Posts Tagged ‘Government Bonds’

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

Monday, March 15th, 2010

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

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

Source: StockCharts.com

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

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

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

Source: StockCharts.com

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

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

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

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

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

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

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

Emerginvest world markets heat map

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

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

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

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

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

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

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

Source: Bespoke, March 9, 2010.

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

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

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

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

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

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

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

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

Source: StockCharts.com

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

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

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

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

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

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

Twitter and Facebook
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those readers not doing so already, you can follow my “tweets” by clicking here. You may also consider joining me as a friend on Facebook.

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

Source: Moody’s Economy.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Week’s economic reports

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Mar 10	10:00 AM	Wholesale Inventories	Jan	-0.2%	-0.1%	0.2%	-1.0%
Mar 10	10:30 AM	Crude Inventories	03/06	1.43M	NA	NA	4.03M
Mar 10	02:00 PM	Treasury Budget	Feb	-$220.9B	-$223.0B	-$222.0B	-$42.6B
Mar 11	08:30 AM	Continuing Claims	2/27	4558K	4550K	4500K	4521K
Mar 11	08:30 AM	Initial Claims	03/06	462K	445K	460K	468K
Mar 11	08:30 AM	Trade Balance	Jan	-$37.3B	-$42.5B	-$41.0B	-$39.9B
Mar 11	12:00 PM	Flow of Funds	Q4	-	-	-	-
Mar 12	08:30 AM	Retail Sales	Feb	0.3%	-0.2%	-0.2%	0.1%
Mar 12	08:30 AM	Retail Sales ex auto	Feb	0.8%	0.2%	0.1%	0.5%
Mar 12	09:55 AM	Michigan Sentiment	Mar	72.5	74.6	74.0	73.6
Mar 12	10:00 AM	Business Inventories	Jan	0.0%	0.0%	0.1%	-0.2%

Source: Yahoo Finance, March 12, 2010.

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

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

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

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

Wednesday, March 17
• PPI

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Steel

Natural gas

Tech (especially semiconductors)

Software/Information services

Housing (entry level)

Tourism

Staffing firms

Chemical manufacturing

Rail transports

Airlines (fares stabilizing, leisure and business demand improving)

Heavy machinery (especially mining and agriculture equipment)

Plastic products

Health care services

Negative mentions

Commercial real estate

Banking

Commercial aircraft

Automotive

Coal

Petrochemicals”

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

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

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

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

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

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

Source: MoneyNews, March 8, 2010.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, March 11, 2010.

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

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

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

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

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

Source: MoneyNews, March 9, 2010.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Wall Street Journal: Cracking down on swaps

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click here for the article.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: MoneyNews, March 9, 2010.

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

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

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

“But we are still living with its consequences.

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, March 11, 2010.

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

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

Source: Bespoke, March 11, 2010.

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

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

Source: Bespoke, March 9, 2010.

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

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

Source: Bespoke, March 10, 2010.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: MoneyNews, March 11, 2010.

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

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

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

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

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

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

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

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

Source: Bespoke, March 9, 2010.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: CNBC, March 11, 2010.

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

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

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

Source: Bloomberg, March 10, 2010.

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

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

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

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

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

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

Tags: Asset Classes, Bipartisan Bill, Cboe, Chairman Christopher, Christopher Dodd, Corporate Bonds, Credit Crisis, Degree Of Risk, Dick Fuld, Doonesbury, Government Bonds, High Yield Bonds, Regulatory Reform Bill, Risk Taking, Senate Banking Committee, Set Of Numbers, Sovereign Debt, Stock Market Indices, Us Treasury, Vix Index
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Words from the (Investment) Wise (February 28, 2010)

Sunday, February 28th, 2010

As investors vacillated about the impact of developments in Greece, together with the uncertainty of strong fourth-quarter economic data possibly not carrying over to the first quarter, stock markets experienced two sharp sell-offs and two rebound rallies, limping to small gains on Friday but ending the week modestly down.

Renewed fears over Greece’s debt woes, disappointing German business confidence statistics and lower-than-expected US consumer confidence data tempered investor optimism for risky assts, triggering haven demand for government bonds and the Japanese yen.

Fed Chairman Ben Bernanke provided some support for stock markets on Wednesday by indicating in his testimony to the US House Financial Services Committee that the fed fund rate will remain at exceptionally low levels for an extended period. However, the flip side of the coin is his gloomy picture of the economy still battling high unemployment and a weak housing sector.

“Greece hasn’t gotten so much press since 146 BC when the Romans took over,” said Paul Kasriel (Northern Trust). In news after the close of the markets, the Financial Times reported: “Germany’s biggest banks are looking at a rescue plan for Greece under which they would buy Greek debt backed by financial guarantees from Berlin. One senior German bank official said serious thought was being given to a plan for the German government, working through KfW, its development bank, to issue guarantees to banks that bought Greek debt.”

Source: Patrick Blower, Guardian

The past week’s performance of the major asset classes is summarized in the chart below - a set of numbers indicating that a degree of risk aversion has crept back into financial markets. Interestingly, unlike equities, both investment-grade and high-yield corporate bonds ended the week in the black. “We believe investors can capture attractive yields and excess spread in the high-yield market with relatively low default risk,” Andrew Jessop, high-yield portfolio manager at Pimco, said in a note on the company’s website (via MoneyNews).

Source: StockCharts.com

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

It was essentially a flat week, with the MSCI World Index declining by 0.1%, but the MSCI Emerging Markets Index managing to eke out a positive return of 0.3%. With the Chinese returning from the lunar holiday, Hong Kong (+3.6%) put in one of the better performances among important markets, whereas mainland China (+1.1%) also closed the week in the black.

Notwithstanding the huge rally since the March lows, only the Chile Stock Market General Index has been able to reclaim its 2007 pre-crisis peak and is now trading 9.4% higher. Mexico could be the next country to eliminate the bear market losses.

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

Top performers among stock markets this week were Ukraine (+4.5%), Greece (+3.7%), Hong Kong (+3.6%), Cyprus (+3.2%) and Thailand (+3.0%). At the bottom end of the performance rankings, countries included Turkey (‑6.8%), Malta (-5.7%), Austria (-5.2%), Argentina (-4.9%) and Latvia (-4.2%). Turkey suffered from tensions between the government and the military. Debt-ridden European countries such as Italy (-3.2%), Spain (-3.2%), Ireland (-3.2%) and Portugal (-2.1%) featured strongly at the bottom end of the performance ranking.

Of the 96 stock markets I keep on my radar screen, 33% recorded gains, 60% showed losses and 7% remained unchanged. The performance map below tells the past week’s somewhat bearish story.

Emerginvest world markets heat map

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

Eight of the ten economic sectors of the S&P 500 Index closed lower for the week, with Financials and Consumer Discretionary the only two sectors not under water. (Who would have guessed the Conference Board’s Consumer Confidence Index would fall to its lowest level since July 2009 on Tuesday?)

Source: US Global Investors - Weekly Investor Alert, February 26, 2010.

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Vanguard Extended Duration Treasury (EDV) (+4.3%), iShares MSCI Thailand (THD) (+3.9%) and CurrencyShares Japanese Yen (FXY) (+3.1%).

At the bottom end of the performance rankings, ETFs included iShares MSCI Turkey (TUR) (-8.8%), Claymore/MAC Global Solar Energy (TAN) (-7.2%) and United States Natural Gas (UNG) (down 5.1%).

Referring to a regulatory report released on Tuesday by the Federal Deposit Insurance Corp (FDIC), the quote du jour this week comes from Addison Wiggin, co-author of Financial Reckoning Day Fallout and The New Empire of Debt. He said in a column on The Daily Reckoning site: “The FDIC is even more broke than it was three months ago. The fund the FDIC uses to ‘insure’ your bank account went $20.9 billion in the red during the fourth quarter of 2009. That’s more than twice the deficit reported when the fund first entered negative territory in the previous quarter. Incredibly, the FDIC is still trying to reassure us that all is well because it’s collecting three years of advance payments on the annual assessments paid by its member banks. The fees total $45 billion - barely twice the amount of the current deficit. Yeah, we feel better.

“On top of that, the FDIC’s list of ‘problem banks’ grew during the fourth quarter from 552 to 702. That’s the highest number since 1993 (when, we presume, more independently owned banks were around, so it’s worse than it sounds). Hmmm, let’s see. The number grew 27% in just one quarter. At this pace, every bank in the country will be on the problem list by the fourth quarter of 2012. Another tidbit from the FDIC’s report: Bank lending last year dropped at the biggest clip since 1942. Of course, in that year, the entire economy was shifting to a war footing. So it’s safe to say what we’re seeing now is another unprecedented postwar occurrence.”

Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. “Bank”, “debt”, “economy”, “Fed”, “rate” and “market” all featured prominently, but it was somewhat surprising to see “China” commanding more media mentions than “Greece”.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town when not traveling) are given in the table below. With the exception of the Dow Jones Transportation Index, the Nasdaq Composite Index and the Russell 2000 Index, the indices in the table are all trading below their 50-day moving averages, but all the indices are still above their respective key 200-day moving averages. However, a red light is starting to flash regarding the Shanghai Composite Index, which is within striking distance (20 basis points) of this key support line.

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

Commenting on the technical picture of the S&P 500, Kevin Lane (Fusion IQ) said: “The Index hit minor resistance a few trading sessions back near the 1,112 level. Until this level is taken out the near-term directional bias remains neutral. Lower down, the key level to watch is in the 1,072 area. This support level represents a much more significant uptrend line and if violated would suggest a bigger correction.

“Sentiment indicators are neutral at present, which is a positive, while market breadth remains a mixed bag. Clearly the recent trading activity suggests volatility will be more present in day-to-day trading than over the past few months.”

On the topic of charts, when considering S&P 500 monthly data, going back to 1998, three momentum-type oscillators (RSI, MACD and ROC) all still signal a bullish trend (see chart below). According to Yahoo Finance - Tech Ticker, Barry Ritholtz (The Big Picture) is not as bullish as he was last March when he called the market bottom, but is sticking with stocks. “The easy thing to do now would be to go to cash,” he said, “[But] I rarely find the easy trade is the one that makes you money.” (Incidentally, the long-term chart for US government bonds is in bearish mode.)

Source: StockCharts.com

David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, said: “Let’s face it, the surprise two months into the year is that the stock market is down more than 1% and 10-year Treasury yields are also down 20bps. It is still early in the year to be sure but it also seems clear that the economic data are starting to show some fragility. The S&P 500 has done little more than hover around the 1,100 mark now for six months in what can only be classified as a major topping formation. The VIX index is at 20, not 40; market vane sentiment is closer to 60 than 30; the US dollar is strong, not weak; policies are moving tighter, not easier; and the government is now aiming to curtail the banks whereas a year ago it was all about saving them.

“With a V-shaped earnings recovery already priced in and economic houses, like MacroEconomic Advisors, calling for 4% GDP growth for 2010, it certainly is difficult to highlight where the upside surprises for the market are going to be.”

From across the pond, David Fuller (Fullermoney) adds the following perspective: “Do we have a real crisis today? It is real enough for Southern European countries and obviously heightens sovereign debt concerns from Greece to the USA via the UK, but is this another global crisis? I do not think so, at least not yet although the OECD countries’ problems are far from resolved.

“The loss of upside momentum by most stock markets and many commodities, including precious metals, clearly indicates that global investors have reduced leveraged exposure in the last three months. Whether this is a normal correction (our previously stated 40% possibility) or likely to become a self-feeding and more significant pullback (also a 40% possibility) is hard to gauge, but action near the 200-day moving averages will be revealing. Even in the latter instance, I do not think the global economic background justifies a resumption of bear markets (20% possibility), which were discounting near-depression conditions between 4Q 2008 and 1Q 2009.”

I side with Fuller on his conclusion, but am also cognizant of the 12-month momentum of the S&P 500 narrowly tracking the US GDP-weighted PMI (see graph below). Current levels of the S&P 500 indicate the market is expecting a GDP-weighted PMI in excess of 60.0 vs a current level of 52.3. If the S&P 500 maintains its current levels around 1,100, the 12-month momentum will drop to 39% at the end of March and 27% at the end of April this year. Even this drop in momentum requires the GDP-weighted PMI to rise to 55 and higher. Although not impossible, it seems improbable given the sub-par economic recovery. It can therefore be deduced that the US equity market is somewhat overpriced even if the GDP-weighted PMI should improve to 55. Understandably, Marc Faber suggests (via a Financial Times interview) “investors should make 2010 the year of ‘capital preservation’”.

Source: Plexus Asset Management (based on data from I-Net Bridge).

For more discussion on the economy and financial markets, see my recent posts “Montier: Was it all just a bad dream? Or, ten lessons not learnt“, “Barry Ritholtz sticks with stocks, especially emerging markets“, “Q4 earnings in perspective“, “Face to face with Marc Faber” and “Is the credit malaise really over?” (And do make a point of listening to Donald Coxe’s webcast of February 26, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
“Business sentiment has improved markedly since hitting bottom about a year ago. This improvement has been about the same across the globe, with South Americans somewhat more optimistic and North Americans somewhat less so,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. Businesses are most upbeat when responding to broader questions about current conditions and the outlook into this summer, but remain cautious when responding to specific questions regarding the strength of sales, pricing, inventories and hiring.

Source: Moody’s Economy.com

Meanwhile, the Ifo Business Survey for industry and trade in Germany clouded over somewhat in February. For the first time in ten months, the business climate index has not risen, blaming especially the situation in retailing, which experienced a setback in February. On the whole, the firms have assessed their current business situation somewhat more unfavorably than in the previous month.

Source: Ifo Business Survey, February 23, 2010.

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

Friday, February 26
• Existing home sales and inventories disappoint
• Minor revisions of Q4 real GDP

Thursday, February 25
• Have durable goods orders and shipments turned the corner?
• Total continuing claims remain at elevated level

Wednesday, February 24
• Chairman Bernanke repeats “Fed fund rate to remain exceptionally low for an extended period”
• Sales of new homes post new record low
• As Greece goes, so goes the US?

Tuesday, February 23
• Consumer confidence slips in February
• Case-Shiller Home Price Index records seventh monthly gain

Monday, February 22
• Fed’s Yellen underscores that removing monetary accommodation now is inappropriate
• Chicago Fed Index advances in January

Referring to Fed Chairman Bernanke’s testimony, Asha Bangalore (Northern Trust) said: “The most important message from Chairman Bernanke’s testimony is that the federal fund rate will be held at 0%-0.25% for an extended period. In light of the higher discount rate (0.75% vs. 0.50%) announced on February 18, 2010, market participants obtained confirmation from the Chairman that the change in the discount rate was a removal of emergency accommodation put in place to address the financial crisis and not a sign of tightening of the monetary policy stance.”

“I don’t think the Fed dares increase the fed fund or policy rate in the face of unemployment at double-digit type of levels. This is more of a technical maneuver,” Bill Gross of Pimco told Reuters (via MoneyNews).

In related news, the Treasury said on Tuesday that it would bolster its Supplementary Financing Program by selling $200 billion in short-term debt and storing the proceeds at the central bank, thereby helping the Fed remove reserves from the financial system.

Summarizing the growth outlook, Bangalore said: “Going forward, the US economy is predicted to show moderate growth in the first three quarters of 2010 and strong growth in the final three months of 2010, with the virtuous cycle of real and financial recovery working together to lift economic growth.”

Bespoke highlights a daily Life Evaluation Poll conducted by Gallup.com and Healthways in which participants are asked whether they are “thriving”, “struggling” or “suffering”. As shown below, 56% now say they’re thriving, while 41% say they’re struggling (3% are suffering, which is not shown on the chart). ”These readings are at just about the widest spread we’ve seen since the markets’ recovery began,” remarked Bespoke.

Source: Bespoke, February 26, 2010.

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

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Feb 23	9:00 AM	Case-Shiller 20-city Index	Dec	-3.08%	-4.5%	-3.1%	-5.34%
Feb 23	10:00 AM	Consumer Confidence	Feb	46.0	56.5	55.0	56.5
Feb 24	10:00 AM	New Home Sales	Jan	309K	325K	354K	348K
Feb 24	10:30 AM	Crude Inventories	2/19	3.03M	NA	NA	3.08M
Feb 25	08:30 AM	Initial Claims	02/20	496K	425K	460K	474K
Feb 25	08:30 AM	Continuing Claims	02/13	4617K	4570K	4570K	4611K
Feb 25	08:30 AM	Durable Orders	Jan	3.0%	1.6%	1.5%	1.9%
Feb 25	08:30 AM	Durable Goods - ex Transportation	Jan	-0.6%	0.7%	1.0%	2.0%
Feb 25	10:00 AM	FHFA Housing Price Index	Dec	-1.6%	0.4%	0.4%	0.4%
Feb 26	08:30 AM	GDP - second estimate	Q4	5.9%	6.0%	5.7%	5.7%
Feb 26	08:30 AM	GDP Deflator - second estimate	Q4	0.4%	0.6%	0.6%	0.6%
Feb 26	09:45 AM	Chicago PMI	Feb	62.6	57.5	59.7	61.5
Feb 26	09:55 AM	U Michigan Consumer Sentiment - final	Feb	73.6	72.7	73.9	73.7
Feb 26	10:00 AM	Existing Home Sales	Jan	5.05M	5.10M	5.50M	5.44M

Source: Yahoo Finance, February 26, 2010.

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

Next week sees interest rate announcements by the Bank of England (BoE) and the European Central Bank (ECB) (Thursday, March 4). In addition, US economic data reports for the week include the following:

Monday, March 1
• Personal income
• Personal spending
• PCE prices
• Construction spending
• ISM Manufacturing Index

Tuesday, March 2
• Auto sales
• Truck sales

Wednesday, March 3
• Challenger job cuts
• ADP employment
• ISM Services Index
• Fed’s Beige Book

Thursday, March 4
• Jobless claims
• Productivity
• Factory orders
• Pending home sales

Friday, March 5
• Nonfarm payrolls
• Consumer credit

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

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

Final words

Sam Stovall, chief investment strategist for Standard & Poor’s Equity Research Services, said: “If everyone is forecasting something, then you know it won’t come true.” (Hat tip: Charles Kirk.) Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards in guarding against popular (and often wrong) market views.

That’s the way it looks from Cape Town with its sun-drenched days.

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Source: Adam Zyglis, Comics.com

Real World Economics Review Blog: Greenspan, Friedman and Summers win Dynamite Prize in Economics
“Alan Greenspan has been judged the economist most responsible for causing the Global Financial Crisis. He and 2nd and 3rd place finishers Milton Friedman and Larry Summers, have won the first - and hopefully last - Dynamite Prize in Economics.

“They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.

“More than 7,500 people voted - most of whom were economists themselves - from the 11,000 subscribers to the real world economics review. With a maximum of three votes per voter, a total of 18,531 votes were cast.

“This blog established the prize in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, ‘Black Swan’ event. In reality, the public perception that economic theories and policies helped cause the crisis is correct.”

Source: Real World Economics Review Blog, February 22, 2010.

BCA Research: Sowing the seeds of the next fiscal crisis?
“Mushrooming government indebtedness has reemerged to the forefront as a major issue. “Global policymakers learned from the volatility during the first half of the 20th century: when faced with an adverse economic shock, the natural tendency for a modern economy with leverage is to deflate and undergo an Austrian-style cleansing process. Thus, there is an incentive for authorities to reflate each time economic and financial problems break out, encouraging a further buildup of debt and leverage in the economy (i.e. push today’s problems forward to the next generation).

“We have coined this the Debt Supercycle. Unfortunately, the dramatic increase in the policy response needed to end the current recession suggests that the Debt Supercycle is nearing an end. In fact, we would argue that the household sector in the US, UK, and many parts of the euro area have already moved beyond their natural debt ceilings, due in part by lax bank lending standards in recent years.

“Given that authorities have reached the limit of their ability to convince households to take on more leverage, governments have instead been forced to leverage themselves to prevent a deflationary economic adjustment. In addition, the nature of the synchronized global downturn meant that substantial currency depreciation was not a viable reflation option for policymakers. As such, monetary and fiscal policy had to do the heavy lifting. Sizable deficits were a necessary evil if authorities wanted to avoid a sustained period of debt-deflation.”

Source: BCA Research - Daily Insights, February 26, 2010.

David Fuller (Fullermoney): Concentrate long-term investments in low risk countries
“There has been a great deal of discussion in the financial press about whether Greece will successfully navigate the crisis it now finds itself in, if the Eurozone will survive a sovereign debt default should one occur and if there is a risk of contagion for countries such as the UK, Japan and the US. These are all important questions which we will have definitive answers for in the coming months and years but to my mind there is a more important question that needs to be addressed first.

“All the issues facing these governments are in essence related to a problem with too much debt and leverage and not enough tax receipts to pay it down. The questions so far have focused on how one country or another might survive this crisis but from the perspective of a judge at an international beauty contest do we want to invest in these countries at all since there are plenty more where these problems are relatively minor if they exist at all?

“Commodity producers such as Australia and Canada have come through this crisis comparatively unharmed. Most of the others are primarily in the so-called emerging markets. Brazil is now a net creditor, China has the biggest foreign currency reserves in the world. Large numbers of countries in Latin America and Asia run trade surpluses. If we look at the world with a broader perspective we see clearly where risk and leverage are concentrated.

“The outcome of the major challenges facing the US, UK, Eurozone and Japan are crucial because of the effect they have on the global market. However, we do not have to invest in the debt, currencies or equities of these countries. Others are better equipped to deal with these issues from a position of strength. They have shown to be credible managers of their economies in a truly testing era and it is surely in these countries one should concentrate long-term investments.”

Source: David Fuller, Fullermoney, February 24, 2010.

Financial Times: Experts eye possible Greek bail-out
“As Greece battles to stop its public finances from drowning in debt, technical experts in eurozone capitals are already looking at the shape of a possible bail-out - despite a chorus of governments insisting that no plans for such a move exist.

“Even Berlin has become so worried about the stability of the euro - and of German banks holding Greek debt - that officials have begun toning down Germany’s “No financial aid for Greece” mantra.

“One senior German official said Berlin and other eurozone governments were prepared to lend Athens money or buy its sovereign bonds, should the Greek administration run into trouble rolling over debt on the markets.

“Lorenzo Bini Smaghi, of the European Central Bank’s executive board, told Italian television that it was ‘possible that money will be needed’ to help Greece. But it would be a sum ‘much more limited’ than the figure of about €20bn ($27bn) discussed by eurozone officials this month.

“Athens has about €20bn in debt coming due in April and May, which will need to be refinanced. Eurozone nations hope that current Greek reforms will convince investors to buy its bonds - with the eurozone only covering any shortfall.

“German officials have said any funding gap the zone might have to fill could well prove ‘quite small’. Berlin might push for the symbolism of all euro nations chipping in modest amounts to meet this shortfall, according to these officials.

“A tried-and-tested allocation key under consideration for this approach is based on the gross domestic product and population-weighted shareholdings of the European Central Bank. By this measure, Berlin would cover 28 per cent of Greece’s funding gap, Paris 21 per cent and Rome 18.

“The bigger the Greek funding need, however, the more this would strain other budgets also under pressure in Italy, Spain, Portugal and Ireland. For this reason, a French official said helping Athens could yet be voluntary.

“In a sign that any help would be decided in an ad hoc manner, a German official said measures would be agreed ‘on a case-by-case basis’. It would be up to each country to decide for itself how to structure its contributions.”

Source: Gerrit Wiesmann and Peggy Hollinger, Financial Times, February 23, 2010.

The Wall Street Journal: Greek debt crisis - Athens choked by general strike
“A massive general strike to protest EU-mandated austerity measures closed banks, government offices and post offices, crippling the Greek capital on Wednesday. The Wall Street Journal’s Andy Jordan reports from the streets of Athens.”

Source: The Wall Street Journal, February 24, 2010.

MartinKronicle: Greece and California death match
“The spreads between Greece/German bunds and California/30-yr Treasuries are widening. Investors are demanding more for carrying the risk. The downgrade in CA paper yesterday will give the Greek bonds a run for their Drachmas …

“According to a Reuters report, the spread between 10-year Greek government bonds and the benchmark Euro zone German bunds has risen to an 11-month high of 298 bps, up from 265 the day before. The high is 300 bps set about a year ago. The equivalent for Spanish bonds is trading at 81 bps premium over German bunds.

“According to an article in Bloomberg, the spreads between CA debt and the 30-year bond are also widening and PIMCO was quoted as saying that the CA debt crisis is headed back to disaster levels.

“Bloomberg: ‘A taxable California bond that matures in 2039 traded today for an average yield of 7.79 percent in blocks of more than $1 million, the highest since December 28, according to Municipal Securities Rulemaking Board data. That opened a gap of 3.15 percentage points between California’s bond and 30-year Treasuries, according to Bloomberg data.’

“Yikes …!

“Add to that the fact that S&P downgraded California’s debt rating to AA- from AA … not that I hold S&P in any esteem - I don’t. But the fact is that CA will now have to pay higher coupon payments on the issuance of new debt thanks to the downgrade. They deserved it.”

Source: MartinKronicle, February 24, 2010.

Financial Times: Goldman role in Greek crisis probed
“The US central bank is looking into Goldman Sachs’s role in arranging contentious derivatives trades for Greece, which helped the country to massage its public finances, Ben Bernanke, chairman of the Federal Reserve, revealed on Thursday.

“‘We are looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece,’ Mr Bernanke said, apparently referring to Greek currency transactions structured by Goldman.

“Testifying before Congress, Mr Bernanke also responded to concerns that instability in markets for Greek debt and other securities has been heightened by trading in other derivatives, known as credit default swaps, which compensate investors in case of default.

“Mr Bernanke said default swaps are ‘properly used as hedging instruments’ and that ‘using these instruments in a way that intentionally destabilises a company or a country is counterproductive’.

“The Securities and Exchange Commission is ‘examining potential abuses and destabilising effects related to the use of credit default swaps and other opaque financial products and practices’, said a spokesman.

“Separately, Phil Angelides, chairman of the US Financial Crisis Inquiry Commission, told the Financial Times he was concerned about the practice of creating securities and ‘fully betting against them’ - and about Goldman’s role in particular. Goldman declined to comment.”

Source: Alan Rappeport, Tom Braithwaite and David Oakley, Financial Times, February 25, 2010.

Financial Times: Bernanke signals US rates to be kept low
“US interest rates will remain at exceptionally low levels for an ‘extended period’ in spite of the ‘nascent’ economic recovery, Ben Bernanke, chairman of the Federal Reserve, told Congress on Wednesday.

“Mr Bernanke painted a gloomy picture of the economy, still struggling with high unemployment and a weak housing market. Inflationary pressures, the main driver of tighter monetary policy, were likely to remain ’subdued’, he said.

“Facing lawmakers for the first time in his second term as Fed chairman, he told the House financial services committee: ‘The Federal Open Market committee continues to anticipate that economic conditions - including low rates of resource utilisation, subdued inflation trends and stable inflation expectations - are likely to warrant exceptionally low levels of the federal funds rate for an extended period.’

“The insistence that rate rises are months away will damp fears that last week’s increase in the discount rate - at which commercial banks can borrow emergency cash from the central bank - from 0.5 per cent to 0.75 per cent heralds a swifter tightening of monetary policy.

“Fed officials, including Mr Bernanke, have indicated it was simply a move to unwind emergency liquidity measures put in place during the crisis, as a result of improving conditions in the financial markets, and not a tightening move. Goldman Sachs economists said it was ‘crystal clear’ the Fed did not anticipate raising rates soon.

“Nevertheless, the Fed this month began to lay out its vision for the sequence of measures that it expects to take to withdraw reserves from the financial system once the economic recovery is sufficiently strong. Although the economy grew at an annualised rate of 5.7 per cent in the fourth quarter of 2009, economists are expecting the pace of growth to slow over the course of the year. The Fed is expecting growth of 3 per cent to 3.5 per cent this year.

“‘A sustained recovery will depend on continued growth in private sector final demand for goods and services,’ said Mr Bernanke.

“Mr Bernanke also addressed the fallout from the financial crisis. He said the US central bank would step up surveillance of financial institutions and agreed that congressional investigators should be allowed to audit the emergency facilities put in place during the crisis.”

Source: James Politi, Financial Times, February 24, 2010.

MoneyNews: Pimco - Fed move isn’t start of tightening cycle
“The Federal Reserve’s surprise move on Thursday to raise the interest rate it charges banks for emergency loans does not mean that a full-fledged tightening cycle has begun, the manager of Pimco, the world’s biggest bond fund, told Reuters.

“‘I don’t think it’s the beginning, really, of a tightening from the standpoint of monetary policy,’ Bill Gross told Reuters soon after the Fed’s decision.

“‘I don’t think it is the beginning of an increase in the fed funds rate or in terms of interest on reserves that has been discussed as well.’

“The US central bank took pains to draw the distinction between the discount rate and its target for the overnight interbank rate, its main monetary policy tool. That rate remains unchanged near zero percent as a fragile US economic recovery struggles to gain traction.

“‘Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities,’ the Fed said in a statement.

“‘The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy,’ it said.

“‘I don’t think the Fed dares increase the fed funds or policy rate in the face of unemployment at double-digit type of levels. This is more of a technical maneuver,’ said Gross.

Source: MoneyNews, February 19, 2010.

Financial Times: Fed efforts boosted by Treasury’s $200 billion debt plan
“The Federal Reserve’s ability to drain excess liquidity from the financial system received a boost on Tuesday when the Treasury revived a plan to sell $200bn in short-term debt and store the proceeds at the central bank.

“The move comes as the Fed lays the groundwork to shrink its balance sheet in preparation for the time when the economy is sufficiently strong to require a tightening of monetary policy.

“By bolstering its Supplementary Financing Programme, the Treasury would help the Fed remove $200bn in reserves from the financial system. Some economists said that this would help bring the Fed’s main interest rate closer to the upper end of its current 0-0.25 per cent target.

“‘This move does mean there will be $200bn fewer reserves in the banking system, which could provide a little bit of lift to the effective fed funds rate,’ said Michael Feroli of JPMorgan. ‘As such, it could be seen as a first step in putting the Fed in position to raise rates.’

“However, the move was described as a ‘purely technical adjustment in liquidity’ by Joseph Abate of Barclays Capital. He said: ‘The $200bn worth of reserves drained … is unlikely to have a noticeable effect on the effective funds rate, which remains locked under 15 basis points.’

“The Fed did not comment on the move, but Ben Bernanke, chairman, could address the issue when he faces Congress on Wednesday. The Treasury programme was introduced during the crisis to help the Fed better manage its balance sheet.

“It had been wound down since last September, when the government’s borrowing capacity ran up against the US debt ceiling. Congress recently agreed to raise the debt ceiling to $1,900bn, making it possible to revive the programme.”

Source: James Politi, Financial Times, February 24, 2010.

TheStreet.com: Stiglitz says beware of double dip
“Joseph Stiglitz, Nobel prize winning economist and the author of Freefall, says the worst effects of the credit crisis may be behind us, but the American economy remains highly vulnerable to a double dip recession.”

Source: TheStreet.com, February 24, 2010.

Asha Bangalore (Northern Trust): Minor revisions of Q4 real GDP
“Real gross domestic product grew at an annual rate 5.9% in the fourth quarter of 2009, slightly higher than the previously reported increase of 5.7%. Upward revisions of inventories, exports, structures, and equipment and software more than offset downward revisions of consumer spending, government spending, and residential investment expenditures to yield a higher headline reading compared with the advance estimate.

“At the cost of reiterating, the fourth quarter headline GDP number is large but not strong because real final sales increased only 1.9% in the fourth quarter, while inventories accounted for nearly seventy percent of the increase in real GDP during the fourth quarter.

“Going forward, the US economy is predicted to show moderate growth in the first three quarters of 2010 and strong growth in the final three months of 2010, with virtuous cycle of real and financial recovery working together to lift economic growth.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 26, 2010.

Asha Bangalore (Northern Trust): Total continuing claims remain at elevated level
“Initial jobless claims rose 22,000 to 496,000 in the week ended February 20. Essentially, initial jobless claims established a bottom in January and have once again resumed an upward trend, which is very worrisome. Continuing claims, which lag initial claims by one week, were virtually steady at 4.617 million and the insured unemployment rate was unchanged at 3.5%.

“Total continuing claims, inclusive of claims under special programs, fell slightly to 10.29 million during the week ended February 6 from 10.56 million in the prior week. Total continuing claims have risen 3.95 million over the past year. The labor market remains the biggest concern of the FOMC, competing closely with the housing market.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 25, 2010.

Clusterstock: The unemployment chart you’ll love and hate
“Here’s an unemployment chart you’ll both love and hate, from Citi’s Steven Wieting.

“As shown below, since 1980, employment (in red) has fallen after corporate profits (in black) have risen, and vice versa. The relationship is very clear.

“Problem is, there’s about a one-year lag between the two trends. This highlights what should simply make sense - companies hire people once they see profits rebounding, and more importantly once they believe that adding more people will lead to higher profits. Still, this fact of economics isn’t fun for the unemployed.

“But here’s the good news. Given the recent rebound in corporate profits the US has already experienced, there is a very high chance that employment will get better over the coming twelve months. One can’t stress enough the fact that employment is a lagging indicator.”

Source: Vincent Fernando and Kamelia Angelova, Clusterstock - Business Insider), February 25, 2010.

Financial Times: US senate moves ahead on $15 billion jobs bill
“The US Senate on Monday voted to move forward on a $15 billion jobs bill proposed by Harry Reid, leader of the Democratic majority in the Senate.

“The 62-30 vote in favour of ending ‘cloture’ prevents a Republican filibuster and came as an exception to the months of gridlock in Congress. It will pave the way for a jobs bill to clear the Senate, just as other critical employment benefits are set to expire.

“Democrats needed to secure two Republican votes to block the filibuster and one came thanks to Scott Brown, making his first vote since he filled Edward Kennedy’s former seat in Massachusetts.

“‘I hope this is the beginning of a new day in the Senate,’ Mr Reid said, invoking Mr Brown by name for his bipartisanship.

“The scaled-back measure is expected to create 250,000 jobs through an array of tax credits and payroll tax exemptions to stimulate hiring. The bill frees businesses from payroll taxes on workers who are hired after more than 60 days of unemployment and gives them a tax credit of $1,000 for new hires that they keep for more than a year.

“The bill also provides funding for highway and transportation projects, allows companies to write-off equipment purchases as expenses and expands the Build America bond scheme to help subsidise school and energy projects.”

Source: Alan Rappeport, Financial Times, February 22, 2010.

Standard and Poors’: Home prices continue to send mixed messages
“Data through December 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 fell in the fourth quarter of 2009 but has improved in its annual rate of return, as compared to what was reported in the third quarter.

“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 2.5% decline in the fourth quarter of 2009 versus the fourth quarter of 2008. This is a significant improvement over the annual rates reported in the first, second and third quarters of the year, at -19.0%, -14.7% and -8.7%, respectively. In December, the 10-City and 20- City Composites recorded annual declines of 2.4% and 3.1%, respectively. These two indices, which are reported at a monthly frequency, have seen improvements in their annual rates of return every month since the beginning of the year.

“‘As measured by prices, the housing market is definitely in better shape than it was this time last year, as the pace of deterioration has stabilized for now. However, the rate of improvement seen during the summer of 2009 has not been sustained,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s.”

Source: Standard and Poors’, February 23, 2010.

VisualEconomics: Cost of home ownership
“The last three years have seen a significant drop in the cost of housing in the United States; bringing prices back down from once astronomical levels.”

Source: VisualEconomics, February 23, 2010.

Asha Bangalore (Northern Trust): Existing home sales and inventories disappoint
“Sales of all existing homes fell 7.2% to an annual rate of 5.05 million units in January after a 16.2% drop in December. Sales of existing single-family homes declined 6.9% to an annual rate of 4.43 million units. Purchases of existing single-family homes have risen nearly 9.0% from the trough in January 2009. Sales of existing homes fell in all four regions across the nation during January. It appears that the extension of the first-time home buyer tax credit program is yet to translate into increased sales; the program expires in April 2010.

“The median price of an existing single-family home was down 0.4% from a year ago to $163,600. There is a gradual stabilization of home prices visible in latest movements of the median price of an existing single-family home but the recent increase in inventories of unsold homes casts a shadow on projections of further improvements on the price front.

“The seasonally adjusted inventory-sales ratio of single-family existing homes rose to 8.4-month supply during January from a 7.6-month mark in December.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 26, 2010.

Asha Bangalore (Northern Trust): Consumer confidence slips in February
“The Conference Board’s Consumer Confidence Index fell to 46.0 in February from 56.5 in the prior month. This is the lowest since July 2009. Sluggish employment conditions are seen to be a major reason for the loss of confidence in February after a string of three monthly gains. The Present Situation Index (19.4 vs. 25.2 in February) and the Expectations Index (63.8 vs. 77.3 in February) declined in February.

“The number of respondents indicating that ‘jobs are to hard to get’ rose in February (47.7% vs. 46.5% in January), while the number claiming that ‘jobs are plentiful’ fell (3.6% vs. 4.4% in January). The net of these two indexes tracks the unemployment rate closely. The difference between these two indexes widened to 44.1 in February from 42.1 in January, suggesting that the jobless rate is most likely to inch higher in February.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 23, 2010.

Asha Bangalore (Northern Trust): Have durable goods orders and shipments turned the corner?
“The headline number for orders of durable goods in January (+0.3%) is strong. But, shipments of durable goods edged down 0.2% after a 2.4% increase in the prior month. The durable goods numbers always show big swings because of large ticket items. The January increase in orders was lifted by the 126% increase in orders of aircraft, with orders excluding transportation posting a 0.6% drop. One way to sort out the large deviations of month-to-month data is to look at year-to-year changes. On a year-to-year basis, orders (+9.9%) and shipments (+1.5%) of durable goods posted gains in January, after an extended period of declines going back to early-2008. This change in trend is noteworthy and warrants close watching.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, February 25, 2010.

Financial Times: Foreclosures in the US
“Aline van Duyn, US markets editor of the Financial Times, says that a number of American homeowners whose houses are worth less than their mortgages are choosing to let their homes go into foreclosure and let the banks suffer the losses.”

Source: Financial Times, February 22, 2010.

Clusterstock: Bankers getting paid a lot to sit on their hands and do nothing
Yesterday we pointed you to the latest data from the St. Louis Fed showing that bank lending continues to plunge. Rather than ply businesses with loans, banks are instead opting to hoard cash and buy Treasuries.

“And yet despite the lending shutdown, bonuses are back up, per fresh data out today from the New York Comptroller. In other words, sitting on your hands and doing nothing is a pretty lucrative gig.”

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - Business Insider, February 23, 2010.

Financial Times: Number of US “problem” banks soars
“The number of problem banks in the US continued to soar in last year’s fourth quarter, hitting their highest level since 1993, according to a regulatory report released on Tuesday.

“The findings by the Federal Deposit Insurance Corp suggest that, although the US economy is on the mend, the financial industry, bedevilled by souring residential and commercial real estate loans, will take longer to recover.

“The FDIC said 702 banks were considered troubled at the end of 2009, up from 552 three months earlier. Problem assets totalled $402.8bn in the final period, compared with $345.9bn in the third quarter. By contrast, Lehman Brothers listed $639bn in assets at the time of its bankruptcy filing in September 2008.

“No longer confined to Wall Street, the financial crisis has cascaded over to regional and community banks that are feeling a disproportionate amount of the pain. ‘The great recession has very much become a Main Street problem,’ said Richard Brown, the FDIC’s chief economist.

“Although bank earnings showed a slight improvement in the fourth quarter, totalling $914m against a $37.8bn loss in the year-ago period, they still remain below historical highs. Any improvement in earnings, the FDIC said, was concentrated among the largest institutions.

“For the full year, banks earned $12.5bn, up from $4.5bn in 2008 but far below the $100bn recorded in 2007.

“Loan losses jumped for the 12th consecutive quarter to total $53bn, an increase of 37 per cent over the year-ago period. On an annualised basis the rate of losses accounted for in the quarter was the highest in more than two decades.

“Losses rose in all significant categories, including residential mortgage loans and credit card debt. One of the fastest growing categories for uncollectable debt was commercial real estate.

“Although the level of bank failures is alarming, it pales against the troubles of the savings and loan crisis. At the height of that meltdown, in 1987, some 2,165 banks were considered troubled and problem assets totalled $833bn.

“But the full weight of the current crunch has yet to be felt. The FDIC took over 140 banks in 2009 and analysts expect more to follow. The FDIC said on Tuesday it set aside another $17.8bn in the fourth quarter for bank failures. It expected total bank failures to cost $100bn from 2008 to 2013.”

Source: Suzanne Kapner, Financial Times, February 23, 2010.

John Authers (Financial Times): US yield curve
“We ignore the yield curve at our peril. That is one of the lessons from the financial implosion that started in 2007, but how do we apply it now?

“The yield curve is the popular name for the spread between the yields on 10-year and two-year Treasury bonds. Usually, investors require a bigger yield to compensate them for the greater risks that come with lending money over a longer term.

“When short-term yields rise above long-term ones, then market jargon holds that the yield curve is “inverted”. This has been a great recession indicator, as it implies the market thinks short-term interest rates must imminently be cut. Each of the past seven recessions was preceded by a brief period when the yield curve was inverted and there has only been one false signal.

“But what happens when the yield curve gets very steep? That is happening now and there are few, if any, precedents. Last week, 10-year yields exceeded two-year ones by 2.94 percentage points, the highest figure since the Federal Reserve’s records for this indicator began in 1976.

“Its previous peaks were at about 2.5 percentage points in October 2003, when a brief bull market in equities was gathering pace, and October 1992, when years of expansion for both markets and the economy lay ahead.

“Should this, then, be regarded as a big reason for optimism? Perhaps not. An implicit bet that rates will rise over the next 10 years is not daring when rates are virtually at zero. Neither is a call for an intermediate economic recovery after a savage recession.

“In any case, the extremes that financial markets have touched in the past few years make it dangerous to read any indicator with too much confidence. But it does seem to suggest that the market is more convinced than economists both that central banks will be raising rates sooner rather than later and that the US economy is enjoying a true recovery.”

Source: John Authers, Financial Times, February 22, 2010.

MoneyNews: Rogers - China will keep dumping US Treasuries
“China will continue to sell US Treasuries in the future, says Jim Rogers, co-founder of the Quantum Fund.

“China will unload more debt as the ‘euro scare’ continues, he said.

“The government reported that appetite for Treasuries declined by the largest amount in December as China reduced its allocation by $34.2 billion to $755.4 billion. Japan made a similar move and lowered its amount by $11.5 billion to $768.8 billion.

“‘I am surprised China has not dropped more,’ Rogers told CNBC.

“The United States should be concerned about this change in investments, he said.

“‘The US should be worried about everyone lightening up - not just China,’ Rogers said.

“Lawrence Summers, director of the White House National Economic Council, said the paring back is not a concern, CNBC reported.

“‘The truth is that these numbers fluctuate and that there’s a wide range of holders of Treasury debt. What’s been very clear from the market responses over the last two years is that the United States is seen as a major source of quality and a place people run to when they’re uncertain,’ he said.

“Other analysts said the amount of US government debt held by the Chinese is likely to be a larger amount since they also buy anonymously via banks in Switzerland, Britain and other countries, the Associated Press reported.

“‘We do not believe that the Chinese are dumping Treasuries. What they are doing is diversifying the channels through which they make these purchases so that it is much more difficult for the market to ascertain what they are doing,’ said Arthur Kroeber, managing director of GaveKal Dragonomics, a Beijing research firm.”

Source: Ellen Chang, MoneyNews, February 25, 2010.

MoneyNews: Pimco - junk bonds may post double digit returns in 2010
“US high-yield bonds could post investment returns in the high single digits to the low double digits this year after their record 58 percent return in 2009, Pimco, the world’s biggest bond fund, said in a new report.

“With yields still attractive and the risk of a financial system collapse largely in the past, ‘we believe investors can capture attractive yields and excess spread in the high-yield market with relatively low default risk,’ Andrew Jessop, high-yield portfolio manager at Pacific Investment Management Co, said in a note on the company’s website.

“High-yield bonds also look attractive compared with equities, which typically depend on faster growth to perform well at this point in the economic cycle, Jessop said.

“However, Pimco’s forecast is that slower economic growth will become the ‘New Normal’ amid broad deleveraging trends, increased regulation and deglobalization, he said.

“‘In that environment, many investors believe equities could continue to underperform high-yield’ bonds, he said.”

Source: MoneyNews, February 24, 2010.

Bespoke: Country and region ETFs
“Below we highlight the recent action in a number of country and region ETFs. For each ETF, we provide its 5-day price change, its percentage from its 50-day moving average, and its percentage overbought or oversold. An ETF is overbought if it’s trading more than one standard deviation above its 50-day, and the percentage number shown indicates how far the ETF is trading above its overbought level. One standard deviation below represents the oversold level.

“As we highlighted in our prior post, the US has been outperforming emerging markets recently. Where the various country ETFs are trading versus their 50-days shows a similar trend. The S&P 500 tracking SPY ETF is one of just four ETFs highlighted below trading above its 50-day moving average. The only other country ETFs trading above their 50-days are Australia (EWA), Canada (EWC), and Mexico (EWW). All of North America is doing well. If we look at the various regional ETFs (Europe, Emerging Markets, Asia, etc.), all of them are still trading below their 50-days.”

Source: Bespoke, February 22, 2010.

Bespoke: Welcome back - USA back in style
“In the charts below, we show the performance of ETFs which track the S&P 500 (SPY) and the MSCI Emerging Market Index (EEM). The third chart shows the relative strength of emerging markets versus the S&P 500. In the relative strength chart, a rising line indicates that emerging markets are outperforming the US, while a falling line indicates the US is outperforming.

“Based on the performances of both ETFs over the last several years, investors have become conditioned to the theme that when equities are rising, emerging markets typically outperform the US. On the other side of the coin, during periods when equities are weak, US stocks have typically held up better than their emerging market peers. As seen on the relative strength chart, the only period where US stocks meaningfully outperformed emerging markets was during the credit crisis (red line in all three charts).

“The existence of this long-term trend makes recent developments all the more interesting. Since the recent lows in early February, equity markets around the world have all recovered to some degree. However, unlike prior rebounds, emerging markets have been underperforming. In fact, while the major US averages (S&P 500, DJIA and Nasdaq) closed above their 50-day averages on Friday, all four BRIC countries (Brazil, Russia, India, and China) had yet to achieve that milestone. Whether or not this trend fizzles out or is an early warning sign for the global economy is debatable, but in either case, emerging market investors would be wise to be on alert.”

Source: Bespoke, February 22, 2010.

Bespoke: S&P 500 sector stats
“As shown below, Consumer Discretionary and Consumer Staples are currently trading the farthest above their 50-day moving averages of the ten sectors. The other two sectors currently above their 50-days are Industrials and Financials. Below we provide the year-to-date change, % from 50-DMA, dividend yield, P/E ratio, price to sales ratio, and price to book ratio for the various sectors. Across the board, we use red to green as the color code from lowest to highest, but obviously for ratios, the lower the better.

“While it used to have one of the highest yields, the Financial sector currently has the second lowest yield at 1.15%. It also has the highest P/E ratio at 66.44, but it has the lowest price to book at 1.14. Consumer Staples, Consumer Discretionary and Telecom have the lowest price to sales ratios, while Technology has the highest. Technology also has the highest price to book.”

Source: Bespoke, February 24, 2010.

Bespoke: Retail sector closes at new bull market high
“Yesterday’s weak Consumer Confidence report has many worried that the consumer is still down in the dumps. If so, no one has told the consumer sectors of the stocks market. As shown below, the S&P 500 Retail sector actually made a new bull market high today. The S&P 500 still has a ways to go to get back to new highs. While the Consumer Confidence report is indicating a weak consumer, the market still seems to be predicting strength from the consumer. If it weren’t for groups like retail, the overall market would be doing worse.”

Source: Bespoke, February 24, 2010.

Bespoke: Percentage of stocks above 50-day moving averages
“As shown below, 55% of stocks in the S&P 500 are currently trading above their 50-day moving averages. The index itself is still trading below its 50-day, so breadth in this case is strong. Looking at sectors, Energy and Consumer Discretionary have the highest percentage of stocks above their 50-days at 69%. Consumer Staples ranks third at 64%. Technology, Materials, Utilities, and Telecom are the four sectors with readings that are still below 50%.”

Source: Bespoke, February 19, 2010.

Bespoke: Final earnings season stats
“The fourth quarter earnings season came to an end yesterday with Wal-Mart’s report. Below we highlight the final earnings and revenue beat rate for all US companies that reported this earnings season. For the third quarter in a row, 68% of companies beat earnings estimates. The revenue beat rate was really strong this quarter at 70% - the highest reading since Q4 ‘04. Does this put the ’strong bottom line, but weak top line’ bearish argument to rest?”

Source: Bespoke, February 19, 2010.

MoneyNews: Biggs - US, Asian stocks will rally higher
“Stocks have further room to rise, thanks to buoyant global economic growth, says Barton Biggs, managing partner at hedge fund firm Traxis Partners.

“‘There is every reason to believe the US is in a strong recovery, and Asia is in a very strong recovery,’ he says.

“While Europe’s growth has been a bit disappointing, the Greek crisis could actually help economies on the continent by pushing the euro down, he told Bloomberg.

“‘A little weakness in the euro is probably good for European exports and for the European economy.’

“Biggs thinks the European Union is handling the Greek situation properly.

“‘The Europeans sent the right message, saying if you can convince us you’re going to practice some discipline, then we’ll take care of you. And I think that’s going to happen.’

“Biggs also approves of China’s steps to deflate its credit bubble.

“‘The Chinese authorities are doing the right thing in terms of gradually tightening. … In all probability China is going to have a soft landing.’

“So what does all this mean for stocks?

“‘On balance, … I’m pretty bullish here,’ Biggs said.”

Source: Dan Weil, MoneyNews, February 22, 2010.

BCA Research: Hot money flows are driving the US dollar trend
“Recent data shows that speculative flows have been a major driver of the bounce in the dollar, especially versus the euro. ‘Hot money’ positions have now reached levels where marginal dollar buyers will be increasingly scarce. For the dollar’s recovery to persist and to be a genuine cyclical advance, it needs the tailwind of long term capital inflows.

“Foreign flows into US equities and Treasury bonds have accelerated smartly and net sales of agency bonds have come to a halt. But capital flows should be analyzed alongside trade and current account deficit positions. While foreign portfolio flows into the US are improving, the US trade account is deteriorating anew. Moreover, capital outflows by US-based investors have resumed. The sum of net long term portfolio inflows and the trade deficit, a monthly proxy for the basic balance, remains well below the 2002 - 2007 average, which was a period of steady dollar weakness.

“Over the coming months, the cyclical economic recovery and the record low national savings rate should keep the US current account deficit on a widening path. This will make it difficult for the basic balance to improve. Indeed, the healthiest environment for the dollar is when the current account deficit is financed by private sector capital inflows. This is typically a sign of strong US growth and attractive expected returns.

“History shows that whenever the US becomes reliant on foreign monetary authorities, the dollar has been under pressure. Foreign reserve accumulation can prevent a dollar crash, but it has never led to sustainable dollar strength. Bottom line: Trends in long term capital flows suggest that the dollar is not yet in a sustainable bull trend.”

Source: BCA Research, February 25, 2010.

MoneyNews: Soros - euro’s future in question even if Greece saved
“A makeshift assistance should be enough to rescue Greece but bigger problems facing Europe would leave the future of the euro currency in question, billionaire investor George Soros said.

“Writing in the Financial Times, Soros said what the European Union needed was more intrusive monitoring and institutional arrangements for conditional assistance.

“He said a well organized euro bond market was desirable.

“‘A makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large of a portion of euro land to he helped in this way,’ Soros said.

“‘The survival of Greece would still leave the future of the euro in question.’

“Greece’s deficit swelled to 12.7 percent of gross domestic product in 2009, way above the EU’s cap of 3 percent.

“Greece has pledged to reduce its budget deficit to 8.7 percent in 2010.”

Source: MoneyNews, February 22, 2010.

Bespoke: Commodity snapshot
“Below we highlight the year-to-date change for ten key commodities. As shown, orange juice has gotten off to a nice start (+13.15%), while natural gas has once again resumed its seemingly perpetual decline (-13.75%). Platinum is the second best performing commodity shown with a gain of 5.34%, followed by gold at +1.59%, and oil at +0.34%. While gold and platinum are up in 2010, silver is down 2.69%.”

Source: Bespoke, February 26, 2010.

Reuters: India seen as potential buyer for IMF gold
“India’s central bank, which has increased its gold holdings to diversify its reserves, looks set to be a buyer again when the International Monetary Fund begins selling 191.3 tonnes of the precious metal amid volatility in major currencies.

“The uncertain outlook for two of the world’s major reserve currencies - the dollar and euro - provides a spur for central banks, including India’s, to buy gold. India’s gold holdings lag those of major economies despite a big purchase in October.

“‘India is no stranger to gold. They are gearing up for growth and want to recalibrate their reserves,’ said Mark Pervan, senior commodities analyst at ANZ.

“‘They can’t lift their gold holdings from domestic output, unlike China. And they have shown an appetite to buy in the past.’

“Reserve Bank of India officials declined to comment on their gold plans but some said the central bank considered gold to be a safe investment strategy.

“The IMF said last Wednesday it would soon begin selling the gold in the open market in a phased manner to avoid disrupting the market.

“The sale is part of an IMF programme announced last year to sell a total of 403.3 tonnes of gold, or about one-eighth of its total stock.

“China, with about $1.6 trillion in reserves, is a producer of gold and is unlikely to buy the gold being offered by the IMF, the official China Daily reported on Wednesday.”

Source: Abhijit Neogy and Suvashree Dey Choudhury, Reuters, February 24, 2010.

BusinessWeek: Soros more than doubled gold ETF stake in Q4
“Billionaire George Soros’s Soros Fund Management LLC more than doubled its holding in the biggest gold exchange-traded fund in the fourth quarter after bullion advanced 8.9 percent to a record.

“The $25 billion New York-based firm became the fourth-largest holder in the SPDR Gold Trust, adding 3.728 million shares valued at $421 million, according to a filing with the US Securities and Exchange Commission yesterday. Its investment was worth about $663 million, the fund’s largest single investment, as of December 31.

“Soros joined China Investment Corp. and central banks including those in China and India in acquiring gold. China Investment, the $300 billion sovereign wealth fund based in Beijing, took a 1.45 million-share stake in the SPDR Gold Trust worth $155.6 million, according to a SEC 13F filing posted on February 5.

“SEC filings are done quarterly, with a 45-day lag, so Soros could have sold some or all of the position since then. Soros, speaking last month at the World Economic Forum in Davos, called gold the ‘ultimate asset bubble’ and said the price could tumble, according to a report in the UK’s Daily Telegraph newspaper.”

Source: Katherine Burton and Glenys Sim, BusinessWeek, February 17, 2010.

MoneyNews: Credit Suisse - gold set to surge to $1,227
“Credit Suisse analyst David Sneddon says the price of gold is poised to move sharply higher.

“‘If we look at the (rising) momentum chart … it suggests to us that price should follow suit,” he told CNBC.

“‘We think gold is going all the way back up to $1,227.’

“Gold denominated in euros shows a much more bullish position than denominated in dollars, Sneddon says. ‘Gold in euros has moved to an all time high with all the euro weakness that’s been going on,’ Sneddon observes.

“Gold priced in euros reached a record today as European Union finance ministers failed to agree on measures to help Greece reduce its budget deficit, Bloomberg reports.

“The precious metal climbed to a four-week high in New York, before paring gains, on speculation that wider Greek budget deficits will spur demand for the metal as an alternative to holding currency.”

Source: Julie Crawshaw, MoneyNews, February 23, 2010.

Financial Times: China taps more Saudi crude than US
“Saudi Arabia’s oil exports to the US last year sank below 1m barrels a day for the first time in two decades just as China’s purchases climbed above that level, highlighting a shift in the geopolitics of oil from west to east.

“The drop in US demand for oil from the kingdom, traditionally one of its primary sources, is the result of overall lower energy consumption but also greater reliance on imports from Canada and Africa.

“China’s economic growth, meanwhile, is prompting Beijing to buy more Saudi oil, a trend Riyadh has encouraged through refinery joint ventures.

“‘China offers demand security, something that for a long time the oil-producing countries including Saudi Arabia have called for,’ said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh. ‘As global demand has been picking up in the east … Saudi Arabia has been looking east.’

“Barack Obama, US president, wants to reduce US dependence on foreign oil and encourage renewable fuels. Meanwhile, Saudi Arabia wants stable markets for its oil reserves.

“The divergence will provide the backdrop as Steven Chu, US energy secretary, visits Riyadh on Monday. His agenda reflects Washington’s focus, with an emphasis on technology research rather than oil politics.”

Source: Gregory Meyer, Financial Times, February 21, 2010.

Financial Times: Harsh winter hits European recovery hopes
“Severe winter weather could have hit economic growth significantly in continental Europe, and especially Germany, at the start of this year, dealing another blow to the region’s recovery hopes.

“Disruption in the construction, retail and leisure industries caused by exceptionally low temperatures and persistent snow is likely to have set back further an economic turnround that had already shown signs of losing momentum in the final months of last year - before the bitter weather took grip.

“In Germany, growth in the first quarter of this year could have been reduced 0.3 percentage points, according to Frankfurt-based Commerzbank. January’s weather was the coldest since 1987 and the 12th coldest January since 1900, according to the German weather service.

“Axel Weber, Bundesbank president, told Reuters this month that German gross domestic product ‘could move sideways or even contract slightly in the first quarter’.

“Jörg Krämer, Commerzbank’s chief economist, said, however, that lost business could be made up, and ‘people’s perceptions of the performance of the German economy are driven by the data on manufacturing - that is, excluding construction’.

“Purchasing managers’ indices on Friday showed that German manufacturing ‘grew strongly’ in February, he added.”

Source: Ralph Atkins, Financial Times, February 21, 2010.

Nationwide: House prices slip in the winter snow during February
“The price of a typical UK property fell by a seasonally adjusted 1.0% month-on-month (m/m) in February, ending a strong run of nine consecutive monthly increases. The relatively smoother three month on three month rate of inflation remained positive at +1.6%, though this is down from +2.0% in January and a peak of +3.7% in September 2009. The annual rate of price inflation still managed to increase from 8.6% to 9.2% year-on-year, as this month’s fall was smaller than the 1.5% m/m decline recorded in February 2009. The average price of a typical property sold in the UK during February was £161,320.

“There is evidence from a range of indicators that the market may have lost momentum in early 2010 as the stamp duty holiday ended and house hunters were obstructed by the icy weather. New buyer enquiries dropped sharply in the New Year and there was also an associated drop in the number of new mortgages taken out by homebuyers in January. This drop in demand seems to have fed into agreed prices during February.

“Judging from the fall in retail sales during January, however, the housing market does not appear to be the only sector of the economy to have experienced a setback related to adverse weather and the expiry of economic stimulus measures. At this stage, it is difficult to gauge how much of the drop in housing activity is attributable to one-off factors and therefore whether February’s fall in prices is just a temporary blip or the start of a new trend.”

Source: Nationwide, February 26, 2010.

Nouriel Roubini (Forbes): Easy money in China
“When will Beijing tighten monetary policy?

“A credit-fueled investment boom successfully boosted China’s growth to 8.7% in 2009, but cheap money drove up asset prices as well, especially in property markets. As China’s output gap closes, loose money is now set to become inflationary, particularly if China’s potential growth rate has come down slightly, as we think it has. The People’s Bank of China (PBoC) has twice hiked banks’ required reserve ratios (RRR) in 2010, following a return to net liquidity reductions through open-market operations in October 2009, but we suspect that the tightening moves have had little effect. China’s monetary policy has shifted toward a neutral stance in recent months, but it will have to tighten further if inflation and the property bubble are to be contained.

“China has not yet started to tighten liquidity significantly, nor has it laid out a clear path for its exit from the extraordinarily loose monetary conditions put in place at the end of 2008. The recent RRR hike, which came into effect on Feb. 25, will drain just over 300 billion renminbi (RMB) in liquidity, but in the first two weeks of February, the PBoC injected a net RMB 508 billion into the banking system through open-market operations to ensure that banks had enough cash on hand for last week’s Chinese New Year holiday. It is widely expected that the bank will drain this liquidity after the holiday, and the RMB300 billion withdrawn through the RRR hike will prove helpful but insufficient in this effort. Tuesday’s RMB 17 billion one-year bill sale suggests that the central bank may be waiting to see the effect of the RRR hike before moving to a more aggressive tightening stance. It will be difficult, however, for the central bank to tighten very much, even if it had the political backing to do so.

“Other sources of liquidity make this task harder. There are RMB 1.2 trillion in central bank bills and repurchase agreements set to expire in the next two months. In March alone, RMB 680 billion in bills will expire, more than double the RMB 290 billion monthly average over the past four months. Banks are already thought to be holding about 1.5% of deposits in additional excess reserves at the PBoC, dulling the impact of the RRR hike even further.

“The political will to tighten monetary conditions looks weak in China, particularly concerning any appreciation of the RMB. On Monday President Hu Jintao headed a Politburo meeting on economic issues that reiterated the ‘active’ fiscal and ‘moderately loose’ monetary policies put in place at the end of 2008. On March 5 Premier Wen Jiabao will present the government’s work plan to the National People’s Congress (nominally China’s highest government authority), likely reiterating this stance.

“Still, we expect the gradual tightening of monetary policy will continue in the coming weeks and months. Rising inflationary pressures are likely to push China’s policymakers to tighten monetary conditions in Q2. This will cause some pain to important interest groups this year, and in our view, policymakers will look to distribute the pain, including by allowing higher consumer inflation.”

Click here for the full article.

Source: Nouriel Roubini, Adam Wolfe and Rachel Ziemba, Forbes, February 25, 2010.

Financial Times: Japan exports jump on Asian recovery
“Strong shipments to Asia helped Japan report the biggest increase in exports in almost 30 years in January, underlining the strength of the country’s economic recovery.

“The value of exports increased 40.9 per cent last month from a year earlier, the fastest pace since February 1980, according to the Ministry of Finance. The increase, however, has been helped by a plunge in exports in the same period a year ago as a result of the global financial crisis.

“Shipments to Asia, which accounted for more than half of total exports, were up 68.1 per cent on the previous year while exports to China, its biggest trading partner, rose 79.9 per cent.

“Like other Asian economies, Japan has benefited from the robust recovery of China, which spurred demand for everything from cars to cement.

“In January, shipments of motor vehicles were up 342.8 per cent while the value of auto parts sales rose 156.6 per cent.

“China’s expanding manufacturing sectors also led to strong demand for chemicals from Japan, which jumped 107.5 per cent, and machinery, which rose 68.8 per cent.

“Japan’s trade data came after Taiwan and Thailand reported unexpectedly strong economic growth this week due to solid exports to China. Taiwanese exports to China, its biggest trading partner, rose 45 per cent year-on-year in the fourth quarter. In Thailand, January’s exports to China grew 94 per cent year-on-year.

“Economists warned that the pace of increase in exports was likely to moderate in the coming months.

“‘Fiscal stimulus programs that supported auto exports in 2009 have now expired in China, the US and EU economies. The boost from inventory adjustment abroad is also beginning to wane,’ said Nikhilesh Bhattacharyya at Moody’s Economy.com.

“‘This should result in slower growth in exports, which would be reflective of the weak growth now being seen in advanced economies across the globe,’ he said.

“In January, imports rose for the first time since October 2008, rising 8.6 per cent. Japan posted a trade surplus of Y85.2bn last month.”

Source: Justine Lau, Financial Times, February 24, 2010.

Financial Times: Toyota’s damaged reputation
“Spencer Jakab, Lex columnist of the Financial Times, says Toyota’s slow response to addressing safety problems brought the world’s largest carmaker to its knees.”

Source: Financial Times, February 24, 2010.

Tags: Ben Bernanke, Biggest Banks, Business Confidence, Consumer Confidence Data, Debt Woes, Default Risk, Excess Spread, Fed Fund Rate, Financial Guarantees, Financial Services Committee, German Bank, Government Bonds, High Yield Corporate Bonds, House Financial Services Committee, Investor Optimism, Japanese Yen, Paul Kasriel, Quarter Stock, Risk Aversion, Risk Equities, Sell Offs
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Which Way Now? Hard Assets or Government Bonds?

Sunday, January 31st, 2010

The debate in the market between inflationists (majority) and deflationists (minority) continues to complicate investors’ ability to make decisions about where to deploy funds.

During the course of the year, inflationists benefited from the tailwind provided by the declining value of the dollar. The rally in risk assets came thanks to Bernanke’s deflation-busting policy, and, ironically, therefore, as long as the news remained dire on GDP growth and unemployment, we could count on interest rates to remain around zero percent, and the dollar to continue lower as faithless investors ditched it.

For nine months, the dollar declined as the market put risk back “on.” At the very beginning of the rally, in March 2009, the market’s mood was very dark. The genesis of the rally was the short covering of bank stocks and financials, and the full scale launch of the dollar funded carry trade, mostly taking place in institutional and hedge fund trading rooms. Except for the wiliest, it most certainly was not driven by retail investors. The retail investor is usually late to the party once fear of missing opportunities sets in.

The rally in the dollar as of late November has confused the inflationist view as the tailwinds appear to have reversed. This has been, and remains a difficult time to make risk-based investment decisions.

Read the whole article here.

by Pierre Daillie (AdvisorAnalyst.com), GlobeAdvisor.com, January 31, 2010.
http://www.globeadvisor.com/advisoranalyst/aa20100131.html

Tags: Bank stocks, Bernanke, GDP, GDP Growth, Genesis, Globeadvisor, Government Bonds, Hedge Fund, interest rates, Investment Decisions, Late November, Launch, Nine Months, Rally, Retail Investor, Retail Investors, Short Covering, Tailwind, Tailwinds, Zero Percent
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David Rosenberg: Government Bonds are on Fire

Friday, November 27th, 2009

In today’s Breakfast with Dave, Gluskin Sheff’s Rosie says:

Government bonds are on fire. Yesterday we saw a 10bps slide in the German Bund and U.K. Gilt yields - they are consolidating today - and U.S. 10-year yields are now down about half that amount, to 3.22% - 2bps from taking out the October lows, so keep an eye here for a possible technical breakdown in yields. The Canadian bond market already did that yesterday with the yield on the 10-year GoC slipping below the October lows - we have news for you: this was a major technical move. We can understand that government bonds are the “enemy” to the bulls (not once were Treasuries even mentioned as an asset class during my two-hour stint on CNBC the other day). But there is no denying that somebody is buying these bonds because the 7-year Treasury note auction ahead of Thanksgiving had $88 billion of bids for the $22 billion offering. Go figure, some folks clearly still have deflation on their mind (as they should).

We went into this latest round of turbulence with tremendous complacency in the marketplace (I really sensed it during the two-hour stint on CNBC’s squawk box on Tuesday) - rallies were still light-volume in nature (only two sessions in the past three weeks with NYSE volume north of a billion shares), the VIX index had just receded to its low for the year, at 20.5 (down 60% since March!), the bull share and bear share of the sentiment surveys hit late-2007 levels, and with the trailing P/E ratio at 27x and the forward P/E on $65 of earnings of 17x. There is no margin for error in an overvalued equity market - one that is priced for nearly 5% GDP growth. Remember, it was in the fourth quarter of 1987, a quarter that saw 7% GDP growth and a 55% earnings trend, that the S&P 500 cratered 30%. So, it’s not just about the economic backdrop, it’s what is being priced in - that is the lesson. For a highly overvalued market, it does not take much - like an off-the-cuff remark from the Treasury Secretary on the Meet the Press - to entice a massive round of profit-taking.

Don’t look now but the Baltic Dry Index has just slipped for the fifth session in a row, and down 12% from the November 19 interim high. Not a constructive near-term signpost for the commodity complex. However, as we said above, we look forward to a correction that allows us another opportunity to build long-term positions in this segment of the market where there are secular positive dynamics at play. But as we highlighted last week, anything connected to the U.S. dollar-carry-trade - a very overcrowded trade - is due for a correction.

To reiterate, the Swiss, the Russians, the Brazilians and the Vietnamese have all taken actions to weaken their currencies in recent weeks (see Russia Launches Campaign to Weaken Ruble on page C2 of the WSJ).

If you would like to read more of this, subscribe to David Rosenberg’s newsletter by clicking on the link below:

Tags: asset class, Bear Share, Bond Market, Canada, Canadian Bond, Cnbc, Commodities, Complacency, David Rosenberg, Economic Backdrop, GDP Growth, German Bund, Gilt Yields, Gluskin Sheff, Government Bonds, Half That Amount, Light Volume, Lows, Nyse Volume, Squawk Box, Treasuries, Vix Index, Year Treasury Note
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Words from the (Investment) Wise (November 16, 2009)

Monday, November 16th, 2009

“Words from the Wise” this week comes to you in a shortened format as I do not have access to my normal research resources while on the road in Europe. Although very little commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.

While the Dow Jones Industrial Index and other benchmark indices reached 52-week highs last week and pleased Wall Street, the cartoonists reminded us that worrisome economic issues remained in Main Street …

Source: Jeff Parker, Comics.com, November 11, 2009.

The past week’s performance of the major asset classes is summarized by the chart below - a mixed bag, so to speak, with government bonds, equities, corporate bonds and gold closing the week in positive territory.

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below. With the exception of only a few indices - notably the Japanese Nikkei Dow that recorded a third consecutive down week - most global stock markets made headway last week, adding to the gains for the month.

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

Top performers among stock markets this week were Romania (+8.1%), Russia (+6.1%), Jamaica (+6.1%), Hungary (+5.2%) and Israel (+5.2%). At the bottom end of the performance rankings countries included Latvia (‑5.1%), Cyprus (-4.4%), Greece (-4.2%), Serbia (-4.0%) and Kuwait (‑3.8%).

Of the 99 stock markets I keep on my radar screen, 66% recorded gains (last week 52%), 31% (43%) showed losses and 3% (5%) 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 PowerShares Global Coal (PKOL) (+7.6%), iShares Cohen & Steers Realty Majors (ICF) (+7.4%), Vanguard REIT (VNQ) (+6.4%) and Market Vectors Russia (RSX) (+6.4%).

At the bottom end of the performance rankings, ETFs included United States Natural Gas (UNG) (-4.9%), ProShares Short Emerging Markets (EUM) (-3.7%), ProShares Short QQQ (PSQ) (-3.4%), SPDR Russell/Nomura Small Cap Japan (JSC) (-3.0%) and WisdomTree Japan Small Cap (DFJ) (-2.5%).

Still on the topic of ETFs, Clusterstock reported that investors have been pouring $108 billion into ETFs during the year to date, with $24 billion coming in during the last three months.

“Yet while investors have been pouring money into commodity, fixed income and global equity ETFs, one very important category has remained a complete pariah - US stocks. Despite the stock market rally …, money has continued to flow out of US equity ETFs. Thus while some might be able to argue that the crowd has jumped into commodities, fixed income and global equities, it’s pretty hard to say that investors are in love with stocks again …,” said Clusterstock.

Source: Clusterstock - Business Insider, November 11, 2009.

Referring to the surge in the gold price, the quote du jour this week comes from Richard Russell, 85-year-old author of the Dow Theory Letters. He said: “America’s Fed Chairman, Ben Bernanke, is convinced he knows the secret of avoiding hard times. The Fed can halt deflation and turn the picture into asset inflation. All it takes, thinks Bernanke, is zero interest rates and the creation of trillions of new dollars - and they will come, and they will spend. This is the path the Bernanke Fed has chosen. So far, it has not worked - they are not coming, and they are not spending. The Fed’s strategy has not even succeeded in bringing down unemployment. Bernanke’s solution - more of the same: ‘Whatever it takes, and as long as it takes.’

“Thus we have a strange and ironic situation. We have world deflation, and a Fed Chairman who believes he can manipulate the primary trend. Bernanke’s strategy is leading to a weakening dollar. The more dollars that are created, the weaker the dollar. As the dollar’s very status comes into question, wise and seasoned investors move to protect their wealth. They move to the time-honored ’safe haven’: the one unit of wealth that cannot be destroyed in that it is not a liability of any government. And, of course, I’m talking about the one unit of wealth that is never questioned - gold.

“So it’s the gold bull market that I trust and believe in. I think and I ponder - what can halt the gold bull market? The only thing that can halt the gold bull market is a complete reversal by the politicians and the Fed, and that would allow the US to sink into a state of deflation and depression. Unthinkable.”

Next, a quick textual analysis of my week’s reading - mostly done on airplanes and between meetings in Europe. This is a way of visualizing word frequencies at a glance. Although “bank” still features prominently, the key words have started taking on a more normal pattern compared to the crisis-related words that have dominated the tag cloud for many months. Unsurprisingly, “gold” is gaining in prominence.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index, most of the indices are trading above their 50-day moving averages, with all the indices also above their respective 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.

The October lows are also given in the table. A break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher-reaction lows.

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

Still on charting, Adam Hewison (INO.com) sounded a cautious note on the outlook for the Dow Jones Industrial Index and S&P 500 Index as explained in one of his popular technical analysis presentations. Click here to access the presentation.

The announcement of Wal-Mart’s results marked the end of the Q3 earnings season. Research outfit Bespoke provided the following summary of the Q3 earnings results as well as Q4 estimates:

“The estimates for the year-over-year change in Q3 earnings at the start of earnings season were -23.2% for the S&P 500. Currently, the actual number sits at -17.2%. As shown below, the Financial sector has seen its earnings grow by 358.8% in Q3 ‘09 versus Q3 ‘08! Given how bad things were last year, it’s not surprising to see a reading this high, but it is a sign that things have gotten much better. Health Care, Utilities and Consumer Staples (all non-cyclical) are the only other sectors that have seen year-over-year earnings growth this quarter. Energy has seen the biggest decline in earnings at -62.9%, followed by Materials (-43.4%), Industrials (-37.3%), and Consumer Discretionary (-29.3%).

“The Financial sector is currently expected to see growth of 133.8% in Q4 ‘09 versus Q4 ‘08. This high estimate in the Financial sector helps put estimates for the entire S&P 500 at +65.2% in the fourth quarter. Ex-Financials, the S&P 500 is expected to see Q4 earnings actually decline by 7.6%. Technology is expected to see growth of 21.5% in Q4, while estimates for the Materials sector are currently at 97.5%.”

Source: Bespoke, November 11, 2009.

From across the pond, David Fuller (Fullermoney) said: “Veteran subscribers will recall a remark often used on this site [Fullermoney]: Bull markets do not die of old age - to which I will add warnings by Roubiniesque economists. Instead, they are assassinated - usually by central banks. So how many rate bullets does it take to fell a bull? You may not be surprised to hear that there is no precise answer, because it depends mainly on sentiment and liquidity. We know when central banks start to reduce liquidity, or at least increase its price, but we do not know precisely when that will affect sentiment adversely.

“Note the still widening spread between US 10-year yields over 2-year yields, otherwise known as the yield curve, on this historical. It is still rising, indicating to me that quantitative easing continues. The time to start thinking about closing long portfolios in anticipation of the next bear market, I suggest, will be when the yield curve next inverts by moving below zero. However, the lead was so early last time (early 2006) that some of us became complacent about it.”

Source: Fullermoney.com

For more discussion on the economy and financial markets, see my recent posts “Picture du Jour: Dow rally in perspective“; “Richard Russell: Six reasons to invest in gold“; “Albert Edwards still über-bearish, calls for new lows in 2010“; “Roubini’s RGE: Global monetary policy outlook“; “Bull markets do not die of old age; they are assassinated - usually by central banks” and “WealthTrack: Jim Grant interview - transcript“.

Twitter and Facebook
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those not doing so already, you can follow my “tweets” by clicking here. You may also consider joining me as a friend on Facebook.

Economy
The Recession Status Map below, courtesy of Dismal Scientist Economy.com, aggregates growth statistics from around the world and allows one to see at a glance which economies are in recession, at risk or beginning to recover. Click on the map to link to the interactive version.

Source: Dismal Scientist

“Global business confidence has remained largely unchanged during the past two months through mid-October. Sentiment is consistent with a very tentative and fragile global economic recovery,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses … are more upbeat about the outlook into next year … and their broad assessment of current business conditions. South Americans are the most positive, and North Americans generally the most negative.”

Source: Moody’s Economy.com

As far as hard data are concerned, the Eurozone emerged from recession in the third quarter, but the speed of the recovery fell short of expectations - and the growth rate of 0.9% achieved by the US. “Eurozone gross domestic product expanded by 0.4% compared with the previous three months, after having previously contracted for five consecutive quarters, according to official figures on Friday. Powering the rebound were Germany and Italy, which saw GDP rising by 0.7% and 0.6% respectively,” reported the Financial Times.

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.)

November 13
• Widening of trade deficit reflects oil imports and improving economic conditions
• Michigan Consumer Sentiment Index - households remained gloomy in November

November 12
• Noteworthy news from labor market - total continuing claims are trending down

November 10
• Yellen on budget deficit and inflation
• Inflation expectations - an update

November 9
• October Senior Loan Officer Opinion Survey - improved picture of lending conditions, but demand for loans was weak

Meanwhile, James Bullard, the president of the Federal Reserve Bank of St Louis, has told the Financial Times that uncertainty over the outlook for inflation “is as high as it has ever been since 1980″. “I think there’s still some risk of deflation, but I do think the deflation risk is fading as the economy recovers,” he said. In the medium term, “you have inflation that will be possibly substantially above target over a horizon of two to four years, and that, I think, is because of the combination of very large fiscal deficits in the US with very easy monetary policy.”

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

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Nov 12	08:30 AM	Initial Claims	11/07	502K	525K	510K	514K
Nov 12	08:30 AM	Continuing Claims	10/31	5631K	5700K	5700K	5770K
Nov 12	11:00 AM	Crude Inventories	11/06	1.76M	NA	NA	-3.94M
Nov 12	02:00 PM	Treasury Budget	Oct	-$176.4B	-$150.0B	-$165.0B	-$155.5B
Nov 13	08:30 AM	Export Prices ex agriculture	Oct	0.3%	NA	NA	0.1%
Nov 13	08:30 AM	Import Prices ex oil	Oct	0.4%	NA	NA	0.5%
Nov 13	08:30 AM	Trade Balance	Sep	-$36.5	-$30.0B	-$31.8B	-$30.8B
Nov 13	09:55 AM	Michigan Sentiment	Nov	66.0	70.5	71.0	70.6

Source: Yahoo Finance, November 13, 2009.

Click the links below for the following economic reports:

• Wells Fargo Securities: Weekly Economic & Financial Commentary
• Wells Fargo Securities: Monthly Economic Outlook (November 2009)
• Wells Fargo Securities: Global Chartbook (November 2009)

In addition to a speech by Fed Chairman Ben Bernanke to the Economic Club of New York, US economic data reports for the week include the following:

Monday, November 16
• Retail sales
• Empire manufacturing
• Business inventories

Tuesday, November 17
• PPI
• TIC flows
• Capacity utilization
• Industrial production

Wednesday, November 18
• Housing starts
• Building permits
• CPI

Thursday, November 19
• Initial jobless claims
• Leading indicators
• Philadelphia Fed

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

Source: Wall Street Journal Online, November 13, 2009.

“Amateurs measure potential while professionals measure risk,” said hedge fund legend Steve Cohen, founder of SAC Capital Advisors (hat tip: The Kirk Report). 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 properly assess the risk associated with specific investments.

That’s the way it looks from Geneva (from where I will be making my way back to Cape Town later today).

Source: Larry Wright, Comics.com, November 10, 2009.

The Wall Street Journal: German, French economies continue to grow
“The euro zone’s two largest economies continued to recover from recession in the third quarter, as exports boosted both German and French gross domestic products.

“Germany’s GDP rose 0.7% in the three months to September 30 from a quarter earlier when adjusted for working days, data from the Federal Statistics Office showed Friday. Private consumption, however, dragged on the economy, the office said.

“In France, GDP grew for the second consecutive quarter, rising 0.3%, after shrinking for a year. Exports outpaced imports by growing 2.3%, with the result that the external sector contributed 0.4% to overall economic growth, the data showed.

“Household consumption, the main pillar of the French economy, remained unchanged from the previous three months, when it had gained 0.3%. Investment fell 1.4%, a faster pace of decline than the -1.2% posted in the previous quarter.

“The outlook for the German economy remains uncertain as unemployment is expected to rise in the coming months, hurting consumer demand. And with the euro trading at high levels against the dollar, German exporters may suffer from weaker demand, economists have said.

“The third-quarter growth marked the second quarterly gain after weak activity in the previous quarters, indicating that the euro zone’s largest economy is making progress in easing out of its worst recession since World War II.

“But overall economic activity remains low, with German GDP shrinking 4.8% in the third quarter from a year earlier, when adjusted for the number of working days each year, the data showed.”

Source: Andrea Thomas and Gabriele Parussini, The Wall Street Journal, November 13, 2009.

MoneyNews: Chanos - huge China crash coming
“To the growing number of China bears, add Kynikos hedge fund manager Jim Chanos, who is reportedly shorting the entire Chinese economy.

“Chanos, among the first to see through Enron’s web of accounting tricks, told Politico.com he sees a similar situation evolving in China - starting with the fact that the $4.3 trillion Chinese economy is under-performing despite a $900 billion stimulus program.

“Also, China seems to be cooking its books, making claims such as a huge surge in car sales while gasoline sales stay flat.

“Finally, there’s a concern that China may have too much capacity to produce too many goods for too few buyers, notes financial journalist Ed Conway.

“‘China has grown to its current size, as do most ‘young’ economies, by exporting cheap goods to richer countries. … (resulting in) the biggest trade surplus in history,’ Conway writes in the UK Telegraph.

“Chinese leaders, Conway points out, are doing whatever they can to keep the value of their currency low.

“‘Such a policy made sense when China had an economy that was relatively underdeveloped, and was trying to shield nascent exporters from volatility; but now, by keeping assets artificially cheap, it serves to exacerbate the bubble that is building up as a result of those low US interest rates,’ Conway writes.

“This, combined with trying to pump up the economy further by channeling cheap credit to companies, ‘could hardly be a more reliable recipe for an asset bubble,’ Conway says.”

Source: Julie Crawshaw, MoneyNews, November 12, 2009.

Asia Times.com: China trade surplus shadows Obama visit
“China’s surging trade surplus, with the increase last month almost double the September figure, makes it impossible that trade issues will not be a key topic when United States President Barack Obama makes his first visit to Beijing this Sunday.

“The surplus was US$24 billion in October, compared with $13 billion in September, bringing the total for the year so far to $159.23 billion.

“Trade tension between the two countries was already rising before the latest data were released on Wednesday, with the US imposing a series of anti-dumping sanctions on Chinese imports and Beijing investigating the possibility of action against imports from the US.

“This week, before leaving on his nine-day trip to Asia, Obama warned that the economic relationship between the countries had become deeply imbalanced in recent decades, with a trade gap between the countries and huge Chinese holdings of US government debt.

“The US and China had to work together on the big issues facing the world, and any competition between them had to be fair and friendly, Obama said in a White House interview with Reuters.

“He said he would be raising with Chinese leaders the sensitive issue of their currency, the yuan, which is seen by some in US industry as significantly undervalued and as an important contributor to the imbalances.

“‘As we emerge from an emergency situation, a crisis situation, I believe China will be increasingly interested in finding a model that is sustainable over the long term,’ Obama said. ‘They have a huge amount of US dollars that they are holding, so our success is important to them … The flip side of that is that if we don’t solve some of these problems, then I think both economically and politically it will put enormous strains on the relationship.’

“China holds about $2.27 trillion in foreign reserves, about two-thirds of it in US dollars, as of the end of September, up 19% from a year earlier. The country held Treasury bills worth about $797.1 billion in August, making China the world’s largest holder of US Treasuries outside the United States, according to the US Treasury Department.”

Source: Olivia Chung, Asia Times.com, November 13, 2009.

Clusterstock: California’s no. 2 export to China - trash
“American exports to China soared 341% from 2000 to 2008, according to the US-China Business Council. In fact, China is the third largest US export market, behind Canada and Mexico.

“Spearheading the charge is sunny California, the largest American exporter to China by state.

“No surprise, right? California’s right on the Pacific coast and filled with innovative companies.

“Well sort of.

“While computers and electronics are indeed California’s top export to the giant nation, the sad truth is that ‘Waste and Scrap’ are the Golden State’s second largest export to China. California sends about as much junk to China as both machinery and transportation equipment combined.

“The rest of the US isn’t doing that much better either. As a nation, ‘Waste and Scrap’ is America’s fifth largest export to China, at a whopping $7.6 billion. We might need to rethink what ‘Made in the USA’ exactly means to the Chinese.”

Source: Vincent Fernando and Kamelia Angelova, Clusterstock - Business Insider, November 12, 2009.

Financial Times: EU states given stark warning on debt levels
“The European Union’s public debt could by 2014 rise to 100% of gross domestic product - a year’s economic output - unless governments take firm action to restore fiscal discipline, EU finance ministers will be warned on Monday.

“The stark message is contained in a European Commission analysis, which highlights the rapid deterioration in EU public finances caused by emergency measures in the past 12 months to rescue Europe’s financial sector and combat recession.

“As recently as 2007, the euro area’s public debt was only 66% of GDP. But, even at this level, it was above the 60% target set for countries aspiring to join the eurozone.

“In its latest six-month economic forecast, published last week, the Commission predicted that the eurozone’s public debt would rise to 84% of GDP next year and 88.2% in 2011. But the new document paints a more sombre picture.

“The document says, based on projections of a return to long-term pre-crisis growth levels, that ‘without consolidation, the gross debt-to-GDP ratio for the EU could reach 100% of GDP as early as 2014, and keep on increasing’.

“The Commission identifies five countries as at particular risk - Greece, Ireland, Latvia, Spain and the UK - because their public finances will come under strain from large increases in pension and healthcare costs, and high deficits triggered by the financial crisis.”

Source: Tony Barber, Financial Times, November 8, 2009.

Financial Times: Uncertainty “high” over inflation outlook
“Uncertainty over the outlook for inflation ‘is as high as it has ever been since 1980′, James Bullard, the president of the Federal Reserve Bank of St Louis, has told the Financial Times.

“He said the US central bank still faced a lingering threat of deflation, but might have to pivot quickly once this danger passed to face the threat of excess inflation.

“His comments followed last week’s Fed meeting at which the US central bank signalled that it expected to keep rates on hold near zero for at least six more months but identified factors that could lead to earlier rate rises.

“‘I think there’s still some risk of deflation, but I do think the deflation risk is fading as the economy recovers,’ the St Louis Fed chief said in an interview.

“In the medium term, ‘you have inflation that will be possibly substantially above target over a horizon of two to four years, and that, I think, is because of the combination of very large fiscal deficits in the US with very easy monetary policy.’

“Mr Bullard - whose views do not neatly categorise him as a hawk or a dove - said: ‘For 2009, in particular, and maybe a little bit into 2010, you have to worry about getting out of the recession, establishing your recovery, making sure the recovery has really taken hold. And then, at the appropriate time, when things are all going forward, you have to switch gears and watch whether the inflation rate is coming up.’

“Mr Bullard said historically the Fed had waited until two-and-a-half to three years after a recession ended before raising rates. That, he said, ‘would put you in the first half of 2012′. But the committee might take into account a wider set of factors this time, including the danger that ultra-low rates could fuel asset price bubbles.”

Source: Krishna Guha, Financial Times, November 8, 2009.

Asha Bangalore (Northern Trust): Inflation expectations - an update
“Inflation expectations (as measured by the spread between the nominal Treasury security yield and TIP rate) have moved up 22 bps in six business days ended November 9 if the 10-year time span is considered, while the 5-year time span shows 18 bps increase in the same period.

“It is well known that inflation expectations are important in the formulation of Fed policy and this aspect is stressed in official policy statements and Fed rhetoric. Inflation expectations as of November 9 (222 bps using the 10-year span) is the highest since August 2008. After the collapse of Lehman Brothers, inflation expectations, much like other market indicators, moved to worrisome territory with a possibility of deflation being priced in. This situation has undergone a significant change with improving financial market and economic conditions in place at the present time. Consistent with more bullish economic data, inflation expectations have moved up to reflect the change in business conditions.

“Inflation expectations have risen in the past few days but there is an exaggerated concern about inflation evolving despite the fact that there is an enormous level of unused capacity across the economy. Inflation should not be problematic in 2010.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 10, 2009.

Bill King (The King Report): Dubious US economic statistics
“For years we inveighed about dubious, if not fraudulent, US economic statistics. Over the past year or so, an increasing number of analysts, pundits and media types have been converted to the cause. The New York Times this week reported that faulty export accounting is overstating GDP.

“Now Goldman’s Jan Hatzius is preaching the dubious economic data gospel.

“‘Today’s comment attempts to gauge whether the recent official estimates might have overstated the economy’s true growth because of an inability to capture the unusually poor performance of small firms. Our tentative conclusion is that the economy might have grown between ½ and 2 percentage points more slowly than indicated by the Q3 ‘advance’ estimate of 3.5% (annualized). However, even if this proves correct and eventually shows up in the revised data, the revision process could take several years.

“Over the years, we have addressed the problems with ISM and other PMI survey data. Mr. Hatzius:

“‘The weakness of the NFIB stands in stark contrast to other indicators such as the purchasing managers indexes published by the Institute for Supply Management, which have moved back to around their long-term averages, and real GDP, which grew an estimated 3.5% (annualized) in the third quarter. Small firms appear to be underperforming their larger peers, most likely because of differential access to credit.

“‘To illustrate how huge the gap between the NFIB and ISM has become, we regress the ISM on the NFIB using monthly data for the 1974-2006 period. (We only use data through 2006 to avoid biasing down the coefficients via an inclusion of the recent enormous gap.) The equation shows that the current level of the NFIB would have been expected to correspond to a manufacturing ISM index of 41.1, at a time when the actual ISM stands at 55.7…

“‘We have argued that the weakness of the small business sector may mean that real GDP in the third quarter in fact grew more slowly than the 3.5% ‘advance’ estimate. The reason is that the GDP data may not fully capture the performance of small firms, and specifically the formation and dissolution - i.e. the ‘birth’ and ‘death - of small firms…’ Amen, Brother Jan!”

Source: Bill King, The King Report, November 12, 2009.

MoneyNews: Edmund Phelps - recovery will lose steam
“Nobel laureate economist Edmund Phelps says the economic recovery will weaken soon.

“The economy ‘is groggy, but it’s getting to its feet’, he told Bloomberg.

“‘We’re already seeing a strong recovery. I just think that it’s going to run out of gas.’

“Phelps, a Columbia University professor, agrees with Pimco executives Mohamed El-Erian and Bill Gross that the economy has entered an extended period of slow growth and high unemployment.

“‘As output goes up, employment is going to continue to lag,’ Phelps said.

“‘Firms have gotten rid of a lot of their workforce cushion, so to speak, and they’re going to do without that for a quite a while.’

“The problem is structural, he said. ‘There are signs that the economy has lost its dynamism, its urge to innovate, or its ability to innovate.’

“Phelps said that the Obama administration’s fiscal stimulus program made sense, but that more stimulus isn’t necessary.”

Source: Dan Weil, MoneyNews, November 9, 2009.

Asha Bangalore (Northern Trust): Widening of trade deficit reflects oil imports and improving economic conditions
“The trade deficit widened to $36.5 billion in September vs. $30.8 billion in August. Exports (+2.9%) and imports (+5.8%) of goods and services grew in September. A large part of the import bill was due to an increase in oil imports resulting from higher prices and a larger quantity of imports (+7.0%). The trade deficit has risen about $10 billion in the past five months from a low of $26.4 billion in April 2009. The September trade data suggest a likely downward revision of the 3.5% gain in third quarter real GDP. The net impact will be known after inventories and retail sales data are published next week.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 13, 2009.

Asha Bangalore (Northern Trust): Households remained gloomy in November
“The early-November University of Michigan Consumer Sentiment Index edged down to 66.0 from 70.6 in October. Both the Current Conditions Index (69.6 vs. 73.7 in September) and the Expectations Index (63.7 vs. 68.6 in October) declined. The weak labor market situation appears to have played a major role in households revising their assessment of economic conditions as the index has dropped for two straight months after posting a large increase in September.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 13, 2009.

Asha Bangalore (Northern Trust): Job market - total continuing claims are trending down
“Initial jobless claims dropped 12,000 to 502,000 during the week ended November 7, the lowest reading in a year. Continuing claims, which lag initial claims by one week, declined 139,000 to 5.631 million.

“Total claims which include recipients under the special programs, Extended Benefits Program and Emergency Unemployment Compensation Program, were 9.81 million during the week ended October 24, down from 10 million during the week ended October 3. These data underscore the positive developments in the labor market amid the gloomy news about a climbing unemployment rate. Initial jobless claims data are a leading indicator, while the overall jobless rate is a lagging economic indicator.

“The 4-week moving average of initial jobless claims is 519,750 for the week ended November 7. Historically, the median of the four-week moving average of initial jobless claims is 347,000. In other words, the current 4-week moving average of initial jobless claims is nearly half way from the median level of jobless claims. At the cost of stating the obvious, robust growth of real GDP will be necessary for achieve more vibrant conditions in the labor market but the current improvements remain significant.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 12, 2009.

Bloomberg: Obama administration accelerating review of ways to boost jobs
“President Barack Obama’s administration is accelerating plans to boost job growth, including more spending on infrastructure and business tax cuts, after the unemployment rate jumped to 10.2% last month.

“Obama and his advisers will within a matter of weeks review ideas for adding to the $787 billion stimulus passed earlier this year, an administration official said. Previously the president’s aides said they wanted to wait for the full impact of the earlier stimulus before taking additional action.

“‘My economic team is looking at ideas such as additional investments in our aging roads and bridges, incentives to encourage families and businesses to make buildings more energy efficient,’ additional tax cuts to spur hiring, and more steps to ease the flow of credit to small business, Obama said today at the White House following the Labor Department report.

“The president made his remarks after signing into law a measure extending an $8,000 tax credit for first-time homebuyers and benefits for unemployed workers, the first major expansion of provisions that were included in February’s economic stimulus. The legislation also provides tax refunds to money- losing companies.”

Source: Kate Andersen Brower and Roger Runningen, Bloomberg, November 6, 2009.

CNBC: Foreclosures fall again but improvement likely fleeting
“Foreclosure rates fell for the third consecutive month in October, but remained sharply higher than a year ago, according to a new report, with analysts cautioning that the improvement was at best temporary.

“The number of Americans receiving foreclosure notices was down 3% on a month-to-month basis, as 332,292 properties generated a foreclosure notice. That was 18.9% higher than last October. (Foreclosure notices are defined as a default notice, bank repossession or auction sale notice.)

“‘It’s good to see that foreclosures have slowed down marginally, but we don’t really think it’s a trend,’ said Rick Sharga, vice president of marketing at foreclosure tracking Web site RealtyTrac, which released the report.

“Legislation in some states has slowed foreclosures, says Sharga, but the impact will be temporary and won’t ultimately prevent most of them. In Nevada, for example, foreclosures dropped 26% from the previous month because of new legislation requiring mediation before initiating foreclosure proceedings.

“The data comes a couple of days after the Treasury Department released a report showing that more than 650,000 homeowners have taken trial loan modifications under the Making Home Affordable program, which was announced last February. About one-third of those modifications have been in California and Florida, which also happen to have some of the highest foreclosure rates in the country.”

Source: Joseph Pisani, CNBC, November 11, 2009.

Clusterstock: The bailout has transformed into an MBS buying program
“When the financial crisis hit its high tide last year the Federal Reserve used a couple of blunt instruments to rescue financial institutions.

“The largest of the credit easing policy tools were the Fed’s programs direct lending to financial institutions, including opening the discount window to investment banks and extending an unprecedented credit line to AIG. It also provided credit to ‘key credit markets’ in the form of loans and guarantees to money market funds and asset backed securities markets.

“But over the course of 2009, those program have shrunk or been phased out. Meanwhile, one program, the Fed’s purchase of mortgage back securities, has grown by more than enough to make up for the decline of those programs. What this means is that despite the rollback of some Fed bailout programs, the market is still highly leveraged to the balance sheet of the Fed.”

Source: John Carney and Kamelia Angelova, Clusterstock - Business Insider, November 9, 2009.

Financial Times: Health reformers prepare for Senate hurdle
“The first thing Barack Obama did late on Saturday night following the passage of the healthcare bill in the House of Representatives was to phone the heads of three industry lobby groups to thank them for their support. Not included on the list was the largest insurance lobby group, American Health Insurance Plans, which doggedly continues to oppose Democratic reform efforts.

“Amid all the late night celebrations after the razor-thin 220-215 vote for the bill, Karen Ignagni, head of AHIP, warned that it would be a much tougher battle to push reform through the Senate in the weeks ahead. ‘The current House legislation fails to bend the healthcare cost curve and breaks the promise that those who like their current coverage can keep it,’ she said. ‘The result will be increased costs and massive disruptions in the quality of coverage individuals and families rely on today.’

“On Sunday, Harry Reid, the Senate majority leader, who will now become the central figure in the drama of the weeks ahead, said ‘we stand closer than ever to reforming our broken healthcare system’.

“The battle is by no means even close to its finale. Mr Reid’s first task will be to persuade sceptical colleagues that the bill should retain the controversial ‘public option’ - a government insurance plan intended to keep the ‘insurers honest’. Even though Mr Reid has watered down that element by allowing states to opt out of it, many Democrats remain opposed.

“Secondly, Mr Reid will be under pressure to restore a strong ‘individual mandate’ that compels all Americans to take out insurance or pay a hefty fine. Dilution of that element is what led AHIP to come out strongly against healthcare reform last month.

“If and when Mr Reid cobbles together a majority in the Senate, Democrats then face the thorny task of stitching the very different House and Senate versions into one bill and then voting on that final product all over again.”

Source: Edward Luce, Financial Times, November 8, 2009.

Financial Times: US banks bill seeks to strip Fed of powers
“An influential US Senate committee has proposed a sweeping overhaul of the country’s regulatory architecture that would strip powers from the Federal Reserve and create a single banking regulator.

“Chris Dodd, chairman of the Senate banking committee, on Tuesday presented a more radical vision of regulatory reform than that proposed by the Obama administration. The move ushered into the open a behind-the-scenes struggle between banks, policymakers and regulators.

“Democrats lined up behind Mr Dodd as he presented the bill. But senior Republicans were missing from a press conference despite attempts by President Barack Obama to secure their support for one of his most important legislative goals.

“The proposal to consolidate regulators faces strident opposition from the Fed, the Federal Deposit Insurance Corporation and smaller regulators who argue they are best placed to supervise banks.

“Mr Dodd said most institutions should benefit from a regulator that would provide ‘clarity, cut red tape and make it easier to compete’ but banks would ‘no longer be able to shop for the weakest regulator’.

“Viral Acharya, professor of finance at the Stern School of Business at New York University, said he thought the idea of a single bank regulator was a bad idea. ‘I think it’s going to be too huge an overhaul of what exists,’ he said. The Fed and FDIC need to keep supervisory functions in order to inform their other roles, he argued.

“An Obama administration official said last week that he was open to the idea of consolidating bank regulators even though that went much further than initial plans from the Treasury.

“The Senate draft legislation also creates an agency to oversee systemic risk, which could call for banks to be broken up if they threatened the entire financial system and impose tougher capital requirements.

“The draft legislation, although more radical than other versions, stops short of forcing the break-up of healthy banks, which has been advocated by some economists.”

Source: Tom Braithwaite and Sarah O’Connor, Financial Times, November 10, 2009.

CNBC: Fed in the crosshairs
“Frederic Mishkin, former Federal Reserve Board Governor and a Columbia University economics professor, discusses Sen. Dodd’s financial reform bill and its potential unintended consequences.”

Source: CNBC, November 12, 2009.

The Wall Street Journal: Banks hasten to adopt new loan rules
“Banks are moving quickly to restructure commercial mortgages under new US guidelines that are more forgiving of battered property values and can help banks avoid bigger losses.

“Citigroup Inc., regional bank Whitney Holding Corp. and other lenders around the country are planning to review loans now considered nonperforming to determine if they can be reclassified under the guidelines announced October 30 by bank, thrift and credit-union regulators, according to bank executives and people familiar with the matter. The moves could help the banks absorb fewer losses on troubled real-estate loans and preserve capital.

“‘It’s a positive all the way around,’ said James Smith, chief credit officer for National Bank of South Carolina, a unit of Synovus Financial Corp.

“Matthew Anderson, partner at research firm Foresight Analytics, estimates that about two-thirds of the $800 billion in commercial real-estate loans held by banks that will mature between now and 2014 are underwater, meaning the loan amount exceeds the value of the property. The flexibility extended by regulators will apply to $110 billion to $130 billion of these loans, he said.

“The guidelines are controversial, with critics accusing the US government of prolonging the financial crisis by not forcing borrowers and lenders to confront inevitable problems.

“Regulators respond that they are being prudent, adding that a crackdown will occur at any banks misinterpreting last month’s announcement as an opportunity for leniency.”

Source: Lingling Wei and Peter Grant, The Wall Street Journal, November 12, 2009.

Reuters: Goldman Sachs boss says banks do “God’s work”
“The chief executive of Goldman Sachs, which has attracted widespread media attention over the size of its staff bonuses, believes banks serve a social purpose and are doing ‘God’s work’.

“In an interview with London’s Sunday Times newspaper, Lloyd Blankfein also said he believed big profits and bonuses at banks were a sign that the world economy was recovering.

“‘We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. We have a social purpose,’ he told the paper.

“The dominant Wall Street bank posted third-quarter earnings of $3 billion and plans to hand out more than $20 billion in year-end bonuses.

“Blankfein told the Sunday Times that the bank’s compensation practices correlated with long-term performance.

“‘Others made no money and still paid large bonuses. Some are not around anymore. I wonder why?’

“He added that he understood, however, that people were angry with bankers’ actions: ‘I know I could slit my wrists and people would cheer.’”

Source: Victoria Bryan, Reuters, November 8, 2009.

Financial Times: A lumpy ride for JGBs
“Government bond markets around the world are quite calm at the moment, but a sharp rise in Japanese government bond yields hints at what could be a lumpy ride to come. Jennifer Hughes, senior markets correspondent of the Financial mail, explains how the credibility of governments is key to keeping any bond market volatility to a minimum as large swathes of debt are offered to the market in the coming months.”

Click here for the full article.

Source: Financial Times, November 10, 2009.

Bespoke: 2009 country stock market performance
“Below we highlight the year-to-date percentage change (local currency) for the major equity indices of 82 countries. So far this year, 71 of the 82 countries are in positive territory, and the average change of all countries is 33.27%. With a gain of 20.76%, the S&P 500 is 13 percentage points below the average, yet it’s the second best G-7 performer behind Canada so far in 2009.

“The BRIC countries (Brazil, Russia, India, China) have been standouts this year. Russia is up the most out of all countries with a gain of 126.71%. Brazil, China, and India are all up more than 70%. Along with Russia, the Ukraine, Argentina, and Peru are up more than 100% year to date.

Eleven countries are down so far in 2009. Ghana is down the most at -48.26%, followed by Puerto Rico (-40.56%), Bermuda (-38.36%), and Costa Rica (-35.37%).”

Source: Bespoke, November 10, 2009.

Bespoke: S&P 500 breadth check-up
“Although the S&P 500 is within 1% of its closing high, breadth in this recent rally has been lagging. As of today [Tuesday], the cumulative A/D line for the S&P 500 since September 2008 is at 778, which is 571 below the highs from October. Given the fact that days where the S&P 500 has a 1% gain typically see a net A/D reading of about +300, it is likely that if we get a rally to new highs, it will not immediately be confirmed by breadth. Therefore, if the S&P 500 does manage to rally to a new closing high, investors with cash already on the sidelines may want to wait for breadth confirmation before putting any new funds to work.”

Source: Bespoke, November 10, 2009.

Bespoke: Breadth not yet confirming new highs
“As we noted on Tuesday [article above], breadth as measured by the cumulative advance/decline line has not yet confirmed the market’s recent rally to new highs. The same holds true for another breadth indicator that tracks the percentage of stocks trading above their 50-day moving averages. At prior highs during the current bull market, the percentage of stocks trading above their 50-days moved up to the 80%-90% mark. Currently, just 72% of stocks in the S&P 500 are trading above their 50-days, so less stocks have participated in the recent run-up.

“In the Financial sector, just 56% of stocks are currently above their 50-days, which is the weakest reading among all ten sectors. Consumer Staples currently has the highest reading at 83%, which is somewhat peculiar given that this sector usually only outperforms when the market is declining and not rising. Industrials and Health Care both have readings of 80% or better as well.”

Source: Bespoke, November 12, 2009.

Bespoke: Midcaps lead the way in 2009
“As shown below, the S&P Midcap 400 has outperformed its large and smallcap brethren so far in 2009. The Smallcap 600 has been the worst performer with a gain of 15.4%, but it was down the most during the declines in the first quarter, so it has had to make up the most ground. The S&P 500 is up 20.77% year to date, while the Midcap 400 is up 29.17%.”

Source: Bespoke, November 12, 2009.

Bespoke: Sector relative strength - technology & financials
“The charts below show the relative strength of the Financial and Technology sectors versus the S&P 500. In each chart, a rising line indicates that the sector is outperforming the S&P 500 while a declining line indicates underperformance. We have also included dots showing each time the Fed has left rates unchanged (blue dots). Believe it or not, the Fed hasn’t made a change in interest rates in the last year.

“Given the fact that Technology and Financials are the most widely followed sectors in the market, any meaningful rally in equities will need to see both Financials and Technology participating. As shown in the charts, while Financials have stopped rolling over, they are hardly outperforming. Since the last Fed meeting on November 4, Financials have merely been performing in line with the S&P 500. Unlike Financials, Technology stocks have been outperforming the market over the last several weeks. Even here though, the sector has yet to make a new high in relative strength. If the S&P 500 is going to stage a meaningful break above the 1,100 level, we will need to see these two sectors leading the way.”

Source: Bespoke, November 12, 2009.

Bespoke: Top line numbers not bad
“With everyone worried about the top line revenue numbers this earnings season, we’ve been tracking this data closely. As shown below, 59% of US companies have beaten revenue estimates this quarter, which is the highest reading over the last 5 earnings seasons. While it’s not in the 70-80% range we saw during the last bull market, the direction of the revenue ‘beat’ rate is trending higher, which is a positive for the market.”

Source: Bespoke, November 10, 2009.

MoneyNews: Prechter - 2008 crash just a warm-up
“Elliott Wave analyst Robert Prechter says the rally is over and predicts the start of ‘another wave of the bear market’, similar to the one investors experienced in 2008.

“‘I don’t think we’ve hit the V bottom yet,’ Prechter told CNBC.

“Prechter, who predicted last March that the Dow would top 10,000, says investors don’t need to be hurt in market downtrends.

“‘Just make sure you have stepped aside in the safest possible cash equivalents in the safest possible institutions,’ he advises.

“‘My message is very easy,’ Prechter says. ‘You want to be as safe as possible. You might miss an upside, but you won’t get hurt.’

“To achieve safety, Prechter advises investors to move their money into Treasury bills and make sure their banks are financially healthy.

“‘You don’t want to be in stocks, real estate, or commodities,’ says Prechter, who believes the number of bank failures is going to increase next year.

“Stocks are still overvalued, but they won’t be for long, according to Prechter. ‘It’s still too early, but there’s a great buying opportunity coming,’ he notes.

“Prechter is very bullish on the dollar, which he thinks is ‘going to be up for a year or two’ and bearish on gold.”

Source: Julie Crawshaw, MoneyNews, November 9, 2009.

MoneyNews: Citi - Treasury yields could torpedo rally
“Rising Treasury bond yields may put an end to the global stock rally, says Yutaka Yoshino, chief technical analyst at Citigroup in Tokyo.

“Investors have been borrowing dollars at low interest rates to invest in stocks around the world - the so-called carry trade.

“But if 10-year bond yields, now about 3.50%, surpass 3.55, that would signal a rise in US interest rates, Yoshino tells Bloomberg.

“That in turn could stanch investors’ desire for the carry trade.

“‘If we pass that 3.55 level on the yield, we stop being in a rebound phase (from the October 1 low of 3.18%) and enter into a rising trend,’ Yoshino said.

“‘Inflation concerns are starting to creep in, and the Federal Reserve has no control over long-term interest rates.’

“US stocks could drop as much as 14%, with the Dow Jones Industrial Average hitting 8,600, and Japan’s Nikkei 225 Stock Average may fall the same amount, he said.

“Yoshino’s calculations come from the Japanese technical analysis method of ‘ichimoku kinko’, which utilizes wave patterns and repeating trends. Ichimoku kinko was devised by a Japanese journalist more than 70 years ago and resembles the Elliott Wave theory popularized by Robert Prechter.”

Source: Dan Weil, MoneyNews, November 9, 2009.

MoneyNews: Siegel - stocks will rise, causing Fed hike
“Market guru and Wharton professor Jeremy Siegel says strong economic growth will keep pushing stocks higher and lead the Federal Reserve to raise interest rates in the first half of next year.

“Meanwhile, rising profits will send stocks up another 10% this year, he says.

“‘I think there are a lot of legs to this bull market. Profits are coming in extremely well in the third quarter.’

“The booming economy, along with rising bond yields and a weak dollar, will push the Fed to hike rates in the first half of next year, Siegel maintains. That’s earlier than most analysts expect.

“Fed officials ‘are going to basically say we’ve got to increase that rate because of the strength in the economy and to preserve the bond market and the dollar’, he says.”

Source: Dan Weil, MoneyNews, November 11, 2009.

Bespoke: Stock market returns lost in translation
“One of the side effects of a weaker dollar is that the returns for foreign investors who invest in US assets are diminished. While the value of the asset may rise in dollar terms, if the dollar is losing value, the investor takes a hit when they convert their funds back into their domestic currency. For example, while the S&P 500 has risen 20.2% so far this year in US dollars, investors outside of the US have generally seen much less impressive returns.

“In the table below, we looked at the YTD returns of the S&P 500 for investors in various currencies. Of the currencies we looked at, the only one that has seen a benefit from the currency translation is the Argentinian peso. Returns have been diminished once fluctuations are taken into account for all other currencies. And of course some countries have been affected more than others. So far this year, Brazilian investors who bought the S&P 500 at the end of last year have lost nearly 12 reals for every 100 they invested on January 1.”

Source: Bespoke, November 9, 2009.

Bespoke: International revenues making an impact
“When the dollar is in decline, companies that generate the bulk of their revenues overseas benefit as the weak dollar attracts purchases of US-made products by foreign companies and consumers. The most recent stock market rally/dollar decline this month has been led by companies that generate a big portion of their revenues outside of the US, which has been characteristic of the entire bull market as well.

“When breaking the S&P 500 into deciles (10 groups of 50 stocks) based on the amount of sales that companies generate overseas, the deciles of stocks with high international revenues have outperformed during the November rally, while the two deciles of stocks with very little or no international revenues have significantly underperformed.”

Source: Bespoke, November 11, 2009.

Moneycontrol.com: Mobius on emerging markets
“In an interview with CNBC-TV18, Mark Mobius, Managing Director of Temptation Asset Management, spoke about his reading on the emerging markets (EMs) and his outlook.”

Source: Moneycontrol.com, November 7, 2009.

The Wall Street Journal: World tries to buck up dollar
“Governments around the world stepped up efforts to stem the US dollar’s slide, as officials grow increasingly concerned about the impact of the weak greenback on their nascent economic recoveries.

“Thailand, South Korea, Russia and the Philippines have been snapping up dollars this week in order to hold down the value of their currencies, traders said Wednesday, as the US currency wallowed near 15-month lows.

“In Latin America, Brazil’s finance minister said the country’s currency remained too strong, sparking speculation that the government would intensify recent efforts to curb the real’s ascent. On Tuesday, Taiwan banned foreign investors from parking time deposits in the country in an effort to ease upward pressure on the local currency.

“The fresh buzz over the dollar’s fall prompted Treasury Secretary Timothy Geithner, visiting Tokyo on Wednesday, to repeat the Obama administration’s commitment to a strong dollar. Still, Washington hasn’t taken any concrete steps to arrest the slide. The weaker dollar is actually benefiting the US as it struggles to come out of recession by helping keep US exports competitive.

“China is coming under new pressure from Pacific Rim countries to let its dollar-linked currency rise in value. On Wednesday, China’s central bank made a nod to concerns about the declining dollar and yuan by issuing a rare change to the official language of its exchange-rate policy. The central bank said it would take major currency trends into account in setting policy, though it wasn’t clear what impact that may have on the yuan’s future value.

“The US wants to see a stronger yuan, though Washington has avoided explicit public pressure on China to abandon its policy of managing its currency. But in the jargon of finance ministers, Mr. Geithner has made clear that’s what he thinks should happen. In an op-ed piece in Thursday’s Wall Street Journal Asia, he emphasized the advantages of ‘market oriented exchange rates in line with economic fundamentals’.

“Asian finance ministers, now gathered in Singapore for a meeting of the 21-member Asia-Pacific Economic Cooperation forum, are expected to raise their concerns about both the dollar’s decline and the inflexibility of the Chinese yuan.

“The fear is two-fold. If currencies surge against the dollar, it damages the ability of countries in the region to compete in world markets, by making their exports more expensive. What’s more, one of their major competitors - China - ties its currency to the dollar. As the yuan sinks in tandem with the dollar, China is able to keep its export prices low and price out competition.

“A concluding statement from the assembled APEC officials is expected to underline the importance of flexible exchange rates to sustainable global growth - generally viewed as code for a rise in the Chinese yuan. Such efforts are unlikely to bear fruit in the near term, which means these countries must act on their own to slow their currencies’ rise.”

Source: Joanna Slater, William Mallard and Bob Davis, The Wall Street Journal, November 12, 2009.

Financial Times: Tough times ahead for rouble
“The best of the rouble’s recent rally seems to have passed - and the currency could drop as much as 15% against its trading basket next year, says Neil Shearing at Capital Economics.

“He notes that, since March, the rouble has risen by 15% against its dollar/euro basket, prompting Russia’s central bank to switch from intervening to shore up the currency to stepping in to stem further appreciation.

“‘The size of the rebound is perhaps surprising given the lingering fragilities in the Russian economy,’ Mr Shearing says. ‘The rally has been driven by developments on the current account side of the balance of payments and, more specifically, by the rebound in oil prices.’

“He notes that, in the past, any improvement to the trade surplus from rising oil prices was largely sterilised by the operations of the Oil Stabilisation Fund and had relatively little impact on the exchange rate.

“‘But things seem to have changed - the authorities have not made any deposits into either the Reserve Fund or the National Welfare Fund since August and thus the rebound in oil exports has led to a rally in the currency - so the prospects for the rouble, for now, are inherently tied to moves in the oil price.

“‘If our forecast for oil to fall to $50 a barrel by the end of 2010 proves correct, the rouble is likely to test the bottom band of its trading range against the dollar/euro basket.’”

Source: Neil Shearing, Financial Times, November 11, 2009.

David Fuller (Fullermoney): Gold bull market on track
“I would not expect gold’s secular bull market to end until short-term interest rates are considerably higher.

“Even if this hypothesis is correct, it is impossible to know in advance the level of short-term rates which would cause gold’s advance to reverse. My guess is that global rates will be rising behind an accelerating advance in the gold price, eventually leading to a spike peak for bullion.

“Meanwhile, everything that gold is doing currently remains consistent with its earlier breakouts from large (approximately eighteen-month) trading ranges from September 2005 to May 2006 and September 2007 to March 2008. If this behavioural consistency continues, gold would reach at least $1,300 between March and May of next year.

“I previously mentioned that if gold maintained its consistency of the last three months, we could expect another ranging consolidation in a $40 to $45 range, commencing near $1,125. However given the post-India purchase excitement, it might accelerate. Whatever, a break in the progression of higher reaction lows evident on the daily chart would be required to question the medium-term uptrend.

“Fullermoney remains bullish of gold bullion and its sister precious metals. Tactically, we prefer to buy them on pullbacks within the medium-term trends. Precious metals mining shares are much more volatile and could do very well if the metals continue to perform, as we expect.”

Source: David Fuller, Fullermoney, November 11, 2009.

Richard Russell (Dow Theory Letters): Gold in strong bull market
“As matters stand today, I’m confident of only one rising tide or bull market. Let’s examine the whole picture. The world is suffering from over-production. In the space of a single decade, the population of the global economy has more than doubled. In our lifetime, we have seen China, India and most of Asia join the world economy. Initially, this was greeted as a great new source of purchasing power. I disagreed. I saw it as a great new source of supply. I was correct. China, India and Asia have produced a vast amount of goods, and as time goes on, this new competition has become increasingly more sophisticated and powerful.

“Three billion people (including their children) are willing to work for comparatively low wages, and they’re willing to work without benefits: no medical, no Social Security, no 401Ks, no state or corporate saving plans or help.

“The net result is over-production and world deflation. Whatever the US can make, whether it’s washing machines or women’s panties or garden hoses, the Chinese and Indians can make cheaper. We’re dealing with a world-wide deflationary tide.

“US politicians feel the pressure. A politician’s first duty is to get re-elected. When the people are unhappy, politicians hear the people’s complaints and hasten to give the people what they want. Making the voters happy is how the pols get re-elected.

“Ultimately, the pressure falls on the president and the party. The president, in turn, puts the pressure on the Federal Reserve. ‘Make the voters happy’ demands the president and the pols, and the Fed hastens to do what it does best. The Fed creates a torrent of money to offset the forces of deflation and it drops interest rates to zero. The problem is that the global forces of deflation are fundamental and powerful. The primary force of deflation is more powerful than the Fed and the rest of the world’s central banks taken together.

“America’s Fed Chairman, Ben Bernanke, is convinced that he knows the secret of avoiding hard times. The Fed can halt deflation and turn the picture into asset inflation. All it takes, thinks Bernanke, is zero interest rates and the creation of trillions of new dollars - and they will come, and they will spend. This is the path the Bernanke Fed has chosen. So far, it has not worked - they are not coming, and they are not spending. The Fed’s strategy has not even succeeded in bringing down unemployment. Bernanke’s solution - more of the same: ‘Whatever it takes, and as long as it takes.’

“Thus, we have a strange and ironic situation. We have world deflation, and a Fed Chairman who believes he can manipulate the primary trend. Bernanke’s strategy is leading to a weakening dollar. The more dollars that are created, the weaker the dollar. As the dollar’s very status comes into question, wise and seasoned investors move to protect their wealth. They move to the time-honored ’safe haven’: the one unit of wealth that cannot be destroyed in that it is not a liability of any government. And, of course, I’m talking about the one unit of wealth that is never questioned - gold.

“So it’s the gold bull market that I trust and believe in. I think and I ponder - what can halt the gold bull market?

“The only thing that can halt the gold bull market is a complete reversal by the politicians and the Fed, and that would allow the US to sink into a state of deflation and depression. Unthinkable.

“If gold goes parabolic, we will be in the third speculative phase of the gold bull market. This will be the final phase in which gold ‘blows its top’. No tree grows to the sky, and neither will gold.”

Source: Richard Russell, Dow Theory Letters, November 9, 2009.

Bloomberg: Faber - gold price won’t drop below $1,000 again
“Gold won’t fall below $1,000 an ounce again after rising 27% this year to a record as central banks print money to help fund budget deficits, said Marc Faber, publisher of the Gloom, Boom & Doom report.

“‘We will not see less than the $1,000 level again,’ Faber said at a conference today in London. ‘Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold.’

“China will keep buying resources including gold, he said.

“‘Its demand for commodities will go up and up and up,’ he added. ‘Emerging economies will grow at the fastest pace.’”

Source: Zijing Wu, Bloomberg, November 11, 2009.

Bespoke: Gold compared to silver and platinum
“Gold has been the talk of the town recently, with everyone wondering if the current rally is a bubble waiting to pop or just the beginning of a run to much higher prices. While gold is getting the attention, its sister metals - silver and platinum - have actually been outperforming.

“Below we provide historical charts of the ratio between gold and silver and gold and platinum. When the line is rising, gold is outperforming, while gold is underperforming when the line is declining. As shown, late last year both silver and platinum lost big ground to gold, with platinum and gold even reaching parity at one point. During the metals rally this year, however, silver and platinum have actually done better than gold.”

Source: Bespoke, November 11, 2009.

MarketWatch: Global energy agencies see world rebound in demand
“Two major agencies Tuesday forecast worldwide energy demand would soon rebound as the global economy recovers, and the US Energy Information Administration raised its forecast for oil prices, in part due to rising appetite in China.

“The EIA said it now expects global oil demand to increase next year by 1.26 million barrels per day, compared with a 1.1 million gain predicted in October, with developing countries the largest part of yearly growth. The EIA, which had bumped up its outlook for consumption last month, also raised its demand forecast for this year.

“‘Sustained economic growth in China and other Asian countries is contributing to the beginnings of a rebound in world oil consumption,’ the agency wrote in its monthly short-term energy outlook.

“As a result of this higher demand and the rise in oil prices since its last outlook, the US government agency lifted its price forecast.

“The price of West Texas Intermediate oil will average $77 a barrel during the period from October to March, the EIA predicted, up $7 a barrel from last month’s forecast. By December 2010, it forecast monthly average oil prices will rise to $81 a barrel, assuming global economic conditions keep improving.

“Earlier Tuesday, the Paris-based International Energy Agency said global energy use will decline this year because of the global economic crisis, but it will soon resume an upward trend if government policies don’t change.

“The IEA said world energy demand is projected to rise by 40% between now and 2030, reaching 16.8 billion tons of oil equivalent.

“Oil demand is expected to grow by 1% per year on average over the projection period, from 85 million barrels per day in 2008 to 105 million barrels a day in 2030, the IEA said.

“The Guardian newspaper quoted an unnamed IEA whistleblower as saying the market would struggle to produce even 90 million to 95 million barrels a day.”

Source: Laura Mandaro and Polya Lesova, MarketWatch, November 10, 2009.

Financial Times: Copper barometer is broken
“The copper market is beginning to price in ‘unrealistically high expectations for global economic activity’, says Daniel Brebner, analyst at Deutsche Bank, who cautions that weaker prices could last well into mid-2010.

“Deutsche says that China’s copper imports will be ‘meaningfully lower’ in 2010 compared with this year and that western world restocking will be modest at best, and largely complete by April.

“But despite the risk of a near-term correction, Deutsche says copper prices should rise 11% next year because of long-term structural constraints on supply and a continuation of investment flows into the market.

“‘We view copper as one of the few commodity markets that has properties of true scarcity,’ says Mr Brebner, who expects copper to average $5,731 a tonne in 2010 from $5,158 a tonne this year.

“Deutsche says that only a thin pipeline of quality copper projects will mature to full production in the next decade because of underinvestment in new mines and a lack of new development opportunities.

“Much of the growth in global copper output has come from a few very large mining operations - the ‘Big 12′ - but these are no longer contributing meaningfully to supply.

“‘The problem for the market is that there are no obvious heirs to these ageing giants,’ says Mr Brebner.”

Source: Daniel Brebner, Financial Times, November 10, 2009.

Financial Times: Bank of England lifts forecasts for UK growth
“The Bank of England has sharply upgraded its forecasts for growth over the next two years but still expects any recovery in the UK economy to be slow and unstable because of how deeply output has fallen since early last year.

“Mervyn King, the Bank governor, said Britain was ‘facing a prolonged period of balance sheet adjustment’ as households, businesses and government rein in spending to levels they can afford, a trend that will limit inflationary pressures.

“The Bank forecast growth rates of 2.1% for 2010 and 4% for 2011 in its quarterly inflation report, much higher than the outlook of private sector economists and the Treasury’s predictions.

“The Bank’s latest estimate for growth is a big upward revision from its own forecasts in August, of 1.9% and 3% for 2010 and 2011 respectively.

“However, Mr King said that gross domestic product had fallen so far that even relatively rapid rates of growth would leave total output well below where it would have been had the recession never happened.

“‘Small movements in quarterly growth rates will not alter the extent of the challenges now facing the economy, such is the scale of the fall in output over the past 18 months,” he said. ‘We have … only just started along the road to recovery.’”

Source: Daniel Pimlott, Financial Times, November 11, 2009.

Financial Times: China recovery accelerates in October
“China’s economic recovery accelerated in October with industrial output increasing at the fastest rate since March of last year while retail sales also grew strongly.

“However, the Chinese central bank said that the rate of new lending declined last month, a possible indication that the government is beginning to slow the aggressive monetary stimulus it has injected into the economy this year.

“Exports and imports were also weaker than expected last month.

“China has rebounded faster and more strongly than any other major economy from the global financial crisis and economists believe the government will meet its target of 8% growth in gross domestic product this year.

“There have been increasing warnings that China could face bubbles in asset prices and even high inflation, however, as a result of this year’s huge stimulus measures.

“The State Council said in late October that monetary policy would remain ‘appropriately loose’ for the time being, but added that it was also now monitoring inflationary pressures.

“The National Bureau of Statistics said that industrial production rose 16.1% from the same month a year before, up from a rate of 13.9% in the year to September. Power generation was 17.1% higher over the same month last year, the fifth month in a row of increases.

“Retail sales gained 16.2% over a year earlier, accelerating from a 15.5% increase the month before, while fixed asset investment increased 33.1% year-on-year.

“The central bank said that Rmb253 billion ($37 billion) of new local currency loans were issued in October, down from Rmb516.7 billion last month and well below the rapid rate of the first few months of the year.

“But economists cautioned against reading too much into the drop in bank loans, as lending is usually weak in the fourth quarter. ‘Policy has already been modestly tightened with credit growth slowing sharply in the second half,’ said Ben Simpfendorfer, economist at RBS in Hong Kong. The October figures could ‘imply some tightening’, he added.”

Source: Geoff Dyer, Financial Times, November 11, 2009.

The Wall Street Journal: Goldman Sachs’s Fred Hu on China’s recovery
“WSJ’s Jason Dean speaks to Dr. Fred Hu, managing director of Goldman Sachs Group, about the biggest challenge in China’s recovery, at the China Financial Markets conference. He also discusses what China needs to do to sustain its growth.”

Source: The Wall Street Journal, November 9, 2009.

Financial Times: China pledges $10 billion in loans to Africa
“Wen Jiabao, China’s premier, has pledged $10 billion in new low-cost loans to Africa over the next three years and defended China’s engagement against accusations it is ‘plundering’ the continent’s oil and minerals.

“Mr Wen’s pledge at a China-Africa summit in Egypt on Sunday came as he urged the US to keep its deficit at an ‘appropriate size’ to ensure the ‘basic stability’ of the dollar.

“China is the biggest holder of US government debt and Mr Wen was reinforcing comments he made in March when he expressed concern that Washington’s deficit would erode the value of its US dollar assets.

“The loan pledge was double a commitment made in 2006 and came during a summit at which delegates from both sides stressed their ties go beyond the Chinese acquisition of raw materials.

“Mr Wen told a press conference: ‘There have been allegations for a long time that China has come to Africa to plunder its resources and practice neo-colonialism. This allegation in my view is totally untenable.’

“Trade between China and Africa jumped 45% to $107 billion in 2008, a tenfold increase since 2000, and the new loans are likely to sustain the expansion.”

Source: Barney Jopson, Financial Times, November 8, 2009.

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Jim Rogers: Gold, Market Bubbles, Equities, and Dr. Doom

Tuesday, November 10th, 2009

This article is a guest contribution from Damien Hoffman, of Wall Street Cheat Sheet.

Jim Rogers is one of the most respected investors in the world. I had a chance to chat with him the other morning to get more details about some of his recent comments in the media …

Damien Hoffman: Jim, you were in the media a few times last week and I want to follow up on a few points you made. You said on Bloomberg that Nouriel Roubini did not do his homework regarding the asset bubbles about which he is now warning. Can you explain what homework he did not do?

Jim: All of it. How can you talk about a bubble when assets such as silver are 70% below their all-time high? Same for coffee, sugar, cotton, natural gas, and many more. I have a problem talking about a bubble when assets are this depressed from their all-time highs.

A bubble is when assets are screaming to new highs everyday, everyone is talking about them, and everyone owns them. Right now, virtually no one owns commodities. So for Mr. Roubini to talk about a bubble in commodities defies comprehension. It proves he does not understand markets.

I am flabbergasted at Mr. Roubini’s comment about bubbles because there is not a single market in the world making all-time highs except Gold, US Government Bonds, Cocoa, and the Sri Lankan stock market. That’s hardly reason to call for a bubble. So, I am most perplexed about this alleged bubble which is out there.

If an asset rises 100% in one year, that’s a great year, but not necessarily a bubble. Look at oil. It’s up huge off the bottom but nowhere near it’s old highs. Look at Citigroup. The stock is up 3 or so times off the bottom …

Damien: … and I doubt long term shareholders feel like they are in a bubble.

Jim: Exactly. And since Mr. Roubini thought oil would stay below $40 a barrel for all of 2009, I would love for him to tell me and the rest of the world exactly where are all the oil supplies because the International Energy Agency (IEA) — which has the best global data set on energy supplies — has no idea where is the oil. Mr. Roubini should tell us where this price suppressing oil supply is hidden. All the oil possessing countries in the world have declining reserves. All the oil companies have declining reserves. So Mr. Roubini must know something the rest of us don’t.

Damien: On another note, Gold has been reaching new all-time highs, although not inflation adjusted. You said Gold may reach $2,000 an ounce over the next decade. Can you explain what variables will push Gold to $2,000?

Jim: First, I hope you will keep Mr. Roubini’s statement where he said Gold going to $2,000 an ounce by 2019 is “utter nonsense.” I think you’re going to get a chance to call him before 2019 to ask him what he thinks of Gold at $2,000 and why he thought it was “utter nonsense.”

Regarding variables, it’s very clear there is huge suspicion about paper money around the world. This suspicion is gathering steam. Governments are printing huge amounts of money. This has always led to higher prices. Maybe I am wrong and it’s different this time. But I doubt it.

Additionally, no new large gold mines have been opened in decades. Some of those mines are over 100-years old. They are all depleting. On the other hand, central banks have huge Gold reserves above ground — and they are less interested in selling than in the past.

If you adjust Gold for inflation and go back to it’s former all-time high in 1980, Gold should be over $2,000 an ounce right now if you want to say it’s reaching new inflation adjusted all-time highs. That does not mean Gold has to get back to a true all-time high. Nothing has to. However, I suspect that given all the money printing in the world, we will see much higher prices for hard assets.

Despite Gold’s potential, I think I will make more money in other commodities such as silver, cotton, or coffee — all of which are terribly depressed.

Damien: Speaking of other assets, as an outsider living abroad, what is your opinion on US Equities?

Jim: This is one of the few times in my life I have not had shorts anywhere in the world. I have also not had a lot of longs in the stock market because I’ve chosen longs in commodities and currencies. I have kept away from shorts because there is a gigantic amount of money being printed and it has to go somewhere. I thought some of it would end up in the stock market, and it has.

How much higher can the equity markets go? I don’t know. There are a lot of problems in the economy, but I don’t know when those problems will cause a downdraft in the stock market. All we’ve done is paper over the problem, so I expect we’ll have to deal with those issues in the future. Printing and spending money we don’t have simply prolongs the problems and makes them worse in the long run.

If the world economy improves, commodities will lead the way due to demand and shortages. If the world economy does not get better, commodities are still a great place to be because governments are printing so much money. And, if the world economy doesn’t get better, they will print even more money!

Damien: Jim, thank you for taking the time to share your outlook and opinions. I greatly appreciate it.

Jim: You are very welcome. Your site is very impressive. I look forward to staying in touch.

Tags: All Time Highs, Bloomberg, Bubbles, Cheat Sheet, Citigroup, Cocoa, Coffee Sugar, Commodities, Comprehension, Dr Doom, Ener, Gold, Gold Market, Government Bonds, Hoffman, Jim Rogers, New Highs, oil, Oil Supplies, Roubini, Single Market, Sri Lankan, Stock Market
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Words from the (Investment) Wise (November 1, 2009)

Sunday, November 1st, 2009

Rewind the movie to before the stock market lows of March 9: stocks down, corporate bonds down, commodities and gold down, emerging-market currencies down, safe havens in fashion, including the US dollar and government bonds. In short, risky assets closed sharply lower over the past few days as concerns mounted over the outlook for central bank policy and the sustainability of the global economic recovery, with investors only warming momentarily to the US emerging from recession as shown by the Q3 GDP report (announced on the 80^th anniversary of Black Tuesday, October 29, 1929).

Cameron Brandt, senior analyst of fund tracker EPFR Global, said (via the Financial Times): “Good corporate earnings - viewed in recent weeks as fuel for a sustained recovery - are currently being regarded as ammunition for policymakers looking to close the fiscal and monetary stimulus taps.”

Adding to the economic uncertainty, Chuck Butler of the Daily Pfennig, highlighted a study by Peter Bernholz (Professor of Economics in Basel) in which he analyzed the world’s 12 most important periods of hyperinflation and discovered that the tipping point occurred when deficits amounted to 40% of the expenditures. “For the United States we have arrived at exactly that point. The deficit of $1.5 trillion amounts to 41.7% of the $3.6 trillion in expenses,” said Butler.

Source: Walt Handelsman, October 30, 2009.

The CBOE Volatility (VIX) Index is a measure of the implied volatility of S&P 500 Index options, with very low numbers indicating extreme bullishness and very high numbers severe bearishness. It is also referred to as the “fear gauge” of US stock markets and is used as a contrary indicator as it moves inversely to equity prices. As shown below, it is noteworthy that the VIX has surged by 48.3% during the past seven trading sessions to its highest level since early July.

Source: StockCharts.com

The past week’s performance of the major asset classes is summarized by the chart below. The numbers indicate an all-change pattern in the performances from the past few months as risk aversion re-entered financial markets and investors moved money from stocks and commodities into government bonds and the US dollar.

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as since the October 19 peak and various other measurement periods, is given in the table below.

The MSCI World Index and the MSCI Emerging Markets Index declined by 4.1% and 5.5% respectively during the past week, resulting in the World Index being down 1.8% for the month of October and the Emerging Markets Index recording a zero return. As far as individual markets are concerned, Sweden and New Zealand were the only major markets closing the week in the black. However, a number of markets (mostly emerging) managed to see the month out with positive returns.

The US indices closed down for the second consecutive week, yo-yoing during the course of the week, but with a particularly ugly close (on steep volume) on Friday, marking the worst day in the case of the Dow Jones Industrial Index and the S&P 500 Index since the beginning of July. The benchmarks recorded their first loss-making month since February, with the exception of the Dow Jones Industrial Index that was unchanged from September.

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

Top performers among stock markets this week were Ecuador (+4.2%), Sweden (+1.2%), Bangladesh (+1.2%), Kenya (+1.1%) and Uganda (+1.0%). At the bottom end of the performance rankings countries included Peru (‑9.5%), Ghana (-8.9%), Ireland (-8.9%), Cyprus (-7.9%) and Argentina (‑7.9%).

Of the 99 stock markets I keep on my radar screen, only 15% recorded gains, 84% showed losses and 1% 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 ProShares Short Emerging Markets (EUM) (+7.7%), ProShares Short Russell 2000 (RWM) (+6.5%) and ProShares Short Financial (SEF) (+6.5%). Besides short funds, CurrencyShares Japanese Yen Trust (FXY) (+2.3%) and PowerShares DB US Dollar Bullish (UUP) (+1.2%) also performed well.

On the losing side of the slate, ETFs included SPDR S&P Emerging Europe (GUR) (-11.0%), Market Vectors Solar Energy (KWT) (-11.0%) and Claymore/MAC Global Solar Energy (TAN) (-10.9%).

Referring to the massive Wall Street bonuses, the quote du jour this week comes from Allan Sloan in The Washington Post (hat tip: The King Report). He said: “What do the record-high Wall Street bonuses have in common with the record-low yields for savers? Answer: They show yet another way that prudent people, especially those living on fixed incomes, are being cheated by the government’s bailout of the imprudent.

“Here’s the deal. The government is spending trillions to keep interest rates down to support the economy and prop up housing prices, and those low rates have inflicted collateral damage on savers’ incomes. ‘It’s a direct wealth transfer from savers and retirees to overly indebted borrowers,’ says Greg McBride, senior financial analyst at Bankrate.com.”

Other news is that the struggle to establish a government-backed healthcare plan in the US received new impetus on Thursday when the Democrats in the House of Representatives tabled an $894 billion bill that included a “consumer option”. Separately, the Federal Deposit Insurance Corporation (FDIC) closed nine more banks on Friday, bringing the tally of US bank failures in 2009 to 115 - the first year since 1992 that more than 100 banks have gone under.

Next, a quick textual analysis of my week’s reading. Although “bank” still features prominently, the key words have started taking on a more normal pattern compared with the crisis-related words that have dominated the tag cloud for many months.

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (from where I am writing this report) are given in the table below. Most of the indices, including all the US indices, have fallen below their 50-day moving averages over the past few days, but all the indices are still holding above their respective 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.

The October lows are also given in the table. A break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher reaction lows. In fact, last week’s declines resulted in some indices - including the Dow Jones Transportation Index, the Russell 2000 Index and the Nasdaq Composite Index - already having fallen below these levels.

Not shown below, the Australian All Ordinaries Index has already broken through its 200-day moving average, albeit only marginally, with the 50-day average at the same level as the 200-day level.

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

Below is a chart not many analysts follow, namely the Dow Jones Composite Average, made up of the 30 industrial stocks, the 20 transportation stocks and the 15 utility stocks. According to Richard Russell (Dow Theory Letters), the Composite tends to lead the market on many occasions. “Note that the Composite is trading completely below its 50-day moving average. The divergence with MACD at the bottom of the chart is spectacular. Volume is expanding as the Composite declines. In all, a nasty picture, and one that I take seriously,” said the old-timer.

Source: StockCharts.com

According to Casey’s Daily Dispatch, State Street Global Markets has just released its Investor Confidence Index for October 2009, measuring investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors. The results indicate that the big money is starting to turn bearish. “Global investor confidence fell by 10.0 points to 108.4 from a revised September level of 118.4. The most pronounced decline was evident among North American investors, where confidence fell by 12.8 points from 113.9 to 101.1,” said the report.

Source: Cris Wood, Casey’s Daily Dispatch, October 30, 2009.

Breadth indicators are useful tools to assess the inner workings of the market’s rallies or corrections, and these indicators are used to identify strength or weakness behind market moves, i.e. to assess how the bulls and the bears are exerting themselves. Three of these measures are discussed below.

The advance/decline spread tracks the difference between advancing and declining issues and is widely used to measure the breadth of a stock market advance or decline. The chart below shows that the cumulative spread between declining and advancing issues on the Nasdaq turned down a few days prior to the October 19 peak and is leading the market lower.

Source: StockCharts.com

Net new highs are calculated by subtracting the number of new 52-week lows from the number of new 52-week highs. March 6 marked an “internal bottom” when a large number of the stocks on the NYSE recorded new lows (whereas a “price bottom” was recorded on March 9). Net new highs have since improved markedly, but it would seem that the ratio is close to falling below the zero line (i.e. when new lows will again exceed new highs).

Source: StockCharts.com

The number of NYSE stocks trading above their respective 50-day moving averages has dropped to 34.7% from 91.6% in September. In order to be bullish about the secondary trend, one would expect the majority of stocks to be above the 50-day line. For a primary uptrend to be intact, the bulk of the index constituents also need to trade above their 200-day averages. This is a slow indicator, with the number still at a lofty 85.9% but down from its recent peak of 93.4%.

Stock market breadth has been moving in the wrong direction over the past few days and the “internals” seem to indicate further downside.

A number of commentators have been making pronouncements about the extent of a possible decline. For example, Jeremy Grantham (GMO) expects the S&P 500 to drop by 15-25%, David Rosenberg (Gluskin Sheff & Associates) sees markets falling by 20%, Doug Kass is looking at -5% to ‑12%, David Fuller at 10-15% and Barry Ritholtz at 5-15% (The Big Picture), with Andrew Smithers (Smithers & Co) the most bearish, viewing the S&P 500 to be 40% overvalued.

Turning to fundamentals: as discussed in a post a few days ago, a good way of looking at valuation levels, and cutting through the uncertainty of having to forecast earnings, is by means of Robert Shiller’s cyclically adjusted price-earnings ratio (CAPE), effectively muting the impact of the business cycle by averaging ten years of earnings. Using rolling ten-year reported earnings, my research (based on Shiller’s methodology, but including some refinements) shows that the “normalized” price-earnings ratio of the S&P 500 Index is currently 18.8. This compares with a long-term average of just more than 16.3 and implies an overvaluation of 13%. The graphs below show data since 1950, but the actual calculations date back to 1871.

From across the pond in London, David Fuller (Fullermoney) said: “In the short term, technical evidence suggests that we are now in a reaction and consolidation phase for most stock markets. Some of this is likely to be confined to primarily ranging patterns as we have already seen. For others, the mean reversion process towards rising 200-day moving averages is likely to include larger corrections than we have seen to date. At this stage of the stock market cycle, I regard mean reversion as a buying opportunity.”

I will bide my time while the fundamentals play catch-up. Meanwhile, caution remains the operative word.

For more discussion on the economy and financial markets, see my recent posts “Stocks and risky assets stumble“, “Stock markets - is uptrend still intact?“, “Picture du Jour: Stock market rally long in the tooth“, “Gross: Rally in risk assets at its pinnacle“, “Rosenberg: Stocks overvalued by 20%” and “Jeremy Grantham: Fair value on the S&P 500 is 860“. (And do make a point of listening to Donald Coxe’s webcast of October 30, which can be accessed from the sidebar of the Investment Postcards site.)

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.

Source: Dismal Scientist

“There has been no meaningful change in global business confidence in almost three months. Sentiment improved sharply this summer and is now consistent with a global economic recovery, but a very tentative and fragile one,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses are most upbeat about equipment and software investment and the broader outlook into early next year, and most negative about the strength of their current sales and hiring. South Americans are the most positive, and North Americans generally the most negative.”

Source: Moody’s Economy.com

According to Li & Fung Research Centre, the Purchasing Managers Index (PMI) in China rose to 55.2% in October, up by 1.3 percentage points from the previous month. The Index has stayed in the expansionary zone of higher than 50% for eight consecutive months, indicating that the manufacturing sector in China has continued to improve steadily.

“Several countries, such as India, Australia, Norway, and Japan, have already begun exit strategies to drain excess liquidity used to stimulate their economies to counter the global recession. India’s lenders are keeping more cash in bonds and raising statutory liquidity ratios, Australia and Norway have already hiked interest rates, and Japan has said it will stop buying corporate debt by year-end,” reported US Global Funds in its latest Weekly Investor Alert.

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, October 30
Consumer spending - mild increase in Q4

Thursday, October 29
Recession is history, economy back in business
Total continuing claims are stabilizing

Wednesday, October 28
Sales of new homes decline, but inventories and prices remain favorable
Durable goods orders - mixed performance in third quarter

Tuesday, October 27
Case-Shiller Home Price Index - further improvement in home prices

Monday, October 26
Chicago National Activity Index - more validation about economic recovery

Commenting on the US GDP annual growth rate of 3.5%, John Williams (Shadow Government Statistics, courtesy of The King Report) warned that one-time stimulus or inventory items represented 92% of the reported growth.

Many people who planned to buy a car in Q4 probably took advantage of “cash for clunkers” and bought in Q3. “To put this into GDP terms, according to the Bureau of Economic Analysis (BEA) the spike you see in the chart below added 1.66% to the US GDP growth figure. Thus without it, GDP growth would have been only 1.89% (3.5-1.66%) in Q3,” reported Clusterstock.

Source: Clusterstock - Business Insider, October 29, 2009.

Commenting on the US growth outlook, Asha Bangalore (Northern Trust) said: “Going forward, the lift to the headline GDP number in the third quarter is partly from future auto sales, which implies that consumer spending and GDP growth are most likely to show more muted growth in the fourth quarter of 2009 and first quarter of 2010. The Fed is on hold for several months until it is confirmed the unemployment rate has peaked.”

According to MoneyNews, bond guru Bill Gross of Pimco said the Federal Reserve would not “risk raising rates” until the US has had a year-and-a-half of sustained economic growth, at a solid 4% rate.

Meanwhile, Richard Koo, chief economist at the Nomura Research Institute, warned (via MoneyNews) that the United States may go through a “lost decade” of stagnant economic growth similar to Japan’s experience in the 1990s if Washington yanks stimulus money out of the economy too soon. “We still need more government spending,” he said, adding that it could take “three to five years to get out of this mess, even under the best of circumstances.”

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

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Oct 27	09:00 AM	Case-Shiller Home Price Index	Aug	-11.32%	-13.0%	-11.90%	-13.26%
Oct 27	10:00 AM	Consumer Confidence	Oct	47.7	52.6	53.5	53.4
Oct 28	08:30 AM	Durable Orders	Sep	1.0%	0.5%	1.0%	-2.6%
Oct 28	08:30 AM	Durable Orders ex Transportation	Sep	0.9%	0.1%	0.7%	-0.4%
Oct 28	10:00 AM	New Home Sales	Sep	402K	450K	440K	417K
Oct 28	10:30 AM	Crude Inventories	10/23	0.78M	NA	NA	1.31M
Oct 29	08:30 AM	Chain Deflator - Advance	Q3	0.8%	1.3%	1.4%	0.0%
Oct 29	08:30 AM	GDP - Advance	Q3	3.5%	2.5%	3.2%	-0.7%
Oct 29	08:30 AM	Initial Claims	10/24	530K	520K	525K	531K
Oct 29	08:30 AM	Continuing Claims	10/17	5797K	5890K	5905K	5945K
Oct 30	08:30 AM	Personal Income	Sep	0.0%	-0.2%	0.0%	0.1%
Oct 30	08:30 AM	Personal Spending	Sep	-0.5%	-0.7%	-0.5%	1.4%
Oct 30	08:30 AM	PCE Prices	Sep	-0.5%	-0.5%	-0.5%	-0.5%
Oct 30	08:30 AM	Core PCE Prices	Sep	0.1%	0.1%	0.2%	0.1%
Oct 30	08:30 AM	Employment Cost Index	Q3	0.4%	0.2%	0.4%	0.4%
Oct 30	09:45 AM	Chicago PMI	Oct	54.2	51.0	49.0	46.1
Oct 30	09:55 AM	MichiganSentiment	Oct	70.6	70.3	70.0	69.4

Source: Yahoo Finance, October 30, 2009.

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

Next week sees interest rate announcements by the Federal Open Market Committee (FOMC) (Wednesday, November 4), the European Central Bank (ECB) (Thursday, November 5) and the Bank of England (BoE) (Thursday, November 5). In addition, US economic data reports for the week include the following:

Monday, November 2
ISM Index
• Construction spending
• Pending home sales

Tuesday, November 3
• Factory orders
• Auto sales

Wednesday, November 4
• ADP Employment Report
• ISM Services

Thursday, November 5
• Initial jobless claims
• Productivity

Friday, November 6
• Wholesale inventories
• Consumer credit
• Payrolls, etc.

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, October 30, 2009.

“Mistakes are a fact of life. It is the response to the error that counts,” said Nikki Giovanni, American poet, author and activist. 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 formulate appropriate strategies to recover from mishaps that are bound to happen from time to time.

Wishing all my readers a Happy Halloween!

That’s the way it looks from Cape Town (where the early-summer weather is unbeatable).

Source: Pat Bagley, Salt Lake Tribune

Financial Times: Transcript - George Soros interview
“Chrystia Freeland, US managing editor, interviewed George Soros about the state of the world economy, relations between the US and China, his investment performance and regulating bankers’ compensation. This is a transcript of that interview.

FT: Thank you for joining us, Mr Soros.

GS: It’s a pleasure.

FT: How do you judge the state of the world economy? Has the world recovered from the crisis of 2007/2008?

GS: Well, certainly the financial markets have regained their composure so they’re beginning to function again, and also the world economy has overcome the shock that it has suffered because for a while everything froze and now things are moving again. So there is rebound, but I think that the facts of the crisis will take a long time for the world to absorb and the main source of the problem is in the United States. This is where consumers have spent more than they earned for a period of 25 years; where we have accumulated current account deficit that reached 6.5 per cent at its peak, which actually could have continued because there were other countries - particularly China and the Asian tigers - that were very happy to run a continuous surplus and to finance our deficit. So that could have actually continued, but the households became over-indebted and it’s the consumer who accounts for over 70 per cent of the US economy that has to cut down, and that will take a while.

Then also you’ve got the banking system that basically was bankrupted. It’s at the bottom and has to earn its way out of a hole and, again, it’s happening at a pretty fast clip because banks borrow at zero and buy 10-year government bonds, yielding 3.5 per cent, and that’s a pretty fast rate of earnings for no risk. So, they’ll earn their way out of a hole, but it will also take time. And then there’s still the whole area of commercial real estate, where the losses have not been recognised. So the source of weakness in the world will be mainly in the US consumer spending and in, let’s say, the decline in the banking sector.

FT: And is that weakness in the US sufficiently grave that there could be a W-shaped recovery, that there could be another dip downwards?

GS: Well, I think certainly there could be another dip in the stock market because, right now we are enjoying the confidence multiplier and there’s a sort of a hope that this is a crisis like the previous ones and we will just sort of recover in a V-shape recovery. So, when that hope is not fulfilled, I think that will be …

FT: Which you are certain it will not be fulfilled?

GS: Well, I can’t see it being fulfilled. I may be wrong. I’ve been wrong before, but I just don’t see where the growth in the US economy can come from.

FT: Given this continued weakness in the US economy, are people right to start to be concerned about the dollar?

GS: Well, they are of course and the dollar is a very weak currency except for all the others. So there is a general lack of confidence in currencies and a move away from currencies into real assets. The Chinese are continuing to run a big trade surplus and they’re still accumulating assets and basically the renminbi is permanently undervalued because it’s tied to the dollar. There is a diversification from assets that are normally held by central banks into other assets, especially in the area of commodities. So there is a push in gold, there’s a strength in oil, and that is in a way a flight from currencies.

FT: Is there going to be a tipping point, a moment at which the dollar is fatally weakened? Or does it just sort of carry on?

GS: As long as the renminbi is tied to the dollar, I don’t see how the decline in the dollar can go too far. Now, of course, to some extent it’s very helpful because with the US consumers saving more and spending less, exports can be way for the US economy to be balanced. So, an orderly decline of the dollar is actually desirable.”

Click here for the full interview.

Source: Financial Times, October 23, 2009.

Forbes: Roubini - are capital controls in fashion again?
“Currency appreciation in emerging markets has been particularly strong this year both because of external conditions - including high liquidity, a weak US dollar and strong risk appetite - and domestic factors such as strong fundamentals, high potential growth and wider interest rates differentials. With portfolio investments to emerging market (EM) countries also rising, policymakers need to figure out how to avoid losing international competitiveness while also containing asset inflation and the emergence of asset bubbles. So far this year, most countries have opted for or maintained either verbal intervention or reserves accumulation. Others have kept or chosen more aggressive administrative measures, including capital controls mostly targeting portfolio investments rather than FDI.

“The imposition of capital controls on capital inflows as well as currency intervention tends to be ineffective in reversing the appreciating trend of the local currencies, especially if the latter are primarily driven by external factors. However, capital controls may be helpful in easing volatility and the pace of the trend itself. The risk is that capital controls are seen as punitive measures against capital markets. They raise uncertainty about future policy actions, hurt the credibility of the central bank and increase the costs of external funding for local businesses. Overall, policymakers’ actions to contain the appreciating trend of their countries’ currencies depend on how fast capital is flowing in, sterilization costs, and monetary policy flexibility. Consequently, EM countries where currencies and equity markets have surged over the course of the year are the most likely to impose some sort of limitations on capital inflows.

“Capital controls alone may not be enough.

“It is important to recognize that the use of capital controls is not uniform and neither are the results. In addition, their impact can be subdued by global conditions. In today’s economy, EM currencies are up against a weakening dollar. The dollar is down 6.3% YTD and 14.3% from its March peak. The EM currency rally this year is even stronger than that of the US Dollar Index, with five different currencies gaining over 10% YTD. Only the Argentine peso has posted a significant loss against the dollar YTD.

“Governments are best served implementing measures aimed at smoothing currency appreciation as opposed to halting or reversing trends. This can be done in part by identifying and targeting areas of volatility and hence vulnerability. By addressing areas of greater volatility, countries can smooth currency flows without endangering macroeconomic stability. The recent tax in Brazil targets volatile portfolio flows as opposed to FDI. Portfolio investments fled Brazil following the Lehman collapse only to flow back this year. Meanwhile, FDI has remained relatively stable.

“Given the extraordinary flow into emerging markets, it is unlikely that capital controls or intervention alone will be able to put the brakes on EM currency appreciation. Indeed, the Brazilian real gave up 3% against the dollar following the announcement of the tax before appreciating 3.7% after four days. That said, Brazil and other governments may find themselves in a position where they need to tap a greater arsenal if their desire to stem appreciation is strong. With that in mind, look for central bank intervention to be a greater theme in the coming months.”

Click here for the full article.

Source: Nouriel Roubini, Forbes, October 29, 2009.

MoneyNews: Krugman - China simply stealing jobs
“China’s asset-buying binge inflated the US housing sector, setting the stage for the global financial crisis, but the Chinese policy of keeping the yuan-dollar rate fixed may be causing an even more harmful economic bubble, says Nobel Prize winner Paul Krugman.

“‘China has been keeping its currency pegged to the dollar - which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead,’ writes Krugman in The New York Times.

“China is creating a bubble for its own economy. Krugman says this policy is particularly precarious during a period when the world economy remains deeply depressed due to dampened demand.

“‘By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere,’ writes Krugman.

“‘The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.’

“The US government has been excessively tepid in addressing this issue.

“Last week, the Treasury Department testified in a required report to Congress that China is not manipulating its currency.

“‘They’re kidding, right?’ writes Krugman. ‘The thing is, right now this caution makes little sense.’”

Source: Gene Koprowski, MoneyNews, October 28, 2009.

Financial Times: Eurozone lending to private sector declines
“The eurozone saw the first year-on-year fall in bank lending to the private sector last month, even as signs became stronger that the 16-country region’s economy had returned to growth.

“September’s eurozone credit numbers indicated lending had been scaled back at an unprecedented pace, strengthening the case for the European Central Bank to maintain its ultra-loose interest rate policy.

“Loans to the private sector contracted at an annual rate of 0.3%, after a 0.1% rise in August, according to the ECB. That was the first time the annual growth rate had turned negative since comparable statistics began in 1992. The euro was launched in 1999.

“Although the data showed signs of a pick-up in lending to households in September compared with August, they could fuel policymakers’ fears that a weakened banking sector will fail to provide business with the credit needed to reboot the economy.

“‘A lack of credit growth could certainly undermine the pace of recovery,’ said Colin Ellis, European economist at Daiwa Securities SMBC Europe. Unlike the UK, the eurozone is thought by economists to have expanded in the third quarter compared with the previous three months, marking the formal end of its recession.

“‘To get a fully fledged business cycle upswing emerging, you need to see credit taking off - but that normally takes one or two years,’ said Julian Callow, European economist at Barclays Capital.

“But Mr Callow argued that the latest data might have been distorted downwards by banks securitising loans, which would have removed them from the ECB’s statistics even though the credit was still available to the economy.”

Source: Ralph Atkins, Financial Times, October 27, 2009.

MoneyNews: Koo - US risks Japan-style lost decade
“The United States may go through a ‘lost decade’ of stagnant economic growth similar to Japan’s experience in the 1990s if Washington yanks stimulus money out of the economy too soon, says Richard Koo, chief economist at the Nomura Research Institute, the research arm of Japan’s largest brokerage.

“‘This isn’t a cold. It’s more like pneumonia,’ Koo told Bloomberg News.

“‘We still need more government spending,’ adding it could take ‘three to five years to get out of this mess, even under the best of circumstances.’

“Koo and other noted economists such as Nobel laureate Paul Krugman believe US economic recovery expected for the latter half of this year will be short-lived if the Obama administration withdraws stimulus money.

“The administration is belatedly trying to narrow a record $1.4 trillion budget deficit and thus boost the sagging dollar.

“As an example, Koo says, look to Japan, where an asset bubble burst in 1990 and left companies repaying debt instead of taking on new projects that would have refueled economic growth via continued stimulus.

“‘When we see the private sector coming to borrow again, I’ll be the loudest person on earth arguing for fiscal reform. That’s the exit,’ says Koo.

“Nevertheless, White House Officials say stimulus spending has already kick-started the economy and will do little to help out next year.

“‘By mid-2010, fiscal stimulus will likely be contributing little to further growth,’ says Christina Romer, the chair of President Barack Obama’s Council of Economic Advisers, according to the Associated Press.”

Source: Forrest Jones, MoneyNews, October 26, 2009.

Bespoke: Is the NBER gearing up for a big announcement?
“The NBER (National Bureau of Economic Research) is the organization in charge of dating recessions and expansions in the US economy, so when the official announcement is made that the most recent recession is officially over, it will come from the NBER. Interestingly, over the weekend, the organization revamped its website for the first time in several years. While companies change their websites for multiple (and often insignificant) reasons, many revamps are often timed to coincide with major events. With most investors and economists agreeing that the economy has seen its trough (probably in June or July), we wonder if the NBER’s website update was put in place ahead of an announcement from them that the recession is over?”

Source: Bespoke, October 26, 2009.

Asha Bangalore (Northern Trust): Recession is history, economy back in business
“The recession is behind us. Real gross domestic product of the US economy grew at an annual rate of 3.5% in the third quarter after a 0.75 drop in the prior quarter. This is the first increase of real GDP after a string of four quarterly declines. Real GDP has declined in five out of the six quarters of the recession.

“The Business Cycle Dating Committee of the National Bureau of Economic Research will make the official announcement after it confirms the turning point based on revisions of economic data. This recession is the longest on record in the post-war period and the deepest also. Real GDP has declined 3.8% from the peak in the second quarter of 2008 to the trough in the second quarter of 2009. This is the largest peak-to-trough decline of real GDP in the post-war period

“In the third quarter, consumer spending accounted for the largest part of the growth in real GDP, followed by exports, inventories and residential investment expenditures. Of these four components, exports and inventories are most likely to continue to make large contributions in the quarters ahead. Consumer spending is projected to advance in the quarters ahead but at a noticeably slower pace. The surge in auto sales from the ‘cash for clunkers’ program in the third quarter provided the temporary lift to consumer spending.

“Going forward, the lift to the headline GDP number in the third quarter is partly from future auto sales, which implies that consumer spending and GDP growth are most likely to show more muted growth in the fourth quarter of 2009 and first quarter of 2010. The Fed is hold for several months until it is confirmed the unemployment rate has peaked.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 29, 2009.

Financial Times: US economy grows
“US GDP figures raise a number of important questions, says Martin Wolf, chief economics commentator of the Financial Times.”

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

Click here for the full article.

Source: Financial Times, October 29, 2009.

Asha Bangalore (Northern Trust): Consumer spending - mild increase in Q4
“The impact of the American Recovery and Reinvestment Act (ARRA) is visible in the third quarter GDP report and the President’s Council of Economic Advisers has estimated that the ARRA contributed between 3 and 4 percentage points to real GDP growth in the third quarter. The ‘Cash for Clunkers’ program was not part of the original ARRA but was included by a supplemental bill and funds were reallocated. The purchase of cars under this program accounted for the sharp increase in auto sales in July and August and the absence of this program following its expiration in August led to the 0.5% drop in consumer spending in September (-0.6% in inflation adjusted terms).

“Effectively, expenditures on cars accounted for a large part of the strong increase in real consumer spending in the third quarter. The question now is if the absence of rebates for cars will prevent an increase in overall consumer spending in the fourth quarter. The nature of consumer spending data for the last month of quarter helps to confirm or revise forecasts of the following quarter. However, the September estimate of real consumer spending ($9261.1 billion) is barely different from the third quarter average ($9265.2 billion). Based on the small negative bias and possibility of revisions, consumer spending is likely to show only a moderate increase in the fourth quarter of 2009 after a 3.4% jump in third quarter.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 30, 2009.

MoneyNews: Bill Gross - no Fed hikes for a while
“Bond guru Bill Gross of Pimco says that the Federal Reserve will not ‘risk raising rates’ until the US has had a year-and-a-half of sustained economic growth, at a solid, 4% rate.

“Consider this in light of the fact that he and his colleagues at the money management giant have long said that US growth is about to engage in a long period of a ‘new normal’ where growth rates are much lower, perhaps under 2%.

“‘Nominal GDP must show realistic signs of stabilizing near 4% before the Fed would be willing to risk raising rates. The current embedded cost of US debt markets is close to 6% and nominal GDP must grow within reach of that level if policymakers are to avoid continuing debt deflation in corporate and household balance sheets,’ writes Gross in his monthly economic forecast.

“The US economy will likely approach 4% nominal growth as early as 2009’s final quarter, says Gross. But, the ability to sustain those levels once inventory rebalancing and fiscal pump-priming effects wear off is ‘debatable’, he says.

“‘The Fed will likely require 12 to 18 months of 4% plus nominal growth before abandoning the zero percent benchmark,’ writes Gross.

The “negative wealth effect” caused by last year’s stock market crash must be ameliorated to reintegrate the private sector into the Wall Street economy, the investment guru adds.”

Source: Gene Koprowski, MoneyNews, October 29, 2009.

Asha Bangalore (Northern Trust): Chicago National Activity Index - more validation about economic recovery
“The Chicago Fed National Activity Index (CFNAI) slipped slightly in September to -0.81 from a revised -0.65 reading in August. However, the 3-month moving average improved to -0.63 in September from -0.96 in the prior month. According to the Chicago Fed, ‘when the 3-month moving average of the CFNAI moves below -0.70 following a period of expansion, there is an increasing likelihood that a recession has begun’. The September reading of -0.63 is confirmation that the weak economic conditions are behind us. This report confirms the message from the latest Index of Leading Economic Indicators.”

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

Asha Bangalore (Northern Trust): Durable goods orders - mixed performance in third quarter
“Orders of durable goods rose 1.0% in September after a 2.6% drop in August. In the third quarter, overall orders of durable goods rose at an annual rate of 12.3%, after a 4.00% gain in the second quarter following substantial declines in the fourth quarter of 2008 and the first quarter of 2009. A similar picture of recovery is applicable to orders of non-defense capital orders excluding aircraft.”

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

Asha Bangalore (Northern Trust): Total continuing claims are stabilizing
“Initial jobless claims were virtually unchanged at 531,000 during the week ended October 24 from the 530,000 reading of the prior week. Continuing claims, which lag initial claims by one week, fell 148,000 to 5.945 million, marking the fourth consecutive weekly decline. A part of this drop is attributed to the expiry of 26 weeks of eligibility for unemployment insurance.

“Upon the completion of 26 weeks, recipients can collect unemployment insurance under the Extended Benefits Program and Emergency Unemployment Compensation Program. Therefore, the true size of recipient of unemployment insurance is a sum total of recipients under these various programs. Data for the special programs lags initial jobless claims data by two weeks. During the week ended October 10, total continuing claims inclusive of seasonally adjusted continuing claims and those under the special programs dropped to 9.84 million from a revised peak of 10 million during the week ended October 3. This decline is noteworthy because it the first positive sign in the labor market after several weeks. We should be able to confirm the improvement as additional data become available.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 29, 2009.

Asha Bangalore (Northern Trust): Consumer confidence slips in October, job situation is main driver
“The Conference Board’s Consumer Confidence Index dropped to 47.7 in October from 53.4 in the prior month. The two sub-indexes, Present Situation Index (20.7 vs. 23.7 in September) and the Expectations Index (65.7 vs. 73.7) fell in October. The early University of Michigan survey results for the Consumer Sentiment Index also showed a decline.

“Consumers continue to view the labor market in unfavorable light. The number of respondents indicating that ‘jobs are hard to get’ rose (47.6 vs. 47.0 in September) while those responding ‘jobs are plentiful’ declined (3.4 vs. 3.6 in September). The net of these two indices moved up in October to 46.2 from 43.4 in September. Historically, there is a strong positive relationship between the net of the indexes about the job market and the unemployment rate. The latest information about a pessimistic perception of the labor market implies that a higher unemployment rate is likely in October. This confirms widely projected information.”

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

Asha Bangalore (Northern Trust): Sales of new homes decline, but inventories and prices remain favorable
“Sales of new single-family homes fell 3.6% to an annual rate of 402,000 in September after a downwardly revised gain in August. Sales of new single-family have moved up 22% from the cycle low reading of 329,000 in January 2009.

“It appears that existing homes inclusive of distressed properties were more attractive for new homeowners compared with new single-family homes in September. Sales of existing homes increased 9.4% in September. The combined sales of new and existing single-family homes have risen in six out of the last nine months and are about 21% above the cycle low seen in January 2009.

“Inventories of unsold new single-family homes have declined from a peak of 12.4-month supply in January 2009 to 7.5-months in the August-September period. The inventory-sales ratio was unchanged at the 7.5-month mark in September. The historical median of inventory of unsold new single-family homes is a 6-month supply.

“The median price of a new single-family home fell 9.1% from a year ago to $204,800 in September, representing a noticeable deceleration in the pace of price declines. Additional reductions in price, but at a slower pace are likely, given the large number of homes that are unsold. There will be setbacks and gains in the housing sector but the net result should be positive in the months ahead.”

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

Standard & Poor’s: Case-Shiller - home prices continue to improve
“Data through August 2009, released by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, show that the annual rate of decline of the 10-City and 20-City Composites improved compared to last month’s reading. This marks approximately seven months of improved readings in these statistics, beginning in early 2009.

“The chart above depicts the annual returns of the 10-City and 20-City Composite Home Price Indices, declining 10.6% and 11.3%, respectively, in August compared to the same month last year. Nineteen of the 20 metro areas and both Composites showed an improvement in the annual rates of decline with August’s readings compared to July.

“‘Broadly speaking, the rate of annual decline in home price values continues to improve’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. ‘The two Composites and 19 of the 20 metro areas showed an improvement in the annual rates of return, as seen through a moderation in their annual declines. Looking at the monthly data, 17 of the MSAs and both Composites saw price increases in August over July. While many of the markets remain down versus this time last year, the relative rate of decline has shown some real improvement.”

Source: Standard & Poor’s, October 27, 2009.

The Wall Street Journal: Gloom spreads on economy, but GOP doesn’t gain
“Americans are growing increasingly pessimistic about the economy after a mild upswing of attitudes in September. But Republicans haven’t been able to profit politically from the economic gloom, according to a new Wall Street Journal/NBC News poll.

“The survey found a country in a decidedly negative mood, nearly a year after the election of President Barack Obama. For the first time during the Obama presidency, a majority of Americans sees the country as being on the wrong track.

“Fifty-eight percent of those polled say the economic slide still has a ways to go, up from 52% in September and back to the level of pessimism expressed in July. Only 29% said the economy had ‘pretty much hit bottom’, down from 35% last month.

“But a dark national view of how everybody in Washington is conducting the public’s business appears to be preventing Republicans from benefiting from concerns about the direction of the country or the Democrat-led government’s handling of the economy, as the minority party often does.

“In fact, disapproval of the Republican Party actually has ticked upward, along with the public’s general pessimism. Asked which political party should control Congress after next year’s midterm elections, Democrats now hold a clear edge over the GOP, 46% to 38%, a month after the Republicans were nearly as popular. In September, the Democratic edge was 43% to 40%.

“‘There was a bounce-back surge for Republicans, and that’s stalled,’ said Bill McInturff, a Republican pollster who conducted the Wall Street Journal/NBC News poll with Democratic pollster Peter Hart.

“‘The mood in America may be blue, but attitudes toward Washington are just jet black,’ Mr. Hart said.”

Source: Jonathan Weisman, The Wall Street Journal, October 28, 2009.

The Wall Street Journal: Geithner testifies on regulation
“The Federal Reserve should lose its authority to bail out big, failing financial firms like AIG and Bear Stearns under proposed reforms aimed at limiting the collateral damage from such failures, US Treasury Secretary Timothy Geithner said.”

Source: The Wall Street Journal, October 29, 2009.

Financial Times: Draft law would extend Fed powers
“The Federal Reserve could order a financial institution to sell a risky division or stop dangerous trading activity if the central bank determined there was a threat to the US financial system, under a draft law released on Tuesday.

“The landmark bill drawn up by the Treasury and the House financial services committee sets up a council of regulators charged with snuffing out systemic risks and gives the government and the Fed sweeping powers over financial companies at home and overseas.

“The Fed would require systemically significant companies - including foreign groups that own a large or risky US subsidiary - to abide by ‘heightened prudential standards’. These include leverage limits, liquidity rules and the drafting of a resolution plan, or ‘living will’.

“Companies would be placed in the new category if the council deemed that ‘material financial distress at the company could pose a threat to financial stability or the economy’.

“But the draft law goes further than expected - allowing the Fed to require any systemically significant company to ’sell or otherwise transfer assets or off-balance sheet items to unaffiliated firms, to terminate one or more activities, or to impose conditions on the manner in which the identified financial holding company conducts one or more activities’.

“If that does not save a company, the government could seize it and force rival banks that have more than $10 billion in assets to repay any taxpayer money used to seize or wind up their competitor.”

Source: Tom Braithwaite, Saskia Scholtes, Aline van Duyn and Francesco Guerrera, Financial Times, October 28, 2009.

Financial Times: Fed chief warns banks on capital
“Ben Bernanke, chairman of the Federal Reserve, placed capital at the centre of his recipe for improving the financial system’s safety on Friday, putting banks on notice that they faced a possible capital surcharge or higher equity buffers.

“In a speech to the Boston Fed, Mr Bernanke said the capital raisings that followed the bank ’stress tests’ were important, but needed to go further to help prevent future failures.

“Tier one common equity ratios increased to 7.5% at the end of June this year from 5.3% at the end of last year.

“‘Options under consideration include assessing a capital surcharge on these institutions or requiring that a greater share of their capital be in the form of common equity,’ he said.

“Institutions whose collapse could threaten the entire system would be forced to go even further, possibly being required to issue contingent capital - hybrid securities that convert from debt to common equity at times of financial stress.

“Economists who advocate the introduction of the requirement believe it would help, not only by reinforcing the capital base for when a bank gets in trouble, but also as it would prompt holders of the securities - who want to avoid conversion - to exert pressure on executives to avoid risky behaviour.

“Increased capital requirements look likely to be one of the few elements of the Obama administration’s regulatory reform plan to survive unscathed after the industry’s huge lobbying effort and wrangling in Congress.”

Source: Tom Braithwaite, Financial Times, October 23, 2009.

Financial Times: Why sovereign bond yields will explode
“For nearly two decades, every credit crisis has been palliated with a further wave of leverage, kicking off a new economic cycle. Can this work again? I think not. In this post-credit crisis world, some things will be permanently different.

“It will not be business as usual for government bond prices. That is because current bond yields and the increasing insolvency of our rulers are the biggest disconnect in financial markets today. This comes from two factors: quantitative easing by central banks and the collapse of credit demand by the private sector. Neither are permanent features of the economic landscape.

v”Some will note that, when Japan’s bubble economy collapsed, it was able to run huge budget deficits and raise outstanding government debt from 60% to 140% of gross domestic product, while still experiencing a fall in bond yields from 8% to 1%.

“But this ‘miracle’ was only possible because Japan’s household savings were huge and invested at home. Japan did not need foreigners to fund its government deficits. Even today, foreign ownership of Japanese debt is only 6% compared with 50% for US government paper.

“But Japan’s household savings rate has collapsed due to an ageing population who no longer save. This low saving rate is something death must undo, not the politicians or monetary policy. So, if Japan is now running budget deficits at double- digit percentage rates of GDP, it can no longer use low-cost excess domestic savings to do so.

v”The Japanese ‘miracle’ of the 1990s cannot be repeated in the US, the UK or even in Japan this time. The US and the UK will still have very low domestic savings rates with government debt heading towards 100 per cent of GDP. Neither is likely to suffer from prolonged deflation as Japan did. And both the US and the UK are heavily dependent on foreigners for financing that debt. So Treasury and gilt yields will rise sharply and the dollar and the pound will slide.”

Source: David Roche, Financial Times, October 26, 2009.

Reuters: PIMCO’s Gross - Fed programs end may pressure debt
“Bill Gross, the influential manager who runs top bond fund PIMCO, warned on Monday that the prospect of an end to the Federal Reserve’s debt buyback programs could add selling pressure to several credit markets, including US Treasuries.

“Asked about the risk that a recovering US economy hurts Treasury investors, he said ‘there’s not a heightened sense of concern, but there is some concern’.

v”‘It’s obvious that the programs in the United States, the Federal Reserve buyback programs … those purchases and that purchasing power will cease within the next three to four months,’ Gross told a Canadian business television channel.

“‘So, to the extent that that’s gone, then perhaps the upward influence in terms of those longer-term Treasuries will be felt more strongly in the next several quarters.’”

Source: Jeffrey Hodgson, Reuters, October 26, 2009.

Richard Russell (Dow Theory Letters): Two possibilities for stock markets
“We are now watching one of two possibilities. The frustrating part of it is that at this time there is absolutely no way of knowing which of the two scenarios is the correct one. Personally, I favor the first scenario which I will now describe.

“(1) The primary trend of the stock market and the economy remains bearish. The advance from the March lows represents a correction or a rally in the bear market. The rally now appears to be in trouble. In fact, the rally may now be in the process of topping out. If this is indeed a rally in a continuing bear market, then in due time the Dow and the majority of stocks will decline and violate their March lows. If both the Industrials and Transports violate their March lows, it will be a signal that the primary bear market has been reconfirmed. However, if both Averages decline, and then rise to new highs, this will be a very bullish indication. It will be a sign that I have been wrong, and that we are probably in a bull market.

“(2) This is the second possible scenario. A bull market started from the March lows, and the advance from the March lows was the first leg of a new bull market. The first leg of the new bull market may now be in the process of topping out. If so, we will have to monitor the decline very carefully. If the decline develops into a secondary reaction and then halts, what comes next is crucial. Following the decline, if both Averages then head higher and break out to new highs, we will know that we are in a new bull market.

“I might add that either way, if the market now declines substantially, I think it will have the effect of turning investors and consumer sentiment even more fearful than it presently is. In which case, consumers will cut back even more on their buying and at the same time boost their desire to save and reduce their debts.

“Admittedly, the first scenario would be a disaster. The disaster would be if the entire advance from the March low were to be wiped out. That would mean that we’ve been in a primary bear market all along, and that the advance from the March low was simply an upward correction in an ongoing bear market. If so, then it’s just a matter of time before the Dow and a majority of stocks break below the March lows, in which case the bear market would be in full force again.

“If the first scenario comes to pass, this would be a disaster, but we must deal what the market gives us. A violation of the March lows by both Industrials and Transports would mean that really hard times lie ahead and that deflation will dominate the US and probably the rest of the world. Furthermore, it would mean that all the trillions that the Obama administration has spent have gone for naught.”

Source: Richard Russell, Dow Theory Letters, October 29, 2009.

David Fuller (Fullermoney): Stocks to correct by 10-15%
“Currently the stock market reaction that we have often mentioned and associated with the anniversary of last year’s meltdown is underway, albeit slightly later than anticipated, and rapidly morphing into a correction for some stock market indices which had led the rally. Interestingly, China may be a template for what occurs, since it has led the recent corrective phase, as mentioned previously.

“At this stage of the bull cycle, I think a correction of approximately 10-15% for developed country stock markets and somewhat more for emerging markets would be good news for investors with cash to invest. Such a mean reversion towards rising 200-day moving averages would blow the recent froth off valuations and stem talk of an early change in monetary policy.

“Equities could then benefit from a second wind for the rally created by what should be good year-on-year comparative figures for GDP and corporate profits during 4Q 2009 and 1Q 2010. Conversely, if stock markets were to surprise us and extend their upward trends in early November, they would be discounting a bullish outlook for the next two quarters, leaving markets more susceptible to profit taking during the next round of favourable economic news.

“Meanwhile, very clear upward dynamics and follow through, similar to what we saw in the second half of July, are now required to check the current reactions / corrections.”

Source: David Fuller, Fullermoney, October 28, 2009.

MoneyNews: Smithers - S&P 500 40% overvalued
“The Standard & Poor’s 500 Index is heading for a fall because it’s 40% overvalued.

“Banks will probably sell more shares to raise the cash they need and drag down the index, said Andrew Smithers, economist and president of research company Smithers & Co., in an interview with Bloomberg.

“‘Markets are very vulnerable to an end of quantitative easing,’ said Smithers.

“‘Central banks, they’ve got to stop (buying) some time and if that happens everything will come down.’

“Smithers presciently warned investors off stocks in 2000 at the beginning of a bear market that growled on for two years.

“The heavy infusions of cash into credit markets by the Fed, the Bank of England, and other central banks around the world to save the collapsing financial system may soon stop, Smithers points out.

“Central bank purchases of debt and troubled assets may have worked short term, Smithers suggests.

“But now, as purchases have slowed and may stop altogether, he’s raising a red flag.

“‘Quantitative easing has set off another sharp, and so far containable, asset bubble,’ he said.

“‘But if it gets too high and starts to come down then we’ll go straight back (into recession).’”

Source: Marc Davis, MoneyNews, October 26, 2009.

Barry Ritholtz (The Big Picture): Ral

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Which Way Now? Hard Assets or Government Bonds?

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Words from the (Investment) Wise (November 16, 2009)

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Jim Rogers: Gold, Market Bubbles, Equities, and Dr. Doom

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