Monday, August 13th, 2012
by Don Vialoux, EquityClock.com
Upcoming US Events for Today:
- No Significant Events Scheduled
Upcoming International Events for Today:
- The Bank of Japan releases the Minutes from its July meeting at 7:50pm EST.
Markets in the US ended positive on Friday, despite concerning signs of economic contraction with China posting a disappointingly low trade surplus number for the month of July. Investors were expecting a surplus of $33.0B, up from the $31.7B reported previous, but the actual was a mere $25.2B. A shockingly low increase in exports at only 1.0%, off from the 8.8% analyst expectation, was the predominant factor behind the weak headline number, which is being pinched primarily by slowing demand from Europe. According to Econoday.com, “this was their worst performance for a non-holiday month since November 2009.” The impact of slowing exports from China is being picked up in the Baltic Dry Index (BDI), which tracks the price to ship freight over the world’s oceans. The BDI is once again pushing towards the lows of the year, signaling that economic fundamentals remain severely depressed. This is typically a leading indicator to equity market weakness.
The Baltic Dry Index is not the only shipping gauge that is under pressure. The Dow Transportation Index has been significantly underperforming the market for almost a month, hinting of weak demand for goods. The Dow Transports typically confirm broad market equity moves, leading markets higher when economic fundamentals are strong, and leading the markets lower when fundamentals are weak. The fact that this cyclical industry, Transportation, is not showing the same upside momentum as what the broad market showing is a significant concern. Higher oil prices are also pressuring transportation stocks, a situation which is seasonally typical into September and October.
Turning to the equity markets, last week saw the lowest equity market volumes for a non-Christmas holiday week in years. The S&P 500 ETF (SPY) was shown on Friday with a 4-day volume moving average. The fifth day, Friday, only weakened the average further. The Dow Jones Industrial Average is also showing a similar volume profile to SPY. Now take a look at the NYSE Primary Exchange Index, which showed the lowest 5-day volume average since the 1990’s. Low volume implies low conviction, often a precursor to market declines. Volumes are typically lower than average during the summer months, albeit not as low as present levels, picking up once again in September as traders return to their desks from summer vacation. As a result, September and October are known to be the most volatile months on the calendar as regular trading resumes.
Concerning activity remains evident in the price of Copper, often referred to as “Doctor Copper” due to its ability to predict broad market moves. Copper has maintained a long-term declining path over the past year, underperforming the market in the process. With expectations of further monetary stimulus overriding economic fundamentals, it would be expected that copper would react positively as well, producing positive results and outperforming the market before central bank officials confirm activity, similar to what occurred prior to the last two QE programs. Investors in the cyclical metal are showing signs of skepticism toward the prominent stimulus expectations, perhaps warning that fundamental concerns are still too serious to ignore. Copper seasonally declines between August and October due to economic factors, such as weak manufacturing demand.
Despite a number of warning signals that remain intact, bullish characteristics are prevailing within the price action of equity markets. The S&P 500 continues to maintain a trend of higher-highs and higher-lows following a June low. Significant moving averages (20, 50, and 200-day) are curling positive. Even bond prices are showing signs of coming under pressure, a positive for equity markets. Sell signals for broad market indices have yet to be confirmed, so although risks are increasing, maintaining appropriate allocations to equities appears prudent until technical indicators roll over. Seasonal tendencies for Presidential election years turn negative into September, so equities are within a window where a peak could be realized at any time. Be prepare to react accordingly.
Sentiment on Friday, as gauged by the put-call ratio, ended neutral at 0.99. The ratio broke out of a falling wedge pattern, which could be the precursor to elevated levels of volatility. The VIX has fallen back to levels where the market has been known to correct as complacency reaches extremes. Volatility remains seasonally positive through to October.
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
- Closing Market Value: $12.37 (unchanged)
- Closing NAV/Unit: $12.39 (unchanged)
|2012 Year-to-Date||Since Inception (Nov 19, 2009)|
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Tags: Baltic Dry Index, Baltic Dry Index Bdi, Bank Of Japan, Broad Market, Christmas Holiday, Don Vialoux, Economic Contraction, Economic Fundamentals, ETF, ETFs, Exports From China, Headline Number, Leading Indicator, Lows, Market Equity, Market Weakness, Oil Prices, Predominant Factor, Seasonal Weakness, Significant Events, Trade Surplus, Transportation Index, Transportation Stocks
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Thursday, April 19th, 2012
by Peter Tchir, TF Market Advisors
Somehow my frustration level is high today. Just feels like we are being lied to, and no one wants to question the lies.
Spanish auctions were a big “success”. That was the story. It wasn’t surprising at all since everyone knew how closely the auction was being scrutinized. What they forgot to manipulate is the post auction trading. Spanish CDS is back over 500, up from 490 earlier in the session. The Spanish 10 year bond, traded as tight 5.75% this morning, but is back over 5.9% and rising. So much for a “successful” auction.
BAC and MS had “great” earnings. MS no longer includes DVA in its “continuing operations” headline number. It was a loss of $2 billion this quarter. With 2 billion shares outstanding, that would have wiped out the gain. What bothers me, is that in Q3, when it was a gain of $3 billion, it was part of continuing ops. Really? It is that easy to change what is part of ongoing business and what isn’t. During this quarter they allegedly made $600 million from unwinding a trade with Italy. They were taking credit reserves against this trade, and were able to release it. Fair, but it should be categorized the same as DVA. This DVA categorization shift seems incredibly misleading and is the exact sort of thing I thought Sarbanes-Oxley was supposed to protect investors from. The quarter was okay, but this shift strikes me as very untrustworthy. On BAC, there is a $3.3 billion adjustment to Fair Value Obligations. Fair enough, but what are the obligations, and what is the adjustment? It seems that something that is size of the quarter’s earnings should be disclosed more fully. I would like to know what it is, and it has to be hedge that tightened, because nothing much went materially wider this quarter. On other hand, the new issue bond side must have killed it, great quarter for bond issuance, is that sustainable?
Jobless claims drop by 2,000. That was the headline. No mention at first that the prior week’s already surprisingly bad number had been revised up to 588,000. That is why it improved, because last week’s awful number was made awfuller (I know that’s not a word, but too annoyed to care). This week’s claims number was bad, missed expectations by a lot, and last week’s is horrific, especially when compared to original expectations of a print in the 350′s.
We have some more data later today, but I remain bearish. Nothing that has happened so far today has been good, and the attempt to spin everything so positively is downright scary. EU officials are busy pumping up that market. The IMF is talking up a storm – hey, don’t look at actual debt and cash flows, just stare at this nice beautiful firewall made up of promises.
On a bright note, the HY bond market remains strong. HY CDS might be weak, but bonds remain strong and we are seeing renewed growth in shares outstanding in the HY ETF’s. It feels to me that once again, “prudent” investors are hedging some risk with CDS, but rather than selling what is rich and well bid, they are shorting what is already cheap and well offered. Expect a reversion soon where either CDS rips tighter, or an otherwise calm bond market goes bidless until it catches up.
CDS indices are weaker now. IG18 is out above 100 after trading better than 99. MAIN traded sub 140 earlier, and is back to 143.5.
Copyright © TF Market Advisors
Tags: Auction, Auctions, Bac, Bond Issuance, Categorization, Check Mail, Earnings, Frustration Level, Headline Number, Investors, Issue Bond, Italy, Jobless Claims Drop, Nbsp, Ops, Oxley, Q3, Spanish Cds, Success Story, Tf
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Tuesday, December 6th, 2011
by Russ Koesterich, Chief Investment Strategist, iShares
Call #1: Some risks to the global economy appear to be fading.
Global equities rallied last week, pushing stocks back toward their October highs, as investors reacted to two new developments:
1. Signs of progress in Europe. Investors are focusing on some preliminary evidence that policy makers are getting more aggressive about combating the crisis in Europe. This has taken several forms including a coordinated global effort by many of the world’s central banks to ease the strain on bank funding, which is a big problem for European banks. Investors also have rising expectations that European politicians are inching closer to a plan for fiscal integration, and that the European Central Bank is softening its opposition to using its balance sheet to help fight the crisis.
2. Better-than-expected US economic data. The second factor supporting markets is more evidence that — absent a worsening European crisis — the broader global economy can avoid another contraction even while Europe is likely to experience a recession (if it isn’t in one already). Most economic data, particularly in the United States, continues to come in at, or better than, expectations. One data point I want to highlight is last Thursday’s November ISM manufacturing report. The headline number came in better than expected and continues to improve from its summer lows. More importantly, the new orders component shot up in November to its highest level since April. As I’ve mentioned in the past, new orders tend to lead gross domestic product growth. Thursday’s new orders component confirmed my view that fourth-quarter US GDP growth should be healthy, perhaps close to 3%.
While we’re not out of the woods yet — European politicians will need to deliver a clear and credible plan at their summit later this week — at least some of the non-European risks to the global market, such as a weakening economy in the United States, appear to be fading.
Call #2: Remain overweight on global energy companies
I’ve been advocating an overweight to energy all year, and I still view the sector as a good opportunity for three reasons.
- Global energy stocks look particularly inexpensive. Energy stocks are up roughly 5% year to date, performing well ahead of global equities. Despite the outperformance, the sector remains cheap. It currently trades at roughly 11x trailing earnings, a 15% discount to the broader market.
- Potential for attractive yield. Global energy stocks currently offer a yield of around 2.25%.
- Potential for elevated oil prices. I expect that despite the slow recovery, oil will remain elevated due to strong demand out of emerging markets, supply constraints and geopolitical risks.
A potential vehicle for accessing energy is the iShares S&P Global Energy Sector Index Fund (IXC).
Disclosure: Author is long IXC
Past performance is not indicative of future results.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments typically exhibit higher volatility.
Tags: Central Banks, Chief Investment Strategist, Contraction, Credible Plan, Economic Data, European Banks, European Politicians, GDP Growth, Global Economy, Global Effort, Global Equities, Gross Domestic Product, Headline Number, Ism Manufacturing, Last Thursday, Lows, New Developments, Recession, Rising Expectations, S Central
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Monday, December 5th, 2011
Time to Bring Out the Howitzers
by John Mauldin
Employment Up But Not Enough
The World Slips into Recession
Central Bankers of the World, Unite!
New York, Hong Kong, Singapore, and Cape Town
And My Conference
It is now common to use the term bazooka when referring the actions of governments and central banks as they try to avert a credit crisis. And this week we saw a coordinated effort by central banks to use their bazookas to head off another 2008-style credit disaster. The market reacted as if the crisis is now over and we can get on to the next bull run. Yet, we will see that it wasn’t enough. Something more along the lines of a howitzer is needed (keeping with our WW2-era military arsenal theme). And of course I need to briefly comment on today’s employment numbers. There is enough to keep us occupied for more than a few pages, so let’s jump right in. (Note: this letter may print long, as there are a lot of charts.)
Employment Up But Not Enough
The headline number is that 120,000 new jobs were created in November, in line with estimates. That total is the sum of 140,000 jobs from the private sector coupled with the now usual loss of 20,000 jobs in the government sector. But when we look at the details, things are not as upbeat.
First, the good news: the US economy is continuing to grow. As I have said for quite some time, the US should not fall into a recession unless it is pushed by something from beyond our shores, which, sadly, I expect (details below). However, we are nowhere near the typical recovery pattern. By this time into a recovery we are usually making new highs on the employment front. As everyone knows, we are millions of jobs from that level.
And my friend Bill Dunkelberg, the Chief Economist of the National Federation of Independent Business, sends us these headlines today from his own survey:
· AVERAGE EMPLOYMENT PER FIRM ROSE
· HARD TO FILL JOB OPENINGS INCREASED, UNEMPLOYMENT DOWN
· PLANS TO CREATE NEW JOBS NEARLY DOUBLED
The net change in employment per firm wasn’t much different from zero, but it did have a plus sign in front of it for the first time in nearly half a year. On average, owners reported increasing employment an average of 0.12 workers per firm. Seasonally adjusted, 14 percent of the owners added an average of 3 workers per firm over the past few months, and 12 percent reduced employment an average of 2.9 workers per firm. The remaining 74 percent of owners made no net change in employment (47 percent hired or tried to hire and 35 percent reported few or no qualified applicants for positions, both figures up 4 points).
The percentage of owners cutting jobs has returned to “normal” levels (even in a great job market, over 300,000 file initial claims for unemployment, i.e., they are fired or laid off). And the percentage of owners adding workers (creating jobs) continued to trend up. Reports of new job creation should pick up a bit in the coming months.
(I spent last Sunday with Bill, and we outlined our new book on creating jobs and employment. Our goal is to finish it in record time and have it out next spring.)
120,000 jobs is not quite enough to keep up with the growth in the population. Along with positive revisions to previous months, we have now averaged about 114,000 a month for the last 6 months. But then why did the headline unemployment number fall to 8.6%? That is a very large drop for one month. The simple answer is that the number of people looking for a job fell by 315,000. And the number of people counted as not in the labor force (a different measure) swelled by 487,000 to a record 86.5 million.
Again, for new readers, you are not counted as unemployed if you have not looked for a job in the last four weeks. Let’s look at a chart from the St. Louis Fed database that shows the number of citizens not in the labor force. What we see is a rise from 77 million in 2007 to 86.5 million today. Part of that can be explained by population growth, but it would be less than half of the increase of almost 10 million people not considered to be in the labor force.
If we looked at a chart of those counted as being in the labor force, we would see that it is roughly where it was back in 2007, yet there has been working-age population growth of at least (my guess) 5 million. And the next chart shows the number of people that are actually employed, private or government, full- or part-time. What we see is that the number of people working is about where it was 8 years ago.
That is not a pretty chart. What all that means is that unemployment would be closer to 11-12% if we went back to the labor force of just a few years ago and adjusted for population.
Let me quickly note, too, that if we went back to the unemployment measurement basis of a few decades ago, the numbers would be closer to what I suggest above. Counting unemployment the way it is currently done allows whoever is in charge to publish numbers that look better than they are in reality on the street. I expect Republicans to point this out in the next election cycle, although if they get into office they will have to live with that analysis when it comes back to haunt them in four years. Because as the next chart shows (from my friend Lance Roberts of Streettalk Advisors in Houston), we need job growth of about 400,000 jobs a month to get back to the long-term trend by 2020. This shows the employment-to-population ratio, which has dropped by 6% since 2000, falling precipitously since the beginning of the recession. We have never had such strong employment growth, and are unlikely to get it as we reduce government spending, which we must do.
This shows above all else why the #1 issue for the coming elections will be jobs. The US economy is looking more and more European all the time in terms of unemployment numbers. If the course is not changed, it will make any real recovery back to what we think of us “normal” for the US highly problematic.
Let’s quickly look at a few other problems in this employment report. The work week was unchanged at 34.3 hours (and was down 0.2 hours in manufacturing). Aggregate hours were up just 0.1%. Average hourly earnings were off 0.1%, leaving the three-month average at -0.1%. For the year, hourly earnings were up just 1.8%. When the Great Recession began, they were rising at a 3.4% annual rate. Aggregate payrolls were up just 0.1% for the past month. The decline in unemployment was concentrated among the shorter durations, with almost all of it among those jobless for 14 weeks or less. Those unemployed for 99 weeks or more rose 143,000 to 2.0 million, very close to an all-time high. The mean duration of unemployment rose to 40.9 weeks, a record. (Hat tip The Liscio Report.)
This does not bode well for consumer spending. Any growth of late has come from a reduced savings rate, as income is barely keeping up with inflation; and if you look at the inflation we “feel” in healthcare, food, and energy, then the average consumer is losing ground. This also means any recovery is only one external shock away from slipping back into recession.
Finally, the “quality” of the new jobs is not what we would like. More and more people are taking lower-paying jobs. We saw 105,000 jobs in retail, temporary, and food services out of the total of 120,000. Many of these are seasonal and will fall off in the next quarter. (Let me hasten to add that I am not being derogatory of food-service jobs. They are important and are hard work. I have two kids who are employed in the food-service world, and most of my kids, and your humble analyst, have been employed in various food-service jobs at one time or another. Without those jobs some of my kids might be moving back home! So, the next time you’re out, leave a bigger tip than normal if it’s deserved. Your wait person is someone’s kid!)
The World Slips into Recession
How fragile is the recovery? The rest of the developed world is either in recession or soon will be.
This next chart is from friend Prieur du Plessis of Plexus Asset Management in South Africa. Notice that every major region is slipping into contraction except the US. (http://www.investmentpostcards.com/2011/12/02/global-manufacturing-pmi-saved-by-the-u-s/)
Now, let’s look at more details, provided by SISR (sadly, I lost the email of the person who provided this, so I can’t credit him). It shows that outside of the US and Canada, the rest of the developed world is watching their PMI (manufacturing production) numbers go into contraction. Of the emerging world, only India and South Africa are growing. Notice that the contraction in both Germany and France is getting worse month by month.
Source: Markit Economics, SISR
How long can the US resist a global slowdown? My answer would be, for longer than you might think, absent the potential shock coming from Europe. But the above data does set the stage for the rest of the letter.
Central Bankers of the World, Unite!
Now, a few quick observations. This was truly a global effort by the central banks of the world (the US, Europe, Japan, Switzerland, Canada, and China). But then, what else did you expect them to do? Their main tool is to provide liquidity, and that is what they promised. They lowered the cost of coming to the “window” and certainly lowered the “shame” factor in doing so. Going to the central bank could be seen as a sign of weakness and, at higher rates, banks might be reluctant to do so. At the new rate it is reasonably economical, and the central banks have signaled it is more than OK.
Second, this effort also included China, which cut its bank reserve requirements by 0.5%. David Kotok pointed out to me something unusual about this. Normally, China makes it moves with a number ending in “7,” like 27 or 47, as 7 is good luck. For those paying attention, this was China’s way of saying “We are part of the team,” rather than acting on their own, as they usually do. Now, it makes sense that if you include Canada in the “club” you should include China.
The stock markets of the world went into an ecstatic frenzy, capping off a very positive week. But I would remind my enthusiastic friends of a few things. Let’s look at what really happened. We just recovered from a very over-sold condition and are still down almost 7% from this summer.
And this has happened before. Let’s rewind the clock to October of 2008, deep in the credit crisis. This is a report from Jim Lehrer of PBS (emphasis mine):
“JIM LEHRER: World stock markets staged a comeback today. They did so as key governments moved to support troubled banks. On Wall Street, the Dow Jones industrial average scored its largest point gain ever, soaring 936 points to close above 9,387. The Nasdaq was up more than 194 points to close at 1,844. Overseas, stock indexes rose 8 percent in Britain, 11 percent in France and Germany. Markets across Asia also shot higher, including a gain of 10 percent in Hong Kong.
News of European efforts to end the banking and credit crisis helped ignite the rally. On Sunday, nations that use the euro agreed on coordinated steps. Today, Britain was first to act. It was followed by Germany, France, Spain, Portugal, Austria, and the Netherlands.”
The good news is that this week’s action may (and I emphasize may) help stave off a true bank credit crisis on the order of 2008. That is, if the central banks of the various European countries follow through (more on that below). The real problem was best summed up this week by Mervyn King, the governor of the Bank of England, speaking at the press conference to launch his Financial Stability Report.
“Many European governments are seeing the price of their bonds fall, undermining banks’ balance sheets. In response, banks, especially in the euro area, are selling assets and deleveraging. An erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts. That, in turn, will weaken banks’ balance sheets further. This spiral is characteristic of a systemic crisis.
“Tackling the symptoms of the crisis without resolving the underlying causes, by measures such as providing liquidity to banks or sovereigns offers only short-term relief. Ultimately, governments will have to confront the underlying causes… The problems in the euro area are part of the wider imbalances in the world economy. The end result of such imbalances is a refusal by the private sector to continue financing deficits, as the ability of borrowers to repay is called into question.
“The crisis in the euro area is one of solvency and not liquidity. And the interconnectedness of major banks means that banking systems, and hence economies, around the world are all affected. Only the governments directly involved can find a way out of the crisis…” (Hat tip, Simon Hunt.)
Time to Bring Out the Howitzers
If the problem were one of liquidity, then this week’s action would be enough. But the problem is solvency. The majority of European banks are insolvent. They own too much debt of sovereign countries that are going to have to reduce their debts. There is a growing number of analysts who are realizing that even Italy may have to reduce its debt burden. I have highlighted the problems faced by Belgium. And how about Spain, and Portugal?
What this action does is give the ECB the dollars it will need to loan to the various national central banks, so they can loan to their insolvent banks. Will they bail them out, or nationalize them? The answer depends on the country and its voters. But absent recapitalizing their banks, there will be a credit crisis that will affect the whole world.
The amount of debt that will have to be written off and the loan portfolios reduced, as well as new capital raised, is daunting. As I have noted previously, the need is for around €3 trillion.
Writing off so much debt in the midst of a recession, coupled with austerity moves, will be massively deflationary for the eurozone. But Merkel and the German Bundesbankers have made it clear that they will not be part of any “printing press” action that is not coupled with serious commitments for balanced budgets. Even in the face of a recession.
Which makes it quite strange that the ECB has been tightening in terms of money supply the past year. Notice in the graph below that M1, M2 and M3 are all in negative territory. (Chart from the London Telegraph.)
The ECB under Trichet was apparently fighting inflation. He raised rates and let his inner Bundesbanker take control. Maybe with the rate cut and the new head of the ECB, Mario Draghi, we can see signs that the ECB may in fact act to ease. This is from my friend Dennis Gartman, writing this morning:
“Turning to the ECB, the new President, Mr. Draghi, has obviously taken on the most difficult of jobs and we’ve no choice but to admire him for the audacity necessary to take on a role such as his… especially at a time such as this. Yesterday, Mr. Draghi made a statement that we find tectonic-plating-shifting-like in nature when he said firstly that the ‘Downside risks to the economic outlook have increased.‘
“They have indeed, and we’ve no problem with what he said for that is indeed the truth. Then, however, the plates shifted when he said, noting that the ECB’s mandate, that price stability is to be maintained ‘in both directions.’ In other words, the ECB’s mandate forces the authorities to be concerned about deflationary risks as well as those inflationary.
“Did you hear the plates shifting? You should have for they have indeed shifted. Draghi’s warning was that the authorities are just as concerned about deflation as inflation and that monetary expansion is to be considered just as has monetary contraction.
“So we are now… or shall soon be… faced with a monetary and political union that is manifestly different than that which the original united nations had signed up for AND we have a central bank intent upon fighting deflation as strongly as it has fought inflation. These are the attributes of a regime intent upon weakening, not strengthening, its currency in order to strengthen the economy and to save the union… if at all possible.”
The coordinated central bank action will make dollars available to the ECB, which will in turn loan them to the national central banks, which presumably will loan them to their in-country banks, taking lower-quality collateral than the ECB (which under the rules they are allowed to do). Given the deflationary pressures that are the natural result of a recession and deleveraging/default, they can print a lot of money without igniting too much inflation. But I agree with Dennis; I just don’t see how they can do so without seeing the valuation of the euro fall rather smartly.
Merkel and Sarkozy have told us they will meet Monday and announce a plan on December 9, when the full eurozone meets. Forget bazookas, this needs the equivalent of a howitzer. They are seemingly intent upon rewriting the treaty, which is the only way that the Germans will go along with any major ECB action. But by my reckoning, a few hundred billion, or even a trillion, is not major action, at least not on the level of what will be needed.
The price for German acquiescence will be a loss of sovereignty and the ability to run deficits of any real size for any appreciable length of time for the countries of Europe. Will the peripheral countries go along? Heck, forget them; will Finland go along? This situation has been coming along since the foundation of the eurozone. The early founders acknowledged that a tighter fiscal union would eventually be necessary if the euro experiment were to survive. And eventually is now. As in this month. Time is running out if they want to forestall a credit crisis that would be worse than 2008.
The world is watching, as what happens in Europe will affect us all, in every part of the globe. It could easily tip the US into recession, and it will only be worse for the emerging markets. For Europe, the Endgame is now. We can only hope they come up with a plan that avoids disorderly defaults and a crisis far graver than 2008. They have no good choices, only difficult ones and disastrous ones. Let us hope they choose wisely.
(And for my fellow Americans, note that we will face the same consequences if we do not get our own house in order, and very soon. This is more than an academic observation.)
New York, Hong Kong, Singapore, and Cape Town
And My Conference
I am reading Niall Ferguson’s new book, Civilization. It is a great read. Quick note: If you enjoy Niall’s writing, you may also enjoy watching his TV series on 4oD: The Ascent of Money (same name as his early book). He presents six 1-hour episodes. Only 11 days left on the website, a good idea for this weekend!
Niall, along with Marc Faber, David Rosenberg, Mohamed El-Erian, Woody Brock, Lacy Hunt, David McWilliams, and your humble analyst, will all be at my conference (co-hosted with partners Altegris Investments) May 2-4 near San Diego. Does this not sound like the best line-up of any conference this year? Details will follow, but you won’t want to miss this one.
I am more or less home for the next six weeks, except for a quick trip back to New York later this month with Tiffani for a business meeting (good changes are coming, as always), and we will take some time to enjoy friends and the city lights.
Then I will go to Hong Kong and Singapore on January 10 for 12 days, coming back to finish a few things and then head off to Cape Town, South Africa in the middle of February (details later).
Tomorrow I go with Tiffani to take my granddaughter Lively to go see Yo Gabba Gabba “live.” This is a new kid’s show for very young toddlers that captures their attention like nothing I have ever seen. Below is a photo from last spring, when we were on a plane to somewhere (Lively is now a seasoned traveler!) and she was watching Yo Gabba Gabba on an iPad with her special baby earphones. Look how rapt she is. “Papa John” gets to sit in on this and even go back stage to meet with the cast. Wild horses could not drag me to endure this with your kid, but with my granddaughter? Try and keep me away! How we change with the advent of the next generation.
I am looking forward to the holidays. All the kids will be here, and we will go out to look at the lights, take in movies, and munch lots of great food! And it now looks like professional basketball will launch on Christmas Day, with the Mavericks playing the Miami Heat in a reprise of the NBA Finals last year. I do have rather good seats (front row behind the chairs), and my phone has been blowing up! The #1 most rabid Mavericks fan in the whole world, my daughter Abbi, has begged me to take her, and Dad can’t say no. (Are you listening, Mark?)
All Dad wants for Christmas is to meet his deadlines for the irrational amount of writing I have committed to do before I leave for Hong Kong. That and to have my kids around.
It is time to hit the send button so the translator in Hong Kong can get started. In theory, no more really late nights on Friday for me. But this letter has been more than long enough. Have a great week.
Your wondering how we Muddle Through analyst,
Tags: Bazookas, Bull Run, Central Banks, Chief Economist, Credit Crisis, Employment Numbers, Federation Of Independent Business, Friend Bill, Government Sector, Headline Number, Hong Kong Singapore, Howitzer, Howitzers, John Mauldin, Jump Right, Military Arsenal, National Federation Of Independent Business, New Highs, New Jobs, Typical Recovery
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Tuesday, February 1st, 2011
Stocks’ Winning Streak Broken, but Long-Term Outlook Positive
by Bob Doll, Chief Equity Strategist, Fundamental Equities, BlackRock
January 31, 2011
For several weeks, we have suggested that the macro market backdrop has been dominated by global bullish forces in conjunction with localized bearish ones, a description that largely explains last week’s stock market action. Early in the week, headlines surrounding European debt issues and US municipal budget concerns faded somewhat, and risk assets (particularly stocks) experienced strong performance. Toward the end of the week, the Egyptian protests and resulting political turmoil unnerved investors, causing stock markets to experience a sharp decline. Stocks were down for the week, with the Dow Jones Industrial Average experiencing its first decline after eight weeks of gains, falling 0.4% to 11,823. The S&P 500 Index and the Nasdaq Composite also declined, losing 0.6% to 1,276 and 0.1% to 2,686, respectively.
The situation in Egypt has reminded investors that geopolitical risks are always present and in this case uncertainty is high, both in terms of what will happen and what the potential impact will be. Investors are questioning whether any degree of calm can be restored, what the political future of Egypt will be, how stable the government is (and will be) and, of course, whether the unrest in Egypt will spread to other parts of the Middle East.
Meanwhile, back in the United States, the preliminary fourth-quarter 2010 gross domestic product (GDP) report was released, showing that the US economy grew at an annualized 3.2% rate, representing an acceleration over the third quarter. Importantly, many of the details within the report were stronger than the headline number. Final sales increased by an annualized 7% rate, consumer spending advanced by 4.4% and strength also emanated from export increases and business equipment and software spending.
So far, economic growth in the first quarter of 2011 has been negatively impacted by a rash of bad weather in many parts of the United States, but we believe that the positive momentum from the fourth quarter means that any disruption is likely to be only temporary. We continue to expect overall 2011 GDP growth to be on the order of 3.5%. Getting to that level will require less restrictive bank lending policies (which we have begun to see) as well as improvements in the labor market (which we are expecting to see).
In this environment of improving (but still fragile) economic growth, many are wondering when the Federal Reserve will consider adopting tighter monetary policies. In our view, the Fed appears to be awaiting economic growth that is stronger than 3.5%, a more significant decline in unemployment and rising expectations for inflation. In our opinion, we are still quite a bit away from such an environment.
Last week also featured President Obama’s State of the Union address to Congress. In his remarks, the President reiterated many of the points he has been raising over the past several months, but he did not offer much that was new in terms of economic policy. The White House appears to be betting that it can appeal to political centrists by upping the use of free market rhetoric, making some personnel changes and highlighting meetings with business leaders without actually proposing significant policy changes. One striking absence from the State of the Union address was a focus on rising deficits—high levels of deficits was an important political point in last November’s midterm elections, and it was somewhat surprising that this issue was not more prominently addressed in President Obama’s remarks.
At present, most investors appear to have increased their expectations for global growth and for growth levels in the United States. The words “double dip” have virtually vanished from investors’ vocabularies and while we agree with the generally optimistic tenor of the conversation, we are also somewhat uneasy about the positive shift in sentiment and growing sense of complacency. As last week’s events remind us, there are a number of risks to be wary of, including one we have not yet mentioned—monetary tightening in emerging markets. While we continue to believe that the global bullish forces will dominate market action over the course of this year, we also believe that at some point we will experience a market pullback, and the declines toward the end of last week may represent the beginning of one.
About Bob Doll
Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.
Sources: BlackRock; Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 31, 2011, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
Tags: Bob Doll, Budget Concerns, Business Equipment, Consumer Spending, Currency, Debt Issues, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Emerging Markets, Fourth Quarter, Gdp Report, Gross Domestic Product, Headline Number, Municipal Budget, Nasdaq Composite, Political Turmoil, Stock Market Action, Stock Markets, Strategist, Term Outlook, Winning Streak
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Thursday, October 21st, 2010
On 19 October, the Chinese central bank announced a series of rate hikes. This column argues that the moves were aimed at combating domestic inflation and addressing the risks of an asset bubble.
On 19 October, the People’s Bank of China announced a series of rate hikes. Although economists have been arguing for monetary tightening for months, this move was a surprise to many in the market.
This policy adjustment tells us several things:
- China’s monetary policymakers see greater inflation risks than the headline CPI inflation data;
- the government is probably trying to avoid the mistake made by Japan in the 1980s: loosening domestic monetary policy in order to reduce pressure for currency appreciation;
- therefore currency appreciation is likely to continue, if not accelerate; and
- the authorities might adopt certain measures to control the capital account temporarily in order to discourage “hot money” inflows.
China’s headline CPI rose to 3.5% year-on-year in August, up two-tenths of a percentage point from the previous month. A look at the disaggregated data reveals that inflation is mainly driven by food prices.
This is the reason why some officials argue that monetary tightening was neither needed nor effective. Nevertheless, during the thirty years’ reform period, almost every major inflation problem (those of 1988, 1993, and 2007) was initially caused by food inflation. Monetary policymakers have learnt not to treat food inflation lightly.
The current momentum of inflation is already pretty serious. CPI rose by 0.6% month-on-month in August, which can be translated into an annualised rate of 7.2%. This certainly is way above the central bank’s target. More importantly, the headline number is probably grossly underestimated due to under-represented service prices in the basket.
Some economists suggest CPI is currently closer to 5%-6%, compared with the official number of 3.5%. The Ministry of Commerce collects market prices for agricultural food every week. These numbers confirm that food prices already rose during the past three month at annualised rate of above 30%.
But that’s not all. Two more factors shadow outlook of China’s inflation picture.
- One, loan growth is slowing; this year’s new loans will likely surpass the central bank’s target of 7.5 trillion.
This is about 50% more than in a normal year. With negative real deposit rates, liquidity holders desperately look for opportunities to invest. They first pushed up stock prices and then housing prices. When these prices stabilised, they shifted their focus on certain types of commodities, such as beans, cotton, garlic, and sugar. As long as liquidity is abundant, some prices will rise dramatically.
- Two, wages are rising by 20%.
Economists and government officials still dispute the notion that China is rapidly approaching the Lewis turning point. But every business person in China agrees that it is happening. It is increasingly difficult to find additional workers and labour costs are skyrocketing.
Increases in wages are actually a positive development for China today. It has already led to improvement in consumption and therefore should be good for rebalancing the economy. But inevitably, it will be inflationary.
Avoiding asset bubbles
The rate hike on 19 October is not only an effort to combat potential inflation, it is also an important departure from the typical Japanese approach of fighting currency appreciation. In the months following implementation of the Plaza Accord in 1985, Japan lowered interest rates and increased its money supply in order to reduce pressure for appreciation and mitigate its impacts. That approach, however, caused even more devastating consequence – a bubble, which eventually collapsed in 1989 (see Corbett and Ito 2010 and Ito 2010 on this site for more discussion).
Some Chinese policymakers had a similar mindset in the early days, believing China could not raise rates because to do so would exacerbate currency pressures. But since the beginning of this year, the asset bubble has been a persistent source of worry. Indeed, the government has already implemented a number of tightening measures aimed towards the housing markets. Yet these measures, unfortunately, have not had much impact since they have not addressed the root cause of the bubble risk: liquidity.
The rate hike on 19 October is unlikely to lead to a collapse of the housing prices, which have potential to go up further in the coming years given the healthy balance sheets of households and banks. But the latest change in the mindset of government officials may be able to help China avoid major asset bubbles like those experienced by Japan in the late 1980s and by the US during the early years of this century.
There is a worry that rate hike might lead to more inflows of “hot money”. This is probably true, given that all major central banks and those in Asia are in a “pause” mood, if not a “loosening” mood. But if the rate hike adds downward pressure on asset prices, it may also discourage hot money inflows. The net impact is not clear, but hot money is not something the government can completely eliminate.
In the near term, China’ government is probably safe to allow the currency to continue to appreciate. With risks of a double dip receding, China’s policymakers are probably more confident about the growth outlook. There is also a possibility that China may be tightening controls over certain types of capital inflows in order to reduce “hot money” flows. These, however, should be viewed as temporarily responses to volatile market conditions. The long-term trend of capital account liberalisation remains on the track.
Corbett, Jenny and Takatoshi Ito (2010), “What should the US and China learn from the past US-Japan conflict?”, VoxEU.org, 30 April.
Ito, Takatoshi (2010), “China’s property bubble”, VoxEU.org, 15 April.
Copyright (c) VoxEU.org
Tags: Bank Of China, China, China Rate Hike, Chinese Central Bank, Commodities, Cpi Inflation, Disaggregated Data, Domestic Inflation, Domestic Monetary Policy, Food prices, Headline Cpi, Headline Number, Hot Money, Inflation Data, Inflation Problem, Inflation Risks, Percentage Point, Rate Hikes, Reform Period, Target, Tenths, Yiping Huang
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Sunday, July 4th, 2010
Energy and Natural Resources Market Diary (July 5, 2010)
- Weekly data released from the U.S. Energy Information Association (EIA) indicates that distillate fuel demand is running 10.9 percent above last year based on the 4-week average.
- A monthly EIA natural gas production survey released this week showed a 2.6 percent year-over-year gain in April.
- Import prices into Turkey have started to increase as Turkish mills look to replenish stocks before Ramadan, analysts at Dahlman Rose report. Heavy melt scrap in Turkey is currently priced at $320-330 per long ton, up $7-15 from last year. We understand that domestic scrap prices in the U.S. are set to decrease $20-40 per long ton in July but Turkish buyers returning to the market may put a floor on how far prices fall. This could in turn be supportive of carbon steel prices.
- The latest World Steel Dynamics Steel Benchmarker assessment has shown another fall in steel prices across the globe. In terms of hot rolled coil, the world export price showed the largest drop, down 5.1 percent to $593 per tonne. This is now down 17.4 percent from late April highs.
- Purchasing Manager’s Index (PMI) data released by the Institute for Supply Management this week showed that manufacturing activity in the U.S. slowed in June, with the headline number moving lower to 56.2 from 59.7 in May. Survey respondents expect a slowdown in growth during the second half of the year.
- According to trade data, coal imports into South Korea fell to an 11-month low of 8.5 million tonnes in May after hitting a record monthly volume of 10.3 million tonnes in April.
- The Australian government and miners reached an agreement on the mining tax last night. The tax, which is expected to kick-in on July 1, 2012, will cover coal, iron ore, onshore petroleum & gas, with coal and iron ore taxed at 30 percent. As expected based on prior news reports, the tax profit threshold will be the 10-year government bond rate (currently at around 5 percent), plus 7 percent and miners will be able to depreciate existing assets at market value over the life of the asset for a maximum of 25 years. Further, any new capital expenditures can be fully deducted up front.
- China may face a shortfall of 200 million metric tons of coal per annum by 2015, according to China Oil, Gas & Petrochemicals published by the Xinhua News Agency. Coal demand may rise to a record 3.8 billion tons by 2015 as domestic coal output reaches 3.6 billion tons, according to estimates in the latest issue.
- Coal demand in India may increase more than 500 million tonnes between 2008 and 2015, according to Wood Mackenzie. Demand may reach 1.5 billion tonnes a year by 2025.
- China’s new government-backed coal price benchmark, called the Bohai Rim Coal Price Index, will incorporate spot coal prices from the ports of Qinhuangdao, Jingtang, Caofeidian and Huanghua, according to Reuters. The index is aimed at bringing more transparency to spot coal pricing out of northern China, although this index may not be significantly different from current Qinhuangdao pricing, with Qinhuangdao accounting for approximately 55 percent of shipments from the four ports.
- Growing nuclear power supply will see Japan use less liquefied natural gas (LNG) in the coming years, even though stiff carbon-cutting and new technology favor nuclear over oil and coal for thermal power plants.
- Kazakhstan may impose export duties on copper, iron ore, ferroalloy, zinc and lead, produced in the country by companies including ENRC, Glencore International and Kazakhmys, a mine lobby said. “We hope that the government will have enough wisdom to stop” its plans for taxes of 5-10 percent on metals,” Nikolai Radostovets, Director of Kazakhstan’s Association of Mining and Metallurgical Enterprises, said in an interview in Astana. He said the proposed duties may affect plans for development projects in the country.
Tags: China, Coal Imports, Commodities, energy, Export Price, Fuel Demand, Headline Number, Hot Rolled Coil, Import Prices, India, Information Association, Institute For Supply Management, Iron Ore, Long Ton, Market Diary, Natural Gas, Natural Resources, Prior News, Production Survey, Purchasing Manager, Steel Dynamics, Steel Prices, Survey Respondents, Tax Profit, U S Energy, World Steel Dynamics
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Thursday, December 10th, 2009
In today’s Breakfast with Dave, Rosie discusses the Canadian housing market:
It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.
While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).
In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …
Source: Breakfast with Dave, Gluskin Sheff, December 10, 2009
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Tags: Canadian Economy, Canadian Market, Closest Thing, David Rosenberg, Economic Expansion, Education Sector, Employment Conditions, Excess Inventories, Gluskin Sheff, Headline Number, Home Price Appreciation, Housing Market, Lows, Market Musings, Personal Income, S Market, Standard Deviation, Statisticians, Target, Textcolor, Workweek
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