation in some

The chart illustrates annual inflation across key economies through April 2009. The UK is an interesting case: the British pound has been taking a beating and pressuring prices, and the consumer price index is holding on (can’t say the same for the retail price index) better than in other economies (US inflation now negative for two consecutive months). Today, though, S&P downgraded the UK outlook to negative, and the sterling took a hit; wonder what that will do to prices?

Amid a calm developing in capital markets, foreign investors returning to US-denominated risk

The chart illustrates the 12-month rolling sum of net capital inflows through March 2009, as reported by the Treasury International Capital data (TIC). Good thing for the Treasury, which is planning on running $trillion deficits in coming years, that foreigners might buy their notes. In March, foreigners showed a slight shift toward risk, with net long-term flows growing for the first time over the year since the end of 2008 (second time over the month).

Source: Rebecca Wilder, News N Economics, May 21, 2009.

Tags: Asian Economies, Capital Inflows, Capital Markets, Consumer Price Index, Deflation, Economic Reports, Economic Updates, Foreign Investors, Foreigners, GDP, GDP Growth, Global Data, inflation, Japan Taiwan, Resilience, Retail Price Index, Shocking Reports, Treasury International Capital, Trillion Deficits, Waiting To Exhale
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Rebecca Wilder’s economic updates (May 8 – 15): still heading down, but “not as fast”

Sunday, May 17th, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog

This week, the hard economic data reminds us that the global recession is ongoing: exports remain deep in the red; retail sales disappoint; inflation gets a small energy bump but still down; and industrial production declines. However, the data are consistent with the story of a slowing economic decline, foretold by several the “green shoot” survey reports (see last week’s World Economic Reports).

Industrial Production: Still heading down, but at a slower rate

The chart illustrates the industrial production index for Germany and the UK (seasonally adjusted), and the growth rate for Malaysia and India (to adjust for seasonal variations) through March 2009. The rate of decline is slowing in Germany - actually, Germany’s index went unchanged over the month - and the UK, improving over the year in Malaysia, but still heading down in India. A stabilization in the industrial sector may be afoot: the cliff diving is likely complete.

Exports: Same as industrial production…stabilization?

The chart illustrates annual export growth through March for Canada, Germany, Malaysia, and the US, and through April for China. Although China, Malaysia, and Canada turned down on an annual basis, the precipitous decline seems to have passed. We look for a trend to show stabilization.

Retail Sales: Struggling

The chart illustrates annual retail sales growth through April for China and the US, and through March for Singapore. Retail sales are struggling to make way. We wait to see if the various stimulus packages will get consumers back to the stores and auto dealerships; but let’s not hold our breath quite yet.

Inflation: Energy and food prices create some volatility

The chart illustrates annual inflation through April 2009. Clearly, the momentum is down on a sharp drawback in aggregate demand. However, the recent bump in energy and food is creating some volatility (some upward momentum against the downward pressure). Norway is experiencing stronger-than-expected inflation, as the economy fairs better than others; but don’t worry, inflation will probably fall, too.

The headline of the day: Eurozone economy took a dive in Q1

The chart compares Eurozone GDP to US GDP: ironic that the US is the epicenter of the global economic crisis,; was able to pass on the pain simply through trade flows; and now foreign economies take a sharper U-turn.

Overall, the global economic decline appears to be slowing; however, the recovery is still tentative.

Source: Rebecca Wilder, News N Economics, May 15, 2009.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

Tags: Aggregate Demand, Auto Dealerships, Bump, Canada, Canada Germany, Cliff Diving, Drawback, Economic Data, Economic Decline, Economic Reports, Economic Updates, Emerging Markets, Food prices, Global Recession, India, Industrial Production Index, Industrial Sector, Precipitous Decline, Retail Sales Growth, Seasonal Variations, Stimulus, Survey Reports, Volatility
Posted in Economy, Markets | No Comments »

Stock market performance round-up: Nowhere to hide

Tuesday, March 3rd, 2009

A great deal has been said in the media (and on this blog site) about the performance of stock markets during February. In the face of unrelentingly dismal economic reports, this posts serves to put market movements around the globe in perspective.

After the worst January (-8.8%) on record, the Dow Jones Industrial Average closed February (-11.7%) in the third worst position, after 1933 (-15.6%) and 1920 (-12.5%). Also, the Dow’s decline marked its sixth consecutive month in the red. Bespoke pointed out that losses during this period (-38.8%) were much larger than in any of the other seven losing streaks of six months or longer.

Factoring in yesterday’s declines, the S&P 500 and Dow have now fallen to 10.9% and 7.7% below their respective 2002 lows, floundering around levels last seen in 1996. December 5, 1996 also marked Alan Greenspan’s well-known Irrational Exuberance speech. The level of the S&P 500 on that day was 43 points higher than yesterday’s closing index of 701! (Hat tip: Barry Ritholtz.)

Even more chilling is the fact that the Dow has wiped out more than half of its entire gain from the July 1932 low of 41 to the October 2009 peak of 14,164

Let’s follow the unfolding drama by means of charts for the S&P 500 Index, the MSCI EAFF Index (representing Europe, Australasia and the Far East - the main benchmark for non-US stocks) and the MSCI Emerging Markets Index.

Source: StockCharts.com

Source: StockCharts.com

Source: StockCharts.com

Zeroing in on the numbers, the performances in the table below are given in local currency terms for different measurement terms ended February 28.

Click on the image for a larger table.

From the highs of October 2007 to the end of February the MSCI World Index and the MSCI Emerging Markets Index lost 55.4% and 62.7% of their respective values. The worst performer was Ireland (-79.2%), with Venezuela (-28.2%) occupying the second last position.

Considering the year to date, the Shanghai Composite Index (+14.4%) is in the lead, but was pipped into second position by Venezuela for the month of February (+5.1% versus +4.6%).

The gains/declines mentioned above are all in local currency terms. However, converting the movements to US dollar shows a somewhat different picture for the non-dollar countries (see table below). In general, most indices show worse returns in US dollar terms as a result of the greenback’s strength. The Nikkei 225 serves as a specific example where a dollar-based investor suffered as a result of the significant weakening of the Japanese yen against the dollar. Until recently, the Russian market endured a similar fate on the back of the plunging ruble.

Click on the image for a larger table.

Where to now? As pointed out before, stock markets are still in the clutches of the bear. The chart below shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (ROC) indicator (red line) and the RSI oscillator (brown line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and again since December 2007. Having said that, the levels of both the ROC and RSI are massively oversold.

Source: StockCharts.com

At this juncture, short-term movements are almost impossible to predict, although the sell-off over the past few days - a capitulation in some respects - could nourish the long-awaited tradeable rally. Also, Lowry’s 90% down-days, like we experienced yesterday, are often followed by two- to seven-day bounces. But we are not yet at the point where we leave the corpse of the bear behind, although each downward move brings us closer to the eventual bottom.

Tags: Alan Greenspan, Australasia, Benchmark, Currency Terms, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Reports, Hat Tip, Irrational Exuberance, Losing Streaks, Lows, Measurement Terms, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Nowhere To Hide, Stock Market Performance, Stock Markets
Posted in Emerging Markets, Markets, US Stocks | No Comments »

Words from the (investment) wise for the week that was (Dec 8 – 14, 2008)

Sunday, December 14th, 2008

Despite a litany of bleak economic and corporate news confronting investors during the past week, global stock markets digested the bearish fodder with a sense of aplomb. The MSCI World Index and the MSCI Emerging Markets Index gained 4.4% and 10.9% respectively on the week, with other reflation trades such as gold (+9.1%) and oil (+20.4%) also putting in a strong performance.

But investor angst was never completely allayed as seen from the yields on US one- and three-month Treasury Bills briefly trading in negative territory for the first time since 1940, indicating the willingness of risk-averse investors to pay the government for the “privilege” of holding their money. Three-month T-Bills ended the week in positive territory but barely so at a minuscule 0.036% yield, indicating that liquidity was still being hoarded. (Also see my “Credit Crisis Watch“.)

Source: Nick Anderson, Slate

The week kicked off on a positive note after US president-elect Barack Obama had spelled out his plans on Sunday for the biggest infrastructure investment in the US since the 1950s. According to CNN, Obama said: “We understand that we’ve got to provide a blood infusion to the patient right now to make sure that the patient is stabilized. And that means that we can’t worry short term about the deficit [which might surpass $1 trillion before his spending plans are included]. We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving.”

“The resultant infrastructure and physical assets will be far better than endowing busted banks, insurance companies and other financial entities with US taxpayers’ cash, which effectively goes down a black hole,” remarked Bill King (The King Report).

Financial markets reacted negatively to the US Senate’s failure to agree on a $14 billion loan to the troubled automakers. The prospect of the biggest industrial failure in US history caused a sell-off on global stock markets, a widening of credit spreads and an onslaught on the US dollar.

However, the US Treasury was quick to signal its readiness to provide funds to prop up the “Big Three”, as quoted in the Financial Times: “Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry.” This indication resulted in an improved tone on financial markets by the close of the week.

Next, a tag cloud from the plethora of articles I have devoured over the past week. This is a way of visualizing word frequencies at a glance. Key words such as “credit”, “debt”, “economy”, “Fed”, “government”, “market”, “rates” and “stock” occur often, but “gold” is also becoming increasingly prominent.

Back to the issue of markets shrugging off bad news for the second week running. Richard Russell (Dow Theory Letters) commented as follows: “On top of everything else, Lowry’s Selling Pressure Index dropped substantially yesterday [Wednesday] and is now in a definite declining trend. At the same time, Lowry’s Buying Power Index is trending higher. Thus, the odds are saying that the trend of the stock market is turning up.

“This is all the more dramatic since this potential upturn has arrived in the face of black-bearish news. Markets bottoming and rising in the face of bearish news are often the most profitable ones. I have never seen a bear market hit its low amid happy news headlines.”

On a fundamental note, 39% of the constituents of the MSCI World Index sell at a discount to shareholders’ equity. “The cash-rich companies allow investors to pay nothing for future earnings streams,” said Jean-Marie Eveillard in an interview with Bloomberg.

A positive for the bulls is that the period post Thanksgiving through the end of the year has usually been a bullish time for stocks, based on studies by Jeffrey Hirsch (Stock Trader’s Almanac). Should the bullish seasonal tendencies provide a tailwind on this occasion, possible first targets are the 50-day moving averages of 8,784 for the Dow Jones Industrial Index (current level 8,630) and 910 for the S&P 500 Index (current level 880).

The last word on equities goes to Hong Kong-based Puru Saxena: “I cannot say with any certainty whether we are already in the early stages of the next cycle. Under my best case scenario, we are in the very early stages of a new multi-year bull market. And under my worst case scenario, we are going to get a very strong rebound (30% move higher in the S&P 500) over a short period of time, which will probably take the markets back to their 200-day moving averages.”

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

Economy
“Global business confidence has been shattered. Sentiment is equally negative in North America, South America and Europe. Asian business confidence is not quite as dark, but it is falling rapidly,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Pricing power is quickly evaporating and approaching that which prevailed in 2003, the last time deflation was a concern.” According to the survey results, the global economy is suffering a severe recession.

Economic indicators released in the US during the past week mostly pointed to a deepening recession.

BCA Research said: “The year-end spending season will be the biggest bust in several decades, as consumers have been hit by a double whammy: a meltdown in financial and residential asset prices; and a sharp rise in layoffs. The government’s failure to deliver a fiscal stimulus plan and unfreeze the credit markets imply that the recession will deepen and any recovery will be pushed farther into the future.

“The contraction in payrolls and economic growth will persist until there are some signs that policy actions are finally becoming effective. The fiscal stimulus plan needed to stabilize the economy will be massive and policy rates will stay near zero for a long time.”

The precarious position of the US consumer is illustrated by a plunge of 21.9 points to 63.7 in the annual average of the University of Michigan Consumer Sentiment Index - the largest annual average decline in the history of the Index which began in 1952, according to Asha Bangalore (Northern Trust).

The Fed fund futures are pricing in a 76% chance of a 75 basis-point cut in rates from 1.0% to 0.25% when the FOMC meets on December 16.

However, Bill King questioned the Fed’s approach: “[Effective] Fed funds traded at zero late last night. We have screamed for months that the official or ‘target’ Fed funds rate was irrelevant because the effective funds rate was much lower, and near zero. Now Fed funds are trading at zero. Yet there will be pundits and experts that will assert that the Fed might cut its target funds rate this week to 0.50% or even 0.25% - even though the cut in the target rate is meaningless. Now that the Fed is paying interest to banks, why did the Fed allow the funds rate to trade at zero? Yep, they are terrified by something.”

Also, the Fed is considering issuing its own debt to further expand money supply without clogging up bank balance sheets and making it harder for the Fed to maintain interest rates at the desired level. RGE Monitor said: “… there are upper limits to Treasury issuance and lower limits to the amount of Treasuries the Fed can sell off from the asset side of its balance sheet. One hurdle to issuing Fed bills: The Federal Reserve Act doesn’t explicitly permit the Fed to issue notes beyond currency.”

Elsewhere in the world, economic reports compounded anxiety about a severe global recession. Specifically, Chinese exports in November declined by 2.2% from a year earlier as a result of a drastic slowdown in demand in many of its main markets. The figures were far below forecasts and the +19% figure for October. “This is the worst collapse in Chinese exports since 1999 and is probably just the beginning of a prolonged export contraction,” said Isaac Meng, economist at BNP Paribas, as reported by the Financial Times.

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

Source: Yahoo Finance, December 12, 2008.

In addition to interest rate announcements by the FOMC (Tuesday) and the Bank of Japan (Thursday), next week’s US economic highlights, courtesy of Northern Trust, include the following:

1. Industrial Production (December 15): The 1.4% drop in the manufacturing man-hours index in November suggests a 1.0% decline in industrial production. The operating rate is projected to have dropped to 75.7. Consensus: -0.8%; Capacity Utilization: 75.7 versus 76.4 in October.

2. Consumer Price Index (December 16): A 0.7% decline in the CPI is forecast for November versus a 1.0% drop in October, reflecting largely lower energy prices. The core CPI is expected to have moved up by 0.1% after a 0.1% decline in October. Consensus: 1.3%, core CPI +0.1%.

3. Housing Starts (December 16): Permit extensions for new homes fell by 9.2% in October, inclusive of a 12.6% drop in permits issued for single-family homes. These figures suggest a sharp drop in housing starts (730,000). Consensus: 740,000 versus 791,000 in October.

4. Leading Indicators (December 18): Interest-rate spread and money supply are the only two components likely to make a positive contribution in November. Stock prices, initial jobless claims, manufacturing workweek, consumer expectations, vendor deliveries, and building permits are expected to make negative contributions. Forecasts of money supply and orders of consumer durables and non-defense capital goods are used in the initial estimate. The net impact is a 0.5% drop in the leading index during November, assuming building permits fell. Consensus: -0.5 %

5. Other reports: NAHB Survey (December 15), Current Account (Q4) (December 17), Philadelphia Fed Survey (December 18).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

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

Source: Wall Street Journal Online, December 12, 2008.

Equities
Global stock markets rallied strongly during the past week as bargain-hunters looked past the grim economic and corporate reports. Both mature and emerging markets participated in the rally, as shown by the gains of the MSCI World Index (+4.4%) and the MSCI Emerging Markets Index (+10.9%). Notwithstanding the improvement, these indices were still down by 47.4% and 58.8% respectively since the peaks of October 2007.

Particularly noteworthy, the MSCI Emerging Markets Index has been outperforming the Dow Jones World Index since late October (rising green line), after a period of solid underperformance from May to October (falling line).

The chart below shows the performance of the four BRIC countries since the November 20 lows. Brazil (orange line), India (green) and Russia (red) have all recovered sharply, but China (blue) has underperformed after initial outperformance following the climactic[MR2] November 10 sell-off.

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

The Dow Jones Industrial Index was one of the few major indices to record a negative return during the past week, with US markets in general lagging other bourses as shown by the major index movements: Dow -0.1% (YTD -34.95), S&P 500 Index +0.4% (YTD -40.1%), Nasdaq Composite Index +2.1% (YTD ‑41.9%) and Russell 2000 Index +1.6% (YTD -38.8%).

The bar chart below shows the US sector performances over the week, and specifically how strongly energy and materials have recovered. Nine of the ten best-performing groups were related to commodities (diversified metals & mining, coal & consumable fuel, aluminum, steel, gold, oil & gas drilling, oil & gas exploration & production, gas utilities[MR3] , and oil & gas equipment & services).

Jamie Dimon, JPMorgan Chase’s (JPM) chief executive, prompted a sharp fall in financial shares with a warning that his bank was having a tough fourth quarter after a “terrible” November and December. Goldman Sachs’ (GS) earnings report on Tuesday is keenly awaited.

Based on the outperformance of emerging-market stocks and the sharp recovery of commodity-related groups, it would appear that investors are becoming less risk averse. Another example is the outperformance of small caps since the November 20 lows. A study published by Bespoke on December 8 highlighted the decile performance of stocks in the S&P 500 Index based on market cap. As shown by the chart below, the two deciles of the largest-cap stocks in the S&P 500 increased by about 17%, while the decile of the smallest-cap stocks was 54% higher.

Fixed-income instruments
The yields on government bonds generally edged up during the past few trading days after a record-breaking plunge since the beginning of November.

The UK ten-year Gilt yield increased by 17 basis points to 3.60% and the German ten-year Bund rose by 26 basis points to 3.30%. Although the US ten-year Treasury Note yield declined by 7 basis points to 2.59% on the week, the yield edged up from an earlier five-decade low of 2.48%.

John Hussman (Hussman Funds) expressed his concern about the level of Treasuries: “The problem with Treasury yields here is that while there are good economic reasons for the downward yield pressures, the levels are low enough to invite explosive spikes that can easily wipe out a year or more of yield-to-maturity in a few days.”

Emerging-market bonds moved in an opposite direction to mature bonds, with the JPMorgan EMBI Global Index gaining 2.4% during the week.

US mortgage rates were almost unchanged on the week, with the 30-year fixed rate rising by 2 basis points to 5.71% and the 5-year ARM declining by 1 basis point to 5.95%

The CDX and iTraxx credit indices, US Treasury Bills and high-yield spreads are still at distressed levels. Some improvement has been seen as a result of the central banks’ actions, notably the tightening of the TED and LIBOR-OIS spreads, and lower mortgage rates. However, credit spreads need to narrow further to indicate that liquidity is moving freely again and credit markets are starting to thaw. (Also see my “Credit Crisis Watch“.)

Currencies
The US dollar fell sharply as the recent relationship between risk aversion and dollar strength weakened as a result of US-specific factors like the deterioration in the US trade balance and the automaker woes. The greenback plummeted to a 13-year low against the Japanese yen and touched its lowest level against the euro for seven weeks.

As shown by the chart below, the dollar has broken below its 50-day moving average and seems to be topping out. Are foreign investors coming to the conclusion that the US currency, which briefly last week yielded a negative yield, is no longer an attractive option?

Over the week the US dollar lost ground against the euro (-5.0%), the British pound (-1.8%), the Swiss franc (-3.6%), the Japanese yen (-1.8%), the Canadian dollar (-2.0%), the Australian dollar (-3.0%) and the New Zealand dollar (-2.2%). The US currency also fell against emerging-market currencies[MR4] , like the South African rand (-2.0%).

The British pound came under renewed pressure as the worsening economic situation triggered concerns of a currency crisis. Sterling’s trade-weighted index fell to its lowest level since record-keeping began in 1981.

Commodities
The Reuters/Jeffries CRB Index (+8.8%) closed higher by the end of the week - only its sixth positive week since commodities peaked early in July. The Baltic Dry Index - a benchmark for shipping major raw materials including coal, iron ore and grain - bounced by 15.2% from very oversold levels.

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

The International Energy Agency urged a “substantial” cut in Opec output when the oil cartel meets next week, as global oil demand this year is expected to contract for the first time in 25 years. The price of West Texas Intermediate crude surged by 20.4% in expectation of a cut of at least 1 million to 1.5 million barrels a day.

Gold bullion (+9.1%) remained in favor with investors as a result of a solid supply/demand situation, store-of-value considerations and a weaker US currency. The chart below illustrates the strong inverse relationship between gold (green line) and the dollar (red line). In addition, gold has broken above its 50-day moving average (blue line) and trades at about the same level it started off in January 2008 - quite a feat in these difficult markets. Platinum (+4.9%) and silver (+8.5%) improved in tandem with the yellow metal.

After the storm comes the calm. With only 12 more trading days remaining before we wish the tumultuous 2008 goodbye, let’s hope the calm lies just ahead. And as Richard Russell reminds us: “Calm after a bearish trend is usually bullish.” Meanwhile, the news items and words from the investment wise below will hopefully assist in steering our portfolios on a profitable course.

That’s the way it looks from Cape Town.

Source: Dave Granlund

YouTube: The twelve days of bailouts
A bailout song for the holidays.

Source: YouTube, December 6, 2008.

New York Magazine: Oracles of doom
They always knew the economy would collapse. What do they think will happen next?

FORTUNE TELLER: Gerald Celente
Trends Research Institute founder; owner of collapseof09.com

TRACK RECORD
Predicted 1987 crash, 1997 Asian currency crisis; said in 2007 that US was headed for “economic 9/11″ in 2008.

CURRENT PREDICTION
“Products are going to be cheaper to buy, but guess what? You’re going to need more dollars to buy them because your dollar’s going to be worth less. There is no fiscal or monetary policy that can save this. You cannot save it by printing more money.”

FORTUNE TELLER: Nouriel Roubini
NYU business professor; chairman of RGE Monitor

TRACK RECORD
Predicted this year’s crisis in 2006, pointing to a housing bust, oil shocks, and interest-rate increases.

CURRENT PREDICTION
“It’s becoming a global recession. I expect it to be the worst US recession of the last 50 years. I expect a cumulative fall in output from the peak of 4% and the unemployment rate going all the way to 9%.”

FORTUNE TELLER: Peter Schiff
President of Euro Pacific Capital

TRACK RECORD
Published “Crash Proof: How to Profit From the Coming Economic Collapse in February 2007″; star of YouTube video “Peter Schiff Was Right 2006-2007.”

CURRENT PREDICTION
“I predicted that the economy would collapse. The bigger risk I saw was the government’s attempt to solve the problem by doing exactly what they’re now doing. They’re going to create another Great Depression, but worse, because the cost of living will go through the roof.”

FORTUNE TELLER: Richard Russell
Founder of the Dow Theory Letters

TRACK RECORD
Predicted bottom of 1974 bear market; exited market before crashes in 1987 and 2000.

CURRENT PREDICTION
“As long as we can hold the Dow above 7,470, I think the situation is hopeful. That’s the halfway level from when the bull market started in 1982 and when it ended in 2007. My guess is that it will break that level. Most bear markets have wiped out more than 50% of a bull market.”

FORTUNE TELLER: Barry Ritholtz
CEO and equity research director of Fusion IQ; blogger at The Big Picture

TRACK RECORD
Predicted downturn last year.

CURRENT PREDICTION
“In March, the first-quarter numbers start coming out, and that’s potentially a problem. It’s just going to be an issue of dealing with the market. If earnings continue to drop and you end up with multiple contractions, that basically takes you to a really bad, ugly place, which is an S&P at 400 or 500. I don’t think that’s likely, but it’s certainly possible.”

FORTUNE TELLER: Jeremy Grantham
Co-founder and chairman, GMO LLC

TRACK RECORD
His 1998 ten-year forecast showed severe market declines in 2007 and 2008; warned of global bubble in April 2007.

CURRENT PREDICTION
“I would think, just to guess, that the period of heroic volatility will end pretty soon and will be replaced by a rather 1974-ish environment, where you quietly get bitterly resigned to your steady diet of bad news.”

Source: Jeff VanDam, New York Magazine, December 7, 2008.

CNBC: Merrill Lynch - outlook for 2009
“An economic and investment outlook for 2009, with Merrill Lynch’s Richard Bernstein and Davis Rosenberg.

Source: CNBC, December 11, 2008.

Financial Times: Obama to focus on stimulus not deficit
“Barack Obama on Sunday spelled out his plans for the biggest infrastructure investment in the US for half a century. The president-elect argued that with the economy reeling, his incoming administration could not afford to worry about a spiralling budget deficit.

“Mr Obama’s proposals for government works on roads, bridges, internet broadband and school buildings, together with energy efficiency measures and health spending, are far more detailed than the normal announcements during a time of transition.

“At a time of deepening economic gloom - with half a million jobs lost last month alone - president George W. Bush has been largely absent from the recent economic debate. Mr Obama is highlighting his concern at the depth of the recession he will inherit, while fast-tracking his plans to counter it.

“‘Things are going to get worse before they get better,’ Mr Obama said on Sunday on NBC’s Meet The Press. He emphasised that his plans represented the largest US infrastructure programme since the federal highway system in the 1950s.

“‘The key is making sure we jump-start the economy in a way that doesn’t just deal with the short term, doesn’t just create jobs immediately, but also puts us on a glide path for long-term sustainable economic growth.’

“Noting the US budget deficit might surpass $1,000 billion before his spending plans are factored in, Mr Obama added: ‘We understand that we’ve got to provide a blood infusion to the patient right now to make sure that the patient is stabilised. And that means that we can’t worry short term about the deficit. We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving.’

“He wanted a strong set of financial regulations to make banks, credit ratings agencies, mortgage brokers and others ‘much more accountable and behave much more responsibly’.

“‘I am absolutely confident that if we take the right steps over the coming months that not only can we get the economy back on track but we can emerge leaner, meaner and ultimately more competitive and more prosperous,’ Mr Obama said at a subsequent press conference.”

Source: Daniel Dombey, Financial Times, December 7, 2008.

Bill King (The King Report): Obama Plan one of the better plans
“The Obama Plan to spend massive amounts of money on infrastructure in the US is one of the better plans being proffered to keep the US out of a depression. But it has its drawbacks.

“Other stimulus plans put money or entitlements in US consumers’ pockets. Most of the money ends up in China, Japan or OPEC. Most infrastructure spending will remain in the US. And instead of just passing out checks or larger entitlements, jobs, mostly temps, will be created and permanent assets will result.

“The resultant infrastructure and physical assets will be far better than endowing busted banks, insurance companies and other financial entities with US taxpayers’ cash, which effectively goes down a black hole.

“Obama’s Plan will boost blue collar employment, provided a limited number of illegals are hired. This will produce an income shift to blue collar and lower middle class households. But fired employees of financial, high tech and other high-end jobs are unlikely to participate. So the multiplier effect of increased income will be less on the economy in general.

“The negatives of the plan, besides the massive debt and likely corruption, is that it does not remedy structural problems in the US economy and financial system. There will be few new industries spawned and therefore few permanent well-paying jobs. Nothing addresses the savings and investment problems.

“There is too much capacity in the world. There are hundreds of empty or abandoned factories in China alone. Until excess capacity is scuttled and new industries appear, stable employment is a fantasy.

“The real problem, the one that solons will not address, is the US welfare state is busted. The Keynesian and monetary stimuli that were abused over many decades to paper over welfare state spending are now being escalated to an unsustainable degree in a last grand attempt to salvage the welfare state system.

“Like all state attempts to stave off a debt deflation by running the printing press and nationalization, it will likely result in a massive inflation that destroys the nation’s fabric and the financial assets of the upper middle class and elites. The middle and lesser classes have few financial assets.”

Source: Bill King, The King Report, December 9, 2008.

Financial Times: Treasury signals rescue for carmakers
“The US administration was on Friday scrambling to save Detroit’s troubled car industry, as General Motors said it was closing most of its North American manufacturing plants for the month of January in the wake of the Senate’s failure to agree a $14 billion loan for GM and Chrysler.

“The US Treasury signaled it was ready to step in with funds intended to prop up the financial system to prevent the biggest industrial failure in US history.

“‘Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,’ the Treasury said.

“GM’s bonds fell to a new low of 9-10 cents on the dollar on fears of a bankruptcy by America’s largest domestic carmaker, before recovering to 15 cents on the news that the Bush administration was looking for alternative financing.

“For weeks George W Bush, the US president, has resisted using the $700 billion troubled asset relief program to provide aid to the carmakers, arguing that such an interventionist step would be a misuse of funds.

“However, facing the prospect of the collapse of one or more of the Detroit companies, the White House indicated it had few other options. ‘A precipitous collapse of this industry would have a severe impact on our economy and it would be irresponsible to further weaken and destabilize our economy at this time,’ said Dana Perino, White House spokeswoman, specifically noting the possibility of using Tarp funds.

“A Chapter 11 bankruptcy filing by GM, the world’s biggest carmaker, would mark the biggest industrial failure in US history.”

Source: Daniel Dombey, John Reed and Bernard Simon, Financial Times, December 12, 2008.

Reuters: Fed mulls issuing own debt
“The US Federal Reserve is considering issuing its own debt for the first time, the Wall Street Journal said, citing people familiar with the matter.

“Fed officials have approached Congress about the move, which could include issuing bills or some other form of debt and would provide the central bank with more flexibility to tackle the financial crisis, the Journal said.

“The Fed can already print as much money as it wants, but issuing debt is largely the province of the Treasury Department.

“The Fed stepped in with emergency credit for investment bank Bear Stearns in March and insurer AIG in September, and threw open its direct loan window to Wall Street firms this year in a bid to stabilize financial markets amid a credit freeze.

“But with the credit crisis showing no signs of abating, and the narrow scope for further interest rate cuts from the present levels of 1%, economists expect the Fed to look at new ways to boost the supply and circulation of money to avoid a deflationary slump.”

Source: Reuters, December 10, 2008.

Paul Kasriel (Northern Trust): The credit rating on a benevolent counterfeiter’s debt - infinity A?
“Why would the Fed be contemplating issuing its own debt? To soak up in the future some of the massive credit the Fed has created in the past year or so. Why would the Fed not just sell US Treasury securities from its portfolio in order to soak up this excess Fed credit? Because, as shown in the chart below, the Fed’s outright holdings of US Treasury securities has dropped from a shade under $800 billion to about $475 billion as Fed credit outstanding has risen from a little over $800 billion to about $2.1 trillion. In percentage terms, the Fed’s outright holdings of US Treasury securities has gone from a bit over 90% of reserve bank credit outstanding to about 22-1/2%. The Fed is afraid it might run out of US Treasury securities to sell!

“I can see nothing sinister about all this. It is not a conspiracy to print money. Just the opposite. It is a way to destroy some of the paper the Fed already has ‘printed’.”

Source: Paul Kasriel, Northern Trust - Daily Global Commentary, December 10, 2008.

Bloomberg: Fed refuses to disclose recipients of $2 trillion
“The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from US taxpayers and the assets the central bank is accepting as collateral.

“Bloomberg filed suit November 7 under the US Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

“The Fed responded December 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital, which oversees $22 billion in assets.

“The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.

“Congress is demanding more transparency from the Fed and Treasury on bailout, most recently during December 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had ‘been bamboozled’.

Source: Mark Pittman, Bloomberg, December 12, 2008.

The Wall Street Journal: Mayors get in line for US funds
“Big-city mayors will arrive on Capitol Hill Monday to lobby for more federal spending to be funneled to urban areas that they say drive the country’s economic engine.

“The push comes after a strong Democratic turnout in metropolitan areas helped President-elect Barack Obama - who is set to become America’s first urban president in almost half a century - win by such a decisive margin in November.

“A delegation of mayors, including Michael Bloomberg of New York and Antonio Villaraigosa of Los Angeles, plans to ask the federal government to distribute funds directly to cities instead of going through state governments. The group is set to present a list of more than 4,600 infrastructure projects that they say are ‘ready to go’.

“Tom Cochran, executive director of the US Conference of Mayors, which is organizing Monday’s event, said the next administration has signaled that it will coordinate financing for projects for an entire metropolitan area instead of dealing with cities and suburbs separately.

“‘I am of the opinion, based on our conversations with President-elect Obama, that he gets it,’ said Mr. Cochran. ‘You can’t just have a transportation system that stops at the city line.’

“Mr. Obama’s transition office is drawing up plans to create a White House office on urban policy, which would report directly to the president, to coordinate funding for cities from different federal agencies. Mr. Obama has pledged to provide new funding for job training, education and grants for local governments and organizations.”

Source: T.W. Farnam, The Wall Street Journal, December 8, 2008.

Bloomberg: Interview with Martin Feldstein
“Harvard University professor Feldstein discusses auto bailout, how to fix the housing market as well as Fannie and Freddie, and 3-month T-Bill rates below zero.”

Source: Bloomberg (via YouTube), December 9, 2008.

Ambrose Evans-Pritchard (Telegraph): Deflation virus is moving the policy test beyond the 1930s
“Debt deflation is tightening its grip over the entire global system. Interest rates are creeping towards zero in Japan, America, and now across most of Europe.

“We are beyond the extremes of the 1930s. The frontiers of monetary policy are being pushed to limits that may now test viability of paper currencies and modern central banking.

“You cannot drop below zero. So what next if the credit markets refuse to thaw? Yes, Japan visited and survived this policy hell during its lost decade, but that was a local affair in an otherwise booming global economy. It tells us nothing.

“This time we are all going down together. There is no deus ex machina to lift us out. Certainly not China, which is the most vulnerable of all.

“As the risk grows, officials at the highest level of the British Government have begun to circulate a six-year-old speech by Ben Bernanke - at the time of its writing, a garrulous kid governor at the US Federal Reserve. Entitled ‘Deflation: Making Sure It Doesn’t Happen Here’, it is the manual of guerrilla tactics for defeating slumps by monetary means.

“‘The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost,’ he said.

“His point was that central banks never run out of ammunition. They have an inexhaustible arsenal. The world’s fate now hangs on whether he was right (which is probable), or wrong (which is possible).

“As a scholar of the Great Depression, Bernanke does not think that sliding prices can safely be allowed to run their course. ‘Sustained deflation can be highly destructive to a modern economy,’ he said.

“Bernanke’s central claim is that the big guns of monetary policy were never properly deployed during the Depression, or during the early years of Japan’s bust, so no wonder the slumps dragged on.

“The Fed can create money out of thin air and mop up assets on the open market, like a sovereign sugar daddy. ‘Sufficient injections of money will ultimately always reverse a deflation.’

“Bernanke said the Fed can ‘expand the menu of assets that it buys’. US Treasury bonds top the list, but it can equally purchase mortgage securities from US agencies such as Fannie, Freddie and Ginnie, or company bonds, or commercial paper. Any asset will do.

“The Fed can acquire houses, stocks, or a herd of Texas Longhorn cattle if it wants. It can even scatter $100 bills from helicopters. (Actually, Japan is about to do this with shopping coupons).”

Source: Ambrose Evans-Pritchard, Telegraph, December 9, 2008.

Asha Bangalore (Northern Trust): Household net worth is shrinking rapidly
“Household net worth in the third quarter of 2008 was $56.5 trillion, down 4.7% from the second quarter. This is the largest quarterly decline since the second quarter of 1962 when net worth of households dropped 5.0%.

“Household spending will suffer as setback a household net worth shrinks, which is already visible in consumer spending data, and the proclivity of households to borrow will show a reduction. The chart below indicates that growth of both mortgage and consumer debt have fallen in the third quarter. The sharp drop in mortgage debt (-2.4%) reflects the impact of mortgage foreclosures and a drop in home purchases, while consumer debt grew at a 1.2% pace in the third quarter versus a 7.2% jump a year ago.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, December 11, 2008.

Asha Bangalore (Northern Trust): Weak trajectory for retail sales
“Retail sales fell 1.8% in November, after a 2.9% decline in the prior month. Retail sales have dropped for five straight months, the longest string of declines since record keeping for retail sales began in 1967. The wide swings of gasoline prices influence the headline of retail sales. Excluding gasoline, retail sales dropped 0.2% in November after a 1.6% plunge in the prior month. Retail sales excluding gasoline have recorded six consecutive monthly declines. Unit auto sales have fallen in ten out of eleven months of the year.

“The upshot is that with or without gasoline and autos, retail sales show an extraordinary weakness that is seen the overall consumer spending data and this weak trajectory for retail sales and overall consumer spending is predicted to prevail in the near term.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, December 12, 2008.

Asha Bangalore (Northern Trust): Consumer spending in post-war recessions
“The chart below illustrates the history of consumer spending during recessions. Consumer spending typically declines in recessionary periods with the exception of the 1948 and 2001 recessions.

“Our forecast includes five consecutive quarterly declines in consumer spending, possibly another record for the books if our forecast is accurate. The highly leveraged household balance sheet of households underlies this prediction.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, December 8, 2008.

Bloomberg: Inside look - housing crisis
“From Housing Forum in Washington D.C.: Interview with PIMCO Managing Director Scott Simon.”

Source: Bloomberg (via YouTube), December 8, 2008.

BusinessWeek: Unretired - retirees are back, looking for work
“They saved. They planned. Then housing tanked and the markets melted. Now they need jobs, and there aren’t any.

“Six years ago, Paul Nelson gave up his long career in the defense industry for what he thought would be a peaceful retirement in Tucson. The weather was mild, the neighbors friendly. He had plenty of time to volunteer and garden.

“But retirement hasn’t worked out the way he planned. In 2006 his wife of 46 years died unexpectedly. He tried to swap their house for a smaller one and lost a chunk of his retirement savings in the process. Then this year the stock market cratered, wiping out almost everything he had left. Now the 71-year-old is looking for work at local hardware stores and Home Depot and contemplating filing for personal bankruptcy. ‘I have nothing left,’ says Nelson, a former Raytheon engineer. ‘I am not alone, I think.’

“Far from it. An increasing number of people who retired in recent years, confident they had set aside enough to live on comfortably, are finding themselves strapped. The stock market plunge and the housing downturn have affected many Americans, of course. But retirees have been particularly pinched because their homes and investments are the primary assets they depend on for income. As a result, many of the country’s elderly are finding themselves in Nelson’s situation, low on money and looking for work. ‘Suddenly the rug has been pulled out from under them,’ says Alicia H. Munnell, director of the Center for Retirement Research at Boston College.”

Click here for the full article.

Source: Heather Green, Business Week, December 4, 2008.

Asha Bangalore (Northern Trust): Oil imports lead to wider trade gap in October
“The trade deficit widened to $57.2 billion in October from $56.6 billion in September. During October, exports (-2.2%) and imports (-1.3%) of goods and services fell.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, December 11, 2008.

Reuters: Jim Rogers calls most big US banks “totally bankrupt”
“Jim Rogers, one of the world’s most prominent international investors, on Thursday called most of the largest US banks ‘totally bankrupt’, and said government efforts to fix the sector are wrongheaded.

“Speaking by teleconference at the Reuters Investment Outlook 2009 Summit, the co-founder with George Soros of the Quantum Fund, said the government’s $700 billion rescue package for the sector doesn’t address how banks manage their balance sheets, and instead rewards weaker lenders with new capital.

“Dozens of banks have won infusions from the Troubled Asset Relief Program created in early October, just after the September 15 bankruptcy filing by Lehman Brothers. Some of the funds are being used for acquisitions.

“‘Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt,’ said Rogers, who is now a private investor.

“‘What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent,’ he said. ‘What’s happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics.’

“Rogers said he shorted shares of Fannie Mae and Freddie Mac before the government nationalized the mortgage financiers in September, a week before Lehman failed.

“Now a specialist in commodities, Rogers said he has used the recent rally in the US dollar as an opportunity to exit dollar-denominated assets.

“While not saying how long the US economic recession will last, he said conditions could ultimately mirror those of Japan in the 1990s. ‘The way things are going, we’re going to have a lost decade too, just like the 1970s,’ he said.

” … Rogers said sound US lenders remain. He said these could include banks that don’t make or hold subprime mortgages, or which have high ratios of deposits to equity, ‘all the classic old ratios that most banks in America forgot or started ignoring because they were too old-fashioned’.

“‘Governments are making mistakes,’ he said. ‘They’re saying to all the banks, you don’t have to tell us your situation. You can continue to use your balance sheet that is phony … All these guys are bankrupt, they’re still worrying about their bonuses, they’re still trying to pay their dividends, and the whole system is weakened.’

“Rogers said he is investing in growth areas in China and Taiwan, in such areas as water treatment and agriculture, and recently bought positions in energy and agriculture indexes.”

Source: Jonathan Stempel, Reuters, December 11, 2008.

CNBC: Meredith Whitney - outlook grim for banks

Source: CNBC, December 7, 2008.

Financial Times: Post-Lehman company defaults to soar
“Default rates for speculative grade companies are forecast to jump threefold next year following the fall of Lehman Brothers, the world’s biggest bankruptcy, according to Moody’s, the US ratings agency.

“The implosion of Lehman on September 15 is widely regarded as a significant milestone, turning the credit crunch into a fully blown economic crisis.

“Jim Reid, credit strategist at Deutsche Bank, said: ‘We are at a turning point for default rates, with much bigger monthly rises from now on.

“‘Two or three months after Lehman’s collapse, we are starting to see the impact on the real economy, particularly for those companies on short-term funding.’

“European companies defaulting on their bonds are also set to outpace those in the US, although analysts suggest this is because the European junk-grade market is smaller, meaning any rise in defaults has a greater impact in percentage terms, rather than pointing to a deeper recession.

“Global default rates are forecast to rise to 10.4% by November 2009 - from 3.1% last month - to levels last seen in 2001 following the dotcom crash. Rates are forecast to jump to 4.2% by the end of this year.

“A year ago, the global rate was 0.9 per cent.

“The ratings agency’s distressed index, which measures the number of companies with bonds trading at more than 1,000 basis points over government paper, rose to 51.8% at the end of last month, up from 48.5% at the end of October, and the highest level since Moody’s launched the index in 1996. This reflects the deepening problems for company funding. Even some investment grade companies are now trading at distressed levels.”

Source: David Oakley and Paul J Davies, Financial Times, December 8, 2008.

Bespoke: 10-Year Treasuries overbought
“It’s an understatement to say that Treasuries are overbought at current levels. We’ve been monitoring the spread between its price and its 50-day moving average, and the 10-year Note has finally gotten to a level that is usually met with selling pressure in the near term. Since 1977, the 10-year has only gotten more than 12% above its 50-day moving average on three different occasions. As shown in the table below, the returns over the next week, month, and 3 months lean to the negative side. The average change of the 10-year over the next three months when getting this overbought has been -3.23%.”

Source: Bespoke, December 9, 2008.

Bespoke: Want to lend money to uncle Sam? It’s going to cost you
“What would your reaction be if you had a friend who had reached the limit on 20 different credit cards and then came to you to borrow $100? Then imagine that you actually said yes, and when you went to give your friend the $100, he or she actually asked for $101 just for the privilege of loaning the money. Well, that is exactly what is happening (to a lesser degree) in the US T-bill market. As just another example of the crazy times we are living in, the yield on 3-month Treasuries went negative today. There was a time when an event such as this was unimaginable. Today it barely gets noticed.”

Source: Bespoke, December 9, 2008.

John Hussman (Hussman Funds): Unusually unfavourabale yield levels for Treasuries
“In bonds, the market climate last week was characterized by unusually unfavorable yield levels and generally favorable yield pressures. As I have frequently noted, yield levels are much more important than market action in driving subsequent total returns in bonds. This is because bonds are less susceptible to ‘bubbles’ as a result of their payment stream being known, so favorable market action can’t be taken as evidence of favorable surprises in those payments.

“The problem with Treasury yields here is that while there are good economic reasons for the downward yield pressures, the levels are low enough to invite explosive spikes that can easily wipe out a year or more of yield-to-maturity in a few days.

“Corporate yields have increased significantly, but default rates tend to pick up in the later stages of recessions, and there isn’t much historical evidence to suggest that corporate bonds reach their lows any earlier than stocks do. For that reason, corporate bonds are essentially equity-equivalents here, and the same considerations about quality apply as well here as they do for stocks. Generally speaking, corporate bonds are currently priced to deliver both lower long-term returns than stocks, but as a group, will probably have lower volatility than stocks as well.”

Source: John Hussman, Hussman Funds, December 8, 2008.

Bloomberg: US Treasury risk surpasses Campbell Soup as debt increases
“The cost to hedge against losses on US Treasuries surpassed the price of default protection on bonds from Campbell Soup and drug-maker Baxter International as government spending on stimulus packages grows.

“Credit-default swaps protecting US government debt in euros for five years are trading at 65 basis points, according to CMA Datavision, meaning costs 65,000 euros ($84,200) to protect 10 million euros of debt. Contracts on Campbell were at 52.5 basis points and Baxter contracts were 57.5 basis points at the close of trading [on Wednesday] in New York.

“The Federal Reserve’s assets have more than doubled from a year ago to $2.14 trillion as the central bank seeks to revive credit markets. Economists including Harvard University professor Kenneth Rogoff and Nobel Prize winner Joseph Stiglitz say President-elect Barack Obama should push for a stimulus package of at least $1 trillion to lift the economy out of a yearlong recession. The US government’s total cost to bail out the economy may exceed $4 trillion, according to strategists including Ira Jersey at Credit Suisse Group AG in New York.

“Contracts protecting U.K. government debt for five years were quoted at a mid-price of 114.75 basis points today [Wednesday], according to CMA. Swaps on Italy are at 190, and the Netherlands at 99.5. France was quoted at 58.75 and Germany at 51.5, CMA data show.

“Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to meet its debt obligations. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.”

Source: Shannon D. Harrington, Bloomberg, December 10, 2008.

Jean-Paul Calamaro (Deutsche Bank): Credit markets offer stunning opportunities
“The crisis gripping financial markets has produced some stunning investment opportunities in credit markets. Among the best is the returns available on ‘basis trades’ between corporate bonds and credit default swaps, says Jean-Paul Calamaro, global head of quantitative credit strategy at Deutsche Bank.

“‘Investors buy a corporate bond and also buy default protection on the issuer via a CDS. When the basis is negative [CDS protection costs less than the bond’s spread to swaps] this produces protected cash flows and further profits if the difference between the bond and CDS narrows, or if the issuer defaults. The basis between bonds and CDS has been at historic wides recently, giving significant returns without using leverage,’ he says.

“‘The trade works for many investment grade and high yield issuers in Europe and the US, but high yield trades look most attractive.

“‘This is because investors can earn high returns more quickly when an issuer defaults and at this point in the credit cycle we think defaults are more likely. The trades also work in investment grade, not because we expect defaults but because we expect the basis between bonds and CDS to narrow.

“‘The major cheapening of bonds versus CDS across corporate credit has been due to the heightened funding crisis since the Lehman bankruptcy in mid-September. We believe conditions will start to ease after year end, which makes these types of trades unusually attractive now.’”

Source: Jean-Paul Calamaro, Deutsche Bank (via Financial Times), December , 2008.

Bloomberg: Cheapest stocks since 1995 show cash exceeds market
“Stocks have fallen so far that 2,267 companies around the globe are offering profits to investors for free. That’s eight times as many as at the end of the last bear market, when the shares rose 115% over the next year.

“Bank of New York Mellon in New York, Danieli in Italy and Seoul-based Namyang Dairy Products hold more cash than the value of their stock and debt as the slowing world economy wiped out $32 trillion in capitalization this year. Companies in the MSCI World Index trade for an average $1.17 per dollar of net assets, the lowest since at least 1995, and 39% sell at a discount to shareholder equity, data compiled by Bloomberg show.

“The cash-rich companies allow investors to pay nothing for future earnings streams, providing opportunities to buyers concerned about deflation, according to Jean-Marie Eveillard, whose $16 billion First Eagle Global Fund has beaten 98% of competitors this year. Microsoft and Novo Nordisk, which generate the most money compared with debt, can expand even if lower consumer demand erodes profits.

“‘Cash is king, not necessarily for the investor but for corporations,’ Eveillard said in an interview from New York last week. ‘It’s useful to sit on a ton of cash, No. 1 to survive, as opposed to going bankrupt, and No. 2 to seize opportunities either to make acquisitions cheaply or to squeeze competitors.’”

Source: Michael Tsang and Alexis Xydias, Bloomberg, December 8, 2008.

Richard Russell (Dow Theory Letters): “I’m beginning to like what I see”
“If they create enough of it, will they come and spend it? That’s what Mr. Bernanke is going to find out. The government has created over a trillion dollars of currency. There’s now over $8 trillion on the sidelines in money markets and T-bills - all frozen with fear and waiting for something better and safer to come along. There’s too much money now in relation to the quantity of goods and merchandise available. This is the formula for inflation or even hyper-inflation. What’s holding it all back? Lack of confidence, fear.

“What would change that? The stock market rising steadily would bring back confidence. Which is why I monitor the stock market so closely. Yes, it’s quite a game, and it’s the most important and fascinating game in the world. No wonder I’m in this business. I read the markets, and I’m beginning to like what I see!

“My guess is that the market is establishing a tradeable bottom with a rally that will last into the first quarter of next year. What we’re seeing now might not be the final bottom but it will serve until the real one comes along.”

Source: Richard Russell, Dow Theory Letters, December 8, 2008.

Richard Russell (Dow Theory Letters): Adding some selected stocks
“Up to now, our favored position has been cash and gold (preferably physical gold). Our new position is cash, gold and, for the bolder crowd, a few selected stocks (DIA if you’re a fearless, speculative type).

“Backing off: Subscribers may think Russell’s lost his mind. He’s turning just a bit bullish. The answer is that I’m reporting exactly what I’m seeing. And if what I see doesn’t jibe with what I’m reading in the newspaper and it doesn’t jibe with prevailing sentiment, then I think it’s that much more important. I keep hearing the most horrendous stories about unemployment and companies in trouble, and my thought is always, ‘Has this been discounted by one of the worst bear markets since the ’30s?’ Which is why I report every item that I see, every item that might suggest that the market has already discounted the bad news. The question always is ‘cut through the BS, what is the market saying?’”

Source: Richard Russell, Dow Theory Letters, December 11, 2008.

Puru Saxena: Sowing the seeds
“This nasty bear-market is in its latter stages and I suspect that the bulk of the declines are now behind us. Although it is premature to claim that the bear-market definitely ended on October 10, it does look increasingly likely that the lows recorded on November 21, were in fact a successful ‘test’ of the prior month’s lows.

“History shows that following a major bear-market, it is common for the major indices to retest the lows. In a recent study undertaken to review recovery patterns, JP Morgan examined all the bear-markets going back to 1900 and it came up with a few interesting observations. The study revealed that market bottoms were almost always retested and that such ‘tests’ resulted in a new marginal low about 40% of the time.

“The study also found that 75% of the retesting events occurred within 44 days of a major bottom; so if October 10 marked the bottom of this bear-market, the retest on November 21 was bang on target from a timing perspective.

“At this stage, I am only guessing that October 10 was the pivotal turnaround of this bear-market. It may well be that this market breaks below those lows in the days ahead, however given the favourable technical and sentiment data, at the very least, there is a strong possibility that we will get a multi-month rally from these oversold conditions.

“It is worth noting that new bull-markets are always born amidst abject pessimism; at a time when the majority are convinced that economic activity will never pick up again. Furthermore, it is interesting to note that frightening economic news continues to surface, long after a new bull-market has begun. So, the time to buy is during such scary times. This was also highlighted by Warren Buffet who recently wrote - ‘If you wait for robins, spring will be over’.

“Now, I cannot say with any certainty whether we are already in the early stages of the next cycle. However, the recent rout in the markets has set the stage for above-average long-term returns. Under my best case scenario, we are in the very early stages of a new multi-year bull-market. And under my worst case scenario, we are going to get a very strong rebound (30% move higher in the S&P500) over a short period of time, which will probably take the markets back to their 200-day moving averages.”

Source: Puru Saxena (via Fullermoney), December 10, 2008.

David Fuller (Fullermoney): S&P 500 at extreme divergence from its 200-day moving average
“We first posted this indicator on October 10 when the relevant spreadsheet was created for us by a subscriber. The indicator remains at a historically low level but has risen considerably from its early October nadir. This has been achieved by the relevant indices having gone mostly sideways for the last two months. The moving average is now starting to come down towards the price and while it still has a long way to go, mean reversion is taking place.

“This is not a guarantee that the market will not go lower later but, historically, when the market has diverged from its mean by such a margin, important stock market lows have occurred relatively soon afterwards.”

Source: David Fuller, Fullermoney, December 8, 2008.

Bespoke: Percentage of stocks above 50-day moving averages
“Even though the S&P 500 is in a new bull market, the percentage of stocks in the index trading above their 50-day moving averages is still at oversold levels. As shown in the chart below, at 26%, this indicator has a long way to go before becoming overbought.

“On a sector basis, Telecom, Utilities, and Consumer Discretionary have the highest percentage of stocks above their 50-days, while Energy and Financials have the lowest.”

Source: Bespoke, December 10, 2008.

Bespoke: Third worst bear market on record
“The S&P 500 finally had its first 20%+ rally in 408 days yesterday [Monday], which means we’re currently in a bull market by the standard definition (20% rally preceded by a 20% decline).

“… below we highlight historical bear markets for the S&P 500 since 1927. As shown, the bear market that ran from 10/9/07 to 11/20/08 is the third worst ever with a decline of 51.93%. The bears that ended in June of 1932 (-61.81%) and March of 1938 (-54.47%) are the only two that had bigger declines without a rally of 20%.”

Source: Bespoke, December 9, 2008.

Bespoke: US sector and stock buy ratings
“Below we highlight the average percentage of buy ratings for stocks in each of the ten S&P 500 sectors. As shown, Financial stocks have the lowest percentage of buy ratings of any sector at 35%, while Energy has the highest at 63%. Consumer Discretionary, Materials, and Consumer Staples are the three other sectors (along with Financials) that have below average buy ratings compared to all stocks in the S&P 500.

Source: Bespoke, December 8, 2008.

David Fuller (Fullermoney): Commodities - are they the most promising asset class today?
“I do think commodities have significant recovery potential, despite the global economic slump, deflation threat and depression fears. Moreover, I believe that the fundamentals for commodities have now improved more than for all other asset classes.

“Consider the following bull points:

1. Interest rates have fallen, which is currently better for commodity speculators than commodity producers, because contangos have shrunk considerably, lowering rollover costs.

2. However, the credit crunch means that it is now more difficult for commodity producers to obtain necessary financing. Consequently, miners and oil producers are deferring development projects and laying off workers, while farmers find it more difficult to finance the purchase of fertilizers and equipment. These problems are not fully offset by the lower cost of energy.

3. Prices for all commodities are much lower today than during the first half of 2008, not least because speculators have been shaken out and traders are actually short. This is good news for those who wish to buy oversold commodities. However it is a big disincentive for commodity producers, many of whom are now reducing production.

4. While the global economic slump has reduced demand for commodities somewhat, these are essential resources which the world cannot do without, unlike luxury goods, the latest fashions, lavish holidays or expensive restaurants.

5. The US dollar has peaked and commenced what is likely to be a significant retracement of gains seen since July. This is bullish for commodities because most are priced in US dollars.

“What could significantly delay or even prevent a big rally for commodities? The reflationary efforts could fail, or more likely take many more months before they turn a global economy that is still contracting. If so, there could be some additional downside risk and base formation development would most likely be lengthy. The US Dollar Index could fail to maintain its downward break. Improved weather patterns could lead to increased supplies of agricultural commodities.

“For these reasons, Fullermoney maintains that commodities are best purchased following setbacks. Positions are most safely built incrementally.”

Source: David Fuller, Fullermoney, December 11, 2008.

Financial Times: So long, super-cycle
“The severity of the crisis has surprised natural resources companies’ executives, commodity traders and Wall Street bankers alike. After all, the commodities boom of 2003-08 has been the most notable for a century in its magnitude, duration and the number of commodities whose prices it has lifted. The sudden plunge poses a fundamental question: is this just a temporary blip within an upward trend, with prices likely to rebound in the medium term, or is it the conclusion of another commodities cycle of boom and bust, with a period of relatively stable prices coming ahead?

“The common belief in the industry itself, and among most Wall Street analysts, is that the market is undergoing a correction but that the boom years have not ended. As many point out, the main drivers of what many have come to see as a commodities super-cycle - such as strong pent-up demand in emerging countries and supply constraints caused by a lack of investment over the past 20 years, along with the rise in resource nationalism - are intact. The current drop is, in the words of one senior mining executive, a ‘reset’ of the boom, not the end of it. Prices will rebound, in this view, and continue rising.”

Click here for the full article.

Source: Javier Blas and Krishna Guha, Financial Times, December 9, 2008.

Bespoke: Consensus gold estimates
“Below we provide the consensus price target for gold through 2012. These target prices are based on the median of 21 gold analysts surveyed by Bloomberg. As shown, analysts currently aren’t expecting a big rally or a big decline in gold over the next few years. By mid-year 2009, analysts are expecting gold to be at $825/ounce, which is less than $10 from its current price of $816. At the end of 2011, analysts expect gold to be down to $790, and then down to $762 by the end of 2012.”

Source: Bespoke, December 12, 2008.

Casey’s Charts: Gold stocks - time to bottom feed
“The previous low point for the ratio of the XAU gold stock index to the price of gold was 0.16, when gold was trading around $270 an ounce in October of 2000. Today, the XAU is trading a mere 57% higher than it was in October of 2000, compared to a gold price that has increased by 184%. As a general rule of thumb, anytime the ratio is above the 25-year average is the time to sell, and below its average says gold stocks are cheap. With the ratio bouncing off the lowest level since the inception of the XAU index, it signals a SCREAMING buy for gold stocks!

“Picking the bottom of any market is near impossible, but knowing when something is grossly undervalued can be easy. Gold has long been considered a hedge against inflation, and with trillions of new government bailout dollars ready to circulate into the system, buying precious metal stocks at these distressed prices is the chance of a lifetime.”

Source: Casey’s Charts, December 5, 2008.

Profit NDTV: Asia beats US in gold futures trading
“Asia, which accounts for 60% of the world gold imports, has overtaken the US in gold futures trading, with Mumbai and Shanghai exchanges growing rapidly, leading trade magazine Futures Industry has reported.

“According to the latest edition of the US-based magazine, data from the first eight months of this year show that the combined volumes in gold futures trading at exchanges in Shanghai, Tokyo, Taiwan and Mumbai reached 49.8 million contracts, far ahead of the 34.3 million contracts traded in the US.

“‘From January through August this year, seven of the top 10 gold contracts in the world were Asian,’ it said, adding that much of that growth was in Mumbai and Shanghai.

“‘Some of the boom is undoubtedly driven by the search for a safe haven as the value of stock investments continues to evaporate,’ the magazine said noting that Asian investors may also have a greater cultural predisposition toward gold than Westerners.

“Asia imports 60% of the world’s gold and its exports 40%. India is the largest consumer of physical gold in the world, followed by the US, and then China. And this year, China became the world’s largest gold producer - a title south Africa had held for more than 100 years.”

Source: Profit NDTV, December 9, 2008.

BBC News: UK economic slowdown “worsening”
“The UK economy contracted 1% between September and November, the National Institute of Economic and Social Research (NIESR) has estimated.

“This fall followed after a 0.8% drop in the three months to the end of October, said the think tank. Indicating that the rate of output decline is ‘accelerating’, the NIESR now expects a fall of more than 1% in the last three months of the year.

“Official data showed that the economy shrank 0.5% from July to September. But it will not be until January that the Office for National Statistics reports on the final quarter’s GDP.

“If it reports a decline for the three months to December, then the UK will be in officially in recession under the generally accepted definition of two consecutive quarters of decline.

“The NIESR says it has a good track record in forecasting GDP growth in advance of the official figures. The latest data from NIESR is just the latest indication that the UK economy is most probably falling into a recession.”

Source: BBC News, December 10, 2008.

Victoria Marklew (Northern Trust): Swiss rates head toward zero
“The Swiss National Bank (SNB) effectively lopped another 50bps off its main policy rate today, lowering its target band for three-month Swiss franc LIBOR to 0.0-1.0% (down from 0.5-1.5%) and aiming for the mid-point of 0.5%. This brings the easing total to 225bps since October 8.

“The SNB warned that the sharply worsening global climate will push Switzerland into recession next year. Chairman Roth stated that growth is likely to be negative, not just in the first two quarters of 2009 but for the year as a whole. The bank is now forecasting a contraction in real GDP of between 0.5% and 1.0% next year. The inflation forecast was also revised down, with the bank now seeing the annual rate averaging 0.9% next year and 0.5% in 2010.”

Source: Victoria Marklew, Northern Trust - Daily Global Commentary, December 11, 2008.

Financial Times: Japan contracts faster than expected
“Japan’s gross domestic product contracted much more rapidly in the third quarter than previously thought, official data showed on Tuesday, amid new indications of distress in the world’s second-biggest economy.

“The revised GDP data showed a quarter-on-quarter fall of 0.5% for the three months to September, compared with last month’s preliminary estimate of a 0.1% decline.

“The economy contracted at an annualised rate of 1.8% between July and September - a much more precipitous pace than the annualised 0.5% decline suffered in the same quarter by the US, centre of the global financial crisis.

“Analysts said the revision, though bigger than expected, reflected relatively technical factors involving inventories and government spending rather than worrying new information and so would not dramatically change assessments of the economy’s prospects.

“‘The downgrade in headline growth does not look as bad as the headline suggests,’ UBS said in a research note.

“However, the news the recession was deeper than thought came as the Cabinet Office said its latest composite index of business conditions showed the economy ‘worsening’.”

Source: Mure Dickie, Financial Times, December 9, 2008.

Financial Times: China’s export fall worse than predicted
“The impact of the global financial crisis on China became clear on Wednesday when the government revealed that exports fell in November for the first time in almost seven years.

“With demand in many of its main markets slowing sharply, Chinese exports declined 2.2% from a year earlier. Imports also fell 17.9% from a year earlier, according to Chinese customs figures, prompting the government to announce plans to further boost the economy.

“The Chinese data shocked economists. The figures were far below forecasts, even in the light of sharp slumps in exports in November from both Taiwan and South Korea.

“‘This is the worst collapse in Chinese exports since 1999 and is probably just the beginning of a prolonged export contraction,’ said Isaac Meng, economist at BNP Paribas.

“The drop in imports, the biggest since the early 1990s, helped push the monthly trade surplus to a record $40 billion, the fourth month in a row that the surplus has broken records.

“The government pledged on Wednesday to do everything it could to maintain ‘stable, healthy’ growth next year. At the conclusion of the three-day Central Economic Work Conference, an annual meeting of top policy-makers, officials said they would boost public spending in order to promote domestic demand.

“A report on state radio about the meeting said the government had reaffirmed its policy of keeping the exchange rate ‘basically steady’, but would take other measures to deal with falling domestic demand.

“Until last month, China’s exports had held up much better than most observers had expected, increasing by 19% in October compared to the same month last year.”

Source: Geoff Dyer and Jamil Anderlini, Financial Times, December 10, 2008.

Financial Times: China inflation falls as growth slows
“China’s consumer price inflation fell to a 22-month low of 2.4% in November, giving the central bank free rein to cut interest rates further to offset an abrupt slump in the world’s fourth-largest economy.

“Economists had expected inflation to moderate to 3.0% from 4.0
% in the year to October. In the event, the reading was the lowest since January 2007.

“Nie Wen, an analyst with Huabao Trust in Shanghai, said the plunge meant real, inflation-adjusted interest rates in China were now back in positive territory even though the economy had run into fierce headwinds.

“‘The government will become more decisive in cutting rates,’ Nie said.

“Jing Ulrich, head of China equities at J.P. Morgan agreed. ‘We believe there is further scope for the central bank to ease monetary policy in an effort to avoid an excessive slowdown and stave off deflation,’ she said in a note to clients.

“‘Definitely we are going to move into a deflationary environment in China, probably through the first six months of the year,’ said Glenn Maguire, chief Asia-Pacific economist for Societe Generale in Hong Kong.”

Source: Financial Times, December 11, 2008.

Bespoke: Deflation coming in China?
“It wasn’t too long ago that one of the biggest worries facing the global economy was that improved standards of living in China would lead to higher wages for its workers. This, it was feared, would cause the country to begin exporting inflation around the world. As recently as August, PPI data from China showed that inflation was running at a rate of 10.1% year over year (y/y). Since then, however, pricing power in China has collapsed as evidenced by last night’s [Tuesday] release of the November PPI, which showed that prices are now up by just 2.0% y/y. At this rate, it won’t be long before we start seeing minus signs.”

Source: Bespoke, December 10, 2008.

Financial Times: Rouble exodus hits Russia’s credit rating
“Russia on Monday became the first G8 country since the start of the financial crisis to have its credit rating downgraded after Standard and Poor’s took fright at the recent exodus from the rouble and sharp drop in oil prices.

“S&P said it had lowered Russia’s foreign currency credit rating by one notch from BBB+ to BBB because of the ‘rapid depletion’ of the country’s foreign exchange reserves and the ‘difficulty of meeting the country’s external financing needs’. It said the outlook for the rating was negative.

“Russia’s reserves have fallen by $128 billion since August to $455 billion, as the country battles the capital flight that began following the war with Georgia and escalated as the oil price fell and the global crisis worsened.

“S&P said Russia could be forced to spend all $200 billion now parked in its two sovereign wealth funds on recapitalising the banking system and covering fiscal deficits in 2009 and 2010.

“The agency expects Russia to run a current account deficit next year of 2.6% of gross domestic product due to the oil price fall, putting further pressure on the balance of payments.

“‘There are a lot of layers of concern,’ said Frank Gill, primary credit analyst at Standard and Poor’s. ‘There are macroeconomic and political risks … and Russia has not operated a current account deficit since 1997 and that was less than 1% of GDP.’

“The thought of devaluation raises the spectre of the 1998 rouble crash that wiped out Russians’ savings, although economists say any devaluation this time would be far less severe.”

Source: Catherine Belton, Financial Times, December 8, 2008.

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

Sunday, November 30th, 2008

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

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

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

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

Source: Daryl Cagle

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Yahoo Finance, November 28, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That’s the way it looks from Cape Town.

Hat tip: Mish (via Live Leak)

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

Source: Big Think, November 2008.

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

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

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

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

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

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

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

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

“Following are excerpts from the interview:

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

Click here for the full article.

Source: Spiegel Online, November 24, 2008.

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

Click here for the article.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TOTAL: $3.92 trillion

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

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

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

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

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

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

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

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

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

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

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

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

Source: Breitbart, November 22, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: ABC News, November 22, 2008.

Fox Business: Wilbur Ross on the next Treasury Secretary

Source: Fox Business, November 21, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Wachovia, November 24, 2008.

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

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

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

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

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

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

Source: Breitbart, November 25, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: CNBC, November 20, 2008.

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

Source: Bespoke, November 25, 2008.

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

Source: Bespoke, November 26, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

“I will invest accordingly.”

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

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

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

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

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

Source: Bespoke, November 25, 2008.

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

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

Source: Bespoke, November 23, 2008.

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

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

Source: Naked Capitalism, November 23, 2008.

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

Source: Bloomberg, November 21, 2008.

Bloomberg: Marc Faber says gold is most precious asset

Source: Bloomberg, November 25, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: BBC News, November 28, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Breitbart, November 27, 2008.

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

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

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

Source: BBC News, November 23, 2008.

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Words from the (investment) wise for the week that was (November 17 – 23, 2008)

Sunday, November 23rd, 2008

A new bout of fear gripped financial markets during the past week, causing the slide in global stocks, commodities and emerging-market assets to deepen. As investors’ angst escalated, positions in risky assets were liquidated in exchange for perceived safe havens such as the US dollar, government bonds and gold bullion.

“We have seen fundamental selling, technical selling, forced selling (deleveraging), short selling, capitulation selling and selling due to ennui,” commented David Fuller (Fullermoney).

Fueling the sell-off were mounting concerns that the economic recession could not only be more intense than previously feared, but also fall into a corrosive deflationary phase. Additionally, sentiment was undermined by renewed questions about the effectiveness of the US government’s bailout plans.

A clear sign of distress and fear was the US three-month Treasury Bill rate falling to zero on Thursday, before nudging up to (a still minuscule) 0.10% by the close of the week. “The financial situation at the moment is so bad that women are now marrying for love,” quipped an e-mail doing the rounds.

After the S&P 500 Index breached the grim milestone of the October 2002 lows and fell to levels last seen in 1997 - thereby threatening to wipe out the entire 2002 to 2007 bull market - Wall Street regained some confidence late on Friday. The trigger for a strong turnaround arrived just in time for the 15:00 witching hour and came in the form of Timothy Geithner’s (pronounced GYTE-ner) nomination as new Treasury Secretary, resulting in the S&P 500 recovering from an intraday loss of more than 1% to a gain for the day of 6.3%.

On the bailout front, the Detroit automakers sought $25 billion from the Treasury to avert bankruptcy. However, Congress withheld financial aid for the time being, giving the companies until December 2 to submit a “viable” recovery plan.

“Don’t be misled, though - the something that is rotten in the auto industry has nothing to do with the credit crunch, and everything to do with years of mismanagement, shoddy products and bad choices,” said Bloomberg columnist Mark Gilbert. “Consider the credit-rating histories of GM and Ford. For both companies, the rot started all the way back in August 2001, when Standard & Poor’s put the A grades they enjoyed for a decade on review for downgrade. In October of that year they each suffered a two-level cut to BBB+ that left them just three moves away from junk status.”

I received the following note from an American friend a few days ago: “…even the children in my son’s second grade class are depressed about the auto industry. I had to answer my son’s questions about bankruptcy since the kids are talking about it …” This comment says it all!

Elsewhere, Citigroup’s (C) share price plunged by 60.4% over the week to a 16-year low as the company wrestled the financial crisis and planned to slash 50,000 jobs. According to The Wall Street Journal, “Citigroup officials have been talking in recent days to Treasury Department and Federal Reserve officials, and those discussions are expected to continue throughout the weekend …”

A pointed comment regarding the principle of bailouts came from Jim Rogers, as quoted by the Financial Times: “What they’re doing is taking the assets away from the competent people, giving them to the incompetent people and saying to the incompetent: ‘Okay, now you can compete with the competent people, with their money.’ I mean this is terrible economics. This is outrageous economics.”

Next, a tag cloud of the text of the plethora of articles I have read since a week ago. This is a way of visualizing word frequencies at a glance. Keywords such as “banks”, “economy”, “market” and “prices” occur often, but words such as “gold” and “deflation” have also started creeping into the tag picture.

The following update on the stock market outlook arrived on Friday from Bennet Sedacca (Atlantic Advisors): “We have been barely invested, mostly void, in equities, since May. We went ½ long today near the lows for a rally that could last longer than some think. Mostly large cap, high-quality, excellent balance sheet companies with a little tech and financials thrown in. We must remember, buy when you can, not when you have to.”

Oversold conditions are bound to result in rallies from time to time (and possibly around Thanksgiving), but these should not be trusted at face value. For a more lasting market turnaround to happen, I would like to see evidence of base formations on the charts, a 90% up-day, and relative outperformance by the financial sector.

I am also closely monitoring the surges in the US dollar and Japanese yen - low-yielding currencies previously used for funding risky investments - as a break of the uptrends in these two currencies will be a good indicator of the forced deleveraging selling starting to subside. Once this situation has played itself out, we should see a return to lower volatility levels and a return of confidence. (Also read my recent posts “Economic woes torpedo stock markets” and “Panic-crash sentiment causes extreme volatility“.)

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

Economic reports
The Ifo World Economic Climate has worsened further in the fourth quarter of 2008 with the indicator falling to its lowest level in more than 20 years, according to the Ifo World Economic Survey. Not only the major economic regions of North America, Western Europe and Asia are affected, but also Central and Eastern Europe, Russia, Latin America and Australia. On the whole, the survey data point to a global recession.

Economic reports released in the US during the past week confirmed an increasingly dire situation.

• The US moved closer to deflation territory as the CPI decreased by 1.0% from September to October (the largest monthly decline since the 1930s), leaving the CPI 3.7% higher compared with a year ago and significantly down from September’s 4.9% rate. The continuing decline in US economic activity is pushing down inflationary pressure.

• Because of weak demand, producer prices for finished goods gave up ground for the third month in a row, falling by 2.8% in October largely as a result of much less expensive energy products.

• On par with expectations, residential construction slowed again in October, with a 4.5% month-on-month decline in total housing starts. At 791,000 annualized units, starts have hit another record low as exceptionally weak demand was constraining homebuilding.

• The NAHB housing market index fell further in November, setting a record low.

• Slumping demand is hitting US industry hard, although production bounced back in October from hurricane-related declines in September. Total industrial production increased by 1.3% after having fallen a downwardly revised 3.7% in September, but the indicator fell around two-thirds of a percent in September and October when excluding once-off effects.

• Initial claims for unemployment insurance benefits increased by 27,000 to 542,000 for the week ended November 15, putting claims at their highest point since the early 1990s. This is a serious warning signal about the health of the labor market.

• The Conference Board Index of Leading Economic Indicators declined by 0.9% in October, led by a sharp plunge in stock prices and decreases in residential building permits and consumer expectations. The LEI in the last three months has shown an acceleration in the rate of decline, adding to evidence that the US has entered a recession that will likely be much deeper than either of the previous two.

It comes as no surprise that the minutes of the Federal Open Market Committee’s meeting of October 28 to 29 indicate that members were extremely concerned about the near-term prospects for the economy, given the stresses in financial markets. With the problems in credit markets persisting, the FOMC’s forecast called for falling growth through the first half of 2009, with next year’s real GDP growth projection lowered to -0.2% to 1.1% (previously 2.0% to 2.8%).

Banks continue to hoard all the liquidity the Fed is injecting directly instead of lending it out. This raises the question: Is the Fed “pushing on a string”? Asha Bangalore (Northern Trust) commented as follows: “The lowering of the Fed funds rate, the Fed’s innovative programs to provide liquidity to financial institutions and more lenient rules for borrowing through the discount window appear to have exhausted the gamut of possibilities routed through monetary policy changes to influence aggregate demand.

“The provisions of the Emergency Economic Stabilization Act of 2008 allow for recapitalization of banks. The FDIC is working on obtaining an approval for the anti-foreclosure plan to address the housing market issues that are central to the current crisis. … the probability of a hefty fiscal stimulus package … is growing every day.”

Economic reports in other parts of the world were equally dismal.

Japan entered into its first recession in seven years as the financial crisis curbed demand for its exports. GDP growth contracted by 0.1% during the third quarter, or at an annualized rate of -0.4%, following a second quarter contraction of a massive 0.9%.

Source: Financial Times, November 17, 2008.

China also warned that the unemployment outlook was “grim” as a result of the financial crisis forcing the closure of more export-oriented factories.

In Europe, a further slowdown in economic activity caused the Swiss National Bank to announce a surprise 100 basis-point cut in its three-month target range to 0.5%-1.5% - the third emergency reduction in two months.

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

Source: Yahoo Finance, November 21, 2008.

Next week’s US economic highlights, courtesy of Northern Trust, include the following:

1. Existing Home Sales (November 24): Sales of existing homes are predicted to have declined in October after a small gain in September. Sales of existing homes advanced by 7.8% from a year ago in September, after posting declines since late 2005. Consensus: 5.00 million versus 5.18 million in September.

2. Real GDP (November 25): Incoming economic reports suggest a small downward revision of real GDP in the third quarter to a 0.5% drop from the advance estimate of a 0.3% decline. Consensus: -0.5%

3. New Home Sales (November 26): Sales of new homes are expected to have fallen in October after a 2.3% increase in September. Sales of new homes have dropped by 32.1% from a year ago in September. Consensus: 450,000 versus 464,000 in September.

4. Durable Goods Orders (November 26): Durable goods orders (-2.0%) are predicted to have dropped in October reflecting declines in bookings of defense and aircraft, which posted large gains in September. Consensus: -2.6% versus +0.9% in September.

5. Personal Income and Spending (November 26): The earnings and payroll numbers for October indicate a steady reading for personal income in October. Auto sales fell sharply in October and non-auto retail sales were noticeably weak, pointing to a likely drop in consumer spending (-0.6%). Consensus: Personal income +0.1%, consumer spending -0.9%

6. Other reports: Case-Shiller Price Index, OFHEO Price Index, Consumer Confidence (November 25).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

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

Source: Wall Street Journal Online, November 14, 2008.

Equities
Global stock markets suffered badly during the past week on mounting worries about the severity of the economic slowdown. The week’s movements - MSCI World Index -9.6% and MSCI Emerging Markets Index -11.8% - tell the story of a rough ride for bourses all over the world and marked a third straight week of losses. And the scoreboard would have been even worse if not for a dramatic late-session recovery in the US on the news that Timothy Geithner would be named Treasury Secretary.

Not a single developed market closed the week unscathed. Similarly, large losses also abounded among emerging markets, with the sole exception being the Shanghai Stock Exchange Composite Index that recorded only a relatively small 0.9% decline. The Index plunged by 72.0% since its high of October 16, 2007 until hitting a low on November 4, but has subsequently bounced by 15.4% to flirt with its 50-day moving average and roundophobia 2000 level. Will the upside leadership for global stock markets come from China on this occasion?

The chart below shows the performances of the four BRIC countries during the past week.

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

The US stock markets all declined sharply over the week as shown by the major index movements: Dow Jones Industrial Index -5.3 (YTD -39.3%), S&P 500 Index -8.4% (YTD -45.5%). Nasdaq Composite Index -8.7% (YTD ‑47.8%) and Russell 2000 Index -10.9% (YTD -46.9%).

The S&P 500 closed below its October 2002 low of 777 on Thursday, but Friday’s rally (+6.3%) to 800 put it back above this key support level. The Dow remained above its 2002 low of 7,286 on Thursday and closed 760 points above this level after Friday’s surge.

Click here or on the thumbnail below for a market map, also from Finviz.com, showing the performances of the various segments of the S&P 500 over the week.

As far as industry groups are concerned, gold (+19%) was the top performer for the week, led by Newmont Mining (NEM) on the back of a sharp rise in the price of gold bullion.

On the other side of the performance spectrum, the industrial real estate investment trust (REIT) group (-40%) was the worst performer. The diversified financial services group (-38%) was the second worst performer, with each of the group’s large banks - Citigroup (C), JPMorgan Chase (JPM) and Bank of America (BAC) - dropping sharply. Investor concerns about future credit losses, valuations of “toxic” securities on the banks’ books, job layoffs and capital adequacy issues were the drivers for the declines.

David Fuller (Fullermoney) commented as follows on the outlook for stock markets: “… we have yet to see evidence of bottoming out on many major stock market charts. While this is worrying, to put it mildly, and sentiment is diabolical, investors should recall an extremely important behavioural conditioning process. The crowd has always turned progressively more bearish with each additional decline towards the eventual low for every bear market. This is inevitable as more people sell, and unfortunately, few are more bearish than a battered holdout who finally capitulates.

“If global stock markets are not close to a major buying opportunity, then I suggest we should all head to sea and become Somali pirates.”

Fixed-interest instruments
Government bond yields across the world plunged last week as spooked investors rushed out of equities into sovereign debt.

The ten-year US Treasury Note yield declined by a massive 57 basis points to 3.18%, the UK ten-year Gilt yield dropped by 20 basis points to 3.87% and the German ten-year Bund yield fell by 30 basis points to 3.38%. However, emerging-market bonds, in general, lost ground as further deleveraging took its toll on risky assets.

The yield on ten-year Treasuries touched a 5½-year low (3.01%) on Thursday before rebounding by the close of the week, whereas the yield on 30-year bonds dropped to its lowest level (3.53%) since the start of regular issuance in 1977 before snapping back by 14 basis points.

US mortgage rates also declined, with the 30-year fixed rate dropping by 9 basis points to 6.09% and the 5-year ARM also by 9 basis points to 5.89%.

A number of indicators show that the credit crisis is still severe. For example, credit default swaps that measure default risk for investment grade debt are trading at their highest levels of the bear market. This is seen from Bespoke’s index that measures default risk for 125 companies with investment grade debt ratings.

Currencies
The week’s feature among currencies was safe-haven flows into the US dollar and Japanese yen as investors liquidated risky assets previously funded with these low-yielding currencies.

The Swiss franc came under pressure as the Swiss National Bank slashed interest rates a full percentage point to 1% as an emergency step to soften the economic slowdown.

The chart below illustrates the accent of the US dollar and Japanese yen since September 15. (The US dollar is measured against a trade-weighted basket of currencies, whereas all the other currencies are measured against the US dollar.)

Emerging-market currencies had another bad week as a result of increasing risk aversion. Examples of losses against the greenback include the Brazilian real (‑10.4%), the Turkish lira (-4.5%), the South Korean won (-6.7%) and the South African rand (-4.4%).

RGE Monitor raised the question whether Bulgaria and the Baltic states will be force