Emerging Markets Highlights

Monday, February 1st, 2010

Emerging Markets

Strengths

• Fitch raised Indonesia’s long-term foreign and local currency credit ratings from BB to BB+, the highest level in more than a decade and only one level below investment grade. Indonesia’s resilience to the 2008-2009 global financial crisis due to improvements in its public finances was cited as a reason.
• Thailand’s industrial production growth rose to 35.7 percent year over year in December, the highest on record and ahead of market expectations, as continued global recovery drove up exports 26.2 percent during the month.
• The unemployment rate in Brazil in December declined to 6.8 percent from 7.4 percent in November, attributable to seasonal factors.
• Fitch followed S&P in raising Russia’s sovereign credit outlook from negative to stable. Industrial production in the country grew 2.7 percent in December, a second positive monthly reading in a row. The monetary base jumped 25 percent in December, spurred by year-end government spending.
• Bond yields in South Africa fell to their lowest level in three weeks after December inflation came in below expectations at 6.3 percent. Outside of gasoline, most major subcomponents of the CPI decelerated during the month.

Weaknesses

• Continued fears over the prospect of macro tightening in China resulted in an 8.8 percent decline for Chinese domestic A shares and 10.1 percent decline for Chinese H shares traded in Hong Kong in January.
• South Korea’s GDP expanded by a seasonally adjusted 0.2 percent sequentially in the fourth quarter of 2009, slower than expected due to a decline in government spending and household consumption.
• Brazil is to end tax cuts on purchases of cars (effective March 31) and appliances (end of January). According to the government, stimulus is no longer necessary. This move had been anticipated.
• Czech industrial production fell 2.3 percent from the November’s level, suggesting a level of production close to that in the first quarter of 2009.

Opportunities

• While the recent correction in China has been steep and swift, history suggests buying opportunities in the medium term. In early 2004 and early 2007, when tightening fears haunted investors in a policy environment similar to the current one, Chinese stocks underwent a sharp selloff for a couple of months and yet finished the year higher as investors realized the economy was not headed for a hard landing.

• The fixed-line telecom market in Mexico is likely to become more competitive after the government decided to auction the fiber-optic long-haul network of CFE (electric utility). It is expected that Televisa and Megacable will participate in the auction in order to provide triple-play services for their customers.
• After the Central Bank of Russia lowered refinancing rates by 425 basis points within last 10 months to the current 8.75 percent, consumer loan rates followed. The benchmark fixed mortgage is down 300 basis points to 17 percent. These lower rates have begun to translate into an increase in mortgage lending, based on research by Deutsche Bank.

Threats

• The Indian central bank’s surprise increase of cash reserve ratio by 75 basis points and hawkish language regarding inflation may in the short term reinforce investors’ perception of tightening bias among global central banks.
• Lower commodities prices would be a headwind for resource-rich economies in Latin America.
• The inflation report from Central Bank of Turkey (CBT) continues to downplay rising headline inflation, according to Citi. As central banks around the world start tightening, keeping rates on hold could risk the CBT’s credibility and the lira’s performance.

Tags: Bond Yields, China, Commodities, CPI, Credit Outlook, Emerging Markets, Fourth Quarter, Global Financial Crisis, Global Recovery, government spending, Household Consumption, India, Investment Grade, Market Expectations, Monetary Base, Public Finances, Resilience, S Industrial, Seasonal Factors, South Korea, Stimulus, Tax Cuts, Unemployment Rate
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Koo: Government fulfilling necessary function

Thursday, October 1st, 2009

Richard Koo, chief economist of Nomura Research Institute, rose to prominence early last year with the publication of his fascinating book, Balance Sheet Recession. He has just been interviewed by the brilliant Kate Welling at Welling@Weeden. Although I have not yet set eyes on the interview, I am sure it is top class. However, Richard Russell (Dow Theory Letters) last week provided a taste of the discussion in his newsletter, some of which has been worked into this post.

Koo defines a balance sheet recession as one that emerges “after the bursting of a nationwide asset price bubble that leaves a large number of private-sector balance sheets with more liabilities than assets. In this type of recession, the economy will not enter self-sustaining growth until private-sector balance sheets are repaired”.

According to Koo, American consumers are suffering from a balance sheet problem and will not increase consumption until their personal finances are back in order. The banks are not lending mainly because nobody wants to borrow and, furthermore, the banks want to build their own balance sheets (raise cash) and get rid of toxic garbage.

Koo says it’s up to the government to make up for the private sector’s problems by spending and continuing to run deficits. Thus we would be “buying time” through government spending while the private sector has time to repair its balance sheets. He claims it is absolutely necessary for the government to spend and run deficits. If the government cuts back on its spending and stimulus, the US economy will swoon and more money will be lost than was lost during 2008-2009.

Again, when asked what would happen if the government cuts back on its fiscal stimulus, Koo replies: “Until the private sector is finished repairing its balance sheets, if the government tries to cut its spending, we’re going to fall into the same trap Franklin Roosevelt fell into in 1937 (a crushing bear market) and Prime Minister Hashimoto fell into in 1997, exactly 70 years later.

“The economy will collapse again and the second collapse is usually far worse than the first. And the reason is that, after the first collapse, people tend to blame themselves. They say, ‘I shouldn’t have played the bubble. I shouldn’t have borrowed money to invest - to speculate on these things.’

“But a second collapse affects everyone, not just the bubble speculators, and it also suggests to the public that all the efforts to fight the downturn up to that point - all the monetary easing, the low interest rates, quantitative easing - have failed and even fiscal policy has failed. Once that kind of mindset sets in, it becomes ten times more difficult to get the economy going again. So the fact that Larry Summers was talking about ‘temporary’ fiscal stimulus had me very, very worried. That whole Larry Summers idea that one big injection of fiscal stimulus will get the US out of the recession, and everything will be fine thereafter, probably led to President Obama’s saying he’s going to cut his budget deficit in half in four years.”

In summary, Koo’s message is that we will have an all-out recession if government spending and the budget deficits are cut back before consumers’ balance sheets have been restored and they start buying again. Does anybody still expect the economy to be coaxed back to recovery without pain?

Tags: American Consumers, Asset Price Bubble, Balance Sheet, Balance Sheets, Bear Market, Buying Time, Chief Economist, Dow Theory Letters, Fiscal Stimulus, Franklin Roosevelt, government spending, Necessary Function, Nomura Research Institute, Personal Finances, Prominence, Recession, Richard Koo, Richard Russell Dow Theory, Swoon, Weeden
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Global Markets Analysis Review (June 15 - 21, 2009)

Sunday, June 21st, 2009

Caution last week crept back into investors’ vocabulary for the first time in more than three months as they faced up to President Barack Obama’s plan to reform the US financial market regulations, weighed the prospects of a global economic recovery and whether the “green shoots” needed more monetary water, and also started pondering the second-quarter earnings season.

As risk-taking moderated, profit-taking on equities and commodities set in after a colossal advance since early March. Government bonds rallied further, high-yield corporate bonds met selling pressure, spreads on credit derivative indices widened, and the US dollar marked time. “We could be seeing one of those occasional ‘all-change signals’ in short-term trends,” said Fullermoney editor David Fuller from across the pond.

From his new abode at Gluskin Sheff & Associates, David Rosenberg said: “Post-credit collapse and asset deflation cycles are always gripped with fragility; the intermittent beta trades and flashy rallies only serve to tell us that nothing moves in a straight line. In the meantime, the incoming data do suggest that recession pressures are subsiding, but it is difficult to see what the sources of recovery are going to be outside of government spending.”

Source: Gary Varvel

The week’s performance of the major asset classes is summarized by the chart below. Not shown, the entire precious metals complex was again out of favor with investors, with gold bullion’s (-0.5%) high-beta cousins - platinum (-3.7%) and silver (-4.1%) - being sold off by cautious investors.

Source: StockCharts.com

The US dollar ended the week virtually unchanged after Russian President Dmitry Medvedev told a regional summit on Tuesday that new reserve currencies, in addition to the dollar, were needed to stabilize the global financial situation. Meanwhile Brazil, Russia, India and China went on the biggest dollar-buying binge in eight months during May, adding $60 billion to their reserves, as cited by MoneyNews (via Bloomberg).

Many stock markets on Monday registered their worst single-session losses in a month. Mature markets perked up towards the end of the week, but emerging markets, in a number of instances, were down for all five trading days. After a four-week winning streak, the MSCI World Index (-3.0%) and the MSCI Emerging Markets Index (-5.0%) closed the week at their lowest levels since the last week of May.

Facing lackluster volume, the major US indices all ended the week in the red, but less so than most European and emerging bourses, as seen from the movements of the indices: S&P 500 Index (-2.6%, YTD +2.0%), Dow Jones Industrial Index (-2.9%, YTD -2.7%), Nasdaq Composite Index (-1.7%, YTD +15.9%) and Russell 2000 Index (-2.7%, YTD +2.7%).

To put the decline in context, the biggest pullback in the S&P 500 since the March 9 low happened in late March when the Index dropped by 5.9% over the course of two days. The most recent decline took the Index down by 5.0% between May 8-15. The S&P 500 is currently a more modest 2.7% off its high of June 12.

After climbing into the black for the year to date in the prior week, the Dow fell back to -2.7% last week - the only major US index in the red for 2009 - and, along with the FTSE 100 Index (-2.0%), one of the few global indices in this unenviable position.

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

As far as non-US markets are concerned, returns ranged from top performers - mostly African countries - Sri Lanka (+10.7%), Kenya (+9.5%), Namibia (+8.5%), Uganda (+7.3) and Côte d’Ivoire (+5.0%), to Russia (-9.8%), Qatar (-9.8%), Argentina (-8.4%), Ukraine (-6.9%) and Finland (-6.8%), which experienced headwinds.

In a bullish move, the Shanghai Composite Index - one of the leading markets in the advance over the last few months - bucked the downtrend with a gain of 5.0%. However, the Russian Trading System Index - the top-performer for the year to date (+70.7%) and since the November 20 lows (+104.8%), succumbed to profit-taking, losing 9.8% on the week. Also, the Bombay Sensex 30 Index (-4.7%) declined after rising for 14 consecutive weeks. (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 leaders for the week included offshore “short” funds such as ProShares Short MSCI Emerging Markets (EUM) (+7.4%) and ProShares Short MSCI EAFE (Europe, Australia, Far East) (EFZ) (+3.3%). On the other side of the performance spectrum, losers centered in the energy sector, including Market Vectors Coal (KOL) (-13.4%) and iShares Dow Jones US Oil Equipment & Services (IEZ) (-11.6%).

In a white paper released on Tuesday night, the Obama administration detailed a number of proposals to overhaul the US system of financial regulations in an effort to restrain the reckless risk-taking that triggered the economic crisis.

The quote du jour this week is related to this regulatory reform and comes from Barry Ritholtz, editor of The Big Picture blog and author of Bailout Nation, a newly published and must-read book, who remarked: “The Federal Reserve, despite its role in causing the crisis, gets MORE authority. Under Greenspan, the Fed did a terrible job of overseeing banking, maintaining lending standards, etc. Why they should be rewarded for this failure with more responsibility is hard to fathom. It is yet another example of rewarding the incompetent.”

Ritholtz offers a better solution: “Have the Fed set monetary policy. They should provide advice to someone else - like the FDIC (Federal Deposit Insurance Corporation) - who hasn’t shown gross incompetence.”

Other news is that the US Treasury is planning to revamp securitization with new rules designed to reduce the incentive for lenders to originate bad loans and flip them on to investors. The aim is to restore confidence in and revitalize securitized markets, which financed more than half of all credit in the US in the years immediately prior to the credit crisis.

Next, a quick textual analysis of my week’s reading. No surprises here, with all the usual suspects such as “market”, “financial”, “credit”, “economy”, “stock”, “banks” and “China” featuring prominently.

Back to the stock markets: an analysis of the moving averages of the major US indices shows the S&P 500, the Nasdaq Composite and the Russell 2000 trading above their 50- and 200-day moving averages, albeit marginally so in the case of the S&P 500. On the other hand, the Dow Industrial and Dow Transportation are below the key 200-day line, but still a few points above the 50-day average. Only the Nasdaq Composite trades above its January peak. The levels from where the rally commenced on March 9 should hold in order for base formations to remain in force.

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

Not only are the indices very close to important moving average support levels, but a short-term oscillator such as the rate-of-change (momentum) indicator is on the verge of giving a selling signal, i.e. crossing through the zero line in the bottom section of the S&P 500 chart below. Also note the negative divergence between the Index and the ROC line - typically a warning sign that a near-term trend change will take place.

Source: StockCharts.com

The Bullish Percent Index shows the percentage of stocks that are currently in bullish mode as a result of point-and-figure buy signals. With the figure at 64.8%, this indicator conveys the message that the majority of stocks are in uptrends, but the line has turned down and the chart has the appearance of at least a short-term top.

Source: StockCharts.com

Richard Russell, veteran writer of the daily Dow Theory Letters, commented on Monday: “I’m of the opinion that this bear market rally is in the process of topping out. When a counter-trend rally tops out within an ongoing primary bear market, the odds are that the stock market will break to new lows during the period ahead. That means that the stock market will break below its March 9 lows in coming weeks. A violation of the March 9 lows would be a shocker to most investors, and it would be a forecast of an even worse economy coming up.”

For more about key levels and the most likely short-term direction of the S&P 500, Adam Hewison of INO.com prepared another of his popular technical analyses. Click here to access the short presentation. (The analysis was done on Tuesday, but is still as relevant today as it was a few days ago.)

Turning to equity valuation levels, economist and strategist David Rosenberg, said: “The notion that we had moved to Armageddon lows in equities does not seem to hold water. After all, the forward P/E multiple on the S&P 500 at the lows was 11.7x. That was not a multi-decade low or some massive standard-deviation figure - we were actually lower than that at the October 1990 lows when the multiple was 10.5x and frankly, coming off the 1987 collapse, the forward P/E had compressed to 9.8x.

“As it now stands, the multiple is back very close to where it was at the October 2007 market high when the multiple had expanded to 15.0x. The range on the forward P/E over the last quarter-century is between 9.8x and 21.8x (excluding the tech bubble), so at 14.5x currently, it is hardly the case that this market can be viewed as a bargain. On a trailing earnings basis, the P/E multiple has actually widened, from 17.0x at the lows to 23.3x currently, a huge multiple expansion.”

Nouriel Roubini, professor at NYU’s Stern School and Chairman of RGE Monitor, shares the view that the stock market rally is long in the tooth. According to Yahoo, Tech Ticker, he pointed to three factors that would lead to a correction in the near future: (1) Volatility and uncertainty would increase; (2) Corporate earnings would disappoint; and (3) The global financial system still faced serious problems.However, Roubini was not convinced that the market would retest the rally lows.

Taking an opposite stance, Mario Gabelli, chief investment officer at Gamco Investors, sees rosy times ahead for the economy and stock market, as reported by MoneyNews. He noted that the Dow Jones Industrial Average was now at 8,500. “Twelve years ago it was 8,500 … In 10 years, 8,500 will look like a bargain, and it’s a bargain today. The best way to make money in the coming bull market is ‘plain old stock picking’,” said Gabelli.

In my opinion, it seems as if the spring rally has probably exhausted itself. It is difficult to envisage how much of a pullback we might see, but I maintain that it will still be part of a bottoming process. I would nevertheless assume a defensive position, as a bigger and longer correction than what many pundits are expecting cannot be excluded.

For more discussion on the direction of stock markets, also see my recent posts “Gold, gold, you’re making me old“, “Albert Edwards: Expect new equity lows in H2, China is global Achilles’ heel“, “Video-o-rama: Regulatory reform dominates debate“, “Stock markets: retreat in store?“, “The recession in historical context“, “Technical talk: S&P 500 turning down from 950 again” and “Have stock markets run away from reality?“. (And do make a point of listening to Donald Coxe’s webcast of June 19, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
“Global business sentiment is much improved during the past three months. Most notable is the optimism regarding the economic outlook toward the end of this year. Assessments of current business conditions and the strength of sales have also measurably improved,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. However, confidence is still weak and fragile, consistent with an ongoing global recession.

Although the European Central Bank (ECB) has warned that Eurozone banks face additional losses of more than $283 billion this year and next, German investor confidence, as measured by the ZEW Economic Sentiment Index, rose to a three-year high in June. The improvement suggests that investors are more confident that the worst of the financial crisis and recession has passed. However, the ZEW Current Situation Index remained around its six-year low in June, indicating that the German economy remains in recession.

Source: ZEW

“‘Green shoots’ is no longer the favorite phrase among policymakers. During last weekend’s meeting of Group of Eight (G8) finance ministers, the message shifted to emphasize that it was far too early to sound the all-clear for the world economy,” writes the Financial Times.

“I don’t think we’re at a point yet where we can say we have a recovery in place,” said Tim Geithner, US Treasury secretary, and continued this theme a day later by saying “it is early still” and “we have a way to go”. Britain’s finance minister, Alistair Darling, said “we’re not there yet”, and the IMF’s Dominique Strauss-Kahn said “the recovery is weak”.

Focusing on the country that seems to have cruised best through the economic malaise, the World Bank raised its forecast for China’s 2009 gross domestic product growth to 7.2% (from 6.5% three months ago), saying the apparent success of the government’s stimulus package had improved the outlook from March, as reported by the Financial Times. The bank estimates a full six percentage points of this year’s 7.2% GDP growth will come from investment and spending either carried out by the government or directly influenced by it.

According to US Global Funds, another validation of China’s economic recovery is provided by the recent growth in government revenue, thanks to rising business tax receipts. “Going forward, a virtuous cycle may set in when improving private sector activity encourages corporate expansion, which in turn benefits employment, income growth, and consumption.”

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

However, Albert Edwards, global strategist at Société Générale, said (via the Financial Times): “I believe the bullish group-think on China is just as vulnerable to massive disappointment as any other extreme or bubble nonsense I have seen over the last two decades. The fall to earth will be equally as shocking.”

In the world’s second largest economy, the Bank of Japan opted not to make any changes to its monetary policy, stating that economic conditions in Japan “have begun to stop worsening”.

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

June 19
• June 23-24 FOMC meeting - coast is not clear yet, minor modifications of April statement likely

June 18
• Index of Leading Indicators suggests worst is over
• Continuing Claims post large decline
• Philadelphia Fed Survey points to improving factory conditions

June 17
• Subdued inflation data leave room for Fed
• Significant improvement in current account deficit

June 16
• Housing Starts - turning the corner?
• Factory Production and Operating Rate remain problematic
• Higher prices for energy and tobacco lift overall Wholesale Price Index

Also, Reuters reported that US credit card defaults rose to record highs in May, soaring to 12.5% from 10.5% in April in the case of Bank of America. This is yet another sign that consumers remain under severe stress.

Summarizing the outlook for the US economy, Asha Bangalore (Northern Trust) said: “For all purposes, although the nature of incoming economic data and current financial market conditions indicate that the worst is behind us, real GDP in the second quarter is projected to decline again. The headline reading of real GDP should show a noticeably smaller drop in the second quarter compared with the 5.7% drop in the first quarter.

“There is mixed opinion in the marketplace about the third-quarter performance of the economy. We expect the economy to gather steam only by the final three months of 2009. The FOMC’s projections show a decline of real GDP growth (Q4-to-Q4 basis) in 2009 to range between -2.0% and -1.3%. The bottom line is that the Federal funds rate will hold unchanged for several months ahead.”

Week’s economic reports

Source: Yahoo Finance, June 19, 2009.

In addition to an interest rate announcement by the Federal Open Market Committee (FOMC) (Wednesday, June 24), the US economic highlights for the week include the following:

Source: Northern Trust

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

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

Source: Wall Street Journal Online, June 19, 2009.

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity. Both bring a permanent ruin. But both are the refuge of political and economic opportunists,” said Ernest Hemingway.

In these troubled times, let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will help Investment Postcards readers to spot the opportunities and invest wisely.

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.

Happy Father’s Day to all, and enjoy the longest summer’s day of the year (in the northern hemisphere)!

That’s the way it looks from Cape Town in the heart of winter (that I will shortly be leaving behind for a two-week visit to Slovenia and Switzerland).

Simon Johnson (The Baseline Scenario): Where are we now?
“1. Financial markets have stabilized - largely because people believe that the government will not allow Citigroup to fail. We have effectively nationalized any banking system losses, but we’ll let bank executives enjoy the full benefits of the upside. How much shareholders participate remains to be seen; there will be no effective reining in of insider compensation.

“2. The real economy begins to bottom out, although unemployment will not peak for a while and could stay high for several years. Longer term growth prospects remain uncertain - has consumer behavior really changed; if finance doesn’t drive growth, what will; is the budget deficit under control or not (note: most of the guarantees extended to banks and other financial institutions are not scored in the budget)?

“3. More broadly, there is sophisticated window dressing in the pipeline but no real reform on any issue central to (a) how the banking system operates, or (b) more broadly, how hubris in finance led us into this crisis. The financial sector lobbies appear stronger than ever. The administration ducked the early fights that set the tone (credit cards, bankruptcy, even cap and trade); it’s hard to see them making much progress on anything - with the possible exception of healthcare.

“4. The consensus from conventional macroeconomics is that there can’t be significant inflation with unemployment so high, and the Fed will not tighten before late 2010. The financial markets beg to differ - presumably worrying, in part, about easy credit leading to dollar depreciation, higher import prices, and potential commodity price inflation worldwide. In all recent showdowns with standard macro models recently, the markets’ view of reality has prevailed. My advice: pay close attention to oil prices.

“5. Emerging markets are increasingly viewed as having ‘decoupled’ from the US/European malaise. This idea was wrong in early 2008, when it gained consensus status; this time around, it is probably setting us up for a new bubble - based on a ‘carry trade’ that now runs out of the US. The ‘appetite for risk’ among investors is up sharply. The G7/G8/G20 is back to being irrelevant or merely cheerleaders for the financial sector.”

Source: Simon Johnson, The Baseline Scenario: June 13, 2009.

The Washington Post: Obama blueprint deepens Federal role in markets
“The Obama administration last night detailed a series of proposals to involve the government more deeply in private markets, from helping to steer borrowers into affordable mortgage loans to imposing new limits on the largest financial companies, in a sweeping effort to curb the kinds of reckless risk-taking that sparked the economic crisis.

“The plan seeks to overhaul the nation’s outdated system of financial regulations. Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect’s blueprint for modernizing a creaky old building.

“The White House makes its case for this approach in an 85-page white paper that describes the roots of the crisis. Gaps in regulation allowed companies to make loans many borrowers could not afford. Funding came from new kinds of investments that were poorly understood by regulators. Big firms paid employees massive bonuses, while setting aside little money to absorb potential losses.

“‘While this crisis had many causes, it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of our financial system,’ the white paper says.

“The plan is built around five key points, according to a briefing last night by senior administration officials and a copy of the white paper obtained by The Washington Post.

“The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms.

“It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy.

“Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans.

“The government would create a new agency to protect consumers of mortgages, credit cards and other financial products.

“And the administration would increase its coordination with other nations to prevent businesses from migrating to less regulated venues.

“Congressional leaders say they hope to pass some version of the plan by year’s end.”

Source: Binyamin Appelbaum and David Cho, The Washington Post, June 17, 2009.

CNBC: Sheila Bair on the regulation revamp
“The White House this week unveiled a new financial regulatory framework, and FDIC Chair Sheila Bair shares her outlook on the new policy initiatives with CNBC.”

Source: CNBC, June 19, 2009.

Barry Ritholtz (The Big Picture): Obama reform plan fails to fix what is broken
“So much for ‘not letting a crisis go to waste’.

“The initial read on the Obama Regulatory plan was an enormous disappointment. Both supporters and critics who expected him to take a hard turn to the Left have been left either surprised or disappointed, depending upon their leanings.

“To the pragmatic center, including your humble blogger, what stands out is the number of half measures and omitted actions that were viewed as necessary to prevent a replay.

“Some very obvious omissions from the plan include:

“1) No major changes for the ratings agencies!

“This is a giant WTF from the White House. It implies that the team in charge STILL does not understand how the problem occurred.

“The ratings agencies are not the only bad actors, but they are a BUT FOR - but for the rating agencies putting a triple A on junk paper, many funds could not have purchased them, the number of mortgages securitized would have been much less, the insatiable demand on Wall Street for mortgage paper would have also been much lower.

“Why is this important? If mortgage originators couldn’t sell a mass amount of loans, they would not have had the need to give a mortgage to anyone who could fog a mirror - and that means no Liar Loans, no NINJA loans, and no huge subprime debacle.

“Better Solution: Take apart the ratings oligopoly! Eliminate the Pay-for-Play/Payola structure. Strip Moody’s S&P and Fitch from their uniquely protected status - they have proven they are neither worthy nor competent. Open up ratings to competition - including open source.

“2) Turn derivatives into ordinary financial products: The Obama team does a series of minor steps for derivatives, but they don’t go far enough.

“Better Solution: Force derivatives to be traded like option/stocks, etc. (including custom one-off derivatives). Trade them only on exchanges, full disclosure of counter-parties, transparency and disclosure of open interest, trades, etc. REQUIRE RESERVES LIKE ANY OTHER INSURANCE PRODUCT.

“3) ‘If they are too big to fail, make them smaller.’

“That is the famous quote from Nixon Treasury Secretary George Shultz, and it applies to the banks as well as insurers, Fannie & Freddie, etc.

“We have a situation where 65% of the depository assets are held by a handful of huge banks - most of whom are less than stable. The remaining 35% is held by the nearly 7,000 small and regional banks that are stable, liquid, solvent and well run.

“Better Solution: Have real competition in the banking sector. Limit the size for the behemoths to 5% or even 2% of total US deposits. Break up the biggest banks (JPM, Citi, Bank of America).

“4) The Federal Reserve, despite its role in causing the crisis, gets MORE authority.

“Under Greenspan, the Fed did a terrible job of overseeing banking, maintaining lending standards, etc. Why they should be rewarded for this failure with more responsibility is hard to fathom. It is yet another example of rewarding the incompetent.

“Better Solution: Have the Fed set monetary policy. They should provide advice to someone else - like the FDIC - who hasn’t shown gross incompetence.

“5) Require leverage to be dialed back to its pre-2004 levels. Have we even eliminated the Bears Stearns exemption yet? This was a 2004 SEC decision to exempt five biggest banks from the mere 12-to-1 prior levels. Note that all five are either gone, acquired or turned into holding companies.

“Better Solution: 12-to-1 should be enough leverage for anyone.

“6) Restore Glass Steagall: The repeal of Glass Steagall wasn’t the cause of the collapse, but it certainly contributed to the crisis being much worse.

“Better Solution: Time to (once again) separate the more speculative investment banks from the insured depository banks.

“All of which suggests that the status-quo-preserving, sacred-cow-loving, upward-failing duo of Lawrence Summers and Tim Geithner are still in control of economic policy. The more pragmatic David Axelrod and the take-no-prisoners, don’t-give-a-shit-about-Wall-Street Rahm Emmanuel have yet to assert authority over the finance sector.”

Source: Barry Ritholtz, The Big Picture, June 18, 2009.

Roubini (Yahoo, Tech Ticker): New regulations “go in the right direction”, but not far enough
“The new Wall Street regulations announced by President Obama yesterday ‘go in the right direction’ but only accomplish about ‘75% of what needs to be done’, says Nouriel Roubini, professor at NYU’s Stern School and chairman of RGE Monitor.”

Click here for the article.

Source: Yahoo, Tech Ticker, June 18, 2009.

MoneyNews: Paul Volcker - put a brake on the bailouts
“Government bailouts should be limited and a clear policy set forth defining who would have access to the government’s financial safety net.

“That’s what former Federal Reserve chairman Paul Volcker told a meeting of the International Institute of Finance in Beijing recently, as reported in The Wall Street Journal.

“Volcker is also chairman of President Obama’s Economic Recovery Advisory Board, so his remarks on the economy may also reflect administration thinking on the subject, and may also be a forecast of reforms to come.

“‘One unfortunate consequence of the massive public assistance provided both banks and nonbanks in dealing with the present crisis is that moral hazard may, I am afraid, become more deeply embedded.’

“Moral hazard is defined as an absence of incentive to protect against risk if you are insured against risk.

“Volcker, in his speech, cited as a conflict of interest among those institutions which ‘engaged in substantial risk-prone proprietary trading and speculative activities.’

“Financial institutions beyond the government ’safety net’ should not count on government protection, said Volcker. But they may be subject to government oversight.

“In an effort to prevent another disastrous financial crisis, the Obama administration wants to empower the Federal Reserve as a ’systemic risk regulator’ with the right to seize large financial firms tottering near failure.”

Source: Marc Davis, MoneyNews, June 17, 2009.

Financial Times: Treasury plans strict rules for securitisation
“The US Treasury is planning a sweeping overhaul of securitisation markets with tough new rules designed to restore confidence by reducing the incentive for lenders to originate bad loans and flip them on to investors.

“The authorities plan to force lenders to retain part of the credit risk of the loans that are bundled into securities and to end the gain-on-sale accounting rules that helped spur the boom of the markets at the heart of the financial crisis.

“The aim is to revitalise the markets for securities backed by mortgages and other assets without re-creating the systemic risks that turned boom to bust in 2007. The plan is part of a wider overhaul of regulation to be unveiled on Tuesday.

“A Treasury spokesman said that while securitisation had made credit more widely available, breaking the direct link between borrower and lender had ‘led to a general erosion of lending standards, resulting in a serious market failure that fed the housing boom and deepened the housing bust’.

“Securitised markets - which financed more than half of all credit in the US in the years immediately preceeding the crisis - are essential for the US economy. Without a recovery in these markets, the flow of credit will not return to more normal levels, even if US banks overcome their problems.”

Source: Krishna Guha, Tom Braithwaite, Francesco Guerrera and Aline van Duyn, Financial Times, June 15, 2009.

Bloomberg: Congress backs war-funding bill, “cash for clunkers”
“A $106 billion war-spending bill won final congressional approval after the Senate voted to retain a ‘cash for clunkers’ provision aimed at helping the auto industry.

“Action by the Senate today sends the measure to President Barack Obama for his signature. The Senate passed the bill on a 91 to 5 vote; the House approved the measure earlier this week.

“Senator Judd Gregg, a New Hampshire Republican, led the effort to drop a provision providing as much as $4,500 to people who trade in their vehicles for more fuel-efficient models. He said the plan, which would cost $1 billion, was a poor use of tax dollars when the government is projected to run its biggest budget deficit since 1945.

“‘It is a clunker,’ Gregg said of the plan. ‘Why should our children and our grandchildren have to pay the bill’ for the government subsidizing ’somebody to buy their car today? How fiscally irresponsible is that?’ he said.

“The legislation provides more than $82 billion to fund military operations in Iraq and Afghanistan, which would bring total spending on the wars to more than $900 billion.

“Lawmakers agreed to Obama’s request to include $5 billion to secure $108 billion in aid, primarily in the form of a line of credit, to the International Monetary Fund. The legislation would permit US representatives to the IMF to agree to its planned sale of 13 million ounces of gold, one-eighth of the organization’s holdings, to help finance aid to poor countries.

“The bill also would provide $7.7 billion for pandemic flu programs.

“Other provisions would allow the Pentagon to transfer suspected terrorists held at the military prison at Guantanamo Bay, Cuba, to the US for trial, though not for long-term incarceration or release.”

Source: Brian Faler, Bloomberg, June 18, 2009.

Financial Times: “Green shoots” wilt
“‘Green shoots’ is no longer the favourite phrase among policymakers. During last weekend’s meeting of Group of Eight finance ministers, the message shifted to emphasise that it was far too early to sound the all-clear for the world economy.

“‘I don’t think we’re at a point yet where we can say we have a recovery in place,’ said Tim Geithner, US Treasury secretary, who continued this theme yesterday by saying ‘it is early still’ and ‘we have a way to go’. Britain’s finance minister said ‘we’re not there yet’. The IMF’s Dominique Strauss-Kahn said ‘the recovery is weak’.

“Financial markets dutifully responded to this message. It is a great example of effective jawboning - the attempt to influence by persuasion rather than by exertion of force or one’s authority, although weak economic data played its part.

“Stock prices fell, bond prices rose. Perhaps most importantly, commodity prices fell too. A persistent rise in oil and other commodities could lead to a return to high inflation expectations. With the US central bank pumping billions of dollars into the economy through purchases of government bonds and mortgage debt, any need to suck that out to curb inflation fears could be messy and lead to a surge in borrowing costs.

“Though there is now a plan to come up with ‘exit strategies’ - the G8 has asked for an analysis of how best to handle this - policymakers are clearly showing they do not want to repeat the mistakes made by Japanese officials in the 1990s, that of pulling back economic stimulus and credit expansion too quickly. This balancing act will be needed for some time. According to Ajay Rajadhyaksha, at Barclays Capital: ‘Policymakers want to see if they can buy another year or year-and-a-half without inflation expectations building up.’”

Source: Aline van Duyn, Financial Times, June 15, 2009.

SmartMoney: Red herrings - false signs of an economic rebound
“Because of the magnitude of the recent downturn, experts say some of the statistics that are widely used to track the economy are now red herrings - misleading, at best, when it comes to predicting a rebound. Here are three indicators that could lead investors astray.

What housing glut?

“Housing inventory measures the supply of unsold homes on the market. Right now it’s high - a 10-month supply of homes, up from the average of about five - and conventional wisdom says the housing market won’t recover until it declines. This time around, however, waiting for ‘normal’ could cost you. In fact, an improving economy might mean more homes on the market, not fewer. Some banks are sitting on foreclosed properties, waiting for a friendlier economic climate before putting them on the market, and many homeowners are essentially doing the same thing. Stephen Kim, senior analyst at Alpine Global Real Estate fund, thinks home-building stocks ‘will rally while inventory levels are still high.’

The hidden jobless

“It seems like a no-brainer: Once more people are working, stocks should rebound. But investors who rely solely on the official unemployment rate - the percentage of workers who are jobless - could be misled. The statistic excludes so-called discouraged workers who have given up looking for a job. And the data doesn’t capture companies that force employees to take pay and benefit cuts or furloughs. ‘You’d get a better idea just asking people on the street if they’re employed,’ scoffs John Williams, founder of economic research firm Shadowstats.com. Strategists put more trust in weekly unemployment-claims data, a different figure that gives a clearer sense of companies’ hiring and firing.”

Inflated expectations

“Many market watchers are hoping for a modest increase in inflation, as a sign that the global economy is starting to crawl out of recession. But investors who watch the so-called core consumer price index (CPI), the most widely used gauge, might miss the first stages of a rally and lose out on run-ups in stocks of energy and raw-materials companies. Core CPI excludes the cost of food and energy, and analysts like Strategas economist Don Rissmiller think energy is where prices may surge first, as billions of stimulus dollars pumped into infrastructure projects stoke demand for metals and fuel. Investors looking for a better indicator than the CPI should watch prices for commodities like copper and oil.”

Source: SmartMoney, June 18, 2009.

The Capital Spectator: A bull market in false dawns?
“Flat to a slight upside bias. That about sums up the prevailing state of inflation at the moment, based on this morning’s latest from the US Bureau of Labor Statistics.

“Seasonally adjusted consumer inflation rose 0.1% last month, up from zero the month before and a modest decrease in March. On its face, that’s good news, as it suggests that the risk of deflation, if not quite passed, is looking more and more like a shadow of its formerly threatening self. Meanwhile, inflation as a clear and present danger also remains thin as an imminent menace.

“We are in a transitory state, passing from severe danger to something less so. Anything’s possible, of course, especially in the current climate. But barring some extraordinary and largely unexpected event, we’re likely to press on through what we’ll call a pre-recovery period, when the economic numbers improve relative to the recent past yet the numbers don’t quite show the traditional bounce that typically accompanies the end of recessions.

“‘The economy seems to be out of intensive care,’ says David Shulman, senior economist at UCLA Anderson School of Management. ‘The freefall stage in dropping output and employment seems to be over, but the economy is still sick.’

“The prospect of false starts in the data looks quite high in the months ahead. The good news on one day will be reversed by bad news the next, and quite a bit of treading water at other times. The transition state that carries us from recession to growth, in short, will last longer than usual. The evidence will be particularly obvious in the lagging indicators, employment being the most conspicuous example.

“Indeed, the labor market is still shrinking and will probably continue to do so in the months ahead, perhaps followed by an extended bottoming-out period over several quarters. The economy’s capacity to create jobs is likely to come later and be more tepid than has typically been the case following the end of recessions in the post-war era.

“Extending the medical metaphor, Bruce Kasman, chief economist for JPMorgan Chase, predicts in BusinessWeek.com yesterday that ‘the economy will return to growth but not to health’.

“Last week we wrote of the ‘technical end’ of the recession and our expectation that NBER would eventually get around to declaring the downturn’s finish at, well, right about now, give or take a few months. That’s good news relative to the recent standard of economic activity. But the technical demise of the recession isn’t likely to bring easily recognizable good news on Main Street anytime soon.

“As frustrating as that outlook is, it’s even more hazardous than is generally recognized. If we’re facing an unusually long transition period, there are specific risks linked to this abnormal state of affairs. That includes figuring out how and when to adjust monetary policy to balance two conflicting forces: deflation and inflation. As the former gives way, the latter isn’t likely to suddenly pop out and yell ‘boo’. Nonetheless, the future inflation risk isn’t trivial, given the massive liquidity that’s been created of late and the historical lessons that go with fiat currencies.

“Tightening monetary policy too soon may risk choking off a nascent but weak recovery; waiting too long to raise interest rates may give inflation a solid foundation to thrive, an especially troubling thought, given the massive amount of debt incurred over the last 12 months or so.

“Overall, economic analysis faces unusually tough times in reading the incoming data and drawing reasonable conclusions about the implications for the future. As a basic example, our proprietary index of economic indicators, published in each issue of The Beta Investment Report, is currently flashing a robust sign of recovery, although this may be misleading because much of the rise has come from monetary policy and, so far, isn’t convincingly corroborated in the real economy.

“In short, interpreting the economic outlook promises to be quite difficult going forward, much more so than usual. Beware: The risk of false dawns is rising.”

Source: The Capitol Spectator, June 17, 2009.

Financial Times: Fed faces key policy decisions
“The sharp increase in both US bond yields and mortgage rates presents the Federal Reserve with two key decisions next week: whether to increase its purchases of Treasuries and whether to push back against expectations of early interest rate rises.

“With the US central bank unlikely to authorise large increases in Treasury purchases, the debate is between stopping at the declared $300 billion, or increasing this total modestly to enable a gradual phase-out.

“Some Fed officials think there could be merit in redirecting some money slated for purchases of mortgage-related securities towards Treasury purchases - giving it more latitude in this market without increasing overall purchases.

“Meanwhile, the Fed is likely to reiterate that it expects to keep rates near zero for an ‘extended period’, challenging market expectations of early tightening. But it will also repeat - and might sharpen - the message that it is not tied to any course of action.

“Fed hawks are getting edgy. ‘As the economy recovers, even at a modest pace, resource demands will begin to increase,’ Tom Hoenig, president of the Kansas City Fed, said on June 3. ‘At this point the current level of monetary accommodation will need to be withdrawn.’

“But some Fed officials highlight the low level at which activity is stabilising. ‘Not enough attention is being paid to how much ground we will need to cover before we return to our pre-recession level of activity,’ said Sandra Pianalto, president of the Cleveland Fed, on June 4.

“The Fed leadership - which puts considerable weight on spare capacity - almost certainly shares this view. Officials probably do not expect to raise rates late this year or early next, assuming sub-trend growth, projected drag as the fiscal stimulus fades and the phasing out of some financial market programmes first. However, the statement may accommodate some of the hawks’ concerns.”

Source: Krishna Guha, Financial Times, June 14, 2009.

MoneyNews: Prechter - US likely to lose AAA rating
“Technical analyst Robert Prechter on Monday said he sees the United States losing its top AAA credit rating by the end of 2010, as he stuck by a deeply bearish outlook on the US economy and stock market.

“Prechter, known for predicting the 1987 stock market crash, joins a growing coterie of market heavyweights in forecasting the United States will lose its top credit rating as the government issues trillions of dollars in debt to fund efforts to bail out the economy.

“Fears about the long-term vulnerability of the prized US credit rating came to the fore after Standard & Poor’s in May lowered its outlook on Britain, threatening the UK’s top AAA rating. That move raised fears that the United States could face a similar risk, with the hefty amounts of government debt issued in both countries to pay for financial rescues causing budget deficits to swell.

“Prechter, speaking at the Reuters Investment Outlook Summit in New York, said he sees investors’ confidence in an economic rebound fading, a trend that will drag the S&P 500 stock index .SPX well below the March 6 intraday low of 666.79 by the end of this year or early next.

“‘There will be a leg down in stock prices, and it will affect all other areas,’ including corporate bonds and commodities, said Prechter, who is executive officer at research company Elliott Wave International, based in Gainesville, Georgia.

“Prechter, who is known for his bearish views, has repeatedly forecast a steep decline in stocks this year, even as the stock market has rebounded from 12-year lows set in March as optimism about an economic recovery has risen.

“Despite the government and Federal Reserve’s massive rescues for financial companies and securities markets, Prechter expects credit markets to clam up again as they did in the first phase of the global financial crisis and for the US economy to sink into a depression.

“The economy ‘is obviously heading toward a depression’, despite the government’s efforts to dodge one, said Prechter.”

Source: MoneyNews, June 16, 2009.

Asha Bangalore (Northern Trust): Index of Leading Indicators suggests worst is over
“The Conference Board’s Index of Leading Economic Indicators (LEI) rose 1.2% in May after a revised 1.1% increase in the prior month. This is the best back-to-back performance of the index since the November-December 2001 period. On a year-to-year basis, the index declined 1.76%, the smallest drop since December 2007.

“The bottom for the year-to-year change appears to have occurred in March 2009 (-4.0%), which is subject to revision. On a quarterly basis, the trough of the year-to-year change of the LEI is probably the first quarter of 2009 (-3.91%), also subject to revision. The 3-month moving average of the index per se hit a low in March 2009 (98.2), with the latest 3-month moving average at 99.03. The 6-month change of the LEI was positive for the first time in two years. The main message from these numbers is that an economic recovery is not too far away.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, June 18, 2009.

Asha Bangalore (Northern Trust): Factory production and operating rate remain problematic
“Industrial production fell 1.1% in May after a downwardly revised 0.7% drop in April. Output at the nation’s utilities and the mining industry fell 1.4% and 1.1%, respectively. Excluding these two sectors, factory production declined 1.0%, led by a 7.9% plunge in production in the auto industry. Production in the high-tech sector was down 0.9% in May.

“The operating rate of the factory sector at 65% in May is the lowest in the post-war period. The historically low operating rate of the factory sector offers support to maintain the current easy monetary policy stance of the Fed for an extended period.”

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

Casey’s Charts: Unemployment rate with and without the recovery plan
“This chart from innocentbystander.net clearly shows Team Obama’s projections in the American Recovery and Reinvestment Plan are overly optimistic. May’s 9.4% unemployment rate, a 25-year high, far exceeded expectations. But don’t worry, your tax dollars are hard at work.

“About 1.6 million jobs were shed since the stimulus bill was passed in February, while the roughly $44 billion borrowed and spent from the recovery act has ’saved or created 150,000 jobs’, claims the White House.

“As the president repeats his tales of an improving economy and spending our way back to prosperity, perhaps it’s time to start reading between the lines.”

Source: Casey’s Charts, June 16, 2009.

Asha Bangalore (Northern Trust): Housing Starts - turning the corner?
“Home builders broke ground to construct more homes in May, both multi-family and single-family homes, compared with April. Housing starts increased 17.2% to an annual rate of 532,000 after posting a 12.9% drop in April and a 9.2% decline in March. The headline number reflects swings in the multi-family sector in both April (-49.4%) and May (+61.7%).

“The 7.9% jump in permits issued for single-family homes and the fact that it is the third monthly increase in the last four months strengthens the bullish outlook gleaned from production of new homes.”

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

Asha Bangalore (Northern Trust): Significant improvement in current account deficit
“The current account deficit of the US economy was $101.5 billion in the first quarter from $154.9 billion in the previous quarter. This is the smallest deficit since the fourth quarter of 2001. The current account deficit as a percentage of GDP fell to 2.88%, the smallest in ten years.

“The deficit on goods declined nearly $55 billion from the fourth quarter of 2008 to $124.04 billion in the first quarter. This is the single largest quarterly narrowing of the deficit on goods on record.

“The significant improvement of the current account deficit places a smaller burden for raising funds from capital inflows. However, the large increase in the federal budget deficit requires the capital to continue flowing.

“Foreign owned assets (net capital inflows) declined $78.1 billion in the first quarter, following a decrease of $11.9 billion in the fourth quarter of 2008.”

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

Asha Bangalore (Northern Trust): Subdued inflation data leaves room for Fed
“Inflation is not and will not be a top priority in Fed policy decisions in the near term. Inflation is a lagging economic indicator which peaks long after a recession is underway and gathers steam long after an expansion is visible. A convincing economic recovery and strong expectations of a growing economy are necessary for the Fed to consider suitable actions to prevent inflation.

“At present time, the enormous slack in the economy supports expectations of subdued inflation data, which is what we see at the moment. In May, the Consumer Price Index (CPI) edged up 0.1% after a steady reading in the prior month. The CPI is down 1.3% from a year ago, the largest drop since April 1950, mostly due to the sharp 27.3% drop in energy prices. The energy index rose 0.2% after posting declines in March and April. Food prices fell 0.2%, the fourth monthly decline.”

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

Asha Bangalore (Northern Trust): Higher prices for energy and tobacco lift Wholesale Price Index
“The Producer Price Index (PPI) of Finished Goods rose 0.2% in May, following a 0.3% gain in the prior month. The 2.9% jump in the energy price index reflecting a 13.9% increase in gasoline prices and higher prices for heating oil combined with a 0.7% increase in cigarette prices led to an increase in the overall PPI. However, food prices fell 1.6% in May, following a 1.5% increase in April. Excluding food and energy, the core PPI of finished goods price index fell 0.1% in May, putting the year-to-year increase at 3.0%. The peak year-to-year increase of the core PPI was 4.7% in October 2008.”

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

CNBC: Marc Faber - hyperinflation looming
“Why the US has a good chance of hyperinflation, with Marc Faber, ‘The Gloom, Boom, & Doom Report’ editor and CNBC’s Erin Burnett.”

Source: CNBC, June 19, 2009.

Reuters: US credit card defaults rise to record in May
“US credit card defaults rose to record highs in May, with a steep deterioration of Bank of America Corp’s lending portfolio, in another sign that consumers remain under severe stress.

“Delinquency rates - an indicator of future credit losses - fell across the industry, but analysts said the decline was due to a seasonal trend, as consumers used tax refunds to pay back debts, and they expect delinquencies to go up again in coming months.

“‘I find it hard to believe that it is really a trend. You need to see stabilization in unemployment before you see anything else,’ said Chris Brendler, an analyst at Stifel Nicolaus. ‘It is too early to see some kind of improvement.’

“Bank of America Corp - the largest US bank - said its default rate, those loans the company does not expect to be paid back, soared to 12.5% in May from 10.47% in April.

“The bank is paying the price of expanding rapidly in recent years and of holding one of the highest concentrations of subprime borrowers among the top card issuers, analysts said.

“In addition, American Express Co, which accounts for nearly a quarter of credit and charge card sales volume in the United States, said its default rate rose to 10.4% from 9.9%, according to a regulatory filing based on the performance of credit card loans that were securitized.

“Citigroup - the largest issuer of MasterCard branded credit cards - reported credit card chargeoffs rose to 10.5% in May from 10.21% in April.

“Credit card losses usually follow the trend of unemployment, which rose in May to a 26-year high of 9.4% and is expected to peak over 10% by the end of 2009.”

Source: Juan Lagorio, Reuters, June 15, 2009.

Fox Business: Mortgage and credit delinquencies climb
“Perspective on the state of the credit and lending market from TransUnion Director of Consulting & Strategy Ezra Becker.”

Source: Fox Business, June 17, 2009.

Gretchen Morgenson (The New York Times): Debts coming due at just the wrong time
“To get a fix on how much work remains to be done, consider the substantial amount of short-term debt coming due at financial companies in the next year or two. As you absorb these figures, keep in mind that many of the entities that bought this debt when it was issued aren’t around now - they’ve either left the market or are gone, casualties of the crisis.

“As a result, they’re not around to step up and buy the debt again. So issuers can’t roll it over. They’ll be forced to buy back the debt, at a time when they’re already wallowing in other forms of troublesome debt and short on liquidity.

“Barclays Capital has analyzed financial company debt among US institutions coming due over the next decade. During the rest of the year, for example, roughly $172 billion in debt will mature; in 2010, an additional $245 billion comes due. That amounts to about $25 billion a month in debt rolling into a market with a shortage of buyers willing to invest in it.

“Of the $172 billion coming due by year-end, Barclays says, $123 billion was floating-rate debt. And of the $245 billion maturing next year, some $141 billion pays a variable rate.

“This much is evident: it is too soon to celebrate the end of the banking crisis. Less debt is the answer, but shrinking balance sheets is hard.”

Source: Gretchen Morgenson, The New York Times, June 13, 2009.

China Daily: China’s holding of US bonds drops first time in 11 months
“For the first time in 11 months China’s holdings of US Treasury bonds fell - to $763.5 billion in April, US government data showed.

“The figure, down from March’s $767.9 billion, was the lowest since June 2008.

“The decline in the China holding ’seems to stem from net selling of Treasury bills’, said Chirag Mirani of Barclays Capital Research.

“On the whole, foreigners decreased holdings of Treasury bills by $44.5 billion in April, the data showed.

“As the largest holder of US Treasury bills, which are crucial to funding Washington’s multi-trillion-dollar recovery plans, China had expressed concerns recently over what it called the safety of its dollar-linked assets.

“US Treasury Secretary Timothy Geithner traveled to Beijing about two weeks ago to reassure Chinese leaders, saying their money is ‘very safe’ despite the US budget deficit, which he pledged to cut.

“The United States has been running large budget shortfalls since the tenure of Democratic President Barack Obama’s Republican predecessor George W. Bush.

“Obama administration officials estimate a deficit of $1.841 trillion for the 2009 budget and $1.258 trillion in 2010.”

Source: China Daily, June 16, 2009.

BCA Research: US corporate credit quality warning
“Corporate credit quality remains weak according to our indicator, based on a composite of six key financial ratios from the non-financial corporate sector.

“The latest update to our Corporate Health Monitor confirms that the credit quality of the non-financial corporate sector has been in decline since the fourth quarter of 2006. Its persistent warning of weak balance sheet fundamentals in the current cycle should not be taken lightly. True, corporate spreads have narrowed sharply in recent months, but this largely reflects a reduction in the premium for liquidity and other factors unrelated to credit risk. The boost to corporate bond performance from this source is largely over. Any further compression in spreads must now come from a decline in corporate credit risk, which may take some time to unfold.

“Bottom line: We expect a significant deceleration in the relative outperformance of corporate bonds, until the outlook for corporate profits begins to improve.”

Source: BCA Research, June 16, 2009.

Dhaval Joshi (RAB Capital): Pricing debt
“When it comes to pricing debt, investors who are overly focused on the huge levels of government borrowing are missing the point, says Dhaval Joshi, economist at RAB Capital.

“Government debt may be ballooning but corporate and household debt is shrinking, he says. ‘So the total stock of debt in the economy is not rising. And the price of debt should depend on the supply of all debt, not just part of it.’

“Mr Joshi notes that one of the big holes that US government borrowing must fill has been left by the shutdown of the shadow banking sector.

“‘Between 2004 and 2007, over $4,000 billion of mortgages were lent in the US. However, most of this did not come from the conventional banking system but from the shadow system, where mortgages were packaged into securities and sold on, rather than held on the banks’ own books.’

“These securitised mortgages accounted for $1,900 billion of lending, equal to 13% of US GDP, he says. This mountain is now collapsing, as borrowers default and the underlying collateral (housing) plunges. Whether debt is reduced by default or repayment, it is a drag on demand, as spending power or net worth falls.

“‘Governments must offset this with more debt, effectively acting as borrower of last resort. Markets should not focus just on government issuance, but look at the bigger debt picture. If they do, the recent rise in bond yields may be short-lived.’”

Source: Dhaval Joshi, RAB Capital (via Financial Times), June 18, 2009.

Bespoke: Barron’s Roundtable head scratcher
“This weekend’s Barron’s provided a mid-year update to its annual ‘Roundtable’ report, and as the title of the article suggested, the consensus among panelists was that the market has come ‘too far, too fast’. While that view is certainly not a minority opinion, we are confused with the logic behind it. As noted in the article, ‘Many predicted at our January 5 confab that the stock market, oversold and under-loved, was due for a major bounce. Now they think stock prices have overshot corporate fundamentals and a correction is in order.’

“So on January 5, when the S&P 500 was at 927, the members of the Barron’s Roundtable were looking for a major bounce. Now, with the S&P 500 up 2% since then, they think the market has come too far, too fast?”

Source: Bespoke, June 15, 2009.

Roubini (Yahoo, Tech Ticker): Nouriel Roubini’s three reasons why stocks are bound to fall
“Believe it or not, Nouriel Roubini - professor at NYU’s Stern School and Chairman of RGE Monitor - has some good news: aggressive government intervention prevented a great depression.

“The bad news: Roubini says the stock market rally is long in the tooth. (They don’t call him Dr. Doom for nothing.) He points to three factors that will lead to a correction in the near future:

“1. Volatility and uncertainty will increase. Note: the CBOE Volatility Index is currently down more than 50% since the October panic.

“2. Corporate earnings will disappoint. He says the market is pricing in a robust ‘V’-shaped recovery. However, when earnings miss expectations, buyers will turn into sellers, as was the case this week with FedEx.

“3. The global financial system still faces serious problems. Roubini thinks unemployment will rise to 11%, bank losses will increase across the globe, and the recession in Europe will get worse.

“The silver lining: Roubini isn’t convinced the market will retest the lows.”

Source: Yahoo, Tech Ticker, June 19, 2009.

David Fuller (Fullermoney): How much of a pullback lies ahead
“I maintain that new lows for Wall Street and most other OECD country stock markets in March 2009 were not dissimilar to the October 2002 trough during the base building process following the previous bear market. Monetary policy was accommodative back then and a strong rally followed to retest an earlier high within the developing base. Most of those gains were subsequently retraced during the build-up to the invasion of Iraq, when everyone feared that Saddam Hussein had weapons of mass destruction.

“The rally commencing in March 2009 occurred against a background of record monetary stimulus and it reflected a belated acceptance that the world was not going to experience a 1930s style depression after all. This was not exactly a conversion on the road to Damascus because a number of leading emerging (progressing) markets such as China and Chile had bottomed in October and were already in uptrends as the US’s S&P 500 Index began to recover from its lows.

“Something very similar happened during the 2001 to 2003 base building process because leading markets at the time, such as India and Thailand had either not retested their lows in 2002, or were in a much stronger position as they completed bases shortly after the invasion of Iraq commenced.

“The S&P 500 rally from its March 2009 low was much stronger than its 2002 rally from the October trough. I attribute this to a realisation that the world was not ending, plus the market inflating success of quantitative easing, against the background of record cash levels for institutional investors.

“So, with the S&P 500 losing upside momentum, how much of a pullback might we see this time, considering that there is no obvious equivalent to the invasion of Iraq for investors to worry about, although the economic background is arguably much worse?

“I suspect we will see a bigger pullback, which lasts longer than most people expect. Technically, the stalk-like rally looks unbalanced compared to the earlier portion of the base formation, although I appreciate that this may seem like an esoteric point to some of you. Many of the optimists are recent converts, sucked in by a momentum move. I suspect that some of those ‘green shoots’ of spring will prove to have been no more than a mirage as a hot summer progresses.

“The risk, I maintain, is that we see a multi-month correction, of at least 10% but which could be 20% or more for some indices. Needless to say, this would weigh on sentiment. The good news is that it should ensure no change in monetary policy, which remains extremely accommodative. I also think that for the better performing emerging (progressing) markets to date, corrections may be little worse than mean reversion in terms of the 200-day moving averages.”

Source: David Fuller, Fullermoney, June 16, 2009.

Bespoke: Market breadth pulls in
“The percentage of stocks in the S&P 500 above their 50-day moving averages fell to its lowest level in two months after yesterday’s [Tuesday's] decline. As of this morning, 71% of the stocks in the index were trading above their 50-days.

“Health care, both consumer sectors, and telecom have seen the biggest decline in breadth, while the utilities sector has increased recently up to 91%. This increase in utilities breadth indicates that investors are rotating money into the most defensive sector as the market takes somewhat of a breather.”

Source: Bespoke, June 16, 2009.

Credit Suisse: Market rally is more than an illusion
“The stock market rally which started in March is still continuing. And the signals from the financial sector are far less dramatic than some months ago. We asked Giles Keating, Head of Global Research at Credit Suisse, how bright the situation in the financial markets really is.”

Click here for the article.

Source: Credit Suisse, June 15, 2009.

MoneyNews: Gabelli bullish on economy, stocks
“Mario Gabelli, chief investment officer at Gamco Investors, sees rosy times ahead for the economy and stock market.

“‘Business is getting better, coming back to some normalcy,’ he told CNBC.

“‘Look at the consumer wealth,’ Gabelli says. ‘We all know about the housing, we all know about the stock market.’

“Replenishment of dwindled inventories will buoy the economy, he says. ‘And then we get the stimulus checks,’ Gabelli adds.

“‘And then we have the global economy. China is going to work. (Its fiscal stimulus package) of $585 billion is going to work.’

“In the US, ‘the economy … is going to pick up slowly but surely. And 2010 and 2011 will be pretty good,’ Gabelli says.

“As for the stock market, we’re now at about 8,500 on the Dow Jones Industrial Average, he notes. ‘Twelve years ago it was 8,500 … In 10 years, 8,500 will look like a bargain, and it’s a bargain today.’

“The best way to make money in the coming bull market: ‘Plain old stock picking,’ Gabelli says.

“‘You look at specific stocks. Do I want to look at the broad market, do I want to look at fancy engineering?’ he asks rhetorically.

“‘We’re back to old simple things, plain old stock picking. What makes money?’”

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

MoneyNews: Birinyi - the bull is here, get on
“Those who say this isn’t a bull market are just plain wrong, says Birinyi Associates CEO Laszlo Birinyi, who expects the market to continue to climb for the next couple of years.

“‘Anxiety is in the part of the people who have missed the rally,’ Birinyi told CNBC. ‘And they’re trying to talk the market down so that they can get back in.’

“‘The market can adjust and adapt,’ Birinyi says. ‘This time it’s taken a little bit longer.’

“Right now, Birinyi says, the market is in a phase of getting better, which ‘makes it hard to pick the best of the best’.

“He advises investors to buy individual stocks, not funds, especially those of exchange-traded variety.

“‘We find that (on) 25% of the trading days, even the SPDRs don’t track the S&P by 20 basis points or more.’

“Birinyi also finds exchange-traded funds (ETFs) ‘terribly inefficient’, noting that returns for investors who bought an oil ETF in the beginning of the year are now flat while oil as a commodity is up nearly 40%.”

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

Barry Ritholtz (The Big Picture): Are stocks cheap?
“Not really - but how ‘not cheap’ depends upon how you measure earnings and handle one time write downs.

First up: NDR:

“‘Ned Davis Research looked at market valuations after bear markets since 1929. The firm found that in the first three months after bear markets, the market’s P/E tends to climb by about 10%. And the multiple has traditionally expanded 22% in the first six months after a major market downturn.

“But since March 9, when the recent rally began, the P/E of the S&P 500 has jumped nearly 40%. Such a surge in P/E ratios may be warranted if the recession ends soon and profits recover quickly. While there are some signs that the worst of the recession may be behind us, few analysts expect profits to stage a major rebound. And, of course, it’s still unclear whether the recession and the bear market have ended.’

“The article also notes, however, that stocks are not terribly cheap ex-one time write-downs. If we look at just operating earnings - excluding one-time write-offs - the P/E of the S&P500 is 22, hardly bargain priced.

“NDR also looks at P/E in an interesting way - instead of just adding up all the SPX earnings them dividing into price, they assess each individual stock P/E ratio. Then, they find the median P/E for the group - the midpoint, with 250 stock P/Es above and 250 stock P/Es below.

“The result? The median P/E of the S&P 500 is 15.6 - well above the median P/E of 12 in March, but below the market’s historical median of 16.5.”

Source: Barry Ritholtz, The Big Picture, June 14, 2009.

Barry Ritholtz (The Big Picture): Looking at corporate profits
“Ron Griess of The Chart Store takes a close look at SPX profitability and comes away unimpressed.”

Source: Barry Ritholtz, The Big Picture, June 17, 2009.

Yahoo: Medvedev calls for new reserve currencies
“Russian President Dmitry Medvedev says the world needs new reserve currencies.

“Medvedev told a regional summit Tuesday that the creation of new reserve currencies in addition to the dollar is needed to stabilize global finances.

“Medvedev has made the proposal before. It reflects both the Kremlin’s push for greater international clout and a concern shared by other countries that soaring US budget deficits could spur inflation and weaken the dollar.

“Airing it at a summit meeting underlined the challenge to US clout.

“Medvedev spoke at a summit of the Shanghai Cooperation Organization, which includes China and four Central Asian nations.”

Source: Yahoo, June 16, 2009.

MoneyNews: Russia, China buy dollars, despite trash talk
“Recent talk from Russian and Chinese officials showing wariness about their huge dollar holdings and suggesting an alternative reserve currency has roiled financial markets.

“But while the Russians and Chinese are walking the walk, they aren’t talking the talk.

“Brazil, Russia, India and China (BRIC, as Goldman Sachs termed them) went on the biggest dollar-buying binge in eight months during May, adding $60 billion to their reserves. That’s according to data compiled by central banks and strategists, cited by Bloomberg.

“Brazilian officials have trashed the dollar just like the Chinese and Russians.

“So why the hypocrisy?

“First, these nations are protecting their exports. A stronger dollar makes their goods cheaper in dollar terms, boosting the exports.

“Second, the BRICs already have huge reserves of dollars, so a drop by the dollar would devalue their own holdings. The more they sell dollars, the less their remaining dollars will be worth.

“And finally, big dollar sales by the BRICs could exacerbate the global financial crisis.

“‘It would be shooting yourself in the foot to sell US assets and move away from dollars too quickly,’ Mitul Kotecha, Calyon’s head foreign exchange strategist, tells Bloomberg.

‘As much as we are seeing in terms of rhetoric, the central banks have so much exposure they will be very careful.’

“Most experts agree that the dollar isn’t going anywhere. ‘I think the dollar is the dominant currency for a while to come,’ hedge fund legend George Soros told CNBC.”

Source: Dan Weil, MoneyNews, June 12, 2009..

Bespoke: Commodity snapshot
“Even after a pullback in portions of the commodity sector over the last couple of weeks, most are still up year to date. As shown below, copper is up the most with a gain of 63.58%, and oil is not far behind at +60.85%. Platinum, silver, orange juice, coffee, and gold are the other commodities that are up year to date. Corn is down 5.76%, wheat is down 11%, and natural gas is still down the most at -26.98%.”

Source: Bespoke, June 19, 2009.

David Fuller: Timing gold’s next significant move?
“We have maintained a cautious view on gold and other precious metals since the key day reversal on 3 June. However the short-term overbought condition has been replaced by a short-term oversold reading, as one can see on the stochastics indicator, which in my view is useful after temporary contra-trend reactions, although it can be early.

“More importantly, gold’s last rally towards $1,000 had been flattered by the USD’s weakness. We know this because gold had not rallied against all currencies, which we look for as a signal that a major move is developing. Therefore Fullermoney has been looking for a consolidation, in line with quiet seasonal factors, which would balance bullion’s big medium-term pattern, from March 2008 to the present. Given the comparatively quiet nature of gold’s pullback over the last three weeks, I doubt that the previous reaction low near $865 will be tested.

“We have been looking for a reaction to the mid to lower $900 region. Consequently I now regard gold as being back in an accumulation zone, prior to renewed strength in 4Q 2009 and 1Q 2010. However the reaction low during this short-term consolidation is likely to come sooner. The clearest signal would be an upward dynamic.”

Source: David Fuller, Fullermoney, June 19, 2009.

Bloomberg: Pickens says oil will average $80 to $85 a barrel
“Crude oil will rise to an average $80 to $85 a barrel in the coming year as inventories decline, billionaire investor T. Boone Pickens said in Calgary today.

“Natural gas will average about $7 per million British thermal units, Pickens, 81, the founder and chairman of Dallas-based BP Capital, said at an event sponsored by the city’s Chamber of Commerce. Falling inventories will also lift gas, he later told reporters.

“‘I bought a 12-month gas strip for $6.02 the other day and I expect to make $1 on it,’ Pickens said during the presentation to about 700 people.

“The hedge-fund manager is promoting an energy plan that relies on US-produced natural gas to cut the country’s dependence on foreign oil.

“‘In this market you’re going to see oil inventories work off,’ Pickens said. ‘There’s no question what the Saudis want; they want a balanced market and they want $75 minimum for their oil.’”

Source: Reg Curren, Bloomberg, June 17, 2009.

Financial Times: World Bank raises China GDP forecast
“The World Bank raised its forecast for China’s 2009 gross domestic product growth to 7.2% on Thursday, saying the apparent success of the government’s stimulus package had improved the outlook from March - when the bank predicted 6.5% growth for the year.

“But the World Bank said a sustainable recovery was not yet assured, in spite of the government’s Rmb4,000 billion ($590 billion) fiscal stimulus, and that Beijing might have little room for additional measures this year.

“‘Government-influenced investment will strongly support growth in 2009. However, there are limits to how much and how long China’s growth can diverge from global growth based on government-influenced spending,’ said Ardo Hansson, the bank’s lead economist for China. ‘It is too early to say a robust, sustained recovery is on the way.’

“With government revenues falling and expenditure rising rapidly, the bank predicts that China’s fiscal deficit will climb to almost 5% of GDP this year, well above the 3% budgeted by Beijing and a large jump from last year’s deficit of 0.4%.

“‘On current projections it is not necessary, and probably not appropriate, to add more traditional stimulus in 2009,’ said Louis Kuijs, senior economist and main author of the quarterly update released on Thursday. ‘One reason is that the fiscal deficit is on course to be significantly higher than budgeted this year and additional stimulus now would reduce the room for stimulus in 2010.’

“Market-based investment and consumption are unlikely to rebound until the rest of the world starts to recover convincingly and the collapse in Chinese exports is reversed. Chinese exports fell about a quarter in the first five months of the year from the same period a year earlier.

“China’s economy grew 6.1% year-on-year in the first quarter, faster than any other leading country but well below the government’s full-year target of 8%.

“The World Bank said it expected China’s economy to grow 7.7% in 2010, a much slower pace than the 13% reached in 2007 and the 9% rate of last year.

“The bank estimates a full 6 percentage points of this year’s 7.2% GDP growth will come from investment and spending either carried out by the government or directly influenced by it.”

Source: Jamil Anderlini, Financial Times, June 18, 2009.

Albert Edwards (Société Générale): China bulls will be let down
“The wholehearted belief in China’s economic recovery could turn out to be the biggest disappointment yet for investors, warns Albert Edwards, global strategist at Société Générale.

“‘The ongoing enthusiasm for all things China reminds me of the way investors were almost totally blind to the fact the US growth miracle was built on sand,’ he says.

“‘We saw this same investor mania 13 years ago with the Asian Bubble, which the consensus thought was a growth miracle.’

“At the heart of Mr Edwards’ scepticism lies doubts about the accuracy of official data releases.

“‘The Chinese data is derided by economic commentators,’ he notes. ‘Many have highlighted that GDP growth seems inconsistent with other data, such as electricity output. Yet few dare to point out that the emperors’ clothes might be absent - and when they do, they are met with robust official rebuttals.’

“‘That is not to say that the fiscal stimulus has not had a beneficial effect on Chinese activity this year. What I question is the quaint notion that the Chinese economy can grow at a respectable rate when the rest of the world is in a deep recession.

“‘I believe the bullish group-think on China is just as vulnerable to massive disappointment as any other extreme of bubble nonsense I have seen over the last two decades.

“‘The fall to earth will be equally as shocking.’”

Source: Albert Edwards, Société Générale (via Financial Times), June 17, 2009.

Charlie Rose: Iranian election results
“Iranian election results with Nicholas Burns, Flynt Leverett, Abbas Milani and Hooman Majd.”

Source: Charlie Rose, June 15, 2009.

You Tube: George Friedman - Iranian elections, Israel and the United States
“In the latest instalment of the Stratfor Insights video series, CEO George Friedman discusses the tense future of the Middle East following the recent Iranian elections. With Israel offering a Palestinian state on terms that are unacceptable to the Palestinians, and freshly re-elected Iranian President Mahmoud Ahmadinejad expected to continue his hard-line policies, how President Barack Obama moves forward merits close observation.”

Source: You Tube, June 15, 2009.

Tags: Asset Classes, Barack Obama, BRIC, Commodities, David Fuller, David Rosenberg, Deflation, Dmitry Medvedev, Earnings Season, Economic Recovery, Emerging Markets, ETF, Fragility, Gluskin Sheff, Gold Bullion, Government Bonds, government spending, High Yield Corporate Bonds, Incoming Data, India, oil, precious metals, Regional Summit, Reserve Currencies, Russian President, Second Quarter Earnings
Posted in Emerging Markets, Gold, Markets | Comments Off

Bespoke: BRIC countries continue to surge

Sunday, May 31st, 2009

Bespoke Investment Group, who do a brilliant job charting, have put together the year-to-date look at BRICs vs. S&P500 [below].

Are emerging markets equities decoupling once again from developed markets equities?

It may still be too soon to tell, however, a recognition of the underindebtedness of BRIC-based companies and consumers, healthy banking systems, sound fiscal and monetary policies, as well as a resurgence in government spending and domestic consumption could be behind the recovery which has taken place in Emerging Markets since last November’s lows, which began 4 months sooner than the equity market recovery in March in the G-7.

Oil’s surging recovery from the $30s to $66 [Friday], and the weakening Greenback [which has been good to commodities' prices] have provided a further boost to Russia and Brazil’s commodity complex.

A landslide general election victory for India’s incumbent Congress [Liberals] coalition government has cleared the way politically for India to move forward on much needed reforms for at least the next 5 years.

China’s economic rebalancing, via its $600-billion stimulus appears to be trickling very solidly into the corporate sector and the economy, much faster than anticipated.

Time will tell.

Russia’s RTS stock index was up another 3.2% today [Friday], while China was up 1.71% and India was up 2.3%. The BRIC (Brazil, Russia, India, China) countries continue to surge higher in 2009, as they’ve far outpaced stock markets of so-called ‘developed’ countries. Below we highlight their year to date performance compared to the S&P 500. As shown, Russia is up a whopping 72.1% this year, followed by India at 51.6%, China at 44.6%, and Brazil at 39.7%. The S&P 500 is up 0.22%.

Source: Bespoke, May 29, 2009.

Tags: Banking Systems, BRIC, Bric Countries, BRICs, Brilliant Job, Coalition Government, Commodities Prices, Corporate Sector, Domestic Consumption, Election Victory, Emerging Markets, Fiscal And Monetary Policies, government spending, Greenback, India, India China, Investment Group, Last November, P500, Rebalancing, Stock Index, Stock Markets
Posted in Emerging Markets, Markets | No Comments »

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

Sunday, December 14th, 2008

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

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

Source: Nick Anderson, Slate

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Yahoo Finance, December 12, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That’s the way it looks from Cape Town.

Source: Dave Granlund

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

Source: YouTube, December 6, 2008.

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

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

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

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

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

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

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

FORTUNE TELLER: Peter Schiff
President of Euro Pacific Capital

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

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

FORTUNE TELLER: Richard Russell
Founder of the Dow Theory Letters

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

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

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

TRACK RECORD
Predicted downturn last year.

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

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

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

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

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

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

Source: CNBC, December 11, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Reuters, December 10, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CNBC: Meredith Whitney - outlook grim for banks

Source: CNBC, December 7, 2008.

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, December 9, 2008.

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

Source: Bespoke, December 9, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bespoke, December 10, 2008.

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

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

Source: Bespoke, December 9, 2008.

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

Source: Bespoke, December 8, 2008.

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

“Consider the following bull points:

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

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

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

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

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

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

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

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

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

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

Click here for the full article.

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

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

Source: Bespoke, December 12, 2008.

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

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

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

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

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

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

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

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

Source: Profit NDTV, December 9, 2008.

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

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

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

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

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

Source: BBC News, December 10, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Financial Times, December 11, 2008.

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

Source: Bespoke, December 10, 2008.

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

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

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

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

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

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

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

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

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

Sunday, November 30th, 2008

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

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

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

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

Source: Daryl Cagle

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Yahoo Finance, November 28, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That’s the way it looks from Cape Town.

Hat tip: Mish (via Live Leak)

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

Source: Big Think, November 2008.

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

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

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

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

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

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

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

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

“Following are excerpts from the interview:

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

Click here for the full article.

Source: Spiegel Online, November 24, 2008.

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

Click here for the article.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TOTAL: $3.92 trillion

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

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

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

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

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

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

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

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

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

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

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

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

Source: Breitbart, November 22, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: ABC News, November 22, 2008.

Fox Business: Wilbur Ross on the next Treasury Secretary

Source: Fox Business, November 21, 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Wachovia, November 24, 2008.

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

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

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

“The Reston, Virginia-based company said 8.2 billion dollars was spent online during the first 23 days of November, four percent less than during the same period last year, when 8.5 billion dollars was spent online.

“ComScore forecast that online retail spending for the November-December holiday period will be flat versus year ago, significantly lower than last year’s growth rate of 19 percent.

“‘With consumer confidence low and disposable income tight, the first weeks of November have been very disappointing, with online retail spending declining versus year ago,’ said comScore chairman Gian Fulgoni.”

Source: Breitbart, November 25, 2008.

Asha Bangalore (Northern Trust): Weakness in consumer spending most likely to persist “Nominal consumer spending fell 1.0% in October, while inflation adjusted consumer spending dropped 0.5%. Inflation adjusted consumer spending has declined for five straight months, the longest string of declines since the 1981-82 recession. Based on October data and conservative assumptions about November and December, consumer spending is most likely to post a 4.0% drop in the fourth quarter after a 3.7% decline in the third quarter.

“The 0.3% increase in personal income during October follows a 0.1% gain in September that was affected by hurricanes. Personal saving as a percent of disposable income was 2.4% in October compared with 1.0% in September. A small upward drift in personal saving is emerging.”

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

Standard & Poor’s: S&P/Case-Shiller - national trend of home price declines continues “Data through September 2008, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, shows continued broad based declines in the prices of existing single family homes across the United States, a trend that prevailed since 2007.

“The decline in the S&P/Case-Shiller US National Home Price remained in double digits, posting a record 16.6% decline in the third quarter of 2008 versus the third quarter of 2007. This has increased from the annual declines of 15.1% and 14.0%, reported for the 2nd and 1st quarters of the year, respectively.

“‘The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals,’ says David Blitzer, Chairman of the Index Committee at Standard & Poor’s.”

Source: Standard & Poor’s, November 25, 2008.

The Wall Street Journal: US agrees to rescue struggling Citigroup “The federal government agreed Sunday night to rescue Citigroup by helping to absorb potentially hundreds of billions of dollars in losses on toxic assets on its balance sheet and injecting fresh capital into the troubled financial giant.

“The agreement marks a new phase in government efforts to stabilize US banks and securities firms. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to help shoulder bad assets, on a targeted basis, from specific institutions.

“Citigroup is one of the world’s best-known banking brands, with more than 200 million customer accounts in 106 countries. Its plunging stock price threatened to spook customers and imperil the bank.

“If the government’s rescue plan is a success, it could help bring stability to the entire financial system. If it doesn’t, even deeper doubts about the industry’s future could spread.

“Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies - the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. - will take on any additional losses, though Citigroup could have to share a small portion of additional losses.

“The plan would essentially put the government in the position of insuring a slice of Citigroup’s balance sheet. That means taxpayers will be on the hook if Citigroup’s massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour.

“In exchange for that protection, Citigroup will give the government warrants to buy shares in the company.

“In addition, the Treasury Department also will inject $20 billion of fresh capital into Citigroup. That comes on top of the $25 billion infusion that Citigroup recently received as part of the broader US banking-industry bailout.”

Source: David Enrich, Carrick Mollenkamp, Matthias Rieker, Damian Paletta and Jon Hilsenrath, The Wall Street Journal, November 24, 2008.

Paul Kedrosky (Infectious Greed): Citigroup - bad bank to create bad bank incubator “I know it isn’t precisely what this headline means - ‘bad bank’ is a euphemism in bailout circles for walling off from one another functional and non-functional parts of banks - but I still like this from the WSJ today.

“To my way of thinking, if we’re interested in creating bad banks, it’s worth knowing that Citi is a veritable ‘bad bank’ incubator.”

Source: Paul Kedrosky, Infectious Greed, November 23, 2008.

CNBC: Mobuis - attraction of Treasurys will wane with lower yields “Despite continued woes in the US economy, the greenback has seen an unexpected surge against currencies around the world. As investors become ever more risk averse, emerging markets are bearing the brunt of a flight to safety.

“But Mark Mobius, executive chairman of Templeton Asset Management, sees a reversal around the corner.

“‘As everyone is rushing into US Treasurys, they need US dollars to do that and have therefore sold everything in sight,’ Mobius told CNBC. ‘This is why emerging markets have gone down, why commodities have gone down as everyone is moving into dollars.’

“But Mobius said that ‘as US Treasury rates go down to 1% or below you will see the attraction of US Treasurys waning’.

“Mobius also believes that emerging markets have learnt a bitter lesson since the Asian Crisis of 1997-1998. ‘One big lesson was ‘don’t borrow in a currency you are not earning in’,’ he said.

“Emerging markets have also curtailed lending and built up foreign reserves, which they can call upon in almost ‘a reversal of 1997 where the emerging markets were debtors, they are now the creditors’, he added.

“But the surge in the greenback has taken a lot of investors by surprise, Mobius said.

“Having learned from the Asian crisis, companies hedged currencies and ‘ironically these hedges have really worked against them in some cases … as they are over-hedged and it went against them as they were expecting the dollar to go weaker and it went the other way,’ he said.”

Source: CNBC, November 20, 2008.

Bespoke: GSE mortgage spreads tighten “The Fed’s actions this morning [Tuesday] have certainly helped to thaw the credit markets so far. As shown below, spreads between 10-year Fannie Mae bonds and the 10-year US Treasury tightened significantly today. While they are certainly moving in the right direction, even after today’s record decline, spreads are still higher today than they were just a little more than two weeks ago.”

Source: Bespoke, November 25, 2008.

Bespoke: 30-Year fixed mortgage rates falling back “Talk of the 30-year fixed mortgage rate falling back below 6% filled the airwaves yesterday [Tuesday], so below we provide a two-year chart of the rate. Even as the Fed funds rate has fallen from 5.5% to 1%, mortgage rates have failed to decline along with it, which hasn’t done much to help the struggling housing market. Economists and investors are hoping that the Fed’s actions yesterday will start pushing mortgage rates lower. This will help ease the credit crisis as banks will become more willing to lend, providing better interest rates for potential homebuyers. 5.81% is better than the 6.4% seen at the start of the month, but the rate could still stand to drop quite a bit.”

Source: Bespoke, November 26, 2008.

Frank Holmes (US Global Investors): Stock market reversal is near “According to research from Thomas Weisel, the S&P 500 has been a ‘Buy’ since that index closed at 800 last Friday, based on its probability models. They say a verification could come in early December, when monthly liquidity figures come out - if there is extreme positive liquidity to accompany the technical ‘Buy’ signal, history shows that on average there’s a six-month price rally of 18.5%.

“Our oscillator tells us that, statistically speaking, the S&P 500 is extremely oversold and thus due for a reversal toward the mean. The chart above shows that the S&P 500 is now down about four standard deviations over 60 trading days, which is a far more dramatic decline than we saw in 1998, when Russia endured a currency crisis and the collapse of the hedge fund Long-Term Capital Management threatened the global financial sector, and in 2001 after the September 11 terror attacks.

“The possible turnaround that we are seeing is not wishful thinking, but it’s not a sure thing, either. Our confidence grows with every positive data point indicating that a reversal is near, and we will continue watching for these indicators …”

Source: Frank Holmes, US Global Investors - Weekly Investor Alert, November 28, 2008.

Eoin Treacy (Fullermoney): Start thinking about stocks to buy “Angst, fear and anxiety are all related emotions which come to the fore when we feel under pressure and begin to doubt our abilities as investors. However, when we see a market fall such as that of the last few months, we have to rein in the temptation to succumb to such emotions. It will prove more profitable over the medium to longer-term, to turn objective about the opportunities we are being presented with sooner rather than later.

“This does not mean one piles into the market with every spare unit of currency right now, but it is a time to begin to think about the shares one wants to own in a recovery environment. From a value perspective there are a number of instruments which have been hit particularly hard and somewhat unjustifiably by the credit / solvency crisis.

“We now need to begin to think more about recovery potential rather than further potential losses. Stocks and corporate bonds are no longer expensive, some are downright cheap. We have not reached the deep value levels seen in the past, but these need not necessarily appear at the numerical low for the market, if they appear at all. However, one looks at the market, given the extent of the fall, this is not a time to become increasingly bearish, but is one in which to make provisions and possible purchases for a recovery scenario.”

Source: Eoin Treacy, Fullermoney, November 27, 2008.

David Fuller (Fullermoney): Watch developments in US rather than invest there “I believe that America’s problems of debt and deficits are worse than for many other countries. More importantly, I will be guided by price charts, which reflect the collective decisions and views of everyone else. In terms of investment appropriateness, my current view is that I would rather watch developments in the US than invest there.

“The credit / solvency crisis is clearly America’s biggest problem at this time. This is not necessarily true for all other countries, although all are obviously affected to a greater or lesser degree by developments in the USA. I suggest that the West’s credit / solvency crisis was only the second biggest problem for Asia’s developing economies.

“Asia’s biggest recent problem, I maintain, was inflation, not least from previously soaring energy and food prices. That crisis, which in comparison was the USA’s second biggest problem, has largely disappeared today. I suspect commodity inflation will not re-emerge for at least the next year or two, subject to supply, global GDP and the USD.

“Consequently, I believe that developing Asia would be in an excellent position for recovery, were it not for the West’s ongoing credit / solvency crisis. Therefore, the worse the USA’s problems become, the more this will be a drag on Asia’s own recovery. Conversely, if the USA somehow avoids a destructive deflation, Asia should still bounce back more quickly.

“I will invest accordingly.”

Source: David Fuller, Fullermoney, November 26, 2008.

Jeffrey Saut (Raymond James): Geithner gotcha “We still think October 10 represented the capitulation ‘lows’. As Barron’s notes, ‘For a bullish spin, though a weak one, the market has not made a significantly lower low since October 10. The word ’significantly’ is important because some major market indexes, including the Nasdaq, have indeed been setting new lows. But the trend, if we can call it that, has been more sideways than decidedly down.

“A better, but still weak, bullish angle comes from trading volume, or the amount of money committed to either the bull or bear side each day. All of the higher volume days that have occurred since October 10 have come on days when prices rose. Theoretically, when prices are going up and volume increases, it means that investors are chasing the market higher. That’s a sure sign of demand. Subsequent declines occurred with lower volume, so we can conclude that the desire to sell was not quite as strong as it was before October 10.”

Source: Jeffrey Saut, Raymond James, November 24, 2008.

Bespoke: Analysts at their least bullish levels ever “While Wall Street analysts are typically known for being overly optimistic, based on at least one measure, they have never been less bullish. According to Bloomberg statistics that track analyst buy, sell, and hold ratings, only 36% of all ratings are currently buys. As the chart below shows, this is the lowest level since at least 1997, and significantly lower than the 75% level we saw in 1997 and 2000. However, since the Spitzer crackdown on Wall Street research and the bursting of the tech bubble, analysts have grown increasingly shy about putting a buy rating on a stock they cover.”

Source: Bespoke, November 25, 2008.

Bespoke: Q3 and Q4 sector earnings growth “With about 96% of S&P 500 companies having reported third quarter earnings, current EPS growth numbers for the quarter should be very close to what the final tally will read. As shown below, four sectors have had negative year over year growth in the third quarter, while six have had positive growth. Financials and consumer discretionary were once again the sectors that brought down the index as a whole. Financials have seen earnings decline by 129.7% in Q3 ‘08 versus Q3 ‘07. Consumer discretionary has seen earnings decline by 41.4%. Telecom and utilities are the two other sectors with negative Q3 earnings growth, and the S&P 500 as a whole currently stands at -18.4%. The energy sector has had by far the largest earnings growth at 57.4% versus the third quarter of 2007. Consumer staples ranks second behind energy at 10.9%, followed by health care, materials, technology, and industrials.

“So what does the fourth quarter look like? Analysts are expecting the S&P 500 to actually show positive year over year earnings growth in the fourth quarter of 4%. This is because the financial sector is expected to show growth of 64.2% due to the fact that Q4 ‘07 was so bad. Utilities, health care, and consumer staples are the other three sectors expected to see earnings growth, while consumer discretionary, materials, energy, telecom, technology and industrials are expected to see earnings declines.”

Source: Bespoke, November 23, 2008.

Naked Capitalism: Cheery chart - no corporate profits for two years during depression “In case you are starting to look to past crises for clues as to how our financial mess might play out, here is a Great Depression factoid (from Levy Forecast, November 2008):

“Note that the report itself argues that the US will have a ‘contained’ depression, with deep recession conditions for a protracted period and an anemic recovery. It does not believe the zero operating profits pattern of the Great Depression will be repeated.”

Source: Naked Capitalism, November 23, 2008.

Bloomberg: Hambro sees “great entry points” for commodity stocks “Evy Hambro, who manages the world’s largest mining and gold funds at BlackRock, talks with Bloomberg about the outlook for commodities and mining stocks.”

Source: Bloomberg, November 21, 2008.

Bloomberg: Marc Faber says gold is most precious asset

Source: Bloomberg, November 25, 2008.

Ambrose Evans-Pritchard (Telegraph): Citigroup says gold could rise above $2,000 next year “The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

“This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

“‘They are throwing the kitchen sink at this,’ said Tom Fitzpatrick, the bank’s chief technical strategist.

“‘The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

“‘Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.

“‘This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”

“Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. ‘If true, this is a very material change,’ he said.

“Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months - reverting to is historical role as a safe-haven store of value and a de facto currency.”

Source: Ambrose Evans-Pritchard, Telegraph, November 27, 2008.

James Turk (GoldMoney): Scenario for gold is bullish “Gold soared $50 this past Friday. It began the day at $748 and was trading at $800 when the day ended.

“It is rare for gold to achieve such a huge one-day gain. In fact, I checked my records for the past twenty years and found only one other instance when gold climbed $50 or more in a day. Interestingly, the other occurrence was on September 17, 2008, barely two months ago. That rally also took gold back above $800.

“That these two rallies - unique and rare in their magnitude - occurred so near to one another is significant. Is there a message from these two events? Yes, indeed!

“Gold itself is telling us two things. First, there is an enormous short position in gold. Huge rallies occur for a reason, and short covering is always a factor. In order to limit their losses, shorts will bid up the market in a desperate attempt to cover their position. The rule of thumb is straightforward - the bigger the short position, then the bigger the rally.

“Second, and more importantly, these huge rallies are signaling that gold under $800 is too cheap. A higher price is needed to bring supply and demand back into balance.

“There is other, more than ample evidence to support this same conclusion. The demand for physical metal remains strong.

“Friday’s trading action adds to the growing body of evidence that the correction in gold that began after making a new record high in March above $1,020 is ending. The low in gold in all likelihood is probably in place. The $700 level has been tested and re-tested, and the huge rallies launched from prices below $800 mean that other attempts to take gold into the $700s will be met with good demand.

“Gold remains in a bull market, and so does silver. National currencies are in a bear market. Get ready for the next leg in the precious metal’s ongoing bull market.”

Source: James Turk, GoldMoney, November 24, 2008.

The Australian: Perth Mint suspends orders amid rush to buy bullion “Fears of the unknown long-term effects from the global financial crisis have sparked a new gold rush.

“With retail and wholesale clients around the world stocking up on the precious metal, the Perth Mint has been forced to suspend orders.

“As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.

“Perth Mint sales and marketing director Ron Currie said the unprecedented demand had forced the Mint to cease orders until January, with staff working seven days a week, 24-hour days, over three shifts to meet orders.

“He said Europe was leading the demand, with Russia, Ukraine, Middle East and US all buying - making up 80% of its sales.

“‘We have never seen this before and are working right at capacity. And we are seeing it from clients in the shop buying one ounce, right up to 30,000 ounces from overseas clients,’ Mr Currie said.”

Source: Sarah-Jane Tasker, The Australian, November 22, 2008.

Mike Wittner (Société Générale): Oil prices susceptible to further deleveraging “Unless oil prices melt down again this week, Opec will not cut production at this weekend’s informal meeting in Cairo and instead will wait until the cartel’s gathering in December to reduce output quotas by 1 million to 1.5 million barrels a day, says Mike Wittner, global head of oil research at Société Générale.

“Mr Wittner says that Opec simply does not have enough information on the effectiveness of the production cuts that it has already made, or sufficient feedback from its customers, to proceed with further reductions in output. ‘We see (a decision to maintain current production quotas) as a 60-40 probability and the outcome of the meeting could easily be affected by price action this week,’ says Mr Wittner, who notes that signals from Opec have been mixed so far.

“Mr Wittner says tanker tracking data suggest there has been a ‘very significant cut’ in Opec’s oil production in November, down 1.2 million barrels a day compared with October.

“But SocGen says fundamentals will be perceived to be weak until the market becomes convinced Opec has cut supplies, given that a tanker requires six weeks to travel from the Persian Gulf to the US. Only then will November’s cuts appear in lower crude imports and stocks, which is what the market wants to see.

“‘Oil prices will remain susceptible to further deleveraging (by hedge funds) and caution remains the order of the day,’ concludes Mr Wittner.”

Source: Mike Wittner, Société Générale (via Financial Times), November 25, 2008.

Financial Times: EU’s stimulus plan met with doubts “The European Union’s proposal on Wednesday for a €200 billion economic stimulus plan for the bloc was met by immediate doubts on whether member states would back the measures aimed at avoiding a deeper recession.

“The proposal envisages that about €170 billion would be contributed by the bloc’s 27 member states through tax and infrastructure plans. The European Commission and the European Investment Bank would provide the remaining €30 billion, partly through the accelerated pay-out of selected spending programmes.

“The package, which is larger than expected, represents about 1.5% of the EU’s gross domestic product. It needs to be reviewed by EU finance ministers next week and by government leaders in mid-December.

“Economists and politicians quickly questioned whether all member states would step up as required or whether individual governments’ responses would diverge from the Commission’s suggested measures.

“Analysts at Capital Economics, the consultants, said: ‘The proposed boost has yet to be agreed by member states and would sadly not do enough to bring European economies out of the gloom for some time anyway.’

“Business Europe, the main business lobby group in Brussels, agreed with the proposals but said a ‘clear commitment from EU member states’ was needed to implement stimulus packages of at least 1.2% of GDP.”

Source: Nikki Tait, Financial Times, November 26, 2008.

BBC News: Boost for Spanish and Italian economies “Spain and Italy have announced plans worth billions of euros to kick-start their economies.

“Italy approved an 80 billion euro emergency package that included tax breaks for poorer families, public works projects and mortgage relief.

“Spain unveiled an 11 billion euro plan aimed at creating 300,000 jobs.

“The announcements are the latest in a series of attempts by EU governments to shore up their economies as the financial crisis bites.

“Italian Prime Minister Silvio Berlusconi called on to Italians to keep on spending. ‘We have helped citizens, the less well off, so that they can continue to consume,’ he said. ‘The intensity and duration of the crisis depends on all of us.’

“Spain’s Prime Minister, Jose Luis Rodriguez Zapatero, said the money will be mainly invested in infrastructure and public works.

“Spain’s unemployment reached 12.8% in October - the highest in the eurozone.”

Source: BBC News, November 28, 2008.

BBC News: German business confidence dives “Business confidence in Germany fell in November to the lowest level since 1993, according to the key Ifo economic climate index. The index, based on a poll of 7,000 companies, has dropped for six consecutive months, the Munich-based Ifo institute said.

“The index stands now at 85.8, down 4.4 points from October.

“‘The downturn has worsened and will now have an impact on the labour market,’ Ifo said in a statement.

“Germany’s exports have been hard hit by falling demand worldwide, with some auto makers seeking state help to maintain production.

“On Friday another key indicator, the Markit purchasing managers’ index, revealed that business activity in the 15 countries sharing the euro had fallen in November to a ten-year low.”

Sources: BBC News, November 24, 2008 and Victoria Marklew, Northern Trust - Daily Global Commentary, November 24, 2008.

Financial Times: Eurozone set for rate cut of at least 50bp “Eurozone official interest rates are almost certain to be slashed again next week by at least half a percentage point after a survey on Thursday showed the region facing its worst downturn since the recession of the early 1990s.

“Economic confidence in the 15-country region crashed this month to its lowest point since August 1993, the European Commission reported. With inflation also falling rapidly, the European Central Bank has not sought to stop financial markets assuming its main interest rate will be cut next Thursday from 3.25% to 2.75% or below.

“Public ECB comments show the bank remains cautious about the pace of cuts, pointing to a half-point reduction next week - the same as in October and this month. But economic news has been consistently gloomier than expected, strengthening the case for a larger cut.”

Source: Ralph Atkins, Financial Times, November 27, 2008.

Financial Times: UK tax hit to fund £20 billion fiscal stimulus “Taxpayers face six years of austerity, paying for the consequences of recession and a £20 billion fiscal stimulus unveiled on Monday by Alistair Darling as he detailed the most dismal Budget outlook seen since 1993.

“National insurance contributions for both employees and employers will rise by 0.5%. Those earning more than £100,000 will pay more income tax - with those on £150,000 facing a new higher tax rate of 45% - and public spending faces its biggest squeeze for 15 years - although all these measures will not kick in until 2011, well after the next election. The tax clawback would leave someone earning £150,000 paying an extra £3,040 in tax.

“Mr Darling detailed the planned tax rises and spending restraint as he sought to show the City and foreign investors that Britain had a clear plan to restore prudence to the public finances after truly shocking forecasts for public borrowing in the next two years.

“Public borrowing will hit a record level of £118 billion in 2009-10 and will fall to a level the government considers prudent only in 2015-16, far later than City forecasts had expected.

“Government debt will blast through the current 40% of national income limit, racing to 57% in 2012-13, when it will top the £1,000 billion mark for the first time.

“Britain’s output will continue to fall until the second half of next year, the chancellor added, as he presented a gloomy forecast with the recession mitigated only in part by the fiscal boost delivered predominantly through a 2.5 percentage point cut in value added tax from next week and lasting until the end of 2009.

“Over the next year, the cut in the VAT rate to 15% will be augmented by £2.5 billion of additional capital expenditure projects brought forward from 2010-11, a £60 payment to every pensioner, an earlier increase in child benefit and a deferral in the planned increases in vehicle excise duties.

“Mr Darling also used the crisis to stage a series of tactical retreats from earlier decisions, announcing a rethink of his plans to reform air passenger taxes and an exemption from tax for the dividends of UK companies’ foreign subsidiaries.

“Together the Treasury assumes the £20 billion package - about 1% of national income for a little over a year - will prevent the economy sinking by a further 0.5%, although Mr Darling’s forecast was for a contraction of 0.75% to 1.25% in 2009.”

Source: Chris Giles and George Parker, Financial Times, November 24, 2008.

James Pressler (Northern Trust): China - getting serious about the slowing economy “The People’s Bank of China (PBoC) slashed its benchmark one-year loan and deposit rates by 108 basis points apiece today [Wednesday], reducing them to 5.58% and 2.52%, respectively. This dramatic move comes well after the industrialized economies coordinated a major monetary easing - most central banks have already turned their attention toward liquidity concerns and an eventual global recession. Only three months ago, Beijing had a proactive mindset, thinking about economic stimulus to compensate for the post-Games lull and a general slowdown in global production. The first question that comes to our mind is why does the government suddenly seem to be lagging in its response?

“One fact worth noting is that the immediate economic impact on the Chinese economy has not been as clear-cut as in the industrialized countries. The Olympic Games threw in plenty of distractions and had widespread effects on economic indicators. Retail sales were positively impacted from the many tourists flooding into the country, but conversely, industrial production fell off as many factories closed in response to temporary anti-pollution measures. The conclusion of numerous infrastructure projects shifted flows of goods and inputs, and plenty of other one-off factors added a lot of noise to China’s economic statistics. Only after the Games passed and some of those factors fell from the calculations did a clearer picture emerge, and the trends are not promising. Industrial production continues to fall, and monthly export growth is showing signs of weakness.

“To be fair, the PBoC issued minor rate cuts over the past three months, and the government did offer a supplementary fiscal stimulus package. Today’s more dramatic move suggests that PBoC officials are now firmly convinced that China will be joining the rest of the world in a significant economic slowdown. Some forecasts recently suggested that after GDP growth of nearly 12% in 2007, the economy could slow to below 10% this year and perhaps 7.5% in 2009. While the growth rate itself is still enviable, officials in Beijing realize all too well that a deceleration of over four percentage points will not go unnoticed, and they will likely be taking more action before the year is up.”

Source: James Pressler, Northern Trust - Daily Global Commentary, November 26, 2008.

Bloomberg: China reserves to pass $2 trillion; Russia’s fall “China’s foreign-exchange reserves may top $2 trillion for the first time by the end of this year, giving the world’s most-populous nation more firepower to stimulate its economy during a global recession.

“China’s holdings increased 25% in the first nine months of the year to stand at $1.906 trillion on September 30. Reserves shrank in Japan and Russia, the nations with the second- and third-largest stockpiles. Russia drained a quarter of its currency and gold assets in less than four months to prop up the ruble, which has dropped 14% since June 30.”

Source: Lee J. Miller and Zhang Dingmin, Bloomberg, November 28, 2008.

Breitbart: Analysts - India economy will be OK despite attacks “The terror attacks that rocked India’s financial capital may depress stocks, dampen tourism and slow new investment, but are unlikely to inflict long-term damage on the nation’s economy, analysts and business people said Thursday.

“‘This is a challenge for the government to maintain law and order in the country,’ said Takahira Ogawa, director of sovereign ratings at Standard & Poor’s in Singapore. ‘At this stage, I don’t think there will be any major impact on the macroeconomic or fiscal position of the government.’

“The attacks, which began Wednesday night when gunmen invaded two posh hotels, a restaurant and several other sites in downtown Mumbai, came as India was struggling to contain fallout from the global financial crisis.

“Foreign investors have already pulled $13.5 billion out of the nation’s stock market this year, driving the benchmark Sensex index down 57% and punishing the rupee. Liquidity has dried up, economic growth is slowing and people are spending less money.

“The attacks are ‘a challenge to the economic resurgence in India’, said Habil Khorakiwala, chairman of Wockhardt, an Indian pharmaceutical company.

“‘The targets identified clearly demonstrate that the intention is to create panic and shatter the confidence in the minds of investors in India and global investors coming to India,’ he said in a statement. ‘This war has to be fought together by all across, to protect the safety of Indian people, for economic resurgence and growth of the Indian nation.’”

Source: Breitbart, November 27, 2008.

BBC News: Saudi Arabia cuts interest rate “Saudi Arabia has cut a key interest rate and taken steps to encourage lending as it faces the slowdown. The central bank reduced the repo interest rate from 4% to 3%, in an attempt to boost liquidity. It also reduced the cash reserve requirements for banks, seen as a way to improve the availability of credit.

“The move came a day after the benchmark Tadawul All Share Index fell to its lowest level in five years, hit by the global slowdown and falling oil prices. The index shed 9.2% on Saturday, the start of its trading week. Since the start of the year the index is down more than 60%.

“The Gulf region has been hard hit by a huge fall in oil prices, a key export. Oil prices are around two thirds lower than they were in July when they hit a record above $147 a barrel.”

Source: BBC News, November 23, 2008.

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Mark Mobius Talks Brazil, Emerging Markets

Friday, November 21st, 2008

Mark Mobius, the emerging market specialist from Templeton Asset Management reckons that Brazil offers a great opportunity for investors with nerve. Telegraph UK asked him why.

What makes Latin America so attractive to investors?

The region’s main attraction is its huge consumer market with pent-up demand for goods and services, as well as excellent companies that are at the same time under- leveraged and inexpensive. On top of all that, its natural resources are among the largest in the world.

How resilient can the region be in the context of a global slowdown and which markets are well-armed to resist a slowdown in the global economy?

During the boom in the past five years, Latin American countries have accumulated substantial reserves. Brazil, for example has over US$200 billion in foreign reserves and the government has no foreign net debt. Overall, our main markets, Brazil, Mexico,

Chile, Peru and Panama, have shown stable political environments, responsible fiscal discipline, commitment to a floating exchange rate and honour of contracts in place. All these support the region’s strength in times of uncertainty.

In addition to natural resource and agriculture producers, what are the other key drivers of growth in Latin America?

Although the region is the world’s largest (and lowest cost producer) of many commodities, the development of the local domestic consumer markets is another important driver. Take Brazil for example, with 190 million people and Mexico with 100 million. Bank loan penetration is still very low in both countries (38% in Brazil and 18% in Mexico) even in comparison to some emerging markets. Thus, this not only reduces the risk of bad debt, it is also a barometer of how under penetrated the countries are in terms of goods and services. Companies have thus been following conservative lending and leveraging policies.

How have the Latin American markets been affected by the correction in commodities’ prices?

While commodity stocks have been negatively affected by the recent decline in commodity prices, many companies are still profitable at current price levels. While commodity prices have come down from their peaks, we do not foresee prices to return to extremely low levels in the near future. This is, in part, because of continued demand from emerging markets, even though growth has slowed, and relatively inelastic supply. Thus, we believe that commodity companies should remain profitable and constitute attractive investment opportunities.

In which Latin American countries/regions/sectors do you expect a faster/larger rebound and why?

We like Brazil, Mexico, Chile, Peru and Panama because they have been pursuing a disciplined approach to control inflation. For the other regional markets, we see few opportunities as capital controls are in place or they lack value stocks. We expect the larger countries, Brazil and Mexico to see faster recoveries once the global environment begins to improve.

The Brazilian economy is heavily involved in the farming, mining and industry sectors – what is the future for the Brazilian economy? What are the strengths and weaknesses of the Brazilian economy?

The Brazilian economy, although strong in the mentioned areas, is also quite diversified.Its big consumer market allows for many opportunities such as selling financial services, health care, cosmetics, beverages and others. For example, Skol is the world’s third largest beer brand (after Bud and Bud Light) and is sold only in Brazil (in spite of beer consumption still being low in comparison to developed countries).

What is your outlook on Brazil and Brazilian companies?

Brazil has a growing consumer base with personal wealth to spend. This stands to benefit Brazilian companies, particularly in the consumer sector. Brazilian exporters also contribute to growth. We also favour undervalued companies with high dividend paying stocks, net generators of cash and low leveraged companies. At the same time, companies with a strong market position and competitive advantages are also attractive.

We continue to maintain a positive outlook on Brazil and its enterprises. We believe the irrational panic that forced many funds to withdraw from Brazil and the stress of the local currency due to the global liquidity concerns, have depressed valuations of the companies to create an enormous opportunity for investment.

Do you think now is the best time to invest in Latin American companies?

While no one can predict the absolute bottom of a market, valuations are looking attractive. History has shown us that the best time to buy is when everyone is despondently selling. Such situations enable us to pick up stocks at more appealing prices. We continue to look for opportunities in Latin America for attractively valued companies with strong fundamentals.

What are the downside risks of investing in Latin America now?

In Latin America, and emerging markets for that matter, a big risk is the abandonment of the market economy philosophy and a cessation of privatisation of state owned companies. Another potential risk is how central banks and governments handle inflationary pressures. Some countries have tried to mask inflation indices and others to freeze capital flows and not cut government spending. We, however, favour those countries that follow an orthodox monetary tightening when necessary, and at the same time have a responsible fiscal behaviour.

Emerging markets are also tied to the global markets, including the developed ones, since world trade has expanded dramatically in recent years and the advent of rapid and cheap communications means that news in one market can affect other markets. This all, however, does not mean a downturn on one market will be followed by downturns in other markets. Emerging markets may react in the short-term to something happening in the US, but local influences could take precedence and see markets change direction.

Source: Telegraph UK

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China Unveils $586-billion Economic Stimulus Plan

Sunday, November 9th, 2008

China’s stunning $586-billion (4-trillion Yuan) economic stimulus package, unveiled Sunday evening, aims to give the country’s domestic demand and global GDP a massive shot in the arm. This should also give commodities and commodity stocks a mighty boost. Here are a few excerpts from the Wall Street Journal on the subject:

The announced sum of four trillion yuan represents about 16% of China’s economic output last year, and is roughly equal to the total of all central and local government spending in 2006. New spending of even half that amount would be substantial next to China’s six trillion yuan annual budget for this year.

The plan includes spending in housing, infrastructure, agriculture, health care and social welfare, and features a tax deduction for capital spending by companies. China’s economy won’t be able to absorb so much spending immediately: Economists expect one or two more quarters of slowing growth at a minimum before a rebound could take hold.

With the announcement, China will enter a meeting Saturday of the Group of 20 largest economies with a plan that would dwarf stimulus measures by others in the group, which is convening in Washington to discuss ways to stem a global slowdown in growth.

…

In the new stimulus package, total new investment could be less than the headline figure of four trillion yuan, since the plan does appear, for instance, to incorporate rebuilding programs for the areas affected by May’s massive earthquake. Those have already been allocated one trillion yuan in funds.

Although Chinese officials have been meeting daily on the financial crisis, most observers hadn’t expected leaders to reach final consensus on a stimulus plan until an annual economic-policy meeting scheduled for the end of this month. The rapidity of the response underscored the government’s concern about the growing risks of a real downturn.

A stimulus this large comes once in a generation, or two, as does the opportunity, especially when the margin of safety is this high. As of Friday November 7, 2008, the Shanghai Stock Exchange Index was down 72% from October 16, 2007 peak closing of 6,092 points, having closed at 1,747 points, and roughly 44% below its 200-day moving average of 3,120 points.

Other packages have been relatively in the same ballpark, but set to span much longer periods of time, like ten years. A few years ago, for example, China earmarked 2.7-trillion Yuan ($300-billion) towards augmenting the country’s railroads, a sum to be invested over ten years.

Giving details of the package, Xinhua said China would invest an additional 100 billion yuan in national construction this quarter and would earmark an extra 20 billion yuan next year for reconstruction in areas hit by major natural disasters.

Sectors that will benefit from the extra spending include affordable housing, rural infrastructure, transport networks, environmental protection and technical innovation, Xinhua said.

The cabinet also confirmed a long-awaited reform to the way value added tax is calculated. The result will be to reduce companies’ tax bill by 120 billion yuan a year, the agency added.

This sum, a grand total of 4-trillion Yuan ($586-billion) is set to be dispensed over 2 years. You do the math…this is enormous.

Click for the complete WSJ.com article here [PDF]

Sources: Reuters

WSJ, China Sets Big Stimulus Plan In Bid to Jump-Start Growth

http://online.wsj.com/article/SB122623724868611327.html

Tags: Agriculture, China, chinese officials, Commodities, Commodity, economic policy, Economists, Economy, Excerpts, GDP, government spending, Infrastructure, Markets, risk, Slowdown, Stimulus Package, Trillion, Value, Wall Street, Wall Street Journal, Yuan
Posted in Commodities, Economy, Markets | 1 Comment »

The Age of Prosperity is Over: Arthur Laffer

Thursday, October 30th, 2008

Arthur Laffer, the Reagan-era economist, famous for defining Supply-Side economics and developing what is now referred to as the Laffer Curve, has written an Op-Ed piece in the Wall Street Journal (October 27, 2008).

The Age of Prosperity is Over, October 27, 2008. This is a must read.

Seymour Schulich provides a foreword to this article:

“This piece from an American friend gives a clear picture of where the U.S. is heading and the price to be paid for allowing unregulated hedge funds and derivative activity.

The next commodity boom will set new price records. It is galling to see the u.s. dollar sell at a huge premium. I think our Canadian dollar is the best buy in the world today.”

Best Regards, Seymour Schulich

Here are some excerpts:

When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.

No one likes to see people lose their homes when housing prices fall and they can’t afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house’s value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

Regarding past Presidents and central bankers:

The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan’s tax cuts, Paul Volcker’s sound money, and all the other pro-growth, supply-side policies.

Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the “retirement test” for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.

Hat Tip: John Budden, BeEarly.com

The Age of Prosperity is Over, Wall Street Journal, October 27, 2008.

Tags: Alan Greenspan, Banks, Canada, Commodity, Dollar, Economics, Economy, Excerpts, GDP, Good Reason, government spending, Hedge Fund, Hedge Funds, Markets, Mortgage, Paul Volcker, REW, risk, Sound Money, Value, Wages, Wall Street, Wall Street Journal
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