Gold Market Highlights (February 28, 2010)

Sunday, February 28th, 2010

Gold Market

For the week, spot gold closed at $1,117.60 per ounce down $1.60 or 0.14 percent. Gold equities, as measured by the XAU Gold & Silver Index (XAU) fell 1.85 percent for the week. The U.S. Trade-Weighted Dollar Index (DXY) fell 0.36 percent.

Strengths

• Gold and equities were able to rebound as Federal Reserve Chairman Ben Bernanke appeared before Congress and reaffirmed that short-term interest rates would remain low for an extended period of time and predicted the economic recovery would remain slow.
• Desjardins Securities said copper stockpiles in China are declining swiftly and that many in the market are wrong in thinking that speculation, rather than fundamental demand, has underpinned imports of copper into China. The company also said fundamental demand far exceeds general expectations.
• The Bombay Bullion Association said India’s gold imports in February are most likely between 30-35 tonnes. This is at least a 280 percent increase year-over-year when compared to 2009 imports of 7.9 tonnes during the month of February.

Weaknesses

• Weaker-than-expected consumer confidence and new home sales reports set the mood earlier in the week as traders and investors remained on the sidelines.
• Investors remain risk averse after ratings agency Fitch downgraded Greece’s largest banks ahead of Greece’s 10-year bond auction. Gold has been under pressure as of late due to a strengthening dollar primarily due to a weakening euro.
• The National Energy Regulator of South Africa has approved Eskom’s 28 percent tariff increases in 2010 and nearly 26 percent the next two years. With the South African economy is still in recovery mode, tariff increases on power utility will impact mining and the wider economy.

Opportunities

• Platinum Guild International has released a report stating young women are spurring demand for platinum jewelry demand in China. The report states that two-thirds of platinum jewelry buyers in China are women between 18 and 34 years old.
• The Financial Times reported the London Metals Exchange will be launching derivatives contracts on cobalt and molybdenum. The new offerings come as investor appetite for commodities continually increases as strong consumption in China drives demand and higher prices.
• JPMorgan said the dollar may fall against Japan’s currency to as low as 87 yen as investors reduce bets that the Federal Reserve will further tighten monetary policy in the near future.

Threats

• The Commodities and Futures Trading Commission (CFTC) will discuss position limits for gold, silver and copper futures markets next month.
• America’s third largest bank recently notified customers that effective April 1, 2010, they reserve the right to require seven days advance notice before permitting a withdrawal from all checking accounts.
• In efforts to ease the housing debacle, the Obama Administration may ban all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.

Tags: Bond Auction, Consumer Confidence, Dollar Index, Dxy, Economy Opportunities, Energy Regulator, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Fundamental Demand, Gold, Gold Equities, Gold Imports, Gold Market, Jewelry Buyers, Platinum Guild International, Platinum Jewelry, Recovery Mode, Report States, Silver Index Xau, South African Economy, Spot Gold
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The Volcker Rule = Job Creation.. NOT!

Sunday, January 24th, 2010

By Dian L. Chu, Economic Forecasts & Opinions

Last Thursday, President Obama unveiled the toughest new restrictions yet on the nation’s largest banks in the aftermath of the financial crisis. The proposal is called the “Volcker Rule”, in recognition of the former Federal Reserve chairman, Paul A. Volcker, who has been pushing the proposal for months.

Under the still sketchy Volcker Rule, referred to as “Glass-Steagall in spirit,” banks that take federally insured deposits or have the right to borrow from the Fed would be required to minimize the trading they do on their own account and give up their stakes in hedge funds and private equity firms.

In other words, banks can choose to engage in proprietary trading (prop trading), or be a traditional bank, but can’t do both.

The plan has plenty of skeptics and it’s too early to know whether it will win congressional approval. But the specter of new profit-crimping regulation was enough to batter the bank stocks sending the Dow Jones Industrial Average down 213.27 points, or 2%, to 10389.88, the biggest decline since last fall.

Right Direction, But…

In recent years, banks have bulked up their profits in areas way beyond the traditional banking. The far more profitable and risky investing banking units have grown dramatically and were at the heart of the financial crisis.

While a renewed focus on financial reform by the Obama administration is certainly a welcoming sign and in the right direction, it certainly does not address the more dire issue of the Middle America – jobs.

Moreover, the timing and haste of the proposal has drawn criticism that this is simply a transparent attempt at populism, as it came two days after voters in Massachusetts sent a Republican to the Senate depriving Democrats of the 60 votes often needed to prevent a Republican filibuster in the Senate.

Missing the Point

The Massachusetts defeat of the Democrat essentially signed, sealed and delivered the one-year report card of the Obama Administration.

While the nation was suffering through the worst economy since the Depression, the Democrats wasted a year on mis-directed priorities such as overhauling health care, expanding college aid, and reducing climate change, etc., while forestalling a much needed legitimate mass job creation strategy.

Poverty Expanded to Suburbs

A new study from the Brookings Institution found that in 2008, 91.6 million people—more than 30% of the nation’s population—fell below 200% of the federal poverty level.

From 2000 to 2008, the poor population in the U.S. grew by 5.2 million, reaching nearly 40 million, up 15.4%, a pace almost twice as fast as the increase in the total population.

Suburbs in the nation’s largest metro areas saw their poor population grow by 25%. Midwestern cities and suburbs experienced by far the largest poverty rate increases over the decade. (Table 1)

Falling Wages, Rising Inflation

The latest Consumer Price Index (CPI) rose at an annual rate of 2.7% with the core rate, in which food and energy are removed from the mix, rising 1.8%.

However, what hurt consumers the most was falling wages.

According to the Bureau of Labor Statistics, while average weekly earnings were up 1.9% year-over-year in December 2009, the real wage, adjusted for inflation, showed that buying power had dropped by 1.6%, the first year-over-year decrease since 2003.

Workers are also being squeezed from the lowest average number of hours worked in a week since 1964, while the underemployment rate (U6), a better gauge of the jobless picture, remains high at 17.3% as of last December, up almost 4% year-over-year.

Job Creation, Anyone?

Infrastructure and construction related spending typically plays a large role in economic recovery. While relatively modest government investments in stimulus construction are having some positive impact on the economy, the overall construction unemployment rate is still a staggering 22.7% as of December 2009, twice the national average and at the highest level in at least a decade.

Construction economists note that stimulus-related jobs gains in the industry have been more than offset by losses in non-residential construction and public works funded by state and local governments.

This just illustrates that more comprehensive and “add-on” job creation programs need to be strategized and implemented. That is, one job creation should lead to two or three more jobs, instead of special interest programs that create one new job while leading to two or three job losses in other areas.

Rhetoric & Substance

Nevertheless, from his recent speech, President Obama appears to be still on the path of mis-guided priority when he said that a jobs bill emerging in Congress must also include tax breaks for people trying to make their homes more energy efficient.

In addition, Senator Evan Bayh said in an interview on Bloomberg Jan. 23 that he expects

“Obama to use the Jan. 27 nationally televised address before Congress to embrace creation of a commission that would suggest spending cuts and tax increases that Congress would be forced to vote on.”

It seems obvious that the Administration will continue its seriously mis-aligned policies with the truth in observable reality.  Soaring rhetoric notwithstanding, people grasp the difference between showmanship and substance.

Tags: Bank stocks, Chairman Paul, Congressional Approval, Dian, Dow Jones, Dow Jones Industrial Average, Economic Forecasts, Federal Reserve Chairman, Glass Steagall, Hedge Funds, Job Creation, Middle America, Missing The Point, Obama, Paul A Volcker, Populism, Private Equity Firms, Proprietary Trading, Report C, Transparent Attempt
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Give Bernanke A Break

Sunday, January 24th, 2010

As populist politicians, long on hypocritical outrage and short on fiscal rectitude, begin the witch hunt for the parties to blame for the Great Recession, fingers are being pointed at Federal Reserve Chairman Ben Bernanke. Their criticism is that Bernanke and the Fed contributed to the housing bubble by keeping short-term interest rates too low for too long early in the decade and then not increasing them quickly enough to snuff out escalating house prices.

In a recent speech, Bernanke pointed out that it was low real long-term rates (i.e. nominal rates less inflation) determined in the bond market that were a major contributor to the housing bubble, not the short-term interest rates engineered by the Fed.

The facts support Bernanke. As depicted in the following graph, real long-term rates trended downwards for much of this decade, hitting bottom just before Lehman’s failure in September 2008. Even the Fed tightening in 2004 and 2005 failed to push real rates up to the levels of the 1990’s. Long-term real rates were just too low and consumers got the message – instead of saving, they spent.

As depicted in the following graph, this view is also supported by the failure of long-term mortgage rates (in red) to respond to the increase in the fed funds rate (in green) in 2005-2006 as they had in previous tightening cycles.

In 1994-95 and 1999-2000, long-term mortgage rates were 2.0% or so higher than the fed funds rate as they peaked, while in 2006 the spread was in the 1.0% range. Monetary policy was less effective at driving up mortgage rates than previous cycles.

The real culprit in keeping long-term real interest rates low was the global savings glut that was in large part created by the recycling of U.S. dollars by China and other Asian countries. The chronically undervalued currencies of those countries have created a permanent trade imbalance and yawning current account deficit in the United States. In fact, Bernanke himself coined the phrase “global savings glut” in a speech that he made in March 2005. At that point, he warned that low real interest rates seemed to reflect an imbalance between global savings and investment – too much money chasing too few investments around the world.

Viewed from this vantage point, the seeds of the recent crisis were sown when China was allowed to join the World Trade Organization in 2001 in the absence of adequate safeguards to curb its policy of promoting exports through currency manipulation. The Great Recession is an unwelcome consequence of the structural faults that were allowed to develop in the world economic system.

Although China and other Asian exporters play leading roles, asset bubbles typically manifest themselves through the disparate actions of a cast of characters so there are many players to point fingers at. Blame the U.S. home buyer for thinking house prices always grow to the sky. Blame the bankers who sold collateralized mortgage securities to every Tom, Dick and Harry and, worse yet, kept some of this dreadful paper on their own books creating systemic risk for the entire financial system. An especially large share of the blame must go to the credit rating agencies who gave their AAA blessing to so much of this flawed paper. Blame also the mortgage brokers who turned “liars’ loans” into the raw material of defective investments as well as the financial engineers who mispriced the risk in a host of derivatives simply because they had never read a history book on the Great Depression. And finally politicians should look in the mirror – they consistently supported housing policies and programs that made housing accessible to buyers who couldn’t afford a down-payment let alone a house.

Instead of pointing fingers at Bernanke, his critics should lead a round of applause for his leadership of the Fed in initiating the dramatic increase in monetary expansion in March 2009 that was clearly the catalyst for the recovery in the stock market and the turn-around of the U.S. economy, however tenuous and fragile it may be. In addition, given the immense challenge faced by the Fed in unwinding its massive monetary stimuli, Bernanke’s second term should be confirmed by the Senate and he and his colleagues should be allowed to concentrate on steering the economy to terra firma.

This is vital. The recession and stock market collapse of 1937-38 that occurred after the initial recovery from the Great Depression was in part triggered by the Federal Reserve’s increase in bank reserve requirements. We cannot afford Bernanke and the Fed to get it wrong this time around.

Tacita Capital Inc. (”Tacita”) is a private, independent family office and investment counselling firm that specializes in providing integrated wealth advisory and portfolio management services to families of affluence. We understand the challenges of affluence and apply the leading research and best practices of top financial academics and industry practitioners in assisting our clients reach their goals.

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Tags: Asian Countries, Bond Market, China, Culprit, Current Account Deficit, Emerging Markets, Fed Funds Rate, Federal Reserve, Federal Reserve Chairman, Global Savings Glut, Hitting Bottom, House Prices, Housing Bubble, Lehman, Monetary Policy, Mortgage Rates, Recession, Rectitude, Term Interest, Term Mortgage, Trade Imbalance, Witch Hunt
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Bonner’s New “Trade of the Decade”

Tuesday, January 5th, 2010

This post is a guest contribution by Bill Bonner, author of two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Bill is also the driving force behind The Daily Reckoning.

Well, that was it for 2009. Whew!

Another great year for gold. But it wasn’t a bad year for stocks either. The NASDAQ rose 45%. The Dow went up about 20%.

As we guessed back at the beginning of the year, stocks bounced. What we didn’t guess was that they would bounce so much for so long. All over the world, stocks went up…and continued to go up. A bounce is inevitable, following a stock market drop. And it’s impossible to say how big a bounce it will be…or how long it will go on.

But a kiss is still a kiss…and a bounce is still a bounce. No kiss lasts forever. Neither does a bounce. Looking ahead, we have to anticipate that it will come to an end…probably in 2010.

If you’ve profited from the 2009 run up in stocks…bravo! Now, sell them… Yes, the bounce could continue. But it’s not worth the risk.

And how ’bout the gold market! Gold has risen every year of the decade. It was the surest, safest place for you money - by far.

Does that mean gold will go up in 2010? Does that mean we will stick with our ‘Trade of the Decade’ for another ten years? Not to brag, but our trade was a big success. Even we were surprised by how well it did.

As long-suffering Daily Reckoning readers will recall, we announced our ‘Trade of the Decade’ in 2000: Sell Stocks; buy gold.

“It turned out to be a good plan,” observes colleague, Merryn Sommerset, in a recent Financial Times story. “In 2000, you could buy an ounce of gold for $280 (the average price over the year). Now, it will cost you about $1,100. At the time, Bonner saw what most others did not. He saw the US not as an economy carefully and cleverly managed by then Federal Reserve chairman Alan Greenspan and his passion for low interest rates, but as a massive credit bubble waiting to burst.

“He also saw the massive and growing national debt, the trade and budget deficits, and fast growth in the money supply as factors that would naturally debase the dollar over the long term. He also saw the credit bubble as global rather than peculiar to America. So it made sense to him to hold the only non-paper currency there is - gold.”

So what’s next? What’s the trade of the coming decade? Well, your editor has decided not to double-down on the identical trade. Gold will remain in our core holdings, but not in our Trade of the Decade for the next 10 years. Why? Because we think the US economy is going the way of Japan.

Japan went into a slump in 1990. It has come out…and gone back in…and come out again…and gone back in again. In terms of the amount of wealth destroyed - at least, on paper - it was the worst disaster in human history. The value of real estate went down 87% in some cities. Stocks fell from a high of 39,000 on the Nikkei Dow down to the 7,000 range in 2009…their lowest point in 27 years.

Why such a bad performance? As we keep saying, if you really want to make a mess of things you need taxpayer support. The Japanese put more taxpayer money into the effort to prevent the correction than any nation theretofore ever had. The result: the correction was stalled, delayed, and stretched out over more than two decades.

And now, US economists are looking at Japan…not with alarm, but with admiration. They are beginning to believe that the Japanese model is the way to go…because it prevented widespread unemployment and a deeper slump.

Here’s our best guess:

Now that the US economy is caught in the same sort of de-leveraging process that gripped Japan, the same sort of “remedies” will inevitably be employed…leading to the same results, more or less.

We’ll skip the details for this morning. You’ll hear plenty of them in the days, weeks, and months ahead - promise!

Instead, this morning, we’ll turn to our Trade of the Decade for the next 10 years. There are, of course, two sides to this trade…the long side and the short side. We had no trouble finding things to put on the short side. In a de-leveraging period almost everything goes down. We could have stuck with US stocks, for example. They’ll probably continue to come down…just as they did in Japan.

But who knows? US stocks just had their worst decade since the ’30s. What are the odds that they’ll have another bad decade? We don’t know. But what we look for in our Trade of the Decade, for the sell side, is something that has just had its best decade ever…something that has been going up for so long people think it will go up forever…something that everyone wants.

What does that describe? Well, the thing that comes closest is US Treasury debt. Yields have been going down (meaning, the price of debt is going up) since 1983. And now, despite a supply that seems to be going off the charts, demand for Treasury bonds, notes and bills has never been stronger. What’s more…if our analysis of the US economy is correct…the supply of Treasury debt is going to continue to rocket upward for many years. Deficits of $1 trillion to $2 trillion per year are going to become commonplace.

How long will it be before the market in Treasury debt crashes? How long will it be before hyperinflation…or a debt default…sends investors running for cover? We don’t know…but it seems a likely bet that it will happen sometime in the next 10 years.

So, on our sell side…we’ll put US Treasury debt.

How about the buy side? Ah…that is something we’ve struggled with. While there are many things that seem likely to go down, there aren’t many that seem destined to go up. Let’s see, what has been beaten down, dissed, battered, and abused for the last 20 years or more? What is it that people don’t want? What is it that they expect to go down…possibly forever?

Of course…Japanese stocks!

So there is our Trade of the Decade:

Sell US Treasury debt/Buy Japanese stocks.

Crazy, right?

Maybe not. Treasury debt has been going up for the last 27 years. Japanese stocks have been going down for the last 20 years.

[PduP: I have added a monthly chart below of the 30-year US Treasury Bond versus the Japanese Nikkei 225 Index, illustrating the massive outperformance of US Treasuries over the past 20 years.]

Source: StockCharts.com

Does this mean we’re giving up on gold? Not at all. We’re sticking with gold. Aurus eternis, or something like that. The yellow metal is what you buy when you think the financial authorities are making a mess of things. We have little doubt about it. So we’ll continue to buy and hold gold…until the financial system blows up.

But gold at $1,100 an ounce is fully priced. It is not cheap. It’s been going up for the last 10 years! At this level, it is insurance against a monetary catastrophe and a speculation on when and how the blow-up will finally come. It is definitely worth having. And holding. And using to protect your wealth.

But the trade of the decade is a way of making money…by buying/selling two opposing assets that are at extraordinary valuations. It is not a speculation on what MIGHT happen. It is merely a bet on the phenomenon known as “regression to the mean.” Things that are out-of-whack tend to go back into whack…

If we’re right, over the next 10 years, the most popular investment of 2009 - Treasury debt - will go out of fashion. The least popular investment of 2009, on the other hand - Japanese stocks - will surprise everyone by finally showing signs of life.

In any event, the trade is fairly low risk. What are the odds that US Treasury debt will go up? What are the odds that Japanese stocks will go down? Of course, we don’t know…things that are out-of-whack can get farther out-of-whack. But we count on time to sort it out. And hope we live long enough to be able to say, “we told you so.”

Source: Bill Bonner, The Daily Reckoning, January 4, 2009.

Tags: Alan Greenspan, Best Selling Books, Bill Bonner, Chairman Alan Greenspan, Credit Bubble, Daily Reckoning, Empire Of Debt, Federal Reserve Chairman, Federal Reserve Chairman Alan Greenspan, Financial Reckoning Day, Financial Times, Gold, Gold Market, Low Interest Rates, New York Times Best Selling Books, Ounce Of Gold, Sell Stocks, Sommerset, Stock Market Drop, World Stocks, Worth The Risk
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TIME Person of the Year

Thursday, December 17th, 2009

TIME managing editor Rick Stengel explains why the magazine chose Federal Reserve Chairman Ben Bernanke as 2009’s Person of the Year.

Click here for the article.

Source: TIME, December 16, 2009.

Tags: Article Source, Federal Reserve, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Managing Editor, Person Of The Year, Rick Stengel, Source Time, Time Person Of The Year
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Words from the (Investment) Wise - September 20, 2009

Sunday, September 20th, 2009

Marking the one-year anniversary of the Lehman Brothers demise, risky assets last week again marched higher to the tune of economic data supporting the argument of a global economic recovery. A realization among investors that the economic transition from recession to recovery was gaining momentum, resulted in many global stock markets scaling fresh peaks for the year.

Ben Bernanke, Federal Reserve chairman, on Tuesday said the US recession “is very likely over”. However, he remained cautious about the shape of the recovery and said he expected a “moderate” recovery in 2010 with growth “not much faster than the underlying potential growth rate of the economy”, i.e. approximately 3%.

“At the moment we don’t see (the economy) getting better or worse, but that’s better than you could say six months ago,” added Warren Buffett. “The terror of last year is gone and that’s thanks in part to the government.”

Source: Tom Toles, Slate.com

Not only did the US stock market indices record up-days on every day except Thursday, but all ten economic sectors that make up the S&P 500 also closed the week in the black. Most other stock markets (mature and emerging alike), commodities, oil, precious metals, high-yielding currencies and corporate bonds also put in a stellar performance as a bullish mood prevailed.

The CBOE Volatility Index (VIX), or “fear gauge”, traded at about the same level (23.9) as before the Lehman bankruptcy in September last year. Also, government bonds and other safe-haven assets such as the US dollar and Japanese yen were out of favor as investors sought higher returns elsewhere.

As investors started assuming more risk since March, the US Dollar Index headed lower, hitting a one-year low last week and trading in a confirmed downtrend as far as primary trend indicators are concerned. The combination of low interest rates and quantitative easing has made the US dollar an attractive currency for funding carry-trade transactions (i.e. selling low-yielding currencies to finance the purchase of higher-yielding currencies). (Click here for a short technical analysis.)

The declining dollar, central bank purchases, the de-hedging by gold producers and rising inflation expectations served as catalysts for gold bullion’s strength, causing the yellow metal to close above the $1,000 level for the sixth consecutive day on Friday. While gold’s move grabbed the headlines, platinum (+42.5%) and silver (+50.5%) have actually outperformed gold (+13.9%) significantly since the start of the year.

Source: StockCharts.com

The past week’s performance of the major asset classes is summarized by the chart below - a set of numbers that indicates an increase in risk appetite.

Source: StockCharts.com

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

The MSCI World Index (+1.8%) and MSCI Emerging Markets Index (+2.8%) both made headway last week to take the year-to-date gains to +23.8% and a staggering +62.1% respectively. These indices are still more than 30% down from the 2007 highs, but markets such as Mexico (-8.8%) and Chile (-5.8%) have almost wiped out all their financial crisis losses.

The major US indices extended their gains to two consecutive weeks, marking eight up-weeks during the past ten weeks. The year-to-date gains are as follows: Dow Jones Industrial Index +11.9%, S&P 500 Index +18.3%, Nasdaq Composite Index +35.2% and Russell 2000 Index +23.7%. Interestingly, since the Nasdaq Index was created in 1971, only 1991, 1995 and 2003 have seen bigger year-to-date gains.

While the indices have gained considerably from their lows, they still have to rally by between 6.0% (Russell 2000) and 17.2% (S&P 500) to reach the levels of the Friday (September 12, 2008) before Lehman’s collapse.

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

Top performers in the stock markets this week were Hungary (+7.4%), Macedonia (+7.3%), Ireland (+6.1%), Argentina (+5.7%) and Sri Lanka (+5.3%). At the bottom end of the performance rankings, countries included Kenya (-1.6%), Uganda (-1.5%), the Philippines (-1.3%), Singapore (-1.2%) and Slovakia (-1.2%).

Of the 98 stock markets I keep on my radar screen, 81% recorded gains, 13% showed losses and 4% remained unchanged. (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 winners for the week included Market Vectors Solar (KWT) (+10.5%), United States Natural Gas (UNG) (+9.9%), iShares Cohen & Steers Realty Majors (ICF) (+9.6%) and Claymore/MAC Global Solar Energy (TAN) (+9.0%).

On the losing side of the slate, ETFs included ProShares Short Financials (SEF) (-4.5%), ProShares Short Russell 2000 (RWM) (-4.2%), Broadband HOLDRS (BDH) (-2.9%) and CurrencyShares British Pound Sterling Trust (FXB) (-2.6%).

The cost of buying credit insurance for US and European companies eased sharply during the past two months, as shown by the tighter spreads for both the CDX (North American, investment-grade) Index (down from 118 to 103) and the Markit iTraxx Europe Index (down from 95 to 86).

Also, junk-bond yields continued declining, as shown by the Merrill Lynch US High Yield Index (and also by the good performance of the iShares iBoxx $ High Yield Corporate Bond ETF, HYG). The Index dropped by 63.4% to 798 from its record high of 2,182 on December 15, meaning the spread between high-yield debt and comparable US Treasuries was 798 basis points on Friday. This heralds the return of high-yield spreads to “pre-Lehman” levels (854 basis points on September 12, 2008).

Referring to the Federal Open Market Committee’s (FOMC) meeting next week, the quote du jour comes from straight-talking Bill King (The King Report). He said: “Traders and investors must contemplate what course of action the Fed will announce and enact after next week’s FOMC if ‘the US recession is very likely over’. If quantitative easing (QE), which is due to expire, is renewed, stocks should rally but commodities, gold and inflation plays should rally far more. The dollar should tank. China should go apoplectic. Benito will look foolish for saying ‘the recession is very likely over’. Bonds might rally initially but then look out below.

“If QE is not renewed, stocks and commodities should tank; the dollar should soar and bonds, after initially declining, should rally. China will be appeased. Benito will have validated his rhetoric with action.”

Other news is that the Federal Reserve and the Treasury are considering sweeping rules to regulate pay at banks. According to The New York Times “the rules depart from the hands-off approach that dominated bank regulation for the last three decades, but are not as strict as proposals from some European leaders”.

Also, the US Securities and Exchange Commission passed rules last week to firm up on the supervision of credit ratings agencies following a flood of criticism over their role in the financial crisis.

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “market”, “economy”, “government”, “China” and “gold” featured prominently. “Recession” has become a footnote.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (from where I am writing this post) are given in the table below. With the exception of the Chinese Shanghai Composite Index, which is trading below its 50-day moving average, all the indices are above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines.

The August highs and September lows are also given in the table as these levels define a support area for a number of the indices. On the other hand, the next potential upside target for the S&P 500 is about 1,120.

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

As stock markets continue to reach new highs, long-term mutual fund investors have reversed their strategy this month, selling shares for the first time since March, said Clusterstock. The outflows for the first two weeks of September were bigger than the inflows seen in the last three months combined.

Source: Clusterstock - Business Insider, September 17, 2009.

Bespoke highlights that the S&P 500 has now closed more than 20% above its 200-day moving average for the first time since May 1983. “This comes just six months after the Index traded the furthest below its 200-day since the Great Depression! Not even during the great bull run of the 90s did the Index get this far above its 200-DMA. This has happened only a handful of times in the history of the S&P 500,” said the report.

Source: Bespoke, September 16, 2009.

Short-term movement aside, when considering monthly data, three momentum-type oscillators (RSI, MACD and ROC) have reversed course over the past few months for the first time since the sell signals of 2007, and now indicate a positive primary trend.

Source: StockCharts.com

Putting matters in perspective from across the pond, David Fuller (Fullermoney) said: “Stock market action continues to confirm a bull market in every respect. Downside risk is probably limited to periodic mean reversions towards the rising 200-day moving averages. Such pullbacks generally offer the best buying opportunities.

“The main danger signs to look for will be an eventual tightening of monetary policy and an inverted yield curve. [PduP: The chart below shows that the next inverted yield curve is probably a long way off.] When this next happens, and both tend to be lead indicators, I will focus on introducing trailing stops for all equity positions, actual or mental, and ideally use strength to reduce equity exposure.

Source: Fullermoney.com

“Currently, I maintain that we are still in the second psychological perception stage of the current bull market, characterized by the ‘wall of worry’. With any luck, we can look forward to the third and climactic stage of a bull market cycle, in which investors become euphoric,” concluded Fuller.

For more discussion on the direction of financial markets, see my recent posts “Interview with Marc Faber“, “Is the rally ending, or does it have more to go?“, “Charts: Stocks face 15% correction in October“, “Albert Edwards: ‘I remain in the bearish camp‘”, “Bullion - a viable alternative to fiat currencies” and “More US dollar woes ahead“. (And do make a point of listening to Donald Coxe’s webcast of September 18, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
The global economic recession is over, according to the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Survey results during the first week of September improved notably across the entire global economy and most industries. Assessments of current business conditions and expectations regarding the outlook in early 2010 rose sharply.”

Source: Moody’s Economy.com

The Survey’s results were confirmed by the Organization for Economic Cooperation and Development’s index of leading indicators (covering 29 countries), which rose to 97.8 in July from 96.3 in June, reported The Wall Street Journal. The OECD said the indicators “point to broad economic recovery” and that “clear signals of recovery are now visible in all major seven economies, in particular in France and Italy, as well as in China, India and Russia”.

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

September 18, 2009
• Loan delinquency and charge-off rates

September 17, 2009
• Housing starts - multi-family units led the charge in August
• Jobless claims - initial claims decline, continuing claims advance

September 16, 2009
• The Energy Price Index lifts Consumer Price Index in August
• Cars and many other components account for the strength in factory activity
• Current account narrows in Q2

September 15, 2009
• Autos and non-auto components lift retail sales in August
• Wholesale Price Index movement largely an energy price story

It is noteworthy that industrial production increased 0.8% in August after an upwardly revised 1.0% gain in July. Asha Bangalore (Northern Trust) said: “The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) uses four variables - industrial production, nonfarm payroll employment, real personal income less transfer payments, and real manufacturing and trade sales - to determine turning points of a business cycle. The important aspect to note is that the trough of industrial production was in June 2009. Therefore, it is quite likely that the NBER will date the end of the Great Recession as June/July 2009 once additional information is available.”

Source: Northern Trust - Daily Global Commentary, September 16, 2009.

Economists surveyed by the The Wall Street Journal are increasingly confident that the US economy is growing again. They predicted that the US will grow at a 3% annual rate in the current quarter - well above the 0.6% forecast they made just three months ago - and will expand at a 2.5% pace in the fourth quarter.

Meanwhile, William White, the highly respected former chief economist at the Bank for International Settlements, warned (via the Financial Times) that government actions to help the economy in the short run may be sowing the seeds for future crises. “Are we going into a W[-shaped recession]? Almost certainly. Are we going into an L? I would not be in the slightest bit surprised,” he said, referring to the risks of a so-called double-dip recession or a protracted stagnation like Japan suffered in the 1990s. “The only thing that would really surprise me is a rapid and sustainable recovery from the position we’re in.”

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

Source: Yahoo Finance, September 18, 2009.

Click here for a summary of Wells Fargo Securities’ weekly economic and financial commentary.

In addition to the interest rate announcement by the FOMC on Wednesday (September 23), US economic data reports for the week include the following:

Monday, September 21
• Leading economic indicators

Tuesday, September 22
• FHFA US Housing Price Index

Wednesday, September 23
• FOMC rate decision

Thursday, September 24
• Initial jobless claims
• Existing home sales

Friday, September 25
• Durable goods orders
• Michigan Sentiment Index
• New home sales

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, September 18, 2009.

“Success is not final, failure is not fatal: it is the courage to continue that counts,” said Winston Churchill (hat tip: Charles Kirk - do make a point of visiting his excellent site). And isn’t this so true of the investment world where mistakes are the order of the day. Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards to overcome the inevitable losing trades and focus on the next money-making opportunity.

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 Cape Town (from where I am leaving on my first trip to Dallas, Texas in just more than a week).

Hat tip: The Big Picture

The New York Times: Wall Street, one year later
“The Times’s Andrew Ross Sorkin, Gretchen Morgenson and Joe Nocera recount the events of the weekend that Lehman Brothers failed and discuss the lessons learned from the financial crisis.”

Source: The New York Times, September 11, 2009.

Charlie Rose: Obama’s Wall Street speech
“President Obama’s speech on Wall Street marking one year since the fall of Lehman Brothers and the global economic recovery plan with Jake Tapper of ABC News, author Jim Stewart and Andrew Ross Sorkin of The New York Times.

Source: Charlie Rose, September 14, 2009.

Financial Times: Bernanke says US recession probably over
“The US recession ‘is very likely over’, Ben Bernanke, Federal Reserve chairman, said on Tuesday as Barack Obama, US President, heralded the end of the economic ‘freefall’.

“Their comments came after data showed retail sales rose 2.7% last month, their fastest rate in more than three years. The expected boost from the popular ‘cash for clunkers’ car rebate programme was accompanied by a surprise pick-up in other spending.

“This raised hopes that US consumers might be re-emerging from the rubble of the housing market collapse, the rollercoaster ride in equities markets and rising unemployment.

“‘This is a consumer that is in a lasting full recovery mode,’ said Chris Rupkey of the Bank of Tokyo/Mitsubishi UFJ. ‘The Fed is going to need to stop talking about its exit strategy and start implementing it if today’s data keeps up.’

“Others were more cautious, pointing out that August was the back-to-school month. ‘I’d like to see if this is just a one-month bounce or an actual trend,’ said Adam York, at Wells Fargo.

“Many economists believe that consumer spending will be constrained for months by households’ limited access to credit and their desire to reduce their debts.

“Mr Bernanke, who did not comment directly on the sales report, remained cautious about the shape of the recovery.

“He said he expected a ‘moderate’ recovery in 2010 with growth ‘not much faster than the underlying potential growth rate of the economy’ - which means around 3%.”

Source: Krishna Guha, Anna Fifield, Sarah O’Connor and Alan Rappeport, Financial Times, September 15, 2009.

The Wall Street Journal: The recession is over … sort of
“Barrons.com’s Bob O’Brien comments on Ben Bernanke’s speech earlier this week in which he believes the recession is over, but not without qualifications.”

Source: The Wall Street Journal, September 16, 2009.

The Wall Street Journal: Economic confidence rebounds
“Economists and consumers are feeling better about the economy a year after the most frightening moments of the financial crisis. Forecasters surveyed by The Wall Street Journal, giving the government generally good marks for its handling of the financial crisis, now see employers slowly adding jobs over the next 12 months.

“And the latest reading of consumer spirits shows signs of optimism. But most economists still expect the unemployment rate will climb to 10.2%, from today’s 9.7%, before falling early next year.

“‘We are in a technical recovery, but risks remain abundant,’ said Diane Swonk of Mesirow Financial. ‘It will still take some luck and skill to get Main Street to feel some of the relief Wall Street has felt.’

“Main Street is beginning to feel some relief, though, according to the Reuters/University of Michigan preliminary reading of consumer sentiment for September, released Friday.

“The index rose to 70.2 in September from to 65.7 in August, the first increase since June. Consumers felt better about current conditions, and about the future.

“The 51 forecasters surveyed over the past week, not all of whom answered every question, are increasingly confident that the US economy is growing again.

“They predicted in the new Wall Street Journal survey that the US will grow at a 3% annual rate in the current quarter - well above the 0.6% forecast they made just three months ago - and will expand at a 2.5% pace in the fourth quarter.

“While they predict the US will add jobs over the next 12 months, they see a net increase of only 200,000 jobs over that period, and predict unemployment to be a still-high 9.3% in December 2010.

“Job-market weakness is expected to keep the Fed from boosting interest rates, now near zero, until August 2010, the economists say.

“The Organization for Economic Cooperation and Development’s forecasting gauge bolsters the optimists’ case. Its index of leading indicators, which covers 29 of its member countries, rose to 97.8 in July, from 96.3 in June.

“The Paris research organization said Friday the indicators ‘point to broad economic recovery’. It said ‘clear signals of recovery are now visible in all major seven economies, in particular in France and Italy, as well as in China, India and Russia’.

“As they look back on a year of extraordinary government actions aimed at avoiding an even worse recession, economists in The Wall Street Journal survey give good grades to the response of the Bush and Obama administrations and the Federal Reserve - a median score of 80 out of 100.”

Source: Phil Izzo, Sara Murray and Justin Lahart, The Wall Street Journal, September 14, 2009.

MoneyNews: Buffett - economy has not turned up
“The US economy has not begun to climb out of the worst recession since the Great Depression, but the ‘terror’ that followed last year’s near-collapse of the financial system is gone, due in part to government intervention, Warren Buffett told Reuters on Tuesday.

“Buffett maintained a positive outlook on the government’s much criticized Troubled Asset Relief Program (TARP) for banks, saying it may ultimately turn a profit for the government.

“‘At the moment we don’t see (the economy) getting better or worse, but that’s better than you could say six months ago,’ said the billionaire known as The Sage of Omaha for his long history of successful investments. ‘The terror of last year is gone and that’s thanks in part to the government.’

“US President Barack Obama said on Tuesday that measures undertaken by his administration to rescue the economy - including a $787 billion stimulus package - were working, but warned a complete recovery would take ’some time’.

“Federal Reserve Chairman Ben Bernanke also gave a fairly upbeat view, saying the longest and deepest recession since the 1930s was likely over, but added it would ‘feel like a very weak economy for some time’.”

Source: MoneyNews, September 16, 2009.

Financial Times: Economist warns of double-dip recession
“The world has not tackled the problems at the heart of the economic downturn and is likely to slip back into recession, according to one of the few mainstream economists who predicted the financial crisis.

“Speaking at the Sibos conference in Hong Kong on Monday, William White, the highly-respected former chief economist at the Bank for International Settlements, also warned that government actions to help the economy in the short run may be sowing the seeds for future crises.

“‘Are we going into a W[-shaped recession]? Almost certainly. Are we going into an L? I would not be in the slightest bit surprised,’ he said, referring to the risks of a so-called double-dip recession or a protracted stagnation like Japan suffered in the 1990s.

“‘The only thing that would really surprise me is a rapid and sustainable recovery from the position we’re in.’

“The comments from Mr White, who ran the economic department at the central banks’ bank from 1995 to 2008, carry weight because he was one of the few senior figures to predict the financial crisis in the years before it struck.

“Mr White repeatedly warned of dangerous imbalances in the global financial system as far back as 2003 and - breaking a great taboo in central banking circles at the time - he dared to challenge Alan Greenspan, then chairman of the Federal Reserve, over his policy of persistent cheap money.

“On Monday Mr White questioned how sustainable the signs of life in the global economy would prove to be once governments and central banks started to withdraw their unprecedented stimulus measures. ‘The green shoots are certainly out there - the question is what kind of fertiliser is being used on them,’ he said.

“Worldwide, central banks have pumped thousands of billions of dollars of new money into the financial system over the past two years in an effort to prevent a depression. Meanwhile, governments have gone to similar extremes, taking on vast sums of debt to prop up industries from banking to car making.

“These measures may already be inflating a bubble in asset prices, from equities to commodities, he said, and there was a small risk that inflation would get out of control over the medium term if central banks miss-time their ‘exit strategies’.”

Source: Robert Cookson and Sundeep Tucker, Financial Times, September 14, 2009.

Financial Times: Lending in Europe continues to shrink
“The credit crunch in Europe worsened over the summer as corporate bond finance issuance failed to plug the gap left by a sharp contraction of bank lending.

“Net lending by banks went further into negative territory in July as companies paid back more loans than they took out new ones.

“Loans outstanding contracted by a net €25 billion ($36 billion) in the month, the fifth successive month of an increasing shrinkage of supply.

“At the same time, there was a retreat in the recent record corporate bond issuance.

“Bond issuance in July declined for the first time since March, by €20 billion month on month to €27 billion, although bankers are convinced that it was only seasonal.

“Bankers said the July trends had continued into August and would affect smaller companies most severely.

“Morgan Stanley, which compiled the credit crunch numbers from central bank data and Dealogic, said the scant availability of bank lending would penalise smaller companies that have no access to bond markets.

“‘As Europe’s commercial banks de-lever, lending is likely to be squeezed,’ said Huw van Steenis, banks analyst.

“According to Morgan Stanley, there was €319 billion of corporate bond issuance in the first seven months of the year and a decline of €33 billion in European bank-originated loans.

“That marked a reversal of the balance of corporate funding from the same time last year, when bank loans totalled €356 billion compared with corporate bond issuance of only €119 billion.

“Banks across Europe have insisted in recent months any decline in lending is due to a fall-off in demand, not supply.”

Source: Patrick Jenkins, Financial Times, September 13, 2009.

Financial Times: OECD warns 25 million jobs at risk from crisis
“Up to 25 million people in high-income countries will have lost their jobs by the end of next year as the recession pushes the unemployment rate towards a record 10%, the Organisation for Economic Co-operation and Development forecast on Wednesday.

“The Paris-based OECD said that, while recent signs of economic recovery might mean unemployment peaked earlier and at a slightly lower level than its forecast, governments must intervene ‘quickly and decisively’ to prevent the sharp rise turning into long-term joblessness.

“Its annual employment outlook underlines fears that a recovery without jobs might be in prospect, even if the return to economic growth seen in some countries in the third quarter is sustained.

“‘Most OECD countries are already facing a jobs crisis. This is likely to get worse before it gets better,’ said Stefano Scarpetta, the report’s lead author and head of the organisation’s employment division.

“The OECD said 15 million jobs were lost between the end of 2007 and July this year and 10 million more could go by the end of next year in the 30-nation area if the recovery failed to gain momentum. A total increase of that magnitude would be equivalent to the population of a country larger than Australia.

“In 2007 the unemployment rate in the OECD hit a 25-year low of 5.6%, but it rose to a postwar high of 8.5% this July.”

Source: Brian Groom, Financial Times, September 16, 2009.

Financial Times: China turns to WTO in trade dispute
“Barack Obama’s decision last week to impose emergency tariffs on Chinese tyres has fuelled an increasingly familiar Sino-US war of words over trade.

“Beijing launched an investigation on Monday into whether US poultry and car parts were being unfairly dumped in the Chinese market. It also requested formal consultations at the World Trade Organisation into the US tariffs - the first step in trying to have them declared illegal.

“Whether it will succeed is unclear. The particular ’safeguard’ measure that the US president invoked was, after all, written specifically to allow the US to block Chinese imports as part of the price for China joining the WTO in 2001.

“However, trade experts and lawyers say the episode does show the increasingly sophisticated legal strategies used by Beijing in its many disputes with trading partners, and the way it maximises political effect while trying to limit the actual economic damage.

“Opinion is divided as to whether this dispute - while breaking ground by using a particular trade law for the first time - is likely by itself to set off a protectionist spiral.

“Gao Yongfu, an expert in trade law at Shanghai Institute of Foreign Trade, said: “I think it unlikely that this dispute will be limited to just one industry - it’s likely to spread to others.”

“Prof Gao said other trading partners, including the European Union, were likely to follow suit, broadening if not deepening the restrictions on trade.

“Yet other trade lawyers and economists noted that China had threatened to retaliate in a way that had high political salience but modest economic impact.

“Beijing has built a reputation for rapid but controlled retaliation during trade disputes. One Washington trade lawyer said: ‘China always responds, so I don’t think this escalates. It just repeats each time the US does something.’”

Source: Alan Beattie and Geoff Dyer, Financial Times, September 14, 2009.

Chart of the day (Clustrstock): Consumer credit collapse
“Hoping for a consumer-led recovery? Don’t hold your breath. The latest data from the Federal Reserve shows that the year-over-year decline in total consumer credit is collapsing at an accelerating rate. God forbid consumers go back to living within their means.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Business Insider, September 9, 2009.

MoneyNews: Geithner - tax hikes not likely
“Treasury Secretary Timothy Geithner acknowledged Tuesday the federal government had to take some ‘deeply offensive’ steps to help the country get past the financial crisis a year ago.

“But he also said in a nationally broadcast interview that things are ‘dramatically different’ now, although it’s too early to say the economy is in recovery.

“‘A year ago we really were on the verge of a full-sale run’ on banks, along the lines of the 1930s Depression, Geithner said in an interview broadcast on ABC’s ‘Good Morning America’. He said ‘the biggest fear now, the biggest challenge, is to make sure we change the rules of the game so it doesn’t happen again’.

“Asked about projections of a $1.6 trillion deficit and a growing US debt obligation to other countries, Geithner said the Obama administration still wants to avoid an increase in income taxes on the middle class. The secretary noted Barack Obama’s pledge against such a hike during his presidential campaign and said Obama remains ‘very committed’ to it.

“He also said it was too early to say just when the government might let allow expiration of an emergency lending program for financial institutions (TARP) and said he also didn’t know how soon Washington could extricate itself from direct involvement in the auto industry, although he said it likely won’t be within a year.

“Geithner said the administration cannot suggest any guarantee of financial stability, but said ‘what we have an obligation to do is to put that in place here and around the world. … That’s our obligation.’

“He acknowledged that to a large degree, Washington’s intervention in the private markets hasn’t gone over well with large elements of the public and said ‘the government had to do some deeply offensive things to undo the damage. … But we’re going to get out of this as soon as possible.’

“On the budget deficits, Geithner said, ‘I think Americans understand we have an unsustainable fiscal position. We have to bring these deficits down over time.’ He said the country must ‘get our fiscal house in order’ and stressed that Obama is vehemently opposed to a general income tax increase for people who make under $250,000 a year.

“The secretary said that while things are better than they were a year ago, ‘I would say there’s no recovery yet. We define recovery … as people back to work, people able to get a job again, businesses investing again … and we’re not at that point.’

“‘We’re going to do what it takes to get this economy going again,’ he said. ‘We’re going to look carefully at any sensible program.’”

Source: MoneyNews, September 15, 2009.

BCA Research: US retail sales - too soon to open the champagne
“A slew of positive economic surprises have propelled stocks to new rally highs. However, the equity rally has entered a more risky phase, with breadth likely to narrow going forward.

“The improvement in household sentiment in recent months and the recent release of the retail sales report offer some hope for a recovery in final demand, but it is still far too soon to determine that a sustainable consumer revival is beginning. Importantly, the uptick in consumer spending outside of autos and gas stations occurred in the context of heavy discounting. This signals that consumer thrift remains well entrenched and that retailers are being forced to slash prices in order to boost sales, to the detriment of margins.

“We remain cautiously optimistic on the equity market, but worry that breadth will narrow as profit expectations for domestically-geared sectors could be disappointed. Investors should stay concentrated in globally-focused companies.”

Source: BCA Research, September 16, 2009.

Asha Bangalore (Northern Trust): Housing starts - multi-family units led the charge in August
“Starts of new homes increased 1.5% to an annual rate of 598,000 in August, with a 25% increase in starts of multi-family units accounting for all the gain. The level of housing starts is the highest since November 2008.

“On a year-to-year basis, starts of new homes have dropped nearly 28%, which is a noticeable deceleration in the pace of activity from the 55% record decline seen in January 2009.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 17 2009.

MoneyNews: Gross - housing recovery no cure
“Housing will not rebound to its former exuberance once the economy rebounds, says Bill Gross, manager of bond giant Pimco.

“Gross said investors will not trust their homes to give them good returns as they did in the past, and that housing will not lead the economy forward.

“‘Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest,’ Gross writes in his September outlook.

“Investors were buoyed by new home sales increasing by 9.6% in July, according to the Commerce Department. Yet the number of Americans owning homes could fall to 65% from a peak of 69%, reported Fortune magazine.

“Americans should not expect a robust bull market, Gross said. The new economy will pay off its debt, increase its savings, and see more ‘delevering, deglobalization, and regulation,’ he said.”

Source: Ellen Chang, MoneyNews, September 17, 2009.

MoneyNews: Millions more foreclosures loom
“As many as six million Americans remain at risk of foreclosure over the next three years, according to a recent press release about the government’s Home Affordable Refinancing Program (HAMP).

“‘We recognize that any modification program seeking to avoid preventable foreclosures has limits, HAMP included,’ wrote Assistant Secretary for Financial Institutions Michael S. Barr.

“‘Even before the current crisis, when home prices were climbing, there were still many hundreds of thousands of foreclosures. Therefore, even if HAMP is a total success, we should still expect millions of foreclosures.’

“Some of these foreclosures, Barr observes, will result from investor borrowers who did not qualify for the program, or because borrowers did not respond to government outreach.

“‘Still others will be the product of borrowers who bought homes well beyond what they could afford and so would be unable to make the monthly payment even on a modified loan,’ Barr says.

“The Home Affordable Refinancing Program was intended to help homeowners whose existing mortgages were up to 105% of their current house value, but has since been expanded to help those with mortgages up to 125% of current value.

“‘Overall, the GSEs (government sponsored enterprises Fannie Mae, Freddie Mac, and Ginnie Mae) have refinanced more than 2.7 million loans since the announcement of the Administration’s comprehensive housing plan,’ Barr notes.”

Source: Julie Crawshaw, MoneyNews, September 15, 2009.

Asha Bangalore (Northern Trust): Current account narrows in Q2
“The current-account deficit of the US economy narrowed to $98.8 billion in the second quarter from $104.5 billion in the first quarter. As a percent of nominal GDP, the current account deficit was 2.8% in the second quarter, down from a 2.9% mark in the first quarter of 2009 and record high of 6.5% in the fourth quarter of 2005. The trade deficit widened in July (-$31.9 billion vs. -$27.5 billion in June) which raises the probability of a wider current account deficit in the third quarter.

“In the second quarter, the surplus on income declined, marking the fifth quarterly drop in the last six quarters. Foreign-owned assets in the US rose $16.4 billion in the second quarter after recording declines in the fourth quarter of 2008 (-$11.9 billion) and the first quarter (-$67.8 billion).”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 16, 2009.

Asha Bangalore (Northern Trust): Cars and many other components account for the strength in factory activity
“Industrial production increased 0.8% in August after an upwardly revised 1.0% gain in July (previously estimated as a 0.5% increase). The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) uses four variables - industrial production, nonfarm payroll employment, real personal income less transfer payments, and real manufacturing and trade sales - to determine turning points of a business cycle. The important aspect to note is that the trough of industrial production was in June 2009. Therefore, it is quietly likely that the NBER will date the end of the Great Recession as June 2009/July 2009 once additional information is available.

“Factory production increased 0.6% in August, after an upwardly revised 1.4% increase in July (previously estimated as a 1.0% gain). Production of autos rose 5.5% in August, following a 20.1% jump in the prior month. Primary metals; machinery; and electrical equipment, appliances, and components all posted gains between 0.5% and 1% during August. The operating rate of the factory sector rose to 66.6% in August, after establishing a record low of 65.1% in June 2009.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 16, 2009.

Asha Bangalore (Northern Trust): Energy Price Index lifts Consumer Price Index in August
“The Consumer Price Index (CPI) moved up 0.4% in August after holding steady in July. The 9.1% increase in gasoline prices accounted for the sharp increase in the headline number. Excluding energy, the CPI increased only 0.1% in August compared with no change in July. Food prices rose 0.1% in August following a 0.3% decline in the prior month. The Energy Price Index recorded a 4.6% gain in August vs. a 0.4% decline in July. The decline in energy prices in the early weeks of September suggests a drop of the Energy Price Index for the month. On a year-to-year basis, the CPI declined 1.5% in August vs. a 2.1% in the twelve months ended July.

“The core CPI, which excludes food and energy, rose 0.1% in August, putting the year-to-year gain at 1.4%. The deceleration of the core CPI and declining trend of the overall CPI is indicative of inflation being a non-issue for several months.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 16, 2009.

Asha Bangalore (Northern Trust): Wholesale Price Index movement largely an energy price story
“The Producer Price Index (PPI) of Finished Goods moved up 1.7% in August following a 0.9% drop in the prior month. The wide swings of this index are largely due to similar noticeable movements of the Energy Price Index. According to the Labor Department, over 90% of the increase in the wholesale finished goods price index during August was the result of higher energy prices, which rose 8.0%. The 23% jump in gasoline price was the biggest culprit. This is most likely to be reversed in September, given the drop in gasoline prices during the first two weeks of the month.

“The food price index was up 0.4% after recording a 1.5% drop in July. A large part of the increase in food prices was due to the 5.9% jump in prices of fresh fruits and melons. Excluding food and energy, the core PPI rose 0.2% in August compared with a 0.1% drop in July. The 0.8% increase of the light motor vehicle index in August accounted for over fifty percent of the gain in the core PPI. The 0.7% increase of the Passenger Car Price Index also played a role in lifting the core PPI.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 15, 2009.

The New York Times: Fed considers sweeping rules to regulate pay at banks
“The Federal Reserve and the Treasury are preparing broad new rules that would force banks to rein in practices that made multimillionaires out of many financial executives during the housing bubble, officials said.

“The rules depart from the hands-off approach that dominated bank regulation for the last three decades, but are not as strict as proposals from some European leaders and suggestions from some members of Congress angered by the financial troubles of the last year.

“Fed officials would give banks wide leeway in how they structure their rewards. They would not prohibit million-dollar pay packages or address issues of fairness. Rather, the rules are intended to restrict pay plans that encourage reckless behavior by rewarding only short-term gains.

“And because the rules would be applied through the confidential bank examination process, it would be hard for consumers and investors to judge how strictly the rules were being applied.

“The effort is also meant to be a credible alternative to the call by some European leaders for specific limits on bonuses to financial executives, an idea opposed by the Obama administration. Officials from Europe and the

“Treasury are negotiating over compensation and other financial industry regulations in advance of a summit meeting next week in Pittsburgh of leaders from the Group of 20 industrialized and large emerging countries.

“The Obama administration opposes strict caps on pay, arguing that the size of the bonuses are not as important as the risk to the financial health of the bank that bonuses linked to performance can create.

“The simple proposition should be that you don’t want people being paid for taking too much risk, and you want to make sure that their compensation is tied to long-term performance,” said Timothy Geithner, the Treasury secretary, in an interview by telephone.”

Source: Edmund Andrews and Louise Story, The New York Times, September 19, 2009.

Financial Times: SEC tightens grip on ratings agencies
“The US Securities and Exchange Commission passed rules on Thursday to tighten supervision of credit ratings agencies following a torrent of criticism over their role in the financial crisis.

“Credit ratings agencies, which are usually paid by the issuers they rate, came under fire during the crisis because they gave top ratings to hundreds of billions of dollars of bonds backed by risky mortgages and other loans that are now in many cases worthless.

“The SEC said on Thursday that ratings agencies must reveal more information on past ratings so that investors could compare relative performance. Banks will have to share the underlying data used to determine ratings, so that competing agencies can offer unsolicited ratings for structured finance products.

“The SEC said it would remove references to ratings in some of its rules as part of efforts to reduce overall reliance on ratings by investors.

“It also decided to get public feedback on whether ratings agencies should be subject to potential legal liability under securities law and what the possible consequences might be.

“Indeed, most lawsuits against ratings agencies have failed because their ratings are an ‘opinion’ and therefore subject to free-speech protection. The issue has become a key factor in the debate on the future of the industry.

“Fresh proposals were also put forward governing disclosure, including whether any “preliminary ratings” were obtained from other ratings agencies - in other words, whether there was ‘ratings shopping’.”

Source: Joanna Chung and Aline van Duyn, Financial Times, September 17, 2009.

The Wall Street Journal: Fed likely to keep buying mortgage instruments
“The Federal Reserve, which convenes its policy meeting next week, is likely to stay the course to buy $1.45 trillion in mortgage-linked securities despite potential resistance from a few regional Fed presidents.

“Central-bank officials plan to discuss winding down those purchases over the coming months to limit disruption to the market when the buying comes to an end.

“Some regional Fed policy makers have suggested the Fed might halt the program before it finishes its purchases of $1.25 trillion in mortgage-backed securities and $200 billion in Fannie Mae and Freddie Mac debt announced in the past year. But they are a small minority across the Fed system.

“Top Fed officials believe such a move would tighten overall monetary policy at a time when they still worry about the durability of the economic recovery. The Fed has completed about two-thirds of its purchases, almost $1 trillion worth, and is likely to complete the rest unless prospects for the economy improve radically in the coming months.

“At the Federal Open Market Committee’s September 22-23 meeting, the central bank’s policy makers - including the 12 regional Fed presidents - will assess the early signs of improvement now taking shape across the economy. Officials are encouraged by the rebound in financial-market conditions and initial indications that the housing market is pulling out of its deep dive.

“But they are hesitant to bank on a strong recovery. The sizable growth expected in the third quarter is due in part to short-term effects such as companies replenishing inventories and the government’s ‘cash for clunkers’ auto-rebate program. Higher saving by households is casting doubt on consumer spending. And even the moderate growth that Fed officials expect next year wouldn’t be enough to bring down the unemployment rate substantially.

“‘The economy seems to be brushing itself off and beginning its climb out of the deep hole it’s been in,’ San Francisco Fed President Janet Yellen said in a speech Monday. ‘But I regret to say that I expect the recovery to be tepid. What’s more, the gradual expansion gathering steam will remain vulnerable to shocks.’”

Source: Sudeep Reddy, The Wall Street Journal, September 16, 2009.

Bloomberg: Pimco’s Gross boosts government debt to 5-year high
“Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., increased holdings of government-related debt last month to the most in five years and cut mortgage securities.

“Gross boosted the $177.5 billion Total Return Fund’s investment in Treasuries, so-called agency debt and other bonds linked to the government to 44% of assets, the most since August 2004, from 25% in July, according to Pimco’s website. The fund cut mortgage debt to 38%, the lowest level since February 2007, from 47%.

“‘We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly,’ Gross wrote at the start of the month in his September investment outlook for the Newport Beach, California, company.

“The Total Return Fund handed investors a 12.2% gain in the past year, beating 92% of its peers, according to data compiled by Bloomberg. The one-month return is 1.8%, outpacing 69% of its competitors.”

Source: Wes Goodman and Susanne Walker, Bloomberg, September 16, 2009.

Bespoke: High-yield spreads fall below pre-Lehman levels
“For the first time since the recovery off the March lows, high yield credit spreads fell below their ‘pre-Lehman’ levels. Based on data from Merrill Lynch indices, high yield bonds are currently yielding 835 basis points more than comparable Treasuries. This compares to a level of 854 bps on 9/12/08, which was the Friday before Lehman’s bankruptcy.

“While credit market benchmarks have mostly recovered to ‘pre-Lehman’ levels, equities still have a ways to go. Even after the historically strong rally off the March lows, all three major indices and all ten major S&P 500 sectors remain below their ‘pre-Lehman’ levels. While the S&P 500 has gained nearly 60% from its lows, the index would still have to rally an additional 17.4% to reach its level from the Friday before Lehman’s bankruptcy.”

Source: Bespoke, September 16, 2009.

CNN Money: Insiders sell like there’s no tomorrow
“Can hundreds of stock-selling insiders be wrong?

“The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as US job losses have slowed and credit markets have stabilized.

“But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.

“While a wave of insider selling doesn’t necessarily foretell a stock market downturn, it suggests that those with the first read on business trends don’t believe current stock prices are justified by economic fundamentals.

“‘It’s not a very complicated story,’ said Charles Biderman, who runs market research firm Trim Tabs. ‘Insiders know better than you and me. If prices are too high, they sell.’

“Biderman, who says there were $31 worth of insider stock sales in August for every $1 of insider buys, isn’t the only one who has taken note. Ben Silverman, director of research at the InsiderScore.com web site that tracks trading action, said insiders are selling at their most aggressive clip since the summer of 2007.

“Silverman said the ‘orgy of selling’ is noteworthy because corporate insiders were aggressive buyers of the market’s spring dip. The S&P 500 dropped as low as 666 in early March before the recent rally took it back above 1,000.

“‘That was a great call,’ Silverman said. ‘They were buying when prices were low, so it makes sense to look at what they’re doing now that prices are higher.’”

Source: Colin Barr, CNN Money, September 12, 2009.

Bespoke: S&P 500 new highs expanding … from a low base
“Back in late February and early March, we made several references that even though the S&P 500 was trading down to new lows, the number of stocks making new lows wasn’t expanding, which is very positive for the market. As shown in the chart below, at the October low, 84% of the stocks in the S&P 500 made a new low. Then in November, 63% of stocks hit new lows. At the March low, however, only 36% of the stocks in the S&P 500 made new lows.

“Just as the smaller number of stocks making new lows shrunk towards the end of the bear market, as the market rises, investors should be looking for an expansion in the number of stocks making new highs. As shown in the above chart, new highs are expanding, albeit from a low base. In today’s trading, 23 stocks (highlighted below) in the S&P 500 hit a new 52-week high. This is the best daily reading since May 2008. Going forward, if the market continues to rally, investors should watch the new high list for confirmation of the rally. If the new high list fails to keep expanding, it could be an early sign that a correction is in the cards.”

Source: Bespoke, September 15, 2009.

Bespoke: Short interest at lowest level since February 2007
“It just keeps getting lonelier on the short side. As of the end of August, the average short interest as a percentage of float for stocks in the S&P 1500 stood at 6.6%, representing the lowest level since February 2007. Over the last six months, the balance of power has shifted from the sellers to buyers. With the short side now being the loneliest trade, will the roles reverse again over the next six months?”

Source: Bespoke, September 14, 2009.

Bespoke: Financials, Industrials and Materials at most overbought levels in at least a year
“While September was supposed to be a month where the market would at least take a breather, halfway through the month, stocks have done anything but rest. This month, the S&P 500 and most sectors have consistently been trading to new highs for the year on a seemingly daily basis. As a result, the 10-day A/D line for the S&P 500 (not pictured) is near its most overbought levels of the last year. Additionally, Financials, Industrials and Materials are currently at their most overbought levels in at least a year. While these levels do not necessarily mean a decline is imminent, they do indicate that some consolidation is to be expected.”

Source: Bespoke, September 17, 2009.

Doug Kass (TheStreet.com): Bearish arguments are roaring
“I would argue that the bulls are ignoring the emergence of a number of secular headwinds. Here are 10 of them:

1. Deep cost cuts have been mainstay of corporations over the last few years. Cost cuts are a corporate lifeline (like fiscal stimulus), but both have a defined and limited life. Ultimately, top-line growth is needed.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the labor force. The consumer remains the most significant contributor to domestic growth. Unemployment should remain high, exacerbated by many retiring later in life because their nest eggs have been reduced.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worth (and confidence) has been damaged and will need to be repaired through time and by higher savings and lower consumption. (The consumer is hurting. Last week I met with a midsized bank’s lending team. The bank is seeing a big mix change toward rising use of their debit cards (where money is in the bank) at the expense of credit cards (where money is then owed).)

4. The credit aftershock will continue to haunt the economy. The unregulated shadow banking industry is dead, as is the securitization market. All signs indicate that banks will likely remain reluctant to lend to individuals and small businesses. Just try to get a jumbo mortgage today.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be probably remain muted. More important, there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn. It might not be as deep as many expect, but it won’t provide much of a contribution to growth.

8. While the public-works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye - most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability during times of economic weakness - no more. They are broadly in disrepair. State sales taxes are being raised all over the country, and so are sin taxes (to shore up municipal finances) on cigarettes, booze and maybe even sugar products.

10. The most important nontraditional headwind is the inevitability of higher marginal tax rates. How will higher individual tax rates affect an already deflated consumer? How will corporations react to higher tax rates? Will rising taxes be P/E multiple benders?

“The liquidity that grew out of the massive government stimulation and the growth in the monetary base is reaching the equity market and our economy. It has been greeted by cheers and almost unnoticeable, brief and shallow pullbacks in stocks, producing a degree of price momentum that is almost reminiscent of the ‘good old days’ in 1999/early 2000. Market participants appear now to have embraced the notion that we are in an economic ’sweet spot’ and that a below-average but self-sustaining domestic recovery is being endorsed.

“With the perspective of the large market rise and dramatic change in sentiment (from dire to positive), there is now little room for disappointment.”

Source: Doug Kass, TheStreet.com, September 14, 2009.

Bill King (The King Report): Be careful about liquidity rally
“The liquidity rally concept is the rationalization that is inducing investors and traders to buy stocks. Nothing else matters right now.”

Source: Bill King, The King Report, September 14, 2009.

Chart of the day (Clusterstock): Fear disappears from the market

“More evidence that investors have gotten very complacent in this market. Not only does the market continue to rally, but the VIX, sometimes called the fear index, is at the lows of the year. There was a brief spike before September, but since then it’s collapsed.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Business Insider, September 15, 2009.

Andrew Garthwaite (Credit Suisse): Too early to sell
“September may historically be the worst month for equity returns, but it is still too early to go underweight on stocks, says Andrew Garthwaite, global equity strategist at Credit Suisse.

“‘This is the best phase of the economic cycle,’ he says. ‘GDP growth continues to be revised up, yet inflation remains muted. We have introduced a mid-2010 target for the S&P 500 of 1,150.’

“Mr Garthwaite points to earnings upgrades and undemanding valuations and also notes that many economic and market variables are back to pre-Lehman levels.

“Furthermore, there is still plenty of quantitative easing to come, with part of the additional liquidity likely to end up in stocks.

“‘We do not exclude a period of near-term equity consolidation, given that some of our tactical indicators are sending a signal of caution.

“‘But other indicators suggest it is too early to sell. Risk appetite peaks six weeks after it hits euphoria, equity sentiment is in line with its average and insider buying is low but this was the same in 2004. The time to go ‘underweight’ strategically will be when we get the second leg down of a W-shaped recovery.

“‘We see three possible triggers for this: first, a rise in US interest rates, which is not likely to come until the second half of 2010; second, a funding crisis - unlikely until bank loan growth rises strongly; or third, clear signs of China overheating.’”

Source: Andrew Garthwaite, Credit Suisse (via Financial Times), September 8, 2009.

CNBC: Biggs - putting your portfolio to work
“How to invest now, with Barton Biggs, Traxis Partners and CNBC’s Maria Bartiromo.”

Source: CNBC, September 15, 2009.

Bloomberg: Dollar diminishing makes US favorite for high-yield
“Betting against the dollar is becoming the trade investors can’t afford to ignore.

“The US Dollar Index fell last week to the lowest level in a year as price swings in foreign exchange declined, encouraging investors to borrow greenbacks at record low interest rates and buy assets in countries offering yields as much as 8.1 percentage points higher than US deposit rates. Borrowing costs in dollars as measured by London interbank offered rates fell below those of yen and Swiss francs for an extended period for the first time since 1994 during the past three weeks.

“Those carry trades are the most profitable since before 2000, according to data compiled by Bloomberg. Borrowing dollars and then selling them is adding pressure on a currency that’s already weakened 14% since March as the budget deficit exceeded $1 trillion, the government sells a record amount of debt and the Federal Reserve floods the financial system with $1.75 trillion to pull the economy out of a recession.

“‘The dollar is the big funding currency,’ said Jonathan Clark, vice chairman of New York-based FX Concepts Inc., the world’s largest currency hedge fund, with $9 billion in assets under management. ‘The reason why people are borrowing the US dollar for carry trade is A: It’s very cheap to fund, and B: The expectation is it’s going to go down.’”

Source: Oliver Biggadike and Ron Harui, Bloomberg, September 14, 2009.

CNBC: Jim Rogers - “I expect a currency crisis or semi-crisis”
“Jim Rogers, CEO of Rogers Holdings, told CNBC Monday that when Lehman Brothers failed he thought ‘thank goodness they’re finally letting somebody collapse’. He said that ‘when somebody fails, you let them fail’, and that former US Treasury Secretary Hank Paulson ’should have let ten people go bankrupt’.”

Click here for the article.

Source: CNBC, September 14, 2009.

Ian Stannard (BNP Paribas): Swiss National bank intervention
“The Swiss National Bank’s meeting on Thursday could provide the ideal opportunity for a further bout of intervention to weaken the franc, believes Ian Stannard, currency strategist at BNP Paribas.

“‘The SNB is likely to continue to warn about deflation risks, justifying the need to maintain non-conventional measures,’ he says.

“Mr Stannard notes that BNP Paribas’ Swiss franc trade-weighted index (TWI) is back at the highs of the past six months, which form the upper end of the trading range that has been in place since March.

“‘This extreme level of the TWI coincides with the previous assumed rounds of intervention by the SNB in June.

“‘Given that the SNB’s objective has been to prevent a further appreciation of the franc, the strength of the TWI must be a concern.’

“He also suggests that while the focus of attention has been on the level of the euro against the franc - given the importance of the Swiss trading relationship with the eurozone - this could start to change.

“‘Despite the franc TWI being at its highs, the euro is still above the levels at which the SNB introduced its intervention policy.

“‘But the dollar has continued to trend lower against the franc and is now testing the lows from December 2008.

“‘This suggests that the SNB may also include dollar-franc to a greater degree in any further rounds of intervention.’”

Source: Ian Stannard, BNP Paribas (via Financial Times), September 16, 2009.

Bloomberg: Canadian dollar climbs to 11-month high on growth optimism
“Canada’s dollar rose to the strongest level since October versus its US counterpart as speculation the global recession is over encouraged appetite for higher-yielding assets.

“‘Risk is back in the market,’ said Andrew Chaveriat, a technical analyst at BNP Paribas SA in New York. The Canadian dollar is ‘catching up a bit’, he added.

“The gain in Canada’s dollar prompted speculation the nation’s central bank is intervening to weaken it. A Bank of Canada spokeswoman, Stephanie Bento, said any intervention would be announced on the central bank’s website.

“‘We did hear those rumors early this morning,’ said Blake Jespersen, director of foreign exchange in Toronto at BMO Capital Markets, a unit of Canada’s fourth-largest bank. ‘We think it’s 100 percent untrue. I don’t think the bank has the ammunition or the desire to intervene. This is a story about US dollar weakness across the board.’

“The nation’s central bank hasn’t done transactions in foreign-exchange markets to affect the currency’s value since 1998, even with the dollar setting record highs and lows against the greenback over the past decade.”

Source: Chris Fournier, Bloomberg, September 17, 2009.

Richard Russell (Dow Theory Letters): Anti-gold interests facing defeat
“Jason Hamlin, founder of GoldStockBull, has put forward four major developments which he thinks all gold-believers should be aware of:

(1) China (today everything seems to depend on China) is encouraging its citizens to buy (accumulate) gold and repatriate any gold held in London. As recently as 2002, the possession of gold in private hands was prohibited in China - now we’re seeing a dramatic reversal of policy. ‘It’s glorious to buy and hold gold’ is the official stance in China.

(2) Barrick Gold Corp. has decided to begin closing its huge gold hedge book. This will entail Barrick buying millions of ounces of gold which they have shorted. Barrick is preparing for a higher gold price. The word I hear is that Barrick has bought 2 million ounces of gold and is expected to buy another 3 million ounces. This is supposed to cut its hedge book by half.

(3) COMEX Commercial traders [usually gold mining companies] have taken the largest net short position ever against gold and silver. Normally this huge addition to supply would knock the precious metals down. But this has not happened, at least, so far. Evidently, buying in gold and silver has been powerful enough to pressure the commercial shorts. They will have to put out more shorts (a dangerous move) or be forced to cover.

(4) Gold and silver have slipped into backwardation. This occurs when the price of a commodity for immediate (spot) delivery is higher than its price for future delivery. One interpretation is that people who control the supply of the metals can’t be persuaded to part with their supply, and this suggests that there is more demand for immediate physical delivery than there is an immediate supply of metals.

“With the news that China and Russia are scrambling to build up their supply of gold, this could mean that the demand for gold is intense.

“Adding to the above, the central banks have now turned into net buyers of gold rather than sellers.

“All in all, the precious metals situation is now fascinating, and the anti-gold interests (those who create fiat currency, i.e. the central banks and the inflationists) may, at last, be facing an inglorious defeat.”

Source: Richard Russell, Dow Theory Letters, September 17, 2009.

Reuters: Central banks seen becoming net gold buyers-expert
“Central banks are expected to buy 6 million to 10 million ounces of gold annually due to currency uncertainties after being net sellers in past decades, Jeffrey Christian, managing director of CPM Group, told the Denver Gold Forum on Monday.

“In a keynote speech kicking off North America’s biggest gold conference, which runs through Wednesday, Christian gave what he said was a conservative forecast for gold to average $914 an ounce over the next 10 years.

“‘What we are seeing is that central banks are making the transition from large net sellers to large net buyers,’ Christian said.

“‘You will see a net buying of 6 (million) to 10 million ounces per year by central banks, and that is an extremely conservative projection,’ he said.

“Christian said that European central banks appeared to be done with their gold selling, and that central banks in emerging countries which have been building up foreign reserves were now diversifying into gold due to volatility in the dollar and other major currencies.

“Recently, China and other emerging economies have signaled growing interest in gold rather than stockpiling their currency reserves in US dollar-denominated assets.”

Source: Reuters, September 14, 2009.

MoneyNews: Gold expert - sell, sell, sell
“One of London’s leading gold experts has urged his clients to dump their gold and silver holdings.

“John Reade, an analyst at UBS, told investors to erase all their positions until the latest upward price surge ends, Ambrose Evans-Pritchard writes in the London Telegraph.

“Gold has climbed amid the dollar’s drop to a one-year low.

“Reade says futures contracts on New York’s Comex exchange are flashing warning signals. The Comex experienced a surge of 6.4 million ounces in net long contracts last week. Such jumps in the past have on average presaged a 5% drop in gold prices over the next month.

“‘We recommend that nimble investors take profits on any long gold and silver positions, looking to re-enter after a correction,’ Reade says.

“He sees gold slipping to $950 over the next month and then resuming its rally next year.

“The last time Comex long contracts approached last week’s levels was in February 2008, when gold hit its record high and then crashed.”

Source: Dan Weil, MoneyNews, September 15, 2009.

Bespoke: Baltic Dry remains flat as markets continue to rally
“Even as China has recovered significantly from its correction and US markets charge higher, the Baltic Dry Index remains in a downtrend. As shown in the first chart below, the Baltic Dry peaked at the start of June and has headed steadily lower since then. China’s Shanghai Composite peaked about a month later, but it has rallied nicely since the start of September. The Baltic Dry led the fall in China during the summer, so is it now suggesting that China’s recent bounce is a pump fake, or is it just lagging this time around?”

Source: Bespoke, September 17, 2009.

Martin Wolf (Financial Times): Wheel of fortune turns as China outdoes west
“China has emerged as the most significant winner from the global financial and economic crisis. At the end of 2008, many questioned whether China would achieve its growth target of 8% in 2009. Who now dares to do so?

“Cushioned by its more than $2,100 billion (€1,440 billion, £1,260 billion) of foreign currency reserves, huge trade and current account surpluses and a robust fiscal position, Beijing has been able to deploy all its levers over the financial system and the economy.

“Meanwhile, as one senior Chinese participant at the World Economic Forum’s annual meeting of ‘the new champions’, in Dalian, noted, ‘the teachers have made big mistakes’. Indeed, any visitor to Asia will recognise the west’s reputation for financial and economic competence is in tatters, while that of China has soared. The wheel of fortune is turning.

“Three immediate questions arise. How has China responded to the crisis? Is its resurgent growth sustainable? How far will its recovery help the world economy?

“The answer to the first question is: astonishingly. According to data reported at the end of last week, industrial output expanded 12.3% in the 12 months to August, up from a 10.8% increase in July. This is the fastest growth for a year.

“Behind this is growth of bank credit at close to 30%, year-on-year, since March 2009. It is no surprise, then, that fixed-asset investment has also been growing at over 30%, year-on-year, since March and by 33% in the year to August.

“Is this growth surge sustainable? In a word, yes. Inevitably, the torrid growth of bank credit and money is spilling over into asset prices, particularly equities. But there is little danger of excessive inflation in an economy with an appreciating currency, fully embedded in a world economy still threatened more by deflation than by inflation, at least in the near term.

“Finally, however successful China is in promoting domestic demand, it will not be the locomotive for the world economy. True, China’s merchandise trade surplus has indeed been narrowing: it was $35 billion in the second quarter, 40% lower than a year earlier. China’s current account surplus is also shrinking: it may be down to 6% of gross domestic product this year, from 11% in 2007.

“Yet, since it still only generates some 7% of world output, China is too small to act as the world’s locomotive. Even halving its external surplus would add only 0.4% to aggregate demand in the rest of the world.”

Source: Martin Wolf, Financial Times, September 13, 2009.

Financial Times: Brussels fears deficits will exceed forecasts
“European governments are at risk of recording even higher budget deficits this year than was thought likely four months ago, the European Commission warned on Monday.

“Presenting its latest economic forecasts for 2009, the Commission said preliminary information indicated that deficits in the 27-nation European Union could be above the average 6% of gross domestic product estimated in May.

“‘This appears to be mainly caused by stronger than expected revenue shortfalls in a number of countries, as output growth and the size of discretionary stimulus measures are broadly in line with the spring forecast,’ the Commission said.

“The warning served as a reminder that the most savage recession in the EU’s 52-year history will inflict lasting damage on the bloc’s public finances and average long-term economic growth.

“Policymakers at the EU’s headquarters believe the emergency measures taken to save the financial system and fight the recession have destroyed all progress made in the first 10 years of European monetary union towards consolidating the public finances.

“According to the Commission’s May forecasts, public debt in the 16-nation eurozone will soar to 77.7% of GDP this year and 83.8% in 2010. Both figures are far higher than the 60% threshold set under EU treaty law for countries aspiring to adopt the euro.

“Private sector economists calculate the picture will be dramatically worse if governments take no remedial action. According to Laurence Boone, economist at Barclays Capital, eurozone public debt would shoot up to 105% of GDP by 2015 if no action were taken and annual inflation would average 2% between 2011 and 2015. Greece’s debt would be 149%, Ireland’s 144%, Spain’s 135% and that of France 106%.

“Some independent economists say the economic damage will end up being worse in Europe than the US, which most European governments hold responsible for having caused the crisis in the first place.”

Source: Tony Barber, Financial Times, September 14, 2009.

Tags: Ben Bernanke, BRIC, Canada, Cboe Volatility Index, Commodities, Corporate Bonds, Economic Sectors, Economic Transition, Emerging Markets, ETF, Federal Reserve Chairman, Gaining Momentum, Global Stock Markets, Gold, Government Bonds, India, Japanese Yen, Lehman Brothers, Low Interest Rates, oil, precious metals, Risky Assets, Stock Market Indices, Tom Toles, Us Dollar Index, Us Stock Market, Volatility Index Vix, Warren Buffett
Posted in Emerging Markets, Gold, Markets | 1 Comment »

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

Thursday, September 17th, 2009

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

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

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

…

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

…

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

…

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

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

Buffett on Bailouts and the Crisis

Buffett on Heroes and a Second Downturn

Buffett on Lehman and Last Year

Sources: Bloomberg | CNBC

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

Gold: Due for Rally or Selloff?

Thursday, September 17th, 2009

Once again gold, inflation and the greenback are making a great number of headlines, and investors are viewing the sliding dollar as a reason to buy gold. Is it, or is there more to this than investors are seeing? Let’s take a look at some headlines that reveal independently, all the components that investors should bind together for a more informed decision.

There are three components that work dynamically and should be laid on the table for holistic consideration - Currency exchange, inflation concerns, and balance.

First, let’s look at the following reports discussing inflation - in between the real news here is the sliding dollar…gold is rising in relation to the weakening dollar. But the dollar is weakening because investors are ditching their risk-free assets in favour of risky assets such as equities, and … gold. So what you have is a double gain for gold, at least for right now.

Gold Rises to Record Settlement Price on Inflation Concern, Bloomberg, September 16, 2009

Gold rose to a record settlement price on speculation that a global economic recovery will stoke inflation. Silver jumped to a 13-month high as the dollar’s slump boosted demand for metals as alternative investments.

The worst U.S. recession since the 1930s has probably ended, Federal Reserve Chairman Ben S. Bernanke said yesterday. The dollar slid to its lowest level in almost a year against a basket of six major currencies as the economic outlook reduced demand for the greenback as a haven. Gold futures were 1.3 percent below an intraday record $1,033.90 set in March 2008

U.S. Economy: Data Point to Growth Without Inflation, Bloomberg, September 16, 2009

Reports on industrial production and consumer prices today showed the U.S. economy is emerging from the economic slump without spurring inflation.

Output at factories, mines and utilities climbed 0.8 percent last month, exceeding the median estimate of economists surveyed by Bloomberg News, data from the Federal Reserve in Washington showed. The Labor Department said the cost of living climbed 0.4 percent, and was down 1.5 percent from August 2008.

The sliding dollar, which comes as a result of bullishness in the market, as well as investors seeking higher yielding investments, is raising the specter of intervention, particularly in the dollar/yen and dollar/euro, which could possibly hamper a further rise in gold - For the time being then it appears that intervention may not yet be on the table unless some unforeseen event arises:

Robinson Says Dollar-Yen May Fall to ‘Just Above 87′, , Bloomberg, September 17, 2009

Andrew Robinson, analyst at Saxo Bank says the dollar could weaken further to 87 vs. the yen - he believes that the Japanese, who currently favour the stronger yen, would intervene verbally at 87 and with policy at 85.

Dollar Falls to 2009 Low Versus Euro; Yen Strengthens Toward 90, , Bloomberg, September 16, 2009

The Dollar Index dropped to a 12-month low as the MSCI World Index of stocks advanced for a third day, boosting appetite for higher-yielding alternatives to the U.S. currency. Demand for riskier assets also increased as Japan’s central bank raised its assessment of the nation’s economy. The Swiss franc declined against the euro before the Swiss National Bank’s decision on interest rates.

“People are getting more optimistic and this is driving the dollar,” lower, said Ulrich Leuchtmann, head of currency research at Commerzbank AG in Frankfurt. “With more risk appetite and improved liquidity in the market, people are again looking at interest-rate differentials.”

So the real concern should be on whether we have inflation or fears of inflation. For the time being, as long as the dollar continues to weaken on optimism, gold could continue to strengthen, but these things never occur in a linear fashion. Secondly, if currency balance becomes untenable for any of the three large currencies (Dollar, Yen, Euro) there will likely be an intervention to strengthen the dollar, or weaken the others. Currency exchange related policy is a phantom area of economics subject at times to the whims of central bankers and the IMF.

It seems unusual for gold to be rising along with the equity markets because it defies the commonly held idea that gold is a bellwether of uncertainty, as it comes at a time when optimism seems to be reigning in the market.

From our perspective, this may be a good time to consider rebalancing, to take some of this rally’s money off the table in the equity market, in emerging markets and gold on strength.

In the long run, inflation may indeed rear itself, given that trillions of dollars have been printed, but for now, it appears to be a perceived notion.

Tags: Alternative Investments, Bernanke, Currency Exchange, Dollar Gold, Double Gain, Economic Outlook, Economic Recovery, Economic Slump, Economy Data, Emerging Markets, ETF, Federal Reserv, Federal Reserve, Federal Reserve Chairman, Gold, Gold Futures, Greenback, Inflation Concerns, Median Estimate, Real News, Reser, Risky Assets, Selloff, September 16, Settlement Price
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Words from the (Investment) Wise (August 30, 2009)

Sunday, August 30th, 2009

Stock markets, in general, again logged gains last week as pundits perceived economic data to be better than expected. But the recovery path is not home and dry yet, as shown by declines in crude oil, a number of emerging stock market indices, small cap indices and high-yield corporate bonds. All said, risky assets displayed some fatigue despite positive economic reports.

Caution remained over the robustness of any economic upswing, as reflected by the solid performance of government bonds, with safe-haven currencies such as the US greenback and the Japanese yen also edging up.

As expected, Federal Reserve Chairman Ben Bernanke was appointed by President Barack Obama on Tuesday to serve a second term. “Mr Obama is said to credit Mr Bernanke with a leading role in helping to avert economic catastrophe. By reappointing Mr Bernanke - who worked in the Bush White House - Mr Obama can also emphasize his bipartisan credentials at a time when he is embroiled in a fiercely partisan battle over healthcare reform,” commented the Financial Times.

Source: LOLFed.com

However, critics of Obama’s decision were plentiful and Morgan Stanley’s Stephen Roach, blaming Bernanke for his pre-crisis actions, said (via the Financial Times): “It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.” Bill King (The King Report) ascribed the stock market rising subsequent to Obama’s announcement to a “thank God it’s not Larry Summers” rally.

The past week’s performance of the major asset classes is summarized by the chart below - a set of numbers showing both the S&P 500 Index and government bonds rising, indicating an expectation of a subdued economic recovery and that the Fed’s monetary policy will stay easy for an extended period of time.

Source: StockCharts.com

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

The MSCI World Index (+1.3%) and MSCI Emerging Markets Index (-0.2%) again followed separate paths last week as China, Hong Kong and Brazil underperformed. Mature stock markets have recorded gains for a straight seven weeks, whereas emerging markets have seen two back-to-back weeks of declines. The end result is that emerging markets have now underperformed developed markets for four weeks running. Could this be a sign of a retrenchment in risk appetite?

The major US indices extended their gains to two consecutive weeks, including eight straight up-days in the case of the Dow Jones Industrial Index, before getting snapped by a decline on Friday. The year-to-date gains are as follows: the Dow Jones Industrial Index +8.7%, the S&P 500 Index +13.9% and the Nasdaq Composite Index +28.6%. With declines on three days, the Russell 2000 Index was the odd index out last week, but still boasts a respectable +16.1% gain since the beginning of 2009.

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

Top performers in the stock markets this week were Lithuania (+28.2%), Estonia (+17.3%), Latvia (+12.6%), Egypt (+9.6%) and Iceland (+9.1%). The top three positions were all occupied by eastern European countries where worries over the risk of some economies collapsing have receded. At the bottom end of the performance rankings, countries included Nepal (-4.0%), China (-3.4%), Kenya (-2.7%), Uganda (-2.6%) and Bangladesh (-1.8%).

The Chinese Shanghai Composite Index recorded its fourth consecutive down-week as investors remained concerned about how long China’s exceptionally loose monetary policy will continue. The banking regulator has already instructed lenders to raise reserves to 150% of their non-performing loans by the end of this year - up from 134.8% at the end of June, and the central bank has increased money-market rates to drain liquidity.

However, US Global Investors opines that historically sustainable market rallies out of a cyclical trough usually start with an expansion in valuation multiples followed by a recovery in earnings. “China may be poised to enter this second stage against a favorable macro backdrop. With surging money supply and significantly lower commodity prices from a year earlier, corporate earnings in China could produce upside surprises going forward,” said the report.

Source: US Global Investors - Weekly Investor Alert, August 28, 2009.

Of the 96 stock markets I keep on my radar screen, 77% (last week 47%) recorded gains, 18% (47%) showed losses and 5% (4%) remained unchanged. (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 winners for the week included CurrencyShares Russian Ruble (XRU) (+5.0%), First Trust Amex Biotechnology (FBT) (+4.8%), iShares MSCI Australia (EWA) (+4.5%) and iShares Silver Trust (SLV) (+4.2%).

On the losing side of the slate, ETFs included Claymore/AlphaShares China Real Estate (TAO) (-4.2%), Market Vectors Coal (KOL) (-3.1%), SPDR KBW Regional Banking (KRE) (-3.1%) and iShares MSCI Brazil (EWZ) (-3.0%).

As far as credit markets are concerned, Bloomberg reported that banks were increasing lending to buyers of high-yield company loans and mortgage bonds at what might be the fastest pace since the credit-market debacle began in 2007. “Federal Reserve data show the 18 primary dealers required to bid at Treasury auctions held $27.6 billion of securities as collateral for financings lasting more than one day as of August 12, up 75% from May 6. The increase over that 14-week stretch is the biggest since the period that ended April 2007, three months before two Bear Stearns Cos. hedge funds failed because of leveraged investments.” This is a sign of credit markets moving towards normalization.

Referring to the mind-boggling US budget deficit, the quote du jour this week comes from 85-year old Richard Russell, author of the Dow Theory Letters. He said: “Comes the dawn - and the penalty. There’s a price to be paid for Bernanke’s all-out battle to thwart the bear market. And now it’s being told. Yesterday the White House itself admitted that the budget deficit over the next 10 years would be $2 trillion above their original outrageous estimate of $7 trillion dollars.

“As I said all along, it would have been better to have allowed the bear market to run its course to conclusion. That would have been extremely painful, but the US would have recovered. However, deficits in the trillions could ultimately ‘break’ this nation. I can’t imagine how Bernanke-Obama plan to handle the coming mind-blowing deficits, plus the interest on those deficits.

“The pressure will be on the reserve status of the dollar, the level of the dollar compared to other international currencies, interest rates, and the standard of living of all of us living in the new ‘banana republic’, the United States of ‘bankrupt’ America.

“When you take all this in, you can begin to see how this bear market could end with stocks selling below known values and people despising the stock market and capitalism.”

Other news is that the Fed must for the first time identify the companies in its emergency lending programs - created to address the financial crisis - after losing a Freedom of Information Act lawsuit against Bloomberg. The Fed is likely to appeal against the order on the grounds that such disclosure would threaten the companies and the economy.

Also, the Federal Deposit Insurance Corporation (FDIC) on Thursday said (via the Financial Times) the number of “problem banks” had grown from 305 to 416 during the second quarter, representing total assets of $299.8 billion. In the meantime, the FDIC’s deposit insurance fund, which insures up to $250,000 per depositor in each bank, had fallen to just $10.4 billion - the lowest level since March 1993 - as a result of all the bank failures, tallying 84 so far in 2009.

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “market”, “Fed”, “bank”, “prices”, “rates” and “economy” featured prominently. Interestingly, “recovery” is still moving up the ranks as the global economy seems to have turned the corner.

The key moving-average levels for the major US indices, the BRIC countries and South Africa (from where I am writing this post) are given in the table below. With the exception of the Chinese Shanghai Composite Index, which fell below its 50-day moving average about two weeks ago, all the indices are trading above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines and therefore not threatening the bullish “golden crosses” established when the 50-day averages broke upwards through the 200-day averages.

The August 17 lows that represent short-term support levels for the major US markets and are as follows: Dow Jones Industrial Index (9,135), S&P 500 Index (980) and Nasdaq Composite Index (1,931).

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

For more on key levels and some ideas regarding the short-term direction of the S&P 500 Index, Adam Hewison’s (INO.com) short technical analysis provides valuable insight. Click here to access the presentation.

The chart below, courtesy of Bespoke, shows that the average short interest as a percentage of float for stocks in the S&P 1500 is currently at 6.9% - the lowest level since February 2007 when the average was 6.6%. “In 2008, it was the bulls who argued that high levels of short interest were a reason the market should rally. With the recent data, however, it is now the bears who will argue that low levels of short interest suggest that investors are now too bullish,” remarked Bespoke.

Source: Bespoke, August 26, 2009.

Doug Kass (The Street.com) said: “The authorities have created a sugar high for speculation, with a Federal Reserve that has maintained interest rates so low that there is no return on savings and with an Administration that promises to provide stimulus until it manufactures economic growth. My view is that investors will shortly see through the current sugar high and the better-than-expected earnings cycle and will begin to look over the valley at the chronic and secular issues that have emerged from the past cycle and from policy decisions aimed at returning the domestic economy toward self-sustaining growth.”

The last words on equities go to Jeff Saut, investment strategist of Raymond James, who said “‘Breakout or fake out?’ is the question du jour. Yet as market maven Arthur Zeikel wrote decades ago, ‘Despite what theoreticians tell us, investing - particularly at the margin - is not the product of rational and objective analysis, but an emotional relative analysis - anxiety about the future.” My colleague Bob Ferrell put it this way: ‘Emotions are simply stronger than reason; people do not change and people make markets!’ Indeed, fear, hope and greed are only loosely connected to the business cycle. And, at session 30 in the ‘buying stampede’, we are clearly in the ‘greed phase’. We continue to invest, and trade accordingly.”

For more discussion on the direction of financial markets, see my recent posts “Stages of a secular bear market“, “The lie of the investment land, according to Hugh Hendry“, “Picture du Jour: Stock market rally long in the tooth” and “RGE: Impact of China on financial markets“.

Economy
“Global business confidence remained positive last week for the third straight week. The last time confidence was consistently positive was nearly a year ago,” said the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses are responding most positively to broad assessments of the current economic environment and the outlook into early 2010; they are as strong as they have been since the financial crisis first hit in the summer of 2007.” The Survey results suggest that the global recession is coming to an end, but isn’t quite over yet.

Source: Moody’s Economy.com

The German economy expanded in the second quarter of 2009 with real GDP rising by 0.3% on a seasonally adjusted basis from the previous quarter. Also, the Ifo Business Survey reported that German business confidence improved to an 11-month high in August, indicating a further improvement in GDP in the second half of 2009.

Source: Ifo, August 27, 2009.

Heading home from Jackson Hole a week ago, the world’s central bankers seemed in no hurry to start increasing interest rates - intent on not repeating the monetary policy tightening mistakes of the Great Depression. As reported by the Financial Times, Martin Feldstein, a Harvard professor, thought it would be possible to have “two years or more of very low interest rates” without risk of excess inflation, given the labor and factory capacity in the economy.

Meanwhile, after keeping the interest rate at a record low of 0.5% from April to July 2009, the Bank of Israel (BoI) became the first central bank to raise interest rates in this cycle, increasing the benchmark rate to 0.75%. Analysts believe Australia and Norway will tighten first among the G-10 central banks in 2010, as reported by RGE Monitor.

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

Friday, August 28
• “Cash for clunkers” lifts consumer spending in July

Thursday, August 27
• Jobless claims decline, but continuing claims including special programs advance
• Q2 real GDP unchanged at -1.0%

Wednesday, August 26
• Sales of new homes advanced, inventories are shrinking
• Defense and aircraft orders lift durable goods in July

Tuesday, August 25
• Case-Shiller Home Price Index and FHFA House Price Index - noteworthy recovery
• Gain in consumer confidence during August nearly erases losses of prior two months

Monday, August 24
• Chicago Fed National Activity Index - confirms positive signals of other reports

The S&P/Case-Shiller Home Price Index for June showed its second straight monthly increase. According to Bespoke, the last time home prices increased two months in a row was back in the summer of 2006 at the end of the last housing boom. “June’s 1.4% monthly gain was also the largest monthly increase since June 2005. There’s no denying that these numbers are showing considerable improvement.”

Source: Bespoke, August 25, 2009.

The White House confirmed on Tuesday that the US deficit would be wider than they had previously estimated. The graph below, courtesy of Clusterstock - Business Insider, shows that although the budget deficit as a percentage of GDP has been revised down for 2009 - due to less bailout spending - it has been increased for every year through 2019.

Source: Clusterstock - Business Insider, August 25, 2009.

“The longest and deepest recession of the postwar era has ended,” said IHS Global Insight chief economist Nariman Behravesh (via MarketWatch). However, he expressed concern that the recovery could lose steam in a few quarters, warning: “A sustained, robust global recovery depends on renewed growth in consumer spending and capital investment. The coming expansion will be restrained by cautious consumers in the United States and Europe, who are saving to rebuild depleted assets and reduce debt burdens.”

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

Source: Yahoo Finance, August 28, 2009.

Click here for a summary of Wells Fargo Securities’ weekly economic and financial commentary.

The European Central Bank (ECB) will make an interest rate announcement on Thursday (September 3). US economic data reports for the week include the following:

Monday, August 31
• Chicago PMI

Tuesday, September 1
• Construction spending
• ISM Index
• Auto sales

Wednesday, September 2
• ADP employment
• Productivity
• Factory orders
• FOMC minutes

Thursday, September 3
• Initial jobless claims
• ISM services

Friday, September 4
• Nonfarm payrolls
• Unemployment rate

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, August 28, 2009.

“Great minds talk about ideas. Average minds talk about events. Small minds talk about people,” said Eleanor Roosevelt. Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist Investment Postcards readers to generate money-making ideas that look past the noise investors so often wave to wade through.

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 Cape Town (from where I am leaving on a business trip to Slovenia in five days’ time - let me know if you are in Ljubljana at the time and would like to meet).

Source: Nate Beeler, August 28, 2009.

Clusterstock: The great banking recovery or next bubble?
“Should we be happy that the value of investments owned by commercial banks has begun to rapidly climb? Or should we be worried that the value is climbing at such a rapid clip that it looks a bit like an unsustainable bubble? Or is it just evidence of banks hoarding money and refusing to lend it out, holding Treasuries and securities instead?”

Source: John Carney and Rory Maher, Clusterstock - Business Insider, August 26, 2009.

Bloomberg: World economy emerging from worst recession since World War II
“The global economy may be coming out of the worst recession since World War II as record-low interest rates and trillions of dollars in fiscal stimulus spur demand.

“Sales of existing US homes jumped in July to the highest level since August 2007, and German service industries expanded this month for the first time in almost a year, reports yesterday showed. The Japanese economy grew for the first time in five quarters, according to a report earlier this week.

“‘There is no question the global economy is healing and emerging from recession,’ Kenneth Rogoff, a Harvard University professor and former chief economist for the International Monetary Fund, said in a Bloomberg Television interview yesterday.

“Federal Reserve Chairman Ben Bernanke and other global policy makers cautioned that the recovery is likely to be muted, indicating they would not soon remove all the stimulus injected into the financial system.

“‘Strains persist in many financial markets across the globe,’ Bernanke said in a speech yesterday at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. ‘The economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.’

“The US housing market, which led the way into the recession, is showing signs of righting itself after almost four years of declines. The 7.2% rise in sales of existing homes last month was the biggest since the National Association of Realtors began keeping records in 1999.

“In Germany, Europe’s largest economy, ‘business sentiment among service providers strengthened in August and was the most positive since January 2006,’ Markit Economics said yesterday, pointing to its purchasing managers’ survey.

“‘The recession is over,’ said Klaus Baader, chief European economist at Societe Generale SA in London, who called the Markit data an ‘incredible reading’.

“Japan’s economy is also being boosted by government measures ahead of an election. Prime Minister Taro Aso, whose party is trailing in opinion polls before the August 30 parliamentary elections, has put forward a 25 trillion yen ($265 billion) stimulus plan.

“The 3.7% rise in Japanese gross domestic product in the second quarter followed an 11.7% contraction in the first three months of the year. Exports led the revival of the world’s second-largest economy last quarter, jumping by 6.3%.”

Source: Rich Miller and Alison Sider, Bloomberg, August 22, 2009.

Nouriel Roubini (RGE Monitor): The exit strategy from the monetary and fiscal easing - damned if you do, damned if you don’t
“In the last few months the world economy has been saved from a near depression. That feat has been achieved by a range of extraordinary government stimulus measures: In the US and in China, and to a lesser extent in Europe, Japan and other countries, governments have pumped liquidity, slashed policy rates, cut taxes, primed demand and ring-fenced and back-stopped the financial system. All of this has worked, but it has worked at a cost. Governments have been spending and borrowing like never before. The question now is: how do they stop?

“This is not a simple problem. Restore normality too soon and the risk is that a weak recovery will double dip into a second and deeper recession. Restore it too late and inflation will already be ingrained.

“The second quarter GDP estimates for the US show just how significant this aggressive front-loaded policy stimulus has been. While total GDP growth was sharply negative in the first quarter - around -5.6% - the rate of decline in the second quarter had moderated to around -1.5%. Credit this relative improvement to governmental monetary, fiscal and financial stimulus. The private components of GDP, private demand and capex, were actually still very weak. But government spending rose by 5.6%, breaking what otherwise would have been another quarter of headlong GDP contraction.

“Necessary as the stimulus has been, it cannot go on indefinitely. Governments cannot run deficits of 10% or more of GDP, and they cannot go on doubling the monetary base, without eventually stoking inflation expectations, pushing up long term interest rates and eventually eroding their very viability as sovereign borrowers. Not even the US can do that.”

Click here for the full article.

Source: Nouriel Roubini, RGE Monitor, August 24, 2009.

Financial Times: Central bankers content to keep rates low
“The world’s central bankers were in no hurry to start raising interest rates as they headed home on Sunday from the US Federal Reserve’s annual retreat in Jackson Hole, Wyoming.

“In private and in public, most officials indicated they believed that rates could be maintained at ultra-low levels for a considerable time without generating excess inflation, in spite of better economic data and a return of ‘animal spirits’ in financial markets.

“Some used the platform of the conference to push back against calls for early implementation of ‘exit strategies’ that would reverse the current extraordinary degree of monetary stimulus.

“‘There is no reason to re-assess our monetary policy stance,’ Erkki Liikanen, Finland’s central bank governor, told Bloomberg news agency. Ewald Nowotny, Austria’s central bank chief, said he did not favour adding a surcharge to the European Central Bank’s next offer of one-year loans to banks - a view shared by some other European officials in Jackson Hole.

“If the ECB simply offers the money at its current policy rate, the market is likely to interpret this as a signal that it does not expect to raise interest rates for 12 months.

“Federal Reserve officials have edged up their assessment of economic conditions but have not significantly revised 2010 forecasts. They are encouraged by the shares rally, and see scope for this to support economic activity by restoring lost wealth and improving confidence, but are not betting too much on this.

“Don Kohn, vice-chairman of the Fed, said he saw no contradiction between its commitment to keep rates low for an ‘extended period’ and the desire to keep inflation at moderate levels - though he emphasised that this was a conditional commitment that could change if the economic outlook changed.

“Martin Feldstein, a Harvard professor, thought it would be possible to have ‘two years or more of very low interest rates’ without risk of excess inflation, given the spare capacity in the economy.

“Rick Mishkin, a former Fed governor, told the Financial Times the Fed would be easing policy further if it were not for the costs associated with monetising government debt.

“‘Optimal policy suggests more Treasury purchases would make sense. But that ignores the fiscal situation,’ he said. ‘The Fed is absolutely right to get off that programme - it cannot be seen to be accommodating the government deficit.’

“Jean-Claude Trichet, president of the European Central Bank, meanwhile spoke against a return to complacency and a failure to follow through on financial reforms, even though ‘we are a little bit out of the current episode’.”

Source: Krishna Guha, Financial Times, August 23, 2009.

The Wall Street Journal: Policy makers seek to learn from 1937’s stalled comeback
“A few months ago, Obama administration officials were sounding the alarm about another 1929. These days, it’s 1937 that has them in a sweat.

“The Great Depression was W-shaped. The stock-market collapse led to a steep economic decline. But by 1933, the economy had rebounded. Then a series of monetary and fiscal blunders drove the country back into a deep recession at the end of 1937.

“That episode is at the heart of the debate over how quickly the government and the US Federal Reserve should unwind the emergency measures they have taken to fend off a Depression-like contraction.

“For the administration, the answer is clear: Err on the side of continued expansionary policies. ‘What you learned from that episode in 1937 is that it’s not enough to be recovering,’ says Christina Romer, chairman of the president’s Council of Economic Advisers and an expert on the Great Depression. ‘You don’t want to do anything when you start recovering that nips it off too soon.’

“For fiscal conservatives, the answer is equally clear: Start cutting the federal deficit and slowing the growth in the money supply now, before the binge generates a burst of inflation.

“Ms. Romer is ’sending the absolutely wrong message - that we can’t do anything to worry about inflation until the recovery is locked in because of concern for unemployment,’ says Allan Meltzer, a political economist at Carnegie Mellon University. ‘The reason economists and central bankers have two eyes is so they can do two things at once.’

“The economy was recovering briskly during Franklin D. Roosevelt’s first term in the White House. The jobless rate, which had peaked at 25% in 1933, fell to 14% in 1937 - not exactly cause for celebration but a relief nonetheless.

“The comeback stalled in 1937. Banks, nervous about the fragile recovery, were holding huge amounts of cash in reserve at the Fed. Fearing an inflationary surge should the banks decide to lend that money out to businesses and individuals, the Fed - which had made the mistake of tightening monetary policy soon after the 1929 stock-market crash - miscalculated again. The Fed ratcheted up banks’ reserve requirements three times, starting in 1936. The banks reacted by cutting lending even further.

“‘There’s no doubt that [Fed Chairman Ben] Bernanke is heavily influenced by these two mistakes of the Fed during the Depression and is absolutely intent on not repeating them,’ says Alex J. Pollock of the American Enterprise Institute, a free-market think tank in Washington.”

Source: Michael Phillips, The Wall Street Journal, August 24, 2009.

Financial Times: Obama to offer Bernanke second term
“Ben Bernanke is to be reappointed by President Barack Obama for a second four-year term as chairman of the Federal Reserve, according to a White House official.

“Mr Obama will make the announcement on Tuesday in Martha’s Vineyard, where he is on holiday with his family. The decision is the ultimate seal of approval for the Fed chairman, who was originally appointed by George W Bush, the Republican former president, and whose reappointment was seen as far from guaranteed.

“It follows Mr Bernanke’s extraordinarily aggressive efforts to fight the economic crisis, including radical interest rate cuts, loans to non-bank financial institutions, Fed-led bailouts of Bear Stearns and AIG and gigantic asset purchases - exploiting the Fed’s powers to their legal limits in a bid to prevent a second Great Depression.

Economists, investors and fellow central bankers overwhelmingly favour Mr Bernanke’s reappointment. However, disquiet in Congress over the exercise of extraordinary Fed powers has raised a cloud over his future.

“The Fed chairman’s reappointment still has to be approved by the Senate, but his prospects look good. Chris Dodd, chairman of the Senate banking committee, on Monday said that ‘reappointing Chairman Bernanke is probably the right choice’, though he promised a ‘thorough and comprehensive confirmation hearing’.

“Mr Obama is said to credit Mr Bernanke with a leading role in helping to avert economic catastrophe. By reappointing Mr Bernanke - who worked in the Bush White House - Mr Obama can also emphasise his bipartisan credentials at a time when he is embroiled in a fiercely partisan battle over healthcare reform.”

Source: Krishna Guha, Financial Times, August 25, 2009.

The Wall Street Journal: Bernanke reappointment politically shrewd
“As President Obama trumpets the turnaround in the economy, WSJ’s Executive Washington Editor Gerald Seib says the reappointment of Federal Reserve chairman Ben Bernanke, therefore, is a politically shrewd move.”

Source: The Wall Street Journal, August 25, 2009.

Stephen Roach (Financial Times): The case against Bernanke
“Barack Obama has rendered one of his most important post-crisis verdicts: Ben Bernanke will be nominated for a second term as chairman of the Federal Reserve. This is a very shortsighted decision. While America’s head central banker deserves credit for being creative and courageous in orchestrating an unusually aggressive monetary easing programme, it is important to remember that his pre-crisis actions played an equally critical role in setting the stage for the most wrenching recession since the 1930s. It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.

“Mr Bernanke made three critical mistakes in his pre-Lehman incarnation:

“First, and foremost, he was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles.

“Second, Mr Bernanke was the intellectual champion of the ‘global saving glut’ defence that exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia.

“Third, Mr Bernanke is cut from the same market libertarian cloth that got the Fed into this mess.

“Notwithstanding these mistakes, Mr Obama may be premature in giving Mr Bernanke credit for the great cure. No one knows for certain as to whether the Fed’s strategy will ultimately be successful. The worst of the US recession appears to have been arrested for now - a fairly typical, but temporary, outgrowth of the time-honoured inventory cycle. But the sustainability of any post-bubble recovery is always dubious. Just ask Japan 20 years after the bursting of its bubbles.

“While financial markets are giddy with hopes of economic revival - in part inspired by Mr Bernanke’s cheerleading at the Fed’s annual Jackson Hole gathering - there is still good reason to believe that the US recovery will be anaemic and fragile. US consumers are in the early stages of a multi-year retrenchment as they cut debt and rebuild retirement saving. The unusual breadth and synchronicity of the global recession will restrain US export demand from becoming a new growth engine.

“It would be the height of folly to reward Mr Bernanke for the recovery that never stuck. Yet Mr Bernanke’s apparent reward is, unfortunately, typical of the snap judgments that guide Washington decision-making. In this same vein, it is hard to forget Mr Greenspan’s mission-accomplished speech in 2004 that claimed ‘our strategy of addressing the bubble’s consequences rather than the bubble itself has been successful’. Eager to declare the crisis over, the Obama verdict may be equally premature.”

Source: Stephen Roach, Financial Times, August 25, 2009.

The Wall Street Journal: Into the abyss - budget deficit deepens
“The White House has released its budget deficit estimates and the news is grim, WSJ’s Deborah Solomon reports. With economic output tipped to fall by almost 3% this year, the US economy is facing more tough times.”

Source: The Wall Street Journal, August 25, 2009.

Bill King (The King Report): Withholding taxes down
“For all the hope and hype of recovery, withholding taxes keep making new lows (via Matt Trivisonno’s blog).”

Source: Bill King, The King Report, August 28, 2009.

Asha Bangalore (Northern Trust): Q2 real GDP decline unchanged
“The real gross domestic product (GDP) of the economy declined at an annual of 1.0% according to the preliminary estimate, unchanged from the advance report. The revisions offset each other to leave the headline unchanged.

“The upward revisions of consumer spending (-1.0% vs. -1.2% in advance estimate), residential investment expenditures (-22.8% vs. -29.3% in the advance report), equipment and software spending (-8.4% vs. -9.0% in advance estimate) led to an upward revision of real final sales (+0.4% vs. -0.2% in advance report), which is the first gain after two quarterly declines.

“Exports were also revised up which led to a smaller trade gap than previously estimated. The decline in inventories (-$159.2 billion vs. -$141.1 billion) is larger than the earlier estimate, implying a big addition to inventories in the second-half of the year. The US economy is projected to show a mild recovery in the second-half of the year.

“The overall GDP price index was revised down to a flat reading but the core personal consumption expenditure price index was left unchanged at a 2.0% increase.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 27, 2009.

MoneyNews: Fed official - real unemployment at 16%
“The real US unemployment rate is 16% if persons who have dropped out of the labor pool and those working less than they would like are counted, a Federal Reserve official said Wednesday.

“‘If one considers the people who would like a job but have stopped looking - so-called discouraged workers - and those who are working fewer hours than they want, the unemployment rate would move from the official 9.4% to 16%, said Atlanta Fed chief Dennis Lockhart.

“He underscored that he was expressing his own views, which ‘do not necessarily reflect those of my colleagues on the Federal Open Market Committee,’ the policy-setting body of the central bank.”

Source: MoneyNews, August 27, 2009.

ViktorCapitalist: US - 34% of workers have one week or less of savings
“An online survey reveals the thin savings cushion of American:

“(Mish’s Global Economic Trend Analysis) … Over a one week period beginning July 6 and running through July 13, more than 16,000 visitors to Monster.com participated in the Monster Meter Poll question ‘If you were laid off without severance, how long would your savings cover your living expenses?’

* One Week or Less: 34%
* 2-4 Weeks: 16%
* 1-2 Months: 16%
* 3-5 Months: 14%
* 6 Months or Longer: 20%

“Creating three broad groups, 50% have less than a month of savings, while only 20% have 6 months or more.”

Source: ViktorCapitalist, August 26, 2009.

Asha Bangalore (Northern Trust): “Cash for clunkers” lifts consumer spending in July
“Nominal consumer spending increased 0.2% in July, after a 0.6% gain in June. In July, the ‘cash for clunkers’ program accounted for the 1.3% increase in purchases of durables (mostly cars). After adjusting for inflation, consumer spending moved up 0.2% in July vs. a 0.1% increase in June. Outlays on non-durables dropped 0.3% in July and purchases of services rose 0.1%. Real consumer spending has now registered three consecutive monthly increases. The “cash for clunkers” program should raise consumer spending in August, albeit a large increase compared with July. The main implication is that consumer spending in the third quarter is most likely to grow around a 2.0% annualized rate after a 1.0% drop in the second quarter. This supports forecasts of an increase in real GDP in the third quarter.

“Personal income held steady in July, following a 1.1% drop in June and a 1.4% increase in May. Personal income data reflect the impact of the American Recovery and Reinvestment Act of 2009 in the past few months, with large transfer payments leading to the wide swings in personal income. Focusing on wages and salaries gives a better picture of earnings. Wages and salaries rose 0.1% in July, this is noteworthy because it is the first monthly increase recorded since October 2008.

“Personal saving as a percent of disposable income was 4.2% in July, down from 4.5% in June. It appears that the saving trajectory is close to 4.0% after excluding the distortions from transfer payments related to the American Recovery and Reinvestment Act. The personal saving rate was 1.7% and 2.6% in 2007 and 2008, respectively.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 28, 2009.

Standard & Poor’s: S&P/Case-Shiller Home Price Indices - home prices on an upswing in the second quarter
“Data through June 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of US home prices, show that the US National Home Price Index improved in the second quarter of 2009.

“The chart above depicts the annual returns of the US National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller US National Home Price Index - which covers all nine US census divisions - recorded a 14.9% decline in the 2nd quarter of 2009 versus the 2nd quarter of 2008. While still a substantial negative annual rate of return, this is an improvement over the record decline of 19.1% reported in the 1st quarter of the year. The 10-City and 20-City Composites recorded annual declines of 15.1% and 15.4%, respectively. These are also improvements from their recent respective record losses of -19.4% and -19.1%.

“‘For the second month in a row, we’re seeing some positive signs,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘The US National Composite rose in the 2nd quarter compared to the 1st quarter of 2009. This is the first time we have seen a positive quarter-over-quarter print in three years. Both the 10-City and 20-City Composites posted monthly increases, as did most of the cities. As seen in both seasonally adjusted and unadjusted data, as well as the charts, there are hints of an upward turn from a bottom. However, some of the hardest hit cities, especially in the Sun Belt, show continued weakness.’”

Source: Standard & Poor’s, August 25, 2009.

Asha Bangalore (Northern Trust): Sales of new homes advanced, inventories are shrinking
“Sales of new single-family homes rose 9.6% in July, after upward revisions for May and June. Purchases of new homes have risen in five of the first seven months of the year. Sales of new single-family homes are now up roughly 32% from a record low reading of 329,000 units registered in January 2009. On a regional basis, sales of new homes rose in the Northeast (+32.4%) and South (+16.2%), fell in Midwest (-7.6%) and was nearly steady in the West (+1.0%). The $8,000 credit for home buyers appears to have raised sales of new and existing single-family homes. Breakdowns of new home sales based on price ranges show a small increase in purchases of homes prices upwards of $400,000 and below $750,000.

“From a year ago, sales of new single-family homes are down only 9.3%; it is a significant improvement compared with double digit declines seen in recent months. The largest drop in the median price of a new single-family home for the cycle was in January 2009 (-45.5%).

“The inventories-sales ratio is encouraging because it declined to a 7.5-month mark, down from a cycle high of 12.4-months in January 2009. The median of this ratio during 1963-2000 is 6-month supply.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 26, 2009.

Clusterstock: New foreclosures dwarf new home sales
“New home sales are ticking up again, bringing some much-needed relief to the beleagured homebuilders. But watch out. Mark Hanson produced this chart, showing foreclosure starts against new home sales. As you can see, the new foreclosure starts jumped even more in July than new home sales, meaning trouble down the road for homebuilders - especially once that $8,000 first-time homebuilder tax credit runs out.”

Source: Joe Weisenthal and Rory Maher, Clusterstock - Business Insider, August 27, 2009.

Asha Bangalore (Northern Trust): Defense and aircraft orders lift durable goods
“Orders of civilian aircraft (+107%) and defense items (+14.8%) led to the 4.9% jump of bookings of durable goods during July. Excluding aircraft and defense, orders of durable capital goods fell 0.3% in July after a 3.6% increase in June and a 4.3% gain in May.

“The main message from the ISM manufacturing survey, industrial production report, and orders of durable goods is that the factory sector is moving toward a complete recovery.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 26, 2009.

Financial Times: US “problem” bank list hits 15-year high
“The number of US banks at risk of failure is at a 15-year-high while the fund protecting depositors is at its lowest level since 1993, according to figures that highlight the spread of the crisis to the lower reaches of the financial system.

“The Federal Deposit Insurance Corporation, a banking regulator, on Thursday said the number of ‘problem banks’ had risen from 305 to 416 during the second quarter. The FDIC does not name the lenders on the ‘problem list’ but said that total assets of that group had increased from $220 billion to $299.8 billion in the three months through June.

“That relatively low figure suggests that after hitting large institutions which traded complex securities, the financial crisis and the recession are taking a toll on smaller banks that lend to businesses and consumers.

“Sheila Bair, the FDIC chairman, said on Thursday that while earlier losses in the industry were related to troubled residential loans and complex mortgage-related assets, there were now problems with more conventional types of retail and commercial loans that have been hit hard by the recession. ‘These credit problems will outlast the recession by at least a couple of quarters,’ she said.

“Thursday’s news of a sharp fall in the FDIC’s deposit insurance fund, which insures up to $250,000 per depositor in each bank, underscored the problems faced by regulators when contemplating the rescue or wind-down of institutions with trillions of dollars on their balance sheets.

“The agency said its fund had fallen to just $10.4 billion from $13 billion in the quarter, the lowest level since March 1993 when the US was in the middle of the savings and loans crisis. The fund has been depleted by bank failures: regulators have shut 81 banks this year.

“‘In many important respects, financial markets are returning to normal,’ said Ms Bair. ‘Combined with the positive economic news in recent weeks, we’re hopeful that this will lead to a moderation in credit problems in coming quarters. But, as our report shows, cleaning up balance sheets is a painful process that takes time.’”

Source: Joanna Chung and Francesco Guerrera, Financial Times, August 27, 2009.

Asha Bangalore (Northern Trust): Some market spreads are widening again
“At the short end, financial market spreads continue to narrow. However at the long end, the situation is different. Two representative long end market spreads - Moody’s Baa less 10-year Treasury note yield and junk bond yield less 10-year Treasury note yield - have both widened during August 11-20. The reasons are not clear as economic reports strongly suggest that underlying fundamentals are improving. Concern about the nature of economic recovery and projected status of balance sheets of banks could be factors influencing these spreads.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 24, 2009.

Bloomberg: Leverage rising on Wall Street at fastest pace since ‘07 freeze
“Banks are increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the credit-market debacle began in 2007.

“Credit Suisse Group AG and Scotia Capital, a unit of Canada’s third-largest bank, said they’re offering credit to investors who want to purchase loans. SunTrust Banks Inc., which left the business last year, is ‘reaching out to clients’ to provide financing, said Michael McCoy, a spokesman for the Atlanta-based bank. JPMorgan Chase & Co. and Citigroup Inc. are doing the same for loans and mortgage-backed securities, said people familiar with the situation.

“‘I am surprised by how quickly the market has become receptive to leverage again,’ said Bob Franz, the co-head of syndicated loans in New York at Credit Suisse. The Swiss bank has seen increasing investor demand for financing to buy loans in the past two months, he said.

“Federal Reserve data show the 18 primary dealers required to bid at Treasury auctions held $27.6 billion of securities as collateral for financings lasting more than one day as of August 12, up 75% from May 6.

“The increase suggests money is being used for riskier home-loan, corporate and asset-backed securities because it excludes Treasuries, agency debt and mortgage bonds guaranteed by Washington-based Fannie Mae and Freddie Mac of McLean, Virginia or Ginnie Mae in Washington. Broader data on loans for investments isn’t available.”

Source: Kristen Haunss and Jody Shenn, Bloomberg, August 28, 2009.

Bill King (The King Report): Foreign assets in the US

“The above chart illustrates why the dollar is under severe pressure and the US financial and economic system is on life-support from the Fed as well as why Bernanke and his ilk will not divulge its records, ways and means to the public.

“It also shows that the Fed is between a rock and a hard place because as the Fed increases its life support (balance sheet/debt monetization) it will increase the desire of foreigners to jettison dollar-denominated assets. This is why there is no exit strategy for the foreseeable future.”

Source: Bill King, The King Report, August 27, 2009.

Eoin Treacy (Fullermoney): Stock markets - give upside benefit of doubt
“There has been considerable debate about how the excess liquidity permeating rallies across asset classes and borders will be withdrawn. What seems clear is that changes will be made cautiously and economic recovery will be given precedence over worries about future inflation.

“The S&P 500 accelerated lower from September, lost consistency at the penultimate low and finally bottomed in March. It encountered brief resistance in the region of 1,000 and is now pulling away from that area. For months we have felt that the S&P’s bull market hypothesis was more faith based than analytical because it had not yet completed its base like so many of the leading markets. This is no longer the case. Current action is consistent with bull market type activity..

“In the short-term, a sustained move back below 1,000 would be needed to check momentum. A fall back below 975 would break the progression of higher lows and pull into the previous May-June range. A sustained move below 900 would indicate an increased likelihood of base formation extension. In the absence of any of these factors, the upside can continue to be given the benefit of the doubt. As stock markets advance, 10,000 points on the Dow Jones Industrials is the next potential area of resistance.

“The Nasdaq has been trending consistently higher from the March lows and appears to be in the process of completing another small range. A sustained move below 1,560 would be needed to question the consistency of the advance.

“Favourable stock market conditions are evident all over the world with an impressive number of markets moving to new recovery highs this week. The FTSE-100 consolidated above the 4,500 for much of the month and broke upwards last week. A sustained move back into the base, with a fall below 4,500 would be required to hinder upside potential. Germany’s DAX has a similar pattern with 5,000 being the operative level.”

Source: Eoin Treacy, Fullermoney, August 25, 2009.

Richard Russell (Dow Theory Letters): Are we in a new primary bull market?
“The stock market is at all times subject to three trends (1) the primary or great tidal sweep of the market which can be likened to the tide of the ocean. (2) The secondary trend of the market, which can be compared with the waves in the ocean. And (3) The daily action, which can be likened to the ripples on the waves.

“Right now we are at a most unusual and rare juncture. I say this because at this time there are questions and arguments regarding both the primary trend of the market and the secondary trend.

“Are we in a new primary bull market now? Personally, I doubt it.

“As for the secondary trend, I’m having some second thoughts about the secondary trend. On July 23, 2009, the Transports finally confirmed the Dow in closing above its June 11 high. This was a signal that the secondary trend of the market had turned bullish. From July 23 onward, the market gathered strength as the secondary trend continues to extend.

“At this point, it’s obvious that the secondary trend of the market remains strongly bullish. How far this counter-trend rally will carry is unknowable. I’ve been reluctant to recommend investing heavily in what I believe is a bear market rally or a correction against the prevailing primary trend. The great values haven’t been there, and playing bear market rallies can be dangerous and stressful.”

Source: Richard Russell, (Dow Theory Letters), August 25, 2009.

Brian Belski (Oppenheimer Asset Management): Reasons to be cheerful
“History shows that September is customarily the weakest month of the year for US equities - but this does not necessarily hold true following positive stock market performances during the summer, says Brian Belski, chief investment strategist at Oppenheimer Asset Management.

“He says that since the second world war, the S&P 500 has suffered an average September fall of 0.5%. But there has been a decided shift in seasonality patterns in the past 15 years.

“‘Given the dramatic change in the financial system during this period, we believe the new pattern provides a more relevant comparison,’ he says.

“‘Seasonal patterns actually favour the market in the current environment. We have found that Septembers that follow positive summer months, such as the one we have seen this year, exhibit positive S&P 500 performance, on average.

“‘In addition, the fourth quarter is typically a period of strength for the market regardless of summer performance.’

“Mr Belski notes that many investors are now anticipating a sizeable correction in the stock market following its strong ascent since March.

“‘While we do not completely discount the possibility of some sort of market pullback given recent gains, we remain optimistic regarding market performance in the months ahead and expect the S&P 500 to finish the year above current levels.”

Source: Brian Belski, Oppenheimer Asset Management (via Financial Times), August 24, 2009.

Bespoke: Missing in action - short sellers
“Last night [Wednesday] after the close, the major exchanges released their mid-month short interest data, or as some would say, their lack of short interest data. As shown in the chart below, the average short interest as a percentage of float for stocks in the S&P 1500 is currently at 6.9%. This is the lowest level since February 2007, when the average was 6.6%. In 2008, it was the bulls who argued that high levels of short interest were a reason the market should rally. With the recent data, however, it is now the bears who will argue that low levels of short interest suggest that investors are now too bullish.”

Source: Bespoke, August 26, 2009.

Bespoke: Investors Intelligence hits most bullish level since January 2008
“… short interest as a percentage of float is currently at its lowest level since 2007. Another group of investors who have turned decidedly less bearish are newsletter writers. According to the weekly data from Investors Intelligence, bullish sentiment among newsletter writers is at its highest levels since January 2008. At the other end of the spectrum, bears are practically in complete hibernation. At a level of 19.8%, bearish sentiment is at its lowest level since late 2007. While it is still far from standing room only, the bullish camp is starting to attract a crowd.”

Source: Bespoke, August 26, 2009.

Bespoke: Individual investors not as bullish as the pros
“In the last few days, we have noted how short interest is at multi-year lows and newsletter writers are more bullish than at any other time since the start of 2008. While the so-called pros are bullish, individual investors apparently need more convincing. According to this week’s survey of the American Association of the Individual Investors (AAII), only 1/3 of investors surveyed are currently bullish, while nearly half (49%) are bearish. Based on these surveys at least, not everyone is bullish.”

Source: Bespoke, August 27, 2009.

MoneyNews: Roubini missed the stock rally
“While perennial pessimist Nouriel Roubini has been prescient in predicting recent economic woes, investors sticking to his forecasts have suffered dearly since March.

“That’s because he’s been warning about continued problems in the economy while stock prices have soared.

“The New York University professor has been arguing for weeks that the economy is in danger of suffering a double-dip recession. And he hasn’t yet recommended that investors plunge into stocks, Bloomberg notes.

“Yet the Standard & Poor’s 500 Index has soared 53% from its March low.

“When the rally began, Roubini called it a ‘dead-cat bounce’, and in May he said the ascent may ‘fizzle’, Bloomberg reports.

“On March 9, Roubini said the S&P 500 was headed down to 600. Instead it has jumped 71% to 1,027 as of Wednesday morning.

“‘We’re looking at a bull cycle in phase one,’ investment guru Laszlo Birinyi told Bloomberg.

“‘No one wants to come out and say, ‘This is a bull market.’ Everyone’s just dancing around the term.’

“Birinyi says Roubini may have missed the upward move because he concentrates on the economy rather than stocks.

“Roubini certainly isn’t the only bear.

“Market sage Robert Prechter told Yahoo! News that recent stock gains represent a bear market rally and that the next wave will be down.

“‘I think we’ll definitely break the March 2009 lows, and I think the bear market will extend well into the next decade,’ he says.”

Source: Dan Weil, MoneyNews, August 26, 2009.

Clusterstock: The trashiest stocks are on fire
“Since the market hit its lows in early March, the trashiest, most beaten-down stocks have been the big winners. Some are arguing that the trash stocks have to slow down soon. But in the meantime, it looks like investors are reaching for the trashiest of the trash. Check out the crazy runs in Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG) and even the soon-to-be-liquidated GM over the last few weeks. This is the kind of behavior that might foretell the end of the junk rally.”

Source: Joe Weisenthal and Rory Maher, Clusterstock - Business Insider, August 24, 2009.

Eoin Treacy (Fullermoney): Carry trades being reopened
“The unwinding of the yen carry trade, from September, forced large positions in speculative assets all over the world to be sold, contributing to the synchronous decline in the price of most financial assets and the corresponding advance of the yen and the dollar. This tumultuous event is now part of our history and conditions, particularly since March, have been conducive to carry trades being reopened.

“Investors in speculative higher yielding assets have seldom been provided with such a wide menu of potential carry trade currencies. Interest rates in the Eurozone, UK, USA and Japan are all at historically low levels. While we tend to concentrate on the main currency cross rates it is evident from a perusal of the major currencies that some classic destinations for carry trades such as New Zealand (USD, GBP, EUR, JPY) or Brazil (USD, GBP, EUR, JPY) have currencies that are appreciating in all four potential carry currencies.

“In the past, a US, UK or European investor would have had to borrow Japanese yen and invest them in a third country. This exposed them to currency fluctuations in two crosses. The current environment is simpler, exposing a domestic investor in one of these countries to a single cross rate.

“We have long said that in the competitive world of globalisation, no country wants a strong currency but some are more motivated to have a weak currency than others. The strength of carry trade destination currencies will increasingly become a political issue. New Zealand’s government has already commented on the strength of Kiwi. The Kiwi has appreciated significantly in all of the crosses mentioned above but has only broke to new highs against the pound. This would suggest that the easiest part of the advance has already occurred and further improvement will have a greater near-term associated risk of reversion.

“Israel is the first country to raise rates following the credit crisis. Most of the potential carry trade funding economies are unlikely to raise interest rates before next year and when they do, rises are likely to be small and the pace slow. Destinations for carry trades are likely to be raising rates at the same time, and potentially faster, so the tightening of interest rate differentials is unlikely to be a major impediment to carry trades.

“Stocks, commodities and credits have all appreciated considerably over the last 6 months. While this move is not over, we are probably closer to the next larger reaction than we are to the next large advance. When some of the consistent trends that are currently evident roll over, profit taking may put upward pressure on carry trade currencies. Looking beyond a reversion to the mean, as long as interest rate differentials remain amenable and funding currencies relatively weak compared to their higher yielding counterparts, carry trades are likely to remain viable sources of funding.”

Source: Eoin Treacy, Fullermoney, August 27, 2009.

Financial Times: High prices necessary for producing Chinese commodities
“For mining companies, the drop in commodities prices earlier this year has been, ironically, good long-term news. True, in the short term earnings have suffered and share prices have tanked. The FTSE 350 Mining Index was down 45% between August 2008 and January this year.

“But amid all the negative news there was, nonetheless, an encouraging clue about the limits of China’s domestic commodities output that paints a brighter outlook for the natural resources sector.

“China’s geological endowment is critical for commodities companies as Beijing attempts to cap imports - and prices - supporting its domestic output. China is rich in iron ore, bauxite, zinc, nickel, coal and crude oil deposits.

“Although the size of the country’s geological endowment matters, what really makes a difference is the price at which Chinese companies can dig out the raw materials. Until this year, the country’s capabilities were mostly untested as most of the recent increase in output came on the back of rising global prices since 2002.

“The drop in global prices earlier this year has now revealed that China can only sustain high domestic production when global prices are near record highs.

“As raw materials prices declined in late 2008 and early 2009, output from Chinese mines plunged because their mines were uncompetitive. This forced the country to rely heavily on imports, mopping up global surpluses and boosting prices.

“The poor resilience of China’s local production to price crashes has been suspected for a long time. But the corroboration is great news for miners with high volume and low production cost assets, such as BHP Billiton and Rio Tinto.”

Source: Javier Blas, Financial Times, August 24, 2009.

Bespoke: Oil to national gas ratio highest ever
“With oil rallying and natural gas continuing to plummet on a daily basis, the ratio of oil to natural gas is at its highest level since at least 1990 at 26.35. When the line is increasing in the chart below, oil is outperforming natural gas, and as shown, it has been doing that now since the end of 2008. The ratio is currently in uncharted territory, so who knows when we’ll see some reversion to the mean.”

Source: Bespoke, August 24, 2009.

GoldSeek: GATA presses Fed to give up its golden secrets
“Yesterday GATA’s [Gold Anti-Trust Action] Washington-area law firm, William J. Olson P.C. of Vienna, Virginia filed with the Federal Reserve Board an administrative appeal of the Fed’s most recent refusal to grant us access to the agency’s records involving the US gold reserve.

“Really, why should any Federal Reserve record involving the national gold reserves be confidential, except perhaps records involving the most ordinary security of the reserve’s vaulting? Plainly the Fed has knowledge of something that has been done with the gold reserve that the US government does not want the American people and the financial markets to know.

“Further, GATA’s administrative appeal notes, the Fed’s search of its records in response to our request was negligent, insofar as it did not cite at least one document involving gold swaps that is posted and publicly accessible at the Fed’s own Internet site. That is, it seems that GATA’s lawyers looked harder for the relevant documents than the Fed itself did.

“It strikes GATA as remarkable that the financial market commentators who most often disparage suggestions that central banks are intervening surreptitiously as well as openly in the gold market never have tried to put a critical question about gold to any central bank. Even big financial news organizations have failed to do this when reporting on the gold market. But if they ever did start asking critical questions, they would have to report that the Fed has some big secrets about gold. It is more justification for US Rep. Ron Paul’s legislation to audit the Fed.”

Source: Chris Powell, GoldSeek, August 23, 2009.

TheStreet.com: Christian - gold will hit $1,000
“Jeffrey Christian, managing director of CPM Group, argues that once investment demand surges, gold will skyrocket to $1,000.”

Source: The Street.com, August 28, 2009.

Financial Times: The weather channel
“In the agricultural commodities market, nothing explains better the influence of weather than the difference between the price of tropical produce such as sugar and cocoa and crops such as wheat and corn.

“While sugar and cocoa hover at multi-decade highs, the price of wheat and corn is falling to its lowest since 2007.

“A poor monsoon in India and unseasonal rain in Brazil have hit sugar output in the world’s two largest producers. Cocoa prices have suffered because of poor weather in Ivory Coast, which produces 40% of the world’s cocoa.

“Meanwhile, the grains’ growing season in the US and Europe has been almost perfect - timely rains in the spring, and sunshine and warm temperatures during the summer - after a delayed start. Yields for wheat are, according to the International Grains Council, ‘unexpectedly good’.

“The corn harvest will not start until the autumn, but the scouters that check fields in the US midwest are reporting a large, if not record, crop.

“The fact that weather causes the price differences also helps to explain why hedge funds and investment banks have hired dozens of meteorologists in the past few years, seating them close to their traders.

“For agri commodities, weather research is now as important as research on consumption trends. Stay tuned to the weather channel.”

Source: Javier Blas, Financial Times, August 27, 2009.

Financial Times: China tightening
“Not for the first time, there is a gap between what China says and what China does. Premier Wen Jiabao warned this week that the ‘foundations of recovery are not stable  . . .  we cannot afford the slightest relaxation or wavering’. The subtext seemed obvious: that China’s exceptionally loose monetary policy will continue for the foreseeable future.

“But a subtle shift is already under way. Monetary policy in China is not qualitative but quantitative. The People’s Bank has a target interest rate but its focus is on economic growth and the assumed quantity of money needed to fund it. By that token, China has been tightening by stealth for a while.

“The banking regulator last month told lenders to raise reserves to 150% of their non-performing loans by the end of this year, up from 134.8% at the end of June. A communiqué last Friday canvassed views on deducting holdings of other lenders’ subordinated or hybrid debt from supplementary (non-core) capital.

“Then there are softer measures, such as reminding banks to ensure that loans for investment in fixed assets actually end up there. The central bank also has raised money-market rates to drain liquidity. The effects of all this can be seen in the M2 measure of money supply, which was up 28% at the end of July, year on year, but which fell 3 basis points from the end of June.

“This is how China tightens: imperceptibly, by degrees. As Goldman Sachs points out, China’s last tightening cycle began not when it raised rates in November 2004 but 18 months earlier when the central bank began to issue short-term bills to mop up excess cash. Listen to the rhetoric now, and you can almost hear the fluttering of doves. But look at the evidence, and it is obvious that hawks are gathering.”

Source: Ben McLannahan, Financial Times, August 25, 2009.

Financial Times: Troubling signs in Japan ahead of vote
“Japan’s consumer prices fell at a faster-than-expected pace in July and unemployment rose sharply, according to data released on Friday, as the country prepared to vote in a new government on Sunday to lead the economy’s recovery.

“The jobless rate jumped to 5.7% in July from 5.4% in June - the highest level since records began in 1960 - as businesses continued to cut their workforce and new graduates joined the labour market.

“Rising job insecurity continued to weigh on private spending. Japanese household spending fell 1.3% compared with June on a seasonally adjusted basis while worsening deflation could further dampen demand. Last month, core consumer prices, excluding fresh food, fell 2.2% from a year ago, compared with a drop of 1.7% in June. The decline was the worst since records began in the early 1970s.

“‘Much of the current bout of deflation is the result of huge falls in year-ago oil prices. However, these will dissipate, as oil prices have since risen. In fact, in six months time oil will likely be a strong positive contributor to headline inflation,’ said Daniel Melser, economist at Moody’s Economy.com.

“The economic data were worse than expected but unlikely to change the fact that most economists believe the economy has hit bottom.

“Japan, which emerged from recession in the second quarter, is expected to see another quarter of growth in the July to September period after volume of exports rose a seasonally-adjusted 2.3% in July from June.

“The long-ruling Liberal Democratic party is expected to face a landslide defeat in Sunday’s general election as Japanese voters demand for changes in the way the country is run.”

Source: Justine Lau, Financial Times, August 28, 2009.

Paul Biszko (RBC Capital Markets): Time up for Russia bears
“There is a growing sense that the worst is now over for Russia - but problems still lie ahead, says Paul Biszko, senior emerging markets strategist at RBC Capital Markets.

“‘In late 2008/early 2009 Russia looked vulnerable to a full blown crisis,’ he says. ‘Its externally over-leveraged private sector was hit by both a sharp credit squeeze and a commodity price collapse.’

“He says three factors have been critical to the country’s turnround.

“First, the risk asset rally and improved investor sentiment in the second quarter of this year helped halt capital flight and eased refinancing problems.

“Second, the partial oil price recovery and commodity bounce has improved both government and corporate cash flow.

“Third, the government acted relatively effectively in confronting a deep domestic liquidity shortage and stemming rampant panic, largely as it had a strong balance sheet coming into the crisis.

“‘Although Russia’s cash reserve cushion has been cut by a third, it is still relatively large at $400 billion - this remains its key near-term anchor, which should allow it to cope with any second-round crisis aftershocks,’ Mr Biszko says.

“‘We are not turning outright bullish on Russia, rather less bearish, at least on a three- to six-month horizon.

“‘Our biggest concern is that Russia remains highly sensitive to recurring commodity price shocks, and its willingness/ability to reduce this vulnerability is questionable.’”

Source: Paul Biszko, RBC Capital Markets (via Financial Times), August 27, 2009.

Nationwide: UK house price bounce extends into August
“Commenting on the figures Martin Gahbauer, Nationwide’s Chief Economist, said:

“‘The price of a typical house rose for the fourth consecutive month in August, increasing by 1.6% on a seasonally adjusted basis. The 3 month on 3 month rate of change - generally a smoother indicator of the near term trend - rose from 2.7% in July to 3.3% in August, the highest level since February 2007. At

£160,224, the average price of a typical UK property is still slightly lower than 12 months ago. However, the annual rate of change rose further in August, from -6.2% to -2.7%. Over the first eight months of 2009, the seasonally adjusted index of house prices has risen by 3.2%, though relative to the October 2007 peak it is down by 14.4%.

“‘The exceptionally low level of interest rates offers some explanation for why house prices have not repeated the very sharp falls of 2008. There are two main channels through which the low level of interest rates has impacted the housing market. First, mortgage payments for existing homeowners - especially those with tracker or standard variable rate loans - have been reduced substantially. Before the MPC began cutting rates, the average interest and principal payment per mortgage holder represented about 38% of the average post-tax labour income. Following the steep cuts in base rate, this has fallen to just 28% of post-tax income, despite historically high levels of outstanding mortgage debt.

“‘The fall in debt servicing costs has meant that fewer homeowners are under immediate financial pressure to sell than might have been expected in a recessionary economic background with rising unemployment. Partly as a result, fewer second-hand properties have come onto the market than is normally the case in recessions, which has contributed to moving the balance of supply and demand more in favour of sellers over the course of 2009.

“‘In addition to limiting the supply of second-hand homes, lower interest rates have also had an impact on the demand side. Even though house prices remain high relative to earnings, the fall in interest rates has improved the affordability of mortgages for those looking to buy a home. This helps to explain the strong rise in new buyer enquiries reported by estate agents for most of 2009. Although not all of these enquiries are turning into sales, house purchase transactions have continued to slowly increase from the record lows reached in late 2008.

“‘At the moment, a rise in interest rates is probably still some way off. However, the eventual exit from exceptionally loose monetary policy could make the recovery in the housing market bumpier than some might expect after the last few months of price increases.’”

Source: Nationwide, August 27, 2009.

James Lord (Capital Economics): Israel’s monetary policy
“The Bank of Israel’s surprise interest rate rise on Monday is unlikely to send other central banks rushing to tighten - but the move is nevertheless of great interest, says James Lord at Capital Economics.

“‘Although Israel is a relatively small economy, the BoI’s response to the global crisis has been sophisticated,’ he says.

“‘It cut rates aggressively and implemented quantitative easing, leading to a large expansion of the monetary base.’

“Mr Lord also notes that Stanley Fischer, the BoI governor, is a former IMF deputy managing director and was US Fed chairman Ben Bernanke’s PhD supervisor. ‘Mr Bernanke is likely to watch closely given that his former tutor is implementing policies that may be relevant for the Fed’s own exit from quantitative easing.’

“Indeed, the BoI started to unwind quantitative easing last month, while the rate of interest payable on commercial bank reserves will now rise - which is Mr Bernanke’s preferred method for reversing any inflationary impact from the Fed’s unconventional easing, Mr Lord says.

“‘But we doubt the BoI’s move has implications for other central banks. The BoI made clear rates went up to help anchor local inflation expectations. In most major economies, inflation is expected to stay low this year and next.

“‘Also, central bankers at Jackson Hole made it clear that ultra-accommodative policy is likely to remain in place in the major economies for some time.’”

Source: James Lord, Capital Economics (via Financial Times), August 25, 2009.

Bloomberg: Zuma may be African Lula as anti-inflation move lures investors
“South African President Jacob Zuma was propelled into office this year by union support. So far, it is investors who are reaping the benefit.

“Zuma, who campaigned on promises to create jobs and slash poverty, began by removing two union foes: Finance Minister Trevor Manuel and central bank governor Tito Mboweni. He then named replacements who once worked for Manuel and Mboweni and who have favored their predecessors’ economic policies, which labor officials say stifle growth and employment.

“That has some analysts comparing Zuma to Brazilian President Luiz Inacio Lula da Silva, who panicked investors with his anti-capitalist rhetoric when he came to power in 2003, only to implement market-pleasing measures later. Since Lula took office on January 1, 2003, Brazil’s gross domestic product has tripled to become the world’s eighth-biggest economy.

“‘Zuma is pulling a Lula,’ said Lars Christensen, head of emerging-market strategy at Danske Bank in Copenhagen. ‘Zuma is a pragmatist. I can’t see any big differences between Zuma’s policies and those of his predecessors. No one expected that.’

“The president has maintained the inflation-fighting policies of his predecessor, Thabo Mbeki, has met investors to reassure them, has said that public spending may need to be curbed and has commissioned a study on using tax revenue more effectively. Yesterday, Gwede Mantashe, secretary general of Zuma’s African National Congress, said labor unions have no undue influence over the president.

“South Africa’s rand is the second best-performing emerging market currency of the 26 monitored by Bloomberg this year. The first is the Brazilian real. Ex-union leader Lula kept spending in check and named as central bank president a FleetBoston Financial Corp. executive who resisted pressure from some members of Lula’s Workers’ Party to immediately cut rates.

“Almost four months into his term, Zuma is adhering to the free-market approach that angered his union backers when implemented by Mbeki. Investors who were irked by Zuma’s ties to labor now say Zuma’s South Africa is looking like a good bet.

“Since the April 22 election, the rand has gained 13% against the dollar, the benchmark South African stock index has advanced 26% and credit default swaps, the cost of protecting against a default, have dropped by more than a third.

“‘Zuma appears to be making very solid decisions,’ said Joseph Rohm, fund manager of the $300 million Africa & Middle East Fund at T Rowe Price International Plc in London. ‘We are encouraged that what was a business-friendly environment has been maintained.’ He said he has been buying South African assets, though he declined to be more specific.”

Source: Nasreen Seria, Bloomberg, August 28, 2009.

Financial Times: Ted Kennedy
“Edward Kennedy died on Tuesday night from the consequences of a brain tumour at the age of 77. He did not fulfil the ambitions of his dynastic family by becoming president of the United States, as one brother did and as another might have, both victims of the assassin’s bullets, but he became a lion of the US senate, liked and admired by friend and foe alike.”

Click here for the full article.

Source: Financial Times, August 26, 2009.

Tags: Barack Obama, BRIC, Canada, Commodities, Crisis Actions, Doctor Bill, Economic Catastrophe, Economic Upswing, Emerging Markets, Emerging Stock Market, ETF, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Global Stock Markets, Gold, Government Bonds, High Yield Corporate Bonds, India, Japanese Yen, Larry Summers, Miracle Cure, Morgan Stanley, oil, Partisan Battle, Recovery Path, Risky Assets, Stephen Roach, Stock Market Indices
Posted in Emerging Markets, Gold, Markets | No Comments »

How You Finance Goldman Sachs’ Profits - a Goldman insider’s view

Friday, July 31st, 2009

By Nomi Prins, via Mother Jones

July 28, 2009 — This is perhaps the most important thing I learned over my years working on Wall Street, including as a managing director at Goldman Sachs: Numbers lie. In a normal time, the fact that the numbers generated by the nation’s biggest banks can’t be trusted might not matter very much to the rest of us. But since the record bank profits we’re now hearing about are essentially created by massive federal funding, perhaps it behooves us to dig beneath their data. On July 27, 10 congressmen, led by Rep. Alan Grayson (D-Fla.), did just that, writing a letter to Federal Reserve Chairman Ben Bernanke questioning the Fed’s role in Goldman’s rapid return to the top of Wall Street.

To understand this particular giveaway, look back to September 21, 2008. It was a frenzied night for Goldman Sachs and the only other remaining major investment bank, Morgan Stanley. Their three main competitors were gone. Bear Stearns had been taken over by JPMorgan Chase in March, 2008, Lehman Brothers had just declared bankruptcy due to lack of capital, and Bank of America had been pushed to acquire Merrill Lynch because the firm didn’t have enough cash to survive on its own. Anxious to avoid a similar fate, hat in hand, they came to the Fed for access to desperately needed capital. All they had to do was become bank holding companies to get it. So, without so much as clearing the standard five-day antitrust waiting period for such a change, the Fed granted their wish.

Bank holding companies (which all the biggest financial firms now are) come under the regulatory purview of the Fed, the Office of the Comptroller of the Currency, and the FDIC. The capital they keep in reserve in case of emergency (like, say, toxic assets hemorrhaging on their books, or credit derivatives trades not being paid) is supposed to be greater than investment banks’. That’s the trade-off. You get access to federal assistance, you pony up more capital, and you take less risk.

Goldman didn’t like the last part. It makes most of its money speculating, or trading. So it asked the Fed to be exempt from what’s called the Market Risk Rules that bank holding companies adhere to when computing their risk.

Keep in mind that by virtue of becoming a bank holding company, Goldman received a total of $63.6 billion in federal subsidies (that we know about—probably more if the Fed were ever forced to disclose its $7.6 trillion of borrower details). There was the $10 billion it got from TARP (which it repaid), the $12.9 billion it grabbed from AIG’s spoils—even though Goldman had stated beforehand that it was protected from losses incurred by AIG’s free fall, and if that were the case, would not have needed that money, let alone deserved it. Then, there’s the $29.7 billion it’s used so far out of the $35 billion it has available, backed by the FDIC’s Temporary Liquidity Guarantee Program, and finally, there’s the $11 billion available under the Fed’s Commercial Paper Funding Facility.

Tactically, after bagging this bounty, Goldman asked the Fed, its new regulator, if it could use its old risk model to determine capital reserves. It wanted to use the model that its old investment bank regulator, the SEC, was fine with, called VaR, or value at risk. VaR pretty much allows banks to plug in their own parameters, and based on these, calculate how much risk they have, and thus how much capital they need to hold against it. VaR was the same lax SEC-approved risk model that investment banks such as Bear Stearns and Lehman Brothers used, with the aforementioned results.

On February 5, 2009, the Fed granted Goldman’s request. This meant that not only was Goldman getting big federal subsidies, but also that it could keep betting big without saving aside as much capital as the other banks. Using VaR gave Goldman more leeway to, well, accentuate the positive. Yes, Goldman is a more risk-prone firm now than it was before it got to play with our money.

Which brings us back to these recent quarterly earnings. Goldman posted record profits of $3.4 billion on revenues of $13.76 billion. More than 78 precent of those revenues came from its most risky division, the one that requires the most capital to operate, Trading and Principal Investments. Of those, the Fixed Income, Currency and Commodities (FICC) area within that division brought in a record $6.8 billion in revenues. That’s the division, by the way, that I worked in and that Lloyd Blankfein managed on his way up the Goldman totem pole. (It’s also the division that would stand to gain the most if Waxman’s cap-and-trade bill passes.)

Since Goldman is trading big with our money, why not also use it to pay big bonuses? It’s not like there are any strings attached. For the first half of 2009, Goldman set aside $11.4 billion for compensation—34 percent more than for the first half of 2008, keeping them on target for a record bonus year—even though they still owe the federal government $53.6 billion, a sum more than four times that bonus amount.

But capital is still key. Capital is the lifeblood that pumps through a financial organization. You can’t trade without it. As of June 26, 2009, Goldman’s total capital was $254 billion, but that included $191 billion in unsecured long-term borrowing (meaning money it had borrowed without putting up any collateral for it). On November 28, 2008 (4Q 2008), it had only $168 billion in unsecured long-term borrowing. Thus, its long-term unsecured debt jumped 14 percent. Though Goldman doesn’t disclose exactly where all this debt comes from, given the $23 billion jump, we can only wonder whether some of it has come from government subsidies or the Fed’s secret facilities.

Not only that, by virtue of how it’s set up, most of Goldman’s unsecured funding comes in through its parent company, Group Inc. (Think the top point of an umbrella with each spoke being a subsidiary.) This parent parcels that money out to Goldman’s subsidiaries, some of which are regulated, some of which aren’t. This means that even though Goldman is supposed to be regulated by the Fed and other agencies, it has unregulated elements receiving unsecured funding—just like before the crisis, but with more of our money involved.

As for JPMorgan Chase, its profit of $2.7 billion was up 36 percent for the second quarter of 2009 vs. the same quarter last year, but a lot of that also came from trading revenues, meaning its speculative endeavors are driving its profits. Over on the consumer side, the firm had to set aside nearly $30 billion in reserve for credit-related losses. Riding on its trading laurels, when its consumer business is still in deterioration mode, is not a recipe for stability, no matter how much cheering JPMorgan Chase’s results got from Wall Street. Betting is betting.

Let’s pause for some reflection: The bank “stars” made most of their money on speculation, got nearly $124 billion in government guarantees and subsidies between them over the past year and a half, yet saw continued losses in the credit products most affected by consumer credit problems. Both are setting aside top-dollar bonuses. JPMorgan Chase CEO Jamie Dimon mentioned that he’s concerned about attracting talent, a translation for wanting to pay investment bankers big bucks—because, after all, they suffered so terribly last year, and he needs to stay competitive with his friends at Goldman. This doesn’t add up to a really healthy scenario. It’s more like bad déjà vu.

As a recent New York Times article (and many other publications in different words) said, “For the most part, the worst of the financial crisis seems to be over.” Sure, the crisis may appear to be over because the major banks of Wall Street are speculating well with government subsidies. But that’s a dangerous conclusion. It doesn’t mean that finance firms could thrive without the artificial, public-funded assistance. And it certainly doesn’t mean that consumers are any better off than they were before the crisis emerged. It’s just that they didn’t get the same generous subsidies.

Additional research by Clark Merrefield.

Nomi Prins is an economist and frequent contributor for Mother Jones. Her most recent book is It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street. To read more articles by Nomi Prins, click here

Source:  Mother Jones

Tags: Alan Grayson, Bank Holding Companies, Bank Of America, Bank Profits, Bear Stearns, Biggest Banks, Commodities, Comptroller Of The Currency, Credit Derivatives, Federal Assistance, Federal Reserve Chairman, Goldman Sachs, Investment Banks, Jpmorgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, Mother Jones, Office Of The Comptroller Of The Currency, oil, Rapid Return, Writing A Letter
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Robert Rodriguez: Stay High Quality, Focused, Shoot with a Rifle

Thursday, July 23rd, 2009

Connie Mack interviewed First Pacific Advisors’ CEO, Robert Rodriguez, co-portfolio manager of FPA Capital, a mid cap value fund, and FPA New Income, his bond fund, which just celebrated its 25th year in positive territory. Rodriguez is one of only two fund managers to have been honoured by Morningstar as best fund manager three times in his career. The other is Bill Gross.

Here are some excerpts from this in depth interview, which you should make a point of watching.

Rodriguez describes the economy as entering a “repression,” not as bad as the Great Depression, but worse than a bad recession.

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

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

CONSUELO MACK: And he wrote you back.

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

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

ROBERT RODRIGUEZ: As Warren Buffett says, he’s the smart one. And after the class I asked him, I said what can I do to make myself a better investor, beyond just what I’m doing here and researching, et cetera? And he said, read history. Read history. Read history. And if people had read history about the economic crises of before, not only the depression but even before then, they would have said this is an old friend, and so that helped. It’s come from a number of different parts, but I think really not being afraid to fail and be different. That’s what it took in order to differentiate in this business.

I had a friend of mine who was a growth stock manager who got just before the debacle of 2000, we were having lunch together in January of 2000 and he was buying all this dot com, and I said why are you buying this crap? And he says, because you have to, he says yes, if I don’t buy it we won’t be competitive. I said, but don’t you realize, you are at the epicenter of a debacle that’s going to occur? And when you get destroyed, you know, you could either have cash or you can buy these things. If you have cash, you get fired. If you buy the dot-com and it blows up, you get fired. So in both cases you’re fired. What’s the difference? Over here the one with the cash, where you held your investment discipline, you can rebuild your business. Over here, you’ve destroyed your credibility, you can never rebuild.

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

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

Rodriguez says that the rebound in the market and economy is a “head fake.” He suggests the way to go is to stay high quality and use a rifle, as opposed to shotgun, approach to investing, the next 5 to 10 years. He says highly diversified equity funds will be a competitive disadvantage - you may as well buy an index fund rather than pay an active fund manager who isn’t necessarily going to deliver an edge in this market.

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

ROBERT RODRIGUEZ: It’s going to be very hard. As a result, on the fixed income side, we’re still maintaining our highest levels of quality. We haven’t gone into the lower rungs of the high yield area, even though there’s been big rungs there, because we think this is a head fake of what’s going on in the economy and this rebound, the green shoots that people talk about. So we’re going to stay high quality and let other people destroy themselves.

On the equity side, we think you have to be very focused in terms of the industries you go after. So we have a natural decline rate in, let’s say energy, supplies of energy. So we think longer term- three, five, ten years. Energy prices are going to be considerably elevated from where they are today. So we have a heavy exposure there.

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

ROBERT RODRIGUEZ: Well, about 41% of the total portfolio, about 55% of the equity. Okay. So we’re looking for other areas to deploy capital that will both benefit from the international side but also from the commodities side.

So we see, you have to be rifle shooting over the course of the next five years or ten years, and that’s why I gave a speech in Chicago at Morningstar that in my opinion, a highly diversified equity fund in this new order will be at a competitive disadvantage, especially if it carries management fees, et cetera, so you’re going to have to do something different from the rest of the market in order to differentiate again, and that’s what we’re doing.

The whole transcript will be available for a limited time only (two weeks) as WealthTrack charges for archived transcripts. Read it here.

In case you didn’t see the video 2 weeks ago, here it is again:

Tags: Bill Gross, Bond Fund, Ceo Robert, Commodities, Connie Mack, Depth Interview, Economist John Maynard, Federal Reserve Chairman, First Pacific Advisors, Great Depression, Investment Field, John Maynard Keynes, Mid Cap Value, Mid Cap Value Fund, Portfolio Manager, Robert Rodriguez, Rodriguez Co, School Assignment, Shareholder Letters, Term Investor, Writing A Letter
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Risk Appetite Fades on Stimulus Gloom

Friday, February 13th, 2009

Events this week were dominated by the announcement of US Treasury Secretary Geithner’s Financial Stability Plan and a deal reached in the Senate on the Economic Stimulus Bill. However, the big bail-out bang soon whimpered as investors were disappointed about the lack of detail.

While markets remained mired in uncertainty, a barrage of video footage on the ins and out of the various plans was produced. Commenting on the financial rescue packages were the likes of Bill Gross, Paul Volcker, Steve Forbes, Frederic Mishkin, Mark Zandi, Robert Shiller, Byron Wien, Martin Feldstein, Paul McCulley, Jim Rogers, Nouriel Roubini, Peter Schiff and John Silvia.

In lighter vein, this week’s compilation kicks off with a message from Jon Stewart to Wall Street: “I suggest that you don’t complain about whether or not you get a window seat on the rescue boat.” Also, don’t miss the “Stimulus” item at the end of the post.

The Daily Show: Wall Street bailout
“Wall Street doesn’t like how the trillion dollars will be distributed to save them.”

Source: Jon Stewart, The Daily Show, February 11, 2009.

ABC News: Obama - no “easy out” for Wall Street

Source: Terry Moran, ABC News, February 10, 2009.

Financial Times: Big bail-out bang whimpers
“The Treasury’s financial rescue plan lacks detail and was unwelcome by the markets, says FT’s Francesco Guerrera.”

Click here for the article.

Source: Financial Times, February 10, 2009.

CNBC: Deal reached on economic stimulus bill
“A deal has been reached on an economic stimulus bill, according to Senate Majority Leader Harry Reid.”

Source: CNBC, February 11, 2009.

Bloomberg: Gross, Volcker, Mishkin and Forbes on stimulus
“Bill Gross, co-chief investment officer of Pacific Investment Management Co. and former Federal Reserve Chairman Paul Volcker speak about the prospects for a US economic stimulus package. President Barack Obama is demanding Congress to pass a stimulus bill before its February 16 President’s Day holiday. This report also includes comments from former Fed Governor Frederic Mishkin, Steve Forbes, chief executive officer of Forbes Inc., Charles Calomiris, a professor at Columbia University, Mark Zandi, chief economist of Moody’s Economy.com, and Joel Prakken, chairman of Macroeconomic Advisers.”

Source: Bloomberg, February 10, 2009.

CNBC: Shiller and Wien discuss stimulus
“Insight on how human psychology drives the economy, with Robert Shiller, Yale School of Management’s professor, and Byron Wien, Pequot Capital chief investment strategist.”

Source: CNBC, February 11, 2009.

CNBC: Feldstein on stimulus deal
“Martin Feldstein, Harvard University professor and a member of Obama’s economic recovery advisory board, discusses the stimulus deal reached by Congress and today’s bank CEO hearings on Capitol Hill.”

Source: CNBC, February 11, 2009.

CNBC: Pimco’s McCulley - a Treasury plan short on details
“Investors are searching for more detail than Tim Geithner was willing to provide, with Paul McCulley, PIMCO portfolio manager/managing director.”

Source: CNBC, February 11, 2009.

CNBC: Rogers - let banks fail
“It’s not the first time in the world that investment banks and commercial banks have gone bankrupt, this has been going on for hundreds of years,” Jim Rogers, CEO of Rogers Holdings, told CNBC Tuesday.”

Source: CNBC, February 10, 2009.

Bloomberg: Roubini expects US to play stronger role in banks
“Nouriel Roubini, a professor at New York University, talks with Bloomberg’s Kathleen Hays about the banking industry and housing market. Roubini, who forecast the US recession two years ago, says the US government will have to nationalize some of the biggest banks because they are now ‘effectively insolvent’.”

Source: Bloomberg, February 9, 2009.

Fox Business News: Peter Schiff - economic Armageddon?

Click here to view Part 2.

Source: Fox Business News (via YouTube), February 5, 2009.

The Wall Street Journal: Silvia on the prospects for a US recovery
“John Silvia, chief economist at Wachovia, talks about his expectations for the future of the country’s gross domestic product, employment data and whether government stimulus will work.”

Source: The Wall Street Journal, February 10, 2009.

CNBC: Dr Doom - US inflation could hit 200%

Click here for the article.

Source: CNBC, February 6, 2009.

Bloomberg: Inside look - January foreclosures top 250K
“Foreclosures exceeded 250,000 for 10th straight month in January; analysis and discussion with RealtyTrac’s Rick Sharga.”

Source: Bloomberg (YouTube), February 11, 2009.

John Authers (Financial Times): The importance of dividends

Click here for the article.

Source: John Authers, Financial Times, February 10, 2009.

Bloomberg: Gross bought mortgages, sold US debt

Click here for the article.

Source: Bloomberg, February 11, 2009.

Financial Times: Martin Fridson on default rates and distressed debt
“Martin Fridson, chief executive of Fridson Investment Advisors, which invests in corporate debt, expects corporate default rates in the US to peak around 15% or 16%, the highest level since the Great Depression. More dire economic conditions could push this level higher. The reason for the soaring default rates is that the quality of outstanding bonds is so much worse than in previous cycles. Investors lent money to companies that were a lot riskier to lend to than they have in the past. This expectation assumes the financial system will get back on its feet, but the outlook could worsen again for the financial system, and that would mean expectations have to be reviewed.

“In Part 2 Martin says a higher default rate combined with structural changes in the debt markets such as changes to the bankruptcy code could push recover rates to 15 cents on the dollar. The average recovery rates over the cycle tend to be in the range of 40 to 45 cents, with recovery at the low point usually at 25 cents. These could be lower this time around. Losses could also come to holders of bonds in banks, especially in banks that could fail or get taken over by the government.

Click here to view part 2.

In Part 3 Martin says the best time to buy distressed debt is when default rates peak, which is not expected until the end of 2009 or the first half of 2010.

Click here to view part 3.

Source: Aline van Duyn, Financial Times, February 8, 2009.

CNBC: Mr. Yen on crisis response - a “behind the curve”
“Eisuke Sakakibara, the former finance minister for Japan, believes moves to counter the financial crisis have been a little slow. ‘So far, the authorities have been a little bit behind the curve,’ he told CNBC. ‘You should have infused capital a little bit earlier.’”

Source: CNBC, February 12, 2009.

BBC News: BoE’s Mervyn King says UK “in deep recession”

Click here for the article.

Source: BBC News, February 11, 2009.

YouTube: Stimulis - because all economies have performance issues
“Are you an economy with performance issues? If you find it hard to achieve and maintain growth, maybe Stimulis is right for you. Take Stimulis once every election cycle or whenever you’re in need …

Source: YouTube, February 4, 2009.

Tags: Chief Investment Officer, Economic Stimulus Bill, Economic Stimulus Package, Federal Reserve Chairman, Frederic Mishkin, John Silvia, Jon Stewart The Daily Show, Mark Zandi, Martin Feldstein, Nouriel Roubini, Pacific Investment Management Co, Paul McCulley, Paul Volcker, Peter Schiff, Risk Appetite, Robert Shiller, Senate Majority Leader, Senate Majority Leader Harry Reid, Steve Forbes, Wall Street Source
Posted in Bonds, Economy, Markets, Outlook | No Comments »